Eva Dauberton
News Editor
BoE and FCA publish consultation on Digital Securities Sandbox
The Financial Conduct Authority (FCA) and the Bank of England (BoE) have published a consultation paper (CP) outlining their plans for implementing and operating the Digital Securities Sandbox (DSS), which aims to promote the adoption of digital asset technology in the UK financial markets.
Some context
Jointly managed by the BoE and FCA, the DSS was established under the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 (DSS Regulations), which came into effect on 8 January 2024. This sandbox arrangement seeks to address existing obstacles to conducting digital asset activities by granting participating entities temporary access to modifications in the current legislative and regulatory framework
Key takeaways
This CP sets out the proposals regarding both regulators' approach to:
- The implementation and operation of the DSS
- The application process to enter the DSS
- The use of rule-making powers
- Approach to managing financial stability and market integrity risks in the DSS
- Supervision and enforcement
These proposals also comprise the BoE approach to:
- Fees levied
- Managing the limits on Digital Securities Depository (DSD) activity within the DSS
Finally, the proposals affect:
- Firms intending to apply to enter the DSS and be approved as sandbox entrants.
- Firms that wish to engage with a sandbox entrant but not become one themselves, such as the prospective members of a DSD in the DSS.
- Firms seeking to offer custody services for the digital securities that are recorded, traded, or settled on those FMIs.
Next steps
Responses to the consultation paper are due by 29 May 2024. The final rules and guidance will be published in the summer of 2024 and the DSS will begin accepting applications.
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BIS launches new project on tokenisation
The Bank for International Settlements (BIS) and seven central banks have announced their intention to partner with the private sector to explore how tokenisation can improve the functioning of the monetary system.
Some context
In its 2023 Annual Economic Report, BIS introduced a blueprint for a future monetary system that leverages the potential of tokenisation. The blueprint includes the integration of elements such as CBDCs and tokenised deposits into a new type of financial market infrastructure (FMI) called a “unified ledger.”
Key takeaways
To further develop this blueprint, the partnership, known as Project Agorá, brings together the Bank of France (representing the Eurosystem), Bank of Japan, Bank of Korea, Bank of Mexico, Swiss National Bank, Bank of England, Federal Reserve Bank of New York, and private financial firms.
The primary focus of the partnership is to explore how tokenised commercial bank deposits can be seamlessly integrated with tokenised wholesale central bank money. This integration will take place within a public-private programmable core financial platform and aims to address existing inefficiencies in payment systems, particularly those related to cross-border transactions, which involve different legal, regulatory, and technical requirements.
Moreover, the partnership aims to address the growing complexity associated with financial integrity controls, including measures against money laundering and customer verification.
Next steps
The BIS will issue a call for expressions of interest to private financial institutions to join, and specific instructions and requirements will be issued in due course.
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SEC speech: what factors drive the value of fines?
In a speech at the SEC Speaks 2024 event, Sanjay Wadhwa, Deputy Director of the Securities and Exchange Commission (SEC) Division of Enforcement, provided a helpful summary of SEC enforcement highlights and considered some of the factors that affect two ongoing initiatives: the recordkeeping initiative and the amended marketing rule initiative.
Highlights
- In FY 2023, the SEC filed 784 total enforcement actions, a 3% increase over the prior fiscal year.
- These actions included 501 original actions, representing an 8% increase, and 162 follow-on administrative proceedings.
- Financial remedies obtained totalled just under $5 billion, the second-highest amount in SEC history.
- Remedies comprised nearly $3.37 billion in disgorgement and prejudgment interest, and nearly $1.6 billion in civil penalties.
- Orders were obtained barring 133 individuals from serving as officers and directors of public companies, the highest number in a decade.
- The Whistleblower Program achieved record-breaking results, issuing nearly $600 million in awards.
- More than 18,000 whistleblower tips were received in FY 2023, the most ever.
