Eva Dauberton
News Editor
UK Overseas Funds Regime: Next steps announced
The UK Government and the Financial Conduct Authority (FCA) have issued a roadmap for implementing the Overseas Funds Regime (OFR) for certain funds from the European Economic Area (EEA). The OFR roadmap outlines the key stages of the process so that operators of EEA Undertakings for Collective Investment in Transferable Securities (UCITS) can prepare to use the OFR as a gateway to the UK market.
Some context
Before the end of the Brexit transition period, EEA UCITS were able to passport into the UK and market their funds to the UK market, including to retail investors.
Currently, three frameworks allow overseas funds to be marketed to investors in the UK: the Temporary Marketing Permissions Regime (TMPR), the AIFMD National Private Placement Regime, and Section 272 of the Financial Services and Markets Act 2000 (FSMA).
The UK government introduced the OFR in 2021, a new legislative framework to give investors more certainty, replacing current transitional arrangements with more permanent access to funds.
The OFR is a new gateway that allows certain investment funds established outside the UK to be promoted in the UK, including to retail clients. If a fund applies for and is given ‘recognised scheme’ status under the OFR, it can be promoted in the same way as an authorised collective investment scheme established in the UK.
Since then:
- In December 2023, the FCA published a consultation paper (CP) 23/26 on operationalising the OFR. The consultation covered how the FCA will process applications for recognition of overseas funds under s271A FSMA, the information it will require for new and change applications, and the disclosures that will need to be made to investors.
- In January 2024, the Government announced that it had found EEA UCITS regimes to be equivalent for the purposes of OFR. The announcement also extended the TPR until the end of 2026. Money-market funds (MMFs) are not in scope of the Government’s equivalence determination.
Key takeaways
The OFR roadmap provides the key stages of the process, so that operators of EEA UCITS that wish to use the OFR as a gateway to the UK market can prepare. Specifically, the roadmap provides:
- The timeline for implementation of the OFR up until December 2026, the end of the TMPR
- The application process
- Other requirements for OFR funds, with expectations relating to operational rules, retail disclosure, sustainability disclosure requirements and labelling, and ongoing data collection.
The timelines are subject to change, and any updates to this information will be published on the Government and FCA websites.
Next steps
Several policy statements and consultations are expected this year, including:
- Operational rules for the OFR: The FCA will publish a policy statement setting out the feedback received to CP 23/26, likely in July 2024.
- Sustainability Disclosure Requirements and Labelling: The Government also intends to consult on whether those requirements should be extended to apply to OFR funds. This consultation is likely to run from Q3 2024, and the Government aims to lay any legislation required to implement its decision by the end of 2024.
- Retail disclosure: The Government will lay legislation to create a new framework for Consumer Composite Investments (CCI), including overseas recognised funds, in due course.
- MMFs: The Government will consider further extensions to the TMPR as necessary to avoid any potential ‘cliff edge’ risks for these products. Further information on the future regulatory treatment of MMFs will be provided in due course.
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PSR proposes guidance on extensions and exemption decisions
The UK Payment Systems Regulator (PSR) is consulting on draft guidance that sets out how it proposes to decide whether to grant an extension or exemption to a specific direction or requirement.
Some context
Specific directions and requirements are tools the PSR uses to require firms to implement changes, such as the Confirmation of Payee name checking service and authorised push payment (APP) fraud reimbursement measures.
The PSR acknowledges that there may be exceptional circumstances where an extension or exemption may be necessary, and this proposed guidance aims to provide firms with clarity on when and how to engage with the PSR to find an effective way forward in these situations.
Key takeaways
The PSR expects to grant extensions and exemptions only in very limited circumstances. The guidance proposes four key factors for the PSR to use as a starting point when considering an extension or exemption request. The guidance also includes instructions on how to apply for an extension or exemption. The key factors are:
- Whether granting an exemption or extension would adversely impact payment systems users, undermine any of our statutory objectives, undermine the priorities set out in the PSR five-year strategy, or adversely impact the improvements the PSR seeks.
- The context in which the specific direction arose, including the underlying policy aims and the key factors set by the specific direction or requirement.
- The burden that not granting the request would place on the regulated party, as well as any impact of granting the request on businesses and consumers more widely.
- In relation to extension requests, the steps the regulated party has taken to ensure that it will comply with the rules in a timely manner and that any risks to service users and/or markets have been mitigated.
Next steps
The consultation is open until 3 June 2024.
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IRS April 2024 criminal investigations digest
The US Internal Revenue Service (IRS) has issued its April 2024 criminal investigation press release. The cases included various instances of money laundering, immigration and tax fraud, with some related to the financial industry.
- A Miami cryptocurrency exchanger was sentenced to prison for running an unlicensed money transmitter business
Miami-based cryptocurrency exchanger Raul Rodriguez was sentenced to prison for running an unlicensed money transmitter business. Despite the requirement to register with the Secretary of the Treasury as a money transmitting business, Rodriguez operated an unregistered and unlicensed money transmitting business for over five years. Among his clients were a convicted drug trafficker and a professional money launderer.
