Financial services matters - July 2024

FCA regulation round-up: June 2024 

On 27 June 2024, the FCA published its regulation round-up for June 2024. 

Points of interest include:

• Consumer Duty: the FCA highlights that 31 July 2024 marks the first anniversary of the Consumer Duty's application to new and existing products and the deadline for firms to produce their first annual Consumer Duty board report. It is also the date of implementation for closed products and services. Additional information is published on this webpage, which sets out the FCA's expectations and requirements for the reports. 

• Changes to firm details attestation: as part of the improvements the FCA is making to its authorisation forms, it is reviewing the firm details attestation form to improve guidance, navigation and accessibility. To improve data quality, the FCA plans to strengthen validation on all existing fields and verification for email addresses, phone numbers and addresses.

• Investment labels: the FCA reminds UK asset managers that, from 31 July 2024, they will be able to opt in to use investment labels for UK investment funds seeking to achieve positive sustainability outcomes if they meet the qualifying criteria. This forms part of the FCA's sustainability disclosure requirements (SDR) and investment labels regime.

• Information for principals with overseas appointed representatives: the FCA has published a page for principal firms with overseas appointed representatives (OARs).

New FCA webpage for firms with overseas appointed representatives

On 27 June 2024, the FCA published a new webpage for firms with overseas appointed representatives (OARS).

The webpage is a response to feedback from the FCA's consultation on improving the appointed representative regime (CP21/34). Feedback showed principals may have challenges overseeing and communicating effectively with the OARs. The webpage sets out the challenges, expectations and considerations for firms with OARs, which includes:

• The FCA expects monitoring and oversight of OARs to account for any extra challenges that may arise, due to difficulties in communication and oversight. 

• Principal firms should consider whether customers dealing with an OAR will receive equivalent services, protections and outcomes as those dealing with UK-based appointed representatives (ARs). If not, firms should make sure customers are given suitable information to alert them to any differences.

• Principals must also establish on reasonable grounds, on a continuing basis, that the activities of their OARs do not result in undue risk of harm to consumers or market integrity.

• When completing the annual self-assessment appointed representative document, firms should consider the additional risks of having OARs when assessing their controls and resources.

• The application of the approved persons regime to OARs depends on, among other things, whether the activities are carried on from an establishment in the UK and how long individuals performing a customer function spend in the UK annually.

• If a firm is unable to adequately monitor the activities of an OAR, or if it does not carry on a regulated activity in the UK, it should consider terminating the arrangement.

Council of the EU agrees its position on simpler financial reporting requirements

On 19 June 2024, the Council of the EU published a press release announcing it has reached an agreement on a proposal to simplify certain reporting requirements in the field of financial services and investment support.

The Council has agreed its negotiating mandate on the proposed Regulation amending: 

• the European Systemic Risk Board (ESRB) Regulation (1092/2010)

• EBA Regulation (1093/2010)

• EIOPA Regulation (1094/2010)

• ESMA Regulation (1095/2010)

• InvestEU Regulation ((EU) 2021/523) as regards certain reporting requirements in the fields of financial services and investment support (2023/0363(COD)).

The proposal updates existing rules on data sharing between the European Supervisory authorities (ESAs) and other financial sector authorities with the aim to reduce administrative burden for authorities in the financial sector.

FSB Plenary: June 2024

On 14 June 2024, the Financial Stability Board (FSB) published a press release following its Plenary meeting in Toronto.

The Plenary discussed follow-up work to the lessons learned from the banking sector turmoil and the outlook for global financial stability, as well as the FSB’s deliverables to the July G20 Finance Ministers and Central Bank Governors meeting.

• Financial stability outlook. Although there has been some improvement in the macroeconomic outlook, there are still a number of vulnerabilities in the financial system that require close monitoring. Some asset prices appear to have high valuations, interest rates remain at higher levels than in recent years in a number of jurisdictions. 

• Banking turmoil lessons. The Plenary discussed the progress made on key international work following the March 2023 banking turmoil, including work on public sector backstop funding mechanisms as a last resort, examining interest rate and liquidity risk in the financial system, and exploring vulnerabilities associated with depositor behaviour because of new technologies and social media.

• Non-bank financial intermediation (NBFI). The FSB is undertaking work to enhance the resilience of NBFI. For example, the Plenary reviewed the FSB's draft public consultation report on its evaluation of the effects of the G20 financial regulatory reforms on securitisation. The consultation is due to launch this month. The FSB is also working on policies to enhance the monitoring of, and to address financial stability risks stemming from, leverage in NBFI, and to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls. The Plenary discussed the importance for policy making of good quality data and the availability to identify and close data gaps for monitoring key open-ended fund vulnerabilities relating to liquidity mismatch.

• Implementation of cryptoasset recommendations. The Plenary welcomes the progress made in implementing the FSB's July 2023 recommendations. The FSB will continue to closely monitor implementation, in both FSB member jurisdictions and in jurisdictions beyond the FSB. Members discussed the challenges posed by the relatively higher levels of adoption and risks of global stablecoin arrangements in emerging market and developing economies.

• Nature-related risks. The FSB is due to publish a report in July 2024 on supervisory and regulatory initiatives relating to nature-related financial risks.

ESAs enter into MMoU with ENISA

On 5 June 2024, the three European Supervisory Authorities (ESMA, EBA and EIOPA) (ESAs) published the text of a multilateral memorandum of understanding (MMoU) it entered into with the European Union Agency for Cybersecurity (ENISA).

