Greg Kilminster
Head of Product - Content
Basel Committee publishes banking turmoil update
The Basel Committee on Banking Supervision has published an update to the G20 Finance Ministers and Central Bank Governors on the 2023 banking turmoil. The update report offers insights into liquidity risks observed during this period. Following the turmoil in March to May 2023, the Committee has been evaluating the adequacy of existing regulatory frameworks, particularly those pertaining to liquidity, in the face of the unprecedented stress events that unfolded.
Some context
In early 2023, several banks collapsed or required government interventions, marking the most significant financial instability since the 2008 financial crisis. With nearly $1.1 trillion in total assets affected, the failures spanned multiple jurisdictions and led to a crisis of confidence in global banking systems. This volatility prompted central banks to deploy extensive support measures, including liquidity provisions and enhanced deposit guarantees, to mitigate wider contagion.
In response, the Basel Committee conducted a thorough stocktake, publishing its initial findings in October 2023. This initial report outlined key areas for improvement within the regulatory framework and highlighted liquidity risks that were either underestimated or not fully covered by the Basel III standards.
Key takeaways
The Basel Committee’s latest update dives deeper into liquidity risk dynamics during the turmoil. Key findings include:
- Liquidity outflows: The report reveals that liquidity outflows during the crisis exceeded typical stress-test expectations, indicating gaps in the existing Basel III Liquidity Coverage Ratio (LCR). Distressed banks faced liquidity challenges that were not fully anticipated by current LCR requirements.
- Valuation of liquid assets: There were issues surrounding the valuation and accounting treatment of liquid assets eligible to meet LCR thresholds. Certain valuation methods may have contributed to an underestimation of liquidity needs, which restricted banks’ ability to effectively utilise their liquidity buffers during periods of stress.
- Supervisory monitoring: The role of supervisory monitoring tools came under scrutiny. Existing tools did not adequately anticipate liquidity pressures, and there were delays in responding to emerging risks. This gap in supervisory effectiveness underscores the need for improved real-time monitoring and stress indicators.
Next steps
Building on these findings, the Basel Committee plans to advance several initiatives aimed at bolstering the resilience of the banking sector:
- Enhanced supervisory guidance: The Committee will prioritise efforts to strengthen supervisory practices on a global scale. This will likely involve updates to guidance that better aligns with the realities observed during the 2023 turmoil.
- Further analysis of Basel Framework: The Committee is undertaking further analysis to assess the performance of specific Basel Framework features, particularly those related to liquidity risk and interest rate risk within banks’ loan portfolios. This may lead to recommendations for adjustments to the Basel III standards over the medium term.
As the Basel Committee continues its work, member jurisdictions are encouraged to implement the Basel III standards consistently and fully.
Click here to read the full RegInsight on CUBE's RegPlatform
FCA speech on supervising the financial advice sector
In a speech at the Future Strategy for Personal Finance Professionals event, Nick Hulme, Head of Department for Advisers, Wealth and Pensions, Consumer Investments at the Financial Conduct Authority (FCA), spoke about the regulator’s evolving approach to the personal finance sector. He stressed the importance of adapting to changing client needs and emphasised a more flexible, outcomes-based regulatory stance: “a new era supervisory strategy.”
As Hulme explained, the FCA's recent strategy is driven by significant shifts within the financial advice industry and the broader economic environment. He pointed to an ageing population, shifting wealth patterns, evolving client expectations, and technological advancements such as artificial intelligence as key influences on the sector. “Our world is changing,” Hulme noted, “and so must we.” He cited the 2023 introduction of the Consumer Duty as a catalyst for adopting a less prescriptive, more flexible regulatory framework. This approach aims to give firms “the flexibility to innovate” and serve clients in ways that align with their unique business models.
