Eva Dauberton
News Editor
CFTC Commissioner comments on alleged staff misconduct in enforcement case
Caroline D Pham, Commodity Futures Trading Commission (CFTC) Commissioner, has issued a statement calling for immediate action to address alleged misconduct by CFTC staff in an ongoing enforcement case against Traders Global Group Inc., a forex trading broker operating as “My Forex Funds.”
The charges against Traders Global Group Inc. involve fraudulent solicitation of customers for leveraged, margined, or financed retail foreign exchange (forex) trading. It is alleged that this fraudulent activity resulted in over 135,000 customers paying at least $310 million in fees. In response, Traders Global Group Inc. filed a motion for sanctions against the CFTC, accusing the regulatory body of consistent misconduct. A court opinion was issued in November 2023.
In her statement, Commissioner Pham expressed serious concerns over the allegations: “This is a grave matter, and we, the Commission, will be subject to intense scrutiny over how we handle the alleged CFTC misconduct. This type of behaviour cannot be tolerated at a law enforcement agency.”
She outlined key recommendations for corrective actions, emphasising the need for the CFTC to take full responsibility. This includes steps to address the issues of independence in internal investigations, accountability, and conflict of interest between the CFTC’s Division of Enforcement and the Commission, issues she had flagged in previous statements.
Pham publicly requested that the Chairman reassign the case to the Division of Enforcement staff in another CFTC regional office or to CFTC headquarters and direct the CFTC’s Office of the General Counsel or the US Department of Justice to handle the Rule 11 sanctions motion.
She added: “The CFTC, as an institution of public trust, must be held to the highest standard to preserve faith in government. The Commission must swiftly deal with these allegations that are a serious blight on the CFTC’s reputation and credibility. “
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Australia passes first tranche of financial advice reforms
The Australian Government has passed the first part of the ‘Delivering Better Financial Outcomes reform package. ' The Treasury Laws Amendment (Delivering Better Financial Outcomes and Other Measures) Bill 2024 introduces changes to reduce unnecessary red tape that adds to the time and cost of preparing financial advice without providing any benefits to consumers.
Some context
The ‘Delivering Better Financial Outcomes reform package’, which was announced on 13 June 2023, aims to expand the supply of financial advice under a new model and will be progressed in three streams:
- Stream one - removing unnecessary red tape that increases the cost of advice without benefiting consumers.
- Stream two - expanding access to retirement income advice.
- Stream three - exploring new channels for advice.
The Australian Government consulted on the draft legislation in June 2024.
Key takeaways
The legislation will:
- Streamline fee documentation into one simplified document.
- Enable flexibility in how financial services guides are provided.
- Strengthen transparency and protections for consumers who receive personal advice about insurance products.
The legislation also clarifies that Australians can use their superannuation accounts to pay for personal financial advice about their superannuation from an independent financial adviser. Superannuation funds will continue to satisfy their current obligations that govern the usage of member funds.
Next steps
The second part of the reforms, which aims to further increase access and affordability of financial advice, will be developed in the latter half of the year.
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APRA releases final updated core prudential standards
The Australian Prudential Regulation Authority (APRA) has issued a final updated version of the core prudential standard that governs strategic planning and member outcomes in superannuation. This includes Prudential Standard SPS 515 Strategic Planning and Member Outcomes (SPS 515), Prudential Practice Guide SPG 515 Strategic and Business Planning (SPG 515), and Prudential Practice Guide SPG 516 Business Performance Review (SPG 516).
Some context
In September 2023, APRA launched a consultation on amendments to the core prudential standard. These revisions were deemed necessary due to changes in the superannuation operating environment since SPS 515 came into effect in 2020. These changes include continued industry consolidation and legislative changes.
Key takeaways
The updated standard and guidance reinforce trustees’ duty to act in the best financial interests of members. They also ensure that members’ interests are at the forefront of trustees’ strategic and business planning, financial resource management, implementation of the retirement income covenant, and fund transfers.
The revised standard and guidance also establish clear expectations for trustees regarding expenditure. This includes design principles for a robust expenditure management framework and the expectation for yearly attestations from senior executive management confirming compliance with expenditure management requirements.
