FinTech Global FS Regulatory Round-up - w/e 7 June 2024

In this regular post, we round-up FinTech-related financial services regulatory developments for the week ending 7 June 2024.

 

ICYMI

• Cyber security: A month in retrospect (Australia) - May 2024

 

Global

BIS: Project mBridge reaches MVP stage and invites further international participation

The Bank for International Settlements (BIS) Innovation Hub has announced that Project mBridge has reached minimum viable product (MVP) stage and is now inviting private sector firms to propose new solutions and use cases that help develop the platform.  

Project mBridge will explore the viability of a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial banks, built on distributed ledger technology (DLT) to enable instant cross-border payments and settlement. It aims to tackle some of the key inefficiencies in cross-border payments, including high costs, low speed and operational complexities. It also seeks to address financial inclusion concerns, particularly in jurisdictions where correspondent banking (which connects countries to the global financial syst #CBDC

IOSCO: Final report on market outages

The International Organisation of Securities Commissions (IOSCO) has published its final report on market outages. The final report addresses the need for improved preparedness and management of market outages to ensure market resilience and investor confidence.

It identifies key findings from recent market outages and sets out good practices to assist regulators, trading venues and market participants in preparing for, and managing, future market outages. The good practices cover five key areas: outage plans; communication plans; reopening of trading; closing auctions / closing prices; and post-outage plans. [5 June 2024] #Outages

BIS: Project Rialto – cross-border payments using wCBDC

The Bank for International Settlements (BIS) has announced that it is launching Project Rialto, which will explore how instant cross-border payments could be improved using a modular foreign exchange (FX) component combined with settlement in wholesale central bank digital currencies (wCBDC). Project Rialto is a collaboration of the BIS Innovation Hub Eurosystem and Singapore Centres in partnership with several central banks. [4 June 2024] #wCBDC

 

UK

FCA writes to MPP on 2024/25 priorities

The FCA has published its letter to the Markets Practitioner Panel (MPP) setting out the areas it expects to prioritise when engaging with the MPP and the regulator's views on the Board's interaction with the MPP in the year ahead. In this respect, the FCA Board and Executive Committee (ExCO) plan to prioritise engagement with the MPP on a number of policy and operational areas, including managing the opportunities and risks from innovation and technology including with respect to data and artificial intelligence (AI). #Risks #Data #AI

The Digital Markets, Competition and Consumers Act 2024

The Digital Markets, Competition and Consumers Act 2024 has been published; the Act received Royal Assent on 24 May 2024.

The Act includes provisions for the regulation of competition in digital markets and for the protection of consumer rights. It amends the Competition Act 1998 and the Enterprise Act 2002, and confers additional powers and responsibilities on the Competition and Markets Authority (CMA) and others. [4 June 2024] #DigitalMarkets #Competition

 

Europe

EBA issues governance regulatory products under MiCAR

The European Banking Authority (EBA) has published three regulatory products on governance, conflicts of interest and remuneration under the Markets in Crypto-Assets Regulation (MiCAR) as part of its efforts to foster a transparent, secure, and well-regulated crypto-assets market.

The package of regulatory products comprises:

• guidelines on the minimum content of the governance arrangements for issuers of asset-referenced tokens (ARTs) which specify further the various governance provisions in MiCAR, taking into account the principle of proportionality – the guidelines also clarify the tasks, responsibilities and organisation of the management body, and the organisational arrangements of issuers, including the sound management of risks across all the three lines of defence;
• draft regulatory technical standards (RTS) on the minimum content of the governance arrangements on the remuneration policy which set out a framework that seeks to ensure that remuneration policies: promote the sound and effective risk management of issuers, do not create incentives to reduce risk standards and ensure cross sectoral consistency; and
• draft RTS on conflicts of interest for issuers of ARTs which specify the requirements for policies and procedures on conflicts of interest – issuers of ARTs must implement and maintain effective policies and procedures to identify, prevent, manage and disclose conflicts of interest. [6 June 2024] #MiCAR #Regulation

ESAs and ENISA sign MoU to strengthen cooperation relating to cybersurity and DORA

The European Supervisory Authorities (EBA, EIOPA, and ESMA - the ESAs) have announced that they have concluded a multilateral Memorandum of Understanding (MoU) to strengthen cooperation and information exchange with the European Union Agency for Cybersecurity (ENISA).

The MoU formalises the ongoing discussions between the ESAs and ENISA to strengthen their already close cooperation, as a result of the Directive on measures for a high common level of cybersecurity (NIS2 Directive) and the Digital Operational Resilience Act (DORA). 

