The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
UK Regulator Announces Successful Applicants to Cohort Four of Its Regulatory Sandbox
The Financial Conduct Authority has published a press release confirming the acceptance of 29 firms to begin testing in the fourth cohort of its regulatory sandbox.
The FCA's regulatory sandbox is part of Project Innovate, the FCA's initiative for encouraging innovation in the interest of consumers. On its launch in June 2016, the FCA sandbox was the first in the world and has since been emulated by regulators globally. The sandbox is open to authorized and unauthorized firms of all sizes and provides a controlled live environment for participating firms to test product and service innovations on a time-limited basis. Applicants to the sandbox must satisfy strict eligibility criteria to be able to test in the sandbox and testing is subject to appropriate safeguards for consumer protection which are set on a case-by-case basis. Cohort 4 had 69 applicants, which is the largest number of applicants to date.
European Banking Authority Publishes First Outputs from Its FinTech Roadmap
Following the publication of its FinTech Roadmap in March 2018, the European Banking Authority has published two reports contemplated by the Roadmap.
The first report sets out the results of a thematic review of the impact of FinTech on the business models of incumbent credit institutions. The second report outlines the perceived benefits and potential prudential risks of seven FinTech use cases.
The EBA has also established a FinTech Knowledge Hub for the sharing of information and experience and promotion of emerging trends among EU national regulators.
UK Prudential Regulator Sets out Expectations on Firms' Exposures to Crypto-Assets
The U.K. Prudential Regulation Authority has published a "Dear CEO" letter, addressed to the Chief Executive Officers of banks, insurance companies and designated investment firms. The purpose of the letter is to remind firms of their relevant obligations under the PRA rules and to communicate the PRA's expectations regarding firms' exposures to crypto-assets.
Crypto-assets have exhibited high price volatility and relative illiquidity and may also be vulnerable to fraud and manipulation, which raises concerns about potential misconduct and poses issues for market integrity. The PRA's letter does not define crypto-assets, but the Financial Conduct Authority uses this term to refer to any publicly available electronic medium of exchange that features a distributed ledger and a decentralized system for exchange. The FCA recently published a "Dear CEO" letter outlining best practice for firms in handling the financial crime risks that crypto-assets can pose.
European Banking Authority Proposes Updated Guidelines on Outsourcing by Financial Institutions
The European Banking Authority has launched a consultation on draft Guidelines on outsourcing arrangements. The proposed Guidelines are intended to update and replace the outsourcing guidelines issued in 2006 (by the EBA's predecessor, the Committee of European Banking Supervisors) that applied to outsourcing by credit institutions. The proposed Guidelines will have a wider scope, applying to all financial institutions that are within the scope of the EBA's mandate, namely credit institutions and investment firms subject to the Capital Requirements Directive, payment institutions and electronic money institutions. The proposed Guidelines also integrate the recommendation on outsourcing to cloud service providers that was published by the EBA in December 2017.
The proposed Guidelines set out a definition of outsourcing in line with delegated legislation under the revised Markets in Financial Instruments Directive. They cover: (i) proportionality and group application; (ii) the nature of outsourcing arrangements; (iii) the applicable governance framework; (iv) the outsourcing process; and (v) guidelines on outsourcing addressed to competent authorities. A separate Annex provides an illustrative template that could be used for complying with the requirement in the proposed Guidelines to maintain a register of all outsourcing arrangements at institution and group level where applicable.
EU's Fifth Money Laundering Directive to Enter into Force July 2018
The Fifth Money Laundering Directive has been published in the Official Journal of the European Union and will enter into force on July 9, 2018. Member States must transpose the directive into their national laws within 18 months of that date. 5MLD makes a number of changes to the European Anti-Money Laundering and Counter-Terrorist Financing regime set out in the Fourth Money Laundering Directive.
The key changes introduced by 5MLD are:
1. Extending the scope of "obliged entities" to include providers of exchange services between virtual and fiat currencies as well as custodian wallet providers. These entities will need to register in their home Member State.
2. Harmonizing the application of enhanced customer due diligence for third countries that are determined by the European Commission to be high risk countries. Member States will be able to apply additional measures, where appropriate.
UK Financial Conduct Authority Sets out Good Practice for Handling Financial Crime Risks from Crypto-Assets
The U.K. Financial Conduct Authority has published a "Dear CEO" letter to U.K. authorized banks, setting out its views on best practice that banks should adopt for handling the financial crime risks that may be posed by so-called crypto-assets. The FCA uses this term to refer to any publicly available electronic medium of exchange that features a distributed ledger and a decentralized system for exchange. Crypto-assets include crypto-currencies, a well-known example of which is Bitcoin. The FCA acknowledges that crypto-assets can be used without any criminal motives. However, the fact that crypto-assets can be held relatively anonymously and can be readily transferred between countries can make them attractive for criminal purposes. Banks should adopt proportionate measures to mitigate the risk that they are used to facilitate financial crimes involving crypto-assets.
EU Fifth Money Laundering Directive Adopted
The Council of the European Union has adopted the EU's Fifth Money Laundering Directive, following the agreement reached between the European Parliament and the Council in December 2017. 5MLD will amend the existing EU Money Laundering Directive.