The MMoU establishes a framework for cooperation and information exchange on matters related to the Regulation on digital operational resilience for the EU financial sector ((EU) 2022/2554) (DORA), the Network and Information Security Directive ((EU) 2022/2555) (NIS 2 Directive), and other areas of mutual interest. These include:

• major incident reporting

• developing draft technical standards

• sharing effective practices across sectors

• providing technical advice and sharing hands-on experience on oversight activities.

The MMoU is valid for three years and will automatically renew for another three years unless otherwise terminated.

FCA research on digital engagement practices

On 20 June 2024, the FCA published a research note on digital engagement practices (DEPs). 

In light of the Consumer Duty and concerns about problem behaviours linked to trading app design, the FCA conducted an online experiment to investigate the effect of digital engagement practices, including gamification, on trading behaviour. The regulator built an experimental trading app platform which tested over 9,000 consumers in an online experiment.

Four DEPs, which have been increasing used, were tested:

• “flashing prices”: real-time price changes being indicated with red and green flickers and directional arrows.

• “push notifications”: frequent pop-up messages about price movements.

• “trader leaderboard”: a table of traders with the highest returns which participants could attempt to climb.

• “points & prize draw”: a lottery to which participants received an increased chance of winning if they traded more.

The FCA noted that these features attracted consumer attention whilst conveying no additional information to improve trading. Its key finding is that DEPs can lead to changes in trading frequencies and investment risk. In terms of the other key findings, the FCA found that:

• Push notifications and points & prize draw increased the number of trades made, by 11% and 12% respectively.

• Push notifications and points & prize draw increased the proportion of trades that were in risky investments by 8% and 6% respectively.

• Those with low financial literacy increased their trading by more than those with high financial literacy in the presence of flashing prices and trader leaderboards.

• Women increased their trading frequency by more than men when push notifications and points & prize draw were introduced.

• Younger participants (18-34) increased their end-of-trading portfolio riskiness by more than older participants (35+) across all DEPs (except flashing prices).

European Commission targeted consultation on AI in the financial sector

On 18 June 2024, the European Commission published a targeted consultation on Artificial Intelligence in the financial sector. 

The aim of the consultation is to inform Commission services on the concrete application and impact of AI in financial services, considering the development in the different financial services use cases. It focuses on the objectives of the financial sector acquis and the AI Act, and it is intended to improve the effective implementation of these legal frameworks.

Responses will support Commission services in their assessment of market developments and risks related to AI and in the implementation of the AI Act and existing financial services legislation in the financial sector.

The deadline for responses is 13 September 2024. Whilst the Commission welcomes responses from all financial services stakeholders, it is particularly interested in responses from financial firms that provide or use AI systems.

FMLC paper on digital assets: governing law and jurisdiction

On 6 June 2024, the Financial Markets Law Committee (FMLC) published a paper on digital assets: governing law and jurisdiction.

The FMLC published a paper in 2018 which examined governing law and related conflicts of law issues in the context of distributed ledger technology (DLT) systems. The sector has seen significant developments, and the recent paper aims to reconsider the remaining uncertainties in the conflict of law rules that should be applied to DLT systems and digital assets.

The paper considers the growing use of DLT systems and digital assets, legal developments such as the Law Commission's Report on Digital Assets and UNIDROITS project on Digital Assets and Private Law, and case law from across the world which has considered digital assets as being capable of giving rise to property rights.

The FMLC concludes that the most effective way to resolve the issue of legal uncertainty in identifying the governing law of proprietary claims relating to digital assets is by statutory intervention. It proposes a statutory rule that would give primacy to the system of law specified in a digital asset or DLT system. In the absence of a choice of law, the rule would establish a waterfall that would enable the governing law to be identified with sufficient certainty in most cases. The FMLC also propose a new jurisdictional gateway giving the courts of England and Wales jurisdiction to determine proprietary disputes relating to digital assets where:

• the digital asset of DLT system contains an express election in favour of the jurisdiction on the courts of England and Wales; or 

• if there is no express election, the governing law of the claim would be the law of England and Wales, following the proposed statutory rule. 

MiCA update

EBA final reports on draft RTS, ITS and guidelines under MiCA: June 2024

On 19 June 2024, the EBA published the following final reports under the Regulation on markets in cryptoassets ((EU) 2023/1114) (MiCA):

• Final report on guidelines establishing the common reference parameters of the stress test scenarios for the liquidity stress tests referred in Article 45(4) of MiCA (EBA/GL/2024/08).

• Final report on draft regulatory technical standards (RTS) on supervisory colleges under Article 119(8) of MiCA (EBA/ RTS /2024/14).

• Final report on draft RTS on the methodology to estimate the number and value of transactions associated to uses of asset-referenced tokens as a means of exchange under Article 22(6) of MiCA and of e-money tokens denominated in a currency that is not an official currency of a member state under Article 58(3) of MiCA (EBA/RTS/2024/13).

• Final report on draft ITS on the reporting on asset-referenced tokens under Article 22(7) of MiCA and on e-money tokens denominated in a currency that is not an official currency of a member state pursuant to Article 58(3) of MiCA (EBA/ITS/2024/04). The report is accompanied by Annex I, II, III, IV and V.

