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.
US Securities and Exchange Commission Charges Digital Asset Trading Platform Founder for Operating Unregistered Exchange
The Securities and Exchange Commission has accused the founder of a digital asset trading platform of failing to register as a national securities exchange. Without admitting or denying the charges, the founder agreed to pay $300,000 in disgorgement and a $75,000 penalty, and to cease and desist from future violations of Section 5 of the Securities Exchange Act of 1934.
The SEC said that the trading platform facilitated secondary market trading of ERC20 tokens, which are a type of digital asset issued and distributed on the Ethereum blockchain. The platform provided a marketplace that matched buyers and sellers of digital assets through the use of its order book, using smart contracts to validate, confirm and execute orders.
UK Crypto-Assets Task Force Outlines the Path to Crypto-Asset Regulation
The U.K. Crypto-Assets Task Force has published its Final Report. Established in March 2018 by the U.K. Chancellor of the Exchequer as part of the U.K. government's FinTech Sector Strategy, the Task Force comprises representatives from HM Treasury, the U.K. Financial Conduct Authority and the Bank of England.
The Task Force engaged with over 60 firms and other stakeholders to seek their views on topics including: the trajectory of the industry, the risks, benefits and underlying economic value of crypto-assets and the U.K.'s future regulatory approach. Stakeholders were of the view that there is a lack of regulatory clarity in the U.K. and that regulation should be introduced to support the legitimate players in the crypto-assets market. It is also crucial in mitigating risks. There were also calls for regulatory and tax frameworks to be aligned.
US State Regulators Sue Office of the Comptroller of the Currency Over FinTech Charter
The Conference of State Bank Supervisors has sued the U.S. Office of the Comptroller of the Currency to prevent it from granting charters for special purpose national banks to non-depository FinTech companies. The CSBS is the nationwide organization of state banking regulators in the United States.
The CSBS filed the lawsuit upon the OCC’s announcement on July 31, 2018 that it would begin accepting these applications. The CSBS previously sued the OCC over its ability to provide SPNB charters in April 2017. The federal district court in D.C., however, dismissed the first suit for lack of subject matter jurisdiction and ripeness, stating that the OCC had not decided whether to grant SPNB charters to FinTech firms at that time.
European Banking Authority Sets Out Its Work Priorities for 2019
The European Banking Authority has published its Work Programme for 2019, setting out details of, and planned main outputs from, 37 separate work streams across the following five key strategic priorities:
- Leading the Basel III implementation in the EU.
- Understanding risks and opportunities arising from financial innovation.
- Collecting, disseminating and analyzing banking data.
- Ensuring a smooth relocation of the EBA to Paris.
- Fostering the increase of the loss-absorbing capacity of the EU banking system.
The EBA also confirms that work related to Brexit will remain a horizontal priority for the EBA in 2019 and explains that the EBA's other activities may be affected in the future by Brexit-related developments. Should that be the case, any substantial change in the work programme will be communicated in due time, in order to seek steering and approval from its Management Board and Board of Supervisors.
View the EBA's 2019 Work Programme.
European Commission Announces Work Plan for 2019
The European Commission has published a Communication, outlining its work plan for 2019. The Communication is addressed to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. The Communication discusses the ongoing challenges for the EU in the run-up to the European Parliamentary elections and the post-Brexit Summit in Sibiu at which a new multi-annual framework for the EU27 will be finalized.
Separately published Annexes to the Communication relating to: (i) new initiatives; (ii) REFIT initiatives; (iii) priority pending proposals; (iv) legislative initiatives that have been withdrawn; and (v) a list of envisaged repeals. Priority pending proposals of particular relevance to financial institutions include legislative proposals relating to the forthcoming sustainable finance package, cross-border distribution of collective investment schemes, crowdfunding, amendments to the European Market Infrastructure Regulation, prudential regulation and supervision of investment firms and a proposed amending regulation relating to minimum loss coverage for non-performing exposures.
EU Supervisory Authority Reports on ICO and Crypto-Asset Risks and Potential Regulation
The European Securities and Markets Authority has published an own-initiative report prepared by its Securities and Markets Stakeholder Group. The purpose of the report is to provide advice to ESMA on steps it might take to contain the risks of Initial Coin Offerings and crypto-assets, on top of existing regulation.