The MoU sets out the framework for cooperation and exchange of information on tasks of mutual interest, including policy implementation, incident reporting, and oversight of critical Information Communication Technologies (ICT) third-party providers. It will also promote regulatory convergence, facilitate cross-sectoral learning and capacity building on areas of mutual interest, and information exchange on emerging technologies. [5 June 2024] #DORA

ECB consults on outsourcing cloud services – DORA, CRR

The European Central Bank (ECB) has published a consultation on its new guide on outsourcing cloud services which aims to clarify both the ECB’s understanding of related legal requirements as well as its expectations for the banks it supervises.

Legislation such as the Digital Operational Resilience Act (DORA) and the Capital Requirements Directive (CRR) require banks to establish effective governance of risk stemming from outsourcing, as well as to build up frameworks for IT security and for cyber resilience. The guide outlines the ECB’s understanding of these specific rules and how they apply to the banks it supervises. It also sets out detailed supervisory expectations, drawing on risks observed in the context of ongoing supervision by joint supervisory teams, as well as on-site inspections.

Responses to the consultation are requested by 15 July 2024. The ECB will subsequently publish a feedback statement and the final guide. [3 June 2024] #DORA #Cloud

 

Australia

Court relieves fintech company from liability to pay a penalty from offering unlicensed crypto-related product

The Federal Court has relieved fintech company Web3 Ventures Pty Ltd (trading as Block Earner) from liability to pay a penalty for contraventions relating to unlicensed financial services. In an earlier judgment, the Court found that Block Earner had provided unlicensed financial services and operated an unlicensed managed investment scheme by offering its crypto-asset trading product, 'Earner'. Web3 Ventures is an AUSTRAC-registered digital currency exchange but does not hold an Australian financial services (AFS) licence. The Court, however, exercised its discretion to grant relief primarily on the basis that Block Earner had acted honestly and not carelessly when it offered the Earner product. It had actively considered whether an AFSL was required to provide the product and received legal advice before launching it. Although the contravention was serious, the Court nonetheless concluded that, having regard to all the circumstances of the case it ought fairly to be excused. ASIC is reviewing the decision, emphasising that it took the case because of its concerns that just because a product hinges on a crypto-asset does not mean it falls outside financial services law.  [4 Jun 2024] #Fintech #Crypto

 

Hong Kong

HKMA and other Project mBridge team members announce commencement of MVP stage of project

The HKMA, together with other Project mBridge team members, have announced that the project has reached the minimum viable product (MVP) stage.  This project aims to study how central bank digital currencies and innovative solutions can be applied to solve the key pain points in cross-border payments.

The project team currently consists of the Bank for International Settlements (BIS) Innovation Hub Hong Kong Centre, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, the Central Bank of the United Arab Emirates, and the HKMA.  It welcomes the Saudi Central Bank as the next full participant.

Since conducting the pilot in 2022 (see our previous update), the project team has continued to develop and enhance the prototype platform in areas including technology, legal and governance.  The four founding central banking institutions have each deployed a validating node in their own jurisdictions.  In addition, together with the BIS Innovation Hub, a fit-for-purpose governance framework and comprehensive legal framework, including a rulebook, have been formulated, with a view to matching the unique decentralised nature of the platform.  In the meantime, participating commercial banks in the four jurisdictions have used the MVP platform to conduct real-value transactions in preparation for the MVP release.

As the project enters the MVP stage, the platform will continue to be enhanced and the participation of public and private sectors will be widened.  The platform could serve as a testbed for add-on technology solutions, new use cases, and interoperability with other platforms, given its high compatibility.  Private sector firms are invited to propose solutions and use cases.  [5 Jun 2024] #CBDC

HKMA Chief Executive highlights current initiatives relating to CDI, CBDC and green finance, among others

The Chief Executive of the HKMA, Mr Eddie Yue, delivered a keynote speech (in Chinese only) at the Caixin Summer Summit 2024.  Some of the current and upcoming initiatives that Mr Yue discussed include:

• Commercial Data Interchange (CDI) – The HKMA is exploring the possibility of connecting the CDI (developed in Hong Kong two years ago) with mainland platforms to make it easier for small and medium enterprises in both places to obtain bank financing.
• Central Bank Digital Currency (CBDC) – Project mBridge is about to enter the minimum viable product phase (see 'HKMA and other Project mBridge team members announce commencement of MVP stage of project' above).  The HKMA hopes that it can solve the long-standing pain points of cross-border payments (ie, the time it takes for such payments to be made, and the high cost).  Separately, Project Ensemble aims use CBDC to facilitate interbank settlement in tokenised currencies at the wholesale level (see our previous update).  The HKMA will launch a sandbox in the third quarter of 2024 to study and test specific use cases for tokenisation. #CBDC #CDI

