The CUBE RegNews team is taking a break on 17th November. Your next RegNews briefing will be published on 20th November.
Basel Committee publishes discussion paper on digital fraud
The Basel Committee on Banking Supervision has published a discussion paper on digital fraud and banking: supervisory and financial stability implications. The paper is structured around three broad sets of questions:
- What is digital fraud? What are its main defining features? How does digital fraud affect banks and how should policymakers think about it?
- What are the supervisory and financial stability implications? How are supervision and financial stability affected by digital fraud? Why is digital fraud of relevance to the Committee and its mandate? What empirical data are available to assess its magnitude and prevalence?
- What is being done to mitigate digital fraud risks within the banking sector? What initiatives have been pursued, or are planned, at the domestic, regional and global level?
Comments on the discussion paper are requested by 16 February 2024.
Quantum technology in financial services
Trade body UK Finance has published a report looking at the implications of quantum technology in the financial services sector.
The report provides a helpful introduction to quantum computing and its potential but notes that the opportunity with significant potential comes with accompanying risks. The reliance on cryptographic systems in financial IT networks makes them susceptible to potential breaches if a Cryptographically Relevant Quantum Computer is developed. The risks include cryptographic vulnerabilities, market instability due to uneven technology access, insufficient quantum talent, technological debt from legacy systems, and ethical/environmental considerations.
To mitigate these risks and embrace the benefits of quantum computing, the financial sector is urged to become “Quantum Safe.” This involves cross-sector collaboration and the establishment of a financial sector Quantum Safe Task Force. At the firm level, specific steps are recommended, such as identifying vulnerable systems, conducting thorough risk assessments, enhancing skills for the transition, identifying key stakeholders, and investing in Quantum-Safe technologies.
Additionally, a quantum-literate workforce is deemed essential for firms and regulators seeking to leverage quantum computing. The recommendation includes developing a workforce strategy, incorporating quantum education into the educational curriculum, and targeted reforms to the migration system.
The report emphasises that being Quantum Safe is crucial for unlocking the potential of quantum technology. This transition will instil confidence in clients, customers, and market participants, but it necessitates active management across the financial services sector, suggesting the development and adherence to sector-specific Quantum Safe roadmaps.
SEC enforcements review: 784 actions and $5 billion in remedies
The Securities and Exchange Commission (SEC) has unveiled its 2023 enforcement statistics and data which provide a fascinating insight into the regulator’s enforcement strategy and direction.
The key content from the release is as follows.
- The SEC filed a total of 784 enforcement actions, marking a 3 percent increase over the previous fiscal year.
- Stand-alone enforcement actions increased by 8 percent, with 501 cases filed.
Types of enforcement actions:
- The SEC conducted actions spanning the securities industry, addressing issues from billion-dollar frauds to emerging threats involving crypto asset securities and cybersecurity.
- Violations were charged against diverse market participants, including public companies, investment firms, gatekeepers, and social media influencers.
- The SEC obtained orders for $4.949 billion in financial remedies, the second-highest in SEC history.
- This included $3.369 billion in disgorgement and prejudgment interest and $1.580 billion in civil penalties.
Officer and director bars:
- Orders were obtained to bar 133 individuals from serving as officers and directors of public companies, the highest number in a decade.
- The SEC distributed $930 million to harmed investors in fiscal year 2023, marking the second consecutive year with more than $900 million in distributions.
- Fiscal year 2023 was a record-breaking year for the SEC’s Whistleblower Programme, with awards totalling nearly $600 million, the most ever awarded in one year.
- The program received more than 18,000 whistleblower tips, a 50 percent increase from the previous fiscal year.
Division of Enforcement initiatives:
- The Division of Enforcement conducted various initiatives, including addressing noncompliance with the Marketing Rule (nine investment advisers charged), failures by insiders to file required SEC forms (11 actions filed), and Regulation A violations (10 microcap companies charged).
- Notable enforcement actions were taken against major companies, including Wells Fargo, HSBC, Scotia Capital, ABB Ltd, Danske Bank, and Vale SA.
Addressing misconduct undermining effective oversight:
- The SEC targeted misconduct undermining its regulatory oversight, including violations of recordkeeping and reporting requirements.
- Examples include charging Goldman Sachs for deficient blue sheet submissions, Citadel Securities for mis-marking orders, and Merrill Lynch for failing to file Suspicious Activity Reports.
Protecting whistleblowers’ rights:
- The SEC settled charges against DE Shaw & Co, LLP for impeding whistleblowing, securing a $10 million civil penalty.
- Enforcement actions targeted firms using agreements violating whistleblower protection rules, emphasising the importance of whistleblowers in the regulatory framework.
- The SEC rewarded cooperation to promote compliance, citing cases like GTT Communications and Perella Weinberg.
- Firms that self-reported received favourable treatment, showcasing the SEC’s encouragement for proactive self-policing.
Accountability and remedial measures against individuals:
- Two-thirds of SEC cases in fiscal year 2023 involved charges against individuals, demonstrating a focus on individual accountability.
- Officer and director bars were imposed in cases like Wells Fargo and McDonald’s, aiming to protect investors from future violations.
Protecting retail Investors:
- Enforcement actions targeted affinity frauds, Ponzi schemes, and public company misstatements, emphasising protection for retail investors.
- Asset freezes were obtained to secure meaningful financial remedies, such as against a Florida resident for a Ponzi scheme.
Gatekeepers and market abuse:
- Enforcement actions against gatekeepers, like audit firms Marcum LLP and Prager Metis, emphasised their crucial role in protecting investors.
- Cases addressed market abuse, including charges against social media influencers and financial services professionals for front-running.
- Fiscal year 2023 saw impactful actions in the crypto space, addressing frauds, unregistered offerings, exchanges, and touting.
- Notable cases include charges against Terraform Labs, FTX CEO Samuel Bankman-Fried, and actions against Kraken, Nexo, and influencers like Paul Pierce and Kim Kardashian.
- SEC charged Virtu and Blackbaud Inc. for cybersecurity-related violations, highlighting the importance of accurate disclosures and preventing misuse of sensitive information.
- The SEC addressed Environmental, Social, and Governance (ESG) issues, charging Deutsche Bank, Goldman Sachs Asset Management, and Activision Blizzard Inc. for various ESG-related violations.
Public finance abuse:
- Enforcement actions in the public finance sector targeted fraud, failure to obtain disclosures, and auditor misconduct, illustrating a commitment to integrity in this sector.
Investment professionals and service providers:
- Charges against Prime Group Holdings LLC, AssetMark Inc, and ETF Managers Group LLC showcased actions against investment professionals involving undisclosed conflicts and misleading trustees.
- The SEC remained committed to enforcing the Foreign Corrupt Practices Act (FCPA), with actions against Koninklijke Philips NV and Albemarle Corporation for corrupt practices abroad.
Trial and litigation highlights:
- More than 40 percent of SEC actions in fiscal year 2023 were litigated, showcasing the agency’s commitment to defending investor interests through legal proceedings.
Chair of ECB speech on crypto finance regulation
Andrea Enria, chair of the Supervisory Board of the ECB, recently delivered a keynote speech on the regulation of crypto assets at a conference in Venice. In his address, Enria discussed the recent developments in the world of crypto-assets and highlighted the need for a regulatory framework to oversee the activities of crypto-asset players. He also pointed out the challenges of supervising and applying financial regulations to crypto.
Enria acknowledged that cryptocurrency has the potential to revolutionise financial markets. However, he also recognised the potential for criminal activities in the sector, such as money laundering and terrorism financing, which poses significant risks if the crypto-assets world remains unregulated. Therefore, he emphasised the need for a regulatory framework to address these concerns.
Enria provided an overview of the various challenges to the supervision of crypto assets.
- The “deterritorialisation” of financial services makes it challenging to obtain a holistic view of the business of crypto-asset players. For instance, the scope of MiCAR does not include already regulated financial instruments or products. Bitcoin, for example, is not covered under MiCAR, but its services are.
- There are no rules on the interactions between the crypto finance and banking sectors. Therefore, regulating these interactions should include policing the banking sector perimeter, upgrading the prudential assessment of applications for initial authorisation to include the provision of crypto-asset services and issuances, and prudentially regulating financial connections between banks and crypto-assets.
- When crypto firms engage in activities reserved for banks, they should apply for a banking license and meet legal requirements. For example, stablecoins may be considered a form of private money and are prone to runs.
- The provisions of MiCAR requiring a significant portion of reserves for asset-referenced tokens to be held in bank deposits may have unintended consequences from a perspective of financial stability. Therefore, credit institutions should monitor the diversification of their deposit base and not rely on volatile deposits, especially those of crypto-asset players.
Enria added that ECB Banking Supervision is ready to cooperate with the EBA and other competent authorities to assess whether regulatory changes are needed.
A selected summary of key developments for regulated financial institutions
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