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Council of EU Press Release

Council of EU and Parliament announce Frankfurt as the host of AMLA

On 23 February, the Council of the EU announced that following an agreement with the EP, the seat of the future European authority for anti-money laundering and countering terrorist financing (AMLA), will be based in Frankfurt and begin operations mid-2025. The Council explains that the new authority is the centrepiece of the reform of the EU’s AML framework. AMLA will have direct and indirect supervisory powers over obliged entities and the power to impose sanctions and measures. Now that the entire package has been provisionally agreed between the EP and Council, they both need to formally adopt the package before it can enter into force. Parliament is expected to vote on its final approval in the plenary session on 22-25 April. Once adopted, the AMLA regulation will apply from July 2025. Before then, the EC will be responsible for establishing AMLA and for its initial operations.

European Parliament Press Release

European Commission Press Release

FINTECH

Please see our website for the fourth instalment of our “MiCAR under Microscope” bulletin series. In this issue, we provide an insight into the newly introduced regulatory status of CASPs, focusing on the scope of the activities these regulated entities may carry out, the main steps of the authorisation and passporting process and procedures, and what phase-in regime entities that already performed crypto-asset services prior to the entry into force of MiCAR may benefit from.

Please see the ‘Other Developments’ section for the FSB’s letter to G20 Finance Ministers and Central Bank Governors.

FUND REGULATION

Please see the ‘Other Developments’ section for the FSB’s letter to G20 Finance Ministers and Central Bank Governors.

FSB peer review on MMF Reforms

On 27 February, the FSB published its thematic peer review on MMF Reforms. The review takes stock of the measures adopted or planned by FSB member jurisdictions in response to the 2021 FSB report on policy proposals to enhance MMF resilience. It should be noted that the review does not assess the effectiveness of those policy measures in addressing risks to financial stability, as that will be the focus of separate follow-up work by the FSB in 2026. The main MMF vulnerability identified by jurisdictions is the mismatch between the liquidity of fund asset holdings and the redemption terms offered to investors, which makes MMFs susceptible to runs from sudden and disruptive redemptions. The review also found that the progress in implementing the 2021 FSB policy proposals has been uneven across FSB member jurisdictions. The review concludes that, given the vulnerabilities reported in individual jurisdictions, further progress on implementing the FSB policy toolkit would be needed to enhance MMF resilience and limit the need for extraordinary central bank interventions during times of stress. To address the identified issues, the FSB makes the following recommendations: (i) FSB member jurisdictions that have not yet done so should review their policy frameworks and adopt tools to address identified MMF vulnerabilities, taking into consideration the 2021 FSB policy proposals. Where relevant tools, such as minimum liquidity requirements, are already available, FSB jurisdictions should consider whether these need to be re-calibrated to ensure their effective use and to maintain a sufficient level of MMF resilience; and (ii) IOSCO should consider the findings of this review when it revisits its 2012 Policy Recommendations for MMFs in light of the framework and policy toolkit in the 2021 FSB Report.

Peer Review Report

Council of EU adopts Directive amending AIFMD and UCTIS

On 26 February, the Council of EU announced it had adopted the proposed Directive amending AFIMD and the UCTIS Directive. The new Directive aims to enhance the integration of asset management markets in Europe and modernise the framework for key regulatory aspects. Amongst other matters, it seeks to: (i) improve the availability of liquidity management tools; (ii) introduce enhanced rules for delegation by investment managers to third parties; (iii) prevent possible misleading names; and (v) prevent costs that could be charged to funds, and hence their investors. The Council also published a ‘note’ (dated 15 February 2024) setting out the adopted text of the Directive. The Directive will enter into force on the twentieth day following its publication in the OJ, member states will then have 24 months after the entry into force to transpose the rules into national legislation.

Note

MARKETS AND MARKETS INFRASTRUCTURE

FCA update on 3-month synthetic sterling LIBOR

On 29 February, the FCA published a report, under Article 23E of the BMR, which concludes that the way in which the FCA exercised its power under Article 23D(2) of the BMR to require IBA to publish 3-month sterling LIBOR under a changed, synthetic methodology for the period between 1 January 2022 and 1 January 2024 has advanced both of its statutory objectives of securing an appropriate degree of protection for consumers and protecting and enhancing the integrity of the UK financial system. In November 2022, the FCA announced its intention to continue to require IBA to publish the 3-month sterling LIBOR setting in synthetic form until end-March 2024, after which it will cease permanently. With just 1 month until the 3-month synthetic sterling LIBOR setting ceases permanently on 28 March, the FCA reminds firms with outstanding sterling LIBOR exposures that they must continue their active transition efforts. The FCA also reminds market participants that US dollar synthetic LIBOR is expected to cease in 7 months’ time and that firms must ensure they are prepared for these final synthetic US dollar LIBOR settings to cease at end-September 2024.