 

India

SEBI launches Saa₹thi2.0

SEBI has announced that it has launched the 'Saa₹thi2.0' mobile app, an updarted version of the previously-launched 'Saa₹thi' app. Saa₹thi2.0 introduces a user-friendly interface with comprehensive tools aimed at simplifying complex financial concepts. It includes financial calculators, and has modules that introduce and explain 'know your customer'(KYC)  procedures,  mutual  funds,  exchange-traded funds (ETFs),  buying  and selling  shares  on  stock  exchanges,  the investor  grievances  redressal  mechanism,  and  the Online Dispute Resolution (ODR) platform. Additionally, the app features a range of videos designed to assist investors in their personal finance planning. [3 Jun 2023] #MobileApp

 

US

FSOC hosts AI conference with Brookings Institution – Day 1 round-up

The Financial Stability Oversight Council (FSOC) has published a round-up of the first day of a conference on Artificial Intelligence (AI) and Financial Stability which it hosted in partnership with the Brookings Institution. The conference brought together public and private sector participants to discuss the evolving role of AI in the financial system and the potential implications for U.S. financial stability.

In her keynote address, Secretary of the Treasury Janet L. Yellen discussed the opportunities and risks in the financial sector associated with AI. She highlighted that FSOC's new Analytic Framework, published last November, provides helpful insights into the range of potential risks that AI can pose to the financial system. 

FSOC identified AI as a potential vulnerability in the financial system for the first time in its 2023 Annual Report. The report noted that financial institutions have rapidly adopted innovative technologies in recent years, and the use of AI had increased. FSOC highlighted the potential benefits and risks posed by AI and recommended that financial institutions, market participants, and regulatory and supervisory authorities deepen expertise and capacity to monitor AI innovation and usage and identify emerging risks. [6 Jun 2023] #AI

Treasury requests information on AI use in the financial sector

The U.S. Department of the Treasury has released a request for information on the uses, opportunities, and risks of AI in the financial services sector.  Through the request, Treasury is seeking to increase its understanding of how AI is being used within the financial services sector and the opportunities and risks presented, including:

• potential obstacles for facilitating responsible use of AI within financial institutions;
• the extent of impact on consumers, investors, financial institutions, businesses, regulators, end-users, and any other entity impacted by financial institutions’ use of AI; and
• recommendations for enhancements to legislative, regulatory, and supervisory frameworks applicable to AI in financial services.

Comments are requested within 60 days.  [6 Jun 2024] #AI

OCC: Acting Comptroller discusses AI and financial stability

The Office of the Comptroller of the Currency (OCC) has published the remarks made by Acting Comptroller of the Currency Michael J. Hsu on the systemic risk implications of artificial intelligence (AI) in banking and finance via livestream at FSOC's AI Conference.  Mr. Hsu commented on how the use and weaponization of AI pose financial stability risks, and offered thoughts on how a shared responsibility model for AI can improve its safety.  [6 Jun 2024] #AI #FinancialStability

FINRA Foundation releases report into consumers views on AI

The FINRA Investor Education Foundation has released a new report, The machines are coming (with personal finance information). Do we trust them?

According to the report, despite the growing popularity of AI, very few consumers knowingly turn to AI for information on personal finances.  Key findings include:

• Over half of the respondents consulted with financial professionals (63 percent) and friends and family (56 percent) for information when making financial decisions, while only 5 percent indicated they used AI.
• Respondents broadly trusted information about homeownership regardless of the source. However, more respondents trusted the information when they were told a financial professional provided it, while more distrusted it when AI was cited as the source.
• Roughly one-third of the respondents trusted information about project stock and bond performance, whether the source was AI (34 percent) or a financial professional (33 percent). However, white men were more likely to trust AI compared to a financial professional. The same was true among those with a higher level of self-assessed financial knowledge.
• More respondents trusted information about portfolio allocation when it came from a financial professional (37 percent) than from AI (30 percent).
• Respondents generally trusted savings and debt information whether it came from AI or a financial professional. However, a greater proportion of Black respondents trusted the information when it came from a financial professional (69 percent) compared to AI (48 percent).  [4 Jun 2024] #AI