Key Regulatory Topics: Weekly Update 16 - 22 July 2021
23 July 2021
This week saw the UK authorities continue to look at the shape of the UK financial services regulatory framework post-Brexit with publications and call for evidence on the UK’s money laundering regime, the overseas framework and the onshored PRIIPs regulation.
Please see our Consumer/Retail section for an update on the FCA consulting on post-Brexit divergence for the Packaged Retail and Insurance-based Investment Products regulation.
Please see our Markets and Markets Infrastructure section for an update on the draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021 being published.
ESMA updates Q&As on Prospectus Regulation
On 16 July, ESMA published an updated version of its Q&As on the Prospectus Regulation. ESMA has added five new Q&As. Firstly, two new Q&As have been added on updating the information in a tripartite prospectus after a registration document (RD) or universal registration document (URD) has expired, specifically: (i) if it is possible to update the RD information in a tripartite prospectus after the RD or URD has expired; and (ii) how an issuer should include information from a new RD or URD in an existing tripartite prospectus. Secondly, a new Q&A has been added on the application of Article 1(6b) (reverse acquisition), specifically asking whether if a securities issuance leads to a reverse acquisition, whether a prospectus should be produced when the listed issuer is an empty shell and not a business. Thirdly, ESMA has addressed the application of Article 3(2) and if it is possible to make an offer of securities to the public in more than one member state using the exemption in Article 3(2). Finally, ESMA has clarified the application of Level 3 guidance to EU Recovery Prospectuses, in regard to whether it applies to the EU Recovery Prospectus.
FCA statement providing information for firms who use certain exemptions to the Financial Promotions Order (FPO)
On 21 July, the FCA published a statement providing information for firms who use certain exemptions to the FPO. The FCA explains that following onshoring changes made to the FPO, the definition of Relevant Market inadvertently no longer includes relevant UK markets. This means the exemptions under Articles 37, 41, 67, 68, 69 of the FPO do not cover financial promotions relating to relevant UK markets or investments traded on such markets – these exemptions will be restored by statutory instrument published on 19 July (and summarised in our Markets and Market Infrastructure section) (SI). The FCA notes that until such date as this SI comes into force, it does not propose to take enforcement action against persons for breach of the financial promotion restriction if such breach only comes about because the relevant exemption no longer applies on account of this omission.
HMT consultation on proposed SM&CR for financial market infrastructures (FMIs)
On 20 July, HMT published a consultation on a proposed SM&CR for FMIs. In practice, these FMIs are: (i) central counterparties (CCPs); (ii) central securities depositories (CSDs); and (iii) payment systems recognised under the Banking Act 2009 (recognised payment systems), and specified service providers to these recognised payment systems. HMT explains that the existing regulatory regimes for FMIs make very limited provision for oversight of individual conduct within these entities as most supervisory and enforcement powers are focused on the legal entity – thus, the government intends to address this deficiency through the introduction of a SM&CR for FMIs. The key features of the proposed SM&CR for FMIs are intended to be similar to the existing SM&CR for banks, insurers and other authorised persons as set out in Part 5 of FSMA, but modified to recognise the fact that FMIs are not authorised persons within the FSMA meaning of the term. The BoE would be granted new powers to implement, supervise and enforce the following: (a) a senior managers regime – this would give the BoE the power to determine whether individuals who perform roles that pose a potential risk to financial stability or to the continuing functioning of the FMI have the appropriate competence, expertise and probity to carry out their roles. It would require firms to submit documentation to the BoE on the scope of these individuals’ responsibilities and would establish a statutory requirement for senior managers to take reasonable steps to prevent and/or stop regulatory breaches in their areas of responsibility; (b) a certification regime – this would require firms to certify any individual who performs a “specified function” that could cause significant harm to the FMI or its users as fit and proper, both on recruitment and annually thereafter; and (c) conduct rules for all employees, which set minimum, high-level requirements regarding the conduct of individuals where necessary or expedient for advancing the BoE’s financial stability objective. HMT intends to legislate for the new regime when parliamentary time allows. The deadline for comments is 22 October.
Please see our Other Developments section for an update on the Department for Business, Energy and Industrial Strategy consulting on reforming competition and consumer policy.
