FinTech Global FS Regulatory Round-up – w/e 9 December 2022

Global FSR Outlook 2023 – Braving the maelstrom

Our FSR team surveys the regulatory landscape for 2023 and considers the challenges confronting firms and regulators.  We explore nine key themes that will impact the financial services sector globally over the next 12 months and beyond:

• Regulators clampdown on scams as enforcement actions rise: much of the billions shovelled out in governments’ Covid-19 relief efforts has been diverted by fraudsters – and regulators’ efforts to recover funds and penalize malefactors will implicate financial institutions in some jurisdictions.
• Crypto winter emboldens regulators to greater intervention: as the crypto industry’s troubles deepen, regulators around the world have been given political license to strengthen rulemaking and enforcement action.
• Regulating E(S)G – a growing commitment: regulatory scrutiny is widening to include an array of new concerns as watchdogs extend environmental and governance standards.
• The ESG Agenda – financing a fair future: as awareness of environmental, social and human rights issues grow, we explore how firms will need to respond to a changing ethical landscape.
• Financial Stability – gathering storms – business and regulators brace as economic outlook darkens: energy shocks, high inflation and persistent geopolitical tensions put central banks’ focus squarely on securing macroeconomic and financial stability.
• Wrestling giants – regulators ramp up efforts to monitor Big Tech: as technology reshapes business, watchdogs are modernising to better detect and act on bad behaviour.
• Turning point – third-party providers under growing scrutiny: regulators are set to take a more muscular approach to technology providers as operational resilience frameworks mature.
• Get ready for the quantum leap: quantum computing is set to reshape financial services. We explore the risks and opportunities inherent in this cutting-edge technology.
• New toolkits and closer proactive regulatory engagement: high volatility resulting from unpredictable global events is pushing regulators to focus on market stability, operational resilience and vulnerable consumers.

FSB Plenary report: Financial stability, crypto-assets, DeFi, climate-related financial risks

The Financial Stability Board (FSB) has published a note of its Plenary session on 5 and 6 December 2022. The Plenary discussed the outlook for global financial stability, including issues of particular relevance to emerging market and developing economies (EMDEs), and actions needed to address identified vulnerabilities in the global financial system. The Plenary also reviewed policy work in several areas.

With regard to crypto-assets and decentralised finance (DeFi), the Plenary discussed developments in crypto-asset markets, including preliminary lessons from the recent failure of FTX. As DeFi has emerged as a fast-growing segment, the Plenary discussed the financial stability implications and areas that merit further attention. The FSB will enhance its crypto-assets monitoring framework to include DeFi-specific vulnerability indicators and explore approaches to fill data gaps to measure and monitor interconnectedness of DeFi with traditional finance, with the real economy and with the crypto-asset ecosystem.

The Plenary also agreed the FSB’s work programme for 2023 which will be published in January. [6 Dec 2022]

#DeFi

Chancellor announces Edinburgh Reform package – overhaul of UK financial services regulation

In a written statement to the House, Jeremy Hunt, Chancellor of the Exchequer, has announced a set of reforms which are intended to drive growth and competitiveness in the financial services sector. This set of announcements is the next step in reform following on the Financial Services and Markets (FSM) Bill and the announcement of the final policy statement on reforming Solvency II at Autumn Statement. In relation to fintech, the reforms include:

• consulting on a UK retail central bank digital currency (rCBDC) alongside the Bank of England (BoE) in the coming weeks (the BoE will also release a Technology Working Paper setting out cutting-edge technology considerations informing the potential build of a digital pound);
• publishing a response to the consultation on expanding the Investment Manager Exemption to include cryptoassets which will facilitate their inclusion in the  portfolios of overseas funds managed in the UK (this change to be made through HMRC regulations this year);
• implementing a Financial Market Infrastructure Sandbox in 2023; and
• working with the regulators and market participants to trial a new class of wholesale market venue which would operate on an intermittent trading basis acting as a bridge between public and private companies.

