Key Regulatory Topics: Weekly Update 13 – 19 November 2020
19 November 2020
Our weekly update on key regulatory topics affecting the financial services sector.
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Great Fund Insights - New ESG changes to MiFID II, AIFMD and the UCITS Directive
As a further step in the roll out of its green agenda, the EC is shortly expected to finalise certain ESG related changes to MiFID II, AIFMD and the UCITS Directive. These will contain various requirements, including a new obligation on portfolio managers to capture information about their client’s ESG preferences and comply with these when managing client portfolios. There are also prescribed changes to organisational requirements. Our Great Fund Insights briefing gives further detail on the new requirements for fund and asset managers and outlines when they will come into effect.
Please see the other sections for product specific updates relating to Brexit.
Financial Services and Economic and Monetary Policy (Consequential Amendments) (EU Exit) Regulations 2020 made
On 18 November, the Financial Services and Economic and Monetary Policy (Consequential Amendments) (EU Exit) Regulations 2020 were published, together with an explanatory memorandum. The Regulations make consequential amendments to financial services EU exit instruments previously made under the European Union (Withdrawal) Act 2018. Specifically, they update references to “exit day” (31 January 2020) within substantive provisions of previous financial services EU exit instruments, where considered appropriate, so that they refer instead to the end of the Transition Period (“IP completion day”). This instrument also amends a reference to “exit day” in the European Union Budget, and Economic and Monetary Policy (EU Exit) Regulations 2019 to “IP completion day”. The Regulations, which were made on 17 November 2020, come into force on 30 December 2020.
Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2020 made
On 16 November, the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2020 were published, together with an explanatory memorandum. These Regulations amend the previous 2019 Gibraltar Brexit SI to extend the transitional arrangements under Parts 2 and 3 by 12 months, to 31 December 2021. These transitional arrangements enable specified categories of Gibraltar-based firms to provide financial services in the United Kingdom and facilitate the access by similar types of UK-based firms to Gibraltar’s financial services market. The Regulations come into force on 14 December 2020.
PRA and BoE update guidance on use of the TTP
On 13 November, the PRA and BoE updated their webpage on their temporary transitional power (TTP) to announce the publication of revised versions of various guidance documents on their use of the transitional directions.
PRA rulebook guidance
The Solvency II and Insurance (Amendment) (EU Exit) Regulations 2018 guidance
FMI Guidance (including EMIR and MiFIR)
PRA on application of TTP to CRD V and BRRD II-derived legislation
On 13 November, the PRA issued a statement confirming that no additional exceptions from the application of the temporary transitional power (TTP) are expected to be required as a result of onshoring amendments to CRD V and BRRD II derived legislation. The PRA reminds firms that they must be ready to comply with changes to domestic law, and PRA rules, which are being made to implement CRD V and BRRD II, as these changes are not onshoring amendments made under section 8 of the EUWA to which the TTP can apply. The PRA restates its intention that it does not intend to grant transitional relief in respect of Contractual Recognition of Bail-in (CROB) rules and Stays rules, except in relation to phase two liabilities as referenced in relation to CROB. The PRA intends that this policy outcome will remain the same irrespective of any changes to PRA rules made due to BRRD II. The PRA notes however, that it may need to reconsider its approach should changes be made to the final rules following responses to the ongoing CRD V and BRRD II consultations.
Please see the Other Developments section for ESMA’s announcement on Union Strategic Supervisory Priorities for NCAs and the FCA’s warning on handling client data.
Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 made
On 19 November, the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (SI 2020/1311) were published, with an explanatory memorandum and a final impact assessment (dated 27 August 2019). The Regulations establish the first part of a debt respite scheme for people in problem debt. This part gives eligible people in problem debt who receive professional debt advice access to a 60-day period in which interest, fees and charges are frozen and enforcement action is paused. This moratorium period is often referred to as ‘Breathing Space’. For people receiving mental health crisis treatment, this instrument establishes an alternate route by which the protections of a moratorium may be accessed and ensures that the protections are in place for the duration of their crisis treatment. The protections under the Regulations are only accessible through debt advice providers, defined in regulation 3(1) as an authorised person with Part 4A permission to carry on any regulated activity of the kind specified in article 39E (debt-counselling) of the FSMA RAO, or a local authority. The second part of the scheme is the Statutory Debt Repayment Plan (SDRP), a statutory agreement that will enable a person in problem debt to repay their debts to a manageable timetable, with legal protections from creditor action for the duration of their plan. As set out in the June 2019 consultation response the Government intends to implement the SDRP over a longer timeframe and has not yet set a specific implementation date for this part of the scheme.