HOC Treasury Committee letter to FCA on frozen bank accounts
On 22 July, the HOC Treasury Committee published a letter addressed to the Chief Executive of the FCA with concerns about reports of the apparent unwarranted freezing of bank accounts for vulnerable customers. The Chair of the Treasury Committee has asked: (i) whether the FCA believes this is a widespread problem across the banking sector; (ii) why banks might have taken this action; (iii) what customer service standards the FCA expects from banks when they move to freeze bank accounts; (iv) how the FCA is ensuring that banks treat customers fairly in relation to freezing bank accounts, and that all banks have the same standards; and (v) what progress the FCA has made on this issue following the Committee recommendations in November 2019 that there should be “timely and appropriate action taken where instances of blanket de-risking are apparent” and that “Banks should only use Artificial Intelligence if they have a high degree of assurance that its use will not result in bias.” The FCA is requested to respond by 9 August.
EBA methodological guide to mystery shopping (MS)
On 21 July, the EBA published a methodological guide to MS. The guide has been developed based on the findings and good practices identified in the EBA report on MS activities of national competent authorities (NCAs) published earlier this year and aims to support NCAs in the design and implementation of MS activities. The EBA notes that the guide sets out in seven steps how MS activities can be conceived and carried out, how NCAs can use the guide as a complement to other existing supervisory tools, and how to adapt such activities to the particular circumstances, goals and MS powers conferred on an NCA under national law and/or EU law, such as the EU Consumer Protection Cooperation Regulation. The guide applies irrespective of whether the activity is carried out directly by the supervisors or outsourced to an external provider. In addition, the guide applies to both online and on-site MS activities but focuses on the latter, due to the type of activities on which the knowledge and experiences of NCAs, and therefore this guide, is based. Furthermore, the guide aims to support those NCAs that are, under their respective national legal framework, in a position to carry out MS activities in designing and implementing MS activities, thus facilitating the coordination of their MS activities and enhancing their ability to assess the retail conduct of financial institutions in their jurisdictions.
FCA terms of reference for mortgage prisoners review
On 20 July, the FCA published a terms of reference, setting out the steps that it will take in its mortgage prisoners review. The FCA explains that the Economic Secretary to the Treasury (EST) announced that the Treasury will work with the FCA to develop further detail, using the FCA’s data, on the characteristics of mortgage prisoners. The EST also said that the FCA would review the effects of its recent interventions designed to remove regulatory barriers to switching for mortgage prisoners. These interventions are the modified affordability assessment, introduced in October 2019 and our intra-group switching rule change, introduced in October 2020. The FCA will provide the results to the Government, and the EST has committed to use them to establish whether further practical and proportionate solutions can be found for these borrowers. In order to provide insights that can be used by the Government to explore potential solutions, the FCA’s mortgage prisoners review will provide information on the following areas: (i) data review to consider the demographic and loan characteristics of mortgage prisoners – the FCA has started its exploratory work ahead of the review; and (ii) interventions review, to assess the effect of the FCA’s recent interventions to remove regulatory barriers to switching, as well as explore how firms have used the flexibility provided by the FCA’s rules to ensure borrowers who have mortgages with inactive lenders benefit from switching options and whether any barriers remain – amongst other things, the FCA will consider the effect of the FCA’s modified affordability assessment as well as intra-group switching rule change. In respect of data review, the FCA expects that the change in economic conditions, more recent data and updated assumptions are likely to lead to an increase in its estimated number of mortgage prisoners. It also expects it to lead to an improved understanding of the current mortgage prisoner population. The FCA will report to HMT Treasury on the outcome of this review and it will be laid before Parliament by the end of November.
FCA consults on post-Brexit divergence for the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation
On 20 July, the FCA published a consultation paper setting out proposals to change disclosure documents provided to retail investors under the PRIIPs regulation. The FCA notes that the changes will provide more clarity to consumers about what the products are, the risk presented and information to help understand likely future performance. The FCA is consulting on the most serious concerns over PRIIPs and proposes to: (i) clarify the scope of the PRIIPs regulation making it clearer that certain common features of these instruments do not make them into PRIIPS and guidance on the meaning of PRIIPs being ‘made available’ to retail investors; and (ii) amend the PRIIPs Regulatory Technical Standards to: require written explanation on performance in the Key Information Document (KID); combat the potential for PRIIPs being assigned an inappropriately low summary risk indicator in the KID and; address concerns over applications of the slippage methodology when calculating transaction costs. Subject to the outcome of the consultation, the FCA plans to amend the PRIIPs regulatory technical standards by the end of this year, with any changes made coming into effect on 1 January 2022.
