FinTech Global FS Regulatory Round-up - w/e 24 May 2024

Global

 

CPMI: Work programme and strategic priorities 2024-25

The Committee on Payments and Market Infrastructures (CPMI) has published its work programme for 2024-25. The work programme outlines the CPMI's strategic priorities for its policy, standard-setting, implementation and analytical activities.

Key themes of the 2024–25 work programme comprise: risk management of financial market infrastructures; enhancement of cross-border payments; and digital innovation in payments, clearing and settlement. [23 May 24]

#Payments

 

UK

 

ASA: Regulation of the advertising of NFTs

The Advertising Standards Authority (ASA) has published information about the regulation of the advertising of non-fungible tokens (NFTs), which remains within the remit of the ASA; the FCA took the advertising of cryptocurrencies into its remit on 8 October 2023.

The ASA explains that its rulings for NFT advertisements are generally compatible with the view that NFTs are a type of digital claim on an asset that is 'minted' on a blockchain through a 'smart contract', but the rulings the ASA has made could also apply to digital assets that exist outside this definition.

Advertisers are encouraged to consider how Section 3 of the Committee of Advertising Practice (CAP) Code on misleadingness applies to their advertising given that NFTs are a technology that is still developing.

The publication also calls on advertisers

• to consider whether the NFTs that they are advertising are likely to be considered by consumers as a form of investment – any advertisements for NFTs likely to be viewed as investments must contain a clear and prominent statement that makes clear the risks of NFTs;
• to consider what rights are conferred to the owner of an NFT – it must be made clear that the ownership of NFTs that contain intellectual property does not necessarily confer intellectual property rights for the content of the NFT; and
• to not omit the technical requirements for consumers to obtain and hold an NFT if the absence of that information is likely to mislead. [23 May 24]

#NFTs

 

FSCP writes to FCA regarding design of FE for open banking

The Financial Services Consumer Panel (FSCP) has published its response to the Joint Regulatory Oversight Committee's (JROC’s) proposals for the design of the Future Entity (FE) for UK open banking. While the panel acknowledges the beneficial potential of open banking, it is concerned about the potential for consumer harm – particularly for those in vulnerable circumstances - if open banking is not designed, delivered and managed in an inclusive and responsible way.

The panel set out key risks to consumers, including:

• the use of open banking data to take repayments in an aggressive and/or inconsiderate way, leaving consumers without the funds they need to meet essential living costs;
• the mis-use of open banking data insights to promote unsuitable products to consumers;
• the potential for criminal use of open banking data if data is not held securely by firms.

With these risks in mind, the panel makes a number of comments on the JROC's proposals, emphasising the need for: protection before competition; consumer stakeholder representation; independent chairs; FCA oversight; levy funding; protections and redress; and, with regard to the relationship between Open Banking Ltd (OBL) and the Interim Entity, ensuring that the intercompany service agreement provides for no more than a cost pass-through of OBL’s fair and reasonable costs. [22 May 24]

#OpenBanking

 

Treasury Sub-Committee publishes letter from PSR on APP fraud

The Commons Treasury Sub-Committee on Financial Services Regulations has published a letter from Chris Hemsley, Managing Director, Payment Systems Regulator (PSR). The letter provides a progress update on the PSR's work in tackling authorised push payment (APP) fraud, and sets out the PSR's expectations of firms ahead of the 7 October deadline, including:

• investing in systems and processes to detect and prevent scams, and making use of available data and technology;
• ensuring fraud risk management is fit for purpose, and/or reassessing transaction limits to ensure that they remain within risk appetite;
• engaging with Pay.UK on the development of the reimbursement claims management system; and
• over the coming months, communicating and taking proactive steps to notify consumers of the protections available under the new policy. [22 May 24]

#APPFraud

 

BoE FPC member discusses different types of AI innovation and associated regulatory challenges

The Bank of England (BoE) has published a speech by Randall Kroszner, external member of the Financial Policy Committee (FPC), delivered at CityWeek 2024. Mr Kroszner outlined the distinction between fundamentally disruptive, versus more incremental, innovation in artificial intelligence (AI) and the different regulatory challenges associated with each. He also discussed the importance of the FPC and Financial Market Infrastructure Committee (FMIC), considering these issues in the context of both their primary and secondary objectives. 

