April Regulation Update
By Kyte Ekstrom | Compliance, Compliance Retainer Service, FCA Inovation Hub, FCA Regulation, FinTech, Uncategorized | 0 Comments
PRA Publishes Consultation Paper – Regulated Fees and Levies 2022/23
Consultation paper (CP4/22) is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2022/23 fee year.
The proposals relate to:
- Fees applicable to firms in the temporary regimes.
- Changes to the internal model application fees and the model maintenance fee.
- Changes to the special project fees for restructuring fees.
- The annual funding requirement (AFR), which consists of the budgeted costs of ongoing regulatory activities (ORA). The proposed ORA for 2022/23 has increased by £9.8 million to £297.5 million.
- How the PRA intends to distribute a surplus from the 2021/22 AFR, and the distribution of retained penalties for 2021/22.
The deadline for responses is 20 May 2022. The PRA intends to publish a policy statement with final rules on 4 July 2022. The rules are expected to enter into force on 6 July 2022.
PRA Consultation Paper: Regulated fees and levies: Rates proposals 2022/23 (CP4/22)
FCA publishes Speech – Innovation: Building a Digital Regulator
The speech delivered at the 2022 Innovation Finance Global Summit by Jessica Rusu, Chief Data, Information and Intelligence Officer at the FCA, refers to three themes that are at the centre of the FCA’s work:
- fostering innovation:In the speech Ms Rusu, announced the launch of ‘Innovation Pathways’, a new unified firm support service that combines and enhances the FCA’s Direct Support and Advice Unit Services. Innovation Pathways is set to provide bespoke regulatory support to firms with innovative business models that want to deliver positive innovations and consumer outcomes in the market.
- Inovation Pathways will operate alongside the FCA’s now ‘always open’Regulatory Sandbox.
- being intelligence-led:Ms Rusu highlighted that, in 2021, through the use of new data and algorithms, the FCA doubled the number of financial promotions that were amended or withdrawn.
- preparing for the future:Ms Rusu noted sustainable finance and ESG as key priorities for the FCA. She also noted that in May, the FCA will publish their Evaluation Report on the learnings identified from the newly created Digital Sandbox Sustainability Cohort, which will help shape the digital sandbox concept.
Ms Rusu went on to discuss the the rapidly unfolding landscape of cryptoassets and their underlying distributed ledger technology (DLT). Over two million people in the UK have invested in cryptoassets, with many being from younger generations. Looking forward, Ms Rusu announced that the FCA will be hosting the first ever CryptoSprint, engaging with industry to inform regulatory policy thinking.
Alongside this, the FCA will be holding a joint TechSprint (FCA events which bring together participants from across and outside the financial services sector to develop technology-based ideas or proofs of concept to address specific industry challenges) with the Payment Systems Regulator on authorised push payment fraud (APP fraud), which increased dramatically during the pandemic. The TechSprint will focus on exploring solutions to identify and prevent APP fraud, including through the identification of suspicious social media advertising and scam promotions.
EBA Publishes Final Report on RTS Amendments – Strong Customer Authentication
The report follows on from consultation paper (EBA/CP/2021/32), published in October 2021. The final report on the amendment of the EBA’s regulatory technical standards (RTS) on strong customer authentication (SCA) and secure communication under the Payment Services Directive (EU/2015/2366).
In the final report the EBA has retained the following amendments as proposed in the consultation:
- the introduction of a new mandatory exemption from SCA when customers use an account information service provider (AISP) to access their payment information, providing certain provisions are met.
- the extension of the frequency of the renewal of SCA from every 90 days to every 180 days.
These amendments aim to reduce friction for customers using account information services and to mitigate the negative impact of the current provisions of the RTS on the services provided by AISPs.
It has been proposed that the amendments to the RTS will apply 7 months after the publication of the amending RTS in the Official Journal of the EU.
HM Treasury Publishes Recommendations for the FCA, FPC and PRC – Energy Security
HM Treasury has published three letters setting out recommendations which relate to aspects of the government’s economic policy.
The letters recommend that the FCA, PRC and FPC should have regard to the government’s energy security strategy, as recently set out by the Prime Minister, and the important role that the financial system will play in supporting the UK’s energy security, including through investment in transitional hydrocarbons.
The recommendations supplement those made in earlier letters published by the Treasury on 23 March 2021, which the Treasury recommended that all three bodies should have regard to the government’s commitment to achieve a net-zero economy by 2050 under the Climate Change Act 2008 (2050 Target Amendment) Order 2019.
Recommendations for the Financial Conduct Authority: April 2022
Recommendations for the Prudential Regulation Committee: April 2022
Recommendations for the Financial Policy Committee: April 2022
HM Treasury publishes Terms of Reference – Centre for Finance, Innovation and Technology Steering Committee
The establishment of the Centre for Finance, Innovation and Technology (CFIT) was a key recommendation of the independent review of UK finTech led by Ron Kalifa OBE which was published in February 2021. CFIT will be a private sector-led organisation focused on driving forward financial innovation by bringing together experts from across the ecosystem, including in the finance and technology sectors, in order to support the growth of UK finTech.
The Steering Committee has been tasked with making proposals on the following points:
- CFIT’s short-term and long-term objectives and a business plan that will support CFIT in meeting these objectives.
- long-term funding options for CFIT.
- an initial coalition for CFIT to focus on.
- any digital or other infrastructure which CFIT might require to operate effectively.
The Steering Committee is expected to conduct this work through monthly meetings taking place in Spring and Summer 2022. Any proposals made by the Steering Committee will constitute non-binding recommendations with final decisions to be taken by the permanent CFIT board and executive team once established.
FCA Publishes Thematic Review (TR22/1) on Wind-down Planning
This review (TR22/1) reiterates the FCA’s expectation that all regulated firms have adequate financial and non-financial resources in order to wind-down in an orderly manner.
The FCA completed a piece of thematic work on wind-down planning across different business models, in light of the ongoing COVID-19 pandemic and the potential harms caused if a wind-down is not orderly. The review focuses on liquidity needs during wind-down, and examined firms’ intra-group dependencies and wind-down triggers. The exercise sought to ensure that the largest firms in several key sectors held sufficient liquid resources to fund a wind-down if required, given the turbulent economic environment.
The review has revealed widespread weakness in wind-down planning, with the FCA noting that many wind-down plans, processes and risk-management frameworks remain at an early stage of maturity and do not meet minimum expectations.
Key observations from the review include:
- Further significant work is required to ensure that firms have credible and operable wind-down planning. This particularly relates to liquidity and cashflow modelling, intra-group dependencies and wind-down trigger calibration.
- Firms need to consider the impact that liquidity needs in wind-down have on their assessment of resource adequacy, their risk appetite and their point of non-viability.
- Testing the outcomes of wind-down planning is the best way of showing the firm’s board and the FCA that the plan and process is credible and operable.
FCA Publishes New Webpage – Innovation Hub: Market Insights
The Innovation Hub has been helping firms to develop innovative products and services since launching in 2014. During this period, due to the number of firms The FCA have supported and engaged with, they have gathered a considerable quantity of data and insights into the growing finTech market in the UK. The new webpage is the first step in sharing these insights with the broader market, and is intended to grow over time as The FCA collect more data.
Key points of the webpage include that:
- Most firms operated in the retail investments, retail banking and payments, and retail lending sectors.
- Since 2016, most of the business models that were accepted into the Regulatory Sandbox focused on distributed ledger technology, blockchain and cryptoassets. 15% of firms had non-technology driven innovative business models and 14% of firms used open banking. The FCA has also supported firms using regTech and artificial intelligence/machine learning.
- The FCA can support firms of all sizes, at any stage of development, provided they meet the relevant criteria.
- Most of the firms supported were based in the UK, with 54% in London and 37% across the rest of the UK. Innovation Pathways has also supported firms across Europe, North America and South America. The same trend is true for the Regulatory Sandbox.
FCA Publishes Call for Input – Use of Synthetic Data to Support Financial Services Innovation
It is widely recognised that artificial intelligence (AI) holds significant potential in the financial services industry. However, the extent of its potential will depend on the wide availability and accessibility of data to innovators who will build the next generation of products and services.
It is with this in mind, the FCA has called for input from academics, technology firms, regulators and policy makers on the potential for synthetic data to support innovation in the financial services sector.
“Synthetic data” is defined in the paper as “a privacy preserving technique that could open up more opportunities for data sharing by generating statistically realistic, but ‘artificial’ data that is readily accessible”. Synthetic data is already used across other sectors, such as robotics and autonomous vehicles, and there is an early but growing level of exploration within financial services.
The benefit of using synthetic data, according to the FCA, is that it simulates real data without identifying specific individuals. Therefore, as long as no real individuals can be identified from the synthetic data, data protection requirements do not apply.
The FCA wants to better understand different market participants’ views on the extent to which synthetic data can expand data access and data sharing opportunities in the market. They are also seeking to evaluate the maturity of synthetic data usage within financial services, and the extent to which both regulated and unregulated firms are currently using it.
Finally, the FCA is interested in what industry stakeholders see as the role of the regulator in this context, particularly regarding their competition remit.
The deadline for responses is 22nd June 2022.
