CUBE RegNews: 6th June

Eva Dauberton

Eva Dauberton

News Editor

FCA speech on asset management regulation


In a speech at the Investment Association Annual Conference, Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), spoke about the pivotal role of the UK asset management industry. The sector, responsible for £11 trillion in assets, underpins the UK's economic strength and sustains a significant portion of the financial services workforce. Rathi's speech considered the necessity of robust regulatory frameworks, international collaboration, and technological innovation to maintain the UK's competitive edge. 


Global regulatory engagement 

Rathi outlined the FCA's active involvement in international regulatory discussions, focusing on liquidity risk management in response to the March 2020 'dash for cash’. He cited the International Organisation of Securities Commissions’ (IOSCO) guidance on anti-dilution liquidity management tools and collaborative efforts with the Financial Stability Board on stress tests for open-ended funds as helpful initiatives aimed at enhancing financial stability and market integrity by addressing systemic risks and identifying data gaps. 


Another area of focus he mentioned in the speech was leverage in non-bank financial institutions. The FCA, co-chairing with the European Central Bank, is finalising a review of existing data and policy tools to monitor and mitigate systemic risk from leverage. 


Rathi also discussed international work on margin preparedness, aimed at reducing procyclical behaviour and enhancing liquidity during market stress. The FCA is leading efforts to update valuation principles for collective investment schemes to keep pace with market developments, alongside examining governance and conflict of interest issues in private market valuations. 


Embracing innovation 

Technological innovation was a prominent theme in Rathi's speech. The FCA is supporting firms through initiatives such as the Digital Securities Sandbox and projects on fund tokenisation. Collaborations like Project Guardian, involving the Monetary Authority of Singapore, Japan's Financial Services Agency, and the Swiss Financial Market Supervisory Authority (FINMA), are also exploring the benefits and regulatory challenges of asset and fund tokenisation. 


The rise of artificial intelligence (AI) presents both opportunities and challenges. Rathi highlighted the potential of advanced analytics to guide investment decisions and assess risks, while also raising concerns about the concentration of power among a few tech firms and the potential for market manipulation. The FCA, he said, aims to balance innovation with market integrity, relying on governance frameworks like the Senior Managers Regime and outcomes-based regulation. 


Responding to market trends 

Rathi acknowledged the transformative impact of passive investing, which recently surpassed active fund management in the US. This shift raises questions about the implications for active management and capital access for smaller businesses. The FCA is also attentive to geopolitical risks and demographic changes, emphasising the need for long-term investment strategies to support retirement savings. 


To enhance investor support, the FCA is reviewing the advice/guidance boundary, potentially leveraging AI to provide more accessible financial advice. Elsewhere, the Long Term Asset Fund (LTAF) initiative, developed with the Investment Association, offers defined contribution pensions access to less liquid investments, aiding diversification and retirement goals. The FCA has authorised four LTAFs, expanding access to retail investors and self-selected DC pension savers. 


Regulatory efficiency 

Rathi discussed the FCA’s efforts to streamline regulations inherited from the EU, aiming to retain, repeal, or replace legislation to create a more proportionate system for asset managers. This involves ensuring policies consider the global distribution models of UK asset managers. 


FCA's operational focus 

Improving the FCA’s operational effectiveness is crucial to supporting the regulatory agenda. Rathi highlighted improvements in authorisation times, with 98.1% of applications processed within statutory deadlines between January and March 2024. The introduction of automated forms is expected to further enhance efficiency. 


The FCA is also addressing the Financial Services Compensation Scheme (FSCS) levy, working to reduce its size and ensure the 'polluter pays' principle remains. This involves more assertive supervisory actions and a proactive approach to redress, aiming to distribute costs fairly. 


Rathi's speech highlighted the UK asset management industry's global significance and the critical role of regulation, innovation, and international collaboration in sustaining its success. The FCA's initiatives, from addressing liquidity risks to embracing technological advancements, demonstrate a commitment to maintaining market integrity while fostering growth and investor confidence. The collaborative approach with industry stakeholders is pivotal in navigating the evolving financial landscape and ensuring the UK's position as a leading asset management centre. 


