FINRA best interest guidance
The Financial Industry Regulatory Authority (FINRA) has published Regulatory Notice 23-20 which collates the guidance and other resources available to assist FINRA members with their compliance efforts in connection with the Securities and Exchange Commission’s (SEC)Regulation Best Interest (Reg BI).
The Notice does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations. It is, however, a useful summary of the guidance available to help broker-dealers in their understanding and implementation of the Reg BI requirements.
OCC publishes latest CRA evaluations
The Office of the Comptroller of the Currency (OCC) has published the latest list of Community Reinvestment Act (CRA) performance evaluations that became public during the period of 1 November to 30 November 2023.
The list contains national banks, federal savings associations, and insured federal branches of foreign banks that have received ratings.
Of the 42 evaluations made public this month, 29 are rated satisfactory, and 13 are rated outstanding
PRA and FCA release final rules on remuneration requirements for small and dual-regulated firms
The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have released final rules and guidance on remuneration requirements for small firms and dual-regulated firms.
PRA: Policy statement (PS) 16/23: Remuneration: Enhancing proportionality for small firms based on responses to Consultation paper (CP)5/23: Remuneration: Enhancing proportionality for small firms .
PS16/23 sets out changes to the remuneration requirements for small Capital Requirement Regulation (CRR) firms and small third-country CRR firms (small firms). The changes include defining small firms in line with the proposed simpler-regime size threshold, removing the requirement for small firms to apply rules on malus, clawback, and buyouts, introducing an expectation that small firms report material changes in their remuneration structures to supervisors, and providing clarity on how disclosure requirements apply for all proportionality levels.
The PRA has also amended the conditions in the definitions of small firms to align with the final rules setting out the (Small Domestic Deposit Taker) SDDT criteria and clarify how the criteria in those definitions apply in the group context.
PS23/17 sets out changes to its existing approach in SYSC 19D that are consistent with the changes proposed by the PRA. The changes include amending the proportionality thresholds, removing the requirement for smaller, less complex dual-regulated firms to apply the rules on malus and clawback, and updating the definitions of dual-regulated firms remuneration code staff and material business unit to align with the PRA’s definitions in respect of material risk takers. The changes make it clear that the thresholds based on a firm’s average total assets need to be met not just by each individual firm, but also by the group on a consolidated basis. The changes also explain how the various qualitative thresholds are to be applied where a firm is part of a group, making it clearer which are relevant to an individual firm within the group, and which also need to be met by the whole group.
The FCA final rules should be read in conjunction with FG23/5 General Guidance on Proportionality: The Dual-regulated firms Remuneration Code (SYSC 19D), FG23/6: General guidance on the application of ex-post risk adjustment to variable remuneration, and FG23/4: Dual-regulation firms Remuneration Code (SYSC 19D): Frequently asked questions on remuneration
Implementation dates: The changes resulting from both PSs will come into force on 8 December 2023. The PRA Rulebook and FCA Handbook amendments will apply to a firm’s performance year starting on or after 8 December 2023. The PRA supervisory statement and FCA non-Handbook guidance changes apply from the 8 December 2023.
PS15/23: PRA releases policy statement on Strong and Simple framework
The Prudential Regulation Authority (PRA) has released a policy statement (PS)15/23, The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements. This PS provides feedback on a series of consultation papers (CPs) that the PRA had previously issued.
The CPs include the following:
- CP5/22 The Strong and Simple Framework: a definition of a Simpler-regime Firm: In this consultation, the PRA proposed introducing a definition of a ‘Simpler-regime Firm’ in the PRA Rulebook.
- CP4/23 The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms: In this CP, the PRA proposed simplifications to liquidity and disclosure requirements for firms that meet the revised Simpler-regime Firms to Small Domestic Deposit Takers (SDDT) criteria.
- CP14/23 Pillar 3 remuneration disclosure: In this CP, the PRA proposed simplifying remuneration disclosure requirements for SDDTs and small firms. The final criteria for small firms are set out in PS16/23 “Remuneration: Enhancing proportionality for small firms”.
- CP16/22 Implementation of the Basel 3.1 Standards : In this CP, the PRA proposed rules and expectations for implementing the Basel 3.1 standards. The proposals also revise certain areas of the Basel III standards already implemented in the UK and would have consequential impacts on the UK implementation of the leverage ratio and elements of the liquidity and large exposures frameworks.