Debt Respite Scheme Regulations
FCA confirms support for mortgage borrowers and consumer credit customers impacted by Covid-19 and updates guidance on delaying mortgage capital repayments
On 19 November, the FCA confirmed its updated guidance to firms setting out the enhanced support that should be available to consumer credit customers, and on 17 November its updated guidance for mortgage borrowers, who are experiencing payment difficulties as a result of Covid-19. The guidance will come into effect from 25 and 20 November respectively, but the FCA encourages firms that are able to start providing this enhanced support sooner to do so. Most respondents to the consultations on the proposals supported the FCA’s proposals. On the 17 November, the FCA also updated its webpage on policy statement 20/11 ‘Mortgages: Removing barriers to intra‑group switching and helping borrowers with maturing interest‑only and part‑and‑part mortgages’. The FCA has issued an updated version of the guidance in relation to delaying the capital repayment until 31 October 2021 on interest-only and part-and-part mortgages that matured between 20 March 2020 and 31 October 2021. The updated guidance states that a customer can take advantage of a mortgage payment deferral after their mortgage has matured and will still be able to delay repaying their capital until 31 October 2021. The FCA previously stated that if a customer fails to make interest payments after maturity, then the guidance would no longer apply – however, in the light of its updated guidance on mortgage payment deferrals, the FCA has clarified this.
Mortgage borrowers: press release
Finalised mortgages payment deferrals guidance
Finalised mortgages tailored support guidance
Mortgage borrowers: feedback statement
Consumer credit: press release
Finalised consumer credit guidance
Feedback statement on consumer credit guidance
Consumer credit: Handbook instrument
Please see the other sections for product specific updates relating to Covid-19.
FSBholistic review of the March market turmoil
On 17 November, the FSB published a report, delivered to G20 Leaders ahead of their November Summit, which provides a holistic review of the March market turmoil. The FSB examines the effects of the pandemic, noting that the breadth and dynamics of the economic shock and related liquidity stress in March were unprecedented. It notes that structural changes in the financial system over the past decade have also increased the reliance on market-based intermediation to finance growing levels of debt. The G20 regulatory reforms and market-driven adjustments in the aftermath of the 2008 financial crisis have resulted in credit risk being increasingly intermediated and held outside the banking sector. Interconnectedness has also increased and taken new forms in some areas. With the overall growth of non-bank financial intermediation (NBFI), market liquidity has become more central to financial resilience. The FSB concludes that this turmoil underscores the need to strengthen the resilience of non-bank financial intermediation (NBFI). Issues that may have caused liquidity imbalances and propagate stress include: (a) significant outflows from non-government MMFs; (b) similar dynamics, albeit less intense and widespread, in specific types of open-ended funds; redistribution of liquidity from margin calls; (c) the willingness and capacity of dealers to intermediate in core funding markets; and (d) the drivers of dislocations in key government bond markets, including the role of leverage in amplifying the stress. The review sets out an NBFI work programme, focusing on three main areas: (i) work to examine and address specific risk factors and markets that contributed to amplification of the shock; (ii) enhancing understanding of systemic risks in NBFI and the financial system as a whole, including interactions between banks and non-banks and cross-border spill-overs; and (iii) assessing policies to address systemic risks in NBFI.
Review and work programme
FSB report on Covid-19 impact on financial stability and policy responses
On 17 November, the FSB published a report delivered to G20 Leaders ahead of their November Summit, considering the financial stability impact and policy responses to the Covid-19 pandemic. The FSB report provides an update as to: (i) financial stability developments and risks relating to Covid-19; (ii) the international policy responses; (iii) the effectiveness of policies; and (iv) the challenges that lie ahead and the way forward for the FSB. The FSB will: (a) continue to assess and share, on a timely basis, information on financial stability risks from Covid-19, including banks’ ability to provide financing to the real economy, functioning short-term funding markets, and the availability of dollar funding globally; (b) build on the holistic review of the March market turmoil, and in coordination with the standard setting bodies (SSBs), initiate and coordinate the international regulatory response to strengthen the resilience of the NBFI sector while preserving its benefits; (c) continue to facilitate sharing of information on jurisdictions’ policy responses and on their use of tools to design, calibrate and assess policies; (d) continue to support crisis management preparedness, including by enhancing cooperation and coordination through crisis management groups and colleges; and (e) discuss the factors to be considered in preparation for an orderly unwinding of support measures, once appropriate, and avoid unintended effects across sectors and jurisdictions.
FCA on changes to certain work streams in light of changing market conditions and Covid-19
On 13 November, the FCA provided an update on work that it intends to either stop or postpone in light of the ongoing impact of Covid-19 and economic conditions to allow it to focus its resources on the most urgent work where it can make the most immediate difference to consumers and markets. The FCA’s key changes include: (i) delaying its further work and consultation on the duty of care until Q1 2021; (ii) stopping its work into the Single Easy Access Rate, which it is currently in the process of consulting on – the FCA reasons that as interest rates for new products fall, so does the gap between rates paid to new and longstanding customers, and the size of the harm falls; (iii) stopping its work into platform exit fees – the FCA reasons that since expressing its concerns in the 2018 Interim Report, there has been a marked shift in the market away from exit fees, with at least two major platforms announcing that they would no longer be charging exit fees. The exit fees consultation was one of a number of remedies to address barriers to switching, including new rules to make moving platforms easier which have already been put in place and come into force in February 2021.
