Key Regulatory Topics: Weekly Update - 8 December 2017 – 14 December 2017
17 December 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 RegulatoryChange@allenovery.com.
House of Commons Treasury Committee publishes report on transitional arrangements for exiting the EU
On 14 December, the House of Commons Treasury Committee published its report, Transitional arrangements for exiting the European Union. This report deals mainly with a point of process: how can the UK move from its position within the EU to its end-state relationship in a smooth and orderly way, particularly when that final relationship might not be fully agreed on 30 March 2019? The report includes the following conclusions: (i) the Committee considers it "very challenging" for the terms of the bespoke free trade agreement envisaged by the government to be fully agreed within the Article 50 process; (ii) the Committee sees two broad possible outcomes for UK-EU trade on 30 March 2019: a reversion to a trade relationship based on WTO commitments ("no deal"), or the preservation on a temporary basis of the status quo through a standstill transition. The Committee explains that the difference between these two outcomes is dramatic, and considers that it is overwhelmingly in the economic interests of both the UK and the EU to reach an agreement on a standstill transition; and (iii) in the Committee's view, reaching an agreement on transition is an urgent priority. The report notes that firms are starting to take action to prepare for a no deal scenario, and the Committee observes that this will gather momentum over time.
DExEU sets out UK position on ECB opinion on implementation of TLAC
On 11 December, the Department for Exiting the European Union (DExEU) published an explanatory memorandum on the ECBs November 2017 opinion on the ECs legislative proposals to implement the FSBs TLAC standard. The memorandum states that the government broadly welcomes the ECB's opinion, but highlights: (i) that it is important that the proposals do not impose constraints on the flexibility for the resolution authority to set an appropriate amount and quality of loss absorbing debt to support the resolution strategy; and (ii) how the government's views diverge from the ECB's opinion with respect to the new moratoria tools. The government continues to raise concerns that the economic impacts of an extended moratorium may be significant and risks undoing international progress to address the risk of cross-border termination of contracts in resolution. In addition, the government has raised significant concerns with proposals to include covered deposits in a moratorium. Given these concerns, the government has advocated removing new moratoria powers.
Brexit - IRSG report on the architecture for regulating finance
On 8 December, the International Regulatory Strategy Group (IRSG) published a report on the architecture for regulating finance after Brexit. The report, which builds on the IRSG's June 2017 report on the Great Repeal Bill, considers the impact of leaving the EU on the current UK regulatory and supervisory system for financial services. It addresses whether the checks and balances built into system are adequate for the UK after Brexit. In the report, the IRSG identifies five principles for assessing the effectiveness of the regulatory framework: (i) regulatory independence; (ii) regulatory accountability; (iii) coherence; (iv) flexibility; and (v) clear and appropriate regulatory objectives. It then discusses how withdrawal from the EU will change the UK regulatory architecture, and makes 14 recommendations aimed at keeping the UK's regulatory architecture aligned with those five regulatory principles.
DExEU sets out UK position on ECB opinion on proposed Regulation amending EMIR
On 8 December, the Department for Exiting the European Union (DExEU) published an explanatory memorandum on the ECBs October 2017 opinion on the proposed Regulation amending EMIR as regards the clearing obligation, the reporting requirements, the risk mitigation techniques for OTC derivative contracts not cleared by a CCP, the registration and supervision of trade repositories and the requirements for trade repositories Among other things, the memorandum states that the government: (i) fully supports the implementation of G20 commitments to increase the safety of OTC derivatives markets and welcomes the European Commission's proposal addressing deficiencies in EMIR and to ensure that businesses and end-users can access OTC derivatives markets to hedge risks to their business; (ii) will seek to ensure that the proposal remains consistent with international standards such as the principles for financial market infrastructure; (iii) considers it as a priority to make the regulatory regime for participants in OTC derivatives markets more proportionate, provided that this does not weaken financial stability. It therefore welcomes the proposal to extend an exemption for pension scheme arrangements from the central clearing obligation; and (iv) supports the objective of reducing the reporting burden on firms and making central clearing requirements more proportionate for corporate (non-financial) counterparties and small financial counterparties. It also welcomes the ECâs proposals to reduce reporting costs.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
FSB, BCBS, CPMI and IOSCO launch surveys on incentives to centrally clear OTC derivatives trades
On 14 December, the FSB, BCBS, CPMI and IOSCO published a press release announcing they have launched a number of surveys as part of their joint project to review the effects on incentives to centrally clear OTC derivatives trades, following the implementation of the G20 regulatory reforms. The project is being undertaken by the FSB-BCBS-CPMI-IOSCO Derivatives Assessment Team (DAT), which expects to complete a final report in late 2018. The surveys cover areas such as the effects of G20 reforms on derivatives markets, client clearing service provision, and other market structure issues and observations. Survey responses must be submitted by 26 January 2018. The responses received, together with other input analyses, will be used to evaluate the effects of reforms on incentives to centrally clear. The BCBS will also use responses to inform its own review of the impact of the Basel III leverage ratio on banks' provision of clearing services and any resulting impact on the resilience of central clearing. In addition, responses may be used by the CPMI and IOSCO Policy Standing Group in relation to potential future work projects.
ESMA updates Q&As on Benchmarks Regulation: December 2017
On 14 December, ESMA has published an updated version of its Q&As on the implementation of the BMR. The Q&As include two new answers on the following topics: (i) authorisation and registration: applicability of BMR requirements (see Q&A 6.1); and (ii) requirements for users: written plans for cessation or material changes of a benchmark (see Q&A 7.1).
ESMA updates Q&As on CSDR: December 2017
On 14 December, ESMA published an updated version (ESMA70-708036281-2) of its Q&As on the CSDR. The revised Q&As include updates on: (i) organisational requirements relating to membership of user committees of a securities settlement system operated by a CSD; and (ii) record keeping requirements in respect of settlement banks. New questions are marked as such in red. The Q&As are a tool used by ESMA to promote common supervisory approaches and practices in the application of the CSDR.
ESMA updates Q&As on EMIR implementation: December 2017
On 14 December, ESMA published an updated version of its Q&As (ESMA70-1861941480-52) on the implementation of EMIR. The updated Q&As include new answers relating to: (i) indirect clearing; (ii) reporting of collateral; (iii) swap reporting to trade repositories; and (iv) contracts with no maturity.
Council of EU publishes revised text of BRRD Insolvency Hierarchy Directive
On 14 December, the Council of the EU published a revised version (PE-CONS 57/1/17) (dated 12 December 2017) of the text of the proposed Directive amending BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy. The text has been revised to include the date of the Directive (that is, 12 December 2017) and to make other minor amendments. In particular Article 2(1) has been amended to set the deadline for member states to bring into force measures implementing the Directive as 12 months from the date of entry into force of the Directive. The next step for the Directive is publication in the OJ.
EBA amends ITS on benchmarking of internal approaches for 2018 benchmarking exercise
On 14 December, the EBA published a press release announcing that it has amended its proposed revisions to the ITS contained in Commission Implementing Regulation (EU) 2016/2070 for the purposes of the 2018 benchmarking exercise. The revised version of the ITS (dated 14 December 2017) are contained in a zip file that has been added to the EBA's dedicated webpage on RTS and ITS on benchmarking portfolios. The EBA states that the changes to the ITS are intended to eliminate inconsistencies in wording and facilitate harmonised data submissions in April 2018 and that they do not entail any change to the policy or legal content of the ITS. The EBA has agreed these changes with the European Commission in advance of the Commission's adoption of the ITS.
EBA produces standardised data templates for NPL transactions
On 14 December, the EBA published on its website standardised data templates for NPL transactions, together with a number of related documents. In a related press release, the EBA explains that the templates provide a common EU data set for screening, financial due diligence and valuation during NPL transactions. The templates provide data loan-by-loan (that is, at the most granular level), including information on counterparties related to the loan and the collateral provided. Bespoke parts of the templates capture national specificities. The templates aim to enhance the standardisation of NPL-related data, and reduce information asymmetries between potential buyers and sellers of NPL portfolios. They are designed to be used by banks, on a voluntary basis, as a market standard for NPL transactions, and also to form the foundation for NPL secondary markets initiatives. The EBA explains that the templates are not a supervisory reporting requirement. However, they are built on existing reporting, which should reduce implementation costs for banks.
HMT letter to HoL on proposed Regulation amending EMIR
On 12 December, HMT published a letter (dated 7 December) from Stephen Barclay, Economic Secretary to the Treasury, to Lord Boswell of Aynho, Chair of the HoL EU Committee, relating to the proposed Regulation amending EMIR as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories. The letter responds to a request from the Committee for further explanation from the government on aspects of the proposed Regulation. Mr Barclay explains that the Council of the EU working group discussions on the proposed Regulation have progressed quickly. The Estonian Council Presidency is looking for member state agreement on a Council general approach by the end of the year. The government's priority in these discussions is to ensure that any revised text continues to promote financial stability both within the EU and globally, while also ensuring that EMIR is proportionate, in particular to non-systemic market participants.
FCA consults on approach to transitioning firms and individuals to SM&CR
On 13 December, the FCA published three consultation papers setting out a package of proposals on how firms and individuals will transition from the approved persons regime to the SM&CR (CP17/40, CP17/41 and CP17/42). Given the differences in the size and nature of firms covered by the extended SM&CR, the FCA is proposing proportionate approaches for different types of firm. The FCA is also consulting on guidance on the duty of responsibility for FCA solo-regulated firms and insurers. Currently, the duty of responsibility only applies to senior managers of banks. The deadlines for comments on the proposals is 21 February 2018. The FCA intends to publish its final rules, including its final approach to transition and conversion, in a policy statement in summer 2018. For the purpose of the draft rules that form part of CP17/40 and CP17/41, the FCA assumed that the rules will apply to insurers in late 2018 and to FCA solo-regulated firms in mid-to-late 2019. However, the date for implementing the new regime will be announced and set by HM Treasury in due course.
