CUBE RegNews: 17th May

Posted: 2024-05-17

BaFin President calls for simplified financial regulation to ensure stability and efficiency 

Mark Branson, President of German regulator BaFin, has spoken about the pressing need for simplifying financial regulation to enhance stability and efficiency within the European financial system. 

Branson began by acknowledging the contradictions prevailing in the current financial landscape. Despite reports of robust profits in the financial sector, uncertainties loom large, driven by geopolitical risks and the ongoing transformation towards a more sustainable and digital economy. 

Call for European unity 

Emphasising the importance of European unity, Branson highlighted the need for concerted action at the European level to navigate through these challenges successfully. He noted the significance of a harmonised and efficient European capital market to facilitate large-scale investments in a green and digitally transformed economy. 

Three key points for future financial regulation 

Branson outlined three points he feels may shape the future of financial regulation in Europe. 

1. Maintaining regulatory standards: He stressed the importance of upholding existing regulatory standards, cautioning against any relaxation that could compromise the stability of the financial system. Branson also emphasised the need to learn from past experiences and avoid deregulation that could lead to future crises. 
2. Reducing complexity: At the same time, he highlighted the need to simplify financial regulation, advocating for clearer and more proportional rules. He cited examples of excessive complexity in current regulations, such as those surrounding sustainability and crypto assets, and urged for streamlining and eliminating overlapping rules. 
3. Ensuring supervisory convergence: Branson called for greater supervisory convergence across Europe, with uniformly high standards. He emphasised too the need for proportionate regulation, particularly for smaller companies, to promote market entry and prevent discrimination. 

Challenges and solutions 

Branson acknowledged the challenges in achieving regulatory simplification, including German-specific complexities. He identified opportunities to streamline regulations at both the national and European levels (for example the Markets in Crypto Assets Regulation and the various sustainability rule initiatives), highlighting the need for principles-based regulation to allow for flexibility and quicker adaptation to new risks. 

Call for supervisory oversight 

Branson spoke of the importance of robust supervisory oversight, suggesting that European supervisory authorities should intervene more decisively to maintain market integrity. He cited examples of potential centralisation of supervision for certain institutions, such as clearing houses, to enhance efficiency and effectiveness. 

A path forward 

Branson concluded by reaffirming the importance of not compromising regulatory standards while striving for simplicity and efficiency in financial regulation. He advocated for clear and proportional rules that can be uniformly implemented across the EU, laying the groundwork for a stable and competitive European financial system. 

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“Finfluencers” charged by FCA 

The Financial Conduct Authority (FCA) has charged nine individuals for promoting an unauthorised foreign exchange trading scheme on social media. 

Emmanuel Nwanze is accused of running the scheme and issuing unauthorised financial promotions. Between 19 May 19 2018, and 13 April 13 2021, Nwanze and Holly Thompson allegedly used an Instagram account to provide advice on high-risk investments known as contracts for difference (CFDs) without authorisation. 

Additionally, Nwanze allegedly paid others to promote the Instagram account to millions of followers. Thompson and the others charged face counts of issuing unauthorised financial promotions under sections 19 and 21 of the Financial Services and Markets Act 2000.

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Insurance risk dashboard shows stable exposure 

The European Insurance and Occupational Pensions Authority (EIOPA) has released its May 2024 Insurance Risk Dashboard. It shows that risks in the EU insurance sector are generally stable, though some uncertainties exist. In summary, the dashboard’s key observations are as follows. 

• Overall risk Level: Risks are at medium levels, with some vulnerabilities from market uncertainty and potential issues in real estate. 
• Macro risks: While some indicators show positive trends, GDP growth is still relatively low. Credit risks are steady but need monitoring due to insurers' high exposure to government and corporate bonds. Market risks are challenging due to volatility and declining commercial real estate prices. 
• Liquidity and funding: These risks are stable but with increased lapse rates, particularly at the end of last year. 
• Profitability and solvency: These risks are also stable, with better returns in late 2023 compared to 2022. Solvency ratios remained steady in late 2023. 
• Interlinkages and imbalances: EIOPA closely monitors insurers' connections with other financial sectors, which have slightly increased. 
• Insurance risks: Premium growth has been positive, but there's a slight worsening in loss ratios. 
• ESG-Related Risks: These risks are stable, with no significant changes in transition and physical risks indicators. 
• Digitalisation and cyber Risks: Supervisors note a slight increase in the materiality of cyber risks and negative sentiment related to cyber issues in early 2024. 

