FinTech Global FS Regulatory Round-up - w/e 28 March 2024

In this regular post, we round-up FinTech-related financial services regulatory developments for the week ending 28 March 2024.

ICYMI

• High Court considers novel APP fraud 'retrieval duty' claim against both sending and receiving PSPs
• FSR GPS Podcast Series – EP10: Impact of quantum computing in financial services

Global

FATF: Status of implementation of Recommendation 15 by FATF members and jurisdictions with materially important VASP activity

The Financial Action Task Force (FATF) has published a report which sets out the status of implementation of Recommendation 15 by FATF members and other jurisdictions with the most materially important virtual asset service provider (VASP) activity. FATF expects members to consider the risks of virtual asset transfers with jurisdictions that have not taken steps towards regulating or banning VASPs.  [28 Mar 2024]

#Crypto #VASPs

UK

BoE/FCA: Transforming data collection – response to phase two industry recommendations and future strategy

The Bank of England (BoE) and the FCA have published a future strategy on transforming data collection from the UK financial sector. The publication also includes the BoE's response to industry’s recommendations.

Building on the learnings from the joint transformation programme, the BoE and FCA are now planning several projects over the next 18 months to improve data collection, contributing to five outcomes:

• data collections meet and are proportionate to regulators’ needs;
• effective and efficient internal processes for creating data collections;
• efficient processes and support for meeting regulatory obligations;
• clear and consistent data definitions; and
• modern systems to underpin data collections.

The regulators also highlighted that they are undertaking a range of specific workstreams to achieve these outcomes. The workstreams have been motivated by the recommendations from industry on how to improve data reporting identified through the joint transformation programme.  [28 Mar 2024]

#Data

BoE/FCA/PRA/PSR: Payment systems MoU

The BoE, the FCA, the PRA and the Payment Systems Regulator (PSR) have announced the completion of their review of the joint-authority memorandum of understanding (MoU). The regulators confirm that the MoU continues to set out the high-level framework for regulatory cooperation in relation to payment systems in the UK. The Financial Services (Banking Reform) Act 2013 requires the authorities to review the MoU annually.

Overall, the authorities have concluded that the MoU continues to work well. The authorities also identified areas for future co-operation and co-ordination, including revisions to the MoU regarding proposed stablecoin regulation, embedding the reforms from the Financial Services and Markets Act 2023 (FSMA 2023), as well as further enhancing the sharing of information and data. These will be undertaken during 2024 and beyond.  [28 Mar 2024]

#Stablecoins #Payments

BoE consults on changes to enforcement approach – securitisations, DSAs, wholesale cash distribution, CTPs

The BoE has published a consultation on proposed changes to its existing approach to enforcement (which includes the PRA’s approach to enforcement) as set out in Policy Statement 1/24 (PS1/24) – referred to as the Enforcement Statement of Policy and Procedure (SoPP).

The consultation proposes changes to the Enforcement SoPP to explain the approaches to using the enforcement powers introduced or extended by the Financial Services and Markets Act 2023 (FSMA 2023) or contained in the Securitisation Regulations 2024. In particular, the proposals address:

• PRA enforcement powers contained in the Securitisation Regulations 2024 in respect of persons not authorised by the PRA, and who act as an originator, sponsor or securitisation special purpose entity (SSPE) for the purposes of the regulations, and in respect of individuals;
• FSMA 2023 provisions regarding digital settlement assets (DSAs);
• new powers conferred on the BoE by FSMA 2023 with regard to wholesale distribution of cash; and
• enforcement policy with respect to critical third parties (CTPs).

Responses to the consultation are requested by 28 June 2024. The BoE intends to implement the changes resulting from this consultation in Q4 2024.

FSMA 2023 also includes new powers for the BoE to create a Senior Managers and Certification Regime (SMCR) in respect of individuals working at financial market infrastructures (FMIs), and those new powers include certain enforcement powers. The BoE will consult on those new powers at a later date.  [28 Mar 2024]

#DSAs #CTPs #Outsourcing

PSR Head of Supervision and Compliance Monitoring discusses first six months in role

The Payment Systems Regulator (PSR) has published a thought piece by Oliver Hanmer on his first six months as Head of Supervision and Compliance Monitoring at the PSR.

Mr Hanmer discussed compliance monitoring as well as the need to have a robust policy evaluation framework that sits alongside compliance monitoring to assess the success of policy development. He also described the PSR's approach to monitoring, noting that the regulator will focus most of its attention on those firms whose conduct carries the most significant risk to the outcomes the PSR is seeking.

