The following posts provide a snapshot of selected UK, EU and global wholesale financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
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UK Ancillary Activities Test On Track For Simplification From 2025
05/18/2023
The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 was made on May 17, 2023. The Order, which enters into force on January 1, 2025, paves the way for the Financial Conduct Authority to develop a simpler test for determining which firms need to be authorized as investment firms as a result of their commodities and emission allowances trading business, known as the "ancillary activities test". The final Order is substantively the same as the draft SI, which we discuss in our related blog: "UK Government Publishes Draft Legislation Revising Application of The Ancillary Activities Test for Commodity Derivatives and Emission Allowances".
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UK Government Consults on Regulatory Accountability and Transparency Metrics
05/12/2023
On May 9, 2023, the U.K. government published a Call for Proposals on which metrics the Financial Conduct Authority and the Prudential Regulation Authority should be required to publish for the new secondary growth and competitiveness objectives. The new secondary objectives, which will be brought in under the Financial Services and Markets Bill, will compel the FCA and PRA in carrying out their functions to support long-term growth and international competitiveness. For the PRA, the new growth and international competitiveness objective will operate in conjunction with its existing secondary objective to facilitate effective competition in the markets for services provided by PRA-authorized firms (banks, large investment firms, insurers and credit unions). For the FCA, the new objective will go together with the FCA's three existing operational objectives of consumer protection, market integrity and competition.
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UK Criminal Insider Dealing Offence Legislation to be Updated
05/10/2023
On April 20, 2023, the draft Insider Dealing (Securities and Regulated Markets) Order 2023 was published (the draft Order). The draft Order will generally align the scope of the U.K.'s criminal insider dealing regime under the Criminal Justice Act 1993 with that of the civil regime under the U.K.'s Market Abuse Regulation and update the criminal regime. The draft Order, which will come into effect 21 days after it is made, will revoke the outdated Insider Dealing (Securities and Regulated Markets) Order 1994 (the 1994 Order).
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UK Financial Conduct Authority Finalizes Improvements to Equity Secondary Markets
05/09/2023
On May 3, 2023, the U.K. Financial Conduct Authority published a Policy Statement on Improving Equity Secondary Markets, following its consultation last year. These changes are part of the response to the Wholesale Markets Review led by HM Treasury. Some of the changes from the WMR require legislative changes and are being progressed in the Financial Services and Markets Bill. We discuss these changes, and others proposed by the Bill in our client note, "UK Financial Services and Markets Bill". The changes that the FCA is bringing in do not require legislation or new powers for the FCA. The FCA confirms that it will consult this year and next on further reforms to the requirements for equity markets once the detailed firm-facing obligations are transferred to its Handbook.
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UK Extends Clearing Obligation Exemption for Pension Funds and Intragroup Transactions
05/03/2023
On April 28, 2023, the Pension Fund Clearing Obligation Exemption and Intragroup Transaction Transitional Clearing and Risk-Management Obligation Exemptions (Extension and Amendment) Regulations 2023 were published, with an explanatory memorandum. These Regulations come into effect on June 12, 2023, and will extend the expiry date of the:- Exemption from the clearing obligation for pension schemes from June 18, 2023, to June 18, 2025. This means that U.K. and EEA pension funds will remain exempt from the U.K. clearing obligation. This change is made by amending U.K. EMIR, as provided for in the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019.
- Temporary intragroup exemption provisions from December 31, 2023, to December 31, 2026. This means that the U.K. clearing obligation and risk mitigation measures will not apply to OTC derivative contracts between U.K. firms and their overseas group entities.
This is the first time that HM Treasury has used its powers to extend these dates. -
Proposed EU Regulation on Markets in Crypto-Assets Approved by European Parliament
05/02/2023
On April 20, 2023, the agreed text of the proposed European Markets in Crypto-Assets Regulation was given final approval by the European Parliament. The Regulation is intended to improve legal certainty in the regulatory treatment of crypto-assets, to preserve consumer protection and market integrity in crypto-asset markets and to ensure financial stability. The text must now be formally endorsed by the Council of the European Union and will then be published in the Official Journal of the European Union. It will enter into force 20 days after publication. The majority of the Regulation is expected to apply from around January 2025, with the exception of the provisions regarding asset-referenced token issuers and e-money token issuers, which should apply from around July 2024.
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EU Travel Rule for Crypto-Assets Set to Apply from January 2025
05/02/2023
On April 20, 2023, the European Parliament announced that it had formally endorsed the draft Regulation on information accompanying transfers of funds and crypto assets (referred to here as the EU Travel Rule Regulation). The draft Markets in Crypto-Assets (MiCA) Regulation has also been adopted.
The existing EU Wire Transfer Regulation (EU WTR) requires EU Payment Service Provider to ensure that information on the payer and the payee accompanies a transfer of funds. The funds can be in any currency, and comprise banknotes and coins, scriptural money and electronic money.
The EU Travel Rule Regulation will extend the requirements to crypto assets and crypto-asset services providers (CASPs), (both as defined under the draft MiCA Regulation) with information on the originator and the beneficiary being required to accompany any transfers in crypto assets, regardless of whether they are domestic or cross-border. The requirements will not apply to person-to-person transfers of crypto assets where a CASP is not involved, or when both the originator and the beneficiary are providers of crypto-asset transfers acting on their own behalf.
