CUBE RegNews: 10th September

Greg Kilminster

Greg Kilminster

Head of Product - Content

FCA offers firms temporary flexibility on sustainability rules compliance 


The Financial Conduct Authority (FCA) has announced a temporary extension for firms to comply with new ‘naming and marketing’ rules under its Sustainability Disclosure Requirements (SDR) regime. 


Some context 

The SDR and investment labels regime (PS23/16), published in November 2023, aims to help investors make more informed decisions and maintain the UK's competitive position in sustainable asset management. Since May 2024, asset managers in the UK have had to follow the FCA’s anti-greenwashing rules, with new investment labels available from July 2024. Full compliance with the ‘naming and marketing’ rules is set to take effect on 2 December 2024. 


Despite the progress made, some firms have faced delays in making necessary changes to their fund names and disclosures. In response, the FCA has opted for a pragmatic approach, allowing additional time for firms to meet the new requirements. 


Key takeaways 

The FCA will grant temporary flexibility until 2 April 2025, but only to firms that meet certain conditions. These include submitting a completed application for approval of amended disclosures by 1 October 2024 and using terms such as ‘sustainable’ or ‘impact’ in their fund names. Firms using other sustainability-related terms will not be eligible for this extension. 


Firms are still expected to comply with all other relevant rules, including the anti-greenwashing rule, and should aim to meet the naming and marketing requirements as soon as possible. 


The new rules are consistent with the FCA’s earlier guiding principles, which state that funds using sustainability-related terms must demonstrate that these characteristics are substantive and material to their objectives and strategies. 


Next steps 

The FCA encourages firms struggling with compliance to contact their supervisory teams for guidance. It also reassured firms that a supportive and proportionate approach will be taken regarding fund mergers, wind-ups, or terminations before the December 2024 deadline. 


As the SDR regime moves forward, the FCA remains committed to providing support and maintaining close engagement with the industry.  


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

 

FCA launches consultation on APP fraud rules and payment delays 


The Financial Conduct Authority (FCA) has opened a consultation on new guidance for payment service providers (PSPs) regarding authorised push payment (APP) fraud. The consultation follows recent regulatory changes aimed at reducing the rising levels of APP fraud in the UK. The consultation will focus on the introduction of a risk-based approach to payment processing, specifically addressing the circumstances under which PSPs may delay transactions to prevent fraud. 


Some context 

APP fraud occurs when individuals are deceived into authorising payments to fraudulent accounts or for fraudulent purposes. In response to the growing threat, the Payment Systems Regulator (PSR) will introduce an APP fraud reimbursement requirement, effective from 7 October 2024. This regulation mandates that banks and PSPs reimburse customers who fall victim to APP fraud. 


To complement this, the UK Treasury has proposed amendments to the Payment Services Regulations 2017, which would allow PSPs to delay payments if they suspect fraud. These changes aim to strike a balance between fraud prevention and the smooth processing of legitimate transactions. 


Key takeaways 

The FCA's consultation focuses on how PSPs can implement these changes in a way that minimises disruption to legitimate payments. The guidance will clarify when and how PSPs should delay transactions, how to handle potentially suspicious inbound payments, and the FCA’s expectations for firms in managing these risks. 


The FCA has emphasised the importance of ensuring that delays are used only when necessary and that PSPs communicate clearly with customers about any potential delays. PSPs will also be expected to monitor their processes closely, ensuring that any delays are proportionate and do not lead to unnecessary friction in the payments system. 


The consultation will provide additional details on how firms should comply with the new rules, including guidance on thresholds for delaying payments and best practices for managing inbound transactions. 


Next steps 

The FCA will gather feedback from PSPs, trade bodies, and other stakeholders, with the aim of finalising the guidance in time for the new regulations to come into force. The regulator also plans to monitor PSPs’ implementation of the payment delays legislation, assessing its impact on both fraud prevention and payment efficiency. 


The consultation is open to PSPs, merchants, consumers, law enforcement agencies, and other interested parties, who are encouraged to submit their views to the FCA before the 4 October 2024 deadline. 


