Key Regulatory Topics: Weekly Update 15 - 21 Jan 2021
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Our weekly update on key regulatory topics affecting the financial services sector.
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Brexit
Please see the other sections for product-specific updates relating to Brexit.
Please see our Brexit financial services webpage, which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators’ publications.
HoL EU Services Sub-Committee launches inquiry on the future UK-EU relations on trade in services
On 15 January, the HoL EU Services Sub-Committee launched a new inquiry on the future of UK-EU relations on trade in services, including the impact of the provisions set out in the UK-EU trade and co-operation agreement. The inquiry covers service sectors including financial services, professional and business services, data and digital services. In relation to financial services, the Committee ask: (i) how the arrangements in the UK-EU trade and cooperation agreement will shape UK-EU trade in financial services; (ii) what form future UK-EU structured dialogue should take; (iii) what form of Parliamentary oversight of UK regulators would be appropriate as more powers are delegated to them; and (iv) how might changes in other sectors effect the financial services sector. The deadline for comments is 5 February 2021. Read more
Capital markets
Please see the Markets and Markets Infrastructure section for the EC’s consultation on the establishment of a European Single Access Point for companies' financial and sustainable investment-related information.Consumer / Retail
FCA consults on restricting CMC charges for financial products and services claims
On 21 January, the FCA began consulting on restricting claims management company (CMC) charges for financial products and services claims. The FCA proposes to: (i) cap the fees that may be charged for claims management activities on claims that yield redress in relation to non-PPI financial products and services where the claims are within the redress system. For fees on non-PPI financial products and services claims where the cap does not apply, the FCA require charges to be no more than reasonable; (ii) improve the way CMCs managing claims about financial products and services disclose key information to consumers at the pre-contract stage, to help consumers make better-informed decisions about using CMC services; and (iii) make minor amendments to the Claims Management: Conduct of Business Sourcebook (CMCOB), Consumer Redress Schemes Sourcebook (CONRED) and the Perimeter Guidance Manual (PERG) to update and clarify existing rules. The deadline for comments is 21 April 2021. A policy statement is expected to be published in Autumn 2021.
Press release
Consultation paper
PRA consults on depositor protection identity verification
On 20 January, the PRA began consulting on proposed rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS). It also proposes amendments to Supervisory Statement (SS) 18/15, including a new expectation that Insolvency Practitioners (IPs) should carry out identity verification in the event that a firm has failed to do so by the compensation date. The proposed rule changes are intended to prevent FSCS eligibility issues in the event that a firm has failed to conduct identity verification in accordance with the relevant AML requirements referred to in DP Rule 2.2(4)(f) while continuing to ensure identity verification is carried out before any compensation is paid. The deadline for comments is 17 February 2021. The PRA proposes that the implementation date for the changes would be 24 March 2021.
FCA Dear Board of Directors letter to debt purchasers, debt collectors and debt administrators
On 18 January, the FCA wrote to the Board of Directors of debt purchasers, debt collectors and debt administrators in order to: (i) set out its view of the key risks debt purchase, debt collection and debt administration firms pose to their customers or the markets in which they operate; (ii) outline its expectations of debt purchase, debt collection and debt administration firms, particularly in light of the ongoing Covid-19 pandemic, including how firms should be mitigating these key risks; and (iii) describe its supervisory strategy and programme of work to ensure that firms are meeting its expectations, and harms are being remedied.
FCA Consumer investments data review 2020
On 18 January, the FCA published a report on its consumer investments data review, covering the period between 1 January and 31 October 2020. The FCA provides information as to the work it has carried in relation to three strategic outcomes of its consumer investments strategy: (i) stopping and disrupting firms from causing consumers harm; (ii) supporting and guiding consumers to investments that meet their needs; and (iii) ensuring firms deal fairly with consumer complaints and pay redress. The FCA will publish this report on a half yearly basis to provide an update on its work to reduce the impact of consumer harm in the investment market and the insights it is gaining from it.
Covid-19
Please see the other sections for product-specific updates relating to Covid-19.
Financial crime
Please see the Consumer / Retail section for the PRA’s consultation paper on depositor protection identity verification.