The EU Travel Rule Regulation must still be published in the Official Journal of the European Union before it comes into effect. This is likely to be around July this year. At that time, the EU Travel Rule Regulation will repeal the EU WTR, however, the existing requirements on information accompanying transfers of funds will carry over to the new Regulation. The EU Travel Rule Regulation will apply from the same date that the MiCA Regulation applies, which is expected to be January 2025.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : AML/CTF, Insider Trading and Sanctions, FinTech, Payment Services -
UK Launches 2023 Review of Senior Manager's and Certification Regime
04/06/2023
Following the Edinburgh Reforms announcement in December 2022, the review of the Senior Managers and Certification regime has been kicked off with HM Treasury publishing a call for evidence and the U.K. Financial Conduct Authority and Prudential Regulation Authority publishing a joint discussion paper. Both reviews should be considered alongside each other and responses to both may be submitted until June 1, 2023. The U.K.'s Senior Managers Regime has been criticized in imposing a close-to-strict level of liability on individuals, including for any problems which arise in their designated area of responsibility, potentially making the U.K. a less attractive place for senior financial services professionals to operate.
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UK Investment Research Review Call for Evidence Published
04/05/2023
The U.K. Investment Research Review call for evidence was published on April 3, 2023. Relevant background to these issues is set out in our recent client note, “MiFID II: An Update on the Rules for Unbundling of Research,” in which we discussed the MiFID II requirements, the actions of the U.S. SEC, potential changes to the U.K. and EU MiFID II rules and the implications for broker-dealers that receive “hard dollars” for research. In summary, the research that investment managers typically receive from brokers is, under MiFID II, generally classified as a prohibited “inducement,” unless the investment manager pays for the research either: (a) directly from its own resources; (b) from a “Research Payment Account” (RPA) funded, with the client’s prior approval, with an advisory client’s money; or (c) a combination of the two methods. These requirements only apply directly to U.K.-regulated investment firms. However, brokers outside of the U.K. are affected by the legislation. Before the U.S. Securities and Exchange Commission granted exemptive relief, U.S. broker-dealers faced challenges because receiving MiFID II-compliant direct payments for research from U.K. investment managers would have amounted to accepting “hard dollar” payments, vitiating an important exclusion from being regulated as investment advisers.
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EU Opinion on Trading Venue Perimeter
04/03/2023
On February 2, 2023, the European Securities and Markets Authority published a final report and an Opinion on the trading venue perimeter. The Opinion clarifies the definition of multilateral systems under the EU's revised Markets in Financial Instruments Directive and sets out guidance on when systems should be considered as multilateral such that authorization as a trading venue would be required. In issuing the Opinion, ESMA is seeking to address the regulatory inconsistencies that have arisen because there is no EU-wide homogenous view as to what constitutes a multilateral system and to provide more certainty about when a system will be considered multilateral, and therefore should apply for authorization as a trading venue. The U.K.'s Financial Conduct Authority recently consulted on proposed guidance on the regulatory perimeter for multilateral trading facilities and on possible future changes to smaller trading venues' regulatory obligations. The FCA is expected to publish its final guidance in Q2 2023.
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UK Mulls Aligning its Ring-Fencing and Resolution Regimes for Banks
03/31/2023
On March 2, 2023, HM Treasury issued a Call for Evidence requesting views on the practicalities of aligning the ring-fencing and resolution regimes for banks. The potential to align the U.K. ring-fencing and resolution regimes was announced on December 9, 2022 as part of the Edinburgh Reforms, in response to the recommendations of Independent Review on Ring-fencing and Proprietary Trading, published in March 2022. We discussed the Edinburgh Reforms in our client note: "UK Government Publishes Edinburgh Reforms for Financial Services." Responses to the Call for Evidence may be submitted until May 7, 2023.
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UK Government Publishes Draft Legislation Revising Application of the Ancillary Activities Test for Commodity Derivatives and Emission Allowances
03/30/2023The U.K. government has published a draft statutory instrument (and related explanatory memorandum), which will be known as the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023. The draft SI will simplify the process for determining when a firm satisfies the “ancillary activities” test and reduce the burden on firms that apply the test. The changes were discussed under the Wholesale Markets Review and announced as part of the Edinburgh Reforms.
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UK Government Publishes 2023 Green Finance Strategy
03/30/2023
The U.K. Government has published the 2023 Green Finance Strategy, its latest plan for mobilizing finance to support the shift to a greener financial system. The U.K. has committed to becoming a net zero economy by 2050.
The action points in the Strategy are based on two pillars: ‘Align’, which focuses on aligning financial markets with U.K. and global climate targets; and ‘Invest’, which encourages green investment. The proposals will have significant implications for corporates, financial institutions and investment firms, asset managers and financial market infrastructure providers.