Irina Dilkinska, who was the Head of Legal and Compliance for the multibillion-dollar cryptocurrency pyramid scheme OneCoin, was sentenced to four years in prison for her role in running the day-to-day operations of the fraudulent pyramid scheme and laundering money for OneCoin, including arranging for the transfer of $110 million in fraudulently obtained OneCoin proceeds to a Cayman Islands entity.
A Sioux Falls man was sentenced for making false statements to a financial institution. The conviction stemmed from an incident where the man knowingly made a false statement and report to American Bank and Trust in connection with an application and loan under the Paycheck Protection Program.
Two men, one from Ventura County and the other from L.A. County were charged in an alleged multimillion-dollar “pump-and-dump” securities fraud scheme. The men allegedly conspired to secretly acquire the freely tradeable shares of a publicly traded shell company that they subsequently rebranded as Airborne. Kabilafkas allegedly misappropriated a $474,500 sham charitable donation and used the funds to secretly buy the shell company’s stock. Following the acquisition, together with Kabilafkas, Daniels—Airborne’s president and sole director — allegedly filed false reports with the Securities and Exchange Commission to conceal from investors that Kabilafkas secretly held all of Airborne’s stock.
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FINRA issues technical notice on multi-factor authentication for data access
The US Financial Industry Regulatory Authority (FINRA) has issued a technical notice about testing Multi-Factor Authentication (MFA) for Application Programming Interface (API) reference data access.
Currently, to access the Trade Reporting and Compliance Engine (TRACE), Alternative Display Facility (ADF), Over-the-Counter Reporting Facility (ORF), and Trade Reporting Facility (TRF) reference data, FINRA API users are required to download a digital certificate and provide verified user id and password credentials. As part of its Transparency Services improvement initiatives, FINRA has introduced MFA as a new method for users to securely access the API.
From the week of 29 April 2024, FINRA users can test the MFA entitlement process through the NASDAQ Testing Facility (NTF). The access to the production region for API access will be announced by FINRA at a later date.
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FDIC address on proposed SoP for bank mergers
James L Anderson, the Deputy General Counsel of the Federal Deposit Insurance Corporation (FDIC), recently addressed the Subcommittee on Financial Institutions and Monetary Policy Committee on Financial Services of the US House of Representatives. During his speech, Anderson provided a detailed analysis of the regulatory framework used by the FDIC to evaluate bank merger transactions. He specifically discussed the newly proposed Statement of Policy (SoP), which outlines a revised statutory framework for assessing these transactions. The FDIC proposal was released on 21 March 2024 as part of a series of initiatives aimed at reviewing bank merger standards. In January 2024, the Office of the Comptroller of the Currency (OCC) also issued a notice of proposed rulemaking outlining its approach to assessing BMA applications.
A necessary update
Anderson highlighted the significant changes that have occurred in the banking industry over the past few decades, particularly the consolidation that has taken place. He emphasised the expectation that this trend will continue among both large and small banks in the future. Considering these developments, he mentioned the Request for Information (RFI) that was issued on 31 March 2022 and the subsequent conclusion of the FDIC Board of Directors that it is necessary to evaluate the regulatory framework for merger transactions.
An overview of current and proposed framework
During his presentation, Anderson provided a comprehensive summary of the current statutory factors considered when assessing a merger application. These factors include the financial and managerial resources of the existing and proposed institutions, the future prospects of these institutions, the convenience and needs of the community to be served, the risk to the stability of the US banking or financial system, and the effectiveness of the involved insured depository institutions (IDIs) in combating money laundering activities.
Furthermore, Anderson outlined the factors proposed under the SoP. These include the assessment of monopolistic or anti-competitive effects, the evaluation of financial resources, managerial resources, and future prospects, the effectiveness of combating money laundering activities, the convenience and needs of the community to be served, and the risk to the stability of the US banking or financial system.
Selected comments on proposed statutory factors
Regarding the monopolistic or anti-competitive effects, Anderson’s comments showed that the Proposed SoP takes a broader approach compared to the former statutory factors. According to him, the evaluation considers:
- All relevant financial services providers that compete in the identified geographic and product markets
- Concentrations beyond those based on deposits
- Concentration in any specific products or customer segments, such as the volume of small business or residential loan originations
Regarding financial resources, managerial resources, and future prospects, according to Anderson, in the Proposed SOP, the evaluation considers:
- Management’s capabilities to administer the resultant IDI’s affairs in a safe and sound manner, and effectively implement integration plans and strategies for absorbing the acquired entity.
- The supervisory history, adequacy of succession planning, responsiveness to supervisory recommendations, existing or pending enforcement actions, and any recent rapid growth and management’s record in controlling risks associated with such growth.
- Whether the resulting IDI will be able to operate in a safe and sound manner and maintain an acceptable risk profile on a sustained basis following consummation of the merger.
Regarding the convenience and needs of the community to be served, Anderson clarified that the proposed SOP emphasises the FDIC’s expectation that a merger will result in an institution better positioned to meet those needs than if the merger didn’t occur.