In his concluding remarks, Mr Kroszner emphasised the importance of the FPC and FMIC, as regulators and guardians of financial stability, being properly equipped to deal with the challenges ahead by continuously building their understanding. [21 May 24]

#AI

 

FCA Practitioner Panel: Proposals for the design of the future entity for UK Open Banking

The FCA Practitioner Panel has written to the FCA regarding its proposals for the design of the future entity for UK Open Banking. Th letter highlights areas where the panel considers that further clarification is needed.

While the panel supports the creation of an interim entity for a Joint Regulatory Oversight Committee (JROC) and other 'non-Order' activity, in the interests of transparency and avoiding market confusion, it cautions against overlap between the JROC interim entity and the future entity.

Additionally, the interim entity should be appropriately insulated from potential overreach of either Open Banking Limited or the Competition and Markets Authority (CMA) (through the existing 'Order'). The panel suggests that the framework for Open Banking should be established by end of 2025 so that the original 'Order' can be formally revoked, removing elements of that risk.

While the panel supports the existing 'non-Order' JROC workstreams proposed for progression by the interim entity, it has concerns regarding the Payment Systems Regulator's (PSR's) approach to the development of Open Banking commercial Variable Recurring Payments (VRP). In the panel's view, requiring firms to offer VRPs free at the point of sale for consumers is not in the long-term best interests of consumers or the market. [20 May 24]

#OpenBanking

 

FSCP responds to FCA's SDEG report

The Financial Services Consumer Panel (FSCP) has responded to FCA’s Synthetic Data Expert Group (SDEG) report on using synthetic data in financial services. The Panel observed that the SDEG’s report analyses synthetic data issues and use cases largely from a firm perspective and does not focus sufficiently on consumer outcomes. With consumer protection in mind, the panel sets out key consumer messages that it considers lack the necessary emphasis in the SDEG’s report. These include: that synthetic data systems and procedures should be designed and delivered with consumers in mind; that consumer representation throughout the development of systems, processes and procedures related to synthetic data is essential; and that firms should only use synthetic data as a substitute for real data where it is more appropriate to do so.

Additionally, while the panel agrees with the SDEG’s assessment of the potential benefits of synthetic data, it also sets out a number of practical challenges and limitations.

The panel also believes that the insights in the SDEG report highlight the importance of fostering international collaboration between organisations, regulators, law enforcement, academics, and other subject matter experts to generate and test emerging technologies for societal benefit. [20 May 24]

#SyntheticData

 

EU

 

EBA: Report on virtual IBANs

The European Banking Authority (EBA) has published a report on the issuance of what is commonly referred to as ‘virtual IBANs’ (vIBANs).

The report observes that the industry issues vIBANs in different ways and for different purposes and national authorities diverge in interpreting and applying regulatory requirements. It also identifies resulting issues in terms of money laundering and terrorist financing (ML/TF), consumer and depositor protection, authorisation and passporting, and regulatory arbitrage, and provides recommendations on how to address them.  [24 May 2024]

#VirtualIBAN

 

ECB: Digital euro – project governance & stakeholder management

The European Central Bank (ECB) has published a slide illustrating the framework for Digital Euro project governance & stakeholder management. The slide sets out the relationship between European institutions and policymakers, market stakeholders, and the Governing Council and Executive Board.

This follows a previous presentation on the digital euro by Piero Cipollone, Member of the Executive Board of the ECB, which provides the rationale and key design choices of the digital euro and provide a project timeline (see our previous update). [20 May 24]

#DigitalEuro

 

Australia

 

National Anti-Scam Centre releases investment scam report

The Australian National Anti-Scam Centre (NASC) has released a report on efforts to combat investment scams, co-led by the Australian Competition and Consumer Commission (ACCC) and ASIC. Key outputs included a direct referral process for taking down scam advertisements, advertorials, and videos; takedowns of investment scam websites; and diversions of calls to investment scam phone numbers to recorded warnings. Efforts to combat investment scams took place in the broader context of A$1.3bn lost to scams in 2023 (down from A$1.5bn in 2022). Other improvements reported by NASC include the expansion of recorded warnings to more telecommunication providers, the development of technology for automated referrals of relevant reports to anti-scam agencies, and a proposal for data sharing trials on investment scam payments. The NASC will continue to build capability and data sharing technology until at least 2026.  [22 May 2024].