Read more.ATTORNEYS: Chloe Barrowman, Thomas Donegan
TOPICS : Environmental, Social and Governance, Sustainable Finance -
UK Government Consults on Regulation of ESG Ratings Providers
03/30/2023
As part of its new Green Finance Strategy, HM Treasury has published a consultation paper on proposals to regulate providers of environmental, social and governance ratings. Such ratings providers offer assessments on a firm’s exposure to ESG risks or a firm’s impact on ESG matters. HM Treasury has found that these assessments increasingly trigger responses in financial markets and should therefore be subject to regulation. Responses to the consultation should be submitted by June 30, 2023.
Read more.ATTORNEYS: Chloe Barrowman, Thomas Donegan
TOPICS : Environmental, Social and Governance, Sustainable Finance -
UK Legal Statement on the Issuance and Transfer of Digital Securities under English Law
02/28/2023
Following its consultation in 2022, on February 9, 2023 the U.K. Jurisdiction Taskforce published a Legal Statement on the issuance and transfer of digital securities under English private law.
Digital securities are shares, bonds and other debt securities which are constituted by reference to a blockchain or distributed ledger. English law is commonly used as the governing law of choice for conventional debt securities in international markets. Seeking to provide legal certainty on the use of digital securities, the Legal Statement concludes that English law can support the issuance and transfer of digital bonds on a public blockchain without custodians, and the on-chain transfer of digital equity securities.
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UK Government Publishes its Proposals for Cryptoasset Regulation
02/14/2023
The U.K. government has published its much-anticipated proposals for regulating the cryptoasset industry. These proposals, currently in the form of a consultation, will see many (but not all) cryptoasset-related activities being brought within the regulatory perimeter for financial services in the U.K. The consultation is extensive, covering the main elements of a new regime for cryptoasset issuance and disclosure, trading, custody and lending, as well as a proposed market abuse framework for cryptoassets.
The consultation closes on 30 April 2023. The government will publish its response once it has analysed the feedback, which will be followed by legislation being put before Parliament. The Financial Conduct Authority will consult on its proposed detailed rules once the legislation has been published.
The government has also announced a significant change to its earlier communicated approach to the regulation of cryptoasset financial promotions. Previously, such promotions could be issued only by regulated financial institutions. The changes will mean that those cryptoasset businesses that are registered with the FCA for the purposes of anti-money laundering compliance will be able to communicate their own financial promotions in relation to qualifying cryptoassets.
We discuss these proposals in detail in our client note, "UK Proposals for Cryptoasset Regulation". -
Bank of England Publishes Consultation Paper on Digital Pound
02/08/2023
The Bank of England has published a joint consultation paper with HM Treasury on the possibility of a digital pound in the U.K. It is envisaged that the digital pound would be a retail central bank digital currency, to be used in day-to-day payments by individuals and businesses. It would operate alongside, instead of replacing, cash. The BoE has also published a Technology Working Paper that explores the technological requirements of a U.K. CBDC. At this stage, the BoE is seeking input on the need for the digital pound and its early-stage proposals for the currency's form and function. As in previous communications on the subject, the BoE and HM Treasury emphasize that no decision has been made on whether to introduce a U.K. CBDC. The introduction of a CBDC would take years to implement, with the design phase expected to last until 2026. Responses to the consultation and Technology Working Paper should be submitted by June 7, 2023.
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EU EMIR 3 Proposals Published
01/19/2023
The European Commission published proposals to amend the EU's European Market Infrastructure Regulation (EMIR) in December 2022 (EMIR 3). According to the Commission, some of these measures are aimed at improving the competitiveness of EU CCPs and of EU clearing activities, and to reduce existing reliance by EU counterparties on U.K. CCPs. Since the Brexit referendum, the EU has been grappling with the bloc's continued reliance on U.K. CCPs. The most controversial aspect is a new mandate for EU counterparties to hold "active accounts" at EU CCPs for all products, and to use such accounts for some products.
EMIR 3 would also bring in several technical changes relating to the clearing thresholds and how these operate for non-EU exchange trade derivatives (ETDs) and the exemption for certain intragroup transactions. Other proposals seek to mitigate some of the issues arising from the strain on the energy market, in particular the difficulties in fulfilling margin obligations.
Our client note, "Clearing in the EU After EU EMIR 3" describes the EMIR 3 proposals in more detail. -
UK Independent Review of Net Zero Recommendations for Carbon Markets and Financial Services
01/13/2023
The final report of the independent review of net zero has been published: "Mission Zero: Independent Review of Net Zero". The review was established in September 2022 to assess the government's approach to achieving its target of net zero greenhouse gas emissions by 2050. The government published its Net Zero Strategy in October 2021. The review's report makes numerous recommendations across a variety of sectors. Below are those most relevant to the financial services sector.
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Edinburgh Reforms: Changes to the Laws of the UK Financial Services Sector
12/09/2022
The U.K. Government has announced on a series of initiatives, billed as the Edinburgh Reforms, to reform the laws for the U.K. financial services sector. The proposals cover:- Reforms to Ring-Fencing Regime;
- Implementation of Post-Brexit Financial Regulatory Framework;
- Growth and Competitiveness Remit for U.K. Regulators;
- Reforms to Wholesale Markets;
- Faster Settlement;
- Senior Manager's and Certification Regime;
- Changes to Promote Investment and Growth in Financial Services;
- Sustainable Finance;
- FinTech and Digital Assets; and
- Consumer Credit.