The EBA consulted on technical standards and guidelines under MiCA in November 2023. The final reports set out the EBA's analysis of the responses as well as any changes resulting from the consultations made to the draft RTS, ITS and guidelines.

The EBA will submit the final draft RTS, ITS and guidelines to the European Commission for endorsement. Then they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union. The guidelines will apply two months after all translations have been published on the EBA website.

EBA final reports on draft RTS and guidelines on prudential matters under MiCA

On 13 June 2024, the EBA published final reports containing five sets of final draft regulatory technical standards (RTS) and one set of guidelines under the Regulation on markets in cryptoassets ((EU) 2023/1114) (MiCA). The reports are intended to help foster a well-regulated market for asset-referenced tokens and e-money in the EU.

Each report sets out the EBA's analysis of the relevant consultation responses, and changes made to the draft RTS and guidelines. The reports comprise:

• Final report on guidelines on recovery plans under Articles 46 and 55 of MiCA (EBA/GL/2024/07).

• Final report on draft RTS on adjustment of own funds requirements and stress testing of issuers of asset-referenced tokens and of e-money tokens subject to such requirements (EBA/RTS/2024/08) developed under a mandate in Article 35(6) of MiCA.

• Final report on draft RTS specifying the procedure and timeframe to adjust the own funds requirements for issuers of significant asset-referenced tokens or of e-money tokens subject to such requirements (EBA/RTS/2024/09) under a mandate in Article 45(7) of MiCA.

• Final report on draft RTS specifying the liquidity requirements of the reserve of assets under Article 36(4) (EBA/RTS/2024/10).

• Final report on draft RTS specifying the highly liquid financial instruments with minimal market risk, credit risk and concentration risk under Article 38(5) of MiCA (EBA/RTS/2024/11).

• Final report on draft RTS specifying the minimum contents of the liquidity management policy and procedures under Article 45(7)(b) of MiCA (EBA/RTS/2024/12).

The EBA will submit the final draft RTS to the European Commission for endorsement. They will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union. The guidelines will apply two months after all translations are published on the EBA website.

ESMA final report on draft RTS on conflicts of interest for CASPs under MiCA

On 31 May 2024, ESMA published a final report (ESMA18-72330276-1634) on its draft regulatory technical standards (RTS) specifying certain requirements in relation to conflicts of interest for cryptoasset service providers under the Article 72 of the Markets in Crypto Assets Regulation (MiCA) ((EU) 2023/1114) (MiCA).

ESMA consulted on the draft RTS in July 2023. The RTS aim to clarify elements relating to vertical integration of CAPS, and to further align with the draft EBA rules which apply to issuers of asset-references tokens. They provide an update on the requirements for the policies and procedure for the identification, prevention, management and disclosure of conflicts of interest, as well as the details and methodology for the content of the disclosure of conflicts of interest.

ESMA submitted the draft RTS to the European Commission, who have three months to decide whether to adopt them.

FCA updates webpage on SDR and investment labelling regime

On 1 July 2024, the FCA updated its webpage on its sustainability disclosure requirements (SDR) and investment labelling regime.

The webpage is helpful for funds using or wanting to apply a label under the regime. Labels can be displayed from 31 July 2024 if firms meet the requirements. A new section has been added to the webpage, which sets out how firms can notify the FCA about their use of an investment label and contains details of how to apply to make associated changes to a fund’s name, investment objectives or policy. The FCA also reiterates that it does not approve labels, but firms are required to notify it when they use, revise, or stop using a label.

The webpage outlines four scenarios for notifying the FCA, but the steps will vary depending on the position of the firm.

Second edition of NGFS guide published on climate-related disclosure for central banks 

On 19 June 2024, the Network for Greening the Financial System (NGFS) published the second edition of its guide on climate-related disclosure for central banks.

The second edition reaffirms the NGFS' support for its globally recognised disclosure standards, which are based on the work of the Task Force on Climate-related Financial Disclosures (TCFD) and builds on experience gathered by NGFS members that have already published climate-related disclosure reports.

Building on and complementing the original TCFD recommendations, the second edition provides additional guidance for central banks taking their first steps in climate-related disclosure and aims to provide insights for those that are already at an advanced state.

In a related press release, the NGFS identified the headline disclosure recommendations as:

• Governance. Disclose the institutional climate-related objectives and decision-making process of the central bank as well as climate-related governance structures for specific areas and functions.

• Strategy. Disclose climate-related impacts related to the central bank as well as the strategy (in terms of adaptation, capacity building and communication) for handling these impacts.

• Risk management. Disclose the processes for managing climate-related risks at the central bank, focusing on identification, assessment and integration.

• Metrics and targets. Disclose metrics and targets relating to the central bank's management of climate-related risks and exposure to climate-related risks and opportunities.

ESAs publish joint opinion on the assessment of SFDR

On 18 June 2024, the ESAs published a joint opinion on the assessment of the Sustainable Finance Disclosure Regulation.

The opinion was published on the ESAs' own initiative in the context of the European Commission's review of the SFDR framework, launched in September 2023. It calls for a coherent sustainable finance framework that caters for both sustainable finance transition and investor protection.

The ESAs' recommendations to the Commission include:

• The Commission could consider introducing a product classification system, based on regulatory categories or sustainability indicators to help consumers navigate the broad selection of sustainable products and support the full transition to sustainable finance.

• The categories should be simple with clear objective criteria or thresholds, to identify which category the product falls into. The ESAs encourage, at least, categories of "sustainability" and "transition".

• A sustainability indicator could refer to environmental sustainability, social sustainability or both, illustrating to investors the sustainability features of a product in a scale.

• Options for product categorisation and sustainability indicators should be consumer tested and consulted on. With clear product categories and sustainability indicators, sustainability disclosures would not need to be as detailed and extensive.

• The ESAs strongly recommend the Commission ensures that sustainability disclosures cater to different investor needs. Also, improvements in sustainability disclosures should consider different distribution channels, including digital ones, and ensure consistency of the information provided. The Commission should prioritise only essential information for retail investors, although professional investors may benefit from more detailed information.

• The Commission could carefully reflect on whether to include other products within scope of the SFDR to ensure harmonised disclosures for both products currently in scope of the SFDR and any other products that could be brought within scope.

ESAs publish final reports on greenwashing in the financial sector

On 4 June 2024, the ESAs published their final reports on greenwashing in the financial sector:

• The EBA's final report on greenwashing monitoring and supervision.

• ESMA's final report on greenwashing.

• EIOPA's final report on greenwashing in the financial services sector. 

The reports respond to the Commission's May 2022 request for input on "greenwashing risks and supervision of sustainable finance policies."

The ESAs have taken a coordinated approach on greenwashing risks. The reports reiterate the common high-level understanding of greenwashing as a practice whereby sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This may be misleading to consumers, investors, or other market participants. The ESAs highlight that financial market players have a responsibility to provide sustainability information that is fair, clear, and not misleading. 

Each final report: 

• outlines the current supervisory response to greenwashing risks under the respective ESA's remit

• notes that national competent authorities (NCAs) are already taking steps in the area of supervision of sustainability-related claims

• considers how sustainability-related supervision can be gradually enhanced; and 

• considers potential improvements to the regulatory framework around greenwashing.

Whilst the reports focus on the EU's financial sector, they acknowledge that addressing greenwashing requires a global response, involving close cooperation among financial supervisors and the development of interoperable standards for sustainability disclosures.

Chartered Banker's new podcast series on Modern Payment Services

On 20 June 2024, Chartered Banker released the first episode of a new podcast series called "Banking Transformations: A Deep Dive into Modern Payment Services", hosted by Institute Trustee Andrew Shiels. The series is designed to bring listeners up to speed with the evolving landscape of payment services, delving into the role of Pay.UK and how it helps shape the UK's banking sector.

The first of seven episodes focuses on the work of Pay.UK, and features its Chief Business Development Officer, Kate Frankish, who provides a comprehensive introduction to Pay.UK, outlines the organisation’s history, its purpose, and its products and services. In episode two, she highlights Pay.UK's work in fraud detection, prevention and reimbursement. Kate and Andrew discuss the increase in authorised push payment fraud and how the industry is working to tackle it.

PSR appointments 

On 19 June 2024, the Payment Systems Regulator (PSR) published a press release, confirming the appointment of Sheldon Mills as non-executive director to its board with immediate effect. Mr Mills was Executive Director, Consumers and Competition at the FCA in December 2020, where he oversaw policy and supervision of retail financial services, as well as the FCA’s competition market studies and enforcement activities. He also chairs the FCA's Executive Regulation and Policy Committee, is the executive sponsor for the Consumer Duty and early careers, and co-chairs the Joint Regulatory Oversight Committee for Open Banking.

On 3 June 2024, the PSR published a press release announcing that it has appointed David Geale as Interim Managing Director of the PSR. Mr Geale will be appointed for nine months, effective 10 June 2024. He joins the PSR from the FCA where he has most recently been Director of Retail Banking with responsibility for supervision and policy.

After the general election, the PSR will begin the recruitment process for a new Managing Director.

Larsson v Revolut – High Court strikes out APP fraud claims against receiving payment service provider

On 4 June 2024, the High Court held that Revolut did not owe a duty of care to the payer in Larsson v Revolut Ltd [2024] EWHC 1287 (Ch), an APP fraud case.

Mr Larsson was a Revolut customer who brought claims against Revolut relating to a case of APP fraud, in respect of its role as the receiving Payment Service Provider (PSP). 

Mr Larsson, the claimant, believed he was purchasing shares which did not actually exist. The perpetrators told him to transfer money to five Revolut accounts (the destination accounts), which they said had been set up in his name. The claimant assumed the money would remain in his control until he became a shareholder. Revolut allowed the five transfers to be made from his Swiss bank account to the destination accounts. The accounts were not, in fact, held in his name, and once the funds were received the perpetrators quickly transferred the funds out of the accounts. The claimant had his own account with Revolut, which was not involved in the fraudulent transactions.

The claims included:

• breach of contract, as he himself was a genuine Revolut customer, due to terms in Revolut's standard conditions that a customer could not open more than one account with the PSP

• breach of tortious duties similar to the alleged contractual liabilities

• dishonest assistance in breach of trust.

The court found no basis for imposing the claimant's alleged contractual duties, and it was accepted that no duty of care is generally owed to a third-party victim when processing payments, in relation to the alleged tortious duties, unlike in the case of a sending PSP. The court also rejected the attempts by the claimant to impose a duty of care on the PSP simply by virtue of the fact the claimant happened also to be a customer of the PSP.

