CUBE RegNews: 10th January

A selected summary of key developments for regulated financial institutions

Greg Kilminster

Greg Kilminster

Head of Product - Content

Sustainable finance – a look ahead to 2024 

Regulators ended 2023 with a better understanding of the challenges faced by financial services firms in implementing sustainability requirements. Rather than adding more complexity to existing frameworks, the focus has shifted towards tweaking the current ones and providing more support to firms. Working groups have been formed, and firms are collaborating with regulators to establish frameworks that align with investors’ expectations and government commitments and are exploring innovative approaches. 

Many jurisdictions are also recognising the importance of reducing information asymmetry and promoting comparability across jurisdictions. New initiatives often refer to the International Sustainability Standards Board (ISSB) global sustainability disclosure standard, issued in June 2023, as the basis for a unified climate and sustainability disclosure framework. Additionally, the integration of climate risk and capital frameworks could be harmonised, with the Basel Committee on Banking Supervision requesting comments on an approach for Pillar 3 disclosure of climate-related financial risks for a potential implementation date of 1 January 2026. 

Regulators are also sharpening their knives to tackle greenwashing head-on, with actions and regulatory initiatives showing that it will remain a key priority in terms of supervision in 2024. 

Let’s take a closer look at some of the initiatives emerging in 2024 across major regions, including the United States, the United Kingdom, Europe, and APAC. 

 United States  

In the US, sustainable finance regulation is still in its early stages compared to other regions. Currently, companies voluntarily decide to engage in this area, and there are very few rules to regulate the field. The highly expected Securities and Exchange Commission (SEC) climate change disclosure rule is still pending, with the agency considering finalising its March 2022 proposal in the spring of 2024

Despite this delay, US regulators are still taking steps against greenwashing. The launch of the Environmental Fraud Task Force (EFTF) in the CFTC Division of Enforcement in 2023 and the actions of the Climate and ESG Task Force in the SEC Division of Enforcement demonstrate the efforts in that area. 

United Kingdom 

In November, the Financial Conduct Authority (FCA) issued Policy Statement (PS)23/16, which introduced the Sustainability Disclosure Requirements (SDR). The FCA is now seeking feedback on additional guidance to the anti-greenwashing rule, which will come into effect on 31 May 2024. 

Early this year, the FCA will also launch a consultation on SDR for UK portfolio managers and will gather feedback on whether to extend the rules to overseas funds and pension products.  

Additionally, the FCA and Prudential Regulation Authority (PRA) will release policy statements on diversity and inclusion in financial services during the latter half of 2024. 

The UK government had several initiatives planned for 2023, which have now been delayed to 2024. In October 2023, the Green Technical Advisory Group (GTAG), established by the government to provide guidance on the development of a green taxonomy, presented its final recommendations. The UK government is expected to launch a consultation on the Taxonomy shortly. Furthermore, there is a pending consultation on the integration of ESG ratings into UK regulations. An industry code of conduct for ESG ratings and data products providers was launched in December 2023. 

Europe 

In Europe, the legislators are focusing on refining the existing regulatory framework. Several reviews and assessments are underway, and findings and final amendments are expected to be released in 2024. These include an assessment of the funds’ sector’s compliance with sustainability disclosure rules, an assessment of MiFID firms’ compliance with sustainability preference rules, and an assessment of benchmark administrators’ compliance with ESG disclosure rules. The final report on the revision of the SFDR level 2 was published in December 2023 but should only come into effect after Q2 2024. Additionally, guidelines on funds’ names using ESG or sustainability-related terms are also expected to be come into effect in Q2 2024. 

The European Commission (EC) is also considering the increasing importance of data and rating providers in sustainable finance and subjecting them to new, binding requirements. The draft text is already available, and an agreement on the final regime is expected by mid-2024.  

The European Securities and Markets Authority (ESMA) will release final guidelines on the supervision of sustainability reporting by national competent authorities by Q3 2024. 

APAC 

Although only a few regulations are currently in place in Australia, the Australian Treasury released its Sustainable Finance Strategy Consultation Paper in November 2023, signifying a shift for the Australian sustainable finance industry from a primarily market-led approach to a government-led one. The proposed measures include a sustainable finance taxonomy, new labelling laws for marketing investment products, and globally consistent climate disclosures. 

On the enforcement front, the Australian Securities and Investments Commission (ASIC) has prioritised greenwashing in its enforcement actions in 2023 with charges being brought against Vanguard Investments as well as Northern Trustand aims to continue this in 2024. 

In Asia, fintech is driving ESG initiatives, with Singapore’s new platform for ESG data set to launch in early 2024 and Hong Kong’s government supporting green fintech through early-stage funding. 

The Monetary Authority of Singapore (MAS) has been particularly active on the regulatory front, issuing three consultation papers to update guidelines for financial institutions and providing credible net-zero transition plans. The final versions should be published in 2024. In December 2023, at COP28, MAS also unveiled the Singapore-Asia Taxonomy for Sustainable Finance, which is broadly aligned with the EU Taxonomy and will be applied by financial and non-financial companies from 2024 onwards. Note that the implementation of Hong Kong enhanced climate disclosures under listing rules has been postponed to 1 January 2025, previously planned for 1 January 2024. 

As we move into 2024, it is clear that regulators worldwide are taking a more collaborative approach to sustainability requirements. Regulators, international bodies and industry will continue to work hand-in-hand to drive change from different angles and ensure the financial services industry moves towards supporting net zero objectives globally. 

