Greg Kilminster
Head of Product - Content
CP 24/9: FCA consults on updates to Financial Crime Guide
The Financial Conduct Authority (FCA) has released a consultation paper (CP) 24/9 proposing changes to the FCA’s Financial Crime Guide (The Guide). The purpose of this paper is to enhance understanding of FCA expectations and help firms assess the adequacy of their financial crime systems and controls and remedy deficiencies. The Guide does not impose any new requirements on firms and does not contain rules.
Some context
This CP is part of a collective effort derived from actions included in the National Economic Crime Plan 2 (2023 to 2026) and Fraud Strategy, both published by the Government in 2023. The FCA’s strategy for 2022-2025 reaffirms the commitment to reducing and preventing financial crime, including lowering incidences of money laundering through the firms they supervise directly.
Key takeaways
The proposed changes affect the following areas:
- Sanctions: Post Russia’s illegal invasion of Ukraine in 2022, the FCA conducted extensive assessments of firms’ sanctions systems and controls. We propose to update this section to reflect what the FCA and firms have learned.
- Proliferation Financing (PF): The guidance is being updated to ensure PF is explicitly referenced throughout the Guide, where appropriate. The FCA also highlights a 2022 update to the MLRs, which requires firms to carry out PF Risk Assessments.
- Transaction Monitoring: The FCA proposes to set out some key guidance for firms on how they can implement and monitor transaction monitoring systems and support responsible innovation and new approaches, such as the use of Artificial Intelligence.
- Cryptoassets: Cryptoasset businesses registered under the MLRs have been subject to FCA supervision for AML purposes since June 2020. The FCA proposes to make explicit reference that Cryptoasset businesses should consult the Guide.
- Consumer Duty: The FCA proposes that the Guide makes it clear that firms should consider whether their systems and controls are proportionate and consistent with their obligations under the Duty.
The proposals also include consequential changes, such as replacing expired links, outdated European Union rules references, and refreshing case studies.
Next steps
The response deadline is 27 June 2024. The FCA plans to publish feedback on this CP, along with the final amended text of the Guide, in a policy statement.
Click here to read the full RegInsight on CUBE’s RegPlatform
FINRA to sponsor additional T+1 settlement tests
The US Financial Industry Regulatory Authority (FINRA) has announced that it will sponsor two production User Acceptance Tests (UAT) to allow clients to test the changes for T+1 Settlement for the Over-The-Counter Reporting Facility (ORF) and the Alternative Display Facility (ADF).
These tests are scheduled to happen on 4 May 2024, and 18 May 2024. The notice includes the details for the 4 May test, and FINRA will distribute a separate technical notice with specifics for the 18 May test.
Click here to read the full RegInsight on CUBE’s RegPlatform
ASIC says act now on mandatory climate disclosure regime
In a speech at the Deakin Law School International Sustainability Reporting Forum, Joe Longo, chair of the Australian Securities & Investments Commission (ASIC), spoke about the impending mandatory climate disclosure regime.
With more than 6,000 entities expected to report under the new climate-related disclosure requirements, Longo urged proactive preparation, stressing the transformative impact of environmental, social, and governance (ESG) issues on financial reporting standards. He addressed concerns regarding the complexity of reporting requirements but emphasised the necessity for early preparation.
Longo refrained from providing a detailed roadmap or enforcement strategy, highlighting the ongoing regulatory transition, and simply noting that he expects more clarity as the deadline approaches.
Emphasising the urgency required for firms to prepare for mandatory climate-related disclosure, Longo said: “you have to do this now. It’s simply not an option to put this off until after legislation has passed, and then scramble to comply. You have to figure out how you're going to marshal data, support and capabilities and start keeping the necessary records now – today.”
Longo stressed ASIC's commitment to supporting entities in meeting their new obligations while encouraging voluntary reporting under established frameworks.
To facilitate compliance, ASIC will develop regulatory guidance and online resources, including a dedicated page for climate-related financial disclosures. The regulator will monitor market practices and provide proactive surveillance to ensure adherence to standards.
Longo reiterated the business benefits of compliance, highlighting the opportunities for enhanced risk management and stakeholder engagement. He also noted the need for transparency and cautioned against misleading disclosures.
In conclusion, Longo urged entities to initiate preparations immediately, emphasising the significance of early adoption of requisite practices. He underscored ASIC's commitment to providing further guidance as the regulatory landscape evolves, stressing the imperative for proactive readiness in the face of impending change.
Click here to read the full RegInsight on CUBE’s RegPlatform
Hong Kong’s SFC welcomes CSRC and SEHK developments
Hong Kong’s Securities and Futures Commission (SFC) has welcomed two developments that it believes will help the region develop as an international financial centre.
Firstly, five new measures announced by the China Securities Regulatory Commission (CSRC) which are expected to enhance Stock Connect – the initiative which allows for mutual market access between the Shanghai Stock Exchange and The Stock Exchange of Hong Kong Limited (SEHK). The measures include:
- Expanding the scope of eligible exchange-traded funds (ETFs).
