Eva Dauberton
News Editor
BoE issues wholesale cash distribution CoPs
The Bank of England (BoE) has released the final Codes of Practices (CoPs), guidelines, and data catalogue for the Wholesale Cash Distribution (WCD) market oversight regime.
Some context
In November 2023, the BoE published a consultation on the CoPs for WCD market oversight. The consultation presented the BoE’s proposed draft CoPs, draft guidance to the CoPs, and a draft WCD data catalogue (which outlined proposed reporting requirements of recognised persons).
The consultation also provided information about the UK cash landscape, industry work, recent legislative reforms, the scope of the new WCD legislative framework, and the BoE’s powers and obligations under that framework.
The BoE had previously published its Statement of Policy on the BoE’s supervisory approach to market oversight for WCD. It consulted on that approach in December 2022 and responded in August 2023.
Key takeaways
The final CoPs includes requirements relating to:
- Information Gathering: The CoPs requires recognised firms to provide information about the performance of their relevant functions and activities as specified in a wholesale cash oversight order. The WCD data catalogue sets out how this should be undertaken.
- Third-party Arrangements: The CoPs sets out requirements for firms to carry out a materiality assessment in respect of all current and proposed arrangements with third-party providers of products/goods or services relating to the firm’s relevant WCD functions and activities.
- Cash Centre Closure and Market Exit: The CoPs requires recognised firms to engage with the BoE at as early a stage as possible in the firm’s strategic planning of a material change, such as the closure of a cash centre or market exit, and prior to a final decision being made.
Next steps
The final CoPs, along with guidance and the WCD data catalogue, will come into effect for recognised firms following their recognition by HMT as having “market significance“ in respect of their WCD functions and activities under wholesale cash oversight orders provided for in the new regime.
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PSR issues call for views on its approach to supervision
The Payment Systems Regulator (PSR) has published a call for views seeking feedback on its proposed approach to supervision.
Some context
The PSR established the Supervision and Compliance Monitoring division last year to drive compliance with the PSR's requirements, set out regulatory expectations of payment systems operators, and manage its relationship with them.
Key takeaways
In the consultation, the PSR is proposing:
- Through supervision and regular engagement, the PSR will establish effective, ongoing relationships with the firms it regulates. The PSR will be evidence-based in its supervision and guided by its remit and the regulatory framework that governs its work.
- The primary focus will be on the PSR's regulatory relationship with payment system operators, such as Pay.UK, Visa and Mastercard. This may evolve over time to include other types of firms if necessary.
- The Supervision team will be responsible for the relationships with supervised firms. This will not replace any of the existing functions within the PSR but will complement them.
- Supervised firms will be provided with a set of principles setting out regulatory expectations in line with the PSR's strategic priorities and statutory objectives. The PSR expects these principles to be applied flexibly, taking into account different firms' aims and needs.
Next steps
The deadline for feedback is 7 June 2024.
The PSR will publish a final document describing its approach later this year.
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CFTC approves final rules on swap execution facilities
The Commodity Futures Trading Commission (CFTC) has approved final rules amending its regulations regarding Swap Execution Facilities (SEFs). The changes are aimed at addressing issues that were previously outlined in CFTC staff no-action letters, such as the latest CFTC No Action Letter No. 17-17.
Key takeaways
The final rules:
- Amend CFTC Regulation 37.6(b) to enable SEFs to incorporate terms of underlying, previously negotiated agreements between the counterparties by reference in an uncleared swap confirmation without being required to obtain such underlying, previously negotiated agreements.
- Amend CFTC Regulation 37.6(b) to require such confirmation to take place “as soon as technologically practicable” after the execution of the swap transaction on the SEF for both cleared and uncleared swap transactions.
- Amend CFTC Regulation 37.6(b) to make clear the SEF-provided confirmation under CFTC Regulation 37.6(b) shall legally supersede any conflicting terms in a previous agreement, rather than the entire agreement.
- Make conforming amendments to CFTC Regulation 23.501(a)(4)(i) to correspond with the amendments to CFTC Regulation 37.6(b).
- Make certain non-substantive amendments to CFTC Regulation 37.6(a)-(b) to enhance clarity.
