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Allen & Overy's weekly update on Key Regulatory Topics - 13 April 2018 – 19 April 2018

23 April 2018

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


Please see the ‘Other’ section for an update on the FCA’s transcript of its business plan 2018/19 press conference.
HMT draft regulations on financial regulators' powers to onshore technical standards
On 18 April, the DExEU published a draft statutory instrument prepared by HMT: the Draft Statutory Instrument: Financial Regulators' Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018. The purpose of the Regulations is to set out the powers of the UK regulators concerning the domestication or on-shoring of EU legislation containing technical standards. The Regulations set out the process for the regulators to make instruments correcting "deficiencies" in the technical standards (EU exit instruments), so that they remain legally operative after Brexit, and to make instruments making new technical standards or amending existing technical standards (standards instruments). HMT intends to lay the Regulations before Parliament using the affirmative procedure as soon as possible after the Withdrawal Bill has received Royal Assent.


Please see our eAlert: Singapore: Trade Reporting of Equity and Commodity Derivatives Contracts to Start

FCA publishes Dear CEO letter on irredeemable preference shares and other similar capital instruments

On 19 April, the FCA published a Dear CEO letter on irredeemable preference shares and other similar capital instruments. The FCA stated that it wants to ensure investors have access to the necessary information to be able to properly assess the risks and rewards attaching to such shares. The FCA advises listed companies to consider whether any intention to cancel or otherwise retire a class of irredeemable, or similar, shares, at a price based on factors other than the prevailing market price, or their company's deliberation on any such intention, constitutes inside information under Article 7 of MAR. The letter also includes details of certain information that listed companies may wish to make readily accessible to all holders and potential holders of such shares, including: (i) the terms and conditions of the instrument as included in the original prospectus or similar document issued at the time of the offer or admission of the shares and details of any changes made after the issue of the shares; (ii) the articles of association of the issuer, particularly the terms of relevance to the shares concerned; and (iii) a Q&A or similar publication, so that information is clear for investors and clarifies areas such as: (a) the extent to which the rights attaching to the shares can be changed by the company without specific resolution of the affected class of securities; (b) the existence of any ability to cancel the shares at a price that is less than the prevailing market price without the specific assent of the affected holders; and (c) in each case whether the company has made a decision on its approach to the use of these rights. The FCA urges listed companies to consider whether there is a risk that the prevailing market price of any of their shares or if any signals from investors suggest there is a lack of understanding about the terms and conditions of those shares or the company's intention regarding them. If a company has stated publicly, or proposes to publicise, its intentions regarding such securities, the FCA urges the company to also set out the governance process and the approach to disseminating any future changes that the company might make.


SFO cuts reliance on ‘blockbuster’ cash for big financial cases
On 19 April, it was announced that the SFO’s core budget for the 2018-19 fiscal year will now be £52.7m, rather than the £34.3m that was originally earmarked. This takes the official budget of the SFO back to a level last seen a decade ago. “Blockbuster funding” will now be needed less. Instead of applying for separate funding for the full cost of any case forecast to cost more than 5% of the core funding, blockbuster funding will cover spend in excess of £2.5m on any single case in a given year. Significantly for the SFO, the new arrangement eliminates the internal ring fences for resource allocation around blockbuster cases. The SFO will not need to manage two separate funding streams, will be able to focus on substantially reducing reliance on temporary personnel and will be able to reallocate staff between cases as the work requires. 
EP adopts MLD5
On 19 April, the EP announced that it has voted in plenary to adopt the proposed MLD5.  A provisional version of the text adopted was also published.  The series of measures in MLD5 are intended to better counter the financing of terrorism and to ensure increased transparency of financial transactions. They: (i) enhance the powers of EU financial intelligence units (FIUs) and facilitate transparency relating to the true ownership of companies and trusts by establishing beneficial ownership registers; (ii) prevent risks associated with the use of virtual currencies for terrorist financing and limit the use of pre-paid cards; (iii) improve the safeguards for financial transactions to and from high-risk third countries; (iv) enhance the access of FIUs to information, including centralised bank account registers; and (v) ensure all member states have in place centralised national bank and payment account registers or central data retrieval systems. The next step is for the Directive to be formally adopted by the Council of the EU.
EP votes in new measures to prevent money laundering
On 19 April, MEPs supported - by 574 votes to 13 votes - a December agreement reached with the Council of the EU, which enables access to data about the beneficial owners of firms operating in the EU. Also proposed is closer regulation for virtual currencies, like Bitcoin, to prevent them being used for money laundering and terrorism financing. An additional measure would also open up data on beneficial owners of trusts and similar arrangements to those who can demonstrate a “legitimate interest”. This would make information on trusts available to investigative journalists and non-governmental organisations. Member states will also retain the right to provide broader access to information, in accordance with their national law. The agreement represents the fifth and latest update to the EU’s Anti-money laundering Directive and is partly a response to the terrorist attacks of 2015 and 2016 in Paris and Brussels, as well as the Panama Papers leaks. 
EC publishes responses to consultation on broadening law enforcement access to centralised bank account registries

