AUGUST 2021
AMEIS REGFACTS FINTECH - Related Regulatory & Compliance News
In This Issue : Government of Canada Consults on Copyright Framework for AI .....1 ICO Seeks Feedback on the Protection of International Data Flows ..3 UK Launches Digital Payments Initiative..........................................4 SEC Approved NASDAQ Proposal on Board Diversity Measures.................................................................................................4 EBA Releases Consultation on AML/CFT compliance officers...........5 FinCoNet Released Long-Awaited Report on Product Governance and Culture..............................................................................................6 BIS Committee Work Programme Out for the First Time.....................9 Stablecoins: What are they? ...............................................................10
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Government of Canada Consults on Copyright Framework for AI The Government of Canada launched a public Consultation paper on a modern copyright framework for artificial intelligence (AI) and the Internet of Things (IoT). The Consultation, launched on July 16, aims at ensuring that the Copyright Modernization Act (‘The Act’) adequately addresses the disruptions and challenges brought about by these new and fast evolving technologies. The Government is looking for technical and views on the challenges related to AI and IoT. The issues related to AI include the following: Absence of an agreed definition of AI that poses challenges for copyright policymaking. The paper points out the divergence of definition between the Organisation for Economic Co-operation and Development (OECD) and the World Intellectual Property Organisation (WIPO). The Government acknowledges that differences between general AI, narrow AI, deep learning, algorithmic methods that do not necessarily involve AI, and automation and computation in general should be taken into account in Copyright policy. An exception to Text and data mining (TDM) to address the burden caused by the obtention of any necessary authorisation from the right holders to make reproductions for all works used in TDM activity.
TDM refers to various techniques of informational analysis, including the computer-based, automated process of analysing large amounts of machinereadable information to identify trends, patterns, and relationships, and to make predictions TDM can be used to train and develop AI applications. The Government outlined the benefit of TDM in health care and legal services. Authorship and ownership of AIgenerated work or AI-assisted work. The Government is seeking comment on 3 proposed approached to help clarify this issue, namely - Attribute authorship of AI-generated works to the person who arranged for the work to be created, similar to the UK’s copyright framework; - Clarify that copyright and authorship apply only to works generated by humans, or that no copyright may subsist in a work created without a 1
human participating in some shape or form in the creation of the work; - Create a new and unique set of rights for AI-generated works. Infringement and liability regarding AI. The Government is seeking for additional evidence to determine to what extent the copyright framework should be clarified with respect to infringement and liability by AI applications and AI-generated or AIassisted works.
Interoperability: The Government acknowledges that although the Act contains the TPM exception for interoperability of computer programs, it might not provide enough protection to business and insufficient freedom to operate and to innovate. The Government is thus seeking for stakeholders feedback on the challenges they are having with the copyright framework in achieving interoperability. The Consultation paper also incorporates approaches taken by other jurisdictions.
The issues related to IoT include: Repair: Consumers and businesses pursuing circumvention activities for repair purposes that are not covered by the existing technological protection measures (TPM) exceptions, can be in violation of one or more of the TPM prohibitions in the Copyright Modernization Act. The Government is proposing two broad approaches to introduce a new TPM exception for repair
Interested stakeholders must provide their technical evidence and views by September 17 to copyright-consultationdroitdauteur@canada.ca.
- Introduce a specific legislative exception to the prohibitions regarding TPMs for the purpose of repair, or - Exercise the regulatory authorities under the Act to create a regulatory TPM exception for the purpose of repair. 2
ICO Seeks Feedback on the Protection of International Data Flows On August 11, the Information Commissioner Office (ICO) released its Consultation paper to gather views on its draft international data transfer agreement (IDTA). The IDTA will replace its current standard contractual clauses to protect personal data out of the UK. The Consultation paper includes ICO’s proposal and plans to update its guidance on international transfers (e.g., processor, sub-processor).
(ii) guidance on how to complete the IDTA, (iii) the template of the IDTA and (iv) and guidance on how to complete the template.
ICO is requesting comments on the following documents, briefly described below.
Draft transfer risk assessment and tool (‘TRA’): The TRA include the tools to assess the risks related to the transfer (e.g., is the transfer enforceable, is there a third-party risk…).
Draft international data transfer agreement: The IDTA draft available on ICO’ website (see link above) includes a (i) detailed description of the IDTA (including the definition of transfer risk assessment),
The consultation will run until October 7.