SM&CR â€“ PRA consultation on implementing extension of SM&CR to insurers
On 13 December, the PRA published a consultation paper on implementing the extension of the SM&CR regime to insurers (CP28/17). In CP28/17, the PRA sets out proposed changes to forms and other consequential amendments related to the extension of the SM&CR to insurers. These include proposals rationalising the existing SM&CR and senior insurance managers regime (SIMR) forms. The PRA proposes a streamlined set of forms for both banks and insurers that do not distinguish between firm types, reducing the number of forms from 26 to 11. The PRA has renumbered certain senior management functions (SMFs) and also plans to integrate the prescribed responsibilities (PRs) of the existing banking SM&CR and SIMR, while respecting the differences between banks and insurers. There will be no changes to the text of the PRs in the Rulebook. The integration of the PRs is purely for the purposes of preparing a form applicable to both banks and insurers. CP28/17 also includes proposals implementing the extension of the SM&CR to insurers, including transitional arrangements, as well as proposals setting out the process for transferring from an SMF at an insurer to a bank. The deadline for comments is 21 February 2018.
Second FCA consultation on persistent debt and earlier intervention
On 14 December, the FCA published its second consultation paper on persistent debt and earlier intervention remedies (CP17/43). In a related press release, the FCA described CP17/43 as an "updated" consultation on provisions to help customers in persistent credit card debt. CP17/43 follows the FCA's April 2017 consultation paper (CP17/10), which set out proposals for new rules and guidance to address the issues identified in the light of responses received; the FCA has made some changes to its proposals on persistent debt, to more clearly reflect the policy intention set out in CP17/10. The changes proposed include the following: (i) the FCA clarified guidance on the content of communications to customers at 18, 27 and 36 months to make it clear that the rules do not specify the form of words firms must use; (ii) the requirement for firms to warn customers in their communications that card suspension may be reported to CRAs has been replaced with a provision that firms make customers aware of the potential implications of continuing with low repayments; (iii) the introduction of additional guidance that, while the FCA expects three to four years to be a reasonable timeframe to repay for customers reaching the 36 month intervention point, a slightly longer period may be reasonable. However, this is only in exceptional circumstances where this results in no additional cost to the customer; and (iv) the FCA plans to give firms a six-month implementation period, so they can amend their contracts to reflect the new persistent debt interventions, and provide any necessary advance notices to customers. An additional three months over what was previously proposed may also give firms an opportunity to phase implementation. The FCA decided not to extend the proposed implementation period to 12 or 18 months, as some firms suggested, as this would significantly delay help to customers already in persistent debt. The deadline for comments on CP17/43 is 25 January 2018.
Current accounts services - FCA policy statement and final rules
On 12 December, the FCA published a policy statement on information about current account services, setting out feedback on CP17/24 and final rules (PS17/26). PS17/26 is of interest to firms that accept deposits (for example, banks and building societies) and provide payment accounts as defined by the Payment Account Regulations (SI 2015/2038). It affects the majority of current and potential participants in the personal current account and business current account markets. It also affects organisations that offer comparison services. The FCA reports that, in general, respondents welcomed the proposed changes. However, a few respondents raised concerns about the areas of service proposed. PS17/26 summarises the feedback received, sets out the FCA's response and indicates where it has adjusted the final rules to take respondents' views into account. The final rules will come into effect on 15 August 2018. On this date, providers will need to publish standing data related to account opening and service availability and major incident metrics. Firms will not need to publish metrics related to account opening and debit card replacement until 15 February 2019. However, they will need to start recording and measuring the time taken to open accounts and to replace a debit card from 1 October 2018.
MLD4 - EC adopts further Delegated Regulation amending list of high-risk third countries
On 13 December, the EC adopted a Delegated Regulation amending the list of high-risk third countries set out in Delegated Regulation (EU) 2016/1675, which supplements the MLD4. The next step will be for the Council and the Parliament to consider the amending Delegated Regulation. If neither objects to the amending Delegated Regulation, it will be published in the OJ. It will enter into force 20 days after its publication in the OJ and will apply from that date.
UK Finance reports on initial success of Banking Protocol fraud prevention scheme
On 13 December, UK Finance published a press release reporting on the success, to date, of the Banking Protocol fraud prevention scheme. The Banking Protocol is a partnership between the finance industry, police and Trading Standards. It aims to identify and protect potential fraud victims when they visit a bank or building society branch. The scheme was launched in October 2016 with a pilot scheme in London, ahead of a national rollout that commenced in May 2017. The scheme is now in place in 43 police forces across the UK, with all remaining forces committed to introducing it. Under the scheme, bank and building society branch staff contact the police and Trading Standards if they suspect a customer is in the process of being defrauded, with an immediate priority response to the branch. According to figures from UK Finance, since launch, the scheme has: prevented Â£9.1 million of fraud, with individual customers protected from losing sums ranging from Â£99 to Â£212,000; and led to 101 arrests nationally (to date, police have responded to a total of 1,262 calls under the scheme).