On 17 April, the EC published a summary of responses to its consultation on broadening law enforcement access to centralised bank account registries, together with a list of the responses. The aim of the consultation was to collect opinions on possible new EU legislation broadening the access to centralised bank and payment account registries to a targeted number of public authorities to disrupt the activities of organised crime groups and terrorists. A key issue raised by respondents related to concerns over data protection requirements.

The Proceeds of Crime Act 2002 (POCA) as amended by the Criminal Finances Act 2017: new Codes of Practice
On 16 April, the UK Home Office published one new and one revised Code of Practice providing guidance on the appropriate and proportionate use of POCA powers. The codes above cover the exercise of search powers to recover cash and the exercise of search powers to recover certain listed assets. These codes came into force on 16 April.


Please see the Prudential Regulation section for updates on the draft prudential regime for investment firms.


Please see the Markets section for an update on the FCA’s advice to firms selling basic advice under the IDD.
EIOPA publishes 2017 oversight activities report

On 19 April, EIOPA published a report on its oversight activities in 2017. The report has been published under Article 259 of the Solvency II Directive, which requires EIOPA to deliver an annual report to the EP in accordance with Article 50 of the EIOPA Regulation. The report summarises EIOPA's oversight activities during 2017 and details specific priorities for EIOPA's oversight work in 2018. It explains that EIOPA intends to pay specific attention to further implementation of prudential regulation, Solvency II, and conduct of business supervision. In particular, EIOPA intends to continue to focus on: (i) close interaction with national supervisory authorities; (ii) improvements in supervisory practices in the authorisation process; and (iii) supporting reviews of business models to detect those models posing material prudential or conduct risk.

EC draft Delegated Regulation amending securitisation calculations under the Solvency II Delegated Regulation

On 17 April, the EC published a draft Delegated Regulation (Ares(2018)2037113), which amends Solvency II Delegated Regulation (EU) 2015/35 as regards the calculation of regulatory capital requirements for securitisations and STS securitisations held by insurance and reinsurance undertakings. The deadline for comments is 15 May. As the Securitisation Regulation amends the Solvency II Directive, this requires a number of changes to the Solvency II Delegated Regulation to ensure alignment and consistency. The amendments proposed concern: (i) certain definitions regarding securitisation that need to be aligned to those used in the Securitisation Regulation; (ii) the abolition of provision on due diligence and risk retention; (iii) the adoption of a new calibration for STS securitisations; and (iv) transitional provisions for current investments in securitisation. The draft Delegated Regulation states that it will apply from 1 January 2019.


