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Key Regulatory Topics: Weekly Update (23 Feb - 1 March 2018)

06 March 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


UK Government response to HoC Treasury Committee report on transitional arrangements

On 27 February, the HoC Treasury Committee published the UK government's response to the Committee's report on transitional arrangements for Brexit. The Committee notes that the overall framework for transitional arrangements recommended in the report has been largely accepted by government. Commenting on the government's response, Chair of the Committee, Nicky Morgan, observed that: (i) recent draft texts published by the UK and EU show that transition is "not yet a done deal" and it is vital that remaining disagreements over the duration and governance of the transition period are resolved quickly. Failure to reach agreement in the March 2018 European Council, would be economically damaging, and would dramatically diminish the value of whatever is eventually negotiated; (ii) as regards the long-term UK-EU relationship, key questions remain unanswered and details are in short supply; and (iii) in the absence of clarity, businesses will have no choice but to prepare for the worst-case scenario of a trade relationship based on WTO commitments.
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ISDA publishes IBOR Global Benchmark Transition Roadmap 2018

On 1 March, ISDA, along with other associations, published its IBOR Global Benchmark Transition Roadmap 2018. The Roadmap summarises existing information published by regulators and various public-/private-sector RFR working groups on the work conducted to date towards transitioning financial products and practices from certain IBORs to the selected RFRs. The roadmap is the first part of a comprehensive analysis of the issues and potential solutions related to transitioning from IBORs for a wide spectrum of financial instruments. The associations are also initiating a global survey of buy-side and sell-side firms and infrastructure providers, which will feed into an in-depth report aimed at supporting interest rate benchmark transition planning efforts.
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ESMA updates EMIR validation rules
On 1 March, ESMA published an updated version of its validation rules for the reports submitted under the revised technical standards on reporting under Article 9 of EMIR. In a related press release, ESMA explained that it has updated the validation rules to: (i) allow for the reporting of exchange-traded derivatives in products for which the effective date may be earlier than the date of execution; and (ii) clarify how the identification of the product should be validated in the reports submitted on or after 3 January.
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ECB publishes responses to consultation on Euro unsecured overnight interest rate
On 26 February, the ECB published a summary of the responses it has received to its first consultation paper on a new euro unsecured overnight interest rate. Fifty-four market participants, mainly from the banking sector, submitted responses or comments to the consultation document. Among other things, the main messages were: (i) the vast majority of respondents agreed with the definition suggested in the consultation document and expected the rate to be generally accepted by the public as a reference rate; (ii) respondents viewed the definition and implementation of a transaction size threshold as challenging and potential benefits as unclear; and (iii) respondents reiterated the importance of a well-planned, documented and communicated development and implementation process to ensure a smooth transition to a widely accepted, trusted and used ECB reference rate. It is reported that the ECB's second public consultation, which will explore the methodology to be used for the new rate, is scheduled to be published towards the end of March 2018.
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SM&CR regime – FCA statement on consultation on new public register of certification employees and others at authorised firms

On 26 February, the FCA published a statement announcing that it will consult on proposals to make information publicly available on a wider range of individuals at authorised firms. The FCA and PRA currently maintain a public financial services register, the "FS Register", of the firms they regulate and the individuals they have approved. Under the FCA's proposals to extend the SM&CR to almost all regulated firms, the FCA will only approve the most senior individuals within firms. This means that only senior managers will appear on the FS Register and not those employees who firms certify as fit and proper under the certification regime. The consultation will take place in the summer. In addition, the FCA states that it plans to issue an update "shortly" on its work to improve the usability of the FS Register, which incorporates feedback from the Work and Pensions Select Committee.
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FCA publishes speech on consumer credit work and priorities

