Eva Dauberton
News Editor
FCA shares asset managers of common authorisation mistakes
The Financial Conduct Authority (FCA) has published a notice highlighting the common mistakes made by asset managers when applying for authorisation.
According to FCA statistics, between April 2023 and April 2024, 18% of applications were either withdrawn or rejected due to concerns or poor-quality information. These concerns include:
- Senior management lacking experience or qualifications.
- Misunderstanding the ‘Location of Offices’ threshold condition.
- Inadequate consideration of the risk posed by their business models.
- Underestimating accountability in outsourcing.
- Failure to identify conflicts of interest.
- Avoidance of consumer protection schemes such as the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS) when it is not appropriate.
- Not being prepared or organised to carry out their planned activities.
Before submitting an application, the FCA encourages asset managers to review relevant supervisory correspondence and pages related to their business model. If firms meet the criteria, they can also request support from the FCA’s pre-application support service (PASS).
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PRA clarifies several aspects of Solvency II MA reforms implementation
The Prudential Regulation Authority (PRA) has released an update in response to the clarification requests made by firms in their feedback to the consultation paper (CP) 19/23 on the reform of the Matching Adjustment (MA) as part of the review of Solvency II. The update aims to assist insurance firms in efficiently preparing for the implementation of the MA reforms.
Some context
On 28 September 2023, the PRA published CP19/23, which addresses various aspects of the solvency regime for MA portfolios. This CP has significant implications for insurers and covers areas such as the new MA attestation process, the expansion of permissible assets and liabilities for MA, changes to credit rating processes, internal model adjustments, and the introduction of a detailed data template to be provided to the PRA on a regular basis. The consultation period ended on 5 January 2024.
Key takeaways
In this update, the PRA clarifies several aspects, including:
- The continuation of permission to apply the MA when such permission has been granted prior to 30 June 2024.
- The treatment of existing fixed assets under the new regime.
- The implementation of new requirements such as the timing of MA attestation, the process for voluntary fundamental spread additions, notching of the fundamental spread, the sub-investment grade MA cap and the triggers for variations of MA permissions.
Next steps
The PRA plans to publish a policy statement with final rules in early June 2024. The PRA will also provide further guidance and materials on the MA application process under the reformed regime before 30 June 2024.
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EIOPA releases report on IFRS 17 implementation
The European Insurance and Occupational Pensions Authority (EIOPA) has released a report analysing the implementation of IFRS 17 by insurance companies in the European Union. The report also examines the similarities and differences between the calculation of insurance liabilities under IFRS 17 and the Solvency II framework.
Along with the report, EIOPA has published a factsheet on the implementation of IFRS 17.
Some context
IFRS 17, which replaced the previous interim standard IFRS 4, became the new international accounting standard for insurance contracts in January 2023. It shares significant similarities with Solvency II, allowing for material synergies. These similarities include employing a market-consistent valuation approach, using probability-weighted estimates of future cashflows, and discount rates to determine the present value of cash flows expected from insurance liabilities.
However, there are also important differences between the two frameworks. These differences can be found in the valuation methods permitted by IFRS 17, the inclusion of a contractual service margin, discount rates, risk adjustment/margin, contract boundaries, and the allocation of expenses.
Key takeaways
In the report, EIOPA acknowledges that implementing IFRS 17 required a significant effort from the industry, as even small differences often necessitated major changes to existing processes. The report is based on the 2023 semiannual financial statements from a sample of 53 (re) insurance groups from 17 Member States.
The report provides an overview of the implementation of IFRS 17, covering:
- The first application and the implementation of the main elements of the framework, such as the groups of contracts, the choice of valuation method, discount rates, risk adjustment, and the contractual service margin.
- The disparities between IFRS 17 and Solvency II, focusing on scope and valuation.
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FINRA April fines summary
The Financial Industry Regulatory Authority (FINRA) has published its latest disciplinary summary for April 2024 covering a range of enforcement actions. Amongst the firms fined for violations are Goldman Sachs, TradeStation Securities, Inc and Ceros Financial Services, Inc. The briefing also details the numerous individuals fined or barred by the regulator.
