Greg Kilminster
Head of Product - Content
DP23/5: FCA and HMT release DP on closing the advice gap
The Financial Conduct Authority (FCA) and the UK Government (HMT) have jointly released a discussion paper (DP)23/5, which includes proposals for closing the advice gap.
The DP covers accumulating assets, including General Investment Accounts (GIAs), Individual Savings Accounts (ISAs), and pension wrappers, as well as decumulating assets, such as pension decumulation. The DP also addresses the support trust-based pension schemes, including master trusts, can provide. However, general insurance, mortgages, debt advice, transferring out of a Defined Benefit (DB) scheme, or giving up other safeguarded pension benefits are out of scope.
Deadline for response is 28 February 2024.
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FCA updates consumer investments data
The Financial Conduct Authority has published its consumer investments data for the period April 2022 to March 2023. This will be the last data review the FCA will publish as future updates will be incorporated in its Consumer Investments Strategy.
Noteworthy achievements include preventing 1 in 5 new consumer investment firms from entering the market, issuing 1716 consumer alerts about unauthorised entities, and securing £4.9 million in consumer redress from unauthorised investment business.
Despite these efforts, the update reveals ongoing challenges investors face. Enquiries about potential scams to the consumer helpline have increased by 12% annually since 2020, continuing into 2022/23. The ScamSmart website experienced a 12% increase in visitors compared to the previous year, with notable rises in inquiries about recovery room scams (21%), FCA impersonation scams (38%), and cryptocurrency scams (17%). Alarmingly, 80% of consumers who contacted the helpline about potential cryptocurrency scams did so after investing, highlighting the need for increased awareness and vigilance in this space.
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OCC report identifies key risks facing federal banking system
The Office of the Comptroller of the Currency (OCC) has published its semi annual Risk Perspective for the latter quarter of 2023. The OCC highlighted credit, market, operational, and compliance risks, as the key risk themes in the report. The executive summary highlights the following points.
Credit risk
- Higher interest rates are increasing the risk of defaults on loans.
- Commercial real estate lending is particularly risky due to rising interest rates and inflation.
- The prolonged economic downturn and decline in corporate profitability are also contributing to higher credit risk.
- Banks are seeing signs of borrower stress across all asset classes.
Operational risk
- Cyber threats are a major concern for banks.
- Banks are increasingly using new technology to digitize their operations, which can increase the risk of fraud and error.
- Fraud targeting peer-to-peer (P2P) and other faster payment platforms is a growing concern.
Compliance risk
- Banks are under increased scrutiny to ensure equal access to credit and fair treatment of consumers.
- The use of innovative technologies for product and service delivery and partnerships with third parties can increase compliance risk.
- Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risk is also on the rise.
Net Interest Margins
- Rising deposit rates and increased reliance on wholesale funding are putting pressure on net interest margins (NIM).
- Competition for deposits and higher interest rates are driving up deposit rates.
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CP27/23: PRA seeks feedback on its approach to policy
The Prudential Regulation Authority (PRA) has published a consultation paper (CP)27/23 regarding its approach to policy. It builds on Discussion Paper (DP) 4/22 – The Prudential Regulation Authority’s future approach to policy. The CP is relevant to all firms regulated by the PRA.
The PRA is seeking feedback on the following:
- Updating the legal framework to incorporate amendments made by Parliament to the FSMA Bill before it was enacted.
- The PRA approach to the secondary objective of competitiveness and growth.
- The PRA approach to international engagement and collaboration.
- How the PRA engages stakeholders throughout the policy cycle.
- Reform of the Rulebook.
The consultation period ends on 8 April 2024.
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ESAs consults on DORA second batch of policy mandates
The European Supervisory Authorities (EBA, EIOPA, and ESMA) have issued a consultation on the second batch of policy mandates under the Digital Operational Resilience Act (DORA). The package includes four draft Regulatory Technical Standards (RTS), one set of draft Implementing Technical Standards (ITS), and two sets of guidelines (GL). These policy instruments aim to ensure a consistent and harmonised legal framework.
This second batch comprises the following:
RTS and ITS on content, timelines and templates on incident reporting: The proposals cover major incident reports for ICT-related incidents, time limits for notification and subsequent report submission, and significant cyber threat notifications.
