Key Regulatory Topics: Weekly Update 12 - 18 August 2022
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It has been a very quiet week this week in terms of publications, both in the UK and in Europe. The FCA strongly encouraged market participants to continue the transition from LIBOR-linked bonds to risk-free rates, while in Europe, the European Commission adopted a Delegated Regulation containing regulatory technical standards on residual risk add-on under the alternative standardised approach for market risk under the Capital Requirements Regulation.
FCA statement on IFPR and eligibility for enhanced SMCR status as a Significant SYSC firm
On 16 August, the FCA published a statement in relation to the renaming of Significant IFPRU firms as Significant SYSC firms, a definition which is used as one of the criteria for identifying Enhanced Firms under the Senior Managers & Certification Regime (SMCR). The definition was renamed and moved so that it could be retained following the deletion of the IFPRU sourcebook with the introduction of the Investment Firms Prudential Regime (IFPR). Stakeholders have since highlighted that the new definition of Significant SYSC firm could result in more firms being brought into Enhanced scope than under the previous definition as it had been understood and applied. The FCA therefore plans to consult shortly to make changes necessary to clarify that only firms that would have been both Significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the new definition of Significant SYSC firm for the purposes of the Enhanced Scope SMCR regime. In the meantime, the FCA makes clear that firms that have unintentionally come under the Enhanced Scope SMCR Regime under the new version of Significant SYSC, need take no action.
JMLSG revisions to sectoral guidance on motor finance
On 12 August, the JMLSG published revisions to part of its sectoral guidance on motor finance found in section 11 of Part II of its AML and CTF guidance for the financial services sector. The revised guidance is an updated version of a Finance & Leasing Association (FLA) industry standard for the prevention of financial crime and terrorist financing in motor finance credit application processing. It sets out the approach required by full FLA members to due diligence when considering a credit application and acceptable methods for conducting these checks. It also outlines common sales channels available for obtaining motor finance and identifies for each what evidence of identification (Know Your Customer) and verification of this evidence (Prove Your Customer) is required to meet the standard. The JMLSG has submitted the guidance to HMT for Ministerial approval.
CMA update on Open Banking implementation roadmap
On 18 August, the CMA published a letter sent to the Open Banking Implementation Entity (OBIE) in response to a letter from the OBIE providing an update on the status of items in the Open Banking implementation roadmap. The CMA states that although Open Banking has secured positive outcomes for consumers and businesses to date, and the majority of the CMA9 (nine largest current account providers in the UK) have made significant progress in implementing the roadmap, the CMA nonetheless remains concerned that some of the CMA9 will be unable to implement the remaining items on the roadmap within an acceptable timeframe. The CMA will actively consider whether any enforcement action is necessary in relation to those of the CMA9 who fail to implement the remaining roadmap items in a timely manner. The CMA looks forward to a further update in September. On this basis, and subject to the CMA9 progressing with implementation as set out above, the CMA anticipates being in a position to determine that the roadmap has been completed later this year.
Markets and markets infrastructure
FCA encourages market participants to continue transition of LIBOR-linked bonds
On 16 August, the FCA published a statement strongly encouraging issuers of the remaining LIBOR-linked bonds (or those that may have a future LIBOR-linked dependency) issued under English or other non-US laws which make consent solicitation practicable, to schedule consent solicitation processes for conversion to fair alternative rates. The relevant risk-free rate (RFR) and the industry-agreed spreads that have been used in successful consent solicitation exercises to date provide a model for such conversions. Responsibility for initiating this process lies with the bond issuer. The FCA also encourages holders of bonds without robust fallbacks or another mechanism to remove reliance on LIBOR, to engage with the relevant issuers or their agents and request that they initiate these conversion processes. The FCA considers the potential implications of the cessation of one and six-month synthetic sterling LIBOR at the end of March 2023, and the end of the US dollar (USD) LIBOR panel at the end of June 2023. The FCA cautions that USD LIBOR bonds issued under English (and other non-US) law will not benefit from US legislation on the conversion of these bonds to RFRs. The FCA encourages market participants that are affected by these developments to respond to its June 2022 consultation paper on winding down synthetic sterling LIBOR and USD LIBOR by 24 August.
EC adopts RTS specifying exotic underlyings and instruments bearing residual risks for the purposes of the calculation of own funds requirements for residual risks under CRR
On 16 August, the EC adopted a Delegated Regulation supplementing the CRR with regards to RTS specifying exotic underlyings and the instruments bearing residual risks for the purposes of the calculation of own funds requirements for residual risks under the alternative standardised approach for market risk. In particular, the final draft RTS: (i) specify that longevity risk, weather, natural disasters and future realised volatility should be considered as exotic underlyings; (ii) set out a non-exhaustive list of instruments bearing residual risks; and (iii) set out a list of risks that, in themselves, do not constitute residual risks.
Regulatory reform post-Brexit
Please see our website for the second publication in our series on the Financial Services and Markets Bill (FSMB). The FSMB is intended to create the legislative and institutional architecture to support a move away from onshored EU legislation towards the historic approach taken under FSMA, whereby primary responsibility for regulation is delegated to the UK regulatory authorities, subject to the oversight of Parliament – taking us back to the future, as it were. In this briefing we discuss the revocation of onshored EU law contained in the Bill, focusing on some questions of relevance to firms.
FCA update on authorisation landing slots for TPR firms
On 12 August, the FCA provided an update for firms in the Temporary Permissions Regime (TPR). All firms in the TPR that the FCA is expecting to apply for full authorisation in the UK should now have received a formal direction confirming their ‘landing slot’. Firms that intend to apply for full UK authorisation and will be solo-regulated by the FCA, but have not received a landing slot direction can still apply before the end of 31 December. All firms in the TPR that intend to apply for full UK authorisation must do so by the end of 31 December. An application from a firm in the TPR which is submitted after this date will be treated as invalid. A FSMA firm that misses its landing slot, (or otherwise fails to apply by 31 December) will have failed to meet the FCA’s expectations and, as a result, the FCA will expect it to voluntarily apply to cancel its temporary permission and either, enter the supervised run-off mechanism to run-off its UK business (if eligible) or leave the UK perimeter. Where firms do not take either of these steps promptly, the FCA will look to take action to cancel their temporary permission.