March Regulation Update

By Kyte Ekstrom | AML, Brexit, Crypto-Assests, E Money, FCA Regulation, FinTech, Investment Advisor, Investment Manager, payments | 0 Comments

GENERAL REGULATION

FSB publishes report: FinTech and Market Structure in the COVID-19 Pandemic – Implications for Financial Stability

The Financial Stability Board (FSB) has published a report on the financial stability impact of the COVID-19 pandemic on FinTech and market structure. The main finding of the report is that the pandemic has accelerated the trend toward digitalisation of retail financial services.

The report notes that BigTech and FinTech firms’ expansion into financial services can bring benefits, such as improved cost efficiencies and wider financial inclusion for previously underserved groups. However, it also warns caution over the potential for market dominance. In some markets, concentration measures are high, but there is no evidence yet of a generalised increase. It also notes there could be consumer protection risks from greater dependency on technology and data protection issues. In addition, the limited number of cloud service providers could magnify the impact of any operational vulnerability.

The growth of BigTechs in particular underscores the need to address data gaps that currently hamper the assessment of those firms’ financial risks and systemic importance. Such data gaps make it difficult for authorities to decide whether and how to regulate BigTechs.

The report outlines the types of actions that regulatory authorities have taken during the pandemic that may affect market structure. These actions relate to financial stability, competition, data privacy and governance. The report also stresses the importance of cooperation between financial authorities and, where relevant, their cooperation with competition and data protection authorities.

FSB: FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability

Webpage

Press release

FOS Publishes Announcement – Increased Award Limits

The Financial Conduct Authority (FCA) has confirmed the increase to the Financial Ombudsman Service (FOS) award limits.

The following increases to the award limits for complaints referred to the FOS with effect from 1st April 2022 include:

  • £375,000 for complaints about acts or omissions by firms on or after 1 April 2019
  • £170,000 for complaints about acts or omissions by firms before 1 April 2019.

These award limits will be automatically adjusted each year in line with inflation. For any complaints referred to the FOS before 1 April 2022, the limits will remain at £350,000 and £160,000, respectively.

Press release: Increase to our award limits

HM Treasury Approves Revised JMLSG Guidance – AML/CFT

The webpage, published by the Joint Money Laundering Steering Group (JMLSG) confirms approval by HM Treasury of the JMLSG’s revised guidance relating to: (i) monitoring customer activity; (ii) trade finance; (iii) correspondent relationships; and (iv) syndicated lending.

Press release

HM Treasury Updates Advisory Notice – AML/CTF Controls in Overseas Jurisdictions

HM Treasury has updated their advisory notice on anti-money laundering (AML) and counter-terrorist financing (CTF) controls in high-risk third country jurisdictions under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The updated advisory notice takes into account two statements published by the Financial Action Task Force on 4 March 2022, identifying jurisdictions with strategic deficiencies in their AML and CTF regimes.

The notice identifies: Albania, Barbados, Burkina Faso, Cambodia, the Cayman Islands, DPRK, Haiti, Iran, Jamaica, Jordan, Mali, Malta, Morocco, Myanmar, Nicaragua, Pakistan, Panama, the Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirate and Yemen as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations. Zimbabwe is no longer subject to the Financial Action Task Force’s increased monitoring process due to significant progress in improving their AML/CFT regime.

HM Treasury advisory notice on AML and CTF controls in high-risk third country jurisdictions

Webpage

FCA Announces Selected Firms and Publishes Case Study – Green FinTech Challenge 2021

The Green FinTech Challenge, first launched in 2018 is aimed at supporting the development and live market testing of new products and services that will aid the transition to a net-zero economy.

Out of the 25 applications received, the FCA has accepted 10 firms into the challenge. Five of the ten firms have been approved for the Regulatory Sandbox, and the other five will benefit from the FCA’s Direct Support services. The firms will also be offered bespoke support and engagement from the FCA as part of the ‘green cohort’.

The FCA has also published a case study on Cogo. Cogo is one of the nine firms accepted into the 2018 Green FinTech Challenge. Cogo’s has an app which connects users with businesses that align with their social and environmental values, and also allows users to track their carbon footprint based on their spending data. With the FCA’s support, Cogo registered with ‘consents.online’ in October 2019 to provide payment services and since then has entered into partnerships with several UK banks.

Updated webpage

Cogo: Green FinTech Challenge case study

PSR Publishes Statement – Russian Invasion of Ukraine

Following Russia’s invasion of Ukraine, the Payment Systems Regulator (PSR) has published a statement highlighting that it is working closely with HM Treasury, financial authorities and other UK government agencies to help ensure the financial sector continues to work well without harm to consumers or financial markets.