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EU Publishes Final Amendments to Cash Penalty Process for Cleared Trades
11/15/2022
The European Securities and Markets Authority has published its Final Report and draft Regulatory Technical Standards amending the cash penalty process for cleared transactions under the EU Central Securities Depositories Regulation. The settlement discipline regime under the EU CSDR, supplemented in EU Regulatory Technical Standards, provides measures for preventing settlement fails. CSDR and the RTS also provide measures for monitoring and addressing settlement fails when they do occur, such as a mechanism for cash penalties (which has applied since February 1, 2022) and a mandatory buy-in process.
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International Organization of Securities Commissions Publishes Consultation and Discussion Paper on Carbon Markets
11/09/2022
The International Organization of Securities Commissions has published a consultation on Compliance Carbon Markets and a separate discussion paper on voluntary carbon markets. Compliance Carbon Markets involve the issuance of carbon allowances by regional, national or state bodies. Companies are obligated to participate in the schemes to "pay" for their emissions. These markets are governed by regulations set at regional, state and international levels. The U.K., EU, Switzerland and California, for example, each have national Emissions Trading Schemes (as do some other countries or states). VCMs, on the other hand, involve participants who wish to offset their carbon emissions by buying carbon credits issued in relation to climate change mitigation or greenhouse gas reduction projects. VCMs are largely unregulated and, unlike Compliance Carbon Markets, are not mandatory. Instead, independent certification bodies usually check projects underlying credits for carbon reduction projects. Those credits can then be traded, either over-the-counter (which accounts for the majority of trades) or on exchanges.
Read more.ATTORNEYS: Chloe Barrowman, Thomas Donegan
TOPICS : Environmental, Social and Governance, Sustainable Finance -
FCA Publishes Consultation Paper on Sustainability Disclosure Requirements
10/25/2022
Following its 2021 Discussion Paper, the FCA has published a consultation paper setting out proposals to enhance sustainability disclosure and labeling requirements for sustainability-linked investment products. The majority of the rules will apply only to fund and asset managers, although the FCA is considering expanding this to FCA-regulated asset owners in relation to their investment products and for certain rules to apply to distributors of investment products to U.K. retail investors. The proposals are directed at fund and asset managers and portfolio managers based in the U.K. The FCA will consult separately on how these proposals apply to overseas fund and asset managers. The FCA already has climate-related disclosure rules for premium listed issuers, as well as rules for standard listed issuers and certain FCA-regulated firms (asset managers, life insurers, pure reinsurers and FCA-regulated pension providers).
Read more.ATTORNEYS: Thomas Donegan, Chloe Barrowman
TOPICS : Consumer Protection, Environmental, Social and Governance, Funds, Sustainable Finance -
UK Financial Conduct Authority Consults on Regulatory Perimeter Guidance for Trading Venues
09/22/2022
The U.K. Financial Conduct Authority has published a consultation paper on proposed guidance on the regulatory perimeter for multilateral trading facilities and on possible future changes to smaller trading venues' regulatory obligations. The FCA's consultation follows proposals made in HM Treasury's July 2021 U.K. Wholesale Markets Review, the response to which was published in March 2022. Responses to the FCA's consultation should be submitted by November 11, 2022. The FCA plans to finalize the draft guidance and publish a policy statement in Q2 2023.
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UK Conduct Authority Warns Buy Now Pay Later Firms on Compliance with Financial Promotion Requirements
08/19/2022
The U.K. Financial Conduct Authority has issued a warning to Buy Now Pay Later firms about financial promotions that potentially breach the FCA's rules. The Financial Services and Markets Act 2000 prohibits the communication of an "invitation or inducement to engage in investment activity" either in the U.K. or in a way that could have an effect in the U.K. Firms authorized in the U.K. are exempt from this Financial Promotion Restriction; however, they must still comply with the rules governing financial promotions when making any promotion or when approving a financial promotion of an unauthorized firm. All financial promotions must be fair, clear and not misleading.
The FCA is concerned about the promotion of unregulated BNPL agreements where the advert does not include a warning about the risks involved in BNPL products, and that only refer to the benefits. These financial promotions do not satisfy the FCA's rule that a balanced view must be included in all financial promotions (i.e., it must cover the benefits and the risks). The FCA is also concerned that the promotion of certain unregulated BNPL products is being carried out by unauthorized firms that have not sought or obtained the approval of their financial promotion by an authorized firm.
The FCA has written to the CEOs of several BNPL firms raising these concerns and warning the firms that it will act if corrective steps are not taken.
Earlier this year, the FCA secured changes to the contracts of four Buy Now, Pay Later firms —Clearypay, Klarna, Laybuy and Openpay. Certain terms, including contract cancellations, continuous payment authorities and right of set-off terms, were fairer and easier to understand. -
European Commission Call for Advice on Greenwashing Monitoring and Supervision
08/15/2022
The European Commission has published a call for advice addressed to the European Supervisory Authorities on the monitoring and supervision of "greenwashing" across the EU. Greenwashing can broadly be understood as the misleading marketing of a company or product as being environmentally friendly or sustainable, when that is not (or not substantially) the case. The EU has introduced legislation to preserve the reliability and transparency of ESG disclosures, including the Taxonomy Regulation and Sustainable Finance Disclosure Regulation. However, the Commission considers it important to continue monitoring greenwashing risks and assess the effectiveness of supervisory activities.
