Key Regulatory Topics: Weekly Update - 8 September 2017 – 14 September 2017
15 September 2017
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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.
Treasury Committee letter to Chancellor on impact of Brexit on insurance contracts
On 14 September, the UK Parliament published a letter from Nicky Morgan, Chair of the House of Commons Treasury Committee, to Philip Hammond, Chancellor of the Exchequer, on the impact of Brexit on cross-border insurance contracts. Ms Morgan refers to insurance contracts sold under passporting arrangements with a duration that extends beyond 29 March 2019. She explains that if insurers were to lose their legal right to service these contracts they would have to terminate the contracts or be in breach of the law. Although they could establish a subsidiary elsewhere in the EEA, and use the provisions of Part VII of the FSMA to transfer the contracts to the new entity, this would be costly and there may not be enough time to do so. She asks the Chancellor to answer cross-border insurance questions by 21 September.
Insurance Europe Brexit position paper on grandfathering of existing contracts
On 11 September, Insurance Europe published a position paper on the grandfathering of existing insurance contracts to protect customers following Brexit. In the paper, Insurance Europe warns that, once passporting rights between the EU and the UK cease after Brexit, (re)insurers that do business on a passporting basis will no longer be able to service existing contracts without breaching national law in host countries where a licence is required. This means that, unless alternative arrangements are put in place, customers will not be able to claim for risks covered by their contracts or pay premiums that would allow them to continue to contribute to their policies. Insurance Europe calls on the UK and the EU to reach an agreement on the grandfathering of existing insurance and reinsurance contracts. This should mean, amongst other things: (i) the rights and obligations of the parties to (re)insurance contracts written lawfully under passporting will continue; (ii) (re)insurance contracts in force at the date that the EU treaties cease to apply to the UK will continue to be in force until they expire in accordance with contractual provisions; (iii) legal obstacles to the ability of a party to an (re)insurance contract to enforce a right or discharge a responsibility under the contract will not apply; and (iv) the continuity of the supervisory standards relating to (re)insurance contracts as these standards currently exist in EU regulation will be maintained. Insurance Europe states that transitional arrangements will not resolve the problem of servicing contracts written under passporting, given that a transitional period is likely to be for a maximum of two or three years, while contractual obligations under passported contracts could run for decades.
Brexit – UK Finance and AFME paper on impact on cross-border financial services contracts
On 8 September, UK Finance and the AFME published a paper that examines the impact of Brexit on cross-border financial services contracts. Key points include: (i) the EU financial services regulatory framework will cease to apply after the UK exit from the EU. This potentially creates significant uncertainty for EU-based firms, including as to the continuity of their cross-border financial contracts that support their funding and risk management; (ii) the existing stock of cross-border contracts with customers will be affected. It is estimated that EUR 1.3 trillion of UK-based bank assets are related to the cross-border provision of financial products and services to a variety of customers, ranging from governments and businesses to individuals; (iii) contractual uncertainty of cross-border contracts needs to be addressed promptly to avoid damaging impacts on business, additional costs for customers and disruptive economic effects for the UK and the EU; and (iv) a range of actions are potentially available to address cross-border contractual uncertainty. These include having a transitional period in place that confirms the legal right to contract in a certain way for a defined period. In addition existing contracts, subject to certain limitations or conditions, should be allowed to continue and run to maturity. Also, the UK, and individual EU member states, could consider grandfathering contracts under their existing national licensing regimes where appropriate.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
European Commission Speech: Capital markets union, technological Innovation and global regulatory co-ordination
On 14 September, Valdis Dombrovskis, Vice-President of the Commission gave a speech at the 2017 Eurofi Financial Forum. The speech highlighted the EC’s desire to complete the Banking union by progressing in parallel on risk-reduction and risk-sharing and also completing the Capital Markets Union by 2019. In addition, it will publish a review of the ESAs and the ESRB next week, with a view to improving the tools they have to promote consistent supervision across the EU and beyond. The speech also discussed the EC’s work on Fintech, the role of financial supervisors in sustainable finance and the importance of international regulatory cooperation. The speech flags that the EU is aiming to adopt its equivalence decision in respect of mutual recognition of equivalent margin rules for uncleared OTC derivatives with the US in the coming weeks and it is also working on its equivalence decisions on trading venues.
HMT publishes response on CSD Regulations 2017
On 11 September, HMT published the first stage response to its December 2015 consultation paper on implementing the Regulation on improving securities settlement and regulating CSDR. This first stage focuses on issues relating to the Central Securities Depositories Regulations 2017 (CSD Regulations). HMT sets out details of the comments it received and the policy decisions that it has taken in response. These include: (i) the designation of the FCA as competent authority for supervising investment firms under CSDR and for participants in securities settlement systems and the designation of the BoE as the competent authority for enforcing CSDR requirements relating to settlement internalisers and CCPs; (ii) additional powers for the BoE relating to settlement internalisers; (iii) the creation of recognised CSDs (RCSDs) as a new category of recognised body; and (iv) additional enforcement powers for the BoE in relation to RCSDs. The CSD Regulations will extend to RCSDs the scope of powers concerning enforcement and information gathering that currently apply to recognised clearing houses (RCHs). The government intends to lay the CSDR before Parliament in due course. HMT also intends to publish a response focusing on the Uncertificated Securities (Amendment) Regulations in due course.
FCA "Dear CEO" letter on consumer credit firms' handling of complaints
On 13 September, the FCA published a "Dear CEO" letter addressed to firms engaging in consumer credit activities, setting out its concerns about firms' handling of complaints. The FCA states that it recently undertook a review of how consumer credit firms approach and deal with customer complaints. It found material non-compliance, particularly with the Dispute Resolution: Complaints sourcebook (DISP), and other concerning practices. The FCA highlights its concerns relating to: (i) the failure of firms to provide appropriate information about their internal complaints-handling procedures and to refer complainants to the availability of it; (ii) the poor quality of final responses from firms about complaints; (iii) the failure of firms to undertake root cause analyses to identify and remedy any recurring or systemic problems, as required by DISP 1.3.3R; and (iv) firms failing to record and report accurate complaints data. The FCA expects firms to review how they identify, record and deal with complaints as well as how this is communicated to customers, particularly taking into consideration the issues highlighted in the letter. Firms do not need to notify the FCA about the review or its outcome. However, the FCA may request evidence of compliance with complaints-handling requirements, including details of any reviews undertaken in response to this letter.
EC publishes responses on a policy approach to FINTECH
On 12 September, the EC published a summary of the contributions to its consultation on its policy approach to FinTech, which was published in March. The EC received 226 responses to the consultation (40 from the UK), the majority of which came from the industry. Many respondents underlined that FinTech, and technological innovation in general, were drivers of financial sector development and that there were huge opportunities in terms of access to finance, operational efficiency, cost-saving and competition. On the risk side, the predominant themes raised by respondents related to cybersecurity, the use and control of data and money laundering. The Commission has summarised the response into the following categories: (i) fostering access to financial services for consumers and businesses; (ii) bringing down operational costs and increasing efficiency for the industry; (iii) making the single market more competitive by lowering barriers to entry; and (iv) balancing greater data sharing and transparency with data security and protection needs.
EP adopts Regulation to amend EuVECA Regulation and EuSEF Regulation
On 14 September, the EP announced that it has voted in plenary to adopt the proposed Regulation amending the EuVECA Regulation and the EuSEF Regulation. The next step is for the Regulation to be formally adopted by the Council.
FCA makes market investigation reference for investment consultancy and fiduciary management services
On 14 September, the FCA published its decision to make an ordinary market investigation reference to the CMA, under section 131 of the Enterprise Act 2002, in relation to the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK. This follows the FCA's final report on the asset management market study, published in June, which found that price competition is weak in a number of areas of the industry. The FCA confirms that it has reasonable grounds for suspecting that a feature, or combination of features, of a market or markets in the UK for investment consultancy services and fiduciary management services prevents, restricts or distorts competition in connection with the supply and acquisition of those services in the UK or a part of the UK. The CMA will now investigate whether there are any adverse effects on competition in the investment consultancy services and fiduciary management services market, and, if so, what remedial action should be taken to address these. The statutory deadline for the CMA to complete the market investigation reference is 13 March 2019.
Fund management – HFSB changes name to SBAI
On 13 September, the Hedge Funds Standards Board (HFSB) announced that it has changed its name to the Standards Board for Alternative Investments (SBAI). In its press release, the HFSB states that the change in name reflects the evolution of the alternative investment industry, commenting that managers increasingly offer investment strategies through a variety of vehicles beyond hedge funds, including liquid alternatives, regulated funds, co-investment vehicles, drawdown funds and managed accounts. It also states that the HFSB's standards and guidelines have broad applicability across asset management, even though they were developed for alternatives managers.