The FCA's strategy focuses on three primary areas:
- Reducing and preventing serious harm: Hulme outlined the FCA's focus on key areas such as retirement income, ongoing advice, and the sustainability of the sector. For example, he noted the importance of providing robust, high-quality retirement advice, stating, “Retirement income advice is so critical, and where advisers can add huge value.” He also addressed concerns about ongoing advice arrangements, where clients may not always receive the value they are paying for. Hulme introduced the concept of a capital deduction for redress, describing it as a “polluter pays” approach. This would require firms that generate liabilities to set aside capital to address potential compensation claims. He mentioned that the FCA plans to publish a Policy Statement on this by year-end. “It is about sustainability and fairness,” Hulme said, noting the strategy’s intention to make the industry more accountable for its actions.
- Consumer Duty: The FCA is also intensifying its focus on the Consumer Duty's four outcomes—price and value, client understanding, support, and products and services. Hulme explained that the FCA’s approach is one of “nurture and challenge,” highlighting its commitment to fostering best practices while addressing compliance failures. He encouraged firms to use the annual Duty report as an opportunity to self-assess and improve, noting, “The Duty is not just met by firms writing more stuff down.”
- Advice Guidance Boundary Review (AGBR): Hulme stressed the importance of clarifying the distinction between advice and guidance, aiming to reduce regulatory uncertainty and help bridge the advice gap. With only 8% of consumers currently taking professional advice, he expressed hope that clearer boundaries will enable firms to offer more targeted, affordable services to a broader clientele. He outlined three pillars of the AGBR: clarification of the boundary, targeted support, and simplified advice. Hulme encouraged firms to consider how they might innovate within this evolving framework, saying, “Don’t wait for it to land before taking further steps to unleash opportunity.”
Hulme concluded by urging the industry to embrace a collaborative approach, emphasising that the FCA’s goals are in alignment with those of the sector. He highlighted the importance of open communication, with the FCA increasing its presence at industry events and seeking direct feedback. The FCA has also launched a Call for Input to help identify regulatory redundancies and better facilitate the outcomes-based approach.
As Hulme said, “There is a lot of ‘different’ happening.” He emphasised the FCA’s commitment to nurturing innovation and achieving shared goals, while ensuring that all clients—regardless of their wealth level—are empowered to make sound financial decisions in a sustainable, well-regulated sector.
Click here to read the full RegInsight on CUBE's RegPlatform
ESMA issues first sanctions report
In its first consolidated report on sanctions, the European Securities and Markets Authority (ESMA) has detailed enforcement actions taken by national regulators across the EU in 2023. According to the report, National Competent Authorities (NCAs) issued more than 970 administrative sanctions and measures in the financial sector, with fines totaling around €71 million. The report highlights the prominent role of the Market Abuse Regulation (MAR) and the Markets in Financial Instruments Directive II (MiFID II) in this sanctioning activity.
Some context
The report aims to foster supervisory consistency and enforcement convergence among NCAs, aligning with ESMA’s 2023-2028 strategic objectives. Notably, the report does not encompass all enforcement measures, as informal actions and some criminal sanctions are excluded. While administrative fines are a visible tool for enforcement, ESMA stresses that they represent just one aspect of NCAs’ broader supervisory efforts.
Key takeaways
The MAR and MiFID II frameworks were associated with the highest sanctions in both number and value. Specifically, MAR accounted for 299 measures worth approximately €45.9 million, and MiFID II for 289 measures amounting to €18.3 million. The report indicates a rising number of NCAs imposing sanctions, though the total number of measures has declined slightly from previous years.
In 2023, several regulatory frameworks—including the Benchmarks Regulation (BMR) and the European Crowdfunding Service Providers Regulation (ECSPR)—saw no administrative sanctions. ESMA highlights that convergence remains an area for improvement, as variations in sanctioning approaches persist across Member States.
Next steps
Looking ahead, ESMA plans to leverage the findings from this report to strengthen enforcement harmonisation across the EU, ensuring that similar breaches result in similar outcomes. This annual report is set to continue as part of ESMA's ongoing efforts to enhance transparency and enforcement in the financial markets.
Click here to read the full RegInsight on CUBE's RegPlatform
FINTRAC guidance on correspondent banking
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has issued updated guidance on the requirements for Canadian financial institutions entering into correspondent banking relationships under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its Regulations. The guidance aims to clarify the obligations for financial entities to mitigate risks associated with correspondent banking and ensure compliance with anti-money laundering (AML) and anti-terrorist financing (ATF) requirements.
