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In our second blog examining the compliance outlook for financial services firms in 2023, Gary Muchmore, Managing Director at StarCompliance, discusses upcoming legislation for individual accountability regimes, the still-evolving post-Brexit compliance landscape, and recent developments in the digital assets space.
INDIVIDUAL ACCOUNTABILITY
The UK’s Senior Managers and Certification Regime (SMCR), introduced in 2016, was implemented to strengthen market integrity by making individuals more accountable for their conduct and competence. With penalties for non-compliance ranging from fines to bans, the regime requires senior executives to take reasonable steps to effectively control their area of business, to ensure regulatory compliance and prevent breaches from occurring or continuing to occur and to delegate appropriately. There is also an onus on firms to certify the fitness and propriety of key employees and apply new Conduct Rules to all employees (excluding ancillary staff) and report breaches appropriately.
However, the number of investigations and enforcement actions has remained consistently low and in December 2022, the UK Treasury announced plans to look at reforming SMCR as part of a package of thirty Financial Sector initiatives dubbed the “Edinburgh Reforms”. A review of the regulation is set to start in Q1 2023.
Modeled on SMCR and expected to come into force this year, the Republic of Ireland’s Central Bank (Individual Accountability Framework) Bill, which includes the Senior Executive Accountability Regime (SEAR), is designed to strengthen and enhance individual accountability in the financial services industry. It will create a fundamental shift in regulatory accountability both for regulated financial services providers (RFSP) and the country’s individual senior executives.
The new framework is wide-ranging and will demand more rigor and transparency in the definition of Senior Executive’s roles and responsibilities, strengthen the existing obligations on firms in relation to the fitness and probity of their key personnel, and prescribe specific conduct standards for RFSPs, Senior Executives, and staff performing controlled functions.
Learn more about compliance with individual accountability regimes here.
UK POISED TO TEAR UP AND RE-WRITE FINANCIAL SERVICES LEGISLATION
The Financial Services and Markets Bill 2022-2023 (FSMB) implements the outcomes of the Government’s Future Regulatory Framework (FRF) review by revoking onshored EU financial services regulation and delegating rule-making to regulators. The Bill also sets out to ensure the FCA and PRA take on a new secondary objective for medium to long-term growth and international competitiveness. Described by UK Finance as a "once in a generation opportunity to improve regulation, enhance consumer protection and create a more competitive financial services sector" the bill is incredibly wide-ranging in its scope.
The FSMB will impact firms from a broad range of sectors in different ways, ranging from increased regulatory scrutiny to the removal of burdensome or inefficient regulations. Certainly, this is likely to entail additional costs and management time for affected firms who will need to update their compliance policies and procedures. Currently in the committee stage in the House of Lords, even when the bill is finally passed the Government acknowledges that the process to revoke and replace all onshore EU financial services regulation with new rules will take several years to complete. The Consultation process on and implementing new rules and regulations (representing a significant program of work for the regulators) has already started and firms should remain alert to these changes.
DIGITAL ASSETS
Regulatory scrutiny of digital assets is on the rise globally and is likely to intensify following the collapse in November of FTX – one of the world’s largest cryptocurrency exchanges – which not only resulted in huge financial losses but also shook consumer confidence in the resilience of digital assets.
As new frameworks and guidelines start to bring digital assets closer to mainstream adoption, firms are becoming increasingly concerned that they may be held liable for the crypto-trading activity of their employees. Rule 204A-1 of the Investment Advisers Act of 1940 requires that registered investment advisers must adopt policies and procedures requiring their employees to report personal transactions and holdings in reportable securities.
Although there has been confusion and debate over which digital assets constitute securities, SEC Chair Gary Gensler has repeatedly emphasized that some crypto assets “don't just resemble securities, they are securities”. A joint SEC-CFTC proposal to reform reporting requirements for large funds recently provided the regulators’ first definition of a digital asset.
Central bank governors and heads of supervision have now endorsed a global prudential standard for banks’ exposures to crypto assets, which was developed by the Basel Committee on Banking Supervision. The standard, which will permit 2% crypto reserve exposure among banks, is due for implementation by January 1, 2025. It aims to provide a robust and prudent global regulatory framework for internationally active banks’ exposures to crypto assets, promoting responsible innovation while preserving financial stability.
In addition, the Markets in Crypto-Assets (MiCA) Regulation is awaiting a vote by the European Parliament in February 2023. MiCA is meant to address gaps in existing EU financial services legislation by harmonizing rules for crypto-assets, related activities, and services. MiCA will regulate primary market activities (issuance & public offerings), access to the secondary market (listings), and certain crypto-related services.
In 2023, regulators will be focusing their attention on creating predictable conditions and bringing order to the highly fragmented digital asset landscape. This could lead to tighter regulations on digital tokens and exchanges and may involve banning the co-mingling of customer capital, with assets to be held in custody, separate from the main business.
Firms that don’t already have a crypto-trading policy in place should consider implementing one in 2023.
COMPLY WITH CONFIDENCE IN 2023
Changes to existing legislation over time and the introduction of new rules and regulations can make it challenging to keep your organization up-to-date on the latest compliance requirements. But a specialist technology solution from a trusted partner can simplify compliance with existing and future regulations – from individual accountability regimes (such as SMCR, MAS IAC Guidelines, and SEAR), to market abuse regulations and post-Brexit legislative changes. It will also ensure you’re ready for both anticipated and unforeseen regulatory developments – in 2023 and beyond.
Interested in learning more? Join Steve Brown, Gary Muchmore and Terry Dawson for a virtual fireside chat and interactive Q&A on Wednesday, February 15, 2023 at 9am ET, for a deeper dive into these topics and to address the latest regulatory shifts in 2023.
