CUBE’s Regulatory Review

Regulatory rumblings for the week to 5 May 2022.

As the first week of May draws to a close, we take a look at the key regulatory developments across the globe.

United Kingdom

The FCA’s CEO has reiterated the importance of crypto for UK wholesale markets

The Financial Conduct Authority’s CEO, Nikhil Rathi, has highlighted the ‘critical issues in financial regulation” in a speech at City Week 2022. As well as societal issues, such as the cost of living crisis and the war in Russia, Rathi also highlighted areas of emerging regulation that should be close to the hearts of financial services.

In particular, firms should be preparing to mange:

• Consumer Duty (CP21/13) – which will ensure firms properly assess the impact of services and product suitability on their customers.
• ESG reforms – the FCA is working across borders to help establish a global standard for climate-related disclosures, which will have direct affect on global financial institutions.
• Diversity and inclusion – following the finalization of new D&I rules, the FCA will be looking to see firms gearing up for the implementation of such rules in 2023.
• Crypto – in advance of the FCA’s first ever CryptoSprint, Rathi has reaffirmed the FCA’s commitment to ensuring the UK is an attractive market for emerging digital currencies. So far, only 33 crypto firms have gained FCA registration under current anti-money laundering rules, with many rejected so far. As such, the FCA is taking a “flexible approach” to regulation and is currently in the process of finalizing its rules around crypto.

The Bank of England has highlighted the role of central banks in climate risk

The Bank of England has joined other global bodies – such as the Financial Stability Oversight Council – in recognizing climate risk as having the potential to “destabilize capital makers” and have the potential to “cause disruption across the broader economy”.

Speaking on behalf of the Bank of England’s Financial Policy Committee (FPC), Elisabeth Stheeman has said that the Committee is working in conjunction with the Prudential Regulation Committee (PRC) to undertake a climate scenario exercise to assess the resilience of UK banks and insurers to different climate scenarios. Stheeman noted that the FPC is working to support the financial system in its transition to net zero, though added that “all of us as individuals too have the responsibility and the tools to do this”.

While this final statement may be true, it serves to minimize the role that financial services play in carbon emissions – which is indisputably significant in comparison to individual responsibility.

North America

The SEC has doubled the size of its crypto unit

The Securities and Exchange Commission (SEC) has created 20 new roles to sit within the unit that seeks to protect investors from the risks of crypto and cyber threats. The Crypto Assets and Cyber Unit (formerly the Cyber Unit) will now be made up of 50 dedicated experts, who will look to understand and manage the risks presented by emerging technologies.

Commenting on the expanding team, SEC Chair Gary Gensler has said that by doubling the size of the unit, the SEC “will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity.”

The new hires mark the SEC’s commitment to understanding new risks, presumably spurred on by an increasing government push towards welcoming crypto into the mainstream of financial services.

The SEC’s Division of Examinations has found a lack of controls around MNPI

The SEC’s Division of Examinations has issued its second Risk Alert of the year, focussing on compliance issues around Material Non-Public Information (MNPI) within the investment adviser space. The Risk Alert notes that its staff has found “notable deficiencies” related to Section 204A of the Investment Advisers Act 1940 and Rule 204A-1 – also known as The Code of Ethics Rule. These rules oblige all investment advisers to take steps that prevent the misuse of MNPI and to adopt and adhere to a code of ethics.

In particular, Division staff have found a handful of MNPI failures including inadequate due diligence and a lack of policies and procedures related to “expert networks”. The Risk Alert drew particular attention to failures surrounding alternative data sources.

Following its findings, the Division has issued deficiency letters, which has caused many advisers to modify their policies, procedures and practices. Looking ahead, the Division expects advisers to review their current processes to ensure they are adhering with the relevant rules.

CUBE solves complex regulation for regulated institutions of all shapes and sizes. We know what’s on the horizon for regulatory change, and implement that change when it happens.