In the report, the term “crypto-assets” is used to refer to coins, tokens, virtual and cryptocurrencies or other digital or virtual assets collectively. The acronym "ICO" is used to refer to an initial offering of any crypto-asset. The report sets out a taxonomy of crypto-assets, based on the distinction between payment tokens, utility tokens, asset tokens and hybrids used by the Swiss Financial Market Supervisory Authority (FINMA).
UK Regulator Launches Green FinTech Challenge
The U.K. Financial Conduct Authority has launched the Green FinTech Challenge for firms developing innovative products and services to assist in the U.K.’s transition to a low-carbon economy. The Challenge is part of the FCA's Innovate project. Successful applicants to the challenge will benefit from authorization support, live testing in the regulatory sandbox and FCA guidance. Applications for inclusion in the challenge should be submitted by January 11, 2019 and successful applicants will be notified by the end of Q1 2019. This is the first FinTech challenge run by the FCA and is separate from the FCA's other Innovate services, which should continue to be accessed by firms developing propositions that fall outside the scope of the challenge. Once the challenge is complete, it will consider whether to launch more challenges.
View the FCA's Green FinTech Challenge webpage.
US Securities and Exchange Commission Launches Strategic Hub for Innovation and Financial Technology
The Securities and Exchange Commission has launched its Strategic Hub for Innovation and Financial Technology (FinHub), designed to engage investors and market participants on FinTech issues and initiatives.
Valerie A. Szczepanik, the SEC's Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC's Division of Corporation Finance, will lead FinHub, which will focus on topics such as distributed ledger technology (DLT) and digital assets, automated investment advice, digital marketplace financing, artificial intelligence and machine learning. The SEC's various divisions will assign staff with expertise in the FinTech space. inHub will replace and build on the efforts of several of the SEC's internal FinTech working groups.
The SEC said that FinHub will provide a platform for market participants to engage directly with SEC staff on innovations and technological developments, publicize the SEC's FinTech-related activity on the FinHub webpage, host FinTech events (including a forum on DLT and digital assets planned for 2019) and act as a resource for SEC staff to acquire and disseminate FinTech-related information within the agency. Further, it will serve as the SEC's liaison to domestic and global regulators in respect of innovations in financial, regulatory and supervisory systems.
UK Conduct Regulator Issues Feedback Statement on Digital Regulatory Reporting
The U.K. Financial Conduct Authority has published a Feedback Statement on the Digital Regulatory Reporting project it began earlier in 2018. The Feedback Statement summarizes the feedback the FCA received from the call for input it published in January 2018 and sets out the FCA's responses.
The FCA is working with the Bank of England in the RegTech sphere to explore ways of using technology to link regulation, compliance procedures and firms' policies and standards together with firms' transactional applications and databases. Most respondents to the FCA's call for input agreed in particular that digital regulatory reporting could bring increased efficiency, among other benefits. Some respondents expressed concerns about costs of implementation and called for a period of overlap were digital regulatory reporting to be introduced. Overall, the FCA is encouraged by the feedback.
The Feedback Statement confirms that participants to a pilot launched in June 2018 to further explore the proof of concept for a move to digital regulatory reporting will publish their findings in a technical paper in Q1 2019. The FCA will continue with workstreams under the project and should a business case be made, it will launch a consultation and a cost benefit analysis. While the FCA is focusing on implementation of digital regulatory reporting in the U.K., it also believes that multinational adoption could bring benefits and is in discussions with its counterparts internationally.
View the Feedback Statement (FCA FS 18/2).
View details of the FCA's call for input.
View details of the terms of reference for the project's pilot phase.
US Commissioner Quintenz Speaks on Smart Contract Regulation
Commodity Futures Trading Commission Commissioner Brian Quintenz has given a wide-ranging speech at the GITEX Technology Week Conference in Dubai addressing a number of key issues faced by the CFTC in considering how to regulate smart contracts. While he acknowledged that there are still many questions to be answered on smart contract regulation, Commissioner Quintenz expressed a number of important views that should make market participants pause before assuming that activity in smart contracts will avoid CFTC scrutiny.
Commissioner Quintenz explained that, in his view, the first step the CFTC should take when considering a smart contract is to understand the basic nature of the contract and whether it is within the CFTC's jurisdiction. For example, is the contract a product that must be traded on an exchange? Does the protocol itself perform the functions of an exchange, which may trigger registration requirements? While the answers will of course be different for every smart contract, Commissioner Quintenz made clear that he believes existing CFTC regulations can and should be applied to such contracts where appropriate.