FCA FAQs on guidance on the fair treatment of vulnerable customers
On 19 July, the FCA published FAQs on its final guidance on the fair treatment of vulnerable customers. The document answers the FAQs arising from a webinar to help firms understand the role that they play in treating vulnerable customers fairly held by the FCA in May, as well as other external engagement. The FAQs cover: (i) why the fair treatment of vulnerable customers is important; (ii) firms’ actions in treating vulnerable customers fairly; (iii) application and scope of the guidance; (iv) how the FCA will supervise whether firms are treating vulnerable customers fairly; (v) understanding customers’ needs; (vi) skills and capabilities of staff; (vii) product and service design; (viii) customer service; (ix) communications; (x) monitoring and evaluation – what firms need to do; (xi) data protection; (xii) other legal and regulatory obligations; and (xiii) other relevant work – new customer duty, diversity & inclusion / equalities, and work with regulators and government.
FCA revises policy statement on regulated fees and levies 2021/22
On 16 July, the FCA updated its policy statement on its regulated fees and levies 2021/22 to amend the Periodic Fees (2021/22) and Other Fees Instrument 2021. It has republished the policy statement to correct errors in the original version of the instrument relating to the Money and Pensions Service pensions guidance levy for the A.4 insurers life fee-block.
HMT call for evidence on its review of the UK’s anti-money laundering (AML) and counter-terrorist financing (CFT) regulatory and supervisory regime
On 22 July, HMT published a call for evidence supporting the review which will aim to assess the UK’s AML and CFT regulatory and supervisory regime, including the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and Counter Terrorist Financing Supervision Regulations 2017. HMT has focused on three themes in this call for evidence: (i) the overall effectiveness of the regimes and their extent (i.e. the sectors in scope as relevant entities); (ii) whether key elements of the current regulations are operating as intended; and (iii) the structure of the supervisory regime including the work of the Office for Professional Body AML/CFT Supervision to improve effectiveness and consistency of the supervision of professional body AML supervisors. HMT fully intends to uphold FATF international standards, in particular the application of a risk-based approach to applying its regulatory framework. HMT sees this review as aimed at the improving effectiveness of its system, in line with FATF’s own rebalancing towards measuring effectiveness rather than technical compliance. Further consultation may be conducted in response to the findings of this review. A final report setting out the findings of the review and, where relevant, possible options for reform will be published no later than 26 June 2022. The deadline for comments is 14 October.
HMT consults on amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
On 22 July, HMT published a consultation paper on a statutory instrument (SI) amending the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The proposed SI will allow HMT to make time sensitive updates to the MLRs, which are required to ensure that the UK continues to meet international standards, whilst also strengthening and ensuring clarity on how the AML regime operates, following feedback from industry and supervisors on the implementation of the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, through relatively minor proposals for change. The deadline for comments is 14 October.
EC proposals to strengthen the EU’s AML and CFT rules
On 20 July, the EC published a package of legislative proposals to strengthen the EU’s AML and CFT rules. The package consists of four legislative proposals: (i) Regulation establishing a new EU AML/CFT Authority – this will be the central authority, which will coordinate national supervisors and enhance cooperation among financial intelligence units; (ii) Regulation on AML/CFT, containing directly-applicable rules, including in the areas of Customer Due Diligence and Beneficial Ownership; (iii) the sixth Directive on AML/CFT (AMLD6), replacing the existing AMLD4 (as amended by MLD5), containing provisions that will be transposed into national law, such as rules on national supervisors and Financial Intelligence Units in Member States; and (iv) revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU). The EC states that the aim of this package is to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system. Furthermore, the EC notes that the proposals enhance the existing EU framework by taking into account new and emerging challenges linked to technological innovation. These include virtual currencies, more integrated financial flows in the Single Market and the global nature of terrorist organisations. The proposals will help to create a much more consistent framework to ease compliance for operators subject to AML/CFT rules, especially for those active cross-border. The legislative package will now be discussed by the EP and the Council of the EU. The EC looks forward to a speedy legislative process. The future AML Authority should be operational in 2024 and will start its work of direct supervision slightly later, once the Directive has been transposed and the new regulatory framework starts to apply. The EC has also published: (a) a FAQs; (b) an impact assessment; and (c) a factsheet.
