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FinTech Global FS Regulatory Round-Up – W/e 22 July 2022 – Commodities/Derivatives/Stock Exchanges

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In this regular update, we round-up FinTech-related financial
services regulatory developments for the week ending 22
July 2022.


Recent updates from Herbert Smith Freehills include:


FCA/BoE/PRA: Operational resilience DP – measures to
oversee CTPs

The Bank of England (BoE), the PRA and the FCA have publishedDiscussion Paper 22/3 – Operational
resilience: Critical third parties to the UK financial
(FCA DP22/3, PRA DP3/22). The DP sets out potential
measures to oversee and strengthen the resilience of services
provided by critical third parties (CTPs) to the UK financial
sector. It also outlines how the supervisory authorities could use
the powers proposed under the Financial Services and Markets Bill,
which include:

  • a framework for identifying potential CTPs, which would inform
    the supervisory authorities’ recommendations for formal
    designation by HMT;

  • minimum resilience standards, which would apply to the services
    that designated CTPs provide to firms and financial market
    infrastructures (FMIs); and

  • a framework for testing the resilience of material services
    that CTPs provide to firms and FMIs using a range of tools,
    including but not limited to scenario testing, participation in
    sector-wide exercises, cyber resilience testing, and skilled
    persons reviews of CTPs.

Comments are open until 23 December 2022. A consultation paper
(CP) will follow in 2023, subject to the progress of the Financial
Services and Markets Bill through Parliament. [21 Jul 2022]



FCA/BoE: Transforming data collection – joint
transformation programme

The BoE and FCA have published an initial set of recommendations from the joint transformation
programme with industry to transform data collection from the UK
financial sector and their response to those recommendations.

The BoE and FCA agreed to accept all of the recommendations made
by the industry committees in principle. For some recommendations,
the BoE and FCA are keen to move to delivery of solutions
immediately. For other recommendations, the joint transformation
programme will need to explore the solutions further to understand
how they might be delivered and the associated business case. If
the BoE and FCA find that there is a business case, then they will
add such recommendations to their future roadmap for
transformation. [21 Jul 2022]

PSR response to Digital Payments Initiative

The Payments Systems Regulator (PSR) has published its response to the PSR Panel’s Digital
Payments Initiative report. The Panel’s report highlighted
reasons for cash reliance, such as lack of access to digital and
financial infrastructure or lack of digital and financial skills,
that cannot be addressed by new types of digital payment alone. The
Panel made 12 recommendations covering: open banking payments; the
PSR’s Card Acquiring Market Review; improved data collection;
digital identity; and fraud prevention and protection.

The PSR explains that despite being unable to tackle the causes
of digital exclusion, the PSR does have a role in challenging
payment systems to consider people with limited digital and
financial inclusion when designing and implementing digital payment
services. As such, that is where the PSR will focus its attention.
In its response, the PSR has considered and addressed each of the
Panel’s 12 recommendations, and also identified areas where the
PSR is seeking consumer and broader stakeholder views. Actions will
be incorporated into the PSR’s work programme where identified.
[21 Jul 2022]


HMT consults on reforming the payment’s regulatory

HMT has publishedThe Payments Regulation and the Systemic
Perimeter: Consultation and Call for Evidence
. The
consultation is published to meet the commitment to bring
systemically important entities operating within payment chains
into BoE regulation which was made by HMG in the October 2021
Payment Landscape Review. The consultation sets out:

  • the rationale for expanding the BoE’s supervision of
    systemic risk relating to payment beyond payment systems and
    associated payment service providers;

  • the principles which HMG would apply to any reforms of the
    BoE’s regulatory responsibilities, namely that of ‘same
    risk, same regulatory outcome’;

  • what an amended regulatory perimeter would involve for
    regulating risk end-to-end throughout the payment chain;

  • what criteria would apply to recognising new entities;

  • the role of HMT in determining the entities which would fall
    within the systemic regulatory regime;

  • HMG’s approach to applying the Future Regulatory Framework
    Review to the payments regulatory landscape;

  • potential reforms to the PSR’s regulatory framework;

  • how the Senior Managers & Certification Regime (SMCR) may
    apply to the sector.

Feedback is requested by 11 October 2022; HMG will respond to
the consultation in 2023. [21 Jul 2022]


SI: The Money Laundering and Terrorist Financing (Amendment)
(No. 2) Regulations 2022

The Money Laundering and Terrorist Financing (Amendment) (No. 2)
Regulations 2022 have been published (alongside an explanatory memorandum). This statutory
instrument (SI) makes some time-sensitive updates to The Money
Laundering, Terrorist Financing and Transfer of Funds (Information
on the Payer) Regulations 2017 (the MLRs), which are being made to
ensure that the UK continues to meet international standards in
relation to anti-money laundering and countering the financing of
terrorism (AML/CFT). The Regulations enter into force on 21 July
2022. The SI is limited to a number of specific measures; a
separate review of the MLRs is underway which will inform the
UK’s broader direction on AML/CFT for the longer term.