Our briefing, What you need to know about the Edinburgh Reforms, is on our FSR & CCI notes blog. [9 Dec 2022]

#rCBDC

#Cryptoassets

#Sandbox

BoE posts requests for application to provide PoC for a sample CBDC wallet

The BoE has posted a request for applications to provide proof of concept (PoC) for a sample wallet for a central bank digital currency (CBDC). The deadline for questions is 16 December 2022, and for applications is 23 December 2022.  The latest start date is 16 January 2023, with an expected contract length of five months (with option for one month extension).  The request sets out a number of aims for the project, including that it will 'explore the end-to-end user journey as a way to sharpen functional requirements for both the Bank and the private sector […] the Bank will not develop a user wallet itself, [but] it may develop payment scheme rules & user experience guidelines etc…'. [9 Dec 2022]

FCA: Insights from the 2021 CCG meetings

The FCA has published an overview of insights from its quarterly Cyber Co-ordination Group (CCG) meetings held in 2021. The publication of the insights is split into three sections: the first highlights the cyber risk landscape, as well as emerging cyber risks discussed at the CCGs in 2021. This is followed by two focus topics in which the FCA summarises members’ insights on board engagement with cyber security and the state of development, security, and operations (DevSecOps).

The insights cover broad cyber risks that span sector priorities and key topics that were discussed at the CCGs. These include the following:

• Malicious cyber actors targeting internet-facing systems such as email servers and virtual private networks (VPNs) with newly disclosed vulnerabilities, ransomware attacks using Remote Desktop Protocols (RDP) and unpatched devices, denial of service attacks, and inadequate supply chain oversight leading to supply chain compromise.
• The  COVID-19 pandemic continued to impact the sector in 2021, with the challenges posed by remote and hybrid ways of working.
• Emerging trends in cyber security risks, including supply chain compromise and exploitation of zero-day vulnerabilities.
• The importance of board engagement in setting the organisational cyber risk appetite. This also extends to board support in measuring the effectiveness of cyber security postures, and board assurance that supply chain partners effectively protect the information shared with them.
• Several common good practices can be used for implementing security in the early stages of the  DevSecOps. This includes empowering rather than mandating security practices and giving access to security tools to the development teams. [8 Dec 2022]

Upper Tribunal Decisions published - Cryptoassets firm with temporary registration

On 30 May 2022, the FCA gave a Decision Notice to Moneybrain Limited refusing its application to be registered as a cryptoasset exchange provider and a custodian wallet provider pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). Moneybrain had created a type of cryptocurrency known as BiPS Tokens; the FCA issued the Decision Notice because it decided Moneybrain had deliberately and recklessly published on its websites misleading marketing and promotional material relating to the these token, and so was not a 'fit and proper person' within the meaning of Regulation 58A of the MLRs.  The FCA also decided that the Decision Notice was to have immediate effect. As a result, the temporary registration held by Moneybrain to carry on the cryptoasset activities ceased to have effect by operation of Regulation 56A(1)(b)(ii) of the MLRs.

Moneybrain made a reference to the Upper Tribunal (Tax and Chancery Chamber) by way of an appeal against the Decision Notice and also applied for a direction that the effect of the FCA's Decision Notice be suspended pending the determination of the appeal.

A hearing of the Suspension Application took place on 23 August 2022. No application was made for that hearing to be in private.  On 22 September 2022, the Judgment on the Suspension Application was issued to the parties and arrangements commenced for it to be published on the Tribunal website and on the National Archives website. Before the Judgment had been published, Moneybrain made a Privacy Application.

The following have now been published:

• the decision in Moneybrain Ltd v Financial Conduct Authority [2022] UKUT 257 (TCC) in which the Upper Tribunal dismissed the claimant's application to suspend the effect of the FCA's Decision Notice pending the outcome of the appeal;
• the decision in Moneybrain Ltd v Financial Conduct Authority [2022] UKUT 269 (TCC) in which the Upper Tribunal refused the claimant's recusal application; and
• the decision in Moneybrain Ltd v Financial Conduct Authority [2022] UKUT 308 (TCC), in which the Upper Tribunal refused the claimant's privacy application that publication of the September 2022 judgment be delayed. [8 Dec 2022] 

DRCF consults on workplan for 2023-2024

The Digital Regulation Cooperation Forum (DRCF) – which brings together the Competition and Markets Authority (CMA), the Office of Communications (Ofcom), Information Commissioner’s Office (ICO) and the FCA to ensure a joined-up approach to digital regulation – has published a call for input (CfI) on its workplan for 2023 to 2024. In particular, the DRCF seeks input on:

• policy interactions or technologies it should take into account as it develops its workplan;
• new areas of focus that are not covered in its previous workplan; and
• particular stakeholder groups (e.g. end users such as vulnerable consumers, children, businesses) that it should be mindful of when prioritising its areas of focus.

Feedback is requested by 6 January 2022. [7 Dec 2022]

#Digital

FCA consults on a new gateway for s21 approvers - financial promotions

The FCA has published Consultation Paper 22/27: Introducing a gateway for firms who approve financial promotions (CP22/27). CP22/27 covers the regulator's proposals for how it will operate the new gateway which will be introduced under the Financial Services and Markets Bill (FSM Bill) for FSMA-authorised persons wishing to approve financial promotions for unauthorised persons (so-called 's21 approvers') to apply for specific permission to do so. The consultation sets out:

• how the FCA will assess applicants;
• the basis for refusal / approval of applications;
• a bi-annual reporting requirement for firms given permission to approve financial promotions;
• a requirement to notify the FCA when approving, amending or withdrawing approval of a financial promotion within seven days of doing so;
• that the compulsory jurisdiction of the Financial Ombudsman Service (FOS) will not be extended to the approval of financial promotions; and
• consequential changes to non-Handbook guidance and additional text on the Consumer Duty.

The FCA notes that HM Treasury (HMT) has said that there will be transitional arrangements to enable current s21 approvers to continue approving financial promotions until their applications have been determined.  Additionally, the FCA does not expect the proposals CP22/27 to be generally relevant to authorised persons approving the financial promotions of their appointed representatives (ARs) or of unauthorised persons within their corporate group. Similarly, the regulator does not expect them to apply where an authorised person approves their own financial promotions for onward communication by an unauthorised person.

Feedback is requested by 7 February 2023. A Policy Statement and final rules are planned for H1/2023, but this will be contingent on the progress of the FSM Bill through Parliament.

*Our briefing on CP22/27 is available on our FSR & CCI Notes blog here. [6 Dec 2022]

BoE: RTGS renewal programme - update

The Bank of England (BoE) has updated its webpage on the real-time gross settlement (RTGS) renewal programme. In the update, the BoE explains that the migration of CHAPS to ISO 20022 messaging (Transition State 2.1 of the RTGS renewal programme) will now occur on 19 June 2023, rather than April 2023. This decision follows consultation with CHAPS direct participants to understand the impact of the European Central Bank (ECB) decision to move their TARGET2 ISO 20022 migration from 21 November 2022 to 20 March 2023. [5 Dec 2022]

#ISO20022

EPC publishes annual update on payments threats and fraud trends

The European Payments Council (EPC) has published its annual update of the Payments Threat and Fraud Trends Report. The report provides an overview of the most important threats and other 'fraud enablers' in the payments landscape, including: social engineering; malware; advanced persistent threats (APTs); denial of service (DoS); botnets; and monetisation channels. [8 Dec 2022]

ECB: Speech on the crypto bubble and digital finance 

The European Central Bank (ECB) has published a speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Insight Summit held at the London Business School. In his speech, Mr Panetta argued that there is an urgent need globally for regulation of crypto which protects consumers, defines minimum requirements for risk management and corporate governance, and reduces the run and contagion risks of stablecoins. Further, he observed that 'a stable digital finance ecosystem requires well-supervised intermediaries and a risk-free and dependable digital settlement asset, which only digital central bank money can provide'. [7 Dec 2022]

#DigitalFinance 

ECB: Technical onboarding package for digital euro prototyping

The ECB has published further information related to the digital euro prototyping exercise, specifically the technical onboarding package which was compiled and shared with the five companies working on the prototyping exercise. The prototyping exercise is expected to conclude in the first quarter of 2023, at which point the ECB will publish its findings. The full specifications for the application programming interface (API) to be developed during the exercise will also be published following the conclusion of the prototyping experiments.