EC adopts proposed Directive on cross-border law enforcement access to bank account registries
On 20 July, the EC adopted a legislative proposal amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point. The EC explains that pursuant to Article 32a of AMLD5, member states are to put in place centralised automated mechanisms, such as central registers or central electronic data retrieval systems, to allow the identification of any natural or legal persons holding or controlling payment accounts, bank accounts and safe-deposit boxes. Directive (EU) 2019/1153 already at present requires member states to designate authorities competent for the prevention, detection, investigation or prosecution of criminal offences in order for them to access and search the centralised automated mechanisms. It also requires member states to include asset recovery offices among their designated competent authorities and enables member states to designate tax authorities and anti-corruption agencies as competent authorities to the extent that these are competent for the prevention, detection, investigation or prosecution of criminal offences under national law. The deadline for transposing the Directive is 1 August. Furthermore, pursuant to the EC’s proposal for a new anti-money laundering directive, member states shall ensure that the information from centralised bank account registries is available through the bank account registers (BAR) single access point to be developed and operated by the EC – the new anti-money laundering directive will provide access to the BAR single access point only to financial intelligence units (FIUs), the national body which receives suspicious transaction reports from obliged entities and forwards them, as appropriate, to criminal investigation authorities However, the EC states that in the interest of combatting serious crime and, in particular, carrying out effective financial investigations, authorities competent for the prevention, detection, investigation or prosecution of criminal offences also need to have access to the BAR single access point allowing them to identify, analyse and interpret the financial information relevant for criminal proceedings. Thus, the proposal seeks to extend access to the BAR single access point, as introduced by the new anti-money laundering directive, to the authorities competent for the prevention, detection, investigation or prosecution of criminal offences that are designated as competent authorities pursuant to Article 3(1) of Directive (EU) 2019/1153.
Please see our Financial Crime section for an update on the EC proposals to strengthen the EU’s anti-money laundering and countering terrorism financing rules.
ESMA reports on penalties and measures imposed under the AIFMD and UCITS Directive in 2020
On 20 July, ESMA published two reports on penalties and measures imposed under the AIFMD and UCITS Directive, respectively, in 2020. In respect of both reports, ESMA notes that broadly, the data gathered under the sanction reports published so far keeps evidencing that the sanctioning powers are not equally used among NCAs and, besides a few NCAs, the number and amount of sanctions issued at national level remains relatively low. ESMA states that work will continue in the future (including by issuing the annual iterations of these reports) to promote further convergence in the use of sanctioning powers by NCAs across the EU.
FCA Dear Chair letter on authorised ESG and sustainable investment funds – improving quality and clarity
On 19 July, the FCA published a Dear Chair letter addressed to the chairs of authorised fund managers (AFMs) in respect of authorised ESG and sustainable investment funds, specifically on improving quality and clarity. The Annex to the letter sets out guiding principles that are relevant where an FCA authorised investment fund pursues a responsible or sustainable investment strategy and claims to pursue ESG/sustainability characteristics, themes or outcomes. The FCA notes that the guiding principles comprise an overarching principle and three supporting principles that focus, respectively, on ‘design’, ‘delivery’ and ‘disclosure’ – each principle is accompanied by a set of ‘key considerations’, which add clarity. The aim of the guiding principles is to help AFMs comply with existing requirements by ensuring that fund disclosures accurately reflect the nature of the fund’s responsible or sustainable investment strategy in both the pre-contractual documentation (for example, the prospectus) and on an ongoing basis. In addition, the letter outlines a number of stylised examples of applications for authorisation of investments funds with an ESG/sustainability focus that have fallen below the FCA’s expectations.
ESMA updates Q&As on application of the AIFMD and UCITS Directive
On 16 July, ESMA published updated versions of its Q&As on the application of the AIFMD and UCITS Directive. New Q&As have been added on the ESMA guidelines on performance fees in UCITS and certain types of alternative investment funds relating to performance fee scenarios.
Markets and markets infrastructure
HMT response to call for evidence on UK’s overseas framework
On 22 July, HMT published a summary of responses to its call for evidence on the UK’s overseas framework. In light of these responses, the Government is committing to the following next steps. First, reviewing the overseas regulatory perimeter to identify: (i) whether the balance of the overseas perimeter remains appropriate for the UK following the UK’s exit from the EU in order to ensure resilient and safe financial markets; (ii) whether there are elements of the overseas regulatory perimeter that need updating to reflect modern working patterns and advancements in technology, such as the ‘in the UK’ test which is the first consideration for firms assessing their regulatory compliance; and (iii) areas of the overseas perimeter that could be clarified to allow greater transparency and clarity for firms. Following this review, HMT will then initiate a consultation on potential changes to the UK’s regime for overseas firms and activities in Q4. In particular, the government will consult on: (a) any proposed changes to the overseas regulatory perimeter following this review, including changes aimed at making the UK’s overseas perimeter more coherent and easier to navigate; (b) any proposed changes to the overseas persons exclusion (OPE), including the option to remove the overlap between the OPE and equivalence provisions under MiFIR Title VIII; and (c) whether the current operation of the regime appropriately balances openness whilst mitigating risks to the resilience and safety of financial markets, the protection of consumers and market integrity, and the promotion of competition, as well as whether further regulatory powers are needed for the recognised overseas investment exchange and OPE to address any deficiencies in regulatory oversight; and (d) options for amendments to the Financial Promotion Order exemptions relating to insurance distribution with an overseas element.