The instrument measures include inserting a new Part 7A into the
MLRs to expand the information sharing standard for wire/bank
transfers to transfers involving crypto-assets – implementing
the ‘Travel Rule’ for cryptoassets. [21 Jul 2022]


PRA speech: Operational and financial resilience

The PRA has published a speech by Nathanaël Benjamin,
Executive Director, Authorisations, RegTech, and International
Supervision on the risks and challenges for investment banks. In
his speech, Mr Benjamin highlights key risks including climate
change and new technology and notes the regulator’s
expectations in relation to financial resilience and operational
resilience. In speaking about operational resilience, Mr Benjamin
noted investment banks’ increasing moves into the digital
assets space – from providing structured products through to
trading in crypto derivative markets. He remarked that ‘before
entering materially into crypto assets, adopting Artificial
Intelligence (AI), introducing the cloud; or entering third-party
relationships, international banks active in the UK must complete
their operational resilience homework’. [20 Jul 2022]


HMT: Financial Services and Markets Bill

HMT has published the Financial Services and Markets Bill (along
with explanatory notes) as introduced to Parliament
on 20 July 2022. The Bill seeks to tailor financial services
regulation to UK markets following Brexit; to bolster the
competitiveness of the UK as a global financial centre; and to
deliver better outcomes for consumers and businesses. The Bill

  • implement the outcomes of the Future Regulatory Framework (FRF)

  • maintain the UK’s position as an open and global financial

  • harness the opportunities of innovative technologies in
    financial services;

  • bolster the competitiveness of UK markets and promote the
    effective use of capital; and

  • support the levelling up agenda, promote financial inclusion
    and consumer protection.

HMT has also published a Memorandum from Her Majesty’s Treasury to the
Delegated Powers and Regulatory Reform Committee
and a Memorandum on the European Convention on Human Rights. The
memorandums seek to address some of the key points in relation to
the Bill and to assist with its scrutiny.

We have published our initial analysis of the Bill’s
contents and its implications, here. [20 Jul 2022]


HMT: Terms of reference for Digitisation Taskforce

HMT has published the terms of reference for its Digitisation
Taskforce, which was a recommendation made in the report of the
Secondary Capital Raising Review. The Taskforce will work with
stakeholders across the financial services sector to build a broad
consensus for change. In particular it will:

  • identify immediate, and longer term, means of improving on the
    current intermediated system of share ownership;

  • eliminate the use of paper share certificates for traded
    companies and mandate the use of additional options to cheques for
    cash remittances; and

  • consider whether the arrangements for digitisation can be
    extended to newly formed private companies and as an optional route
    for existing UK private companies.

The Taskforce will also consider the use of new processes and
technologies in achieving these goals. It will develop a timetable
and plan for implementation of changes and engage with HMG and
other regulators on its progress. A public report on the
Taskforce’s progress and initial findings is due by spring
2023, and final recommendations and an implementation plan are due
by spring 2024. [20 Jul 2022]


DCMS/BEIS/Office for AI: Policy paper for consultation and AI
strategy update

The Department for Digital, Culture, Media & Sport (DCMS),
Department for Business, Energy & Industrial Strategy (BEIS),
and Office for Artificial Intelligence (AI) have published a policy paper, Establishing a pro-innovation approach to
regulating AI
and a new AI Action Plan.

The policy paper outlines HMG’s intention to adopt a
pro-innovation regulatory framework for AI technology in the UK.
The framework will be underpinned by a set of cross-sectoral
principles tailored to the specific characteristics of AI which
will be context-specific, pro-innovation and risk-based, coherent,
and proportionate and adaptable. Feedback on the policy paper is
requested by 26 September 2022; a white paper and public
consultation will follow later in 2022.

The action plan provides a summary of HMG’s progress since
the publication of the National AI Strategy in September 2021. It
describes actions taken in relation to the following three

  • investing in the long term needs of the AI ecosystem;

  • ensuring AI benefits all sectors and regions; and

  • governing AI effectively. [20 Jul 2022]



EIOPA: Peer Review on outsourcing

The European Insurance and Occupational Pensions Authority
(EIOPA) has published the report of the peer review on outsourcing. The
peer review assessed the overall maturity of the framework
implemented by national supervisory authorities (NSAs) to supervise
the outsourced activities of insurance and reinsurance
undertakings. The objective was to identify gaps, areas of
improvements and best practices to promote consistent and effective
supervision. The findings show that firms are increasingly using of
outsourcing, particularly for technology, although the level of
outsourcing varies greatly across the European Economic Area

EIOPA has identified somes areas where higher supervisory
convergence could be achieved, and is considering conducting
further analysis in three domains:

  • the outsourcing of delegated authority;