- Incorporating real estate investment trusts (REITs).
- Supporting the inclusion of RMB-denominated stocks into southbound transactions.
- Enhancing the scheme of mutual recognition of funds.
- Supporting the listing of leading Mainland companies in Hong Kong.
Secondly, the publication by the SEHK of its consultation conclusions on the enhancement of climate-related disclosure requirements for listed companies in Hong Kong.
The new disclosure requirements begin phased introduction on 1 January 2025 and are expected to align local sustainability disclosure requirements with the IFRS Sustainability Disclosure Standards published by the International Sustainability Standards Board (ISSB)
Click here to read the full RegInsight on CUBE’s RegPlatform
Red Rock Secured and its executives fined for fraud in connection with precious metals sales
The Commodity Futures Trading Commission (CFTC) has announced that Judge R Gary Klausner of the US District Court for the Central District of California has entered a consent order against Red Rock Secured, LLC, Sean L Kelly (formerly known as Shade L. Kelly-Johnson), and Anthony “Tony” Spencer. The US Securities and Exchange Commission has also filed a lawsuit against these defendants.
According to the order, the defendants have been found liable for engaging in fraudulent activities by making false statements to customers and providing unlawful investment advice regarding the buying and selling of precious metals. The order reveals that the defendants orchestrated a nationwide fraud scheme from around November 2019 to approximately June 2022. During this period, they managed to convince at least 950 individuals to pay over $69 million for silver and gold Canadian Red-Tailed Hawk (RTH) coins, which were actually worth only $30 million, resulting in a mark-up of 91.89% to 129.97%.
As a result, the order mandates that the defendants collectively repay $38,984,313.90 to the victims of their fraudulent activities, surrender $5.1 million in unlawfully obtained profits, and pay $12.25 million in civil monetary penalties.
Click here to read the full RegInsight on CUBE’s RegPlatform
Rohit Chopra proposes new banking takeover rule
Rohit Chopra, Director of the Consumer Financial Protection Bureau, has issued a statement proposing changes to the Federal Deposit Insurance Corporation (FDIC) rules overseeing takeover of banks.
In the statement, Chopra cites the story of Farmington State Bank which underwent a series of unusual events, beginning with its takeover by a Bahamian financial firm, linked to the stablecoin Tether, in 2020, despite its rural US roots. This was followed by Farmington's membership approval in the Federal Reserve System in 2021 and an investment by Alameda Research, owned by Sam Bankman-Fried of notorious FTX fame, which raised concerns due to the inflated valuation of the bank. Behind the scenes, there was a shift towards speculative crypto asset activities, leading to law enforcement seizing millions tied to Bankman-Fried's entities, leaving FTX customers in financial distress.
Chopra explained how this episode has provided a number of lessons for the FDIC and regulators about the efficacy of bank takeover policies and he gives two examples of how oversight was avoided.
- Charter shopping – moving from one regulatory supervisor to another.
- Exploiting the holding company level transaction which defers to the judgement of the Federal Reserve not the FDIC.
Chopra notes his concern that the “FDIC’s rules rely solely on the Federal Reserve for certain transactions and therefore violate statutory responsibility to ensure that banks we supervise are operated in a safe and sound way”. He also expresses concern regarding the number of large asset managers with stakes in banks, noting that holding a seat on a bank’s board of directors can hardly be ‘passive’ despite the ability to enter into ‘passivity’ agreements with the Federal Reserve.
Chopra’s proposed rule change aims to address issues similar to those seen at Farmington State Bank by restoring the FDIC's oversight role in reviewing certain changes in control. This involves removing an exemption for acquisitions of voting securities of a holding company with an FDIC-supervised subsidiary, which currently falls under the Federal Reserve Board's review. Additionally, the proposal seeks public input on various aspects of the Change in Bank Control Act, including concerns about concentrated ownership by large asset managers.
Click here to read the full RegInsight on CUBE’s RegPlatform
CFTC Commissioner on AI use in the derivative market
Commodity Futures Trading Commission (CFTC) Commissioner Kristin N Johnson recently spoke about the role of artificial intelligence (AI) in the derivatives markets at the Futures Industry Association (FIA) L&C Panel. She emphasised the need for the CFTC to adapt to the rapidly evolving innovation and widespread use of AI, both internally and externally, on the enforcement and regulatory front.
Existing regulatory authority in evolving markets
In her speech, Johnson discussed how AI is used in the market and noted that in some areas, AI models may be subject to existing regulations, including risk management and governance requirements. However, she pointed out that risks associated with algorithm and AI-based trading need to be addressed, specifically the need to attribute a "mental state" in the context of fraud, which is challenging.
Envisioning a new regulatory framework
Johnson recommended that the CFTC adopt a principles-based regulatory framework to address the increasing prevalence of AI. She proposed a set of critical questions that the framework may address, such as promoting the explainability of AI models, the need for data controls, implementing measures to address bias, a focus on the governance of AI models, and testing and monitoring output.