US District Court Dismisses Challenge to US Office of the Comptroller of the Currency FinTech Charter
The U.S. District Court for the District of Columbia granted the U.S. Office of the Comptroller of the Currency’s motion to dismiss a lawsuit brought by the Conference of State Bank Supervisors challenging the OCC’s authority to grant special purpose national bank charters to companies that provide bank-like services but do not accept deposits (largely FinTech companies.) The D.C. District Court’s decision follows the December 2017 dismissal by the U.S. District Court for the Southern District of New York of a similar lawsuit filed by the New York State Department of Financial Services against the OCC. The court found that CSBS did not have standing to bring the action, as it did not plead an injury in fact and that any of the grounds asserted by the CSBS were speculative and contingent on whether the OCC in fact charters a FinTech company, and that regardless, CSBS failed to identify an imminent injury to a particular member of its organization. In addition, the court dismissed the action on ripeness grounds, citing, among other reasons, that the OCC still has yet to issue a charter to a FinTech company.
View full text of the court’s decision.
Financial Action Task Force Publishes Outcomes of its 2018 Private Sector Consultative Forum
The Financial Action Task Force held its annual private sector consultative forum in Vienna on April 23 – 24, 2018. The annual forum provides a platform for the FATF to learn more about the private sector's views and concerns on issues related to anti-money laundering and countering the financing of terrorism. Attendees at the forum included representatives from the financial sector and other businesses and professions subject to AML/CTF obligations.
UK Financial Conduct Authority Publishes its 2018/19 Business Plan
The Financial Conduct Authority has published its Business Plan for 2018/19 which sets out its key priorities for the coming year. The FCA confirms that it will continue to focus on issues relating to the U.K.'s withdrawal from the EU by working with the Government, ensuring appropriate transition measures for EEA firms, working towards operational readiness and cooperating at international level.
The FCA divides the remainder of its priorities into cross-sector priorities and sector priorities. There are seven cross-sector priorities: firms' culture and governance; financial crime and anti-money laundering; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; long-term savings, pensions and intergenerational differences; and high-cost credit. There are seven sector priority areas: wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking; and general insurance and protection. The FCA also published Sector Views for each of these sectors which provide an FCA view of how each sector was performing as of mid-2017.
UK Financial Conduct Authority Confirms Regulatory Status of Cryptocurrency Derivatives
The Financial Conduct Authority has published a statement confirming the regulatory requirements applicable to firms engaged in cryptocurrency derivatives. The FCA does not regulate cryptocurrencies, provided that they do not form part of other regulated services or products. However, the FCA states that cryptocurrency derivatives may be categorized as financial instruments under the revised Markets in Financial Instruments Directive II and that firms carrying out regulated activities in cryptocurrency derivatives should comply with the FCA's Handbook rules as well as the directly applicable EU provisions. The FCA points out that dealing in, arranging transactions in, advising on or providing other services that are regulated activities in relation to derivatives that reference cryptocurrencies or tokens issued through an Initial Coin Offering will require FCA authorization.
View the FCA's statement.
European Central Bank Issues Final Guides on Licensing Credit Institutions and FinTech Credit Institutions
The European Central Bank has published finalized versions of its guides “Guide to Assessments of Licence Applications” and “Guide to Assessments of FinTech Credit Institution Licence Applications”, following consideration of the responses to consultations on draft versions of the guides, which the ECB ran between September and November 2017.
The ECB has been exclusively competent, since November 2013, to authorize all Eurozone credit institutions and credit institutions established in any other EU Member States that participate in the Single Supervisory Mechanism via close cooperation arrangements.
The ECB exercises its competence in close cooperation with the relevant national regulators. The ECB has developed the Guides, which are not legally binding, to promote awareness and enhance the transparency of the assessment criteria and processes for establishing a credit institution within the SSM. These should serve as practical tools to support applicants and all other entities involved in the process of banl authorization to ensure a smooth and effective procedure and assessment.
UK Government Launches FinTech Sector Strategy
HM Treasury has published a document entitled "FinTech Sector Strategy: Securing the Future of U.K. FinTech" to coincide with the U.K. government's second International Fintech Conference.
The Strategy Paper provides an overview of the work already conducted by successive U.K. governments to support the FinTech sector by promoting competition and removing barriers to entry. Drawing on the findings of the 2017 "UK FinTech Census," which set out a comprehensive review of the sector and the challenges it faces, the government has identified further action it might take to remove barriers to entry and growth faced by FinTech firms. These further actions focus on reducing the cost of regulatory compliance, ensuring access to skilled talent, improving FinTech firms' access to equity finance, improving the take-up of new FinTech services, increasing competition and providing access to new markets.
UK and Australian Regulators Agree Enhancements to FinTech Bridge
The U.K. Financial Conduct Authority and the Australian Securities and Investments Commission have signed an enhanced cooperation agreement on FinTech innovation. The new agreement supersedes the previous cooperation agreement entered into by the two countries' regulators in March 2016. It aims to enable public officials and private parties to work together to foster Fintech innovation and help early-stage Fintech firms to expand their businesses. The FCA and ASIC will, through their Innovation Hubs, explore ways to speed up the process of authorization of innovative businesses that are already authorized in the other jurisdiction. The framework agreed between the regulators includes a referral mechanism and mutual access to regulatory sandbox testing environments, enabling the two authorities to refer FinTech businesses between their respective sandboxes. The Authorities also plan to share and use information on innovation in their respective markets.
