In this weekly post, we round-up FinTech-related financial services regulatory developments for the week ending 4 August 2023.
- Cyber security: A month in retrospect (Australia)
- UK Commercial Court takes rare decision to refuse enforcement of arbitration award on public policy grounds in crypto case
- Talking Shop: A consumer sector podcast series – EP7: AI booms – whilst regulation looms
IIF: Response to IOSCO’s Consultation on Policy Recommendations for Crypto and Digital Asset Markets
The Institute of International Finance (IIF) has responded to the International Organization of Securities Commissions’ (IOSCO’s) consultation report on policy recommendations for crypto and digital asset markets. In its submission, the IIF advocates for a measured approach that does not unduly restrict the ability of regulated financial institutions to prudently engage in crypto-asset activities, such that associated risks will be subject to robust, sound risk management practices. Additionally, to the IIF advocates for technology neutrality as a guiding principle for regulation in this space, and agree with the principle of ‘same risk, same regulatory outcome’.
The IIF also made a number of specific observations, including::
#crypto #digitalassets #stablecoins #DLT
FCA portfolio letter: Supervisory strategy for Principal Trading Firms
The FCA has published its portfolio letter to Principal Trading Firms (PTFs) setting set out its supervisory strategy. The letter details the FCA’s view of the most important risks arising from PTFs, the drivers of those risks, the FCA’s expectations of firms and the FCA’s supervisory focus for the next two years. Among the FCA’s areas of focus over the next two years for firms in this portfolio are algorithmic trading controls and operational resilience. [4 Aug 2023]
IA: Member guidance on operational resilience and third party providers
The Investment Association (IA) has published member guidance on operational resilience and third party providers. The guidance in intended to provide firms in the investment management sector with a practical framework with which to guide their interactions with third parties around resilience. It includes a framework for third party risk management in the context of operational resilience, as well as policy developments and areas for future progress. The provision of the guidance responds to the trend towards greater outsourcing and third party service provision within the industry and the growing importance of technology providers from outside of the financial sector. [4 Aug 2023]
FOS: Guidance on helping consumers – chargeback and Section 75
The Financial Ombudsman Service (FOS) has published guidance on how firms can help consumers if they have problems with goods and services purchased using plastic cards and credit. FOS has identified that consumers are not always aware of their rights, and that firms do not always explain the application of Section 75 of the Consumer Credit Act (CCA) or chargeback clearly. Firms are urged to improve their processes around chargeback and Section 75 in order to improve outcomes and reduce consumer complaints. FOS has also updated its information for financial businesses about problems with goods and services bought using a debit card or credit. [3 Aug 2023]
#plastic #credit #chargeback #debitcard
BoE/FCA joint response: Transforming data collection
The Bank of England (BoE) and FCA have published a joint response to Data Standards Recommendations from the Joint Transformation Programme. The Data Standards Committee has made recommendations to advance the use of common data standards for the purposes of regulatory reporting; the BoE and FCA has accepted most of the recommendations, including:
The BoE and the FCA will consider funding and resource requirements prior to making any timeline commitments. An update will be provided on the scope and timelines in the next phase of the joint transformation programme in Q1 2024. [ 2 Aug 2023]
#datacollection #datastandards #metrics
JMLSG Consultation paper: Cryptoasset Transfers
The Joint Money Laundering Steering Group (JMLSG) has published a consultation paper (CP) with proposed amendments to Sector 22 on cryptoasset providers and custodian wallet providers in Part II of its Guidance. The proposed addition of Annex I to Sector 22 takes account of amendments relating to cryptoasset transfers, as introduced by The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, with respect to implementing the ‘travel rule’ under Part 7A of the MLRs, for cryptoasset transfers in the UK. The travel rule requires effective procedures to be in place to detect money laundering, terrorist financing and proliferation financing.
