SEPTEMBER 2021
AMEIS REGFACTS FINTECH - Related Regulatory & Compliance News
In This Issue : Lynx By-Law Published in The Canada Gazette ....................................1 FCA Registration: Use it or Lose It .........................................................1 Lynx: Now a Systemically Important Payment System .......................2 The Nexus project ...................................................................................3 IOSCO Final Guidance on the Use of AI & ML Out ................................4 Cryptoassets : Quésaco? ........................................................................5
www.ameiscorp.com
Lynx By-Law Published in The Canada Gazette The Canadian Payments Association By-law No. 9 — Lynx, was published in the Canada Gazette AMF Quebec on August 18, 2021 and sets out the rights and responsibilities of Payments Canada, the Bank and Lynx Participants.
The By-law came into force on August 28, 2021 except for certain sections including the section related to the repeal of By-law No. 7 - Large Value Transfer System, that will come into force on June 1, 2022.
Some of the key provisions relate to: Approval criteria: Candidates must, among others, (i) be a member of Payment Canada, (ii) have a settlement account at the Bank of Canada, and (iii) meet the technical and testing requirements test. Connectivity: Lynx participants must connect to Lynx every business day unless technical difficulties prevent them from connecting. Collateral: Participants other than the Bank must Key takeaways pledge collateral and the Bank must, before the beginning of the payments processing cycle every business day, assess the value of that collateral. Settlement: with specific requirements relating to (i) financial message service provider, (ii) extraction of settlement instructions by participant, and (iii) settlement instructions sent to settlement mechanism.
FCA Registration: Use it or Lose It On 9 September 2021, the UK Financial Conduct Authority (FCA) released Consultation Paper 21/28 “New cancellation and variation power: Changes to the Handbook and Enforcement Guide” (the Consultation). The New Powers will enable the FCA to reduce the risk of harm to consumers by removing the permissions given to firms that do not carry on or stop providing FCAregulated activities. Impacted firms will consequently be withdrawn from the FCA’s public Financial Services Register (Register). 1
The changes will apply only to firms authorised or deemed, under the temporary permissions regimes, to be authorised by the FCA under Part 4A of Financial Services and Markets Act 2000 (FSMA). Firms authorised by the FCA other than under Part 4A (e.g., payment service providers or electronic money issuers) will not be impacted by the changes.
Comments are to be provided by 29 October 2021 by using the online form on the FCA website, by writing or by email at cp2128@fca.org.uk.
Industry News Lynx: Now a Systemically Important Payment System On September 1, the Bank of Canada designated Canada’s high-value payment system, Lynx, as a systemically important payment system under the Payment Clearing and Settlement Act. Pursuant to the Bank of Canada’s Criteria and Risk-Management Standards for Prominent Payment Systems, Lynx is deemed to pose systemic risk to the Canadian financial system, considering the : Value and volume of transactions, proxy measures for the potential to pose credit, liquidity and operational risk Limited availability of substitutes that is more likely to result in the event of a disruption to that system should adverse events occur Time criticality of payments and potential for disruption and adverse economic effects Centrality, or importance in the payment system and market Interdependencies, potentially increasing the economic effects of a disruption and extending the impact on confidence in payment systems Lynx will be owned and operated by Payments Canada and overseen by the Bank of Canada.
2
The Nexus Project A Report by the Bank for International Settlements Innovation Hub (BIS) with support from the Monetary Authority of Singapore (MAS) and the National Payments Corporation of India (NPCI), outlines how the Nexus Project will provide a blueprint for a scalable cross-border payments network that addresses six key elements of the user payment experience: speed, cost, transparency, access, confidence and security, and usability.
Sixty seconds, the amount of time within which the Nexus Project will enable cross-border payments to reach their destination. Specific design elements of a payments system can help prepare for cross-border payments through Nexus, including: ISO 20022 standard for payment messages Pre-validation of payment instructions Confirmation of payee functionality Sanctions pre-screening
Leveraging the growing availability of instant payment systems (IPSs) in many countries, the Nexus Project aims to take advantage of nearreal time payment on a 24/7 basis and overcome many of the challenges that exist in linking international IPSs.
Key takeaways
Nexus enables interoperability between payment systems through a combination of standardised rules and obligations for crossborder payments (Nexus Scheme) with the use of a common software platform (Nexus Gateway) that coordinates processes amongst countries. The full blueprint is available on nexus.bisih.org. The BIS Innovation Hub is accepting feedback on the blueprint and can be contacted at singapore.centre@bisih.org.
