Contents:
- Exciting news – our merger with Moore Kingston Smith
- Proposed changes to safeguarding rules for Payment and E-money firms
- Investment research payment optionality for fund managers
- Transaction reporting
- Regulation of cryptoassets
- Operational incident reporting
- Other news – debt management firms
Exciting news!
This update covers some of the news in the financial services space for Q4 2024, but we’ll start with some exciting news. We are delighted to announce that in October 2024, Shipleys merged with Moore Kingston Smith.
Moore Kingston Smith is a top 20 audit firm, and together, we can now offer a wider range of services and an improved depth of knowledge and resources. Furthermore, the firm has a dedicated financial services team specialising in regulated entities and fintech.
We are very excited to work with our new Financial Services team colleagues and look forward to bringing our clients even more support and value. Find out more here: Shipleys LLP joins Moore Kingston Smith – Shipleys LLP
Proposed changes to safeguarding rules for Payment and E-money firms
In consultation paper CP24/20: Changes to the safeguarding regime for payments and e-money firms, the FCA has proposed a number of changes with the aim of strengthening safeguarding and consumer protection concerning payment and e-money firms.
E-money firms are currently required to have a safeguarding report undertaken by an audit firm or suitable third party, although this is currently not submitted to the FCA as a matter of course but rather retained by the directors.
The FCA proposals include a ‘CASS’ audit style report, bringing those firms in scope under similar client money audit requirements as other firms currently subject to the CASS rules.
Other proposed changes include insolvency protocols should the firm enter administration. Enhanced record keeping and more detailed reporting to the FCA are also included within the proposals.
We have prepared a separate article here which covers the proposed changes in more detail: Changing the safeguarding regime for payments and e-money firms
Investment Research Payment Optionality for Fund Managers
Investment research is critical in providing analysis and forecasts to investors, but historically, firms bundled research costs with execution commissions.
The introduction of MiFID II regulations required firms to separate these charges, creating two main payment models:
- paying for research through the firm’s own resources (P&L model), or
- using a dedicated research payment account (RPA model).
In 2023, the UK Investment Research Review (IRR) made recommendations to improve the investment research market, including allowing more flexible payment options for research. As a result, the UK introduced a joint payment option for firms that met specific criteria, allowing them to pay for research in conjunction with execution services.
In July 2024, the UK finalised rules on the new payment option, enabling MiFID firms to use joint payments for third-party research and execution services for segregated mandates alongside the existing RPA or self-funded models. Feedback has suggested that the new payment option should also apply to fund managers – particularly those managing pooled vehicles under the AIFMD or UCITS regimes.
To address this, the UK is consulting on changes to COBS 18 Annex 1 and other related rules, allowing fund managers to use joint payments for investment research and aligning the rules for pooled funds with those for segregated mandates.
The consultation also addresses the operational complexities of the current research payment options, which could hinder UK asset managers from accessing non-UK research, particularly from the US.
The proposed changes would allow pooled vehicles to adopt the joint payment option, provided they meet certain conditions. More details can be found here: CP24/21: Investment research payment optionality for fund managers
Transaction Reporting
The UK receives over 7 billion transaction reports annually, covering transactions executed by UK firms and on UK markets for over 20 million reportable financial instruments.
These reports, part of the UK MiFID framework, are essential for monitoring market cleanliness, transparency, and resilience and are used to detect and prevent market abuse.
Since the regime’s implementation in 2018, the FCA has worked with market participants to improve data quality. It shares the data with the Bank of England to monitor sovereign debt and bond market risks. However, as market data needs have evolved, the FCA has identified opportunities to enhance data quality while reducing reporting burdens on market participants.
In particular, the FCA aims to address areas where current rules have led to inconsistent or incomplete reporting, benefiting firms by reducing errors and costly back reporting.
Additionally, it plans to review and potentially amend rules that impose disproportionate costs while encouraging technological innovation. The FCA is also exploring opportunities to:
- harmonise transaction reporting with other wholesale market reporting requirements and align with global data standards to enhance transparency,
- reduce reporting burdens, and
- facilitate effective market monitoring and information sharing among authorities.
More information can be found here in the discussion paper: DP24/2: Improving the UK transaction reporting regime
Regulation of Cryptoassets
This has been on the agenda for a while, and the FCA has released this discussion paper: DP24/4: Regulating cryptoassets which outlines its plans and invites feedback. As a reminder, firms operating within the cryptoasset space were already subject to supervision from the FCA with respect to anti-money laundering and financial promotions.
The discussion paper proposes a move to a more comprehensive set of rules, including conduct. This will cover cryptoasset trading, regulation of stablecoins, intermediation, custody, and other core activities. The definition of cryptoassets has also been expanded to be broad and includes ‘stablecoins’, and also coins such as Bitcoin and Ether.
The discussion paper has a proposed timeline with final policy guidance due to be published in 2026, at which point the comprehensive rules are likely to apply.
With these changes, the FCA aims to improve consumer protection, maintain market effectiveness, and prevent some of the many scams this sector has seen. The intention is for certain firms operating in this space to become FCA-authorised entities.
Operational Incident Reporting
The FCA is consulting on proposals around operational incident reporting. In doing so, they aim to address the issue that many firms are unclear on when and how to report any events that have significantly disrupted their operations to the FCA.
The proposal suggests that firms should report operational incidents that exceed specific reporting thresholds. Firms would assess the impact of incidents to determine if they meet these thresholds and must report accordingly.
The purpose of this is to gather consistent, timely information for managing the impact on consumers, firms, and markets, as well as to enhance understanding of operational resilience and identify potential vulnerabilities.
An “operational incident” is defined as an event or series of events that disrupt a firm’s operations, such as impacting service delivery or the security of client data. Firms should report only those incidents that breach the defined thresholds, while continuing to report other matters as currently required.
This will also help the FCA identify ‘critical third parties’ upon which a number of firms simultaneously rely. The intention is that this will help them identify and mitigate overall market risk by monitoring these CTPs. See: CP24/28: Operational Incident and Third Party Reporting
Other news
There are proposals in consultation paper CP24/26 that would bring debt management firms into the scope of a CASS audit, similar to other regulated firms that hold client money. The aim is to strengthen consumer protection in the event of a failure of a debt management firm.
CAN WE HELP?
If you would like to discuss any of these developments or have questions for our specialist Financial Services team, please do get in touch.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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Related Resources
Financial Services Update – September 2024
Financial Services Update – May 2024
