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Key Regulatory Topics: Weekly Update 14-20 August 2020

21 August 2020

Our weekly update on key regulatory topics affecting the financial services sector.

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Capital Markets

FCA Primary Market Bulletin (PMB) Issue No. 30

On 19 August, the FCA published the 30th Issue of its PMB. The new Issue starts with general news and information, moving on to the latest changes that the FCA has made, or is proposing to make, to its Knowledge Base. The FCA includes a reminder on the importance of the person discharging managerial responsibilities (PDMR) regime under the Market Abuse Regulation (MAR). The FCA also gives updates on recent changes to the Prospectus Regulation and comments on the prospectus requirements for Global Depository Receipts. The FCA additionally: (i) finalises guidance and technical notes that it consulted on in Issue 24 of its PMB; (ii) consults on a new technical note on prospectus requirements, specifically on when a prospectus is required where securities are issued pursuant to Schemes of Arrangement (the deadline for comments being 30 September); and (iii) gives further updates on its technical and procedural notes to reflect the EU Prospectus Regulation. 

FCA PMB Issue 30

FCA Finalised Guidance

FCA Consultation

FCA statement on accounting for lease modifications – amendment to IFRS 16

On 18 August, in the context of the requirement for UK companies with securities admitted to trading to publish annual and half yearly financial statements, the FCA published a statement announcing temporary relief for issuers who choose to use the amended IFRS 16 during the Covid-19 pandemic and its aftermath. The amendment provides practical relief to lessees in accounting for rent concessions granted due to Covid-19. The policy is effective for reporting periods beginning on or after 1 June in relation to Covid-19-related rent concessions that reduce lease payments due on or before 30 June 2021. For the time being, the FCA will permit issuers subject to its rules to use the modified IFRS 16 rather than the IFRS 16 as currently adopted by the EU. This temporary relief is subject to two conditions: (i) issuers must apply the accounting treatment to those transactions as foreseen in the IFRS 16 amendment; and (ii) issuers must disclose their use of the amendment as issued by the International Accounting Standards Board (IASB) in the notes to the financial statements. The FCA intends the policy to be in place until the amendment to the standard is formally adopted. Should the EP or the European Council object to the adoption of the IFRS 16 amendment before the end of the Transition Period, the FCA will end the temporary relief. 

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Consumer/Retail

Please see our Covid-19 section for an update on the FCA’s Regulation round-up being published.

Covid-19

Please see the other sections for product specific updates relating to Covid-19. 

FCA Regulation round-up – firms’ approaches to disclosure during Covid-19

On 20 August, the FCA published its Regulation round-up newsletter for August, which includes its views on firms’ approaches to disclosure during Covid-19. The FCA states that it has been monitoring and evaluating the disclosure of firms, to understand if they are providing consumers with enough support with their decisions. The FCA are impressed with how firms have approached disclosure during the crisis, and welcome the accessible and engaging disclosures that have been designed. The FCA hopes that firms will continue to design innovative disclosures that facilitate consumer understanding.

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Financial Crime

Please see our Capital Markets section for an update on the FCA publishing the 30th edition of its Primary Market Bulletin.

EBA response to the EC’s consultation on an Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) action plan and the establishment of an EU level AML/CFT supervisor

On 19 August, the EBA published its response to the EC’s consultation on an AML/CFT action plan and the establishment of an EU level AML/CFT supervisor. In its response, the EBA sets out technical points that policy-makers should consider when deciding on the scope and powers of an EU-level supervisor for AML/CFT. The EBA is of the view that a comprehensive assessment of the current EU AML/CFT framework is necessary to ensure that the EU and its component parts are equipped to tackle ML/TF more effectively and efficiently. Specifically, the EBA recommends that the EC: (i) harmonise the EU’s legal framework to reduce the risk of gaps created by divergent approaches to incorporating EU AML/CFT law into national law; (ii) combine an ongoing role for national AML/CFT authorities with an EU-level AML/CFT supervisor in a ‘hub and spoke’ approach that builds on national AML/CFT authorities’ expertise and resources, and complement this with effective EU-level oversight for a consistent approach with comparable outcomes; and (iii) leverage on the EU’s existing AML/CFT infrastructure, including the EBA’s policy, data and information technology resources as well as the EBA’s European and international supervisory cooperation networks. The EBA has also published a letter to Valdis Dombrovskis (Executive Vice-President of the EC), summarising the response.

EBA Response

EBA Letter

Joint Money Laundering Steering Group (JMLSG) receives HMT ministerial approval for its guidance material

On 19 August, the JMLSG announced that it has received HMT ministerial approval for its guidance material published in June and July. This includes the new Sector 22 Cryptoasset exchange providers and custodian wallet providers, Annex 5-V Pooled Client Accounts, and various other revisions within Part I and Part II.

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Fintech

Please see our Financial Crime section for an update on the Joint Money Laundering Steering Group (JMLSG) receiving HMT ministerial approval for its guidance material.

BIS speech on leveraging technology to support supervision – challenges and collaborative solutions

On 19 August, BIS published a speech by Benoît Cœuré (Head of the BIS Innovation Hub) on leveraging technology to support supervision, providing a broad overview of the challenges that remain for suptech and regtech to be embraced more widely, as well as highlighting the potential future if efforts are coordinated. Amongst other things, the speech outlines: (i) benefits of regtech and suptech; (ii) challenges for digital transformation; and (iii) building trusted platforms of collaboration – specifically, on improving trusted interaction with innovative financial players to facilitate innovative technologies and business models for financial services. 

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Fund Regulation

ESMA letter to EC – Review of the Alternative Investment Fund Managers Directive (AIFMD)

On 18 August, ESMA published a letter to the EC in respect of reviewing the AIFMD. The letter shares ESMA’s views in the Annexes on the key topics of the AIFMD review where it sees the need to consider amendments to the framework for alternative investment funds in Europe. In many cases, these suggestions also require consideration of changes to the Undertakings for the Collective Investment in Transferable Securities (UCITS) framework. The letter includes recommendations for changes in 19 areas including: (i) harmonising the AIFMD and UCITS regimes; (ii) delegation and substance; (iii) liquidity management tools; (iv) leverage; (v) the AIFMD reporting regime and data use; and (vi) the harmonisation of supervision of cross-border entities. Annex I sets out the key issues in the legislative framework where ESMA recommends revisions and Annex II sets out more specifically the key reporting issues where improvements could be made. ESMA is asking the EC to support the areas identified in the letter in order to improve the effectiveness and soundness of the AIFMD. The EC will present their stance on ESMA’s recommendations in their consultation report on AIFMD II, which is expected to be published in September. 

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Markets and Markets Infrastructure

Please see our Recovery and Resolution section for an update on the FSB’s questionnaire on the continuity of access to financial market infrastructures (FMIs) for firms in resolution.

Recovery and resolution

FSB questionnaire on the continuity of access to financial market infrastructures (FMIs) for firms in resolution

On 14 August, the FSB published a questionnaire on the continuity of access to FMIs for firms in resolution. As one of several outcomes of a workshop held in May 2019, it was suggested that the process of collecting certain baseline information relevant to continuity of access in resolution could be streamlined through the use of a common template or questionnaire for gathering relevant information, which could: (i) reduce the “many to one” nature of inquiries from banks and authorities to FMIs; (ii) streamline the provision of this information from FMIs to firms and authorities; and (iii) streamline the information gathering process for firms who are members of multiple FMIs. All FMIs are encouraged to complete the questionnaire and to publish their responses, or to make them available in other ways to FMI service users and resolution authorities to inform their resolution planning. The experience will be evaluated after the first iteration in the course of 2021. FMIs and banks, as well as other stakeholders, will then have the opportunity to provide feedback and suggestions on the questionnaire itself and the process.

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Sustainable Finance

PRA and FCA’s joint Climate Financial Risk Forum (CFRF) discusses strategy for second year

On 14 August, the PRA published a new webpage on the fourth meeting of the PRA and FCA’s joint CFRF. The CFRF agreed that all current members would continue into the second year, and that membership would be widened to include a small number of asset owners alongside other regulators that would be invited to observe. The CFRF discussed the strategy for the second year of work. There was broad agreement that the focus of each working group would be two-fold: (i) to undertake a thematic piece of work on metrics, data and methodologies; and (ii) to build on the CFRF Guide (published on 29 June), by progressing and refining the recommendations, particularly highlighting how these approaches can be effectively implemented by firms. The next CFRF meeting will take place in Q4 where the work plans and approaches will be agreed. Furthermore, possible next steps to support COP26 (the international climate summit being hosted by the UK in November 2021) will be discussed.

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Other developments

BoE working paper on whether bonus cap curb affects risk taking

On 14 August, the BoE published a staff working paper on whether bonus cap curb affects risk taking, discussing an experimental study of relative performance pay and bonus regulation. The BoE conducted a lab experiment with 253 participants to examine how constraints on bonus akin to bonus regulations (such as bonus cap and malus) could affect individuals’ risk-taking in the presence of relative performance pay. Participants took greater risks when bonus was linked to investment performance relative to that of their peers (relative performance pay) than when it depended on their own performance only. The BoE concludes that in the absence of relative performance pay, bonus cap and malus reduced risk-taking. Furthermore, with relative performance pay, the risk-mitigating effects of bonus cap and malus were significantly weakened – however, participants took less risk when bonus was made conditional on their team avoiding a loss.

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EBA revised work programme

On 14 August, the EBA published a revised work programme for 2020 to reflect projects that it has postponed as a result of the Covid-19 pandemic. The revised work programme outlines the prioritisation principles for the revision, as well as the EBA’s initiatives to monitor the Covid-19 crisis. The principles are: (i) freezing of publication of new consultation papers, unless considered critical; (ii) limiting minimum interaction with industry (only voluntary exercises with industry were planned); (iii) data collection for the purpose of ad-hoc analysis to support policy options / investigations being put on hold until further notice; and (iv) publishing final Regulatory Technical Standards / Implementing Technical Standards (RTS/ITS) on a case-by-case basis, depending on their degree of finalisation and expected time of implementation. The EBA states that these principles have been followed across all policy work in order to face the more complex working situation as well as to alleviate the burden on banks.

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