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Global Regulators Publish Discussion Paper on Central Counterparty Practices to Address Non-Default Losses
08/04/2022
The Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published a discussion paper on the practices that central counterparties use to manage losses arising from non-default events, e.g., operational risk, investment risk, custody risk and legal risk.
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UK Conduct Regulator Publishes Policy Statement on Improvements to Appointed Representatives Regime
08/03/2022
The U.K. Financial Conduct Authority has published a Policy Statement and final rules on improvements to the Appointed Representatives regime. The AR regime allows authorized firms to appoint representatives to conduct certain regulated activities on their behalf. The FCA consulted on proposed changes to the regime in December 2021. The changes will take effect from December 8, 2022, although there is a transitional period for some of the rules (e.g., those relating to on-going submission of information and annual self-assessments), giving firms longer to comply. Principal firms will be required to provide data on their existing ARs within 60 days of the rules coming into force – the FCA will be sending out section 165 requests for information towards the end of 2022.
Read more.ATTORNEYS: Thomas Donegan, Chloe Barrowman
TOPICS : Conduct & Culture, Corporate Governance, FinTech -
UK Regulator Proposes Extending Long-Term Asset Fund to Certain Retail Investors
08/01/2022
Following the introduction of a regulatory framework for a new type of authorized open-ended fund called the long-term asset fund, the U.K. Financial Conduct Authority has opened a consultation on extending the LTAF to more retail investors. The LTAF enables investors to invest in long term illiquid assets through an authorized fund vehicle. The LTAF may currently only be marketed to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals. The FCA is proposing to categorize the LTAF as a Restricted Mass Market Investment as per its recent Policy Statement on revising the financial promotion rules for high-risk investments. Opening the LTAF to more retail investors would be accompanied by additional investor protections rules, such as those that apply to other retail authorized funds. Responses to the consultation may be submitted by October 10, 2022. The FCA intends to publish a policy statement and final rules early in 2023.ATTORNEYS: Barnabas W.B. Reynolds, Thomas Donegan, Sandy Collins
TOPICS : Consumer Protection, Funds -
UK Jurisdiction Taskforce Publishes Consultation on Transfer of Digital Assets
08/01/2022
The U.K. Jurisdiction Taskforce has published a consultation on the issuance and transfer of "digital securities" under English law. Digital securities are shares, bonds and other debt securities which are constituted by reference to a blockchain or distributed ledger. English law is commonly used as the governing law of choice for conventional debt securities in international markets, but a question arises as to whether English law can support the issuance and transfer of digital securities. The UKJT intends to publish a legal statement on the subject in December 2022.
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Stricter UK Financial Promotion Rules Going Ahead
08/01/2022
The U.K. Financial Conduct Authority has published its final Policy Statement and Rules on financial promotions of high-risk investments and firms approving financial promotions. Many of these changes address or build upon recommendations of the Gloster Report or are otherwise related to the fallout from the London Capital & Finance plc scandal. The rules on risk warnings for financial promotions of high-risk investments will apply from December 1, 2022, and all other rules will apply from February 1, 2023. The FCA's related guidance (which is included in Annex 2 of the Policy Statement) will also apply from February 2023.
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UK Law Commission Consults on Law Reforms for Digital Assets
07/28/2022
Following the Call for Evidence on digital assets in 2021, the U.K. Law Commission has issued a consultation on proposals to reform the law of England and Wales to recognize and protect the rights of users of digital assets. The Law Commission believes that the law of England and Wales is sufficiently resilient, flexible and iterative to adapt to digital assets, including cryptoassets and stablecoins. However, the law Commission considers that law reforms are needed to ensure that digital assets gain from consistent legal recognition and protection. Responses to the consultation may be submitted until November 4, 2022.
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UK Financial Conduct Authority Publishes Final Rules and Guidance for New Consumer Duty
07/27/2022
The U.K. Financial Conduct Authority has published its final rules and guidance for the new Consumer Duty, which is intended to establish clearer standards for consumer protection across the financial services industry. The FCA conducted two consultations, one in May 2021 and another in December 2021 (following its earlier Discussion paper and Feedback Statement in 2018/2019). The final rules and guidance take account of the feedback received to those consultations.
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UK Regulators Propose Requirements for Critical Third Parties' Services to UK Regulated Firms
07/21/2022
The Bank of England, Prudential Regulation Authority and Financial Conduct Authority (together, the supervisory authorities) have published a discussion paper proposing measures to supervise and enhance the resilience of critical third parties (CTPs) to the U.K. financial sector. Responses to the discussion paper may be submitted until December 23, 2022. The supervisory authorities intend to consult on proposed requirements for CTPs in 2023.