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PRA issues PS10/24 as part of Solvency II review 


The Prudential Regulation Authority (PRA) has issued a policy statement (PS) 10/24 on the reform of the Matching Adjustment (MA) as part of the review of Solvency II. This PS follows the consultation paper (CP) 19/23 published in September 2023. 


Some context 

The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 (IRPR Regulations) will come into force for firms on 30 June 2024. These regulations set out the Government’s reforms to the Solvency II MA. It maintains most of the existing methodology and calibration of the fundamental spread (FS), broadens the MA eligibility criteria to allow assets with highly predictable (HP) cash flows, reforms the powers of the PRA where firms breach MA eligibility conditions, and creates space for the PRA to make rules on other specific MA policy aspects. The final policy in this PS implements and works alongside the Government’s MA reforms. 


Key takeaways 

In CP19/23, the PRA proposed the following: 


Improving business flexibility 

  • Widening the range of investments that firms may hold in MA portfolios. 
  • Expanding the types of insurance business that may claim MA. 
  • Removing the limit on the amount of MA that may be claimed from sub-investment grade (SIG) assets. 

Being more responsive to the level of risk 

  • Establishing a streamlined MA application process for a range of suitable assets proportionate to risk. 
  • Making the regulatory treatment of breaches of MA conditions more proportionate. 
  • Increasing the granularity of the FS. 

Enhancing firms’ responsibility for risk management 

  • Introducing an attestation process for the amount of MA benefit being claimed. 
  • Clarifying expectations around the risk management of SIG assets. 
  • Formalising the data submitted to the PRA by firms on the assets and liabilities in their MA portfolios through a new Matching Adjustment Asset and Liability Information Return (MALIR). 
  • Converting expectations on internal credit assessments to requirements. 
  • Introducing an MA eligibility condition for firms to be able to demonstrate compliance with the Prudent Person Principle (PPP). 


The PRA has identified a number of areas where it adjusted the draft policy to reflect its consideration of the responses received. Alongside amendments to existing related supervisory statements and statements of policy (SOP), the PS includes a new Matching Adjustment Part of the PRA Rulebook and a new SoP – Solvency II: Matching Adjustment Permissions (‘MA SoP’). 


Next steps 

The implementation date for final rules and policy materials reflecting policy changes set out in this PS is 30 June 2024 unless otherwise stated. The PRA considers that implementing the MA reforms on 30 June 2024 will allow firms that use the MA to take advantage of these MA reforms in advance of the remainder of the Solvency II reforms, which will be implemented on 31 December 2024. 


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CFPB launches process to recognise open banking standards

 

The Consumer Financial Protection Bureau (CFPB) has finalised a new rule that outlines the qualifications for becoming a recognised industry standard-setting body under the upcoming Personal Financial Data Rights rule. This new rule sets out the necessary attributes for standard-setting bodies seeking recognition from the CFPB. 

 

Some context 

Currently, there is inconsistency in people’s access to their financial data across different financial institutions. Even among companies that share data upon customer request, the terms of sharing vary greatly. On 19 October 2023, the CFPB proposed a Personal Financial Data Rights rule, utilising a dormant authority under Section 1033 of the Consumer Financial Protection Act that grants consumers the right to access their data. 

 

The proposal aims to expedite the adoption of open banking in the United States by establishing a comprehensive regulatory framework. This framework will provide consumers and their authorised third parties with the right to receive structured, consistent, and timely access to their personal financial data held by financial institutions. It will also impose limitations on the collection, use, and retention of that data by authorised third parties. 

 

As part of the proposal, the CFPB intends to allow companies to use technical standards developed by standard-setting organisations recognised by the CFPB. The finalised rule marks the beginning of the process for standard-setting organisations to seek formal recognition. 

 

Key takeaways 

To be recognised by the CFPB, standard setters must meet certain criteria and demonstrate specific attributes. These attributes include: 

  • Openness: The process must be open to all interested parties. 
  • Transparency: Procedures must be transparent and publicly available. 
  • Balanced decision-making: The decision-making power to set standards must be balanced across all interested parties. - Consensus: Standards development must proceed by consensus, though not necessarily unanimity. 
  • Due process and appeals: The standard-setting body must use documented and publicly available policies and procedures, providing fair and impartial processes. 

The rule also includes a step-by-step guide for standard setters to apply for recognition, as well as a process for the CFPB to revoke it. 