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New Zealand supervisors issue AML statement 

The Department of Internal Affairs, the Financial Markets Authority and the Reserve Bank of New Zealand (supervisors) have jointly issued a statement welcoming the changes to the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements which have arisen as a result of the various Amendment Regulations coming into force on 1 June 2024. 

The statement outlines various guidelines that have already been produced and notes too that the supervisors envisage taking a broadly educative and constructive approach with firms with the focus being on issuing guidance on compliance expectations and more generally supporting firms to comply with the new requirements at the earliest opportunity. 

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Speech: setting up the EU's Anti-Money Laundering Authority for success 

In a speech at the at the European Anti-Financial Crime Summit, Derville Rowland, Deputy Governor at the Central Bank of Ireland discussed the new European Anti-Money Laundering Framework and, specifically, the establishment of a central Anti-Money Laundering Authority (AMLA). Rowland noted at the outset that this initiative signifies a major shift in the European Union's approach to combating financial crime, focusing on a unified and coordinated strategy across member states. 

The AMLA is being established in 2024 and is expected to begin direct supervision of certain high-rick entities in 2028. 

Historical context and current challenges 

Rowland said that the creation of the AMLA and the move towards a single rulebook for anti-money laundering (AML) within the EU reflects a critical response to the complexities of financial crime that have intensified with globalisation and technological advancements. Recent financial scandals and the increasing sophistication of cross-border crimes simply emphasise the challenge and the inadequacies of fragmented national approaches. 

Rowland pointed out that technological innovation, while beneficial, also poses significant risks by facilitating faster and often less transparent financial transactions. The interconnected nature of global financial systems further complicates the regulatory landscape, making it difficult for individual countries to effectively tackle financial crime. This necessitates a collective and more holistic approach, as no single nation can combat these issues alone. 

Strategic objectives of the AMLA 

Rowland outlined her view of the factors to consider in order to make the AMLA a success. 

1. Clear mandate and adequate powers: The AMLA must be endowed with a robust mandate and sufficient powers to adopt a risk-based approach in achieving regulatory outcomes. This approach should be flexible enough to address the diverse and evolving nature of financial crime across different sectors and regions within the EU. 
2. Strong governance and operational independence: To ensure effectiveness, the AMLA needs to maintain strong governance structures and operational independence. This involves having an impartial and technically proficient Executive Board capable of making binding decisions free from external pressures. 
3. Skills and capabilities: The AMLA's success hinges on the expertise and judgement of its personnel. The authority must attract skilled professionals with a deep understanding of financial crime, policy development, and enforcement. This diversity in skill sets is essential for comprehensive risk identification and management. 
4. Building on existing foundations: While the AMLA is a new entity, it should leverage existing initiatives and foster cooperation with national authorities and other EU institutions. This will enhance information sharing, data analysis, and technological innovation, which are crucial for effective AML oversight. 

A risk-based approach and supervisory convergence 

A key theme in the speech is the need for the AMLA to employ a risk-based approach, focusing on significant issues and tailoring strategies to specific contexts. This approach should avoid the pitfalls of a prescriptive, one-size-fits-all methodology that might lead to a tick-box mentality rather than addressing underlying risks. 

Rowland also emphasised that while harmonisation of supervisory practices is necessary, it should not come at the expense of flexibility and adaptability. The AMLA should aim for outcome-focused regulation, ensuring that processes facilitate effective supervision without becoming overly bureaucratic. 

Additionally, the AMLA must be forward-looking, capable of anticipating and adapting to emerging risks. This will require a dynamic and responsive regulatory framework that can pivot based on evolving financial crime trends. 

Governance and operational structure 

Rowland highlighted effective governance as a cornerstone of the AMLA's success. The creation of an independent Executive Board with substantial expertise in financial crime is crucial, she said, adding that this governance structure should ensure transparency, accountability, and trust in the decision-making processes. 

Operational independence is equally important to shield the AMLA from political and external influences, allowing it to focus on its regulatory objectives without compromise. This independence will support the authority's credibility and effectiveness in the long term. 

Collaboration and information sharing 

The AMLA's ultimate effectiveness will significantly depend on its ability to collaborate with national competent authorities (NCAs) and other stakeholders. Building a common supervisory culture across the EU is vital to ensure consistency in AML efforts. The AMLA must foster a cooperative environment where information sharing and coordinated actions are standard practices. 

