Eva Dauberton
News Editor
ESMA issues guidance on AI use and MIFID II compliance
The European Securities and Markets Authority (ESMA) has released a statement offering initial guidance to firms that use Artificial Intelligence (AI) technologies to provide investment services to retail clients. While there is an ongoing discussion about creating a comprehensive EU legal framework for AI, such as the AI Act and DORA, this statement specifically addresses the application of AI in investment services within the existing requirements of the Markets in Financial Instruments Directive II (MiFID II).
Key takeaways
The statement highlights the potential benefits and risks of using AI in Investment Services, as well as the compliance considerations with MiFID II requirements, particularly those related to organisational requirements, conduct of business requirements, and the general obligation to act in the best interest of the client.
Next steps
Investment firms are encouraged to seek additional resources and collaborate with their supervisory authorities to effectively address the complex challenges associated with AI. ESMA and national competent authorities (NCAs) will continue to monitor the development of AI and the relevant EU legal framework to determine if further action is necessary in this field.
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CFPB consults on mortgage closing costs
The US Consumer Financial Protection Bureau (CFPB) has launched a public inquiry into junk fees that are increasing mortgage closing costs. The CFPB aims to understand the reasons behind the rising closing costs, who is benefiting from them, and how these costs could be reduced for both borrowers and lenders.
Some context
This inquiry comes after a recent analysis conducted by the CFPB revealed a significant surge in the closing costs paid by borrowers in relation to their mortgages. Between 2021 and 2023, the median total loan costs for home mortgages grew by over 36%.
Key takeaways
To gather insights, the CFPB has requested input from the public, including borrowers and lenders, regarding the potential inflation of mortgage closing costs and its impact on the mortgage lending market. Specifically, the CFPB is seeking information on the following aspects:
- Which fees are subject to competition: The CFPB is interested in the extent to which consumers or lenders currently apply competitive pressure on third-party closing costs. The CFPB also wants to learn about market barriers that limit competition.
- How fees are set and who profits from them: The CFPB wants to learn about who benefits from required services and whether lenders have oversight or leverage over third-party costs that are passed onto consumers.
- How fees are changing and how they affect consumers: The CFPB wants information about which costs have increased most in recent years and the reasons for such increases, including the rise in cost for credit reports and credit scores. The CFPB is also interested in data on the impact of closing costs on housing affordability, access to homeownership, or home equity.
Next steps
Comments must be submitted within 60 days of the publication of the request for information in the Federal Register.
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US Treasury releases first-ever NFT illicit finance risk assessment
The US Department of the Treasury has released the 2024 Non-fungible Token (NFT) Illicit Finance Risk Assessment report. This report provides an overview of the structure of the NFT market and highlights the potential threats and vulnerabilities associated with illicit finance in this area.
It also presents various measures that the private sector, US regulators, and the US government should consider to address these concerns.
Key takeaways
The assessment reveals that inadequate cybersecurity measures, challenges related to copyright and trademark protections, and the volatile pricing and hype surrounding NFTs can create opportunities for criminals to engage in fraud and theft within the NFT market and its platforms. Additionally, certain NFT firms and platforms lack the necessary controls to effectively mitigate risks related to market integrity, money laundering, terrorist financing, and sanctions evasion.
Finally, the report outlines mitigation measures such as industry tools, law enforcement authorities, and the analysis of public blockchain data, which can partially address these risks.
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MAS updates Guidelines on Fair Dealing
The Monetary Authority of Singapore (MAS) has issued an updated set of Guidelines on Fair Dealing. The revised Guidelines aim to raise standards of fair dealing and improve customers' experiences with Financial Institutions (FIs).
Some context
First introduced in 2009 under the Financial Advisers Act, the Guidelines cover the selection, marketing and distribution of investment products, as well as the provision of advice and post-sales services for these products.