Comments on the proposed revisions are requested by 25 August 2023. [31 Jul 2023]
#cryptoasset #transfers #moneylaundering
EBA publishes follow-up report on ML for IRB models
The European Banking Authority (EBA) has published a follow-up report on machine learning (ML) for internal ratings-based (IRB) models. The report follows the EBA’s discussion paper, published in November 2021.
It details the current use of ML techniques for IRB models and analyses possible obstacles to the implementation of ML models in the IRB model space, based on practical issues, industry experience and the current state of regulatory developments in this area.
Given that the use of ML techniques in credit risk models may create issues beyond the scope of prudential consideration, the report also discusses the interaction with the General Data Protection Regulation (GDPR) and the Artificial Intelligence (AI) Act and calls for some clarifications in order to reduce legal uncertainty and avoid unintended consequences of the AI Act. [4 Aug 2023]
#machinelearning #IRB #MLmodels
ESMA updates Q&A on ECSPR
The European Securities and Markets Authority (ESMA) has updated its questions and answers (Q&As) on the European crowdfunding service providers for business Regulation (ECSPR). The updates can be found under the following sections: General Provisions, Provisions of crowdfunding services and organisational and operational requirements, and Authorisation and supervision of CSPs. [3 Aug 2023]
HKEX exchanges and clearing houses announce rehearsals for emergency trading system recovery and data centre failover on 19 August 2023
The SFC has issued a circular to intermediaries regarding the annual rehearsal for emergency trading system recovery on 19 August 2023 (from 11:00am to 3:10pm), covering the following processes under the Hong Kong investor identification regime:
All RRIs are encouraged to participate in the rehearsal to familiarise themselves with the contingency procedures and related operational matters upon service outage on the HKEX’s systems. Details are provided in The Stock Exchange of Hong Kong Limited (SEHK)’s circular (attaching a notification form, guidelines for the rehearsal, OTP-C activity rundown, OTP-CSC activity rundown, contingency arrangements, and rehearsal evaluation reply form).
Separately, the SEHK, the Hong Kong Futures Exchanges Limited, the SEHK Options Clearing House Limited, the HKFE Clearing Corporation Limited, the Hong Kong Securities Clearing Company Limited, and the OTC Clearing Hong Kong Limited have issued circulars on their data centre failover rehearsals, which will also take place on 19 August 2023. [28 Jul 2023]
ASIC sues eToro regarding its contract for difference product
The Australian Securities & Investments Commission (ASIC) has commenced proceedings in the Federal Court against online investment platform, eToro Aus Capital Limited (eToro), regarding its contract for difference (CFD) product. A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities or crypto-assets. ASIC is alleging breaches of design and distribution obligations and of eToro’s licence obligations to act efficiently, honestly and fairly. ASIC alleges eToro’s target market for the CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.
MAS: Revised regulatory cap on retail deposits for digital full banks and other safeguards for consumers
The Monetary Authority of Singapore (MAS) has published the written reply to a Parliamentary Question on revised regulatory cap on retail deposits for digital full banks and other safeguards for consumers. The response explains that MAS requires a digital full bank (DFB) to progressively build up its business model and risk management capabilities as it grows. This recognises that DFBs are new start-ups with non-bank parents and have no track record in banking.
Aside from the aggregate deposit cap, each DFB must comply with a cap on the deposits of an individual depositor of S$75,000. This is the prevailing limit of the deposit insurance scheme, which the DFBs are members of. The DFBs’ business operations in their initial years are also subject to other restrictions, such as not conducting proprietary trading activities, so that the DFBs focus on scaling their core businesses in a risk appropriate manner. In addition, a DFB is subject to the same prudential requirements, such as those on capital and liquidity, as other full banks in Singapore. [3 Aug 2023]
MAS: Impact of AI on trading platforms in financial markets
MAS has published the written reply to Parliamentary Question on impact of artificial intelligence (AI) on trading platforms in financial markets. The response explains that MAS requires regulated FIs to have controls in place to avoid or mitigate conflicts between their interests and those of their customers. This approach is technology-neutral and is applied across all regulated FIs.
