Global Regulator & Central Bank News Roundup

Volume 16/2024 (April 29 – May 5)

 

Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 700+ financial services regulators, central banks as well as global and regional standard setters. For more current updates, visit Regxplora, Regxelerator’s end-to-end automated and generative AI-powered financial regulatory intelligence platform. Sign up here to receive the roundup via email.
 


Themes covered in this edition
 

 


Prudential & financial stability
 
European Supervisory Authorities Issue Spring 2024 Risk Assessment Highlighting Persistent High Risks in EU Financial Sector
The European Supervisory Authorities (ESAs) have disclosed their Spring 2024 Joint Committee update on risks and vulnerabilities in the EU financial system, highlighting that risks remain high amid various economic and geopolitical challenges. The update reveals that financial markets have shown strong performance due to the anticipation of potential interest rate cuts in 2024, despite significant uncertainties. This optimism, however, carries risks of market corrections triggered by unforeseen events. In the banking sector, credit risk is expected to rise, particularly in high-yield debt and real estate sectors, as economic growth decelerates. Although banks have maintained robust asset quality and high profitability, with a CET1 ratio of 15.8% and a liquidity coverage ratio above 160%, the future outlook appears challenging due to potential lower interest income and slower loan growth amidst a tough macroeconomic environment. The insurance sector remains financially healthy with solid capitalization, evidenced by solvency ratios well above 200%, although liquidity positions have slightly weakened. The sector faces challenges from subdued growth and potential repricing of risk premia. Additionally, the ESAs raise concerns about heightened geopolitical instability and increased reliance on digital solutions, which are likely to further amplify cyber security risks. The rising number of cyberattacks and related insurance claims are pressing the (re)insurance industry to enhance pricing techniques and risk-transfer mechanisms.

 


AML & CFT
 
MENAFATF Partners with UNODC to Launch Asset Recovery Network in MENA Region
The Middle East and North Africa Financial Action Task Force (MENAFATF) has held a Regional Meeting for the Establishment of the Asset Recovery Inter-Agency Network (ARIN) in the Middle East and North Africa Region. Supported by the United Nations Office on Drugs and Crimes (UNODC), the German Agency for International Cooperation (GIZ), and hosted by the Egyptian Financial Intelligence Unit (EMLCU), the meeting aimed to enhance the capabilities of states in the region in asset recovery in line with United Nations Conventions and latest Financial Action Task Force (FATF) recommendations. Discussions included inter alia sharing good practices from established ARIN networks, discussing key challenges in asset resevoery as well as exploring potential sources of funding and tools for effective information exchange within and between ARINs. The event saw participation from approximately 90 representatives, both in-person and online, from 17 member states of the MENAFATF, along with international observers and partners.

 

EBA Expands EuReCA Database to Include Personal Data for AML/CFT Supervision Enhancement
The European Banking Authority (EBA) has announced that starting from May 2024, EU supervisors will have the option to report names of natural persons to its AML and CFT database, EuReCA, which serves to centralize information on serious AML/CFT deficiencies identified in financial institutions by EU supervisors and the measures taken to address these deficiencies. Under the new approach, supervisors can report names of customers, beneficial owners, members of the management body, or key function holders within financial institutions when they are associated with specific AML/CFT deficiencies and/or when their lack of honesty or integrity may impact the institution’s governance and AML/CFT defenses. The legal basis for EuReCA to collect personal data has been established under article 9a (1) and (3) of the EBA Regulation and Regulation (EU) No 1093/2010. Additionally, joint controllership arrangements have been established with ESMA and EIOPA for the processing of personal data in EuReCA, in accordance with Article 26 of Regulation (EU) 2016/679 and Article 86 of Regulation (EU) 2018/1725, ensuring that data processing remains limited to significant AML/CFT compliance failures and is necessary and proportionate.