Anderson provided specific metrics that can be considered to meet this standard and noted that the evaluation also takes into account public input.
Conclusion
Anderson stated, “The Proposed SOP would update, strengthen, and clarify the FDIC’s approach to evaluating mergers under the BMA.”
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HM Treasury publishes AML supervision report
The UK government has published its Anti-money Laundering and Countering the Financing of Terrorism: Supervision Report 2022-23, which provides information about the performance of anti-money laundering (AML) and counter-terrorist financing (CTF) supervisors between 6 April 2022 and 5 April 2023.
The report summarises the UK’s anti-money laundering and counter-terrorist financing (AML/CTF) supervisory regime, noting it is overseen by HM Treasury in collaboration with various regulatory bodies. This approach aims to combat economic crime by ensuring that regulated sectors and firms effectively identify and prevent money laundering and terrorist financing activities. Methodologically, the report relies on annual data collected from supervisors, including quantitative and qualitative evidence to provide a comprehensive assessment.
Two chapters of the report address specific areas:
- Chapter two considers each supervisor’s risk-based approach in relation to supervising their population, outlines their supervisory activity and considers information-sharing.
- Chapter three considers supervisors’ use of dissuasive enforcement to promote compliance with the AML/CTF standards among their supervised population.
As well as including a number of useful case studies, the report summarises the Financial Conduct Authority’s (FCA) activity during the period in question:
- During the 2022-23 reporting period, the FCA issued seven fines under the Money Laundering Regulation (MLRs) and the FSMA for a total sum of more than £136 million. Of these, two fines were issued through a Decision Notice.
- This was two fines more than the 2021-22 period, but was almost £340 million less in fine value than the previous period (which saw a significant AML fine against NatWest bank).
- During the 2022-23 reporting period, the FCA brought criminal prosecutions to two regulated entities under the MLRs.
- During the 2022-23 reporting period, the FCA published over 1,900 consumer alerts about unauthorised firms or individuals and opened 857 enquiry cases into unauthorised businesses. The FCA also submitted over 549 Suspicious Activity Reports (SARs) to the National Crime Agency.
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APRA speech: “think bigger” call to life insurance sector
In a speech at the All Actuaries Summit 2024, Suzanne Smith, Australian Prudential Regulation Authority (APRA) Executive Board Member spoke about the life insurance industry in Australia shedding light on the current state of the life insurance industry and outlining its achievements and the hurdles it faces.
The power of a thriving insurance industry
Smith began with a reflection on the profound impact of a robust insurance sector on society at large. Insurance serves as a safety net, providing individuals with peace of mind and financial security in the face of unexpected adversities. A flourishing insurance industry contributes to economic stability by fostering consumer confidence, facilitating business investments, and supporting financial markets through prudent investment practices.
Addressing foundational needs
Smith noted the industry's essential role in meeting foundational requirements, such as paying claims promptly and maintaining adequate capitalisation. With more than AUS$11 billion disbursed in claims payments in 2022 alone, life insurers demonstrated their commitment to supporting community resilience. APRA's prudential oversight of the sector ensures that insurers remain well-capitalised, instilling confidence among policyholders regarding their insurer's ability to honour claims.
Navigating complex challenges
Despite its foundational successes, Smith noted the sector’s issues with multifaceted challenges that demand attention. These challenges include:
- a decline in new business sales
- complexity in product offerings
- dwindling financial advisor numbers
- sustainability concerns
- eroding consumer trust
She also mentioned external factors, such as rising interest rates and cost-of-living pressures, exacerbate the trend of individuals opting out of insurance coverage.
Transforming challenges into opportunities
Smith highlighted the opportunities for industry stakeholders to rebuild relevance and trust within the community. Emphasising the importance of innovation, she encouraged insurers to develop products tailored to evolving demographics and risk profiles. Opportunities abound, she said, in addressing neglected areas like mental health coverage and aligning insurance offerings with social security provisions to simplify consumer navigation.
The importance of collaboration
Recognising the systemic nature of the industry's challenges, Smith stressed the importance of collaborative efforts involving insurers, industry bodies, government, financial advisors, and consumer groups. By pooling expertise and resources, stakeholders can identify root causes, address structural deficiencies, and design solutions that meet evolving societal needs. She cited past progress, such as the industry's response to the Individual Disability Income Insurance intervention, as a positive example of collaboration and adaptation.
In concluding, Smith suggested opportunity lay in the "First-Mover Advantage" to prioritise product development and help prioritise community understanding, coverage, and outcomes which she argued are pivotal in fostering industry sustainability. She ended with the clarion call to "Think Bigger" and proactively address the sector’s challenges. By fostering innovation, transparency, and collaboration, stakeholders can revitalise the industry, ensuring its resilience in an ever-evolving landscape. As the industry embarks on its journey towards greater relevance and trust, concerted efforts from all stakeholders will be instrumental in shaping a thriving future for Australia's life insurance sector.
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