UK government revises guidelines on mutual legal assistance
On 15 January, the government published revised guidance on mutual legal assistance (MLA) and European Investigation Order (EIO) requests in response to the end of the Brexit transition period. MLA is a method of cooperation between states for obtaining assistance in the investigation or prosecution of criminal offences. MLA is generally used for obtaining material that cannot be obtained on a police cooperation basis, particularly enquiries that require coercive means. The government notes that following the end of the Brexit transition period, the UK is no longer part of the EIO procedures. Instead mutual legal assistance requests from EU Member States are based on the Council of Europe’s 1959 European Convention on Mutual Assistance in Criminal Matters and its two additional protocols as supplemented by the EU-UK Trade and Cooperation Agreement.
Fintech
Please see the Other Developments section for the minutes of the FMLC’s meeting held on 10 December 2020, where it discussed current areas of legal uncertainty.
A&O Publication: HMT’s consultation on a proposed UK regulatory framework for stable tokens
In this note, we summarise various key aspects of the consultation, and compare HMT’s proposed approach to other recent initiatives in the UK and EU, including the following proposals referred to in the consultation: (i) HMT’s July 2020 consultation on extending the financial promotions (i.e. advertising) regime to cryptoassets; and (ii) the EC’s proposed regulation on markets in cryptoassets (MiCA). You can download the publication here.
Market and markets infrastructure
Please see the Other Developments section for the FSB’s work programme for 2021 and the minutes of the FMLC’s meeting held on 10 December 2020, where it discussed current areas of legal uncertainty.
EC consults on establishment of a European single access point
On 21 January, the EC began consulting on the way to establish a European Single Access Point (ESAP) for companies' financial and sustainable investment-related information that must be made public pursuant to EU legislation. The EC explains that the collection and dissemination of data is fragmented as per EU law in the financial services and capital markets union (CMU) area, with the establishment of the ESAP the first action in the EC’s current CMU Action Plan. The EC believes that the ESAP will: (i) address primarily information published by companies that are capital market participants, as well as SMEs looking for funding; (ii) encompass information disclosed pursuant to the Non-Financial Reporting Directive and it could also be extended to other categories of ESG information disclosed by financial institutions; (iii) entail streamlining disclosure mechanisms set-out in EU legislation. The platform should build to the greatest extent possible on existing EU and national IT infrastructure. The EC seeks views as to: (a) the scope of information that should be included; (b) the preferred technical solution(s) to establish the architecture of the ESAP; and (c) whether companies, other than those with securities listed on EU regulated markets (for example, unlisted companies and those listed on an SME growth market), should be allowed to disclose information on the ESAP on a voluntary basis. The deadline for comments is 3 March 2021.
European Commission consults on draft Implementing Decisions on equivalence under EMIR
On 20 January, the EC began consulting on six draft Implementing Decisions made under Article 13(2) of EMIR on the recognition of the legal, supervisory and enforcement arrangements for derivative transactions in relation to Brazil, Australia, Hong Kong, Singapore, Canada, and the USA as equivalent to Article 11 of EMIR (risk mitigation (including collateral) requirements for uncleared derivatives). The deadline for comments is 17 February 2021. The drafts decisions state that they will enter into force 20 days following their publication in the OJ.
Commission Implementing Decision (Ares(2021)445861) - Brazil
Commission Implementing Decision (Ares(2021)445856) - Australia
Commission Implementing Decision (Ares(2021)445869) - Hong Kong
Commission Implementing Decision (Ares(2021)445873) - Singapore
Commission Implementing Decision (Ares(2021)445866) - Canada
Commission Implementing Decision (Ares(2021)445878) - USA
EP adopts BMR amending Regulation to address benchmark cessation risks and exempt certain third-country FX benchmarks
On 19 January, the EP announced that it has adopted its position at first reading on the proposed Regulation amending the BMR as regards the exemption of certain third-country FX benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. The EC will be granted the power to replace when necessary: (i) “critical” benchmarks, which influence financial instruments and contracts with an average value of at least €500 billion and could thus affect the stability of financial markets across Europe; (ii) benchmarks with no, or very few, appropriate substitutes whose cessation would have a significant and adverse impact on market stability; and (iii) third country benchmarks whose cessation would significantly disrupt the functioning of financial markets or pose a systemic risk for the financial system in the Union. EU market participants will be able to use benchmarks administered in a country outside the EU until the end of 2023. The EC will be empowered to adopt a delegated act by 15 June 2023 to prolong this extension by a maximum two years until, but such an extension will have to be duly motivated.
