26 August 2023:
Key Global Compliance Updates
26 August 2023: marks an important day for the Financial Services Industry
Several significant global compliance updates
come into effect, bringing about a major shift in regulatory frameworks
European Union (EU)
The European Banking Authority (EBA)
finalizes the Basel IV Accord
– Revised capital adequacy rules
Banks in the EU must comply with the new risk weighting
– Stricter liquidity requirements
Ensuring a higher liquidity buffer
United States (US)
The Securities and Exchange Commission (SEC)
introduces new reporting requirements
– Enhanced disclosures on climate risk
Assets and funds must report their carbon footprint
– Regulation of digital assets
New regulations for cryptocurrencies and stablecoins
Asia Pacific
The Asia Pacific Economic Cooperation (APEC)
announces new data privacy regulations
– Greater protection for personal data
Businesses must comply with stricter data handling and sharing rules
– Expanded scope of data protection laws
Data protection laws now cover more types of data and entities
Conclusion:
The 26 August 2023
brings about a significant change in the regulatory landscape
for the financial services industry
Ensuring compliance with these updates
is crucial for maintaining regulatory standing
and avoiding potential penalties
Comprehensive Update: Significant Global Compliance Changes Affecting the Financial Services Industry as of 26 August 2023
The financial services industry, a vital sector of the global economy, is subject to intricate regulatory frameworks designed to protect consumers and maintain financial stability. With ever-evolving market conditions and increasing regulatory expectations, it is crucial for businesses and consumers alike to stay informed about compliance changes. In this article, we will provide a comprehensive update on some of the most significant global compliance changes that are set to take effect in the financial services industry as of 26 August 2023.
Overview of the Financial Services Industry and its Regulatory Landscape
The financial services industry, which includes banks, insurance companies, investment firms, and other financial institutions, plays a critical role in the global economy by facilitating transactions, managing risk, and providing essential financial products and services. Given their systemic importance, these entities are subject to extensive regulation at both the national and international levels. Some of the primary regulators include the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO), and various national regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States and the Financial Conduct Authority (FCA) in the United Kingdom.
Importance of Staying Updated with Compliance Changes
Compliance with regulatory requirements is essential for financial institutions to maintain their reputations, mitigate risks, and avoid costly fines or legal action. For consumers, adherence to these regulations ensures that they are protected from fraudulent activities and unscrupulous practices. As the regulatory landscape continues to evolve, it is essential for businesses and consumers to stay informed about these changes to ensure that they are in compliance and can adapt as needed.
Significant Global Compliance Changes Effective 26 August 2023
Basel IV Capital Requirements Regulation (CRR)
Effective 26 August 2023, the Basel IV Capital Requirements Regulation (CRR) will come into force, introducing more stringent capital requirements for banks to strengthen their risk-absorbing capacity and promote financial stability. Some of the key changes include the introduction of a new capital classification system, more rigorous stress testing requirements, and higher capital charges for certain risks such as operational risk.
Markets in Crypto-Assets (MiCA)
The European Union’s Markets in Crypto-Assets (MiCA) regulatory framework, designed to provide a comprehensive regulatory structure for crypto-assets, is set to take effect on 26 August 202This regulation aims to ensure investor protection, market integrity, and financial stability in the crypto-asset market by establishing a licensing framework for crypto-asset service providers, setting disclosure requirements, and implementing anti-money laundering and countering the financing of terrorism (AML/CFT) measures.
Digital Services Act (DSA)
The Digital Services Act (DSA), a landmark regulatory initiative aimed at enhancing the safety and security of digital services, will come into effect on 26 August 202This regulation introduces new obligations for online platforms and search engines regarding the removal of illegal content, transparency in terms of advertising practices, and the protection of user rights.
Anti-Money Laundering Directive 6 (AMLD6)
Effective 26 August 2023, the Fifth Anti-Money Laundering Directive (AMLD5) will be succeeded by the Sixth Anti-Money Laundering Directive (AMLD6). Some of the key changes include the expansion of the definition of ‘obliged entities,’ the introduction of a central register of beneficial owners, and the requirement for risk-based customer due diligence procedures.
5. Securities Financing Transactions Regulation (SFTR)
The Securities Financing Transactions Regulation (SFTR), which aims to increase transparency in securities financing transactions (SFTs), will become applicable on 26 August 202This regulation requires reporting entities to report certain information related to SFTs to the relevant national competent authorities and a trade repository, promoting greater transparency and improved risk management in this area.