On 27 February, the FCA published a speech given by Andrew Bailey, FCA Chief Executive, on the FCA's work and priorities in the consumer credit area. Mr Bailey reiterated much of what the FCA has already reported in recent months, including in its January update on its high-cost credit review. However, he also confirmed the likely timings for the FCA's publication of a number of key reports relating to different strands of its consumer credit work: (i) the FCA plans to publish an update on its work on the motor finance market in March 2018; (ii) the FCA will present its conclusions on the rent-to-own services in May 2018, as part of its high-cost credit review; (iii) as previously indicated, the FCA is moving to supervise consumer credit firms as groups or portfolios with comparable business models - the FCA will publish a document setting out its approach to supervision in March 2018; and (iv) the FCA is continuing its work on reviewing the appropriateness of the retained provisions of the CCA - it will publish an interim report in summer 2018.
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FCA publishes policy statement on persistent debt and earlier intervention
On 27 February, the FCA published a policy statement (PS18/4) to its consultation paper on persistent debt and earlier intervention (CP17/43), which was published in December 2017. The FCA also explained the changes made to the proposals as a result of the feedback received. The final rules are set out in the Consumer Credit (Earlier Intervention and Persistent Debt) Instrument 2018 (FCA 2018/7) and come into force on 1 March. However, firms have until 1 September to comply. A summary of the feedback to CP17/43 and the FCA's response is set out in Chapter 2 of PS18/4.
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Retail investments – FCA publishes policy statement on personal recommendations
On 23 February, the FCA published a policy statement (PS18/3) on perimeter guidance on personal recommendations relating to retail investments. PS18/3 summarises feedback the FCA received to proposals to amend PERG in relation to what constitutes a “personal recommendation”, which the FCA consulted on in August 2017. The text of the final Handbook changes is set out in the Advising on Investments (Article 53(1) of the Regulated Activities Order) (Perimeter Guidance) Instrument 2018 (FCA 2018/8), which came into force on 23 February 2018. At the same time, the FCA is retiring its non-Handbook guidance on independent and restricted advice (FG12/15). The FCA reports that, in general, respondents to CP17/28 were supportive of its proposed perimeter guidance and the retirement of FG12/15. However, some respondents asked for clarification on some aspects of the guidance and others asked for additional illustrative examples of how firms could support customers without giving personal recommendations. On this basis, the FCA will proceed with its proposals broadly as consulted on but with some drafting changes to clarify issues raised and some new illustrative examples. The FCA has also published a consumer guide on understanding advice and guidance on investments. The guide is designed to help consumers seek support when making decisions about some investment, pension and insurance products. Publication of the new perimeter guidance is the final step in the FCA's implementation of the recommendations made by the Financial Advice Market Review (the FAMR). The FCA proposes to conduct a review of the impact of the FAMR recommendations in 2019 and to publish its findings in 2020.
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EP publishes recommendation of 1 March 2018 on cutting the sources of income for jihadists – targeting the financing of terrorism

On 1 March, the EP published a recommendation to the Council, the EC and the Vice-President of the EC / High Representative of the Union for Foreign Affairs and Security Policy on cutting the sources of income for jihadists – targeting the financing of terrorism (2017/2203(INI)) (P8_TA-PROV(2018)0059). In particular, the MEPs urge the EU Council, EC and External Action Service to: (i) step up proactive information exchange and coordination among financial institutions, law enforcement and intelligence agencies via a European counter-terrorism financial intelligence platform, which could be run by EUROPOL, and include a database of suspicious transactions; (ii) oblige banks to monitor pre-paid debit cards, so as to ensure that they can only be reloaded via bank transfers and personally identifiable accounts; and (iii) assess whether virtual and cryptocurrencies, blockchain and FinTech technologies help fund terrorism and should be regulated by EU rules.
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Draft Order brings Financial Services Act 2012 offences within scope of DPA
A draft version of the Crime and Courts Act 2013 (Deferred Prosecution Agreements) (Amendment of Specified Offences) Order 2018 has been published, with an explanatory memorandum. When implemented, the Order will remove the offence of making misleading statements and practices under section 397 of FSMA 2000 from within scope of a DPA following the repeal of that offence by the FSA 2012. The order will instead bring offences under sections 89, 90 and 91 of the FSA within scope of a DPA. The new offences within scope of a DPA are as follows: (i) making a misleading statement (section 89, FSA); (ii) making a misleading impression (section 90, FSA); and (iii) making misleading statements etc. in relation to benchmarks (section 91, FSA).
Read the Order here
Read the explanatory memorandum here