ESMA consults on supervisory fees for data reporting services providers
On 19 November, ESMA began consulting on supervisory fees for data reporting services providers (DRSPs) to be supervised by ESMA from 2022 due to the new competences under the ESA Review Regulation. The proposed fee framework for DRSPs draws on the existing fee frameworks for Trade Repositories and Securitisation Repositories which set out application as well as annual supervisory fees. ESMA is proposing both application and authorisation fees, as well as an annual supervisory fee for DRSPs. It has also proposed a timeline for the payment of the fees. The deadline for response is 4 January 2021 and ESMA expects to submit technical advice to the EC and publish its final report in Q1 2021.
FCA consults on regulatory fees and levies proposals for 2021/22
On 19 November, the FCA began consulting on proposed policy changes to the way it will raise fees from 2021/22. The FCA proposals set out (i) to revalorise and simplify all FCA authorisation application fees and introduce some new transaction fees; (ii) the structure of periodic fees for cryptoasset businesses; and (iii) the third stage of its consultation to introduce income to calculate periodic fees for firms that operate Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). The deadline for comments is 22 January 2021. The FCA will provide its feedback and rules in the March 2021 Handbook Notice.
NCA Suspicious Activity Reports Annual Report 2020
On 19 November, the National Crime Agency (NCA) published its Suspicious Activity Reports Annual Report 2020. Highlights include: (i) the UK Financial Intelligence Unit (UKFIU) once again saw a record number of SARs during 2019/20, a 20% increase on the previous period and an 81% increase in requests for a defence; (ii) the Defence Against Money Laundering (DAML) submissions saw increases in volume in every month. £172m was denied to suspected criminals as a result of DAML requests – up 31% on the previous year. The NCA highlights that for over £100m of the total restrained, there was no previous or existing law enforcement investigation, showing the unique value added by the SARs regime in enabling new law enforcement investigations, as well as enhancing existing ones; and (iii) HMRC was able to obtain an additional £56 million through matching SARs with other data sets for criminal and civil intervention.
FSCS and Serious Fraud Office to work together against fraud
On 19 November, FSCS and Serious Fraud Office (SFO) announced that had signed a MoU to assist co-operation and co-ordination between the organisations to facilitate the effective investigation and prosecution of serious or complex fraud. Both parties are committed to work more closely together and to share intelligence and information that assists each other as they carry out their respective statutory functions. FSCS notes that it has collected a vast amount of invaluable data, insights and intelligence, including into pension liberation scams, fraudulent investment schemes and the independent financial advisers who are promoting them. FSCS explains that compensation is subject to a cap, which means some customers may be left with uncompensated losses, however if FSCS is able to make a recovery through an SFO prosecution, it may be able to pass on the proceeds to customers who have not been fully compensated.
Sanctions (EU Exit) (Consequential Provisions) (Amendment) Regulations 2020 made
On 16 November, the Sanctions (EU Exit) (Consequential Provisions) (Amendment) Regulations 2020 were published, having been made on 12 November 2020. The Regulations amend: (i) the ISIL (Da'esh) and Al-Qaida (United Nations Sanctions) (EU Exit) Regulations 2019; (ii) the Counter-Terrorism (International Sanctions) (EU Exit) Regulations 2019 and the Counter-Terrorism (Sanctions) (EU Exit) Regulations 2019. In turn, these Regulation will amend the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), the MLRs, the EMRs and the PSRs. These amendments are consequential on the commencement at the end of the transition period of the counter-terrorism sanctions framework established by the three 2019 Regulations. The Regulations will come into force in accordance with regulations made by the Secretary of State under section 56 of SAMLA.
Please see the section on Covid-19 for the FSB holistic review of the March market turmoil which looks in particular at non-bank financial intermediation.