GL on aggregated costs and losses from major incidents: The draft guidelines specify the estimation of annual costs and losses caused by major ICT-related incidents. The guidelines also propose that the reference period for the aggregation should be an accounting year to rely on available figures from the validated financial statements.
RTS on subcontracting of critical or important functions: The RTS specifies how to assess when ICT services supporting critical or important functions can be subcontracted and sets key requirements for financial entities using such services.
RTS on oversight harmonisation: The draft RTS covers the information to be provided by an ICT third-party service provider to be designated as critical. It outlines the details that must be provided to the Lead Overseer, including content, structure, and format of the information.
GL on oversight cooperation between ESAs and competent authorities: The draft guidelines cover procedures for task allocation and information exchange between competent authorities and ESAs. They also provide details on these exchanges.
RTS on threat-led penetration testing (TLPT): The draft RTS specify the criteria used for identifying financial entities required to perform TLPT, the requirements and standards governing the use of internal testers, and the supervisory and other relevant cooperation needed for the implementation of TLPT and the facilitation of mutual recognition.
The consultation runs until 4 March 2024.
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Effectiveness of European banking supervision
In a speech at the House of the Euro, Brussels, Frank Elderson, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the Supervisory Board of the ECB, discussed the role and powers of the ECB in supervising banks
The Rationale for prudential supervision
Elderson began by explaining the rationale for prudential supervision. He emphasised that supervisors do not run banks and that it is the responsibility of bank management to manage risks properly. However, he also argued that there are several reasons why external supervision is necessary:
Delegated responsibility: Individual citizens usually don’t have the time or expertise to inspect banks’ balance sheets, so they delegate this responsibility to supervisory authorities.
Moral hazard: Banks operate with high leverage, which gives them an incentive to take on excessive risks. Prudential supervision helps to curb moral hazard by encouraging responsible risk-taking and monitoring banks’ risk management practices. This is especially relevant because financial markets are prone to market failures. Information asymmetry is a common problem, as banks have more information about their financial health than depositors or investors. Prudential supervision is needed to mitigate this imbalance by ensuring that banks disclose accurate information and maintain sufficient capital to absorb losses.
Systemic risk: The failure of one financial institution can have cascading effects on others, so prudential supervision is crucial to maintaining overall financial stability.
Supervisory assessment and tools
Elderson then discussed the ECB’s supervisory assessment process. He explained that the ECB uses a comprehensive approach to assess the risks faced by banks, including their asset quality, liquidity, and capital adequacy. The ECB also assesses a bank’s internal governance, risk management, and business model sustainability.
Elderson also discussed the tools available to supervisors. He distinguished between moral suasion and binding supervisory measures. He defined moral suasion as the use of persuasion and informal pressure to encourage banks to take corrective action. This is often the first step that supervisors take, and it can be effective in many cases. However, there are also times when moral suasion is not enough, and supervisors need to use more intrusive tools.
The ECB has a wide range of binding supervisory measures available to it. HE noted a few:
- Requiring banks to hold additional own funds
- Imposing qualitative requirements on banks’ risk management practices
- Restricting or limiting the business, operations, or network of institutions
- Requiring the divestment of activities that pose excessive risks to the soundness of an institution
- Reducing the risk inherent in the activities, products, and systems of institutions
- Restricting or prohibiting distributions by the institution to shareholders, members or holders of Additional Tier 1 instruments where the prohibition does not constitute an event of default of the institution
- Removing members from the management body of credit institutions who do not fulfill the requirements set out in the relevant acts
- Imposing periodic penalty payments
- Imposing sanctions
The ECB has used these tools to address a wide range of issues at banks across the European Union. For example, the ECB has required banks to strengthen their risk management practices, to reduce their reliance on wholesale funding, and to improve their capital adequacy.
Escalation and Enforcement
Elderson emphasised the importance of escalation and enforcement in supervisory action. He explained that the ECB has a clear escalation ladder, which means that it will start with the least intrusive tools and will only escalate to more intrusive tools if necessary. However, he also noted that the ECB is willing to use its powers to the full extent necessary to ensure that banks comply with prudential requirements.
