CUBE RegNews: 30th October

A selected summary of key developments for regulated financial institutions

Greg Kilminster

Greg Kilminster

Head of Product - Content

FATF outlines forthcoming initiatives

At its recent plenary meeting in Paris, the Financial Action Task Force (FATF) announced several new initiatives to enhance their role as the global standard-setting body for anti-money laundering and counter terrorism financing. Among the initiatives were the following: 

  • Revisions to asset recovery standards: FATF members adopted revisions to its asset recovery standards, enhancing the tools available to law enforcement, asset recovery agencies, and the criminal justice system. These changes are aimed at improving their ability to target and recover criminal proceeds. 
  • Report on terrorist crowdfunding: FATF members adopted a report that explores how terrorist groups, such as Hamas, utilise crowdfunding techniques to raise funds for their activities. This analysis provides insights into countering terrorism financing. 
  • Misuse of citizenship and residency programs: In response to a commitment made in April 2022, FATF adopted a report highlighting the misuse of citizenship and residency by investment (CBI/RBI) programs. It underscores how corrupt actors, tax evaders, and criminals have exploited these programs to hide their identities, open bank accounts, establish shell companies, or evade taxes using new identification documents. 
  • Revision of Recommendation 8: FATF revised Recommendation 8, which deals with the protection of non-profit organisations (NPOs) from misuse by terrorist financiers and other illicit actors. This aims to strengthen measures against misuse. 
  • Draft guidance on beneficial qwnership: FATF members released draft guidance for public comment to implement the revised standards on beneficial ownership of trusts and similar legal arrangements. 
  • Work on Recommendation 5 compliance: FATF will focus on countries’ compliance with Recommendation 5, which requires them to criminalise terrorist financing, as part of its ongoing efforts to combat terrorism financing. 

The full text of the changes is to be published by the Financial Action Task Force in the coming months.  

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UK Treasury issues stablecoin update 

The UK Treasury (HMT) has issued a new policy update to set out further detail on the government’s planned approach following its consultation on the UK regulatory approach to cryptoassets and stablecoins which was published in April 2022. 

The update covers developments for the regulatory regimes for the FCA, the Bank of England and the Payment Systems Regulator. 

The update states that: “the government intends to bring the regulation of certain activities relating to fiat-backed stablecoins within the UK’s financial services regulatory perimeter” and notes that the Financial Services and Markets Act 2023 (FSMA 2023) contains measures to allow HMT to do so. 

The update states that, by early 2024, HMT intends to bring fiat-backed stablecoins into the regulatory perimeter, enabling the FCA to regulate them. 

The update also notes that HM Treasury released a consultation in February 2023 regarding the regulation of cryptoassets in the financial services sector. This consultation outlined plans to regulate various cryptoasset activities like exchanges, custody, lending, and address issues such as market abuse and cryptoasset disclosures. 

In response to feedback to that consultation, notes the update, the government has clarified its approach. Phase 1 of regulation will cover activities related to fiat-backed stablecoins, while phase 2 will address other cryptoasset activities like algorithmic stablecoins and certain commodity-backed tokens. This phased approach provides flexibility for businesses, allowing some to focus on phase 1 activities while others concentrate on phase 2 activities. 

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CFTC and AMF sign MoU

The US Commodity Futures Trading Commission (CFTC) and the French Autorité des marchés financiers (AMF) have cemented their commitment to cooperation and information exchange by agreeing a Memorandum of Understanding (MOU), aimed at enhancing the supervision and oversight of regulated firms operating across the borders of both countries. 

Key highlights of the MOU include: 

  • Cooperative framework: The CFTC and AMF will collaborate closely, promoting transparency and mutual understanding in regulatory matters, particularly in the cross-border context. 
  • Information sharing: The MOU paves the way for the exchange of vital information to facilitate effective supervision of firms falling within the agreement’s scope. 
  • Examination procedures: Procedures for examining French swap dealers registered with the CFTC will be streamlined and standardised, ensuring efficiency and consistency in oversight. 

