Quarterly update on Global financial services regulatory developments

According to the Organization for Economic Co-operation and Development (OECD), global growth is expected to be 2.9% in 2023 and weaken to 2.7% in 2024 due to the strain of conflicts, still-elevated inflation and continued high interest rates, which are leading to tighter financial conditions, lower business and consumer confidence.

We see regulators responding to these developments by seeking to manage risks to financial stability and focus on financial crime, digital assets and environmental, social and governance (ESG). Compared with last quarter, we observe a stronger focus on the digitalization of finance, as policymakers and regulators are creating guardrails for the use of artificial intelligence (AI) in some jurisdictions and expanding regulatory activity in payments.

This quarterly update highlights key changes in regulatory developments across global jurisdictions in the final quarter of 2023 that will lead to increased requirements for firms.

????? Regulators continue to address risks observed during the bank turmoil in March 2023:

????? The US Board of Governors of the Federal Reserve System set capital requirements for depository institution holding companies that are significantly engaged in insurance activities. This risk-based capital framework adjusts and aggregates existing legal entity capital requirements to determine enterprise-wide capital requirements, effective on 1 January 2024. In addition, the US Federal Deposit Insurance Corporation (FDIC) proposed new guidelines for governance and risk management at FDIC-supervised insured depository institutions. The proposed guidelines would have a lower size threshold for applicability, be more prescriptive and expand board responsibilities in several areas.

????? Meanwhile in Europe, the European Central Bank (ECB) is refocusing its supervisory priorities and will ask banks to address shortcomings in their asset and liability frameworks and credit and counterparty credit risk management, and to accelerate the effective remediation of shortcomings in internal governance.

????? Regulators to improve the resilience of the insurance sector: The European Council and the Parliament have reached a provisional agreement on new rules under the Insurance Recovery and Resolution Directive (IRRD) and on amendments to the Solvency II directive. Among others, it will introduce a new harmonized regime at European level for resolving insurers in an orderly manner, requiring (re)insurance entities and groups to draw up and submit pre-emptive recovery plans.

????? Regulators continue to mitigate risks from digital assets:

????? The International Organization of Securities Commissions (IOSCO) established a global regulatory policy framework for the regulation of Crypto and Digital Asset markets (CDA), including Decentralized Finance (DeFi) to address market integrity and investor protection issues. Regulators should assess how their regulatory framework would apply to prevent fraud, misconduct, and other risks to investors in CDA markets. Singapore’s regulator already set out conduct measures for Digital Payment Token (DPT) service providers, while Hong Kong's regulators?imposed conduct requirements on intermediaries providing virtual assets dealing services and on those providing dealing, asset management or advisory services in tokenized securities. In addition, Hong Kong’s Securities and Futures Commission (SFC) set out requirements for intermediaries engaging in tokenized securities-related activities and the tokenization of SFC-authorized investment products.

????? The Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto asset exposures of banks, with a proposed implementation date of 1 January 2025. The proposal will require banks to disclose the sources of information they have used to assess whether the crypto assets to which they are exposed to comply with the crypto asset classification conditions set out in the Basel Framework. Canada’s regulator is running a?consultation?on the same topic and will issue draft guidelines on public disclosures by fall 2024. Final guidelines are expected by winter 2025, taking effect in Q4 2025.

????? Meanwhile in the EU, the Markets in Crypto-Assets Regulation (MiCAR), will apply as of 30 December 2024. The EU continues to consult on level two measures which will cover, among others, business continuity requirements and record-keeping requirements for crypto-asset service providers (CASPs). In addition, draft guidelines under MiCAR were published to ensure issuers of tokens properly assess and monitor their liquidity needs. EBA also launched a consultation on recovery plans to be drafted by issuers of asset-referenced tokens (ARTs) and e-money tokens (EMTs), which set out the information to be included therein.

????? Regulators continue to address ESG challenges:

????? The issue of directing public and private finance toward climate action dominated the agenda at COP28. We have summarized the outcomes of Finance Day for financial services and have analyzed the key implications for financial services firms from COP28.

????? Globally, a set of good practices to promote the integrity and orderly functioning of Voluntary Carbon Markets (VCMs) was proposed. These measures include standardizing terminology in VCMs, preventing double counting of credits, and introducing safeguards against fraud and market manipulation.

????? The European Banking Authority (EBA) is assessing the appropriateness of its Pillar 1 framework. The goal is to enable firms to develop techniques to identify how and to what extent environmental and social (E&S) risks translate into financial risks. Meanwhile, the first set of EU Sustainability Reporting Standards (ESRS) applied on 1 January 2024 and requires firms to report on ESG policies, targets, action plans, transition plans and potential financial impacts.

????? The UK issued sustainability disclosure rules, to tackle greenwashing, including investment product sustainability labels, and to restrict how terms like "ESG," "green" and "sustainable" can be used. Asset managers will also be required to make consumer-facing product-level disclosures and more granular disclosures at both a product and entity level that are suitable for a broad range of stakeholders.?UK regulators are also proposing new rules, which would require firms to report diversity and inclusion (D&I) data, implement and govern D&I strategies, and set diversity targets. The?final rules are planned for publication in 2024.

????? The Singapore-Asia taxonomy for sustainable finance sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate change mitigation across eight focus sectors. It includes a “traffic light” system, aimed at enabling users to distinguish between Green, Amber — or transition — and ineligible activities.

????? Regulators are establishing guardrails for the use of AI: The OECD published a paper on recent evolutions in AI in finance and discusses whether policy makers may need to reinforce policies and strengthen protection against potential AI risks. Meanwhile, the Group of Seven (G7), as well as the US and Hong Kong published principles that call on firms to implement robust governance and risk management when using AI. In addition, the G7, Canada, Australia and Hong Kong have set out code of conducts or ethical principles that call for accountability, fairness and transparency throughout the AI lifecycle, while the European Union (EU) Parliament and Council negotiators reached a provisional agreement on the Artificial Intelligence Act (AI Act), which could set a global standard for AI regulation in other jurisdictions.

????? Regulators expand scope to include firms across the payment chain and money-like assets:

????? Regulators aim to regulate more firms across the payment chain: The UK HM Treasury proposed to regulate all systemic market actors across the payment chains, which means that all firms (incl. payment institutions, system operators, service providers and e-money institutions) should ensure they understand the Bank of England’s proposed new powers related, for example, to the ability to set limits on a recognized payments entity’s business operations. Meanwhile in the US, the Consumer Financial Protection Bureau (CFPB) proposed increased oversight of nonbanks. Digital wallet and payments providers would need to comply with federal consumer financial law and provide information about their activities and executives, consumer risks and the effectiveness of their compliance systems. Finally, the Bank of Canada designated additional prominent payment systems under the?Payment Clearing and Settlement Act, effective 16 October 2023, which requires them to adhere to banks’ risk management standards and have risk controls in place to ensure continued resilience.

????? Regulators are also applying the principle “same risk, same regulatory outcome” to money-like assets: The Bank of England?outlined how it would regulate operators of systemic payment?systems that use stablecoins, Hong Kong is proposing to regulate stablecoin issuers, while the EU’s MiCAR will provide legal clarity for "stablecoins." As such, the EBA is consulting on reporting requirements for transactions with ARTs and EMTs under MiCAR.

????? Regulators are addressing financial crime with focus on money laundering: While 13 countries have recently created a task force to disrupt illicit money flows to terrorist organizations, several jurisdictions are addressing money laundering risks by scrutinizing firm’s anti-money laundering programs and increasing recordkeeping and reporting requirements.

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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