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Financial Regulatory Observer 2022

What's inside

The Financial Regulatory Observer spotlights selected topics currently driving regulatory and technological changes in the financial industry.

Shaking up the wholesale markets: UK, EU and US approaches

As lawmakers look to reform aspects of wholesale markets regulation, the UK may be poised to drift closer to the US.

stock market

Operational resilience in the UK, EU and US: A comparison

With a new operational resilience framework in force in the UK and similar reforms proposed in the EU and the US, we examine how the regimes compare and their practical impact on financial services firms.

currency

Regulatory round-up

As the world emerges from the turmoil caused  by the COVID-19 pandemic, the financial services sector is going through a time of considerable change. This section highlights some developments to be aware of in key regulatory hot topics.

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golden glass building

Regulatory round-up

As the world emerges from the turmoil caused by the COVID-19 pandemic, the financial services sector is going through a time of considerable change. This section highlights some developments to be aware of in key regulatory hot topics.

Insight
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8 min read

Cryptoassets

United Kingdom

  • Any person wishing to acquire "control" of an FCA-registered cryptoasset business, directly or indirectly, must now obtain prior FCA approval. This will include anyone who will ultimately own or control, directly or indirectly, more than 25 percent of the shares or voting rights
  • A new "travel rule" requires cryptoasset exchange providers and custodian wallet providers to share information concerning cross-border transfers of cryptoassets above a €1,000 threshold. There is a 12-month grace period (until September 2023) for firms to implement the rule
  • Implemented in stages from December 2022 to February 2023, under PS22/10, the FCA has strengthened its financial promotion rules for high-risk investments and has indicated that the rules for promoting cryptoassets are likely to follow the same approach, subject to HM Treasury bringing "qualifying cryptoassets" into the scope of the financial promotion regime
  • Stablecoins and other "digital settlement assets" are set to be brought into the UK regulatory purview by the Financial Services and Markets Bill 2022-23. The changes aim to facilitate the use of certain stablecoins as a widespread means of payment, including by retail customers, to drive consumer choice and efficiencies. "Digital settlement assets" is defined more broadly than just stablecoins to allow for regulatory flexibility
  • An amendment to the Financial Services and Markets Bill 2022-23 has been agreed to by the UK Parliament, which amends the Financial Services and Markets Act 2000 to clarify that powers relating to financial promotion and regulated activities can be relied on to regulate cryptoassets and activities involving cryptoassets. "Cryptoasset" is also defined

European Union

  • The proposed Regulation on Markets in Cryptoassets (MiCA) has been provisionally agreed upon by the European Parliament and Council of the EU. It is expected to be adopted by the end of 2022
  • A provisional agreement has also been reached on proposals to amend and recast the Wire Transfer Regulation (WTR). Similar to the UK, the changes introduce a new "travel rule" by expanding the scope of rules on information accompanying the transfer of funds so they also apply to cryptoasset transfers, with the aim of strengthening the EU's AML/CFT rules

United States

  • A new Comprehensive Framework for Responsible Development of Digital Assets issued by the White House outlines potential future changes relating to financial inclusion, AML/CFT and the potential case for a US central bank digital currency
  • The US Congress has introduced several comprehensive legislative proposals on digital assets in 2022. While unlikely to pass in the near future, these proposals indicate a growing interest in streamlining digital asset regulation

Retail initiatives and consumer protection

United Kingdom

  • The FCA has published details of its new "Consumer Duty," aimed at raising standards of consumer protection across retail markets. Firms' boards should now have signed off their implementation plans for the Consumer Duty, and firms should be ready to comply with the rules by July 31, 2023 (for products and services open to sale or renewal) or July 31, 2024 (for closed products and services)
  • New, stronger financial promotion rules will start to apply in the coming months for high-risk investments and firms approving financial promotions. Measures relating to risk warnings for high-risk investments take effect on December 1, 2022, while other rules will begin to apply on February 1, 2023. Details are set out in FCA policy statement PS22/10
  • A strengthened regime for appointed representatives (ARs), which is intended to ensure authorized firms take more responsibility for their ARs, will begin to apply on December 8, 2022

European Union

  • As part of its preparations for a new EU retail investment strategy, which aims to increase retail investor participation in the EU's capital markets, the European Commission is expected to finalize an impact assessment shortly. The strategy was supposed to be adopted in early 2022, but it has been delayed and is now expected to be adopted in early 2023
  • The EU institutions have reached a provisional agreement on proposed amendments to the regulation on European Long-Term Investment Funds (ELTIFs). One of the aims of the changes is to make it easier for retail investors to invest in ELTIFs while ensuring strong investor protection

