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Allen & Overy's weekly update on Key Regulatory Topics - 29 March 2018 – 5 April 2018

10 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 Prudential Regulation section for an updates on ECON’s draft report on relationships between the EU and third countries.


HoC publishes Exiting the EU Committee report on the future UK-EU relationship

On 4 April, the HoC Exiting the EU Committee published a report on the future UK-EU relationship. The report looks at the EU’s existing relationships with other countries. It concludes that the ability to elevate a Canada-style agreement into a deal that makes up for any loss in services trade consequent on leaving the single market would require an unprecedented development of mutual recognition agreements far more ambitious than any previously agreed by the EU with another country. The report also examines the UK's future relationship with the EU, and sets out the Committee's tests by which it will judge the political declaration in October. These tests include the following: (i) any new immigration arrangements set up between the UK and the EU must not act as an impediment to the movement of workers providing services across borders or to the recognition of their qualifications and their right to practise; (ii) UK providers of financial and broadcasting services must be able to continue to sell their products into EU markets as at present; and (iii) UK providers of financial and other services should be able to retain automatically, or with minimal additional administration, their rights of establishment in the EU, and vice versa, where possible on the basis of mutual recognition of regulatory standards.

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UK Government responds to HoL EU Committee report on the future of financial regulation and supervision

On 29 March, the HoL EU Sub-Committee on Financial Affairs published the government's response to its January report and recommendations on Brexit and the future of financial regulation and supervision. The UK government comments that it recognises the recommendations made in the report as, by and large, sensible and broadly in line with action that it is already taking. However, the final shape of the UK's future financial regulatory and supervisory framework depends to some extent on the outcome of negotiations with the EU. Because of this, the nature of ongoing negotiations means that it cannot respond fully to the detail of the committee's recommendations. The UK government's response includes the following observations: (i) the UK's position as a global leader on regulatory standards, promoting open global markets and high international regulatory standards, will not change on its withdrawal from the EU; (ii) the UK government is already taking action to ensure the EU acquis is incorporated in financial services through the EU Withdrawal Bill 2017-19 (EUWB), which will ensure that the UK's statute book is ready to function as intended following Brexit; (iii) the exact structure of market access remains a matter for negotiation. The UK government’s priority is to secure market access for financial services as part of an economic partnership with the EU; (iv) the UK government welcomes the report's clear-sighted recommendations on supervisory co-operation, and will integrate these into its ongoing work on the issues raised in the report; and (v) the UK government is committed to strengthening the UK's already world-leading positions in the markets of the future.

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IOSCO publishes final report on regulatory reporting and transparency in secondary corporate bond markets

On 5 April, the IOSCO published a final report (FR05/2018) on regulatory reporting and public transparency in the secondary corporate bond markets. The report makes seven recommendations that emphasise the importance of ensuring the availability of information to regulators, and to the public. IOSCO recommends that regulatory authorities should ensure that they have access to sufficient information to perform their regulatory functions effectively and should have clearer regulatory reporting and transparency frameworks to facilitate better cross-border understanding of corporate bond markets.  It also recommends that regulatory authorities should consider steps to enhance pre-trade transparency in corporate bond markets and implement regimes that require post-trade transparency.


Corrigendas to EEA Joint Committee Decisions amending Annex IX (Financial Services) to the EEA Agreement published in OJ

On 5 April, the following corrigendas were published in the OJ: (i) Corrigendum to EEA Joint Committee Decision No 198/2016 amending Annex IX (Financial services) EEA Agreement [2017/275]; and (ii) Corrigendum to EEA Joint Committee Decision No 206/2016 amending Annex IX (Financial services) EEA Agreement [2017/283]. The corrigendas each make a minor technical amendment to the text of the decisions.


ESMA publishes final report on technical advice (corporate aspects) under the Prospectus Regulation

On 3 April, ESMA published its final report on the technical advice under the new Prospectus Regulation in relation to three consultation papers published on 6 July 2017. The final report sets out the changes to the draft technical advice that ESMA proposed in the three consultations and covers areas such as the format of the prospectus, base prospectus and final terms and the scrutiny of the prospectus. The final report also contains an annex with the text of ESMA's technical advice, noting in some cases that further recitals will depend on the advice that is adopted. The report has been delivered to the EC. Subject to endorsement by the EC, this technical advice will form the basis for the delegated acts to be adopted by the EC by 21 January 2019.

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ESMA publishes translations of three ESMA guidelines

On 29 March, ESMA published translations in all official EU languages of the following sets of guidelines under the CSDR: (i) Guidelines on the process to determine the most relevant currencies in which settlement takes place (ESMA70-708036281-66); (ii) Guidelines on the process to determine the substantial importance of a CSD for a host member state (ESMA70-708036281-67); and (iii) Guidelines on co-operation between authorities under Articles 17 and 23 of the CSDR (ESMA 70-151-435). The guidelines apply from 29 May (two months after their publication on ESMA’s website in all official languages of the EU). NCAs must notify ESMA whether they comply or intend to comply with the guidelines also by that date.

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EMMI publishes consultation on hybrid methodology for EURIBOR

On 29 March, the EMMI published a consultation paper (dated 26 March) on a hybrid methodology for the EURIBOR. The proposed methodology is composed of a three-level waterfall. EMMI is seeking respondents’ views on the proposed methodology to gain a reliable indication of market opinion. The consultation also addresses other aspects of the publication process that concern the market, as well as issues such as the inclusion or cessation of certain tenors. The deadline for comments is 15 May.

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Please see the Financial Crime section for an update on the Treasury Committee’s new inquiry into the money laundering regime and the impact of economic crime on consumers in the UK.


ESMA confirms Canada and South Africa will continue to meet CRA Regulation endorsement requirements

On 4 April, ESMA published a press release confirming that Canada and South Africa will continue to meet the requirements for endorsement under Article 4(3) of the CRA Regulation from June. As a result, there will be no disruption to the ability of CRAs registered in the EU to endorse credit ratings from Canada and South Africa from that date. The full list of all jurisdictions that are eligible for the purposes of endorsement under the CRA Regulation is available on ESMA's website.

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Treasury Committee launches economic crime inquiry

On 29 March, the Treasury Committee launched an economic crime inquiry. The inquiry will have two strands: (i) the scale of money laundering, terrorist financing and sanctions in the UK, the current regulatory and legislative landscape, and how individuals and firms and the wider economy have been impacted by these regimes and the implementation of them; and (ii) the Treasury Committee will scrutinise the scale and nature of economic crime faced by consumers, the effectiveness of financial institutions in combatting economic crime and the security of consumer's data. The Treasury Committee will examine the UK's role in international efforts to tackle money laundering and terrorist financing and to implement financial sanctions. The second strand, looking at consumer level, fraud and scams will examine online banking and payments as part of the inquiry. The deadline for submitting written evidence to the inquiry is 8 May.

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GFMA publishes framework for cybersecurity penetration testing

On 3 April, the GFMA published a framework (dated March 2018) for cybersecurity penetration testing in the financial services industry. The framework aims to create an agreed global approach for regulators and financial services firms to conduct effective testing and facilitate dialogue, while taking account of regulatory concerns and recommendations and firm requirements. GFMA intends the framework to be continually revised to take account of emerging technologies, threats, industry-leading practices and regulatory requirements. To ensure firms are following industry best practices while meeting regulatory demands, the framework outlines a testing lifecycle consisting of four phases: (i) threat intelligents phase; (ii) planning phase; (iii) testing phase; and (iv) analysis and response phase. The framework is focused on the interaction between regulators and firms when conducting tests and is not intended to serve as a detailed industry guide for conducting testing.

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UK Finance and Whitechapel Think Tank discussion paper on using DLT for customer due diligence
On 29 March, UK Finance published a discussion paper entitled "Un-blocking identity in a digital world", with a related article. The paper has been produced by the Whitechapel Think Tank (WTT), which is supported by UK Finance. The WTT (whose membership includes industry academia, regulators and the UK government) was established to consider the application of advanced technology and, in particular, DLT, in the financial services industry. The paper looks at how technology can provide a potential solution to safely validating identity and verification, a major requirement for doing business and transacting in the digital economy, and a matter of critical importance to the financial services industry. The aim is for the paper to promote discussion, rather than to propose a conclusive solution to the challenges of customer due diligence in an increasingly digital economy.
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FCA publishes policy statement and final rules implementing asset management market study remedies and consultation on further remedies
On 5 April, the FCA published a policy statement, setting out feedback on CP17/18 and final rules on Handbook changes implementing some of the remedies identified in its AMMS (PS18/8). PS18/8 also contains the FCA's response to the feedback received to its June 2017 consultation paper setting out proposals to implement some of the remedies identified in the AMMS (CP17/18) proposed Handbook changes. The main changes to the rules consulted on in CP17/18 relate to: (i) value for money assessments and reporting; (ii) independent directors; (iii) SM&CR; (iv) box profits; and (v) share classes. The final rules for the governance remedies, which require AFMs to assess whether their offering is in line with their need to act in the best interest of investors, and the independent directors requirements will come into effect on 30 September 2019. The final rules for the prescribed responsibility for AFMs will come into effect at the same time as the rules for the extension of the SM&CR, which the FCA expects to happen in mid to late 2019. The FCA also published a consultation paper on further remedies following the AMMA (CP18/9). The FCA proposes to: (i) publish guidance reminding AFMs how they should express fund objectives and investments policies to make them more useful to investors; (ii) make new rules requiring AFMs to explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund; (iii) require that, if an AFM uses benchmarks, the benchmarks must be referenced consistently across the fund's documents; and (iv) amend its performance fees rules to provide that performance fees must be calculated on performance net of other fees in all cases. The deadline for responses to the consultation is 5 July.
CMA publishes IFF report on investment consultants market investigation

