Greg Kilminster
Head of Product - Content
FCA chair discusses equity market reform
In a speech at the International Capital Markets Conference, Ashley Alder, Chair of the Financial Conduct Authority (FCA), highlighted the pressing challenges and transformative reforms aimed at strengthening the UK’s capital markets. He emphasised the role of vibrant, sustainable markets in driving investment into the real economy, while outlining a vision for broader public engagement and investment.
UK equity markets reforms
Reflecting on the evolution of capital markets since the 1980s, Alder noted the sweeping changes brought by the FCA's recent overhaul of the UK’s equity markets. These reforms are intended to facilitate greater access for businesses, allowing more of them to "get into the shop window." However, Alder acknowledged that the ultimate challenge lies in mobilising domestic savings to support growth and making equity investment more inclusive for the UK public: “We need to make a case for it to matter to a far wider section of the population,” he said, noting that while US stock market performance is often discussed publicly, retail participation in the UK has waned over the past decades.
Wider inclusion
Alder pointed to the contrasts in investment cultures between the UK and other markets, such as the US and Hong Kong. He highlighted that in the US, stock market capitalisation reaches nearly 200% of GDP, whereas in the UK, it stands at around 100%. This disparity, he argued, demonstrates a national reluctance toward risk-taking and investment—a trend that has limited the UK's ability to finance future growth.
According to Alder, just 4.4% of UK pension funds are held in domestic equities, a figure he described as a “huge opportunity cost.” He also noted that many UK households are forgoing potential gains by holding cash savings instead of investing. "Barclays reports that 13 million UK adults are missing out by holding £430 billion in cash savings," he said, adding that this represents a significant missed opportunity for capital-hungry businesses and the broader economy.
Advice guidance boundary review
Alder discussed the FCA’s ongoing review of the boundary between regulated financial advice and guidance. While the review is technically complex, he stressed its importance for improving public access to financial advice, which he argued is key to fostering broader market participation. “Its aim is simple,” Alder said, “unlocking innovation so people can get the support that suits their financial needs, in easy-to-access ways, at prices they can afford.”
He added that the FCA’s work in this area would boost personal finances and support investment, benefiting not only individuals but also businesses seeking funding and the UK economy as a whole.
Value for money framework
In line with the FCA's broader objective to reshape public perceptions of risk, Alder also outlined a new framework developed with the government and The Pensions Regulator. This Value for Money Framework is designed to ensure that the £130 billion saved annually in workplace pensions is managed effectively. “A focus on value rather than costs,” Alder explained, “should help providers invest in assets that deliver greater long-term returns.”
He expressed hope that these initiatives would foster a more engaged and informed investing public. By shifting the national view of risk, the FCA aims to encourage greater participation in capital markets, ultimately driving growth and innovation.
Looking ahead
Alder concluded by reiterating the importance of collaboration, both within the UK and internationally. With regulators worldwide facing similar issues, he voiced optimism for continued partnership on developing capital markets that deliver robust returns and fuel economic growth. “Today has shown that many others around the world are grappling with similar issues,” he said, underlining the shared goal of promoting capital markets that benefit both investors and the broader economy.
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ASIC issues latest Market Integrity Update
The update covers the following developments.
Priorities for market intermediary supervision in 2024-25
- Strengthening market integrity: ASIC will prioritise driving consistency and transparency across markets and products to enhance market integrity.
- Promoting market cleanliness, consumer protection, and investor protection: ASIC remains committed to these fundamental objectives to maintain trust in Australia's financial system.
Expansion of operational resilience guidance
- Key areas: ASIC has published a letter outlining new guidance which focuses on identifying critical business services and notifying major events.
- Importance: It’s essential for maintaining a strong focus on technological and operational resilience.
- Next steps: Market participants are encouraged to review the guidance and make necessary adjustments, and ASIC will consult with industry on incorporating it into relevant Regulatory Guides.
New powers under financial market infrastructure (FMI) reforms
- Enhanced regulatory regime: The new laws strengthen ASIC's and the Reserve Bank of Australia’s (RBA) powers to monitor, manage, and respond to FMI risks.
- Implementation plans: ASIC will now plan and implement the new FMI regulatory regime and update its website with further information and guidance.
Key points on share sale fraud
- Increased vigilance: Market intermediaries should be more vigilant in verifying client information due to rising fraud reports.
- Potential vulnerabilities: Stolen information can be used for identity theft and fraud, so review account opening and customer due diligence controls.
- Report suspicious activity: If fraud is suspected, file a suspicious matter report with AUSTRAC and reference 'share sale fraud.'
Key points on changes to OTC derivative transaction reporting and clearing rules:
- Finalised amendments: ASIC has finalized changes to the 2024 Reporting Rules and Clearing Rules.
- Alignment with international standards: The 2024 Reporting Rules will align with international standards and consolidate transitional provisions.
- Effective dates: Changes will take effect on October 21, 2024, and October 20, 2025.
The update also includes recent enforcements.
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SFC concludes REIT and CIS consultations
The Securities and Futures Commission (SFC) has published the results of its recent consultation on two significant regulatory proposals for Hong Kong’s real estate investment trust (REIT) and listed collective investment scheme (CIS) markets. The REIT Scheme Proposal seeks to establish a statutory scheme of arrangement and compulsory acquisition mechanism for REITs, mirroring protections offered to shareholders under the Companies Ordinance. Meanwhile, the Listed CIS Proposal aims to extend the Securities and Futures Ordinance (SFO) market conduct regime to listed CIS, including REITs, thus broadening the framework against insider trading and market manipulation.
Some context
The consultation, launched in March 2024, gathered responses from various industry stakeholders, including investment associations, legal firms, and REIT managers. The REIT Scheme Proposal would enable REITs to conduct restructuring and privatisation with a robust statutory framework that includes safeguards for unitholders, aligning them with shareholder protections. The Listed CIS Proposal would bring listed CIS under the purview of the SFO’s market conduct regime, enhancing investor protections by addressing misconduct issues such as insider trading and manipulation, which have historically been applied only to listed companies.
The proposals received general support, with respondents welcoming the regulatory clarity and enhanced protections. There was, however, a call for clarifications on specific technical aspects, particularly around REITs’ unique structure compared to traditional companies. For instance, as REITs do not fall under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, certain modifications to the existing framework are anticipated to ensure that the new regime is suitable for REITs.
Key takeaways
The consultation feedback indicates broad support for both proposals. Respondents noted that the REIT Scheme Proposal offers a transparent and orderly mechanism for REITs to restructure, while ensuring unitholders are afforded comparable protections to shareholders. The SFC has indicated it will tailor the Companies Ordinance framework to accommodate the distinct nature of REITs, excluding winding-up provisions which do not apply to them.
The Listed CIS Proposal was also widely supported, with respondents noting that expanding the SFO market conduct regime to include CIS would promote a more transparent and robust market. A few respondents sought clarifications on the applicability of the new rules to trustees and custodians of CIS. The SFC has confirmed that trustees and custodians will be covered under the proposed regime to prevent any potential misconduct within these roles.
Next steps
The SFC is now preparing a bill to submit to Hong Kong’s Legislative Council, with an expected completion of the legislative process by December 2025. Upon approval, the REIT Scheme Proposal would become effective immediately, providing a clear framework for REIT privatisation and restructuring. The Listed CIS Proposal will also come into force as soon as the legislative amendments are enacted. The SFC intends to issue further guidance to the industry following the passage of the legislation.
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Time for action: UK Finance issues timely DORA blog
Trade association UK Finance has issued a timely blog regarding the EU Digital Operational Resilience Act (DORA) which will come into force on 17 January 2025. DORA mandates that financial institutions with a presence in the EU and EEA comply with a range of new operational resilience requirements. As the deadline approaches, these institutions must take prompt action to ensure that their information and communications technology (ICT) service contracts align with the new regulations.
Actionable requirements
DORA sets out specific requirements for ICT contracts, with particular emphasis on services involving critical or important functions. For these contracts, institutions must implement unrestricted access and audit rights, establish clear subcontracting terms, and secure agreements for participation in threat-led penetration testing. Importantly, even contracts previously aligned with frameworks like the Prudential Regulation Authority’s SS2/21 or the EBA Guidelines on Outsourcing may need adjustments to comply with DORA’s unique mandates.
A broader set of requirements applies to all ICT service contracts, regardless of the service’s criticality. These include obligations for notifying data processing locations, ensuring data availability and integrity, and providing support in the event of ICT incidents. The law goes beyond traditional outsourcing, extending to all digital and data services provided through ICT systems, thus capturing a wider range of service agreements.
Financial institutions are required to maintain a contract register for all relevant ICT contracts. EU supervisory authorities have now released technical standards specifying the template for these registers, which must include detailed data points about service providers and their subcontractors. Regulators can request access to these registers at any time, underscoring the need for thorough and ongoing compliance.
Next steps
With only three months until DORA takes effect, financial institutions must quickly evaluate all ICT contracts for compliance. This process will involve extensive reviews, particularly of contracts with digital and data service providers who may not have been subject to similar regulations previously. Gap analyses, prioritisation of critical vendors, and standardised variation agreements are essential steps in meeting DORA’s requirements.
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Vision and supervision - Elizabeth McCaul speech
In a speech at the S&P European Financial Institutions Conference, Elizabeth McCaul, a Member of the Supervisory Board of the European Central Bank (ECB), emphasised the importance of maintaining comprehensive vision in banking supervision. She discussed how effective supervision must encompass not just immediate challenges but also broader trends affecting the financial landscape.
Central vision: the current state of European banking
McCaul opened her remarks by discussing the resilience of the European banking sector amid numerous challenges, including the pandemic and geopolitical crises. “In recent years, Europe’s banking sector has shown resilience in the face of unforeseen challenges,” she stated. Notably, she highlighted a decrease in the average ratio of non-performing loans (NPLs) from 7.5% in 2015 to 2.3% by mid-2024, alongside an increase in the Common Equity Tier 1 ratio from 12.7% to 15.8%. “Bank profitability has considerably increased in recent quarters, benefiting from higher interest rates, and return on equity now stands at 10.1%,” she added.
However, McCaul cautioned that while this resilience stems partly from a strengthened supervisory framework, it is crucial to assess how much of it is cyclical versus structural. She also noted the ongoing need for banks to manage climate and cyber risks, urging that “climate change can no longer be regarded only as a long-term or emerging risk.”
Fringe vision: broader macroeconomic environment
Transitioning to the macroeconomic context, McCaul reflected on the current credit risk landscape. Despite improving macro-financial conditions, she indicated that credit risk had only partially materialised, particularly in the commercial real estate and small and medium-sized enterprise (SME) sectors. “While the macroeconomic outlook signals a lower immediate risk of recession, asset quality in riskier segments is slowly deteriorating,” she remarked, warning that high interest rates might affect borrowers’ capacity to service their debts.
She pointed out that while the market environment has exhibited a high-risk appetite, it remains vulnerable to sudden shifts. “This environment is susceptible to sudden shifts in market sentiment and episodes of high volatility,” McCaul warned, referencing the recent global market sell-off as a cautionary tale for banks to prepare for potential volatility.
Peripheral vision: structural changes in banking
McCaul urged supervisors to expand their perspective to encompass broader structural changes affecting the banking sector. She discussed how big tech and non-bank financial institutions (NBFIs) are reconfiguring the financial value chain, creating regulatory challenges. “Companies whose primary business is technology are entering the financial sector through e-commerce and payment platforms,” she noted, highlighting the risk of regulatory gaps.
McCaul also addressed the changing nature of depositor behaviour exacerbated by digitalisation and social media. “The events were a reminder to banks of the changing and increasingly volatile nature of depositor behaviour,” she said, citing the case of Silicon Valley Bank as an example where concentrated depositor bases led to rapid withdrawals.
Key takeaways for effective supervision
In her conclusion, McCaul drew attention to the importance of using all aspects of vision—central, fringe, and peripheral—for effective supervision. She stated, “Crises often emerge from the shadows, and it’s the overlooked risks that pose the greatest danger.”
Citing the need for comprehensive oversight, she provided several recommendations:
- Cross-risk analysis: Supervisors should adopt a holistic approach to risk analysis, considering the interplay between different risk factors.
- Scrutiny of deposit models: Increased scrutiny is needed regarding banks’ models of non-maturity deposits to ensure they are based on solid economic evidence.
- Supplementary indicators: It is vital to consider additional liquidity and funding risk indicators to capture residual risks not addressed by standard metrics like the liquidity coverage ratio (LCR).
- Timely data collection: Regular and up-to-date information on liquidity and funding risks is essential to identify structural shifts across the banking system.
In concluding, McCaul invoked a sense of vigilance, urging stakeholders not to underestimate the importance of peripheral vision in supervision. “If my career has taught me anything, it’s that accidents are more likely to happen when people get complacent,” she remarked. Echoing the wisdom of Mark Twain, she cautioned, “There is no education in the second kick of a mule,” emphasising that hidden risks can pose significant threats if left unaddressed.
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PRA issues CP 12/24 amending reporting and disclosure dates
The Prudential Regulation Authority (PRA) has issued consultation paper (CP) 12/24 proposing amendments to the reporting and disclosure dates for resolution assessments. This consultation aligns with the Bank of England's second assessment of major UK firms' resolvability, published on 6 August 2024.
The PRA's revisions intend to allow for a more flexible timeline for reporting, reflecting the advancements made by major UK banks in their resolution preparations.
