Eva Dauberton
News Editor
FCA releases Market Watch 79
The Financial Conduct Authority (FCA) has released Market Watch 79, which focuses on issues related to market conduct and transaction reporting. The FCA highlights two main topics in this edition:
- Failures in market abuse surveillance due to problems with data and automated alert logic.
- The recent peer review of firms’ testing of front-running surveillance models.
Market abuse surveillance
Under the Market Abuse Regulation (UK MAR), it is mandatory for firms to identify and report any potential market abuse instances. To ensure this, firms must have effective systems and procedures in place to detect and report suspicious activity. These systems should be appropriate and proportional to the nature, size, and scale of their business activities.
The FCA has noticed that there are issues with surveillance alerts, which are not working as intended and assumed by firms. To help firms understand the types of problems they may face, the Market Watch includes examples of malfunctions they have observed.
Peer review of firms’ testing of front-running surveillance models
In 2023, the FCA assessed how investment firms review their automated surveillance models. Specifically, the FCA looked at the frequency and methods used by nine investment banks to test the efficacy of their client order front-running models. The participating firms had differing approaches to testing, touching on several areas.
The Market Watch highlights key findings, observations, and steps that firms may consider to avoid surveillance failures and ensure that issues do not go unidentified for prolonged periods.
While the FCA acknowledges that this review has limitations, it encourages all firms that undertake market abuse surveillance to study the observations and consider whether modifying their testing arrangements would be useful.
Click here to read the full RegInsight on CUBE’s RegPlatform
ASIC wins first court case regarding a non-cash payment facility involving cryptoassets
The Australian Securities and Investments Commission (ASIC) has won its first court case related to a non-cash payment facility that dealt with cryptocurrency assets.
The Australian Federal Court found BPS Financial Pty Ltd (BPS) guilty of engaging in unlicensed conduct while offering services related to cryptoasset-based products.
BPS had been offering a ‘Qoin Wallet’ since January 2020 that used a cryptocurrency token called ‘Qoin.’
Justice Downes found that the Qoin Wallet qualified as a financial product, specifically a non-cash payment facility. However, BPS did not hold an Australian Financial Services Licence and was not authorised to issue or provide financial advice about the Qoin Wallet, contravening the Corporations Act. Justice Downes also found BPS guilty of engaging in misleading or deceptive conduct and making false or misleading representations concerning the Qoin Wallet.
ASIC Chair Joe Longo stated: “These proceedings should send a message to the crypto industry that their products will continue to be scrutinised by ASIC to ensure consumers are protected and that they comply with regulatory obligations.”
Click here to read the full RegInsight on CUBE’s RegPlatform
FCA updates data on cryptoasset AML/CT regime applications
The Financial Conduct Authority (FCA) has recently updated the data on applications made under the Cryptoasset Anti-Money Laundering/Counter-Terrorist Financing (AML/CTF) regime.
Although there have not been significant changes in the data, this serves as a reminder of the key elements that firms should consider before submitting an application.
Background
Since January 10, 2020, the FCA has been the supervisor of anti-money laundering and counter-terrorist financing for UK cryptoasset businesses. Companies that want to provide cryptoasset services under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) must apply with the FCA. In the past year, 17% of applications have been rejected, and 11% since 2020.
When preparing an application, applicants must provide the FCA with a range of information about how their business is organised and operates. Below is a summary of poor practices the FCA has identified.
Example of poor practice
- Business plan: Business plans that lack forecasts or provide unrealistic financial, staffing, marketing, and customer breakdown forecasts, as well as those that focus solely on the business model without addressing compliance oversight, risk mitigation, and financial controls, particularly for cryptoasset holdings.
- Risk assessment and management: Incorrect understanding of the risks associated with cryptoasset products or no consideration of the additional risks from combining new cryptoasset-related services or products with its ongoing business model.
- Policies, systems and controls: Underdeveloped AML framework and generic/off-the-shelf policies and procedures that do not align with business model or contain obsolete documents not designed for or adapted to the proposed cryptoasset activities.
- Sanction monitoring and blockchain analysis coverage: Compliance staff that lack the skills to carry out blockchain investigations despite having blockchain analytics tools.
- Group structure and reliance on group policies and procedures: Reliance on group policies and procedures, but no clarity as to how they apply to the applicant.
- Outsourcing: Failure to provide policies and service level agreements for outsourcing, as well as a lack of oversight and assurance testing for outsourced activities.
- Training: Inadequate training plan or lack of resources to deliver that training.
- Suspicious Activity Reporting (SAR): SAR policy that lacks a clear escalation process internally to the MLRO/Nominated Officer and externally to the National Crime Agency (NCA).
Click here to read the full RegInsight on CUBE’s RegPlatform
DFSA annual report shows surge in licensed activities
The Dubai Financial Services Authority (DFSA) has published its annual report for 2023. The report notes a 25% increase in licensing activity compared to the previous year, with the total number of licensed firms reaching 791.
The report also reveals a 50% year-on-year increase in licensing applications across all business models. Particularly noteworthy was the substantial growth in the wealth management sector, with increased licensing applications from private banks, asset managers, and fund management companies. Additionally, the Dubai International Financial Centre (DIFC) received more than 40 domestic fund registration applications. Other highlights include:
- 104 newly authorised firms.
- 914 newly authorised individuals.
- 15 enforcement investigations concluded, with eight enforcement actions.
- 545 complaints received with 541 ‘finalised’.
- Six consultations issued.
The DFSA also recorded significant growth in Environmental, Social, and Governance (ESG) securities listings, with a total value of USD 11.72 billion in new ESG bonds and Sukuk (Islamic bond or “Sharia-compliant” bond) listed in 2023, bringing the total outstanding ESG securities to USD 27 billion by year-end.
Click here to read the full RegInsight on CUBE’s RegPlatform