Commenting on the enhanced cooperation agreement, U.K. Chancellor of the Exchequer Philip Hammond stated that "This is our most ambitious collaboration to date, bringing together regulators, policy-makers and private sector leaders to collaborate on growing our respective fintech markets in tandem."
View the Enhanced Cooperation Agreement.
View the FCA press release.
UK Secondary Legislation on Regulatory Treatment of Peer-to-Peer Borrowers
The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2018 has been published. This Amendment Order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 to clarify the position of borrowers who raise funds through peer-to-peer lending platforms.
The Amendment Order provides that, subject to a number of conditions, if a borrower using peer-to-peer lending uses the capital of, or interest on, money received by way of deposit solely to finance its other business activities, this is to be regarded as evidence indicating that the borrower is not carrying on the business of accepting deposits. This clarifies that only firms whose core business involves borrowing through a peer-to-peer platform would need to obtain a banking license and be regulated as a "deposit taker." The Amendment Order resolves uncertainty for businesses borrowing via peer-to-peer platforms (and for the platforms themselves) by clarifying the circumstances in which those borrowers would be considered to be carrying on the regulated activity of accepting deposits.
The Amendment Order comes into force on March 22, 2018.
View the Amendment Order (S.I. 2018 No. 394)..
View the explanatory memorandum.
G20 Communiqué Calls for Recommendations for Regulation of Crypto-Assets
The G20 has published a Communiqué following the meeting of Finance Ministers & Central Bank Governors in Buenos Aires on March 19 – 20, 2018.
Among other things, the Communiqué states that the G20 welcomes the finalization of Basel III and remains committed to full, timely and consistent implementation and finalization of the reforms. The G20 looks forward to the outcome of the evaluation of the reforms to identify and address any unintended consequences, which is being led by the Financial Stability Board.
The G20 also commits to continue to address the decline in correspondent banking relationships. It welcomes the FSB's March 2018 progress report on correspondent banking and calls on the FSB to monitor, with the FATF, the International Monetary Fund, the World Bank Group and the Global Partnership for Financial Inclusion, the adoption of the recommendations in the FSB's March 2018 report "Stocktake of Remittance Service Providers' Access to Banking Services."
European Supervisory Authorities Issue Final Report on Financial Institutions' Use of Big Data
The Joint Committee of the European Supervisory Authorities has published a final report on the use of Big Data by financial institutions. The Final Report has been prepared following feedback to a discussion paper published in December 2016 by the Joint Committee’s sub-Committee on Consumer Protection and Financial Innovation. “Big Data” is the term used to refer to situations where high volumes of different types of data, produced with high velocity from a wide variety of data sets and sources, is processed (often in real time) by IT tools, such as powerful processors, software and algorithms. Big Data tools have been in use for several years in some sectors, but less so in others. Nevertheless most respondents to the ESAs’ discussion paper agreed that Big Data may have an impact on almost all financial institutions and on their products and services. The use of Big Data techniques can help financial institutions to improve their understanding of customers’ preferences and their interactions with customers and clients. This can enable them to tailor products to their target markets and support effective product governance. However, the use of Big Data also entails risk.
European Banking Authority Publishes FinTech Roadmap
The European Banking Authority has published a Roadmap setting out its conclusions following responses to its August 2017 discussion paper on its approach to financial technology. The EBA adopts the definition of FinTech that is used by international standard-setting bodies, namely, “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”.
Regulators and supervisors must balance, on the one hand, the needs for consumer protection, a level playing field, the integrity of financial markets and the stability of the financial system against, on the other hand, the need to ensure the opportunities presented by FinTech can be fully realized.
International Standard Setters Report on the Implications of Central Bank Digital Currencies
The Committee on Payments and Markets Infrastructures and the Markets Committee of the Bank for International Settlements have issued a joint report that considers two types of central bank digital currency: (i) a wholesale CBDC for use in financial markets and limited to select financial institutions; and (ii) a general purpose CBDC that would be available for use by the public. The report analyzes the implications of both types of digital currency in the core central banking areas of payments, monetary policy implementation and financial stability.
As regards wholesale CBDCs, the report finds that, while they might be useful for payments, more work is needed to assess their full potential. The report also finds that a wholesale CBDC would not alter the basic mechanics of monetary policy implementation, but that its transmission could be affected. The report states that a general purpose CBDC could have wide-ranging implications for banks and the financial system and could also have effects on the efficiency of financial intermediation. As a result, the report concludes that any jurisdiction considering the launch of a CBDC should carefully and thoroughly consider the implications before making any decision.
The joint report has been published in advance of the meeting of the G20 central bank governors and finance ministers, scheduled for March 19-20, 2018, which, among other things, proposes to discuss the technology behind cryptocurrencies.
View the joint report.
View the press release.
European Commission Outlines its Action Plan for FinTech
The European Commission has issued a Communication on FinTech to the European Parliament, the European Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions.
The Communication sets out the Commission's Action Plan for FinTech, building on responses from the Commission's public consultation on its policy approach to FinTech, which ran from March to June 2017, and on the work of the Task Force on Financial Technology which was established in November 2016. The Action Plan is part of the Commission's efforts to build a Capital Markets Union and a true single market for consumer financial services. It is also part of its drive to create a Digital Single Market. The Communication is accompanied by Frequently Asked Questions on FinTech and a factsheet.