ESMA speech on future challenges for fund managers
On 19 November, ESMA published a speech by Verena Ross, ESMA Executive Director on future challenges for fund managers. Key points include: (i) liquidity issues in the asset management sector in light of Covid-19 - ESMA acted upon a recent recommendation from the ESRB and coordinated a focused supervisory exercise with investment funds exposed to less liquid asset classes to assess their preparedness to potential future adverse shocks. ESMA concluded that there are a number of shortcomings in the way liquidity is managed in certain segments of the asset management sector. This deserves further action: by asset managers who need to promptly address any misalignment between their funds’ investment strategies and redemption policies and by NCAs who need to keep monitoring and actively supervise the funds under their jurisdiction; (ii) on delegation in light of Brexit and the AIFMD review - ESMA observes that investment managers often make use of large-scale delegation arrangements and that Brexit will likely make delegation to non-EU entities more pronounced. Ms Ross refers to ESMA’s AIFMD review letter to the EC in August of this year and that the stated objective of the clarifications suggested by ESMA in its AIFMD review letter is to ensure that the key legal requirements on delegation and substance are clear and unambiguous. Ms Ross notes that the existing AIFMD legal text already states that investment management functions delegated shall “not exceed by a substantial margin” the functions retained by the authorised AIFM and that it has invited the EC to further specify this concept. Ms Ross emphasises that ESMA fully acknowledges that delegation is (and should remain) permitted under the AIFMD and UCITS rules. ESMA is purely asking for clarification of existing text; and (iii) on the ESG agenda - Ms Ross highlights a number of ESMA’s key initiatives including: (a) its Strategy on Sustainable Finance; (b) in the context of ESMA’s risk analysis reporting in the Trends, Risks and Vulnerabilities (TRV) publication, they now also incorporate ESG indicators; (c) planning future climate-related stress tests; and (d) pursuing supervisory convergence of national practices, focusing on preventing greenwashing, miss-selling and fostering transparency and reliability of non-financial reporting. Ms Ross confirms that the ESAs final report on the draft regulatory technical standards under the disclosure regulation, is due by the end of January 2021. Ms Ross reiterates that though the application date of the technical standards under the disclosure regulation will be delayed, the obligations stemming from the Level 1 regulation must be applied according to the original schedule starting from 10 March 2021. Ms Ross notes that the ESAs are aiming to launch a consultation paper in January 2021 on additional taxonomy-related product disclosures stemming from empowerment given to the ESAs by the Taxonomy Regulation.
FCA clarification on options for reporting income for FSCS levy calculations
On 18 November, the FCA published a new webpage for investment managers, clarifying the process for reporting income for FSCS levy calculations. From dialogue with industry representatives, the FCA understands that some firms may be reporting income for the FSCS levy that they do not need to report. The FCA reminds firms that the definition of annual eligible income provides these options: (i) only include such annual income if it is attributable to business in respect of which the FSCS may pay compensation, or (ii) include all such annual income. The FCA explains that firms must include income, which they know relates to eligible claimants, and income which may relate to eligible claimants. If the firm cannot identify whether the underlying beneficiary is an eligible claimant, income derived from that business must be included, because the FSCS may pay compensation in relation to it. However, if the firm can identify income that relates to beneficiaries who are not eligible claimants, that income can be excluded. In any case, the FCA explains, a firm can report all income if it chooses to do so.
Please see the Other Developments section for ESMA’s announcement on Union Strategic Supervisory Priorities for NCAs.
EP adopt BMR amending Regulation at first reading
On 19 November the EP adopted at first reading the proposal for a regulation amending Regulation (EU) 2016/1011 (BMR) as regards the exemption of certain third country foreign exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. In its report the EP sets out its amendments to the draft amending Regulation. The EP instructs its President to forward its position to the Council, the EC and the national parliaments.
HMT call for evidence on UK listings review.
On 19 November, HMT opened a call for evidence into a review of the UK’s listing regime. The review will seek input and evidence from market participants, based on which it will propose a range of recommendations for how to boost the UK as a destination for IPOs and optimise the capital raising process for companies seeking to list on the main UK markets. In evaluating options, it will consider both legislative and non-legislative measures, including measures which may fall to FCA to consider. The review considers in particular whether: (i) current rules around free floats, dual class share structures, and track record requirements strike the correct balance between corporate governance and market integrity on the one hand, and the requirements of companies seeking to list on the other; (ii) the requirements for when a prospectus has to be produced (which are currently harmonised at EU-level), are appropriate for the UK market – including whether companies that are already listed should be able to more easily raise new capital, and whether other triggers and documentation required for offers to the public and admission to trading venues are optimal for the UK market; (iii) there are specific non-regulatory, non-legislative actions which the government could take; and (iv) other issues, including whether there is a case to introduce differentiated entry requirements for the UK’s premium listing segment in respect of companies which already have a primary equity listing on markets in other countries that are assessed to have high standards of corporate governance. The deadline for responses is 5 January 2021.