On 14 December 2022, MAS issued a consultation paper on proposals to enhance the Guidelines. The consultation proposals included:
- Widening the scope of application of the Guidelines to explicitly include all financial institutions (FIs) and the corresponding products and services they offer their customers.
- Putting in place sound and objective processes to assess applications received for financial products and services.
- Designing and manufacturing products and services that are suitable for target customer segments.
- Delivering products and services to customers as they have been led to expect and exercising right of review (RoR) clauses judiciously.
The consultation period closed on 8 February 2023
Key takeaways
While the core objectives of fair dealing and focus on customer outcomes have not changed, the main changes to the guidelines include:
- Scope of application of the guidelines: A key change is that the scope of the Guidelines has been expanded beyond advisory services and investment products to apply to all FIs, financial products and services (including incidental services), and customers.
- Designing and manufacturing products and services that are suitable for target customer segments: MAS has refined the expectations and guidance for manufacturers. To note, the expectations on manufacturers are consistent with those of other jurisdictions, such as Australia, Hong Kong, and the United Kingdom.
Changes to the guidance also include:
- Justification of differential treatment based on relevant information or data
- Products and services disclosures
- Disclosure and Safeguards around RoR
Next steps
The updated Guidelines take immediate effect. Where system or process enhancements are needed for FIs to meet specific areas of the revised Guidelines, FIs should take action to effect the necessary changes.
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UK Finance publishes financial services manifesto
UK Finance – the UK trade association representing around 300 firms – has published a manifesto outlining key priorities it believes the next UK government should focus on. The manifesto addresses the top three concerns identified by consumers' polling. These are:
- Tackling the cost of living
- Reducing fraud and economic crime
- Supporting growth and investment in regions across the UK
On supporting people and businesses, the key recommendations are as follows:
- Improving the environment for savers by reviewing personal savings allowances.
- Delivering financial education through the school curriculum, including across all devolved nations.
- Establish a new cross-government taskforce to help tackle financial abuse.
- Maintaining the currently increased thresholds at which movers and first-time buyers pay Stamp Duty on a home purchase and increase Stamp Duty bands annually in line with the UK House Price Index.
- Creating an independent Retrofit Advisory Service - a ‘one stop shop’ for free retrofitting advice, modelled on similar services in Scotland and Ireland.
- Extending the new Growth Guarantee Scheme for the full term of the next parliament.
On supporting communities and society, the recommendations include:
- Introducing a new Fraud and Scams Bill which draws on the Online Fraud Charter.
- Making technology, social media and telecoms companies contribute to the cost of tackling economic crime and fraud reimbursement.
- Legislating to ensure information held on Companies House can be properly verified and relied upon.
- Publishing detailed Net Zero investment roadmaps for key sectors of the economy.
- Giving the UK Infrastructure Bank a greater mandate to invest in Net Zero projects to unlock private investment.
On supporting growth, recommendations include:
- Championing the National Payments Vision and Strategy to ensure a world-leading payments ecosystem.
- Issuing a digital gilt backed by HM Treasury to encourage the development of securities tokenisation.
- Creating a government champion for competitiveness with a remit to produce an annual report to parliament on the burden of regulation for financial services, including the impacts on different types of financial services firms.
- Publishing a tax roadmap for financial services.
- Using the Berne Financial Services Agreement as a blueprint for agreements with other overseas financial centres.
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CBI outlines actions required by firms following compliance review
The Central Bank of Ireland (CBI) has written to firms to provide feedback on the findings of the recent thematic review of compliance among retail intermediaries and to outline the CBI’s expectations in relation to adherence to the provisions of the Minimum Competency Code (MCC) and the Know Your Customer (KYC)/suitability requirements laid out in the Consumer Protection Code (Code). The findings and recommendations will be of interest to all firms regardless of location.
Overview
The CBI’s thematic review highlighted significant compliance issues within the retail intermediary sector, particularly among smaller firms. The findings emphasise the need for robust internal processes, thorough KYC and suitability documentation, and effective remuneration policies to safeguard consumer interests. Subsequent expectations aim to address these deficiencies and promote a culture of professionalism and consumer-focused service within the industry. Firms must take immediate and comprehensive actions to align with these expectations.