The court considered the Quincecare duty and decided that it does not extend to third parties. The court confirmed that the receiving bank in did not owe a duty to the third-party payer (the victim of APP fraud) to ensure that sums were sent only to the beneficiary identified in the payer's instructions.

APP fraud claim against receiving PSP: High Court refuses to strike out claim for unjust enrichment

On 12 June 2024, the High Court dismissed an application by Revolut to strike out a claim for unjust enrichment in the case of Terna Energy Trading doo v Revolut Ltd [2024] EWHC 1419 (Comm). 

In 2022, Terna Energy Trading doo (Terna) (the claimant) instructed its bank to pay €700,000 to Zdena Fashions Ltd (Zdena), who held an account with Revolut. The claimant believed it was paying a genuine invoice from one of its energy suppliers. The funds were initially frozen by anti-money laundering software, but once they were released, they were entirely dissipated in a matter of hours.

Terna brought a claim in unjust enrichment against Revolut, the payment service provider (PSP). It argued that since Revolut received the money into its account, it obtained legal and beneficial title to the funds and was therefore enriched, and claimed Revolut’s enrichment was at its expense.

Revolut applied for reverse summary judgment or strike out. It asserted that it had not been enriched, and that even if it had received a benefit, this was not at the expense of Terna.

The court dismissed the application.

The court accepted that Revolut was entitled to reverse summary judgment or strike out, if it could show that it was not enriched or that any enrichment was not at the expense of the claimant. The court found that both points were at least sufficiently arguable to go to trial and accordingly refused the application. The court found that there was a real prospect of the claimant proving that Revolut was enriched, even though there was an immediate balancing liability/obligation on the receiving PSP to its own customer when the funds were received (although it was acknowledged that this could amount to a defence, but defences were not to be dealt with as part of the summary judgment application).

The court acknowledged that its judgment conflicted with the High Court decision in Tecnimont Arabia Ltd v National Westminster Bank plc [2022] EWHC 1172 (Comm) but it held it was not strictly bound by the decision, and it did not agree with it. 

Permission to appeal was granted on 18 June 2024.

This is the latest instalment in a series of High Court cases relating to APP fraud and the responsibilities of receiving PSPs. No clear position has been taken by the first instance courts to date. It is hoped that the appeal in Terna Energy Trading doo v Revolut Ltd will provide greater clarity on the litigation risk for receiving PSPs.

PSR publishes policy statement on changes to specific directions relating to supply of card-acquiring services

On 29 May 2024, the Payment Systems Regulator (PSR) published a policy statement (PS24/1)  confirming revisions to its Specific Directions 14, 15 and 16, which relate to the supply of card-acquiring services.

The PSR consulted on changes to the above directions between January and February 2024, as reported in our February 2024 update. Following its analysis of responses to the consultation, the PSR has confirmed that it will:

• update the legal entities

• introduce the new mechanism for the transfer of legal entities.

The changes to the Specific Directions are set out in a Specific Direction 14/15/16a.

EBA published final report on amendments to guidelines on arrears and foreclosure under MCD

On 28 June 2024, the EBA published a final report (EBA/GL/2024/10) on amendments to its guidelines on arrears and foreclosure under the Mortgage Credit Directive (2014/17/EU) (MDC).

The MCD aimed to bring about a more transparent, efficient and competitive internal market, through consistent, flexible and fair credit agreements relating to immovable property. Article 28 of the MCD introduced provisions in the area of arrears and foreclosure, requiring Member States to adopt measures to encourage creditors to exercise reasonable forbearance before foreclosure proceedings are initiated.

In June 2015 the EBA issued Guidelines on arrears and foreclosure which provided greater detail on how the relevant MCD provisions in Article 28 should be applied. The EBA will amend these guidelines to:

• Delete guideline 4 on the resolution process between creditor and borrower.

• Delete the material in the guidelines concerning the regime for national authorities designated as competent under the MCD that are not also national competent authorities (NCAs) under the EBA regulation (1093/2010). 

• Introduce a new guideline 6 on outsourcing that cross-refers to the EBA guidelines on outsourcing arrangements (EBA/GL/2019/02).

The amendments will apply from two months after the date of publication on the EBA's website of the amendments in all EU official languages.

New FCA webpage on mortgage charter data

On 11 June 2024, the FCA published a new webpage setting out the latest data from firms who have signed up to the government's mortgage charter.

The government's mortgage charter, which was introduced in June 2023, aims to provide additional support measures for residential mortgage holders concerned about higher interest rates. It contains commitments, over and above FCA requirements, made by mortgage lenders. The charter has 49 signatories, which represents around 90% of the mortgage market. 

Key findings include:

• Data suggests that a minimum of around 1.1 million mortgages benefited from one or more of the options set out in the Charter, whether explicitly or through a business-as-usual channel.

• Around 113,000 mortgages have temporarily reduced monthly payments via the new FCA rules.

• Between July 2023 and April 2024, the monthly payments on around 159,000 mortgages were reduced as people switched to temporarily paying interest-only or extended their mortgage term.

• 91 properties were repossessed within 12 months of missing the first payment. Firms report these were for customer-driven reasons, for example voluntary possessions or abandoned/vacant properties.

The FCA will publish this data quarterly whilst it continues to ask firms to report on charter uptake, and intends to closely monitor the mortgage market.

BoE Financial Stability Report and FPC summary: June 2024

On 27 June 2024, the Bank of England (BoE) published the financial policy and summary record (FPSR) of the meeting of its Financial Policy Committee (FPC) on 11 June 2024. 