UK Governments plans for a national economic crime centre
On 11 December, Home Secretary Amber Rudd announced plans to tackle economic crime to help stop criminal gangs exploiting the vulnerable and profiting from fraud, money laundering and corruption. A new national economic crime centre within the National Crime Agency (NCA) will task and coordinate the national response to economic crime, backed by greater intelligence and analytical capabilities. It will draw on expertise from across government, law enforcement and criminal justice agencies, as well as new resources provided by the private sector. To further improve the coordination of the law enforcement response, new legislation will allow the NCA to directly task the Serious Fraud Office (SFO) to investigate the worst offenders. The SFO will continue to act as an independent organisation, supporting the multi-agency response led by the NCA.
European Parliament Committee adopts report on new EU-wide penalties for money laundering
On 11 December, the Civil Liberties Committee of the EP adopted its Report on a draft Directive tackling money laundering and narrowing the scope of organised crime. The proposal, put forward by the EC in December 2016, is part of a larger legislative package aimed at fighting terrorism financing as well as other forms of organised crime. The proposal set minimum rules for the making of money laundering a crime across the EU, and introduced EU-wide definitions of money laundering related crimes, including practices that are not currently deemed a crime in all EU countries, such as "self-laundering", where a person who has committed a crime tries to hide the illicit origin of those proceeds. It also sought an EU-wide minimum term of imprisonment of at least two years in cases with aggravating factors, such as organised crimeCSDR. The aim of these measures is to step up co-operation between member states, as the lack of uniform definitions and penalties currently allows criminals to exploit these differences and commit crimes where penalties are lowest. MEPs added a range of new EU-wide penalties for those convicted of money laundering, as compared to the ECs proposal. These include: (i) barring those convicted from running for public office or holding a position of public servant, banning businesses and other legal persons from signing contracts with public authorities, and confiscating property and other assets.
HM Government publishes UK anti-corruption strategy 2017-22
On 11 December, HM Government published its UK Anti-Corruption Strategy 2017-22, which seeks to provide a framework to guide UK government anti-corruption policies and actions, as well as focusing on economic crime. The strategy covers a number of different areas, touching on bribery and corruption, money laundering, law enforcement, and guidance for both the public and private sectors and overseas. The key developments focus on increased co-operation, both between various law enforcement agencies and the public and private sectors.
ISPVs - FCA final statement and Handbook instrument on new regulatory framework
On 13 December, the FCA published final versions of: (i) an FCA statement on authorising and supervising ISPVs (dated December 2017); and (ii) The Risk Transformation Regulations 2017 (Consequential Amendments) Instrument 2017 (FCA 2017/81/FOS 2017/8). In the statement the FCA sets out its approach and expectations when authorising ISPVs in line with the FCAs objectives and Threshold Conditions.
Regulations on tax treatment of insurance linked securities made
On 12 December, regulations were made introducing a new regime for the taxation of ILSs. The regulations are in the same form as the last draft. The regulations come into force on 15 December (three days after they were made) and have effect: (i) for corporation tax purposes, for accounting periods beginning on or after that date; and (ii) for income tax purposes, for payments made on or after that date. The overarching aim of the government's actions in this area is to attract ILS activity to the UK, developing the UK's position as a major global hub for specialist insurance and reinsurance. The regulations are also intended to make the tax treatment of insurance special purpose vehicles consistent with that of other investment vehicles, taxing investors as if they had invested in the underlying assets directly, and to provide rules that are simpler than those currently existing. However, the conditions for application of the rules are intended to preclude and deter attempts at avoidance.
Solvency II - PRA consultation on model change process
On 12 December, the PRA published a consultation paper (CP27/17) proposing updates to its guidance on the model change process under the Solvency II model change policies and reporting of minor model changes. In CP27/17, the PRA proposes to: (i) update its supervisory statement (SS12/16) on changes to internal models used by UK insurance firms to introduce an additional annual reset of minor model change accumulations for minor model change accumulations; (ii) clarify its expectation relating to the scope of firms' model change policies by updating its supervisory statement (SS17/16) on Solvency II: internal models' assessment, model change and the role of non-executive directors; and (iii) update SS17/16 to make changes to the requirements on minor model change reporting. The deadline for comments is 20 March 2018.
EIOPA opinion on monetary incentives and remuneration between providers of asset management services and insurance undertakings
On 11 December, EIOPA published an opinion on monetary incentives and remuneration between providers of asset management services and insurers (EIOPA-BoS-17/295). The opinion is addressed to NCAs. EIOPA is concerned about insurance undertakings choosing underlying investment vehicles of unit-linked policies on the basis of those that provide the highest level of monetary incentives and remuneration to insurance undertakings. EIOPA found this type of monetary practice to be widespread and significant in its April 2017 report on the topic.