3
IOSCO Final Guidance on the Use of AI & ML Out On 7 September 2021, the International Organization of Securities Commissions (IOSCO) published its Final Report providing guidance to its members on the regulation and supervision of the use of Artificial Intelligence (AI) and Machine Learning (ML) by market intermediaries and asset managers. The guidance consists of six measures that reflect expected standards of conduct by market intermediaries and asset managers using AI and ML. The guidance indicates that Regulators should require their firms to: Have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML. This includes a documented internal governance framework, with clear lines of accountability. Adequately test and monitor the algorithms to validate the results of an AI and ML technique on a continuous basis. The testing should be conducted in an environment that is segregated from the live environment prior to deployment to ensure that AI and ML: (a) behave as expected in stressed and unstressed market conditions; and (b) operate in a way that complies with regulatory obligations. Have the adequate skills, expertise and experience to develop, test, deploy, monitor and oversee the controls over the AI and ML that the firm utilises. Compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider. Understand their reliance and manage their relationship with third-party providers, including monitoring their performance and conducting oversight. To ensure adequate accountability, firms should have a clear service level agreement and contract in place clarifying the scope of the outsourced functions and the responsibility of the service provider. This agreement should contain clear performance indicators and should also clearly determine rights and remedies for poor performance. 4
Disclose information regarding their use of AI and ML, including: (a) Regulators should consider requiring firms to disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes. (b) Regulators should consider what type of information they may require from firms using AI and ML to ensure they can have appropriate oversight of those firms. Have appropriate controls in place to ensure that the data that the performance of the AI and ML is dependent on is of sufficient quality to prevent biases and sufficiently broad for a well-founded application of AI and ML. The Final Report includes the feedback received by IOSCO following its Consultation Report published in June 2020, see our summary piece here.
Product Corner
Key takeaways
Cryptoassets : Quésaco? A cryptocurrency, often refers to as a cryptoassets, is defined by the Financial Action Task Force (FATF) as ‘a math-based, decentralised convertible virtual currency that is protected by cryptography’. (cf. The FATF report, Virtual Currencies: Key Definitions and Potential AML/CFT Risks, published June 2014). In other words, a secured technology – Blockchain – is used to record a virtual currency (electronic cash) ownership and enable payments between users. The best-known cryptocurrency being Bitcoin. Cryptoassets rely on public and private keys to transfer value from one person (individual or entity) to another, and must be cryptographically signed each time it is transferred to prevent fraudulent transactions. Cryptoassets have no intrinsic value They only exist in a network and have no physical form They are not issued and backed by a central bank
5
Cryptoassets are increasingly under Canadian watchdogs’ scrutiny. Applicable Canadian Securities Laws includes: Joint CSA/IIROC Staff Notice 21‑329 — Guidance for Crypto-Asset Trading Platforms: Provides guidance on how securities legislation applies to CTPs that facilitate or propose to facilitate the trading of (i) cryptoassets that are securities (Security Tokens), or (ii) instruments or contracts involving cryptoassets, as indicated in CSA Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto-Assets. CSA Staff Notice 46-307 Cryptocurrency Offerings: Outlines how the requirements of applicable Securities Laws may apply to initial coin offerings (ICOs), cryptocurrency investment funds and the cryptocurrency exchanges trading these products. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (PCMLTFA): The Financial Transactions and Reports Analysis Centre of Canada’s (FINTRAC) imposes regulatory requirements on reporting entities involved in the business of cryptoassets (e.g., record keeping, know your customer (KYC), registration, and reporting of certain electronic funds transfers and suspicious transactions). The success and growing interest from investors in cryptoassets and the Covid-19 pandemic have stirred debate among central banks to assess the feasibility of creating a central bank digital currency which would be simple, transparent and secure. Indeed, the Bank of International Settlement (BIS) and seven (7) central banks including the Bank of Canada, the U.S. Federal Reserve, the European Central Bank and the Bank of England published a report laying out some key requirements for central bank digital currencies (CBDCs). (Cf. joint report, Central bank digital currencies: foundational principles and core features, published in October 2020). Although CBDCs are not to be confused with cryptocurrencies, more on this distinction in our next AMEIS Regfacts edition. Stay tuned! 6
Ameis Regulatory Services focuses on providing regulatory and compliance support for fintech companies
About us
Complex landscape & widening gaps
We help you understand the rules that govern your activites, services and products, enabling you to meet your ongoing regulatory obligations and navigate the ever-evolving, complex regulatory landscape.
Increasing regulatory requirements and the pace of change are making it harder for you to keep up with the pressures of compliance and managing cost-effective operations.
Our team is composed of professionals with extensive experience serving the investment management, capital markets and asset servicing industries.
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.
Current challenges
We provide practical and tailored solutions Review and analysis of regulatory texts Reporting Response preparation Compliance program development
Contact us Déborah Koualé, Founder deborah.kouale@ameiscorp.com
Change management Regulatory intelligence and training Ongoing compliance support Registrations
Carolyn Le Quéré carolyn.lequere@ameiscorp.com
www.ameiscorp.com