On 29 March, the CMA published a report by IFF Research in relation to its market investigation into the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK. This report outlines the findings of research which centred on a large-scale telephone survey of trustees. The survey found that trustee boards rarely buy fiduciary management services without buying investment consultancy services, but often buy investment consultancy services without buying fiduciary management. The survey also found relatively low levels of switching, and that around 70% of schemes that use both services use the same provider, and over half are reliant on a single company. Furthermore, the survey found: (i) industry concerns over conflicts of interest, and that the most frequent proposals to mitigate concerns were improvements in disclosure of corporate links and relationships; (ii) separation of companies providing investment consultancy and fiduciary management services; and (iii) improvements in trustee knowledge.

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EC publishes report on group supervision under Solvency II and transitional period for IORPs

On 5 April, the EC published a report on the application of Title III of the Solvency II Directive (2009/138/EC) (COM(2018) 169 final). The report fulfils the EC’s requirement to report to the EP and the Council of the EU on the benefits of enhancing the group supervision provisions in Title III. In the report, the EC concludes that only the area relating to group internal models of the group supervision regime requires legislative amendments at this stage. As divergences among member states have been identified, the EC considers that EIOPA needs enhanced powers to bring about convergence. However, it explains that action has already been taken on this, given the urgency of the issue. The EC’s package of proposals to reform the ESFS, published in September 2017, includes a legislative proposal to amend the Solvency II Directive to mitigate and prevent divergences in the supervision and approval of group internal models. The report also fulfils the EC’s requirement to report on the transition period for institution for occupational retirement provisions (IORPs) operated by life insurers. The EC explains that it may take a decision nearer the end of the transition period (that is, the end of 2022) about a possible extension of this period. If it decides to extend the period, it considers that a legislative proposal could be introduced in good time before the end of 2022.


FCA warning to firms that fail to meet insurance renewal rules

On 3 April, the FCA published a press release warning that it will take action against general insurance firms that are failing to implement properly the rules aimed at increasing transparency and encouraging shopping around at renewal time. The rules, which came into force on 1 April 2017, require firms to show the insurance premium a customer paid in the previous year alongside their proposed renewal premium. They also require firms to show a prominent, clear and straightforward message to encourage customers to shop around. In the press release, the FCA states that it has found that firms are still failing to implement the rules properly. It is reported that the FCA has already acted in cases of particularly poor practice and will continue to act where it finds that firms are not being transparent. The FCA expects firms and senior management to take immediate action to ensure they comply with the rules.

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NPSO updates code for indirect access providers
On 5 April, the NPSO published an updated version of its voluntary code of conduct (dated March 2018) for IAPs. A related webpage explains that, following the November 2015 consultation, an enhanced version of the code was published in September 2016. The NPSO, the PSR and the IAPs have reviewed the code in the light of PSD2 and it now reflects the new powers relating to indirect access to designated payment systems. The code sets out the standards of best practice that an IPSP should expect from an IAP for the provision of indirect access services to regulated payment systems within its scope. It aims to improve the experience of IPSPs by clearly setting out the responsibilities of IAPs who have subscribed to the code. The Code aims to improve the experience of IPSPs by providing: (i) clarity on the contractual arrangements that govern indirect access services they receive; (ii) security of supply of indirect access; (iii) confidentiality of commercially sensitive information they share with IAPs; (iv) support in establishing indirect access and in switching between providers; and (v) appropriate and timely communication between IAPs and IPSPs about the availability of services and planned changes. The code is owned by the IAPs that have subscribed to it and is currently administered by the NPSO. These IAPs and the NPSO will discuss with the PSR annually the outcomes of the monitoring and compliance processes.