The FPSR covers a number of topics, including:

• Private equity: improved transparency over valuation practices and overall levels of leverage would help to reduce vulnerabilities in the private equity sector. Risk management practices in some parts of the sector also need to improve, including among lenders to the sector such as banks. The FPC will consider the outcome of the FCA and PRA's work to address some of these issues.

• UK banking sector resilience: the UK banking system is well capitalised and UK banks maintain strong liquidity positions. A number of system-wide factors are likely to affect bank funding and liquidity in the coming years, so banks should factor these system-wide trends into their liquidity management and forward planning.

• The resilience of market-based finance: vulnerabilities that the FPC previously identified in marked-based finance remain. In particular, leveraged positions, which have been a driver of a number of recent stress events, appear to be increasing among hedge funds. The FPC supports the Financial Stability Board’s international work programme on leverage in non-bank financial institutions, and encourages global cooperation to reduce the vulnerabilities through internationally co-ordinated policy reforms.

The FPC’s next Policy meeting will be on 19 September 2024 and the record of that meeting will be published on 2 October 2024.

Alongside the FPSR, and covering similar issues, the BoE has published its Financial Stability Report for June 2024 (based on data available as at 10 June 2024). As reported in our recent post, the BoE analyses the Financial Policy Committee's findings on the stability of the UK financial system. The Report identified a number of market participants and instruments of interest, with particular focus on the private equity sector.

FCA publishes finding from insurance multi-firm review of outcomes monitoring under consumer duty

On 26 June 2024, the FCA publishing a webpage which sets out its finding following a multi-firm review of 20 large insurance firms in outcomes monitoring under the consumer duty.

In December 2023 the FCA requested the most recent board and/or committee reporting from 20 larger insurance firms, and asked firms how they monitor, assess and test the outcomes customers are receiving, along with actions firms had taken after identifying poor outcomes. The FCA assessed the submissions against the monitoring requirements set out in PRIN 2A.9, as well as the guidance given to firms in its consumer duty final guidance (FG22/5).

It saw a wide variety in the quality of responses by firms; some showed good progress in developing a clear and comprehensive firm-wide approach to monitoring customer outcomes, but many firms still need to make improvements in their monitoring to enable them to determine whether they are delivering good outcomes for retail customers, as required by the Consumer Duty.

The consumer duty came into force on 31 July 2023 for firms' existing products and services.

CRR III Regulation and CRD VI Directive published in OJ

On 19 June 2024, the following legislation was published in the Official Journal of the European Union: 

• The Regulation amending the Capital Requirements Regulation (575/2013) (CRR) as regards requirements for credit risk, credit valuation adjustment (CVA) risk, operational risk, market risk and the output floor ((EU) 2024/1623) (CRR III Regulation).

• The Directive amending the CRD IV Directive (2013/36/EU) as regards supervisory powers, sanctions, third-country branches and ESG risks ((EU) 2024/1619) (CRD VI Directive).

The legislation entered into force on 9 July 2024, which was 20 days after publication in the Official Journal. The CRR III Regulation will apply from 1 January 2025, with the exception of certain specified points of Article 1, which applied from 9 July 2024. Member states must bring into force the laws, regulations and administrative provisions necessary to comply with the CRD VI Directive by 10 July 2027, with the exception of Article 1(4) and (5), for which the transposition deadline is 10 July 2029.

European Commission speech on CMU and Banking Union

On 18 June 2024, the European Commission published a keynote speech given by Commissioner McGuinness at the European Financial Integration 2024 joint conference of the European Commission and the European Central Bank.

Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union (CMU), announced that there would be a delay to the Commission applying the market risk reforms in the EU until 1 January 2026. The reforms reflect the Basel Committee on Banking Supervision's (BCBS) fundamental review of the trading book (FRTB).

Commissioner McGuinness stated that there will likely be a delay in the implementation of Basel III in the United States, and it won't take place before 1 January 2026. Therefore, the Commission's decision to implement a one-year delay aims to ensure a global level-playing field for European banks competing with other global players, and it gives the Commission time to see what others are doing.

The Commission intends to adopt a delegated act to implement the delay as soon as possible, but it will take a minimum of three months.

Joint Committee of ESAs updates Q&As on PRIIPs KID: June 2024

On 28 June 2024, the Joint Committee of the European Supervisory Authorities (ESAs) (the EBA, EIOPA and ESMA) published an updated version of its Q&As (JC 2023 22) on the Regulation on key information document (KID) requirements for packaged retail and insurance-based investment products (PRIIPs) (1286/2014) (PRIIPs Regulation) and related delegated acts.

Under the "General topics" heading, a new Q&A has been added on whether foreign exchange (FX) forwards fall within the scope of the PRIIPs Regulation.

Council of EU agrees negotiating mandate on retail investment package

On 12 June 2024, the Council of the European Union published a press release announcing that it has reached an agreement on strengthening the EU’s rules on retail investor protection.

The Council of the European Union has agreed its negotiating position on the retail investment package, which consists of the proposed Directive on retail investment protection (referred to as an "Omnibus Directive") and the proposed Regulation amending the PRIIPs Regulation (1286/2014).

The package aims to support individual consumers who wish to invest on the EU’s capital markets, by better protecting their investments, providing them with clearer information about investment products and ensuring more transparency and disclosure.