FCA wholesale data market study report

On 29 February, the FCA published the findings of its wholesale data market study which examined competition in the markets for credit ratings data, benchmarks and market data vendor services. Overall, the FCA did not find any evidence that firms cannot access the wholesale data they need. The evidence suggests that firms buy the kind of data they need, and, in most cases, the data they buy is of sufficient quality to meet their needs. However, across all 3 markets in scope of the study, the FCA did identify evidence of, and drivers for, market power. Users may be paying higher prices for the data they buy than if competition was working more effectively. The FCA identified that: (i) these markets are concentrated. There are usually no more than 3 key providers in each market, most of whom have maintained a significant market share; (ii) most key providers are highly profitable. They have maintained high profitability (with operating profit margins of at least 30% and, in some cases, more than 60% in the period 2017-2022); (iii) data from key providers is essential. Users regard sources of data from most key providers as essential as there are limited or no effective alternatives; and (iv) key providers face limited competition from challenger firms. There are barriers to challenger firms entering or expanding in these markets. Challenger firms struggle to overcome network effects, compete with well-established brands and access input data needed for creating wholesale data products. The FCA explains that it has found that the costs of wholesale data are initially incurred by data users, such as banks or asset managers, but that such costs will, at least in part, ultimately be passed on to end investors. However, for most users’ data costs are a relatively small proportion of their total costs. There may be a similarly small proportionate impact on the prices charged to end investors, but this is not easily quantifiable. Indeed, many firms were not able to identify how higher data charges have or would be passed on to investors. Moving forward, the FCA will focus its next steps on two broad areas – looking at where the issues identified in the market study could be addressed through the Smarter Regulatory Framework and tackling firm specific issues using other tools such as our powers under the Competition Act 1998.

Final report on fees charged to Tier 1 third-country CCPs under EMIR

On 27 February, ESMA published a final report on the technical advice to the EC on fees charged to Tier 1 third-country CCPs under EMIR. In October, ESMA published a consultation paper to seek stakeholders’ input on its proposal to revise the Fees Delegated Regulation in relation to Tier 1 CCPs. This final report considers the feedback provided by the respondents and provides advice to the EC with ESMA’s updated technical advice on the Fees Delegated Regulation. The Annexes contain ESMA’s proposed amendments to the Fees Delegated Regulation and the initial mandate for ESMA to develop this technical advice. ESMA proposes that the structure of the annual fee for Tier 1 CCPs be revised, in view of introducing a more proportionate approach via a weighting factor based on the global turnover of each Tier 1 CCP as stated in EMIR. ESMA also confirms the 50 000 EUR recognition fee set out under Article 1 of the Fees Delegated Regulation is unchanged.

Final Report

PAYMENT SERVICES AND PAYMENT SYSTEMS

Please see the ‘Regulatory Reform Post Brexit’ Section for the Financial Services and Markets Act 2024 (Commencement No. 5) Regulations 2024, which addresses the commencement of section 51 and paragraph 1 of Schedule 7 of FSMA 2023 which concern the accountability of the PSR.

FATF consults on recommendation 16 on payment transparency

On 27 February, the FATF published a consultation on draft revisions to Recommendation 16 of its Interpretive Note (INR.16) and the related Glossary of specific terms, to adapt them to the changes in payment business models and messaging standards. FATF explains that the updates are required to ensure that the FATF Standards remain technology-neutral and follow the principle of ‘same activity, same risk, same rules’. The updates also aim to help make cross-border payments faster, cheaper, more transparent and inclusive whilst remaining safe and secure. FATF is seeking comments from all interested parties, particularly the payment industry, on its proposed revisions, which can be found in an explanatory memorandum attached to the consultation. The explanatory memorandum also presents eighteen questions for consultation across various issues, including: (i) additional transparency requirements on the exemption for purchase of goods and services using cards; (ii) removal of the withdrawal or purchase of cash or a cash equivalent from the R.16 exemption, subject to certain conditions; (iii) improving the content and quality of basic originator and beneficiary information in payment messages; (iv) obligations on beneficiary financial institutions to check alignment of beneficiary information in payment messages; and (v) definition of payment chain and conditions for net settlement. The deadline for comments is 3 May.