 


Cyber & operational resilience
 
U.S. Federal Agencies Publish Resource Guide for Community Bank Third-Party Risk Management
The Federal Deposit Insurance Corporation, Federal Reserve Board, and Office of the Comptroller of the Currency have jointly released a guide aimed at assisting community banks in the management of risks associated with third-party relationships. Specifically directed at community banks, the guide provides considerations, resources, and examples to navigate the various stages of third-party interactions with a view to helping community banks compete and respond to the changing financial services landscape while ensuring that their activities with third parties are conducted in a safe and sound manner. Specifically, the guide outlines the expectations for community banks to appropriately identify, assess, monitor, and control the risks presented by third-party relationship and complements the principles set out in the third-party risk management guidance issued by the agencies in June 2023.

 


Conduct & consumer protection
 
ASIC Reviews Superannuation Trustee Compliance in Handling Death Benefit Claims
The Australian Securities & Investments Commission (ASIC) has announced a review of industry practices and compliance with laws relating to superannuation member services, with an initial focus on how trustees handle death benefit claims. The first phase of ASIC’s work on death benefits has highlighted areas for improvement in trustees’ public communications, revealing that information provided on trustees’ websites about death benefit nominations and claims was often insufficient or unclear. The next steps in the review process include a detailed examination of data and processes from a sample of trustees. According to data from the Australian Financial Complaints Authority (AFCA), complaints related to death benefit claims have seen a significant increase between 2021 and 2023, with a sevenfold rise in complaints about delays in handling these claims. ASIC’s review identified several communication issues on superannuation trustees’ websites, including poor explanations of the death benefit claims process and inadequate guidance on making and updating beneficiary nominations. Based on these findings, ASIC expects trustees to urgently review their practices and improve communications with consumers about death benefits. Trustees are also encouraged to use complaints data to identify and address systemic service delivery issues. Where non-compliance is identified, ASIC will consider enforcement action as demonstrated by recent actions such as the civil penalty proceedings against Telstra Super for failing to meet internal dispute resolution requirements.

 

U.S. CFPB Study Reveals Complex Pricing Structures Result in Higher Consumer Costs
The Consumer Financial Protection Bureau (CFPB) has released a report indicating that consumers tend to pay more for products with complex pricing structures. The research, part of the CFPB’s junk fee initiative, was based on experiments simulating simple market transactions, where buyers and sellers interacted with products priced either as a single all-inclusive cost or split into multiple fees. The study specifically examined the effects of price complexity in markets such as auto loans and mortgages, where consumers must navigate a various fees such as extended warranties, add-ons, and closing costs. Key findings from the CFPB’s research reveal that higher price complexity leads to increased total costs for consumers, with sellers’ asking prices being 60 percent higher and transaction prices 70 percent higher in markets with multiple sub-prices compared to single-price markets. Additionally, the complexity made price comparisons more challenging, with buyers 15 times more likely to choose higher-priced options when faced with multiple sub-prices. The report also highlights common financial products with complex pricing, including credit cards, checking and savings accounts, mortgages, and auto loans, illustrating the widespread nature of this issue.

 


Fintech & ecosystem innovation
 
OECD Revises Principles on AI
The OECD has announced revisions to its Principles on Artificial Intelligence (AI), which serve as a global framework for shaping AI policies, advocating for innovative and trustworthy AI, which maintains human rights and democratic values . The revisions seek to reflect the recent advancements in AI technologies and address among other things safety concerns, issues related to information integrity such as the spread of misinformation, the environmental footprint of AI systems as well as the need for jurisdictions to collaborate and to promote interoperable governance and policy environments for AI.

 

New BIS Working Paper Explores Motivations in DeFi Lending Using Aave V2 Data
The Bank for International Settlements has released a working paper titled “Why DeFi lending? Evidence from Aave V2,” which provides a deep dive into decentralized finance (DeFi) lending protocols, particularly focusing on the Aave V2 platform. The analytical study utilizes transaction-level data to understand the motivations behind lending and borrowing within these protocols. It contrasts the DeFi lending market, characterized by anonymity and over-collateralization, with traditional financial intermediation, which typically relies on borrower reputation and financial strength. The research zeroes in on the reasons why individuals participate in DeFi lending and borrowing, despite the seemingly counterintuitive requirement for over-collateralization. Key findings indicate that liquidity provision in DeFi is predominantly driven by the search for yield, especially among retail users influenced by the low interest rate environment in advanced economies. Borrowing, on the other hand, is primarily motivated by speculation and, to a lesser degree, the desire to increase voting power in governance tokens. The study also highlights behavioral differences between investor types: retail investors are influenced by real economy interest rates when depositing, while large investors focus on the rates within the DeFi protocol itself. Speculative motives drive borrowing decisions for both groups, but large investors also borrow to gain influence over protocol decisions.

