Greg Kilminster
Head of Product - Content
MS 23/1: FCA publishes market study on wholesale data
The Financial Conduct Authority (FCA) has published a Wholesale Data Market Study (MS) 23/1, which examined the competition for credit rating data, benchmarks, and market data vendor services, specifically for UK-based wholesale data users, such as asset managers and investment banks.
Background
Launched in March 2023, the study examined competition in three markets.
- Benchmark provision across several asset classes.
- Credit ratings data provided by credit rating agencies (CRAs) and their affiliates.
- Market data vendor (MDV) services.
Findings
Overall, the FCA found no evidence that firms cannot access the wholesale data they need. However, the study identified evidence of, and drivers for, market power across all three markets in scope.
The FCA identified that:
- These markets are concentrated, with usually no more than three key providers in each market, most of which are highly profitable.
- Users consider data sources from most key providers as essential because there are limited or no effective alternatives.
- Key providers face limited competition from challenger firms.
One additional concern is that although data users, such as banks or asset managers, will bear the initial costs of wholesale data, they might ultimately transfer these costs to end investors.
Additionally, several firms were unable to identify how higher data charges have been or would be passed on to investors.
Next steps
FCA will focus on two broad areas:
- Examining where the issues identified can be addressed through the Smarter Regulatory Framework.
- Addressing firm-specific issues using other tools, such as the FCA’s powers under the Competition Act 1998.
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PS3/24: PRA issues near-final rules on Solvency II reporting and disclosure policies
The Prudential Regulation Authority (PRA) has issued policy statement (PS) 3/24, which sets out the PRA’s near-final reporting and disclosure policy as part of the review of Solvency II.
Background
The PS follows the consultation paper (CP) 14/22: Review of Solvency II: Reporting Phase 2, issued on 7 November 2022. The CP proposed streamlining regulatory reporting and disclosure requirements for insurers as part of its wider package of Solvency II reforms. The aim is to reduce ongoing reporting costs for firms, improve competitiveness and proportionality, and reflect the features of the UK insurance sector.
Rules
The PS contains near-final rules and policy material covering several sections of the PRA Rulebook, along with updates to supervisory statements (SSs) and the issuance of a Statement of policy (SoP).
These rules simplify and remove some reporting requirements and introduce the collection of new information to address data gaps in specific key risk areas.
However, the PRA isn’t changing the data collection system for Solvency II reporting.
Implementation
This policy will come into effect on 31 December 2024 for triennial, annual, semi-annual and quarterly requirements with a reporting or disclosure reference date as of 31 December 2024 and onwards. The PRA will also align existing reporting waivers or modifications by consent that remain in effect from 31 December 2024.
Next steps
The PRA will publish a final taxonomy reflecting changes set out in this PS as well as proposals outlined in other Solvency II consultations.
The PRA also intends to consult, in Q2 2024, on transferring the remaining firm-facing Solvency II requirements from assimilated law into the PRA Rulebook and other policy materials without significant policy reforms. These changes should take effect from 31 December 2024 as well.
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US Justice Department to release notice of proposed rule making on bulk personal data access
The US Justice Department has announced that it will release an advance notice of proposed rule making (ANPRM) in response to an Executive Order (EO) issued on 28 February 2024. The EO aims to address the access of countries of concern to Americans’ bulk sensitive personal data, which threatens national security.
Current laws do not adequately address the national security risks associated with this issue. Therefore, the EO aims to bridge this gap by prompting the development of a new program. The ANPRM will gather public input on the upcoming related department regulations.
While this program encompasses several industries, there are some important points concerning financial services:
- The six countries of concern are expected to be China (including Hong Kong and Macau), Russia, Iran, North Korea, Cuba, and Venezuela.
- The rules will define categorically the persons covered under the program.
- The rules will identify categories of highly sensitive data transactions that will be prohibited and categories of restricted transactions.
- Some data transactions will be exempt, including those ordinarily incident to and part of financial services, payment processing, and regulatory compliance.
The forthcoming ANPRM will describe in more detail the expected actions firms should take to comply. The EO also allows the Department of Justice to investigate violations of the regulations.
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CFPB releases guidelines on comparison-shopping tools for regulators and law enforcement agencies
The Consumer Financial Protection Bureau (CFPB) has released a circular to law enforcement agencies and regulators, providing guidelines on how comparison-shopping tools can be in violation of the law by directing consumers to certain products or lenders in exchange for kickbacks.
Consumers often use comparison-shopping tools to compare various financial products’ costs, features, and terms, such as credit cards, loans, and bank accounts. Unfortunately, these tools often display manipulated results or have hidden incentives from lenders, which can lead to a distorted perception of the financial market.
The circular discusses how regulators and law enforcement agencies can assess companies that operate comparison-shopping tools that receive payments from financial institutions to promote specific results. It also provides examples of illegal practices and how they can violate federal laws, emphasising the need for transparency in the industry.