FCA updates firms selling stakeholder products using basic advice under MiFID II and IDD

On 19 April, the FCA published a new webpage on the basic advice regime under MiFID II and the IDD. The webpage, which sets out information for firms selling stakeholder products using basic advice: (i) explains the impact of the FCA's implementation of MiFID II on the basic advice regime; (ii) explains the future impact of the FCA's implementation of the IDD on the basic advice regime, which is not fully compatible with the requirements of the IDD; (iii) directs firms to further information that the FCA has previously published on providing streamlined advice to consumers. The FCA explains that streamlined advice is a separate term, unrelated to basic advice, which describes advisory services that provide a personal recommendation that is limited to one or more of a client's specific needs; and (iv) provides contact information for firms with further questions relating to the application of the basic advice regime under MiFID II and the IDD. Firms are advised to read the webpage to ensure that they understand the impact of MiFID II and the IDD, and comply with the FCA's standards.

ESMA updates its MiFID II/ MiFIR transitional transparency calculations
On 19 April, ESMA has updated its MiFID II/ MiFIR transitional transparency calculations for bonds. The update relates to the liquidity assessment for bond instruments except for ETCs and ETNs. Trading venues are expected to apply the new results from 23 April.


BoE announces the first non-bank PSP has joined a UK payment system for central banks
On 18 April, the BoE announced that the first non-bank PSP has joined a UK payment system settling in central bank money. The PSP in question is TransferWise, which is regulated by the FCA. It became a direct participant in the UK's Faster Payments system on 13 April.


Please see the Insurance section for an update on amendments to the Solvency II Delegated Regulation.
HMT publishes memorandum on the EC’s legislative proposal on amendments to CRR on statutory prudential backstop for non-performing loans

On 19 April, the UK government published an explanatory memorandum submitted by HMT on the EC’s legislative proposal for a Regulation containing amendments to the CRR on the minimum loss coverage for non-performing exposures (COM(2018) 134). In the memorandum, HMT sets out the UK government's position with regard to the EC’s proposals. In particular, it explains that any policy measures taken to address NPLs are unlikely to affect the UK or UK-based firms, as the UK has low relative levels of NPLs. The memorandum also states that the government: (i) supports targeted work on NPLs to improve financial stability and free up lending to more productive sectors of the economy; (ii) agrees with the position adopted by other member states that measures taken should avoid giving rise to additional economic or market risk; and (iii) is satisfied that, in their current form, the policy solutions to the NPL problem are targeted at specific problem areas. It feels that broad measures aimed at reducing aggregate levels of NPLs in the EU would be disproportionate.

EC publishes draft ninth Implementing Regulation extending transitional periods related to own fund requirements for CCP exposures
On 17 April, the EC published a draft version (Ares(2018)2044238) of an Implementing Regulation on the extension of the transitional periods related to own funds requirements for exposures to CCPs, set out in the CRR and EMIR. The draft Implementing Regulation extends the transitional periods by an additional six months, to 15 December. 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 third-country CCPs. The recognition process for the remaining third-country CCPs that are still awaiting recognition will not be completed until 15 June. The deadline for comments is 15 May. The draft Implementing Regulation states that the extended transitional period should enter into force before 16 June.

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EBA publishes final report on draft revised ITS on supervisory reporting of institutions with regard to prudent valuation
On 17 April, the EBA published a final report (EBA/ITS/2018/01) on revised draft ITS on supervisory reporting of institutions with regard to prudent valuation under the CRR. It has also separately published ten annexes to the report. The EBA consulted on the draft ITS in March 2016. A summary of responses, and the EBA's analysis of the comments received, is set out in the final report. The final draft ITS included in the final report, which amend Implementing Regulation 680/2014 on supervisory reporting, aim to keep the reporting requirements in line with changes in the regulatory framework and with the evolving needs for supervisory authorities' risk assessments. The updated ITS include: (i) new information on prudent valuation for fair-valued items and supplementary information on credit risk; (ii) high-level information on securitisation subject to the revised securitisation framework introduced by Regulation (EU) 2017/2401 amending the CRR and revised information on selected Pillar 2 items (COREP); and (iii) Q&A-based changes and other minor amendments. The EBA has made some amendments to the final draft ITS to reflect the responses. The ITS will apply from December.

