Greg Kilminster
Head of Product - Content
FRC announces significant update to the UK Stewardship Code
The Financial Reporting Council (FRC) has announced comprehensive revisions to the UK Stewardship Code.
Some context
The UK Stewardship Code sets high stewardship standards for those investing money on behalf of UK savers and pensioners, and those that support them. Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
The updates aim to enhance support for UK capital markets, streamline reporting processes, and promote effective stewardship. Following extensive stakeholder engagement, the FRC has identified five key themes for the next phase of the Code's revision: Purpose, Principles, Proxy Advisors, Process, and Positioning.
Key takeaways
The FRC's focus on Purpose will involve defining effective stewardship and how reporting against the Code can facilitate this. Principles will be scrutinised to determine necessary reporting requirements. Regarding Proxy Advisors, the FRC seeks to enhance transparency in their operations. The Process theme aims to reduce the reporting burden for signatories, ensuring the provided information is useful and accessible. Positioning will involve collaboration with other regulators to ensure clarity and avoid duplication in the revised Code's implementation.
Immediate changes to the reporting requirements include:
- Eliminating the need for annual disclosure of all 'Context' reporting expectations, except for new or significantly altered reports.
- Removing the requirement for annual disclosure against 'Activity' and 'Outcome' reporting expectations for certain Principles.
- Allowing the use of previous reports and cross-referencing.
- Defining what constitutes an 'outcome' for stewardship purposes.
- Clarifying the conditions under which reporting against Principles 10 and 11 (collaborative engagement and escalation) is necessary.
These adjustments are expected to reduce reporting volume and provide signatories with greater flexibility.
Next steps
The new reporting changes will be implemented in the upcoming application window on 31 October 2024. The FRC will individually inform signatories about the impact of these changes. A formal public consultation on the Code will be launched later this year, accompanied by further stakeholder engagement in August and September on the identified key themes.
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Federal Reserve fines Green Dot $44 million for consumer compliance failures
The Federal Reserve Board has fined Green Dot $44 million for unfair and deceptive practices, as well as a deficient consumer compliance risk management program. The violations involved improper marketing, selling, and servicing of prepaid debit cards, and tax refund processing services. Issues included failure to disclose tax refund processing fees, blocking legitimate customer accounts receiving unemployment benefits, and inadequate consumer compliance and anti-money laundering programs.
Green Dot is required to hire an independent third-party to improve its compliance programs and address consumer complaints. Additionally, the firm must develop an effective anti-money laundering program and undergo an independent review of certain transaction activities.
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SEC launches Interagency Securities Council to coordinate enforcement efforts
The Securities and Exchange Commission (SEC) has established the Interagency Securities Council (ISC) to enhance coordination among federal, state, and local agencies in combatting securities fraud.
Some context
Spearheaded by the SEC’s Division of Enforcement, the new ISC aims to create a collaborative platform where regulatory and law enforcement professionals can share insights, trends, and strategies. The ISC will convene quarterly, with its inaugural session featuring representatives from over 100 departments and agencies, including federal bodies, state attorney general offices, and local law enforcement.
Key takeaways
The primary goal of the ISC is to foster a cohesive network among various levels of government to strengthen investor protection and streamline enforcement efforts. Key objectives include:
- Enhancing collaboration on securities fraud cases.
- Providing guidance and insights to agencies less experienced in securities law.
- Creating a unified forum to discuss emerging threats and fraud mitigation strategies.
The ISC’s discussions will cover a range of topics, including emerging threats, innovative investigation techniques, and case studies of successful fraud combat strategies. This initiative also seeks to engage law enforcement agencies that less frequently handle securities violations, such as local police and sheriff departments, tribal and military community law enforcement.
Next steps
The SEC’s efforts on the ISC will be led by Adam Anicich and Manuel Vazquez and will continue to meet quarterly, with each session providing opportunities for members to engage with experts, share information, and explore collaborative approaches to securities fraud. The ISC is expected to play a crucial role in unifying enforcement efforts and enhancing the overall effectiveness of securities regulation and investor protection across the United States.
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US agencies propose amendment to the Bank Secrecy Act Compliance Program rule
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, the “Agencies”) have issued a notice of proposed rulemaking (NPRM) to update their requirements for supervised institutions to establish, implement, and maintain effective, risk-based, and reasonably designed anti-money laundering and countering the financing of terrorism (AML/CFT) programs.
To note: Governor Michelle W Bowman issued a dissenting statement, noting that she "would have preferred the compliance expectations for this new rule to be expressly tailored to the size, business model, complexity, and risks presented by institutions, especially for community banks and those with assets below $10 billion."