Based on the responses received, the PRA has made the following changes:
- Change of name: The PRA decided to rename “Simpler-regime Firm” to “SDDT” (Small Domestic Deposit Taker), “Simpler-regime Consolidation entity” to “SDDT consolidation entity”, “Simpler Regime” to “SDDT regime”, and “Simpler regime criteria” to “SDDT criteria”. The PRA considers that “SDDT” is a more appropriate name as it is more informative about the type of firm that would be in the simpler prudential regime.
- Change of the modification by consent process: The PRA decided to change the modification by consent process for consolidation groups so that the responsibility for certifying that the group meets the SDDT criteria on a consolidated basis and that the other firms in the group meet the SDDT criteria sits with the group’s CRR consolidation entity, rather than the solo entity. The SDDT consolidation entity is also responsible for notifying the PRA if the SDDT criteria cease to be met on a consolidated basis or by any firms in the group. This change only alters where the responsibility lies for certifying that the consolidated SDDT criteria are met and notifying the PRA when they cease to be met.
- Change to implementation dates: The PRA set the implementation dates as 1 January 2024 for the rules relating to the definition of an SDDT, the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with glossary changes, application rules, definitions, as well as the disclosure rules, and as 1 July 2024 for the liquidity rules. The PRA considers that the split implementation date will allow sufficient time for eligible firms to transition to the SDDT regime.
- Changes to the Statement of Policy (SoP) – Operating the Small Domestic Deposit Taker regime: Originally, information on how firms would access the SDDT regime was set out in a SoP that also covered how firms would access the TCR. The PRA has moved the content on the SDDT regime into a separate standalone SoP, as the TCR is still yet to be finalized. The text remains the same as in the previous joint SoP. The changes to the SoP are not substantive in nature and allow the PRA to finalize this SoP alongside the rules to which it refers.
Overall, the PRA considers that the changes to the final rules are not significant and will not materially alter the cost-benefit analysis presented in the CPs.
Implementation dates: The rules relating to the definition of an SDDT and the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with Glossary changes, application rules and definitions, will take effect from 1 January 2024. The rules on disclosure will also take effect from 1 January 2024. The other rules in this PS will take effect from 1 July 2024.
The PRA intends to consult on simplifications to Pillar 2 and buffer requirements for SDDTs and SDDT consolidation entities in Q2 2024.
CP23/23: PRA proposes new rules for step-in risk, shadow banking entities and connected clients
The Prudential Regulation Authority (PRA) has released a consultation paper (CP) 23/23 proposing new rules for the identification and management of step-in risk, shadow banking entities, and groups of connected clients.
The proposed rules require Capital Requirement Regulation (CRR) firms and CRR consolidation entities to regularly assess their step-in risk and transfer the European Banking Authority (EBA) guidelines on limits on exposures to shadow banking entities (SBEs) and connected clients to PRA Rules and supervisory statements (SS).
The PRA proposes to introduce new rules requiring CRR firms and CRR consolidation entities to assess their step-in risk. The accompanying SS provides guidance for firms with PRA expectations in identifying potential step-in risk and deciding, where necessary, on potential mitigating action.
The PRA proposes to transfer the EBA guidelines on limits on exposures to shadow banking into a new SS with some amendments. The PRA also proposes to amend the Large Exposures (CRR) Part of the PRA Rulebook to include definitions of ‘shadow banking entities’ and ‘excluded undertakings’.
Groups of connected clients
The PRA proposes to transfer the EBA guidelines on connected clients, with some amendments, into a new SS. The PRA also proposes to amend the Large Exposures (CRR) part of the PRA Rulebook to include definitions of ‘group of connected clients’ and ‘control’ to make the UK rulebook more coherent.
The PRA proposes that the changes take effect on Thursday 1 January 2026. Firms are expected to comply with the existing EBA guidelines on limits on exposures to SBEs and the EBA guidelines on GCCs in the meantime. The PRA also expects firms to continue to meet these expectations and requirements once these guidelines are transferred into the proposed SSs and PRA Rules.
This consultation will be open until Tuesday 5 March.
ASIC report into online traders
The Australian Securities & Investments Commission (ASIC) has published a report which summarizes the post-COVID research carried out into the growth of online retail investor participation in financial markets. The report identifies a number of findings as follows.
