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Key Regulatory Topics: Weekly Update 07 February - 13 February 2020

Our weekly update on key regulatory topics affecting the financial services sector.

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APAC Financial Regulatory Focus: Expected Developments in the Year of the Rat

As we move into the year of the rat, our team across Asia Pacific consider some of the key areas of financial regulatory development that are expected this year in the region. This bulletin considers developments regarding (i) virtual banks, virtual assets and fintech; (ii) the asset management and funds industry; (iii) private banking; (iv) data/outsourcing/cloud storage; (v) corporate governance; and (vi) enforcement.

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European Parliament (EP) adopts non-legislative resolution on proposed mandate for negotiations on a new partnership with United Kingdom and Northern Ireland

On 13 February, the EP published a non-legislative resolution on the proposed mandate for negotiations on a new partnership with the United Kingdom and Northern Ireland. This covers the: (i) economic partnership; (ii) specific sectorial issues and thematic cooperation; (iii) security and foreign affairs partnership; and (iv) governance of the future agreement. For financial services, the EP states that market access should be based on equivalence decisions and any future framework should safeguard financial stability in the EU.

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BoE’s speech on governance of the financial sector connections between the EU and the UK

On 11 February, the BoE published a speech by Sir Jon Cunliffe, BoE Deputy Governor for Financial Stability, on how new arrangements for the governance of the financial sector connections between the EU and the UK will be built, from the particular perspective of financial stability. Governance encompasses legislation, regulation and the institutions of governments, as well as broader frameworks of standards, norms and conventions, international organisations and agreements. These broader frameworks are important for the governance of financial globalisation, and the management of cross-border risk. The BoE notes in its speech that though the financial connections between the EU and the UK will change and adapt, they will not be severed. The UK will remain open to access from the EU and its members. As EU regulation no longer needs to cater for the greater complexity and scope of risk and activity in London, and as the complex structures needed to manage the regulatory framework within the EU are no longer needed in the UK, there may be divergence and the issue is how this will be managed to provide the necessary assurance on the import and export of risk. In terms of equivalence assessments, Sir Jon Cunliffe notes that the following considerations are important for the relationship between the EU and the UK to work: (i) the UK cannot outsource regulation and supervision of the world’s leading complex financial system to another jurisdiction; (ii) future regulatory and supervisory arrangements need to be stable and built on good faith; (iii) on both sides, it is necessary to have deep supervisory cooperation in all areas of cross-border financial activity; and (iv) arrangements need to be reciprocal and proportionate.

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Capital markets

Association for Financial Markets in Europe (AFME) updates its model selling restrictions for equities

On 9 February, AFME updated its model equity selling restrictions for use following the UK’s withdrawal from the European Union until the end of the transitional period. In relation to the public offer selling restrictions for transaction contracts and prospectuses, AFME has updated the wording to reflect that each Member State of the EEA, as well as the UK, are a “Relevant State”. Although the selling restrictions have been effective from 1 February, AFME will continue to monitor the progress of any free trade agreement or any other relevant developments covering financial services and the policy of the UK Government. It will review whether any changes to these selling restrictions may be required.

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FCA’s speech on penalties, remediation, and its general principles

On 13 February, the FCA published a speech by Mark Steward (the Executive Director of Enforcement and Market Oversight) on penalties, remediation, and the FCA’s general principles. The speech covers: (i) financial penalties and the importance of cooperation and remediation; and (ii) observations and issues arising from cases over the last 12 months, especially regulatory cases involving breaches of the general principles. Mark Steward notes that the FCA’s Principles for Businesses are the foundations of good conduct and should be an integral part of the operational process of planning or decision-making and as a way of assessing whether the firm’s conduct remains appropriate.

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FCA recognises the Lending Standards Board’s (LSB) Standards of Lending Practice for business customers

On 11 February, the FCA published a webpage which summarises responses to its quarterly consultation paper (QCP 19/27) on the recognition of the LSB’s Standards of Lending Practice for business customers. The FCA have decided to recognise the Standards only for unregulated activities. The FCA will recognise the Standards for business customers for three years. After this time, the FCA can extend its recognition if it thinks the content of the Standards is still relevant and appropriate. Firms following the code will still need to comply with any restrictions that apply on financial promotions in the Financial Services and Markets Act 2000 or rules in CONC 3 (financial promotions and communications with customers), which may apply to some unregulated activities.

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Please see our Conduct section for an update on the FCA’s recognition of the Lending Standards Board’s (LSB) Standards of Lending Practice for business customers.

Please see our section on Financial Crime for an update on a speech published by the FCA, discussing sanctions imposed as a result of breaches of the FCA’s general principles leading to losses suffered by consumers.

FCA’s letter on the key risks credit brokers should act on

On 13 February, the FCA published its letter addressed to directors which sets out its view of the key risks credit brokers could pose to their consumers or markets based on its examination of information and data. The FCA found, inter alia, that: (i) many firms did not understand their regulatory requirements; (ii) firms have poor oversight of staff and/or Appointed Representatives’ activities; (iii) some firms do not explain the level of service provided; and (iv) where the firm is responsible for providing product information, some firms are not providing adequate or relevant information. The FCA’s supervision strategy for credit brokers runs to March 2022, with work to identify, diagnose and resolve any harm from credit broking. The FCA is developing a series of strategies for supervision to make sure it monitors firms effectively. The FCA will support its reactive supervisory work with wider engagement and communication, clarifying its expectations of firms. The FCA expects directors to take notice of the areas of concern, as well as examine their businesses and consider whether they can make changes to reduce harm or potential harm to consumers. The FCA will identify firms that cause harm. If contacted, firms must provide evidence of governance, systems and controls in place as well as wider actions to safeguard consumers.

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FCA’s review of how retail banks provide information about Basic Bank Accounts (BBAs)

On 11 February, the FCA published a webpage on their review on how retail banks provide information about BBAs. Firstly, in identifying eligibility for a BBA, examples of good practice that the FCA observed involved customers being informed about BBAs and offered assurance that there was an account available to them suitable to their circumstances. Though, the FCA also observed examples where frontline staff did not provide information on BBAs. The FCA notes that frontline staff should present customers who are potentially eligible for a BBA with that account option at point of first contact, once it has been identified that the individual either does not meet the criteria for a standard bank account, or that they do meet the criteria for a BBA. Secondly, in terms of information received by eligible customers, good practice included information being given on BBAs from staff in branches or over the phone, detailing features of BBAs and an explanation of how the account opening would work. Thirdly, in relation to the treatment of customers showing potential traits of vulnerability, good practice involved frontline staff asking questions to clarify the customer's circumstances and to better understand their needs. Finally, in regard to applying the bank’s identification and verification policy, good practice that was observed was all banks outlining a range of acceptable proof of identity on their websites. Though, inconsistency in how frontline staff interacted was observed. The FCA encourages all firms to create a customer journey which is inclusive of all customers and their needs, specifically (i) how best to support consumers who find that they are inadvertently excluded from participating in financial services, as well as preventing that exclusion from continuing; and (ii) how the current structure of customer journeys on BBAs helps or impedes participation. Given that the FCA has recently consulted on guidance for vulnerable customers, it encourages firms to respond to the final guidance once published. BBAs will remain a key area of focus for the FCA.

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EBA’s opinion on deposit guarantee scheme (DGS) funding and uses of DGS funds

On 11 February, the EBA published their opinion on DGS funding and uses of DGS funds. The opinion sets out a number of proposals for the EC to consider when preparing a report on the implementation of the Deposit Guarantee Scheme Directive (DGSD) to be submitted to the EP and the Council, as well as if and when it prepares a proposal for a revised DGSD. This opinion lists all the proposals made by the EBA on the topic of DGS funding and uses of DGS funds. Specifically, it provides proposals on: (i) target level, collection of contributions and fund access; (ii) the definition of available financial means; (iii) extraordinary contributions and alternative funding arrangements; (iv) the use of DGS funds for interventions other than payouts; (v) the use of failed institutions’ assets for DGS payouts; and (vi) reporting of data. The EBA also announced in a press release that it has put forward proposals to improve the current DGSD legal framework. The EBA calls for the need to clarify in the DGSD what funds should count towards the DGS’s available financial means and when different DGS funding sources can be used and under what conditions. The Opinion also addresses the need to introduce more transparency in relation to the reporting of DGS funds, more consistency in the approach to payment commitments, and more precision in the DGSD in relation to how DGS funds should be invested. The EBA also published a fact sheet, setting out its plans for the future. Specifically, in its Opinions, the EBA proposes areas where further changes to the current legislative framework would address existing challenges and recommends that the EC considers them when proposing a revised deposit protection regulatory framework in the EU. The Opinions also highlight a number of important topics where further analysis is needed and propose that the EBA is well placed to do this work, including on crucial issues to do with anti-money laundering, clarity on DGS funding and treatment of depositors who live in one EU Member State but have their deposits elsewhere in the EU.

EBA Opinion

EBA Press Release

EBA Fact Sheet

FCA’s, ICO’s and FSCS’s Joint Statement on how insolvency practitioners and FCA-authorised firms deal with personal data

On 7 February, the FCA, ICO and FSCS published a joint statement warning insolvency practitioners and FCA-authorised firms to be responsible when dealing with personal data. Some insolvency practitioners (IPs) and FCA-authorised firms have attempted to sell clients’ personal data to claims management companies (CMCs) unlawfully. The Joint Statement notes, inter alia, that: (i) by passing on personal data, companies may be failing to meet their obligations under the Data Protection Act 2018 and the General Data Protection Regulation (GDPR); (ii) CMCs using such personal data may not be acting in the interests of customers - CMCs seeking to rely on legitimate interest grounds for processing such data are highly unlikely to meet the requirements of the GDPR; and (iii) CMCs that intend to buy and use such personal data must be able to demonstrate how they have considered the fair treatment of customers and how their actions comply with privacy laws.

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Financial crime

Please see our Consumer/Retail section for a publication by the EBA on deposit guarantee scheme (DGS) funding and uses of DGS funds, which highlights that the EBA is well placed to conduct further analysis on particular issues, including anti-money laundering.

Please see our section on Markets and Market Infrastructure for a speech by the FCA on market integrity and its strategic approach.

Please see our section on Conduct for a speech by the FCA on its general principles, penalties and remediation.

Please see our News and Insights webpage for a brief that discusses liability for breaches of sanctions. Two recent settlements in the United States have highlighted the risks for parties involved in aviation and shipping of incurring liabilities for a breach of sanctions.

Please see our Investigations Insight Blog discussing Hong Kong’s Privacy Commissioner for Personal Data. On 20 January, the Hong Kong’s Constitutional and Mainland Affairs Bureau presented a paper to the Legislative Council proposing changes to Hong Kong’s data privacy law. If the proposed amendments are implemented, Hong Kong’s privacy law and its Privacy Commissioner will have the tools necessary to bring data protection standards in line with international standards, in particular GDPR.

EC’s roadmap on action plan for combating money laundering and terrorism financing

On 12 February, the EC published an action plan for a new comprehensive approach to preventing and combating money laundering and terrorism financing. This will most likely take the form of a policy communication. The main objective of the communication is to identify the areas where further action would be needed at EU level in order to achieve a comprehensive and effective framework to prevent criminals from laundering the proceeds of their illicit activities and the financing of terrorism. It aims to trigger a debate within the EU institutions, Member States and with interested stakeholders on what measures are needed to protect the EU internal market from criminals attempting to launder money and finance terrorism. The communication will also provide a first response to the EP’s and the Council’s calls for strong and rapid action to deliver an effective EU framework for fighting money laundering and terrorist financing. The communication will present the EC’s view on how it intends to approach the preparatory work for future proposals. The communication will be the basis for extensive consultation in view of presenting new policy initiatives in early 2021. The EC also published a webpage, inviting feedback on the action plan, the deadline being 11 March.

EC Roadmap on Action Plan

EC Webpage

Commission sends letters of formal notice to eight Member States for fifth Anti-Money Laundering Directive (MLD5) failures

On 12 February, the EC announced the key infringement decisions that it has made in February, pursuing legal action against Member States for failing to comply with their obligations under EU law. In relation to its decisions under Financial Stability, Financial Services and the Capital Markets Union, the EC has announced letters of formal notice to Cyprus, Hungary, the Netherlands, Portugal, Romania, Slovakia, Slovenia and Spain for not having notified any implementation measures for MLD5. Recent money laundering scandals have revealed the need for stricter rules at EU level as legislative gaps occurring in one Member State can have an impact on the EU as a whole. Without a satisfactory response from Member States within two months, the EC may decide to send them reasoned opinions. The EC has also made decisions in regard to the environment, climate, transport as well as the internal market.

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The International Organisation of Securities Commissions (IOSCO) on issues, risks and regulatory considerations relating to cryptoasset trading platforms (CTPs)

On 12 February, IOSCO published its final report on issues, risks and regulatory considerations relating to CTPs. In relation to the issues and risks identified, the report describes key considerations and provides related toolkits that are useful for each key consideration. These key considerations and toolkits are intended to assist regulatory authorities who may be evaluating CTPs within the context of their regulatory frameworks. The key considerations (which are also included in the press release that IOSCO published) relate to: (i) access to CTPs; (ii) safeguarding participant assets; (iii) conflicts of interest; (iv) operations of CTPs; (v) market integrity; (vi) price discovery; and (vii) technology. These key considerations are dependent on the operational model of the CTP and may already be mitigated or addressed by existing regulatory frameworks. IOSCO will continue to monitor the evolution of the markets for cryptoassets.

IOSCO Final Report

IOSCO Press Release

Markets and Markets infrastructure

The European Association of Central Counterparty (CCP) Clearing Houses (EACH) on their CSDR Settlement Discipline Framework

On 12 February, EACH published a document on their CSDR Settlement Discipline Framework. Its objective is to provide ESMA, relevant authorities and market participants with details of EACH’s implementation of the CSDR settlement discipline provisions that affect CCPs and their clearing members. The Framework is applicable to all CCPs subject to CSDR. This Framework may be subject to change due to shifting working assumptions and discussions with ESMA, the European Central Securities Depositories Association (ECSDA) and/or the market community.

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ISDA Legal Guidelines for Smart Derivatives Contracts (Equity Derivatives)

On 10 February, ISDA published guidelines to provide an introduction to equity derivatives for those who are designing and implementing technology solutions for these products. The guidelines provide an overview of the legal documentation framework used for OTC equity derivatives transactions and highlight certain issues that may need to be considered by technology developers to appropriately tailor technology solutions for this market. It also recommends steps that the industry should now take to further standardise and digitise equity derivatives documentation and to achieve greater automation of this market, also highlighting the benefits of automation. Furthermore, an explanation on how equity derivatives transactions are documented is provided.
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Scope of reporting obligations for non-EU alternative investment funds (AIFs) under the regulation on reporting and transparency of securities financing transactions (SFTR)

On 10 February, the International Securities Lending Association (ISLA) published correspondence between the Alternative Investment Management Association (AIMA), the EC and ESMA that clarifies the scope of the reporting obligations for non-EU AIFs under the regulation on reporting and transparency of securities financing transactions. In its letter to ESMA and the EC, AIMA addresses ESMA’s final report on Guidelines on reporting under Articles 4 and 12 SFTR. Inter alia, AIMA expresses concern that the Final Report includes a statement on the scope of SFTR Article 4 reporting that is at odds with the drafting of the Level 1 SFTR text which has the potential to cause significant and unwarranted compliance costs for firms. Given the limited time for the implementation of SFTR reporting requirements, AIMA urgently calls on the EC and ESMA to adopt a FAQ to address who falls within the scope of the reporting and record-keeping obligations set out in Article 4. In its response to AIMA, the EC clarifies (following its analysis of provisions in the SFTR) that AIFs not established in the EU are not subject to the obligations set out in Article 4(1) SFTR, even if the AIFM is authorised or registered, except in respect of securities financing transactions concluded in the course of the operations of a branch in the EU of the non-EU AIF. In its separate response, ESMA declined the need for a Q&A following its analysis of the reporting guidelines, concluding that these contain all the clarifications and examples that have to be taken into account to ensure reporting in accordance with the regulatory framework under SFTR, specifically the Level 1 Regulation and the technical standards.

Letter from AIMA

Letter from the EC

Letter from ESMA

FCA’s speech on market integrity and its strategic approach

On 7 February, the FCA published a speech on market integrity and its strategic approach by Mark Steward. Inter alia, the FCA views the market cleanliness metric (MC metric) and the abnormal trading volume (ATV) as different proxies that enable the FCA to develop and measure trend lines. The MC metric has decreased since 2008 to 2018 by 20%. Mr Steward notes that such a positive movement can be explained by the improvement in the Financial Services Authority’s (FSA’s) enforcement activity and educational agenda.

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ESMA’s report on alignment of MiFIR with the changes introduced by EMIR Refit

On 7 February, ESMA published its final report on the alignment of MiFIR with the changes introduced by EMIR Refit. The changes introduced by EMIR Refit concern, inter alia, the scope of counterparties subject to the clearing obligation (CO). EMIR Refit introduces an exemption from the CO for small financial counterparties and modifies the mechanism to determine the obligations of non-financial counterparties above the clearing threshold. EMIR Refit was not accompanied by direct amendments to MiFIR, which currently leads to a misalignment between the scope of counterparties subject to the CO and to the derivatives trading obligation (DTO). However, in light of the close interconnection between those two obligations, EMIR Refit requires the EC to prepare a report assessing the necessity and appropriateness of aligning the trading obligation for derivatives. The EC’s report will be submitted to the EP and to the Council by 18 December. ESMA’s report is expected to feed into the report that the EC will prepare for the EP and the Council on the necessity and appropriateness of aligning the trading obligation for derivatives under MiFIR with changes made under EMIR Refit to the CO for derivatives.

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Payment services and payment systems

Please see our section on Brexit for a speech published by the BoE, which discusses specific financial-regulatory issues that have cross-border implications, one being technology-driven changes that are happening in cross-border payment systems.

Prudential regulation

EBA’s consultation paper on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer (SyRB) under the CRD IV

On 12 February, the EBA published a consultation paper on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a SyRB in accordance with Article 133(5)(f) of the CRD IV. The objective of the guidelines is to set a common framework to harmonise the design of the appropriate subsets of sectoral exposures to the application of a SyRB. The draft guidelines recommend a common framework where relevant authorities can define subsets specific to their needs. The guidelines also highlight how the enhancements in the scope of the SyRB introduced under CRD V have increased the flexibility of the SyRB, but have also brought potential challenges. Thus, the relevant authority should avoid inconsistent uses of instruments and unwarranted interactions by ensuring that other active macroprudential measures are taken into account when calibrating and activating the sectoral SyRB. The deadline for comments is 12 May.

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Sustainable finance

Please see our section on Brexit for a speech published by the BoE which discusses that regulators are increasingly working together to ensure the financial system is resilient to the risks posed by climate change.

Please see our section on Financial Crime for the EC’s announcement of their key infringement decisions made in February, with some of these relating to the environment and climate. 

ESMA’s speech on sustainable financial markets at the European Financial Forum 2020

On 12 February, ESMA published a speech by Steven Maijoor at the European Financial Forum 2020 on translating changing risks and investor preferences into regulatory action in the sustainable financial markets. Mr Maijoor notes that while political action is needed to set priorities and the appropriate fiscal policies and incentives, including an adequate carbon pricing mechanism, the financial sector plays a pivotal role as a key transmission channel of the much-needed transformation of the economy. 

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Other developments

FCA announces new Interim Executive Director of Strategy and Competition

On 13 February, the FCA announced that it has appointed Sheldon Mills as the Interim Executive Director of Strategy and Competition, replacing Christopher Woolard as he steps into the role of the Interim Chief Executive.

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FCA’s updated webpage on policy development

On 7 February, the FCA updated its webpage on its policy development. This provides information on recent and upcoming publications as well as quarterly consultation papers. Upcoming publications include, but are not limited to: (i) policy proposals for regulatory fees and levies; (ii) a consultation paper on exit fees in investment platforms and comparable firms; (iii) a consultation paper on proposals to facilitate standard listing for open-ended investment companies; and (iv) a policy or feedback statement in response to a consultation on the Single Easy Access Rate.
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