UK Conduct Regulator Invites Applications for Cohort Five of Its Regulatory Sandbox
The U.K. Financial Conduct Authority has announced that the application window has opened for cohort five of its regulatory sandbox. The FCA announced the successful applicants to the previous cohort in July 2018.
The FCA's sandbox is part of the FCA's Project Innovate, which was launched in 2014. The regulatory sandbox has been in operation since 2016 and provides a controlled environment for firms that satisfy the relevant eligibility criteria to test innovative products and services with real customers.
The deadline for completed applications for cohort five is November 30, 2018.
View the FCA webpage.
View details of the successful applicants to cohort four.
UK Regulator Considers Potential Regulatory Refinements for Climate Change
The U.K. Financial Conduct Authority has published a Discussion Paper on climate change and green finance in which it calls for comment on potential changes to its regulatory approach in these areas. The Discussion Paper sets out specific action that the FCA intends to take in the short term in four focus areas - capital markets disclosures, public reporting requirements, green finance and pensions.
First, the FCA is considering whether the regulatory approach to disclosures by issuers in the capital markets should be amended. In particular, the FCA is asking for comments on: (i) the difficulties that issuers may have in determining materiality of climate-related issues such that a specific disclosure would be warranted; (ii) whether investors would benefit from greater comparability of disclosures; (iii) whether further prescribed requirements on climate-related disclosures should be introduced to facilitate more consistent disclosures by issuers. This final point includes whether the introduction of a "comply or explain" approach to the Task Force on Climate-related Disclosures would facilitate more effective markets.
US Securities and Exchange Commission Halts Fraudulent Initial Coin Offering
The Securities and Exchange Commission announced that it halted a planned initial coin offering and related pre-ICO sales by Blockvest LLC and its founder, Reginald Buddy Ringgold, III. In seeking an emergency court order, the SEC alleged that Blockvest had falsely claimed that it and its affiliates received regulatory approval from various agencies, including the SEC and a fake agency called the "Blockchain Exchange Commission." Blockvest and Ringgold also allegedly used the National Futures Association seal in making false claims about their regulated status, even after the NFA sent them a cease-and-desist letter for doing so.
The SEC also charged that Blockvest and Ringgold violated the antifraud and securities registration provisions of the federal securities law. The SEC sought injunctions, return of ill-gotten gains plus interest and penalties, and a bar against Ringgold participating in any future offering of securities.
The Chief of the SEC Enforcement Division's Cyber Unit, Robert A. Cohen, said that "the SEC does not endorse investment products and investors should be highly skeptical of any claims suggesting otherwise." In addition, the SEC's Office of Investor Education and Advocacy and the U.S. Commodity Futures Trading Commission's Office of Customer Education and Outreach jointly issued an investor alert on the use of false claims regarding SEC and CFTC endorsements.
View the SEC's announcement.
Financial Stability Board Recommends Vigilant Ongoing Monitoring of Crypto-Assets
The Financial Stability Board has published a report entitled "Crypto-asset markets: Potential Channels for future financial stability," in which it outlines its findings following its assessment of the crypto-asset markets in 2018.
The FSB has considered the primary risks present in crypto-assets markets as low liquidity, volatility, leverage risks, as well as technological and operational risks (including cyber security risks). The FSB considers that crypto-assets lack the key attributes of sovereign currencies and do not serve as a common means of payment, a stable store of value or a mainstream unit of account. Based on the available information, the FSB considers that crypto-assets do not pose a material risk to global financial stability at this time. However, the FSB's report highlights that there could be financial stability implications from these primary risks through a variety of transmission channels including: (i) confidence effects; (ii) financial institutions' exposures to crypto-assets, related financial products and entities that are financially impacted by crypto-assets; (iii) the level of market capitalisation of crypto-assets; and (iv) the extent of their use for payments and settlements.
European Supervisors Announce 2019 Work Priorities
The Joint Committee of the European Supervisory Authorities (that is, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) has published its 2019 Work Programme. EIOPA will Chair the Joint Committee in 2019. The Work Programme provides details of the Joint Committee's key workstreams for 2019.