Next steps
Initially, APRA proposed that SPS 515 would commence on 1 January 2025. However, submissions suggested changing the commencement date to 1 July 2025 to align with the timing of the conventional business planning cycle for most superannuation funds. APRA acknowledges the merits of this suggestion and has deferred the commencement date of SPS 515 to 1 July 2025. This adjustment will provide the industry with an additional six months to implement any changes required to meet the standard.
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PS 24/5: FCA issues final fee and levy rates for 2024/25
The Financial Conduct Authority (FCA) has released the final regulatory fee and levy rates for 2024/25, covering the FCA and the Financial Ombudsman Service, as well as levies collected on behalf of government departments, in a policy statement (PS) 24/5.
Amendments to the April 2024 consultation paper (CP) 24/6 proposals include:
- Some differences in the final fee and levy rates for 2024/25 compared to the draft rates due to changes in the fee data used by the FCA to calculate fee rates
- An explanation that the FCA will no longer recover the AGBR exceptional project costs from general insurance firms (fee-block A.19)
- Final rates for fee-block A.24 will be made via a separate instrument as it is entering into force at a later date.
It's worth noting that several respondents expressed concerns about the proposals to increase periodic fees, stating that the increase was above the inflation rate. Given the high compliance costs and challenging market conditions, they also emphasised that it was not the right time to raise fees. Respondents requested that the FCA reconsider or pause the fee-rate proposals. In response, the FCA acknowledged the inflationary pressures firms face but clarified that they are not proposing to recoup the cost savings provided by the freeze and that the increase only represents the ongoing regulatory activity costs, which have been limited to 8.75%.
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Basel Committee approves cryptoassets and interest risk frameworks and standards
The Basel Committee on Banking Supervision (BCBS) has provided an update on various policy initiatives, including the disclosure framework and capital standard for banks' cryptoasset exposures, the interest rate risk in the banking book standard, and principles for third-party risk management.
Cryptoassets: The BCBS has approved the disclosure framework for banks' exposure to cryptoassets, which consists of a standardised set of public tables and templates covering banks' cryptoasset exposures, and a set of targeted revisions to the cryptoasset prudential standard. The framework and updated standard will be published later this month, with an implementation date of 1 January 2026.
Interest rate risk in the banking book: The BCBS has approved a set of targeted adjustments to its standard on interest rate risk in the banking book (IRRBB), including adjustments to the specified interest rate shocks in the IRRBB standard and targeted adjustments to the methodology used to calculate these shocks to better capture interest rate changes during periods when rates are close to zero. The updated standard will be published later this month, with an implementation date of 1 January 2026.
Third-party risk: The BCBS has agreed to consult on principles for the sound management of third-party risk. These principles would replace the current guidance on outsourcing in financial services with respect to the banking system. The consultation will be published later this month.
Climate-related financial risks: The BCBS has reviewed the comments received on its consultation proposing a Pillar 3 disclosure framework for climate-related financial risks. It has agreed to continue working on finalising such a framework as part of its holistic approach to addressing climate-related financial risks.
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FSB releases initial findings on the impact of G20 financial regulatory reforms on securitisation
The Financial Stability Board (FSB) has released a consultation report containing its initial findings on the impact of G20 financial regulatory reforms on securitisation.
Some context
The report focuses primarily on the recommendations of the International Organisation of Securities Commissions (IOSCO) regarding minimum retention and the changes to prudential requirements for banks’ securitisation-related exposures by the Basel Committee on Banking Supervision (BCBS). These reforms were introduced to address vulnerabilities in the securitisation market that worsened losses during the 2008 global financial crisis (GFC).
The evaluation specifically examines the effects of these reforms on the Collateralised Loan Obligation (CLO) and the non-government-guaranteed segment of the Residential mortgage-backed securities (RMBS) market.
Key takeaways
The interim conclusion reveals that:
- Risk retention and higher prudential requirements have enhanced the resilience of the securitisation market, without strong evidence of material negative side-effects on financing to the economy: Securitisation volumes containing complex structures that contributed to the GFC have declined significantly, the quality of collateral in securitisations has improved in some asset classes, credit performance has been strong and the market has not faced significant stress. While other outcomes were identified in the report, it is uncertain whether they can be directly attributed to the reforms.
