FinTech Global Regulatory Round-up – w/e 23 July 2021

IOSCO/CPMI: Report on FMIs’ business continuity planning

The International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) have published a report on FMIs’ business continuity planning. The report represents the third Level 3 assessment of consistency in the outcomes of financial market infrastructures (FMIs). The report found that:

• FMIs have operational reliability objectives, focusing on system availability and recovery time; however
• some FMIs do not fully meet expectations with respect to recovery from operational incidents, such as natural disasters or IT systems outage. [21 Jul 2021]

BEIS consults on competition and consumer policy reform

The Department for Business, Energy and Industrial Strategy (BEIS) has published a consultation on reforms to competition and consumer policy. The consultation covers proposals under three themes: promoting competition to drive enterprise, innovation, growth, and productivity; updating consumer rights to keep pace with markets; and strengthening the enforcement of consumer law by individuals and regulators.  Among other things, the consultation includes a case study on open banking, highlights FCA action in home and motor insurance markets, and considers how to strengthen pre-payment protections for consumers. Responses to the consultation are requested by 1 October 2021. [20 Jul 2021]

#OpenBanking

DCMS/BEIS consult on competition regime for digital markets, role of DMU

The Department for Culture, Media and Sport (DCMS) and BEIS have published a consultation setting out proposals for a new pro-competition regime for digital markets. The consultation seeks feedback on a number of matters, including the criteria and mechanisms that will identify which firms fall within scope of the regime and the objective and powers of the new Digital Markets Unit (DMU). Responses to the consultation are requested by 1 October 2021. [20 Jul 2021]

#Competition

DCMS/Cabinet Office consultation on digital identities

DCMS and the Cabinet Office have published a consultation on digital identity.  The consultation seeks views on how the digital identity system should operate, including proposals for a governing body which will be charged with making sure organisations follow government rules on digital identity. The consultation includes consideration of how the proposed governing body will collaborate with other relevant regulators, such as the FCA and Ofcom, and agree regulatory practices with other industry regulators who use digital identities within their sectors. Responses are requested by 13 September 2021. [20 Jul 2021]

EC consults on AML/CFT legislative package

Having presented its package of legislative proposals to reform the EU's AML/CFT rules on 20 July, the European Commission (EC) has now published relevant texts for comment by 16 September 2021, including a proposal for a regulation on information accompanying transfers of funds and certain cryptoassets. [22 Jul 2021]

#AML/CFT

HKMA hosts symposium to enable industry to better understand CDI imitative and announces launch of CDI innovation hub

The HKMA has hosted a symposium on the Commercial Data Interchange (CDI), as part of its initiatives under the "Fintech 2025" strategy announced in June 2021 (see previous update).

The CDI is a consent-based data infrastructure that aims to enable more efficient financial intermediation in the banking system and enhance financial inclusion in Hong Kong.  The symposium was organised with the aim of assisting financial institutions and potential data providers to better understand the CDI initiative and how they could contribute to and benefit from its development.

The symposium highlighted the current status and the roadmap for the development of the CDI:

• Phase 1 of the proof-of-concept, which studied the technical feasibility of the CDI platform, was completed last year.  Phase 2 is underway, and is focussed on using commercial data to facilitate alternative credit scoring by banks.
• A pilot launch of the CDI is expected towards the end of 2021.
• The HKMA has launched the Commercial Data Interchange Innovation Hub to assist in the matchmaking between potential data providers and data users.  Prospective CDI participants are encouraged to seek advice from the HKMA on potential business cases through the hub. The hub will also act as the testing ground for innovative business cases where proof-of-concept trials and tests can be conducted.  [22 Jul 2021]

#Innovation

HKMA Executive Director delivers keynote speech on tackling fraud and financial crime  

Ms Carmen Chu, Executive Director (Enforcement and AML) of the HKMA delivered an opening keynote speech at the Fraud and Financial Crime Asia 2021 Conference on 21 July 2021.

Ms Chu noted the increasing prevalence of online fraud and cybercrime in the past 12 to 18 months and provided an overview of the HKMA's approach in tackling the phenomenon, as well as the actions taken or planned going forward.

• The HKMA has been promoting regtech and encouraging banks to utilise regtech in anti-money laundering and counter-terrorist financing (AML/CFT) related work. The HKMA has published papers and reports from time to time to share regtech use cases including AML, such as its report "AML/CFT Regtech: Case studies and Insights" (see our previous update) and a thematic review of the use of external information and data in AML/CFT control systems (see our previous update). The HKMA will launch its first interactive lab session featuring machine learning in the area of monitoring.
• The Fraud and Money Laundering Intelligence Taskforce (a public-private information sharing partnership), which was formed in 2017 (see our previous update), has seen remarkable growth and clear improvement in the industry's collective abilities to identify and disrupt financial crime.
• To address impersonation risk, the HKMA has issued guidance on expectations on remote on-boarding of clients (see our previous update) and worked with the industry to better educate bank staff and customers on fraud prevention.
• The HKMA is working on significantly upgrading its ability to source, store, process, and use data to enhance and support its AML/CFT supervisors, while investing in other talent (data specialists) to help drive this initiative.