US and Australian Regulators Agree FinTech Information Sharing Arrangement
The Commodity Futures Trading Commission and the Australian Securities and Investments Commission have signed an arrangement designed to support cross-border FinTech innovation through their respective FinTech initiatives, LabCFTC and the ASIC Innovation Hub. The arrangement will facilitate information sharing between the two regulators in respect of emerging trends and developments, regulatory issues pertaining to FinTech innovations and best practices, among other things. It also includes a referral mechanism that will allow the CFTC and ASIC to refer to one another innovators that wish to operate or have questions about operating in the other's jurisdiction. The arrangement further calls for joint proofs of concept, trials and innovation competitions, where permitted, as well as periodic meetings to update each other on FinTech and RegTech trends and developments of common interest.
European Parliament Adopts Resolution on Distributed Ledger Technologies
The European Parliament has adopted a non-legislative resolution entitled "distributed ledger technologies and blockchains: building trust with disintermediation." Of particular relevance to the financial services sector, the European Parliament is requesting that the European Commission and other EU authorities take various steps to maximize the potential of this technology in the EU.
US Federal Judge Affirms Commodity Futures Trading Commission's Authority to Police Virtual Currency Fraud
The U.S. District Court for the District of Massachusetts issued an order confirming that the Commodity Futures Trading Commission maintains the authority to police virtual currency fraud. The order was issued in response to a motion to dismiss charges against My Big Coin Pay, Inc. and several individuals for operating a fraudulent virtual currency scheme through which they solicited customers to purchase a virtual currency known as My Big Coin (MBC).
The CFTC's initial enforcement order, filed in January 2018, accused the defendants of operating a fraudulent virtual currency scheme through which they solicited more than $6 million from customers throughout the U.S. by making false and misleading claims that MBC was actively being traded, was backed by gold and could be used anywhere MasterCard credit cards were accepted. The defendants also were alleged to have misrepresented MBC's daily trading price in reports on its website, when no daily trading price existed because MBC was not actively being traded.
UK Parliamentary Committee Calls For Urgent Regulation of Crypto-Assets
The U.K. House of Commons Treasury Committee has published a report calling for crypto-assets to be regulated in the U.K. as a matter of urgency. The Treasury Committee considers that the current "ambiguity of the UK Government and regulators' position is clearly not sustainable" and is recommending that an amendment be made to the Regulated Activities Order to bring crypto-assets within the U.K. regulatory perimeter, supervised by the Financial Conduct Authority. The Committee does not specify in the report the activity related to crypto-assets that should go into the RAO, but recommends that it should at least include the issuance of crypto-assets through Initial Coin Offerings and the provision of crypto-exchange services. This will, according to the Committee's report, address anti-money laundering risks and consumer protection, aligning investor protections with those adopted in the U.S.
The Committee is also seeking various actions by the Government and the U.K. regulators.
US Agencies Issue Multiple Digital Asset-Related Enforcement Orders
The Securities and Exchange Commission and the Financial Industry Regulatory Authority have issued three digital asset-related enforcement orders, and the SEC also suspended trading in two securities that track the value of digital assets. The orders mark an uptick in digital asset enforcement from previous months.
Crypto Asset Management, LP
On September 11, 2018, the SEC alleged that hedge fund manager Crypto Asset Management (CAM) had caused its Crypto Asset Fund (CAF) to fail to register as an investment company based on its digital asset investments, marking the first time the SEC has invoked the Investment Company Act of 1940 (the 1940 Act) in an enforcement proceeding against the managing member of a pooled investment vehicle that invests in digital assets.
Basel Committee on Banking Supervision Provides Brief Update on Various Workstreams
The Basel Committee on Banking Supervision has published a press release summarizing the outcome of its meeting on September 19-20, 2018. The Committee committed to consider Pillar 1 and Pillar 3 measures to prevent banks adjusting their balance sheets around regulatory reporting dates to manipulate reported leverage ratios. In addition, the Committee intends to further analyze banks' exposures to crypto-assets to reach a conclusion on whether action is needed to address the risks that these assets may present.
The Basel Committee will publish the following before the end of the year:
- an updated 2018 list of global systemically important banks, along with the high-level indicator values of all the banks that are within the G-SIB assessment exercise;
- final revisions to the market risk framework (towards the end of the year);
- a consultation paper (in October 2018) on whether the exposure measure should be revised to alleviate its impact on client clearing, including presenting options for revising this; and
- the revised Principles on Stress Testing (in October 2018).
The Basel Committee also published responses to Frequently Asked Questions on the treatment of settled-to-market derivatives under the Liquidity Coverage Ratio and Net Stable Funding Ratio.
View the press release.
View the FAQs.
