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Key Regulatory Topics: Weekly Update 10 – 15 December 2021

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Key Regulatory Topics: Weekly Update 9 - 15 Feb 2024

We bring you our update a day early this week due to team holidays. Next week’s update will also be delivered on Thursday followed by our usual break over the holiday period. We will recommence our Friday updates on 7 January 2022.

Amongst the flurry of year end regulatory publications, this week HMT issued its report on the review of the Securitisation Regulation and a consultation on financial promotion exemptions for high net worth individuals and sophisticated investors.  The PRA and the FCA published a joint Dear CEO letter to selected firms concerning the supervisory review of global equity finance businesses following the March default of Archegos Capital Management.

Consumer/retail

Please see the ‘Other Developments’ section for the BoE December 2021 financial stability report.

CAG final report on community access to cash pilots

On 15 December, UK Finance published a final report with the Cash Action Group (CAG) on community access to cash pilots. UK Finance and the largest retail banks and building societies have made five commitments to continue to preserve access to cash for consumers and businesses over the long term to provide certainty that cash access will be available for individuals and businesses to both withdraw and deposit cash, now and in the future. These commitments are: (i) ensuring that cash will be available for those who need it, particularly small businesses, the elderly and vulnerable, when they need it; (ii) supporting the Community Access to Cash Pilots; (iii) working together to consider possible models for future access to cash which addresses changing access requirements and meets the needs of customers and communities; (iv) protecting current critical cash infrastructure until a viable alternative to cash is available; and (v) establishing and maintaining a framework to enable early identification of potential cash ‘cold spots’. Additionally, the FCA published a statement with the FCA and PSR’s response to this announcement. The FCA and PSR welcome the initiative, and currently assess that most people have reasonable access to cash. Firms should continue to follow the FCA’s Guidance on branch and ATM closures or conversions and Guidance on the fair treatment of vulnerable customers when making and implementing their decision. In July 2021, the Government consulted on legislating to protect access to cash in the long-term. Ahead of future legislation, both the FCA and PSR will continue to monitor access to cash, and watch how the CAG’s initiative develops. The FCA will use what it learns to inform any work on the proposed future regulatory regime, including future requirements for cash access. 

Final report

Statement

UK Finance updates Financial Abuse Code

On 10 December, UK Finance published its updated 2021 Financial Abuse Code. The new Code is aligned with recent legislative and regulatory developments including the FCA’s Guidance on the Fair Treatment of Vulnerable Customers and the Domestic Abuse Act 2021, which legally recognises economic abuse as a form of abuse. The new 2021 Code includes enhanced consideration of how firms can deal with debt separation, including consideration of controlling and coercive behaviour. This is a complex area and will continue to be a focus for UK Finance throughout 2022, as currently there is no legal framework for the fair separation of debts or apportionment of credit balances. UK Finance is also working with the Money and Pensions Service to explore how it can develop new consumer money guidance materials. 29 members and 39 brands have committed to implementing this Code, including 14 organisations that are making the commitment for the first time. The original version of the code will remain active until 1 January 2023, when it will be superseded by the new 2021 code.

Code

LSB access to banking standard review 2021 report and recommendations 

On 10 December, the Lending Standards Board (LSB) published a report setting out its recommendations following a review of the Access to Banking Standard and its public consultation. To ensure good customer outcomes are protected, the LSB recommends that: (i) oversight of branch closures and changes in branch service provision, currently provided for through the Standard, is transitioned so that the FCA becomes the sole regulator, with firms supporting an orderly winddown of LSB oversight; (ii) UK Finance and signatory firms encourage the FCA to adopt a regulatory approach that maintains or enhances the expectations on firms, currently set out in the Access to Banking Standard and supporting guidance; (iii) signatory firms maintain their commitment to the Access to Banking Standard to ensure that customers continue to benefit from the protections it offers as oversight of branch closures is transitioned; and (iv) firms support industry efforts to provide access to in-person banking alternatives that meet the needs of personal and SME customers, and take steps to support customers to use digital and physical alternatives where they are available. The LSB believes that the best outcome for customers will now be achieved by the FCA taking forward its work, continuing its supervisory activity, and developing further rules and guidance that align with the FCA principles and which build upon the work of industry and the LSB. This approach would reflect the consensus view from industry, consumers and SME respondents to the LSB consultation that there should be clear regulatory oversight of branch closures, with a single set of rules and/or guidance for firms to follow. The LSB will continue its oversight of the Standard until a clear timeframe for next steps is agreed with firms, UK Finance and any other key stakeholders.

Report 

Financial crime

ACER updates Q&As on REMIT 

On 14 December, the European Union Agency for the Cooperation of Energy Regulators (ACER) updated its Q&As (26th edition) on the regulation on wholesale energy market integrity and transparency (REMIT). The new update concerns: (i) how market participants should fulfil the mandatory field named "publication inside" when registering on CEREMP; (ii) whether there is a special data format or protocol for the web feed provided to the Agency; and (iii) what are the minimum data quality requirements for effective disclosure of inside information which apply when assuming that a market participant uses the own company website as backup for the publication of inside information. Alongside the Q&A, ACER published a letter confirming that it has decided to extend the possibility for market participants to use their corporate websites as backup solutions until 31 December 2022 due to persisting exceptional circumstances.