Current initiatives
Johnson also discussed the CFTC's current initiatives, including issuing a Request for Comment (RFC) to the market and the Market Risk Advisory Committee's (MRAC) plan to develop specific initiatives to support the CFTC and comply with the Executive Order on Safe, Secure, and Trustworthy Artificial Intelligence, which was issued on 30 October 2023.
Forthcoming initiatives
The MRAC Subcommittee will examine the issuance of a survey on the use of AI in CFTC-regulated markets and may advance a recommendation that the staff should consider new guidance, advisories, or formal rule-making based on how CFTC market participants are using AI to conduct regulated activities. They may focus on framing the risk of AI models and robust monitoring and testing of AI models, including addressing cybersecurity, data controls, bias, privacy, output consistency, and oversight of AI models.
Proposed intervention
Johnson suggested the CFTC should lead in creating a financial markets interagency task force focused on information sharing and composed of market and prudential regulators. She also emphasised the need for the CFTC to take action to combat AI-enabled manipulation and fraud in CFTC-regulated markets.
Overall, the speech provided valuable insight into the future direction of the CFTC's work while also highlighting some current compliance issues relevant to firms.
Click here to read the full RegInsight on CUBE’s RegPlatform
Basel Committee endorses revised Core Principles for Effective Banking Supervision
The Basel Committee on Banking Supervision (BCBS) has announced the endorsement of the revised Core Principles for Effective Banking Supervision. They have also agreed to publish a consultation on guidelines for banks’ counterparty credit risk management and an analytical report on the digitalisation of finance.
Revised Core principles for effective banking supervision
At the 23rd International Conference of Banking Supervisors, delegates endorsed the revised Core Principles for effective banking supervision. This global standard for sound prudential regulation and supervision of banks and banking systems is universally applicable and can be used by supervisors to assess the effectiveness of their regulatory and supervisory frameworks.
Consultation on guidelines for banks’ counterparty credit risk management
The BCBS has also agreed to publish a consultation paper on the proposed guidelines for strengthening banks’ counterparty credit risk management. These guidelines reflect the lessons learned from recent episodes of non-bank financial intermediation distress and will replace the BCBS’s existing sound practices for banks’ interactions with highly leveraged institutions. The consultation paper is set to be published next week.
Analytical report on the digitalisation of finance.
Finally, the BCBS has approved the publication of an analytical report on the digitalisation of finance. This report builds on the Sound Practices: Implications of FinTech Developments for Banks and Bank Supervisors published in 2018 and takes stock of recent developments in the digitalisation of finance and the regulatory and supervisory implications. The report is set to be published in May.
Click here to read the full RegInsight on CUBE’s RegPlatform
Money laundering charges against crypto mixer founders
Keonne Rodriguez and William Lonergan Hill, co-founders of Samourai Wallet, have been charged with conspiracy to commit money laundering and operating an unlicensed money transmitting business. The charges follow an investigation revealing that Samourai Wallet facilitated over $2 billion in unlawful transactions and laundered more than $100 million in criminal proceeds.
Rodriguez was arrested in Pennsylvania, while Hill was arrested in Portugal. The United States plans to seek Hill’s extradition for trial. In coordination with Icelandic authorities, Samourai Wallet's website and mobile app have been seized, making it unavailable for download in the United States.
Samourai Wallet offered a cryptocurrency mixing service to facilitate anonymous transactions. Rodriguez and Hill each face up to 20 years for money laundering and five years for operating an unlicensed business.
Click here to read the full RegInsight on CUBE’s RegPlatform
Central Bank of Ireland reviews mortgage arrears resolution framework
The Central Bank of Ireland has completed a comprehensive review of the mortgage arrears resolution framework as outlined in the Code of Conduct on Mortgage Arrears (CCMA). The review aimed to evaluate the support provided to borrowers by banks, retail credit firms, and credit servicing firms, particularly those in or facing early arrears.
The review found that early engagement between lenders and borrowers, as stipulated by the CCMA, has been effective in finding solutions for borrowers facing financial difficulties. However, the review also identified areas requiring improvement, notably in customer service and support for borrowers in early arrears.
The review pinpointed several shortcomings in the current framework:
- Customer service: Instances of late and incomplete information, unclear website information, inadequate follow-up, and lack of assistance in completing paperwork were identified.
- Engagement: Issues such as inadequate follow-up, poor staff knowledge, failure to recognize financial difficulties, and inadequate complaint handling were observed.
- Information provision: Delays in providing information to borrowers and failure to provide clear, comprehensive information were noted.
- Temporary Alternative Repayment Arrangements (ARAs): The review found minimal usage of temporary ARAs among firms, with unclear policies on their implementation.
To address these deficiencies, the Central Bank has instructed regulated firms to make necessary improvements. The bank also highlighted examples of good practices observed during the review, such as the use of Plain English paperwork, prepaid return envelopes, and staff empathy.
Additionally, the Central Bank encourages lenders to make greater use of temporary ARAs to support borrowers at risk of deteriorating financial situations during information gathering and assessment periods.
Click here to read the full RegInsight on CUBE’s RegPlatform