Council of EU adopts Regulation on instant credit transfers in euro

On 26 February, the Council of EU announced it had adopted the proposed regulation amending the SEPA Migration Regulation, the Cross-Border Payments Regulation, the Settlement Finality Directive and PSD2 as regards instant credit transfers in euro. The new rules aim to improve the strategic autonomy of the European economic and financial sector as they will help reduce any excessive reliance on third-country financial institutions and infrastructures. The regulation will allow people to transfer money within ten seconds at any time of the day, including outside business hours, not only within the same country but also to another EU member state. The regulation takes into consideration particularities of non-euro area entities. Payment service providers such as banks, which provide standard credit transfers in euro, will be required to offer the service of sending and receiving instant payments in euro. The charges that apply (if any) must not be higher than the charges that apply for standard credit transfers. The Council also published a ‘note’ (dated 14 February 2024) setting out the adopted text of the regulation. The regulation will enter into force on the twentieth day following its publication in the OJ. The new rules will come into force after a transition period that will be shorter in the euro area and longer in the non-euro area.

Note

PSR's approach to reviewing FPS reimbursement monitoring proposals

On 23 February, the PSR published a letter (dated 21 February) to Pay.UK setting out the approach it will take in assessing Pay.UK’s proposals for monitoring compliance with the FPS reimbursement rules, to determine whether to approve them. The PSR explains that it will be using ‘confidence objectives’ to review and assess the proposals, meaning the things that Pay.UK must demonstrate and provide assurance of, for the PSR to approve the proposals. The PSR notes that while Pay.UK has made good progress, there is still significant work ahead to continue preparations and be ready for 7 October, as such the PSR would welcome sight of draft proposals in March, ahead of Pay.UK formally providing these by 5 April. The PSR also notes that as SD19 does not give Pay.UK the power to require the provision of data or information from PSPs, the PSR will be consulting in April on a direction that will require all PSPs in scope of the policy to report data to Pay.UK to enable it to effectively monitor compliance with the FPS reimbursement rules.

Letter

PRUDENTIAL REGULATION

Please see the ‘Other Developments’ section for the FSB’s letter to G20 Finance Ministers and Central Bank Governors.

BCBS announces outcome of February 2024 meeting

On 29 February, BCBS published the outcomes of its meeting held on 28 and 29 February. Points of notes include: (i) BCBS has approved the final version of revisions to its core principles for effective banking supervision. The final standard will be published following the International Conference of Banking Supervisors on 24–25 April; (ii) BCBS intends to consult on potential measures aimed at reducing window-dressing behaviour by banks in the context of the framework for G-SIBs. The consultation paper, and an accompanying working paper summarising the empirical analyses, will be published next month. The committee also agreed to publish a working paper on an assessment of the G-SIB score dynamics over the past decade; and (iii) BCBS will publish a discussion paper on the use of climate scenario analysis by banks and supervisors to help inform potential future work in this area. The discussion paper will be published in the coming months.

RECOVERY AND RESOLUTION

EP adopts the ‘Daisy Chains’ proposal

On 27 February, the EP published the text of the legislative resolution it has adopted at first reading on the proposed ‘Daisy Chains’ Directive making targeted amendments to the BRRD and the SRM Regulation concerning MREL. The next step is for the Council of the EU to formally adopt the proposed Directive. It will enter into force on the twentieth day following its publication in the OJ. Member states will then have six months from the date of entry into force to adopt and publish measures implementing the proposed Directive and to apply those measures from the following day. The amendments to the SRM Regulation will also apply one day after the transposition date.

Text

REGULATORY REFORM POST BREXIT

The Financial Services and Markets Act 2023 (Commencement No. 5) Regulations 2024

On 29 February, the Financial Services and Markets Act 2023 (Commencement No. 5) Regulations 2024 were made and published on legislation.gov.uk. The regulations bring into force various provisions of FSMA 2023. Regulation 2(b) and (c) brings fully into force on 1 March the provisions of FSMA 2023 which concern the Bank of England levy. Please see the Fees/Levies section for more information on the Bank of England levy. The remaining regulations address the commencement of section 51 and paragraph 1 of Schedule 7 of FSMA 2023 which concern the accountability of the PSR. Regulation 2(a) commences section 51 for certain purposes on 1 March, regulation 3 commences section 51 and paragraph 1 of Schedule 7 for certain purposes on 1 August and regulation 4 commences those provisions for all remaining purposes on 1 January 2025.