Currently, the supervisory authorities' direct powers over entities providing critical services to U.K. authorized firms, their service providers (authorized e-money institutions, payment institutions and registered account information services) and financial market infrastructures (together, U.K. regulated firms) are limited. The Financial Services and Markets Bill, introduced to Parliament yesterday, would grant HM Treasury and the supervisory authorities' new express powers to oversee such third parties. HM Treasury will be able to designate an entity as a CTP if it provides services to U.K. regulated firms and its failure would pose financial stability or confidence risk to the U.K.
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UK Proposals for Regulating Systemic Payment Activities
07/21/2022
HM Treasury has opened a consultation on payments regulation and the systemic perimeter. The consultation arose out of the Payments Landscape Review and the government’s commitment to consult on bringing systemically important entities within payment chains under Bank of England regulation. Market developments and innovation have changed how risks are dispersed across payment networks. It is therefore likely, according to HM Treasury, that some entities operating in the payments space are not subject to systemic supervision by the Bank of England and as a result pose systemic risks to the U.K. financial system or even to those entities that are subject to Bank of England supervision. This consultation makes various proposals to address such risks or issues. Responses to the consultation may be submitted until October 11, 2022. The government will respond to that feedback in 2023.
Read more.ATTORNEYS: Sandy Collins, Thomas Donegan
TOPICS : Financial Market Infrastructure, FinTech, Payment Services -
UK Government Publishes Financial Services and Markets Bill
07/20/2022
The U.K. government has published the much anticipated Financial Services and Markets Bill. Following its exit from the EU, the U.K. has undertaken a fundamental review of how financial regulation policy and rules should be made, reviewed and established in law, particularly in light of the return of the U.K.'s sovereignty. Furthermore, there has been a substantial assessment of the U.K.'s financial services rules and regulations, with some areas warranting further consideration. The Bill implements the outcomes of the Future Regulatory Framework Review, which assessed whether the U.K. financial services regulatory framework is fit for purpose and able to support future growth, particularly in light of challenges such as Brexit and climate change. On the same day, HM Treasury published its response to the final consultation in the FRF Review. The FSM Bill establishes a revised blueprint for financial services regulation by revamping the existing model under the Financial Services and Markets Act 2000 and revoking retained EU law in financial services. The regulators will be delegated powers for detailed rulemaking, and as a result, become subject to enhanced Parliamentary oversight.
Read more.ATTORNEYS: Sandy Collins, Barnabas W.B. Reynolds
TOPICS : Brexit for Financial Services, FinTech, MiFID II, Payment Services, Securities -
HM Treasury Publishes Final Policy Following Financial Services Future Regulatory Framework Review
07/20/2022
HM Treasury has published its final response to the Financial Services Future Regulatory Framework Review in which it sets out the government's policy approach to reforming the U.K.’s regulatory architecture post-Brexit. The response is published on the same day as the Financial Services and Markets Bill is introduced to Parliament, which will implement in legislation these significant reforms.
Read more.ATTORNEYS: Sandy Collins, Thomas Donegan, Wilf Odgers
TOPICS : Brexit for Financial Services, Financial Services -
Final UK Policy on Regulation of Central Counterparties and Central Securities Depositories Post-Brexit
07/20/2022
HM Treasury has published its final policy approach to the regulation of central counterparties and central securities depositories under the Financial Services Future Regulatory Framework Review. The response is published on the same day as the Financial Services and Markets Bill is introduced to Parliament, which will implement these changes as well as the reforms to the U.K.’s regulatory architecture post-Brexit. HM Treasury has also published its final response to the Financial Services Future Regulatory Framework Review in which it sets out the government's final policy approach to reforming the U.K.’s regulatory architecture post-Brexit.
Read more.ATTORNEYS: Sandy Collins, Thomas Donegan, Wilf Odgers
TOPICS : Brexit for Financial Services, Financial Market Infrastructure -
International Bodies Confirm Application of Principles for Financial Market Infrastructures to Systemically Important Stablecoin Arrangements
07/13/2022
The International Organization of Securities Commissions and the Committee on Payments and Market Infrastructures have published guidance on the application of the Principles for Financial Market Infrastructures to systemically important "stablecoin arrangements" that are considered to be systemically important FMI and that have a transfer function. "Stablecoin arrangements" combine a range of functions e.g., issuance, transfer, storage and exchange of coins that purport to be used as a means of payment and/or a store of value. The various functions may be performed by a single entity or may be unbundled and offered by a range of entities. According to the guidance, systemically important stablecoin arrangements that have a transfer function (i.e., facilitate the transfer of crypto tokens between users) should be considered to be systemically important FMIs and therefore subject to the PFMIs. Other types of stablecoin arrangement may be captured by CPMI/IOSCO principles, for example, stablecoin arrangements that are primarily used for making payments should adhere to the principles for payment systems. However, the current guidance only relates to stablecoin arrangements which perform transfer functions.
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UK Treasury Commitee Publishes Inquiry Into Crypto-Assets
07/13/2022
The UK Treasury Commitee has launched an inquiry into the role of crypto-assets in the U.K. and their regulatory framework. The inquiry poses questions on a range of subjects, including the likelihood of digital currencies (e.g., stablecoins) replacing traditional fiat currencies, the risks and opportunities posed by crypto-assets and the environmental implications of crypto-asset technology, as well as a range of questions on the optimal approach to regulation for the industry. Responses should be submitted by September 12, 2022. The inquiry comes in the wake of another period of volatility in the crypto markets, which has drawn attention to some of the risks of investing in these products.