Some context
Canadian banks, credit unions, life insurance companies, and certain trust and loan companies are subject to these requirements if they enter into correspondent banking relationships. A correspondent banking relationship is established through an agreement with a foreign financial institution, enabling services like cash management or international fund transfers. The purpose of FINTRAC’s guidance is to outline due diligence measures to identify and mitigate AML and ATF risks inherent in these relationships.
Compliance obligations
Financial entities must:
- Verify the foreign institution: Before entering a correspondent relationship, institutions must collect information about the foreign bank’s activities and confirm it is not a shell bank. Senior management approval is also required.
- Monitoring and documentation: Ongoing monitoring, including periodic risk assessments, must be conducted to identify suspicious transactions, ensure the foreign bank’s AML/ATF measures are robust, and verify the foreign institution’s compliance record.
- Record keeping: Financial entities must keep detailed records, including copies of the foreign institution’s business licenses, annual reports, and a statement affirming it has no indirect or direct ties to shell banks. These records must be retained for at least five years from the date of the last business transaction.
Direct client access
If a foreign financial institution’s client has direct access to services provided by a Canadian entity, additional measures are required. Canadian institutions must verify that the foreign bank meets client identification standards and will share client identification information if requested.
Exemptions and limitations
The guidance also identifies specific scenarios where some correspondent banking requirements do not apply. For example, transactions related to credit card or prepaid payment product processing for merchants are exempt from full record-keeping and ongoing monitoring obligations.
Next steps
Financial entities are encouraged to integrate these requirements into their AML and ATF compliance programs to ensure consistent and effective risk management. The guidance serves as a reminder that correspondent banking relationships carry significant risk, requiring rigorous due diligence and regular assessments to maintain compliance with Canadian regulations.
Click here to read the full RegInsight on CUBE's RegPlatform
Summary of US round table on de-risking published
The Financial Stability Oversight Council has published a brief report on a roundtable on the impact of de-risking practices on financial inclusion and consumer protection which was held in June 2024. This virtual event, led by Treasury Under Secretary Brian Nelson and CFPB Director Rohit Chopra, focused on balancing access to financial services with the need to safeguard against illicit activities.
Some context
Under Secretary Nelson highlighted Treasury’s 2023 National De-Risking Strategy, which addresses the adverse effects of denying financial services to certain customer groups due to perceived risk. Emphasising a risk-based approach, he noted the July 2022 FinCEN guidance, which clarified that no customer type inherently represents a uniform risk. He also discussed Treasury’s efforts to facilitate humanitarian aid through sanctions exemptions and revealed plans to update AML/CFT compliance requirements, enhancing flexibility and effectiveness for financial institutions.
Director Chopra added that financial inclusion is essential for societal participation. He pointed to recent CFPB actions against banks that allegedly discriminated against specific consumer groups. Chopra expressed concern about overbroad risk management practices that can unlawfully restrict access to financial services. He also raised issues related to third-party data brokers and the challenges consumers face when accounts are unjustly closed or frozen.
Treasury’s approach to de-risking
- Treasury aims to address inequitable financial exclusion through a targeted de-risking strategy, advocating for a nuanced, risk-based assessment.
- Planned updates to AML/CFT regulations will seek to prevent a blanket approach that can lead to service denials for entire customer groups.
CFPB’s consumer protection efforts
- The CFPB has acted against financial institutions accused of discriminatory practices, including account closures based on ethnicity or unfounded fraud risks.
- Chopra called for increased scrutiny of third-party data brokers and pledged to support consumers who experience unjust denials or closures.
Both agencies encouraged public feedback, with Under Secretary Nelson inviting comments on the proposed AML/CFT rule through the online comment process. Director Chopra also urged consumers affected by account denials to file complaints with the CFPB, emphasising the importance of continued dialogue to shape effective policies for financial inclusion and consumer protection.
Click here to read the full RegInsight on CUBE's RegPlatform