Terms of reference
Call for evidence
FCA consults on approach to new powers under UK BMR
On 18 November, the FCA began two consultations into the use of its new powers under the Financial Services Bill’s (FS Bill) proposed amendments to the BMR: (i) designating an unrepresentative benchmark using new powers under proposed Article 23A; and (ii) requiring changes to a critical benchmark, including its methodology, using new powers under proposed Article 23D. The deadline for comments is 18 January 2021. The FCA has also published a document setting out the background to the UK BMR and amendments proposed by the Government under the FS Bill to give it enhanced powers, in particular in relation to managing the orderly wind-down of critical benchmarks. The FCA intends to finalise its proposals taking account of responses to this engagement and publish relevant Statements of Policy in due course. The FCA plans to consult in Q2 2021 on its approach to the exercise of its powers under the proposed Article 21A and Article 23C. The FCA will conduct a further consultation in 2021 in relation to any decision to exercise the proposed Article 23D power in respect of LIBOR. ICE Benchmark Administration (IBA) has also announced that it will consult on its intention that the euro, sterling, Swiss franc and yen LIBOR panels will cease at the end of 2021. The announcement also stated that discussions involving IBA, the FCA, other official sector bodies and panel banks are continuing regarding the future of US dollar LIBOR. In response to the FCA and IBA announcements, the International Swaps and Derivatives Association (ISDA) has stated that neither of these statements constitute an index cessation event under the IBOR Fallbacks Supplement or the ISDA 2020 IBOR Fallbacks Protocol. Therefore, these statements will not trigger the fallbacks under the supplement or protocol or have any effect on the calculation of the spread. These statements will also not trigger fallbacks under the 2018 ISDA Benchmarks Supplement or its protocol.
FCA Article 23A consultation
FCA Article 23D consultation
FCA UK BMR powers webpage
ECON draft report on proposal for Directive amending MiFID II – Covid-19
On 18 November, the EP’s Committee on Economic and Monetary Affairs (ECON) published its report on the proposal for a Directive amending MiFID II as regards information requirements, product governance and position limits to help the recovery from the Covid-19 pandemic. ECON adopted the report on 29 October 2020. The procedure file for the legislative initiative indicates that the report will be considered by the EP between 23-26 November 2020.
CPMI call for papers on cross-border payments for conference
On 16 November, the Committee on Payments and Market Infrastructures (CPMI) opened a call for policy-oriented, theoretical, legal and/or empirical papers on cross-border payments. CPMI asks that papers cover at least one of the following three related themes: (i) making existing payment infrastructures and arrangements fit for cross-border purpose; (ii) streamlining data exchange to improve cross-border payments; and (iii) exploring the international dimension of new payment infrastructures and arrangements. CPMI is open to submissions from authors from academia, public institutions (including central banks), special interest groups and the private sector. CPMI will select certain papers to be discussed at its conference on ‘pushing the frontiers of payments: towards a global payments area’ to be held on 12 and 19 March 2021. The deadline for responses to the call for papers is 20 January 2021.
Payment Services and Electronic Money (Amendment) Regulations 2020 made
On 16 November, the Payment Services and Electronic Money (Amendment) Regulations 2020 were published, together with an explanatory memorandum. These Regulations amend the EMRs and the PSRs in order to apply sections 93(4) and 233-236 of the Banking Act 2009. This will provide an enabling power for HMT to create new insolvency regulations and rules for the payments and e-money sectors; a Special Administration Regime for payments and e-money institutions (pSAR). The explanatory memorandum provides that in recent years, insolvencies in these sectors have taken a number of years to resolve and seen consumers receiving reduced monies after the cost of distribution. With a large number of creditors and only the standard insolvency toolkit available, there have been difficulties for insolvency practitioners to efficiently wind-down firms and return the money to consumers and other creditors. In the three insolvencies since 2018, none have so far returned client assets to consumers. The pSAR would give insolvency practitioners administering the insolvencies of payments or electronic money institutions an expanded toolkit. This would allow the insolvency practitioner to keep an insolvent institution operational and prioritise the return of client assets.
EBA report on analysis of the unwind mechanism of the LCR
On 19 November, the EBA published a report analysing the functioning of the unwind mechanism of the liquidity coverage ratio (LCR), based on common reporting of larger EU banks. Overall, the empirical evidence does not support the hypothesis that the unwind mechanism has a detrimental impact on the business and risk profile of credit institutions. The EBA’s analysis shows that the specific impact of the unwind mechanism on the LCR is practically null and therefore it is also not possible to affirm that it could have an effect on the stability and orderly functioning of financial markets. At country level, the data suggests that the unwind mechanism would not lead to any specific effect on the LCR, except for one EU country. As regards the possible impact on the functioning of the monetary policy, the report, which is built under the assumption that the amount of central bank reserves has been substantially cut, shows that the specific effect of the unwind mechanism would be immaterial. The EBA also analyses possible modifications to the unwind mechanism and the Report shows that their impact is limited as well. Introducing a zero floor to avoid the components of the high-quality liquid assets becoming negative as a consequence of the unwind mechanism would not have effects in terms of the LCR based on current reporting data. In addition, better aligning of the unwind mechanism with the Basel LCR standards for what concerns the type of operations that are taken into consideration in the unwinding would not have material impacts. The EBA recommends that the analysis be extended over the next years to gain more experience and to be able to include in the sample smaller banks after the Euclid project has entered into force.