The PSR is asking firms to consider how they can manage any associated risks, such as:

  • the ability to withstand attack from a sophisticated state actor.
  • whether staffing levels are available to deal with an elevated cyber risk from state sponsored or other actors.
  • the implications on third party suppliers “if there are sanctions”.
  • the resilience of third party suppliers.

The PSR highlights guidance published by the National Cyber Security Centre (NCSC) outlining the actions organisations should take in response to the current situation in Ukraine, and more generalised guidance for firms of different sizes. It cautions that while the NCSC is not aware of any current specific cyber threats to the UK, organisations should be vigilant. The NCSC has also published more generalised guidance for firms of different sizes on their website, and encourages firms to review the ‘Cyber Essentials’ scheme.

Press release

FCA Publishes April-September 2021 Review – Consumer Investments Data

The review provides insight into the FCA’s Consumer Investments Strategy, published in September 2021.

Key findings of the review include:

  • The FCA received over 16,400 enquiries about possible scams, compared with 12,400 over the same period in 2020. The top four types of scams reported were boiler rooms, cryptocurrency scams, FCA-impersonation scams and recovery rooms.
  • Reports of possible crypto currency scams increased in the FCA’s Supervision Hub and their ScamSmart website, which were up 14% and 49% respectively on the previous six months. The FCA added 172 firms to their Unregistered Cryptoasset Business list. The FCA’s Cryptoasset Supervision team opened over 300 cases relating to potential unregistered cryptoasset business.
  • The FCA published 735 consumer alerts, an upward trend on the 1,317 alerts received in the 12-month period from April 2020 to March 2021. The FCA also received over 16,300 reports on potential unauthorised activity over the review period.
  • The FCA stopped 32 new firms (1 in 4) from entering the consumer investments market. In nine of these cases, the FCA suspected phoenixing (where individuals move firm or new firms are set up in order to avoid the consequences of their actions) or lifeboating (where individuals set up and seek authorisation for a new firm before their existing firm has received complaints about previous advice provided) by advice firms (the same number had been reported for the previous 12-month period).
  • The FCA’s Pension Scams team opened 51 cases on the basis of data analysis, related to suitability of pension transfer advice and potential scams.
  • The FCA’s Enforcement work led to custodial sentences for three unauthorised individuals; voluntary requirements (VREQs) imposed on 27 authorised firms; and own-initiative requirements (OIREQs) imposed on 10 authorised firms. This is compared with 21 VREQs and 9 OIREQs for the previous 12 months.

The FCA will publish an updated report on consumer investments data later in 2022.

FCA Consumer investments data review April – September 2021

Press release

PAYMENT SERVICES, EMONEY & OPEN BANKING

FCA Updates Webpage – Strong Customer Authentication

Following a consultation in January 2021 (CP21/3), the FCA introduced several changes to Regulatory Technical Standards on Strong Customer Authentication (SCA) and common and secure methods of communication (SCA-RTS). These changes were set out in a policy statement (PS21/19), published in November 2021.

The FCA has now updated their webpage to include information on the SCA reauthentication exemption.

The exemption is brought in under Article 10A of the SCA-RTS. If adopted by account servicing payment service providers (ASPSPs), it will mean customers will not need to reauthenticate when they access their account through a third party provider (TPP). Instead, TPPs will be required to obtain explicit consent from customer at least every 90 days.

The FCA strongly encourages ASPSPs to apply the exemption as soon as possible after the changes to the SCA-RTS come into effect on 26 March 2022. The FCA hopes for widespread adoption of the exemption by 30 September 2022. The FCA also expects TPPs to be technically ready to reconfirm customer consent under Article 36(6) of the SCA-RTS as soon as possible after 26 March 2022. However, up to 30 September 2022, it will not object if TPPs do not reconfirm customer consent, provided that SCA is applied at least every 90 days during that period.

Updated webpage

UK Finance Publishes Report – UK Payments Regulation Review

The report, published in conjunction with the Payments Association and Latham & Watkins, explores the impact of regulation and outlines how industry, lawmakers and regulators can work together to strengthen and enhance the country’s payments infrastructure and regulatory and supervisory frameworks following both Brexit and the expanding digitalisation of the economy.