At this stage, the Commission considers that there is limited need for regulatory or legislative action or reform. However, the outcome of ongoing monitoring and assessment of innovative technologies may point to the need for regulatory action at EU level in the future. The current Action Plan is concerned with initiatives designed to facilitate the emergence of innovative models throughout the EU (through sandboxes and similar approaches), to enable innovative models to scale up (through consistent licensing, common standards and interoperability). The Commission also aims to improve the uptake of technological innovation in the financial sector, by ensuring the suitability of the regulatory regime, reducing barriers to entry for innovative firms such as cloud service providers and, in particular, harnessing the potential of blockchain and other distributed ledger technologies. The Action Plan further outlines planned initiatives to strengthen cybersecurity as well as the integrity of the financial system.
European Commission Proposed Legislation to Regulate Cross-Border Crowdfunding Service Providers
The European Commission has published a proposed Regulation on European Crowdfunding Service Providers for Business. The proposed ECSP Regulation is part of the EU Capital Markets Union initiative and the Commission's FinTech Action Plan. It aims to increase access to finance through crowdfunding for innovative companies, start-ups and SMEs.
The Commission is seeking to introduce an "EU label for crowdfunding service providers" which would be authorized and supervised by the European Securities and Markets Authority and able to passport their services across the EU. Currently, different EU Member States apply different levels of regulatory requirements to CSPs. Some Member States require CSPs to comply with onerous obligations under the Markets in Financial Instruments package, some apply more lenient regimes, while others allow CSPs to benefit from exemptions and remain unregulated. The Commission's view is that this divergence hampers the potential scaling-up of crowdfunding activity, because CSPs need to comply with different legal and regulatory requirements and adjust their business models accordingly if they want to provide services in more than one EU Member State. The Commission is not proposing that current national frameworks be repealed. Instead, those frameworks can continue to exist, which will allow CSPs to choose to either provide or continue providing services on a domestic basis under national laws or to provide services under the proposed ECSP Regulation. However, the Commission is proposing that the MiFID II Directive be amended to exclude CSPs from its obligations.
European Commission Calls for Acceleration of Completion of the Capital Markets Union
The European Commission has published a Communication on completing the Capital Markets Union by 2019. The Communication confirms the Commissions commitment to completing the CMU by mid-2019 and announces the publication of the FinTech Action Plan, including a proposed Regulation on Crowdfunding, and the Sustainable Finance Action Plan. Legislative proposals on covered bonds, the cross-border distribution of collective investment funds and the law applicable to third-party effects of assignment are expected to be published on March 12, 2018. In May 2018, the Commission intends to publish a proposed Directive on credit servicers, credit purchasers and the recovery of collateral as well as impact assessments on the SME listing regime and the resolution of investment disputes.
The Commission states that completion of the CMU is more urgent due to the impending exit by the UK from the EU because the UK is currently the EUs largest financial centre. The Commission notes that an effective CMU will need to "open-up markets to give better access to finance for EU businesses and more and innovative investment opportunities for savers."
UK Parliament Launches Inquiry into Digital Currencies and Distributed Ledger Technology
The House of Commons Treasury Committee has launched an inquiry into digital currencies and distributed ledger technology in the U.K. The inquiry will consider the risks and opportunities of digital currencies for consumers, businesses and the Government as well as the impact of DLT on financial institutions, financial market infrastructure and the central bank. The regulatory response of the Bank of England and the Financial Conduct Authority in relation to anti-money laundering legislation will also be assessed against the need to ensure the protection of consumers without repressing innovation.
View the announcement.
UK Financial Conduct Authority Consults on Machine Executable Regulatory Reporting
The Financial Conduct Authority is seeking input on using technology to assist firms to meet their regulatory reporting requirements. The FCA would like to improve regulatory reporting by firms so that it is more accurate, efficient and consistent, less reliant on human interpretation and quicker for firms to implement changes to the requirements.
As part of its RegTech strategy, the FCA holds regular TechSprint events which are attended by financial services providers, technology companies and financial regulation experts to develop solutions to regulatory challenges. The Call for Input explains the proof of concept for Model Driven Machine Executable Regulatory Reporting which emerged at the November 2017 TechSprint.
The proposed Model Driven Machine Executable Regulatory Reporting has the potential to make regulatory reporting requirements machine-readable and executable, enabling firms to use automated, straight-through processing of regulatory returns. The proof of concept successfully used rules from the FCA Handbook, the Prudential Regulation Authority's Rulebook and International Financial Reporting Standards, illustrating the possibility for firms to comply with multiple regulatory reporting requirements.
10 Key Implications and Considerations of FinTech for Banks and Bank Supervisors Published by the Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision has published a report, "Sound Practices on Implications of FinTech developments for banks and bank supervisors." The report is a result of the analysis by the Basel Committee-mandated taskforce of financial technology innovations and emerging business models in the banking industry, including the consultation that was run last year. The report sets out the final 10 key implications and considerations for banks and banking systems and for bank supervisors and regulatory frameworks. The report also provides an overview of the current state of play in the industry.
The Basel Committee has decided not to determine whether there is a need to stipulate specific requirements at this stage. It will continue to monitor FinTech developments and assess whether any updates to the implications and considerations are warranted.
View the report.