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

 

SEC fines nine investment advisers for marketing rule violations 


The Securities and Exchange Commission (SEC) has announced settlements with nine registered investment advisers for breaching its Marketing Rule by disseminating misleading advertisements. The firms are accused of making unsubstantiated claims, using testimonials and third-party ratings without required disclosures, or making false statements. Combined, the firms have agreed to pay $1.24 million in civil penalties. 


The SEC's Marketing Rule under the Investment Advisers Act of 1940 sets clear standards for truthfulness and disclosure in advertisements. The rule aims to protect investors from misleading or inaccurate information. Violations in this sweep included claims of conflict-free services that couldn’t be substantiated and the use of outdated third-party ratings without proper disclosure. 


The penalties imposed on the nine firms vary, with Integrated Advisors Network LLC facing the largest fine at $325,000, while AZ Apice Capital Management LLC received the lowest penalty at $70,000. Firms such as Abacus Planning Group Inc. and Callahan Financial were found to have made untrue statements about third-party ratings. 


Howard Bailey Securities LLC used testimonials that were not from actual clients and paid endorsements without disclosing their non-client status. Additionally, Richard Bernstein Advisors and others failed to disclose the timing or basis of third-party ratings used in their advertisements. 


The SEC has reinforced that firms must adhere strictly to the Marketing Rule, ensuring advertisements are truthful, substantiated, and transparent. Each of the firms involved has agreed to cease further violations, comply with undertakings, and pay the respective penalties. 


The SEC is expected to continue its focus on marketing rule enforcement to protect investors from misleading promotional practices. 

 

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

 

Australian Treasury publishes update on sustainable finance taxonomy 


The Australian Treasury has published the sustainable finance taxonomy interim report as part of the industry-government initiative led by the Australian Sustainable Finance Institute (ASFI) to establish a sustainable finance taxonomy for Australia. 


Some context 

The Australian Taxonomy Development Project started in July 2023, with ASFI leading the initial phase of taxonomy development. To facilitate this, ASFI established a Taxonomy Technical Expert Group (TTEG) that will operate for 12 months, starting in July 2023. 


During this time, the TTEG has several key responsibilities, including providing input on technical deliverables produced by ASFI, such as reports and research, as well as considering feedback from stakeholders and offering recommendations on how this feedback should be incorporated or considered. 


The TTEG also provides input, review, and recommendations on the endorsement of a draft report, a final report, and, if necessary, an updated final report should the initial phase of taxonomy development be extended. 


Key takeaways 

The interim report: 

  • Provides an overview of the development of the Australian taxonomy up to this point. 
  • Includes an analysis of the alignment between the taxonomy deliverables, including the draft technical screening criteria and the policy objectives outlined in the Terms of Reference. 
  • Summarises the stakeholder consultation that has been conducted thus far. 


Next steps 

AFSI issued its first consultation in May 2024 to gather feedback on the draft climate change mitigation criteria developed for the first three priority sectors: electricity generation and supply, minerals, mining and metals, construction, and the built environment. 


The second public consultation, scheduled for Q4 2024, will seek additional feedback on the following areas: 

  • Technical screening criteria for further priority sectors 
  • Do No Significant Harm (DNSH) criteria 
  • Minimum Social Safeguards (MSS) criteria 
  • Proposals related to the taxonomy’s implementation and adoption. 


The Australian sustainable finance taxonomy, which covers climate change mitigation for the priority sectors consulted on, along with DNSH and MSS, will be completed by the end of 2024. 

 

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

 

NZ FMA issues report on use of AI in financial services 

 

A new report issued by New Zealand’s Financial Markets Authority considers current and future use of artificial intelligence (AI) within the financial services sector.   


The report highlights that AI is fast becoming a key technology in the financial services sector, with asset managers, banks, insurers, and financial advisers integrating AI tools into their operations or planning to do so soon. The FMA report reveals that institutions are primarily motivated by the potential for AI to enhance customer outcomes, improve operational efficiency, and strengthen fraud detection efforts. 


All 13 financial firms surveyed have either adopted generative AI (GenAI) or are in the process of doing so, signalling the technology’s significant promise. These AI systems range from off-the-shelf solutions like GitHub’s CoPilot to bespoke AI applications aimed at decision-making and fraud prevention. Some firms have already seen clear benefits from AI, while others anticipate realising these advantages within the next year. 