Ms Chu concluded by identifying three areas which will enable AML/CFT systems to tackle the "fraud pandemic" going forward:

• Data – Expanding the use of non-traditional and new data streams to realise the full potential of analytics capabilities and AML regtech;
• Technology – Leveraging on information-sharing and network analytics to help curb risk displacement across the system.
• Collaboration – Maintaining public-private partnership and engagement within the industry.  [21 Jul 2021]

#Data

#MachineLearning

SFC issues warning statement on unregulated virtual asset platforms

The SFC has issued a statement warning investors about a virtual asset platform offering trading services in stock tokens in a number of jurisdictions, including Hong Kong. The platform is not licensed or registered with the SFC to conduct regulated activities in Hong Kong.

The SFC notes that the stock tokens, which are represented to be backed by different depository portfolios of underlying overseas listed stocks, are likely to fall within the meaning of "securities" under the Securities and Futures Ordinance. Where stock tokens are "securities", a licence from the SFC is required for marketing and distributing such tokens, whether in Hong Kong or targeting Hong Kong investors. Offering such tokens to the Hong Kong public without a licence constitutes a criminal offence.

The SFC reminds intermediaries to observe its 1 June 2018 circular (see our previous update) which provides that if they intend to provide any financial services in virtual assets, they should notify and discuss their plans with the SFC at an early stage.

The SFC also reminds investors to be careful when investing in stock tokens offered on unregulated platforms, as there may not be any due diligence or audit conducted by an independent third party to confirm that the stock tokens are backed up by an equivalent depository portfolio of the underlying shares.  Further, the rights attached to the stock token might not be fully disclosed to investors, for example, rights to dividends and rights to redeem the underlying stock.

If a virtual asset platform does not have a nexus with Hong Kong, the SFC may not have jurisdiction over it and seeking recourse against it is likely to be difficult.  [16 Jul 2021]

#StockTokens

MAS and SFA launch 2021 Global FinTech Awards

The Monetary Authority of Singapore (MAS) and the Singapore FinTech Association (SFA) have launched the 2021 Singapore FinTech Festival (SFF) Global FinTech Awards. The Awards recognise innovative FinTech solutions by FinTech companies, financial institutions and technology companies; as well as individuals and companies whose initiatives have contributed significantly to the FinTech ecosystem.

The theme for the 2021 Awards is 'Emerging from a pandemic, the road to recovery'. There are a total of 12 award categories and winners of the awards will be announced at SFF 2021. The deadline for submission for the 2021 SFF Global FinTech Awards is 31 August 2021. [21 Jul 2021]

SEC Shuts Down Fraudulent Mother-Son Offering Involving Purported Supercomputer

The Securities and Exchange Commission (SEC) has announced that it filed an emergency action and obtained a temporary restraining order and asset freeze to halt an alleged ongoing offering fraud by a Las Vegas-based company, a Las Vegas resident, and her son, which had raised more than $12 million from at least 277 retail investors.

According to the SEC’s complaint, which was filed in the US District Court for the District of Nevada and unsealed on 16 July, since at least May 2018 the defendants raised investor funds through the company while assuring investors that their money would be invested in securities trading and cryptocurrencies based on recommendations made by an "artificial intelligence supercomputer." As alleged, the company claimed that its supercomputer consistently generated enormous returns, which in turn allowed the company to guarantee investors fixed returns of 20% to 30% per year with monthly compounding interest. According to the complaint, however, over 90% of the company’s funds came from investors. The complaint further alleged that the defendants did not use funds received from investors to trade securities, buy cryptocurrencies, or do any of the things that the company promised its investors it would do with their money. Instead, the complaint alleged that the defendants misused investor money by, among other things, transferring millions of dollars to the defendant’s personal bank account, paying millions of dollars to promoters, and making Ponzi-like payments to other investors. The complaint alleges that the company actively encouraged investors to use money from retirement funds and home equity, and targeted investors looking to build educational funds for their family. [20 Jul 2021]

#AI

SEC Files Charges in Multi-Million Dollar Fraud Involving Two Companies

The SEC has announced charges against a defendant for defrauding investors in two companies he controlled.

According to the SEC’s complaint, filed in the US District Court for the Southern District of New York, the defendant, the controlling shareholder and executive director of the company, misappropriated over $7 million of the company’s investor funds between April 2016 and January 2018 to finance his personal business ventures and to pay his personal expenses. The complaint also alleges that the defendant engaged in scalping – secretly selling the company’s stock while paying stock promoters to recommend that retail investors buy the company’s stock – and insider trading. The complaint alleges that the defendant did not file with the SEC any of the required disclosures in connection with his company’s trading. The SEC’s complaint also alleges that the defendant, while serving as the company’s chief executive officer, made material misrepresentations to investors regarding the company’s products. According to the complaint, between at least April 2019 and May 2020, the defendant falsely told investors that the company, which purports to be a developer of mobile phone applications or “apps,” had developed an app, which allowed users to transact in cryptocurrencies from their mobile phones, and also had started work on an app to detect Covid-19. These statements allegedly were false because the app did not have the stated cryptocurrency functionality and the company had not started work on the Covid-19 detection app. [19 Jul 2021]

#Apps