Quarterly update on financial services regulatory developments

Over the last few months, we have seen some strain in parts of the banking system, most notably in some US regional banks and Credit Suisse. Since then, regulators across jurisdictions are addressing gaps in surveillance, supervision and regulation and are strengthening capital requirements, resolution regimes and deposit insurance programs. Regulators are helping financial institutions (FIs) put in place disclosure practices and structures to provide high-quality information about climate-related risks and opportunities. Regulators are also increasingly aiming to mitigate risks that arise from digital assets.

This quarterly update highlights key changes in supervisory priorities across jurisdictions in 2Q23 that may lead to increased regulatory requirements for FIs.

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·????????Regulators respond to recent bank failures in the US and Switzerland: In the US, regulators will issue a notice of proposed rulemaking to seek public comment on the incorporation of Basel III reforms to the US capital framework . Regulators are considering whether to apply the proposed new rule to banks with assets over US$100b, whereby community banks would not be impacted by the proposal, given their limited overall size and trading activities. In addition, the Federal Reserve’s annual stress test is under scrutiny. Instead of just testing whether banks have enough capital and liquidity to withstand shocks, William Barr, the Federal Reserve Vice-Chair, proposed a “reverse stress test,” where regulators would attempt to identify what it would take to cause a bank to fail. However, the Fed’s board would need to approve these changes before they could be enacted. We are also expecting the US approach to Basel III implementation to be published soon. Meanwhile, Swiss regulators plan to review the too-big-to-fail (TBTF) framework to enable early intervention in the case of bank failures. The results will be presented to Parliament within 12 months as part of the Federal Council’s next report on systemically important banks.

·????????Regulators ring in next phase of evolution in sustainability disclosure: The International Sustainable Standards Board (ISSB) has issued its first two sustainability standards that will enter into force in January 2024. The standards cover requirements for disclosure of sustainability- and climate-related information and build on existing global initiatives. As such, companies applying ISSB standards will be fully compliant with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations; however, national variations still apply. In addition, the Basel Committee of Banking Supervision (BCBS) will issue a consultation paper on the Pillar 3 disclosure framework for climate-related financial risks by the end of 2023. This framework would complement and be interoperable with disclosure initiatives of the ISSB and other authorities.

·????????Regulators continue to adapt regulatory framework for digital assets:

·????????Applying governing standards related to market infrastructures to digital assets: The Monetary Authority of Singapore (MAS) proposed a framework for “designing open, interoperable networks for digital assets (i.e., tokenized real economy and financial assets).” It features contributions from experts at the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructure (CPMI) and discusses ways through which governing standards related to market infrastructure can be applied to digital assets.

·????????Flagging the need to regulate decentralized finance (DeFi): In May 2023, the Financial Stability Institute (FSI) published a report on crypto, tokens and DeFi , that calls on financial authorities to adjust regulatory regimes and regulate firms involved in services provided through DeFi protocols (e.g., coders, developers, miners, validators and governance token holders in "decentralized autonomous organizations" (DAOs)). The International Organization of Securities Commissions (IOSCO) plans to publish a DeFi-specific?consultation ?with proposed recommendations later this year. Also the European Systemic Risk Board (ESRB) proposed policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi .

·????????Reducing risk of regulatory fragmentation and arbitrage in crypto-asset regulation: In July 2023, the Financial Stability Board (FSB) published its global regulatory framework for crypto-asset activities to promote the comprehensiveness and international consistency of regulatory and supervisory approaches. It consists of two high-level recommendations for the regulation, supervision and oversight of crypto-assets and markets , and global stablecoin arrangement s. In May 2023, IOSCO published its recommendations for crypto and digital asset markets . It aims to globalize the "same risk, same regulatory outcome" approach to the sector and align crypto asset regulations with existing traditional finance rules.

·????????Regulating the promotion of crypto-assets: In June 2023, the UK Financial Conduct Authority (FCA) set out financial promotion rules for crypto-assets , effective on 8 October 2023. The new rules ban promotional incentives and require firms to ensure customers have the "appropriate knowledge and experience" to invest.

·????????Extending money laundering rules to crypto asset service providers (CASPS): The European Banking Authority (EBA) has set out proposed changes to its guidelines on money laundering and terrorist financing (ML/TF) to extend the scope to crypto asset service providers. The proposed changes introduce risk factors crypto assets service providers (CASPs) should consider when entering a business relationship or carrying out transactions in crypto assets. The proposed changes also offer guidance to FIs on the risks associated with engaging with a CASP or dealing with crypto assets. The EBA intends to deliver specific ML/TF guidance for CASPs in the future through amendments to the EBA’s risk factors guidelines, amendments to the guidelines to prevent the abuse of fund transfers for ML/TF purposes, and new guidelines on policies and procedures for compliance with restrictive measures. The Canadian government has plans for new measures to address money laundering and financial crime . Law enforcement could get new powers to freeze or seize?crypto currency ?suspected to be linked to criminal activity. FIs and pension funds could be required to disclose their exposure to volatile crypto currency markets.

·????????Requiring registration or licensing for digital assets trading platforms: The Canadian Securities Administrators (CSA) is pursuing enforcement actions for noncompliance with Canadian securities legislation and has enhanced pre-registration requirements imposed on crypto asset trading platforms . In Hong Kong, a new licensing regime for centralized virtual asset trading platforms (VATPs) under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615) (AMLO) will come into effect on 1 June 2023. Under the new regime, all VATPs operating a virtual asset exchange in Hong Kong or actively marketing their services to Hong Kong investors will need to be licensed by the Securities and Futures Commission (SFC).

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The views reflected in this article are views of the author’s and do not necessarily reflect the views of the global EY organization or its member firms.

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