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UK Launches Digital Payments Initiative Announced on July 30 by the Payment Systems Regulator (PSR), the initiative will be carried out by the PSR Panel and focused on four key areas : Identifying potential purchases or transactions where digital payments could provide a solution to future needs.
Identifying the practical challenges for users and small businesses that could prevent digital payment options being adopted.
Collating relevant evidence from international experience and payment initiation aspects of Open Banking.
Identifying technical and/or regulatory barriers within the PSR’s remit to enable suppliers of digital payment services to develop new payment solutions.
The findings of this Panel-led initiative are scheduled to be submitted to the PSR later this year.
SEC Approved NASDAQ Proposal on Board Diversity Measures On August 6, the Securities Exchanges Commission (SEC) announced its approval of NASDAQ proposal to change its listing rules related to board diversity (“Board Diversity Proposal”). The Board Diversity Proposal, subject to the ‘comply or explain’ principle, requires entities with a board of directors of five or fewer members to have at least one member of its board of directors who is Diverse, including at least one Diverse director who self-
identifies as Female and at least one Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. Each Nasdaq-listed company would be required to disclose annually to the public its board-level diversity data.
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EBA Releases Consultation on AML/CFT compliance officers The Consultation paper published on July 29 by the European Banking Authority (EBA), invites comments on all proposals listed below. The role and responsibilities of the management body in the AML/CFT framework and of the senior manager responsible for AML/CFT. This section sets out EBA’ expectations regarding the role and responsibilities of financial sector operators’ management body relating to the: Approval of the policies, controls and procedures Role of the management body in its supervisory function in the AML/CFT framework Role of the management body in its management function in the AML/CFT framework Identification of the member of the management body responsible for AML/CFT Identification of a senior manager responsible for AML/CFT where no management body is in place Tasks and role of the member of the management body or senior manager responsible for AML/CFT
Role and responsibilities of AML/CFT compliance officer This section includes EBA’ proposed guidelines relating to the following: Appointment of the AML/CFT compliance officer Proportionality criteria for the appointment of a separate AML/CFT compliance officer Suitability, skills and expertise of the compliance officer Tasks and role of the AML/CFT compliance officer Relationship between AML/CFT compliance function and other functions Organisation of AML/CFT compliance function at group level EBA’s proposed guidelines focuses on the following: Integration at group level Role of the management body for AML/CFT at group level Organisational requirements at group level 5
Review of AML/CFT compliance function by competent authorities Including the proposal that competent authorities ensure that AML/CFT compliance officers meet the conditions relating to integrity, expertise and knowledge of the legal and regulatory AML/CFT framework, either at appointment or at a later stage.
Responses to this consultation will help the EBA address the uneven implementation of AML/CTF rules across the EU for more efficiency in the results sought in fighting financial crime. The draft guidelines are published for a three-months public consultation.
FinCoNet Released Long-Awaited Report on Product Governance and Culture Key takeaways
The Consultation paper published on July 29 by the European Banking Authority (EBA), invites comments on all proposals listed below. In July 2021, the International Financial Consumer Protection Organisation (“FinCoNet”) and the G20/OECD Task Force on Financial Consumer Protection published its long-awaited report, Financial Product Governance and Culture (the “Report”) in relation to financial products, including banking products, based on 29 responses collected from 25 participating countries. Culture is defined as “the shared values and norms that drive behaviours and decision making within the [financial services] organisation”. The Report identifies a strong link between “good organisational culture and product governance”.
The Report includes findings on areas such as, regulatory frameworks, tools for good consumer outcomes, risks to consumers, consumer complaints, supervisory tools and impacts of organizational culture, some of which are summarized hereunder. Regulatory Frameworks The Report outlined that most respondents implemented rules and processes to ensure the fair treatment of consumers; most product governance requirements being specifically focused on banking products.
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Governance Highlights of the report: 89% of respondents have established product governance rules for products, generally and for banking products specifically 65% of respondents have provisions for a target market, relating to the consumer or factors relating to the product. Consumer factors include demography, financial capacity, occupation, risk aversion, financial knowledge potential vulnerability. Product factors refer to product risk level or the product complexity level. 81% of respondents hold third-party providers responsible for breaches of design and distribution obligations 80% of respondents have product governance requirements that address sales incentives Most respondents reported that their product governance requirements are “designed to produce good consumer outcomes”. These include suitability, choice, safety, fairness, and purpose.