FMLC response to FCA consultation on the proposed policy with respect to the exercise of its powers in relation to LIBOR transition
On 18 January, the FMLC published its response to the FCA’s consultation on its approach to new powers under the Financial Services Bill relating to LIBOR transition. The FMLC highlights two broad areas of uncertainty, firstly, on the practicalities of intervention and the scale of the ‘tough legacy’ contracts. The FCA’s new powers would permit the publication of a “Transition LIBOR” in respect of the wind-down of legacy contracts. While this may create a welcome safety net, there is also an evident risk that it may give rise to mixed messages in regard to successor rates, setting Transition LIBOR up against other successor rates being used by market participants. In a world of multiple alternatives to LIBOR, disagreement may arise between the parties in situations in which the existing contract refers generally to a "successor rate" or where a term as to the interest payable should necessarily be implied as a matter of business efficacy. The FMLC highlights that there are likely to be differing views around the delimitation of the phrase “tough legacy” but, in light of the FCA's apparent policy preference to transition the market away from LIBOR and towards the adoption of an RFR, reliance on a Transition LIBOR with a methodology which does not reflect this preference should be discouraged and the definition of "Tough Legacy" circumscribed tightly accordingly. The FMLC notes that it is not clear how the IBA’s proposals to continue the production of the USD LIBOR panel past 2021 will interact with transitional arrangements. Stakeholders have suggested to the FMLC that some market participants are transitioning existing contracts and relationships to USD LIBOR away from other currencies. It is to be doubted this was the intended effect of preserving the USD LIBOR panel. Secondly, the FMLC discusses issues concerning the use of LIBOR in foreign jurisdictions and the problem of potential conflict and overlap between the varying approaches. The FMLC urges the FCA to centre careful coordination with authorities around the world in exercising its power.
ESAs final draft ITS on reporting templates for intra-group transactions and risk concentration under FICOD
On 18 January, the ESAs submitted to the EC the final report on the draft implementing technical standards (ITS) under the Financial Conglomerates Directive (FICOD) on reporting templates for intra-group transactions and risk concentration. This draft ITS proposes harmonised templates for the reporting of intra-group transaction and risk concentration for financial conglomerates aiming at collecting information in order for competent authorities to perform their supervisory overview referred to in Articles 7(2) and 8(2) of FICOD. The harmonisation of the templates aims to: (i) fully align the reporting under FICOD in order to enhance supervisory overview regarding group specific risks, in particular contagion risk; (ii) increase comparability amongst financial conglomerates of different Member States improving supervisory consistency; and (iii) enhance the level playing field between financial conglomerates diminishing the reporting burden for cross-country financial conglomerates. In doing so, the present regulation will contribute to the consolidation of the single market. Once endorsed by the EC, the draft ITS would take the form of a delegated regulation. The ITS will enter into force on 1 January 2022.
ACER updates its requirements and resumes registration of registered reporting mechanisms
On 15 January, the Agency for the Cooperation of Energy Regulators (ACER) announced that in light of the adoption and entry into application of the EC’s decision on fees due to ACER for collecting, handling, processing and analysing of information reported under REMIT, ACER has updated its requirements' document for Registered Reporting Mechanisms (RRMs) and will resume their registration. The document defines the technical and organisational requirements for submitting data. The update now integrates the latest provisions: the EC’s decision foresees an initial enrolment fee for entities applying to become a RRM and a yearly fee for registered RRMs. As a next step, ACER will resume the RRMs' registration and the provision of all necessary services. ACER will inform stakeholders about the schedules of these activities in future communications.
Payment services and payment systems
Please see the Other Developments sections for the FSB’s work programme for 2021.
Prudential regulation
PRA Direction for modification by consent to sections of the Capital Buffers Part of the PRA Rulebook
On 21 January, the PRA published an updated direction for modification by consent of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook, in conjunction with voluntary requirements, effective from 1 January 2021. It is relevant to firms invited to apply for a voluntary requirement (VREQ) under section 55M of FSMA 2000 in relation to a Pillar 2A requirement, a G-SII buffer or an O-SII buffer. As part of the VREQ application process, firms are expected to also apply for a modification of 5.1 to 5.3 and 5.5 of the Capital Buffers Part of the PRA Rulebook. The purpose of the modification is to avoid any potential conflict between the individual requirements (of Maximum Distributable Amount trigger points) imposed on a firm and PRA rules.