AML measures – HMT publishes Advisory Notice on money laundering and terrorist financing controls in higher risk jurisdictions
On 27 February, HMT published an Advisory Notice on Money Laundering and Terrorist Financing controls in higher risk jurisdictions. The notice is not legally binding, but should be followed as part of the due diligence procedures required by the Money Laundering Regulations 2017. Firms are advised to take appropriate actions to minimise the associated risks, which may include enhanced due diligence measures in high risk situations in respect of: (i) Ethiopia; (ii) Iraq; (iii) Serbia; (iv) Sri Lanka; Syria; (v) Trinidad and Tobago; (vi) Tunisia; (vii) Vanuatu; and (viii) Yemen.
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MAR – EC Implementing Regulation on ITS on co-operation under MAR published in OJ
On 27 February, EC Implementing Regulation (EU) 2018/292 laying down ITS on forms and procedures for co-operation between national competent authorities under MAR was published in the OJ. The EC adopted the Implementing Regulation on 26 February. It enters into force on 19 March (that is, 20 days after publication in the OJ).
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Guidance on European Investigation Order requests published
On 26 February the Home Office published guidance for competent authorities in EU Member States and in the UK about obtaining evidence within the UK or abroad to assist in criminal investigations or proceedings.
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Outcomes of the FATF plenary meeting, Paris, 21-23 February 2018
On 23 February, the FATF published a report on the outcomes of its plenary meeting in Paris from 21 to 23 February. In particular, the issues considered by the plenary included: (i) updated FATF Guidance on Counter Proliferation Financing; (ii) improving the understanding of virtual currencies risks; and (iii) improving global AML compliance.
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Please see the Financial Crime section for the outcomes of the FATF plenary meeting on 21-23 February in relation to FinTech, RegTech and virtual currencies.

Please see the Payments section for an update on the impact of technology on the payments landscape.

EC publishes speech outlining the goals of FinTech action plan
On 27 February, the EC published a speech given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and CMU, which included an outline of the goals of the EC’s FinTech action plan. Mr Dombrovskis explained that the action plan will propose over 20 new measures intended to achieve a more innovative and competitive EU financial sector. He outlined some of these measures in his speech, which fall under the following three main goals: (i) to support innovative business models; (ii) to encourage the uptake of new technologies; and (iii) to increase cyber-security and the integrity of the financial system.
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ESMA publishes speech on measured approach to FinTech
On 27 February, ESMA published a speech by Steven Maijoor, ESMA Chair, on taking a measured approach to FinTech. Mr Maijoor explains that there are two strands to ESMA's measured approach to FinTech. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). He goes on to address the following three key areas of FinTech: (i) the structural features of FinTech; (ii) monitoring FinTech by looking at economic function; and (iii) the challenges and opportunities for regulators.
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EP provisional text adopted: EU-USA Bilateral Agreement on prudential measures regarding insurance and reinsurance

On 1 March, the EP published a legislative resolution on the draft Council decision on the conclusion of the Bilateral Agreement between the EU and the United States of America on prudential measures regarding insurance and reinsurance (08054/2017 – C8-0338/2017 – 2017/0075(NLE)) (P8_TA-PROV(2018)0045).
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EIOPA final report on second set of technical advice on Solvency II Delegated Regulation
On 1 March, EIOPA published a document (dated 28 February 2018) (EIOPA-BoS-18/075) containing the second and final set of advice to the EC on specific items in the Solvency II Delegated Regulation ((EU) 2015/35). In the advice EIOPA recommends a mixture of revised calibrations, simplifications, removal of technical inconsistencies and, where necessary, proposals for achieving greater supervisory convergence. EIOPA has modified its advice to take account of the responses to the consultation, which are published on a separate webpage and are summarised in the relevant sections of the advice.
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Second set of data in FCA's general insurance value measures pilot
On 1 March, the FCA published a new webpage setting out the second set of data in its GI value measures pilot, covering data for the year ending 31 August 2017. The data, from 36 insurers (including both UK and EEA firms), is intended to provide consumer groups, firms and market commentators with additional indicators of value for a range of insurance products. It includes information about claims frequencies, claims acceptance rates and average claims pay-out by insurers for four GI products: (i) home insurance (combined buildings and contents); (ii) home emergency insurance; (iii) personal accident insurance sold as an add-on to motor or home insurance; (iv) key cover sold as an add-on to motor insurance. The FCA expects all firms regardless of their participation in the pilot, to regularly review their products as part of their conduct risk framework. Boards and senior management are expected to provide appropriate oversight and challenge and ensure that potential harm arising from poor value and poor performing products is addressed.
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LMA guidance for UK coverholders on IDD
On 28 February, the LMA published guidance for UK coverholders on the IDD. The guidance is designed for UK coverholders and is intended to highlight certain important aspects of the IDD. It is not intended to cover every element of the new regime. The guidance covers: (i) product oversight and governance, including product manufacture and product distribution; (ii) product information, including the insurance product information document (IPID or PID); (iii) identifying client needs and advising, including statements of demands and needs and personalised explanations; (iv) information about the firm and its services, including remuneration disclosure and means of communication to customers; and (v) other requirements, including in relation to the customer's best interest rule, conflicts of interest, knowledge, competence and good repute, organisational requirements and complaints.
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PRA publishes speech on policyholder and Solvency II reform
On 27 February, the BoE published a speech by Sam Woods, BoE Deputy Governor, Prudential Regulation, and Chief Executive Officer of the PRA, which among other things, considers the role of the policyholder and reform of the Solvency II. Points of interest include: (i) there is no evidence to suggest that the introduction of Solvency II has "crushed" the profitability or growth of UK insurance companies. Also, there is no on-going evidence that Solvency II has driven up prices for UK insurance policyholders; (ii) the PRA is launching an insurance sub-committee of its practitioner panel to free up more space for discussion focussed on insurance issues; and (iii) the PRA is taking forward reforms to address the issues identified in the Treasury Committee’s October 2017 report on the findings from an inquiry into Solvency II and its impact on the UK insurance market.
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PRA publishes final response to Treasury Committee report on Solvency II
On 27 February, the PRA published its final response to the Treasury Committee's October 2017 report on the findings from an inquiry into Solvency II and its impact on the UK insurance market. In the report, the PRA considers the Committee's recommendation on the PRA's secondary competition objective and points raised by the Committee about the PRA's engagement with industry and its skills and experience in insurance. The PRA argues that giving it a primary competition objective would dilute its focus and would probably create significant overlaps with the activities of the existing competition regulators. Among other things, the PRA states that: (i) it is reviewing its approach to DVA and will provide a fuller update to the Committee on this issue in due course; (ii) it is assessing the feasibility of simplifying the recalculation of transitional measures on technical provisions and expects to consult on any proposed changes in 2018; and (iii) it is investigating the implementation of the surplus fund rules across the UK insurance industry and expects to further its review in 2018. The PRA states that it will provide a further update in due course on any outstanding issues, including the risk margin.
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FCA publishes speech on MiFID II implementation and LIBOR reform

On 1 March, the FCA published a speech given by Andrew Bailey, FCA Chief Executive, which included updates on the implementation of MiFID II and the reform of LIBOR. Mr Bailey began by mentioning the FCA's ongoing work on open-ended fund structures and algorithmic trading. He clarified that the FCA does not intend to prevent the use of algorithms but wishes to ensure that firms have robust governance, risk management and compliance standards. The speech includes the following comments on MiFID II: (i) since MiFID II has applied in the UK, there has been a significant downturn in OTC equity trading, as expected. There have been delays in introducing some of the planned measures, including the double volume cap (which limits "dark trading"), but ESMA has stated that this will happen in March 2018. However, there have been no major operational disruptions to trading and it appears that the changes have not adversely affected liquidity across equities, bonds and derivatives; and (ii) although the FCA has stated that it would enforce compliance with MiFID II effectively and proportionately, it does not intend to offer forbearance and expects firms to comply with their obligations. The FCA will set out the thematic work it will conduct during 2018 on MiFID II related issues in its 2018/19 business plan.
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FCA "Dear CEO" letter to second charge lenders on responsible lending

On 1 March, the FCA published a "Dear CEO" letter it has sent to firms that have entered into regulated second charge mortgage contracts, in which it asks them to review their mortgage lending processes. The FCA has found a number of poor practices leading it to conclude that second charge lenders might not always be lending responsibly, leading to potential customer harm. The areas where the FCA has found significant issues, and where CEOs are asked to focus their reviews in particular, are: (i) overall affordability assessment; (ii) income assessment; (iii) expenditure assessment; (iv) oversight arrangements; and (v) financial crime.
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PSR announces next steps for protecting victims of APP scams

On 28 February, the PSR announced developments in its proposal to introduce a contingent reimbursement model (CRM) relating to APP scams. It states that an industry code will be in place by September, paving the way for victims of APP scams to have better protection. From September the code will be publicly consulted on to be refined in early 2019 and the PSR expects that it will continue to evolve to ensure preventative measures are up to date. The PSR is also bringing consumer and industry representatives together to establish a dedicated steering group. Led by an independent chair appointed by the PSR, the group will ensure the contingent reimbursement model is designed in the best way to minimise the number of scams in the future and protect victims of scams. The steering group will be required to take into account both consumer and industry needs and meet the PSR’s ambitious timescales. The group will start work in March. The PSR has published a document providing further information on the steering group and summarising the outcome of its November 2017 consultation.
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BoE publishes speech on impact of technology on payments
On 26 February, the BoE published a speech by Sir Jon Cunliffe, BoE Deputy Governor for Financial Stability, on changes to the payments landscape. Among other things, the speech highlights two related developments to changes in the technologies supporting money: (i) the growing use of non-cash technologies for small value payments; and (ii) the change to the way people manage and use payment accounts at banks. In the speech, Sir John Cunliffe also referred to the need to ensure that the banks and the payments system as a whole are robust and have the resilience to withstand very severe risks. In particular, he referred to the longer term "exploratory scenario" exercise that the BoE, in 2017, set the major banks in addition to the regular banking stress test. The aim of the exercise was to examine banks' strategic responses and preparedness to, among other things, increasing competitive pressures due to certain changes in technology. The BoE's assessment was that there were a number of risks to the banks' projections in the scenario. For example, open banking, PSD2 and other related changes might cause faster and greater disruption to business models and the forecast increases in efficiency may be more difficult to deliver than assumed. The BoE will be following up with banks on the results of the exercise.
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Please see the Insurance section for an update on the EU-USA Bilateral Agreement on prudential measures regarding insurance and reinsurance.

CRD IV – ESRB publishes report on use of macro-prudential structural buffers
On 27 February, the ESRB published a report (dated December 2017) on the use of structural buffers (that is, the buffer for G-SIIs, the buffer for O-SIIs and the SRB) in the EU over the last three years. The report is written by the EGSB and proposes amendments to the ESRB handbook on making operational the macro-prudential policy in the banking sector, and makes a number of policy proposals regarding the legal framework of the buffers. The ESRB has also published an opinion (dated December 2017) on how the EU legal framework for structural buffers could be enhanced to apply the macro-prudential toolkit more effectively. Its proposals cover the following areas: (i) the level of the O-SII buffer cap; (ii) an additional O-SII buffer cap for subsidiaries; (iii) formal guidance for O-SII buffer calibration; and (iv) a clear delineation between the O-SII and SRB policy objectives, discouraging the application of the SRB to risks covered by the SII framework.
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BCBS publishes consultation on updated framework for Pillar 3 disclosure
On 27 February, the BCBS published a consultative document (BCBS432) on an updated framework for the Pillar 3 disclosure requirements. The consultative document sets out the proposals for the third phase of the Pillar 3 framework, which covers the following elements: (i) revisions and additions to the Pillar 3 framework arising from the finalisation of the Basel III framework - these include revised disclosure requirements for credit risk, operational risk, leverage ratio, credit valuation adjustment, and templates on risk management, risk-weighted assets and key prudential metrics; (ii) new disclosure requirements on asset encumbrance - the BCBS proposes to introduce a new template that would require banks to disclose information on their encumbered and unencumbered assets; and (iii) new disclosure requirements on capital distribution constraints - the proposed template states that the disclosure would be mandatory for banks only when required by their national supervisors. The BCBS is also requesting feedback on the scope of application of the disclosure requirement on the composition of regulatory capital that was introduced in March 2017. The deadline for comments on the scope of the application is 25 May.
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CRD IV – Council of EU declares compromise proposals on CRR II and CRD V null and void
On 26 February, the Council of the EU published the following documents relating to compromise proposals on the proposed CRR II and CRD V: (i) note on CRR II (6200/18 COR 1); and (ii) note on CRD V. In each case, the note states that compromise proposals originally published under these document references in February 2018 should be considered null and void.
Note on CRR II:
Note on CRD V:

