Eva Dauberton
News Editor
FCA takes action against SVS Securities Plc leadership for mistreatment of pension funds
The Financial Conduct Authority (FCA) has taken decisive action against three individuals who were involved in managing SVS Securities Plc (SVS), a discretionary fund manager.
Kulvir Virk, the former CEO and majority shareholder, implemented a complex business model that aimed to direct customer funds into high-risk illiquid bonds, which ultimately resulted in substantial financial losses when these bonds defaulted. This model also involved undisclosed commissions and conflicts of interest, further compromising the interests of SVS customers.
The Head of Compliance, David Stephen, and SVS’s former finance director and CEO, Demetrios Hadjigeorgiou, were also found to have failed to address conflicts of interest and ensure proper due diligence, which contributed to the negative impact on customers.
The FCA has concluded that these three individuals acted recklessly and has decided to fine Virk £215,500, Hadjigeorgiou £84,600, and Stephen £52,100. The FCA has also banned Virk from working in financial services, while Hadjigeorgiou and Stephen were banned from holding senior management positions.
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US agencies adopt new rules establishing quality control standards for AVMs use in home valuation
The Consumer Financial Protection Bureau (CFPB) has approved a new rule to address the current and future applications of complex algorithms and artificial intelligence in home value estimations.
This rule, developed in collaboration with the Federal Housing Finance Agency (FHFA), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors, the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) - collectively referred to as the agencies - establishes quality control standards for Automated Valuation Models (AVMs) used by mortgage originators and secondary market issuers.
Some context
AVMs are computer programs used to estimate the value of properties for various purposes, such as loan underwriting and portfolio monitoring.
The Dodd-Frank Act, specifically Section 1473(q), amended Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and added a new section, section 1125, mandating the agencies to implement quality control standards for AVMs.
The agencies sought public input on a proposed rulemaking notice to implement these quality control standards in June 2023, and the final rule now fulfils Congress’s instruction.
Key takeaways
Under the final rule, mortgage originators and secondary market issuers engaging in credit decisions or covered securitisation determinations must adopt and maintain policies, practices, procedures, and control systems to ensure AVMs adhere to quality control standards.
These standards are designed to:
- Ensure a high level of confidence in the estimates produced.
- Protect against the manipulation of data.
- Seek to avoid conflicts of interest.
- Require random sample testing and reviews.
- Comply with applicable nondiscrimination laws.
There are no specific requirements for the structure of these policies, allowing institutions to adapt quality controls based on their size, complexity, risk profile, and transactions. This flexible approach accommodates the evolving nature of modelling technology, enabling institutions to refine their policies, practices, procedures, and control systems as necessary. The existing guidance provided by the agencies regarding AVMs remains relevant in this context.
Next steps
The rule will take effect approximately one year after all agencies provide their final approval.
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EBA issues amendments to counterparty credit risk standards
The European Banking Authority (EBA) has released a final draft amending the Regulatory Technical Standards (RTS) on the standardised approach for counterparty credit risk (SA-CCR). This draft is one of the deliverables included in the EBA roadmap on the Banking Package.
Some context
In December 2019, the EBA finalised and published the draft RTS on the SA-CCR. These RTS specify the method for identifying the material risk drivers of derivative transactions, the formula for calculating the supervisory delta of options when mapped to the interest rate risk category, and a suitable method for determining the direction of the position in a material risk driver.
The Regulation (EU) 2024/1623 (CRR3) has expanded the EBA mandate to specify the formula that institutions should use to calculate the supervisory delta of call and put options mapped to the interest rate risk or commodity risk categories, compatible with market conditions in which interest rates or commodity prices may be negative, as well as the supervisory volatility suitable for those formulas.
The amending final draft modifies the existing RTS to incorporate this expanded mandate.
Key takeaways
The final draft specifies the formula for calculating the supervisory delta of commodity options, compatible with negative commodity prices (and the corresponding supervisory volatility).
The proposed formula is as the one set out in Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR), but it additionally includes a 𝜆 shift to the terms P and K to move them into positive territory when they are negative. The value of the 𝜆 shift is determined such that a certain threshold on the smallest term between 𝑃 and 𝐾 is not crossed. The formula is applied at transaction level.
This approach aligns with the approach for interest rate options set out in the existing RTS.
Next steps
The draft RTS will be submitted to the Commission for endorsement, following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.
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ECB releases first progress report on digital euro
The European Central Bank (ECB) has released its first progress report on the preparation phase for the digital euro. This phase's primary objective is to lay the groundwork for potential issuance, including finalising the digital euro rulebook and identifying prospective providers to develop a digital euro platform and infrastructure.
The report offers a comprehensive overview of advancements in crucial design elements and presents findings from technical work.
Specifically, the report covers features to ensure user privacy, considers the implementation of an offline digital euro and outlines the progress made in the development of the digital euro rulebook.
Other aspects related to the methodology for defining holding limits, environmental considerations, the number of digital euro accounts per user, the compensation model, and user experience are also covered in the report.
The next progress report is scheduled to be published in autumn 2024, marking one year since its commencement. At the end of the preparation phase, in October 2025, the ECB’s Governing Council will decide whether to proceed to the next stage of preparations. However, a decision to issue a digital euro can only be made after the completion of the legislative process.
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