The post below was first published on our Fintech notes blog

In this regular update, we round-up FinTech-related financial services regulatory developments for the week ending 28 October 2022.

ICYMI

Recent updates from Herbert Smith Freehills include:

 

 

Global

BIS: Report on Project mBridge

The Bank for International Settlements (BIS) has published a report on Project mBridge which details the successful pilot involving the use of central bank digital currencies (CBDCs) by commercial banks for real-value transactions across borders. For the pilot, the BIS Innovation Hub Hong Kong Centre joined forces with the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates. The report explains that the pilot involved 20 banks in four jurisdictions using the mBridge platform to conduct 164 payment and foreign exchange transactions totalling over $22 million over six weeks, settled directly on the platform. [26 Oct 2022]

#CBDCs

 

UK

PDP: Progress update report 

The Pensions Dashboards Programme (PDP) has published the latest progress update report. The report sets out developments over the last six months and priorities up to April 2023. It details PDP’s work on setting up the central digital architecture for dashboards as well as working with organisations on industry readiness. The PDP will host a webinar on 3 November 2022 to discuss progress in more detail. [28 Oct 2022]

#PDP
CLLS/Law Society: Updated note on the execution of a document using an electronic signature 

The City of London Law Society (CLLS) and the Law Society have published an updated note on the execution of a document using an electronic signature. The note takes into account a number of developments since the previous 2016 note, including:

  • the publication by the Law Commission in September 2019 of its report on ‘Electronic execution of documents’ (the 2019 Law Com Report);
  • changes in practice adopted by HM Land Registry, HM Revenue and Customs and others; and
  • the more widespread use of e-signing platforms. [27 Oct 2022]
#E-signatures
BoE: Transforming data collection – Data Standards Review update

The Bank of England (BoE) has published an update on the progress of the joint programme to transform data collection from the UK financial sector. The update focuses on the Data Standards Review commissioned by the programme’s Data Standards Committee and explains how industry can provide input to the review over a period up to 6 December 2022. [26 Oct 2022]

#Data
TC: Written evidence on the crypto-asset industry 

The Treasury Committee (TC) has published the written evidence from its inquiry into the crypto-asset industry. There are 70 responses, including written evidence from the FCA and the Payment Systems Regulator. [26 Oct 2022]

#Cryptoassets
FCA: DP on competition impact of Big Tech entry and expansion in retail financial services

The FCA has published Discussion paper 22/5: The potential competition impacts of Big Tech entry and expansion in retail financial services (DP22/5). DP22/5 seeks to understand the emerging risks and opportunities of Big Tech firms’ entry and expansion into retail financial services sectors, so that the FCA can ensure that consumers and competition are protected.

Feedback is requested by 15 January 2023. [25 Oct 2022]

#BigTech 
HoC BEIS Committee: Report on post-pandemic economic growth includes call for HMG to publish Digital Markets Bill 

The Business, Energy and Industrial Strategy (BEIS) Committee has published a report on post-pandemic economic growth: state aid and post-Brexit competition policy. In the report, the BEIS urges HM Government (HMG) to publish a draft Digital Markets Bill to ‘help deter abusive practices by big tech firms’. It also highlights that consumers may be at risk if the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is not given appropriately strong powers, including to impose fines of up ‘to 10% of global annual income’.

In line with the usual timetable, a response from HMG to the Committee is due by 25 December 2022. [25 Oct 2022]

#DigitalMarkets

 

EU

EBA: Examination programme priorities for prudential supervisors and resolution authorities

The European Banking Authority (EBA) has published the European Supervisory Examination Programme (ESEP) for 2023, which identifies key topics for supervisory attention across the European Union (EU). For 2023 the key topics include: macroeconomic and geopolitical risks; operational and financial resilience; transition risks towards sustainability and digitalisation; money-laundering and terrorist financing (ML/TF) risks in the supervisory review and evaluation process (SREP) and internal controls/governance.