Regulation

Draft Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024

On 26 February, a draft version of the Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024 was published on legislation.gov.uk, alongside an explanatory memorandum. The draft regulation grants the PRA the ability to disapply or modify the application of any of its rules made under FSMA, where appropriate, to take into account the circumstances and business models of individual firms. These regulations are made under new Section 138BA of FSMA. The ability to flex the application of regulator rules for individual firms is a well-established feature of the FSMA framework. However, the existing tool– section 138A of FSMA – did not, provide sufficient flexibility, requiring the relevant regulator to have determined that the rules to be disapplied or modified are “unduly burdensome”, or “would not achieve the purpose for which the rules were made”. The greater flexibility provided for in Section 138BA contributes to one of the government’s key objectives for the Smarter Regulatory Framework, to deliver an agile regulatory regime which can respond quickly to take account of changing market conditions, address emerging risks and facilitate innovation. The regulations introduce certain procedural requirements that must be followed in relation to PRA decisions on disapplying or modifying PRA rules. Affected firms may also challenge a decision made by the PRA by referring the decision to the Upper Tribunal (Tax and Chancery Chamber). The draft regulations, which have already been laid before Parliament, state that they will come into force on 30 June.

Regulation

Explanatory Memorandum

SUSTAINABLE FINANCE

Please see the ‘Other Developments’ section for the FSB’s letter to G20 Finance Ministers and Central Bank Governors.

UK government response to report on financial sector and UK's net zero transition

On 23 February, the UK government published its response to the House of Commons’ Environment Audit Committee’s (EAC) report on the financial sector and the UK’s net zero transition. The initial report set out how the financial sector would contribute to achieving net zero greenhouse gas emissions by 2050. Amongst other matters discussed, the government confirms that it has commissioned the Transition Finance Market Review to report on how best to create conditions for scaling transition focused capital raising with integrity, maximising the opportunity for UK based financial services to develop structure and export high integrity transition finance services, positioning the UK’s professional services ecosystem as a global hub. The review is expected to report by July. In an upcoming consultation on the UK’s approach to transition plans, the government will consider the role of the Transition Plan Taskforce’s Disclosure Framework and help to inform the UK’s assessment and endorsement of the ISSB standards. In addition, the FCA has committed to consult on guidance that will set out their expectations for listed companies’ transition plan disclosures at the same time as consulting on their policy approach in relation to the ISSB standards. The FCA plans to develop their guidance with reference to the final outputs from the Transition Plan Taskforce. The government also confirmed that it remains committed to implementing Sustainability Disclosure Requirements as set out in the 2023 Green Finance Strategy and will continue to actively encourage UK businesses to engage with the TNFD recommendations, as well as consider how best the TNFD’s recommendations should be incorporated into UK policy and legislative architecture in a manner that is coherent with global sustainability reporting.

OTHER DEVELOPMENTS

FCA regulation round-up: February 2024

On 29 February, the FCA published its regulation round-up for February 2024. Points of interest that we have not covered in other items include: (i) authorisation applications update: the FCA is continuing to roll out the improved Form A, which is used for Senior Management Function and Controlled Function applications. The FCA explains that from the Spring, applicants will use the improved form for any new applications but any outstanding drafts using the old version will remain accessible until they are submitted. Firms that already have access should use the new version for all applications from now on. The next form the FCA plans to update is the Sensitive Business Names Form which will be available for testing shortly; (ii) approving financial promotions for unauthorised persons: the initial application window to apply for permission to approve financial promotions for unauthorised persons has now closed. Firms that didn’t apply for this permission by 7 February are now subject to a restriction which means they cannot approve promotions for unauthorised persons (subject to exemptions). Firms are still able to apply for this permission, but they will not be able to approve promotions within the scope of the requirement for permission unless and until their application is granted; and (iii) principals REP025 submissions: the FCA is seeing common mistakes from principal firms when completing their REP025. Firms are reminded when submitting their REP025 to check for typos and inaccuracies before they submit, include complaints data only for Appointed Representatives with complaints in the relevant reporting period and to send the REP025 within 60 business days of the firm’s accounting reference date (ARD) to avoid a late return notification and £250 administration fee.

Regulation Round-Up

EC progress report on the strategy on supervisory data in EU financial services

On 29 February, the EC published a report on the implementation of its strategy on supervisory data in EU financial services. Overall, the report shows that the EC is on track to rationalise supervisory reporting requirements in financial services and improve their overall consistency. However, the EC notes that while progress has been made there is still significant work to be done. Progress on some building blocks has been more challenging and slower than expected, also given resource constraints and complexities in the legal and institutional set-up. Strategy implementation is therefore expected to take several more years. The next steps include the final adoption of the EC’s legislative proposals by the co-legislators, reports by the ESAs setting out further measures to advance on integrated reporting and technical work in all the financial services sectors to realise the practical impact of the measures taken to date. The EC services will continue to reach out and work with stakeholders to discuss the next steps and report on progress.

