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Publications

Key Regulatory Topics: Weekly Update - 20 October 2017 – 26 October 2017

 

27 October 2017

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector. If you would like to receive this update by email please contact RegulatoryChange@allenovery.com.

 

BREXIT

 
Brexit – HoC Treasury Committee launches inquiry into UK's economic relationship with the EU

On 20 October, the HoC Treasury Committee launched an inquiry into the UK's economic relationship with the EU. The inquiry will consider, among other things, transitional arrangements, preparedness for 'no deal', and the long-term economic relationship. The first evidence session of this inquiry was on Wednesday 25 October with Sir Ivan Rogers, Professor Sir Alan Dashwood QC, and Professor Catherine Barnard. It considered the progress of the negotiations to date, the design and governance of transitional arrangements, and the shape of the long-term economic relationship.

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CAPITAL MARKETS AND MARKET INFRASTRUCTURE

 
FCA announces amended rules on availability of information in the IPO process
 
On 26 October, the FCA published a policy statement (PS17/23) on reforming the availability of the information in the UK equity IPO process. The policy statement includes the final COBS rules and guidance. Taking effect on 1 July 2018, the new COBS provisions will require that a prospectus or registration document be published before any connected research is released and that providers of unconnected research have access to the issuer's management. At this stage the rules will only apply to regulated markets and not IPOs of MTFs. The policy statement also considers the identification of inside information in the context of the creation, receipt and disclosure of information in the IPO process, in particular information shared in analyst presentations. The FCA notes that such issues will be considered further in its work assessing the implementation of MAR.

Policy statement

COBS provisions
 
Shadow banking – BCBS final guidelines for identification and management of step-in risk
 
On 25 October, the BCBS published its final guidelines (BCBS423) for the identification and management of step-in risk. The guidelines aim to mitigate the systemic risks stemming from potential financial distress in shadow banking entities spilling over to banks. The guidelines build upon two public consultations carried out by the BCBS in December 2015 and March 2017. They introduce a flexible and tailored approach, where measures to mitigate significant step-in risk rely on a supervisory process that is supported by proportionate reporting. In particular: banks should define the scope of entities to be evaluated for potential step-in risk, based on the relationship of these entities with the bank; for entities where step-in risk is identified, banks should estimate the potential impact on liquidity and capital positions and determine the appropriate internal risk management action; banks should report their self-assessment of step-in risk to their supervisor; and after reviewing the bank's self-assessment analysis, where necessary supported by an analysis of the bank's policies and procedures, the supervisor should decide whether there is a need for an additional supervisory response. The guidelines are expected to be implemented in member jurisdictions by 2020.

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EMIR – EC draft versions of eighth Implementing Regulation extending transitional periods related to own fund requirements for CCP exposures
 
On 24 October, the EC published a draft version (Ares(2017)5186307) of an Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to CCPs, set out in CRR and EMIR. The draft Implementing Regulation extends the transitional periods by an additional six months, to 15 June 2018. This is to avoid disruption to the international financial markets and to prevent penalising institutions by subjecting them to higher own funds requirements during the process of authorisation and recognition of existing CCPs. The deadline for comments is 21 November.

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CONSUMER/RETAIL

 
Retail banking – FCA paper on scope and purpose of retail banking business model review
 
On 25 October, the FCA published a paper setting out the purpose and scope of its strategic review of retail banking business models. The paper covers: the context for the strategic review (section 2); how the FCA uses business model analysis in conduct and competition regulation (section 3); and the changing face of retail banking and its potential effects on retail banking business models (sections 4 and 5). The first phase of the review will focus on gathering information. The second phase will consider areas of specific focus that the FCA has identified, together with any additional areas identified through the first phase. The FCA still intends to publish an update on its work in the second quarter of 2018, explaining its preliminary analysis and the next steps.

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Debt advice – HMT call for evidence
 
On 24 October, HMT published a call for evidence relating to relieving the burden of "problem debt" for individuals. This is described as debt which absorbs a disproportionate amount of a person’s income. The call for evidence therefore proposes a six week “breathing space” allowing the individual time to apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks. The deadline for comments is 16 January 2018.

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CORPORATES/ISSUERS


Prospectus Directive – ESMA Q&As version 27

On 20 October, ESMA updated its Q&As on prospectuses. This update includes the deletion of one Q&A (Q&A 27) and updates to four others (Q&A 29, 31, 32 and 44). The changes do not relate to the substance of the Q&As and come as a result of the Prospectus Regulation (EU) 2017/1129 becoming applicable on 20 July.

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FINANCIAL CRIME

 
HMT publishes national risk assessment of Money Laundering and Terrorist Financing Regulations 2017
 
HMT and the Home Office have published the national risk assessment of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs). The assessment identifies the key risks to money laundering by sector and proposes steps to be taken to reduce the risks.

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FINTECH


Regulatory sandbox – FCA report on lessons learnt

On 20 October, the FCA published a report on lessons learned from its regulatory sandbox. Early indications suggest the sandbox is providing the benefits it set out to achieve with evidence of the sandbox enabling new products to be tested, reducing time and cost of getting innovative ideas to market, improving access to finance for innovators, and ensuring appropriate safeguards are built into new products and services. Specifically, the report revealed that around 90% of firms that completed testing in the first cohort progressed towards a wider market launch and at least 40% of firms which tested in the first cohort received investment either during or after their sandbox tests.

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INSURANCE

 
Solvency II – PRA consultation on matching adjustment
 
On 25 October, the PRA published a consultation paper (CP21/17) on the application of the matching adjustment under Solvency II. In this consultation paper the PRA sets out its proposed expectations of firms in respect of the application of the matching adjustment (MA). The MA allows firms to adjust the relevant risk-free interest rate term structure for the calculation of a best estimate of a portfolio of eligible insurance obligations. The paper also proposes to consolidate and update material previously set out in Directors’ letters, Executive Director’s letters and feedback statements (‘Directors’ letters’) published in the period 1 April 2013 to 15 February 2016 in a new supervisory statement (SS) (see Appendix 1). This consultation will allow firms to provide feedback to the earlier published material and updated guidance, provide greater clarity on the PRA’s expectations in relation to the MA, and help firms realise the intended benefits of the MA. The deadline for comments is 31 January 2018.

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IDD – SRA consultation on implementation
 
On 24 October, the SRA published a consultation paper on implementing the IDD. The aim of the consultation is to seek views on the regulatory changes that the SRA needs to make as a designated professional body in time for the implementation. The changes proposed are to: (i) registration requirements; (ii) professional and organisational requirements; (iii) conduct of business requirements; (iv) information requirements; and (v) demands and needs of clients. The deadline for comments is 20 November.

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ICPs – IAIS publishes tables showing status of Insurance Core Principles (ICPs) and ComFrame development
 
On 23 October, IAIS published a press release announcing that it has published the following tables:

(i) a table showing the status of the 26 ICPs, including ongoing or planned revisions; and (ii) a table showing the status of the development of the ComFrame material. It includes information on how the elements of the 2014 draft ComFrame were or will be distributed among the ICPs, following the decision to integrate the ComFrame material with relevant ICPs.

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MARKETS

 
MiFID II technical standards on authorisation of investment firms published in OJ
 
On 26 October, the following legislation relating to technical standards required under MiFID II was published in the OJ: (i) Commission Delegated Regulation (EU) 2017/1943, which contains RTS on information and requirements for the authorisation of investment firms. These RTS contain a harmonised list of information to be provided to the competent authorities by investment firms as part of their authorisation process; and (ii) Commission Implementing Regulation (EU) 2017/1945, which contains ITS with regard to notifications by and to applicant and authorised investment firms. The ITS set out standard forms, templates and procedures for the notification or provision of information concerning applications for the authorisation of investment firms. The Regulations will enter into force on 15 November and will apply from 3 January 2018.

Commission Delegated Regulation (EU) 2017/1943

Commission Implementing Regulation (EU) 2017/1945
 
MiFID II technical standards on acquisitions of qualifying holdings in investment firms published in OJystem
 
On 26 October, the following legislation relating to technical standards required under MiFID and MiFID II was published in the OJ: (i) Commission Delegated Regulation (EU) 2017/1946, which contains RTS on an exhaustive list of information to be included by proposed acquirers in the notification of a proposed acquisition of a qualifying holding in an investment firm; and (ii)         Commission Implementing Regulation (EU) 2017/1944, which contains ITS with regard to standard forms, templates and procedures for the consultation process between relevant competent authorities in relation to the notification of a proposed acquisition of a qualifying holding in an investment firm. The Regulations will enter into force and be directly applicable on 15 November 2017.

Commission Delegated Regulation (EU) 2017/1946

Commission Implementing Regulation (EU) 2017/1944
 
EC FAQs clarify impact of MiFID II inducements and research reforms in cross-border context
 
On 26 October, the EC published FAQs that look to clarify the obligations of EU investment firms when they seek out research and brokerage services from broker-dealers in non-EU countries. The EC’s guidance is not limited to the activity of obtaining research and brokerage services from US brokers, but explains how such services might be obtained from third country jurisdictions. In response, the US SEC has issued three related “no-action letters” designed to provide market participants with greater certainty regarding their US regulated activities as they engage in efforts to comply with MiFID II. In addition, the FCA has issued a statement, welcoming the announcements of the EC and the US SEC. The statement explains that the clarifications provided by both the EC and US SEC staff will address key concerns raised with the FCA by UK market participants. They ensure that firms can continue to access US research from 3 January 2018, while also maintaining the investor protection safeguards of the MiFID II regime.

FAQs

US SEC press release

FCA statement
 
MiFID II – ESMA agrees MiFID II position limits proposed by FCA
 
On 24 October, ESMA published nine opinions on limits regarding commodity derivatives under MiFID II and MiFIR. ESMA has also published a list of liquid contracts that will receive a bespoke position limit. It will continue to assess the notifications received and issue opinions to ensure that the position limits are set in accordance with the MiFID II framework. The limits will apply to the net position a person can hold in commodity derivative contracts from 3 January 2018.

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PAYMENTS

 
EPC consults on revised mobile contactless card payments guidelines
 
On 26 October, the EPC published a consultation (EPC144-17) on the revised set of its mobile contactless Single Euro Payments Area card payments interoperability implementation guidelines. The aim of the guidelines is to act as a reference for stakeholders working on mobile contactless payments in Europe. The EPC is requesting views on the following changes to the guidelines (which were last published in 2011), namely: (i) extending their scope to cover new technical solutions such as cloud-based HCE (host card emulation) and the eUICC (an embedded universal integrated circuit card); and (ii) reflecting the impact of PSD2, including the proposed RTS on strong customer authentication. The deadline for responses to the consultation is 26 January 2018.

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PRUDENTIAL REGULATION

 
Political agreement reached on CRR IFRS 9 Regulation and BRRD Insolvency Hierarchy Directive
 
On 26 October, the EP published a press release announcing that it has reached political agreement with the Council of the EU on: (i) the proposed BRRD Insolvency Hierarchy Directive; and (ii) the proposed CRR IRFS 9 Regulation. The EC states that the agreement will be followed by further technical talks to finalise the text.

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ICAAP – PRA updates webpage clarifying IFRS 9 for ICAAP stress testing
 
On 25 October, the PRA updated its stress test scenario webpage to clarify how firms should incorporate IFRS 9 into stress testing and capital planning carried out as part of their ICAAP obligations from 2018. The clarification covers the information firms should consider and include in their ICAAP reports produced in 2017. The aim is to encourage firms applying IFRS to prepare forecasts for 2018 onwards on an IFRS 9 basis, to reinforce the need to be prepared for the new accounting standard, and to help the firms and PRA size and plan for the impact of IFRS 9. The PRA advises firms that are unable to incorporate IFRS 9 in their ICAAP, to contact their supervisors. It intends to publish additional clarification for firms participating in concurrent stress testing in due course.

