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FSB report addresses financial risk concerns with third-party relationships
On December 4, the Financial Stability Board (FSB) published a report titled “Enhancing Third-Party Risk Management and Oversight: A Toolkit for Financial Institutions and Financial Authorities,” as summarized in this press release. The report provides a toolkit that: (i) defines common terms to improve consistency among financial institutions, including “third-party service relationship,” “service provider,” and “critical service,” among others; (ii) outlines tools for financial institutions to identify critical third-party services and manage potential risks throughout the service lifecycle, onboarding and monitoring of service providers, and reporting incidents, among others; and (iii) outlines tools for financial authorities to manage third-party risks, including how to identify third-party dependencies and potential systemic risks. In preparing the report, the FSB received public feedback over the past summer regarding risk concerns stemming from outsourcing and third-party service relationships.
EU-U.S. releases statement from Joint Financial Regulatory Forum
On December 8, participants in the EU-U.S. Joint Financial Regulatory Forum met, including officials from the Treasury Department, Fed, CFTC, FDIC, SEC, and OCC, and issued a joint statement. The statement regarded ongoing dialogues from December 4-5 and focused on six themes: “(1) market developments and financial stability; (2) regulatory developments in banking and insurance; (3) anti-money laundering and countering the financing of terrorism…; (4) sustainable finance; (5) regulatory and supervisory cooperation in capital markets; and (6) operational resilience and digital finance.”
The joint statement acknowledged how risks to the EU and U.S. financial sectors have been mitigated in recent months, e.g., inflation risks, although lingering concerns remain regarding the impact of increased interest rates, high levels of private and public sector debt, and the ongoing geopolitical situations. Participants reaffirmed the significance of strong prudential standards for banks, effective resolution frameworks—particularly across borders—and robust supervisory practices, along with effective macroprudential policies. Finally, the conversations covered recent cryptoasset market changes and updates on regulatory and enforcement initiatives in the U.S.
IOSCO releases report advising country regulators on crypto asset regulation
On November 16, the International Organization of Securities Commissions (IOSCO) released a report titled “Policy Recommendations for Crypto and Digital Asset Markets” for centralized financial bodies to put forth parallel, global policies on crypto assets, including a country’s stablecoin.
IOSCO’s report aims to protect retail investors from illegal crypto-asset market activities, including regulatory non-compliance, financial crime, fraud, market manipulation, and money laundering that have led to investor losses. The report puts forth 18 policy recommendations summarized within six key themes: conflicts from firms doing too much at once; market manipulation, insider trading, and fraud; cross-border risks and regulatory cooperation; operational and technological risks; and retail access, suitability, and distribution. ISOCO maintains its principles on global regulation are within the “same activities, same risks, same regulation/regulatory outcomes.” IOSCO also mentioned it plans on releasing a second report on decentralized finance before the year’s end.
Bank of England and Financial Conduct Authority seek feedback on stablecoin regulatory proposals
On November 6, the Bank of England and the Financial Conduct Authority (FCA) requested feedback on their proposal to regulate a form of cryptocurrency known as stablecoins. Stablecoins are a cryptoasset that “maintain a stable value relative to a fiat currency by holding assets as backing” and fall within the UK Government’s plan to regulate them for future retail payment use. In addition to retail use, the Bank of England and FCA’s wish to regulate stablecoins is meant to “prevent money laundering… and safeguard financial stability.”
The Bank of England published a handy road map with similar regulators on how to best navigate rolling out new technological payment innovations, such as the digital pound. Each of the financial regulators provided two white papers: (i) the FCA’s discussion paper outlines how the FCA can regulate cryptoassets under the Financial Services and Markets Act 2000, including providing information on backing assets, custody requirements, and allowing overseas stablecoins used as a form of tender in the UK; and (ii) the Bank of England’s discussion paper examines proposed regulations for sterling-dominated stablecoins in the hopes of becoming widespread for retail use. Furthermore, this paper details proposed regulations for everyday use, including money transfers and providing digital wallets.
Both regulators’ comment period is open until February 6, 2024.
UK Government finalizes cryptoasset guidance with financial promotions
On November 2, the UK Financial Conduct Authority (FCA) finalized guidance informing individuals and firms regarding the communication and promotion of cryptoassets. The final guidance follows a consultation period that closed on August 10.
In UK law, Section 21 of the Financial Services and Markets Act 2000 prohibits any person from, in the course of business, communicating a financial promotion – an invitation or inducement to engage in investment activity – unless such person is an authorized person, the content is approved by an authorized person, or another exemption applies. The guidance describes the application of the financial promotion oversight regime to “qualifying cryptoassets” and expresses the expectation that all “cryptoasset financial promotions must be fair, clear and not misleading.”