#Scams #DataSharing #Technology

 

APRA member speaks at AFIA Risk Summit on generative AI

Therese McCarthy Hockey, a board member of the Australian Prudential Regulation Authority (APRA), has spoken at the Australian Finance Industry Association’s (AFIA) 2024 Risk Summit on the topic of generative artificial intelligence. She observed that Australian financial institutions have begun to use advanced AI tools in a wider range of areas, including review of documentation, product testing, customer support and coding. She also highlighted the risks arising if generative AI is inappropriately applied, including the potential to undermine financial stability, an increase in criminal and scam activity, and risks to decision-making. Ms McCarthy Hockey suggested that APRA did not have plans to introduce new regulatory requirements, given the Australian government’s taking the lead on a national approach to AI, and given that APRA believes its prudential standards (such as on information security, managing data risk or operational risk management) are well-equipped to deal with generative AI. She further suggested that APRA broadly supported financial entities it regulated testing how AI could be integrated into their practices, where those entities have robust platforms and strong risk management track records. [22 May 2024]

#AI

 

ASIC chair appears before Australian Senate select committee on adopting AI

The chair of ASIC, Joseph Longo, has appeared before the Australian Senate’s select committee on adopting AI. In his opening statement, Mr Longo commented that AI is a key priority for ASIC, given the enormous benefits and considerable harm that might arise in a financial services context from generative AI. He also referred to current ASIC reviews of the use of AI and data analytics in banking, credit, insurance and financial advice entities, and how AI may change regulation and the practice of regulators in the financial space in the future. In the hearing, Mr Longo referred to existing regulation which covers AI, such as obligations arising under financial services licenses, but suggested that the current financial regulatory framework will require updating and refining in the future to respond to AI (without suggesting what such regulation would look like). A transcript of the hearing on 21 May 2024 is available.  [21 May 2024]

#AI #DataAnalytics

 

Hong Kong

 

SFC publishes additional forms relating to VATP operators applicable from 24 May 2024

The SFC has gazetted the following notices regarding additional forms relating to virtual asset trading platform (VATP) operators:

• A notice stating that the electronic forms published on the SFC's website and accessible through WINGS with effect from 24 May 2024 shall supersede all previous versions of such forms serving the same purposes.

• A notice stating that the additional paper forms as listed within (annual returns and a notification), which take effect on 24 May 2024, shall be used only when WINGS is not in service. 

The above are in addition to the forms gazetted by the SFC on 23 February 2024 (see our previous update).  [24 May 2024]

#VATP #VirtualAssets

 

HKMA Deputy Chief Executive shares thoughts on dual impact of innovation and what banks can expect to be on their supervisors’ radar

The HKMA's Deputy Chief Executive, Mr Arthur Yuen, delivered an opening keynote at The Asian Banker Summit, discussing the dual impact of innovation for finance, and what banks can expect to be on their supervisors’ radar, with a focus on three aspects of resilience.

While innovation can positively impact the financial industry in terms of the level and quality of service and risk management, it also introduces significant new risks that need to be managed effectively.  Discussions in this regard have intensified following US/Europe banking turmoil in March 2023, which had distinct 'tech' elements. 

Mr Yuen provided a high-level overview of what banks can expect to be on their supervisors’ radar, focussing on three aspects of resilience:

• The impact of innovation or digitalisation on liquidity risk management – Banks should critically review the adequacy of their liquidity risk management practices, including their contingency funding arrangements.  They should also dedicate greater efforts to monitoring social media.  The HKMA has done an internal review following the banking turmoil on its resolution functions and how they interact with the supervisory functions, and is working on enhancing its optionality in relation to resolution functions.

• Operational resilience – The HKMA introduced its operational resilience framework in 2022, and expects banks to confirm sufficient operational resilience no later than May 2026.  It is working closely with banks on this.  The HKMA considers that the fight against fraud needs to be a collaborative effort among regulators, law enforcement agencies, as well as the banking industry.

• Customer impact – Despite the resilience risks of innovation, Mr Yuen points out that innovation can also bring about a multitude of benefits, including those that extend beyond the customer experience.  These include supervisory technology (to enable the HKMA to conduct supervisory work in a more focused manner and reduce the supervisory burden on banks) and small and medium enterprise lending (assisted by tools such as the Commercial Data Interchange). 

