26 June 2017
Fourth Money Laundering Directive (MLD4) ((EU) 2015/849)
- The fourth piece of EU legislation on the prevention of the use of the EU financial system for money laundering and terrorist financing, which seeks to bring the EU regime in line with Financial Action Task Force standards.
- MLD4 does not apply solely to financial services institutions, but extends to auditors, accountants, tax advisers, legal professionals, trust & company service providers, estate agents, gambling service providers, and traders of goods of EUR 10,000 or more.
- Obliged entities are required to obtain and maintain information on their beneficial ownership, which is also to be made accessible on a central register (operated by Companies House in the case of companies, and HMRC in the case of trusts).
- The approach to customer due diligence ("CDD") is to change, with a greater emphasis on a risk-based approach. The "white list" of non-EU jurisdictions deemed to have equivalent AML and CTF legislation is rescinded, meaning that obliged entities will have to perform risk assessment in respect of all non-EU jurisdictions in which they conduct business. The definition of "politically exposed persons"(in respect of whom enhanced CDD must be applied) is also extended.
- An exemption to the requirement to perform CDD is introduced in respect of electronic money products with a maximum monthly limit of EUR 250.
- MLD4 was implemented by the UK government on 26 June 2017 with the introduction of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "MLTF Regulations").
Full text of MLD4
Full text of the MLTF Regulations
Explanatory memorandum to MLTF Regulations
Revised Joint Money Laundering Steering Group guidance
Financial Conduct Authority ("FCA") finalised guidance on PEPs
FCA consultation paper on implementing MLD4
Fifth Money Laundering Directive (MLD5) ((EU) 2016/208)
- The EU Commission has published a proposal for a Fifth Money Laundering Directive ("MLD5") to amend and expand upon MLD4.
- Under MLD5, virtual currency exchange platforms and custodian wallet providers are to be brought within the scope of MLD4.
- MLD5 clarifies the requirements for enhanced CDD by establishing a prescriptive set of measures to be applied by firms, including checks on the customer, the purpose and nature of the business relationship, the source of funds, and monitoring of transactions.
- The threshold for application of the exemption from CDD in respect of electronic money products is to be reduced from EUR250 to EUR150.
- The threshold that constitutes beneficial ownership of "passive non-financial entities" (i.e. intermediaries with no economic activity which create distance between beneficial ownership and the assets) is to be reduced, as they are deemed to pose a specific risk of money laundering and tax evasion.
- A European Council notice of meeting explains that the European Council's working party on financial services met on 27 November 2017 to prepare for a ninth political trialogue on MLD5. However, it is not clear when the next trialogue meeting is taking place.
- In an answer (dated 28 November 2017) to a written question on cryptocurrencies, the UK government advised that it expects negotiations on MLD5 to conclude in late 2017 or early 2018.Clearly, the longer it takes to reach agreement on MLD5, the less likely that the implementation date will fall before Brexit. It is uncertain what approach the UK will take to transposing MLD5 if the implementation date is post-Brexit.
Full text of legislative proposal for MLD5
EBF position paper on MLD5
AFME/BBA position paper on MLD5
European Central Bank opinion on MLD5
on: 25 June 2017
Took effect: 26 June 2017
Revised Wire Transfer Regulation (WTR2) ((EU) 2015/847)
- Like MLD4, WTR2 seeks to align the EU's anti-money laundering and counter terrorist financing regime in line with Financial Action Task Force standards, in this instance by ensuring that fund transfers be traceable.
- WTR2 requires payment service providers ("PSPs") to ensure that payee information (name and account number or unique transaction identifier) accompanies fund transfers. Where the value of the fund transfer exceeds EUR1,000, PSPs are also obliged to verify payee information.EC's draft Regulation published 10 January 2017.
- Both payee and intermediary PSPs are also required to implement effective risk-based procedures to help determine when to execute, reject or suspend fund transfers which lack the requisite payee information.Will replace Member State laws which implement the ePrivacy Directive (2002/58/EC, as amended by Directive 2009/136/EC) which contains rules on cookies and similar technology.
- PSPs are also required to establish secure, independent and anonymous internal whistleblowing channels for employees.
- WTR2 came into force on 25 June 2017, and became effective on 26 June 2017. As an EU regulation, it is binding and directly effective in member states immediately, and is therefore now in force in the UK.
Joint Committee of ESAs consultation paper on WTR2
Implemented on: 3 July 2017
Takes effect: 3 January 2018
Second Markets in Financial Instruments Directive ((EU) 2014/65)
Markets in Financial Instruments Regulation (600/2014)
(together, MiFID II)
- MiFID II sets out the EU framework for the regulation of financial markets and trading venues and of the way in which they operate.
- The scope of the original MiFID is extended under MiFID II. MiFID II will cover new products and services (e.g. structured deposits, emissions allowances), and organised trading facilities (OCFs) constitute a new type of regulated trading venue. (OCFs are multilateral discretionary trading platforms (e.g. broker crossing networks), which were not previously regulated).
- New requirements are introduced generally for trading venues, including strengthened systems and controls, circuit breakers and rules on minimum "tick size".
- Market transparency is a key issue, with transaction reporting requirements extended to all financial instruments, and transparency requirements for equity market transactions extended to "equity-like" transactions. A new trading transparency regime is established for non-equity transactions (e.g. bonds, derivatives, emissions allowances, etc.)
- Additional safeguards are introduced in respect of high frequency algorithmic trading. Traders must be properly supervised, and risk systems and controls are required to be strengthened.
- Supervisory bodies will now have the power to ban products, services or practices where they pose a threat to investor protection, financial stability or the orderly functioning of the markets.
- The Regulation comes into force on 3 January 2018. As an EU regulation, it is binding and directly effective without the need for UK implementing legislation.
- The UK government has published three statutory instruments amending the FSMA regime to give effect to MiFID II – the Data Reporting Services Regulations 2017, the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017, and the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017. For almost all purposes each instrument comes into force on 3 January 2018.
- The FCA has also amended a number of its rules and guidance to implement certain of the provisions of MiFID II.
- MiFID and MiFID II allow UK investment firms to "passport" their services to the rest of the EU. Whether this passporting regime will continue once the UK has exited the EU will be a key element of the Article 50 exit negotiations.
Full text of Directive
Full text of Regulation
Data Reporting Services Regulations 2017
Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017
PRA second policy statement on the implementation of MiFID II
FCA second policy statement on the implementation of MiFID II
Implementation deadline: 13 January 2018
Second Payment Services Directive (PSD2) ((EU) 2015/2366)
- PSD2 updates the EU's primary piece of legislation on the regulation of the payment services industry.
- PSD2 applies to payment institutions, credit institutions, e-money institutions, central banks, government departments and local authorities.
- PSD 2 introduces two new payment services, payment initiation services and account information services.
- The scope of transactions to which the rules apply has been extended to "one-leg" transactions, i.e. where one party is located in the EU, and the other in a third country. "One-leg" transactions conducted in a non-EU currency will also be caught.
- PSD2 establishes a number of authorisation requirements for payment services providers (PSPs), which enable passporting throughout the EU.
- PSD2 imposes revised security obligations, requiring payment service providers to compile annual risk reports and to report security incidents; to apply strong customer authentication on customers when certain actions are initiated, and to notify customers in the event of security incidents.
- A number of exclusions that were available under the PSD have been cut down or deleted in PSD2 as the European Commission believes that they have been applied beyond their intended scope, causing uncertainty and regulatory arbitrage.
- PSD2 must be implemented by 13 January 2018.
- On 19 July 2017 HM Treasury published the Payment Services Regulations 2017, which will implement PSD2 in the UK.
- In September 2017, the FCA published it final rules on conduct of business, client monies and regulatory perimeter guidance to reflect the implementation of PSD 2.
- The EBA has developed regulatory technical standards and guidelines which will further implement some of the provisions of PSD2. However, the regulatory technical standards on secure customer authentication will only come into force 18 months after it is finalised and is still yet to be finalised.
- PSD and PSD 2 allow UK authorised payment institutions to "passport" their services to the rest of the EU. Whether this passporting regime will continue once the UK has exited the EU will be a key element of the Article 50 exit negotiations.
Full text of PSD 2
Payment Services Regulations 2017
FCA policy statement in implementing PSD 2, September 2017
HM Treasury response to consultation on implementation of PSD2
FCA consultation paper on implementing PSD2, 13 April 2017