Tony Hughes, Ph.D.

Today the Bank of England's most recent guidance on model risk (SS1/23) becomes effective. https://lnkd.in/e_QntcTB There's lots of useful guidance in there for anyone working with models - not just banks! But it is also clear to see the struggle of regulators here and in other sectors: how should we regulate models? Can we really get a grip on model risks? Yes, we can evaluate models based on past data, but the future has a habit of not looking quite as much like the past as a mathematician would like it to. So, when the models are wrong but we still have to make decisions, how should we proceed? That's my research programme*. Model risk isn't necessarily quantifiable but it can be manageable. *My main application areas of interest at the moment are climate finance/insurance, disaster risks, and epidemiological modelling.

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Upcoming UK flash PMI survey data for August will provide important insights into economic growth and inflation trends, coming at a time of mixed views on the future policy path at the Bank of England. The Monetary Policy Committee cut interest rates for the first time since the pandemic at its August meeting, the policy rate falling from 5.25% to 5.00%. However, the decision was 'finely balanced' with five committee members voting to cut rates against four voting to leave rates unchanged. Any strengthening of economic growth signalled by the PMI will worry the hawkish rate setters that pricing power and wage bargaining power remain elevated. Services inflation - which has been the bug-bear of the central bank's fight against stubborn inflation - encouragingly fell from 5.7% to 5.2% in July, and core inflation dipped from 3.5% to 3.3%, its lowest since September 2021; both of these key gauges moving in the right direction. But further downward progress in the PMI price gauges - especially for services - may be needed to convince the majority of policymakers that another cut interest rates is warranted any time soon. Read more at

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The UK Financial Conduct Authority issues its second letter to the CEOs of the leading Credit Rating Agencies... This time, the letter details the supervisory strategy and makes clear that conflicts of interest, location of activities, poor quality ratings, and the need to better understand CRA innovation is of key importance for the regulator. 🔊 The letter details how governance issues within the UK subsidiaries of the CRAs are of increasing concern, especially how non-UK-based staff and services are being utilised. 🔊 The letter details how the regulator has observed 'errors' in the methodologies and application that have led to 'incorrect outcomes'. There is also mention of an observed lack of challenge or review coming from control functions. There are also delays in reporting to regulators. 🔊 There were reported risks from the CRAs themselves regarding operational resilience, specifically relating to aspects like cybersecurity, incident management, and service testing. 🔊 The letter also notes that the CRAs are expanding their influence in non-regulated areas, presumably like in the SPO markets for example. The letter reveals areas of development. But, the perseverance of key failures and conflicts of interests adds just the latest piece of evidence that such failures are INHERENT to the global delivery of credit ratings. The Big Three, as well as the periphery agencies, cannot seemingly change this behaviour. If that is the case, the strategies of the regulators and legislators then come into question. Is this letter useful? https://lnkd.in/ef2wmV9A The Credit Rating Research Initiative #creditratings #regulation #UK #conflictsofinterest

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The Financial Conduct Authority (FCA) has set up an industry led working group, the Advisers’ Sustainability Group, to focus on enhancing #sustainablefinance capabilities within the financial advice sector. We provide the Secretariat and the FCA sits as an active observer - https://pimfa.cc/tPtwz Led by Daniel Godfrey (Chair) and Julia Dreblow (Vice-Chair), the Group is tasked by the FCA with developing guidance for good practice to help #FinancialAdvisers include consideration of long-term #sustainability risks in their #financialplanning and, where it meets client needs, to support them in the incorporation of #sustainableinvestment related activities. The Group is currently focused on four main areas: 👉sustainability issues,👍good practice,👌regulation and training and is seeking opinions and suggestions via two surveys published on the Advisers’ Sustainability Group’s pages on our website. The aim is to ensure that the Group hears a balanced representation of views from across the advice sector and its clients on the issues the Group should consider, how to approach them, what good looks like - and any other suggestions. To share your views, please go here for Survey 1 - https://pimfa.cc/C8tIU and here for Survey 2 - https://pimfa.cc/oJs47 If you have any queries, please contact our Senior Policy Adviser, Maja Erceg.

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🔔FOS Case Fees for CMCs 🔔 The Treasury has announced that the Financial Ombudsman Service (FOS) will soon have the power to charge case fees to claims management companies (CMCs). HM Treasury has issued a statutory instrument granting it the authority to define who the FOS can charge fees to. We believe these fees are likely to be introduced in Spring 2025. It’s essential to start considering the potential impacts on your operations and financial planning. https://lnkd.in/ejpgmGtA The CMA is committed to providing guidance and resources to help you navigate this new regulatory landscape. Stay connected with us for more updates. 📩 If you have questions or concerns, reach out to us today! #ClaimsManagementAssociation #News #RegulationUpdate #CMCs #FOSCaseFees #SupportingOurMembers

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Whilst this New, New Labour government, will not interfere with UK independent monetary policy, its policies cannot fail to influence the MPC’s base rate management and indeed QT. And though it will not seek to interfere with the OBR in its clear and close oversight of national accounts, the Government’s budgetary policies cannot fail to have a bearing on its fiscal projection’s. The simple truth is that regardless of when the General Election had been timed or which party actually triumphed, the UK economy was primed for a new higher normal steady-state inflation rate. Primed that is, by such existential shocks as Brexit, covid & Ukraine. It was primedup all the more by extremely ambitious home-grown ‘net-zero’ environmental policies, & by other well-meaning BUT inflationary ESG targets. The plain statistical fact is this: for the UK, post covid & Ukraine, and yes Brexit, & with its ever so lofty targets to become an ESG role model, the UK cannot fail to record CPI inflation on average ABOVE 2%. To be clear, not greatly higher, but such that a 2% three-month moving average will prove something the MPC will fail to achieve, outside of occasional "very lucky hits". True, a strengthening £ - relative to the € but most notably & 'shockingly' against the $ - and lessened trade tensions with the EU, will prove disinflationary on the goods-side of UK CPI. More specifically, lessening energy cost will themselves help to contain inflation; thanks to these enjoying being capped by "market cyclicality" on the downside, & if needed on the upside, capped by regulators. No less true is that more generous public sector pay awards – to speedily end strikes & other 'work to rule' disruptions – will feed into higher private sector wages, & so inflate the service-side of the CPI. So too will increases in minimum & indeed ‘living wage’ awards. As for private sector rents, we should not anticipate any attempt at invariably self-defeating supply-restraining rent controls, but firm policies enforced by the Labour state, to build more public rental homes. The real prospect of trade-wars breaking out will also come to bare on UK inflation and do so regardless of whether the UK is a willing combatant; consider it us being caught in unfriendly US inflation-fire. To be perfectly clear then, on the UK’s fiscal side every effort will be made NOT to spook the UK’s monetary horses: £ and Gilts. Here however is what is certain NOT to happen, EVEN IF IT SHOULD that is, for the UK’s best economic comfort. With a considerable Majority & with a policy agenda to be Green - so accepting of inflationary re-shoring, because it delivers a welcome lowering of the UK’s carbon footprint, & raising of its CSR score, but lift inflation more widely - the Chancellor should insist on a Bill UPWARDLY revising the 1-3% inflation range, ‘a mere’ 100bps higher (ideally 150bps). Whilst failure to do so will ensure a stubbornly (slightly) elevated base rate, doing so would need some Balls, Ed.

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The Financial Conduct Authority is consulting on updating it's #financialcrime Guide in relation to sanctions, proliferation financing and transaction monitoring. https://lnkd.in/dBCWyYCW Drop me a message to chat about how you can best leverage the FCA's Financial Crime Guide to inform and enhance your framework. The following key areas of the Guide are proposed to change • Sanctions: Updates based on FCA lessons learnt from its extensive assessments of firms’ sanctions systems and controls since Russia’s invasion of Ukraine in 2022 • Proliferation Financing (PF): Weaving in PF content throughout the Guide reflecting the 2022 update to the #moneylaunderingregulations which requires firms to carry out PF Risk Assessments • Transaction Monitoring: Setting out key guidance for firms on how they can implement and monitor transaction monitoring systems and support responsible innovation and new approaches (like #AI) • Cryptoassets: Explicitly referencing that Cryptoasset businesses should consult the Guide following their inclusion in the scope of the UK Money Laundering Regulations since 2020 • Consumer Duty: The Guide should make it clear that firms should consider whether their systems and controls are proportionate and consistent with their obligations under the Consumer Duty regime. The FCA also proposes to update expired links and outdated references, and include refreshed case studies drawing from more recent enforcement cases. The consultation response deadline is 27 June. Go go go! 🏃

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The ECB has just published its 'Guide on effective risk data aggregation and risk reporting' (https://lnkd.in/eV7FwmdE). While there is limited divergence from the July 2023 consultation paper, it does put greater emphasis on the minimum scope requirements and threatens significant sanctions for non-compliance. It's a timely reminder of the increased regulatory focus on BCBS 239 across European banks. While BCBS 239 was published over a decade ago, there remains limited traction when it comes to Board and Executive focus on Risk Data Aggregation and Risk Reporting (RDARR) capabilities. It is clear from the ECB that this 'laissez faire' attitude will no longer be tolerated as it upscales its supervisory intensity. While many banks have or had BCBS 239 programmes, aligned to their own interpretation of the Principles, it is now incumbent on senior management to take a step back and consider how they align to the seven key areas of the ECB Guide, namely: 1) The role and responsibilities of the Management Body 2) The scope of application of banks' Data Governance Framework, including the identification of in-scope reports 3) Articulation and embedding of roles and responsibilities for data governance 4) The need for enterprise-wide Integrated Data Architecture 5) Implementation of consistent data quality controls across dimensions of data quality 6) The timeliness of internal risk reporting, including capabilities around reporting in times of stress 7) The importance of well-supported implementation programmes. Many banks are currently grappling with the challenges of ESG reporting, including CSRD. It is important that a BCBS 239 lens is put over these reporting processes from day 1. The SSM has been clear that RDARR is a key priority of its supervisory work programme. The implications are clear - the regulator has stepped up its game, and banks will need to do likewise. #bcbs239 #data #datagovernance #ecb #bankingsupervision

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So the latest journalistic fail by the FT, of course Guardian, BBC and others has been to publish the recent claim by Aston Business School that UK exports across 1645 goods categories had fallen to zero because of TCA regs or simply being shut out of EU supply chains, and that exports are 27% down on "where they would have been". It seems they did not bother to find out that the global HS codes for trade classification were changed in 2021, so these exports are simply reported under different HS codes. Let's not even get started on whether categories of goods which the UK doesn't in fact produce (my favourite learning point from Catherine's analysis was discovering that Aston count 'Frozen Camel Meat' as a sector cruelly lost to British exporters due to the dastardly impact of Brexit...) are as valuable to the UK economy as categories for major UK export flows such as aircraft, or jet engines, or whether these worthies understand that the TCA rules of origin in fact result in much more accurate trade data than was seen under Intrasat (which now particularly cleans up reporting of re-exports - in both directions), so data comparisons pre- and post- Brexit are not 'like for like' anyway. On the plus side, this has prompted another excellent riposte from the very well informed Catherine McBride.