The HKMA uses a risk-based and technology-neutral approach to supervising innovation, and is actively exploring with a partner organisation the establishment of a new sandbox on generative artificial intelligence (AI), which it aims to launch in the latter part of 2024.  The sandbox will provide both technical and regulatory support and enable banks to test out their generative AI solutions in a more risk-controlled environment.  [23 May 2024]

#Innovation #RiskManagement

 

HKMA Deputy Chief Executive discusses impact of AI on manpower management in banking industry and indicates intention to conduct studies in collaboration with industry

The HKMA's Deputy Chief Executive, Mr Arthur Yuen, has published an inSight article regarding the implications of artificial intelligence (AI) on manpower management in the banking industry, as well as the HKMA plans in this regard.

The emergence of AI is reshaping the nature of certain traditional job roles while giving rise to fresh new roles, such as AI engineers and data engineers. As far as generative AI is concerned, its impact may not be limited to replacing repetitive jobs alone, and there may be broader implications for manpower management in the industry and even the labour market more broadly. 

• The banking industry must proactively plan ahead for manpower development, including enhancing the professional knowledge and skill-sets of employees in respect of technology and AI.  By effectively utilising innovative technology, banks can also enhance customer experience, creating a 'triple-win' outcome for bank staff, customers and the banks themselves.  The HKMA has just issued a revised Supervisory Policy Manual module with updated guidance relating to manpower planning and training.

• Banks should also assess the impact of technological advancement and changing customer needs on the requirements of different job roles, which would help inform a reskilling plan for supporting staff to acquire new knowledge and skills over the medium to long term. Some banks have already taken steps in this direction.

Forward-looking analysis is crucial for long-term manpower planning.  The HKMA will embark on in-depth research studies in collaboration with the industry in the coming months, focusing on two important areas:

• Examining the extent of AI’s impact on various job roles within the banking industry – This would facilitate a better assessment of future manpower deployment, and formulation of corresponding strategies to support affected employees in their transition journey. 

• Assessing the future talent and skill requirements of the banking industry in the context of global financial and technological trends – In 2020, the HKMA published a study jointly with industry bodies which identified fintech, green and sustainable finance, and business related to the Guangdong-Hong Kong-Macao Greater Bay Area as three major areas with notable skill gaps that need to be bridged in the period from 2021 to 2025.  The HKMA plans to conduct the study again for publication in 2025.  This second report aims to identify the skill gaps in the next five-year horizon (ie from 2026 to 2030), so that the industry can develop and adjust talent development strategies and measures in good time to support future business growth.  [23 May 2024]

#AI

 

HKMA Executive Director (Banking Supervision) stresses the need for an even more coherent response to digital fraud

The HKMA's Executive Director (Banking Supervision), Ms Carmen Chu, delivered an opening keynote speech at the Fraud and Financial Crime Asia 2024, focusing on the need for an even more coherent response to fraud.  She highlighted that scams are becoming more sophisticated and are impacting millions of individuals and businesses globally.

• Tackling fraud remains one of the most important global and regional priorities.  Mitigating digital fraud risks requires a combination of increasing customer awareness, enhancing banks' cybersecurity arrangements, the ability to detect and respond in real time, and forward-looking supervisory and regulatory measures.

• There is considerable debate in some jurisdictions regarding reforms to legal frameworks and sharing responsibility for compensation.  Ms Chu welcomes this debate, but questions whether placing exclusive responsibility on financial institutions for compensating victims will fully solve the problem.

• There is also considerable traction globally and regionally to bring enabling sectors to the table as part of an ecosystem approach.  All parties in the system, from victims, telecommunications companies, social media platforms, to financial institutions, need to be incentivised to address this issue collectively.

• There have been positive developments contributing to a collaborative ecosystem response to fraud – such as multi-disciplinary risk assessment and management, information sharing partnerships, and tactical interventions.  An example is the suspicious proxy ID alert mechanism that was launched by all retail banks in Hong Kong in November 2023.  The HKMA is currently working with banks and law enforcement agencies to enhance these efforts, the next step being the introduction of additional fraud alerts for internet banking and intra-bank transactions, which will be launched in the coming weeks.  [21 May 2024]

#DigitalFraud

 

Government to publish roadmap on sustainability reporting and policy statement on application of AI in financial market within 2024

The Secretary for Financial Services and the Treasury, Mr Christopher Hui, attended the Hong Kong Venture Capital and Private Equity Association's Greater China' Private Equity Summit 2024 and delivered a speech discussing a number of key topics, including the following highlights:

• Wealth management – As announced in the 2024-25 Budget, the Government will establish a task force to engage with the industry on measures for further developing the asset and wealth management industry, including enhancing the preferential tax regimes for funds, single-family offices and carried interest.  Mr Hui also noted that the new Capital Investment Entrant Scheme, launched on 1 March 2024, has received a good response, including over 160 applications and thousands of enquiries. 