Next steps
The final rules are effective 30 days after publication in the Federal Register. CFTC No Action Letter No. 17-17 will expire upon the effective date of the final rules.
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SEC publishes new report of Registered Fund Statistics
The Securities and Exchange Commission (SEC) published a new report of Registered Fund Statistics, which is based on aggregated data collected from SEC-registered funds on Form N-PORT.
The report includes essential industry statistics, trends over time, and information related to portfolio holdings, flows, returns, interest rate risk, and other exposures across US mutual funds, exchange-traded funds, closed-end funds, and other registered funds.
The report will be updated quarterly and aims to provide the public with a comprehensive and detailed view of the registered funds industry.
According to Tim Husson, head of the Division of Investment Management’s Analytics Office, “This report provides the public an unprecedented view of the composition and activities of registered funds. We welcome feedback on the report, which we believe will assist the public dialogue on issues pertaining to the asset management industry.”
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CFPB issues findings on illegal practices in mortgage servicing
The Consumer Financial Protection Bureau (CFPB) has released its 33rd edition of Supervisory Highlights, detailing its efforts to combat the illegal practices of mortgage servicers, such as charging junk fees. The findings cover select examinations conducted between 1 April 2023 and 31 December 2023.
Key takeaways
Some of the key findings from this report include:
- Illegally charging and obscuring fees: Mortgage servicers charged homeowners prohibited and unauthorised fees. These included prohibited fees for property inspections and late fees that exceeded amounts allowed by their mortgage loan agreements. Mortgage servicers also failed to explain the reasons for fees by not describing them adequately on statements.
- Keeping homeowners on the hook for fees during COVID-19: During COVID-19, many servicers used a streamlined process to determine repayment options for struggling homeowners. Some servicers failed to waive late fees and penalties, as required.
- Missing deadlines to pay property tax and home insurance: Mortgage servicers that accepted or required money from borrowers to pay taxes and insurance failed to make those payments in a timely manner, which caused some borrowers to incur penalties. Servicers only took responsibility for those penalties for missed on-time payments if homeowners submitted complaints.
- Deceiving homeowners and failing to properly evaluate them for repayment options: Some servicers sent notices to homeowners in financial distress that stated they had been approved for a repayment option. In fact, no final decisions had been made, and some of the homeowners were ultimately rejected. Examiners also found servicers sent some homeowners false notices saying that they had missed payments and should apply for repayment options. Servicers also improperly denied requests for help and failed to evaluate struggling borrowers for repayment options as required under the CFPB’s mortgage servicing rules.
Next steps
The CFPB will use these findings to help inform any proposed changes to streamline mortgage servicing rules while ensuring servicers fulfil their obligations to treat homeowners fairly.
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EBA issues consultation on draft RTS on the specification of long and short positions under the derogations for market and counterparty risks
The European Banking Authority (EBA) has launched a public consultation on its draft Regulatory Technical Standards (RTS) on the method for identifying the main risk driver and determining whether a transaction represents a long or a short position. These RTS are part of the Phase 1 deliverables of the EBA roadmap for implementing the EU banking package in the area of market risk.
The Capital Requirements Regulation (CRR) includes some derogations for the calculation of the capital requirements for market and counterparty credit risks, for small trading book business, derivative business or business subject to market risk. The CRR3 specifies that the size of the business shall be equal to the absolute value of the aggregated long position, summed with the absolute value of the aggregated short position. Whether a position is considered long or short depends on how movements in its primary risk driver impact the market value.
The proposed draft RTS includes a general methodology and a simplified approach for identifying the primary risk driver and determining the position direction.
The consultation period will run until 24 July 2024.
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Ireland and France receive notice from the EC for incorrect transposition of AML Directives
In its April infringement package, the European Commission (EC) has called on Ireland and France to correctly transpose the 5th Anti-Money Laundering Directive.
Some context
As part of its regular package of infringement decisions, the EC takes legal action against Member States for failing to comply with their obligations under EU law. These decisions cover various sectors and EU policy areas, to ensure the proper application of EU law for the benefit of citizens and businesses.
Key takeaways
The EC has initiated an infringement procedure by sending letters of formal notice to Ireland and France for incorrectly transposing the 4th and 5th Anti-Money Laundering Directives (4th AML Directive as amended by the 5th AML Directive).