PRA on remediation of prudential treatment of legacy instruments before CRR transition period ends
On 16 November, the PRA sent a letter to CFOs of UK deposit-takers on the remediation of the prudential treatment of legacy instruments before the end of the transition period specified in CRR. The PRA shares the concerns raised by the EBA in its October 2020 Opinion, on the two main issues, namely subordination provisions and flexibility of distribution payments, creating risks to the eligibility of firms’ own funds and eligible liabilities instruments. In light of the policy established in Supervisory Statement 7/13 and the BoE’s minimum requirement for own funds and eligible liabilities Statement of Policy, paragraph 5.10, the PRA expects affected firms to undertake a risk-based approach and assess appropriate remedial actions before the end of the CRR transition period. A firm’s choice of remedial action may depend on a number of factors, including call options, governing law, issuing entity, and market conditions. Firms are requested to share an action plan with their usual supervisory contact by 31 March 2021. If a firm intends to keep affected legacy instruments as non-regulatory capital, and non-eligible liability instruments beyond the end of the CRR transition period, the action plan should include a reasoned analysis of any prudential risks, including concerns for resolvability or insolvency, and potential actions to mitigate those risks.
UK regulators on the implementation of prudential reforms in the Financial Services Bill
On 16 November, HMT, the PRA and the FCA issued a joint statement on the planned timelines for introducing the UK’s Investment Firms Prudential Regime (IFPR) and implementation of those Basel 3 reforms which make up the UK equivalent to the outstanding elements of CRR II. The regulators are targeting an implementation date of 1 January 2022 for these two regimes. This follows feedback from industry in relation to these specific proposals and in response to the most recent Regulatory Initiatives Grid where industry raised concerns about the general volume of regulatory reform in 2021. HMT will ensure the relevant secondary legislation is in place in good time, and the regulators will endeavour to provide industry with as much sight of the final rules as possible ahead of this date, to support effective implementation.
EBA methodology for 2021 EU-wide stress test
On 13 November, the EBA published the final methodology, draft templates and template guidance for the 2021 EU-wide stress test along with the key milestones of the exercise. The objective of the test is to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks and the EU banking system to shocks, and to challenge the capital position of EU banks. In particular, it is designed to inform the SREP carried out by competent authorities. The disclosure of granular data on a bank-by-bank level is meant to facilitate market discipline and also serves as a common ground on which competent authorities base their assessments. The EBA notes that the methodology and templates include some targeted changes compared to the postponed 2020 exercise, such as the recognition of FX effects for certain P&L items, and the treatment of moratoria and public guarantees in relation to the Covid-19 crisis. The stress test exercise will be launched in January 2021 with the publication of the macroeconomic scenarios and the results published by 31 July 2021.
FSB annual report on implementation and effects of financial regulatory reforms – Covid-19
On 13 November, the FSB published its 2020 report on the implementation and effects of the G20 financial regulatory reforms. Key conclusions from the report include: (i) the G20 reforms that followed the 2008 crisis have served the financial system well during the pandemic; (ii) bold and decisive actions by authorities have helped maintain global financial stability during the pandemic; (iii) given the pandemic, there has been limited additional progress in implementing G20 reforms since last year with delays in implementing some Basel III standards and substantial work remaining to operationalise resolution planning for systemically important banks and to implement effective resolution regimes for CCPs. The FSB believes that the pandemic represents the first major global test of the post-crisis financial system and therefore provides an opportunity to examine whether reforms have worked as intended: (a) whether the flexibility provided by authorities is actually used by financial institutions – for example, in the case of bank capital and liquidity buffers ; (b) the FSB’s holistic review of the turmoil considers the implications for regulatory and supervisory policies, especially for non-bank financial intermediation. The FSB and standard setting bodies will carry out further work to identify potential lessons learned from the Covid-19 experience for international standards. The FSB also presents the main findings of the FSB's June 2020 consultative report on the evaluation on the effects of too-big-to-fail reforms for systemically important banks. The FSB states that it will be delivered to G20 leaders ahead of their summit on 20/1 November 2020.
FSB annual report
Please see the Payments and Payment Systems section for the publication of the Payment Services and Electronic Money (Amendment) Regulations 2020, which provide an enabling power for HMT to create new insolvency regulations and rules for the payments and e-money sectors.
Council of the EU adopts draft CCP Recovery and Resolution Regulation
On 18 November, the EC published a communication to the EP on the proposed Regulation on the recovery and resolution of central counterparties (CCPs), following the Council of the EU’s adoption of the proposed Regulation at first reading. The EC supports the results of the interinstitutional negotiations and therefore accepts the Council's position at first reading, however expresses institutional concerns as to the retroactive postponement by one year of the open access provisions in MiFIR. The EC did not include these provisions in its initial proposal and they are, in the EC’s view, not entirely in line with the EU’s institutional set-up, in particular the EC’s right of initiative, and cannot constitute a precedent for future negotiations. As the MiFIR changes at issue do not entail a substantive change of policy, but are rather limited to a short postponement of the MiFIR access provisions, the EC states that it will not now stand in the way of their adoption. The text of the proposed Regulation on which the Council voted and a draft statement of the Council's reasons have also been published. The Chair of the ECON Committee has indicated that, should the Council adopt the agreed text as its first-reading position, she would recommend to the EP’s plenary session that the EP should in its second reading approve this Council first-reading position. With certain limited exceptions, the provisions of the proposed Regulation will start applying 18 months after its date of entry into force.
Draft statement of Council’s reasons
FSB 2020 resolution report
On 18 November, the FSB published its ninth report on the implementation of its resolution reforms. The report takes stock of progress made by FSB members in implementing reforms and summarises findings from the FSB’s monitoring of resolvability across the banking, financial market infrastructure, and insurance sectors. Key findings in relation to banks include: (i) the sixth round of the resolvability assessment process conducted during 2019-2020 confirmed that crisis management groups (CMGs) are broadly satisfied with the current progress of global systemically important banks (G-SIBs) toward resolvability; (ii) most G-SIBs are estimated to already meet the final 2022 minimum external TLAC requirement, and the market has so far absorbed issuance without difficulty; (iii) disclosure of external TLAC levels by G-SIBs has improved over the past year, however there is still little information available to market participants on the distribution of TLAC within groups; and (iv) an FSB stocktake demonstrates that CMGs are working well, but that authorities should continue to test resolution plans on the basis of simulations and scenario analyses. Key points in relation to central counterparties (CCPs) include: (a) a review by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) qualified 13 CCPs as systemically important in more than one jurisdiction (SI>1 CCPs); (b) to support discussions on CCP resolvability within CMGs, the FSB developed in 2020 a resolvability assessment process (RAP) questionnaire that will be used for the first time in the 2021 RAP for SI>1 CCPs; and (c) the FSB will organise with the BCBS, CPMI and IOSCO workshops for authorities on the potential financial stability impact from the use of various recovery and resolution tools.
FSB final guidance on CCP financial resources for resolution and announcement of further work
On 16 November, the FSB published final guidance on financial resources to support central counterparty (CCP) resolution and on the treatment of CCP equity in resolution. The guidance will support resolution authorities and crisis management groups in assessing the adequacy of financial resources for CCP resolution and provides guidance on approaches to the treatment of CCP equity in resolution. The guidance: (i) sets out five steps to guide authorities in assessing the adequacy of a CCP's financial resources and the potential financial stability implications of their use; and (ii) addresses the treatment of CCP equity in resolution, providing a framework for resolution authorities to evaluate the exposure of CCP equity to losses in recovery, liquidation and resolution and how (where possible) the treatment of CCP equity in resolution could be adjusted. The draft guidance does not cover the wind-down plans of systemically important CCPs. The FSB intends to consider in five years' time whether any adjustments are needed to the guidance in the light of market developments and resolution authorities' experience with using the guidance. The FSB also announced that in collaboration with the Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO), it will conduct further work on CCP financial resources through their respective committees. This will consider the need for, and develop as appropriate, international policy on the use, composition and amount of financial resources in recovery and resolution to further strengthen the resilience and resolvability of CCPs in default and non-default loss scenarios. This would include assessing whether any new types of pre-funded resources would be necessary to enhance CCP resolvability. The FSB also published an overview of responses to the consultation on the guidance.
AFME and ICMA model clauses for recognition of EU and UK bail-in clauses for other liabilities
On 13 November, the Association for Financial Markets in Europe (AFME) published a document, developed in association with the International Capital Market Association (ICMA), containing model clauses for: (i) contractual recognition of bail-in powers for liabilities other than debt instruments or liabilities governed by industry standard master agreements governed by a non-EEA law reflecting the requirements of Article 55 of BRRD; and (ii) for contractual recognition of bail-in powers for liabilities other than debt instruments or liabilities governed by industry standard master agreements governed by a non-English law reflecting the requirements of the UK bail-in regime. The intended use of the model clauses is for contracts related to new issues of bonds, bond issuance programmes and ECP issuance programmes.
Please see the Fund Regulation section for a speech by Verena Ross, ESMA Executive Director on future challenges for fund managers.
BoE Climate Biennial Exploratory Scenario
On 13 November, the BoE announced that it intends to launch its Climate Biennial Exploratory Scenario (CBES) in June 2021. The BoE sets out which banks, building societies, insurers and Society of Lloyd’s managing agents it has invited to take part. Ahead of the launch, the BoE will: (i) in December 2020, inform participants about its high level approach for the CBES in a number of key areas including counterparty exposure data and also release a provisional set of scenario variables to be included in the exercise; (ii) in February 2021, release a set of draft data templates, as well as a draft qualitative questionnaire for feedback from participants; and (iii) in April 2021, release a finalised set of data templates and qualitative questionnaire. The BoE will decide whether to run a second round of the exercise in December 2021 and expects to publish results at the end of Q1 2022.