The speech suggests that AMLA should not start from scratch but build upon existing frameworks and relationships. This strategic leverage will help in integrating AMLA smoothly into the broader EU regulatory landscape and enhance its operational efficiency from the outset. 

Rowland concluded with an optimistic outlook on the AMLA's potential impact on the European AML framework. Its successful establishment and operation could mark a significant milestone in the fight against financial crime, provided it adheres to principles of strong governance, skilled staffing, and a flexible, risk-based regulatory approach. 

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UK sustainability reporting update 

The UK government has published an update to its Sustainability Disclosure Requirements, which builds on the 2023 launch of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) baseline standards. 

The update states that the Government aims to make the UK-endorsed ISSB standards available in Q1 2025, these will be known as UK Sustainability Reporting Standards. The Financial Conduct Authority (FCA) will then be able to use the UK Sustainability Reporting Standards to introduce requirements for UK-listed companies to report sustainability-related information. The Government will then decide on disclosure requirements against UK Sustainability Reporting Standards for UK companies that do not fall within the FCA’s regulatory perimeter. 

The update goes on to note that the FCA plans to consult on strengthening its expectations for transition plan disclosures with reference to the Transition Plan Taskforce (TPT) Disclosure Framework and that the Government will be consulting on how the UK’s largest companies can most effectively disclose their transition plans, meeting a key commitment of last year’s Green Finance Strategy. 

The update also notes the recent FCA activity around SDR and labelling, including the recent consultation to extend the SDR and labelling regime to UK-based portfolio managers. 

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Michelle Bowman speech on innovation in the financial industry 

In a speech at the Digital Chamber DC Blockchain Summit 2024, Michelle Bowman, member of the Board of Governors of the Federal Reserve System, discussed the role of innovation in the financial system. She emphasised the importance of understanding and responsibly managing technological advancements within the highly regulated banking industry. 

Bowman explained that the Federal Reserve views financial innovation through its core responsibilities, of issuing currency, conducting monetary policy, maintaining financial stability, and supervising financial institutions. She acknowledged that while innovation can enhance efficiency and competition, it also introduces new risks that regulators must manage. 

She noted that regulators often resist innovation due to its inherent risks and the need for compliance with laws. However, Bowman proposed “building blocks” to help regulators embrace innovation more effectively: 

• Understanding innovation: Regulators must grasp the dynamics of new technologies, such as distributed ledger technology (DLT), and their potential impact on various financial sectors. 
• Openness to innovation: Regulators should be open and receptive to innovation, focusing on solutions to mitigate risks and provide clear regulatory expectations. 

Bowman urged a proactive approach to innovation, suggesting that regulators should promote it through transparency and open communication. She cited the example of cross-border payments, where innovation can address speed and cost issues while maintaining compliance safeguards. 

She also emphasised the need for a clear and sensible regulatory framework that enables private sector innovation within established guardrails. This framework should support both current and future financial products and services, ensuring safety and soundness. 

In closing, Bowman expressed her commitment to understanding and accommodating new technologies while maintaining the safeguards that protect consumers and ensure financial system stability: “My hope is that as we enhance our understanding, and we recognise the promise of new technology, we can achieve a banking system that welcomes innovation, and is stronger and more efficient as a result.” 

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Dear CEO letter on closed products 

The FCA has written to firms to remind them that any closed products and services that customers may still be using will fall under the Consumer Duty obligations by 31 July 2024. 

The Consumer Duty aims to enhance consumer protection within the financial services sector. It sets higher and clearer standards of consumer care across all financial services and focuses on delivering good outcomes for consumers. The letter notes that firms must review all closed products and services against all aspects of the Consumer Duty before 31 July and then on an on-going basis. 

To ensure firms are aware of the requirements, separate letters have been sent to cover the following services.  

• Retail banking 
• Life insurance 
• Consumer finance 
• Consumer investments 
• Asset management 
• All other firms 

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US Treasury issues strategy to combat terrorist financing

The US Department of the Treasury has released its 2024 National Strategy for Combating Terrorist and Other Illicit Financing which provides a blueprint for the US government’s efforts to effectively address the most significant illicit finance threats and risks to the US financial system. 

The 2024 Strategy targets major illicit finance threats, including large-scale fraud, ransomware, the opioid epidemic, terrorism, corruption, and misuse of technological advancements in finance. It highlights how terrorist financing by Hamas and Russia's invasion of Ukraine, supported by Russian elites, exploit vulnerabilities in the US and global financial systems, posing national security risks. 