Cautious optimism amid growing use  

Despite the enthusiasm for AI, the report notes a cautious, risk-focused approach across the sector. Financial institutions are deliberately balancing the opportunities AI presents with the need to mitigate risks before widespread adoption. The emphasis on security and risk management is paramount, with firms ensuring that the deployment of AI does not outpace their ability to manage potential vulnerabilities. 


Key areas of focus for organisations include staff training, AI model validation, and ensuring robust governance frameworks are in place. This measured strategy reflects the sector’s commitment to responsible AI deployment, particularly in high-risk areas such as fraud detection and automated decision-making. 


Key applications of AI 

The report identifies several key AI applications currently being utilised or planned within financial services. These include: 

  • Generative AI (GenAI): Capable of generating new content, such as customer communications and financial reports. This technology is being used to streamline routine tasks and improve decision-making processes. 
  • Machine learning: Widely used for fraud detection, credit scoring, and personalised financial advice, machine learning models adapt through experience, enhancing efficiency and security. 
  • AI decision-making tools: These systems can analyse large datasets to predict and mitigate risks, providing automated support and personalised advice to customers. 
  • Chatbots: Offering real-time support, chatbots are increasingly being used to handle transactions and improve customer service, enhancing overall operational efficiency. 


Risks and challenges remain  

While the financial services sector is embracing AI, the report highlights a range of challenges. These include the risk of algorithmic bias, cybersecurity threats, and concerns over data privacy. The reliance on AI systems introduces new risks around accountability and operational resilience, with the potential for disruptions if systems fail or are compromised. 


There is also concern over over-reliance on AI tools, particularly in areas like decision-making where human judgment is still crucial. Firms are taking steps to ensure that AI complements, rather than replaces, human oversight in critical operations. 


Looking ahead: A future shaped by AI  

The report points to a strong commitment from financial institutions to expand AI’s role, particularly in areas like customer service, risk management, and fraud detection. However, the sector is proceeding with caution, recognising that the technology must be deployed responsibly to avoid unintended consequences. 


Governance, accountability, and ongoing risk management will remain key priorities as AI continues to transform financial services. Firms are actively investing in staff training and the validation of AI models to ensure that AI’s integration supports positive outcomes for both consumers and the broader financial markets. 


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

 

HKMA urges proactive action on financial crime risks 


In a speech at the 2024 INCLUSION Conference on the Bund, Raymond Chan, Executive Director of Enforcement and Anti-Money Laundering (AML) at the Hong Kong Monetary Authority (HKMA), emphasised the critical need to safeguard the integrity of Hong Kong’s financial system amid growing threats from fraud, digitalisation, and geopolitical tensions. 


Chan opened by reaffirming Hong Kong’s strategic importance as an international financial centre under the “One Country, Two Systems” principle. While Hong Kong continues to focus on market development and financial innovation, Chan highlighted the essential role of AML and counter-terrorist financing (CFT) measures in ensuring the long-term sustainability of its banking sector. 


“A banking system without a robust AML/CFT regime will never be sustainable,” Chan said, stressing the importance of building a solid foundation as Hong Kong seeks to strengthen its global financial position. 


Four major risk trends reshaping financial crime landscape 

Chan outlined four major risk trends that are reshaping the financial crime landscape, both in Hong Kong and globally, with profound implications for the sector. 

  • The first is the rapid digitalisation of banking services, which has created new vulnerabilities for fraudsters to exploit. While the ability to remotely onboard customers and the shift towards online commerce offer efficiencies, they have also opened the door to sophisticated scams targeting individuals and businesses. 
  • The second trend is the growing prevalence of fraud across society. Chan described fraud as a critical global and regional priority, warning that fraudsters are continually evolving their techniques to exploit weaknesses. He called for continued focus on tackling fraud, cybercrime, and deception. 
  • Third, Chan addressed the rise of non-bank financial intermediaries, particularly in the digital assets space, as introducing new risks related to money laundering and terrorist financing. As these new players gain prominence, regulators must stay vigilant to understand and mitigate the risks they pose. 
  • The final risk trend identified by Chan is the increased use of economic sanctions amid rising geopolitical tensions. He stressed the importance of maintaining vigilance and adaptability in the face of complex sanctions regimes, which often require sophisticated technology and human expertise to navigate. 


