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Allen & Overy's weekly update on Key Regulatory Topics - 4 May 2018 – 10 May 2018

15 May 2018



UK Government response to HoL EU Committee report on Brexit and future of financial regulation and supervision
On 9 May, the UK Government published its response to the HoL EU Sub-Committee on Financial Affairs report on Brexit and the future of financial regulation and supervision, which was published in January. The UK Government's response to the report's conclusions and recommendations fall under the following six categories: (i) the origins of regulation and supervision - the UK Government assures the committee that the UK will continue to be a global leader on regulatory standards, promoting open global markets and high international regulatory standards after it withdraws from the EU; (ii) incorporating the EU acquis in financial services - as the report notes, action is already being taken on this through the EU (Withdrawal) Bill 2017-19. This will ensure the UK's statute book is ready to function as intended following the UK's withdrawal from the EU; (iii) possibilities for a transition period - the UK has made clear its ambition to agree promptly an implementation period. The draft UK and EU legal texts on the period demonstrate the broad alignment between the UK and EU positions, with only a small number of areas requiring discussion. This reflects the desire of both parties to provide certainty as swiftly as possible to individuals and businesses in the UK, and across the EU, about the arrangements that will apply from the point of the UK's withdrawal; (iv) alignment and market access - the exact structure of market access remains a matter for negotiation. The UK Government assures the committee that its priority is to secure market access for financial services as part of an economic partnership with the EU; (v) supervisory co-operation – the UK Government welcomes the report's clear-sighted recommendations on supervisory co-operation, and will integrate these into its on-going work on the issues mentioned in the report; and (vi) regulatory innovation, FinTech and the future – the response refers to matters including Solvency II, Basel rules, the need for regulation to support innovation in financial services, and the UK's relationship with the European Investment Bank and European Investment Fund.




Please see the Recovery and Resolution section for an update on the ECB’s speech on co-operative approach to CCP recovery and resolution.


Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 published
On 10 May, a draft of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 was published together with a draft explanatory memorandum and draft de minimis assessment. The draft Order amends the RAO to expand the criteria by which AIFBs qualify as a specified investment under the RAO. The Order expands the conditions set out in article 77A(2) of the RAO, allowing for a broader range of AIFBs. It provides that arrangements involving securities that are traded on an MTF or an OTF may satisfy the conditions in article 77A and may be treated as AIFBs. The Order also amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 so that a person administering a benchmark as specified in the RAO will be regarded as carrying on the activity by way of business. This amendment is consequential on the coming into force of the BMR, which was given effect in the UK by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018. The draft Order is due to come into force a day after it is made.


Joint Committee of ESAs consults on the draft RTS amending EMIR Delegated Regulation on the risk mitigation techniques for uncleared OTC derivatives
On 4 May, the Joint Committee of the ESAs published a consultation paper (JC 2018 15) on the draft RTS amending Delegated Regulation (EU) 2016/2251 on the RTS on the risk mitigation techniques for OTC derivative contracts not cleared by a CCP under Article 11(15) of EMIR in the context of STS securitisations under the Securitisation Regulation. The draft RTS are set out in the consultation paper in the form of a draft Regulation. The deadline for comments on the consultation is 15 June. The draft RTS will be submitted to the EC for endorsement by 18 July, after which they will be considered by the EP and the Council of the EU. A public hearing to discuss the draft RTS and related proposals set out in a separate consultation paper (see further below) will take place on 31 May.


Joint Committee of ESAs consults on the amending RTS on EMIR clearing obligation as result of Securitisation Regulation
On 4 May, the Joint Committee of the ESAs published a consultation paper (JC 2018 14) on amendments to the RTS relating to the EMIR clearing obligation as a result of the Securitisation Regulation. The Joint Committee has developed the draft RTS in accordance with Article 4(6) of EMIR, as amended by Article 42(2) of the Securitisation Regulation. The amendments to Article 4 of EMIR are designed to ensure a level playing field between the regime for covered bonds and the regime for securitisation with respect to the clearing obligation. They include a mandate for the Joint Committee to draft the proposed RTS. The draft RTS are set out in Appendix III to the consultation paper. They aim to amend the existing RTS on the EMIR clearing obligation to clarify which arrangements under covered bonds or securitisations adequately mitigate counterparty risk and, as a result, may benefit from an exemption from the clearing obligation. A public hearing to discuss the proposals will be held at the EBA's premises on 31 May. The deadline for comments on the consultation paper is 15 June. The Joint Committee of ESAs will submit the final draft RTS to the EC for endorsement in the form of a Commission Delegated Regulation.




FSB consults on the recommendations for compensation data reporting to address misconduct risk
On 7 May, the FSB published a consultation paper on the recommendations for compensation data reporting to address misconduct risk. The recommendations aim to assist national supervisory authorities, from all financial sectors, by enhancing their capacity to consider and monitor the effectiveness of compensation tools and other mechanisms in promoting good conduct and addressing misconduct risk. They build on existing international efforts and national supervisory work. The proposed data set included in the recommendations is designed to help firms and supervisors answer a number of important questions. These include whether governance and risk management processes surrounding compensation: (i) appropriately include conduct considerations in the design of their compensation and incentive systems, including the setting of individual goals, ex ante performance measurement mechanisms and ex post compensation adjustments; (ii) support the effective use of compensation tools to help promote good conduct or to remediate individual conduct that is not in line with the firm's expectations, including holding individuals accountable for any misconduct that occurs; (iii) promote wider risk management goals, including for conduct issues, consistent with the firm's strategy and risk tolerance; and (iv) support the effective identification of emerging misconduct risks and where appropriate, review use of incentive systems and compensation decisions in response to conduct incidents to ensure alignment of incentives, risk and reward. The FSB has also published a summary of an industry workshop, held in December 2017, as part of the FSB's work to develop the recommendations. The deadline for comments on both documents is 6 July.




Financial Guidance and Claims Act 2018 received Royal Assent
On 10 May, following agreement by the HoL and HoC on the text of the Bill the Financial Guidance and Claims Act 2018 received Royal Assent.


FCA publishes interim report on its market study on competition in the mortgage sector
On 4 May, the FCA published its interim report (MS16/2.2) on the mortgages market study. This market study, launched in December 2016, has focused on consumers’ ability to make an effective choice of mortgage, given the tools available, and the possible conflicts of interest arising from commercial arrangements. The FCA has found that there are certain aspects of the mortgage market are working well for consumers: (i) there are high levels of consumer engagement; (ii) a range of products are on offer and there appears to be competition on headline rates between lenders; (iii) consumers who use intermediaries value their experience and expertise; and (iv) there is little evidence that current commercial arrangements between firms are associated with material harm for consumers. However, the FCA has also identified certain areas where the market could work better: (i) navigating the market is currently difficult and many customers miss out on significant savings on the cost of their mortgage; (ii) the tools to help consumers choose a mortgage are currently of limited effectiveness and there is little support available to help consumers to choose an intermediary; and (iii) there are barriers to switching for some consumers. The FCA discusses various possible ways in which its concerns about the operation of the market could be remedied, including measures to make it easier for consumers to find the right mortgage, ways of encouraging the development of tools to give consumers more choice (possibly through revision of FCA rules and guidance), and measures to help consumers when choosing an intermediary. The FCA also discusses how to ensure fair treatment of consumers who do not or cannot switch. The deadline for comments on the interim report is 31 July. The FCA aims to publish its final report towards the end of the year.




CPMI publishes report on reducing risk of wholesale payments fraud
On 8 May, the CPMI published a report on reducing the risk of wholesale payments fraud related to endpoint security. The report follows the CPMI’s September 2017 consultation on its strategy to reduce the risk of wholesale payments fraud related to endpoint security. The final version of the strategy, which is set out in the report, reflects feedback received following the consultation. The strategy sets out seven elements, covering all areas relevant to preventing, detecting, responding to and communicating about fraud. The elements are designed to work holistically, and describe, at a high level, what should be done. The strategy is designed to help operators and participants of payment systems and messaging networks, as well as their respective supervisors, regulators and overseers. Stakeholders have flexibility in how best to put the strategy into practice. However, the CPMI stresses that flexibility should not lead to inaction or slow progress. The aim of the strategy is to encourage and help focus industry efforts to reduce the risk of wholesale payments fraud and, in doing so, support financial stability – it is not intended to replace or supersede the CPMI’s and the IOSCO’s 24 principles or guidance for FMIs. The CPMI explains that it is essential that relevant stakeholders take a holistic and more co-ordinated approach to guarding against the potential loss of confidence in the integrity of the wholesale payments ecosystem. The CPMI will monitor progress throughout 2018 and 2019 to determine whether further action is needed.


EC adopts Delegated Regulation on the MLD4 central contact point
On 7 May, the EC adopted a Delegated Regulation (C(2018) 2716 final) containing RTS relating to central contact point (CCP) under Article 45(9) of MLD4. The Delegated Regulation sets out the criteria for the appointment of CCPs for electronic money issuers and payment service providers. It creates legal certainty about the criteria that Member States will use to determine whether or not a CCP must be appointed. It also clearly sets out the functions a CCP must have to fulfil its duties. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the OJ.




Please see the Brexit section for an update on the UK Government’s response to the HoL EU Committee report on Brexit and future of financial regulation and supervision.


Please see the “Other” section for an update on the IOSCO’s discussions at its 2018 annual conference.




Please see the “Other” section for an update on the HoC European Scrutiny Committee’s thoughts on the asset management sector and the cross-border distribution on funds within the EU.


CMA publishes working paper on gains from engagement in the context of its investment consultants market investigation
On 10 May, the CMA published a working paper on gains from engagement as part of its market investigation into the supply and acquisition of investment consultancy and fiduciary management services in the UK. The working paper sets out the CMA's emerging findings on its examination of whether pension schemes that are more engaged with the market receive better outcomes (in terms of price) than those that are less engaged. The CMA's initial view is that a significant proportion of pension schemes do not appear to be engaged and that there exists a range in how much different schemes pay, both in fiduciary management (FM) and investment consultancy (IC). Engaged schemes would also appear to pay significantly less than disengaged customers when moving into FM with the same provider they had used for IC. The deadline for comments on the CMA’s analysis and emerging thinking in these working papers is 24 May.


ESMA publishes new one-stop company portal
On 7 May, ESMA published a new one-stop company portal, which enables investors to establish whether a financial service provider is authorised within the EU. An accompanying press release explains that the portal provides investors with information on certain types of firm including the following: (i) investment firms authorised under MiFID II, including systematic internalisers; (ii) MiFID trading venues; (iii) MiFID data reporting service providers; (iv) UCITS management companies; and (v) fund managers authorised under AIFMD, including funds that are managed, or marketed, in the EU.




Please see the Brexit section for an update on the UK Government’s response to the HoL EU Committee report on Brexit and future of financial regulation and supervision.


ABI and BIBA publishes guiding principles for general insurance pricing
On 8 May, the ABI and the BIBA published a set of guiding principles and action points. The guiding principles and action points aim to address some of the issues in the market, which can lead to excessive differences between new customer premiums and subsequent renewal premiums that unfairly penalise long-standing customers. They apply to general insurance products with contract terms of ten months or longer. Pet and private health insurance products are excluded as different market conditions means that they are not applicable. Action points for member firms include the following: (i) they should make clear in written, online or verbal customer communications that the new customer premium only applies for that year and subsequent renewal premiums may be higher; (ii) if impacting the final premium paid by customers, they should review their pricing approach for customers who have been with them longer than five years and assess whether this approach delivers a fair outcome; (iii) ABI members will actively review their customers' tendency to shop around in line with the existing ABI and BIBA code for potentially vulnerable customers at renewal, to ensure outcomes for these customers are carefully considered against the guiding principles. The ABI and BIBA expect to start seeing an improvement in the outcome for long-standing customers. They intend to produce a report, in no more than two years' time, which demonstrates how ABI and BIBA members have taken action.




Please see the Financial Crime section for an update on the CPMI’s report on reducing risk of wholesale payments fraud.


UK Finance, EMA, FDATA and techUK publishes voluntary guidelines and encouraged market behaviours for PSD2 transitional period
On 4 May, UK Finance, the FDATA, the EMA and techUK jointly published voluntary guidelines and encouraged market behaviours under PSD2 in the transitional period. The aim of the guidelines is to increase consumer protection around the practice known as "screen scraping", which is used in the market as a method of accessing customer data or initiating payments on a customer's behalf. The industry bodies that have developed the guidelines hope to foster a collaborative and co-operative industry ecosystem around AIS and PIS. The guidelines are not legally binding and are designed for general guidance only. Their scope includes firms that are registered or authorised by the FCA or another EEA competent authority and operating in the UK. In particular, they are intended to apply to regulated firms and businesses relying on the grace period afforded to firms offering AIS or PIS before 12 January 2016 which have not yet been registered or authorised under PSD2. Although the guidelines are voluntary, UK Finance, the FDATA, the EMA and techUK believe there are significant benefits for all parties active in the market of providing services to customers or providing technical services for AIS or PIS in adopting and integrating them into their practices. In a related article on its website, UK Finance also encourages market participants to work towards using the open banking API standards as the basis on which secure API access to payment accounts is provided in future.




Please see the Brexit section for an update on the UK Government’s response to the HoL EU Committee report on Brexit and future of financial regulation and supervision.


Please see the “Other” section for: (i) an update on the HoC European Scrutiny Committee’s thoughts on proposals on on-performing loans; and (ii) an update on the IOSCO’s discussions at its 2018 annual conference.


HMT further updates Parliament EU Scrutiny Committee on the progress of BRRD II, CRD V and CRR II
On 9 May, the DExEU published a letter (dated 2 May) from John Glen, Economic Secretary to the Treasury, to Sir William Cash, HoC European Scrutiny Committee Chair, on the EC’s proposed package of reforms referred to as BRRD II, CRD V and CRR II. The letter provides an update following Mr Glen's previous letters on the proposed package of reforms. Points of interest in the letter include: (i) the ECOFIN continues to work towards a compromise on MREL subordination. Other areas on the resolution side of the banking package are not being reopened; (ii) the Presidency is engaging with member states on the ways in which different MREL components could be balanced together, including the scope and level of caps on the subordination of MREL; (iii) Mr Glen confirms that the issues relating to the implementation of the FRTB, together with the exemptions from scope, remain the same as they were at the time of the previous letter in March. The intention is for the remaining issues to be discussed in the last official level working group in early May; (iv) with the expectation that a general approach is tabled at the May ECONFIN meeting, Mr Glen requests that the committee grants clearance, or continues to waive scrutiny, to the proposals; and (v) the EP expects a vote to be held by the ECON in June, with trilogues starting just before, or after, summer recess. DExEU has also published a letter from Mr Glen to Lord Boswell of Aynho, Chair of the HoL EU Committee, which contains broadly identical material.


ECB publishes report on the thematic review on effective risk data aggregation and risk reporting
On 8 May, the ECB published a report following its thematic review on effective risk data aggregation and risk reporting. The ECB is concerned to find that the implementation status of the BCBS 239 principles (within the 2016 sample of 25 significant institutions) is unsatisfactory. As at the date of the report, none of the significant institutions, which include G-SIBs, have fully implemented the BCBS 239 principles. The deadline for G-SIBs to meet the principles was the beginning of 2016. The ECB found that weaknesses stem mainly from a lack of clarity regarding responsibility and accountability for data quality. The report describes the key areas of concern and gives examples of good practice. It also provides information about the methodology adopted by the thematic review, and the findings observed to raise awareness of the importance of strengthening governance arrangements around data aggregation and reporting capabilities. The ECB concludes its report by: (i) stating that the full implementation of the BCBS 239 principles will probably not be achieved any time soon, as several credit institutions' implementation schedules are set to run until the end of 2019 or beyond; and (ii) encouraging all significant institutions to implement data aggregation and reporting principles, taking into account their size, business models and complexity.


EC calls on EBA to revise own fund requirements for credit, operational, market and credit valuation adjustment risk
On 7 May, the EBA published a letter (dated 4 May) from Olivier Guersent, EC Director General of FISMA, to Andrea Enria, EBA Chair, together with a call for advice (Ares(2018)2374104) on revising the own fund requirements for credit, operational, market and CVA risk. In the letter, Mr Guersent explains that the EC is preparing for EU implementation of revisions to the credit risk, operational risk and CVA risk frameworks, as well as implementation of the new output floor (that is, the Basel III reforms). As part of the implementation process, the EC is seeking technical advice from the EBA on the potential impact of the revisions mentioned above (including any potential revisions to the market risk framework) on the EU banking sector and the wider EU economy. The EC has also asked the EBA to: (i) provide advice on possible implementation challenges that would arise for firms established in the EU; and (ii) deliver its advice by 30 June 2019. However, if delivery of the advice on the revisions relating to the CVA and market risk is not possible by that date, the EBA should deliver the advice by 30 September 2019 at the latest. In this case, the EBA should still deliver its preliminary analysis of the new output floor and the combined impact of the key revisions in the advice submitted by 30 June 2019. In a related press release, the EBA explains that, as a preliminary step, it is planning to launch, by July, an overall data collection to which smaller and less complex banks, as well as banks with specific business models, will be invited to participate. The data collection exercise is important as the collected evidence will form the basis for the EBA's policy recommendations. The EBA will provide more details on the scope of the exercise in the coming months.


EBA publishes the results of its 2016 CVA monitoring exercise
On 4 May, the EBA published a report setting out the results of its 2016 CVA monitoring exercise. The EBA produced the report on the basis of data submitted by 169 major EU institutions, representing 27 member states. The report assesses the impact on own funds requirements of the reintegration of the transactions currently exempted from the scope of the CVA risk charge under the CRR. The structure of the report and the methodology employed to monitor the impact of the exempted transactions are the same as those used for the EBA's 2015 CVA monitoring exercise, the results of which were set out in a report published in June 2017. In particular, the indicators used in the report are consistent with those proposed in its October 2017 consultation on draft guidelines on common supervisory procedures and methodologies for the SREP and supervisory stress testing under Article 107(3) of CRD IV. The results are similar to those of 2015 CVA monitoring exercise. They continue to show the materiality of CVA risks that are currently not capitalised due to the exemption under Article 382(4) of the CRR. As a result, the EBA will extend the scope of its 2017 CVA risk monitoring exercise to assess the impact of the CRR exemptions also in the context of the future implementation of the revised CVA standards in the EU. According to a related press release, the EBA has already begun the data collection process for the 2017 CVA risk monitoring exercise, which will be part of its regular Basel III monitoring exercise. It has drafted and included in the Basel III monitoring reporting template an EU-specific worksheet on CVA, with related instructions.




Please see the Prudential Regulation section for the HMT’s further updates on the progress of BRRD II.


ECB publishes speech on the co-operative approach to CCP recovery and resolution
On 4 May, the BIS published a speech by Benoît Coeuré, member of the executive board of the ECB, on a co-operative approach to CCP recovery and resolution. Points of interest include: (i) more international co-operation is needed. Authorities responsible for several major cross-border CCPs have not yet undertaken resolution planning and no cross-border crisis management arrangements are in place; (ii) further steps should be taken to improve the analytical foundation of CCP resolution planning and better prepare authorities; (iii) arrangements for CCP recovery and resolution must be co-ordinated, to ensure system-wide risks are fully identified and mitigated fairly and effectively. The boundaries between default management and recovery and resolution are blurred so it is important to align responsibilities and control measures throughout the potential lifecycle of EU CCPs; (iv) current efforts to strengthen the EU arrangements for third country CCPs are very important. If a third country CCP is systemically important for the EU, a focus on regulatory equivalence alone is not sufficient. EU authorities also need tools to directly liaise with a third country CCP to identify, clarify and address issues that may pose specific concerns from an EU financial stability perspective. This is in line with other major jurisdictions; (v) similarly, the development of home country arrangements for CCP resolution in line with international standards must be complemented by the involvement of relevant EU authorities, to ensure that systemic risk concerns are fully taken into account; and (vi) given the financial stability, macroprudential and liquidity issues a CCP resolution raises, central banks must be involved in all aspects of the process.




IOSCO reports on developments at 2018 annual conference
On 10 May, the IOSCO published a press release summarising discussions of its board at its 43rd annual conference relating to key challenges facing securities regulators. The discussions included the following points of interest: (i) the continuing growth of ICOs was discussed. The board agreed to develop a support framework to assist members as they consider how to address the domestic and cross-border issues arising from ICOs that could impact investor or consumer protection; (ii) the board has made progress on its work to protect retail investors from the risks arising from binary options and other OTC leveraged products, particularly when offered by unlicensed firms on a cross-border basis. Members discussed enforcement practices that mitigated the risks of these products to unsophisticated retail investors; (iii) the board discussed exchange traded funds and reviewed progress in IOSCO's work on measuring leverage in investment funds; (iv) members supported a third implementation review of the IOSCO principles for the regulation and supervision of commodity derivatives markets; and (v) the board will launch a FinTech network to facilitate sharing of information, knowledge, and experiences related to FinTech among IOSCO members. The network also will serve as a forum for collaborative work on regulatory issues, trends, and emerging risks.


HoC European Scrutiny Committee considers proposals on asset management, non-performing loans and long-term EU financial services regulatory plans
On 8 May, the HoC European Scrutiny Committee published its twenty-sixth report of the 2017-19 parliamentary session (dated 2 May). The report outlines the committee's views on matters including the EC’s proposals relating to: (i) asset management and the cross-border distribution of funds within the EU; (ii) non-performing loans, in particular debt management and out-of-court collateral recovery; and (iii) long-term EU regulatory plans relating to financial services.