Global Financial Regulatory Blog

Acting Comptroller Confronts “Too Big to Manage” Issue

Posted in Banking

The Acting Comptroller of the OCC discussed the limits of large bank manageability and the steps that regulators can take to address the risks posed by size and complexity.

Arthur S. Long, Pia Naib, and Deric Behar

On January 17, 2023, Acting Comptroller of the US Office of the Comptroller of the Currency (OCC) Michael Hsu delivered a speech titled “Detecting, Preventing, and Addressing Too Big to Manage.” The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of non-US banks. The speech is the latest statement by the leader of the OCC on US bank size in the wake of substantial mergers in the banking sector, which have become a political as well as supervisory issue.

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The “Edinburgh Reforms”: Timetable of Key Changes

Posted in Regulatory Reform

The timetable sets out three tranches of extensive regulatory changes to UK and EU law in 2023 and 2024.

By Rob Moulton, Becky Critchley, Denisa Odendaal, and Dianne Bell

The “Edinburgh Reforms”, a series of announcements made on 9 December 2022 by the Chancellor of the Exchequer (see here), set out the UK government’s reforms to drive growth and competitiveness in the financial services sector. The Reforms build upon the reform agenda that the government is taking forward through the Financial Services and Markets (FSM) Bill and which implements the Future Regulatory Framework Review.

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NYDFS Proposes Guidance on Climate Change Risk Management

Posted in Environmental, Social and Governance (ESG)

The Guidance would increase expectations for regulated financial institutions to identify, measure, monitor, and control climate-related financial risks.

By Betty M. Huber, Arthur S. Long, Pia Naib, Austin J. Pierce, and Deric Behar

For the past few years, the New York State Department of Financial Services (DFS) Superintendent has prioritized setting the pace in climate risk management for financial institutions that it supervises. On December 21, 2022, the DFS proposed Guidance for New York State-Regulated Banking and Mortgage Institutions Relating to Management of Safety & Soundness Risks from Climate Change (the Guidance). The Guidance follows on the DFS’ October 2020 letter to CEOs of its regulated financial institutions, which announced that DFS was developing a strategy for integrating climate-related risks into its supervisory mandate. The letter also announced that DFS would engage with banking organizations (and coordinate with US and international counterparts) to develop effective supervisory practices and guidance to mitigate the financial risks from climate change.

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Addressing the Evolving Landscape of ESG

Posted in Environmental, Social and Governance (ESG)

Latham’s Global Co-Chair of the Financial Institutions Industry Group, Nicola Higgs, sits down with Lucy McNulty, host of the Following the Rules podcast, to discuss how financial services firms should adapt to the constant evolution of ESG requirements.

In this podcast interview, host Lucy McNulty talks to Nicola Higgs, Latham’s Global Co-Chair of the Financial Institutions Industry Group, about the rapid changes in environmental, social, and governance (ESG) requirements and how financial services firms should best respond.

“The ESG regulatory reform agenda presents quite an unprecedented challenge for management teams of regulated firms and in particular those with an international footprint,” says Higgs, who advises banks, fund managers, and insurers on UK and European financial services regulatory matters as a partner in Latham’s London office.

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FCA Recommends Measures Encouraging Diversity and Inclusion in Financial Services

Posted in Diversity and Inclusion

By David Berman, Sarah Gadd, Nicola Higgs, Rob Moulton, Becky Critchley, and Nell Perks

The FCA’s latest report into D&I highlights the need for additional metrics, social mobility, firm culture, staff development, data quality, and systematic strategies.

In 2021 and 2022, the FCA carried out a survey of firms in respect of their approach to diversity and inclusion. In advance of a full consultation on new rule proposals in 2023, the FCA has provided a progress update. Overall, the FCA remains concerned about the lack of progress in the industry and has highlighted a number of key points that it encourages regulated firms to consider and use.

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The FCA’s Approach to Non-Financial Misconduct — A Further Twist

Posted in Conduct of Business

By David Berman, Nicola Higgs, Jon Holland, Andrea Monks, Rob Moulton, and Nell Perks

The FCA stated that the perpetrator’s character is key to non-financial misconduct investigations, which suggests a mismatch with recent case law.

In last year’s Frensham[1] case, the Upper Tribunal considered how relevant a (non-dishonesty-based) criminal offence committed in one’s personal life is to the perpetrator’s regulatory “fitness and propriety”. The Upper Tribunal effectively reined in the FCA from too readily linking (i.e., considering as relevant) non-work-related misconduct to the perpetrator’s regulatory fitness and propriety to perform a regulated function. In doing so, the Upper Tribunal set out the approach to be taken when determining the relevance of non-financial misconduct in a regulatory context.

This Latham Client Alert highlights the difficulty in reconciling the FCA’s newly published ban of Mr Zahedian with the Upper Tribunal’s findings in Frensham. On the basis of the published Zahedian Final Notice[2], it is difficult to understand how (or even whether) the FCA followed and applied the approach laid down by the Upper Tribunal in Frensham. Indeed, Mr Zahedian may have felt somewhat aggrieved if he had read the Frensham judgment. Continue Reading

Federal Reserve Proposes Climate Risk Guidance for Large Financial Institutions

Posted in Environmental, Social and Governance (ESG)

The guiding principles are similar to related proposals from other banking regulators, but will require further clarification through the comment process.

By Nicola Higgs, Betty M. Huber, Arthur S. Long, Pia Naib, Anne Mainwaring, and Deric Behar

On December 2, 2022, the Board of Governors of the Federal Reserve System (Federal Reserve) published proposed Principles for Climate-Related Financial Risk Management for Large Financial Institutions (the Proposal). The Proposal urges large financial institutions[1] to consider how best to identify, measure, monitor, and control the various risks associated with climate change over a variety of time horizons. It also specifies that large financial institutions should monitor microprudential risks, including credit, market, liquidity, operational, and legal and compliance risks, as well as other financial and nonfinancial risks that could arise from climate change.

The Proposal aims to support financial institution boards of directors and management in incorporating mitigation of climate-related financial risks into their broader risk management frameworks, consistent with safe and sound practices and the Federal Reserve’s rules and guidance on sound governance.

Large financial institutions are defined as those with over $100 billion in assets that are subject to Federal Reserve supervision, including the US operations of non-US banking organizations. The Federal Reserve’s guidance is founded on the premise that climate change poses an emerging risk to the safety and soundness of financial institutions and the financial stability of the United States. Continue Reading

10 Key Focus Areas for UK-Regulated Financial Services Firms in 2023

Posted in Conduct of Business, Environmental, Social and Governance (ESG), Financial Crime, Regulatory Reform

Monitoring the progress of the Financial Services and Markets Bill and regulatory divergence between the UK and the EU will continue as a key theme in 2023. 

The Financial Services and Markets Bill leaves a significant amount of the essential regulatory detail to be developed later by HM Treasury (through regulations), followed by development of the specific rules by the regulators. Therefore, firms operating in the financial services sector will face legal and regulatory uncertainty as to the UK’s regime for the next few years.

In addition, the regulators have been adjusting their approaches to deal with the rapid change and emerging issues in the markets they oversee. The FCA has, for example, moved to be an “outcomes focused” regulator, and firms need to adjust to that mindset when considering whether they are meeting their regulatory obligations.

Other key focus areas for 2023 include conduct and culture; consumer protection and the new Consumer Duty (including the outcomes-based nature of the Duty’s rules); diversity and inclusion; financial crime; and the overseas persons exclusion. Further, the topics of climate change and ESG are increasingly significant for financial services firms, along with new developments in the areas of ephemeral messaging and plans for the regulation of critical third parties.

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FCA Issues Final Notice to Former Banking CEO Over Anti-Money Laundering Failures

Posted in Financial Crime, Individual Accountability and Governance, Market Misconduct

The case provides instructive practical examples of the “reasonable steps” companies can take according to the FCA and a reminder of the FCA’s cultural expectations of CEOs.

By David Berman, Jonathan Ritson-Candler, and Sean Wells

On 16 November 2022, the FCA issued a final notice (Final Notice) to the former CEO of Sonali Bank (UK) Limited (SBUK), Mr Prodhan, for anti-money laundering (AML) failings for a period running from 2012 to 2014 (the Relevant Period).

The Final Notice provides a reminder to firms of the FCA’s expectations in relation to AML compliance; in particular:

  • the role of senior management oversight of the Money Laundering Reporting Officer (MLRO);
  • the individual accountability of the senior manager tasked with overseeing the firm’s AML and financial crime compliance; and
  • the importance of senior management engendering a strong compliance culture, including in relation to AML.

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ESMA Issues Consultation Paper on Fund Names to Tackle Greenwashing

Posted in Environmental, Social and Governance (ESG)

The European Securities and Markets Authority proposes to restrict ESG- and sustainability-related terms in the naming of funds, with an eye on the US and UK fund naming regimes.

By Paul Davies, Nicola Higgs, Anne Mainwaring, and Dianne Bell

On 18 November 2022, the European Securities and Markets Authority (ESMA) published its consultation paper on guidelines in relation to funds’ names, including quantitative thresholds that would need to be met before ESG- and sustainability-related terminology can be used in funds’ names. The proposed rules would set common standards for AIFMs[1] and UCITS[2] management companies when promoting AIFs and UCITS using an ESG- or sustainability-related name, including when these funds are set up as EuVECA, EuSEF, and ELTIFs[3] to facilitate marketing of funds throughout EU Member States. Continue Reading

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