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EBA publishes consultation on draft guidelines on exposures associated with high risk
On 17 April, the EBA published a consultation paper (EBA/CP/2018/03) on draft guidelines on specification of types of exposures to be associated with high risk under the CRR. The draft guidelines aim to clarify the notion of investments in venture capital firms and private equity as referred to in Article 128(2) CRR. They also specify which other types of exposures should be considered as high risk and under which circumstances by way of application of Article 128(3) CRR. The EBA states that it considers it beneficial to issue the guidelines to ensure detection of high risk within banks before transposition of the December 2017 Basel III standards and the application of any consequential revisions to Articles 128(2) and (3) of the CRR. The EBA notes that BCBS only requires the framework to apply from 2022. The deadline for comments is 17 July. The EBA will hold a public hearing on the proposals on 4 May.
HMT publishes response to EC consultation on implementing Basel III

On 17 April, HMT published a response to the EC’s consultation on the EU implementation of the final Basel III reforms agreed by the BCBS, which was published in December 2017. In particular, HMT makes the following points in its response: (i) as the UK prepares to leave the EU, it remains committed to international standards for the financial industry, of which Basel III is a key component; (ii)  it believes that efforts by any jurisdiction to "pick-and-choose" elements of the Basel III package in their implementation has the potential to severely undermine the Basel package; and (iii) the Basel III revisions constitute minimum standards, and are not themselves sufficient to ensure financial stability. Jurisdictions and competent authorities can adopt, or require, more conservative standards where necessary.

Draft Cash Ratio Deposits (Value Bands and Ratios) Order 2018 published

On 17 April, a draft of the Cash Ratio Deposits (Value Bands and Ratios) Order 2018 was published together with a draft explanatory memorandum and a draft final impact assessment. The draft Order amends the ratio used for calculating the percentage of eligible liabilities that eligible financial institutions are required to deposit in a non-interest bearing account at the BoE under the CRD scheme. The Order amends the scheme to provide that the ratio for institutions whose eligible liabilities are more than £600 million will be calculated every six months by applying the formula contained in the Order. The Order is due to come into force on 1 June.

ECON publishes draft reports on draft prudential regulation of investment firms

On 13 April, ECON published: (i) its draft report (dated 11 April 2018) on the proposal for a Directive on the prudential supervision of investment firms, which amends the CRD IV and the MiFID II (PE619.409v01-00) (2017/0358(COD)) (known as the IFD). The draft report contains an EP legislative resolution, the text of which sets out suggested amendments to the proposed IFD; and (ii) its draft report (dated 11 April) (PE619.410v01-00) on the proposal for a Regulation on the prudential supervision of investment firms (2017/0359(COD)) (known as the IFR). The draft report contains an EP legislative resolution, the text of which sets out suggested amendments to the proposed IFR. In the explanatory statements of the draft reports, the rapporteur states that he broadly supports the objective of the EC’s proposal to create a dedicated, tailor-made, regime for investment firms in the EU. In particular, he supports the approach of treating large and systemic investment firms as credit institutions and the policy choices made. However, he suggests amendments to the proposed IFD and the IFR in respect of: (i) own funds requirements; (ii) movements between class 2 firms and class 3 firms; (iii) capital and liquidity requirements and K-factors; (iv) reporting, governance and remuneration; and (v) third country regime and equivalence.


EBA final report on draft ITS on reporting for resolution plans under BRRD

On 16 April, the EBA published a final report (EBA/ITS/2018/02) on revised draft ITS on reporting for resolution plans under Article 11(3) of the BRRD. It has also published separately Annex I (Resolution templates) and Annex II (Instructions). In the report, the EBA sets out: (i)  the final draft version of the ITS; (ii) feedback on its October 2017 consultation; and (iii) details of changes made by the EBA in response to feedback, is set out in chapter 4 of the report. The EBA has submitted the draft ITS to the EC for endorsement. The draft ITS provide for the new framework to be operational in 2018 when resolution authorities collect information as of 31 December.