 

Next steps 

The rule's effective date is 30 days after its publication in the Federal Register. The CFPB believes that no later effective date is necessary, as this final rule does not impose obligations on any party other than applicants for recognition, who can choose when to submit their applications. An applicant may request a pre-filing meeting before the effective date. 

 

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CFTC chairman outlines comprehensive regulatory reviews 


In a speech at the Piper Sandler Global Exchange and Trading Conference, Rostin Behnam, Chairman of the Commodity Futures Trading Commission (CFTC), highlighted the pivotal role of financial markets in facilitating the transition to a lower-carbon economy, and emphasised the CFTC's regulatory responsibilities, market resilience, and the need for continuous adaptation in the face of evolving market and technological landscapes. 


Historical context and market resilience 

Setting out a historical perspective provided Behman the opportunity to set the stage for discussing the resilience of modern derivatives markets, which have withstood significant stress over recent years. The robust performance of these markets, despite extreme volatility, shows the effectiveness of post-financial crisis reforms and longstanding regulatory frameworks. 


Behman noted that while the markets have demonstrated resilience, there is no room for complacency. The CFTC remains vigilant, actively engaging in global regulatory discussions through organisations such as the International Organisation of Securities Commissions (IOSCO) to ensure regulations remain fit for purpose. Key areas of focus currently include clearing, cybersecurity, fintech, and conflicts of interest. 


Regulatory agenda and progress 

Behnam provided an update on the CFTC's regulatory agenda for 2023-2024, which includes approximately 30 regulatory and policy matters. This agenda aims to enhance risk management, strengthen customer protections, promote efficiency and innovation, improve reporting and data policy, address duplicative regulations, and amplify international comity. 


Since January 2023, the CFTC has made significant progress, approving ten final rules, publishing 16 proposed rules, and issuing various orders and guidance. Key upcoming considerations include: 

  • final orders on capital and financial reporting for swap dealers in several jurisdictions, 
  • updates to customer protection regulations, 
  • amendments to rules governing product submissions and listings, and 
  • enhancements to access US markets through foreign boards of trade. 


The CFTC is also set to finalise rules on safeguarding customer funds, operational resilience, and the protection of clearing member funds. Additionally, a forthcoming final rule on real-time public reporting and swap data reporting is expected to enhance international harmonisation and market resilience. 


Enforcement and market integrity 

Behnam also emphasised the CFTC's rigorous enforcement effort. The Division of Enforcement (DOE) has been particularly active in addressing fraud, manipulation, spoofing, and regulatory non-compliance across traditional and digital asset markets. He highlighted the record-setting enforcement actions of FY 2023, which included significant penalties and demonstrated a steadfast commitment to customer protection. 


The DOE's focus on digital assets reflects the growing significance of this market segment and Behnam noted that, in FY 2024, digital asset-related cases have continued to receive substantial attention, ensuring that market participants are held accountable. He reminded the audience that the CFTC's enforcement actions, guided by principles of fairness and integrity, aim to protect market participants and maintain market integrity. 


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ESAs and ENISA sign cybersecurity MoU 


The European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority – collectively known as the European Supervisory Authorities (ESAs) – have signed a multilateral Memorandum of Understanding (MoU) with the European Union Agency for Cybersecurity (ENISA) which aims to enhance cooperation and information exchange to strengthen cybersecurity across the EU financial sector. 


The MoU formalises ongoing collaboration, driven by the NIS2 Directive (the EU-wide legislation on cybersecurity which provides legal measures to boost the overall level of cybersecurity in the EU) and the Digital Operational Resilience Act (DORA). It outlines a framework for cooperation on policy implementation, incident reporting, and oversight of critical third-party Information Communication Technologies (ICT) providers. The agreement aims to promote regulatory convergence, facilitate cross-sectoral learning, and enhance capacity building in areas of mutual interest. 


The MoU represents a significant step towards a unified approach to cybersecurity in the EU financial sector. By fostering closer collaboration and resource sharing, the agreement aims to build a resilient financial ecosystem capable of withstanding cyber threats. 