The report outlines key conclusions of work undertaken to assess the impacts of payments regulation, and identifies key opportunities that regulators need to develop and enhance within the UK regulatory regime. The report argues that a coherent and consistent framework is needed across banking and finance, and that the enhanced Financial Services and Markets Act 2000 model proposed by HM Treasury should be applied, not just to the PRA and the FCA, but also to the Payment Systems Regulator and the Bank of England’s regulatory functions in respect of payment systems.

The report’s key recommendations relate to market change (which includes consideration of cryptoassets and central bank digital currencies), regulatory coordination and public policy, and the UK’s approach to alignment with, and divergence from, EU regulation.

UK Payments Regulation Review: Making sense of where to go now

Webpage

INVESTMENT SERVICES

FCA Publishes Statement on Future Consultation – Side Pockets

The FCA has begun discussions with stakeholders about options to allow UK authorised retail funds to make exceptional use of ‘side pockets’, given the significant practical challenges associated with disposing of Russian and Belarusian assets in the context of suspensions and extensive global sanctions.

Side pockets would potentially give authorised fund managers the option to separate Russian and Belarussian assets that are difficult to sell and/or hard to value from the fund’s other core investments.

The FCA highlights that side pockets could allow:

  • New investors to enter the fund without getting exposure to Russian assets.
  • Existing investors to redeem the rest of their investment, while illiquid Russian assets remain in a separate side pocket (and are in many cases marked to zero), while retaining rights to any eventual value.
  • Some funds to end their current suspension of dealing.

The FCA will consult on proposals with the aim of ensuring that any side pockets that are introduced, and the date on which they take effect, treat existing, redeeming and subscribing investors fairly and do not encourage speculative new investment at the expense of existing investors.

The FCA notes that the use of side pockets by authorised fund managers would be optional and that their scope would be limited to assets that are illiquid as a result of Russia’s invasion of Ukraine. Their precise scope will be determined as part of the FCA’s consultation.

FCA statement: FCA to consult on use of ‘side pockets’ for retail funds with exposure to sanctioned and suspended Russian assets

CRYPTOASSETS

FCA Publishes Notice – Cryptoassets

The FCA has published a notice to all regulated firms, reminding them of their existing obligations when interacting with or becoming exposed to cryptoassets and related services.

The FCA highlights areas of risk that firms need to consider, including: (i) being clear with customers, (ii) financial crime and registering cryptoasset business, (iii) having appropriate systems and controls in place, (iv) assessing risks, (v) relevant prudential requirements, and, (vi) client money requirements under the CASS regime.

The FCA notes that this is not an exhaustive list and reminds firms to consider its latest guidance on how to manage financial crime risks associated with cryptoassets in the ongoing Russia/Ukraine conflict. The FCA also recommends that firms read the PRA’s letter on existing or planned exposures to cryptoassets, as well as the Bank of England and Financial Policy Committee’s publications on cryptoassets and new forms of digital money (see items above in this section).

As a final point, the FCA states that it is continuing to work with international bodies, including the International Organization of Securities Commissions, the Financial Stability Board and the Financial Action Task Force, to achieve international co-operation and standards, as well as with the UK government and other bodies through the Cryptoassets Taskforce to achieve a UK approach that balances innovation and competition with orderly markets and consumer protection.

Notice to all FCA regulated firms with exposure to cryptoassets

FCA, Bank of England and OFSI Publish Joint Statement on Sanctions and Cryptoasset Sector  – Russian invasion of Ukraine

Following the Russian invasion of Ukraine, the FCA and the Bank of England and the Office of Financial Sanctions Implementation (OFSI), have published a joint statement on sanctions and the cryptoasset sector.

The joint statement highlights that the use of cryptoassets to circumvent economic sanctions is a criminal offence under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692), and regulations made under the Sanctions and Anti-Money Laundering Act 2018. The FCA has already written to all registered cryptoasset firms and those holding temporary registration status to highlight the application of sanctions on various entities and individuals.

The FCA reminded all authorised financial institutions to check the FCA register to identify whether any cryptoasset firms they do business with are registered, or to check the equivalent register of the jurisdiction in which the cryptoasset firm is based.

The joint statement confirmed that the FCA and the PRA will act if they see authorised financial institutions supporting cryptoasset firms operating in the UK illegally.

The joint statement also set out suggested steps that firms could take to reduce the risk of sanctions evasion via cryptoassets, including ensuring that customers and their transactions are screened against relevant updated sanctions lists and, where blockchain analytics solutions are deployed, ensuring that compliance teams understand how these capabilities can be best used to identify transactions linked to higher risk wallet addresses.

Joint statement from UK financial regulatory authorities on sanctions and the cryptoasset sector


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