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UK Regulators Propose Changes to Margin Requirements for Non-Centrally Cleared Derivatives
07/12/2022
The U.K. Prudential Regulation Authority and Financial Conduct Authority have issued a joint consultation paper on proposals to amend the U.K. Binding Technical Standards on margin requirements for non-centrally cleared derivatives (i.e., the U.K. version of Commission Delegated Regulation (EU) 2016/2251 on risk mitigation techniques). The BTS on risk mitigation techniques were onshored for Brexit, and the PRA and FCA are responsible for setting the requirements and are empowered to make adjustments, subject to approval from HM Treasury. The BTS supplement the European Market Infrastructure Regulation as onshored for Brexit, which requires counterparties to uncleared OTC derivative transactions to implement risk mitigation techniques to reduce counterparty credit risk. The BTS prescribe required margin amounts to be posted and collected and the methodologies by which the minimum amount of initial margin and variation margin should be calculated, as well as listing securities eligible as collateral, such as sovereign bonds, covered bonds, some securitization instruments, corporate bonds, gold and some equities. Responses to the consultation may be submitted until October 12, 2022. The regulators will consider the feedback and then send their proposed draft amending BTS to HM Treasury for approval. It is proposed that the changes would take effect on publication by the regulators of the revised BTS.
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EU Proposes to Amend Cash Penalty Process for Cleared trades
07/11/2022
The European Securities and Markets Authority has opened a consultation in which it proposes to amend the cash penalty process for cleared transactions under the EU Central Securities Depositories Regulation. The EU CSDR provides a harmonized regulatory and prudential regime for central securities depositories and increases the robustness and resilience of securities settlement arrangements. The settlement discipline regime, set out in EU Regulatory Technical Standards, provides measures for preventing settlement fails through automated matching, a hold and release mechanism and partial settlement. CSDR and the RTS also provide measures for monitoring and addressing settlement fails, such as a mechanism for cash penalties and a mandatory buy-in process. The settlement discipline rules have applied since February 1, 2022.
ESMA is proposing to amend the RTS to remove the obligation on CCPs to collect and distribute penalties for cleared transactions. Instead, CSDs will operate the entire collection and distribution process for penalties (i.e., for cleared and uncleared trades). In terms of timing, ESMA is considering a six-month implementation delay to give industry time to test arrangements in their cash penalties processes. Responses to the consultation may be provided by September 9, 2022. -
Crypto-Asset Market Turmoil: Financial Stability Board Issues Statement
07/11/2022
The Financial Stability Board has issued a statement on international regulation and supervision of crypto-asset activities. The statement is made in light of the crypto-asset market turmoil. The statement warns crypto-asset service providers to comply with existing legal obligations in the countries in which they operate, which would include anti-money laundering obligations. FSB members are implementing the Financial Action Task Force's recommendations for crypto-asset service providers to be registered for AML purposes and to comply with the so-called travel rule, which requires relevant originator and beneficiary information to accompany crypto-asset transactions.
The FSB reiterates that an effective regulatory framework should adopt the "same risk, same outcome/regulation" approach. The FSB is progressing work with other international standard-setting bodies to tackle potential financial stability risks presented by crypto-assets, including stablecoins. This includes reviewing existing applicable standards, identifying gaps, and adjusting those standards or developing new standards. The FSB's view is that stablecoins that are used as a means of payment potentially present significant risks to financial stability and should be subject to robust regulations and supervision, including transparency obligations and, importantly, holding sufficient reserves to mitigate financial stability risks. The FSB will report to the G20 Finance Ministers and Central Bank Governors in October this year on the adoption of regulatory approaches to stablecoins. -
LIBOR Transition: Further Proposed Changes to EU Clearing and Derivatives Trading Obligations
07/11/2022
The European Securities and Markets Authority has opened a consultation on proposals to amend the EU clearing and trading derivative obligations to reflect recent benchmark transitions from LIBOR to so-called risk-free rates. The scope of the EU derivatives clearing and trading obligations for interest rate derivatives based on LIBOR denominated in EUR, GBP, JPY and USD were amended earlier this year. Amendments to the Regulatory Technical Standards, which took effect on May 18, 2022, removed interest rate derivative classes referencing GBP and USD LIBOR from the clearing and trading obligations, removed IRD classes referencing EONIA and JPY LIBOR from the clearing obligation, and introduced a clearing obligation for IRD classes referencing three new risk-free rates, namely €STR, SONIA and SOFR.
ESMA is proposing to further amend the RTS to:- introduce a clearing obligation for overnight index swaps referencing TONA (JPY);
- expand the maturities in scope of the clearing obligation for OTC interest rate swaps referencing SOFR (USD); and
- introduce a derivatives trading obligation for certain classes of OTC interest rate swaps referencing €STR (EUR).