Mr Hanmer commented on supervision and the relationship between the PSR and those it regulates. He confirmed that the PSR is proposing a more structured approach to financial and regulatory reporting. A call for views on the PSR's approach to supervision will be issued in April 2024, with a similar exercise on the compliance monitoring framework due to take place later in 2024.  [28 Mar 2024]

#Payments

AST publishes report on accelerated settlement cycle

The government-convened Accelerated Settlement Taskforce (AST) has published its report on the UK moving to an accelerated settlement cycle.

Key recommendations of the report are that:

• the UK should commit to moving to a T+1 settlement cycle;
• this move should take place no later than 31 December 2027;
• the UK and other European jurisdictions should collaborate closely to see if a coordinated move to T+1 is possible, and if other European jurisdictions commit to a transition date then the UK should consider whether it wishes to align with that timeline; and
• a Technical Group of industry experts should be set up to determine the technical and operational changes necessary for the transition to T+1 happen and how these should be implemented. This group should select a date in 2025 for these changes to be mandated, and a date before the end of 2027 for the UK transition to T+1.

HM Government (HMG) has accepted all the recommendations and has appointed Andrew Douglas to chair the Technical Group to take forward the next phase of the work. HMG has asked the Technical Group to produce a report with its findings and recommendations by the end of 2024.  [28 Mar 2024]

#T+1

BoE: H1 2024 SRS results

The BoE has published its H1 2024 systemic risk survey (SRS) results. The SRS is conducted on a biannual basis, to quantify and track market participants’ views of risks to, and their confidence in, the stability of the UK financial system. The key H1 2024 findings include that geopolitical risk and cyber-attack remain the most frequently cited risks among participants and that the share of respondents citing risks to financial stability from artificial intelligence (AI) has continued to grow. [27 Mar 2024]

#AI

FCA: Finalised guidance on financial promotions on social media

The FCA has published Finalised Guidance 24/1 (FG24/1) which clarifies the regulator's expectations of firms and others, such as influencers, communicating financial promotions on social media. FG24/1 sets out how adverts across social media channels must be fair, clear and not misleading. The FCA explains that adverts must have balance and carry the right risk warnings so that people can make well-informed financial decisions.

The FCA reminds social media influencers that promoting a financial product without approval from an FCA-authorised person with the right permission could be a criminal offence. [26 Mar 2024]

#SocialMedia

HMT: TWG report on further fund tokenisation

HM Treasury (HMT) has published the second interim report by its Technology Working Group (TWG). The second report builds on the publication of the TWG's first report in November 2023, and expands the potential use cases of fund tokenisation first highlighted in that initial report. In particular, the second report explores the use of tokens as collateral for money market funds (MMFs), and the role that tokenised funds play in a fully 'on chain' investment market that will streamline back-office functionality. [26 Mar 2024]

#Tokenisation

Europe

ESMA launches third consultation package under MiCAR and publishes final reports covering authorisation, notification, complaints handling and cooperation between regulatory authorities

The European Securities and Markets Authority (ESMA) has launched its third consultation package under the Markets in Crypto Assets Regulation (MiCAR). The package covers:

• detection and reporting of suspected market abuse in cryptoassets (regulatory technical standards (RTS));
• policies and procedures, including the rights of clients, for cryptoasset transfer services (Guidelines);
• suitability requirements for certain cryptoasset services and format of the periodic statement for portfolio management (Guidelines); and
• information and communication technology (ICT) operational resilience for certain entities under MiCAR (Guidelines),

Responses are requested by 25 June 2024. ESMA will then publish a final report based on the feedback received and will submit the draft RTS to the European Commission (EC) for endorsement by 30 December 2024.

ESMA has also published its first final report, which covers:

• information required for the authorisation of cryptoasset service providers (CASPs);
• the information required where financial entities notify their intent to provide cryptoasset services;
• information required for the assessment of intended acquisition of a qualifying holding in a CASP; and
• how CASPs should address complaints.

ESMA has submitted the final report to the EC and will provide further advice and technical guidance in this area if requested by the EC. The EC has three months to decide whether to adopt the technical standards.