US and Singaporean Regulators Sign FinTech Collaboration Agreement
The U.S. Commodity Futures Trading Commission and the Monetary Authority of Singapore today signed a cooperation arrangement on FinTech innovation, which is to be supported by the agencies' respective FinTech initiatives, LabCFTC and the MAS Financial Technology & Innovation Group. The arrangement will facilitate inter-agency cooperation on FinTech innovation and referrals for innovators that wish to enter the other regulator's market. In addition, it will provide an information sharing framework between the agencies focused on FinTech market trends and developments, innovations and best practices within their respective jurisdictions. The arrangement also calls for joint events, proofs of concept, trials and innovation competitions where permitted, along with periodic meetings to discuss FinTech issues of common interest.
CFTC Chairman J. Christopher Giancarlo in a statement said that he believes this collaboration with the MAS will "enhance global awareness of the critical role of regulators in 21st century digital markets," while Ravi Menon, Managing Director of the MAS, said that he hopes the arrangement will "create more opportunities for firms in both jurisdictions, especially in developing innovative business models for the derivatives market."
The arrangement follows a similar agreement reached by the CFTC and the U.K. Financial Conduct Authority this past February, and reflects the global nature of FinTech markets and the importance of cross-border collaboration between regulators.
View the cooperation agreement.
View the CFTC/FCA agreement.
European Supervisory Authorities Report on Automation in Financial Advice
The Joint Committee of the European Supervisory Authorities has published a joint report on automation in financial advice. The Report follows the ESA's 2015 joint discussion paper and follow-up report in 2016. The Report provides a summary of recent sectoral work by the ESAs in this area and the main findings of a survey with national regulators on the evolution of automation in financial advice in the securities, banking and insurance sectors. The ESAs observed that automated services are more often offered through partnerships between established financial intermediaries and FinTech firms than by FinTech firms alone. The ESAs also found that automation in financial advice has grown slowly and that the number of firms and customers involved is still limited. As a result, the ESAs do not consider that any of the previously identified risks have materialized and therefore that further action is unnecessary at this stage. The ESAs will conduct a new monitoring exercise if and when market developments and risks merit the work.
View the report.
Regulators Unveil Plans to Launch Global Financial Innovation Network
12 international financial regulators and related organizations have announced the launch of the Global Financial Innovation Network. The announcement, which was accompanied by a consultation paper on the role and objectives of the GFIN, serves as part two of a whitepaper published earlier this year by the U.K. Financial Conduct Authority on the possibility of forming a "global sandbox." The GFIN, as proposed, would consist of three components: (i) information sharing and collaboration through a network of regulators; (ii) joint policy work and regulatory trials; and (iii) cross-border firm trials.
The GFIN hopes to build upon existing information sharing agreements to allow information sharing to take place on a larger and quicker scale, which would allow regulators to fill information gaps related to innovation, technological trends and emerging issues. This would help FinTech firms navigate international regulations by providing a comprehensive forum through which to interact with multiple regulators. In addition, the GFIN aims to provide a space to encourage joint policy work and address areas of divergence between financial services regulators, particularly with respect to emerging technologies and legacy business models and regulatory frameworks. As envisioned, the GFIN would also facilitate cross-border trials of emerging technologies across global jurisdictions.
US Office of the Comptroller of the Currency Begins Accepting National Bank Charters from FinTech Companies
The U.S. Office of the Comptroller of the Currency announced that it would begin accepting national bank charter applications from non-depository FinTech companies that seek to engage in the business of banking. In connection with the announcement, the OCC released a policy statement that outlines the OCC’s chartering authority with respect to non-depository FinTech companies, the OCC’s stated support for reasonable innovation, and the chartering standards and supervisory expectations applicable to such institutions.
US Treasury Publishes Report on Nonbank Financials, Fintech, and Innovation
The U.S. Department of the Treasury released its report on Nonbank Financials, Fintech, and Innovation. The FinTech report is the fourth in a series mandated by U.S. President Donald Trump’s Executive Order 13772 on Core Principles for Regulating the United States Financial System.
UK Payment Systems Regulator Reports on the UK Contactless Mobile Payment Sector
The U.K. Payment Systems Regulator has published a Report setting out its understanding of the Contactless Mobile Payments sector, following information-gathering during 2016 and 2017. CMPs are in-store payments made by consumers, using apps installed on their mobile devices, usually using Near Field Technology for communication between the mobile device and the retailer's point-of-sale terminal and with payment security enabled via a "tokenization" process.