Key findings
- Compliance and firm size: The review found a clear correlation between compliance levels and the size of retail intermediaries. Larger firms generally exhibited better practices and adherence to regulations, while smaller firms displayed significant weaknesses. This disparity suggests that smaller firms may lack the resources or infrastructure necessary to maintain robust compliance systems, leading to inadequate internal processes and poor record-keeping.
- KYC and suitability weaknesses: A recurring issue identified was the insufficiency in KYC documentation and suitability statements. Many firms were found to use generic templates for suitability statements, which do not adequately address the specific needs and circumstances of individual consumers. This gap in personalised service delivery is a critical flaw, as it directly affects the appropriateness of the financial advice and products provided to consumers.
- Minimum competency gaps: The review revealed that some firms failed to maintain their Accredited Persons Registers in line with the MCC requirements. Variances in the standards and frequencies of review indicate a lack of consistent oversight. Properly maintaining these registers is fundamental to ensuring that all personnel meet the necessary competency standards, which is essential for consumer protection.
- Variable remuneration policies: The CBI noted that many firms did not have adequate variable remuneration policies in place. These policies are crucial for promoting a culture of suitability over sales volume, thereby ensuring that consumer interests are prioritised. The absence of such policies, especially in larger firms where they are deemed necessary, is a substantial compliance gap.
- Treatment of vulnerable consumers: While most firms demonstrated awareness of the needs of vulnerable consumers, some placed the responsibility on clients to self-identify as vulnerable. This approach is problematic as it may result in inadequate support for those who are unable or unwilling to disclose their vulnerability.
Good practices
The review did identify commendable practices in some firms, such as comprehensive and easily understandable suitability statements and regularly updated MCC registers. These examples set a benchmark for other firms to follow and suggest that high standards of compliance are achievable.
CBI expectations
In response to the findings, the CBI has issued Risk Mitigation Programmes to individual firms, requiring specific actions to address identified deficiencies. Additionally, the CBI has outlined several expectations for all retail intermediaries:
- Comprehensive review and documentation: Firms are expected to conduct a thorough review of their business practices and compliance arrangements against the review findings. This review must be documented and include detailed action plans, updated procedures, and timelines for implementation. The completion of this review and approval by the management team is to be completed by 31 August 2024.
- Enhanced KYC/suitability practices: Following the review, firms must apply improved KYC and suitability measures in all future consumer engagements. Any gaps identified in existing consumer files should be addressed proactively in subsequent interactions.
- Proactive compliance monitoring: Firms are encouraged to adopt a proactive approach to continuously evaluating the effectiveness of their compliance arrangements. This includes regular updates and improvements to ensure they meet the highest standards of consumer protection and deliver fair outcomes.
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ASIC Commissioner Simone Constant’s three principles for better compliance
In a speech at the Australasian Investor Relations Association (AIRA) Annual Conference, the Australian Securities and Investments Commission (ASIC) Commissioner Simone Constant discussed three foundational principles to enhance compliance in the financial services industry: transparency, accountability, and consistency. These principles are critical in navigating the complex regulatory landscape faced by listed entities. Constant’s speech examined how these principles underpin ASIC’s approach to promoting good governance, fostering investor confidence, and ensuring market integrity.
Transparency
Transparency, said Constant, is the bedrock of fair and efficient markets. She emphasised that the strength of the Australian market lies in its transparency. The free flow of information ensures that all market participants have access to accurate and timely data, which fosters trust and confidence.
- Clean market reputation: Australia boasts one of the cleanest listed equities markets globally. This reputation is crucial not only for investor confidence but also for the smooth functioning of companies and the economy at large. Despite periods of volatility, companies in Australia can raise capital and issue debt with certainty, owing to the robust disclosures regime that supports market transparency.