US Commodity Futures Trading Commission and UK Financial Conduct Authority Agree to Collaborate on Regulating FinTech Innovation
The Commodity Futures Trading Commission and the Financial Conduct Authority have signed a Cooperation Arrangement on Financial Technology Innovation, an arrangement that commits both regulators to collaborating and fostering innovation through their respective FinTech initiatives, LabCFTC and FCA Innovate. This is the CFTC's first agreement of its kind with a non-U.S. counterpart and the FCA's first such agreement with a U.S. regulator. The arrangement will focus on information-sharing based on FinTech market trends and developments in each jurisdiction, simplify the referral process for FinTech companies interested in entering the other's market and facilitate sharing insight gained from each regulator's relevant sandbox, proof of concept or innovation competitions.
CFTC Chairman J. Christopher Giancarlo in a statement said he believes this collaboration will allow the CFTC to contribute to the growing role of regulators in new technology markets, and FCA Chairman Andrew Bailey argued that international borders should not inhibit global technological innovation. Chairman Bailey also announced an upcoming joint event between the CFTC and FCA in London to demonstrate how firms can work and engage with both regulators in the FinTech space.
View the joint press release.
View the Cooperation Arrangement.
US Commodity Futures Trading Commission Issues First Customer Advisory on Virtual Currency Pump-and-Dump Schemes
The Commodity Futures Trading Commission has issued its first customer advisory regarding pump-and-dump schemes in virtual currency markets. The CFTC warned customers to exercise extreme caution when investing in virtual currency listings promoted on social media, reportedly backed by famous high-tech business leaders and investors or accompanied by posts creating false urgency or telling investors to purchase right away.
The CFTC noted particular concern with the anonymous nature of virtual currencies, which makes enforcement actions against pump-and-dump schemes difficult. These schemes may occur in the largely unregulated virtual currency cash markets, over which the CFTC only has anti-fraud and anti-manipulation enforcement authority.
Additionally, the CFTC stated it has received multiple complaints from customers who have suffered losses due to virtual currency pump-and-dump schemes. The CFTC warned that virtual currencies should only be purchased after they have been thoroughly researched and that customers should avoid purchasing virtual currencies based on sudden price spikes.
The CFTC also encouraged market participants to come forward with any information that could lead to an enforcement action against a virtual currency pump-and-dump scheme.
View the CFTC’s customer advisory.
View the CFTC’s press release.
UK Financial Conduct Authority Moots Global Sandbox
The Financial Conduct Authority has issued a questionnaire on whether a global regulatory sandbox for fintech and other innovative businesses would be beneficial and how it would operate. The FCA set up the United Kingdom's Regulatory Sandbox in 2016 to provide a controlled environment for firms looking to develop and launch innovative businesses models. Similar sandboxes have been introduced in other countries as diverse as the United States, Australia, Bahrain, the Abu Dhabi Global Market, the Netherlands, Hong Kong, Malaysia, Thailand, Canada and Singapore. Other countries have officially announced the establishment of a sandbox or are in the process of setting up their sandbox.
The FCA considers that a global sandbox could allow firms to conduct tests in different jurisdictions at the same time. It could also bring regulators together to identify and work on solutions to common cross-border regulatory issues. Recognizing that establishing a global sandbox would be an enormous task, the FCA also suggests, as an interim measure, the establishment of an international college of regulators with innovation or sandbox models, so that firms could access multiple regulators simultaneously. This approach would also allow the regulators to share and learn from each other about new innovative business models.
The FCA requests feedback on the ideas by March 2, 2018. The FCA expects to provide an update on the global sandbox proposition later in March 2018.
View the FCA webpage.
View the questionnaire.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
EU Blockchain Observatory and Forum Launched
The European Commission has announced the launch of the EU Blockchain Observatory and Forum. The Commission intends the new Forum to build on existing initiatives and to ensure the feasibility of Blockchain use cross-border. It is also expected to assist in tackling difficulties arising from the use of Blockchain, such as disintermediation, trust, security and traceability. Furthermore, the Blockchain Observatory and Forum will support cross-border cooperation on practical use cases and be an open forum for discussing and developing new ideas.
The Commission's FinTech Action Plan is expected to be issued in Spring.
View the press release.
European Commission Hints at Future Changes to the Second Electronic Money Directive
The European Commission has published a report to the European Parliament and the Council of the European Union on the implementation and impact of the second Electronic Money Directive, known as 2EMD. 2EMD establishes a legal framework for the issuance and redemption of e-money and covers the rights and obligations linked to the redemption of funds by consumers, the licensing of e-money institutions and the prudential requirements applicable to e-money institutions, which updates the regime under the first Electronic Money Directive to align it with requirements on payment institutions under the revised Payment Services Directive. It applies to e-money service providers in the EEA. The regime has been sparsely used in practice, with few firms operating under its auspices.
2EMD requires the Commission to assess its implementation and impact and to propose legislative changes, if appropriate. The report was due on November 1, 2012, however, the Commission delayed its publication because a majority of member states had failed to transpose 2EMD into their national laws by the transposition date of April 2011. The Commission also wanted to take into account the impact of PSD2, which includes numerous cross-references to 2EMD.