Leveraging technology and intelligence to combat financial crime 

Chan emphasised the need for innovative approaches in the fight against financial crime, highlighting the role of advanced technologies such as artificial intelligence, data analytics, and cloud computing. These tools, he argued, are central to generating actionable intelligence and managing the evolving risk landscape. 


He advocated for the use of enriched customer data to provide a more comprehensive view of illicit activity, allowing banks to collaborate with law enforcement more effectively. By integrating intelligence-led analytics with human judgement, financial institutions can more accurately target specific risks, such as illicit cross-border flows or suspicious activities. 


Chan termed this approach a “human-led technology approach,” where technology enhances human efforts, providing a more holistic and collaborative framework for combating financial crime. 


Supervisors as enablers of AML innovation 

Chan called on financial supervisors to act as enablers of innovation in AML work. He argued that traditional methods are no longer sufficient to protect the integrity of increasingly interconnected financial systems. Instead, supervisors should push for the adoption of advanced technology, particularly in suspicious activity surveillance. 


To that end, Chan announced that the HKMA will soon launch a programme to enhance banks' capabilities in monitoring and detecting criminal activities. The programme will encourage banks to critically assess the feasibility of applying artificial intelligence in their AML efforts. 


Expanding regulatory oversight of digital assets 

Chan also touched on the risks posed by non-bank financial institutions, particularly those involved in digital assets. He warned that these entities could facilitate money laundering or terrorist financing if left unregulated. To address this, the HKMA is preparing legislation to bring stablecoin issuers under its regulatory umbrella. 


“Our aim is to capture the right opportunities associated with digital assets while keeping the risks well managed,” Chan said, signalling a proactive approach to regulating the growing digital finance sector. 


Strengthening international collaboration 

Chan closed by highlighting the importance of global collaboration in combating financial crime. He called for stronger cooperation between domestic authorities, overseas counterparts, and international standard-setting bodies to tackle cross-border criminal syndicates and illicit fund flows. 


Chan also reiterated Hong Kong’s commitment to maintaining its status as a global financial hub by safeguarding the integrity of its financial system. He expressed hope that other jurisdictions would consider similar approaches to managing the complex risks posed by financial crime in today’s rapidly evolving landscape.  


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


  

SEC Chief Accountant discusses accounting for cryptoasset safeguarding obligations at banking conference 

 

Paul Munter, Chief Accountant of the US Securities and Exchange Commission (SEC), delivered a speech during the 2024 the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) conference on banks and savings institutions accounting for cryptoasset safeguarding obligations. He mainly covered the application of the staff of the Division of Corporation Finance and the Office of the Chief Accountant (staff) Accounting Bulletin 121 (SAB 121).  

 

SAB121, issued in March 2022, relates to the accounting by entities that have obligations to safeguard cryptoassets held for their platform users. 

 

Munter mentioned that since the issuance of SAB 121, entities had requested the views of the staff on the accounting for a variety of other fact patterns involving the use of distributed ledger technology (DLT) and the safeguarding of cryptoassets. Munter took the opportunity to discuss examples of fact patterns that were not contemplated by SAB 121 and where the staff has not objected to entities’ conclusions that the particular arrangement was not within the scope of SAB 121. 

 

Examples cover instances involving bank holding companies, introducing brokers and dealers and cases of innovative uses of DLT. 

 

Notwithstanding the above, he reiterated the fact that the staff’s views in SAB 121 remain unchanged, and absent particular mitigating facts and circumstances, the staff believes an entity should record a liability on its balance sheet to reflect its obligation to safeguard cryptoassets held for others. 

 

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

 

CFPB Director discusses impact of falling interest rates on homeowners 


Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra spoke at the National Housing Conference about the impact of falling interest rates on existing homeowners. He mentioned that many people are concerned about how much today’s high interest rates will decrease. 


Chopra specifically addressed: 

  • The current status and future of the mortgage refinancing market, as well as its importance for homeowners and the economy in the upcoming months. 
  • The challenges and complexities homeowners and lenders face. 
  • The actions that both the CFPB and the marketplace should take to ensure that families can take advantage of reduced rates. 