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SEC director discusses emerging “AI-washing” risk
In a recent speech at the Program on Corporate Compliance and Enforcement Spring Conference 2024, Gurbir S Grewal, the Director of the Securities and Exchange Commission’s (SEC) Division of Enforcement, discussed emerging issues of non-compliance and the risks associated with the use of AI in the corporate context.
The “perfect storm of risk” triggers
Grewal first examined issues that have occurred over the last decade. He emphasised that the combination of charismatic leaders, strong investor interest, non-compliance, weak controls, and under-empowered gatekeepers creates a “perfect storm of risk,” potentially causing significant harm to investors. He also discussed more recent issues, such as non-compliance and investor harm in the crypto markets and the impact of financial fraud.
The emerging “AI-washing” risk
Looking towards the future, Grewal emphasised the increased risk that AI poses in financial decision-making and its impact on investor and market interest. He stressed the need to prepare for and address these potential risks by drawing on the experience of ESG investing. Grewal highlighted the emerging risk of “AI-washing,” comparing it to companies exaggerating or making misleading statements about their ESG activities or products.
He mentioned that the SEC recently settled charges against two registered investment advisers for making false and misleading statements about their use of AI, hoping that these actions would serve as a warning to the investment industry.
“Proactive compliance” is key
Grewal then provided pointers on how to ensure compliance with securities law requirements related to AI through “proactive compliance.” He explained that this approach involves three key components: education, engagement, and execution.
Firstly, he encouraged compliance practitioners to educate themselves about the emerging risks associated with AI in their businesses. This includes reading about AI-related enforcement actions, reviewing future enforcement actions, and staying updated on how AI issues are affecting companies in the real world.
Secondly, Grewal urged them to use their knowledge to engage with personnel in different business units within their company. The goal is to understand how AI intersects with their activities, strategies, risks, and financial incentives.
Lastly, he emphasised the importance of execution. Individuals should assess if their use of AI requires updating policies, procedures, and internal controls, tailored specifically to their company. Grewal stressed the need to effectively implement these measures, as many firms struggle with execution.
How SEC looks at individual liability
He then discussed individual liability and the SEC’s approach to cybersecurity disclosure failures. In that area, he noted that the SEC considers what a person knew or should have known, what actions they took or didn’t take, and how that aligns with the standards set by statutes, rules, and regulations. Grewal reiterated that individuals who operate in good faith and take reasonable steps are unlikely to face consequences.
Ultimately, Grewal noted that the SEC’s experience with other developing technologies and investment products can help market participants take steps to avoid “the next perfect storm of risk.”
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ASIC consults on regulatory guidance for external administrators
The Australian Securities & Investments Commission (ASIC) has issued a consultation paper outlining proposed updates to Regulatory Guide 16 (RG 16), which governs reporting obligations for external administrators and controllers concerning alleged misconduct.
The proposed revisions aim to offer clearer guidance on compliance with reporting obligations and articulate ASIC's approach to the reports it receives. The updates are a response to industry associations, professional bodies, and recommendations from the Parliamentary Joint Committee. ASIC anticipates that these changes will streamline reporting requirements, reducing both effort and expenses.
Statutory reports serve as a critical information source for ASIC to identify potential misconduct, monitor 'phoenix' behaviour, administer director bans, and select cases for enforcement actions. Additionally, ASIC uses this data to publish insolvency statistics for Australia.
Background to the consultation
- In the fiscal year ending 30 June 2023, ASIC received 5,775 Initial Statutory Reports and requested 778 Supplementary Statutory Reports.
- A significant majority of insolvent liquidations disclosed dividends to unsecured creditors of 50 cents in the dollar or less.
- Factors driving the need for updates include expanding case law, legislative reforms (for example simplified liquidation reporting), and insights from the Parliamentary Joint Committee's inquiry into corporate insolvency.
ASIC seeks feedback on the proposed updates to RG 16 by 6 June 2024.
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