United States

  • The Consumer Financial Protection Bureau (CFPB) is adding to the toolkit it uses to address discriminatory practices by consumer financial services providers. Among other things, the CFPB has said that it will use its authority to take enforcement action for unfair deceptive or abusive acts or practices (UDAAP) to address intentional and unintentional violations of discrimination laws related to any consumer financial product, not just those limited to lending
  • In September, the CFPB joined state regulators in taking a look at the need for increased regulation of buy-now-pay-later (BNPL) providers. The CFPB said it will issue guidance on how consumer protections under existing credit card rules apply to BNPL products, and that the data privacy protection and credit reporting practices should be extended to BNPL products

Sustainability and ESG

United Kingdom

  • In a Dear CEO letter, the PRA has warned that firms need to make further progress in managing climate-related financial risk. The letter provided examples of good and poor practices and flagged that firms judged not to have made sufficient progress in embedding the PRA's expectations may be asked to provide a roadmap explaining how they will overcome the gaps
  • The FCA is planning to develop "technical screening criteria" under the UK Green Taxonomy to define which economic activities are environmentally sustainable and, therefore, "taxonomy-aligned" by the end of 2022
  • The government has confirmed that it plans to adopt and endorse corporate reporting standards for sustainability in line with those being developed by the International Sustainability Standards Board (ISSB)
  • In CP22/20, the FCA is consulting on new rules to tackle greenwashing, with proposed measures such as investment product sustainability labels and restrictions on how terms like "ESG," "green" and "sustainable" can be used

European Union

  • The proposed Corporate Sustainability Reporting Directive (CSRD) has been provisionally agreed to by the European institutions and is expected to be adopted in late 2022
  • The delayed level 2 legislation underpinning the Sustainable Finance Disclosure Regulation (SFDR) will begin to apply on January 1, 2023. Commission Delegated Regulation (EU) 2022/1288 contains regulatory technical standards specifying details of the required content and presentation of taxonomy disclosures
  • The EBA has published a report on incorporating ESG risks into the supervisory process for investment firms under the Investment Firms Directive. The report recommends prioritizing the recognition of ESG risks in investment firms' strategies, governance arrangements and internal processes, and later incorporating them into the assessments of risks to capital and liquidity

United States

  • The Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) highlighted climate risk management as a priority in their regulatory and supervisory agendas
  • As a first step, the Federal Reserve Board will conduct a pilot exercise with six of the largest US banks in 2023 that will stress test the ability of the banks to manage the financial risks under various climate change scenarios. The exercise for now will not have any capital or supervisory implications, but could be used to inform future requirements
  • The OCC has proposed principles for a high-level framework for climate-related financial risk management that would require large national banks to address governance, risk management and stress testing of identified climate risks
  • Similarly, the FDIC proposed a high-level framework for the safe and sound management of exposures to climate-related financial risks that would apply to all FDIC-insured banks with material financial exposures to climate risk

Market abuse

United Kingdom

  • Recently, the FCA has notably issued the following fines for market abuse failures:
    • A brokerage firm was fined £531,000 for failing to accurately report transactions and to bring suspicious transactions to the FCA's attention, leaving potential market abuse undetected. Two directors were also banned from holding senior positions in financial services as a result
    • A large international broker-dealer was fined £12.6 million for failing to properly implement the Market Abuse Regulation trade surveillance requirements relating to the detection of market abuse. The FCA said this prevented the firm from effectively monitoring its trade activities for certain types of insider dealing and market manipulation
  • The FCA has also begun criminal proceedings against four individuals involved with a public limited company for fraudulent trading, alleging that they knowingly concealed the company's insolvent financial position and co-ordinated a "pump and dump" scheme to artificially inflate the share price through a series of misleading statements. A fifth individual has been charged with money laundering for laundering the proceeds from the sale of company shares

European Union

  • Issuers admitted to trading on SME growth markets should ensure that the formats of their insider lists and their liquidity contracts comply with the revised requirements recently introduced through level 2 regulation
  • The proposed MiCA Regulation (discussed above) includes provisions concerning market abuse. Under MiCA, market abuse involving cryptoassets is prohibited and requirements are introduced to prevent it, including bans on insider dealing, unlawful disclosure of inside information and market manipulation involving cryptoassets

United States

  • The new head of the SEC's Division of Enforcement has said that the Division's focus will be to pursue robust enforcement, robust compliance and robust remedies. The Division is expected to focus on cybersecurity, digital assets, insider trading and the protection of material, non-public information

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2022 White & Case LLP

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