CUBE RegNews:
13^th October

FCA outlines asset management priorities

In a speech given at the Investment Association annual dinner, Financial Conduct Authority (FCA) chairman Ashley Alder has outlined the UK regulator’s priorities for the asset management sector. 

Alder began his speech by stressing the need for proportionality across regulation and hence noted that the regulator would not be moving ahead with consolidating rules for different types of asset managers as had been suggested in the discussion paper of February 2023. 

He moved on to discuss three priorities. The regulator is considering the following. 

Alternative fund managers 

• Using a set of consistent rules across all managers of alternative funds, rather than having two different categories of manager with different rules. 
• Making the regime more proportionate depending on the nature and scale of a firm’s business. 
• Allowing full-scope alternative fund managers to carry out other activities within the same legal entity. 
• Easing some of the reporting requirements on managers. 

Retail funds 

• Making a clearer distinction between the requirements that apply to managers of authorised retail funds and managers of alternative investment funds. This should simplify the retail rules for non-UCITS funds. 
• The rebranding non-UCITS funds to help rationalise the regime. 

Technological innovation 

• A blueprint for fund tokenisation, which is being developed by the Technology Working Group under the Treasury’s Asset Management Taskforce. 
• A tech-sprint with the industry to test policy initiatives and the rule changes needed to support work on fund tokenisation. 
• The Direct2Fund proposal, which could make the UK fund dealing model and interactions with investors far more efficient. 

Alder finished by confirming consultations on amending the AIFMD regime and re-evaluating the AIFMD rules for non-UCITS retail funds in 2024, and in 2025 a review of the regulatory reporting regime. 

MAS guidance for fund managers 

The Monetary Authority of Singapore (MAS) has published new guidance for fund management companies which sets out MAS’ supervisory expectations of effective liquidity risk management (LRM) frameworks and practices and includes key findings from the MAS thematic liquidity inspections and review of prospectuses, which focused on collective investment schemes offered to retail investors. 

The guidance covers four areas: 

• Governance 
• Initial design of product 
• Ongoing liquidity risk management  
• Stress testing 

It goes on to note that “there are areas of improvement such as enhancing senior manager’s oversight of liquidity risk, and the FMC’s monitoring and management of liquidity risk throughout the CIS’s entire product life cycle. This includes ongoing review of the assumptions used and assessing the reliability of the LRM models, tools and metrics. In addition, fund management companies could improve the execution of liquidity stress tests and ensure that clear and proper guidance are set out in the LRM policies and procedures.” 

PSR revises penalty statement guidance

The UK’s Payment Systemss Regulator (PSR) has revised its penalty statement guidance which helps firms understand how the PSR approaches financial penalties and the amount.  

 Oliver Hanmer, Head of Supervision and Compliance Monitoring said of the updated guidance: 

“Enforcement action is one of our key tools to reduce non-compliance and improve outcomes for people and businesses across the UK. 

“This updated penalty statement will give industry greater clarity about what to expect if we find they have broken our rules or not followed our directions. It will also help the PSR to explain any decisions we take in the event of enforcement action.” 

CFTC charges former Voyager CEO with fraud and registration failures

The Commodity Futures Trading Commission (CFTC)  has filed a complaint  against Stephen Ehrlich, the former chief executive officer of now-bankrupt crypto lender Voyager Digital. 

The complaint alleges that Ehrlich and Voyager engaged in a scheme to defraud customers by misrepresenting the safety and financial health of the Voyager digital asset platform. Ehrlich and Voyager, via publicly available postings on social media and their website, touted Voyager as a “safe haven” for customers’ digital assets in an otherwise volatile market environment and that Voyager would operate with the “same level of rigor and trust” as a traditional financial institution. Ehrlich and Voyager also promised customers high-yield returns—as much as 12%—on certain digital asset commodities stored on the Voyager platform. 

The CFTC is seeking restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged. 

The case serves as a reminder to the crypto industry that the CFTC is taking a tough enforcement stance against fraud and registration failures. It is also a warning to investors to be wary of platforms that promise high returns with little or no risk. 

HKMA announces digital fraud initiatives

The Hong Kong Monetary Authority has written to 28 retail banks to update them on changes being made to help combat digital fraud.  The Dear CEO letter covers three areas.

Information sharing 

The region’s Fraud and Money Laundering Intelligence Taskforce (FMLIT) has been expanded to include the 28 banks. The Financial Intelligence Evaluation Sharing Tool (FINEST) which was rolled out as a pilot in June 2023 will be expanded to cover more banks and a wider scope of financial crimes and accounts. HKMA will soon consult on legal provisions to facilitate personal account information sharing for preventing and detecting crime. 

Transaction monitoring 

The letter proposes that all authorised institutions (AIs) should explore the inclusion of more data and applying network analytics in real-time fraud monitoring systems to strengthen their ability to identify high-risk accounts and networks and alert customers of high-risk transactions. 

Customer Alerts 

HKMA will be working closely with numerous stakeholders to introduce a pre-transaction alert mechanism to give retail customers early warning that a transaction may be fraudulent. In order to facilitate this, the letter requires all AIs to make appropriate enhancements to their systems. 

The letter concludes: “AIs are expected to establish adequate systems and controls with senior management oversight to enable effective implementation of the measures and initiatives. The objectives and requirements should be clearly communicated to staff and key performance indicators should be developed to track performance.” 

EBA environmental and social risk report

The European Banking Authority has published a report on environmental and social risks in the prudential framework. 

The report is based upon the outcome of a discussion paper from May 2022 and is intended to facilitate the incorporation of environmental risks, In particular, ESG risks, across all pillars of the regulatory framework in line with the EBA’s Road map on sustainable finance. The report recommends the following proposals. 

• Stress testing: Include environmental risks in stress testing programmes under Internal Ratings Based and Internal Model Approaches under the Fundamental Review of the Trading Book. 
• Credit rating agencies: Encourage credit rating agencies to include environmental and social factors in external credit assessments. 
• Real estate collateral: Encourage inclusion of environmental and social factors in due diligence requirements and valuation of immovable property collateral. 
• Operational risk: Require institutions to identify whether environmental and social factors constitute triggers of operational risk losses. 
• Concentration risk metrics: Progressively develop environment-related concentration risk metrics as part of supervisory reporting. 

Possible future Pillar 1 revisions covered include: 

• Scenario analysis: Use scenario analysis to enhance the forward-looking elements of the prudential framework. 
• Transition plans: Consider the role of transition plans in the development of further risk-based enhancements to the Pillar 1 framework. 
• IRB formula: Reassess the appropriateness of revising the IRB supervisory formula and the corresponding standardised approach (SA) for credit risk to better reflect environmental risk elements. 
• Environment-related concentration risk metrics: Introduce environment-related concentration risk metrics under the Pillar 1 framework.