- The reforms have contributed to a redistribution of risk from banks to the non-bank financial intermediation (NBFI) sector. This shift is not unique to securitisation, given the increased reliance on market-based intermediation since the GFC.
Next steps
The FSB is inviting comments on this consultation report by 2 September 2024. Based on the feedback received, further analysis will be undertaken before a final report is published at the end of 2024.
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Canadian consumer agency welcomes new mandate to oversee open banking framework
The Financial Consumer Agency of Canada (FCAC) has issued a statement welcoming the recent passage of Bill C-69, the Budget Implementation Act, 2024. This Act gives the FCAC new mandates to oversee, administer, and enforce Canada’s Consumer-Driven Banking (also referred to as open banking) framework.
FCAC already supervises the compliance of federally regulated financial entities with consumer protection measures set out in legislation, public commitments, and codes of conduct. The FCAC also implements Canada’s National Financial Literacy Strategy and conducts research to better understand consumer needs and behaviours.
With its expanded mandate, according to the statement, the FCAC “will oversee and promote a Consumer-Driven Banking Framework that supports innovation, protects consumers, and contributes to Canadians’ financial well-being while advancing Canada’s economic growth and international competitiveness. “
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Bank of France Governor on how central bankers and financial supervisors can embrace AI
Denis Beau, First Deputy Governor of the Bank of France, delivered introductory remarks at the Point Zero Forum 2024, in Zurich, on the evolution and implications of artificial intelligence (AI). During his address, he presented the issue from the perspectives of central bankers and financial supervisors, outlining the challenges, opportunities, and next steps.
Key challenges: Vulnerability, performance and competition
“The underlying AI technology does not yet appear to be fully mature.”
Beau highlighted two key challenges regarding AI technology, especially in relation to generative AI (GenAI). The first challenge revolves around the level at which models are developed and their impact on performance and competition. The second challenge relates to the vulnerability of AI systems.
- Performance and competition: Beau focused on the broader use of general-purpose AI (GPAI) models, which could overshadow specialised models and, considering the wide range of tasks relevant to the financial sector, might pose performance issues. Additionally, Beau expressed concerns about the potential consequences for competition if large GPAI models were introduced across all areas, potentially leading to a natural monopoly or oligopoly, which would compound the already oligopolistic nature of the cloud market.
- Vulnerabilities: He specifically discussed the cybersecurity issues surrounding GenAI models. He mentioned the recent discovery of the dangers associated with “indirect prompt injection,” illustrating that research in this area is far from complete. He noted that while the race between the development of new attack techniques and the development of effective countermeasures is not new, the ability to adequately secure AI systems would greatly impact the extent to which different actors can effectively use this technology.
Opportunities: Advancing financial supervision through AI
“Even though AI technologies are not yet fully mature, it seems to me that central banks and financial supervisors should embrace them without delay. “
Beau emphasised the importance of leveraging AI to enhance missions, develop critical expertise, and drive the financial ecosystem.
Beau also provided examples of AI-based initiatives at the Banque de France, such as the LUCIA tool for analysing banking transactions and the exploration of generative AI’s potential for supervisory functions, as demonstrated in the recent “Suptech Tech Sprint” hackathon.
Furthermore, Beau mentioned the ongoing work at the Banque de France on post-quantum cryptography, which is raising awareness among private stakeholders about the need to address this threat.
Next steps: Key principles to consider for AI integration
“While it is clear to me that central banks and supervisors must seize the opportunities offered by AI, the question is: How do we do that?”
Beau shared that institutions must consider this fundamental governance principle: “AI must be at the service of humanity and society, and not the other way round”. He mentioned the ongoing implementation of the European AI Act, which, although not solving all problems, he viewed as a positive step towards increasing consumer confidence and providing legal certainty for economic operators.
To supplement this first step, Beau proposed three operational principles:
- Using AI proportionately and progressively with regulators taking on more responsibility for critical use cases.
- Experimenting without delay, even with simple use cases, to find the right way of integrating AI into regulators’ activity.
- Collaborate with others, sharing best operational practices and establishing a cohesive AI supervision framework. This includes international cooperation with counterparts and collaboration with authorities in other sectors, as AI-related concerns are interconnected.
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