financial regulation

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Assertive regulators are bringing greater clarity and new challenges as they step up oversight of fintech innovation.

By Stuart Davis, Tom D. Evans, Nicola Higgs, Christian F. McDermott, David J. Walker, Brett Carr, Catherine Campbell, and Charlotte Collins

As the fast-growing fintech industry thrives, the sector has begun to attract greater regulatory scrutiny. We expect new legal and regulatory focus and oversight of those players operating on the unregulated perimeter of financial services.

While the level of supervision is set to increase and pose challenges for industry participants, a more robust regulatory environment could play into the hands of PE buyers and create opportunities for portfolio companies best able to navigate this rising regulation. In our view, PE firms must pay heed to the tone of more assertive regulators, but that approach coupled with new regulation will create a space in which firms in nascent fintech verticals can legitimately pursue their aims with greater certainty, no longer looking over their shoulders.

While the UK government is keen to stress that the new regulation will be applied proportionately, proposals are likely to result in the redirection of resources and attention of firms, and buyout firms should remain alert to changes that may impact a range of fintech investments.

New resource developed following increased regulatory focus on outsourcing.

Latham & Watkins has partnered with the Association for Financial Markets in Europe (AFME) and law firms Matheson and BSP to develop: Outsourcing – Guidance on the Legal and Regulatory Framework, a pioneering resource examining the key European legislation, rules, and guidance for financial services firms to consider in relation to outsourcing.

In light of the plethora of legislative change and increasing regulatory focus on outsourcing in financial services, as well as the growing range of sources that need to be taken into account to ensure compliance in this area, the Paper is designed to provide compliance, legal, and risk teams within regulated firms with a single reference point of regulatory requirements. The resource also provides a number of practical tools to help firms effectively map out their processes and procedures for legal compliance.

Partners Nicola Higgs, Fiona Maclean, and Andrew Moyle and associates Anne Mainwaring, Jagveen Tyndall, Oscar Bjartell, Sean Wells, and Sidhartha Lal led a team of more than 25 lawyers from five Latham offices and local law firms Matheson (Ireland) and BSP (Luxembourg) to produce the Paper.

US lawmakers urge FSOC to designate cloud-based storage systems used by major banks as systemically important financial market utilities.

By Alan W. Avery, Victoria McGrath, and Pia Naib

In an August 22, 2019, letter addressed to Treasury Secretary Steven Mnuchin, in his capacity as chair of the Financial Stability Oversight Council (FSOC), Congresswoman Katie Porter and Congresswoman Nydia Velazquez urged Secretary Mnuchin to designate the three leading cloud-based storage systems used by major banks — Amazon Web Services, Microsoft Azure, and Google Cloud — as systemically important financial market utilities (SIFMUs). This designation would subject such cloud-based storage systems to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve). Citing Title VIII of the Dodd-Frank Act, which was enacted to promote stability in the financial system, the Congresswomen highlighted the dependence on cloud services by banks and financial institutions for their data needs and the subsequent risks such services pose to the safety and stability of the financial system.

The Federal Reserve is finally stepping into the real-time payments arena.

By Todd Beauchamp, Loyal T. Horsley, and Deric Behar

On August 5, 2019, the Board of Governors of the US Federal Reserve System (the Fed) announced that it plans to roll out a real-time payment and settlement service by 2023 or 2024. The service, named FedNow, is being developed with the stated goal of modernizing the national payment system. Facing political and societal pressure to upgrade the national payment system, the Fed sought comment on the development of a faster payment service in late 2018. After receiving more than 350 comments, the Fed is now moving forward and seeking additional comment on the best way to design the system so that it maximizes inclusivity and utility for all stakeholders. The Fed envisions that FedNow will capitalize on its nationwide infrastructure to provide consumers, businesses, and banks the ability to safely make and receive immediate and fully settled payments 24 hours a day, seven days a week.

Latest FCA and PRA fines against a retail bank show little tolerance for poor outsourcing systems and controls.

By Fiona M. Maclean, Christian F. McDermott, Laura Holden, and Charlotte Collins

On 29 May 2019, the FCA and PRA announced that they had fined an independent UK bank for failing to manage its outsourcing arrangements properly between April 2014 and December 2016. The bank received separate fines of £775,100 from the FCA and £1,112,152 from the PRA (resulting in a combined fine of £1,887,252) for breaches of the regulators’ high-level principles for authorised firms, as well as their more detailed rules on outsourcing. Each fine includes a 30% early settlement discount.

The bank was fined by both regulators as the failings resulted in breaches of both regulators’ rules, and went to both regulators’ statutory objectives (specifically, the FCA’s consumer protection objective and the PRA’s objective to promote firms’ safety and soundness). Although both regulators applied the same five-step penalty framework to calculate their penalties, the way in which they applied the framework led to different figures. In particular, because the PRA had previously fined the same bank for outsourcing failures in November 2015, the repeat failure was a significant aggravating factor that led to an uplift in the PRA’s penalty.

FCA teams up with other regulators to advance its idea of creating a global regulatory sandbox.

By Stuart Davis, Gabriel Lakeman, Sam Maxson, Brett Carr and Charlotte Collins

The FCA, along with several other financial services regulators, has launched a consultation on the operating framework for a Global Financial Innovation Network (GFIN). This is an evolution of the FCA’s proposal, mooted earlier this year, to create a global regulatory sandbox (see Latham’s related blog post).

The FCA reports that its proposal was received positively, with respondents keen to see greater regulatory coordination and cooperation at a global level. Therefore, the FCA sees merit in continuing to explore this idea.

The PSR is to consider whether there is effective competition in the market and makes clear that further reviews of the payments ecosystem could be triggered by its findings.

By Brett Carr, Stuart Davis, and Christian McDermott

The Payment Systems Regulator (PSR) has issued Draft Terms of Reference for a market review into the supply of card-acquiring services.

The PSR will use its powers under the Financial Services (Banking Reform) Act 2013 to carry out the market review in line with its statutory competition, innovation and service user objectives.

Effective competition in the payments market is a focus of the PSR, and this review follows shortly after dawn raids reported by the PSR in February 2018 as part of its first action under the Competition Act 1998.

Both the FCA and the PRA have written to firms to warn about certain risks associated with exposures to crypto-assets, and to advise firms of the measures they should consider implementing to mitigate such risks.

By Stuart Davis and Charlotte Collins

The FCA and the PRA have each written a “Dear CEO” letter to firms, to warn about the risks associated with exposure to crypto-assets. The letters reflect each regulator’s concerns, according to their regulatory remit, and provide examples of practical measures that firms should be putting in place.

These letters come at a time when both the use and regulatory scrutiny of crypto-assets is increasing, with the FCA recently revealing in a response to a Freedom of Information Act request that it is currently investigating 24 crypto firms.

FCA warns providers of cryptocurrency derivatives of their regulatory obligations.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The UK Financial Conduct Authority (FCA) has issued a statement reminding businesses offering cryptocurrency derivatives of the requirement to be authorised.

The FCA explains that, although cryptocurrencies are not themselves regulated in the UK, derivatives that reference cryptocurrencies (such as cryptocurrency futures, cryptocurrency contracts for differences, and cryptocurrency options) are capable of being financial instruments under the Markets in Financial Instruments Directive II (MiFID II) and therefore within scope of regulation. The FCA clarifies that it does not consider cryptocurrencies to be currencies or commodities under MiFID II.

The FCA seeks industry feedback to capitalise on global regulatory sandbox trend.

By Stuart Davis and Charlotte Collins

The regulatory sandbox was pioneered by the Financial Conduct Authority (FCA) back in November 2015 — a “safe space” in which businesses can test innovative products, services, business models, and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.

The sandbox has been a success to date, helping both existing and new businesses to develop and launch innovative products and business models (see Latham’s previous blog post on the success of the first round of sandbox participants, and Client Alert that tracks the use of the sandbox model across the globe).