Click here to read the full RegInsight on CUBE’s RegPlatform

FinCEN publishes new Financial Trend Analysis report   

The Financial Crimes Enforcement Network (FinCEN) has published a new Financial Trend Analysis (FTA) report which looks at insights into identity-related suspicious activity within financial institutions, using data from Bank Secrecy Act (BSA) reports filed with FinCEN from January to December 2021. During this period, approximately 42% of the 3.8 million BSA reports, equivalent to $212 billion, were related to identity-related suspicious activity. 

The report notes that perpetrators or attackers employed 14 typologies to exploit identity processes. FinCEN’s analysis reveals that 69% of identity-related BSA reports involved attackers impersonating others, 18% involved the use of compromised credentials for unauthorised access, and 13% exploited insufficient verification processes. Depository institutions filed the majority (54%) of identity-related BSA reports, reporting $201 billion in suspicious activity, followed by Money Services Businesses (MSBs) at 21%. 

The most reported typologies include general fraud, false records, identity theft, third-party money laundering, and circumventing standards. Notably, compromise during authentication has a disproportionally large monetary impact compared to impersonation and circumvention. 

Click here to read the full RegInsight on CUBE’s RegPlatform

CFTC publishes DeFi report     

The Subcommittee on Digital Assets and Blockchain Technology, Technology Advisory Committee of the US Commodity Futures Trading Commission (CFTC) has published a new report on Decentralised FInance (DeFi) which argues that government and industry should take timely action to work together, across regulatory and other strategic initiatives, to better understand DeFi and advance its responsible and compliant development. 

The main findings of the report are summarised below. 

DeFi characteristics: 

  • DeFi enterprises, projects, and ecosystems are defined by highly automated financial networks. 
  • They lack a single point of failure and operate without reliance on a central authority capable of altering or censoring information crucial for financial service delivery. 

Complexity of DeFi systems: 

  • Understanding DeFi systems is intricate, requiring an examination of decentralisation features across dimensions like access, development, governance, finances, and operations. 

Spectrum of (De)centralisation: 

  • Most DeFi systems exist on a multi-level spectrum of (de)centralisation, varying across functional and technical dimensions. 
  • They are not entirely decentralised or centralised, showcasing diverse degrees of decentralisation. 

DeFi architecture: 

  • DeFi architecture comprises key components across layers (physical/hardware, protocol, network, data, application, user, asset and market, and governance). 
  • These layers support operations with varying degrees of characteristics like programmability, composability, automation, transparency, openness, immutability, and censorship resistance. 

Regulatory considerations: 

  • Policymakers should align regulatory strategies to balance various objectives in DeFi innovation, including customer and investor protection, market integrity, safety and soundness, financial stability, combatting illicit finance, national security, competitiveness, leadership, and expanding access to financial services. 

Opportunities of decentralised networks: 

  • Decentralised networks and technologies on public, un-obfuscated ledgers offer opportunities for efficiency improvements in payments and financial markets. 
  • They promote transparency, auditable financial services, financial sector resilience, access to financial services, innovation, competition, and reinforce US leadership in technology and finance. 

Risk management for policymakers: 

  • Policymakers should comprehend the type, nature, sources, probability, and potential impact of identified risks associated with DeFi. 

Click here to read the full RegInsight on CUBE’s RegPlatform

SEC goes after Nanban Ventures LLC for $130 million fraud     

The Securities and Exchange Commission (SEC) has obtained a temporary restraining order, an asset freeze, and other emergency relief to halt an ongoing fraud targeting the Indian American community that had raised nearly $130 million since April 2021.  

The SEC’s complaint alleges that Nanban Ventures LLC, its three founders, and three other entities that the founders controlled had engaged in fraudulent activities by:  

  • Misrepresenting the profitability of the investments and paying investors at least $17.8 million in fake profits that were Ponzi payments.  
  • Violating their fiduciary duties.  
  • Misrepresenting their expertise and success. 

All defendants are charged with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  

The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties from all defendants. The SEC also seeks to bar the founders from serving as officers or directors of a public company. 

Click here to read the full RegInsight on CUBE’s RegPlatform

FINRA publishes annual regulatory oversight report        

The Financial Industry Regulatory Authority (FINRA) has published today its 2024 FINRA Annual Regulatory Oversight Report which provides key insights and observations from recent activities of FINRA’s regulatory operations for firms to use in strengthening their compliance programs. 

The report covers a range of topics including manipulative trading, best execution and books and records but also introduces a new section on crypto assets as well as new topics within the Market Integrity section (OTC Quotations in Fixed Income Securities, Advertised Volume). Also included this year is information related to artificial intelligence’s potential impact on firms’ regulatory obligations; and guidance concerning firms’ supervision and retention of off-channel communications. 

For each topic covered, the report addresses: 

  • the relevant rule(s); 
  • key considerations for firms’ compliance programs; 
  • noteworthy findings or observations from recent oversight activities; 
  • effective practices that FINRA observed through its oversight activities; and 
  • additional resources that may be helpful to firms in reviewing their supervisory procedures and controls and fulfilling their compliance obligations. 

Click here to read the full RegInsight on CUBE’s RegPlatform

EBA publishes consolidated ITS on institutions’ public disclosures      

The European Banking Authority (EBA) has published the consolidated text of the Implementing Technical Standards (ITS) regarding institutions’ public disclosures. This framework covers the information stated in Titles II and III of Part Eight of Regulation (EU) No 575/2013 and aims to improve clarity and make it easier for institutions to comply with disclosure requirements. The original document was published in March 2021, and has been updated over the years. This new document has no legal effect.

Click here to read the full RegInsight on CUBE’s RegPlatform