Greg Kilminster
Head of Product - Content
HSBC fined £57.4m by PRA for Deposit Protection failures
HSBC Bank plc (HBEU) and HSBC UK Bank plc (HBUK) have been fined £57,417,500 by the Prudential Regulation Authority (PRA) for failures in deposit protection identification and notification. This is the second-highest penalty ever imposed by the PRA.
According to the Depositor Protection Rules, financial institutions must establish adequate governance, systems, and controls to ensure the accuracy of critical information that the FSCS relies on to make timely payments to depositors in the event of a bank’s failure. The firms failed to fulfil these requirements, including failing to assign clear ownership of the Depositor Protection Rules’ processes and ensuring a senior manager was allocated responsibility for these processes and the information’s accuracy. Other failings include:
- Incorrectly marking 99% of eligible beneficiary deposits as ineligible for FSCS protection.
- Providing an incorrect attestation to the PRA that its systems met certain requirements of the Depositor Protection Rules.
- Failing to produce finalised annual reports required to be signed by the board of directors that confirm compliance with the Depositor Protection Rules.
The PRA concluded that the firms’ breaches were not deliberate or reckless. The Firms received a 15% reduction to the penalty for their cooperation throughout the investigation. Furthermore, the firms agreed to resolve the matter, resulting in a further 30% reduction in the fine. The PRA would have imposed a £96.5m fine without the reductions.
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PS1/24: BoE announces new enforcement policy
The Bank of England has issued a policy statement (PS)1/24, outlining its approach to enforcement for PRA firms and financial market infrastructure firms in response to consultation paper (CP) 9/23. The revised policies set out a new path for early cooperation and greater incentives for early admissions to speed up investigations in appropriate cases. The Enforcement Decision Making Committee’s procedures have also been revised.
The policy changes are not expected to result in a significant increase in penalties. However, certain firms may face larger financial penalties due to the shift to a new starting point used for calculation
The new policy will come into effect on 30 January 2024, and different regimes will apply for breaches that occur before and after this date. Conduct before 30 January 2024 will be subject to the previous regime, while conduct from that date onwards will be subject to the new regime.
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FRC publishes guidance to support implementation of UK Corporate Governance Code 2024
The Financial Reporting Council (FRC) has released guidance to support companies in applying the recently issued UK Corporate Governance Code 2024.
The guidance is a comprehensive resource that amalgamates the most pertinent information from previous publications into one user-friendly format. It features examples of good practice and pertinent questions to help boards effectively implement the Code’s Principles and Provisions. The primary aim of the guidance is to promote thoughtful discussions and decision-making.
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EBA launches survey on classification methodologies for exposures to ESG risks
The European Banking Authority (EBA) has launched an industry survey to gather insights from credit institutions regarding their approaches for identifying and evaluating environmental, social, and governance (ESG) risks. The survey will use qualitative information to achieve two main objectives:
- Evaluate the availability and accessibility of consistent and comparable ESG data for every exposure class established under Part III, Title II of Regulation (EU) No 575/2013. This includes exposures to corporates, retail exposures, and exposures secured by mortgages on immovable property.
- Determine the feasibility of implementing a uniform methodology to identify and qualify exposures for each exposure class mentioned above.
The deadline for responding to this industry survey is 29 March 2024.
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ESMA issues two MiCA consultations
The European Securities and Markets Authority (ESMA) has released two Consultations Papers (CPs)on guidelines under the Markets in Crypto Assets Regulation (MiCA), one on reverse solicitation and one on the classification of crypto-assets as financial instruments.
The two consultations are part of the third and final consultation package for MiCA’s implementation.
Consultation paper on guidelines on reverse solicitation
In this CP, ESMA seeks input on proposed guidance to clearly define the conditions of application of the reverse solicitation exemption and the supervision practices that National Competent Authorities (NCAs) may take to prevent its circumvention.
Under MiCA, third-country firms can only provide crypto-asset services or activities in cases where such services are initiated exclusively by a client or through the reverse solicitation exemption. This exemption is narrowly framed and should be treated as an exception. The guidelines aim to clarify the conditions of applying the reverse solicitation exemption and the practices that NCAs can use to prevent its circumvention.
Consultation paper on guidelines on conditions and criteria for the classification of crypto-assets as financial instruments
In this CP, ESMA seeks input on conditions and criteria for the classification of crypto-assets as financial instruments. Due to the different approaches to the national transposition of MiFID across Member States, there is no commonly adopted application of the definition of ‘financial instrument’ under MiFID in the EU. With the implementation of MiCA, practical consequences may emerge regarding the classification of crypto-assets as financial instruments. The guidelines aim to provide guidance on the qualification of crypto-assets as financial instruments that national competent authorities and market participants should consider.
Next Steps
The consultation period is open until 29 April 2024. ESMA will review and consider the feedback received during the consultation in Q2 2024 and expects to publish a final report in Q4 2024.
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CFTC chair raises concerns over spot bitcoin ETFs in comprehensive speech
In a broad-ranging speech at the ABA Business Law Section Committee on Derivatives and Futures Law, Rostin Behnman, chair of the Commodity Futures Trading Commission (CFTC) spoke about the CFTC’s rule-making agenda, crypto and the recent SEC decision to approve bitcoin exchange-traded products (ETP).
Behnman began by reminding the audience that in 2023 the CFTC set a goal of considering and voting on 30 new matters, categorised into five themes: risk management, customer protection, efficiency and innovation, reporting and data, and reducing regulatory burden. Despite some challenges, the CFTC stayed on track, proposing and finalising nine new rules, one final rule, and four public comment matters. They also issued three advisories and more than a dozen letters to clarify existing rules and bridge gaps. Additionally, the CFTC focused on improving data and reporting requirements, issuing two proposed and two final rules to improve data standardisation and integration.
Behnman said the CFTC is taking proactive steps to address cyber risk, proposing a rule requiring future commission merchants (FCMs), swap dealers (SDs), and major swap participants (MSPs) to create Operational Resilience Frameworks (ORFs) covering IT security, third-party relationships, and business continuity. The ORFs must be customised to each firm’s risk profile and align with existing best practices. Behnman added that non-binding guidance on managing third-party risk was also issued by the CFTC, which is prioritising these measures to strengthen cyber resilience within the commodities market.
Behnman went on to discuss two further topics: the CFTC’s efforts regarding artificial intelligence (AI) in the derivatives market and its considerations for new market structures and affiliate relationships.
Behnman noted that the CFTC has issued a Request for Comment (RFC) to understand the use and potential risks of AI in its regulated markets. This aligns with the Biden Administration’s focus on responsible AI development and allows the CFTC to better monitor and potentially regulate AI use. The CFTC has also issued a Customer Advisory warning about AI-driven scams.
Behnman told the audience that in 2023 the CFTC had requested comment on the potential risks and conflicts of interest arising from new market structures and affiliate relationships. The comment period is now closed, and the CFTC is expected to consider a proposal addressing these issues this summer, but Behnman made it clear in his speech that the goal is to adapt to market evolution while protecting customer interests and market stability.
Overall, the speech stressed that the CFTC is taking a cautious and measured approach to both AI and new market structures, seeking public input and ensuring responsible development and regulation.
Behnman then moved onto ESG matters by noting the CFTC’s proposed guidance for listing voluntary carbon credit (VCC) derivatives. He added this is the first-ever such guidance to provide risk management, price discovery, and financing tools for decarbonisation. He added however, that the CFTC’s role in market integrity and financial system support for emissions reduction is “not intended to signal that we have a role in creating or mandating compliance with any kind of climate policy”.
Behnman then turned to enforcement, noting that strong enforcement efforts in 2023 secured the CFTC’s position as the leading enforcer in the digital asset space with 49% of CFTC actions related to digital asset fraud and manipulation. He added that a lack of direct jurisdiction over spot markets limits CFTC’s reach, and called for expanded authority to fully tackle digital asset misconduct.
Finally, Behnman discussed the Security and Exchange Commission’s (SEC) approval of applications for listing and trading spot bitcoin ETPs. Whilst seen by many as a natural progression, Behnman noted that the challenges and lack of regulatory clarity in the cash markets for digital assets means there is still inconsistent practice being carried out, and that issues such as trade settlement, conflicts of interest, data reporting, cybersecurity, customer protections, transparency, and general market integrity have not been addressed. He noted the CFTC’s role of enforcing existing standards but not their ability to determine legitimacy in the eyes of market participants, and concluded by stressing his fear that “regulatory approval of bitcoin ETPs introduces risk that, in spite of yellow flags, market participants, retail and institutional alike, may mistake the technical approval of a product—with actual regulatory oversight of the cash commodity digital assets”.
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