- $930 million was distributed to harmed investors, marking the second consecutive year with over $900 million in distributions.
Recordkeeping
Wadhwa noted that since December 2021, the SEC has charged around 60 firms with recordkeeping violations with fines ranging from $2.5 million to $125 million. To dispel suggestions that this wide range indicates fine values are randomly chosen, Wadhwa outlined some of the factors taken into account when assessing penalties.
- Firm size: Penalties are tailored to ensure deterrence, considering the firm's revenue from regulated business areas and the number of registered professionals.
- Violation scope: Examination of off-channel communications includes factors like the number of individuals involved and communications, though penalties may not strictly correlate with these figures due to sample-based analysis.
- Compliance efforts: Efforts to meet recordkeeping obligations and prevent off-channel communications, such as implementing timely technological solutions, are taken into account.
- Precedent: Previous settled orders provide guidance but are not decisive in determining penalties, which are individually assessed.
- Self-reporting: Firms that self-report benefit significantly in penalty mitigation, reflecting the most significant factor in penalty assessment.
- Cooperation: Non-self-reporting firms can still receive credit based on cooperation with SEC staff during investigations, which will be further discussed in the panel.
Marketing rule
Similarly, Wadhwa outlined the factors the SEC considers in determining what penalty to recommend for violations of this rule which he noted: “contains important investor protection measures that we want to ensure that firms comply with”.
Factors assessed include:
- Reported assets under management.
- The firm's regulatory history, including any prior enforcement actions.
- Promptness of the firm in remedying noncompliant marketing materials.
- Strong messages of accountability and deterrence are deemed necessary.
- Self-reporting and cooperation with SEC investigations.
Wadhwa concluded by pointing out that the above factors “are almost certainly going to be relevant in any SEC investigation you may be dealing with.”
Click here to read the full RegInsight on CUBE’s RegPlatform
OCC updates list of CRA evaluations
The Office of the Comptroller of the Currency has provided the latest Community Reinvestment Act (CRA) performance evaluations for March 2024 which looks at 19 banking entities.
The CRA is a US federal law that requires banks to meet the credit needs of the communities in which they operate, particularly low- and moderate-income neighbourhoods, through lending, investment, and service activities. It aims to prevent discriminatory lending practices and encourage financial institutions to help meet the credit needs of all segments of their communities, including those traditionally underserved.
Two banks – one large entity in Jackson, MS and one intermediate small in Colombus, OH – are rated ‘needs to improve’ whilst 13 are rated ‘satisfactory’. Only four are rated ‘outstanding’.
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AFCA raises concerns over financial hardship assistance by lenders
The Australian Financial Complaints Authority (AFCA) has raised concerns about the growing number of complaints related to financial difficulty. Specifically, they are worried about how lenders are handling customer requests for hardship assistance. According to AFCA, there has been a 25% increase in complaints related to financial difficulty in 2023. Over half of these complaints were due to lenders failing to respond to hardship assistance requests.
AFCA has observed that:
- This issue is prevalent among smaller lenders and Buy Now, Pay Later (BNPL) providers.
- Some lenders provide generic responses that do not consider individual circumstances.
- Some lenders have issued default notices to customers who have already agreed to repayment arrangements, created unnecessary obstacles for financial counsellors assisting customers, and initiated debt recovery actions while the case was still with AFCA, which is against the rules.
The AFCA reminds firms that under the National Credit Code and the Banking Code of Practice, banks are required to work with customers to find a sustainable solution to financial hardship and to do that by considering their individual circumstances.
Click here to read the full RegInsight on CUBE’s RegPlatform
APRA consultation on minor updates to prudential framework
The Australian Prudential Regulation Authority (APRA) has issued a consultation on minor updates to the prudential framework for authorised deposit-taking institutions, General insurance, Private health insurance, and the Life insurance industries.
These updates primarily focus on providing technical clarifications and do not entail any substantial alterations to policy settings.
The deadline for feedback is 3 May 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform