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Key Regulatory Topics: Weekly Update - 16 February 2018 - 22 February 2018

23 February 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 our eAlert: Import/export licenses post-Brexit

Please see our ‘Other’ section for an update from the EBA speech on banks' business model adaptation.

AFME FAQs on wholesale financial services contracts

On 19 February, AFME published a set of FAQs on how wholesale financial services contracts might be impacted by Brexit. The FAQs address operational impacts on clients of wholesale firms and are designed to assist clients in their own planning and timetabling of changes to be made as a result of changes in post-Brexit business structures. The FAQs do not consider the Brexit impact on loans booked in the banking book. They build on a September 2017 paper from AFME that highlighted the potential impact of Brexit on existing cross-border financial services contract.

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Equity capital raising: IOSCO consultation on conflicts of interest and associated conduct risks

On 21 February, IOSCO published a consultation on proposed guidance to help its members address conflicts of interest and associated conduct risks during the equity capital raising process, including in relation to the role of connected analysts, the role that connected research plays in investor education and price formation, and allocations of securities. The proposed guidance provides, briefly, that regulators should consider requiring firms to: (i) in the context of pitches to secure a mandate to manage an equities securities offering, take reasonable steps to prevent their analysts from coming under pressure to take a favourable view on the offering from the issuer's representatives; (ii) once an underwriting or placing mandate has been awarded, take reasonable steps to prevent a connected analyst's views and research on the equities securities offering from being improperly influenced and to ensure that the analyst remains objective; (iii) once an underwriting or placing mandate has been awarded, have appropriate controls to manage potential conflicts of interest and associated conduct risks arising from connected analysts performing an internal advisory role within the firm in the context of an equity securities offering; (iv) support the provision of a wide range of independent information to investors in a timely manner, where distribution of such information is permitted under local law; (v) maintain an allocation policy that sets out their approach for determining allocations and provides the issuer with an opportunity to express their preference during the process; and (vi) maintain records of the allocation decisions to demonstrate that any conflicts of interest are appropriately managed. Comments must be received by or on 4 April 2018.

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Financial Services and Markets Act 2000 (Benchmarks) (Amendment) Regulations 2018 published

On 20 February, the FSMA 2000 (Benchmarks) (Amendment) Regulations 2018 (SI 2018/204) (Amending Regulations) were published with an explanatory memorandum. The Amending Regulations make a required amendment to the transitional provision made by regulation 61 of the Benchmarks Regulations. The amendment is required because the transitional provision made by regulation 61 of the Benchmarks Regulation only applies to existing benchmark administrators in respect of benchmarks they were administering on or before 26th February 2016. The Amending Regulations were laid before Parliament on 21 February and come into force on 26 February. Subject to certain exceptions, the Benchmarks Regulations (as amended by the Amending Regulations) will then come into force on 27 February.

Read the Regulation here

Read the Explanatory memorandum here

FMIs – BoE annual report on supervision

On 20 February, the BoE published its annual report on the supervision of FMIs. The report sets out how the BoE has exercised its responsibilities for FMI supervision during the period 23 February 2017 to 20 February 2018. It outlines the BoE's role in supervising FMIs, sets out how it has worked to meet its financial stability objective through FMI supervision and reviews progress against the priorities discussed in the previous annual report.

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BSB further supporting guidance to help firms assess fitness and propriety of staff under certification regime

On 22 February, the BSB published supporting guidance to help firms identify and deal with risks and issues that may arise when they are assessing the F&P of their certified staff under the certification regime. The supporting guidance should be read in conjunction with the BSB's statement of good practice 1 on F&P assessment principles, which the BSB published in February 2017 alongside a first set of supporting guidance. The BSB refers to the newly published guidance as supporting guidance 2 and the first guidance as supporting guidance 1. Supporting guidance 2 is intended to provide firms and those assessing F&P with further information on the options available to them when deciding whether or not to issue a certificate following an F&P assessment. It focuses on principle 4 (establishing pass or fail criteria) and principle 5 (evidencing the F&P assessment) of statement of good practice 1. The guidance includes illustrative examples of the challenges that firms may encounter when assessing F&P, and how these could be addressed. The BSB explains that the examples are not intended to suggest that there is a single formula for reaching a decision; each firm's approach will depend on its own risk tolerances. The circumstances of F&P decisions will be different, and firms will need to exercise their own judgement as to which factors are relevant. The BSB hopes that firms will find the examples helpful in developing their own scenarios for use internally.

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Wolfsberg Group publish updated Correspondent Banking Due Diligence Questionnaire (CBDDQ) and related guidance material

On 22 February, the Wolfsberg Group, an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks, published an updated Correspondent Banking Due Diligence Questionnaire (CBDDQ) and related guidance material (Completion Guidance, FAQs and Glossary). The CBDDQ aims to set an enhanced and reasonable standard for cross-border and/or other higher risk Correspondent Banking Due Diligence, reducing to a minimum any additional data requirements. It is also the Group’s expectation that the Group members will begin to use the CBDDQ, in a phased approach, with all of their respondents. In the long term, it is the Group’s view that the adoption of a standardised, reasonable CBDDQ should engender a less arduous, and thereby inherently less costly, due diligence process for Correspondent Banks, which, as it beds down, should also allow for a standard which all financial institutions, and their supervisors, can work towards achieving. This should, in the end, support the objectives of the G20 and other supranational organisations towards a well supervised and more harmonised regulatory standard in the correspondent banking space, with longer term positive effects on de-risking, access to finance, the development of trade and financial inclusion.

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HMRC review of anti-money laundering compliance in the money service businesses sector

On 22 February, HMRC published a review of money service businesses, especially those businesses engaged in money transmission through networks of agents.

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Anti-corruption measures – AFET votes to adopt draft recommendation on cutting sources of terrorist income

On 21 February, the EP’s Foreign Affairs Committee (AFET) published a press release announcing it has voted to adopt a draft recommendation on cutting the sources of terrorist income. The draft recommendation (2017/2230(INI)), entitled "Cutting the sources of income for Jihadists: targeting the financing of terrorism", is addressed to the Council of the EU, the EC and the European External Action Service (EEAS). It is contained in a draft report (PE612.229v01-00), dated 23 October 2017. The EP is expected to debate and vote on the final text of the recommendation at its mini-plenary session on 1 March.

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Treasury Committee launches inquiry into digital currencies

On 22 February, the HoC Treasury Committee announced an inquiry into digital currencies (also known as cryptocurrencies or virtual currencies). The scope of the inquiry includes the following: (i) the role of digital currencies in the UK, including the opportunities and risks that they may bring to consumers, businesses and the government. In particular, the inquiry will consider whether digital currencies are ultimately capable of replacing traditional means of payment and to what extent they could disrupt the economy and the public sector; (ii) the potential impact of distributed ledger technology, such as blockchain, on financial institutions and financial infrastructure; and (iii) the regulatory response to digital currencies from the government, the FCA and the BoE, and how regulation could protect consumers and businesses without restricting innovation. In particular, the inquiry will assess whether the increased adoption of digital currencies would require amendments to any processes, such as AML measures. It will also look at whether the UK could learn any lessons from other jurisdictions.

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RegTech – FCA call for input on using technology to achieve smarter regulatory reporting

On 20 February, the FCA published a call for input on how technology can be used to make it easier for firms to meet their regulatory reporting requirements and improve the quality of the information they provide. The FCA regularly explore how technology can make regulation more efficient. One of the ways is through ‘TechSprints’ that bring together financial services providers, technology companies and subject matter experts to explore technological innovations. In November 2017, one of these events developed a ‘proof of concept ’which could potentially make it easier for firms to meet their regulatory reporting requirements and improve the quality of the information they provide. This Call for Input outlines the technical steps that developed this proof of concept and asks for views on how the process can be improved. The deadline for comments is 20 June. The FCA intends to publish a feedback statement in summer 2018, which will bring together the results of roundtable and further industry discussions, as well as feedback from the call for input.

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FCA and CFTC enter into FinTech co-operation agreement

On 19 February, the FCA published a press release announcing that it has signed an agreement with the US CFTC on FinTech innovation. The co-operation arrangement (also dated 19 February) focuses on information sharing on FinTech market trends and developments. It facilitates referrals of UK and US FinTech companies interested in entering the others’ market, and sharing information and insight derived from each regulator’s relevant sandbox (FCA Innovate and LabCFTC), proof of concept, or innovation competitions. The press release explains that the arrangement supports both regulators' efforts to facilitate responsible FinTech innovation and ensure international collaboration on emerging regulatory best practices. It follows the FCA publishing a new webpage about a global FinTech sandbox. Read more BCBS sets out sound practices on implications of FinTech for banks and bank supervisors On 19 February, the BCBS published a report (BCBS431) setting out sound practices on the implications of FinTech for banks and bank supervisors. In the report, the BCBS assesses how FinTech may affect the banking industry and the activities of supervisors in the near to medium term. It considers five future potential scenarios: the better bank, the new bank, the distributed bank, the relegated bank, and the disintermediated bank. In addition, the report contains six case studies focussing on specific innovations. Three of the case studies assess enabling technologies (Big Data, DLT and cloud computing), and three assess FinTech business models (innovative payment services, lending platforms and neo-banks). The BCBS notes that a common theme across the various scenarios is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.

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Investment consultants – CMA progress update on investment consultants market investigation

On 21 February, the CMA published a progress update and administrative timetable for 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 explains the work that the CMA has done to date and the next stages of its work, prior to the publication of its provisional decision report in July. The CMA has also published an updated administrative timetable for the market investigation.

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PRA prepares for IDD application delay by updating near-final policy statement on PRA Rulebook changes outlined in October 2017 occasional consultation

On 22 February, the PRA published an updated near-final policy statement (PS31/17) on changes to the PRA Rulebook, as outlined in chapters 7 and 8 of its October 2017 occasional consultation paper (CP18/17). PS31/17 was originally published by the PRA on 15 December 2017 and subsequently updated on 21 December 2017 to include the MIFID II Passporting Amendment Instrument 2017 (PRA 2017/43) as Appendix 5. On a related webpage, the PRA explains that PS31/17 has again been updated following the PRA's consultation (CP4/18) on amendments to the effective date of its rules relating to the IDD. The PRA has made the necessary changes for the implementation of the IDD, on the basis of 1 October being confirmed. Having consulted in CP4/18, the updated PS31/17 therefore confirms that the IDD-related rules made in PS31/17 will now apply from 1 October, although the IDD-related consequential amendment to Short Form A (consulted on in chapter 8 of CP18/17 and set out in PS31/17) will still apply from 23 February. Appendix 6 to the updated PS31/17 includes a new PRA Rulebook: CRR Firms, Non CRR Firms, Solvency II Firms, Non Solvency II Firms: MIFID II Passporting and IDD Consequential Amendments Commencement Instrument 2018 (PRA 2018/2), which was made on 20 February. The annexes to the instrument come into force on either 23 February or 1 October, as specified in commencement provisions E to J.

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GDPR – LMA guidance on information notice

On 16 February, the Lloyd's Market Association (LMA) published guidance relating to the General Data Protection Regulation ((EU) 2016/679) (GDPR). The "core uses information notice" is designed to explain to consumers the complexities of the market and how personal data may be processed by the various data controllers. The guidance sets out the background and explains how the notice should be used by insurance market participants. The core uses information notice has been developed by the cross-market GDPR focus group led by the LMA and will be reviewed quarterly. The guidance and the core uses information notice will be updated when the GDPR becomes applicable on 25 May.

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Investment Association position paper on use of "last look" in FX markets

On 22 February, the IA published a position paper on the use of "last look" in FX markets. The paper states that last look may have valid applications so as to protect market participants from taking on too much risk. Investors also note that not "last looking" is not necessarily an indication of good behaviour or quality of execution. However, concerns remain about the way in which last look is sometimes applied, particularly with regard to last look policy and process transparency, unacceptable practices, and data disclosures and timestamps. The IA's position paper, therefore, sets out recommendations for how these concerns may be best addressed by liquidity providers (LPs) and venues. These include that: (i) LPs should provide each client with a clear internal definition of last look and process of use on an annual basis and at any point where changes are made to the last look policy; and (ii) to help fair comparison, banks should make investors aware of the last look price tolerance of orders in their terms of business.

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MiFID II – CLLS letter to AIMA concerning outsourcing in relation to portfolio management services

On 21 February, the CLLS published a letter (dated 29 December 2017) from Karen Anderson, CLLS Regulatory Law Committee Chair, to Stephen Hanks, Manager, FCA Markets Policy Division, concerning outsourcing in relation to portfolio management services under MiFID II and MiFIR. The committee states it is grateful for Mr Hanks' confirmation that the EC Q&A on MiFID remains a continuing source of useful legal interpretation of the MiFID and MiFID II outsourcing provisions. On this basis, the committee agrees with the FCA that, when delegating the performance of a function, an investment firm should seek to ensure it is not in conflict with its obligations to act in the best interests of its relevant clients. The committee notes the FCA's view that, in applying this principle, and the provisions of Article 31 of the MiFID II Delegated Regulation ((EU) 2017/565) (which concerns the outsourcing of critical or important operational functions), to the new inducements framework for portfolio managers, a purposive reading of that framework is necessary. In the committee's view, the FCA is correct to say that "the firm will need to take steps to secure for its clients substantively equivalent outcomes".

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MiFID II – UK Finance member update on implementation

On 21 February, UK Finance published a summary of the progress made by its members on implementing MiFID II and MiFIR. UK Finance reports that the general consensus in the industry is that the implementation of MiFID II has been relatively smooth. The update summarises the feedback UK Finance has received from its members on certain key areas.

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Unregulated markets – CLLS response to FCA consultation on industry codes of conduct

On 21 February, the CLLS published the response (dated 9 February) of its Regulatory Law Committee to the FCA's consultation on industry codes of conduct relating to unregulated markets and activities (CP17/37). The CLLS is concerned that the FCA's proposals would present various risks to firms and does not agree that Principle 5 of the FCA's Principles for Businesses (which requires firms to observe proper standards of market conduct) should be extended to all unregulated activities.

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ECB speech on RTS on strong customer authentication and common and secure open standards of communication under PSD2

On 22 February, the ECB has published a speech by Yves Mersch, ECB executive board member, on the timely implementation by PSPs of the RTS on strong customer authentication and common and secure open standards of communication under PSD2. In the speech, Mr Mersch makes the following comments: (i) it is in the interest of PSPs and the retail payments market to implement the RTS and other related PSD2 requirements as soon as possible, well before they are obliged to do so; (ii) banks should work towards a single standardised dedicated interface to communicate with TPPs across Europe safely and efficiently; (iii) the few initiatives currently developing standardised specifications for APIs should join forces and agree on one common technical specification so that all European TPPs can base their systems on one or a few technical API standards. This would facilitate market entry, promote competition and avoid technical obstacles; (iv) TPPs should be authorised or registered as soon as possible and comply with all legal requirements at an early stage. They should test the access interfaces promptly and contribute constructively to the ongoing efforts to standardise them; and (v) the EC’s API Evaluation Group has started work to promote the uptake of standardised APIs and that the Euro Retail Payments Board's working group on PIS is expected to complete its work by June 2018.

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PSD2 – EC letter to EBA on RTS on strong customer authentication

On 16 February, the EC published a letter (dated 13 February) from Olivier Guersent, EC Director-General, DG FISMA, to Andrea Enria, EBA Chairman, relating to RTS on SCA and common and secure communication under the revised PSD2. In the letter, Mr Guersent states: (i) the EC’s amendments to the final version of the RTS took on board concerns expressed by the EBA and member state officials, and were explained on numerous occasions; (ii) it is not possible for the EBA or the EC to anticipate all possible problems with APIs and to specify in the RTS how these should be addressed. Therefore, both the EC and the EBA will have to rely on market players to develop APIs together that work for all sides (that is, banks, third party providers and payment service users); (iii) the best way the EC can help national supervisors is by supporting work by market participants, ensuring that they identify and solve problems themselves at an early stage. This will help spare national competent authorities the difficult task of investigating problems with APIs; (iv) the EC would welcome the EBA actively participating in the meetings of the group that will be evaluating API standards. Many of the issues that will be discussed in the group should also be taken up in the Q&A tool that the EBA envisages for PSD2 and the RTS; (v) the EC is confident that the resulting workload for national competent authorities relating to assessing corporate payment processes or systems, and whether they deliver security levels that are equivalent to those using SCA, will remain reasonable; and (vi) the differences between the EBA and the EC with regard to the RTS were about processes rather than anything else. Whether these processes become a burden for the EBA and the national competent authorities depends most of all on the behaviour of market players. The EBA, together with the EC and the ECB, should give them its full support.

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Cross border payments – CPMI report on cross-border retail payments

On 16 February, the CPMI published a report on retail payments that are sent from one national jurisdiction to another. The report explores the challenges affecting the cross-border retail payments market. It is based on a detailed analysis of the market and a survey of around 100 providers of cross-border retail payment services. The CPMI also held workshops with stakeholders from the supply and the demand sides of the market. The report concludes that more diversity in back-end clearing and settlement arrangements could result in quicker, cheaper and more transparent cross-border retail payments. This could include an improved traditional correspondent banking system, greater interoperability between domestic payment infrastructures and greater interoperability between closed-loop proprietary systems.

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New Council of EU Presidency compromise proposals on CRR II & CRD V

On 22 February, the Council of the EU published: (i) a second Presidency compromise proposal (6200/18) (dated 21 February) relating to the EC’s proposal to amend the CRR (known as CRR II); and (ii) a second Presidency compromise proposal (6201/18) (dated 20 February) relating to the EC’s proposal to amend the CRD IV (known as CRD V).

Read proposal 6200/18

Read proposal 6201/18


Prudential regulatory returns – FCA Dear CEO letter on quality of prudential regulatory returns

On 19 February, the FCA published a "Dear CEO" letter it has sent to IFPRU investment firms and BIPRU firms concerning the quality of prudential regulatory returns. In the letter, the FCA asks the CEOs to review their regulatory reporting practices because a "significant number" of firms submit regulatory returns that contain inaccurate or incomplete data (or both), hindering the use of the data within the returns. The FCA notes that, although these errors may appear minor in isolation, they can materially distort data that is aggregated and used to analyse a sector or a group of firms. CEOs of IFPRU investment firms and BIPRU firms should therefore review their firm's regulatory reporting practices to ensure they are fit for purpose, comply with the relevant reporting provisions and produce materially accurate data. With effect from 1 October, the FCA will review a sample of firms' returns. If it finds that firms continue to submit materially inaccurate, incomplete or poor quality data, it will consider taking further steps to improve the standards of returns.

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CRR – PRA consultation on amending supervisory statement on credit risk mitigation

On 16 February, the PRA published a consultation paper, Credit risk mitigation: eligibility of guarantees as unfunded credit protection (CP6/18), which sets out proposals to amend the PRA's supervisory statement on CRM (SS17/13). The consultation paper seeks to clarify expectations regarding the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the CRR. The proposals extend to any contract or other documented obligation that purports to be a guarantee for the purpose of achieving unfunded credit protection. The deadline for comments is 16 May.

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For further analysis, please see our client bulletin: PRA consultation paper published on eligibility requirements for guarantee CRM



BRRD II and SRM II – Council of EU Presidency compromise proposals

On 21 February, the Council of the EU published: (i) a second Presidency compromise proposal (6202/18) on the EC’s proposal for a Directive to amend the BRRD (proposed BRRD II Directive); and (ii) a second Presidency compromise proposal (6203/18) on the EC’s proposal for a Regulation to amend the SRM Regulation (proposed SRM II Regulation).

Read Presidency compromise proposal 6202/18

Read Presidency compromise proposal 6203/18



Government response to Independent Dormant Assets Commission report on extending existing dormant assets scheme

On 22 February, the government published its response to the Independent Dormant Assets Commission's report on extending the existing dormant assets scheme. In its response, among other things, the government: (i) agrees with the Commission that there is significant scope to expand the scheme to a wider range of asset classes; (ii) agrees that the core principles of the current scheme should be maintained; (iii) urges firms to focus initially on expanding the scheme to a wider range of cash assets and other assets whose value does not vary significantly because of market forces; (iv) encourages banks and building societies to transfer other banking products such as dormant cash ISAs, suspense accounts and foreign currency accounts into the scheme; (v) believes that there is substantial potential for dormant insurance and pension products to be included in the scheme and encourages insurance and pension firms to consider how their products could be included in an expanded scheme; and (vi) believes more can be done to improve the approaches taken to dormant assets across the investment and wealth management sectors and encourages firms to work together to improve tracing and reunification of dormant assets. It also encourages firms to consider whether any dormant investment and wealth management assets could be included in an expanded scheme.

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SME lending – HoC Treasury Select Committee publishes terms of reference for launching an inquiry

On 20 February, the HoC Treasury Select Committee published the terms of reference for its inquiry into the state of the SME finance market. The inquiry will consider the state of the SME finance market under the following themes: funding options available to SMEs; the ability of SMEs to resolve disputes and access fair and reasonable compensation when they borrow money; and the regulation of SME lending.

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Bank business models – EBA speech on banks' business model adaptation

On 20 February, the EBA published a speech by Adam Farkas, EBA Executive Director, on bank business models: structural changes and their systemic implications. In his speech, Mr Farkas considers the practical regulatory and supervisory aspects of the evolution of bank business models in Europe.

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Small Business, Enterprise and Employment Act 2015 (Consequential Amendments, Savings and Transitional Provisions) Regulations 2018 in force on 13 March 2018

On 20 February, the Small Business, Enterprise and Employment Act 2015 (Consequential Amendments, Savings and Transitional Provisions) Regulations 2018 (SI 2018/208) were published. These regulations reform how creditors' decisions are made in insolvency proceedings for financial institutions (by removing creditors' meetings as the default method) and allow creditors to opt out of receiving insolvency notifications. With important exceptions, they bring financial institution insolvency in line with the changes to decision making processes and creditor opt-out rights made more generally to insolvency procedures from 6 April 2017 by the Small Business, Enterprise and Employment Act 2015 and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024). However, these changes are not brought into effect for financial institutions which are not companies or partnerships, or in relation to financial institution special insolvency or administration regimes. In addition, the regulations continue the application more generally of the Insolvency Rules 1986 (SI 1986/1925) to banks, building societies and certain other types of institution. The Regulations come into force on 13 March 2018.

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