Some context
This announcement follows the issuance of a NPRM on 28 June 2024, by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposing amendments to anti-money laundering/countering the financing of terrorism (AML/CFT) program requirements for all financial institutions subject to the Bank Secrecy Act (BSA) with AML/CFT program obligations. Most of the amendments result from the Anti-Money Laundering Act of 2020 (AML Act).
The Agencies are proposing to make changes to their respective BSA compliance program rules to align those rules with FinCEN’s proposed revisions.
Key takeaways
The proposed amendments would require supervised institutions to identify, evaluate, and document the regulated institution’s money laundering, terrorist financing, and other illicit finance activity risks, as well as consider, as appropriate, FinCEN’s published national AML/CFT priorities.
Additionally, and consistent with the AML Act, the proposal would mandate that the duty to establish, maintain, and enforce the AML/CFT program remain the responsibility of, and be performed by, persons in the United States who are accessible to, and subject to the oversight and supervision by, the relevant agency. The proposal also supports institutions’ consideration of innovative approaches to meet compliance obligations.
That way, institutions would comply with one standard rather than differing program rule requirements between FinCEN and the Agencies.
Next steps
Comments on the proposal are due 60 days after the date of publication in the Federal Register.
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US agencies issue final guidance on reconsideration of value for residential real estate transactions
The Board of Governors of the Federal Reserve System (Board), the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) have jointly issued final guidance on reconsiderations of value (ROVs) for residential real estate transactions.
Some context
An ROV is a request from a financial institution to the appraiser or valuation report preparer to re-assess the report based on potential deficiencies or additional information that could impact the value conclusion. Deficient valuations can pose risks to the financial condition and operations of a financial institution.
This guidance was initially proposed for comment in the Federal Register in July 2023. After carefully considering the comments received on the proposed guidance, the agencies finalized the guidance with some clarifying edits.
Key takeaways
The interagency guidance includes:
- Description of the risks associated with deficient collateral valuations and an outline of applicable laws, regulations, and existing guidance related to the appraisal review process and correction of valuation deficiencies.
- Explanation of how financial institutions can integrate ROV processes into existing risk management functions like appraisal review and complaint management.
- Provision of examples of policies, procedures, and control systems that financial institutions may choose to adopt when developing risk-based ROV-related policies, procedures, control systems, and complaint processes to identify, address, and mitigate the risk of deficient valuations.
The interagency guidance offers a flexible, risk-based approach to ROV processes that institutions can tailor to their unique profiles. Institutions can apply the considerations discussed in this guidance to their specific circumstances.
Next steps
The guidance is final upon publication in the Federal Register.
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US agencies issue automated valuation models standards for mortgage lenders
The Board of Governors of the Federal Reserve System (Board), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC), with the US Treasury, have jointly issued a final rule implementing quality control standards for automated valuation models (AVMs) used in valuing homes by mortgage originators and secondary market issuers.
Key takeaways
The quality control standards, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, require institutions involved in certain transactions secured by a consumer’s principal dwelling to establish policies and procedures ensuring:
- High confidence in estimates.
- Protection against data manipulation.
- Avoidance of conflicts of interest.
- Random sample testing and reviews.
- Compliance with nondiscrimination laws.
The rule does not prescribe specific requirements for structuring these policies, procedures, and control systems, allowing institutions flexibility to set appropriate quality controls based on their size and the risk and complexity of transactions using AVMs covered by the rule. The agencies' existing guidance on AVMs remains applicable.
Next steps
The final rule will come into effect on the first day of the calendar quarter following 12 months after publication in the Federal Register.
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APRA issues AU$10.7 million infringement notices on OPC for compliance failures
The Australian Prudential Regulation Authority (APRA) has accepted a court enforceable undertaking (CEU) from OnePath Custodians Pty Limited (OPC) to address compliance deficiencies and provide compensation to members.
In June 2023, APRA fined OPC for failing to direct member contributions to a MySuper product, a requirement under the Superannuation Industry (Supervision) Act 1993 (SIS Act) when members have not specified their investment preferences.
Despite engaging an independent expert and rectifying a significant number of affected members, OPC continued to identify new members adversely impacted by their failure to direct default member contributions to a MySuper product, leading to numerous alleged breaches of section 29WA of the SIS Act. APRA has expressed deep concern that this ongoing non-compliance reflects OPC's broader cultural and governance issues.
As part of the CEU, OPC has committed to identifying, rectifying, and remediating all affected members with input from an independent expert, allocating additional resources to meet the Operational Risk Financial Requirement, and holding AU$40m of its existing Operational Risk Financial Requirement assets as an overlay until the terms of the CEU are met.
OPC has been fined AU$10,704,600 in addition to the AU$1.5 million penalty paid in June 2023.
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