The main changes proposed by the Council relate to inducements and value for money in the proposed Directive, and include:

• The Council has decided to remove the proposed ban on inducements received for execution-only sales as a ban is already in place for independent investment advice and portfolio management with limited exceptions. It has strengthened the safeguards accompanying all inducements.

• The Council agrees that ESMA and EIOPA should develop EU supervisory benchmarks as part of the value for money framework, as a supervisory tool developed in a way to help national competent authorities detect products that fail to offer value for money.

• Benchmarks would not be directly binding on firms, so they would be required to compare their investment products to a peer group of other similar investment products in the EU to establish whether their products offer value for money.

The legal texts, dated 7 June 2024, of the Council's negotiating mandate on the proposed Directive and the proposed Regulation have also been published.

EBA and ESMA publish discussion paper on IFR and IFD prudential framework

On 3 June 2024, the EBA published a discussion paper (EBA/DP/2024/01), produced jointly with ESMA, on the European Commission's call for advice on the investment firms prudential framework in the Investment Firms Regulation ((EU) 2019/2033) (IFR) and the Investment Firms Directive ((EU) 2019/2034) (IFD).

The paper addresses issues raised by market participants and supervisors that may lead to changes to the IFR, the IFD or related delegated regulations. There are 11 sections in total, where the EBA seeks views on issues which include:

• The categorisation of investment firms: the EBA analyses thresholds concerning investment firms that are required to apply the Capital Requirements Regulation (575/2013) (CRR) without being authorised as credit institutions, and covers conditions for investment firms that qualify as small and non-interconnected.

• Interaction with other regulations: the EBA analyses the interactions of the IFD and IFR with other regulations. this includes investment firms' exposures to cryptoassets and the provision of services related to cryptoassets, the role of other providers of financial services, the interaction with the own funds requirements applicable to alternative investment fund managers (AIFMs) and UCITS management companies providing ancillary MiFID services.

• Remuneration: the EBA considers aspects related to investment firms, AIFMs and UCITS management companies, including the scope of application, remuneration policies, the requirements on variable remuneration, their oversight, disclosure and transparency.
  The deadline for responses is 3 September 2024. The EBA and ESMA intend to publish the final report in response to the Commission's call for advice by December 2024.

IOSCO publishes final report on good practices for leveraged loans and CLOs

On 3 June 2024, the International Organization of Securities Commissions (IOSCO) published its final report on good practices in the leveraged loan and collateralised loan obligation (CLO) markets.

In IOSCO's announcement, it explains how it has been following the evolution of leveraged loan and CLO markets, and its analysis examines the impact of fewer and looser covenants on investor protections, whether there is adequate transparency in these markets and the scope for potential conduct-related issues to arise.

The report:

• Provides an overview of the leveraged loan and CLO markets and their evolutions since the global financial crisis. 

• Explains why the vulnerabilities identified in the leveraged loan and CLO markets could impact IOSCO’s objectives.

• Sets out 12 good practices for market participants, designed to support them in their decision-making when operating in these markets, which are grouped into five themes.

The final report reflects the results of the public consultation launched by IOSCO on 14 September 2023, as reported in our October 2023 update.

FCA announces OFR landing slots for funds in TMPR

On 5 July 2024, the FCA updated its webpage on the overseas funds regime (OFR). It has added information on landing slots it has allocated for fund operators in the temporary marketing permissions regime (TMPR).

Eight weeks before the fund operator's landing slot opening, the FCA will issue a binding direction to each fund operator, and it will tell the fund operator how to apply. The webpage sets out the landing slot dates, and fund operators should apply within their allocated three-month slot. The fund will lose its recognition under the TMPR if no application is made, or it does not notify the FCA that no application will be made, during its landing slot.

The FCA urges funds to consider the impact on UK investors if they wish to remove any funds from the TMPR.

For a fund that is in the TMPR, the FCA has published a direction stating that the operator must not apply for it to be a recognised scheme under section 271A of the Financial Services and Markets Act 2000 until such period as the FCA may specifically direct.

FCA update on 'finfluencers’ charged with promoting an unauthorised trading scheme

On 3 July 2024, the FCA updated its webpage on the "finfluencers" who were charged with promoting an unauthorised investments scheme, as reported on in our June 2024 update.

On 13 June 2024, three of the defendants pleaded not guilty, whilst three defendants did not indicate pleas. The final three individuals pleased not guilty on 3 July 2024. A plea and trail preparation hearing for all defendants was fixed for 11 July 2024.

FCA takes action against individuals for mistreatment of pension funds

On 24 June 2024, the FCA published a press release announcing it has decided to take action against three individuals for mistreatment of pension funds.

The three individuals, who were involved in running SVS Securities Plc (SVS), a discretionary fund manager, have been banned and fined. SVS managed investments held on behalf of retail pension customers within a self-invested personal pension (SIPP).

The FCA issued a final notice (dated 19 June 2024) to Kulvir Virk, SVS' majority shareholder and its former Chief Executive, fining him £215,500 and prohibiting him from performing any function in relation to any regulated activities for failing to act with integrity and failing to exercise due skill, care and diligence. Kulvir Virk has not referred the FCA’s decision to the Upper Tribunal and his Final Notice has not been the subject of any judicial finding.