Additionally, work on the digital euro rulebook is expected to commence in January 2023. [7 Dec 2022]

EC: Address from Commissioner McGuinness - the EU's crypto-asset strategy

The EC has published the address delivered by Commissioner McGuinness for an event at the EU Delegation in London on the EU's crypto-asset strategy. The Commissioner opened her remarks with a brief review of the risks of crypto-assets (highlighted by, for example, the collapse of FTX) versus the potential benefits to be derived from distributed ledger technology (DLT). She said that the EU is focused on addressing 'clear risks and shortcomings, while still enabling innovation to flourish'. The Commissioner then outlined key elements in the EU's framework:

• the DLT pilot for market infrastructures is due to go live in March 2023 and will provide regulatory flexibility to facilitate experiments with integrating trading and settlement;
• the Markets in Crypto-Assets Regulation (MiCA) provides a comprehensive framework for crypto-assets; and
• crypto firms will be fully subject to the Digital Operational Resilience Act (DORA) which will require them to manage the risks of hacks or technology failures.

She also noted that the EC is working on a possible digital euro to complement cash and that the crypto ecosystem should be fully integrated into environmental considerations. [6 Dec 2022]

ECB announces partnership with European University Institute to train banking supervisors

The European Central Bank (ECB) has announced the launch of a long-term partnership with the Florence School of Banking and Finance of the European University Institute to develop a training programme for all supervisors across European banking supervision. The programme will run over at least four years and aims to train 6,000 supervisors at the ECB and national competent authorities. The training will cover a range of thematic areas, including cyber risk, digital transformation and climate and environmental risks. [6 Dec 2022]

#digital

OJ: Commission Delegated Regulation - PSD2

Commission Delegated Regulation (EU) 2022/2360 amending the regulatory technical standards (RTS) laid down in Delegated Regulation (EU) 2018/389 as regards the 90-day exemption for account access under the revised Payment Services Directive (PSD2) has been published in the OJ.

The Delegated Regulation will enter into force on 25 December 2022, and will apply from 25 July 2023. Article 2 of the Regulation includes transitional provisions for payment service providers (PSPs) that applied the exemption in Article 10 of Delegated Regulation (EU) 2018/389 before 25 July 2023. [5 Dec 2022]

LegCo passes amendments to AMLO to introduce licensing regime for VASPs and other AML/CFT enhancements

The Government has announced that the Legislative Council (LegCo) has passed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO).  The amendments were introduced into the LegCo in July 2022 (see our previous update) to enhance Hong Kong's anti-money laundering and counter-terrorist regulatory (AML/CFT) regulatory regime.

The amendments address three areas:

• A new licensing regime for virtual asset service providers (VASPs) to be administered by the SFC;
• A new two-tier registration regime for dealers in precious metals and stones (DPMSs) to be administered by the Commissioner for Customs and Excise; and
• Miscellaneous amendments to address various technical issues identified in the Financial Action Task Force (FATF)’s mutual evaluation report on Hong Kong and in other FATF contexts.

An entity seeking to be a VASP must satisfy the fit and proper test and comply with various AML/CTF requirements (including requirements on customer due diligence (CDD) and record keeping), as well as other regulatory requirements on investor protection (such as those relating to safe custody of client assets, financial soundness and avoiding conflicts of interest).  As announced in the Government's policy statement on virtual assets in October 2022 (see our previous update), the SFC will carry out a further consultation on the detailed regulatory requirements of the regime, including on how retail investors may be given a suitable degree of access to virtual assets under the new licensing regime.

The amendments to align Hong Kong's AML/CFT requirements with FATF standards include (among others) amending the definition of "politically exposed person" (PEP) and facilitating a risk-based approach in determining the degree of CDD that former PEPs are subject to.  The HKMA has issued a circular to highlight the aspects of amendments relevant to the banking sector.  The HKMA will launch a consultation on the corresponding changes to its guideline on AML/CFT for authorised institutions as well as specific guidance on topical issues.