The strategy outlines four main priorities as follows: 

• Assess and address legal and regulatory gaps 
• Identify and close gaps in the US anti-money laundering (AML) and countering the financing of terrorism (CFT) regime. 
• Enhance the beneficial ownership database and finalise rules to prevent exploitation by illicit actors. 
• Evaluate the need for additional AML/CFT measures for sectors currently lacking comprehensive obligations, including certain non-bank financial institutions and key gatekeeper professions. 
• Update regulatory requirements for virtual asset activities. 
• Risk-focused and effective AML/CFT framework 
• Modernise the US AML/CFT regime to be risk-based and outcome-focused. 
• Ensure adequate resources for AML/CFT supervision and enforcement, particularly for non-bank financial institutions. 
• Enhance operational effectiveness in combating illicit finance 
• Regularly update and communicate key illicit finance threats and risks via the National AML/CFT Priorities. 
• Use targeted law enforcement and interagency coordination to address priority illicit finance challenges. 
• Improve public-private information-sharing efforts and strengthen global AML/CFT standards implementation. 
• Support technological innovation to mitigate illicit finance risks 
• Provide regulatory and policy support for reliable digital identity solutions. 
• Encourage innovation in AML/CFT compliance technologies. 
• Expand the use of artificial intelligence and data analytics in detecting and disrupting illicit finance. 
• Promote US leadership in payment technologies that align with US standards and values. 

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Michael J Hsu provides update on OCC activity 

Acting Comptroller of the Currency, Michael J Hsu has provided an update on the Office of the Comptroller of the Currency (OCC) activity to the Committee on Banking, Housing, and Urban Affairs. 

Hsu reported that the federal banking system remains sound, with strong regulatory capital and liquidity. However, he highlighted ongoing risks in commercial real estate and interest rate exposures, urging vigilance against complacency. He noted the OCC's 2024 Bank Supervision Operating Plan which prioritises asset liability management, credit risk, cybersecurity, operational risk, and consumer compliance risk. 

Hsu emphasised the OCC’s commitment to promoting fairness in banking, noting a significant reduction in overdraft fees following OCC guidance on overdraft protection. He also discussed the challenges community banks face with digitalisation, particularly in managing fintech partnerships. To support these banks, the OCC, alongside the Federal Reserve and FDIC, has issued a third-party risk management guide. 

Hsu said the OCC remains dedicated to maintaining a dynamic and diverse banking system, focusing on updating bank merger analytical frameworks. A proposed policy statement on bank mergers was released for comment, with the comment period extended to 15 June 2024. 

Addressing issues at the Federal Deposit Insurance Corporation (FDIC), where Hsu is a board member, he condemned the harassment and misconduct revealed in a recent independent report and stressed the need to protect FDIC staff and endorsed the report’s recommendations, including the engagement of an external expert and establishment of an independent monitor. Hsu affirmed his commitment to transforming the FDIC into a safe workplace and expressed confidence in Chairman Gruenberg’s commitment to lead these efforts. 

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SEC approves changes to Regulation S-P 

The Securities and Exchange Commission (SEC) has made changes to Regulation S-P, which deals with how financial institutions handle personal information about consumers. The changes were proposed in March 2023 and were officially adopted on 15 May 2024. The amendments aim to update and improve the protection of consumer financial information. 

The new rules affect broker-dealers, investment companies, registered investment advisers, and transfer agents, collectively referred to as "covered institutions." In summary, the key changes are as follows. 

1. Incident Response Program: Covered institutions must establish a plan to detect, respond to, and recover from unauthorised access to customer information. This plan should also include procedures for notifying affected individuals in a timely manner if their sensitive information is accessed without permission. 
2. Customer Notification Requirement: Covered institutions must inform individuals if their sensitive information has been accessed or is likely to have been accessed without authorisation. This notification must be provided promptly, usually within 30 days of discovering the breach. It should include details about the incident and guidance on how affected individuals can protect themselves. 

Other key changes include: 

• Expanding the rules to cover both information collected directly from customers and information received from other financial institutions. 
• Requiring covered institutions to keep records showing they are following the rules. 
• Adjusting the delivery of annual privacy notices to align with certain conditions outlined in the Fixing America’s Surface Transportation Act (FAST) Act. 
• Extending the rules to cover transfer agents registered with the SEC or another relevant regulatory agency. 

Large institutions have 18 months, and smaller ones have 24 months, from the date of publication in the Federal Register to comply with these changes.  

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