Some context
Since 2019, eight major UK firms have made substantial progress in their preparations for resolution. As a result, the PRA plans to adjust the schedule for future assessments. Specifically, the PRA intends for firms to submit their next reports by October 2026 and to publish their disclosures in June 2027, a delay from the current deadlines of October 2025 and June 2026, respectively.
This shift aims to provide firms with adequate time to refine their resolution preparations and ensure compliance with PRA Fundamental Rule 8, which mandates ongoing readiness for resolution. The Bank expects firms to continue enhancing their capabilities in light of findings from the second assessment, particularly in areas such as valuations and restructuring planning.
Key takeaways
Proposed timeline adjustments: The PRA's changes will allow for submissions and disclosures to occur on a periodic basis rather than fixed two-year cycles. Firms will receive advanced communication regarding specific reporting timelines for future assessments.
Ongoing obligations: Firms must remain vigilant in maintaining their preparedness for resolution, which includes regular testing and refinement of their processes.
Areas for improvement: The PRA has outlined specific areas for firms to target, including the management of valuations and assurance of resolvability preparations. This targeted work is aimed at enhancing the robustness of the financial sector’s resilience.
Regulatory review: The PRA may consider further amendments to resolution assessment rules, including the thresholds that determine which firms fall under these regulations. Any significant proposals will be subject to separate consultation.
Next steps
The consultation on these proposed amendments will close on 8 November 2024. The PRA believes that a shorter consultation period of one month is appropriate to provide clarity on the timing of the next resolution assessment. The changes are anticipated to come into effect upon the publication of the final policy, expected by the end of Q1 2025.
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IOSCO chair discusses trust in regulation
In a speech at the Financial Conduct Authority’s International Capital Markets Conference 2024, Jean-Paul Servais, Chair of the International Organization of Securities Commissions (IOSCO), highlighted the organisation’s role in fostering trust and stability in financial markets amidst rapidly changing technological, geopolitical, and environmental conditions.
The role of regulation
Servais framed IOSCO’s mission as a response to the ongoing challenges since the 2008 financial crisis. He stressed the need for regulation that supports capital markets in achieving societal goals while avoiding the pitfalls of “unchecked greed and misconduct.” Regulation, he argued, must be adaptable and proportionate, ensuring financial stability without stifling innovation.
Building trust through coordinated regulation
Since the financial crisis, IOSCO has spearheaded global regulatory reform, with its Principles for Financial Benchmarks now regarded as the “gold standard.” Servais emphasised the centrality of trust, noting, “Trust can be strengthened when regulators ensure that all participants follow the rules and are treated fairly.” He reiterated IOSCO’s focus on three key objectives: investor protection, fair and efficient markets, and reducing systemic risk.
Principles-based regulation in action
Servais highlighted IOSCO’s successes, from the final LIBOR transition to comprehensive frameworks for credit rating agencies and collective investment schemes. IOSCO’s principles-based approach, he explained, allows flexibility for jurisdictions to adapt regulations to their specific needs, which has been essential in harmonising global standards.
Sustainable finance and technological impact
Servais stressed IOSCO’s leadership in sustainable finance, pointing to its endorsement of the International Sustainability Standards Board’s (ISSB) standards, which have been adopted by over 20 jurisdictions covering 40% of global market capitalisation. He remarked, “IOSCO’s call for action for jurisdictions ‘to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards’ has been heard.”
On crypto-assets, he emphasised the importance of a unified global approach to prevent regulatory arbitrage and ensure investor protection, mentioning IOSCO’s collaborative efforts with other international bodies to set global standards in digital asset regulation.
Strengthening market resilience
Servais also outlined IOSCO’s continuing focus on the resilience of non-bank finance, open-ended investment funds, and the use of leverage. He noted IOSCO’s work with the Financial Stability Board and Basel Committee as essential to ensuring market stability, adding that IOSCO’s Multilateral Memorandum of Understanding (MMoU) enables cross-border enforcement, demonstrating the organisation’s global reach and impact.
IOSCO’s evolving role in global finance
Servais emphasised IOSCO’s collaboration with the IMF, World Bank, and other entities, which has bolstered IOSCO’s influence within the global financial regulatory framework. “IOSCO’s standards are recognised as key pillars in the architecture of global financial regulation,” he stated, underscoring their importance for fostering resilience and inclusivity.
A call for continued collaboration
In closing, Servais encouraged ongoing engagement with IOSCO’s initiatives, noting the value of international cooperation in addressing the shared challenges of a complex financial environment. “The challenges we face are global in nature, and so must be our solutions,” he affirmed, reiterating IOSCO’s commitment to building a stable and resilient financial system.
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