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It's the start of International Fraud Awareness Week and we have published our Overview for MPs of the impact of Fraud and Error on public funds. https://lnkd.in/eQ62DS5d We include a new estimate of fraud and error across government - £55 billion to £81 billion in 2023-24. This is a significant increase from the 2021-22 estimate of £39.8 billion to £58.5 billion lost to fraud and error. The new estimate uses government's methodology and the latest figures from the accounts and spending stats. It includes updated figures on: • £39 billion of fraud and error from the tax gap • £10 billion of welfare overpayments • £3 billion across the rest of government where there is some sort of fraud and error measurement • an assumption that there is between £3 billion and £28 billion (0.5% to 5.0%) across parts of government without proper fraud and error measurement The estimate has risen significantly since the government published its 2021-22 estimate because the level of government income and spend has increased significantly, welfare fraud has risen, and reporting has improved as fraud awareness has increased. Read the full Overview here: https://lnkd.in/eQ62DS5d #FraudWeek

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Today the National Audit Office has published it's new report 'The impact of fraud and error on public funds 2023-24'. Continue to join us this week for more insights on: ✅ The impact of public sector fraud  ✅ Building fraud resistance  ✅ Counter fraud careers #FraudWeek

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The UK Financial Conduct Authority (FCA) has set out its five-year strategy to support the competitiveness of the UK economy. Key priorities include improving market resilience, reducing financial crime and fostering competition. However, city lawyers have expressed scepticism, labelling the approach as overly familiar and questioning its effectiveness. Meanwhile, a report by the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services has criticised the FCA as "incompetent at best, dishonest at worst." They cited a lack of accountability and a failure to protect consumers after an examination of the regulator spanning nearly three years.   They called for a supervisory council, similar to that created in Australia; changes to the way the FCA is funded; the removal of the FCA’s immunity from civil liability to consumers; and a new leadership team, if necessary. https://lnkd.in/dzQpCQSq

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At our 2024 Annual Financial Crime Conference, Mario Menz, PhD, one of our committee members chaired a panel discussion on '𝘚𝘱𝘦𝘢𝘬𝘪𝘯𝘨 𝘜𝘱 𝘌𝘷𝘦𝘳𝘺 𝘋𝘢𝘺: 𝘍𝘳𝘰𝘮 𝘴𝘶𝘱𝘱𝘰𝘳𝘵𝘪𝘯𝘨 𝘤𝘰𝘨𝘯𝘪𝘵𝘪𝘷𝘦 𝘥𝘪𝘷𝘦𝘳𝘴𝘪𝘵𝘺 𝘵𝘰 𝘸𝘩𝘪𝘴𝘵𝘭𝘦𝘣𝘭𝘰𝘸𝘪𝘯𝘨' with Arpita Dutt, Chair of the Trustee Board at Parrhesia; Simran B, Chair of the Financial Services Focus Group at WhistleblowersUK; and Mark Schreiber, Independent Consultant, and former Head of Investigations, Global Compliance Investigations & Whistleblowing at Barclays. We have caught up with all four of them and have asked them to summarise the key messages of their discussion into a Dear CEO letter. Although references to whistleblowing have appeared in various Financial Conduct Authority Dear CEO letters, none have specifically addressed the combination of cognitive diversity and whistleblowing. We believe it is important to explore this topic further. You can find the full Dear CEO letter her: 👉 https://lnkd.in/dWvW2fgZ The Institute Committee Iain Armstrong | Meagan Birch | Mario Menz, PhD | Leon Clifford The Institute of Money Laundering Prevention Officers is supported by: Jade ThirdEye | Efficient Frontiers International | Eversheds Sutherland #antimoneylaundering #fintech #regtech #financialcrime #organisedcrime #cybercrime #counterterrorism #lawenforcement #policing #scams #Corruption #anticorruption #sanctions #fraud #antifraud #terrorism #compliance #regulation #AML #economiccrime #duediligence #banking #money