Additionally, since 2018, MAS’ FEAT Principles have guided FIs’ responsible use of AI and data analytics (AIDA) in their products and services. FEAT is an acronym for Fairness, Ethics, Accountability, and Transparency. Among other things, these principles require FIs to ensure that AIDA adoption does not result in customers being treated less fairly than the business. [2 Aug 2023]
#AI #tradingplatforms #controls #datanalytics
SEBI: Online resolution of disputes in Indian securities market
In a circular, SEBI has announced that it is establishing an online dispute resolution portal for resolution of disputes arising in the Indian securities market. Disputes will be resolved in accordance with the circular and by harnessing online conciliation and/or online arbitration as specified. [31 Jul 2023]
#onlinedisputes #securities #onlineconciliation #onlinearbitration
SCM: Guidelines to strengthen technology risk management
The Securities Commission Malaysia (SCM) has published its guidelines on technology risk management, which aim to promote robust and sound technology risk management practices among capital market entities.
Among the requirements set out in the guidelines include the establishment and implementation of an effective technology risk framework, technology project management, technology service provider management and cyber security management by capital market entities.
The guidelines will be applicable to all capital market entities licensed, registered, approved, recognised or authorised by the SCM and are expected to come into effect in Q3 2024. [1 Aug 2023]
SEC Obtains Emergency Relief to Halt Utah-Based Company’s Crypto Asset Fraud Scheme Involving 18 Defendants
The SEC has announced that it obtained a temporary asset freeze, restraining order, and other emergency relief against a Utah based entity, its four principals, and 13 other defendants in connection with a fraudulent scheme to sell crypto asset securities to hundreds of U.S. investors that raised approximately $50 million and unspecified amounts of Bitcoin and Ether. The SEC’s complaint, unsealed on August 2 in the U.S. District Court for the District of Utah, charges the defendants in an ongoing scheme that began in March 2021 to sell unregistered securities they call “node licenses.” The complaint seeks permanent injunctive relief, the return of alleged ill-gotten gains, and civil penalties. [3 Aug 2023]
FINRA’s Crypto Asset Work
In a blog post, Jason Foye, Chief of FINRA’s Crypto Hub, provides an overview of FINRA’s crypto asset work. Foye introduces FINRA’s Crypto Hub – established in October 2022 to bring together representatives from nearly every FINRA department working as a center for managing FINRA’s regulatory work related to crypto assets. In addition to the Hub, FINRA has also established a Crypto Asset Investigations (CAI) team which conducts complex investigations related to crypto asset fraud and collaborates with FINRA’s exam program to conduct risk-based examinations of firms’ compliance with FINRA rules and federal securities laws and regulations. FINRA has also recently established a Crypto Asset Surveillance Team, which works in collaboration with the Hub and supports FINRA’s ability to conduct surveillance of the crypto asset markets. A Blockchain Lab serves as a central point within FINRA for the development of blockchain-related regulatory initiatives and helps build or source technology solutions to facilitate oversight of blockchain-related activities.
With regard to FINRA Member Firms’ Crypto Asset Activities, Foye explains FINRA requires approval by our Membership Application Program (MAP) for firms’ material crypto asset securities business lines. Firms seeking approval for such a business line must provide specified information to FINRA and meet the applicable requirements under the securities laws and FINRA rules. There are currently 26 firms approved solely to engage in crypto asset securities business. [3 Aug 2023]
#cryptoasset #cryptohub #FINRA #surveillance
SEC Charges Individual with Misappropriating Investor Funds from Unregistered Crypto Asset Securities Offerings
The SEC has announced that it has charged an individual and three unincorporated entities that he controls with conducting unregistered offerings of crypto asset securities that raised more than $1 billion in crypto assets from investors. The SEC has also filed charges of fraud for the misappropriation at least $12 million of offering proceeds to purchase luxury goods including sports cars, watches, and a 555-carat black diamond known as “The Enigma” – reportedly the largest black diamond in the world. [31 Jul 2023]