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Key Regulatory Topics: Weekly Update 12 January – 18 January 2018

24 January 2018

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



HoL EU Financial Affairs sub-committee publishes transcript of BoE oral evidence on financial supervision

On 17 January, the HoL EU Financial Affairs Sub-Committee published the transcript of the oral evidence given by Sir Jon Cunliffe, BoE Deputy Governor for Financial Stability, and Sam Woods, BoE Deputy Governor for Prudential Regulation and PRA CEO, at an evidence session on 1 November 2017. Sir Jon and Mr Woods commented: (i) on the contingency plans requested by the BoE from banks and insurance companies; (ii) that firms need certainty and need to know where to go if they have problems that cannot be solved by them; (iii) that most institutions that are significantly active in terms of establishing a stronger or new EU27 base will start to operationalise these plans from the first quarter of 2018; and (iv) if, after Brexit, continued preferential market access arrangements were agreed for certain parts of financial services between the UK and the EU27, a natural counterpart of that would be a kind of successor to the current EU institutional and regulatory architecture for supervisory co-operation, notably the Joint Risk Assessment and Decision process.


First EC progress report on reduction of NPLs in EU

On 18 January, the EC published a communication (COM(2018)37/F1) setting out its first progress report on the reduction of NPLs in the EU. Alongside the communication, the EC has published a staff working document (SWD(2018) 33 final), FAQs and a factsheet. In the communication, the EC explains that the positive trend of falling NPL ratios has solidified and continued into the second half of 2017. NPL ratios have been falling in nearly all member states, although the situation differs significantly across member states. This is in line with the overall progress on risk reduction in the EU banking sector. However, despite this positive trend, high NPL ratios remain an important challenge for several member states, and for the EU as a whole. The Council of the EU's July 2017 action plan was a major step in addressing this challenge. The EC's report shows that important progress is being made in implementing the action plan. The EC plans to present a comprehensive package of measures in spring 2018 to reduce the level of existing NPLs and prevent the build-up of NPLs in the future. The package will focus on four areas: (i) supervisory actions; (ii) reform of restructuring, insolvency and debt recovery frameworks; (iii) development of secondary markets for distressed assets; and (iv) fostering restructuring of the banking system. The EC considers that action in these areas should be at both the national and EU levels, where appropriate. The EC will continue to closely follow developments in this area, and will report again in March 2018 at the latest.


Staff working document




Benchmark Regulation - EC Delegated Regulation published in OJ

On 17 January the following Delegated Regulations under the BMR were published in the OJ: (i) Delegated Regulation (EU) 2018/64, which supplements the BMR with regard to specifying how the criteria of Article 20(1)(c)(iii) of the BMR are to be applied for assessing whether certain events would result in significant and adverse impacts on market integrity, financial stability, consumers, the real economy or the financing of households and businesses in one or more member states; (ii) Delegated Regulation (EU) 2018/65, which supplements the BMR specifying technical elements of the definitions laid down in Article 3(1) of the BMR; (iii) Delegated Regulation (EU) 2018/66, which supplements the BMR specifying how the nominal amount of financial instruments other than derivatives, the notional amount of derivatives and the net asset value (NAV) of investment funds are to be assessed; and (iv) Delegated Regulation (EU) 2018/67, which supplements the BMR with regard to the establishment of the conditions to assess the impact resulting from the cessation of or change to existing benchmarks. All the Delegated Regulations will enter into force on 6 February (that is, twenty days after their publication in the OJ).

Regulation 2018/64

Regulation 2018/65

Regulation 2018/66

Regulation 2018/67


EBA final report on implementation of guidelines on methods for calculating contributions to DGSs

On 17 January, the EBA published its final report on the implementation of its guidelines on methods for calculating contributions to DGSs. The final report, which assesses authorities' compliance with the principles outlined in the guidelines, concludes that: (i) the guidelines have broadly met the aim of introducing different contribution levels for institutions according to their riskiness; (ii) the approach taken by member states in line with the guidelines seems to ensure a good level of transparency to stakeholders and not to cause excessive additional reporting requirements; and (iii) further analysis and greater experience of the risk-based systems in use is needed before proposing any changes to the guidelines, as the available data covers only one year of risk-based contributions. The report notes a number of suggested improvements to the guidelines, which the EBA intends to consider as part of a wider review of the Deposit Guarantee Schemes Directive in 2019.

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ESMA call for evidence on potential product intervention measures on CFDs and binary options to protect retail clients

On 18 January, ESMA published a call for evidence on potential product intervention measures on CFDs and binary options to protect retail clients (ESMA35-43-904). In December 2017, ESMA published a statement explaining it was considering the possible use of its product intervention powers under Article 40 of MiFIR to address investor protection concerns arising out of the marketing, distribution and sale of CFDs (including rolling spot forex) and binary options to retail investors. In relation to CFDs, ESMA is considering the following: (i) leverage limits on the opening of a position by a retail client; (ii) a margin close-out rule on a position by position basis; (iii) negative balance protection on a per-account basis, to provide an overall guaranteed limit on retail client losses; (iv) a restriction on incentivisation of trading provided directly or indirectly by a CFD provider, such as providing retail clients with a payment (other than a realised profit on any CFD provided) or a non-monetary benefit in relation to the marketing, sale or distribution of a CFD; and (v) a standardised risk warning by CFD providers in any communication to, or published information accessible by, a retail client relating to the marketing, distribution or sale of a CFD. The call for evidence closes to responses on 5 February 2018.


PRA "Dear Chair" letter as follow up on statement

On 17 January, the PRA published a "Dear Chair" letter as follow-up to its statement on consumer credit, which was published in July 2017. The statement raised ten issues for firms to consider. Firms with material consumer credit exposures were required to respond to the PRA, with responses approved by their boards. The letter sets out the PRA's key findings and identifies points for firms to action.

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Home Office publishes report examining the costs of cybercrime in the UK and attempts to understand how to better explore cybercrime costs in the future

On 18 January, the Home Office published a report showing an estimated £1.6m cost to the government and core industry targets. The Home Office also says cybercrime has cost UK companies an estimated £5.1m through malware infections reported to the malware domain list.

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The Department for Business, Energy & Industrial Strategy (DBEIS) announces a "world-first" public register, which will require overseas companies that own or buy property in the UK to provide details of their ultimate owners

On 18 January, the government issued a press release announcing plans for the register with the aim of reducing opportunities for criminals to use shell companies to buy properties in London and elsewhere to launder their illicit proceeds by making it easier for law enforcement agencies to track criminal funds and take action. The press release states that £180 million worth of property in the UK has been brought under criminal investigation as the suspected proceeds of corruption since 2004. The government aims to produce a draft Bill in summer 2018, with a view to the register going live early in 2021.

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David Green, Director of the UK Serious Fraud Office, says once he leaves the SFO, he hopes that the SFO continues to promote its current message on self-reporting

On 17 January, David Green, who is set to leave the SFO in April, spoke at a conference organised by industry event business He said he hopes the current message continues: if a company self-reports misconduct, the "odds are" it will be offered a deferred prosecution agreement (DPA), and if not, it will be prosecuted.

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WFE best practice guidelines for cyber security compliance

On 18 January, the World Federation of Exchanges (WFE) published best practice guidelines for cyber security compliance. The best practice guidelines are for market infrastructures (including exchanges and CCPs) and are designed to engender a staff culture of cyber security compliance. They are also designed to support future dialogue with regulatory authorities as they continue to consider how best to strengthen the system in response to an ever-increasing degree of sophistication of cyber criminals. When creating a cyber compliance framework, the best practice guidelines to consider include: (i) behavioural incentives; (ii) cultural incentives; (iii) operational support (that is, training, transparency and technology). The guidelines were compiled by the WFE's dedicated cyber security group of information security professionals within global exchange and CCP groups, drawing on their collective experience of what works, and what has proven to be less effective, in approaching staff training and behaviour around cyber security.

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Government responds to MLD5 queries from House of Commons European Select Committee

On 17 January, the DExEU published a letter, from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Select Committee Chair, on the proposed MLD5. The letter responds to queries set out in a November 2017 report produced by the committee. Mr Glen explains that the political agreement reached on MLD5 in December 2017 meets many of the UK's negotiating priorities (including ensuring appropriate criteria against which high-risk third countries will be assessed). He also refers to a review clause requiring the EC to consider the proportionality of applying enhanced due diligence measures to all politically exposed persons, and to publish a report on its findings in 2019. Mr Glen notes that the politically agreed MLD5 text does not require third countries entering into a free trade agreement with the EU to meet specific AML and CTF standards. When the UK leaves the EU it will be a third country under MLD4. Mr Glen explains that the European Union (Withdrawal) Bill will preserve the MLRs 2017, subject to minor amendments necessary to rectify deficiencies within the legislation caused by the UK leaving the EU. The existing approach of UK supervisors and firms to complying with the MLRs 2017 will not change once the UK is a third country. Mr Glen also comments that the UK plays a leading role in the FATF and, as such, is committed to full and effective implementation of the FATF's AML and CTF standards.

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Joint Committee of ESAs update webpages on final guidelines under revised Wire Transfer Regulation

On 16 January, the Joint Committee of ESAs updated its webpage on its guidelines under the revised WTR on the measures that PSPs should take to detect missing or incomplete information on the payer or the payee, and the procedures they should put in place to manage a transfer of funds lacking the required information. The updated webpage now includes links to the guidelines in each of the official languages of the EU. The effective date for implementation is 16 July.

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EP to consider MLD5 at plenary session

On 12 January, the EP updated its procedure file on the proposed MLD5. The procedure file indicates that the EP will debate and vote on MLD5 at its plenary session to be held from 16 to 19 April. The EP and the Council of the EU reached political agreement on MLD5 on 15 December 2017. Once both the EP and the Council have formally adopted MLD5, it will enter into force 20 days after its publication in the OJ. Member states will have 18 months to transpose MLD5 into national legislation after OJ publication.

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IOSCO Board communication on concerns about ICOs


On 18 January, IOSCO published a board communication on concerns relating to ICOs. At a meeting held on 18 and 19 October 2017, the IOSCO Board discussed the growing use of ICOs to raise capital as an area of concern. Following the meeting, IOSCO issued a statement to its members on the risks of ICOs, and referenced various approaches to ICOs taken by members and other regulatory bodies. A sample of communications issued by authorities, including ESMA and the FCA, is available on IOSCO's website. The IOSCO Board has established an ICO Consultation Network, through which members can discuss experiences and raise concerns, including any cross-border issues, to the attention of fellow regulators. In December 2017, the FCA advised that it is further examining developments in the ICO market. It will use the findings from this work to help determine whether further regulatory action is needed, beyond the consumer warning issued in September 2017. At the EU level, ESMA issued statements on ICOs in November 2017.

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MMF - EC calls for feedback on roadmap on delegated act on liquidity requirements

On 16 January, the EC published a roadmap (Ares(2018)245681) relating to a delegated act under the MMF Regulation, which specifies quantitative and qualitative liquidity requirements applicable to assets received as part of a reverse repurchase agreement and on credit quality assessment. The objectives relating to the delegated acts are set out in Articles 11, 15 and 22 of the MMF Regulation. The first two empowerments tackle the need to introduce detailed requirements for the methodology for a proper credit risk assessment to ensure that the MMF manager performs their tasks properly. The aim of the third empowerment is to link the MMF Regulation with the Securitisation Regulation ((EU) 2017/2402). The EC is consolidating the three separate empowerments into a single delegated act. The deadline for comments on the consolidated delegated act is 12 February.

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ECON letter to COREPER on the legislative proposal to postpone the application date of the IDD

On 16 January, ECON published a letter (dated 9 January) sent by its Chair to the Chair of Coreper II on the legislative proposal to postpone the application date of the IDD to 1 October. In its latest letter, ECON confirms its support for a "postponement of the date of transposition of the IDD by a few months, such as 1 July 2018". ECON goes on to confirm its intention to "steer the adoption of [the proposed amending Directive] in an expedited manner while respecting [Parliament] Rules of Procedure, and in order to avoid trialogue procedures", and in so doing co-operate with the Council of the EU on this. To this end, ECON explains that it intends to launch a procedure to adopt a recommendation not to object to the adoption of the proposed Directive to speed up its entry into force, and states that it trusts the Council will do the same.

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Solvency II - HMT and PRA responses to Treasury report

On 16 January, the HoC Treasury Committee published material relating to its October 2017 report on the findings from an inquiry into Solvency II and its impact on the UK insurance market. It published HMT's response to the report, together with an interim response from the PRA. HMT responded to two recommendations set out in the report. One recommendation relates to the PRA's competition objective. HMT believes that it would be wrong to give the PRA's secondary competition objective equal primacy with its other statutory objectives. The other recommendation relates to Brexit. HMT explains that one of the government's priorities is to ensure a smooth adjustment from the current structures to the new relationship. In the PRA's response, it advises that it will provide a full progress report before the end of March. However, in the interim, the PRA makes a number of points. It believes that there is a lot of common ground between it, the committee and the industry on aspects of the Solvency II regime that do not work well. The most glaring of these is the risk margin, on which the PRA is actively looking at further steps it may take.

HMT response

PRA interim response


HMT response to consultation on transposing IDD

On 15 January, HMT published its response to its February 2017 consultation on transposing the IDD. In the response, HMT confirms that the government has maintained its core position on all of the covered policy areas. A revised draft of the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Order 2018 has also been published. A related webpage explains that the Order will be laid before parliament in "due course" and come into force on 23 February.

HMT response

Revised Order


MiFID II - EC Delegated Regulation published in OJ

On 17 January, Delegated Regulation (EU) 2018/63, which amends Delegated Regulation (EU) 2017/571 supplementing MiFID II with regard to RTS on the authorisation, organisational requirements and the publication of transactions for data reporting services providers was published in the OJ. The EC adopted this Delegated Regulation on 26 September 2017. The Delegated Regulation will come into force on 6 February (that is, twenty days after their publication in the OJ).

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Delegated Regulation supplementing IFR with RTS on separation of payment card schemes and processing entities published in OJ

On 18 January, Commission Delegated Regulation (EU) 2018/72, which supplements the IFR with regard to RTS establishing the requirements to be complied with by payment card schemes and processing entities to ensure the application of independence requirements in terms of accounting, organisation and decision-making process, was published in the OJ. In accordance with its powers under Article 7(6) of the IFR, the EC adopted the Delegated Regulation on 4 October 2017 after revising the draft RTS submitted to it by the EBA. The Delegated Regulation will enter into force on 7 February. The EC has published a press release welcoming the new requirements.

Commission Delegated Regulation (EU) 2018/72

EC press release


PSR open letter to NPSO sets out expected initial priorities 

On 18 January, the PSR published an open letter from Hannah Nixon, PSR Managing Director, to Paul Horlock, CEO of the NPSO, setting out the PSR's expectations of the NPSO's initial priorities. The PSR and the BoE announced the formation of the NPSO in September 2017. During 2018, the NPSO will take over the operation of three key interbank retail payment systems (that is, Bacs, Faster Payments and the new ICS for cheques). The NPSO is also responsible for designing and delivering several key strategic payments initiatives, which were developed by the Payments Strategy Forum and handed over to the NPSO in December 2017 for implementation. Notably, the creation of the NPSO is intended to help facilitate the safe and secure transition to, and management of, a new payments architecture (NPA). The PSR concludes the letter by noting that, while it has a range of powers it could use to facilitate the successful development of the NPSO and delivery of the NPA, its preference is for the NPSO to manage these issues though the development of the TOM, its approach to stakeholder engagement and its procurement strategy for the NPA.

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Payment services - PSR letter to Treasury Committee on concerns on future of UK free-to-use ATMs

On 17 January, on a new webpage relating to the UK's ATM network, the PSR published a letter (dated 15 January) it has sent to the HoC Treasury Committee. In the letter, the PSR responds to concerns raised by the committee regarding the future of the UK's free-to-use (FTU) ATM network and expectations of the PSR's role in ensuring the interests of service users are not compromised by any changes to the LINK interchange rate. The PSR reiterates that its primary focus is to ensure that ATMs in the UK serve the needs of UK consumers. It has made clear to LINK (the UK's main ATM network), the retail banks and independent ATM deployers (IADs) that consumers should be able to access cash through a widely spread geographic network of FTU ATMs and that this provision should be provided effectively and efficiently, meeting consumers' evolving needs. Having recently consulted, LINK will be taking a decision on its interchange fee proposal later in January. Before the decision is taken, the PSR will continue to actively engage with LINK and will update the committee at a forthcoming evidence session. The PSR is monitoring the situation closely and, if it considers any decision LINK takes is not in the interests of ATM service users, it will intervene.

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FCA updates webpages on implementation of revised PSD2

On 13 January, The FCA has updated a number of its webpages to reflect the implementation of the revised Directive on payment services in the internal market ((EU) 2015/2366) (PSD2), including a number of webpages on reporting requirements and EMIs regular returns.

Reporting requirements: Payment Service Providers & E-Money Issuers

Send financial reports: electronic money institutions




BoE responds to independent evaluation of its approach to providing sterling liquidity

On 18 January, the BoE published a report (dated January 2018) by its Independent Evaluation Office (IEO) providing an evaluation of the BoE's approach to providing sterling liquidity. The BoE has also published its response (dated January 2018) to the report. The BoE provides sterling liquidity insurance through its published market facilities. The IEO found substantial progress has been made in opening up access to the BoE's liquidity facilities, which have become cheaper and more flexible. In general, firms have been receptive to the reforms, with the facilities at least partly integrated into firms' own liquidity planning. The IEO notes that, over the review period, there have been no severe idiosyncratic or market-wide liquidity crunches to fully test the mechanics of the facilities. Despite this, the evaluation has uncovered opportunities for the BoE to refine and update its approach. Among other things, the IEO's recommendations include: (i) ensuring the facilities can adapt to changing environment and future stress events; (ii) establishing a new, internal senior cross-BoE forum to discuss strategic questions relating to the positioning of the facilities; (iii) clarifying the relationship between the PRA and Prudential Regulation Committee (PRC) and the SMF; and (iv) reconsidering the SMF oversight and scrutiny process.

IEO report

BoE Response


Pillar 2 - PRA updates webpage on timing of introduction of reporting proposals

On 17 January, the PRA updated its webpage on regulatory reporting in the banking sector to provide an update on the timing of the introduction of its reporting proposals in its July 2017 consultation paper on Pillar 2 liquidity (CP13/17). In CP13/17, among other things, the PRA set out its proposals on a cash flow mismatch risk (CFMR) framework and other methodologies for assessing firms liquidity risk under the Pillar 2 liquidity framework. It proposed to introduce a new liquidity reporting template (PRA110) to support the CFMR framework. The PRA has not yet published a related policy statement containing final rules, templates and instructions. However, on the updated webpage, the PRA states that, having considered responses to CP13/17, it has decided to postpone the proposed introduction of PRA110 by six months, from 1 January 2019 to 1 July 2019 and delay the interim reporting by six months, from March 2018, to September 2018 (at the earliest).

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CRR - EBA final report on guidelines for uniform disclosure of IFRS 9 transitional arrangements

On 12 January, the EBA published its final report (EBA/GL/2018/01) on guidelines on uniform disclosures under Article 473a(10) of the CRR as regards the transitional period for mitigating the impact of the introduction of IFRS 9 on own funds. The guidelines are set out in chapter 3 of the report. They specify a uniform disclosure template for banks to use when disclosing the information on own funds, capital and leverage ratios, with and without the application of transitional arrangements for IFRS 9 or IFRS 9-like expected credit losses (analogous ECLs). The EBA has explained that it is crucial that a uniform format on the disclosure of these parameters is used to ensure that banks' pillar 3 disclosures regarding capital and leverage ratios are consistent across the EU during the transitional period. The guidelines state that they will apply from 20 March until the end of the transitional period referred to in Article 473a(6) of the CRR.

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ECA special report on operational efficiency of ECB's crisis management for banks

On 16 January, the ECA published a special report on the operational efficiency of the ECB crisis management for banks. The ECA explains that the ECB refused to provide important evidence requested by the ECA to carry out the audit and that this had a negative impact on the work. Consequently, its observations and conclusions are provisional. Although it can draw overall conclusions about the design of the ECB's processes, the ECA is unable to confirm the operational efficiency of crisis management at the ECB in practice. Overall, the ECA found that the ECB has established a substantial framework for crisis management procedures. The ECB's organisational set-up and resourcing for the assessment of recovery plans and the supervision of banks in crisis are satisfactory, despite weaknesses in initial planning and a need to improve the allocation of staff to the most urgent situations. The ECA makes the following recommendations: (i) co-operation. The ECB should improve co-ordination with external actors and adopt an internal framework for the supplementary supervision of financial conglomerates. For recovery planning, the ECB should provide additional guidance regarding the calibration of recovery plan indicators; (ii) crisis identification. The ECB should further develop its guidance on early intervention assessments and set indicators for determining deterioration in the financial condition of a bank. It should make systematic use of information from recovery plan assessments in these circumstances too; and (iii) crisis response. The ECB should ensure that issues are quantified before crisis response measures are considered, and establish reporting for systematically monitoring asset quality.

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Joint PRA and FCA consultation on 2018/19 management expenses levy limit for FSCS

On 18 January, the PRA and FCA issued a joint consultation paper on the management expenses levy limit (MELL) for the FSCS for 2018/19 (PRA CP3/18 / FCA CP18/2). Under FSMA, the PRA and FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms without further formal consultation. The proposed MELL of £77.7 million would apply from 1 April (the start of the FSCS' financial year) to 31 March 2019. This figure covers: (i) the proposed management expenses budget (£72.7 million), excluding complainants' compensation costs (which are levied separately). This is the amount that will be levied for 2018/19 to cover the FSCS' ongoing operating expenses, including IT, outsourcing, legal and claims handling costs. It represents an overall increase of 5% (£3.5 million) over the 2017/18 budget, which is driven by a proposed increase in the capacity of its credit facility and a number of one-off costs; and (ii) an unlevied contingency reserve (£5 million). This figure represents a reduction of 5.7% (£0.3 million) from the 2017/18 contingency reserve. It would only be levied if the FSCS faced a significant unforeseen event or events that necessitated additional funding. In the consultation paper, the regulators state that it was used in March 2017 following the failure of Enterprise Insurance Company. In line with usual practice, the FSCS would liaise with stakeholders including the PRA, the FCA and trade associations before levying the contingency reserve. The consultation period closes on 16 February. The PRA and FCA will consider any feedback and, subject to approval by their respective boards, will finalise and publish their rules in respective policy statements or equivalent Handbook notices. The final rules will be in place for the start of the FSCS' financial year on 1 April.

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