ESMA has also published its final report containing draft RTS and implementing technical standards (ITS) regarding cooperation, exchange of information and notification between competent authorities, the European Supervisory Authorities (ESAs) and third countries under MiCAR. ESMA will submit the final report and technical standards to the EC which has three months to decide whether to adopt the technical standards; the EC may extend that period by one month. [25 Mar 2024]

#MiCAR #Cryptoasset

Hong Kong

HKMA Executive Director of Banking Supervision makes opening remarks regarding initiatives relating to use of DLT in financial services

At the second seminar focusing on distributed ledger technology (DLT) under the new Fintech Promotion Roadmap jointly developed by the HKMA, the SFC and the Insurance Authority, Mr Raymond Chan (Executive Director (Banking Supervision) of the HKMA), made the following comments, among others:

• Innovations such as DLT do not come without challenges, such as those relating to upskilling, data privacy assurance, volatility management, and the establishment of robust cybersecurity controls.  The HKMA considers it of utmost importance that its supervisory approach remains balanced, focusing on risks and maintaining a neutral stance towards the underlying technologies.  The HKMA's guiding principle is equivalence, that is, 'same activity, same risk, same regulation'.
• As an increasing number of banks are approaching the HKMA to ask how this guiding principle applies in practice to DLT, the HKMA plans to issue a set of non-exhaustive, non-binding guidelines in the coming weeks to outline the key considerations that it will take into account when reviewing banks' DLT applications.
• The HKMA, the SFC, the Insurance Authority and the Mandatory Provident Fund Schemes Authority are rolling out other initiatives including research projects, training sessions, and spotlight videos to support the adoption of DLT among other financial technologies by financial institutions.  [27 Mar 2024]

#DLT #Fintech #Cybersecurity

SFC and HKMA remind LCs, management companies of SFC authorised funds and AIs to prepare for shortening of securities transaction settlement cycle in US and Canada to T+1

The SFC has issued a circular to inform licensed corporations (LCs) and management companies of SFC-authorised funds that from 28 May 2024, the standard settlement cycle for transactions in US securities (such as equities, bonds, exchange-traded funds and options) will be shortened from two business days after the trade date (T+2) to one business day after trading (T+1).  Canada will similarly transition to T+1 on 27 May 2024.

This will lead to a compressed timeline for completing post-trade settlement processes, such as trade allocation, confirmation and affirmation.  The SFC is of the view that this may impact Hong Kong market participants significantly due to time zone differences.

The SFC reminds LCs to assess their readiness and ensure they are able to cope with the shortened settlement cycle, including reviewing their liquidity risk management practices and ensuring that necessary funding is available for settling US securities transactions on time, ensuring that there is sufficient staff to complete the post-trade settlement processes within the shortened timeframe, and proactively engaging and communicating with their clients who are potentially affected by the transition.

Management companies of SFC-authorised funds (particularly those with considerable exposures to US securities) are reminded to carefully assess the impact of the transition on their funds, make appropriate arrangements where necessary (such as expanding pre-funding facilities and allocating additional staff to handle the compressed settlement timeline), and giving early alerts to the SFC and investors about any intended changes, issues or untoward circumstances arising from the transition that may materially affect them (and take remedial actions accordingly).

Similarly, the HKMA has issued a circular reminding authorised institutions (AIs) to carefully assess their capability in settling the in-scope transactions on a T+1 basis and, where necessary, enhance their operations, systems and infrastructure before the shortened settlement cycle commences, especially given that the standard settlement cycle for foreign exchange transaction remains at T+2.  [27 Mar 2024]

T+1

SFC warns public of suspected virtual asset-related fraud

The SFC has warned the public of suspected virtual asset-related fraud involving the following:

• A purported virtual asset trading platform operating under the name 'EDY', which falsely claims to be affiliated to a financial institution in Hong Kong and a digital token system developed by another financial institution, when in fact they are not associated (victims have reported that they are unable to withdraw funds from the platform after making deposits);
• Entities operating under the name 'HKCEXP' (also known as HKCEXP-MAX and HKCEXP OTC Holdings Co), with victims reporting difficulties and payment of exorbitant 'tax' to process withdrawals (the SFC suspects that HKCEXP has disseminated false and misleading information regarding its status as a SFC-registered company as well as other information about its businesses, including a fake Hong Kong address on its website to mislead investors).

EDY's website is now inaccessible, and (at the SFC’s request) the Hong Kong Police Force has taken steps to block access to the relevant website of HKCEXP.  However, the public should be aware that scammers may continue to create new websites with similar domain names to mislead investors.

The SFC posted EDY, HKCEXP and their websites on the Suspicious Virtual Asset Trading Platforms Alert List on 25 March 2024.  [25 Mar 2024]

#VirtualAsset

Singapore

MAS MD: Investing in change

MAS has published the opening address by its Managing Director, Chia Der Jiun, at the Investment Management Association of Singapore (IMAS) Investment Conference 2024. Mr Jiun spoke on the importance of supporting Asia's growing investment needs; raising more interest and demand for sustainable investments; and generating business value through asset and fund tokenisation.  [27 Mar 2024]

#Tokenisation

US

SEC adopts reforms relating to investment advisers operating exclusively through the internet

The Securities and Exchange Commission (SEC) has adopted amendments to the rule permitting certain internet investment advisers to register with the SEC (the 'internet adviser exemption'). The amendments will require an investment adviser relying on the internet adviser exemption to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The amendments will also eliminate the current rule’s de minimis exception by requiring an internet investment adviser to provide advice to all of its clients exclusively through an operational interactive website and to make certain corresponding changes to Form ADV.