The EBA has also published the European Resolution Examination Programme (EREP) for 2023, which identifies key topics for resolution attention across the EU. [27 OCt 2022]

#Digitalisation
EC: Proposal for a regulation amending the SEPA Migration Regulation and the CBPR

The European Commission (EC) has published a proposal for a regulation amending the Single Euro Payments Area (SEPA) Migration Regulation and the Cross Border Payments Regulation (CBPR) as regards instant credit transfers in euro. An impact assessmentfact sheet and frequently asked questions (FAQs) have been published alongside the proposal. The proposal consists of four requirements regarding euro instant payments:

  • making instant euro payments universally available;
  • making instant euro payments affordable;
  • increasing trust in instant payments; and
  • removing friction in the processing of instant euro payments.

The aim of the proposal is to support innovation and competition in the EU payments market, as well as contribute to the EC’s wider objective on digitalisation.

The EC has also published the remarks of Commissioner McGuinness on the proposal. [26 Oct 2022]

#Payments

#Euro

#Digitalisation

EC launches first Academy for digital finance supervisory authorities

The European Commission (EC) has launched the EU Supervisory Digital Finance Academy (EU-SDFA). The project’s aim is to help build financial supervisory authorities’ capabilities and understanding with respect to the use of advanced technologies in the financial sector. The project also seeks to improve the stability of the digital financial sector and increase consumer protection by establishing the first EU-wide, cross-sectoral academy for financial sector supervisors. The academy will include 26 national financial supervisory authorities from 20 Member States that have requested the EC’s support. The project will be implemented via three-year training programmes, exchange of good practices and thematic workshops to let participants acquire new skills and tools on digital finance. It will last until October 2025. [24 Oct 2022]

#DigitalFinance

 

Australia

ASIC sues BPS Financial for alleged misleading statements about crypto-asset Qoin

ASIC has commenced civil penalty proceedings in the Federal Court against BPS Financial Pty Ltd for allegedly making false, misleading or deceptive representations and engaging in unlicensed conduct in relation to a non-cash payment facility involving a crypto-asset token called Qoin.

ASIC Deputy Chair Sarah Court said, ‘Where it falls within our remit, ASIC will take targeted action against unlicensed conduct and misleading promotion of crypto-asset financial products that could harm consumers – this is a key priority for ASIC. Crypto-assets are highly volatile, inherently risky, and complex. Every crypto-asset is different, often making it difficult to compare with each other – or anything else. This makes it crucially important that investors are provided with honest and accurate information.’ ASIC is seeking declarations, pecuniary penalties, injunctions and adverse publicity orders from the Court. The date for the first case management hearing is yet to be scheduled by the Court.  [25 Oct 2022]

#Cryptoassets

 

Hong Kong

HKMA publishes eighth issue of Regtech Adoption Practice Guide on sales practices and suitability

The HKMA has published the eighth issue of its Regtech Adoption Practice Guide, focusing on regtech solutions that help banks improve the efficiency of their sales suitability processes and fulfil the corresponding obligations amid the growing volume and complexity of products sold.

This guide series was launched by the HKMA in June 2021 as part of its regtech adoption roadmap to provide banks with detailed practical guidance on the adoption of regtech solutions (see our previous update in relation to the seventh issue).

The areas covered in the eighth issue include:

  • Key challenges faced by Hong Kong banks in relation to sales practices and suitability, benefits of leveraging regtech solutions for sales suitability and the key considerations when adopting such solutions;
  • Practical implementation guidance to help banks plan the adoption of sales practices and suitability regtech solutions, including advice on how banks can address the challenges associated with the processes of customer risk profiling, product due diligence, sales and advisory, and management supervision;
  • Two use cases on the adoption of sales practices and suitability regtech solutions (product due diligence workflow and database, and sales suitability supervision), discussing the challenges, solutions and key factors for successful regtech implementation from the perspectives of banks as well as regtech solution providers. [27 Oct 2022]
#RegTech
BISIH Hong Kong Centre, HKMA and three other central banks jointly publish report on successful cross-border CBDC pilot under Project mBridge

The HKMA has announced that it has jointly published with the Bank for International Settlements Innovation Hub (BISIH) Hong Kong Centre, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates a report titled “Project mBridge: Connecting economies through CBDC”.