European Financial Regulations: 5AMLD, MiCA, and SFDR
Europe
EU’s Fifth Anti-Money Laundering Directive (5AMLD)
The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) aims to strengthen the EU’s regulatory framework against money laundering and terrorist financing. Key provisions include widening the definition of politically exposed persons (PEPs), enhancing customer due diligence measures, and improving transparency on beneficial ownership. These objectives seek to prevent financial crimes and promote a more transparent European financial system.
Impact on financial institutions: 5AMLD requires increased diligence in identifying and assessing the risks of money laundering and terrorist financing. Institutions must conduct thorough customer due diligence checks, verify the identity of beneficial owners, and implement measures to prevent transactions with high-risk third countries. The regulation’s deadline for full implementation is June 2017.
Markets in Crypto-Assets (MiCA) Regulation
The MiCA regulation, an essential component of the EU’s action plan on crypto-assets, sets out a comprehensive regulatory framework for crypto asset service providers (CASPs). Its primary objectives are ensuring investor protection and market integrity. By defining clear rules, MiCA aims to create a single market for crypto-assets, providing legal certainty for CASPs and encouraging innovation.
Impact on crypto asset service providers, market infrastructure, and regulatory frameworks: MiCA introduces provisions related to risk management, transparency, and operational standards for CASPs. It also requires the development of technical regulatory frameworks, such as a European supervisory authority to oversee the sector. The expected timeline for implementation is between 2024 and 2025.
Sustainable Finance Disclosure Regulation (SFDR)
Background and objectives of the SFDR: The SFDR aims to promote transparency and long-term sustainability in the financial services industry. Its objectives include improving the quality of disclosures on sustainability factors, encouraging better integration of ESG (Environmental, Social, and Governance) considerations into investment decision-making processes, and developing a classification system for sustainable financial products.
Requirements for financial market participants and institutional investors: The SFDR requires disclosures on the adverse impacts of investment decisions on sustainability factors, along with information regarding the integration of ESG considerations. Financial market participants and institutional investors must report this data annually under the SFDR’s deadline for reporting, which is March 2021.
I North America
Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI)
Background, objectives, and key provisions of Reg BI: The Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Reg BI) in June 2019, which sets a new standard for broker-dealers and investment advisors when making recommendations to retail clients. The objectives of Reg BI include requiring broker-dealers to act in the best interest of their clients when making recommendations for securities transactions or investment strategies. Key provisions include a duty of care, which requires broker-dealers to take reasonable steps to ensure their recommendations are in the best interest of their clients. Additionally, there is a duty of loyalty, which prohibits broker-dealers from putting their interests ahead of their clients’.
Implications for broker-dealers, investment advisors, and their clients:
The implications for broker-dealers include the need to establish and implement policies and procedures designed to comply with Reg BI. Investment advisors, who already have a fiduciary duty, will also need to review their existing practices and ensure they are consistent with the new regulation. Clients may benefit from increased transparency and disclosure regarding fees, conflicts of interest, and other material facts.
Compliance deadlines and ongoing obligations:
The compliance deadlines for Reg BI varied based on firm size. Larger firms had to comply by October 1, 2019, while smaller firms had until June 30, 2020. Ongoing obligations include maintaining and updating policies and procedures to ensure compliance with the regulation.
Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) Updates in the U.S.
The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, issued several updates to the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.
Changes to BSA/AML regulations affecting financial institutions and regulators:
One significant change is the requirement for financial institutions to implement a risk-based approach to customer due diligence, which includes identifying and verifying the identity of beneficial owners. Regulators are also expected to increase their focus on AML/BSA compliance, and failures to comply could result in significant penalties.
Implications for financial services firms’ risk assessment, customer due diligence, and ongoing monitoring processes:
The implications for financial services firms include the need to implement more robust risk assessment processes, conduct thorough customer due diligence, and enhance ongoing monitoring capabilities. These changes will help financial institutions better manage their risks related to money laundering and terrorist financing.
Training requirements for employees:
In addition, there is a requirement for firms to provide regular training to their employees on AML/BSA regulations and procedures. This will help ensure that employees are equipped with the knowledge and skills needed to identify and report suspicious transactions.
Financial Institutions Supervisory Committee’s Guidance on Climate Risk
Background and objectives of the guidance: The Financial Institutions Supervisory Committee (FISC) issued a joint statement on climate risk in March 2021, which emphasizes the importance of managing climate risk as part of an institution’s overall risk management framework. The objectives of the guidance include helping financial institutions better understand and manage climate risks, as well as improving disclosures to regulators and investors.
Implications for financial institutions:
The implications for financial institutions include the need to assess their exposure to climate risks, both physical and transition risks. This may involve analyzing the potential impact of extreme weather events, sea-level rise, and other climate-related hazards on their assets and liabilities.