The amendments will become effective 90 days after publication in the Federal Register. An adviser relying on the internet adviser exemption must comply with the rule, including the requirement to amend their Form ADV to include a representation that the adviser is eligible to register with the SEC under the internet adviser exemption, by March 31, 2025. Most investment advisers will have filed their annual updating amendments to Form ADV by this date i.e., 90 days after the Dec. 31, 2024, fiscal year end). An adviser that is no longer eligible to rely on the amended exemption and does not otherwise have a basis for registration with the Commission must register in one or more states and withdraw its registration with the SEC by filing a Form ADV-W by June 29, 2025.

A factsheet accompanies the announcement of the reforms.  [27 Mar 2024]

#DigitalInvestment

CFPB warns remittance transfer providers on advertising claims

The Consumer Financial Protection Bureau (CFPB) has issued a new circular warning remittance transfer providers that false advertising about the cost or speed of sending a remittance transfer can violate federal law. The circular highlights several marketing practices relating to sending international money transfers that may violate the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices. This prohibition is enforced by the CFPB, states, and other regulators. Guidance in the circular applies both to traditional providers of international money transfers and to "digital wallets" that offer the capability to send money internationally from the U.S.  [27 Mar 2024]

#DigitalWallets

CFTC: Civil enforcement action filed against operators of digital asset exchange

The Commodity Futures Trading Commission (CFTC) has announced that it has filed a civil enforcement action in the U.S. District Court for the Southern District of New York charging the operators of a centralized digital asset exchange, with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations.  The CFTC alleges that the exchange illegally dealt in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions; solicited and accepted orders for commodity futures, swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a futures commission merchant (FCM); failed to diligently supervise its FCM activities; operated a facility for the trading or processing of swaps without registering with the CFTC as a swap execution facility (SEF) or designated contract market (DCM); and failed to implement an effective customer identification program (CIP).

The CFTC seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations, as charged.  [26 Mar 2024]

#DigitalAsset

FTC: 24 ICN participants issue joint statement on increasing tech capacity to keep pace with increasing digitization of the economy

The Federal Trade Commission (FTC) and other member agencies of the International Competition Network (ICN) have jointly issued a statement about how regulatory agencies can increase their tech capacity to keep pace with the increasing use of technology across industries.  The joint statement follows the first-ever Technology Forum convened March 25-26 in Washington DC by competition and consumer protection authorities who participate in the ICN.

Separately, a number of U.S. federal and state agencies, including the FTC and CFPB, have released agency-specific action statements on tech capacity. These statements reflect concrete actions to increase tech capacity, including actively hiring technologists, which will help the agencies enforce existing laws and design remedies that work for consumers, workers, small businesses, and others.

The FTC has also released a new staff report that details the evolution of the agency’s work to expand its technological expertise and how the agency’s Office of Technology, created in early 2023, applies its subject matter expertise to assisting the agency’s enforcement and regulatory work.  [26 Mar 2024]

#TechCapacity

CFPB joins federal and state agencies in coordinated statements on tech & enforcement capability

The Consumer Financial Protection Bureau (CFPB) has joined other federal and state agencies to release agency-specific action statements on tech capacity. The CFPB explains that the statements reflect concrete actions to increase tech capacity, including actively hiring technologists – which will help enforce the laws on the book and design remedies that work for consumers, workers, small businesses, and others in the digital era.

The CFPB's statement highlights several goals which the agency is focusing on, including: embedding more technologists across the agency's core functions; conducting research and analysis on the application of emerging technologies; and advancing competitive marketplaces and assisting compliant firms.  [26 Mar 2024]

#TechCapacity

CFTC Commissioner Johnson addresses SARB FinTech Summit – crypto, AI, tokenized environmental commodities

The CFTC has published the opening remarks of Commissioner Kristen N Johnson at the South African Reserve Bank FinTech Summit. The Commissioner discussed: the regulatory landscape for cryptoassets in the U.S., including the CFTC's enforcement agenda; artificial intelligence (AI), including the challenges which GenAI may present to existing regulations; and the further developments in certain sectors of the economy, e.g., tokenized environmental commodities such as voluntary carbon credits (tokenized VCCs).  [25 Mar 2024]

#AI #Crypto #Tokenization #GreenTech