• Green and sustainable finance – The Financial Services and the Treasury Bureau announced a vision statement in March 2024 on developing the sustainability disclosure ecosystem in Hong Kong, aiming to be among the first jurisdictions to align local sustainability disclosure requirements with the International Financial Reporting Standards - Sustainability Disclosure Standards.  In order to achieve this, the Government will launch a roadmap within 2024 to provide a transparent and well-defined pathway on sustainability reporting for businesses in Hong Kong.

• Fintech and artificial intelligence (AI) – Mr Hui made three observations regarding the impact of AI on the economy and the financial industry, and mentioned that the Government will release a policy statement later in 2024 to outline its policy position and direction on the application of AI in the financial market.  This was also discussed by him in a speech in April 2024 (see our previous update).

• Globalisation and connectivity – Mr Hui provided an overview of the recently announced measures to further expand the mutual access between the capital markets of the Mainland and Hong Kong, enhancements to the Swap Connect, and measures to deepen the financial cooperation within the Greater Bay Area.  [20 May 2024]

#AI #Globalisation #Connectivity

 

India

 

RBI Bulletin May 2024 – DeFi article

An article in the latest RBI Bulletin focuses on the implications for the financial system of decentralised finance (DeFi).  The RBI identified the following as highlights of the article:

• Volatility in DeFi returns is far greater than traditionally higher yield providing asset classes such as equity returns.
• Major global financial institutions have direct exposure to the crypto system, although the overall exposure to total assets under management is estimated to be low.
• The empirical analysis indicates that DeFi returns and volatility in the returns are mainly driven by speculative motive.
• The empirical evidence suggests increasing volatility in DeFi with respect to the volatility of foreign exchange market and stock market.
• On account of the borderless feature of DeFi, spillover by liquidity linkages across countries is a major risk.
• As DeFi continues to evolve and mature, and its interaction with the traditional financial system grows, its utility against risks demands further analysis.  [21 May 2024]

#DeFi #Crypto

 

RBI Deputy Governor addresses key role of assurance functions in urban cooperative banks

The RBI has published a speech delivered by Deputy Governor Shri Swaminathan J, at the at the Conference of Heads of Assurance of Urban Cooperative Banks. The speech focused on the crucial role of assurance functions, namely, risk management, internal audit and compliance functions, in urban cooperative banks. Among other things, the Deputy Governor discussed: emerging risks against the backdrop of the changing landscape of banking, such as cybersecurity threats and operational disruptions; the changing dynamics of traditional risks; and the RBI's expectations of Heads of Assurance. [17 May 2024]

#Cybersecurity

 

US

 

CFTC Commissioner announces GMAC meeting

CFTC Commissioner Caroline Pham announced that a Global Markets Advisory Committee (GMAC) meeting will take place on June 4, 2024 from 10:00 a.m. to 3:00 p.m. EDT at the CFTC’s New York Regional Office. GMAC advises the CFTC on US securities competition and global regulatory challenges, which in turn affects the CFTC’s adoption of new regulations aimed at international banking conduct. At the June 4 meeting GMAC will hear a presentation from its Global Market Structure Subcommittee, its Technical Issues Subcommittee, and its Digital Asset Markets Subcommittee. [23 May 2024]

#DigitalAssetMarkets

 

FDIC publishes 2024 Risk Review

The Federal Deposit Insurance Corporation (FDIC) has published its 2024 Risk Review, which summarizes conditions in the U.S. economy, financial markets, and the banking industry. The 2024 Risk Review provides an overview of banking risks in 2023 in five broad categories: market risks that include funding and liquidity risks; credit risks in various portfolios including commercial real estate and consumer lending; operational risks; cryptoasset risks; and climate-related financial risks.

The credit risks areas discussed are commercial real estate, residential real estate, consumer, agriculture, small business, corporate debt and leveraged lending, nonbanks, and energy. The discussion of operational risks examines the potential negative impact to banks from cyber threats and illicit activity. The cryptoasset risks section discusses the FDIC’s approach to understanding and evaluating cryptoasset-related markets and activities. The discussion of climate-related financial risks focuses on the physical risk of severe weather and climate events to the banking system.  [22 May 2024]

#Cyberthreats