The FCA issued a decision notice to David Stephen (DS), SVS' former Head of Risk and Compliance, and a decision notice to Demetrios Hadjigeorgiou (DH), a former director and then Chief Executive of SVS. The notices, both dated 24 April 2024, set out the FCA's decision to fine DS £52,100 and DH £84,600, and prohibit them from performing any senior management function and any significant influence function in relation to any regulated activities. The FCA considers that DS and DH failed to act with integrity and failed to exercise due skill, care and diligence. DH and DS have referred their Decision Notices to the Upper Tribunal, therefore any findings in these individuals’ Decision Notices are provisional and reflect the FCA’s belief as to what occurred and how it considers their behaviour is to be characterised.

The FCA summarises the individual's conduct in warning notice statement 23/5.

The Upper Tribunal (Tax and Chancery Chamber) publishes decision on FCA application to amend statements of case

On 13 June 2024, the Upper Tribunal (Tax and Chancery Chamber) published its decision (dated 4 June 2024) in Burdett v Financial Conduct Authority [2024] UKUT 00156 (TCC), where it refused the FCA's application to amend its statements of case with alternative allegations and dismissed privacy applications from the applicants.

During the preliminary hearing of the applicants' referrals to the tribunal of decision notices issued by the FCA, the tribunal heard a number of applications for directions. The notices consider they acted without integrity in relation to pensions business.

Among other things, the FCA applied for permission to amend its statement of case in relation to each reference, primarily to include an alternative allegation of failing to act with due skill, care and diligence if neither applicant is found by the tribunal to have lacked integrity. This application was refused on the grounds of tribunal jurisdiction – allegations which were not articulated in the "matter referred" to the tribunal could not be later incorporated into the allegations that had been pleaded in the FCA's warning notice. The FCA were, however, granted permission to renew its application within a specified period. Other, more minor, amendments were permitted.

The individuals' privacy applications were refused, whilst the FCA's consolidation application was permitted, meaning the references will be heard together.

FCA speech on Teamwork: A Smart way to tackle financial crime

On 26 June 2024, the FCA published a speech by Steve Smart, joint executive director of enforcement and market oversight at the FCA, titled "Teamwork: A Smart way to tackle financial crime", which was delivered at an investigations and enforcement conference.

The speech covered collaboration and teamwork in combatting financial crime. Key points were:

• The FCA is as much a law enforcement agency as a regulator.

• Collaboration and teamwork are key to its success – both internally and with its external partners including industry.

• The FCA is focused on speeding up the pace of its investigations and making the different components of the organisation, such as enforcement, supervision and authorisations, work together more seamlessly. 

Mr Smart also highlighted the importance of focusing on non-financial misconduct, as well as financial misconduct, since it can undermine the standards and reputation of the financial services industry. He closed the speech by emphasising the need to invest in the capabilities and relationships that will prevent and pursue those who seek to undermine the UK's as one of the world’s leading financial services sectors.

FCA rejects complainant's suggestion about introducing explicit money mule warnings

On 20 June 2024, the FCA published its response to the Financial Regulators Complaints Commissioner's final report (dated 8 May 2024) regarding a complaint made against the FCA.

The Commissioner recommended that the FCA consider the approach suggested by the complainant to require banks to make messages explicit to their customers about money mules.

After analysing its duties under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017) and the Financial Services and Markets Act 2000 (FSMA), the FCA explains that Regulations 17 and 46 of the MLRs do not contain an explicit requirement for banks to tell customers about the risks of money mules, nor do they require the FCA to make rules requiring firms to do this, or to supervise that firms are doing this. The FCA also considered if meeting its supervisory duties under the regulations referred to above would allow the FCA to introduce such an explicit requirement for firms to follow, and its opinion is that was not intended. 

FCA to publish findings from a review of firms' treatment of domestic PEPs in July 2024

On 19 June 2024, the FCA published a statement providing an update on its review of the treatment of domestic Politically Exposed Persons (PEPs) by financial services firms.

The FCA had been on track to publish its findings in line with the end of June deadline set in the Financial Services and Markets Act 2023 (FSMA), however, it did not think it was appropriate to publish the review during the pre-election period. The FCA will publish its findings once Parliament has returned in July. 

The FCA launched the review in September 2023, as reported in our October 2023 update, to comply with the duty imposed under section 78 FSMA 2023. 

Industry coalition aims to reduce economic crime through enhanced verification

On 12 June 2024, The Centre for Finance, Innovation and Technology (CFIT) published an announcement that a new industry coalition to fight economic crime through enhanced verification will be formed.

The coalition will bring together experts from a broad range of fields including finance, technology, policy, and academia, to devise solutions for detecting fraud, protecting SMEs and bolstering defences against crime such as Authorised Push Payment (APP) fraud. The aim of the coalition is to unite big tech providers, trade associations, major retail and challenger banks, fintech firms, digital ID solution providers and credit agencies to explore how collaboration can make the UK economy even more resilient against fraud.

CTIF is developing the core use cases for this coalition and will announce the final cohort of partners over the summer. CFIT intends to provide interim findings in Q4 2024, and a final report in early 2025.

The answer to last month's question: The FCA applies a five-step framework to determine the appropriate level of a financial penalty for breaches of regulatory requirements, the first step being disgorgement.

What is the name of the FCA's campaign to help consumers make better-informed investment decisions and become more astute investors?

• SavvyInvesting

• ShrewdTrading

• InvestSmart

• MoneyHelper.