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FinCEN issues statement on Russian Federation and updates lists of high-risk jurisdictions
The Financial Crimes Enforcement Network (FinCEN) has updated financial institutions regarding the recent actions of the Financial Action Task Force (FATF). In a public statement issued after its plenary meeting, FATF reiterated its stance on the Russian Federation’s ongoing aggression against Ukraine, maintaining the suspension of Russia’s membership due to its non-compliance with FATF principles. FATF stressed the risks posed to the international financial system by Russia’s financial connections with entities like the Democratic People’s Republic of Korea (DPRK) and Iran, highlighting concerns about proliferation financing, cyber activities, and ransomware attacks.
FATF has also updated its lists of jurisdictions with strategic deficiencies in anti-money laundering, countering the financing of terrorism, and countering proliferation financing (AML/CFT/CPF). Kenya and Namibia were added to the list of Jurisdictions Under Increased Monitoring, while Barbados, Gibraltar, Uganda, and the United Arab Emirates were removed from this list.
The list of High-Risk Jurisdictions Subject to a Call for Action remains unchanged, with Iran, DPRK, and Burma under scrutiny. Iran and DPRK face FATF countermeasures, while Burma is subject to enhanced due diligence requirements.
The update reminds financial institutions to consider FATF’s positions when assessing risks and obligations. Specifically, they should pay attention to due diligence obligations for correspondent accounts maintained for foreign financial institutions and remain updated on UN and US sanctions programs.
Similarly, for jurisdictions removed from FATF monitoring, financial institutions should factor in FATF’s decisions when evaluating risks. Moreover, financial institutions must adhere to reporting requirements if they suspect any transactions involve illicit funds or illegal activities.
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CBI speech on regulating the payments and electronic money sector
In a speech at the Payments and Electronic Money Institutions event, Elizabeth McMunn, Director of Banking, Payments and Credit Union Supervision at the Central Bank of Ireland (CBI) set out some of the regulator’s priorities with regard to the payments sector.
Overview of financial regulation priorities
McMunn began by outlining the financial regulation priorities of the CBI, emphasising the importance of stability, resilience, and trustworthiness in the financial sector. These priorities are aligned with the global macroeconomic environment, statutory mandates, and domestic and international responsibilities. The overarching supervisory objective, she noted, is to ensure the sector operates sustainably in the best interests of consumers and the wider economy.
Publication of Regulatory & Supervisory Outlook report
The CBI’s publication of the Regulatory & Supervisory Outlook report signifies a proactive approach to communicate key trends, risks, and regulatory priorities for the next two years. McMunn said this report serves as a complement to sector-specific supervisory engagement, publications, and consultative forums, providing firms with valuable insights into the regulatory landscape.
Importance of technological innovation
The speech acknowledged the significance of technological innovation in the financial sector but stressed the need for a regulatory environment that enables innovation while effectively managing associated risks. She welcomed the development of a National Payments Strategy, issued by the Department of Finance, indicating that the CBI will shortly be responding to the strategy.
Supervisory priorities
McNunn outlined the CBI’s supervisory priorities for the payment and electronic money sector, noting a focus on safeguarding, operational resilience, governance, risk management, anti-money laundering, countering the financing of terrorism, and financial resilience. The risk-based supervisory approach undertaken highlights the importance of aligning regulatory efforts with the evolving landscape of the sector but also means that the CBI does “not operate a no failures regime but rather work[s] to ensure that any firms that do fail do so in an orderly way, hence our emphasis on wind up planning”.
McMunn mentioned two Dear CEO letters issued to the sector, noting that they represent a clear communication approach, adding that “supervisory conversations can be most productive when firms and supervisors are engaged in honest and open dialogue”.
McMunn then outlined five areas that she felt align with the CBI’s supervisory objectives:
- Acknowledging many supervised entities are part of global groups, but that such firms should not lose their domestic regulatory focus.
- Strong governance and risk management foundations are essential for the growth and innovation of firms in the payments sector, but that some firms lack robust controls and understanding of money laundering and terrorist financing risks.
- Firms need to have resilience on the front of mind for boards and executives. She noted, “Resilience here is your own ability to identify and prepare for, respond and adapt to, and recover and learn from operational disruptions. It is about building the capability to do so within your firms and seeing your business operations through the business services lens”.
- In seeking authorisation from the CBI, a firm should do all the necessary planning required to ensure it is well-governed and sustainable to enter the European market.
- Diversity in governance will yield dividends and ensure an appropriate culture.
In concluding, McMunn noted the growing importance of the payment and electronic money sector, but reiterated her warning that many firms are still not meeting regulatory expectations, posing risks to customer funds and system integrity. Recent audits have highlighted deficiencies in safeguarding practices, underscoring the need for firms to prioritise customer security and effective business management. Addressing these issues, she said, is crucial for both regulatory compliance and business growth.
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