- High-risk offers: Some entities offered or planned products which posed inappropriate risks for retail investors, potentially exposing them to unforeseen dangers.
- Supervision of representatives: Certain online trading providers, operating as authorized representatives of Australian financial services (AFS) licensees, lacked adequate monitoring and supervision of their representatives, raising concerns about regulatory compliance.
- Misleading or deceptive statements: Some providers promoted their services using potentially misleading claims, including those related to low or zero brokerage fees, client asset safety, and regulatory oversight.
- Use of digital engagement practices: Certain platforms utilized behavioral levers and choice architecture that could unfairly influence consumer decision-making, potentially leading to trading practices resulting in losses or harm to consumers.
- Holding client assets: Some providers lacked transparency in explaining how they hold client assets, whether on trust or in pooled arrangements, making it challenging for clients to assess potential benefits and risks in choosing a trading provider.
- Holding client money: Certain providers had inadequate arrangements for handling client money, potentially breaching client money provisions and exposing clients to increased risks.
The report also outlines ASIC’s actions to resolve the issues identified.
- Disrupting proposals to offer retail securities lending products that carry significant risks, and are inappropriate, for retail clients.
- Disrupting proposals to offer trading in unregulated crypto-assets alongside trading in regulated securities, that may have led retail clients to underestimate risk or believe that investor protections apply where they do not.
- Improving licensee oversight of authorized representatives to ensure that trading providers have the expertise and supervision required to protect retail client assets and prevent misconduct.
- Engaging with online trading providers to rectify misleading or deceptive statements that may result in retail clients choosing to use a product or service based on inaccurate depictions of fees, safety or security.
- Promoting informed decision making by retail investors, by encouraging trading providers to enhance disclosure of product features and risks, including custody of client assets.
- Engaging with online trading providers to rectify their arrangements for holding client money, reducing the risks to investor funds by correctly segregating client funds from operational funds.
Eddie Yue outlines five key elements to digitize trade and finance
Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), delivered a keynote speech at the The International Chamber of Commerce Hong Kong (ICCHK) Digital Trade Forum titled “Digital Trade and Finance in Hong Kong: Reasserting Global Leadership.”
Yue began by acknowledging the significance of the event, celebrating the 25th anniversary of the ICCHK. He highlighted the importance of digitizing trade and finance in Hong Kong, given that these sectors contribute significantly to the city’s GDP.
Drawing an analogy to the five elements in Chinese culture, Yue noted five key elements of digitizing trade and finance. He proceeded to elaborate on each element.
Government: Yue emphasized the role of the government in leading digitalization efforts, citing examples like the Trade Single Window and the Digital Economy Development Committee. Open access to government data was identified as a key initiative to enhance digital trade.
Cross-border collaboration: Recognizing the interconnected nature of global trade, Yue stressed the importance of cross-border collaboration, specifically in data sharing. Memorandums of Understanding, such as the one with Abu Dhabi Global Market, exemplify efforts to establish secure frameworks for data exchange.
Digitizing banking processes: Yue underscored the need for streamlined banking processes, focusing on areas like credit approval and Know Your Customer (KYC). The integration of the HKMA’s Commercial Data Interchange (CDI) will play a pivotal role in enhancing the speed and accuracy of credit assessments with the the regions’s Companies Registry to become connected to the CDI before the end of the year.
Digitizing supply chain and manufacturing platforms: Embracing technologies like Internet of things, blockchain, and artificial intelligence (AI), Yue highlighted the importance of digitizing supply chain and manufacturing platforms to optimize operations and drive productivity gains.
Exploring advanced digital payment options: Yue discussed the significance of advanced payment options such as central bank digital currencies, programmable money, and smart contracts. Yue noted that projects like mBridge and e-HKD exemplify the HKMA’s active exploration of innovative payment solutions.
Yue stressed the interconnectedness of these five elements, illustrating how the government’s digitalization efforts lay the foundation for collaboration, banking processes, supply chain digitization, and advanced payment options. The role of CDI as a central platform for interconnectivity was again highlighted.
Eddie Yue’s speech provides a useful analysis of the digitalization of trade and finance in Hong Kong,offering a strategic roadmap with five interconnected elements. The emphasis on collaboration, government leadership, and technological innovation aligns with the broader goal of reasserting Hong Kong’s global leadership in the digital era.
A selected summary of key developments for regulated financial institutions
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