In a separate statement, Commissioner Kristin N Johnson noted: “the MOU outlines an array of procedures that will greatly streamline the provision of information from French firms to the CFTC, and vice versa. Among other benefits of this agreement, it confirms the CFTC’s ability to seek data directly from French-registered firms pursuant to the procedures provided in the MOU, and to coordinate and execute on-site visits at French-registered entities should the need arise. The MOU also defines how mutual cooperation will interact with French and European Union blocking and privacy laws, and lays out the permissible uses of non-public information.” 

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FTC approves change to Safeguards Rule 

The Federal Trade Commission (FTC) has approved an amendment to its Safeguards Rule that will require non-banking financial institutions to report certain data breaches and other security events to the agency. The amendment is designed to help the FTC identify and investigate data breaches more quickly and effectively, and to provide consumers with more information about the risks to their personal and financial information. 

Under the new rule, non-banking financial institutions will be required to notify the FTC within 30 days of discovering a security breach that involves the unauthorised acquisition of unencrypted customer information affecting at least 500 consumers. The notice must include information about the nature of the breach, the number of consumers affected, and the steps the institution is taking to mitigate the harm to consumers. 

The new rule applies to a wide range of non-banking financial institutions, including mortgage brokers, motor vehicle dealers, and payday lenders. These institutions are often entrusted with sensitive financial information, such as Social Security numbers, bank account numbers, and credit card numbers. A data breach at one of these institutions could have serious financial consequences for consumers. 

The FTC’s Safeguards Rule requires certain financial institutions to meet several data security requirements to protect customers’ personal financial information. The new rule will go into effect 180 days after it is published in the Federal Register. 

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Michael S Barr discusses the Fed’s role in payments

In a brief speech given at the Economics of Payments XII Conference, Michael S Barr, Vice Chair for Supervision Board of Governors of the Federal Reserve System, has discussed the Federal Reserve’s role in the payments system and the evolving landscape of payments technology. The speech covered various aspects, including the Fed’s initiatives, stablecoins, central bank digital currencies (CBDCs), international collaboration, traditional payment methods, and the importance of financial inclusion. 

The key points covered were as follows: 

  • Introduction to the Federal Reserve’s role: Barr began with an acknowledgment of the Federal Reserve’s multifaceted role in the payments system. He highlighted that the Federal Reserve acts as a supervisor of banks and financial market utilities while also operating critical components of the payments infrastructure. 
  • FedNow Service: The speech introduced the FedNow Service, launched in July, and aimed at enabling secure and convenient instant payments. Its launch emphasises the growing demand for instant payments from both households and businesses and the need for modernized payment infrastructure. 
  • Stablecoins regulation: Barr proceeded to underline the significance of regulating stablecoins, which are considered a form of private money, especially when they are pegged to a government-issued currency. The Federal Reserve aims to ensure these operate within a federal prudential oversight framework to prevent threats to financial stability and the payments system’s integrity. 
  • Central Bank Digital Currencies (CBDCs): Barr discussed ongoing research into CBDCs, stressing the exploration of system architecture, ledger maintenance, tokenisation, and custody models. However, he noted that the Federal Reserve has not yet decided on issuing a CBDC which would require support from the executive branch and authorisation from Congress. 
  • International collaboration: Barr acknowledged the importance of international collaboration in enhancing cross-border payments. The G20 governments have endorsed a roadmap for improving cross-border payments, and the Federal Reserve is committed to working with the international community on this issue. 
  • Traditional payment methods: The speech recognised the enduring importance of traditional payment methods in the US payments system and he proposed that research should continue to explore the use of cash and the dynamics within the debit card industry. 
  • Interchange fee cap for ebit cards: Barr reminded the audience that the Federal Reserve has proposed revisions to the interchange fee cap for debit card issuers. 
  • Financial inclusion: Finally, he underscored the importance of payments innovation that promotes financial inclusion. He highlighted that the cost of payment services can be a significant barrier for low- and moderate-income households and small businesses. 

 In summary, the speech highlighted key initiatives, such as the FedNow Service and ongoing research into stablecoins and CBDCs and emphasised the importance of international collaboration, traditional payment methods, and financial inclusion as integral components of responsible innovation in the payments industry. 

Click here to read the full RegInsight on CUBE’s RegPlatform