Regulatory Updates May 2024

In this issue we cover:

• Payments and systems innovation
• Deadline approaches – Consumer Duty closed products
• Sustainability development
• Financial Crime Snapshot
• ‘Finfluencers’ beware – Unlicensed Forex Scheme

Payments and systems innovation

Sarah Breeden’s (Deputy Governor of Financial Stability at the Bank of England) address at the 2024 Innovate Finance Global Summit, discussed the banks role in advancing innovation in the financial and payments sectors. The address highlighted the benefits of technological innovation and the consequential impacts on the financial system, whilst underscoring BEO’s measures to maintain safety whilst pursuing such advancements.

Highlighted topics of the speech included:

• The emergence of stablecoins
• The exploration of retail central bank digital currencies
• Innovations in wholesale payment systems

Breeden also stressed the importance of developing regulatory frameworks to mitigate risks of new monetary forms including stablecoins. She encouraged banks to pursue innovations in payment methods and highlighted the importance of partnering with the private sector. The speech concluded with an announcement of plans to release a discussion paper to solicit feedback on these subjects.

Deadline approaches – Consumer Duty closed products

In May the Financial Conduct Authority (FCA) issued six “Dear CEO” letters outlining their key concerns and actions firms should take by 31 July 2024, related to the Consumer Duty implementation deadline. for closed products and services. The letters targeted a wide range of financial institutions, including asset management, consumer finance, consumer investment, life assurance, retail banking firms, and all other firms. Key points include:

1. Definition and Scope:

• A product or service is labelled “closed” if it was contracted before 31 July, 2023, and hasn’t been marketed or renewed since.
• Consumer Duty will apply from 31 July 2024, forward, affecting future actions but not retrospective to past actions.
• The application of Consumer Duty rules varies; not all rules apply to closed products as they do to open/new ones.

2. Implementation Priorities:

• Firms are urged to identify and remedy gaps in customer data and ensure information is current.
• Fair value assessments are necessary to show pricing aligns with the value for closed products.
• Increased support and monitoring for vulnerable customers are required.
• Firms need protocols to address disengaged customers and possibly forfeit vested contractual rights to prevent consumer harm.

3. Next Steps:

• Firms must review and approve a Consumer Duty annual report by boards by 31 July documenting product and service outcomes.
• Develop and execute a clear implementation plan for closed products addressing priority areas.
• Ensure ongoing information exchange within distribution chains.

The FCA plans a two-stage review across various sectors starting in summer 2024 to evaluate consumer support outcomes, aiming to identify best and poor practices.

Sustainability development

The 2024 Update on the Government’s Sustainability Disclosure Requirements (SDR), part of the 2023 Green Finance Strategy, introduces a framework for improved information flow among businesses, consumers, investors, and markets, highlighting SDR’s role in financial and economic sectors. This update details when stakeholders can engage with these initiatives.

Additionally, the Investment Association has provided guidance to assist firms with implementing the SDR and investment labels per the FCA’s Policy Statement (PS23/16). Important deadlines include:

• Anti-greenwashing: Compliance required by 31 May 2024.
• Product labelling: Compliance by 2 December 2024.
• Naming and marketing requirements: Compliance by 2 December 2024
• Product disclosure: Begins 31 July 2024.
• Entity disclosure: Effective 2 December 2024

Enforcement investigations reconsidered

On 25 April 2024, the FCA responded to Lord Forsyth regarding its plans to change the disclosure of enforcement investigations. The FCA aims to transition from a presumption against public disclosure to a public interest framework for announcing investigation details. This change is seen as better aligning with the FCA’s goals for transparency and accountability, without harming the financial sector’s competitiveness or contradicting the presumption of innocence.

The FCA also notes that publicising firms’ names during investigations is unlikely to affect their market position or client trust adversely. The consultation on these ‘naming and shaming’ proposals concluded on 30 April 2024.

Financial Crime Snapshot

Financial crime plays a major role in understanding the financial sector as a whole, the FCA have consequently issued a consultation paper (CP24/9) detailing proposed updates to the Financial Crime Guide (FCG). These updates aim to clarify the FCA’s expectations for firms’ financial crime prevention systems and controls, addressing deficiencies in these areas.

Key proposed changes include:

• Sanctions: Enhanced focus and reporting requirements for sanction systems, especially due to recent sanctions following Russia’s invasion of Ukraine.
• Proliferation Financing: New mandates for firms to assess risks related to proliferation financing.
• Transaction Monitoring: Additional guidance on maintaining effective automated monitoring systems.
• Cryptoassets: Expectations for cryptoasset businesses registered with the FCA to integrate FCG standards into their financial crime controls.
• Consumer Duty: Clarifications on whether firms’ systems and controls are proportionate and align with their obligations under the Duty.
• Consequential Changes: The Guide will have expired links and outdated references to EU regulations removed, and the introduction of updated case studies will be used to reflect recent FCA enforcement notices.

The FCA advises firms to ensure their financial crime controls comply with Consumer Duty obligations. The consultation period ends on 27  2024, after which the FCA will issue a policy statement with the feedback and final guide amendments.

Market Watch 79

The Market Watch 79 newsletter highlights issues in market abuse surveillance due to problems with data and the logic of automated alerts, alongside a peer review of firms’ testing of front-running surveillance models.

The FCA identified that surveillance alerts often malfunction due to faulty implementation, bugs, and data not being processed correctly by surveillance models. This has led to incomplete monitoring of certain business segments, partially effective alerts, and in some cases, scenarios where alert generation for specific types of market abuse was entirely ineffective due to poor pre- and post-implementation testing.

In its peer review of 2023, the FCA noted that surveillance systems in larger firms are complex, covering a broad spectrum of traded assets, participants, and trading venues. To prevent and address failures effectively, the FCA recommended:

• Enhancing data governance to ensure that all relevant trading data is accurately captured and analysed.
• Implementing rigorous testing and independent validation of surveillance models.
• Ensuring that new models or updates to existing models are thoroughly tested before deployment, while maintaining the ability to make swift modifications as needed.

‘Finfluencers’ beware – Unlicensed Forex Scheme

On 16 May 2024, the FCA announced that nine individuals have been charged in connection with promoting an illegal foreign exchange trading operation on social media.

Emmanuel Nwanze is accused of managing an unauthorised investment operation and making unlawful financial promotions. According to the FCA, Nwanze, alongside Holly Thompson, offered advice on buying and selling contracts for difference through an Instagram account without the necessary authorisation. Additionally, it’s alleged that Nwanze compensated others to boost the Instagram account’s visibility to their extensive follower base.

The accused are scheduled to make a court appearance at Westminster Magistrates’ Court on 13 June 2024. This highlights enforcement of previous warnings, which continues to demonstrate how the FCA are working to make the financial markets protected for retail investors.