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FCA updates CP18/10 on 2018/19 regulated fee and levy rate proposals
On 13 April, the FCA announced that it has updated its consultation paper on regulated fee and levy rate proposals for 2018/19 (CP18/10). The FCA published CP18/10 on 9 April. The FCA states that it has made the following changes to CP18/10: (i) information relating to the calculation of fees and levies for insurers has been added at the end of chapters 3 and 10, under paragraph 11.9 and at the end of chapter 11; and (ii) the information at the end of chapter 9 has been updated to reflect that some insurers will be notifying the FCA of relevant gross written premium tariff data (business conducted with consumers) in the case of the FOS general levy.

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EP publish Draft Report on draft decision of the EP and Council amending Art 22 of the Statute 0f the ESCB and of the ECB
On 19 April, the EP published a joint draft report by ECON and AFCO on the ECB’s proposed amendments to modify the Statute of the ESCB and of the ECB published on 22 June 2017.  The ECB’s proposed amendments would bring CCPs within the scope of regulatory powers conferred on the ECB by Article 22 of the Statute.  This would allow the Eurosystem to take up the powers that will be granted to it as central bank of issue of the euro under the EC proposal amending EMIR as regards the supervision of CCPs, issued 13 June 2017.  The rapporteurs welcome the proposed changes but consider it necessary to lay down a clear principle of respect of the legal framework established by other EU institutions by the acts adopted by the ECB under the amended Article 22.  The rapporteurs also deem it necessary to include in the recitals of the amending act a list of the regulatory powers that can be exercised over CCPs by the ECB under Article 22 albeit that such list would be open ended and non-exhaustive.
US-UK Financial Regulatory Working Group
On 19 April, a statement was made announcing the formation of a US-UK Financial Regulatory Working Group with a view to “the further promotion of financial stability; investor protection; fair, orderly and efficient markets; and capital formation on both sides of the Atlantic”.  The working group is to be a forum for HMT and the Treasury Department of the United States staff, along with staff from applicable US and UK financial regulatory authorities, to exchange views on the regulatory relationships between the US and UK. 
FCA publishes transcript of business plan 2018/19 press conference
On 16 April, the FCA published a transcript of its business plan 2018/19 press conference, which was held on 9 April. Points of interest in the transcript include the following from members of the FCA's Executive Committee: (i) the high level of uncertainty both on the substance of the FCA's Brexit work, and on its timing, has complicated the business plan 2018/19; (ii) it is very important for the FCA to remain outward-looking. This is one of the reasons it has created a new International division. The new division is a sign of the importance the FCA places on its continued and enhanced international engagement, and its role in shaping the international regulatory agenda; and (iii) in the light of the nature of the Brexit process, the FCA will keep the business plan under close watch during the year, and is prepared to adjust and reprioritise as things come up. It will be transparent about how it does this.
ESMA publishes response to Article 29 Working Party consultation draft guidelines on GDPR

On 13 April, ESMA published its response (dated 22 March) to the Article 29 Working Party's February 2018 consultation on draft guidelines on Article 49 of the GDPR (ESMA40-133-624). Generally, ESMA welcomes the draft guidelines. Its response focuses on the importance of the "public interest derogation", which is applicable to international transfers of personal data necessary for important reasons of public interest under Article 49(1)(d) of the GDPR. However, ESMA asks Article 29 Working Party to make a number of clarifications in the draft guidelines. It considers that clarity on the scope of the derogations is essential to enable EU financial supervisors to fulfil their missions, while ensuring compliance with applicable EU data protection requirements (in particular, in the absence of comparable legal requirements in the relevant third countries).

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