In the third quarter of 2022, Project mBridge entered a six-week pilot phase, the largest cross-border central bank digital currency (CBDC) pilot to date, in which 20 banks in four jurisdictions used the mBridge platform to conduct over 160 payment and foreign exchange transactions totalling more than HK$171 million. It was among the first multi-CBDC projects to settle real-value, cross-border transactions on behalf of corporates.  The report delivers the results and key lessons learnt from the pilot.

Equipped with the lessons from earlier phases of the project, the pilot and policy, legal and regulatory analysis, Project mBridge will continue the technology build and testing. This includes improving on existing functionalities and adding new functionalities to the platform, as it continues to progress towards a minimum viable product and eventually, a production ready system. [26 Oct 2022]

#CBDC
HKMA announces official launch of CDI to facilitate secure and seamless data exchange

The HKMA has announced the official launch of the Commercial Data Interchange (CDI), which is part of its “Fintech 2025” strategy to create a next-generation data infrastructure and ecosystem for secure and seamless data exchange in Hong Kong.

The CDI aims to enhance data sharing by facilitating financial institutions in retrieving enterprises’ commercial data (in particular data of small and medium-sized enterprises (SMEs)) from public and private data providers.  Financial institutions can embrace more innovative applications to digitalise and streamline a wide range of financial processes, such as know-your-customer, credit assessment, loan approval and risk management.

During the pilot launch, the CDI registered over HK$1.6 billion in approved SME loans and attracted the participation of 23 banks with material SME business and 10 data providers.  Six key data providers with substantial SME data have joined the CDI at its official launch and will start providing consented access to banks.  The commercial data involved during this phase includes e-trade declaration, e-commerce, supply chain, payment and credit reference data.

The HKMA has also launched the CDI Framework which details the governance model and structure, to ensure all participants follow a set of rules for proper, fair and secure exchange of commercial data.

Moving forward, the HKMA will continue to broaden the spectrum of data available via the CDI, including data from government departments and analytics service providers, with a view to exploring new business use cases.

SMEs are encouraged to contact participating banks to learn more about the new CDI-related financial services offered by the banks.

In August 2022, the HKMA launched a consultation on proposed revisions to its Supervisory Policy Manual module IC-7 for sharing and use of commercial credit data through a commercial credit reference agency (see our previous update).  [24 Oct 2022]

#FinTech

#Data 

BISIH Hong Kong Centre and HKMA publish report on prototype for two-tier CBDC under Project Aurum

The Bank for International Settlements Innovation Hub (BISIH) Hong Kong Centre and the HKMA have published a report entitled “Project Aurum: A Prototype for Two-tier Central Bank Digital Currency”.

Project Aurum is a collaboration between the BISIH Hong Kong Centre, the HKMA and the Hong Kong Applied Science and Technology Research Institute. Through the creation of a technology stack comprised of (1) a wholesale interbank system in which the wholesale CBDC is issued to banks for onward distribution to retail users, and (2) a retail e-wallet system in which the retail CBDC circulates among retail users, the project parties aim to bring to life two very different types of retail tokens – intermediated CBDC (also referred to herein as CBDC-tokens) and CBDC-backed stablecoins (in short, stablecoins).

After a year of development, the prototype system was successfully completed. The present report provides an overview of the Aurum technology architecture. It is presented at a more technical level, supplemented by user interface visualisations, and should best be read in conjunction with the three e-HKD papers issued by the HKMA (see our previous updates in October 2021April 2022 and September 2022), as well as with the extensive body of foundational research issued by the Bank of International settlements.  [21 Oct 2022]

#CBDC

#Stablecoins

 

Singapore

MAS’ CSAP insights Actions to Deal with New Financial Sector Cyber Risks

The Monetary Authority of Singapore (MAS) has published insights from its Cyber Security Advisory Panel (CSAP) on how Singapore’s financial sector can address technology and cyber risks amid heightened geopolitical tensions, rapid digitalisation of financial services, and an increasingly hostile cyber threat landscape.  Key suggestions included:

  • maintaining agility of responses to cyber threats amid a worsening geopolitical climate, and particularly the need for financial institutions (FIs) to have processes in place to respond swiftly and decisively to new cyber threats;
  • adopting a holistic approach in dealing with digital banking scams including verifying and restricting the device from which a customer can access digital banking services; using biometrics as an additional form factor to authenticate high risk transactions; and leveraging artificial intelligence and machine learning for real-time fraud monitoring;
  • mitigating cybersecurity risks related to the increasing use of distributed ledger technology (DLT), and the need for FIs to continually monitor for new modes of attacks and upgrade their security controls to protect their DLT-based services;
  • preparing for emerging risks associated with quantum computing, including the need for FIs to monitor the development of international standards on post-quantum cryptography, and begin the process of identifying weaker cryptographic solutions; and
  • managing concentration risks associated with critical third-party service providers, and the need for financial authorities to work more closely together to engage public cloud service providers on their risk management controls and practices. [28 Oct 2022]
#CyberRisk

#DLT

MAS announces 65 Finalists for the 2022 Global FinTech Hackcelerator and FinTech Awards

MAS has announced the 65 finalists for the 2022 Global FinTech Hackcelerator, “Accelerating A Greener Digital Future”, and the Singapore FinTech Festival (SFF) Global FinTech Awards, “Embracing Digital, Charting the New Normal”. These Awards are among the highlights of SFF 2022, which will take place from 2 to 4 November 2022. [28 Oct 2022]

#FinTech 
MAS consultations on regulatory measures for DPT services and stablecoin-related activities

MAS has published two consultation papers proposing regulatory measures in respect of digital payment token (DPT) services to reduce the risk of consumer harm from cryptocurrency trading, and to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.

The regulatory measures for DPT services will cover risk disclosures, disallowance of credit facilities and leverage, segregation of customer assets, mitigation of conflicts, processes for complaints handling and maintaining high availability and recoverability of critical systems, amongst others.

MAS also proposes to regulate the issuance of stablecoins pegged to a single currency (SCS) whose value (in circulation) exceeds S$5m. Key requirements will include value stability, a reference currency (S$ or G10 currencies), mandatory disclosures and prudential standards including base capital and liquidity requirements. Banks in Singapore will be permitted to issue SCS. MAS–regulated SCS must be clearly labelled as such, but will continue to be treated as DPTs for the purpose of non-issuance activities.

Comments on the proposals are sought by 21 December 2022. [26 Oct 2022]

#DPTs

#Stablecoins

 

India

IFSCA MoU with T-Hub Foundation

The International Financial Services Centers Authority (IFSCA) and T-Hub Foundation, have signed a memorandum of understanding (MoU) at T-Hub’s new campus at Hyderabad. The MoU aims to put in place a framework for cooperation and understanding between IFSCA and T-Hub Foundation to collaborate in supporting and facilitating FinTech and TechFin entities. This MoU will enable cooperation and collaboration on diverse initiatives regarding FinTech. FinTechs registered with T-Hub may be facilitated to access IFSCA’s Regulatory and Innovation Sandbox and apply to the IFSCA FinTech Incentive Scheme 2022. [21 Oct 2022]

#MoU

US

SEC proposes new oversight requirements for certain services outsourced by investment advisers

The Securities and Exchange Commission (SEC) has proposed a new rule and rule amendments under the Investment Advisers Act of 1940 to prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.  The proposal would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions, and to subsequently carry out periodic monitoring of the service provider’s performance. The rule would apply to advisers that outsource certain “covered functions,” which include those services or functions that are necessary for providing advisory services in compliance with the Federal securities laws and that if not performed or performed negligently would result in material negative impact to clients.

Additionally, the proposal would require advisers to conduct due diligence and monitoring for all third-party recordkeepers and obtain reasonable assurances that the recordkeepers will meet certain standards. Finally, the proposal would require advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule.

The public comment period will remain open for 60 days after the date of issuance and publication on SEC.gov or 30 days after the date of publication in the Federal Register, whichever period is longer.  [26 Oct 2022]

#Outsourcing

 

 

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.


Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary.