JULY 2021
AMEIS REGFACTS FINTECH - Related Regulatory & Compliance News
In This Issue : IIROC and MFDA Recommendations on KYC & Suitability ...........1 Crypto in the List of FinCEN First Issue of AML/CFT Priorities ....2 IOSCO Consults on Sustainability-Related Practices in Asset Management ....................................................................................3 FCA Proposes New Climate-Related Disclosure Regime .............5 BIS - 2021 Annual Economic Report and CBDC ............................6 ECB Opinion on Pilot Regime for Market Infrastructures based on DLT ...................................................................................................7 ESMA - Call for evidence on digital finance ...................................8 BdF and MAS Team Up for CBDC Experimentation ......................8 FATF ‘ Second 12-Month Review on Revised Standards on VA & VASPs Out.........................................................................................9
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IIROC and MFDA Recommendations on KYC & Suitability On June 21, IIROC published for comment a proposed guidance (the Proposed Guidance) to assist Dealer Members (Dealers) in understanding and complying with IIROC’s Client Focused Reforms rule amendments relating to the know-your-client (KYC) and suitability determination requirements (CFRs Amendments). The Proposed Guidance is aimed at: Providing IIROC’s interpretation of the CFRs Amendments Clarifying how IIROC’s KYC and suitability requirements should be implemented, and Making the guidance consistent with the IIROC Rules, which will be effective on December 31, 2021.
Key takeaways
The Proposed Guidance lists, among others things, the type of KYC information that should be collected by dealers, including: Essential facts relative to each order, client and account Information to establish the identity of clients Information regarding the client reputation Information about the client’s insider status Information to ensure dealers have a sufficient understanding of their clients to enable a discharge of suitability determination obligations. Specific KYC information that must be collected for suitability determination includes: The client’s personal circumstances The client’s financial circumstances (e.g., liquidity needs, financial assets and net worth, use of leverage or borrowing to finance the purchase of securities, investment needs and objectives, investment knowledge, client risk profile etc.…) The guidance also includes IIROC’s expectations on how dealers can put the client’s interest first and confirms that KYC requirements are not one-size fits all but depend on the dealer’s business model, service offerings and clients. 1
The suitability determination requirement is applicable to all investment products offered, and not just securities. The guidance also addresses when it would be acceptable to collect and maintain one set of KYC information for multiple accounts and when separate account applications would be required. The Proposed Guidance is available in Appendix 1 available and will replace Notice 12-0109 - Know your client and suitability – Guidance. On the same date, the MDFA also published for comment, CFR Conforming Changes to MSN-0069 (Know-Your-Client and Suitability), proposing revisions to its suitability guidance. The MDFA guidance provides the various types of KYC information that must be collected by mutual fund dealers (e.g. personal circumstances, investment knowledge, financial circumstances, investment time horizon and risk profile…) to help them meet their suitability requirement. The proposals are out for a 60-day comment period ending August 20, 2021.
Crypto in the List of FinCEN First Issue of AML/CFT Priorities On June 30, FinCEN issued its first ever list of priorities for anti-money laundering and countering the financing of terrorism (AML/CFT) policy with the aim to assist financial institutions in their efforts to comply with their AML/CFT obligations. The new priorities were drafted after FinCEN consultation with a number of stakeholders and consideration of various sources of information. The list explicitly includes the use of cryptocurrency for ML/TF and ransomware payments. The priorities also focus on other areas such as corruption, cybercrime, foreign and domestic terrorist financing, and fraud. FinCEN will issue the final revised regulations at a later date that will specify how financial institutions should incorporate these Priorities into their risk-based AML compliance programs. 2
IOSCO Consults on Sustainability-Related Practices in Asset Management On June 30, IOSCO published for comments proposed recommendations about sustainability-related regulatory and supervisory expectations in asset management. The Consultation Report includes 5 recommendations listed below: Asset Manager Practices, Policies, Procedures and Disclosure IOSCO recommends that Securities regulators and/or policymakers sets regulatory and supervisory expectations for asset managers for the Development and implementation of practices, policies and procedures relating to sustainability-related risks and opportunities. This will help ensure that asset Key takeaways managers take sustainability-related risks and opportunities into consideration and integrate them into their decision-making process. Related disclosure to promote consistency, comparability, and reliability in disclosure to help prevent greenwashing at the asset manager level. To do so, asset managers could reference the Task Force on Climate-related Financial Disclosures (TCFD) Framework in their disclosures of climate-related risks and opportunities. The related practices, policies and procedures could cover aspects such as governance, investment strategy, risk management and metrics & targets. Product Disclosure Clarification of existing regulatory requirements or creation of new ones should be considered by securities regulators and/or policymakers to enhance product-level disclosure in order to help investors better understand: (a) sustainability-related products; and (b) material sustainability-related risks for all products.
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The requirements or guidance relating to product-level disclosure could cover areas such as (i) product authorisation, (ii) naming, (iii) investment objectives disclosures, (iv) investment strategies disclosure, (v) proxy voting and shareholders engagement disclosure, (vi) risk disclosure, (vii) marketing materials and website disclosure and so forth. Supervision and Enforcement With the recommendation for securities regulators and/or policymakers to have supervisory tools to ensure that asset managers and sustainability-related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements. This is to help prevent greenwashing at both the asset manager and product levels and promote investor confidence in asset managers. Terminology Encouraging industry participants to develop common sustainable finance-related terms and definitions will promote consistency throughout the global asset management industry. Financial and Investor Education IOSCO recommends that securities regulators and/or policymakers promotes or enhances financial and investor education initiatives relating to sustainability to help Protect investors from greenwashing Promote awareness of sustainability-related risk Encourage the continued growth of sustainability-related asset management products Foster a greater understanding of the benefits and risk profiles of sustainabilityrelated products relative to other products. Comments are to be submitted before 15 August 2021.
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FCA Proposes New Climate-Related Disclosure Regime On June 22, the FCA released CP21/17 setting out its proposals to introduce climate-related financial disclosure rules and guidance for asset managers and other FCA’s regulated entities, consistent with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations (covering governance, strategy (including scenario analysis), risk management and metrics and targets) and recommended disclosures. Some of the key requirements that will be applicable to asset managers include: Entity-level disclosure requirements: Requiring annual disclosures by firms on how they take care of their climate-related risks and opportunities when managing or administering assets on behalf of their clients and consumers. Disclosures that must be made on their main website. This would help clients and consumers understand firms’ approach to climaterelated risks and opportunities. Product or portfolio-level disclosure requirements: Requiring annual disclosures in respect of the individual products or portfolio management services offered by firms. The disclosures must be done on their website, in appropriate client communications or upon client request where applicable. The proposals would apply to FCA-regulated firms such portfolio managers, UK UCITS management companies, full-scope UK AIFMs, small authorised UK AIFMs. The deadline for comments is 10 September 2021.
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BIS - 2021 Annual Economic Report and Central Bank Digital Currencies The latest Annual Economic Report of the Bank of International Settlements (BIS) examines the case for central bank digital currencies (CBDC), the features and implications of CBDC, potential design choices and their principles, and finally impacts in a cross-border context. CBDCs provide an opportunity to contribute to an “open, safe and competitive monetary system that supports innovation and serves the public interest”. Recently, digital currencies have gained increasing interest following technological developments such as cryptocurrencies, stablecoins and big tech advancement in the payment and financial services space. The exploration of CBDC is taken in the context of public interest -- for example, economic benefits, to data privacy, Keyrights takeaways competition, innovation, good governance and equal access. Digital money is also viewed in the context of the Central Bank’s role to pursue safety, integrity, efficiency and access. The success of implementing a CBDC relies on the architecture chosen, balancing the central bank and the private sector. The report presents alternative models, their merits and consequences, including the considerations on the monetary policy transmission process. Data governance remains a top priority, particularly in the ability to provide effective identification while safeguarding data privacy. Various models of verification schemes are presented and one promising approach identified in the report is an account-based CBDC built on digital ID with official sector involvement. Lastly, the report discusses the international dimension of CBDC and challenges such as the use of digital ID information outside the originating country. As payment innovations and technologies continue to develop, Central banks have opportunities to shape the payment system of the future. This report examines the potential of CBDCs in a rapidly changing financial sector and payment system.
