Key Regulatory Topics: Weekly Update 15 - 21 May 2020
21 May 2020
Our weekly update on key regulatory topics affecting the financial services sector.
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UK Government publishes draft legal texts on future relationship with the EU
On 19 May, the UK Government published the draft legal texts which have formed the basis for the discussions with the EU on the future relationship. The UK Government explains that the main element of its approach is the Free Trade Agreement and it has also published texts on fisheries, an agreement on law enforcement and judicial cooperation in criminal matters; and agreements in technical areas covering aviation, energy and civil nuclear cooperation. The UK Government explains that it is seeking a similar agreement with the EU to that of Canada and that its proposals have drawn on previous EU agreements such as the Comprehensive Economic Trade Agreement, the EU/Japan Economic Partnership Agreement and the EU/South Korea Free Trade Agreement.
Please see the other sections for product specific updates relating to Covid-19.
Please see our dedicated Covid-19 webpage containing links to a number of articles and insights to keep up-to-date with developments and assist with effective contingency planning.
FCA’s response to Treasury Committee regarding: Inquiry into the Economic Impact of Covid-19
On 21 May, the House of Commons Treasury Committee published the FCA's response (dated 12 May) addressing specific questions from the Committee on the FCA’s package of support for borrowers, and SMEs during the Covid-19 pandemic. Areas covered include: (i) how the FCA will ensure that customers availing themselves of temporary financial relief measures will not have their credit ratings affected, and how future payments and the unwinding of any future payments will not cause consumers to get into further financial difficulty; (ii) whether the FCA is monitoring the protection it has put in place for mortgage prisoners protecting them from repossessions and being refused payment holidays; (iii) the work that the FCA is doing to consider what will be needed after the initial 3-month period of temporary financial relief; and (iv) what the FCA is doing to ensure that small businesses are getting the best advice with regards to available loans.
Corporate Insolvency and Governance Bill 2019-21
On 20 May, the Corporate Insolvency and Governance Bill was published by the UK Government and introduced in Parliament, with a second reading scheduled for 3 June. It consists of 6 insolvency measures and 2 corporate governance measures which amend insolvency and company law to support business to address the challenges resulting from the impact of Covid-19. This Bill has three main sets of measures: (i) to introduce greater flexibility into the insolvency regime, allowing companies breathing space to explore options for rescue; (ii) to temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action; and (iii) to provide companies and other bodies with temporary easements on company filing requirements and requirements relating to meetings including annual general meetings (AGMs).
Corporate Insolvency and Governance Bill 2019-21
JMLSG consults on Pooled Client Accounts guidance
The JMLSG published for consultation the proposed text of a new annex to be added to Part I Chapter 5 of its AML/CTF guidance for the financial services sector containing guidance on pooled client accounts (PCA). A PCA is defined as: “a bank account opened with the firm by a customer, for example a legal practitioner or letting agent, to administer funds that belong to their own clients. Their clients’ money will be co-mingled but the customer’s clients will not be able to directly instruct the firm to carry out transactions. Suspense accounts held by respondent institutions are not PCAs.” Areas covered within the guidance include: (i) what to consider as part of the documented customer risk assessment; (ii) the written agreement with the customer; and (iii) due diligence measures. The deadline for comments is 10 June.
Markets and markets infrastructure
ESMA’s clarifications on the reporting of repos with EU central banks under MiFIR
On 21 May, in response to an enquiry by the International Capital Market Association (ICMA), ESMA provided some clarifications on the reporting of repos transacted with EU central banks under MiFIR given the reporting framework has not been designed to cater for all SFTs and their specific characteristics.
ESMA's statement on implications of the Covid-19 outbreak on the half-yearly financial reports
On 20 May, ESMA issued a statement to promote transparency and consistent application of European requirements for the information provided in the half-yearly financial reports under the current Covid-19 circumstances. In the statement, ESMA provides recommendations on areas of focus and highlights: (1) the importance of providing relevant and reliable information; (2) the importance of updating the information included in the latest annual accounts to adequately inform stakeholders of the impacts of Covid-19, in particular in relation to significant uncertainties and risks, going concern, impairment of non-financial assets and presentation of Covid-19 related items in the statement of profit or loss; and (3) the need for entity-specific information on the past and expected future impact of Covid-19 on issuers' strategic orientation, operations, and performance, as well as any mitigating actions put in place to address the effects of the pandemic. ESMA notes that in the current situation some issuers may choose to publish their half-yearly financial reports later than usual (within the permitted period) but highlights that reports must not be unduly delayed. Regardless, issuers must still comply with their ongoing obligations under the Market Abuse Regulation.