Q&As

Letter

HMT/OFSI guidance on change in format for UK sanctions list

On 13 December, the Office of Financial Sanctions Implementation (OFSI) and HMT published guidance regarding the change to the UK sanctions list’s format. The structure and the format of the UK Sanctions List is changing in February 2022, and this guidance is directed at businesses that regularly use the UK Sanctions List and the OFSI consolidated list and need to understand the change to prepare their own systems. Changes to the UK sanctions list will include: (i) alias strength for UN listings; (ii) data will be standardised (where possible) to remove duplications, unnecessary punctuation, and improve consistency; (iii) new fields will be created to improve the detail and structure of the data; (iv) some field names will change to make their purpose clearer; (v) ‘name’ fields will be changing so that only SWIFT characters are accepted; and (vi) additional file formats are being introduced to improve range of data formats available: XML, HTML. The OFSI Consolidated List will also be changing to align with the structural changes of the UK Sanctions List. Changes to the OFSI Consolidated List will include: (a) seven new fields; (b) a new group type ‘Ship’ will be introduced; and (c) the .xls format of the Consolidated List will be retired. OFSI will publish a new format guide to assist users of the Consolidated List. Existing fields will remain in place and Group IDs will not be changing. Ahead of the formal changeover in February 2022, there will be a 3-week period where businesses will be able to view both the old and new formats of the list simultaneously, so they can prepare for the formal changeover, before the old format of the UK Sanctions List and OFSI consolidated list are retired.

Guidance

IMF/World Bank draft framework for ML/TF risk assessment of a remittance corridor 

On 13 December, the FSB released a joint report made by the IMF and the World Bank, dated September 2021, proposing a draft framework and methodology for risk assessment in remittance corridors having the potential of being identified as “safe remittance corridors”. This draft framework provides a contribution to the FSB’s Roadmap for Enhancing Cross-Border Payments that was endorsed by G20 Leaders in 2020 and aims to achieve faster, cheaper, more transparent, and more inclusive cross-border payment services. Specifically, the draft framework for remittance corridors’ risk assessments is the first action under Building Block 7, the goal of which is to promote “safe payment corridors”. It proposes the development of a draft framework and methodology for the ML and TF risk assessment in remittance corridors and the identification of potential “lower risk corridors”. This term does not imply an absence of ML/TF risks in the corridor, but rather a lower risk level. This assessment framework can be applied jointly or separately by the sender and the recipient corridor countries. This report is expected to facilitate ML/TF pilot risk assessments in one or more remittance corridors to be determined in the next phase of the project. The final version of the framework will incorporate findings and insights from the pilot risk assessments and stakeholder consultations.

Report

EBA consults on new remote customer onboarding guidelines

On 10 December, the EBA launched a public consultation on its draft Guidelines on the use of remote customer onboarding solutions under MLD4. These Guidelines set out a common understanding by competent authorities of the steps financial sector operators should take to ensure safe and effective remote customer onboarding practices in line with applicable anti-money laundering and countering the financing of terrorism legislation and the EU’s data protection framework. Once adopted, these Guidelines will apply to all financial sector operators that are within the scope of MLD4. This consultation runs until 10 March 2022. The EBA will finalise these guidelines once the consultation responses have been assessed. A public hearing will take place via conference call on 24 February 2022.

Consultation Paper

FinTech

Please see the ‘Other Developments’ section for the BoE December 2021 financial stability report.

Fund regulation  

Please see the ‘Prudential Regulation’ section for the publication of FSMA 2000 (Consequential Amendments of References to Rules) Regulations 2021, as well as the ‘Other Developments’ section for the BoE December 2021 financial stability report.

Markets and markets infrastructure

ISDA paper on contractual standards for digital asset derivatives

On 14 December, ISDA published a paper on the key issues around contractual standards for digital asset derivatives. The paper explains how ISDA will develop digital product templates and definitions and how they can be integrated within the operational and technological infrastructure that is being designed and implemented across the digital asset ecosystem. In particular, the paper will: (i) identify the distinguishing features of different types of digital asset, highlighting the key characteristics and features of these assets and their relevance to contractual standards; (ii) identify potential disruption events that could occur with respect to digital asset derivatives and provide a framework for defining these events, drawing lessons from the approaches adopted for these events in other asset classes; (iii) identify issues relating to how digital assets and the derivatives that reference them can be valued, including in circumstances where a valuation source or methodology is disrupted; (iv) explain how contractual standards for digital asset derivatives will interact with the existing ISDA documentation architecture, highlighting potential interpretative issues that might arise with respect to the ISDA Master Agreement when considering some of the novel features of digital asset markets; and (v) highlight potential contractual issues to consider when collateralizing digital asset derivatives, whether using traditional or digital forms of collateral. ISDA has also produced a supplement to the paper that sets out a granular, technical analysis of different ISDA product definitions and their potential applicability to digital asset derivatives.

Paper

Definitional booklet

ESMA statement on transfer of competences and duties relating to certain DRSPS 

On 14 December, ESMA published a statement clarifying the transfer of competences and duties relating to supervisory and enforcement activity in the field of certain data reporting services providers (DRSPs) from National Competent Authorities (NCAs) to ESMA. Under articles 27b and 54a of MiFIR, as amended by
Regulation (EU) 2019/21752 (‘ESAs Review Regulation’), the operations of certain DRSPs will be subject to ESMA’s authorisation and supervision as of 1 January 2022. The EC has gathered feedback from stakeholders on a draft delegated act encompassing these empowerments. However, as of today, the delegated act has not been adopted yet. MiFIR does not envisage the consequences of a late application date of the delegated acts. It therefore remains unclear whether ESMA or the relevant NCA would be competent for authorisation and ongoing supervision of DRSPs from 1 January 2022 until the entry into force of the delayed delegated act. ESMA expects that the delegated act will be adopted and apply shortly after 1 January 2022. To avoid imposing on supervised entities the unnecessary burden of potentially having to change supervisor twice over a few months, ESMA considers following the below pragmatic supervisory approach: (i) As of 1 January 2022, ESMA would take over supervisory responsibilities from the NCAs only for the DRSPs which, according to ESMA’s best estimations may likely fall under its remit once the delegated act will apply. ESMA will bilaterally inform the DRSPs that it is planning to start supervising from 1 January 2022; and (ii) once the delegated act on derogation criteria and supervisory fees becomes applicable, ESMA will charge fees to the DRSPs which are not derogated and fall under its supervision, for the entire period starting from 1 January 2022. NCAs are encouraged to continue to oversee DRSPs which will likely be subject to derogation from ESMA supervision and, therefore, fall under NCAs supervisory purview once the delegated act will apply. ESMA will continue to monitor market and regulatory developments, and to periodically reassess whether this approach remains fit for purpose.

Statement

BoE 2021 annual report on supervision of FMIs

On 14 December, the BoE published its 2021 annual report on its supervision of financial market infrastructure firms (FMIs). The report sets out how the Bank has exercised its responsibilities in respect of supervising FMIs since the last report. It also outlines the Bank’s domestic and international policy work to strengthen the regulatory and supervisory frameworks for FMIs. Chapter 4 outlines the BoE's future priorities, which are compiled under four headings: (i) delivering robust supervision of FMIs and targeted enhancements to supervisory frameworks. The BoE will continue to promote FMIs’ financial and operational resilience. This includes continuing to develop its approach to supervising operational resilience, including to the new standards coming into force in April 2022, focusing on the role of third party providers in the provision of critical services by FMIs, with a particular focus on interdependencies and maintaining operational resilience, and consulting on its proposed expectations and policies for FMIs on outsourcing, with specific reference to the use of Cloud. In addition, HMT has proposed increasing the Bank’s supervisory toolkit by establishing a Senior Manager’s and Certification Regime for FMIs. The BoE will continue to promote good risk management, better decision-making and greater innovation by promoting diversity and inclusion in the FMI sector; and (ii) enhancing FMI resilience and recovery. The BoE will conclude its first supervisory stress test of UK CCPs in summer 2022 and further develop its CCP supervisory stress testing framework. HMT is considering conferring further powers on the BoE as part of its Future Regulatory Framework review. The BoE will continue to keep the scope of the clearing obligation under review, including by monitoring developments in benchmark transition in the USD interest rate derivatives markets; (iii) shaping the UK’s response to innovations in payments. More precisely, innovation in payments, including stablecoins, will remain a key area of focus. The BoE will review responses to the June 2021 Discussion Paper and will continue to work closely with HMT and other authorities to develop the UK approach to crypto-assets and stablecoins; and (iv) the BoE will continue to support international workstreams on payments and FMIs more broadly. It will take a leading role in key international workstreams and co-ordinate closely with international counterparts on a wide range of topics related to FMI regulation.

Annual report

HMT report on its review of the Securitisation Regulation

On 13 December, HMT published a report on its call for evidence on the functioning of the UK Securitisation Regulation (Sec Reg). The report finds that: (i) as the Sec Reg has only applied in the UK since 2019, it is challenging to definitively draw conclusions on its effect on the functioning of the UK securitisation market. Additionally, unique external factors, like the Covid-19 pandemic, have disrupted financial markets and made it difficult to assess the effects of the Sec Reg; (ii) there are signs that the Sec Reg has increased the transparency and robustness of the UK securitisation market. At the same time however, there are some indications that the Sec Reg has not boosted securitisation issuance or broadened the investor base as much as it could have; (iii) there are some areas of the Regulation that may benefit from targeted and appropriate refinement. HMT, the FCA and the PRA will continue to further examine these areas and, where appropriate, bring forward reforms. For instance, HMT recognises that work is needed on the disclosure requirements, especially to assess the distinction between different types of securitisations (whether they are public or private), and to consider whether the disclosure requirements for certain private securitisations are appropriate; and (iv) no changes are currently needed to the Sec Reg relating to Third Party Verifiers or Securitisation Special Purpose Entities, because neither of these elements of the regime raised major concerns. In response, the HMT: (a) will consider amending or clarifying some of the jurisdictional scope matters related to the Sec Reg that were raised. This includes scoping out certain unauthorised, non-UK AIFMs from the Regulation’s definition of institutional investor and clarifying due diligence requirements for investors when they invest in non-UK securitisations; (b) agrees with respondents that an STS equivalence framework, under which future equivalence determinations could be made, should be introduced; (c) will consider whether changes are appropriate include revisions to risk retention requirements and explore expanding disclosure templates to require more information about a securitisation’s environmental, social, and governance impact; and (iv) will consider certain points related to the prudential treatment of securitisations in due course.

Report and call for evidence response

Joint PRA and FCA Dear CEO Letter on supervisory review of global equity finance businesses 

On 10 December, the PRA and the FCA published a joint Dear CEO letter to selected firms concerning the supervisory review of global equity finance businesses following the March default of Archegos Capital Management. This default resulted in over $10 billion of reported losses across multiple firms. The PRA, FCA and other global regulators have reviewed and assessed firms’ equity finance businesses, including for those who were counterparties to Archegos, focusing in particular on counterparty risk management. The annex to the letter sets out the PRA’s and FCA’s main observations and expectations in the following areas: (i) firm’s business strategy and organisation; (ii) onboarding and reputational risk; (iii) financial risk management controls and governance; and (iv) liquidation and close-out. The regulators have observed weaknesses in the holistic management of risk across business units, narrow focus of onboarding arrangements and inadequate re-assessment of client relationships thereafter, ineffective and inconsistent margining approaches, and an absence of comprehensive limit frameworks. The regulators posit that the origins of these shortcomings often stem from a risk culture in which frontline business executives fail to take accountability for ownership of risk in their organisation, where the independent risk function lacks standing, and where senior management incentives do not promote safe, sound, and sustainable outcomes for the firm. They believe this demonstrates the importance of firms investing sufficiently in their risk management frameworks and controls infrastructure, as well as the critical role of senior management in establishing and reinforcing an effective and appropriate internal risk culture. The regulators expect firms to carry out a systematic review of their equity finance business and its risk management practices and controls benchmarked against their findings. While the observations set out in the letter are directly relevant to equity finance businesses and have been brought to light by the default of Archegos, the regulators expect firms to consider the highlighted themes more broadly across sales and trading businesses, including but not limited to other forms of secured and synthetic financing activities.The review should cover all major prime brokerage activity, including fixed income and derivative prime brokerage services. Firms should also address the FCA and PRA’s broader observations on risk culture. Firms should report their findings to the regulators with detailed plans for remediation where relevant, by end of Q1 2022.

Letter

FCA issues final 2021 LIBOR documents before transition 

On 10 December, the FCA published a final set of publications relating to the 2021 transition from LIBOR at the end of the year. These include: a speech delivered on 8 December by Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision, a feedback statement and a notice made under Article 23(B) of the UK Benchmarks Regulation. In the speech, Mr Schooling Latter provides an overview of the readiness of the markets regarding the LIBOR transition, and sets out the FCA’s expectations on the remaining actions firms need to take as the end of the year approaches. Mr Schooling Latter highlights three actions that firms which have been slow with transition can take: (i) it is not too late to sign the ISDA protocol for firms with outstanding uncleared LIBOR swaps; (ii) for firms who are an issuer of a LIBOR bond that’s not yet been converted, they still have time to act; and (iii) firms should use the current expertise and awareness around the LIBOR transition at their advantage. Further, Mr Schooling Latter warns that the synthetic rates are not forever, and will probably cease at end-2022. Mr Schooling Latter explains that the FCA has had queries relating to "dealer polls". The FCA does not consider it appropriate or reasonable to put regulatory pressure on firms to respond to such polls. However, Mr Schooling Latter suggests that it would be helpful if market participants are able to assess and conclude at appropriate speed whether such dealer polls will work. The FCA and the PRA will monitor for evidence of unexpected problems emerging. In its feedback statement, the FCA provides details of comments received on its proposal to use its Article 23C and Article 21A powers under the Benchmarks Regulation for certain LIBOR settings. In response to the feedback, the FCA confirms that it did not make any changes to its proposed Article 23C(2) notice. However, the FCA did make changes to its proposed Article 21A notice concerning its approach on fallbacks, and added an Annex to its notice setting out its decision to provide further detail on the exceptions to the restriction on new use. Regarding the notice made under Article 23(B)(2), the FCA provides that the prohibition on use of the Article 23A LIBOR versions will not take effect until the Article 23(C)(2) notice is published. This is expected to happen on 1 January 2022. This is done so that the permission of legacy use of the Article 23A LIBOR Versions is available from the same time that the prohibition on use takes effect. The FCA also updated its webpage on the Benchmarks Regulation to reflect the publication of the feedback statement and its intentions around the Article 21A and Article 23 notices. The update also contains a statement that the FCA intends to issue a statement early in the New Year confirming that the 1, 3 and 6 month sterling and yen LIBOR settings are permanently unrepresentative Article 23A benchmarks, in line with the Notice it published in September.

Speech

Feedback statement

Notice

Webpage

Payment services and payment systems

Please see the ‘Markets and markets infrastructure’ section for the BoE’s 2021 annual report on the supervision of FMIs.

PRA statement on 2022 cyber stress test on retail payment system

On 13 December, the PRA published a statement on the 2022 cyber stress test on retail payment system. The PRA announced that it will invite a number of firms to participate in a voluntary cyber stress test. It will focus on a severe data integrity incident as the disruption scenario and will test firms’ ability to meet the impact tolerance for payments in a ‘severe but plausible scenario’. The Prudential Regulation Committee in addition agreed to invite a limited number of firms with a smaller presence in the retail payment system to take part in this cyber stress test. The objective of expanding coverage of the cyber test, suitably adjusted for scale, is intended to provide valuable insight about the role and preparedness of smaller banks as a sector, and any systemic implications that may arise. The PRA will contact the firms selected for invitation, and they will receive more information about the test in due course.

Statement

EPC updates 2021 SEPA scheme rulebooks and rules

On 13 December, the EPC published updated versions of some of its 2021 SEPA scheme rulebooks and payment scheme management rules. These include: (i) 2021 SEPA Direct Debit Core Scheme Rulebook (version 1.1). This rulebook version 1.1 enters into force on 11 January 2022 and remains in effect up to and including 18 November 2023; (ii) 2021 SEPA Instant Credit Transfer Scheme Rulebook (version 1.1). This version 1.1 enters into force on 11 January 2022 at 08:00 CET and remains in effect up to 19 November 2023 08:00 CET; (iii) Maximum Amount for Instructions under the SEPA Instant Credit Transfer Scheme Rulebook version 1.1 (version 2.1). This document sets the maximum amount per instruction that can be processed under the SEPA Instant Credit Transfer Scheme Rulebook scheme based on the 2021 rulebook version 1.1. This document is referred to in section 2.5 of the rulebook and forms a binding supplement; (iv) 2021 SEPA Direct Debit Business-To-Business Scheme Rulebook (version 1.1). This version enters into force on 11 January 2022 and remains in effect up to and including 18 November 2023; (v) 2021 SEPA Credit Transfer Scheme rulebook (version 1.1). This version 1.1 enters into force on 11 January 2022 and remains in effect up to and including 18 November 2023; and (vi) SEPA Payment Scheme Management Rules (version 4.4). These contain descriptions of the organisation, structure, rules, and processes that make up the scheme management of the Credit Transfer and Direct Debit schemes. This version enters into force as of 11 January 2022 and will remain in effect until further notice.

2021 SEPA Direct Debit Core Scheme Rulebook

2021 SEPA Instant Credit Transfer Scheme Rulebook

Maximum Amount for Instructions

2021 SEPA Direct Debit Business-To-Business Scheme Rulebook

2021 SEPA Credit Transfer Scheme rulebook

FSB survey on its work under Building Block 6 of the Roadmap for enhancing Cross-border Payments 

On 10 December, the FSB launched a survey as part of its work under Building Block 6 of the Roadmap for enhancing Cross-border Payments. The FSB agreed to conduct a stocktake of existing national and regional data frameworks relevant to the functioning, regulation and supervision of cross-border payment arrangements, with a view to identify issues relating to cross-border use of those data by national authorities and by the private sector. The FSB wishes to gather stakeholders’ feedback in order to better understand how requirements applicable to data could affect cross-border payments, by potentially affecting cost, speed, access, security of cross-border payments, or interoperability of cross-border payment networks. Data frameworks within scope of the survey include: (i) domestic data frameworks, including rules, regulations, guidelines and supervisory guidance, that affect the provision of - or access to - cross-border payment services in one or more jurisdictions, or the manner in which those services utilize cross-border payments data in one or more jurisdictions; (ii) implementation of international standards from the FSB and other standard-setting bodies, including BCBS, CPMI, FATF, IAIS, IOSCO, if not included as part of formal domestic data frameworks; and (iii) other international efforts, arrangements, or agreements that jurisdictions may implement in their domestic data frameworks or that may affect cross-border data flows. The FSB invites feedback from banks, non-banks, financial market infrastructures, academics and industry associations. The survey closes on Friday 14 January 2022. Responses to the survey will support FSB member authorities in the analysis of the constraints on cross-border data flows imposed by existing national and regional data frameworks.

Survey

Prudential regulation

Please see the ‘Other Developments’ section for the BoE December 2021 financial stability report.

PRA feedback statement on prudential framework for non-systemic banks and building societies

On 15 December, the PRA published a feedback statement with a summary of the responses to Discussion Paper (DP) 1/21, which explored options for developing a ‘strong and simple’ prudential framework in the UK. This statement summarises the responses to DP1/21 as far as they concern the matters raised in that DP. It does not include policy proposals, nor does it signal how the PRA is considering designing and implementing a strong and simple framework. The majority of respondents were supportive of the long-term vision for a strong and simple prudential framework for non-systemic firms in the UK as presented in the DP. A majority of respondents showed some or full support for the idea of achieving the vision by having a strong and simple framework comprised of a number of layered prudential regimes, although some respondents were concerned that many layers would make the prudential framework too complicated. There was support for many of the ideas about how the simpler regime could be designed, including the concept of a "streamlined" approach, which would involve using the existing prudential framework as a starting point and modifying those elements that appear to be over complex for smaller firms. Respondents offered a range of views about the options for prudential requirements that were discussed in the DP. The PRA welcomes comments or enquiries about this FS and further consultation papers will follow during 2022 and/or 2023.

Feedback statement

PRA guidance on changes to banking reporting requirements

On 15 December, the PRA published a guidance on changes to banking reporting requirements and how they are being implemented in the CRR reporting modules. Changes include: (i) the PRA has incorporated the entire body of the UK version of COREP and FINREP requirements, which is aligned to the EBA Taxonomy 3.0, into PRA rules to create a single source for reporting requirements for firms; (ii) the PRA made changes to the Leverage Ratio reporting requirements which will take effect on Saturday 1 January 2022; (iii) firms are required to submit Remuneration Benchmarking and High Earners Reports to the PRA, as set out in Chapters 17 and 18 of the Remuneration Part of the PRA Rulebook, respectively; and (iv) firms will not be required or expected to submit any data for the 2022 and 2023 benchmarking exercise. This includes Credit Risk, IFRS 9 and Market Risk data (also known as COR009a, COR009b and COR010).

Guidance

PRA policy statement on designating investment firms

On 15 December, the PRA published a policy statement on the designation of investment firms. The PRA received no responses to its consultation, and therefore made no changes to the draft policy. The amendments proposed were made to: (i) reflect HMT’s proposed amendments to the PRA-regulated Activities Order, including the change in the scope of the firms that can be designated; (ii) explain that there will usually be six months, rather than three months, between the Prudential Regulation Committee designating an investment firm and it becoming PRA-regulated; (iii) note that the PRA will take into account whether or not an investment firm is a clearing member of a central counterparty offering clearing services to other financial institutions (that are not clearing members themselves) when making a designation decision; and (iv) delete any obsolete text and make other minor textual amendments. The Definition of Capital Part of the PRA Rulebook is now changed to increase the base capital resources requirement for designated investment firms from €730,000 to £750,000 and to denominate it in Sterling. The policy presented in this PS will take effect on Saturday 1 January 2022.

Policy statement

EBA final report on amendments to RTS on credit risk adjustments

On 13 December, the EBA published its final report on the draft Regulatory Technical Standards (RTS) amending its RTS on credit risk adjustments in the context of the calculation of the Risk Weight (RW) of defaulted exposures under the Standardised Approach (SA). The proposed amendments follow the EC’s Action Plan to tackle Non-Performing Loans (NPL) in the aftermath of the COVID-19 pandemic, which indicated the need for a revision of the treatment of purchased defaulted exposures under the SA. This Action Plan asks the EBA to reconsider the appropriate regulatory treatment of the RW for purchased defaulted assets which have been sold at a discount; that is NPL sales. Under the current regulatory framework, the capital charge for a defaulted exposure may increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets. The proposed amendment to the existing RTS on credit risk adjustments introduces a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight. The EBA also recommends that the treatment set out in this RTS be directly reflected in the level 1 text, in line with the European Commission’s CRR3 proposal. The final draft RTS will be submitted to the Commission for endorsement before being published in the OJ.

Final report

EBA consults on RTS and guidelines on liquidity requirements for investment firms

On 10 December, the EBA published consultation papers on draft regulatory technical standards (RTS) and guidelines relating to liquidity requirements under the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR). These include: (i) a consultation paper on draft RTS on the specific liquidity measurement for investment firms under Article 42(6) of the IFD (EBA/CP/2021/41). Article 42(1) of the IFD mandates competent authorities to impose specific liquidity requirements for an investment firm on the basis of an assessment of supervisory review and evaluation process. Article 42(6) of IFD mandates the EBA to develop draft RTS to specify how the liquidity risk and elements of liquidity risk are to be measured. The draft RTS on specific liquidity measurement set out liquidity risk elements that may raise major concern for investment firms and that competent authorities will be required to consider when setting specific liquidity requirements as a result of an investment firm’s supervisory review and evaluation process. The draft RTS specify that those elements shall be considered under normal and severe, but plausible, conditions. In addition, to ensure proportionality, competent authorities should assess only a smaller set of elements for small and non-interconnected investment firms; and (ii) a consultation paper on draft guidelines on the liquidity requirements exemption for investment firms under Article 43(4) of the IFR (EBA/CP/2021/42). The draft guidelines set out the criteria that competent authorities should take into account when exempting small and non-interconnected investment firms from liquidity requirements set out in the IFR. These Guidelines specify that an exemption should be based on the assessment of the financial resource needed for an orderly wind-down of the investment firm. The deadline for the submission of comments is 10 March 2022. The EBA intends to publish the final guidelines by mid-2022, with the guidelines applying two months following publication.

EBA/CP/2021/41

EBA/CP/2021/42

FSMA 2000 (Consequential Amendments of References to Rules) Regulations 2021 published  

On 10 December, the Financial Services and Markets Act (FSMA) 2000 (Consequential Amendments of References to Rules) Regulations 2021 were published on legislation.gov.uk, alongside an explanatory memorandum. The Regulations amend: (i) the definition of “Directive 2013/36/EU UK law” in various legal instruments; and (ii) the definitions of the Collective Investment Schemes sourcebook, the FCA Handbook and the PRA Rulebook where they appear in the statute book to ensure that those definitions capture CRR rules and Part 9C rules made as of 1 January 2022. The amendments substitute the reference to ‘IP completion day’, in the context of rules made by the FCA or the PRA, with ‘1 January 2022’. This ensures that the definitions capture regulator rules as they have effect on 1 January 2022 and follows amendments to certain PRA and FCA rules that implemented the CRD IV Directive relating to the introduction of CRR rules and Part 9C rules (that is, PRA rules further implementing Basel III and FCA rules implementing the Investment Firms Prudential Regime). The Regulations come into force on 1 January 2022.

Regulations

Explanatory memorandum

Recovery and resolution

FSB paper on bail-in execution practices 

On 13 December, the FSB published a paper on practices regarding the execution of bail-in. Drawing on examples and practices across different jurisdictions, this paper provides an overview of practices, operational processes and arrangements as part of the bail-in process. This includes: (i) the suspension of trading and delisting from trading venues of securities of bailed-in firms; (ii) the (re-)listing and (re-)admission to trading of new and existing securities; and (iii) the role CSDs play in the cancellation of shares, write-down and/or conversion of eligible instruments, and issuance of new shares and interim instruments. The paper also highlights cross-border challenges to the execution of bail-in, where securities are listed on more than one trading venue across different jurisdictions, or where securities are issued in a market other than the domestic market. These include: (a) the suspension of trading and settlement across all relevant trading venues and CSDs; (b) the distribution of the new securities in foreign markets or to foreign investors; and (c) operational challenges arising for example from the involvement of multiple CSDs. These issues introduce additional complexities to the execution of bail-in, which may need to be specifically addressed as part of resolution planning.

Paper

Sustainable finance

Delegated Regulation supplementing Taxonomy Regulation 

On 10 December, Delegated Regulation 2021/2178 supplementing the Taxonomy Regulation by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of the 2013 Accounting Directive (2013/34/EU) concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation was published in the official journal. This Regulation will enter into force on 30 December. From 1 January 2022 until 31 December 2022, non-financial undertakings shall only disclose the proportion of Taxonomy-eligible and Taxonomy non-eligible economic activities in their total turnover, capital and operational expenditure and the qualitative information referred to in Section 1.2 of Annex I relevant for this disclosure. From 1 January 2022 until 31 December 2023, financial undertakings shall only disclose: (i) the proportion in their total assets of exposures to Taxonomy non-eligible and Taxonomy-eligible economic activities; (ii) the proportion in their total assets of the exposures referred to in Article 7, paragraphs 1 and 2; (iii) the proportion in their total assets of the exposures referred to in Article 7(3); (iv) the qualitative information referred to in Annex XI. Credit institutions shall also disclose the proportion of their trading portfolio and on demand inter-bank loans in their total assets. The key performance indicators of non-financial undertakings, including any accompanying information to be disclosed pursuant to Annexes I and II to this Regulation, shall be disclosed from 1 January 2023. The key performance indicators of financial undertakings, including any accompanying information to be disclosed pursuant to Annexes III, V, VII, IX, XI to this Regulation, shall be disclosed from 1 January 2024. Sections 1.2.3 and 1.2.4 of Annex V shall apply from 1 January 2026.

Regulation

Other developments

FOS consultation on 2022/23 plans and budget 

On 15 December, the FOS published a consultation on its 2022/23 plans and budget. The consultation sets out the FOS’ plans for the coming financial year, including the volumes of complaints it expects to receive and resolve, and its proposed budget and funding arrangements. It also gives an update on its progress this financial year. Final plans and budget will be published by 31 March 2022, after it has been approved by the FCA. The consultation is open until 31 January 2022.

Consultation

HMT consultation on financial promotion exemptions 

On 15 December, the HMT published a consultation on financial promotion exemptions for high net worth individuals and sophisticated investors. This consultation proposes reforms to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 exemptions, responding to economic, social and technological changes that have occurred since the exemptions were introduced in 2001, and to instances of misuse of the exemptions identified by the FCA. The proposed reforms look to: (i) ensure that thresholds for exempt investors are calibrated to reflect investors’ experience or their ability to absorb losses; (ii) reduce the risk that the exemptions are used for promotions to investors who do not meet the conditions; and (iii) ensure that, where exemptions are used, investors understand the regulatory protections they are losing and are able to take responsibility for their investment decisions. This consultation closes at 11:45pm on 9 March 2022.

Consultation

EC strategy on supervisory data in EU financial services

On 15 December, the EC published a communication on its strategy on supervisory data in EU financial services. The EC’s strategy builds upon the conclusions of the comprehensive fitness check of EU supervisory reporting requirements in financial sector legislation. This strategy will contribute directly to the objectives of the European Data Strategy and the Digital Finance package to promote digital innovation in Europe. Moreover, this strategy contributes to the objectives of a Capital Markets Union and helps to achieve a single market in financial services. There are four main building blocks in this strategy: (i) ensuring consistent and standardised data that relies on clear and common terminology, as well as on common standards, formats and rules; (ii) facilitating the sharing and re-use of reported data amongst supervisory authorities by removing undue legal and technological obstacles to avoid duplicative data requests; (iii) improving the design of reporting requirements by developing guidelines based on best practices in applying better regulation principles in supervisory reporting; and (iv) putting in place joint governance arrangements in order to improve coordination and foster greater cooperation between different supervisory authorities and other relevant stakeholders, allowing them to share their expertise and to exchange information.

Communication

Joint Committee report on the Draft Online Safety Bill

On 14 December, the Joint Committee on the draft Online Safety Bill (OSB) published a report on the Draft OSB. The report concludes that: (i) big tech has failed its chance to self-regulate. They must obey this new law and comply with Ofcom as the UK regulator, or face the sanctions; (ii) Ofcom should set the standards by which big tech will be held accountable. Their powers to investigate, audit and fine the companies should be increased; (iii) Ofcom should draw up mandatory Codes of Practice for internet service providers. They should also be able to introduce additional Codes as new features or problem areas arise, so the legislation doesn’t become outdated as technology develops. These should require the service providers to conduct internal risk assessments to record reasonable foreseeable threats to user safety, including the potential harmful impact of algorithms, not just content; (iv) the new regulatory regime must contain robust protections for freedom of expression, including an automatic exemption for recognised news publishers, and acknowledge that journalism and public interest speech are fundamental to democracy; (v) paid-for advertising should be covered by the Bill; and (vi) service providers should be required to create an Online Safety Policy for users to agree with, similar to their terms of conditions of service. The Committee also believes the Bill should be clearer about what is specifically illegal online and that individual users should be able to make complaints to an ombudsman when platforms fail to comply with the new law. A senior manager at board level or reporting to the board should be designated the "Safety Controller" liable for a new offence: the failure to comply with their obligations as regulated service providers when there is clear evidence of repeated and systemic failings that result in a significant risk of serious harm to users. 

Report

BoE December 2021 financial stability report 

On 14 December, the BoE published the Financial Policy Committee (FPC)’s December 2021 Financial Stability Report. This report sets out the FPC’s view on the stability of the UK financial system and what it is doing to remove or reduce any risks. Overall, the report found that the UK and global economies have continued to recover from the effects of the pandemic, but uncertainty over risks to public health and the economic outlook remains. The report then focuses on specific areas: (i) bank resilience. The FPC continues to judge that the UK banking system remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the final results of the 2021 solvency stress test; (ii) debt vulnerabilities. The FPC judges that domestic debt vulnerabilities have not increased materially over the course of the pandemic. UK corporate debt vulnerabilities have increased relatively moderately over the pandemic so far. Global debt vulnerabilities remain material; (iii) risk-taking in global financial markets. Risk-taking in certain financial markets remains high relative to historical levels, notwithstanding recent market volatility; (iv) the UK countercyclical capital buffer rate. The FPC judges that vulnerabilities that can amplify economic shocks are at a standard level overall, as was the case just before the pandemic. The FPC is therefore increasing the UK countercyclical capital buffer rate from 0% to 1%. If the UK economic recovery proceeds broadly in line with the MPC’s central projections in the November Monetary Policy Report, and absent a material change in the outlook for UK financial stability, the FPC would expect to increase the rate further to 2% in 2022 Q2; (v) the FPC’s mortgage market Recommendations. The FPC intends to maintain the LTI flow limit Recommendation, but consult, in the first half of 2022, on withdrawing its affordability test; (vi) building the resilience of the financial system. In the FPC’s view, further policy measures are needed to enhance the resilience of market-based finance in other areas including open-ended funds, margin, the liquidity structure and resilience of core markets, and leveraged investors and their prime brokers; and (vii) risks from cryptoassets. As the FPC has noted, direct risks to the stability of the UK financial system from cryptoassets are currently limited. However, at the current rapid pace of growth, and as these assets become more interconnected with the wider financial system, cryptoassets will present a number of financial stability risks. Enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to influence developments in these fast-growing markets in order to manage risks, encourage sustainable innovation and maintain broader trust and integrity in the financial system. 

Report

UK Government statement on review of retained EU Law

On 13 December, the HoL published a written statement by Lord Frost on behalf of the UK Government, setting out the progress made on the review of “retained EU law” (REUL), and the next steps. Lord Frost explains that many laws that were retained are not necessarily right for the UK as an independent country, and there are anomalies and uncertainties which remain over the precise status of REUL as part of the UK’s domestic law. Accordingly, the Government launched two reviews: the first into the substance of REUL, and the second into its status in law. On the substance review, Government departments have been taked with establishing the content of REUL in policy areas for which they are responsible, and to consult stakeholders as necessary. On the second review, the government has identified the following areas where EU law concepts, retained by the EU Withdrawal Act, still affect the UK: (i) many of the incorporated rights from the EU Law replicate rights that were already part of UK law. The Government wants to ensure that the UK law-derived rights are not confused or overlaid with EU-derived rights; (ii) the UK courts are still required to interpret REUL in accordance with retained general principles of EU law, such as proportionality and the protection of legitimate expectations. The Government needs to consider whether this new body of UK law should be interpreted under UK principles of interpretation, or under those that apply to the EU treaties and legislation developed for Member States; (iii) currently REUL has a special and unusual status in UK law. REUL is treated as UK primary legislation, and in other cases its status depends on its original form. The Government will be revisiting the legislative framework in the European Union Withdrawal Act and the operation of such REUL, so that it is given a more appropriate status within the UK legal system for the purposes of amendment and repeal; (iv) the EU concept of the ‘supremacy of EU law’ has been preserved by the 2018 Act. This interpretative concept is alien to the UK legislative principles, and is clearly no longer appropriate. The Government will consider the issue and it is likely that it will propose removing the concept from the statute book; (v) the Government needs to consider the anomalous status of EU case law, and will be revisiting the issue of which UK courts should be able to depart from retained EU case law, and on what basis; (vi) in addition to the general process for addressing REUL which is no longer right for the UK, the Government proposes to ensure that the retained version can be swiftly removed when the original EU law measure has been declared invalid under EU law; and (vii) the review will also consider any consequential actions, such as updated guidance relating to the courts and the place of EU law in legal education. The Government will incorporate Parliament’s views, and aims to issue proposals in the spring, and legislate as soon as parliamentary time allows.

Statement