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ECB Opinion on Pilot Regime for Market Infrastructures Based on DLT On June 22, the European Central Bank (ECB) opinion on a proposal for regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) was published in the Official Journal of the European Union. First released in April, the EBC opinion raised diverse points for further consideration and drew attention to these three aspects : 1 - Effects on monetary policy of Applying of DLT in existing settlement ecosystem A potential fragmentation in collateral and liquidity pools and eventual increase in commercial bank money 2 - Oversight and systemic/financial stability Role of the ESCB in the area of securities settlement Participation of natural persons in DLT market infrastructure Settlement of payments in DLT market infrastructures Settlement of payments in central bank money Settlement of payments with persons that are not licensed as credit institutions Risk management requirements applicable to banking-type ancillary services Insolvency protections under the Settlement Finality Directive Level playing field between operators of DLT market infrastructures Exit strategy for operators of DLT market infrastructures and removal of DLT transferable securities from trading Interplay with the proposed Markets in Crypto-assets regulation 3 - Prudential supervision ECB powers concerning activities of credit institutions Authorisation and exemption process of credit and non-credit institution operators alike The proposal is part of the digital finance package aiming to support and enable the potential of digital finance. Read Ameis' summary in the Regfacts/Industry News & Trends. 7
EU/ESMA - Call for Evidence on Digital Finance The European Securities and Markets Authority (ESMA) is seeking feedback from stakeholders on three principal issues related to developments in digital finance: 1 - Increasing fragmentation or non-integrated value chains, arising from new entrants and different models of service delivery that may introduce new risks and challenges 2 - Digital platform use and exposure to diverse risks including financial stability, investor protection, data protection and money laundering / terrorist financing 3 - Emergence of new risks in relation to groups with mixed-activities (financial and non-financial) The thirty-three question call for evidence remains open for feedback until Aug 1, 2021.
EU/APAC - BdF Experimentation
and
MAS
Team
Up
for
CBDC
On July 8, The Banque de France (BdF) and the Monetary Authority of Singapore (MAS) announced a successful experiment of wholesale cross-border payment and settlement using central bank digital currency (CBDC). The simulated cross-border and cross-currency transactions are notable for being the first multiple CBDC transactions to apply “automated market making and liquidity management capabilities to reap cross-border payment and settlement efficiencies”. The experiment demonstrates the potential to simplify the integration of multiple CBDC models and improve efficiencies. The joint press release from the BdF and MAS highlighted four key outcomes achieved during the experiment:
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1 - Interoperability across different types of cloud infrastructures 2 - Visibility on cross border payments combined with independent control over the issuance and distribution of individual country CBDC 3 - Automated liquidity pool and market-making service, involving smart contracts to automatically manage the currency exchange rate 4 - Potential to reduce the number of correspondent banking parties involved in a payment chain for cross-border transactions and in consequence, the number of contractual arrangements, the KYC (Know Your Customer) burden as well as the associated costs
FATF ‘ Second 12-Month Review on Revised Standards on VA & VASPs Out On July 5, the FATF completed a second 12-month review of the implementation of its revised Standards on virtual assets (VAs) and virtual asset service providers (VASPs). The report indicates that although many jurisdictions have continued to make progress in implementing the revised FATF Standards on VAs and VASPs, the degree of implementation is still far from being sufficient due the the lack of actions by jurisdictions. The report states that progress have been made in the development of technological solutions to enable the implementation of the ‘travel rule’ but jurisdictions have yet to implement this rule globally for the private sector to invest in the necessary technology solutions and compliance infrastructure. The report also comprises the first market metrics on peer-to-peer (P2P) transactions of VAs, using data from blockchain analytic companies which indicate that a those assets are mainly transferred on a P2P basis. 9
The report indicates that the ‘share of illicit transactions appears higher for P2P compared with transactions with VASPs, at least in terms of direct transactions’. The FATF will not amend its Revised Standards for the time being but is stressing all jurisdictions to implement the later, including travel rule requirements, as quickly as possible. The FATF will next : Focus on implementing the current FATF Standards on VAs and VASPs, including through finalising the revised FATF Guidance on VAs and VASPs by November 2021; Accelerate the implementation of the travel rule; and Monitor the VA and VASP sector, but not further revise the FATF Standards. The first review was conducted on July 7, 2020, read our article here.
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