Responses to the consultation may be submitted by September 30, 2022. ESMA will consider the feedback before submitting for approval by the European Commission final draft amending RTS. -
EU Consultation on Guidelines for Applications to Operate DLT Market Infrastructures under the EU Pilot Regime
07/11/2022
The European Securities and Markets Authority has launched a consultation on proposed guidelines on standard forms, formats and templates to apply for permission to operate distributed ledger technology for market infrastructure. The EU Regulation on a pilot regime for DLT market infrastructures will permit certain DLT market infrastructures to operate with exemptions from some elements of otherwise applicable EU financial services legislation, which may otherwise inhibit the trading and settlement of crypto-assets. The DLT Regulation sets the conditions for operating a DLT multilateral trading facility (DLT MTF), DLT settlement system (DLT SS) and DLT trading and settlement system (DLT TSS), and will, for the most part, apply from March 23, 2023. ESMA is consulting on proposed guidelines on:- the minimum instructions that national competent authorities should provide to market participants for submitting their applications; and
- the method that applicants should use to provide the requested information and documents to their competent authorities.
Responses to the consultation may be submitted until September 9, 2022. ESMA will consider the feedback and intends to publish the final guidelines before the DLT Regulation applies.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Financial Market Infrastructure, FinTech, MiFID II -
Ashley Alder to Chair UK Financial Conduct Authority
07/08/2022
HM Treasury has announced the appointment of Ashley Alder as Chair of the U.K. Financial Conduct Authority. Mr Alder will succeed interim chair Richard Lloyd, who has served as interim Chair since Charles Randell stepped down from his post in May 2022. Mr Alder, a former lawyer who is currently CEO of the Securities and Futures Commission of Hong Kong and Chair of the International Organisation of Securities Commissions, will take up his post from January 2023. -
Basel Committee on Banking Supervision Consults Further on Capital Requirements for Banks' Exposures to Crypto-Assets
06/30/2022
Following its consultation last year, the Basel Committee on Banking Supervision has launched a second consultation on bank prudential requirements for exposures to crypto-assets. The first consultation set out a preliminary proposal for the prudential treatment of crypto-assets, based on feedback to the 2019 discussion paper and other input from stakeholders. This second consultation proposes revisions to the initial proposals based on the feedback received and sets out proposed minimum standards based on the principle of "same risk, same activity, same treatment". Responses to the consultation may be submitted until September 30, 2022. The Basel Committee intends to publish final standards before the year-end; standards may be stricter than those presented in this consultation if feedback indicates any deficiencies.
The Basel Committee is maintaining its approach of adopting different prudential treatments depending on whether a crypto-asset meets certain conditions. Crypto-assets that meet all of the conditions are referred to as Group 1 crypto-assets and will be subject to the existing Basel framework. Group 2 crypto-assets are those that do not meet the conditions and are therefore deemed to present additional and higher risks than Group 1 crypto-assets. Group 2 crypto-assets will be subject to an adapted prudential regime, with netting and a 100% capital charge. Group 1 and Group 2 crypto-assets could be tokenized crypto-assets and stablecoins; Group 2 could also include unbacked crypto-assets.
Read more.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Bank Prudential Regulation & Regulatory Capital, FinTech -
UK Parliament Creates New Sub-Committee on Financial Services Regulations
06/23/2022
The House of Commons Treasury Committee has announced the creation of a new sub-committee that will scrutinize financial services regulatory proposals and has published a report setting out the approach that Parliament will take to its scrutiny role now that the U.K. has left the EU. The new sub-committee will be called the Sub-Committee on Financial Services Regulations, and its members will initially be all the members of the Treasury Committee. The sub-committee has been set up because Parliament's examination of regulatory proposals is likely to increase when existing EU regulations are moved to the rulebooks of the U.K. regulators, resulting in an assessment by the regulators as to whether those rules are appropriate for the U.K. Among other things, the new Sub-Committee on Financial Services Regulations will have powers to "send for persons, papers and records", to seek and take evidence and report on its findings. -
UK Treasury Committee Makes Recommendation for Future Regulatory Framework Review
06/16/2022
The House of Commons Treasury Committee has published a report on the Future of Financial Services Regulation setting out its view on the priorities for regulatory change in the U.K. now that the U.K. has left the EU. The report considers some of HM Treasury's proposals in the Future Regulatory Framework Review and presents its related recommendations. It also makes specific recommendations for the Financial Conduct Authority and the Prudential Regulation Authority.
Read more.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Bank Prudential Regulation & Regulatory Capital, Financial Services, FinTech, Payment Services -
UK Money Laundering Regulation Changes Announced for September 2022
06/15/2022
Following its 2021 consultation on targeted amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs), the U.K. government has published a consultation response which summarises the feedback to the consultation and sets out the government's approach to making changes to the statutory instrument. The amendments will be made in the draft Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, which are intended, for the most part, to take effect from September 1, 2022. A summary of the changes is set out below. The government will also soon publish its response to the call for evidence on the U.K.'s anti-money laundering and counter terrorist financing regulatory and supervisory regime, which covered the overall effectiveness and extent of the regime, whether key elements operate as intended, and the structure of the supervisory regime.
Read more.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : AML/CTF, Insider Trading and Sanctions, FinTech, Payment Services