- Continuous disclosure: ASIC remains vigilant in enforcing continuous disclosure obligations. This vigilance is essential in maintaining market integrity and preventing misconduct such as insider trading and ongoing enforcement actions, highlighting ASIC’s commitment to upholding transparency standards.
- Proactive surveillance: ASIC’s proactive surveillance of financial reporting ensures that listed entities maintain high standards of transparency. The October 2023 review of 156 financial reports revealed that more than a third were substandard, highlighting the need for continuous improvement. Enhanced transparency in financial reporting, including the expanded scrutiny of superannuation funds, is critical for investor confidence and market fairness.
Accountability
Turning to her second point, Constant said that accountability ensures that entities and their leaders are answerable for their actions and decisions. She stressed the importance of accountability in both public and private markets.
- Private markets scrutiny: With the growing significance of private capital, ASIC is increasingly focused on ensuring that these markets uphold accountability standards comparable to those in public markets. The shift towards private equity and the slowing of initial public offerings (IPOs) requires vigilant regulation to protect investors. Constant noted that ASIC’s oversight aims to ensure that private market investments are fair and transparent, even without the extensive reporting requirements of public markets.
- Governance in superannuation funds: The accountability of superannuation fund trustees is paramount, particularly as the population entering the pension phase increases. ASIC’s scrutiny of superannuation fund practices, such as the handling of death benefit claims, highlights the need for trustees to meet their commitments and deliver on promises to their members.
Consistency
Finally, Constant addressed consistency, how it is crucial for maintaining confidence and fostering market participation, and its role in various aspects of governance and regulatory compliance.
- Service delivery in superannuation: With a significant number of Australians reliant on superannuation funds for their retirement, consistent service delivery is essential. ASIC’s focus on ensuring trustees deliver on their commitments is aimed at protecting members’ interests and maintaining confidence in the superannuation system.
- ESG claims and greenwashing: The rise of responsible investing has brought environmental, social, and governance (ESG) claims to the forefront. However, not all claims withstand scrutiny and ASIC’s actions against greenwashing often show the inconsistency between what companies claim and what they do. Upcoming mandatory climate reporting laws will further enhance the ability of ASIC to scrutinise these claims, ensuring that companies can back up their ESG commitments with concrete actions.
Commissioner Constant’s emphasis on transparency, accountability, and consistency provides a useful framework for navigating regulatory challenges in the financial services industry. By adhering to these principles, listed entities can enhance their governance practices, foster investor confidence, and ensure the continued integrity of the market.
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SRB publishes its Multi-Annual Plan 2024-2028
The Single Resolution Board (SRB), the central resolution authority within the EU Banking Union, has released its Multi-Annual Plan 2024-2028. The plan outlines the SRB’s main focus areas in the upcoming years, detailing the action plan to achieve the SRM Vision 2028 strategy and the agency’s core mission and tasks. The Multi-Annual Plan includes the updated Annual Work Programme 2024, which replaces the Annual Work Programme 2024, published in November 2023.
Key takeaways
Over the next five years, the SRM will:
- Increase its focus on crisis management and readiness, operationalising all resolution tools, and implementing comprehensive testing to ensure effective resolvability of banks.
- Develop a general testing framework and multi-annual plan in close collaboration with the National Resolution Authorities (NRAs). Conduct more frequent dry runs involving an increasing number of relevant internal and external stakeholders involved in resolution or liquidation.
- Enhance its capabilities to efficiently manage crises with diverse triggers and complete the operationalisation of resolution tools within the Single Resolution Mechanism (SRM).
- Continue implementing activities such as the management of the Single Resolution Fund (SRF) and oversight of Less Significant Institutions (LSI).
- Focus on the long-term development of staff, ensuring recruitment and retention of talented and motivated staff.
- Implement dedicated actions on diversity and inclusion, including measures to improve gender balance and other forms of diversity. Drive transparency, communication, and awareness to reduce hidden bias and any other form of discrimination.
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