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 RegulatoryChange@allenovery.com.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
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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.
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.
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.
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.
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.
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.
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.
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.
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.
RECOVERY AND RESOLUTION
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.
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).