The PSR conducted two calls for information in 2016 and 2017, to increase its understanding of:
- whether the way CMPs operate and the way they are being offered in the U.K. potentially affects competition, innovation and the interests of people and organizations that use payment systems (and, if so, how); and
- whether there were any restrictions affecting the provision of tokenization services.
The Report explains how CMPs work from a functional and technical perspective, outlines the main participants and their respective roles, summarizes the PSR's consideration of particular issues and proposes next steps.
UK Financial Conduct Authority Proposes Changes to Rules Governing Peer-to-Peer Lending Platforms
The Financial Conduct Authority has launched a consultation on new rules for loan-based crowdfunding platforms, also known as peer-to-peer lending platforms. The FCA implemented rules regulating FCA-authorized firms operating investment-based and loan-based crowdfunding platforms on April 1, 2014. Investment-based crowdfunding is governed by the Markets in Financial Instruments package and the Alternative Investment Fund Managers Directive, as transposed into U.K. law. The regime for P2P lending is a national one and is less detailed and prescriptive.
The FCA began a post-implementation review of the crowdfunding sector and the applicable regimes in 2016. In the post-implementation review, the FCA identified that harm may be caused to investors as a result of poor business practices and due to the business models that some platforms have adopted. The consultation paper summarizes the FCA's findings from that review and sets out the FCA's proposals to change certain rules and guidance.
G20 Sets October 2018 Deadline for Financial Action Task Force to Clarify AML/CTF Standards For Crypto Assets
The G20 Finance Ministers & Central Bank Governors have issued a communiqué following their meeting in Buenos Aires on July 21 - 22, 2018. Among other things, the communiqué requests that the Financial Action Task Force clarify, by October 2018, how its global anti-money laundering and counter-terrorist financing standards apply to crypto assets.
The FATF's global standards (also known as the 40 Recommendations) promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. However, the FATF standards do not refer explicitly to crypto assets or the associated service providers and intermediaries, which creates uncertainty as to the scope of AML/CTF obligations that may apply to them.
Bank of England Confirms its Renewed Real-Time Gross Settlement System Can Interface With DLT
The Bank of England has published the outcomes from a "Proof of Concept" it ran to understand how its renewed Real-Time Gross Settlement service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on Distributed Ledger Technology. The BoE has operated the RTGS service since 1996 to provide a safe and reliable means of settling high-value cash payments in real time in sterling central bank money. The BoE published a blueprint for renewal of the RTGS in May 2017, setting out how it proposed to overhaul the system to ensure higher resilience, broader access, wider interoperability, improved user functionality and strengthened end-to-end risk management of the high-value payment system.
UK Conduct Regulator Outlines Scope of Digital Regulatory Reporting Pilot
The U.K. Financial Conduct Authority has published the terms of reference (dated June 2018) for the pilot phase of its Digital Regulatory Reporting project. The FCA is working with the Bank of England in the RegTech sphere to explore ways of using technology to link regulation, compliance procedures and firms' policies and standards together with firms' transactional applications and databases.
The FCA published a Call for Input in February 2018 following a TechSprint in November 2017, at which a 'proof of concept' was achieved, showing that it was feasible to make regulatory reporting requirements machine readable and executable. Using this "Digital Regulatory Reporting" would allow firms to map their regulatory requirements directly to the data that they hold. Potential benefits include automated, straight-through processing of regulatory returns, greater accuracy in data submissions and faster implementation of changes in regulatory requirements, as well as cost reduction and improvements to competition.
Financial Action Task Force Reports to G20 and Announces Priority Work for 2018-2019
The Financial Action Task Force has published its report to the G20 Finance Ministers and Central Bank Governors. The report gives an overview of recent FATF work and its proposed next steps in its current workstreams. The United States takes over the FATF Presidency for the period July 2018 to June 2019 and has separately published a document summarizing its priority and other initiatives for the duration of its presidency.
Financial Stability Board Reports on the Work of International Bodies on Crypto-Assets
The Financial Stability Board has issued a report to the G20 providing an overview of its current work on crypto-assets and that of the international standard setters, namely the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions and the Basel Committee on Banking Supervision. The G20 Ministers of Finance and Central Bank Governors issued a communiqué in March 2018 stating that they were concerned that crypto-assets raise a number of problematic issues in the contexts of consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. The G20 highlighted that crypto-assets may also have implications for financial stability and called on the FSB to provide a report on ongoing work by July 2018.
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 bank 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.