FCA Call for Input: Synthetic data to support financial services innovation
2022/23 Annual Plan Published by the CMA
Following a consultation on the draft version published in December 2021, the Competition and Markets Authority (CMA) has published their Annual Plan for 2022/23.
The CMA intends to focus on the following areas:
- the protection of consumers from unfair behaviour by businesses, during and beyond the COVID-19 pandemic.
- fostering competition to promote innovation, productivity and long-term growth across the UK.
- promoting effective competition in digital markets.
- supporting the transition to low carbon growth, including through the development of healthy competitive markets in sustainable products and services.
- delivering the CMA’s new responsibilities and strengthening its position as a global competition and consumer protection authority.
The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022
The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022 (the Regulations) have been published, together with an explanatory memorandum, under section 55(3) of the Sanctions and Anti-Money Laundering Act 2018.
The Regulations update schedule 3ZA of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to include the United Arab Emirates as a ’high-risk third country’. Zimbabwe no longer falls within this definition for the purposes of enhanced due diligence requirements in schedule 3ZA of the MLRs.
The Regulations came into force on 29 March 2022.
Wolfsberg Group Publishes Guidance – Digital Customer Lifecycle Risk Management
The Wolfsberg Group, an association of 13 global banks which aims to develop frameworks for financial institutions’ financial crime management, has published guidance on the effective management of financial crime risks associated with non-face-to-face digital engagement.
The Guidance explores how non-face-to-face customer interaction could be considered a standard, or even lower risk channel for firms, by further developing three core anti-money laundering controls, namely more effective identification, verification and authentication processes at the onboarding stage; a multi-dimensional and continually reassessed customer risk profile; and a redesigned trigger-based approach for conducting ongoing due diligence.
Wolfsberg Group Guidance on Digital Customer Lifecycle Risk Management
CRYPTO ASSETS
HM Treasury sets out plan to make UK a Global Cryptoasset Technology Hub
Economic Secretary to HM Treasury, John Glen, announced in a keynote speech at the Innovative Finance Global Summit that stablecoins are to be brought within UK regulation. This will allow stablecoin issuers and service providers to operate and grow in the UK.
The announcement is just part of a series of measures aimed at making the UK a global hub for cryptoasset technology and investment. These measures include:
- legislating for a ‘financial market infrastructure sandbox’ to enable firms to experiment and innovate in providing infrastructure services that underpin markets.
- establishing a Cryptoasset Engagement Group to work more closely with the industry.
- commissioning the Royal Mint to create a non-fungible token as early as this summer as a symbol of the UK’s forward-looking approach.
- exploring ways to enhance the competitiveness of the UK tax system to encourage further development of the UK cryptoasset market.
HM Treasury Publishes Response to Consultation and Call for Evidence – Cryptoassets, Stablecoins and DLT
In response to HM Treasury’s, January 2021, combined consultation paper and call for evidence on the UK regulatory approach to cryptoassets and stablecoins and on distributed ledger technology (DLT) in financial markets. The Treasury has now confirmed their intention to take the necessary legislative steps to bring activities that issue or facilitate the use of stablecoins, as a means of payment within the UK regulatory perimeter. The Treasury aims to amend existing electronic money and payments legislation. In order to achieve this the Treasury will:
- amend the Electronic Money Regulations 2011 and the Payment Service Regulations 2017.
- extend the application of Part 5 of the Banking Act 2009 to include stablecoin activities where the risks posed by those activities have the potential to be systemic and, therefore, meet the threshold for Bank of England supervision.
- extend the scope of the Financial Services (Banking Reform) Act 2013 to ensure that relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator.
In light of the continued worldwide growth of cryptoassets, the Treasury intends to consult later in 2022 on regulating a wider set of cryptoasset activities.
FCA Updates Webpage – Cryptoassets: AML / CTF Regime
The FCA has updated its webpage on the anti-money laundering and counter-terrorist financing (AML/CTF) supervision of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017) with new information on the temporary recognition regime (TRR), established in December 2020.
The TRR had been due to expire on 9 July 2021 but was extended to 31 March 2022. It allowed existing cryptoasset businesses that applied to register with the FCA under the MLRs 2017 before 16 December 2020 to continue trading while their applications were being assessed. The FCA has now concluded these assessments. The FCA is closing the TRR on 1 April 2022 for all except a small number of cryptoasset businesses where it is strictly necessary for them to continue to have temporary registration. The FCA explains that this is necessary where a firm may be pursuing an appeal or may have particular winding-down services.
Only firms that are registered with the FCA or on its list of firms with temporary registration may continue trading. Other firms must have ceased trading from 10 January 20221. Firms that have not ceased trading are at risk of being subject to the FCA’s criminal and civil enforcement powers.
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