Implications for financial institutions’ risk assessment processes:
Financial institutions will need to integrate climate risk into their existing risk assessment processes, which may involve updating risk models and scenarios to reflect the potential impact of climate change.
Disclosure requirements:
The disclosure requirements include providing transparent and detailed information about climate risks to investors and regulators. This will help ensure that investors have a clear understanding of the potential impact of climate change on an institution’s financial performance and risk profile.
Implementation timeline and expectations from regulators:
The implementation timeline for the FISC guidance is ongoing, with financial institutions expected to take a phased approach to implementing the recommendations. Regulators will be monitoring firms’ progress closely and may take enforcement action against those that fail to make sufficient progress.
Asia Pacific Financial Regulations: Key Developments in the Region
Asia Pacific
Financial Action Task Force (FATF) Travel Rule Expansion
The Financial Action Task Force (FATF)
Travel Rule Expansion
is a significant development in the Asia-Pacific financial sector, aimed at enhancing anti-money laundering (AML) and countering the financing of terrorism (CFT) measures. Here’s a closer look:
Background and objectives of the travel rule expansion
The original FATF Travel Rule required financial institutions to transmit certain customer information when transferring funds above a specified threshold. The expansion broadens the scope of covered transactions and extends the travel rule to include more jurisdictions.
Impact on financial institutions, regulatory expectations, and technology investments
Institutions will need to invest in robust compliance systems to capture and transmit the required information. The expanded travel rule also necessitates collaboration between financial institutions, regulators, and technology providers.
Compliance deadlines for various jurisdictions:
- Japan: October 2021
- South Korea: January 2023
- Australia: April 2023
- Indonesia: Ongoing phased implementation
Monetary Authority of Singapore’s (MAS) Sandbox Framework
Monetary Authority of Singapore (MAS)
provides a safe and controlled environment for financial services firms to test innovative products and services through its
Sandbox Framework
. Here’s a brief overview:
Overview of the MAS sandbox framework and its objectives
The Sandbox Framework allows firms to test new offerings under real-world conditions while still being subject to regulatory oversight.
Implications for financial services firms testing new products or services in a controlled environment
Firms can mitigate risk, gain valuable insights, and adjust offerings before launching them to the general public.
Key requirements and success stories from previous sandbox participants
- Applicants must meet eligibility criteria, including being registered and based in Singapore.
- Participating firms have included Alibaba, Grab, and OCBC Bank.
China’s Anti-Monopoly Law Amendments
China’s Anti-Monopoly Law (AML)
has undergone significant amendments, with the following implications:
Background, objectives, and key provisions of the amendments
The revisions strengthen penalties for anti-competitive practices, expand regulatory powers, and introduce new provisions such as the ability to issue fines based on revenues.
Impact on financial services firms operating in or targeting the Chinese market
Firms must ensure compliance with the revised AML, which could impact M&A activity and strategic planning in China.
Compliance considerations and potential implications for M&A activity in the industry:
Companies must evaluate whether their proposed transactions could result in a significant market presence, potentially triggering regulatory scrutiny.
Conclusion
In this article, we have discussed several key compliance changes that are currently shaping the financial services industry. Firstly, we explored the new data privacy regulations such as GDPR and CCPA, which impose stricter rules on how financial institutions handle customer data. The impact of these regulations has been significant, requiring firms to invest in new technologies and processes to ensure compliance.
Secondly
we examined the evolving anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, which have become increasingly complex and stringent. These changes have led to a greater focus on risk assessment and mitigation strategies, as well as increased collaboration between regulators and financial institutions.
Thirdly
we looked at the impact of geopolitical events and social trends on financial regulations. For instance, the ongoing trade tensions between major economies have led to new tariffs and sanctions that impact financial markets. Additionally, societal trends such as climate change and social justice issues are influencing regulatory agendas.
Now, it is important for financial services firms to stay informed about evolving regulations and adapt accordingly. Failure to do so can result in hefty fines, reputational damage, and even legal action. Therefore, it is crucial that businesses have a robust compliance function in place.
Call to Action
To ensure that your organization is prepared for these changes, we encourage you to consult with legal and compliance experts. They can help you navigate the complex regulatory landscape and provide guidance on best practices. By taking a proactive approach to compliance, you can build trust with your customers, protect your reputation, and mitigate risk.
Stay Informed
In conclusion, the financial services industry is facing a rapidly changing regulatory landscape. By understanding the key compliance changes discussed in this article and staying informed about new developments, you can position your business for success. We hope that this article has provided valuable insights and encouraged you to take a proactive approach to compliance.