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EBA unveils plans for DPM 2.0 

 

The European Banking Authority (EBA) has unveiled its plan for the adoption of the data point model (DPM) 2.0 as part of its reporting release 4.0 framework. This move aims to transition towards a more integrated regulatory reporting system. 

 

Some context 

The DPM serves as a data dictionary that presents a structured representation of the data needed for regulatory purposes. It covers regulatory processes and consolidates data from various EBA Technical Standards and Guidelines. The EBA has used DPM Standard 1.0 since its establishment and has worked with EIOPA on a DPM Refit project to establish a common DPM Standard 2.0, which was published in June 2023. The EBA aims to implement the new DPM 2.0 model in 2024. 

 

Key takeaways  

 

  • Transition period  

To ease the transition from DPM 1.0, the EBA anticipates a transitional period for DPM 2.0 until December 2025. During the transitional period (2024-2025), both versions of the DPM metamodel, DPM 1.0 and DPM 2.0, will be available simultaneously. Upon the release of Reporting 4.0 (with the first reference date of March 2025), the EBA will begin publishing new and updated reporting frameworks in both DPM 1.0 and DPM 2.0 formats. However, starting from the releases with a reference date of December 2025, the EBA will exclusively publish in the new DPM 2.0 format. Therefore, for releases with a first reference date before December 2025, the EBA will publish in both DPM 1.0 and DPM 2.0 formats, but for releases with a first reference date from December 2025 onwards, only DPM 2.0 will be published. 

 

  • Reporting 4.0  

In addition to changes to reporting requirements resulting from the CRR3, release 4.0 will integrate the new glossary produced by data quality review and all the modules will be updated with this new glossary. To expedite and streamline this process, the EBA will release a preliminary version of the technical package in October, two months before the final version scheduled for publication in December 2024. The preliminary publication of Reporting release 4.0 will include all elements typically shared by the EBA to validate the technical package and refer to the DPM 1.0. The same data will also be defined in DPM 2.0, which will be published only three weeks later, reflecting some additional preparatory work for the new data dictionary. 

 

  • Data glossary and taxonomy architecture  

A new semantic glossary will be introduced with release 4.0, at which point all existing frameworks will be redefined to align with this new glossary. Reporting will gradually change in subsequent releases, and the old DPM semantic data dictionary (old glossary included) will be phased out from December 2025. The XBRL new taxonomy architecture 2.0 will be implemented for reporting from release 4.0, with a preliminary taxonomy version (not for use) already available in release 3.5. By the reference date of December 31, 2025, only the xBRL-CSV reporting format will be accepted by the EBA. With each new release, the EBA will continue to provide the technical packages with the standard specifications, including validation rules, the DPM, and exchange taxonomies to support changes to EBA reporting and disclosure requirements. 

 

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CBI announces plans to establish Innovation Sandbox 

 

The Central Bank of Ireland (CBI) has confirmed that it will establish an Innovation Sandbox Programme later this year. The programme aims to provide regulatory advice and support for innovative projects that promote better outcomes for society and the financial system. 

  

This announcement follows a three-month public consultation and is accompanied by a feedback statement on the Central Bank’s approach to engaging with innovation in the financial sector. 

  

The Innovation Sandbox Programme will take a thematic approach, with specific themes and a call for potential participants to be issued in the coming months. The first programme is expected to commence in Q4 2024. 

 

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Australian Federal Court finds superannuation fund trustee guilty of greenwashing 

 

The Australian Securities and Investments Commission (ASIC) has announced that the Australian Federal Court has found LGSS Pty Limited, as trustee of the superannuation fund Active Super, contravened the law in connection with various misleading representations concerning its environmental, social, and governance (ESG) credentials. 

 

Active Super claimed in its marketing that it eliminated investments that posed too great a risk to the environment and the community, including gambling, coal mining, and oil tar sands. Following the invasion of Ukraine, Active Super also made representations that Russian investments were “out”. However, the Federal Court found that from 1 February 2021 to 30 June 2023, Active Super invested in various securities that it had claimed were eliminated or restricted by ESG investment screens. 

 

ASIC remind firms that Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products (INFO 271) provides information for responsible entities of managed funds and super fund trustees about how to avoid greenwashing when offering or promoting sustainability-related or ethical products and investments. 

 

The Court will consider the pecuniary penalty to impose for the conduct at a later date. 

 

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