European Supervisory Authorities Deliver Opinion on Benefits, Risks and Challenges of Innovative Customer Due Diligence Solutions
The Joint Committee of European Supervisory Authorities has published an Opinion addressed to EU national regulators to develop a common understanding of the appropriate use, by credit and financial institutions, of innovative methods to meet Customer Due Diligence obligations.
All firms that are subject to the Fourth Money Laundering Directive must put in place effective policies and procedures, including effective CDD procedures, to address the risk that their businesses may be used for money laundering or for terrorist financing purposes. 4MLD is "technology neutral" and does not set out specific steps or procedures that must be followed for CDD. There is scope, therefore, for new ways to verify customers' identity, for example non-face-to-face verification using traditional identity documents (such as passports) through portable devices or verification via centralized databases. Innovative means such as artificial intelligence are also increasingly used for monitoring customer relationships, for risk assessment and in decision-making processes.
The ESAs recognize that innovative solutions can improve the effectiveness and efficiency of AML/CFT controls and firms often use innovative solutions to meet demand for improved customer experience and costs savings. The ESAs believe that firms should not be prevented from using such solutions, provided that proper safeguards have been put in place to mitigate the ML/TF risk associated with the firm's business relationships and risk profile. The ESAs' Opinion highlights additional factors that national regulators can take into account when assessing the adequacy of any proposed use of innovative CDD solutions. These include: oversight and control mechanisms; the quality and adequacy of CDD measures; the reliability of CDD measures; delivery channel risk; and geographical risks.
View the Opinion.
Commodity Futures Trading Commission Discusses Approach to Virtual Currency Futures Markets
The Commodity Futures Trading Commission has released a backgrounder on the federal oversight of virtual currencies and its approach to regulating the virtual currency derivatives markets. Because virtual currencies have been deemed a commodity, certain derivative and other transactions in virtual currencies may be subject to CFTC oversight under the Commodity Exchange Act.
The CFTC outlined its 5-pronged approach to the regulation of derivatives involving virtual currencies, which will focus on (1) consumer education; (2) asserting legal authority; (3) market intelligence; (4) robust enforcement; and (5) government-wide coordination.
Draft UK Legislation Confirms Regulatory Position of Borrowers on Peer-to-Peer Lending Platforms
HM Treasury has published draft legislation to amend the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 (S.I. 2001/1177), to clarify the position of borrowers who raise funds through peer-to-peer lending platforms.
The draft Order will, once it is approved by Parliament, clarify that only firms whose core business involves borrowing through a peer-to-peer platform would need to obtain a banking license and be regulated as a "deposit taker". The draft legislation has been laid before Parliament to address uncertainty for businesses borrowing via peer-to-peer platforms (and for the platforms themselves) as there is a risk that those borrowers might in certain circumstances be carrying on the regulated activity of accepting deposits.
European Banking Authority Publishes Recommendations on Outsourcing by Financial Institutions to Cloud Service Providers
The European Banking Authority has published its final report on Recommendations on outsourcing by financial institutions to cloud service providers. The EBA has developed the Recommendations on its own initiative as part of its broader work on FinTech, given the increasing importance and popularity of cloud services as an enabling technology used by financial institutions.
The Recommendations are designed to complement the guidelines on outsourcing issued by the EBA's predecessor, the Committee of European Banking Supervisors on December 14, 2006. The Recommendations further specify the CEBS guidelines in five key areas: the security of data and systems; the location of data and data processing; access and audit rights; chain outsourcing; and contingency plans and exit strategies.
The Recommendations are addressed to credit institutions, investment firms and national regulators and will apply from July 1, 2018.
View the EBA Final Report.
UK Financial Conduct Authority Rules Out New Rules for Distributed Ledger Technology
The Financial Conduct Authority has published a feedback statement on Distributed Ledger Technology, following the discussion paper it issued in April 2017.
Respondents to the discussion paper provided the FCA with details of various use cases for DLT in the context of payments, asset management, securities trading, financial crime and regulatory reporting. The feedback statement summarizes stakeholder feedback and the FCA's response in relation to: the operational risks arising from permissioned and permissionless networks; the risks and legal and regulatory issues associated with digital currencies and initial coin offerings; digital asset trading and smart contracts; the ability of DLT to improve regulatory reporting and the benefits it could bring in tackling financial crime; and whether DLT is compatible with the requirements of the EU General Data Protection Regulation.
SEC Chairman Jay Clayton Releases Statement on Cryptocurrencies and Initial Coin Offerings
Chairman of the US Securities and Exchange Commission Jay Clayton released a public statement regarding cryptocurrencies and initial coin offerings (ICOs). In the statement, Chairman Clayton notes rapid growth in these areas and how expanding areas of innovation in this space may impact retail consumers and market professionals. With regard to retail consumers, Clayton reiterated that these investments carry with them reduced investor protections in comparison to traditional investments, highlighting that no ICOs have been registered with the SEC to date. For market professionals, Chairman Clayton stressed that, ICOs, while an innovation in the field, may still constitute securities transactions subject to SEC regulation, noting that much of the distinction between ICOs and traditional offerings may be more of a matter of form, rather than substance. Clayton also raised this point as it relates to cryptocurrencies, stating that merely calling a product a “currency” does not change the analysis of whether it is a security. Chairman Clayton further discussed the need for adequate disclosure, processes and investor protections with regard to ICOs, and stated that for cryptocurrencies, market professionals should either be able to demonstrate that the product is not a security, or comply with securities regulations.
