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Key Regulatory Topics: Weekly Update - 15 September 2017 – 21 September 2017

22 September 2017

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


CMA issues statement on investment consultancy market investigation

On 21 September, the CMA published its issues statement to set out the scope of the 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. The market investigation reference was made by the FCA on 14 September. The issues statement explains the CMA's intended approach to conducting the market investigation and identifies various market characteristics and market outcomes that it plans to examine during the investigation. It also identified three initial high-level hypotheses (theories of harm) for structuring its investigation. These relate to demand side and information issues (difficulties in customers’ ability to effectively assess, compare and switch investment consultants resulting in weak incentives to compete), possible conflicts of interest (which may reduce the quality and/or value for money of investment consultants' services) and barriers to entry and expansion (which reduce competitive pressure on investment consultants). The CMA invites comments on the issues identified and possible remedies by 12 October.


FCA occasional paper on ageing population and financial services

On 21 September, the FCA published an occasional paper on the ageing population and financial services (occasional paper 31).The paper outlines the findings from a project it launched to explore the impact of the ageing population on the financial services industry. The FCA found that there are risks that the financial services needs of older people are not being fully met, resulting in exclusion, poor customer outcomes and potential harm. The paper therefore focusses on the issues where the FCA believes that regulations and firms can play a greater role and make a difference to those outcomes. The issues are driven by a range of interrelated causes including policies and controls that are not designed around consumer needs and unintended consequences of product and service design. The paper sets out the FCA's ideas for addressing these issues. These ideas cover: (i) Retail banking, where many common issues arise for older consumers (see chapter 3); (ii) Third party access and planning ahead, ranging from powers of attorney to sharing details like passwords (see chapter 4); (iii) Later life lending, ensuring appropriate access for older consumers (see chapter 5); and (iv) Long term care (see chapter 6).

Consumer deposit protection – FSCS announces new industry-wide agreement to raise consumer awareness

On 20 September, the FSCS announced a new industry-wide agreement, supported by UK Finance and the BSA, to raise consumer awareness of deposit protection. Banks and building societies are already required, under PRA rules, to display the "FSCS protected" badge on stickers in branches and on posters and leaflets. Under the new agreement, they will display the FSCS badge across the following consumer channels and documents: websites; mobile banking apps; and customer information sheets. The FSCS explains that ensuring banks and building societies use the FSCS badge in a consistent way across these channels, which will also include advertising, will help to make consumers more aware of the protection FSCS provides for their deposits and savings. Banks and building societies have agreed to implement this agreement in the next 18 months.

FSCS – PRA updates supervisory statement on depositor and dormant account protection

On 19 September, the PRA issued a revised version of its supervisory statement on depositor and dormant account protection (SS18/15). The PRA has updated its webpage on SS18/15 to explain that the only updates to the previous version (which was published in January) are to section 3.16 (Trademarks and FSCS Badge). The PRA has clarified the use of the FSCS badge on the information sheet contained in Annex 1 of the Depositor Protection Part of the PRA Rulebook.


EC adopts Delegated Regulations supplementing IDD on distribution of insurance-based investment products

On 21 September, the EC adopted two Delegated Regulations supplementing the IDD ((EU) 2016/97) with a view to protecting consumers when they buy insurance products in the EU. Delegated Regulation (C(2017) 6229 final) supplements the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products. Delegated Regulation (C(2017) 6218 final) supplements the IDD with regard to product oversight and governance requirements for insurance undertakings and insurance distributors. The next step will be for the Council of the EU and the EP to consider the Delegated Regulations. If neither of them objects, the Delegated Regulations will enter into force 20 days after their publication in the OJ. Both Delegated Regulations will apply from 23 February 2018.

Insurance markets – IAIS application paper on regulation and supervision MCCOs on increasing access

On 19 September, the IAIS published an application paper on the regulation and supervision of mutuals, co-operatives and community-based organisations (MCCOs) in increasing access to insurance markets. The paper explains that insurance supervisors are increasingly looking for an appropriate balance between regulation, enhancing access to insurance services and protecting policyholders. The paper is intended to assist those supervisors to understand how the use of MCCOs might help in enhancing access to insurance. It explains the important role MCCOs play in inclusive insurance markets and includes descriptions and examples of how MCCOs operate and are supervised from both developed and developing market perspectives (see section 2). It provides guidance (in section 3) on the way the ICPs could be applied in a proportionate manner to help remove unnecessary barriers caused by disproportionate regulation and supervision, while at the same time ensuring appropriate policyholder protection. The paper was published by the IAIS financial inclusion working group, and was adopted by the IAIS Executive Committee on 12 September.



EP and Council of EU decide not to object to MiFIR Delegated Regulation exempting certain third countries' central banks from pre- and post-trade transparency requirements

On 21 September, the EP updated its procedure file on the proposed EC Delegated Regulation (C(2017) 3890 final) supplementing the MiFIR with regard to exempting certain third countries' central banks in their performance of monetary, foreign exchange and financial stability policies from pre- and post-trade transparency requirements. The procedure file states that the Council of the EU and Parliament have raised no objection to the Delegated Regulation. The Delegated Regulation will enter into force 20 days after it is published in the OJ.

New working group on risk-free reference rate for euro area

On 21 September, the Belgian Financial Services and Markets Authority, ESMA, the European ECB and the EC published a joint press release announcing the launch of a new working group that will identify and adopt a risk-free reference rate for the euro area. It is intended that the risk-free overnight rate will serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the Euro area. The working group will regularly consult market participants and end-users, as well as gather feedback from other public authorities. It will publish its terms of reference and regularly report on its meetings. Once it has made a recommendation on its preferred alternative risk-free rate, if needed, the group will consider possible approaches for ensuring a smooth transition to this rate. Alongside the joint press release, the ECB has published a further press release announcing that it will start providing an unsecured overnight interest rate before 2020, which will be based on data already available to the Eurosystem. The ECB overnight rate will complement existing benchmark rates produced by the private sector and serve as a backstop to private sector benchmark rates.

Wholesale markets – FCA speech on recent enforcement trends

On 20 September, the FCA published a speech by Mark Steward, FCA Director of Enforcement and Market Oversight, on recent enforcement trends with a focus on wholesale markets. In the speech Mr Steward explained that the most significant change over the last year has been the 75% increase in the number of investigations the FCA has commenced. He then went on to focus on: why there had been an increase in investigations; the starting point for investigations; the role of new data reporting requirements in the FCA’s ability to oversee markets and supervision of firms; and that the FCA will adopt a flexible approach to enforcement of MiFID II obligations where firms have made a concerted effort to be as ready as possible for the January 3 deadline.

FCA Market Watch issue 53

On 18 September, the FCA published issue 53 of Market Watch, its newsletter on market conduct and transaction reporting issues. Issue 53 contains articles relating to: (i) MiFID II legal entity identifier; (ii). MiFID II and market data obligations; (iii) MDP entity portal and the data extracts facility; (iv) Outsourcing market data; and (v) Systematic internalisers and the instrument reference data obligation.

MiFID II – FCA press release reminding proprietary traders and direct electronic access providers about VoPs

On 18 September, the FCA published a press release about authorisation and variation of permissions under MiFID II. In the press release, the FCA highlights that some proprietary traders who are not currently authorised may need to be authorised under MiFID II. It cites the example of unregulated proprietary traders who use a form of direct electronic access (DEA) provided by regulated firms to access trading venues, and warns that these traders may need authorisation from 3 January 2018 when MiFID II enters into force. It recommends that proprietary traders consult the guidance available in the FCA's application and notification user guide and Handbook, and urges them to confirm urgently whether they will need authorisation and, if so, to make an application. The FCA also reminds firms or venues that provide their clients with DEA to trading venues that they will have a duty under MiFID II to carry out due diligence on their prospective DEA clients. It recommends that such entities work closely with their clients to ensure they are aware of the potential need to be authorised and be authorised on time. The press release also contains a further general reminder that firms need to submit their complete applications to the FCA as soon as possible so that they have a chance of having the appropriate regulatory permissions in place by 3 January 2018.

MiFIR – ESMA issues procedure for exemption from access provisions for trading venues

On 15 September, ESMA published a procedure (ESMA70-154-259) for trading venues applying for exemption from the requirement in the MiFIR for them to provide CCPs access to trade feeds. Article 36(1) of MiFIR requires a trading venue to provide trade feeds on a non-discriminatory and transparent basis to CCPs wishing to clear transactions in financial instruments that are concluded on that venue. Article 36(5) provides an exemption in respect of ETD. If a trading venue falls below a specified threshold of annual notional amount traded, it may, before 3 January 2018, notify ESMA and its national competent authority that it does not wish to be bound by Article 36(1). The exemption is initially for a period of thirty months from 3 January 2018 but may be rolled over provided the trading venue remains below the trading threshold. The document sets out the procedure that ESMA will follow for verifying and approving trading venues' notifications for the exemption.


PSD2 – PSR approach document on monitoring and enforcing PSD2

On 19 September, the PSR published an approach document, which sets out how it will monitor and enforce the revised PSD2, together with a factsheet. The PSR consulted on its approach in April. The approach document makes it clear that indirect access providers can still choose which organisations they will provide access to, but they must consider each request on its own merits. If an indirect access provider decides not to give a payment service provider access, it must tell the payment service providers why. The approach document also explains the PSR's and FCA's joint approach to monitoring and enforcing new rules on access to bank accounts for payment institutions. Annex 1 to the approach document provides guidance on the PSR's powers, procedures and penalties under the PSRs 2017. EU member states must implement PSD2 by 13 January 2018.

PSD2 – FCA policy statement on implementation

On 19 September, the FCA published a policy statement (PS17/19) on the implementation of the revised PSD2. PS17/19 confirms the final rules the FCA consulted on in CP17/11 and CP17/22, which were published in April and July respectively. The FCA has also published a revised approach document setting out how it intends to apply the PSRs 2017 and the amended Electronic Money Regulations 2011 (SI 2011/99) (EMRs). It will replace the FCA's existing payment services and e-money approach documents. The final rules are set out in the Payment Services Instrument 2017 (FCA 2017/54 / FOS 2017/4). Alongside PS17/19, the FCA has also published new application forms for firms.


Pensions Act 2014: transaction cost disclosure provisions brought into force

The Pensions Act 2014 (Commencement No.11) and the Pension Schemes Act 2015 (Commencement No. 2) Regulations 2017 take forward the Pensions Act 2014 disclosure regime, with the intention of clarifying the transaction costs in certain occupational and personal pension schemes. Section 44 of the Pensions Act 2014 was brought into effect on 18 September. This requires the Secretary of State to publish regulations that mandate the disclosure of information about work-based money purchase schemes' transaction costs. Once these regulations are made and finalised, they will require details of those costs to be disclosed to workers who are auto-enrolled, or contractually enrolled, in their employer's pension scheme. Certain schemes will remain outside the compliance regime, including public service schemes, executive schemes and those whose only money purchase benefits come from AVCs. Also with effect from 18 September a similar duty is imposed on the FCA to make rules in relation to certain personal pension schemes, by inserting a new section 137FA into the Financial Services and Markets Act 2000.

Pension investments – FCA policy statement on standardising disclosure of transaction costs

On 20 September, the FCA published a policy statement on standardising the disclosure of the transaction costs incurred by pension investments (PS17/20). PS17/20 contains final rules that require firms managing money on behalf of defined contribution (DC) workplace pension schemes to disclose administration charges and transaction costs to the governance bodies of those schemes using a standard approach. It also sets out the FCA's response to the feedback received to its October 2016 consultation on the disclosure of transaction costs (CP16/30). PS17/20 is of relevance to anyone involved in the DC workplace pensions market, such as pension providers, asset managers and the governance bodies of pension schemes (independent governance committees (IGCs) and trustees). A new section (COBS 19.8) in the FCA's COBS will focus on disclosure of transaction costs and administration charges in connection with workplace pension schemes. The changes to COBS come into effect on 3 January 2018.


ECB consults on draft guides to credit institution licensing

On 21 September, the ECB published for consultation: (i) A draft guide for assessing general credit institution licensing. This sets out the general process and the requirements for the assessment of credit institution licensing applications; and (ii) A draft guide for assessing FinTech credit institutions licensing. This is directed at entities with a FinTech business model that are considering applying for a banking licence. The guides apply to all licence applications to become a credit institution within the meaning of the CRR. They aim to make the application process more transparent and help applicants in their preparations. The guides will also further enhance the harmonisation of licensing assessments, while at the same time maintaining all prudential standards for licensing new credit institutions. The consultation closes on 2 November. The ECB is holding a public hearing on the guides on 26 October. The ECB has also published FAQs on the guides.

SSM – ECB Regulation amending Regulation on reporting of supervisory financial information published in OJ

On 19 September, Regulation (EU) 2017/1538 of the ECB amending Regulation (EU) 2015/534 on reporting of supervisory financial information (SSM Financial Reporting Regulation) (ECB/2017/25) (amending Regulation) was published in the OJ. The amending Regulation will enter into force 20 days after its publication in the OJ (that is, 9 October).

CRR – EBA discussion paper on significant risk transfer in securitisation

On 19 September, the EBA published a discussion paper (EBA-DP-2017-03) on the SRT in securitisation. The work builds on the EBA's monitoring activity of supervisory practices relating to SRT, which it started when it published EBA guidelines on SRT for securitisation transactions in July 2014. The discussion paper seeks views on how to further harmonise the regulation and supervision of the risk transfer through securitisation in three core areas: the standardisation of the process of SRT assessment by competent authorities, as regards the originators' notification of SRT and the competent authority’s feedback on the achievement of SRT, for any particular transaction; having a set of selected structural features that are widely present in securitisation transactions and that affect the sustainability of SRT during the life of the transaction including, but not limited to, the use of excess spread and pro rata amortisation schemes; and having a set of proposals that aim to tackle the identified limitations of the EU framework to measure SRT, and in particular to provide a platform for a more harmonised assessment of the concept of commensurate risk transfer. The deadline for comments is 19 December. There will be a public hearing on 17 November.

Basel III – BCBS updates FAQs on definition of capital

On 19 September, the BCBS published a revised version (BCBSd417) (dated September 2017) of its FAQs on the definition of capital under Basel III. The BCBS published the first version of the FAQs in July 2011 and last updated the FAQs on 16 December 2011.


CCPs – ISDA paper on recovery and resolution framework

On 18 September, ISDA published a paper containing recommendations for a comprehensive recovery and resolution framework for CCPs. In the paper, ISDA sets out the key points that should be considered when implementing CCP recovery and resolution mechanisms. In particular, ISDA recommends that: there should be transparency for clearing participants about the expected resolution and recovery strategies for a CCP; the resolution regime should indicate a time at which resolution could commence. It should also allow flexibility for recovery to continue beyond that time; there should be mechanisms for allocating losses after a clearing member default; there should be mechanisms for a CCP's book to be rebalanced; clearing participants bearing losses should retain claims on the CCP's future profitability; there should be mechanisms for allocating non-default losses. ISDA recommends that CCPs and their shareholders should bear at least some of these losses; and CCPs should have access to liquidity from central banks in recovery and resolution. ISDA's recommendations are intended to build on guidance produced by the FSB, the CPMI and IOSCO.


Joint Committee of ESAs report on risks and vulnerabilities in EU financial system: September 2017

On 21 September, the Joint Committee of ESAs published its September 2017 report (JC 2017 46) on risks and vulnerabilities in the EU financial system. The Joint Committee identifies the following as two of the main risks to the EU financial system: (i) Brexit. Uncertainties around the terms of the UK's withdrawal from the EU are seen as one of the main risks. The Joint Committee is concerned that if negotiations end in a disorderly fashion, it could cause disruptions to the legal framework for financial services and the continuity of financial contracts between parties in the EU and the UK. It goes on to state that as passport arrangements enabling the EU and UK-domiciled financial entities to operate in each other's jurisdictions will expire, business continuity planning is essential. Policy makers will have to make sure that the regulatory framework keeps up with the challenges arising from Brexit; and (ii) Rapid developments in FinTech. The rapid growth of FinTech is increasingly affecting the financial sector. The Joint Committee states that the ESAs are assessing the impact of FinTech on financial institutions' business models and their strategic response, as well as on supervision and regulation. They have identified data privacy issues, potential client discrimination, vulnerability to cybercrime and associated legal issues among key risks to consumers and financial institutions.

FSB and IMF second progress report on phase 2 of G20 data gaps initiative

On 21 September, the FSB published its second progress report on the implementation of the second phase of the G20 data gaps initiative (DGI-2), which it has produced jointly with the IMF. The report provides an update on the work undertaken since September 2016 to advance implementation of the 20 recommendations aimed at addressing the data gaps identified after the global financial crisis and promote the regular flow of timely and reliable statistics for policy use. The key messages set out in the report are that: (i) Substantial progress has been achieved during the first year of the DGI-2, despite challenges in the implementation of some recommendations; (ii) A new monitoring framework to help assess and track progress in implementing the 20 DGI-2 recommendations has been agreed with the G20 economies. A traffic light monitoring dashboard, included in the report, provides a concise overview of such progress. Country notes explain in more detail specific accomplishments and challenges in each jurisdiction; and (iii) If, as is intended, all DGI-2 recommendations are to be fully implemented by 2021, high-level political support is crucial to ensure that adequate resources are allocated to DGI-2 implementation and more complex work streams are thoroughly and timely addressed.

FCA and Hong Kong Insurance Authority enter into FinTech co-operation agreement

On 21 September, the FCA published a co-operation agreement (dated 12 September 2017) it has entered into with the Hong Kong Insurance Authority to provide a framework for co-operation on information sharing on FinTech innovation and referrals of innovative firms seeking to enter the other's market. The FCA entered into a similar co-operation agreement with the Securities and Futures Commission of Hong Kong in July 2017.

FSMA controllers regime – PRA webpage and FCA statement on entry into force of ESA guidelines on prudential assessment of acquisitions and increases of qualifying holdings

On 20 September, the PRA and FCA reminded firms that the guidelines issued by the Joint Committee of the ESAs on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector come into force on 1 October. Both regulators state that they have notified the ESAs that they will comply with the guidelines except for provisions relating to the identification of acquirers of indirect qualifying holdings. They also advise firms to continue to use the existing methodology as laid out in Part 12 of the FSMA to identify proposed and/or existing controllers.

EC legislative proposals for reform of financial supervision

On 20 September, the EC published legislative proposals that it has adopted for reforms to the European System of Financial Supervision that will give additional powers and responsibilities to the ESAs and the ESRB. These proposals are: Omnibus Regulation (COM(2017) 536); and Omnibus Directive (COM(2017) 537). The EP and the Council of the EU will now consider these proposals. In the communication, the EC invites them to agree on the proposals as a matter of urgency to ensure that they enter into force before the end of the current legislative term in 2019. The deadline for comments on the proposals is 15 November.

EC speech on financial services initiatives for 2017 and early 2018

On 15 September, the EC published a speech given on 14 September by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and CMU on technological innovation and global regulatory co-ordination. In the speech, Mr Dombrovskis set out details of a number of financial services initiatives on which the EC intends to take action before the end of 2017 or in early 2018: European System of Financial Supervision: the EC intends to improve the ESAs' tools to promote consistent supervision across the EU and to give ESMA powers to supervise directly certain firms. The EC will also propose reforms to the governance of the ESAs and the introduction of partial industry funding of the ESAs. FinTech: the EC intends to publish a FinTech Action Plan early in 2018. Mr Dombrovskis suggests that, as part of this work, the EC is considering issues relating to crowdfunding, peer-to-peer lending, privacy and cyber-security. Sustainable finance:  the EC intends to publish an action plan on sustainable and green finance early in 2018. EMIR equivalence decisions: Mr Dombrovskis sets out details of the EC’s work on equivalence decisions made under EMIR (that is, the Regulation on OTC derivative transactions, CCPs and TRs (Regulation 648/2012)) relating to the US. Banking reforms: The EC will publish proposals "in the coming weeks" on its work to complete the banking union and its work on risk-reduction and risk-sharing.