In March the UK Financial Conduct Authority (FCA) published its business plan for 2024/25. When discussing market oversight, in keeping with its recent drive to become more data-driven, the regulator stated that it intends to carry out increased market monitoring of fixed income and commodities markets and is increasing its ability to detect and pursue cross-asset class market abuse. The UK’s civil market abuse regime is set out in the UK Market Abuse Regulation (UK MAR) which it onshored (inherited) following Brexit. In this Regulation are prohibitions on insider dealing, unlawful disclosure of inside information and market manipulation, and provisions aimed at preventing and detecting these. There is also a criminal regime including an insider dealing offence and an offence of making a false or misleading statement.  A separate but corresponding civil and criminal regime applies to wholesale energy products under UK REMIT (the UK’s version of the EU Regulation on wholesale energy market integrity and transparency) which is enforced by the UK’s energy regulator, Ofgem. As with the EU regime, the UK market abuse regime contains no restrictive pre-condition for the existence and breach of a specific duty – whether owed by the insider to: (i) the issuer or its shareholders; or (ii) the source of the inside information. In other words the US misappropriation theory does not apply. As regards commodities, the scope of this article is not to provide an exhaustive analysis of UK MAR and UK REMIT but key points which are relevant to this market include: First, like the US regime, there are a number of key definitions that are relevant to the scope of the prohibitions set out in the UK MAR and these include, ‘financial instrument’, ‘commodities derivatives’, ‘spot commodity contract’ and ‘emission allowance’. The defined term, ‘financial instrument’ is taken from the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and is similar but not identical to the definition in the EU Markets in Financial Instruments Directive. A ‘spot commodity contract’  is defined in UK MAR as a contract for the supply of a commodity traded on a spot market which is promptly delivered when the transaction is settled, and a contract for the supply of a commodity that is not a financial instrument, including a physically settled forward contract. In addition, ‘spot market’ is also defined in UK MAR as a commodity market in which commodities are sold for cash and promptly delivered when the transaction is settled, and other non-financial markets, such as forward markets for commodities. Similarly, as UK REMIT applies to all market participants in Great Britain entering into transactions or orders in wholesale energy products, relevant definitions include ‘wholesale energy product’ and ‘market participant’.  In this regard it is worth bearing in mind that UK REMIT specifies certain contracts and derivatives that will fall within the scope of wholesale energy products irrespectiveof where and how they are traded.  A market participant is any person (natural or legal and including transmission system operators) entering into a transaction including placing orders to trade in one or more wholesale energy markets (this includes transmission system operators).  It is also irrelevant whether the market participant is resident in the UK or EU. Second, Article 12(1) of UK MAR provides that the market manipulation offence comprises the following four activities: (i) manipulating transactions, (ii) manipulating devices, (iii) dissemination, misleading behaviour and distortion, and (iv) misleading behaviour or inputs in relation to benchmarks. Each of these are further described in UK MAR.  Article 2 of UK REMIT defines ‘market manipulation’ by reference to similar categories of activities but in relation to the supply of, demand for, or price of wholesale energy products, Third, as regards manipulative trading practices, UK regulators have traditionally published fewer enforcement outcomes than their US counterparts. Manipulative practices vary across different markets and instruments. It is therefore difficult to prescribe what makes a particular practice manipulative or deceptive in light of the descriptions provided in UK MAR. For instance trades which are executed for legitimate purposes may appear unusual and abusive, especially where the market is illiquid or volatile. Manipulative practices include: layering or spoofing, wash trading, squeezes or corners, share ramping or pumping or dumping, window dressing, printing and flying prices. In a similar vein, Ofgem has historically made clear that it considers practices which constitute market manipulation include layering, placing small bids ahead of placing large offers (and vice versa), marking the close and pre-arranged trading. Fourth, the FCA regularly comments on manipulative practices in its Market Watch newsletter which focuses on market integrity and. has published guidance that provides additional details on the types of behaviour likely to be flagged as illegally manipulative in its Handbook of rules and guidance. Ofgem has also published supplementary guidance on insider dealing, market manipulation and enforcement, for example in the form of open letters to the industry, procedural guidelines, penalties statement and a prosecution policy. The FCA has historically penalised firms for failures to ensure that there were adequate risk management surveillance systems for the purposes of detecting and identifying orders and transactions that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation.  It is worth highlighting the following FCA enforcement action: the FCA concluded its first notable enforcement action in relation to commodities in 2013 when it fined the US based high frequency trader, Michael Coscia, US $903,176 (£597,993) for deliberate manipulation of commodities markets. Between 6 September 2011 and 18 October 2011 Coscia used an algorithmic programme of his own design to instigate an abusive trading strategy commonly known as layering. More recently, on the securities side, the FCA censured the holding company of the largest private healthcare operator in the United Arab Emirates (UAE), NMC Health Plc (in administration), for misleading the market about the size of its debt, and failing to declare related party transactions, which was found to be market manipulation. Ofgem has also issued substantial fines to corporate entities for REMIT breaches, including recently in August 2023 when it announced the first fine in Great Britain concerning the recording and retention of electronic communications under regulation 8 of the REMIT Enforcement Regulations. In terms of general developments regarding the UK market abuse regime, there are perhaps two key ones. In March 2023 the UK Government announced that as part of the Future Regulatory Framework Review it intends to repeal UK MAR and replace it with UK-specific legislation. It stated that it will set out a timetable for this “in due course”. So far there is no information on likely timings or other information on UK MAR’s revocation and potential replacement. In May 2024 the FCA issued a Market Watch newsletter which discussed its observations on firms’ failures in relation to market surveillance.. One example related to a firm that designed and implemented an in-house surveillance model to identify potential insider dealing in corporate bonds, covering trading by clients and its own traders: ‘Firm B designed and implemented an in-house surveillance model to identify potential insider dealing in corporate bonds, covering trading by clients and its own traders. The alert logic did not require news to be released for an alert to trigger (this would be considered during alert review). It did need a price movement at or above a defined threshold (X%) within a defined period after a trade. However, a mistake was made at the coding stage. This meant that for an alert to trigger, either for a client or through its own traders, the firm had to trade in the instrument on the day that the price moved. With this alert logic, in a liquid, frequently traded instrument, this requirement for a trade on the day of the significant price move would not impede the monitoring. In less liquid instruments, however, the alert logic created a risk of potential insider dealing going undetected. For example, if a client of the firm purchased a bond on a date (T) and 2 days later (T+2) the bond increased in price by X+3%, but on T+2, the firm did not undertake any trading in the bond, no automated alert would be generated. The fault originated several years before, at the design and implementation stage. After this point, its identification was impeded by the fact that the model was generating alerts in reasonable numbers and of good quality. The alert output contained true positives, some of which resulted in the submission of STORs. This led the firm to mistakenly believe that the model was working as intended. The firm’s compliance team discovered the reality when it received a front office escalation. On checking if a surveillance alert had been generated, the team found it had not.’ Comment: The recent FCA Market Watch provides firms, including those in the commodity and derivatives space, with a timely reminder that they need to test and review their market abuse surveillance arrangements. Firms in other jurisdictions may also find the FCA’s observations useful. In addition, at some stage there will be a consultation on possible changes to UK MAR which the UK inherited from the EU. Perhaps there won’t be wholesale changes to the regime, but there may be some interesting tweaks. As always with financial services, the devil will be in the detail, and firms with a cross-border footprint will face the additional challenge of staying abreast of the divergence between EU and UK regulatory frameworks as regards both UK/EU REMIT and UK/EU MAR.

It has been a busy couple of weeks for payments regulation – the go-live of the APP scam reimbursement rules, the FCA feeding back on its findings related to implementation of the Consumer Duty by payments firms and the FCA’s publication of its proposed new framework for safeguarding. The safeguarding proposals are particularly interesting – here is what caught my eye: Whilst there are various aspects of the proposed new requirements that payments firms will already be complying with, both the interim and end-state measures will have a real world impact in terms of compliance burden, individual accountability, compliance resource and existing operating practices that will have to be addressed by firms. The end result of the proposals would not simply be business as usual. It’s clear that using operational accounts as a staging location prior to relevant funds hitting safeguarding accounts will be no more, save for in a small number of circumstances. This could have an operational impact on firms, particularly for any pay-in arrangements, and that needs to be impact assessed by firms. There is a degree of “SMCR creep” flowing from the requirement to allocate a responsible person for oversight of compliance with safeguarding rules. If I was a payments firm, I would be trying to clarify whether there are any broader obligations to which such a person is subject or whether other aspects of the SMCR regime – which doesn’t apply to payments firms – should now be treated as requirements or guidance applicable to the firm or that particular individual. It is arguably going to be harder to invest relevant funds in secure, liquid assets at a time when higher interest rates has made that option more attractive to firms. This is where there is arguably a misalignment between the corresponding provisions in CASS 7 on use of qualifying money market funds and the proposals in CASS 15, and I would not be surprised if there is advocation for a lighter touch to make this safeguarding option more facilitative. Reading between the lines and if alignment with CASS 7 is the ultimate goal, I have a bad feeling for the insurance or guarantee method of safeguarding, in that I do not think it is long for this world. Firms shouldn’t underestimate the codification of guidance as rules – it is easier to supervise and enforce breaches of rules than it is to supervise and enforce regulatory expectations delivered via guidance. That impacts compliance burden and risk profile and potentially changes the supervisory environment in which payments firms operate. We’re looking forward to discussing these points further with clients and the industry more broadly in what remains an interesting time for payments

Introduction On the 7 October, 2024 the Payment Systems Regulator (the ‘PSR’) landmark reform to tackle authorised push payment (‘APP’) fraud came into force. Whilst some of the uncertainty surrounding scope of application of the measures has begun to settle, many will now be questioning what role the FOS will play in relation to related customer complaints and whether they may, despite the reduced cap on compensation under the PSR’s measures, nonetheless be required to pay compensation of up to £430,000 in connection with APP fraud suffered by consumers. Meanwhile, the FCA’s dear CEO letters of 7 October have added to the growing list of regulatory expectations surrounding APP fraud with which firms need to comply. Key points: APP fraud, the FOS and the Consumer Duty The maximum compensation capable of being awarded by the FOS is significantly higher than the maximum compensation under the new APP fraud mandatory reimbursement requirement – meaning that in some circumstances, firms may be required to compensate up to £430,000 rather than £85,000 despite the PSR’s change in policy to reduce the limit for mandatory compensation. Firms must ensure that they are clearly signposting the availability of the FOS to customers – this is required by the PSRs, but firms must also comply with the Consumer Duty and so tailoring this content to customer cohorts is key; as is testing to ensure that the information is understood and is effectively enabling customers to act on it. Whilst many firms will have raced to the finish line to implement the systems changes associated with mandatory reimbursement, the FCA has also laid out its expectations relating to broader systems and controls, which are likely to require continued effort across much of the sector. Whilst mandatory reimbursement is a major step change in consumer rights, the FCA remains focused on firms preventing it in the first place. In its recent dear CEO letters, the FCA has explicitly called out the likelihood that some firms may even need to consider redress to customers where inadequate systems or poor controls, such as poorly designed or implemented warnings around scams, have played a role in consumers falling victim to APP fraud in the first place. In more detail The mandatory reimbursement requirement provides consumers with significant new rights to reimbursement in connection with certain losses relating to APP fraud in connection with payments made through Faster Payments or CHAPS. The scope and impact of the measures to achieve the reimbursement requirement – which take effect through Specific Directions 19 and 20 issued by the PSR – have been amongst the hotly debated reforms in the sector over recent years. Partly in recognition of concern from affected PSPs, and following further interrogation of 2023 data relating to APP fraud, the PSR reduced the maximum compensation limit under the rules from £430,000 (aligned to the present maximum compensation capable of being awarded by the FOS) as originally consulted upon, to £85,000 (which reflects the statutory maximum deposit protection afforded to consumers by the FSCS). The effect of the new mechanism is that, subject to the consumer standard of caution exception, when a consumer who has made one or more FPS APP scam payments reports a reimbursable FPS APP scam payment to their sending PSP, the sending PSP must reimburse the consumer in full. Subject to any ‘stop-the-clock’ provisions being engaged, the sending PSP must generally reimburse consumers within five working days of the consumer making this report; and although reimbursement responsibility lies with the sending PSP, liability is shared between sending and receiving PSPs. Although the cap on compensation under these measures has been reduced to £85,000, the PSR has clearly signposted to consumers that where they are dissatisfied with the way in which their PSP has behaved, they have the ability to complain to the firm, and to have this complaint referred to the FOS. Importantly, despite this reduction in the limit, there has been renewed concern that the higher compensation limit of the FOS – currently set at £430,000 – might be a ‘back door’ to a higher reimbursement limit with which firms will need to comply. The PSR has been clear that the revised, lower limit is expected to cover the great number of instances of APP fraud; but it has also signalled that the FOS has a wide remit, and that it will look at the individual facts and circumstances of each case. It is fair to say that, whilst measures such as confirmation of payee have played an important role in combatting APP fraud in recent years it remains one of the prevalent examples of financial crime across retail banking and payments. Consequently, whilst at one level, the possibility of firms facing sizeable compensation liabilities arising from FOS decisions is not new; the introduction of mandatory reimbursement adds a new dimension. It is possible, for example, that the FOS may take its own particular interpretation of the consumer standard of caution exception; and may also look to the wider circumstances of a customer’s experience when assessing complaints relating to losses exceeding £85,000. For its part, the FCA very clearly sees the PSR’s mandatory reimbursement measures as only one part of the picture relating to firms responsibilities to manage and mitigate payment fraud risk in their businesses. The Consumer Duty is front and centre of the FCA’s approach to setting the standards for firms in this area, as in most other areas of retail business. Under the Duty, firms must avoid causing foreseeable harm. The FCA sees a consumer becoming victim to APP fraud as an example of foreseeable harm, where this arises due to inadequate systems and controls to detect and prevent scams; or where there are inadequate processes to design, test, tailor and monitor the effectiveness of scam warning messages. Firms are reminded of their obligations to put things right – at pace – where foreseeable harm is identified, and this may well include redress where it is appropriate. There is much packed into these relatively short letters from the FCA. Key point All in all, whilst mandatory reimbursement is a major reform, APP fraud is likely to remain a regulatory hot topic for some time to come.

The FCA has published the results of its survey on non-financial misconduct. Set out below are (1) key findings; (2) next steps for the FCA; and (3) seven suggested action points for firms in light of the survey. (1) Key findings The key findings from the survey are that: Most frequent concerns: the number of allegations of non-financial misconduct reported increased between 2021 and 2023. In the 3 years covered by the survey, bullying and harassment (26%) and discrimination (23%) were the most recorded concerns. Outcomes: disciplinary or ‘other’ actions were taken in 43% of cases and some types of reported non-financial misconduct, such as violence, intimidation and sexual harassment, more often resulted in disciplinary actions compared to other types, such as discrimination. In addition, 62% of reported discrimination incidents and 47% of reported bullying and harassment incidents between 2021 and 2023 were not upheld. The FCA has suggested that the industry should reflect on these differing rates and whether they are explainable. Remuneration impact: action taken following non-financial misconduct rarely resulted in remuneration adjustment. When remuneration was adjusted it was mostly against unvested variable pay rather than other forms of remuneration adjustments such as fixed salary adjustment or clawback. Management information: 38% of respondents to the survey also stated that boards and board level committees did not receive management information about non-financial misconduct, and the FCA considers that the responses to questions about board MI and governance structures suggest that large firms’ governance and oversight of non-financial misconduct could be falling short of the FCA’s expectations. (2) Next steps for the FCA The FCA has confirmed that it will now: Engage with firms to understand their results and how they have used the data to reflect on their own culture, focusing on the firms that are outliers from their peer groups. Support trade associations to lead industry efforts to improve standards using the survey data. Continue to communicate with firms and set out its regulatory expectations through portfolio letters. Act where it considers that firms have failed to adhere to the FCA’s rules and principles. (3) Next steps for firms  Firms may wish to consider the following seven questions for the purpose of assessing next steps in light of the survey: Does your employee handbook or equivalent guidance adequately cover types of non-financial misconduct?  The specific types included in the survey were sexual harassment, bullying and harassment, discrimination, possession or use of illegal drugs, violence or intimidation. However, 41% of incidents fell into the non-specific ‘other’ category. Firms should consider whether to feed any ‘other’ experience into their employee guidance. Is adequate support provided to internal-decision makers on conduct boundaries?  Discrimination had the lowest proportion of upheld complaints with action taken which may reflect the fact that discrimination is sometimes harder to judge than other types of misconduct. Providing guidance to decision-makers may assist in achieving appropriate outcomes.    Are you using settlement agreements and confidentiality agreements correctly? The report serves as a reminder that NDAs / confidentiality agreements should not be used to prevent individuals from whistleblowing to the FCA. Confidentiality agreements were most used for discrimination, bullying and harassment and the FCA is carrying out some follow up to understand the reasons for this.  Do you have an appropriate level of reported incidents, an appropriate whistleblowing policy and a healthy speak up culture?  The survey indicates a variety of detection methods including grievances and whistleblowing. It is helpful and a potential silver lining for firms with high levels of complaints that the FCA recognises that this may indicate a healthy speak-up culture. However, not all respondents had a whistleblowing policy and low levels of complaints may not reflect positively on the firm.    Should you have a remuneration policy? It may be understandable that where remuneration was impacted, the use of retrospective clawback or salary adjustment was less common than making forward looking variations to bonuses or other pay which had not yet vested. However, the FCA has flagged that not all firms had remuneration policies and for some firms this may itself not be in keeping with its requirements. Does your board or a board level committee receive adequate management information about non-financial misconduct?  Over a third of respondents stated that boards or a board level committee did not receive MI about non-financial misconduct and a third had no formal governance structure or committee to determine outcomes. The FCA suspects that governance and oversight at large firms could be falling short of expectations. The Board should also consider whether to adopt the new Code of Conduct for Directors structured around six key “Principles of Director Conduct” which was published by the IoD this week. Do you provide adequate references, keep them updated and take account of adverse references received?  Although 92% of respondents said they would include non-financial misconduct in a regulatory reference, only 87% said they would update a reference following an incident. Firms should check they have an adequate process for providing and updating references. The FCA flags that it expects firm to consider their regulatory obligations with regards to hiring of employees with adverse references and ensure individuals remain fit and proper.  The recently updated Regulatory Initiatives Grid confirmed that the FCA’s policy statement on ‘Tackling Non-Financial Misconduct in the Financial Sector’ will be published “around year-end”. Watch this space. 

In the latest Global Regulation Tomorrow Plus episode, Jonathan Herbst, Hannah Meakin and Anita Edwards discuss some of the key issues concerning the UK regime for payment for order flow. Listen to the episode here.

On 28 October 2024, the European Securities and Markets Authority (ESMA) issued a consultation paper setting out proposed amendments to the research provisions in the Markets in Financial Instruments II (MiFID II) Delegated Directive (Commission Delegated Directive (EU) 2017/593). Background At present, Article 24(9a) of MiFID II and Article 13 of the MiFID II Delegated Directive set out the conditions that the provision of research by third parties to investment firms must meet in order not to be regarded as an inducement. Directive (EU) 2021/338 amended MiFID II by, inter alia, inserting a new paragraph (9a) into Article 24. This amendment introduced the possibility for joint payments of execution services and research covering issuers whose market capitalisation did not exceed EUR 1 billion. The Listing Act provides that joint payments for execution services and research will be made possible irrespective of the market capitalisation of the issuers covered by the research. But whatever payment option an investment firm may choose in relation to its payments for research (out of its own resources, payments from a separate research payment account or joint payments for research and execution services), it will need to adhere to certain conditions so that the provision of research is not regarded as an inducement. Earlier this year ESMA received from the European Commission (Commission) a request to provide technical advice on the implementation of the amendments to the Prospectus Regulation, Market Abuse Regulation and the MiFID II Delegated Directive in the context of the Listing Act. The deadline to provide the technical advice is 30 April 2025. This latest consultation paper focuses on the changes to the MiFID II Delegated Directive related to the payments for research and execution services. Proposals ESMA proposes to include some high-level requirements in Article 13 of the MIFID II Delegated Directive so as to better align the level 2 legislation with the new options offered in the level 1 text and promote the market for investment research, in a context that continues to regulate inducements and require the proper management of conflicts of interests. The proposed changes to Article 13 of the MIFID II Delegated Directive (EU) 2017/593 are included in Annex IV of the consultation paper. The proposed changes include: The introduction of new paragraph 1b in Article 13 of the MIFID II Delegated Directive dealing with the annual assessment provided in new Article 24(9a)(c) of MiFID II. A new paragraph 10 in Article 13 of the MIFID II Delegated Directive that specifically deals with joint payments for execution services and research and clarifies how firms will meet the conditions for the mandatory agreement between the investment firm and the third-party provider in new Article 24(9a)(a) of MiFID II. Next steps The deadline for comments on the consultation is 28 January 2024. ESMA aims to provide its technical advice to the Commission in Q2 2025.

On 28 October 2024, the European Securities and Markets Authority (ESMA), issued a consultation paper on draft technical advice under the Prospectus Regulation and a call for evidence (CfE) on prospectus liability. Background On 8 October 2024, the Council of the EU adopted the Listing Act, a legislative proposal intended to simplify the listing requirements to promote better access to public capital markets for EU companies, in particular SMEs, by reducing the administrative burden on companies that seek a listing or want to remain listed on a trading venue. The package comprised a regulation amending the Prospectus Regulation, Market Abuse Regulation, Markets in Financial Instruments Regulation and a directive amending the Markets in Financial Instruments Directive II and repealing the Listing Directive. Furthermore, it introduced a new directive on multiple vote share structures. The European Commission (Commission) expects that the bulk of the provisions of the Listing Act to enter into application in July 2026. On 6 June 2024, ESMA received a request for technical advice from the Commission on a range of topics, and in relation to the Prospectus Regulation, on the following points: The content and format of the full prospectus, including a building block of additional information to be included in prospectuses for non-equity securities offered to the public or admitted to trading on a regulated market that are advertised as taking into account ESG factors or pursuing ESG objectives. The criteria for the scrutiny and the procedures for the approval of the prospectus, including proposed amendments to Commission Delegated Regulation 2019/9801 or ‘CDR on scrutiny and disclosure’.   This latest consultation paper focuses solely on ESMA’s advice relating to the delegated acts supplementing the Prospectus Regulation. The deadline for this technical advice is 30 April 2025. ESMA is also consulting on proposed changes to Commission Delegated Regulation 2019/9792 or ‘CDR on metadata’ concerning the update of the data for the classification of prospectuses. Call for evidence The Listing Act inserts a new Article 48(2a) into the Prospectus Regulation which asks the Commission to present a report on liability for information provided in securities prospectuses to the European Parliament and the Council of the EU by 31 December 2025. The Commission has asked ESMA to provide technical advice in this context. ESMA is launching the CfE to obtain feedback on the issue from market participants to respond to the Commission’s request. Next steps The deadline for comments on the consultation paper and the CfE is 31 December 2024. ESMA will publish in Q2 2025 its final technical advice to the Commission in two separate final reports based on feedback received.

Many people associate the phrase “insider trading” with company executives buying or selling the company’s stock before news hits the market.  The underlying problem government authorities point to in those cases is the use material nonpublic information about the company for personal benefit.[1]  Although the phrase is commonly used in related to securities laws, there have been cases in the commodity and derivative markets using the same theory.  Even more recently, the “insider trading” language involving the use of material nonpublic information has even been used in cases involving commodity and derivative traders. There is an “insider trading” prohibition in the derivative markets, but that prohibition is limited in its potential application.[2]  For example, employees of registered entities such as futures exchanges may not use “any material non-public information” gained through their employment “to trade for such person’s own account” or even disclose such information for any purpose unrelated to the performance of the person’s job duties.[3]  That prohibition was used to pursue alleged violations by two employees of NYMEX, a registered commodity futures and options exchange.  In CFTC v. Byrnes, et al., the Commodities Futures Trading Commission alleged that two employees of the exchange provided material non-public information they learned through the course of their employment to a broker.[4]  It was agreed that the two employees “disclosed, among other things, the identities of counterparties to specific options trades, whether a particular counterparty purchased or sold the option, whether it was a call or a put, the volume of contracts traded, the expiry, the strike price, and the trade price.”[5]    As the prohibition against “insider trading” in the Commodity Exchange Act (CEA) does not apply to anyone other than the persons and entities specified, the CFTC changed course when it accused a broker in CFTC v. EOX Holdings, L.L.C. of disclosing nonpublic information concerning “the identities, positions, orders and trading interests” of other customers’ block futures orders as part of providing “market color.”[6]  The CFTC accused the broker of “tipping material, non-public information” about customers “in breach of a preexisting duty” to those customers.[7]  The CFTC also alleged that the broker had used this information to trade in a managed account.[8]  The provisions in the statute and regulations relied upon, however, do not prohibit “insider trading” by brokers; they prohibit fraud.[9]   The court in EOX Holdings noted that the CFTC had previously recognized that “unlike securities markets, derivatives markets have long operated in a way that allows for market participants to trade on the basis of lawfully obtained material non-public information.”[10]  The CFTC nevertheless maintained that “trading on the basis of material non-public information in breach of a pre-existing duty (established by another law or rule, or agreement, understanding, or some other source), or by trading on the basis of material non-public information that was obtained through fraud or deception” may be fraudulent and in violation of this prohibition.[11]  The court in EOX Holdings then found that the CFTC had to establish that the broker “(1) misappropriated confidential information in breach of a preexisting duty of trust and confidence to the source of the information; (2) intentionally or recklessly, i.e., with scienter; (3) in connection with a contract for sale or purchase of a commodity in interstate commerce; (4) for personal benefit.”[12] The CFTC’s prior guidance appeared to focus on trading in breach of a duty, while the standard adopted by the court in EOX Holdings suggests that the misappropriation of information contrary to a preexisting duty was problematic.  In any event, both the CFTC guidance and EOX  require that the preexisting duty be based on particular source, which could be an agreement or even an “understanding.”  Neither the previous guidance or the court’s opinion provide any specific bounds for the industry to follow, and the CFTC’s terminology in cases involving alleged misappropriation of information, as well as its application, continues to evolve.  In CFTC v. Xie, the consent order indicates that Xie was a quantitative trader who had access to his employer’s “options and futures positions and associated order for feeder cattle.”[13]  The CFTC believed that the trader “had a duty of trust and confidence” to the employer to which he owed “a duty to act in its best interests, keep confidential [its] material non-public information, and not misappropriate this information for his own financial or personal benefit.”[14]  The consent order also indicates that Xie traded “through his personal trading account as counterparty” to his employer.[15]  The Xie consent order alleged that he committed a violation by “misappropriating … material non-public information” and trading “for his personal benefit in breach of a pre-existing duty.”[16]  The statute and regulation cited in Xie were not the “insider trading” prohibitions in the CEA and corresponding regulations, as he was a trader and not subject to them.  Rather, the CFTC alleged that Xie engaged in fraud.[17]  The CFTC’s curious use of the phrase “material non-public information” in a case that was not an “insider trading” case in the traditional sense drew the criticism of one Commissioner.[18]  In addition to the use of terminology more commonly associated with securities markets, the CFTC cited no source for Xie’s alleged duties to his employer.  Perhaps such documented source of the duties existed, but the industry would have benefitted from understanding the basis for the CFTC’s allegations.  Comment: The Xie case should serve as a reminder to commodity and derivative trading companies subject to U.S. law to review and update company policies, codes of conduct, trading guidelines, or employment agreements regarding duties owned by employees to the company.  [1] See, e.g., U.S. Attorney Announces Charges In Four Separate Insider Trading Cases Against 10 Individuals, Including Drug Company Employees, Investment Firm Executive Director, And SPAC Investors, Press Release, U.S. Attorney’s Office, S.D.N.Y. (June 29, 2023), available athttps://www.justice.gov/usao-sdny/pr/us-attorney-announces-charges-four-separate-insider-trading-cases-against-10.  [2] See 7 U.S.C. § 13(e)(1); 17 CFR § 1.59(d). [3] Id. [4] CFTC v. Byrnes, et al., Consent Order for Permanent Injunction, Civil Monetary Penalty and Other Equitable Relief Against Defendants William Byrnes, Christopher Curtin, and the New York Mercantile Exchange, Inc., Case 1:13-cv-01174-VSB (Aug. 3, 2020).  [5] Id. [6] CFTC v. EOX Holdings L.L.C., et al., Memorandum Opinion and Order, Civil Action H-19-2901 (Sept. 30, 2021.  [7] Id. [8] Id. [9] Id. at 46-47 (citing 7 U.S.C. § 9(1); 17 C.F.R. § 180.1(a)).  [10] Id. at 49.  [11] Id. at 50. [12] Id. at 53 (citing 7 U.S.C. § 9(1), 17 C.F.R. § 180.1(a); also citing O’Hagan, 117 S.Ct. at 2207-08; SEC v. Cuban, 634 F.Supp.2d 713, 723-25 (N.D. Tex. 2009) (“Cuban I”), vacated on other grounds, SEC v. Cuban, 620 F.3d 551 (5th Cir. 2010) (“Cuban II”) (stating elements of misappropriation with respect to the securities laws); SEC v. Obus, 693 F.3d 276, 284 (2d Cir. 2001)).  [13] CFTC v. Xie, Consent Order for Permanent Injunction, Civil Monetary Penalty and Other Equitable Relief Against Defendant Dichao Xie, Case No. 23-cv-1947 (Sept. 26, 2023).  [14] Id.  [15] Id. [16] Id. [17] Id. (citing 7 U.S.C. § 9(1); 17 C.F.R. § 1801.1(a)(1), (3)).  [18] See Dissenting Statement of Commissioner Caroline D. Pham on Misappropriation Theory in Derivatives Markets (Sept. 27, 2023), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement092723.

Introduction On 17 October 2024, HM Treasury (HMT) issued a consultation paper (CP) which sets out the government’s approach to regulating buy now pay later (BNPL). This CP builds on HMT’s previous consultations that ran between February 2023 and April 2023. HMT’s latest CP is accompanied by a draft statutory instrument (SI), The Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2025, which would bring the new BNPL regime into force. This short article explains some of the key implications for firms across the BNPL landscape, including retailers for whom BNPL is a critical point of sale payment method, and for the customers for whom it has become equally important as a payment method. Major changes for the BNPL sector Based on HMT’s consultation and the draft legislation, the major changes for the BNPL sector will be: Unregulated third party BNPL providers will need to obtain Financial Conduct Authority (FCA) authorisation and comply with FCA rules and guidance once authorised (though there will be a grandfathering regime, in a similar way to the interim permission regime for consumer credit when firms transitioned from the Office of Fair Trading (OFT) licensing to FCA authorisation). Lenders will be required to carry out affordability and creditworthiness assessments as a regulatory requirement, in accordance with FCA rules. Lenders will have to comply with new FCA rules for the provision of pre- and post-contractual information, and in respect of the credit agreement itself. Borrowers will have recourse to the Financial Ombudsman Service, and lenders may be subject to the FCA’s existing complaints handling rules. Lenders will be required to report to credit reference agencies in respect of the new regulated agreements. Borrowers will have recourse to the protections provided under s.75, Consumer Credit Act 1974 (CCA) where the credit agreements are above £100 (and below £30,000), which will place additional potential liabilities on lenders where there are issues with the services/goods provided by merchants. A number of the most significant CCA sanctions will be disapplied for this new regime, including the automatic disentitlement of interest that may arise in respect of certain post-contractual documents under the CCA. Although HMT’s consultation has provided much greater shape to the proposed regulatory regime for BNPL providers, much has been left for the FCA to determine via its final rules (e.g. information requirements, nature of affordability assessments, ability to opt-in to the CCA requirements, etc). As such, it is likely that the full impact of the BNPL regime will not become clear until the FCA’s final rules are published in an upcoming consultation. Notwithstanding this, the HMT consultation has ruled out any potential ambiguity over whether the BNPL sector would fall within the FCA’s regulatory perimeter. Third party BNPL lenders – who have already been under significant scrutiny from the FCA to date – will now need to upscale their operations to meet the FCA’s conditions for authorisation in order to sustain their BNPL operations in the medium-long term (i.e. beyond the temporary permissions regime). It is expected that firms will need to have effective compliance functions in place given the FCA’s historic focus on financial promotions and unfair contract terms, which may therefore lead to additional scrutiny in any authorisation process on how firms they will provide good outcomes to their customers and comply with the Consumer Duty. These additional compliance costs and the related costs may well lead to consolidation within, or exits from, the BNPL market. This could therefore favour existing authorised lenders that are already operationally organised to comply with FCA regulation, and which already bear these costs/may have an expedited variation/authorisation process. Regulated DPC Agreements The new name for BNPL is here – a ‘regulated deferred payment credit agreement’. The scope for this new form of regulated agreement will be limited to deferred payment credit (DPC) agreements offered by third party lenders. This means that merchants offering credit to their customers will continue to be able to rely on the pre-existing ‘BNPL exemptions’ in Art.60F, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. By way of reminder, Art.60F broadly covers borrower-lender-supplier loans which are interest free and are either for a fixed amount and up to one year, or are for running account and last up to three months. The scope of a regulated DPC agreement is intended to cover both the standard model for BNPL in the market, whereby third party lenders provide credit to a borrower to purchase goods from a merchant, and alternative models whereby the lender may purchase the relevant goods from the merchant and then provide these (alongside the credit arrangement) to the borrower. HMT has included anti-avoidance provisions within the draft SI to capture the different potential models for third party lenders within the BNPL market. To CCA or not to CCA? That was the question In the CP, the government had only proposed to disapply the pre-contractual information requirements within the CCA for regulated DPC agreements. However, in the CP (and draft SI), the government has decided to take a much more expansive approach – with a potential eye to the upcoming broader reform of the consumer credit regime – and exclude large portions of the CCA from applying to regulated DPC agreements. For example, alongside the pre-contractual information requirements, prescriptive requirements under the CCA for the credit agreement itself, post-contractual information, arrears/defaults, early termination and variations will not apply to the new regulated DPC agreements. Importantly, this also means that some of the related sanctions under the CCA will also fall away (i.e. interest disentitlement for issues relating to annual statements/notices of sums in arrears). Notwithstanding this, certain key protections under the CCA have been retained – such as Time Orders and the unfair relationship provisions, which will continue to protect borrowers from egregious actions by lenders. Instead, HMT will empower the FCA to create new rules (as it considers appropriate – alongside the existing provisions in the FCA’s Consumer Credit sourcebook (CONC)) for the provision of information to customers, and conduct requirements for this new regime. Although the government has been keen to stress that this regime will be tailored to what is appropriate for the BNPL market (and its specific characteristics), these new rules may provide some insight into the direction of travel for the wider consumer credit regime reforms. Notwithstanding the broad swathe of CCA provisions that have been disapplied, it is important to note that the new regulated DPC agreements will otherwise fall within scope of the CCA. This means that other protections and requirements – such as s.75, reporting to credit agencies and affordability checks (under CONC) will now apply to these types of BNPL agreements. Finally, HMT have also decided to disapply s.82, CCA which applied to variations of credit agreements. This move is likely to be welcomed by lenders as s.82, CCA is typically a complex area of law, which can pose significant operational issues for lenders when seeking to unilaterally vary agreements or provide forbearance to borrowers. The government considered that broader consumer law (i.e. Consumer Rights Act 2015) and FCA requirements (i.e. the Consumer Duty) will ultimately provide a sufficient layer of protection for borrowers in the event of any variations to the borrower/lender relationship given the nature of the BNPL agreements. We expect that lenders will be hoping that this approach is replicated in the upcoming HMT consultation on reforms to the consumer credit regime. Three’s a crowd for existing regulated lenders? At present, most existing lenders are likely to already have two different tracks for their consumer lending operations – regulated (i.e. within scope of the CCA) or unregulated. As such, whilst more flexible and outcomes focused, the new approach may not be entirely welcomed by existing lenders, as it may involve creating a third track and set of documentation in order to comply with the new regulated DPC agreement regime. Interestingly, HMT declined to provide a mechanism within the draft SI for lenders to ‘opt’ regulated DPC customers up to the ‘full’ CCA regime. Instead, HMT has left this for the FCA to determine, as it sees fit (by making rules to implement this approach if necessary). Whilst existing lenders will likely wish to see the form and nature of the new FCA rules for the regulated DPC regime, this may be one area of particular interest for them in the upcoming FCA consultation on this new regime. Credit broking and financial promotions HMT have retained their pre-existing approach for the scope of credit broking and financial promotions. Merchants will therefore not need to be authorised in order to effect introductions of their customers to third party lenders for regulated DPC agreements. Equally, merchants may use financial promotions approved by third party DPC providers, but will need an authorised lender with the appropriate permissions to approve any of their bespoke promotions under the new financial promotions approval gateway. Timelines and Temporary Permissions Regime The government has confirmed that there will be new regulated activities of entering into, or exercising the rights of a lender for a DPC agreement. HMT are proposing to introduce a temporary permissions regime for firms in respect of these regulated activities. The draft SI put forward by HMT includes an Initial Commencement Date (ICD) (to be determined by HMT, but which is likely to be in 2025 given the proposed desire to implement the regime as soon as possible). There will then be a 12 month period (as set out in the SI), which will run from the ICD, within which the FCA will need to consult on to make their rules for the new regulated DPC regime. Upon the expiry of this 12 month period (known as the ‘Regulation Day’), the DPC regime shall come into effect. In order to qualify for the temporary permissions regime, firms will need to demonstrate that they are undertaking the relevant DPC activities at the ICD, have registered with the FCA and paid the relevant registration fees. Following the Regulation Day, firms will then be provided with ‘landing slots’ by the FCA for the full consideration of their authorisation to provide DPC agreements. Until the FCA reach a determination either way, the relevant firms will hold a ‘deemed Part 4A authorisation’, which shall allow them to approve their own financial promotions. This is similar to the approach used by the FCA for the temporary permission regimes used post-Brexit and for the transfer of credit from the OFT to the FCA. HMT have proposed a two year backstop date for the temporary permissions regime, by which time firms should have either become authorised or exited the market. HMT have proposed a wind-down regime for such firms (bearing similarities to the Financial Services Contracts Regime utilised for firms exiting the UK following Brexit). Next steps The deadline for responses to the CP is 29 November 2024. Following, this all eyes will very much be on when the Government will lay the draft SI (and if any amendments are made to it or not), which will determine the ICD and Regulation Day for the new BNPL/DPC regime. Given that HMT have delegated considerable discretion for the shape and form of the new regime to the FCA, whilst this consultation does significantly move the regulation of BNPL forwards, there is still much more detail to follow. This will be keenly awaited by both BNPL providers and wider participants in the consumer credit sector given its broader potential signposting for regulation in this market in the years ahead.

On 24 October 2024, the European Commission adopted a Delegated Regulation supplementing the Regulation on digital operational resilience for the financial sector (DORA) with regard to regulatory technical standards (RTS) on harmonisation of conditions enabling the conduct of the oversight activities. The European Supervisory Authorities issued the draft RTS as part of the second batch of policy products under DORA earlier this year. The Delegated Regulation enters into force on the twentieth day following its publication in the Official Journal of the European Union.

On 25 October 2024, the FCA issued the following portfolio letters setting out its key concerns and priorities in 2025: FCA strategy for Non-bank Mortgage Lenders & Mortgage Third Party Administrators in 2025. FCA strategy for lifetime mortgage providers in 2025. FCA strategy for Building Societies in 2025. FCA strategy for Retail Banks in 2025.

On 25 October 2024, the Financial Conduct Authority issued its latest financial promotions quarterly data covering Q3 2024. One of the key messages in the data is that the cryptoasset financial promotions regime has now been live for a year. Over the last year the FCA has issued 1,702 consumer alerts about illegal crypto promotions and its actions have resulted in the take down of over 900 scam crypto websites and the removal of 56 apps from UK apps stores. Another key message is that the regulator continues to engage with firms who appear to be providing and advertising unauthorised debt advice and debt solutions to consumers via online promotions. The FCA continues to see aggressive sponsored promotions placed by unauthorised firms and it remains committed to using its powers to work with and take appropriate action against unauthorised firms to prevent serious harm to consumers in this area.

On 25 October 2024, the Financial Conduct Authority (FCA) published the results of its survey to better understand how firms record and manage allegations of non-financial misconduct. Background Previously, the FCA published a letter to all regulated Lloyd’s managing agents, London market insurers and Lloyd’s and London market brokers and managing general agents, requesting information relating to incidents of non-financial misconduct. The letter asked for aggregated statistics for the years 2021,2022 and 2023, including the number of incidents, the method by which these were recorded, and the outcome. The letter was not a voluntary request for information. The FCA elected to exercise its powers under section 165 Financial Services and Markets Act 2000 to formally request the relevant data from firms, failure to comply with such a request risked being found in contempt of court. Firms had until 5 March 2024 to respond to the letter. Wholesale banks and wholesale brokers also received letters from the FCA. Importantly, the letters were the first comprehensive non-financial misconduct survey across these sectors and a significant step for the FCA in understanding the subject matter, providing a baseline assessment of behaviours. Key findings The FCA reports that over 1,000 firms responded to its survey, and it found that the number of allegations reported increased between 2021 and 2023. The distribution of non-financial misconduct types varied by sector although bullying and harassment (26%) and discrimination (23%) were the most reported types of non-financial misconduct across all sectors. There were also 41% of non-financial misconduct incidents reported in the ‘other’ category. The wholesale banks portfolio had the highest number of reported incidents in all 3 years although this sector has a substantially larger employee population, while also having a higher number of reported incidents per 1,000 employees. Wholesale banks also tended to be more likely to detect incidents compared with other portfolios. A high proportion of smaller firms (0 to 49 employees) reported no incidents during 2021, 2022 or 2023. Other findings included: Disciplinary or ‘other’ actions were taken in 43% of cases. In the remainder, the FCA saw a range of other outcomes – either the cases were not investigated or unable to conclude, not upheld, upheld with no other action, or investigations were ongoing. The total number of confidentiality and settlement agreements signed by complainants fell over the 3 years surveyed according to the data from the wholesale banks sector. The data from other sectors showed no clear trend. In all sectors, action taken following non-financial misconduct rarely resulted in remuneration adjustment. When remuneration was adjusted it was mostly against unvested variable pay. 38% of total respondents stated that a board or a board level committee did not receive management information about non-financial misconduct. This may include respondents that do not have a regulated entity level board. 33% of total respondents stated that they have no formal governance structure or committee that decides the outcomes and disciplinary actions for those involved in non-financial misconduct cases. Next steps The FCA expects firms to have effective systems in place to identify and mitigate risks of all kinds. Should allegations or evidence of non-financial misconduct come to light, it expects a regulated firm to take them seriously through appropriate internal procedures. It can investigate and act against authorised firms that have inadequate systems and controls in this regard. The FCA expects firms to reflect on the survey findings and consider how their own performance compares with their peers. It also wants firms to discuss non-financial misconduct at senior management and board level and consider whether steps are needed to improve the firm’s culture, how risks are identified and managed and how non-financial misconduct is addressed on an ongoing basis. The FCA also expects firms to: Take allegations of non-financial misconduct seriously. Have effective systems in place to identify, investigate and remedy promptly and fairly when allegations are substantiated. Be fully compliant with their regulatory responsibilities and reporting requirements, regardless of size or sector. Guidance The FCA states that it will not be publishing best practice or guidance to firms at this time. It will publish its feedback to Consultation Paper 23/20: ‘Diversity and inclusion in the financial sector – working together to drive change’ in due course. Grid The interim version of the Regulatory Initiatives Grid states: “Following the joint Discussion Paper (DP21/1) published in July 2021, the regulators (PRA, FCA) published their separate Consultation Papers on 25 September 2023, with policy proposals that aim to support progress on improving diversity and inclusion across the financial sector and, through the FCA’s consultation, tackle non-financial misconduct (NFM). The FCA intends to publish a Policy Statement on ‘Tackling Non-Financial Misconduct in the Financial Sector’ around year-end 2024, to be followed by FCA and PRA Policy Statements on the remaining D&I proposals in 2025.”

The FCA has issued a short statement following the Court of Appeal judgment in certain cases concerning motor finance commission. The FCA states that it is carefully considering the decision. In September, the FCA extended its pause to the time firms have to provide a final response to customers about motor finance complaints involving a discretionary commission arrangement in light of these legal cases.

Overview: This is another FCA fine in connection with treatment by a bank of borrower customers, particularly with regards to the application of forbearance for vulnerable and other customers in arrears or in financial difficulty.    Relevant period: The misconduct spanned nearly a six year period between 2014 and 2020. Breaches: The FCA found that TSB was in breach of Principle 3 (systems and controls) and Principle 6 (treating customers fairly). The findings were based on the outcome of a skilled person review (under s.166 FSMA) which took place in stages between 2020 and 2023 and which found that in 55% of a sample of 400 customer files customers experienced unfair outcomes. TSB agreed that the FCA could rely on these findings for the purposes of the enforcement action. What did the FCA find: Some customers placed into the collections and recoveries process were at risk of unfair treatment with examples including: inadequate customer assessment with regards to financial position and affordability resulting in unaffordable repayment plans and failure to identify vulnerable customers (examples in the Notice include a staff member suggesting a customer make sandwiches for their son instead of paying for school meals); forbearance options not being offered or not fully explored, pressure on customers to make payments to access forbearance options, assistance sometimes lasting longer than necessary resulting in longer terms and higher charges (examples in the Notice include a staff member asking whether a customer could borrow money from family or friends); inappropriate interest, fees and charges with regards to both TSB policies and procedures and the customer’s circumstances and not suppressed when they should have been (an example in the Notice references arrears fees being applied to a customer in a care home after an Alzheimer’s diagnosis); and errors and poor or missing communications including where TSB did not have up to date addresses for customers (an example of an error included a payment being applied as a debit rather than a credit resulting in the improper commencement of litigation). When issues were raised, including by TSB’s parent following its own remediation process and by internal 2LOD and 3LOD reviews, the bank’s response was inadequate. Key root causes: Policies and procedures contained requirements which increased the risk of unfair outcomes such as requiring customers to make a payment before offering a forbearance arrangement. Training didn’t equip staff to ask customers the right questions about their financial position and ability to repay or the range of forbearance options. Incentivisation programmes had the potential to encourage staff to prioritise the number of payment arrangements made (ahead of appropriate customer discussions). Automated processes didn’t function as intended and there were instances of customers being charged two arrears fees in a single period or accounts not being moved to the next stage in the collections and recoveries process. Internal testing focused on single customer interactions rather than the whole customer experience so senior management didn’t have adequate information. Assurance reviews attributed root causes to staff errors without recognising wider issues and did not include a review of policies and procedures or training. Remediation: TSB paid £99.9m in respect of over 270,000 customer accounts at a total cost of £105m. The remediation extended to customers in arrears outside the relevant period and where it was not clear that detriment had occurred “ensuring no customers were left out”. TSB also took considerable steps to remedy failings in its systems and controls and dedicated “considerable resources” to making improvements.    Penalty: £10,910,500 including 30% discount for early settlement. No disgorgement was applied in recognition of the remediation exercised which negated any financial benefit to TSB from its arrears handling.  However, the starting point for the calculation of the penalty was 10% of the fees and interest charged by TSB during the relevant period to customers in arrears who were at risk of unfair treatment.  Aggravating factors included failure by senior management to take action sooner. Mitigation took into account the remediation programme and acceptance of the skilled person’s findings. Balancing the aggravating and mitigating factors, the FCA gave TSB an overall significant reduction of 40%. 

This article was co-authored with Michele Beck, Tom Clark, Masooma Saberi and Vivian Truong. In September 2024, ASIC continued to focus on regulatory and enforcement action in the superannuation industry by: releasing public notes from the latest Superannuation CEO Roundtables; publishing REP 794 ASIC enforcement and regulatory update: January to June 2024; and updating the default rate of nominal wage inflation in a superannuation forecast relief instrument. ASIC also: urged product issuers to review their compliance with design and distribution obligations; reminded businesses to prepare for mandatory climate reporting; reissued guidance on doing financial services business in Australia; updated guidance on whether carbon market participants require an AFS licence; and extended relief for employee redundancy funds. Further, ASIC succeeded in its greenwashing action in the Federal Court of Australia against Vanguard Investments Australia (Vanguard). Vanguard was ordered to pay a $12.9 million penalty for making misleading claims about its ESG exclusionary investment screens. September also saw APRA focus on enhancing superannuation data collections and improving transparency in superannuation. AUSTRAC commented on the introduction of the AML/CTF Amendment Bill in Parliament. 1             ASIC and APRA host Superannuation CEO Roundtables On 2 September 2024, ASIC and APRA released the public notes from the latest Superannuation CEO Roundtables, held on 18 June and 16 July 2024. Twelve superannuation trustee CEOs and executives attended the Roundtables, representing a broad cross-section of the industry. The Roundtable discussions highlighted the ongoing importance of investment governance, integrity, and robust risk culture in the superannuation industry. ASIC’s media release can be accessed here. The public notes can be accessed here. 2             ASIC to target misconduct in banking and superannuation sectors ASIC released REP 794 ASIC enforcement and regulatory update: January to June 2024 (REP 794) on 9 September 2024, setting out recent outcomes in enforcement and regulation. REP 794 outlined key ASIC activities between 1 January and 30 June 2024, including: ASIC succeeding in 95% of its civil and criminal prosecutions, securing $32.2 million in civil penalties and nine criminal convictions; the launch of 63 new investigations, commencement of 12 new civil proceedings and completion of 550 surveillances; and completion of ASIC’s review of 15 banks (outside the four major banks) on their scam prevention, detection and response activities. ASIC emphasised that it will continue to focus on enforcement and regulatory activities relating to crypto-assets and blockchain technology, financial hardship, scams, greenwashing, banking, unconscionable conduct, and superannuation cold-calling. ASIC’s media release can be accessed here. 3             ASIC calls on product issuers to review distribution practices for DDO compliance On 10 September 2024, ASIC released REP 795 Design and distribution obligations: Compliance with the reasonable steps obligation (REP 795). This Report outlines ASIC’s findings from its surveillance of 19 issuers of high-risk investment, insurance and credit products between October 2023 and August 2024. Design and distribution obligations require product issuers to take reasonable steps to support appropriate distribution of their products to ensure that the products meet consumers’ needs. In REP 795, ASIC shared key observations about, and recommendations for: selection and supervision of distributors; training staff; marketing and promotional materials; use of questionnaires; and use of information and monitoring outcomes. ASIC also released minor updates to Regulatory Guide 274 Product design and distribution obligations (RG 274) to clarify its guidance on the appropriateness requirement for target market determinations.  ASIC’s media release can be accessed here. 4             ASIC updates superannuation forecasts relief instrument ASIC has updated the default rate of nominal wage inflation in ASIC (Superannuation Calculators and Retirement Estimates) Instrument 2022/603 and Regulatory Guide 276 Superannuation forecasts: Calculators and retirement estimates (RG 276). This follows industry feedback on consultation CS 7 Proposed update to superannuation forecasts relief instrument. ASIC decreased the default rate from 4% p.a. to 3.7% p.a. to align with the revised long-term wage growth forecast in the 2023 Intergenerational Report. The revised rate of 3.7% p.a. applies from 1 January 2025. Providers of superannuation calculators and retirement estimates must update the default inflation rate used in their economic assumptions by 31 December 2024. ASIC’s media release can be accessed here. 5             ASIC urges businesses to prepare for mandatory climate reporting The Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 (Cth) (Bill) passed Parliament on 9 September 2024 and received Royal Assent on 17 September 2024. The Bill amends the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) to, among other things, introduce mandatory climate reporting. From 1 January 2025, many large Australian businesses and financial institutions must prepare annual sustainability reports with climate-related financial disclosures. Smaller entities will be required to start reporting on or after 1 July 2026 and 1 July 2027. ASIC plans to engage with stakeholders and industry participants before issuing or updating regulatory guidance on complying with the mandatory sustainability reporting obligations. ASIC has provided information on the new regime in its sustainability reporting web page. ASIC’s media release can be accessed here. 6             ASIC reissues Regulatory Guide 121 on doing financial services business in Australia ASIC reissued Regulatory Guide 121 Doing financial services business in Australia (RG 121), which it last updated in June 2013. RG 121 provides guidance about the financial services regime for individuals and companies outside Australia. This guidance includes information on when an AFS licence is needed, available exemptions from holding an AFS licence, and AFS licensee obligations. RG 121 was reissued to: clarify the available licensing exemptions and relief; remove references to expired or repealed AFS licencing relief, including class relief granted to foreign financial services providers and foreign collective investment schemes; update the description of “carrying on a business in Australia” to align with judicial guidance, including general indicators, and when a one-off transaction may constitute carrying on a business; and reflect general developments in the legal and regulatory framework. ASIC’s media release can be accessed here. 7             ASIC extends reportable situations relief and personal advice record keeping requirements ASIC has made two legislative instruments, ASIC Corporations and Credit (Breach Reporting–Reportable Situations) Instrument 2024/620 and ASIC Corporations Record-Keeping Requirements for Australian Financial Services Licensees when Giving Personal Advice) Instrument 2024/508, to extend reportable situations relief and personal advice record keeping requirements. The relief and requirements are set out in instruments that are due to expire in October 2024. ASIC has extended the instruments for five years (until October 2029), as they are operating efficiently and effectively and continue to form a necessary and useful part of the legislative framework This decision follows a public consultation in which six submissions were received. The submissions were generally supportive of the proposal to extend the operation of the relief and requirements. However, the submissions advocated for wider relief from the reportable situations regime, and migration of the relief and requirements to primary law. ASIC’s media release can be accessed here. 8             ASIC’s Vanguard greenwashing action results in record $12.9 million penalty On 25 September 2024, the Federal Court ordered Vanguard to pay a $12.9 million penalty for making misleading claims about ESG exclusionary investment screens. ASIC commenced proceedings against Vanguard in July 2023, alleging greenwashing in relation to the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund). The Court found that approximately 74% of the securities in the Fund were not researched or screened against applicable ESG criteria, and that Vanguard had misrepresented the “ethical” characteristics of the Fund. Greenwashing continues to be an enforcement priority for ASIC, and recent regulatory interventions are outlined in Report 791 ASIC’s recent greenwashing interventions. ASIC’s media release can be accessed here. The full judgment can be accessed here. 9             ASIC to allow instrument for primary production managed investment schemes to expire ASIC will allow the ASIC Corporations (Land Holding for Primary Production Schemes) Instrument 2024/15 to expire on 1 October 2024, as the instrument is no longer necessary. The instrument imposed minimum standards that a responsible entity must meet regarding the holding of certain interests in land for primary production managed investment schemes. ASIC’s media release can be accessed here. 10          ASIC updates guidance for participants in the carbon market following Safeguard Mechanism reforms On 30 September 2024, ASIC released an updated version of Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? (RG 236) to: address the safeguard mechanism reforms which commenced on 1 July 2023, as introduced under the Safeguard Mechanism (Crediting) Amendment Act 2023 and National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015; and reflect developments in the Australian Carbon Credit Units Scheme since RG 236 was last updated in May 2015. ASIC consulted with stakeholders earlier this year by releasing Consultation Paper 378 Safeguard mechanism reforms: Updates to RG 236. ASIC received 19 submissions, including one from Norton Rose Fulbright Australia. See our submission here. ASIC’s media release can be accessed here. 11          ASIC extends relief for employee redundancy funds After receiving mixed feedback from stakeholders, ASIC has extended the operation of ASIC Corporations (Employee redundancy funds relief) Instrument 2015/1150 for a transitional period of 18 months. This will allow for further consultation on the appropriateness and form of the relief. The transitional relief is provided under ASIC Corporations (Amendment) Instrument 2024/618. The Employee Redundancy Funds instrument, which was due to expire on 1 October 2024, grants relief to operators and promoters of employee redundancy funds from the AFS licensing and managed investment provisions of the Corporations Act. Entities relying on the relief must notify ASIC by 31 October 2024. Further consultation is intended for early 2025. ASIC’s media release can be accessed here. 12          APRA releases response to consultation on enhancements to superannuation data collections On 20 September 2024, APRA released a response to its recent consultation on enhancements to superannuation data collections relating to indirect investment costs and trustee financial statements reporting. In the consultation, APRA sought feedback on ways to improve the breadth, depth and quality of APRA’s superannuation data collection. Submissions were largely supportive of APRA’s proposals. However, some submissions raised concerns about: inconsistencies between registrable superannuation entity (RSE) reporting requirements under ASIC’s Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97) and SRS 332.0 Expenses and Investment and Transaction Fees and Costs; data completion under different trustee business structures; and the definition of ‘Related Party’. APRA’s response clarified the following: APRA will refine the reporting standard to capture total investment fees and costs and transaction costs for each investment manager and internally incurred, aligning with RG 97 requirements; APRA will update instructions and guidance for different entity types; and the related party disclosures required to be reported are aligned to AASB 124 Related Party Disclosures. APRA intends to release a second response by the end of 2024, addressing proposed enhancements for the collection of data on investments and RSE, and RSE licensee, profile. APRA’s media release can be accessed here. APRA’s response can be accessed here. 13          APRA releases performance metrics and insights package to improve transparency in superannuation On 24 September 2024, APRA released the Comprehensive Product Performance Package (CPPP), which sets out product performance metrics and insights in relation to 876 MySuper and choice products. The data derives from the legislated performance test and APRA’s superannuation heatmaps. The CPPP is intended to increase transparency and improve member outcomes in the superannuation industry. APRA’s media release can be accessed here. The CPPP can be accessed here. 14          APRA releases intermediated general insurance statistics for June 2024 On 26 September 2024, APRA released its bi-annual intermediated general insurance statistics for June 2024. This publication outlines key statistics on intermediated general insurance placed with APRA-authorised general insurers, Lloyd’s underwriters and unauthorised foreign insurers. APRA’s media release can be accessed here. The statistics can be accessed here. 15          AUSTRAC releases update on the introduction of the AML/CTF Amendment Bill in Parliament On 11 September 2024, the Commonwealth Attorney-General introduced the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024 to Parliament. The Bill aims to modernise the AML/CTF regime and better protect the community from financially-enabled crimes. The Bill also aims to strengthen and update the existing regime to improve its effectiveness. The Bill has three key objectives: extend the AML/CTF regime to additional services provided by real estate professionals, lawyers, accountants, trust and company service providers, and dealers in precious metals and stones (Tranche 2 entities); improve the effectiveness of the AML/CTF regime, and make it simpler and clearer; and modernise the regime to reflect changes in business structures, technologies and illicit financing methodologies. The Attorney-General’s Department and AUSTRAC consulted on the proposed reforms and received over 270 submissions over 2023-2024. AUSTRAC’s media release can be accessed here. More information about the Bill can be accessed here. To stay updated, you can access the Norton Rose Fulbright AML/CTF hub: here.

On 24 October 2024, there was published the European Parliament’s position adopted at first reading on 24 April 2024 with a view to the adoption of Regulation (EU) 2024 amending Regulation (EU) 2016/1011 as regards the scope of the rules for benchmarks, the use in the Union of benchmarks provided by an administrator located in a third country, and certain reporting requirements. European Parliament [BMR]: Position of the European Parliament adopted at first reading on 24 April 2024 with a view to the adoption of Regulation (EU) 2024 of the European Parliament and of the Council amending Regulation (EU) 2016/1011 as regards the scope of the rules for benchmarks, the use in the Union of benchmarks provided by an administrator located in a third country, and certain reporting requirements (EP-PE_TC1-COD(2023)0379) (PE743.492v01-00) (24 October 2024) https://www.europarl.europa.eu/doceo/document/TC1-COD-2023-0379_EN.pdf

On 24 October 2024, the Financial Conduct Authority (FCA) published a speech by Graeme Reynolds (Director of Competition, FCA) entitled Vulnerability is not a buzzword. The speech was delivered at the PIFMA’s Wealth Vulnerability event. The speech focuses on customer vulnerability in the whole wealth management sector. Among other things Mr Reynolds notes that the Consumer Duty applies proportionately with firms more remote from retail clients having more limited obligations. However, he adds that the design and value proposition for a product or service, and the information provided to ensure it is understood, can have a real impact on clients with characteristics of vulnerability. “If you are part of the distribution chain, you need to act” warns Mr Reynolds. In the latter part of his speech Mr Reynolds notes that one of the criticism of regulators is that they are “long on diagnosis and short on prescription” and he goes on to explain what things the regulator is looking for firms to do. This includes: Putting processes in place to recognise those who may need more help, or to identify those engaging with the firm’s services where they may not meet their needs. This applies to all firms – with or without direct client engagement. Considering why people are using the firm’s products and services, what their goals are, and how the client journey the firm provides – from promotion to ongoing client service – supports them to be realised. Issuing clear, easily understood communications and promotions so people can make informed decisions, tailoring them where necessary. Evolving well trained, empathetic client service that appreciates vulnerabilities are not fixed, that circumstances change and that the firm might need to adapt, too, as a result. Thinking pragmatically and proportionately about what a ‘good’ client outcome is for those using the firm’s service. Using data to test whether clients are, in fact, those the firm expected to have, and receiving the service they and the firm intended. Digesting the work the FCA has published, and will publish, on how the Consumer Duty and vulnerability guidance is being implemented elsewhere, considering what lessons there might be.

On 24 October 2024, the European Banking Authority (EBA) issued a consultation paper on draft regulatory technical standards (RTS) on the treatment of structural foreign exchange (FX) positions under Article 104c of the Capital Requirements Regulation (CRR) and on the reporting on structural FX positions. Prior to the CRR 3, the concept and specific application of the structural FX provision pursuant to Article 352(2) of the CRR had been subject to several interpretations, across both supervisory authorities and institutions. To ensure a harmonised EU interpretation and implementation, the EBA published in 2020 guidelines on how to implement the structural FX provision contemplated in Article 352(2) of the CRR. As part of the CRR3 legislative process, the co-legislators introduced a mandate for the EBA to develop RTS on structural FX positions. Changes The EBA consultation explains that the draft RTS overall keep the provisions in the guidelines and that there have only been a few changes including: The introduction of clear quantitative thresholds for a currency to be considered eligible for the structural FX treatment; this is proposed in view of reducing observed variability in the currencies that were considered relevant for the business under the guidelines. The possibility for banks to consider only credit risk own funds requirements when determining the position neutralising the sensitivity to the capital ratios, as long as the credit risk own funds requirements are the one driving the variability of the ratio against FX changes. Clarifications around how institutions are to remove the risk position from the own funds requirements for foreign exchange risk. Provisions relating the institution’s policies as regards currencies that are particularly illiquid in the market, for example, because of EU restrictive measures. Reporting In the consultation paper the EBA sets out a proposal for the reporting on structural FX permissions granted by Member State competent authorities. Next steps The deadline for comments on the consultation paper is 7 February 2025. The EBA will assess the feedback received during the public consultation, before submitting the final draft RTS to the European Commission.

On 24 October 2024, the Financial Conduct Authority issued aggregate complaints data for H1 2024. Key findings for H1 2024 include: Compared to H2 2023, there was a 4% decrease in complaints to financial services firms. The product groups that experienced an increase in complaints were decumulation and pensions (up 7.1%), insurance and pure protection (up 1.4%) and investments (up 2.1%). The product groups that experienced a decrease in complaints were banking and credit cards (down 9.6%) and home finance (down 1.7%). There were decreases in the three most often complained about products which are current accounts (down 4.5%), motor and transport (down 1.7%) and credit cards (down 4.4%). The total amount of redress was £243m. This was a 6.9% decrease on the 2023 H2 figure of £261m.