Work and Pensions Committee calls for default decumulation pathway

On 5 April, the WPC has proposed that the government should take steps to introduce an automatic drawdown pensions option. In the final report of its inquiry into pension freedoms, the WPC has suggested that, by April 2019, the government should offer a default decumulation pathway which will allow pension members to access their pension pots in retirement, in a bid to protect those who are less engaged with the pensions environment. In light of the success of auto-enrolment, the WPC suggested that a default drawdown option, certified by the FCA and scrutinised by independent governance committees, should be introduced "so that everyone, no matter how they are saving, has a simple, suitable, default pension option, with a low, capped fee". The option would be subject to a 0.75% charge cap and targeted towards uninformed savers who are less able to make a decision at retirement.

Please see the ‘Other’ section for an update on the PRA’s policy statement on changes to Rulebook.
ECON publishes draft report on relationships between the EU and third countries concerning financial services regulation and supervision
On 5 April, ECON published a draft report on the relationships between the EU and third countries concerning financial services regulation and supervision. The report discusses: (i) the developed relationships with third countries since the crisis and how this has improved global consistency in financial regulation and made the EU more resilient to global financial shocks; (ii) the EU equivalence procedures for regulatory cooperation with third countries; and (iii) the importance of the EU’s role in global standard-setting for financial regulation.
BCBS publishes report on frameworks for early supervisory intervention
On 29 March, the BCBS published a report (BCBS439) discussing how supervisors around the world have adopted frameworks, processes and tools to support early supervisory intervention in order to promote financial stability by reducing the probability and impact of a bank failure. The BCBS concludes that its study has found that early action taken by supervisors depends not only on the supervisors' judgement but also to a large extent on an organisational infrastructure that sets in place: (i) supervisory reinforcement through both vertical and horizontal risk assessments to maximise the early detection of risks; (ii) a clear framework for when actions should be taken; and (iii) internal governance processes and programmes to support supervisory development and capacity-building.
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PRA publishes policy statement on FSCS management expenses levy limit for 2018/19
On 29 March, the PRA published a policy statement on the 2018/19 MELL for the FSCS (PS5/18). The MELL for 2018/19 is £77,661,000. This new limit will apply for the financial year ending 31 March 2019. There is no feedback in PS5/18 as the PRA did not receive any responses to the consultation. The final PRA rules for the 2018/19 MELL are set out in the PRA Rulebook: Non Authorised Persons: FSCS Management Expenses Levy Limit and Base Costs Instrument 2018 (PRA 2018/4), the text of which is contained in a separately published Appendix to PS5/18. This instrument was made by the PRA Board on 27 March and came into force on 1 April.
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CMA publishes its Annual Plan for 2018/19

On 29 March, the CMA published its proposed approach to its work in 2018/19. The Annual Plan sets out the CMA's plans and priorities, and sets out how it will deliver on its statutory duty to promote competition for the benefit of consumers, and its mission to make markets work well in the interests of consumers, businesses and the economy.

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PRA publishes policy statement on changes to Rulebook outlined in October 2017 occasional consultation paper

On 29 March, the PRA published a policy statement (PS6/18) on changes to its Rulebook outlined in chapters 2 to 6, 9 and 10 of its October 2017 occasional consultation paper (CP18/17). The PRA published a policy statement (PS31/17) on changes to its Rulebook outlined in chapter 7 of CP18/17 in December 2017. The proposed changes relate to: (i) Chapter 2: Minor typographical amendment to Solvency II - Conditions Governing Business Part; (ii) Chapter 3: Market risk: CRD IV amendment to Internal Capital Adequacy Assessment part to reflect the text set out in CRD IV which clarifies that firms should fund themselves with adequate capital when they hold opposite positions in stock-index futures which are not identical in respect of either maturity, composition, or both.; (iii) Chapter 4: Amendments to Transitional Measures Part to correct references; (iv) Chapter 5: Application requirements: CRR and CRD IV amendments to various parts of the Rulebook to ensure that the application of prudential requirements on an ‘individual basis’ is altered to reflect any relevant CRR permissions granted by the PRA and or any national discretions which alter the scope of consolidation or sub-consolidation; (v) Chapter 6: amendments to the General Organisation Requirements Part to clarify that the requirement on firms to share details of their whistleblowing channels with UK branches of non-UK entities that are part of the same group applies to firms which are the UK parent company of the group as well as those which are subsidiaries; (vi) Chapter 9: Application of EBA guidelines on corrections to modified duration for debt instruments when making calculations under Article 30 of CRR; and (vii) Chapter 10: Naming convention for life insurers when reporting best estimate liabilities data for homogeneous risk groups under Solvency II. The changes took effect from 30 March.

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