View full text of Chairman Clayton’s statement.
UK Financial Conduct Authority Elaborates on its Mission and Consults on Approaches to Competition and Authorization
The UK Financial Conduct Authority has published two consultations, seeking feedback on draft documents setting out its regulatory approach to authorization and competition. The two documents, once finalized, will form part of a series of formal approach documents explaining the FCA's approach to regulation in more depth. They should be read alongside the FCA's Mission document, which was first published in October 2016 and most recently updated in November 2017.
In the consultation on its approach to authorization, the FCA explains the public value and purpose of requiring authorization to conduct regulated financial services activities and the FCA's current approach to authorizing firms and individuals. The FCA seeks feedback on four questions: (i) understanding of the Threshold Conditions that firms and individuals must meet for authorization, and any areas where the FCA might be more specific; (ii) how the FCA might improve its approach to supporting firms and individuals to meet the minimum standards and how the FCA might better promote competition; (iii) whether the FCA has suggested the correct commitments to firms making authorization applications and what other commitments could be made; and (iv) whether the FCA has prioritized the right strategic goals, and, if not, what additional goals could add the most public value to the FCA's work.
Federal Reserve Board Governor Lael Brainard Discusses the Impact of Fintech on Consumers
US Federal Reserve Board Governor Lael Brainard discussed the evolution of FinTech including the impact in the consumer space and the important role that banks, data aggregators, consumers, and other stakeholders play in the evolution of this fast-changing market. Brainard noted that consumers often are unaware of how their data is collected, who it is collected by, and how it is used, which can present issues, particularly in the fast-moving and constantly evolving FinTech space. Governor Brainard highlighted the important role that the consumer plays in the FinTech market, and cautioned consumers against allowing their financial choices to be completely on autopilot without some consideration of the underlying processes.
View Governor Brainard’s speech.
European Securities and Markets Authority Issues Alerts to Firms and Investors on Initial Coin Offerings
The European Securities and Markets Authority has published a statement alerting investors about the high risks of investment in Initial Coin Offerings, including the risk of total loss of their investment. The statement is accompanied by an alert to EU firms involved in ICOs reminding them of their regulatory obligations.
US Securities and Exchange Chairman Jay Clayton Raises Concerns About Virtual Currency Offerings11/08/2017
US Securities and Exchange Chairman Jay Clayton raised concerns about virtual currency offerings or so-called initial coin offerings. He noted that ICOs are similar to securities offerings by firms required to register with the SEC. However, he was concern that there is a significant lack of information about online platforms that list and trade the virtual coins and tokens that are offered in such ICOs. Clayton highlighted the potential for misconduct, including price manipulation and trading practices. An SEC investigation into two ICOs, announced in September, is ongoing. Earlier this year, the SEC's Office of Investor Education and Advocacy issued an investor alert warning about the risks associated with ICOs.
View Chairman Clayton's speech.
Financial Stability Board Considers Financial Stability Implications of Artificial Intelligence and Machine Learning in Financial Services
The Financial Stability Board has published a report prepared by experts from its Financial Innovation Network, which examines the potential financial stability implications of the growing use of artificial intelligence and machine learning by financial institutions. Data on the extent of adoption of this technology is still relatively limited, but the FSB considers that, overall, AI and machine learning applications show great promise for the financial services industry, provided that their specific risks are managed properly. Potential risks for financial stability should be monitored over the coming years as this technology is adopted and more usage data becomes available. These potential risks include the possibility of third-party dependencies, which may introduce new systemically important players outside the regulated sector. There is also a risk of new and unexpected forms of interconnectedness developing between financial markets and institutions. The FSB is also concerned that it is not possible to interpret all aspects of AI and machine learning methods and stresses the importance of ensuring adequate testing and training of AI and machine learning applications with unbiased data and feedback mechanisms, to ensure applications behave as intended.
The Report sets out a number of selected use cases and considers the possible effects of AI and machine learning on financial markets, financial institutions, consumers and investors along with a macro-financial analysis of issues such as possible market concentration and interconnectedness. The Report also considers the legal and ethical issues around AI and machine learning and sets out some preliminary thoughts on governance and the development and auditability of models.
View FSB Report.
View Press Release.
European Commission Furthers its Initiative on Crowdfunding and Peer-to-Peer Lending Platforms
The European Commission has published an Inception Impact Assessment on the possible introduction of legislation for crowdfunding and peer-to-peer lending. The Inception Impact Assessment discusses the need for the EU to develop alternative financing sources as part of the Capital Markets Union and how this might be achieved through strengthening the EU crowdfunding market. The Commission has identified two issues that would need to be addressed - firstly, the relatively small scale of crowdfunding platforms and lack of cross-border activity and secondly, the market's perception of the lack of reliability of crowdfunding and peer-to-peer platforms. The Inception Impact Assessment discusses the policy options that will be included in the impact assessment, if the Commission decides to proceed with the proposal, which are: (i) no EU framework; (ii) a self-regulatory approach with minimum EU standards; (iii) a comprehensive approach that treats crowdfunding platforms like regulated trading venues or payment institutions; and (iv) a standalone opt-in EU framework for platforms wishing to undertake cross-border activity (leaving national regimes for purely domestic platforms). The Inception Impact Assessment is intended to inform stakeholders and market participants of the Commission's intentions and to seek feedback on the intended initiative and any related future consultations. Feedback is requested by November 27, 2017.