FMSB draft standard for client onboarding: documentation and processes

On 28 February, the FMSB published a draft of a standard for client onboarding documentation and processes for consultation. The draft standard is intended to provide practical guidance for firms onboarding new clients or reviewing existing clients in a manner that is compatible with, and works within the framework of, any applicable laws, regulations, and guidance for KYC and AML, including the JMLSG guidance and the MLRs 2017. It is designed to apply to all client industries, although specific focus has been placed on financial institutions, including asset managers and funds. The draft standard is structured in two main parts: (i) core principles: which relate to the way in which onboarding firms choose the required data points and source relevant evidence in the process of client onboarding, and (ii) annexes: including the documentation requirements, which consists of a list of the data points identified by participating firms, universally acceptable sources, and commonly available documents which can populate and evidence these data points to the level of credibility required. The deadline for comments is 3 May. The FMSB will be holding a roundtable on 11 March to answer any questions on the proposed standard.

Transparency Draft

Annexes

FCA webpage on investigation opening criteria

On 27 February, the FCA updated its webpage on investigation opening criteria. The webpage sets out the factors the FCA considered when deciding to open an investigation, including how it assesses serious misconduct. Some of the changes made to the webpage include: (i) adding new sections on ‘Investigation opening criteria’ and ‘Overall, is enforcement action likely to drive impactful deterrence?’; (ii) amending the wording in the ‘How we assess serious misconduct’ section; and (iii) adding a new section entitled "Joint investigations with the PRA".

FCA new approach to publicising Enforcement Guide and publicising enforcement investigations

On 27 February, the FCA published a consultation paper on a proposed new approach to publicising its enforcement investigations and changes to its Enforcement Guide. The FCA wants to change how it publicises its enforcement investigations to increase transparency about its enforcement work and its deterrent effect and to disseminate best practice. The FCA proposes publicly announcing that it has opened an enforcement investigation, including the identity of the subject of the investigation, and publishing updates on the investigation, if it considers that it is in the public interest to do so. Firms can expect one business day notice of the FCA’s intention to publish. It proposes following a new public interest framework to inform its decision-making, applying the framework to the fact, content and timing of each announcement. Regarding amendments to the Enforcement Guide, the FCA has carried out a comprehensive review and concluded it contains too much redundant material. The guide includes information that could sit better elsewhere, and there are some areas where it has become out of date, no longer reflecting current FCA policies and ways of working. The FCA’s key proposals relating to the Enforcement Guide include: (i) revising the guide to set out the FCA’s key enforcement policies relevant to its investigation process; (ii) directing stakeholders to information about its strategic approach and general enforcement priorities; (iii) moving information currently in the guide but relevant to the FCA’s wider work to its website to make it easier to find, and (iv) deleting content that is repetitive or duplicates that found in FSMA, DEPP and other legislative provisions. The FCA intends to delete the Enforcement Guide in its entirety and replace it with the text set out in Appendix 1. The deadline for comments is 16 April. Following the consultation, the FCA will publish a policy statement and feedback statement. On the same day, the FCA also published a speech by Therese Chambers, joint executive director of enforcement and market oversight, on the same topic.

FSB letter to G20 Finance Ministers and Central Bank Governors

On 26 February, the FSB published a letter (dated 20 February) from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors, ahead of the G20 meeting on 28-29 February. In the letter, Mr Knot warns that the global financial stability outlook remains challenging, encouraging caution despite the steady global growth and moderating inflation. He notes that past interest rate hikes are still passing through to borrowers, asset valuations are also stretched in some key markets, and abrupt shifts in market pricing could expose vulnerabilities in the financial system, including those related to leverage and liquidity mismatch in non-bank financial intermediation (NBFI). The letter also lays out the FSB’s workplan for 2024. Core elements of this plan are to identify and address financial system vulnerabilities in key areas including: (i) lessons from the March 2023 banking turmoil; (ii) NBFI; (iii) digital innovation; (iv) climate change; and (v) cross-border payments. The annex to the letter provides a list of FSB deliverables to the G20 in 2024, which include: (i) recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds, due to be published in February; (ii) a stocktake of regulatory and supervisory initiatives relating to the identification and assessment of nature-related financial risks, due to be published in July; (iii) a report on the financial stability implications of tokenisation, due to be published in October; (iv) a report summarising work on interest and liquidity risk and on deposit behaviour and the role of technology and social media, due to be published in October; (v) a consultation report on the format for the cyber incident reporting exchange (FIRE), due to be published in October; (vi) a report on the financial stability implications of AI, due to be published in November; and (vii) a report on progress in achieving consistent climate-related financial disclosures, due to be published in November.

Letter