In relation to the latter, Chopra noted that the CFPB: 

  • Will closely monitor the adoption of new mortgage technology, including applications that claim to use artificial intelligence. He also mentioned that the CFPB now has technologists working across its functions and is better prepared than ever to identify and prosecute violations of the law. 
  • Is considering potential changes to existing mortgage regulations to simplify the refinancing process and lower closing costs and working on rules to expedite the adoption of open banking in relation to mortgages. 

Chopra expects the CFPB to finalise its initial rule on Personal Financial Data Rights under Section 1033 of the Consumer Financial Protection Act next month. Following this, he anticipates that there will be more rules covering a wider range of use cases for open banking, including for mortgages. This could potentially make it easier for consumers to grant permission for different types of data, such as their credit score, rather than requiring every competing lender to purchase it. 

 

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

 

FinCEN issues trend analysis on mail theft-related check fraud 


The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued d a Financial Trend Analysis (FTA) on mail theft-related check fraud incidents. This analysis is based on the Bank Secrecy Act (BSA) and covers the period from 27 February to 31 August 2023. With this analysis, FinCEN continues its focus on fraud, which it has highlighted as one of the anti-money laundering and countering the financing of terrorism national priorities. 


Key takeaways 

During the review period, FinCEN received 15,417 BSA reports from 841 financial institutions regarding check fraud incidents linked to mail theft. These reports accounted for over $688 million in reported suspicious activity. In their analysis of the BSA reports for the FTA, FinCEN identified three main outcomes resulting from checks stolen from the US Mail: 

  • 44%of the stolen checks were altered and then deposited 
  • 26%were used as templates to create counterfeit checks. 
  • 20% were fraudulently signed and subsequently deposited. 

The methods used to manipulate the stolen checks varied in sophistication, with many perpetrators attempting to avoid direct contact with bank personnel. 


FinCEN also discovered that banks were responsible for filing 88%of all reports related to check fraud resulting from mail theft. 

 

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

 

SEC approves PCAOB’s new quality control standard 


The Securities and Exchange Commission (SEC) has approved the Public Company Accounting Oversight Board’s (PCAOB) new quality control (QC) standard, QC 1000, “A Firm’s System of Quality Control”, along with related amendments to PCAOB rules, standards, and forms. This new standard reflects the PCAOB’s strategic goal to modernise standards, as current QC standards were developed and issued by the accounting profession before the PCAOB was established in 2002. 


Key takeaways 

The new standard and related amendments: 

  • Require all registered firms to design a QC system in compliance with QC 1000. 
  • Require firms involved in engagements under PCAOB standards to have a QC system. 
  • Require an external oversight function (EQCF) for the QC system for the largest firms. 
  • Provide specific requirements regarding firm technological resources. - Provide objectives for a firm’s publication of firm and engagement metrics. 
  • Establish annual reporting requirements to the PCAOB on a new, non-public reporting form, Form QC. 
  • Expand the auditor’s responsibility to respond to deficiencies on engagements under an amended and retitled Auditing Standards (AS) 2901, “Responding to Engagement Deficiencies After Issuance of the Auditor’s Report,” and related amendments to attestation standards for broker-dealer engagements. 
  • Establish a new standard, Ethics and Independence Rules and Interim Standards (EI) 1000, titled “Integrity and Objectivity,” to better align ethics requirements with QC 1000. 
  • Make additional changes to PCAOB rules, standards, and forms. 


Next steps 

QC 1000 and the related amendments to other PCAOB standards, rules, and forms will take effect on 15 December 2025. 

 

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

 

EBA launches 2024 EU-wide transparency exercise 


The European Banking Authority (EBA) has launched the 2024 EU-wide transparency exercise as part of its ongoing efforts to enhance transparency in the EU financial market. This initiative complements banks’ own Pillar 3 disclosures, as outlined in the EU’s capital requirements directive (CRD).  


As usual, the transparency exercise will be carried out across autumn, and the results will be published in late November, along with the release of the Risk Assessment Report (RAR).  


EBA will disclose capital positions, financial assets, risk exposure amounts, sovereign exposures, and asset quality information of the EU banking sector in the second half of 2023 and the first half of 2024. Importantly, this exercise will solely rely on supervisory reporting data, thereby imposing no additional reporting burden on banks. 


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