Multiple risks arise from poor product design and inappropriate product distribution. For credit products, risks include over-indebtedness, improper product design, inadequate sales practices and poor marketing and limited consumer understanding. For deposit products, risks include lack of transparency about conditions and fees, mis-selling of deposit accounts and investment products, aggressiveKey sales, poor product takeaways design, and fraud and depository institution failure. For payment products, risks include fraud (unauthorised payments, scams, identity theft and/or data breaches) and payments processing (risk of incorrect payments, service outages making it impossible to send, receive or access money, delays in payment processing and cyberattacks). This is especially challenging for vulnerable populations such as older consumers. Yet, only 19% of respondents have product governance requirements that address banking products sold to older consumers.
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Consumer complaints
Culture
Consumer complaints contribute to product governance by helping providers “identify failures” in products and allow supervisors to identify risks to financial consumer protection. 88% of respondents attest that these complaints play a role in financial product governance.
The Report states that Canada is the only jurisdiction where “good culture” is defined.
Next, a dispute resolution process provides an alternative to resolve complaints and subsequently “refine product governance requirements and assess whether consumers are being treated fairly”. The Report indicated that supervisory authorities should also collect and analyze complaints information to help them better identify consumer risk, regulatory gaps and systemic irregularities, and measure the effectiveness of regulatory policies as well as the level of compliance with law and regulations.
Culture has been observed as a driver for good and bad governance. A poor product design can stem from poor culture such as failure to incorporate multiple perspectives, or to highlight product risks and concerns. Good culture focuses on consumer needs and delivering suitable products Key takeaways in a fair and transparent manner. A variety of regulatory and supervisory approaches have been used to foster good culture. Good culture is viewed as a way to “achieve consumer focused decision making” by taking into account the needs, interests, objectives and characteristics of consumers. This in turn builds confidence in financial firms and their products.
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BIS Committee Work Programme Out for the First Time On August 5 the Bank of International Settlement (BIS) Committee on Payments and Market Infrastructures (CPIM) published its Work Programme for 2021-2022, outlining its strategic priorities for monitoring and analysis, policy work, and standard setting and implementation activities. Two principal themes were announced for 2021-2022, covering the subsequent following objectives:
and central bank digital currencies (CBDC) to contribute to the crossborder payments programme.
1. Shaping the future of payments by
Monitoring changing trends in payments mainly the rise in digital payments and decline in cash shaped by changes in retail payments Key takeaways behaviour since the beginning of the COVID-19 pandemic.
Enhancing cross-border payments. The Committee acknowledges longstanding issues in cross-border payments that are “still slow, expensive, opaque and not inclusive”, yet the industry has undergone transformation with innovative payment methods, interfaces and general improvements including digitalization. Analyzing and addressing policy issues arising from innovations in payments, in particular as they relate to the application of the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI) to stablecoin arrangements. In addition, further analysis will focus on the potential for innovations such as Multilateral payment platforms, stablecoin arrangements
2. Evaluate and address risks in financial market infrastructures (FMIs) by Analyzing issues related to central clearing, including margin practices, resiliency and recovery, and access and portability Addressing issues relevant to the resilience of FMIs, including individual and collective preparedness, FX settlement risks, operational resilience, cyber risk, climate change-related risks and monitoring.
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Product Corner Stablecoins : What Are They? A stablecoin is defined by the Financial Stability Board (FSB) as a "cryptocurrency that aims to maintain a stable value relative to a specific, asset, or a pool or basket of assets’’. Stablecoins are electronic, can be exchanged peer-to-peer and are not issued by central banks. They are token-based; their validity is verified based on the token itself, rather than the identity of the counterparty (see BIS Working Papers: Stablecoins: risks, potential and regulation, November 2020). Two main varieties of stablecoins currently exist: Algorithmic stablecoins are pegged to a reserve asset such as the US dollar, gold or any other foreign currency. They help achieve price stability.
Collateral-backed stablecoins rely on collateral to back the value of the coins (fiat currency, such as U.S. dollars, euros, gold). The market value of existing stablecoins (Tether, USD Coin, Dai, etc.) reached USD 14 bn in August (BIS, November Key2020 takeaways 2020). Stablecoins are subject to reporting requirements under Canadian securities laws outlined in CSA Staff Notice 51 363 Observations on Disclosure by Crypto Assets Reporting Issuers. Notice in which he Canadian Securities Administrators (CSA) provides guidance on continuous disclosure obligations for reporting issuers dealing in digital assets, including stablecoins. See our summary here.
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Complex landscape & widening gaps
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Investor demand for enhanced transparency and disclosure, data privacy, investor and consumer protection requirements, and AML/KYC concerns are some of the many challenges affecting the industry.
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