View the consultation website.
Basel Committee on Banking Standards Consults on Implications of Fintech Developments for Banks and Bank Supervisors
The Basel Committee on Banking Standards has issued a consultative document on the implications of fintech for the financial sector. The consultation document assesses how technology-driven innovation in financial services, or "fintech", may affect the banking industry, banks' business models and the activities of supervisors in the near to medium term.
The Basel Committee has identified 10 observations and recommendations on supervisory issues for consideration by banks and their supervisors, which focus on risk management and the approaches that could be adopted to address the risks. The consultation considers various future potential scenarios - in addition to the banking industry scenarios, three case studies focus on technology developments (big data, distributed ledger technology and cloud computing) and three on fintech business models (innovative payment services, lending platforms and neo-banks). Responses to the consultation are requested by October 31, 2017.
View the consultation paper.
European Banking Authority Discussion Paper on its Approach to Financial Technology
The European Banking Authority has published a discussion paper seeking views on its assessment of areas in which it could conduct further work in the innovative field of financial technology. The discussion paper considers the work on FinTech already carried out in the EU and internationally. In the EU, this includes work by the European Supervisory Authorities and the European Commission and Parliament and at SSM level the work of the European Central Bank in developing policy on the assessment of licensing applications for FinTech credit institutions. Internationally, work has been carried out by both the FSB and the Basel Committee on Banking Supervision in order to assess the developments, risks, opportunities and challenges of FinTech.
The discussion paper outlines the work carried out by the EBA in relation to FinTech, including the preliminary findings of a mapping exercise it carried out in May 2017 to gain a better insight into the financial services offered, and innovations applied, by FinTech firms in the EU, and their regulatory treatment.Based on the results of the mapping exercise, the EBA identifies a number of areas that merit further analysis.
G20 Leaders Outline Action Plan Following Hamburg Summit
The G20 Leaders met in Hamburg, Germany on July 7-8, 2017 and have published a Leaders' Declaration and an Action Plan setting out the G20's strategy for achieving strong, sustainable, balanced and inclusive growth. The Action Plan includes ongoing and planned work on financial sector regulation and development.
US Government Accountability Office Releases FinTech Reports
The US Government Accountability Office released the first in a series of planned reports on fintech. In the report, the GAO describes the general regulatory framework for oversight over four subsectors of fintech, including marketplace lending, mobile payments, digital wealth management and distributed ledger technology. The report also found that the regulation of each subsector depends on the extent to which the firms provide a regulated service and the format in which such services are provided.
View the GAO report.
Financial Conduct Authority Publishes Discussion Paper on Distributed Ledger Technology
The Financial Conduct Authority has published a discussion paper on distributed ledger technology (DLT). The FCA is seeking to start a dialogue on the potential for future development of DLT in the markets it regulates. The FCA describes DLT systems (such as Blockchain and Ethereum) as rapidly developing technology which offer exciting potential to support the needs of consumers and the market. However, it notes that DLT may also present new challenges and potential risks, such as how regulated firms allocate responsibilities for systems shared among them.
In the discussion paper, the FCA discusses the risks and opportunities of DLT in relation to a number of specific areas, as follows:
- governance and technology resilience;
- DLT and distributed data;
- recordkeeping and auditability;
- smart contracts; and
- the use of digital currencies to deliver financial services.
View the Discussion Paper and related webpage.
View the online response form.
US Comptroller of the Currency Discusses Fintech
US Comptroller of the Currency Thomas Curry provided remarks describing actions the OCC has taken to meet the needs of all types of consumers, businesses and communities in the US. Specifically, he described a new department at the OCC, Compliance and Community Affairs Department, which brings together policy, supervision and community outreach in respect of consumer compliance, fair lending, AML/BSA and the Community Reinvestment Act. Curry also discussed OCC’s focus on encouraging innovation and establishing a framework for responsible innovation in the federal banking industry. He noted that the OCC started conducting research and discussing opportunities for innovation and financial technology (fintech) with banks and other companies as well as community and consumer groups, academics and other regulators in 2015, before releasing its framework in October 2016. He also discussed the agency’s draft supplement to its licensing manual that provides additional detail on how the OCC would evaluate applications for national bank charters from fintech companies and how the agency would supervise these banks and ensure fair access and treatment of customers. Specifically, Curry emphasized that the supplement does not establish any new authority, charter or policy and rather builds upon existing rules, guidance and processes. He further noted that, although changes to the OCC’s manuals are not typically released for public comment, the OCC is accepting comment on the supplement until April 14, 2017 in order to appropriately incorporate industry feedback.
View full text of speech.
US Office of the Comptroller of the Currency Releases Draft FinTech Charter Supplement
The US Office of the Comptroller of the Currency released its proposed FinTech charter supplement to the Comptroller’s Licensing Manual. Among other things, the OCC supplement defends the decision to consider issuing special purpose national bank charters for FinTech companies and provides further guidance on (i) initial steps for applying for an SPNB charter; (ii) standards that would apply to such a charter; (iii) applicable business plan requirements (i.e., inclusion of alternative business strategies, contingency plans and recovery and exit strategies); and (iv) the approval process. Comments on the OCC draft supplement are due by April 14, 2017.
View the OCC supplement.