PRA publishes policy statement on Pillar 2 liquidity
On 23 February, the PRA published a policy statement (PS2/18) on Pillar 2 liquidity. PS2/18 provides feedback to responses to the PRA's May 2016 and July 2017 consultations on Pillar 2 liquidity (CP21/16 and CP13/17). Following the consultations, the PRA made a number of changes to its proposals, including: (i) removing monetisation in the granular LCR stress scenario on which guidance was being set; (ii) delaying implementation of PRA110 reporting from January 2019 to July 2019; (iii) adding new timing assumptions on a number of outflows in PRA110 and a new row in the template for the reporting of Pillar 2 add-ons; and (iv) amending the stress uplift reference point for calculating intraday liquidity risk. The appendices to PS2/18, which have been published separately, set out: (i) the final version of PRA Rulebook instrument: CRR Firms: Regulatory Reporting PRA110 Amendment Instrument 2018 (PRA 2018/3); (ii) revised versions of SS24/15 and SS34/15, and a SoP on Pillar 2 liquidity; and (iii) the PRA110 reporting template and instructions. The updated versions of SS24/15 and SS34/15 and the SoP took effect on 23 February. The PRA 110 template and reporting instructions, and the PRA Rulebook instrument (PRA 2018/3) will take effect from 1 July 2019.
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Council of EU declares compromise proposals on BRRD II and SRM II Regulation null and void

On 26 February, the Council of the EU published the following documents relating to compromise proposals on the proposed BRRD II and the SRM Regulation: (i) Note on BRRD II (6202/18 COR 1); and (ii) Note on SRM II Regulation (6203/18 COR 1). In each case, the note states that compromise proposals originally published under these document references in February 2018 should be considered null and void.
Note on BRD II:
Note on SRM II Regulation:


EP publishes annual report on the banking union

On 1 March, MEPs adopted the annual report on the banking union, setting out what progress has been made. The EU plans to base the banking union on three pillars: supervision of the biggest European banks by the ECB, a single resolution regime for banks in trouble and a common deposit insurance to protect small savers. While the first two are already in place, agreement on the deposit insurance has not been reached yet.
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CMA publishes working paper on investment consultants market investigation
On 1 March, the CMA published a working paper on information on fees and quality as part of its investment consultants market investigation.
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HM Treasury letter on progress of legislative proposal to establish EDIS
On 1 March, DExEU published a letter from John Glen, Economic Secretary to the Treasury, to Lord Boswell of Aynho, Chair of the House of Lords EU Committee, relating to the proposed EDIS Regulation (2015/0270 (COD)) (dated 23 February). The letter explains that member states have now started discussions on how much risk reduction is needed before the talks on EDIS can proceed, with a view to agreeing a roadmap in June 2018. The letter sets out the nature of these discussions, explaining that this could involve the use of specific indicators to measure the progress of risk reduction. Participating member states will also consider whether these indicators will take the form of targeted benchmarks for relevant countries to reach or the EU average as targets. Mr Glen explains that the UK government is supportive of this work, to ensure the stability of the EU banking system. It explains that the UK will continue to take part in formal discussions within the Council of the EU, as well as informal discussions in the margins of those meetings, on the basis that this is a matter for participating member states to decide, provided that the interests of non-participating states (including that of the UK) are respected.
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