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Last week, HM Treasury (HMT) published their 11th Annual Report of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) supervisory regime in 2022-2023. Key statistics include: 🔸 5k+ remote reviews/onsite visits were held (5% of AML/CTF regulated firms) 🔸 10% of firms were identified as high risk (versus 11% in 2021-2022) The Financial Conduct Authority (FCA) 🔹 Conducted 231 remote reviews and 7 on-site visits 🔹 Retail banking (including payments), wholesale banking, wealth management and crypto-asset firms remain highly vulnerable to Financial Crime (FC) 🔹 4% of firms reviewed remotely, and 14% reviewed on-site, were rated as “non-compliant” (full MI is unavailable as many reviews were on-going) 🔹 The FCA also opened 375 cases for FC/Sanctions concerns + 95 for crypto-assets. Key findings: 🔴 Inadequate client and/or firm-wide risk assessments and poor enhanced due diligence (EDD) processes 🔴 Insufficient compliance monitoring/testing programmes 🔴 Inadequate resources/training UK Gambling Commission 🔸 Assessed 25 firms remotely, rating 48% of firms as non-compliant 🔸 8 out of 9 firms (89%) visited were rated as non-compliant Key findings: 🔴 AML risks are sometimes outweighed by commercial and/or reputational concerns 🔴 Firms rely on monetary thresholds, instead of a risk-based approach HM Revenue & Customs (HMRC) 🔹 Conducted 1741 remote/onsite reviews 🔹 28% of firms were found as non-compliant overall Key findings: 🔴 Money Service Businesses (MSBs), Art Market Participants and the Trust and Company Service Provider sectors remain as high risk for AML 🔴 MSBs also have the highest inherent risk of CTF 🔴 HMRC noted a trend of supervised activity occurring before registration Office for Professional Body Anti-Money Laundering Supervision (OPBAS) 🔸 3,220 remote and onsite visits took place across the 22 legal and accountancy supervisory bodies within OPBAS 🔸 17% of accountancy firms assessed remotely were non-compliant, versus 20% of those reviewed onsite 🔸 16% of legal firms assessed remotely were non-compliant, versus 25% of those reviewed onsite Key findings: 🔴 OPBAS identified a limited awareness of the AML/CTF regime and a strong industry view that the regime is “disproportionate”. What’s Next? 🔹 The UK supervisory ecosystem remains somewhat fragmented and its restructure has been deemed a priority by HMT (2022 annual review) and was highlighted by the Financial Action Task Force (in their 2018 Mutual Evaluation of the UK), thereby forming part of the UK’s second Economic Crime Plan for 2023-2026. 🔸 In the meantime, firms should be mindful of their supervisors increasing outreach, ahead of FATF’s 5th round of Mutual Evaluation Reports in 2027. K2 Integrity can support firms subject to regulatory scrutiny, please reach out for a confidential discussion.

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📈 A win for trade finance? A balanced approach to Basel 3.1 in the UK 📌 The Prudential Regulation Authority (PRA) has released its second policy statement on the implementation of Basel 3.1, set to take effect in January 2025. 📄 This policy introduces significant changes to capital requirements for UK banks, with important implications for trade finance, a vital component of the UK’s international trade ecosystem. 📙 In our latest hashtag #TRADEFINANCETALKS magazine Sibos edition, Deepesh Patel is Editorial Director at Trade Finance Global (TFG) and host of Trade Finance Talks, discusses about the Prudential Regulation Authority (PRA) has released its second policy statement on the implementation of Basel 3.1. 📖 Read the article and access the magazine by following the link in the comments section below ⬇️ 🔍 Check out our exclusive coverage, insider insights, and all the latest updates from Sibos 2024. Don’t miss a moment: https://lnkd.in/gbRfix2y #sibos2024 #tradefinance #policies

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Regulatory Heatmap 2024-2027: Prepare for Future Change The #finserv regulatory landscape continues to evolve. Our updated Regulatory Heatmap provides a detailed overview of new and updated regulations, including the MiFID II/MiFIR Review, ECB Final Guideline (RDARR), CRR 3 FRTB, EU AI Act, and AMLD 6. Acquire strategic insights and take proactive steps to ensure compliance. ✅ Learn more today! https://okt.to/ABoHTL

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