PRA issues new credit union rules
The Prudential Regulation Authority (PRA) has issued policy statement (PS) 11/23 outlining changes to the regulatory regime as it affects credit unions.
The PS is in response to a consultation paper published in September 2022. The changes make minor amends to the Credit Unions part of the PRA Rulebook and also introduce a new Supervisory Statement (SS) which includes:
- changes in presentation that make the SS easier to read;
- changes to the investment counterparty concentration limits to provide that they would not apply to certain investments;
- changes to the PRA’s expectations regarding the quality of credit unions’ capital base;
- clarifications of the PRA’s expectations with respect to credit unions that provide mortgages; and
- changes to the PRA’s expectations for large credit unions to carry out exit strategy planning.
FRC publishes annual enforcement review
The Financial Reporting Council (FRC) has published its Annual Enforcement Review to the end of March 2023.
During the 12 month period there were seventy cases opened in total and firms were fined more than £40m . Most of the cases arose from audit investigations and the report notes that a number of recurring themes occurred in those investigations including lack of skepticism, insufficient audit evidence, audit of inventory, audit planning, going concern, revenue recognition, disclosures and audit documentation.
CFTC Commissioner discusses amendments to improve review process for new financial products and rules
Commissioner Christy Goldsmith Romero of the Commodity Futures Trading Commission (CFTC) has been discussing the need for a more robust review process for new financial products and rules in the derivatives markets. With the rapid emergence of new technologies, government policies, and economic dynamics, the derivatives markets have witnessed a surge in innovative products and contracts, ranging from commodities to digital assets.
Commissioner Romero highlighted the significance of promoting responsible innovation while ensuring customer protection, market integrity, and transparency. She stressed that new financial products could enhance market access, reduce costs, and manage novel risks. However, she noted some of these novel derivative contracts might lack a sufficient historical track record to demonstrate resistance to manipulation. She also added: “And for digital assets, showing that the contract is derivative of commodities rather than securities is important to prevent regulatory arbitrage.”
To effectively oversee new products, the CFTC requires comprehensive information about the products’ characteristics and the underlying commodity market that determines their prices. Currently, most exchanges can self-certify that new products comply with core principles, including being resistant to manipulation. This self-certification process might allow potentially complex or novel products to enter the market before the Commission’s staff can fully assess their compliance with regulations and potential risks.
The proposed amendments would mandate a “complete” explanation of new product terms and conditions during the self-certification phase. The proposal aims to equip the Commission with better tools to fulfill its regulatory responsibilities, assess the lawfulness of new products, and evaluate associated risks. This requirement is especially crucial for digital assets and climate/environmental products, where heightened review standards are essential to safeguard market integrity and customer interests.
Furthermore, the proposal seeks to extend the heightened review framework to self-certified climate and environmental products, addressing potential challenges in the integrity of the carbon credit spot market. With growing interest in products like lithium, rare earth metals, and copper due to increased investments in electric vehicles and batteries driven by recent legislation, the CFTC aims to work with exchanges on listing standards tailored to meet specific requirements.
The amendments would also apply to self-certified rule changes by exchanges or clearinghouses. As the derivatives markets witness novel products and technologies, modifications to traditional market structures have been proposed.
The proposal also includes changes designed to decrease systemic risk and specifies when systemically important clearinghouses must notify the Commission about rule, procedure, or operational changes that may impact the level of risks presented. This approach seeks to enhance the Commission’s ability to manage systemic risk, a crucial responsibility for financial regulators.
The CFTC has now opened the proposal for public comment, inviting stakeholders to provide their insights on the rule’s potential impact on the derivatives markets and the financial industry as a whole.
FINRA reminds members of continuing education requirements
FINRA has published an Information Notice reminding firms and registered individuals of the new requirements regarding the Continuing Education (CE) Regulatory Element, including: 2023’s training assignments and completion deadline of December 31, 2023; the consequences of not completing required annual training and CE inactive status; and resources available to firms for facilitating compliance with the new annual Regulatory Element requirements.
Since 1st January 2023, FINRA Rule 1240 (Continuing Education) requires all registered persons to complete the Regulatory Element annually by the end of December. Registered persons who fail to complete their Regulatory Element by the deadline will be automatically designated as CE inactive by FINRA.
SEC proposes new rules to address conflicts of interest in predictive data analytics
The Securities and Exchange Commission (SEC) has announced proposed rules aimed at ensuring broker-dealers and investment advisers take necessary steps to address conflicts of interest arising from their use of predictive data analytics and similar technologies when interacting with investors. The rules are designed to prevent firms from prioritizing their own interests over those of investors.
In the press release, SEC Chair Gary Gensler highlighted the transformative impact of predictive data analytics and artificial intelligence in today’s age, adding that while these technologies offer valuable insights and market efficiency, they also raise concerns about potential conflicts of interest when advisers and brokers optimize their actions to serve their own interests rather than those of investors.
The proposed rules build upon existing legal standards and require firms to evaluate whether their use of predictive data analytics involves conflicts of interest that may harm investors. Firms would be obligated to eliminate or neutralize any identified conflicts to prioritize investors’ interests. However, firms can implement tools specific to the technology they use to address these risks.
To comply with the proposed rules, firms would need to develop written policies and procedures that aim to achieve compliance with the regulations and maintain related books and records.
The SEC is currently seeking public feedback on the proposed rules, which aim to protect investors from potential conflicts of interest and ensure firms uphold their obligations to act in investors’ best interests regardless of the technology employed.
CFTC approves new rule for DCOs
The Commodity Futures Trading Commission (CFTC) has approved certain reporting and information regulations applicable to derivatives clearing organizations (DCOs). These amendments, among other things, update information requirements associated with commingling customer funds and positions in futures and swaps in the same account, revise certain daily and event-specific reporting requirements in section 39.19(c), 17 CFR, and codify in an appendix the fields that a DCO is required to provide on a daily basis under § 39.19(c)(1).
New cybersecurity rule from SEC
In the accompanying Fact Sheet to its new company cybersecurity disclosures rule, the SEC notes that “disclosures of material cybersecurity incidents and cybersecurity risk management and governance have improved since the 2011 and 2018 guidance, [but] disclosure practices are inconsistent, necessitating new rules.
“The new Form 8-K Item 1.05 will require registrants to disclose any cybersecurity incident they determine to be material and describe the material aspects of the nature, scope, and timing of the incident, as well as the material impact or reasonably likely material impact of the incident on the registrant, including its financial condition and results of operations”.
A selected summary of key developments for regulated financial institutions
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