The guidance reiterates that it “does not create new obligations for firms but relates to firms existing regulatory obligations” and that persons and firms that act in accordance with the guidance will be considered “as having complied with the rule or requirement to which that guidance relates.”
UK Government to regulate cryptoassets more strictly under a new regulatory regime
On October 30, the HM Treasury of the UK Government released a report titled “Future Financial Services Regulatory Regime for Cryptoassets,” confirming its plans to regulate digital assets more strictly. The regulatory framework includes descriptions of requirements for the admission of digital assets to a trading venue, including disclosure documents. To make cryptocurrencies subject to the FCA’s rule-making powers, the HM Treasury expanded the definition of “specified instruments” to include digital currencies, but not its definition of “financial instrument.”
The UK Government created the report based on stakeholder feedback on an extensive survey on cryptoassets. The report summarizes responses to 51 survey questions and provides explanations regarding the UK government’s intentions to proceed with the framework. The report outlines how the UK can attract more crypto businesses while also protecting consumer interests. Topics include, among other things, (i) confirmation that the proposed regime does not intend to capture activities relating to cryptoassets which are specified investments that are already regulated; (ii) information regarding the future FCA authorization process for cryptoasset activities; (iii) the UK government’s support for the use of publicly available information to compile appropriate disclosure and admission documents; and (iv) acknowledgment of the potential need for a staggered implementation for cross-venue data sharing obligations. The report recognizes the rapidly evolving nature of the crypto sector and emphasizes that “the government continues to consider that developing a fully bespoke regime outside of the FSMA framework would risk creating an un-level playing field between cryptoasset firms and the traditional financial sector.”
Any legislative changes in response to this report on how the UK Government regulates cryptoassets will occur in 2024, “subject to Parliamentary time.”
U.S.-UK partnership discuss fintech innovation
On October 30, the U.S. Treasury Department issued a joint statement on behalf of the U.S.-UK Financial Innovation Partnership (FIP) providing an overview of recent meetings where Regulatory and Commercial Pillar participants exchanged views on “topics of mutual interest and to deepen ties between U.S. and UK financial authorities on financial innovation.” As previously covered by InfoBytes, the FIP was created in 2019 as a way to expand bilateral financial services collaborative efforts, study emerging fintech innovation trends, and share information and expertise on regulatory practices. Discussions focused on four topic areas: (i) cryptoassets; (ii) payment system modernization; (iii) distributed ledger technology; and (iv) artificial intelligence. Participants recognized “the continued importance of their partnership on financial innovation as an integral component of U.S.-UK financial services cooperation.” Participants also noted a desire to continue discussing these topics ahead of the next meeting in 2024.
EBA report recommends environmental and social risk enhancements for financial sector
On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.
Treasury issues statement on U.S.-UK Financial Regulatory Working Group biannual meeting
On September 29, the Department of Treasury issued a statement on the U.S.-UK Financial Regulatory Working Group, comprised of officials from both countries, and its meeting to discuss key themes including: (i) economic stability; (ii) banking issues; (iii) non-bank sector developments; (iv) climate-related financial risks; (v) international engagement; and (vi) digital finance.
In their meeting, participants discussed international banking regulations, specifically Basel III, emphasizing the importance of consistent global implementation. They also acknowledged ongoing work by the Financial Stability Board (FSB) and Basel Committee on Banking Supervision regarding lessons learned from events in March 2023, with a focus on bank resolution. In addition, the group deliberated on the urgency of strengthening resilience within the non-bank financial intermediation (NBFI) sector. Topics included national reforms related to money-market funds, forthcoming work by the FSB to address vulnerabilities linked to leverage in the NBFI sector, and the value of globally implementing reforms in this sector to maintain financial stability. Among other topics, the group also noted progress in climate-related financial risks and sustainable finance mandates.
The group emphasized the importance of international cooperation and agreed to meet again in 2024 to continue their dialogue. Established in 2018, this biannual dialogue aims to enhance financial stability, investor protection, market efficiency, and capital formation in both countries.
UK-U.S. data bridge adequacy regulations to come into effect October 12
The EU-US Data Privacy Framework (the “Framework”) sets forth a set of principles and requirements that US organizations can comply with and, following certification, be permitted to join the Framework. On October 12, the UK extension to the Framework will come into effect following the UK digital minister’s submission of regulation and the US Attorney General’s designation of the UK as a “qualifying state.”
This data bridge and the associated framework ensures that the level of protection for UK individual’s personal data, as provided for under UK GDPR, is maintained. The FTC and U.S. Department of Transportation are the independent supervisory authorities for the UK extension, which is administered by the U.S. Department of Commerce.