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    HMT Publishes Policy Statement on Critical Third-Party Regime

    June 10, 2022

    Her Majesty's Treasury (HMT) published a policy statement proposing the approach to mitigate risks from critical third parties, such as cloud-based service providers, to the UK finance sector. Additionally, HMT and the Japanese Financial Services Agency established a UK-Japan Financial Regulatory Forum.

    Policy statement on "Critical" Third-Party Regime

    The statement provides details on HM Treasury’s proposal for reducing the risks of systemic disruption to the financial regulators’ objectives, including financial stability and market confidence. Under this proposal, HM Treasury, in consultation with the financial regulators and other bodies, will designate certain third parties that provide services to firms as "critical." The financial regulators will then be able to make rules, gather information, and take enforcement action, in respect of certain services that critical third parties provide to firms of particular relevance to the regulators’ objectives (which the regulators refer to as "material" services). The proposed regime will allow financial regulator to directly oversee services that critical third parties provide to firms. This will enable the regulators to ensure that services critical third parties provide to firms in the finance sector are resilient, thus reducing the risk of systemic disruption. The proposed regime will provide financial regulators with powers to:

    • request information directly from critical third parties on the resilience of their material services to firms, or their compliance with applicable requirements.
    • commission an independent "skilled person" to report on certain aspects of a critical third party’s services.
    • appoint an investigator to look into potential breaches of requirements under the legislation.
    • interview a representative of a critical third party and require the production of documents.
    • enter a critical third party’s premises under warrant as part of an investigation.

    As a next step, the UK government intends to legislate the aforementioned critical third-party regime, to publish a joint discussion paper that details how these powers granted to financial regulators might be exercised, and to seek views from industry on the most effective and proportionate way to do so. The discussion paper will also explore potential specific ways for the financial regulators to coordinate the exercise of their powers with overseas financial regulators, and UK authorities and regulators from outside the financial services sector.

    UK-Japan Financial Regulatory Forum. HM Treasury, in collaboration with the Japanese Financial Services Agency, established a UK-Japan Financial Regulatory Forum, setting out provisions for the exchange of information, consultation, deference, technical mediation, and cooperation on diversity in finance, sustainable finance, and other emerging issues. The Forum will support closer cooperation on areas of mutual interest, including public-private partnerships in insurance, sustainable finance, and financial innovation. The UK and Japan also discussed their approaches for supporting international firms to access their markets, cross-border data flows, diversity in financial services, and opportunities in the insurance, asset management and fintech sectors.

     

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    Keywords: Europe, UK, Banking, Third-Party Risk, Cloud Service Providers, Systemic Risk, Sustainable Finance, Insurance, Regtech, UK-Japan Financial Regulatory Forum, Operational Resilience, JFSA, HM Treasury

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