Regulatory Affairs Newsletter: March 2024

2024 Regulatory Horizon Scanning

As we approach the second quarter of 2024, the global precious metals market continues to brace itself for more volatility and evolving landscapes. In this dynamic environment, understanding the key regulatory drivers and anticipated changes becomes paramount for industry players to navigate effectively.

Setting the Scene

The economic and political backdrop sets the stage for an intriguing 2024. A record-breaking 76 countries are due to hold national elections this year, representing over 50% of the world’s population. The outcomes and regime changes, taken separately and together, will undoubtedly impact the global regulatory framework. However, despite these significant political events, the regulatory landscape is expected to remain relatively quiet this year.

On the economic front, growth rates are anticipated to bottom out in western economies, potentially triggering headlines of recession, while growth continues to rise in Asia. Anticipated interest rate cuts across major economies in the second half of the year are expected to break the logjam on corporate activity. Meanwhile, the continued growth in AI and ESG signals a complex environment where regulatory frameworks must adapt to ensure stability and foster growth.

UK and EU Trends

1. Divergence in Regulatory Regimes: The divergence between UK/EU regulatory regimes, particularly through the Edinburgh Reforms, MiFID2, AIFM2, and MiCA, presents challenges and opportunities for market participants. The evolving landscape requires a keen eye on upcoming regulatory initiatives, such as the UK Regulatory Initiatives Grid, to proactively navigate changes.

2. Emphasis on ESG Regulation: ESG regulations continue to take centre stage, with ongoing developments in the UK’s sustainability disclosure requirements (SDR), investment labels, and ESG ratings. The phased implementation of these regulations, including anti-greenwashing measures which applies to all FCA regulated firms, underscores the importance of compliance and transparency in ESG practices.

3. Focus on Financial Crime Prevention: Addressing financial crime remains a top priority for regulators, with a spotlight on fraud prevention, money laundering, sanction evasion, and market abuse. Regulatory reforms, such as the UK Economic Crime and Corporate Transparency Act (ECCTA), aim to enhance firms' resilience against evolving threats and strengthen enforcement mechanisms.

4. Sanctions: On 22 February 2024, the UK Government released its inaugural sanctions strategy, outlining its comprehensive approach to implementing and enforcing sanctions. This includes collaboration with the private sector, NGOs, and international partners to bolster effectiveness.

5. Market Reform and Resilience: Regulatory initiatives like Basel III, CRD 6, and EU NPL focus on boosting market confidence, fostering resilience in firms, and supporting economic recovery. However, firms face challenges amid shifting political landscapes and evolving regulatory requirements.

6. Conduct and Consumer Protection: Regulators scrutinise firms' conduct and consumer protection practices, with a particular emphasis on the UK FCA Consumer Duty and EU Retail Investment Strategy. Diversity and inclusion initiatives also gain prominence, reflecting regulators' commitment to fostering a fair and inclusive financial sector.

7. Facilitating Cross-Border Access: Navigating cross-border access remains a complex endeavour, with tensions between individual EU member states and the EU seeking tighter control. Regulatory developments, such as AIFMD II and CRD 6, introduce new requirements for third-country firms, influencing market access dynamics.

8. International Collaborations: International collaborations, such as the Berne Financial Services Agreement and EU-UK Financial Regulatory Forum, facilitate mutual recognition of regulatory frameworks and foster reciprocal market access. These collaborations reflect efforts to navigate global regulatory challenges and promote financial stability.

9. Market Review: Regulatory reforms in the wholesale markets, including commodity derivatives, shape the market landscape. Initiatives like the intermittent trading venue (ITV) and reforms in derivatives reporting requirements underscore regulators' efforts to enhance market transparency and efficiency.

Global Perspective

1. Responding to Digitalisation: Regulators are facing the complex task of regulating financial promotions online and dealing with entities beyond their traditional regulatory boundaries in the digital age. The regulatory framework for crypto assets is experiencing substantial changes, with initiatives like MiCA influencing regulations across jurisdictions. International collaboration and policy recommendations are crucial to address the challenges posed by technological advancements, safeguard investors' interests, and promote fairness, efficiency, and transparency in crypto asset markets.

2. Supply Chain Due Diligence: Since the adoption of the United Nations Global Compact in 1999, over 12,000 companies worldwide have committed to its principles of corporate responsibility. In 2011, the United Nations Guiding Principles on Business and Human Rights addressed the specific issue of human rights within business operations, relying on voluntary application by governments and companies. Despite efforts relying on voluntary action, such as Germany's National Action Plan on Business and Human Rights implemented in 2016, which aimed to have 50% of relevant companies fulfil due diligence obligations by 2020, success has been limited. Consequently, governments are now drafting obligatory supply chain legislation. Countries like the United Kingdom, France, and Germany have already taken steps in this direction, with the European Union also introducing comprehensive laws. These laws impose new due diligence obligations on companies, including defining internal processes, conducting risk analyses, establishing preventative complaints mechanisms, and publishing annual reports.

Moreover, at the EU level, the European Commission unveiled its proposal for the Corporate Sustainability Due Diligence Directive (CSDDD) on 23 February 2022 and we expect the final text to be agreed in 2024. This directive seeks to establish uniform sustainability obligations for companies operating within the EU, further bolstering the regulatory landscape governing supply chain practices.

In addition to developments in Europe, Canada's modern slavery legislation, which came into effect on 1 January 2024 mandates in-scope entities to provide prescribed information to the government by 31 May 2024, regarding the preventive measures taken during the preceding year. These legislative measures reflect a growing global momentum towards enhancing supply chain due diligence and promoting ethical business practices on a broader scale.

Final Thoughts

As we embark on 2024, the precious metals market confronts a regulatory landscape shaped by economic and political shifts, technological advancements, and international collaborations. Navigating these regulatory waters demands adaptability, meticulous compliance, and a proactive stance to remain ahead in this rapidly evolving environment. In summary, while regulatory shifts may pose challenges, they also pave the way for innovation, growth, and the adoption of sustainable practices within the precious metals market. For specific areas of focus or to stay updated on regulatory developments, please don't hesitate to reach out to LBMA's Compliance Team at compliance@lbma.org.uk. We welcome your inquiries and look forward to supporting your compliance efforts.