Although these Member States had previously notified a complete transposition of the amended Directive, the EC has identified several instances of incorrect transposition of the Directive into national law.
Specifically:
- France has failed to ensure the completeness of the national Beneficial Ownership register by not including certain legal entities (fonds de dotation, fonds de pérennité, and most associations) in it.
- Ireland’s failure refers to the current system not guaranteeing the adequacy and completeness of the information held in the Beneficial Ownership register of trusts, as well as the accessibility of its information.
Ireland and France have been given two months to respond and address the shortcomings raised by the EC. In case of an unsatisfactory response, the Commission may decide to issue a reasoned opinion.
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“Governance and risk culture: going forward by looking back” speech by ECB
In a speech at the joint European Central Bank/European University Institute seminar, Anneli Tuominen, a Member of the Supervisory Board of the European Central Bank (ECB) spoke about the critical importance of governance and risk culture in the European banking sector.
The imperative of good governance and risk culture
Tuominen began by emphasising the essential role that good governance and a sound risk culture play in facilitating informed decision-making within banks. Drawing upon lessons from past financial crises and recent sector turmoil, she said that deficiencies in internal governance and risk culture can serve as early warning signs of impending challenges. Conversely, effective governance can equip banks with proactive strategies to navigate through an ever-evolving financial landscape.
The Single Supervisory Mechanism (SSM) and Progress in Governance
Celebrating the tenth anniversary of the Single Supervisory Mechanism (SSM), Tuominen acknowledged the continuous efforts made by both supervisors and banks in enhancing governance practices. Despite progress however, ECB reviews indicated persistent structural deficiencies in the functioning of banks’ management bodies. The ECB’s ability to benchmark practices across different banking organisations facilitates a comparative analysis essential for discussing governance standards and the collective suitability of management bodies.
Individual and collective suitability
Tuominen highlighted the importance of suitability criteria for individual members of the management body. While the collective management body is accountable for a bank's entire business, each member must understand and contribute to their specific area of responsibility. The bank and the supervisor should jointly ensure that members possess adequate knowledge, skills, experience, and independence. Ongoing assessments and potential reassessments are integral to maintaining individual suitability.
Collective suitability focuses on the management body's collective knowledge, skills, and experience. Tuominen stressed the need for a diverse range of expertise, particularly in risk management, to effectively identify, monitor, and mitigate risks. However, ECB reviews have revealed long-term deficiencies in areas like challenging capacity, collective suitability and diversity.
Challenging capacity and continuous learning
The ability to challenge effectively is a critical aspect of governance. Tuominen described the concept of challenging capacity as “asking the right questions at the right time with the right intent and tone”. To support this, management bodies should undergo regular training, ensuring that their knowledge remains current. For instance, expertise in information and communications technology (ICT) and digital security risks is increasingly vital, given the growing digitalisation of banking services. And all members of the management body should understand the fundamentals of all these issues.
The role of risk culture
Tuominen added that simply having the appropriate knowledge is not enough. Risk culture, encompassing collective mindset, norms, attitudes, and behaviours related to risk management, plays a pivotal role in shaping a bank's decision-making process. Tuominen emphasised the importance of a positive “tone from the top” that encourages constructive criticism, fosters collaboration, and prevents groupthink. Additionally, she added, clear accountability and appropriate remuneration structures are crucial in promoting a sound risk culture aligned with long-term interests.
Supervisory approach and future directions
Tuominen expressed confidence in the ECB’s supervisory approach, highlighting its role in improving governance across supervised banks. The ECB’s supervisory priorities for 2024-26 emphasise the importance of strong internal governance and effective strategic steering in building resilient and sustainable business models. She added that continued collaboration between banks and supervisory teams is essential for addressing deficiencies and sharing best practices.
In concluding, Tuominen reiterated that good governance and risk culture are indispensable for maintaining a healthy banking sector. While challenges remain, ongoing dialogue and collaboration between banks and supervisory authorities, alongside targeted reviews and on-site inspections, offer avenues for improvement. As banks face new risks stemming from climate change, geopolitical shifts, and cyber threats, the importance of relevant expertise and knowledge cannot be overstated.
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