SRB publishes MREL Policy under the Banking Package
On 20 May, the SRB published its final ‘Minimum Requirements for Own Funds and Eligible Liabilities (MREL) Policy under the Banking Package’, along with an overview of the SRB responses to the industry consultation. The Policy is structured as follows: (i) calibration - the SRB is modifying and extending its approach to MREL calibration in accordance with the new framework; (ii) subordination requirements for resolution entities in accordance with the new framework, as well as defining a methodology to determine and quantify 'no creditor worse off' risk; (iii) internal MREL for non-resolution entities - the SRB will progressively expand the scope of non-resolution entities for which it will adopt internal MREL decisions; (iv) MREL for cooperative groups; (v) eligibility of liabilities issued under the law of a third country; and (v) transition arrangements. MREL decisions implementing the new framework will be taken based on this policy in the 2020 resolution planning cycle. The decisions will be communicated to banks in early 2021. These decisions will replace those issued under the previous legal framework. Each new decision will set out two binding MREL targets: the binding intermediate target to be met by 1 January 2022 and the fully calibrated MREL (final target) to be met by 1 January 2024.
SRB MREL policy under the banking package
SRB MREL policy feedback statement
EP to consider CRR Amending Regulation on 18 June and ECB issues an opinion on the proposals – Covid-19
On 19 May, the EP updated its procedure file on the proposed Regulation amending the CRR in response to the Covid-19 pandemic. The EP will consider the proposals during the plenary session on 18 June. On 20 May, in response to the requests from the Council of the EU and the EP, the ECB issued an opinion on the proposed Regulation. The ECB sets out general comments on the proposed Regulation and specific observations on each of the key reforms introduced by the Regulation, as well as providing an overview of the actions it and other authorities, notably BCBS and the EBA have taken in response to the pandemic. Against this backdrop, the ECB fully supports the EC's initiative to increase the capacity of credit institutions to lend and to absorb losses related to the Covid-19 pandemic, while still ensuring their continued resilience. The targeted adjustments to CRR are welcomed and any further adjustments to the proposed Regulation should not fundamentally alter the prudential framework. The ECB's observations include, regarding the readiness to provide loans to the economy, that if the CET1 ratio of credit institutions falls below the level of the combined buffer requirement, credit institutions can distribute resources only within the limits of the maximum distributable amount. Credit institutions might not be willing to use their buffers for additional lending due to concerns of being obliged to cancel Additional Tier 1 coupons and facing the potentially negative reactions of market participants. Such behaviour would impair the intended beneficial effect of the buffer framework.
EP procedural file
Recovery and resolution
EBA publishes Report on interlinkages between recovery and resolution planning
On 20 May, the EBA published its report which assesses interlinkages between recovery and resolution planning under the BRRD, with the aim of enhancing synergies between the two phases and ensuring consistency in their potential implementation. The Report outlines the EBA’s observations and identifies best practices and areas where further improvement and/or clarifications are needed. In addition, on some specific common elements between both types of plans such as critical functions and access to central bank facilities, it clarifies their specific purpose in each planning phase and the advantages/disadvantages of potential convergence/harmonisation. The Report also analyses the potential impact of recovery options on the institution’s resolvability and introduces an assessment framework to support the assessment and consultation process between resolution and competent authorities. The Report is accompanied by two separate annexes: (i) a template used to perform the comparative analysis of a sample of recovery and resolution plans; and (ii) a practical tool that will help resolution authorities in conducting their analysis of the potential impact of recovery options on the institution’s resolvability.
SRB consults on its ‘standardised Data Set’ proposals
On 19 May, the SRB began consulting on its ‘standardised Data Set’ to ensure that a minimum level of data is available to support a robust valuation for resolution. The publication is a follow up to the 2019 Framework for Valuation intended to provide independent valuers with the SRB’s expectations regarding the principles and methodologies for valuation reports, as required under EU law. The consultation covers two documents: (i) the ‘SRB Valuation Data Set instructions document’, which develops the SRB Valuation Data Set and establishes clear expectations in relation to data needs providing additional guidance on detailed definitions of key topics and describes data definitions in detail; and (ii) an explanatory note aiming to provide guidance to the banks regarding their management information systems' capabilities to produce information that is as up to date and complete as possible and of adequate quality to carry out a fair, prudent and realistic valuation. The SRB Data Set does not impose any reporting obligations. It is a tool that defines the SRB’s expectations for the information it needs to perform an independent valuation, and provides guidance to institutions. The deadline for comments is 30 June.
SRB Valuation Data Set Instructions
EBA consults on technical standards for contractual recognition of stay powers under the BRRD
On 15 May, the EBA began consulting on its draft RTS for contractual recognition of stay powers in the BRRD, to support the effective application of temporary restrictions on early termination rights (resolution stays) in relation to financial contracts governed by the law of a third country. The EBA has proposed in the draft RTS a list of mandatory components which must be present in the contractual term required in the financial contracts by which the parties recognise that the financial contract may be subject to the exercise of powers to suspend or restrict rights and obligations by the exercise of those powers by a member state resolution authority. These include provisions specifying the acknowledgement, description of the powers and recognition of the parties that they are bound by the powers to suspend certain obligations and restrictions of some rights and that they are bound by the requirements of article 68 of BRRD. In addition, the parties acknowledge that no other contractual term impairs the effective and enforceability of this clause. The deadline for comments is 15 August.
ECB consults on its guide on climate-related and environmental risks
On 20 May, the ECB began consulting on a draft guide that outlines the ECB’s understanding of the safe and prudent management of climate-related and environmental risks under the current prudential framework. It describes how the ECB expects institutions to consider climate-related and environmental risks – as drivers of established categories of prudential risks – when formulating and implementing their business strategy and governance and risk management frameworks. It further explains how the ECB expects institutions to become more transparent by enhancing their climate-related and environmental disclosures. This guide is not binding for institutions, but rather it serves as a basis for supervisory dialogue. As part of this supervisory dialogue, the ECB will discuss with institutions the ECB’s expectations set out in this guide in terms of any possible divergences in institutions’ practices. The ECB has also published FAQs on the consultation. As part of the consultation process, the ECB will organise an Industry Dialogue Webinar on 17 June, as well as a public hearing on 2 September. The deadline for comments is 25 September.
BoE provides an update on its review of transforming data collection from the UK financial sector
On 21 May, the BoE updated its webpage on its review, undertaken in consultation with banks, insurers and financial market infrastructures, to explore a transformation of the hosting and use of regulatory data over the next decade. The first phase of the review was a discussion paper, in respect of which responses were required by 20 May. During the next phase of the review, which will run until the end of Autumn 2020, the BoE will be working with industry to shape the feedback received into a transformation plan for data collection. The transformation plan will encompass a vision, approach and next steps. To develop the transformation plan, the BoE will continue to carry out a range of direct stakeholder engagement, including bilateral meetings, roundtable events and industry working groups.
FSCS announces its levy for 2020/21 at £649m
On 21 May, FSCS confirmed its levy for 2020/21. FSCS will levy firms £649m this year, £14m more than was forecast in its Plan and Budget 2020/21, published in mid-January.
Business Banking Resolution Service (BBRS) - Live Pilot: Interim findings
On 15 May, the BBRS published interim findings from its live pilot, namely a study of how a new more supportive approach to settling disagreements between SMEs and banking service providers could work. The live pilot, set up at the end of last year, has taken on board over 40 complaints by SME customers against their banks, some arising in the wake of the 2008 financial crisis or even further back, others more recent. It will be used to inform and set up the BBRS so that it launches as smoothly as possible later this year. The interim findings begin to inform what customers can expect from the service, setting out the story of the customers who are registering with the BBRS, the types of unresolved complaints they have with their banks and the service that BBRS has designed.