UK Finance sustainable finance whitepaper
On 13 November, UK Finance published a white paper on sustainable finance, which sets out a principles-based framework for the way in which credit institutions measure and report multi-year commitments to sustainable finance. It provides an opportunity for prepositioning in advance of the ESG framework being more clearly defined by standard setters and others. The principles are: (i) governance – ESG considerations should be seen as part and parcel of board responsibility for purpose, strategy and the design of the business model intended to achieve these; (ii) definitions - sustainable finance is not limited to supporting environmental initiatives; it can be broader and cover all relevant ESG areas, including by reference to sustainable development goals and commitments. Defined products and services should align to publicly
available standards where possible and where standards do not exist, or are not fully formed, it is recommended that firms seek guidance and advice from a third party specialist and/or one of the globally recognised standard setters; (iii) measuring the contribution - clearly defined accounting policies and basis of
preparation to consistently measure the contribution made by each credit institution and avoid double counting. Investors and others should be able to add together all institutional commitments and form a consolidated view of what has been provided; and (iv) reporting and disclosure – It is expected that firms that have set or plan to set sustainable finance commitments will disclose: (a) overall governance over the sustainable finance commitment; (b) total commitment value, timeframe for the target value and the rationale/approach taken for selecting both the value and timeframe; (c) a quantitative breakdown of the products/services included within the commitment; (d) a narrative account enhancing understanding of the activities involved and the sustainability goals that are driving the firm’s approach; and (e) definitions used, including any frameworks, taxonomies and methodologies.
FCA regulation round-up: November 2020
On 19 November, the FCA published its regulation round-up for November 2020. Hot topics highlighted by the FCA include: (i) submission of data to the FS register - dual-regulated firms had to submit their Directory Persons data via Connect by 13 November 2020, and solo-regulated firms have until 31 March 2021. The FCA will start publishing data from 14 December; and (ii) policy statement 20/12 on the extension to implementation deadlines for the Certification Regime and Conduct Rules. The FCA also reminds firms to continue to prepare for the end of the transition period, noting its recent approach document on the share trading obligation.
FOS Ombudsman News issue 155
On 19 November, the Financial Ombudsman Service (FOS) published issue 155 of its Ombudsman news. The issue focuses on: (i) the FOS’ quarterly complaints data for Q3 2020, noting that it continued to see an increase in complaints from people who borrowed money, who then felt the debt was unaffordable. The FOS has also seen a significant increase in complaints relating to Covid-19; (ii) the FOS’ annual reports and accounts; (iii) the FOS’ general approach to complaints about consumer credit products and services; and (iv) important information relating to Covid-19 and how the FOS is handling complaints during this period.
FCA warns firms to be responsible when handling client data
On 18 November, the FCA published a statement warning firms to be responsible when handling client data given that the current economic climate is changing the way many firms operate and may cause some to leave the market or merge with other firms. When this happens, firms must make sure they lawfully process and transfer client data. The FCA reminds firms of the applicable principles: (i) Principle 3, on adequate risk management systems; (ii) Principle 6, to pay due regard to the interests of customers and treat them fairly; and (iii) Principle 7, to pay due regard to the information needs of clients and communicate with them clearly and fairly. The FCA notes that data controllers must ensure that they are also compliant with data protection legislation, under the supervision of the Information Commissioner’s Office, including: (a) the Data Protection Act 2018; (b) GDPR; and (c) the Privacy and Electronic Communications Regulations (EC Directive) 2003. Firms will need to, amongst other things: (1) provide information to clients clearly setting out ‘privacy information’, which includes the purposes for which they are collecting or processing client data, and individuals’ rights when their data is processed; (2) maintain a record of how and why they process, share and retain personal data; (3) record the lawful basis for processing data; and (4) if processing data based on consent, maintain an effective audit trail of how and when consent was given. The FCA will act where it identifies breaches of relevant parts of the FCA Handbook. Firms that intend to transfer or receive personal client data must be able to demonstrate how they have considered the fair treatment of consumers and how their actions comply with data protection and privacy laws.
ESMA identifies new Union Strategic Supervisory Priorities for NCAs
On 13 November, ESMA announced that it had identified, using its new convergence powers, costs and performance for retail investment products and market data quality as the Union Strategic Supervisory Priorities for national competent authorities (NCAs). Under these Priorities, the specific topics on which NCAs will undertake supervisory action in 2021, coordinated by ESMA, are: (i) costs and fees charged by fund managers - ESMA considers that problems linked to cost and performance are multifaceted due to the lack of transparency and undue costs or differences observed in the application of certain MiFID requirements across Member States.; and (ii) improving the quality of transparency data reported under MiFIR - the reporting datasets and requirements have grown exponentially since the 2008 financial crisis and a better understanding of the requirements by market participants could avoid poor and late reporting.