The latest regulatory update – January 2022

Home / FINANCIAL CRIME / The latest regulatory update – January 2022

Regulatory Update January 2022

In this issue we cover:

  • Ring-fencing and proprietary trading review
  • Strengthening financial promotions rules
  • TPR firms falling short of FCA’s expectations
  • FCA publishes guidance consultation on its approach to compromises for regulated firms
  • FCA provides supervisory flexibility on the short selling indicator in UK MiFIR transaction reports
  • Payment Services Directive: EBA’s preliminary observations on selected payment fraud data
  • EBA consultation: remuneration and gender pay gap benchmarking guidelines

Ring-fencing and proprietary trading review

In advance of the publication of its final report, the Skeoch Review of Ring-fencing and Propriety Trading (RFPT) has released an interim statement. Ring-fencing is a regulatory measure introduced after the 2008 financial crisis to address the issue od banks being too-big-to-fail. It required them to separate core retail divisions from riskier investment banking.

The review has made several findings:

  • overall, ring-fencing has enhanced the stability of the banking sector and compliance has been widespread;
  • there has been no material impact on competition in the industry as a result of ring-fencing and there is no evidence of inefficiency having been brought about by ‘trapped’ liquidity; and
  • banks are no longer systemically carrying out proprietary trading activity in the UK.

Strengthening financial promotions rules

The FCA is consulting on proposals to strengthen the financial promotion rules for high-risk investments, and for authorised firms which approve and communicate financial promotions. This consultation should be considered alongside the Treasury’s recent consultation to reform exemptions from the financial promotions requirements when promoting to high-net worth and sophisticated investors, as well as its recent confirmation that promotions for cryptoassets will be brought within the financial promotions regime. 

The proposed changes include:

  • the classification of high-risk investments
  • the consumer journey into high-risk investments
  • the role of firms approving and communicating financial promotions
  • application of financial promotion rules to qualifying cryptoassets.

The consultation requests feedback by 23 March 2022, with a Policy Statement and un update to the Handbook’s rules expected in the middle of this year.

TPR firms falling short of FCA’s expectations

The FCA has provided details of its approach to temporary permissions regime (TPR) firms that do not meet its expectations. The TPR should only be used by those firms wanting to operate in the UK in the long-term, preparing for full UK authorisation and meeting the required standards.

If the FCA takes action against a firm, it might result in the home state regulator being contacted and a notice being published in the UK. The webpage highlights specific circumstances, including:

  • FSMA firms that miss their landing slot
  • firms that fail to respond to mandatory information requests
  • firms that do not intend to apply for full authorisation
  • firms whose authorisation application is refused.

Other actions that the FCA may take include:

  • removing the firm from the TPR
  • asking the firm to prove that they have voluntarily ceased any new business, or restricting them accordingly
  • directing a FSMA firm to apply in a landing slot sooner than the existing landing slot.

FCA publishes guidance consultation on its approach to compromises for regulated firms

On 25 January 2022, the FCA published a guidance consultation on its approach to compromises for regulated firms (GC22/1). Compromises refer to arrangements that allow a firm to settle its liabilities with creditors and/or shareholders (redress liabilities in particular). The consultation sets out how the factors that the FCA considers when assessing compromises and the FCA’s role in relation to proposed compromises. The consultation makes clear that firms which seek to limit their liabilities through compromise should do so in a way that provides the best possible outcome for customers. Failure to do so may lead to the FCA objecting to the firm’s proposal in court.

The guidance is aimed at both solo-regulated firms and dual-regulated firms. The consultation runs until 1 March 2022.

FCA provides supervisory flexibility on the short selling indicator in UK MiFIR transaction reports

On 13 January 2022, the FCA outlined temporary measures in relation to the reporting of the short selling indicator in transaction reports under UK MiFIR (RTS 22, field 62). Article 26(7) of UK MiFIR requires firms to correct errors and omissions in the short selling indicator field and resubmit affected transaction reports. The FCA has confirmed that it does not expect firms to notify it about issues affecting the short selling indicator field through an errors and omissions notification form. The FCA will not take actions against firms who do not meet the requirements for the time being.

These temporary measures are being put in place while the FCA considers more permanent changes to the UK MiFIR transaction reporting regime and will keep the position under review.

Payment Services Directive: EBA’s preliminary observations on selected payment fraud data

On 17 January 2022, the European Banking Authority (EBA) released a discussion paper on its preliminary observations on selected payment fraud data under the Payment Services Directive (PSD2) for 2019-2020. All payment service providers in the EU must report payment fraud to national competent authorities (NCAs) under the PSD2. NCAs must then make statistical data on fraud relating to alternative payment methods available to the EBA and the European Central Bank (ECB).

The paper provides an indication of the preliminary patterns across: transfers, card-based payments and cash withdrawals. The paper also sets out some inconclusive patters which would benefit from further analyses and comments from market stakeholders.

Preliminary patterns indicate that the regulatory requirements concerning payment security are proving effective. In almost all cases, transactions which are authenticated with strong customer authentication (SCA) are resulting in a substantially lower share of fraudulent payments in relation to total payment volume and value than those not using SCA. It is also revealed that there is a considerably higher amounts of fraud in cross-border transactions involving non-EEA counterparts than those located in the EEA.

The deadline for comments on the consultation is 19 April 2022.

EBA consultation: remuneration and gender pay gap benchmarking guidelines

On 21 January 2022, the European Banking Authority (EBA) published two consultation papers in relation to updates to its guidelines on remuneration and gender pay gap benchmarking to reflect the additional requirements introduced under the Capital Requirements Directive (CRD V):

  • draft guidelines on the benchmarking exercises on the remuneration practices, the gender pay gap and approved higher ratios under Directive 2013/36/EU; and
  • draft guidelines on the Benchmarking exercises on remuneration practices and gender pay gap under Directive (EU) 2019/2034.

Benchmarking the gender pay gap will enable competent authorities to monitor measures that have already been implemented regarding equal pay for equal work and how these measures develop at different pay grades. The draft guidelines also seek to ensure the benchmarking of the gender pay gap is representative of a selection of institutions.

The EBA has introduced specific templates for the benchmarking, as well as updating the templates for data collection, taking the European Commissions’ Implementing Regulation on disclosures into consideration.

The new reporting framework for the collection of data is anticipated to apply in 2023 for the financial year 2022. Data on the gender pay gap will first be collected in 2024 for the financial year 2023.