Legal Shorts 13.12.19 including FATF speech outlines areas of focus

FCA publishes forms and other materials now extended SM&CR in force

On 9 December 2019, the FCA published a press release announcing the extension of the senior managers and certification regime (SM&CR) regime to around 47,000 solo-regulated firms (replacing the approved persons regime (APR) for those firms).

The FCA describes the extension as a key step to creating a culture across financial services where individuals step forward to take accountability for their own actions and competence.

The FCA has also published the following materials relating to the extended SM&CR:

  • Senior managers regime: Statement of responsibilities for solo-regulated firms (Annex 10D, chapter 10C, of the FCA’s Supervision manual (SUP))
  • Short Form A: solo-regulated firms (including European Economic Area (EEA) and third-country firms) (Annex 3D, SUP10C).
  • Notification procedures for changes to the management body for non-SMF directors.
  • Form E: internal transfer of a person performing a controlled function for solo-regulated firms (including EEA and third-country firms) (Annex 7D, SUP 10C).
  • Form O: Notification of change to firm classification under the senior managers & certification regime (rule 23.2R of the FCA’s Senior Management Arrangements, Systems and Controls sourcebook (SYSC)).
  • Long Form A: solo-regulated firms (including EEA and third-country firms) (Annex 3D, SUP 10C).
  • MiFID members of the management body and key function holders: Article 4 Information Form (SMR).
  • Form H: notification of disciplinary action relating to conduct rules staff (other than SMF managers) (Annex 7R, SUP 15).

By 9 December 2020, solo-regulated firms will need to ensure that all relevant staff are trained on the conduct rules, and that all staff in certified roles are fit and proper to perform their roles and are issued with the appropriate certificate. They will also need to submit data to the FCA for the directory of key people working in financial services. As this will take time, the FCA encourages firms to start preparing now.

Among other things, now that the extended SM&CR is in force and the forms have been published, fully-authorised claims management companies (CMCs) must start applying for individuals to be authorised to perform senior management functions (SMFs).

FATF speech outlines areas of focus

On 11 December 2019, the Financial Action Task Force (FATF) published a speech, given by David Lewis, FATF Executive Secretary, outlining some key areas of focus.

Points of interest made by Mr Lewis include the following:

  • The FATF’s mutual evaluations show that in nearly 100 countries evaluated, fundamental or major improvements are needed in the preventive measures taken by banks, money service businesses (MSBs) and others in the regulated sector. Although compliance costs have soared, with around EUR84 billion spent annually in the EU, confiscation rates remain as low as 1% of the proceeds of crime estimated to be available for money laundering. Despite the increasingly high volumes of suspicious activity reports (SARs), law enforcement agencies only report, or record, a small fraction as useful.
  • There needs to be a clearer idea of what the right efficient and effective outcomes look like. The FATF is seeing increasing numbers of good examples that are leading to the right outcomes, or with the potential to do so. This includes public-private partnerships that go beyond merely sharing typologies, to sharing actionable intelligence (without breaching data protection and privacy rules). Also, new technologies offer great promise, from artificial intelligence (AI) and distributed ledgers to privacy-enhancing technologies (such as homomorphic encryption).
  • The FATF expects to publish its final guidance on the use of digital identity (ID) in the coming months (see Legal update, FATF consults on draft guidance on digital identity). To fully realise these efficiencies, banks will need to rely more on others, and their technology. To support this, the FATF encourages its members to reconsider where legal liability lies when relying on others.

Because the mutual evaluations have revealed that only 25% of countries have effective supervision, this year the FATF is using its convening power to bring together supervisors from around the world. In November 2019, it convened 100 supervisors from 40 countries to ensure they understand the FATF’s expectations, and to share the challenges they face and discuss how these challenges can be overcome. This ranges from developing a risk-based approach to supervision, to international co-operation, and better use of technology for more efficient supervision (SupTech).

FSB report on BigTech in finance

On 9 December 2019, the Financial Stability Board (FSB) published a report assessing BigTech market developments and the potential implications for financial stability.

BigTech firms are large technology companies with extensive customer networks, such as Amazon, Facbeook and Google. Some BigTech firms use their platforms to facilitate the provision of financial services. They can achieve scale very quickly through advantages such as brand recognition, proprietary data and state-of-the-art technology.

In the report, the FSB analyses the provision of financial services by BigTech firms, its drivers and the implications for financial stability. It considers the nature and scale of these firms’ activities in different financial services, jurisdictions and financial sectors as well as their business models. It also examines the potential future response of traditional financial institutions and provides a qualitative assessment of the benefits and risks of BigTech activities in finance.