 

EIOPA Analyzes Digitalization Trends and Readiness in EU Insurance Sector
The European Insurance and Occupational Pensions Authority (EIOPA) has released a report analyzing the digitalization level in the European insurance sector. Based on EIOPA’s 2023 Digitalisation Market Monitoring Survey and insights from a dedicated Eurobarometer poll, the research reveals a wide range of digital practices among European insurers, with many still in the early stages of digital adoption. Among other things, it finds that digital-only distribution channels remain less common than physical or hybrid ones, particularly for life insurance products where consumers still prefer in-person interactions. However, the use of online tools for product comparison and information is growing, as is the expected use of chatbots, driven by advancements in generative Artificial Intelligence (AI). More broadly, AI is already employed by half of the respondents in non-life insurance and by 24% in life insurance, mainly for simpler tasks with algorithms that allow for human oversight. The report also notes that most insurers have commercial relationships with BigTech firms, with cloud storage services being utilized by nearly 80% of respondents. Other technologies including the Internet of Things, blockchain, and parametric insurance, on the other hand, are still less common. EIOPA will draw on the findings as part of its continued evaluation of the risks and benefits of digitalization and the associated review of appropriate regulatory responses as well as supervisory oversight. Social media is widely used by insurers for customer engagement and marketing, often in collaboration with influencers.

 

CFTC Technology Advisory Committee Releases Report on Responsible AI Usage in Financial Markets
The Commodity Futures Trading Commission (CFTC) has released a report by its Technology Advisory Committee (TAC) on Responsible Artificial Intelligence (AI) in Financial Markets. The TAC has conducted research to understand the impact of AI’s evolution on financial markets and has made recommendations for the CFTC’s approach to this evolution to ensure market safety. The report highlights the longstanding use of AI in financial markets while stressing the emergence of new issues due to the rise in generative AI, such as potential market instabilities and the risks of biases, lack of transparency, data mishandling, and concentration risks. To address these, the Committee has put forwards several recommendations including the organization of public roundtables and the engagement with registered entitiesto deepen the understanding of AI adoption in the industry, the creation of an AI Risk Management Framework and an inventory of AI-related regulations as basis for a a gap analysis of the potential risks associated with AI systems, the alignment of policies with other federal agencies, and engaging in domestic and international AI dialogues, including with registered entities.

 


Payments & money
 
BIS CPMI Outlines SLA Best Practices for Cross-Border Payment Systems
The Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures has released a new report detailing the use of service level agreements in cross-border payment arrangements. The report sets out several high-level recommendations alongside key features and guiding questions that parties involved in such arrangements, including payment service providers, correspondent banks and/or payment system operators, should consider. The report is the result of a collaborative effort, involving a year-long interaction with both public and private stakeholders, and contributes to the objectives under the G20’s cross-border payments roadmap.

 

Bank of Namibia Initiates Instant Payment Project to Foster Financial Inclusion and Efficiency
The Bank of Namibia has announced the launch of a new Instant Payment Project. The project, which is expected to officially launch in 2025, was developed as part of the Bank’s strategic plan to reduce cash dependency and increase transactional efficiency and aims to fulfill several policy objectives, including enhancing accessibility and affordability for underserved populations, achieving full interoperability of payment instruments, modernizing the financial sector, and ensuring a secure and efficient National Payment System. To ensure the project’s accessibility and affordability, the platform will be available on various devices, including non-smartphones, and aims to minimize infrastructure costs for financial institutions. For the purpose of the project’s implementation, an independent Special Purpose Vehicle has been established.

 

Federal Reserve Board Puts Forward Proposal for Year-Round Operation for Fedwire Funds and National Settlement Services
The Federal Reserve Board has requested public comment on a proposal to extend the operating days of the Fedwire Funds Service and the National Settlement Service (NSS) to include weekends and holidays, thereby enabling them to function every day of the year. Currently, these services operate from Monday through Friday, excluding holidays. Under the new proposal, the Fedwire Funds Service would continue to operate for 22 hours per day, while the NSS would be open for 21.5 hours per day. The proposed changes would affect service participants such as banks and credit unions, with participation in the expanded operating days being voluntary. The Fedwire Funds Service is utilized for sending and receiving high-value electronic funds transfers, and the NSS facilitates settlements for participants in private-sector clearing arrangements. Anticipated benefits include improved credit risk management, operational efficiency for financial market utilities, innovation in payment solutions, and more efficient cross-border payments. However, the proposal also acknowledges that the changes would necessitate operational and technical adjustments, incurring costs.

 


ESG
 
HKMA Publishes Hong Kong Taxonomy Framework
The Hong Kong Monetary Authority (HKMA) has released the Hong Kong Taxonomy for Sustainable Finance. Developed in response to stakeholder feedback from a discussion paper released in May 2023, the taxonomy aims to provide clear definitions of green products, enhance interoperability with other taxonomies, and mitigate the risks of greenwashing. The current version of the taxonomy covers 12 economic activities across four sectors: power generation, transportation, construction, and water and waste management. It aligns with international frameworks such as the Common Ground Taxonomy, China’s Green Bond Endorsed Projects Catalogue, and the European Union’s Taxonomy for Sustainable Activities, promoting a common understanding of green activities and facilitating cross-border green finance flows. Future plans include expanding the taxonomy to encompass additional sectors and transition activities, as well as ongoing collaboration with stakeholders to promote its application and enhancement. To aid in the taxonomy’s implementation, the HKMA has also published a consultation report summarizing stakeholder feedback, along with supplemental guidance providing background information, use cases, and answers to frequently asked questions.

 


Other transversal themes
 
SAMA Partners with BIS to Host Regional Reserve Management Symposium in Riyadh
The Saudi Central Bank (SAMA) in collaboration with the Bank for International Settlements (BIS) has convened a high-level regional meeting on Reserve Management in Riyadh, Saudi Arabia. The meeting addressed the evolving challenges and opportunities in central bank reserve management amid the current complex macro-financial environment. Attendees include reserve managers and experts from the Middle East and North Africa (MENA) region, as well as participants from other central banks. The meeting’s agenda featured a series of panel discussions and keynote speeches, providing a forum for participants to share insights, perspectives, and expertise on key aspects of managing foreign exchange reserves.

 

CFTC Appoints Dr. Ted Kaouk as Agency’s Inaugural Chief Artificial Intelligence Officer
The Commodity Futures Trading Commission has designated Dr. Ted Kaouk as the agency’s first Chief Data & Artificial Intelligence Officer. In this role, Dr. Kaouk will lead the development of the CFTC’s enterprise data and artificial intelligence strategy with the goal of enhancing the agency’s capabilities in oversight, surveillance, and enforcement within the derivatives markets. Chairman Rostin Behnam emphasized the transformative potential of advanced data analytics and AI for the CFTC’s long-term functions and highlighted the agency’s commitment to modernizing staff skillsets, fostering a data-driven culture, and leveraging AI efficiencies. Prior to this appointment, Dr. Kaouk served as the Chief Data Officer at the Office of Personnel Management and the U.S. Department of Agriculture, where he developed a federal government-wide human capital data strategy and established an enterprise data analytics and AI platform, respectively. He also chaired the Federal Chief Data Officers Council.

 


Cross-border cooperation
 
Ukraine NSSMC and BaFin Establish MoU or Enhanced Regulatory Cooperation and Information Exchange
The Ukraine National Commission on Securities and Stock Market (NSSMC) has announced a Joint Declaration on Assistance and Mutual Cooperation with the Federal Financial Supervisory Authority of Germany (BaFin). The agreement aims to foster collaboration between the two bodies through the exchange of information and mutual assistance in investigations. Specifically, the cooperation will focus on financial reporting requirements, alternative funds, non-governmental pension funds, fraud prevention, supervision of virtual assets, as well as financing construction and investment funds in the construction sector.