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RECOVERY AND RESOLUTION

 
ECON report on BRRD Insolvency Hierarchy Directive
 
On 23 October, the ECON published a report (dated 12 October 2017) (PE606.264v03-00) on the ranking of unsecured debt instruments in insolvency hierarchy under BRRD. ECON voted to adopt the report on 10 October 2017.

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RBS – FCA interim summary report on treatment of SME customers in financial difficulty

On 23 October 2017, the FCA published an interim summary of the independent review of the RBS’ treatment of SME customers transferred to its Global Restructuring Group (GRG). The independent review was undertaken by a ‘skilled person’, Promontory Financial Group (UK) Limited, together with its sub-contractor Mazars and considered 207 individual cases. The summary reports that while some isolated examples of poor practice were identified, RBS did not set out to artificially engineer a position to cause or facilitate the transfer of a customer to GRG. However, there were other areas in which the inappropriate treatment of SME customers by GRG was identified by the review as being widespread. Examples of this include: (i) a failure to comply with RBS’s own policy in respect of communicating with customers around transfer, where the standard of much SME customer communication was poor and in some cases misleading; and (ii) a failure to support SME businesses in a manner consistent with good turnaround practice. Some elements of this inappropriate treatment of customers were also considered by the independent review to be systematic, resulting from a failure on the part of RBS to fully recognise and manage the conflicts of interest inherent in what were described as GRG’s ‘twin’ commercial and turnaround objectives, and to put in place the appropriate governance and oversight procedures to ensure that a reasonable balance was struck between the interests of RBS and SME customers.

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STRUCTURAL REFORM

 
European system of financial supervision reforms – Council of EU note inviting ministers’ views
 
On 20 October, the Council of the EU published a note (13447/17) from the General Secretariat to Council Delegations relating to the review of the ESFS which attaches a note from the Presidency inviting views on 7 November. The Presidency would like views on the following three matters: (i) should the co-legislators take this opportunity to prepare the ESFS for potential future challenges?; (ii) are there elements of the ESFS review package that should be prioritised to address short-term challenges?; and (iii) given that financial integration in the EU is progressing, in which areas and to what extent should the powers of the ESAs be strengthened with a view to creating a more integrated supervisory framework? The EC has invited the EP and the Council to agree on the legislative proposals as a matter of urgency, to ensure that they enter into force before the end of the current legislative term in 2019.

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OTHER

 
Credit unions – Credit Unions and Co-operative and Community Benefit Societies Act (Northern Ireland) 2016 (Commencement) Order (Northern Ireland) 2017 published
 
On 24 October, the Credit Unions and Co-operative and Community Benefit Societies Act (Northern Ireland) 2016 (Commencement) Order (Northern Ireland) 2017 was published. The Order was made on 18 October and brings into operation sections 4, 8 and 16(1)(b), and Part 2 of Schedule 1 of the Credit Unions and Co-operative and Community Benefit Societies Act (Northern Ireland) 2016 on 6 April 2018.

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EC work programme 2018 – financial services aspects

On 24 October, the EC published a communication (COM(2017) 650 final) outlining its work programme for 2018. The communication is addressed to the EP, the Council of the EU, the EESC and the Committee of the Regions. Alongside the communication, the EC has published a Q&As document. The communication sets out 26 initiatives that the EC proposes to work on and complete in 2018.

Communication document

Q&As document

FCA publishes complaints data for first half of 2017

On 23 October, the FCA published a press release on the publication of complaints data relating to the period from 1 January to 30 June. In total, 3.32 million complaints were recorded by firms in the first half of 2017. This compares to 3.04 million in the second half of 2016. Since June 2016, firms have been required to report data to us in a new way which has increased the number of complaints reported. This is the first half year in which all firms are reporting under the new rules. PPI continues to be the most complained about product making up a third of all complaints in the first half of 2017. The total number of PPI complaints increased by 24% from 899,000 to 1.11m. Excluding PPI, the number of complaints was 2.21 million. The total redress paid to consumers was £1.99 billion in the first half of 2017. 82% of the total redress payments are for PPI complaints.

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