As at 6pm Hong Kong time on 9 December 2022, the amended AMLO has not yet been published in the gazette.  The implementation of the amended AMLO will be in phases – the DPMS registration regime will be implemented on 1 April 2023, whereas the VASP licensing regime and the miscellaneous AML/CFT amendments will be implemented on 1 June 2023.  Transitional periods will be provided under the two new regimes to give those concerned sufficient preparation time.  [7 Dec 2022]

SFC publishes quarterly report for July to September 2022

The SFC has published its quarterly report summarising its work and key developments from July to September 2022. The highlights covered by the report include:

• Intermediary-related developments – These include launching a new list of licensed virtual asset trading platforms on the SFC’s website to enable investors to easily ascertain whether a particular platform is licensed by the SFC, conducting 53 on-site inspections of licensed corporations (LCs), and publishing findings from a review of LCs and their compliance with regulatory requirements when onboarding clients and distributing or advising on investment products via their online platforms; and
• Regulatory enhancements – These include The Stock Exchange of Hong Kong Limited's consultation launched in October 2022 on proposals to introduce a new listing regime for specialist technology companies which cannot meet the existing revenue on profit track record requirements, and its consultation conclusions on proposals to enhance the disclosure of share schemes and provide issuers with greater flexibility to grant share options and share awards whilst protecting shareholders from excessive dilution (the amended rules will come into effect on 1 January 2023).  [6 Dec 2022]

#Platforms

#Listing

Government announces development roadmap for Hong Kong insurance sector

The Government has announced a development roadmap for the insurance sector to consolidate Hong Kong's status as a global risk management centre and sophisticated insurance hub.   The announcement was made at the Insurance Authority's annual Asian Insurance Forum 2022 which was held in hybrid format with the theme "Reflect, Reset, Revive for a Resilient Future", and was opened by the Chairman of the Insurance Authority, Mr Stephen Yiu.The development roadmap sets out the Government's visions and missions for developing Hong Kong's insurance sector, and discusses a number of areas, including the Government's determination to intensify cross-sector collaboration in fintech through subsidy schemes on proof-of-concept trials.  The Insurance Authority will also be working on differential underwriting, impact investment mandates, disclosure requirements and product innovation in the area of green and sustainable finance.

The Government considers that its visions and missions must be supported by four enablers – connectivity with the Mainland and global markets, attracting new talent and nurturing existing talent, adoption of fintech, and data accessibility.  [5 Dec 2022]

SCM Speech on The Role of Compliance and Ethics in Risk Management

In a keynote address at the MFPC Professional & Ethics Forum 2022, SCM Chair Dato' Seri Dr. Awang Adek emphasised three key areas that will ensure a well-prepared and thriving financial planning industry for the long term. These include maintaining high standards of professionalism, upholding duty of care and embracing innovation. He said that for the SCM, the notion of a vulnerable investor is a key priority to ensure a more inclusive capital market. He also noted that Millennials and Gen Zs are more inclined to use robo-advisory services, and that financial planners and advisers must ensure that their clients do not fall prey to unlicensed schemes and activities. [8 Dec 2022]

#Innovation

SCM remarks on cyber security

At the closing of the Capital Market Cyber Simulation 2022, SCM Chair Datuk Seri Awang Adek Husin emphasised that capital market players cannot afford to be complacent about cyber security and confirmed that the SCM places a high value on cyber resilience. 110 organisations across the capital market spectrum participated in the yearly simulation exercise, designed to simulate cyber event scenarios as close to the real situation as possible. Participants included Bursa Malaysia, brokers, asset managers, trustees, and recognised market operators such as equity crowdfunding, peer-to-peer platforms, and digital asset exchanges.  The SCM is making efforts to strengthen the capital market’s overall capabilities and ability to withstand attacks and will release a new Regulatory Framework on Technology Risk Management by early 2023. [6 Dec 2022]

SECP consults on regulatory amendments for ICO portals and digital token offerings

The SECP is consulting on a draft notice (Thai language only) regarding the revision of the ICO portal regulatory rules and related digital token offerings.  Issues covered include conflicts of interest, outsourcing requirements and restrictions, and notifications to the SEC.  Responses to the consultation are sought by 5 January 2023. [6 Dec 2022]

SEC Division of Corporate Finance publishes sample letter to companies regarding recent developments in crypto asset markets

The SEC's Division of Corporate Finance has published an illustrative letter which, in relation to recent developments in crypto assets markets, contains sample comments that the Division may issue to companies depending on their particular facts and circumstances.

The Division notes that recent events among crypto asset market participants have caused widespread disruption in those markets. Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business. The Division of Corporation Finance believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated. [8 Dec 2022]