  • the definition of ‘material development’ and the
    meaning of ‘timely notification’ according to article 49(3)
    of Solvency II; and

  • the supervision of undertakings that make such an extensive use
    of outsourcing that it impacts their corporate substance (so-called
    ’empty shells’). [19 Jul 2022]


Hong Kong

HKMA and Cyberport co-organise second AMLab as part of
“Fintech 2025” strategy

As part of its “Fintech 2025” strategy, the HKMA has
co-organised its second AML Regtech Lab
(AMLab) with Cyberport (supported by Deloitte). Following its first
session on network analytics capacity held in November 2021 (see
our previous update), the second AMLab focused on
the use of “enabling technologies” such as robotic
process automation, low-code/no-code platforms and visualisation
tools to automate repetitive and time-intensive processes, managing
large volumes of data to draw insights from data analysis to be
presented in easily understood formats.

A group of five small and medium-sized banks collaborated with
technical experts to:

  • target common pain points in essential but repetitive
    anti-money laundering (AML) operations, such as customer due
    diligence at onboarding and record keeping;

  • identify applicable technology solutions to address the common
    pain points and develop business cases for the adoption of
    “enabling technologies”; and

  • gain hands-on experience with relevant technologies and explore
    potential use cases to cope with individual circumstances.

Following this second AMLab, a new Regtech Connect session took
place where technology companies in Cyberport demonstrated a range
of tools and services and engaged in open and collaborative
discussions with participating banks regarding the use of AML

The HKMA and Cyberport will continue to encourage innovation and
arrange further AMLabs on other solutions such as regtech tools for
banks’ transaction monitoring. [21 Jul 2022]



HKMA publishes seventh issue of Regtech Adoption Practice Guide

The HKMA has published the seventh issue of its Regtech Adoption Practice
Guide, focusing on regtech solutions that help banks manage
third-party monitoring and risk management (TPRM). 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 sixth

The areas covered in the seventh issue include:

  • Key challenges faced by Hong Kong banks in relation to TPRM and
    key considerations when adopting TPRM regtech solutions;

  • Practical implementation guidance to banks on the adoption of
    TPRM regtech solutions, including on strategy and operating model,
    people and capabilities, governance and organisation, and
    technology and data;

  • Two use cases on the adoption of TPRM regtech solutions
    (cloud-based TPRM platform and automated residual risk assessment),
    discussing the challenge, solution and key success factors for
    each. [18 Jul 2022]



RBI regulatory sandbox: Second cohort on cross-border payments
– exit

In a press release, the RBI has advised that four
of the entities which were in the second cohort to enter the
regulatory sandbox, which had as its theme cross-border payments,
have completed the test phase. The products were evaluated based on
mutually agreed test scenarios and expected outcomes. All were
found viable within the boundary conditions defined during testing
in the regulatory sandbox and have now exited. The products may be
considered for adoption by Regulated Entities (REs) subject to
compliance with applicable regulatory requirements. [19 Jul

SEBI files FIR on email
cyber security incident

In a press release, the Securities and Exchange
Board of India (SEBI) explained that it has filed a first
information report (FIR) for a cyber security incident on its email
system which was identified during the course of a system upgrade.
[16 Jul 2022]



CFTC announces that a federal court orders Texas man to pay
over $290,000 for manipulative and deceptive digital asset
pump-and-dump scheme

The CFTC has announced that the US District Court for the
Southern District of New York entered a consent order on 14 July
for a permanent injunction, monetary sanctions, and disgorgement of
ill-gotten proceeds against a resident of Dallas, Texas.

The consent order resolves the claims against the individual in
the CFTC action filed against the defendants on 5 March 2021 that
alleged they engaged in a manipulative and deceptive digital asset
“pump-and-dump” scheme. The order requires one defendant
to disgorge over $146,000 he received in ill-gotten gains from the
scheme and also to pay an equal amount in a civil monetary penalty.
The order also permanently prohibits him from engaging in further
violations of the Commodity Exchange Act (CEA) and CFTC regulations
as charged, and it imposes registration and trading bans. [18 Jul



CFTC extends comment period for RFI on climate-related
financial risk

The CFTC has announced an extension to the deadline for the public
comment period on a request for information on climate-related
financial risk (RFI) to October 7.

On June 2, the CFTC announced that it was seeking public
feedback on all aspects of climate-related financial risk,
including as it may pertain to the derivatives markets, underlying
commodities markets, registered entities, registrants, and other
related market participants. The RFI also seeks responses on
questions specific to data, scenario analysis and stress testing,
risk management, disclosure, product innovation, voluntary carbon
markets, digital assets, greenwashing, financially vulnerable
communities, and public-private partnerships and engagement.

The RFI was published in the Federal Register on June 8, with a
60-day comment period; it was originally scheduled to close on
August 8. [18 Jul 2022]


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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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