EIOPA template for IPID
On 11 December, EIOPA published an editable template for the insurance product information document (IPID). The IPID will have to accompany all non-life insurance policies from February 2018. The new rules will provide consumers with all of the information they need to make informed decisions when buying non-life insurance products such as car, travel or house insurance.
IAIS consults on activities-based approach to mitigating systemic risk in insurance sector
On 8 December, the IAIS published an interim consultation paper on the development of an activities-based approach (ABA) to mitigating systemic risk in the insurance sector. The interim consultation paper is designed to give stakeholders an opportunity, at an early stage, to input into development of the ABA and the structure of work that will follow. The approach that the IAIS intends to adopt to derive ABA policy measures is set out in section IV of the paper. Subsequent sections describe the key steps of the approach, which include identifying potentially systemic activities, considering existing policy measures within the IAIS' policy framework, and the process for assessing the residual risks or supervisory aspects that may warrant additional policy measures. The IAIS also notes that the application of an ABA will necessarily require the use of proportionality, as well as consideration of costs and benefits. This could lead to the application of materiality thresholds or other restrictions of the scope of application, where appropriate. Comments can be made on the interim consultation paper until 15 February 2018. The IAIS also plans to hold a public background call, to discuss the interim consultation paper, on 19 December.
PRA updates supervisory statement and makes final rules on authorisation and supervision of ISPVs
On 8 December, the PRA published an updated version of its supervisory statement on authorisation and supervision of ISPVs (SS8/17). ISPVs will issue insurance linked securities (ILS), which are financial instruments whose value is linked to an insurable loss event. ILS allow insurers and reinsurers to transfer risk to the capital markets, enabling that risk to be managed more effectively for businesses and consumers.
ESMA updates Q&As on MiFID II and MiFIR post trading issues: December 2017
On 14 December, ESMA published an updated version (ESMA70-151-957) of its Q&As on post trading issues under MiFID II and MIFIR. The updated version includes a new answer relating to the segregation level for indirect clearing accounts.
EC Implementing Decisions recognising certain third-country equities markets under MiFID II published in OJ
On 14 December, the following Implementing Decisions on the equivalence of the legal and supervisory frameworks of certain third countries, in accordance with Article 25(4)(a) of MiFID II, were published in the OJ: (i) European Commission Implementing Decision ((EU) 2017/2318) on the equivalence of the legal and supervisory framework in Australia applicable to financial markets in accordance with MiFID II; (ii) European Commission Implementing Decision ((EU) 2017/2319) on the equivalence of the legal and supervisory framework applicable to recognised exchange companies in the Hong Kong Special Administrative Region in accordance with MiFID II; and (iii) European Commission Implementing Decision ((EU) 2017/2320) on the equivalence of the legal and supervisory framework of the United States of America for national securities exchanges and alternative trading systems in accordance with MiFID II. The Implementing Decisions deem the legal and supervisory frameworks of Australia, Hong Kong and the US applicable to the markets specified in each of the Decisions to be equivalent to the EU's frameworks for the purposes of Article 25(4)(a) of MiFID II. The Commission adopted the Implementing Decisions on 13 December and they come into force on 15 December.
UK Finance guidelines on implementing MiFID II product governance and retail costs and charges requirements
On 14 December, UK Finance published four sets of guidelines designed to help firms implement some of the key requirements under MiFID II on product governance and retail costs and charges: (i) MiFID II product governance: guidelines on target market identification; (ii) MiFID II product governance: guidelines on information exchange between manufacturers and distributors; (iii) MiFID II product governance: standard responsibilities annex; and (iv) MiFID II retail costs and charges: guideline Q&As. UK Finance explains that the guidelines represent the views of members of its working groups, and have not been approved by any regulator. It intends to keep the guidelines under review, and to amend them where appropriate (for example, in the light of regulatory developments or member feedback).
MiFID II product governance: guidelines on information exchange between manufacturers and distributors
Final versions of FOS instruments amending voluntary jurisdiction to reflect MiFID II and new RAO regulated advice definition
On 13 December, final versions of two FOS instruments amending its voluntary jurisdiction were published on the FCA Handbook website: (i) the Dispute Resolution: MiFID 2 Complaints (Voluntary Jurisdiction) (Financial Ombudsman Service) Instrument 2017 (FOS 2017/6). This instrument comes into force on 3 January 2018; and (ii) the Advising On Investments (Article 53(1) of the Regulated Activities Order) (Consequential Amendments) (Financial Ombudsman Service) Instrument 2017 (FOS 2017/7). This instrument comes into force on 3 January 2018, immediately after FOS 2017/6.
MiFID II and MiFIR - FSMA (Markets in Financial Instruments) (No 2) Regulations 2017 published
On 13 December, the FSMA (Markets in Financial Instruments) (No 2) Regulations 2017 (SI 2017/1255) were published. The Regulations were made on 12 December and laid before Parliament on 13 December. They are the final piece of UK legislation required to complete the implementation of MiFID II and MiFIR.
MiFID II - Delegated Regulation amending systematic internaliser definition published in OJ
On 13 December, Delegated Regulation (EU) 2017/2294 amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers for the purposes of MiFID II was published in the OJ. The Delegated Regulation enters into force the day after its publication in the OJ (that is, 14 December). It will apply from 3 January 2018.
MiFID II - FCA "Dear CEO" letter on payment for order flow
On 13 December, the FCA published a "Dear CEO" letter on payment for order flow (PFOF). The FCA's view is that the practice of brokers demanding payments from counterparties as a condition for conducting client business with them substantially undermines a broker's ability to act as a good agent. In the letter, the FCA reiterates that firms continuing to charge PFOF will breach the new requirements under MiFID II and MiFiR. The FCA reminds firms that they must take action now to ensure compliance. It also warns against any attempted models that seek to avoid these new rules. This will be a priority area of FCA supervisory focus after January 2018.
MiFID II - ESMA update on MiFID II registers
On 8 December, ESMA published a press release confirming that it will provide updated registers information in line with MiFID II and MiFIR. A launch on 3 January 2018 will update existing registers and provide for new registers under MiFID II. However, a new register release will not be fully available because of IT functionality until later in Q1 2018. As an interim solution, ESMA will publish registers information on a fortnightly basis.
FCA policy statement on FAMR implementation Part II and further consultation on retiring finalised guidance FG14/1 and FG12/15
On 8 December, the FCA published a policy statement (PS17/25) on the second part of its implementation of the recommendations made by the, FAMR final report. The policy statement includes a further consultation on retiring the finalised guidance on inducements and conflicts of interest (FG14/1) and on independent and restricted advice (FG12/15). The proposed changes that will take effect from 3 January 2018.
PSR statement on proposals to improve switching of Facilities Management providers
On 13 December, the PSR announced its decision (PS17/3) on its consultation on proposals to change the direct debit rules relating to the switching of Facilities Management providers. The PSR has now decided to use its powers under section 54 of FSBRA (and not section 55 as consulted upon) to give a direction to the operator of the Bacs payment system (BPSL) to ensure that commercial FM service providers that wish to do so can use the Bacs bulk change process to help clients who wish to switch to/from another provider and to submit for approval a plan and timetable to achieve that outcome through the approach already engaged in by BPSL. This approach involves: (i) amending the definition of 'FM provider' in the Direct Debit rules; (ii) introducing a rule requiring commercial FM providers to become accredited by BPSL under a new accreditation scheme; and (iii) including within the new accreditation scheme a requirement for FM providers to support customers who want to change provider, by using the Bacs bulk change process unless certain exemptions apply.
PSD2 - EBA final report on draft RTS and ITS on EBA electronic central register
On 13 December, the EBA published its final report (EBA/RTS/2017/10, EBA/ITS/2017/07) on draft RTS and ITS relating to the establishment of the EBA electronic central register under the revised PSD2. The final draft RTS and ITS will be submitted to the EC for adoption. Following the submission, the RTS will be subject to scrutiny by the EP and the Council of the EU before being published in the OJ. The EBA are only able to develop the register after the draft RTS and ITS have been adopted. Therefore, the EBA will not be able to have it in place by 13 January 2018 (which is the date of the application of PSD2). It will be in place later on in 2018.
PSD2 - FCA updates webpages on PSD2 passporting gateway
On 13 December, the FCA updated the following webpages relating to the revised PSD2: (i) passporting under PSD2 webpage; (ii) passporting webpage; (iii) how to process passporting notifications webpage; and (iv) notify changes to PSD individuals and agents webpage.
PSD2 - EBA final report on guidelines on security measures for operational and security risks
On 12 December, the EBA published its final report (EBA/GL/2017/17) on guidelines on the security measures for operational and security risks under the revised PSD2. The guidelines aim to ensure that PSPs have in place appropriate security measures to mitigate operational and security risks. The guidelines apply from 13 January 2018. The EBA acknowledges that PSPs will require time to implement the guidelines. As a result, PSPs are not expected to comply with the guidelines until the EBA has published translations of the guidelines in all official EU languages, issued the compliance table, and the competent authorities have implemented the guidelines into their national regulatory or supervisory frameworks.
PSD2 - EBA final report and RTS relating to central contact point under PSD2
On 11 December, the EBA published a final report containing draft RTS on central contact points under the revised PSD2. The draft RTS will be submitted to the EC for endorsement, following which they will be subject to scrutiny by the EP and the Council of the EU. They will then be published in the OJ and enter into force twenty days later.
Pensions Ombudsman agrees updated memorandum of understanding with FOS
The Pensions Ombudsman and the FOS have agreed an updated version of their MoU to clarify the remit of both organisations so that consumers are directed to the correct complaints body, to deal with their case in the most efficient way. The updated MoU is contained in an explanatory leaflet on the Pensions Ombudsman's website, which sets out the roles and capacity of each organisation. Both organisations have jurisdiction over certain areas of pension matters, with some overlap. Broadly, the Pensions Ombudsman will handle complaints concerning the administration and/or management of both occupational and personal pension schemes. The FOS will investigate complaints about pension advice, as well as administrative complaints regarding personal and group pension schemes. Even with this clarification, there is an obvious area of overlap regarding personal pensions, which may include complaints regarding SIPPs. Meanwhile, the FCA published its 19th quarterly consultation paper (CP17/39), which sets out proposals to amend the FCA Handbook with regard to how authorised firms signpost the services of the Pensions Ombudsman and the FOS to consumers. The consultation launched on 1 December and will close on 1 February 2018, with any changes due to take effect on 1 April 2018.
FCA update on financial advice and pension transfers
On 11 December, the FCA published a statement about its work on financial advice given to members of the British Steel Pension Scheme (BSPS). The BSPS is being restructured and this has prompted many members to consider if they should transfer out of a DB scheme to a personal pension scheme. The statement also explains that the FCA has re-issued its advice to consumers about pensions and that it is continuing its planned work on DB transfer advice.
CRR - EC Delegated Regulation on RTS on disclosure of encumbered and unencumbered assets published in OJ
On 13 December, EC Delegated Regulation (EU) 2017/2295 supplementing the CRR with regard to RTS for the disclosure of encumbered and unencumbered assets was published in the OJ. The Delegated Regulation comes into force 20 days after publication in the OJ (that is, 2 January 2018). Article 2 will apply from 2 January 2019.
Pillar 2A - PRA policy statement on capital requirements and disclosure
On 12 December, the PRA published a policy statement on Pillar 2A requirements and disclosure (PS30/17). The PRA sets Pillar 2A capital for risks that are not captured, or not fully captured, under CRR. Through PS30/17, it adjusts the Pillar 2A capital framework to set a clear market-wide expectation and provide a greater level of clarity, transparency and consistency. The PRA consulted on the changes in July. As a result of the feedback received from the consultation, the PRA made a minor change from the draft SS31/5 to the total capital requirement (TCR) disclosure expectation for sub-consolidated ring-fenced bodies (RFBs). The change clarifies that the disclosure expectation for RFBs applies only at a sub-consolidated group level, where one has been set up, and not at subsidiary or individual (solo) level. The PRA has also made further minor corrections to the SS and SoP to reflect the change of terminology from individual capital guidance to TCR, and minor linguistic corrections. The changes will take effect from 1 January 2018. However, the PRA clarifies in PS30/17 that the disclosure expectation for RFB sub-group TCR will not take effect until 1 January 2019, aligning it with the implementation of the ring-fencing regime as a whole.
MREL - PRA updates supervisory statement on own funds and eligible liabilities
On 11 December, the PRA published an updated version of its supervisory statement on the MREL (SS16/16). SS16/16 is aimed at banks, building societies and PRA designated investment firms. It was published in December 2016 to set out the PRA's expectations on the relationship between MREL and both capital and leverage ratio buffers. It also explains the implications that a breach of MREL would have for the PRA's consideration of whether a firm is failing, or likely to fail, to satisfy the threshold conditions. The PRA's proposed clarifications concerned its expectations regarding: (i) the amount of core equity tier one capital (CET1) that firms should not count simultaneously towards buffer requirements and MREL (that is, an amount equal to the size of the usable buffer derived from the two going-concern regimes); and (ii) the consequences of not maintaining sufficient CET1 to meet both the usable buffer requirement and MREL.
RECOVERY AND RESOLUTION
Please see our Brexit section for details of the Government's explanatory memorandum on the ECBs November 2017 opinion regarding the implementation of TLAC and the new moratoria tools.
Recovery and resolution plans - PRA policy statement
On 11 December, the PRA published a policy statement on recovery planning (PS29/17), together with a supervisory statement on recovery planning (SS9/17) and an updated supervisory statement on ring-fenced bodies (RFBs) (SS8/16). PS29/17 is relevant to UK banks, building societies, PRA-designated investment firms and qualifying parent undertakings to which the Recovery Planning Part of the PRA Rulebook applies. In PS29/17, the PRA provided feedback on responses to its June consultation paper on recovery planning (CP9/17). Respondents were broadly supportive of the PRA's proposals, but raised a number of specific issues and questions on the details of the draft version of SS9/17 on which the PRA consulted in CP9/17. These issues, and the PRA's response, are outlined in chapter 2 of PS29/17. The PRA also set out in PS29/17 its final expectations on the content of recovery plans (meaning both recovery plans and group recovery plans) and the approach to recovery planning for groups containing an RFB.
PRA policy statement on changes to PRA and FSCS fees and levies for insurers and designated investment firms
On 8 December, the PRA published a policy statement on fees and levies: model transaction fees, fees and FSCS levies for insurers, and fees for designated investment firms (PS28/17). PS28/17 sets out the final rules designed to: (i) introduce a new approach for determining periodic fees for designated investment firms in the A10 fee block, and a new approach for determining periodic fees for general insurers and life insurers in the A3 and A4 fee blocks respectively; (ii) introduce a new approach for determining FSCS levies for insurance firms falling within FSCS levy classes B1 (general insurance) and C1 (life and pensions); (iii) amend an error in the rules concerning the criteria for determining model application fees under the CRR; (iv) change the criteria for determining model application fees for designated investment firms and insurers; and (v) introduce a model maintenance fee for firms with models under the CRR or Solvency II. In response to comments received to CP16/17, the PRA has made a small number of changes from the proposals it consulted on. These are explained in paragraph 1.7 of PS28/17. Generally, the PRA does not consider that the changes will have a significant impact on the relevant firms. The PRA has also separately published the instruments making the rule changes outlined above (the texts of which are set out in Appendices to PS28/17).
Law Commission 13th programme of law reform: financial services aspects
On 14 December, the Law Commission published a report setting out its 13th programme of law reform, which will run from 13 December. Projects discussed that may be of interest to financial services practitioners include: (i) Intermediated securities (see paragraphs 2.17 - 22) - the Law Commission explains that shares and bonds are increasingly held through a system of "dematerialisation" and "intermediation". In other words, paper certificates have been replaced by a system in which most investors "own" securities in the form of computerised credit entries through a chain of intermediaries (such as brokers and banks); and (ii) Anti-money laundering (see paragraphs 3.2 - 4) - this is one of two Ministerial references the Law Commission has received from the Home Office (the other is confiscation under the Proceeds of Crime Act 2002 (POCA)). The project will include consideration of the consent regime in sections 327 to 329 and 335 and 338 of Part 7 of POCA, and the disclosure offences in sections 330 to 333A of POCA, which raise related problems. The project aims to optimise the detection of anti-money laundering through effective reporting and to minimise the adverse impact of the current regime on the businesses and institutions. It will commence in December 2017 with an expected duration of 12 months.
FOS consultation on plans and budget for 2018/19
On 13 December, the FOS published a consultation on its proposed plans and budget for 2018/19. The consultation contains updated figures on the problems consumers have been raising with the FOS in the current 2017/18 financial year. Points of interest for the consultation include: the FOS is likely to receive and resolve 7,000 more complaints that it had originally anticipated, with the exception of packaged bank account complaints, which have fallen more quickly than anticipated (the FOS now expects to receive around 2,500 fewer complaints in this area); the implementation of the revised PSD2 in the UK, from 13 January 2018, will mean businesses have to resolve certain types of complaints within 15 days, rather than the current eight weeks; since the FCA's Plevin rules and guidance came into effect in August and its PPI awareness campaign was launched, the FOS has seen an increase in consumers getting in touch regarding PPI; and the FOS has received 4,500 more complaints concerning short-term lending (that is, payday loans and instalment loans) than previously forecast. Overall, the FOS expects to receive and resolve 410,000 new complaints, including 250,000 PPI complaints and 20,000 short-term lending complaints, but it anticipates there will be a further decline in complaints about packaged bank accounts. The FOS also proposes to freeze the case fee at Â£550 for the sixth consecutive year, with 25 "free" cases. The deadline for comments is 31 January 20118.
EC speech on action plan for green finance
On 12 December, the EC published a speech given by Vice President Valdis Dombrovskis, European Commissioner for CMU, which includes an announcement that the EC will present an action plan to promote green finance on 22 March 2018, at high-level conference on the role of financial services in the transition to a sustainable economy.
Cyber security - GFMA key principles for cybersecurity penetration testing framework
On 12 December, GFMA published a set of principles to guide the development of a commonly accepted framework for cybersecurity penetration testing. GFMA explains that penetration testing allows firms to evaluate their systems and the controls to identify and remedy vulnerabilities, thereby strengthening their infrastructure against cyber threats. Since regulators are showing increased interest in penetration testing and other operational assessment, GFMA believes that firms are faced with an increasing regulatory demand for technical insights into how they protect their customers' data, infrastructure and the results of tests they have carried out. The increased use of penetration tests puts pressure on firms' resources and may cause risk to both them and their clients if the results become public or are inadvertently disclosed or stolen. GFMA believes that regulators need to be confident that the industry is meeting its regulatory requirements through transparency in all phases, and the industry needs a flexible framework to perform realistic and rigorous penetration tests in a meaningful and efficient manner.
FCA consults on mission documents setting out its approach to authorisation and competition
On 11 December, the FCA published two mission documents setting out its approach to authorisation and its approach to competition. Both documents include a number of questions and are open for consultation until 12 March 2018. Final approach documents are due to be published in summer 2018.