Key Regulatory Topics: Weekly Update: 1 December 2017 – 7 December 2017
07 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.
Please see the Prudential Regulation section for an update on the impact of Brexit on CRD V and CRR.
HoC European Scrutiny Committee second report on impact of Brexit
On 5 December, the HoC European Scrutiny Committee published its second report of the 2017-19 parliamentary session (dated 29 November) in which it considers, among other things the following matters in the context of Brexit: (i) the supervision of CCPs; and (ii) the impact of Brexit on EuVECA and EuSEF Regulations. In the light of its concerns, the committee raises a series of detailed questions addressed to Stephen Barclay, Economic Secretary to HM Treasury, concerning the implications of Brexit.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
Please see the Brexit section for an update on the HoC European Scrutiny Committee's second report on Brexit, which discusses the implications of Brexit on CCP supervision.
TARGET2 and T2S - ECB approves consolidation
On 7 December, the ECB announced that it has approved consolidation of the Eurosystem's real-time gross settlement system, TARGET2, and the securities settlement platform, T2S. It has also approved the development of a Eurosystem collateral management system (ECMS). The aim of both projects is to modernise existing systems and increase efficiency. Consolidation of TARGET2 and T2S will provide market participants with enhanced liquidity management procedures. The ECB expects to launch the consolidated system in November 2021. The ECMS is intended to provide a harmonised platform for collateral operations across the Eurosystem and will replace the existing systems of the 19 national central banks for those functions that can be harmonised before the launch. The ECB plans to launch the ECMS in November 2022.
Capital markets and FCA speech on global regulation
On 6 December, the FCA published a speech (dated 5 December) by Megan Butler, FCA Director of Supervision: Investment, Wholesale and Specialists, on effective global regulation in capital markets. In her speech, Ms Butler emphasised the importance of effective co-ordination between national regulators in addressing the global issues affecting capital markets. Ms Butler also discussed: (i) cyber crime in capital markets; (ii) money laundering through capital markets; and (iii) Brexit.
Please see the Insurance section for an update on PRIIPS.
FCA publishes feedback from roundtables on high-cost credit review
On 6 December, the FCA published a report setting out feedback received from roundtables on its review of high-cost credit. The report summarises the issues and ideas raised by participants at three FCA roundtables, hosted in September and October. The roundtables covered two areas: (i) a general discussion on alternatives to high-cost credit, and (ii) a focused discussion on the provision of essential goods. Three of the key themes that emerged from the discussions are: (i) accessing capital is a major challenge for alternative lenders - raising awareness of the social benefits could encourage investment from social investors; (ii) alternative lending is most effective as part of a complete package of services - exploring the scope for partnerships across public agencies and the financial services industry would increase the range of assistance available to consumers; and (iii) greater clarity about the regulatory boundaries and compliance with regulatory requirements could support more cross-referrals at a community-level to providers of alternatives to high-cost credit. The issues raised do not necessarily reflect the FCA's own views. However, it is considering them further, with a view to identifying opportunities for increasing access to alternatives, and making recommendations in its spring 2018 consultation paper.
AML - FCA speech on firms' use of artificial intelligence
On 6 December, the FCA published a speech by Rob Gruppetta, head of the FCA's financial crime department, on using AI to keep criminal funds out of the financial system. In his speech Mr Gruppetta discussed the uses of AI in monitoring AML and referred to a report published by the FSB on the impact of AI on financial crime (dated 1 November). Points of interest include, in particular: (i) data analytics and machine learning are widely seen by firms as the approaches with the greatest potential to improve current AML practices, particularly in the field of transaction monitoring; (ii) the main concern in relation to transaction monitoring is whether machine learning systems are effective at identifying suspicious activities; and (iii) the FCA sees machine learning as complementing, not replacing, human judgment.
HoC Public Accounts Committee publishes sixth report on financial aspects of online fraud
On 6 December, the HoC Public Accounts Committee published its sixth report of the 2016-17 parliamentary session, on the growing threat of online fraud. The committee finds that banks do not accept enough responsibility for preventing and reducing online fraud. The protection they provide is variable and some are keener to invest in educating customers and anti-fraud technology than others. It considers that shifting more responsibility onto banks for scams is likely to make them better at protecting customers. The committee highlights that there is scope for: (i) more transparency over individual banks' performance; and (ii) banks to provide more help to vulnerable people, such as putting restrictions on their bank accounts. The committee stated that unless all banks start working together, including making better use of technology, there will be little progress on tackling card fraud and returning money to customers. The committee recommends that the Home Office should: (i) set out minimum standards for banks on preventing online fraud and protecting customers; (ii) press the banking industry to make relative online fraud vulnerability performance data publicly available. The committee expects the Home Office to provide a plan for publication of this data by spring 2018; and (iii) make sure all banks make better use of technology and information to reduce card fraud and return money to customers. This should include establishing minimum technical standards for strong customer authentication of electronic payments.
MLD4 - Joint Committee of ESAs final report on draft RTS on strengthening group-wide management of money laundering and terrorist financing risk
On 6 December, the Joint Committee of the ESAs published a final report (JC 2017/25) on draft RTS designed to strengthen group-wide management of money laundering and terrorist financing (ML/TF) risks, produced under Article 45(6) of the MLD4. The ESAs aim to foster a consistent and more harmonised approach to identifying and managing the ML/TF risk to which credit and financial institutions are exposed as a result of their operations in a third country, should the implementation of the third country's law not permit the application of group-wide policies and procedures. The final draft RTS sets out minimum actions that should be taken by credit and financial institutions in such circumstances and will contribute to creating a level playing field across the Union's financial sector. The draft RTS require credit and financial institutions to determine the extent of these measures on a risk-sensitive basis. They must also be able to demonstrate to their NCAs that the steps taken are commensurate with the ML/TF risk. The ESAs will now submit the final draft RTS to the EC for approval.
MLD4 - UK Government negotiates amendments to MLD4 in relation to virtual currency exchange platforms and custodian wallet providers
On 3 December, Stephen Barclay, Economic Secretary to HM Treasury, confirmed that the government is currently negotiating amendments to MLD4 that will bring virtual currency exchange platforms and custodian wallet providers in scope of European anti-money laundering and counter-terrorist financing regulation, which will result in these firms' activities being overseen by national competent authorities for these areas. It is expected that these negotiations would conclude later this year or in early 2018.
Please see the Financial Crime section for an update on the UK Government's proposed MLD4 amendments in relation to virtual currency exchange platforms and custodian wallet providers.
FCA publishes update on regulatory sandbox and announces fourth cohort application period
On 5 December, the FCA published an update on the next phase of its regulatory sandbox. The update includes details of those firms that were successful in their applications to test in the third cohort of the sandbox. It explains that of the 61 submissions, 18 applications met the sandbox eligibility criteria and were accepted to develop towards testing. The latest update lists the successful cohort 3 firms, which includes propositions covering a range of areas including blockchain-based payment services, RegTech propositions, general insurance, AML controls, and biometric digital ID and KYC verification. Over 40% of firms invited to test in cohort 3 are based outside London, compared to 35% in cohort 2 and 25% in cohort 1. The FCA has updated its webpage on cohort 3. The FCA also announces that the application window for its fourth sandbox phase is now open and firms have until 31 January 2018 to submit their applications in accordance with the eligibility criteria and process set out in the regulatory sandbox pages of the FCA website. It has published a new webpage on cohort 4 that includes a link to the relevant application form. The FCA expects that all accepted firms from cohort 4 will be ready to begin testing from June 2018.
Please see the Brexit section for an update on the HoC European Scrutiny Committee's second report on Brexit, which discusses the implications of Brexit the use of the EuVECA and EuSEF Regulations by UK-based firms.
Investment management - HMT report on renewed investment management strategyHMT report on renewed investment management strategy
On 6 December, HMT published a report setting out the UK's renewed investment management strategy. The government initially launched its strategy in May 2013, which focused on enhancing the UK's attractiveness as a centre for fund domicile (see Legal update, UK investment management strategy launched). As the original strategy has delivered its policy initiatives, the government is revisiting its objectives and plans for achieving them. The government's approach to the 2013 investment management strategy was underpinned by six core principles, which have been reviewed and updated to reflect the current economic environment. The 2017 strategy focuses on six areas for growth.
Asset management - ESMA speech on asset management sector priorities in 2018
On 5 December, ESMA published a speech, given by Verena Ross, ESMA Executive Director, in which she comments on a number of ESMA's asset management sector priorities in 2018. In particular, Ms Ross discusses: (i) Brexit; (ii) MMFs; (iii) costs and charges of investment funds; and (iv) MiFID II.
ELTIF Regulations - EC adopts Delegated Regulation on RTS
On 4 December, the EC adopted a Delegated Regulation supplementing the ELTIF Regulation with regard to RTS (C(2017) 7967 final). The RTS specify: (i) the circumstances in which the use of financial derivative instruments solely serves hedging purposes under Article 9(3) of the ELTIF Regulation; (ii) the circumstances in which the life of an ELTIF is considered sufficient in length to cover the life-cycle of each of the individual assets of the ELTIF under Article 18(7) of the ELTIF Regulation; (iii) the elements and risks related to each ELTIF underlying asset that an ELTIF manager must take into account in the assessment of the market for potential buyers; (iv) the criteria to be considered for the valuation of the assets to be divested under Article 21(3) of the ELTIF Regulation so as to include an appropriate value in the schedule for the orderly disposal of the ELTIF assets; and (v) the characteristics and functions of the facilities to be put in place by the manager of an ELTIF marketed to retail investors under Article 26(2) of the ELTIF Regulation. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, the Delegated Regulation will enter into force twenty days after it is published in the OJ.
Please see the 'Other' section for an update on the recently published Risk Transformation Regulations 2017.
PRA "Dear CEO" letter on results of general insurance stress test 2017
On 7 December, the PRA published a "Dear CEO" letter to firms from Anna Sweeney, PRA Director, Insurance, providing feedback on the general insurance (GI) stress test 2017. The PRA launched the GI stress test in April 2017. The letter explains that the main findings of the review related to: (i) resilience - the UK general insurance sector in aggregate, and regulated firms at an individual level, are resilient to those scenarios within the regulatory threshold of Solvency II;and (ii) reinsurance interconnectedness - there is no evidence that the level of interconnectedness, reflected by the concentration to specific reinsurers, has increased. The results indicate that concentration to individual reinsurers has fallen marginally since 2015, with alternative capital remaining an important part of reinsurance panels. The letter also explains that the results suggest that exposure management, natural catastrophe modelling weaknesses, post loss planning and accounting are all potential areas for improvements that impact underwriting, finance and risk functions. The PRA anticipates that the next stress test exercise will be in 2019.
EC report on exercise of power to adopt delegated acts under Solvency II
On 7 December, the EC published a report (COM(2017) 740 final) to the EP and the Council of the EU on the exercise of the power to adopt delegated acts conferred on the EC under Solvency II. Article 301a(2) requires the EC to draw up a report in respect of a number of delegated powers referred to in various Articles of the Directive. These powers are conferred on the EC for a period of four years from 23 May 2014, and the EC must draw up a report in respect of those delegated powers at the latest six months before the end of that four-year period. The EC reports that it exercised the vast majority of empowerments under Solvency II in 2014. It concludes that it has exercised its delegated powers in a timely and correct manner to ensure that the required delegated acts were in place for insurance and reinsurance undertakings and national supervisory authorities to apply the rules on the date Solvency II became fully applicable. Since that date, targeted amendments have ensured that the prudential framework is appropriately calibrated to allow insurers to contribute to the CMU as long-term investors. The EC believes that all delegations of power should be retained.
PRIIPs - Packaged Retail and Insurance-based Investment Products Regulations 2017 published
On 5 December, the Packaged Retail and Insurance-based Investment Products Regulations 2017 (SI 2017/1127) were published together with an explanatory memorandum. The Regulations, which were made on 4 December, implement in part certain provisions of the PRIIPs Regulation. Among other things, the Regulations: (i) designate the FCA as the competent authority for the purposes of the PRIIPs Regulation; and (ii) implement Article 24(2)(a), (b) and (d) of the PRIIPs Regulation by providing the FCA with the power to prohibit or suspend the marketing of a PRIIP, to prohibit the provision of a KID or to require the publication of a new version of a key information document where certain requirements of the PRIIPs Regulation have been infringed. The Regulations come into force on 1 January 2018. They require HMT to review the operation and effect of the Regulations and publish a report by 1st January 2023 and within every five years after that.
Index based insurance - IAIS consultation on draft index-based insurances issues paper
On 1 December, the IAIS published for consultation a draft issues paper (dated 16 November) on index-based insurances. The draft issues paper provides background on this product, describes practices and actual examples, and identifies related regulatory and supervisory issues and challenges. It focuses on the insurances usually directed at weather related or natural catastrophe event risks. However, it does not consider products: (i) where the index is solely a function of capital markets, asset prices or other economic measures, or where payouts are determined by the value of underlying assets in an investment portfolio; and (ii) that are based on an index related to mortality rates particularly directed at long-term longevity risk. The descriptions and examples of how index-based insurances function are provided from both developed and developing market perspectives. However, the main focus of the draft issues paper is for insurance supervisors who are seeking to enhance financial inclusion in developing markets. The deadline for comments is 29 January 2018.
MiFID - ESMA publishes MiFID II transitional transparency calculations for equities and bonds
On 6 December, ESMA published transitional transparency calculations (TTC) for equity and bond instruments required under MiFID II and MiFIR. MiFID II requires firms to perform various transparency calculations in respect of equity and non-equity instruments. The calculations must be done both for the transition from MiFID to MiFID II and afterwards on an ongoing basis once MiFID II applies. NCAs are responsible for performing the calculations. ESMA is co-ordinating the exercise in the transitional phase on behalf of the NCAs.
MiFIR - EP extends scrutiny period for Delegated Regulation relating to trading obligation for derivatives
On 6 December, the EP updated its procedure file on the EC Delegated Regulation (C(2017) 7684 final) supplementing MiFIR with regard to RTS on the trading obligation for certain derivatives. The procedure file originally indicated that the scrutiny period was one month from 17 November. This period has now been extended to three months. If the EP and the Council do not object to the Delegated Regulation, it will enter into force on the day following its publication in the OJ.
MiFIR - EC adopts Implementing Decision recognising certain US trading venues
On 5 December, the EC adopted an Implementing Decision on the equivalence of the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the US in accordance with Article 28(4) of MiFIR. The EC published a statement issued jointly with the CFTC alongside the Implementing Decision. The statement explains that, in line with the common approach agreed between the EC and the CFTC in October, CFTC staff have recommended to the EC that the CFTC issues an order of exemption from the CFTC's SEF registration requirements, with respect to MTFs and OTFs authorised in the EU (the Order). The Order would enable US counterparties to comply with the CFTC's trade execution requirement, by executing swaps subject to that requirement on MTFs or OTFs that have been exempted by the Order. These MTFs and OTFs would also be able to offer trading in swaps that are not subject to the CFTC's trade execution requirement, to US counterparties. The Implementing Decision was published in the OJ on 6 December and entered into force on 7 December.
BEIS issues guidance on new payment surcharge rules for consumer and business transactions
On 5 December, BEIS updated its guidance on the Consumer Rights (Payment Surcharges) Regulations 2012 to add commentary on the amendments introduced by the PSR 2017. The new rules implement provisions in PSD2. The amendments introduce, with effect from 13 January 2018: (i) for most retail payments, a ban on merchants charging a fee in addition to the advertised price of a transaction on the basis of a consumer's choice of payment instrument (for example, credit card, debit card or e-money). This ban will apply when the payment service providers of both the merchant and the consumer are located within the EEA; and (ii) for other retail payments and most payments between businesses made with commercial payment instruments, a ban on merchants charging customers more than the direct cost borne by them for use of the relevant means of payment. This ban will apply when the payment service provider of at least one party to the transaction must be located within the EEA.
FCA announces further success in reducing workplace pension schemes' costs and charges
On 6 December, the FCA announced further success in reducing costs and charges in workplace pension schemes. This follows the publication of a joint report in December 2016 by the FCA and the DWP on pension providers' progress in implementing the recommendations of the Independent Project Board (IPB) to improve value for money for customers in workplace pension schemes. The FCA states that costs and charges have been reduced to 1% or less on a further estimated Â£4.9 billion AUM since December 2016. The FCA and DWP have written to all relevant providers to ask them to continue to ensure that customers are not exposed to high costs and charges that are poor value for money, and to engage regularly with their Independent Governance Committees, trustees and members to achieve this.
PEPPs - HoC third report on proposed PEPP Regulation
On 5 December, the HoC European Scrutiny Committee published its third report of the 2017-19 parliamentary session. In the report, the committee considers the EC's proposed Regulation on a pan-European personal pension product (proposed PEPP Regulation) and the related proposed Recommendation on the tax treatment of personal pension products, including the PEPP. The report refers to the UK Government's position as set out in a memorandum published in June. The committee states that it is not satisfied that the proposal offers much added value for UK consumers, who already benefit from a well-developed domestic market for personal pensions. It agrees with comments made by the FSCP that the introduction of a parallel regulatory regime for PEPPs is unlikely to bring clarity to a market that many consumers already find confusing and complex. The committee urges the government to use the Council of the EU's scrutiny of the proposal to ensure that this legislation does not create new risks for UK consumers, and asks to be kept informed of any significant developments in the legislative procedure. The committee, in the meantime, retains the proposal under scrutiny, but clears the Recommendation from scrutiny. Both documents have been drawn to the attention of the Treasury Committee and the Work and Pensions Committee.
Please see the 'Other' section for the record of the FPC's meetings on 22 and 27 November, which includes the results of the UK banking system's 2017 ACS stress test and the UK CCyB rate.
EBA publishes cumulative impact assessment of the Basel reform package
On 7 December, the EBA published a summary of the results of an analysis carried out by the EBA to assess the impact of the December 2017 package of revisions on the EU banking system. The sample used to assess the impact includes 88 European institutions from 17 EU Member States, of which 36 are Group 1 institutions and 52 are Group 2 institutions. The impact assessment relies on December 2015 data. The results of the analysis do not, therefore, reflect bank-level changes in capital, portfolio composition and adjustments to business models occurred since December 2015. In addition, the baseline MRC used in the impact assessment reflects the implementation of the Basel III framework at jurisdiction level and assumes full implementation of the Fundamental Review of the Trading Book (FRTB). Further details on the methodology are provided in the Annex.
Governors and Heads of Supervision finalise Basel III reforms
On 7 December, the GHOS endorsed the outstanding Basel III post-crisis regulatory reforms. The reforms endorsed by the GHOS include the following elements: (i) a revised standardised approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach; (ii) revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modelled approaches for low-default portfolios will be limited; (iii) revisions to the CVA framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach; (iv) a revised standardised approach for operational risk, which will replace the existing standardised approaches and the advanced measurement approaches; (v) revisions to the measurement of the leverage ratio and a leverage ratio buffer for G-SIBs, which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB's risk-weighted capital buffer; and (vi) an aggregate output floor, which will ensure that banks' RWAs generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework's standardised approaches. Banks will also be required to disclose their RWAs based on these standardised approaches. A short description of the agreed reforms is set out in an accompanying summary document. The final standards text detailing the reforms and the committee's assessment of their quantitative impact have also been published. The revised standards will take effect from 1 January 2022 and will be phased in over five years. The committee has established a programme to evaluate its post-crisis reforms and will actively participate in the Financial Stability Board's efforts to evaluate the effects of reforms.
BIS (BCBS): Report: Basel III: Finalising post-crisis reforms (dated December, published 7 December) and webpage
Eighth Implementing Regulation extending transitional periods related to own fund requirements for CCP exposures published in OJ
On 7 December, Commission Implementing Regulation ((EU) 2017/2241) on the extension of the transitional periods related to own funds requirements for exposures to CCPs, set out in CRR and EMIR, was published in the OJ. The Implementing Regulation extends the transitional periods by an additional six months, to 15 June 2018. This is to avoid disruption to the international financial markets and to prevent penalising institutions by subjecting them to higher own funds requirements during the process of authorisation and recognition of existing CCPs. The EC published a draft of the Implementing Regulation in October. The Implementing Regulation will enter into force three days after publication in the OJ (that is, 10 December).
Joint Committee of ESAs final reports on draft amending ITS on mapping of credit assessments of ECAIs under CRR and Solvency II Directive
On 7 December, the Joint Committee of the ESAs published the following final reports containing draft ITS on the mapping of credit assessments of external credit assessment institutions (ECAIs) for credit risk: (i) final report (JC/CP/2017/61) containing draft ITS amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs' credit assessments under Article 136(1) and (3) of CRR (CRR Mapping Regulation). ESMA has withdrawn the registration of one CRA and five additional CRAs have been recognised. The ITS have, therefore, been amended to reflect the allocation of appropriate risk weights to the newly established ECAIs and to remove the reference to the de-registered ECAI; (ii) final report (JC/ 2017/067) containing draft ITS amending Implementing Regulation (EU) 2016/1800 on the allocation of credit assessments of ECAIs to an objective scale of credit quality steps in accordance with Solvency II. The draft ITS amend the Annex of the Implementing Regulation to take into account changes to the ECAI population. The ESAs will submit the draft ITS to the EC for approval.
Transcript of ECB public hearing on draft addendum to guidance to banks on tackling non-performing loans and comments by Chair of ECB Supervisory Board
On 7 December, the ECB published the transcript of the public hearing on its consultation on a draft addendum to its guidance to banks on NPLs. The ECB published its guidance on NPLs in March. The guidance is a supervisory tool that clarifies supervisory expectations regarding identification, management, measurement and write-offs of NPLs in the context of existing Regulations, Directives and guidelines. The ECB published its consultation on the addendum 4 October and the public hearing was held on 30 November. The ECB has also published a letter (dated 6 December) from DaniÃ¨le Nouy, ECB Supervisory Board Chair, to Roberto Gualtieri, Chair of ECON in response to a letter from Mr Gualtieri following up from an exchange of views on the draft addendum during a meeting on 9 November. Among other things, Mr Nouy stresses in the letter that the addendum was always intended to clarify supervisory expectations as a starting point for an institution specific supervisory dialogue in the context of the SREP. It was never intended for any automatic application of measures. The ECB will review the wording in this respect and make further clarifications in the final text. The draft addendum states that it will apply to newly classified NPLs from January 2018 onwards, however Mr Nouy says that this date will be kept under review.
Council of EU adopts CRR IFRS 9
On 7 December, the Council of the EU published a press release announcing that it has adopted the Regulation amending CRR as regards the transitional period for mitigating the impact on own funds of the introduction of IFRS 9 and the large exposures treatment of certain public sector exposures denominated in non-domestic currencies of member states. Prior to this, the Council of the EU published the text (PE-CONS 59/17) of the Regulation amending CRR relating to IFRS 9, which can be found here. The Regulation will enter into force on the day after its publication in the OJ. It will apply from 1 January 2018.
Pillar 2 - PRA consultation on reporting requirements
On 6 December, the PRA published a consultation paper on updating the Pillar 2 reporting requirements of CRR (CP25/17). In CP25/17, the PRA sets out proposals for: (i) introducing a new data item (PRA111) to capture stress testing data currently included in firms' ICAAP documents; (ii) reducing the frequency of reporting of the data items in the Reporting Pillar 2 part of the PRA Rulebook for some firms; (iii) consolidating some of the definitions in the PRA Rulebook into the Glossary; and (iv) updating the reporting instructions in its supervisory statement on Pillar 2 reporting (SS32/15) and the PRA's statement of policy on its methodologies for setting Pillar 2 capital (October). The proposals will be of relevance to UK banks, building societies and PRA-designated investment firms. The proposals in CP25/17 would make changes to the following Parts of the PRA Rulebook: (a) Glossary; (b) Regulatory Reporting; (c) Reporting Leverage Ratio; and (d) Reporting Pillar 2 (see Appendix 1). The PRA is also proposing to update the reporting instructions in SS32/15 (see Appendix 2) and the Statement of Policy (see Appendix 3). The deadline for comments is 6 March. The PRA intends to issue the final policy, which it proposes to take effect from 1 October 2018. The PRA proposes that the frequency of submission of PRA111 be aligned with the frequency of SREP of individual firms. Relevant firms will need to submit PRA111 at the same time as their ICAAP assessment to the PRA.
Stress testing - PRA consultation on model risk management principles for stress testing by banks, building societies and PRA-designated investment firms
On 6 December, the PRA published a consultation paper on model risk management principles for stress testing (CP26/17). The PRA's proposals in CP26/17 are to support effective practices in model risk management for stress testing. They are relevant to banks, building societies and PRA-designated investment firms. At present, the PRA's proposals are not relevant to: (i) credit unions; (ii) insurance; and (iii) reinsurance firms. The PRA sets out four principles in CP26/17, which are designed to support firms in developing and implementing policies and procedures through which to identify, manage and control the risks inherent in the use of stress test models and meet the high standards of risk management and internal governance already required of them under CRD IV and the PRA Rulebook. The deadline for comments is 6 March 2018.
CRD V and CRR - UK Government's memorandum on ECB opinion
On 5 December, the UK Department for Exiting the European Union published a European memorandum (14388/17) (dated 30 November) on the ECB November opinion on the EC's proposals to amend CRD IV and CRR. The memorandum, which has been submitted by HMT, explains that the government broadly welcomes the ECB opinion. In particular, it sees merit in the proportionality of reporting, and the need for further specification on the supervisory measures a consolidating supervisor may apply to a holding company. However, the memorandum also sets out a number of areas where the government's view differs from that of the ECB.
CRR II and CRD IV - ECON draft reports
On 1 December, ECON published its draft report on the proposed CRR II (dated 22 November) and its draft report on the proposed CRD V (dated 16 November). The EC's proposals for CRR II and CRD V contain revisions to CRR and CRD IV respectively. The draft reports contain EP legislative resolutions, the text of which sets out suggested amendments to CRR II and CRD V. They also contain identical explanatory statements by the rapporteur, Peter Simon. In the explanatory statements, the rapporteur highlights proposed amendments to the proposals relating to issues including: (i) scope of CRR and CRD IV; (ii) lending to SMEs and infrastructure; (iii) fundamental review of the trading book; (iv) G-SIIs; and (v) remuneration.
RECOVERY AND RESOLUTION
BRRD - Council of the EU adopts BRRD Insolvency Hierarchy Directive
On 7 December, the Council of the EU published a press release announcing that it has adopted the Directive amending BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy. Prior to this, the Council of the EU published the text (PE-CONS 57/17) of the proposed Directive amending the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy. The text has been published in advance of the Council's formal adoption of the Directive, which can be found here. The Directive will enter into force on the day after its publication in the OJ. According to Article 2 of the Directive, member states must introduce national legislation necessary to comply with the Directive by 12 months from the date of entry into force of the Directive or 1 January 2019, whichever is the earlier. Member states must apply the measure from the date of their entry into force in national law.
SRB 2018 work programme and multi-annual programming 2018-20
On 4 December, the SRB published a document containing its work programme for 2018 and its first multi-annual programme, covering the period 2018-20. In the document, the SRB sets out its priorities for 2018 and the next three years more broadly as they relate to its strategic areas of operation. These include: (i) resolvability of SRB entities and less significant institution (LSI) oversight; (ii) resolution framework; and (iii) crisis management.
EC publishes roadmap on completing economic and monetary union: financial services aspects
On 6 December, the EC published a package of measures on completing the Europe's economic and monetary union (EMU), including: (i) communication containing a roadmap on further steps to completing EMU (COM(2017) 821). In the communication, the Commission calls for agreement on a roadmap for the completion of measures relating to the EMU. These include a number of financial services measures relating to banking reforms and the CMU; and (ii) a legislative proposal for a Council Regulation on the establishment of the European EMF (COM(2017) 827). The Commission proposes that one of the EMF's roles will be to act as a common backstop to the SRF. The EMF will have the power to provide financial support to the SRB through credit lines or guarantees for the SRB's tasks relating to credit institutions in the banking union. The Commission has published separately the Annex to the proposed Regulation. The Commission has also published a fact sheet containing Q&As on the Commission's proposals.
Risk Transformation Regulations 2017 published
On 6 December, the Risk Transformation Regulations 2017 (SI 2017/1212) were published together with an explanatory memorandum and a final impact assessment (dated 5 April and signed by the responsible minister on 18 April). The Regulations were made on 5 December and come into force on 8 December (that is, three days after the Regulations were made). They implement a new regulatory and supervisory framework for insurance linked securities (ILS) in the UK. In particular: (i) Part 2 of the Regulations makes provision for a streamlined PRA and FCA authorisation and supervision process for transformer vehicles, which assume certain risks from insurers and reinsurers; (ii) Part 3 of the Regulations restricts the type of investors to whom transformer vehicles may issue investments; and (iii) Part 4 of the Regulations enables the creation of a new type of body corporate; an ISPV called a protected cell company for transformer vehicles. The Regulations, together with the Risk Transformation (Tax) Regulations 2017 (which have not yet been published) provide a regulatory and tax regime that the government considers will allow the UK to become an attractive domicile for ILS ISPVs.
FPC record of meetings on 22 and 27 November 2017
On 5 December, the BoE published the record of the meetings of its FPC on 22 and 27 November. The record explains that the FPC met on 22 November to agree its view on the outlook for financial stability and, on the basis of this, its intended policy action. The FPC met subsequently on 27 November to confirm its response to: (i) the results of the 2017 annual cyclical scenario stress test of the UK banking system; (ii) its setting of the UK CCyB rate; and (iii) its approach to the biennial exploratory scenario for the UK banking system, which the BoE ran for the first time in 2017. The record summarises the discussions. Its content is largely reflected in the financial stability report (which was published on 28 November), but, in addition, the record covers: (i) the leverage ratio recommendation (17/Q3/1); and (ii) a review of redacted text from record of the meeting on 20 September. The FPC's next policy meeting will be held on 12 March 2018 and the record of that meeting will be published on 27 March 2018.
CMA consults on annual plan 2018/19
On 4 December, the CMA issued a consultation on its proposed Annual Plan for 2018/17. This sets out the CMA's proposed approach to its work and identifies key commitments and initiatives in relation to its enforcement, merger and markets, and partnership and advocacy work. The CMA proposes to maintain its stepped-up pace in its investigations against anti-competitive or unfair practices. The proposed Annual Plan also recognises that planning for the new arrangements post-Brexit will be an important priority for the CMA in the coming year. The CMA will enter 2018/19 with a substantial volume of ongoing work. It is currently conducting 15 competition enforcement cases, seven consumer enforcement cases, 11 merger investigations and one market investigation. The CMA invites comments on the draft plan by 14 January 2018.
EU regulatory framework - EC report on follow-up to call for evidence
On 1 December, the EC published a report on the follow-up to the call for evidence on the EU regulatory framework for financial services (COM(2017) 736). In the report, the EC sets out an update on progress on initiatives relating to its call for evidence on the EU regulatory framework for financial services since its November 2016 communication on the follow-up to the call for evidence. Section 2 of the report contains details of individual measures introduced in response to the call for feedback, including ongoing initiatives that require further analysis. Section 3 of the report provides information on the Commission's work on a comprehensive assessment of the financial services supervisory reporting framework. The Commission is concerned at feedback it has received that existing supervisory reporting requirements are too complex, as a consequence of duplication between reporting frameworks and insufficient standardisation and clarity on what needs to be reported. It also notes the costs to firms caused by major changes to EU legislation on supervisory reporting and ad hoc reporting requirements, such as information requests from supervisors. The EC emphasises its commitment to addressing the issues identified by stakeholders in the follow-up to the call for evidence. It states that it intends to ensure that the regulatory compliance framework is fit for the digital age, through automation and standardisation where possible.
FCA quarterly consultation 19
On 1 December, the FCA published its 19th quarterly consultation paper (CP17/39). CP17/39 invites comments on proposed changes to a number of different parts of the FCA Handbook that relate to matters including the following: (i) DEPP; (ii) LR and DTR; (iii) DISP; (iv) FOS levy for registered account information service providers (RAISPs); (v) financial crime reporting; and (vi) reporting requirements in the Supervision manual and ICOBS. Depending on the proposal in question, the deadline for responses is 1 January 2018 or 1 February 2018.