He cited the ECB’s recent action on climate-related and environmental (C&E) risks as an example of this. The ECB has set out clear expectations for how banks should manage C&E risks, and it has imposed sanctions on banks that have not met these expectations. This sends a clear message that the ECB is serious about enforcing its supervisory requirements.
In concluding, Elderson emphasised the importance of timely and effective remediation in European banking supervision. He argued that supervisors need to have a strong analytical focus on risks, and that they should be willing to use their powers to compel banks to take corrective action. The ECB remains committed to providing effective supervision, and it is taking steps to ensure that its supervisory actions are timely, informed, and enforceable.
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Joint statement on the EU-US Financial Regulatory Forum
The EU–US Joint Financial Regulatory Forum has concluded its latest session with representatives from key financial regulatory bodies on both sides of the Atlantic engaged in discussions. Hosted by the US Department of the Treasury and the European Commission, the forum aims to enhance cooperation and understanding on various aspects of financial regulation.
In the joint statement issued by the US Department of Treasury, the participants underscored the significance of the ongoing collaboration in addressing challenges and promoting financial stability. The discussions revolved around six pivotal themes:
Market developments and financial stability: Both the EU and US acknowledged a moderation of risks in the financial sector in recent months. While inflation has slowed, concerns persist regarding the impact of higher interest rates, elevated debt levels, and geopolitical uncertainties.
Regulatory developments in banking and insurance: The summit provided updates on proposed rules, including the US federal banking regulators’ implementation of the final set of Basel III reforms and the EU’s progress on the Banking Package.
Anti-money laundering and countering the financing of terrorism (AML/CFT): Participants exchanged views on AML/CFT issues, with a specific focus on the ongoing implementation of the Anti-Money Laundering Act of 2020 in the US.
Sustainable finance: The forum delved into discussions on climate-related financial risk assessment, sustainability-related disclosures, and other requirements. The EU highlighted the European Sustainability Reporting Standards, while the US Treasury presented its recently released Principles for Net-Zero Financing and Investment.
Regulatory and supervisory cooperation in capital markets: Updates were provided on recent developments in capital markets structure, fund reform rules, and the shortening of the settlement cycle in the United States.
Operational resilience and digital finance: Participants shared insights on operational resilience and digital finance, including updates on legislative processes such as the Digital Operational Resilience Act (DORA) in the EU and regulatory efforts in the United States regarding crypto-assets.
The forum concluded with discussions on the use of artificial intelligence in financial services and financial data sharing proposals. Participants acknowledged the forum’s crucial role in fostering ongoing financial regulatory dialogue, emphasising the importance of regular communication on mutual concerns.
Looking ahead, participants committed to continued engagement, with the next Forum meeting anticipated in summer 2024 and all participants concurring “that regular communication on regulatory and supervisory issues of mutual concern is important to support financial stability, investor protection, market integrity, and a level playing field.”
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Nasdaq fined $4 million for OFAC sanctions breach
The Office of Foreign Assets Control (OFAC) has agreed charges with Nasdaq, Inc (Nasdaq) regarding sanctions violations with regard to Iran. Nasdaq will pay a fine of more than $4 million.
Nasdaq previously owned Nasdaq OMX Armenia OJSC (Nasdaq OMX Armenia), the former owner and operator of the Armenian Stock Exchange (ASE). Nasdaq OMX Armenia processed trades and settled payments involving the OFAC-designated Armenian subsidiary of Iran’s state-owned Bank Mellat. Nasdaq OMX Armenia therefore knowingly engaged in the exportation of services to Iran and the Government of Iran, thereby committing 151 apparent violations of OFAC sanctions on Iran. The violations all took place between 28 December 2012, and 3 September 2014. After voluntarily disclosing the apparent violations to OFAC, Nasdaq subsequently wound down its ownership interest in the ASE
The case shows the importance of businesses implementing effective sanctions compliance programs, especially in the context of mergers and acquisitions (M&A), which pose specific sanctions risks, particularly across borders. The Framework for OFAC Compliance Commitments suggests integrating compliance functions into the M&A process, ensuring the proliferation of compliance standards to newly acquired businesses through training, resources, and cultural integration.
The case also highlights the need for routine sanctions risk assessments for multinational entities, focusing on the awareness of non-US subsidiaries regarding OFAC sanctions compliance obligations.
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