EBA RTS to identify investment firms’ risk takers and to specify instruments used for variable remuneration
On 21 January, the EBA published two final draft regulatory technical standards (RTS) under Articles 30(4) and 32(8) of the Investment Firms Directive (IFD): (i) on the criteria to identify all categories of staff whose professional activities have a material impact on the investment firm’s risk profile or assets it manages (‘risk takers’). Risk takers will be identified based on a combination of qualitative and quantitative criteria specified in the RTS. To ensure that all risk takers are identified, members of staff are identified as having a material impact on the institution’s risk profile as soon as they meet at least one of the qualitative or quantitative criteria in the RTS or, where necessary because of the specificities of their business model and additional internal criteria; and (ii) on the classes of instruments that adequately reflect the credit quality of the investment firm and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration. These introduce requirements for investment firms regarding Additional Tier 1, Tier 2 and other instruments used for the purposes of variable remuneration, to ensure that they appropriately reflect the credit quality of the investment firm and to specify possible alternative arrangements for the pay out of variable remuneration where investment firms do not issue any of the instruments referred to in Article 32 of the IFD. The EBA report that the provisions in the RTS are aligned with Commission Delegated Regulation 527/2014 on classes of instruments that are appropriate to be used for the purposes of variable remuneration under the CRD.
Final draft RTS on identified staff under IFD
Final draft RTS on instruments for variable remuneration under IFD
BoE sets out key elements of 2021 stress test
On 20 January, the BoE published a new webpage on the key elements of the 2021 stress test. The BoE notes that the 2020 concurrent stress test was cancelled following the Covid-19 pandemic. The aim of the 2021 stress test is to update and refine the ‘reverse stress test’ exercise carried out by the FPC in August 2020, which calculated how severe the economic paths for the UK and global economies would need to be in order to deplete regulatory capital buffers by around 5 percentage points. In the 2021 test scenario, cumulative UK GDP losses over the period 2020–22 will total around £800 billion (37% of 2019 UK GDP), relative to a pre-Covid-19 projection in line with the January 2020 Monetary Policy Report. The stress scenario will also see UK unemployment peak at a little under 12% and UK residential and commercial property prices fall by around 33% between the end of 2020 and the trough of the stress. In the scenario the cumulative fall in world GDP over the three years from 2020 to 2022 equates to 31% of 2019 GDP, relative to a pre-Covid-19 baseline. The timetable for the 2021 solvency stress test will be staggered. Participating banks will submit projections for credit impairments and credit risk-weighted assets in April, rather than the usual timing of June in order to inform further desktop analysis by the BoE in the first half of the year. The PRA has also published a webpage providing guidance on the 2021 stress test for participants conducting their own analysis.
EBA consults on guidelines on the establishment of intermediate EU parent undertakings under CRDIV
On 15 January, the EBA published a consultation paper on guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate EU parent undertakings under Article 21b of CRD IV. The guidelines clarify the relevant dates for the calculation of the total value of the assets in the EU, taking into account the fluctuation in the value of assets. In particular, the guidelines specify that for the purpose of the application of the IPU requirement, the total value of assets in the Union of the third-country group should be calculated as an average over the last four quarters. The EBA states that In order to meet the IPU requirement in a timely manner it is necessary that institutions belonging to third-country groups apply a forward-looking approach – therefore, it is specified that they should assess at least annually whether the threshold is expected to be breached within the three-year horizon. In addition, the guidelines specify certain procedural aspects related to the monitoring of the threshold by competent authorities and the establishment of the IPU where necessary. The deadline for comments is 15 March 2021.
Recovery and resolution
Please see the Other Developments sections for the FSB’s work programme for 2021.
Sustainable finance
Please see the Other Developments sections for the FSB’s work programme for 2021 and the minutes of the FMLC’s meeting held on 10 December 2020, where it discussed current areas of legal uncertainty.
Please see the Markets and Markets Infrastructure section for the EC’s consultation on the establishment of a European Single Access Point for companies' financial and sustainable investment-related information.
Other developments
FMLC meeting minutes
On 21 January, the FMLC published the minutes of a meeting held on 10 December 2020. Points discussed include: (i) the publication of a paper highlighting the relevant legal positions taken by England, Germany, the Netherlands, Ireland and Luxembourg with regards to electronic signatures; (ii) the publication of an addendum to its October 2020 paper on LIBOR transition in order to highlight issues of uncertainty arising in the context of transition following a number of recent developments. Members also agreed to a joint letter from the FMLC, Financial Markets Law Group, Financial Law Board & EFMLG to the relevant authorities, (IOSCO, the FSB and local authorities in the US, UK, EU and Japan) asking for increased coordination to avoid unintended consequences linked to legislative initiatives; (iii) legal uncertainties arising in the context of the legislation proposed as a part of the EC’s Digital Finance Package including the FMLC's continued engagement with EU law after Brexit. It was noted that, especially in the context of FinTech, it was important that the FMLC highlight any uncertainties in EU law, as the UK is likely to establish its own regulations in due course and it would be unfortunate if there were discrepancies between the two regimes, creating an additional burden on firms. The Brexit Advisory Group has recommended that the FMLC should continue to comment on EU legislative proposals; (iv) the lack of clarity relating to the UK's strategy with regards to implementing EU legislation on ESG matters, though it was noted that the UK’s measures are expected imminently; and (v) the two open consultations on the future of financial services in the UK. Members agreed that the FMLC should raise issues of uncertainty arising in the context of decisions made in relation to the financial services framework in the UK.
FSB 2021 work programme
On 20 January, the FSB published its work programme for 2021. The FSB notes that the programme reflects a strategic shift in priorities in the Covid-19 environment. Important items it highlights, including key deliverables to the G20 Italian Presidency include: (i) international cooperation and coordination related to Covid-19 - assess vulnerabilities in the global financial system; share information on policy responses; assess their effectiveness and coordinate the future timely unwinding of the temporary measures taken; and monitor the use of flexibility and consistency of policy responses with existing international financial standards; (ii) non-bank financial intermediation (NBFI) - focus on the specific issues identified in the FSB holistic review and launch an evaluation of the effects of G20 financial reforms on bond market liquidity will be launched; (iii) CCP resilience, recovery and resolvability - consider the need for, and develop as appropriate, international policy on financial resources in recovery and resolution to further strengthen the resilience and resolvability of CCPs; (iv) enhancing cross-border payments - development of quantitative targets for the roadmap, a stocktake of data frameworks and exploration of the scope for, and obstacles to develop a global digital Unique Identifier; (v) climate change and sustainable finance - promote globally comparable, high-quality and auditable standards of disclosure based on the TCFD recommendations, and review regulatory and supervisory approaches to addressing climate risks at financial institutions; (vi) interest rate benchmarks - support transition away from LIBOR, which is to discontinue after 2021, to more robust benchmarks and report on transition progress to the G20; and (vii) cyber and operational resilience - explore the scope for convergence in the regulatory reporting of cyber incidents and the need for revisions to the FSB Cyber Lexicon.
EC strategy to foster the openness, strength and resilience of Europe's economic and financial system
On 19 January, the EC presented a new strategy to stimulate the openness, strength and resilience of the EU's economic and financial system. The EC set out how the EU can reinforce its open strategic autonomy in the macro-economic and financial fields by promoting the international role of the euro, strengthening the EU’s financial market infrastructures, improving the implementation and enforcement of EU’s sanctions’ regimes, and increasing the EU’s resilience to the effects of the unlawful extra-territorial application of unilateral sanctions and other measures by third countries. In its communication the EC sets outs 15 key action proposals in order to achieve these objectives. The EC will monitor the actions on an ongoing basis. It will review the state of implementation in 2023.
FCA reminds firms to regularly review regulatory permissions
On 18 January, the FCA reminded firms of their obligation to regularly review regulatory permissions to ensure they are up to date and removed where they are not needed. The FCA expects firms to notify it of material changes and apply to make any necessary changes in a timely way. Reviewing permissions helps to assure firms that they will continue to meet the threshold conditions, are demonstrating effective oversight of their business, meet their obligations under the Senior Managers Regime and are providing accurate information to consumers. The FCA reminds firms that they are required to provide it with an annual attestation that the information held on the Financial Services Register is accurate. The FCA explains that under new powers granted by the Financial Services Bill, it will be able to act more quickly where it considers that firms are no longer carrying out regulated activities. Should the FCA suspect that a firm is not carrying on a regulated activity, it will be able to vary or cancel the firm’s permissions 6 weeks after serving the firm with a notice, should the firm not respond.