The FSB concludes that policymakers must keep ahead of BigTech developments and their implications for systemic risks. It suggests that policymakers should consider three particular issues:

  • Provision of financial services by BigTech firms. The FSB suggests that authorities may wish to complement entity-based regulatory approaches with activity-based approaches. They may also wish to consider the relative size and risk of large BigTech and smaller FinTech firms and ensure that regulation is proportionate to the relative size and risk of these firms.
  • Interlinkages between BigTech firms and financial institutions. Authorities should monitor linkages between BigTech firms and traditional financial institutions, including the impact of BigTech firms’ activities on financial institutions’ ability to generate capital through retained profits. Some jurisdictions may need to co-ordinate the supervision of BigTech firms’ financial activities with the supervision of financial institutions’ use of third-party services from these firms.
  • Data rights. Authorities may wish to consider whether, and the degree to which, they should promote the mobility of data, in the light of BigTech firms’ ability to leverage customer data. The FSB notes that regulatory obligations for banks to share relevant data with new entrants, as envisaged in open banking, may enhance competition but may also pose new risks.

The report follows on from the FSB’s February 2019 report on FinTech market developments and the potential implications for financial stability.

EBA action plan on sustainable finance

On 6 December 2019, the EBA published its action plan on sustainable finance.

In the action plan, the EBA sets out its proposed timings for delivering on sustainable finance mandates set out in revised EU legislation:

  • Strategy and risk management. The EBA intends to publish a discussion paper in the second or third quarters of 2020 on a uniform definition of environmental, social, and governance (ESG) risks, reflecting the mandate in Article 98(9) of the CRD IV Directive (2013/36/EU) as amended by the CRD V Directive ((EU) 2019/878). The EBA intends to complete the report before the deadline of 28 June 2021. It may also issue guidelines on the uniform inclusion of ESG risks in the supervisory review and evaluation process (SREP) and make related amendments to existing EBA guidelines.
  • Key metrics and disclosure. The EBA is developing technical standards to implement disclosure requirements mandated by the Capital Requirements Regulation (575/2013) (CRR), as amended by the CRR II Regulation ((EU) 2019/876). The EBA intends to finalise these standards, which include requirements on ESG disclosures, in 2021, following consultation in 2020.
  • Stress testing and scenario analysis. The EBA intends to develop a climate change stress test, with the aim of identifying banks’ vulnerabilities to climate-related risk, reflecting a mandate in Article 23 of the EBA Regulation (1093/2010), as amended by the European System of Financial Supervision (ESFS) Omnibus Regulation (2017/0230(COD)). It may undertake a sensitivity analysis for climate risks in the second half of 2020. It will also provide guidance on bank’s own stress testing as part of a report mandated by Article 98 of the CRD IV Directive on criteria to assess the impact of ESG risks.
  • Prudential treatment. The EBA is mandated by new Article 501c of the CRR to consider the merits of a dedicated prudential treatment of exposures related to sustainable finance-related assets or activities. It intends to publish a discussion paper on this between 2022 and 2024 ahead of the final report required by June 2025.

The EBA also intends to publish in December 2019 advice requested by the Commission on short-term pressures that financial market participants may exert on corporate managers.

The action plan follows the specific initiatives in the European Commission’s March 2018 action plan on sustainable finance for the European Supervisory Authorities (ESAs)

Political agreement reached on Regulation on sustainable investment framework

On 6 December 2019, the European Commission updated its webpage on the technical expert group on sustainable finance (TEG) to announce that on 5 December 2019 the EU co-legislators (that is, the European Parliament and the Council of the EU) reached a common understanding on the proposed Regulation on the establishment of a framework to facilitate sustainable investment (2018/0178(COD)) (also referred to as the Taxonomy Regulation). An article published on indicates that the Parliament and the Council have reached political agreement on the Regulation.

The European Parliament announced its adoption of the proposed Regulation at first reading in March 2019 (see Legal update, European Parliament adopts first reading position on proposed Regulation on sustainable investment framework). The Permanent Representatives Committee (COREPER) of the Council of the EU approved the Council’s negotiating mandate on the Regulation in September 2019 (see Legal update, COREPER approves Council negotiating mandate on proposed Regulation on sustainable investment framework).

The text of the version of the Regulation on which agreement was reached has not yet been published.

The proposed Regulation establishes an EU-wide classification system, or taxonomy, intended to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable.