In this regular update, we round-up FinTech-related financial services regulatory developments for the week ending 3 February 2023.
Recent updates from Herbert Smith Freehills include:
- UK Government publishes non-stablecoin cryptoasset consultation and call for evidence
- BCBS Standard on Prudential Treatment of Cryptoasset Exposures: What does this mean for banks?
- Failure to prevent offence may be introduced in the UK in the new Economic Crime and Corporate Transparency Bill
- High Court considers application of gateways for service out of the jurisdiction to cryptoassets removed from the jurisdiction
FATF Annual Report 2021 – 2022
The Financial Action Task Force (FATF) has published its Annual Report 2021-2022. The report sets out the FATF’s achievements from the last year and highlights its priorities going forward. Among the highlights from the year’s activities, the FATF notes:
DRCF: Insight paper on Web 3
The Digital Regulation Cooperation Forum (DRCF), which brings together the FCA, Competition and Markets Authority (CMA), the Office of Communications (Ofcom) and the Information Commissioner’s Office (ICO), has published an insights paper on Web 3. The insights paper sets out the following:
HMT: Consultation and CfE on regulatory regime for cryptoassets
HMT has published a consultation and call for evidence (CfE) on the future financial services regulatory regime for cryptoassets. Proposals are centred around a number of cryptoasset activities – including exchange activities, custody activities and lending activities – which will be brought into the regulatory perimeter for financial services. For each activity the consultation sets out key design features of the regime covering themes such as prudential requirements, data reporting, consumer protection, location policy and operational resilience.
The consultation paper also proposes regimes for a range of cross-cutting issues which apply across cryptoasset activities and business models, including market abuse and cryptoasset issuance and disclosures.
The CfE portion of the consultative exercise asks for views on decentralised finance (DeFi), a collection of other cryptoasset activities (including investment advice and portfolio management, post-trade activities, and crypto mining and validation), and sustainability.
Feedback is requested by 30 April 2023. Once legislation is laid, the FCA will consult on its detailed rules for the sector. [1 Feb 2023]
HMT: Consultation outcome – cryptoasset financial promotions
Alongside the consultation and CfE on a broader regime for cryptoassets, HMT has also published the consultation outcome confirming that certain cryptoasset financial promotions will be brought into the scope of the financial promotions regime. In order to accomplish this, the scope of the Financial Promotions Order (FPO) will be expanded, with a new definition for ‘qualifying cryptoassets’. In a change from the original proposals, there will be a transitional period (approximately six months) from both the finalisation and publication of the proposed FPO regime and the complementary FCA rules.
In addition, HMT’s press release explains that: ‘In order to address industry concerns about the small number of FCA authorised cryptoasset firms who can issue their own promotions, a time limited exemption will be introduced. Cryptoasset businesses that are registered with the FCA for anti-money laundering purposes will be allowed to issue their own promotions, while the broader cryptoasset regulatory regime is being introduced.’ [1 Feb 2023]
CMA: Report on recommendations for the future of Open Banking
The CMA has published Report: Trustee end of implementation roadmap report – Recommendations for the Future of Open Banking. The report sets out recommendations on how to maintain the ongoing requirements of the Retail Banking Market Investigation Order. It also sets out the views of the Chair and Trustee of Open Banking Limited (OBL), Charlotte Crosswell, on what the Joint Regulatory Oversight Committee (JROC) should consider regarding the design of the Future Entity and strategic roadmap. The Chair also outlines the progress OBL has made to prepare for transition, and the key priorities for the organisation over the coming weeks and months.
JROC is expected to publicly set out its vision for the future of Open Banking by the end of the first quarter of 2023. [1 Feb 2023]
CMA: New chair of Open Banking appointed
The CMA has announced that Marion King has been appointed as new Chair and Trustee of the Open Banking Implementation Entity (OBIE). She will succeed the current Chair and Trustee Charlotte Crosswell on 1 February 2023, the current Chair and Trustee. [1 Feb 2023]
PRA/BoE/FCA: Letter on 2022 CBEST thematic findings
The PRA, FCA and Bank of England (BoE) have published the covering letter to senior management functions of banks, insurers, asset and investment managers, and financial market infrastructures (FMIs) relating to the 2022 CBEST thematic findings. CBEST is a framework for intelligence-led penetration testing which focuses on an organisation’s security controls and capabilities when faced with a simulated cyberattack. In sharing the findings with firms, the regulators seek to ensure that: firms identify and address potential similar weakness; the senior executive team have an awareness of the issues; and support the work of the risk and internal audit functions. [31 Jan 2023]
ESMA Q&As on DLTR
The European Securities and Markets Authority (ESMA) has published updated questions and answers Q&As the implementation of DLT Pilot Regulation (DLTR) – the updates are in the chapters on transaction reporting, financial instruments reference data, and transparency. [3 Feb 2023]
ESMA: Final Report on the trading venue perimeter
ESMA has published the Final Report on the Opinion on the trading venue perimeter. This provides guidance on when certain systems and facilities qualify as multilateral and therefore should seek authorisation as a trading venue. The opinion provides clarity on the definition of multilateral systems provided in the Markets in Financial Instruments Directive (MiFID II), to account for innovation in the financial markets. In particular, Section 5 of the Opinion considers specific cases in which the trading venue perimeter may be difficult to determine, in particular the cases of new technology providers, request for quote systems and the case of pre-arranged transactions.
In terms of next steps, ESMA will work with national competent authorities (NCAs) to ensure that firms assess their systems against the ESMA Opinion and reflect whether they are operating under the appropriate authorisation. ESMA expects NCAs to require firms to take appropriate action to swiftly apply for authorisation as a trading venue where necessary. [2 Feb 2023]
ESMA: Article on AI in securities markets
ESMA has published an article on artificial intelligence (AI) in EU securities markets. The article provides an overview of AI use cases across securities markets in the EU and assesses the degree of adoption of AI-based tools. It also highlights some of the potential risks of AI in the context of securities markets. [1 Feb 2023]
EBA clarifies the application of SCA requirements to digital wallets
The European Banking Authority (EBA) has published three questions and answers (Q&As) that, jointly with three other Q&As that the EBA had published previously, clarify the application of strong customer authentication (SCA) to digital wallets under the revised Payment Service Directive (PSD2). The Q&As seek to ensure a consistent understanding of the applicable requirements. The new Q&As include:
APRA releases policy and supervision priorities for 2023
The Australian Prudential Regulation Authority (APRA) has released its policy and supervision priorities for 2023. APRA’s 2023 agenda focuses on embedding recent regulatory reforms, as well as bolstering operational resilience and ensuring entities have sufficient financial strength to act as a buffer against any emerging financial stresses. In particular, APRA identifies the following key priorities for 2023.
HKMA publishes conclusions to discussion paper on crypto-assets and stablecoins, with plans to conduct further consultation and implement regulatory regime by 2023/2024
In general, the respondents were supportive of regulating stablecoins with a risk-based and agile approach. They also broadly support the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime.
The HKMA aims to implement the regulatory regime by 2023/2024, and is considering the pros and cons between introducing a new legislation and amending existing laws.
A further consultation with more granular information about the regulatory regime will be conducted in due course with a view to hammering out the major parameters that will be covered in the draft legislation. The HKMA’s thinking includes:
HKMA publishes presentation materials for upcoming briefing to LegCo Panel on Financial Affairs on 6 February 2023
The HKMA has published presentation materials for its upcoming briefing to the Legislative Council (LegCo) Panel on Financial Affairs on 6 February 2023. Updates are provided in various areas, among others:
Hong Kong as an International Financial Centre
MAS and BDCB hold 4th Bilateral Roundtable
The Brunei Darussalam Central Bank (BDCB) and Monetary Authority of Singapore (MAS) have held their fourth BDCB-MAS Bilateral Roundtable. At the Roundtable, BDCB Managing Director, Rokiah Bakar and MAS Managing Director, Ravi Menon signed a Memorandum of Understanding (MoU) to deepen cooperation in banking and insurance supervision. The MoU will facilitate the effective supervision of banks and insurers operating across the two jurisdictions, including through information exchange and cross border on-site inspections.
BDCB and MAS also exchanged views on recent economic and financial developments, cooperation in sustainable finance to accelerate climate change mitigation and adaptation in ASEAN, as well as developments in Central Bank Digital Currencies (CBDCs) and cross-border payments. [3 Feb 2023]
SECT amends rules for quota allocation for FX transactions of digital asset fund managers
The Securities and Exchange Commission, Thailand (SECT) has amended the regulations on quota allocation for foreign exchange (FX) transactions to allow digital asset fund managers to apply for such quota allocation in the same manner as other types of digital asset business operators. The amendment is with effect from 1 February 2023. [3 Feb 2023]
BSP: PH Open Finance Pilot open for standards consultation
The Bangko Sentral ng Pilipinas (BSPs) is inviting interested BSP-supervised financial institutions (BSFIs) and third-party providers to participate in the standards consultation for the Philippine Open Finance Pilot (PH Open Finance Pilot) to inform the development of open finance technical and operational standards and arrangements. The PH Open Finance Pilot is a collaborative undertaking of financial institutions and third-party providers, participating on a voluntary basis, to explore the use of Application Programming Interface (API) technologies in the delivery of financial products and services responsive to the needs of customers.
The activities of the PH Open Finance Pilot, which will operate through the support of the International Financial Corporation (IFC), will be governed pursuant to Circular No. 1122, and monitored by the Open Finance Oversight Committee Transition Group (OFOC TG). [1 Feb 2023]
DoJ: Individual charged in $110 million cryptocurrency scheme
The Department of Justice (DoJ) has announced that a man has been charged with commodities fraud, commodities market manipulation, and wire fraud in connection with the manipulation of a decentralized cryptocurrency exchange.
According to court documents, the man engaged in a scheme to fraudulently obtain approximately $110 million worth of cryptocurrency from the cryptocurrency exchange and its customers and achieved this objective by artificially manipulating the price of certain perpetual futures contracts.
If convicted, he faces a maximum penalty of 10 years in prison for the commodities fraud count, maximum penalty of 10 years in prison for the commodities manipulation count, and maximum penalty of 20 years in prison for the wire fraud count. The Commodity Futures Trading Commission (CFTC) has initiated parallel civil proceedings. [2 Feb 2023]
Ukraine-related sanctions information
Regular updates on sanctions and other developments that may impact businesses with interests or operations in Ukraine and/or Russia are available on our FSR and Corporate Crime Notes blog here.