Please see the Brexit section for an update on the grandfathering of existing insurance and reinsurance contracts following Brexit.
Delegated Regulation amending Solvency II Delegated Regulation on infrastructure corporates published in OJ
On 14 September, the Commission Delegated Regulation amending the Solvency II Delegated Regulation concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings was published in the OJ. The Amending Regulation will enter into force on 15 September (the day after its publication in the OJ).
MiFID II – ESMA updates Q&As on market structures topics
On 13 September, ESMA published an updated version (dated 12 September) of its Q&A document on implementation issues relating to market structures requirements under the MiFID II and MiFIR. The new Q&As have been updated with four new questions relating to access to CCPs and trading venues.
MiFIR – EC report on temporary exclusion of exchange-traded derivatives
On 11 September, the EC published a report (COM(2017) 468 final) on the temporary exclusion of ETDs from the scope of Articles 35 and 36 of the MiFIR. In its report, the EC accepts ESMA's recommendation and concludes that it is not necessary to exclude ETDs temporarily from the scope of Articles 35 and 36. Although, the report identifies potential risks arising from the implementation of open and non-discriminatory access to ETDs under MiFIR, it considers that the current regulatory framework in MiFIR and EMIR appropriately addresses these risks.
MiFID II – ESMA updates FAQs on transitional transparency calculations
On 11 September 2017, ESMA published an updated version of its FAQs (ESMA50-164-677) on transitional transparency calculations (TTC) for non-equity instruments under MiFID II and MiFIR. These include contain TTC calculations for bonds and correct the TTC calculators for credit derivatives and equity derivatives following feedback from trading venues. In the light of the scope and complexity of the calculations, including the various underlying data sources, ESMA expects to continuously supplement and update the FAQs where necessary.
MiFID II – FIA due diligence questionnaire for firms providing direct electronic access to clients
On 11 September, the FIA and the Managed Funds Association (MFA), published a due diligence questionnaire for MiFID II investment firms providing DEA to their clients. The FIA intends to publish additional annexes to the questionnaire for a standardised set of questions regarding other topics, such as algorithmic trading, which are not explicitly required under RTS 6 but investment firms may wish to incorporate into their due diligence processes.
MiFID II – FCA new webpage on notifications obligations
On 11 September, the FCA published a new webpage providing an update on MiFID II notifications for firms. The purpose of the webpage is to provide a summary of updates concerning MiFID II notifications that the FCA has made since it published its MiFID II application and notification user guide in January. The webpage focuses on the notifications that should be made by SIs and by firms that provide DEA or that undertake algorithmic trading. The FCA summarises the notifications that these firms should make and the ways that notifications should be made. The FCA has also published a guide to assist firms submitting SI notifications and electronic trading notifications. The webpage also corrects a mistake in the application and notification user guide, clarifying that firms are not required to inform the FCA if they act as a general clearing member, and provides a reminder that, under MiFID II, firms or individuals that trade in commodity derivatives, emission allowances and derivatives on emission allowances may be able to use their authorisation exemption (the ancillary activity exemption).
Payment systems – BoE and PSR announce formation of NPSO
On 13 September, the BoE and the PSR published a joint press release announcing the formation of the New Payment System Operator (NPSO). They report that the Payment System Operator Delivery Group (PSODG) had completed its tasks relating to planning for the consolidation of the operators of three payment systems: (i) Bacs Payment Schemes Ltd (BPSL); (ii) Cheque and Credit Clearing Company (C&CCC); and (iii) the Faster Payments Scheme Ltd (FPSL). These systems will be consolidated into the NPSO. With the NPSO now taking the lead, the PSR and the BoE have confirmed the closure of the PSODG. Responsibility for completing the consolidation now lies with the NPSO and three existing payment system operators.
PSD2 – FCA updates webpages for PSD2 payment and electronic money institution applications
On 8 September, the FCA updated the following webpages in the light of changes brought about by the revised PSD2: (i) a webpage on applying to become a payment institution, together with a webpage on authorising and registering payment institutions; and (ii) a webpage on applying to become an EMI, together with a webpage on authorising and registering EMIs. Applications under PSD2 relating to payment institutions and EMIs can be submitted from 13 October. New firms applying to be payment institutions and EMIs are advised to make their applications under the PSRs 2017, rather than the PSRs 2009, to ensure that they are registered (or authorised) under the new regime. The webpages provide further information on the transitional arrangements for applications.
BCBS report on Basel III monitoring exercise
On 12 September, the BCBS published a report (BCBS416) and an accompanying press release, which summarise the aggregate results of the latest Basel III monitoring exercise, using data as of 31 December 2016. The report covers analysis relating to: (i) capital ratios; (ii) capital shortfalls; (iii) composition of capital; (iv) leverage ratio; (v) TLAC requirements for G-SIBs; (vi) LCR; and (vii) NSFR. The BCBS highlights: (i) that all banks meet Basel III minimum and target CET1 capital requirements; and (ii) and all G-SIBs meet both fully phased-in liquidity requirements.
EBA reports on Basel III monitoring exercise
On 12 September, the EBA published a report which summarises the results of the latest EU Basel III monitoring exercise, using data as of 31 December 2016. The exercise monitors the impact of the EU legislation that implemented the Basel III reforms: the CRD IV and the CRR (collectively, CRD IV). The report contains analysis relating to matters including: (i) capital ratios; (ii) capital shortfalls; (iii) impact of phase-in arrangements; (iv) composition of capital and RWAs; (v) composition of the leverage ratio exposure measure; (vi) LCR; and (vii) NSFR. The report is based on a sample of 164 banks, comprising 45 Group 1 banks (that is, internationally active banks that have tier 1 capital of more than EUR3 billion) and 119 Group 2 banks (that is, all other banks). The EBA highlights an improvement of EU banks' capital positions, with a total average common equity tier 1 (CET1) ratio of 13.4%, in comparison with a 12.8% ratio as of 30 June 2016. It also notes that the average LCR was 139.5% as of 31 December 2016, in comparison with 133.7% as of June 2016, and the overall average NSFR ratio was 112.0%, in comparison with 107.8% as of June 2016.
RECOVERY AND RESOLUTION
EC adopts Delegated Regulation on system of contributions to expenditures of the SRB
On 14 September, the EC adopted Delegated Regulation on the final system of contributions to the administrative expenditures of the SRB. The explanatory memorandum to the Delegated Regulation states that in October 2014, the Commission adopted a Delegated Regulation on the provisional system of installments on contributions to cover the administrative expenditures of the SRB during the provisional period, which was based on a simplified methodology and covering a limited subset of entities. That Regulation provided that the provisional system would continue to apply until the entry into force of the final system. Now that the SRB is becoming fully operational, the Commission believes it is important that it exercises the powers conferred upon it by Article 65(5) of the SRM Regulation to adopt the final system, transition out of the provisional system and provide steady rules for the contributions to the administrative expenditures of the SRB.
PRA fee and levy rates – PRA consultation on adjustments to rates
On 12 September, the PRA published a consultation paper (CP17/17) on its proposal to correct the fee rates for the PRA's annual funding requirement for 2017/18. The fee rates published in PS17/17 did not reflect the most up-to-date data received from firms before its publication. The PRA therefore proposes to correct the rates by amending Table III of the Fees Part of the PRA Rulebook. The proposed changes to text are set out in the draft PRA Periodic Fees (2017/18) Correction Instrument 2017, which is in the Appendix to CP17/17. The fee rates used in the fees calculator on the FCA's website, and the invoices issued by the FCA to firms on behalf of the PRA for the 2017/18 year, reflect the correct rates. The deadline for comments is 12 October.
CA Handbook Notice 47
On 13 September, the FCA published Handbook Notice 47, which sets out the changes made to the FCA Handbook under instruments made by the FCA Board on 12 September 2017. This instrument makes minor changes to various modules of the FCA Handbook, the PERG and the Readers Guide. It comes into force on 13 September 2017, except for: (i) part 2 of Annex H (SUP), which comes into force on 12 November; (ii) part 1 of Annex I (DISP), which comes into force on 17 November; (iii) part 3 of Annex H (SUP), which comes into force on 4 December; (iv) part 2 of Annex A (Glossary of definitions), part 2 of Annex B (Senior Management Arrangements, SYSC), part 1 of Annex F (COBS), part 2 of Annex G (CASS), and Part 2 of Annex I (DISP), which come into force on 3 January 2018; (v) part 2 of Annex F (COBS), which comes into force on 1 March 2018.