Committee on Payments and Market Infrastructures (CPMI) and International Organisation of Securities Commissions (IOSCO) report on financial market infrastructures’ (FMIs’) business continuity planning
On 21 July, the CPMI and IOSCO published a report on FMIs’ business continuity planning. The report finds that all the surveyed FMIs have operational reliability objectives, focussing on system availability and recovery time. However, the report found that some FMIs do not fully meet expectations with respect to recovery from operational incidents, such as natural disasters or IT systems outages. In particular, the business continuity management of some, and potentially many, FMIs do not seem to aim to resume operations in a timely way, including in the event of a wide scale or major disruption. The CPMI and IOSCO note that this is a serious area of concern and thus expect the relevant FMIs as well as their supervisors to address this as a matter of the highest priority. In addition, the report includes a high-level summary of FMIs’ actual responses to Covid19 in some member jurisdictions.
FCA and BoE encourage market participants to switch to RFRs in the LIBOR cross-currency swaps market from 21 September
On 21 July, the FCA published a statement outlining that following close engagement with authorities across LIBOR jurisdictions and with market participants, the FCA and BoE support and encourage liquidity providers in the LIBOR cross-currency swaps market to adopt new quoting conventions for interdealer trading based on risk-free rates (RFRs) instead of LIBOR from 21 September. The FCA notes that this is to facilitate a further shift in market liquidity toward RFRs, bringing benefits for a wide range of users as they move away from LIBOR. Moreover, the FCA states that a survey it undertook of UK market participants identified strong support for a change in the interdealer quoting convention, which would see RFRs rather than LIBOR become the default price from 21 September 2021.
ESMA results of 2020 Common Supervisory Action (CSA) on MiFID II suitability requirements
On 21 July, ESMA published the results of its 2020 CSA on MiFID II suitability requirements. ESMA states that the 2020 CSA has shown that firms overall comply with key elements of the suitability requirements that were already regulated under MiFID I, such as the understanding of products and clients and their processes and procedures to ensure the suitability of investments. However, shortcomings and areas of improvement have emerged about some of the new requirements introduced by MiFID II, notably the requirement to consider the cost and complexity of equivalent products, the costs and benefits of switching investments and suitability reports. ESMA, based on the results of the CSA, will update, in 2021/2022, its guidelines on suitability to address, where needed, some areas where a lack of convergence has emerged or/and to further clarify some of the new MiFID II requirements. It will also look to complement the guidelines with relevant examples of good and poor practices which emerged from the CSA. Furthermore, based on the results of the CSA, NCAs will undertake follow-up actions on individual cases, where needed, to ensure that regulatory breaches as well as other shortcomings or weaknesses identified are remedied.
ESMA updates Q&As on MiFIR data reporting
On 19 July, ESMA updated its Q&As on MiFIR data reporting. ESMA has amended question 6 in respect of the legal entity identifier of the issuer. Amongst other amendments to the question, an additional sub-paragraph (b) has been added, addressing if in case of a financial instrument issued by an umbrella fund that is an alternative investment fund or an undertaking for the collective investment in transferable securities, which LEI code should be reported in the field 5 (issuer or operator of the trading venue identifier) of regulatory technical standard (RTS) 23 and related RTS, as well as implementing technical standard under Article 4 of the Market Abuse Regulation.
Draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021
On 19 July, the draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021 were published. In the draft explanatory memorandum that was also published, it is explained that the instrument addresses deficiencies in retained EU law in relation to the non-discriminatory access regime for exchange-traded derivatives, which requires trading venues and central counterparties to grant each other non-discriminatory access. Furthermore, the instrument amends the low carbon benchmarks regime, which sets out requirements and voluntary standards for firms that administer benchmarks under the Benchmarks Regulation. Finally, the instrument makes technical amendments to certain exemptions to the financial promotions regime for relevant markets to ensure that they apply to relevant UK markets following the UK’s departure from the EU. An impact assessment has also been published.
ESMA report on sanctions and measures imposed under MiFID II in 2020
On 19 July, ESMA published a report providing an overview of the applicable legal framework and the sanctions and measures imposed by national competent authorities (NCAs) under the MiFID II framework in 2020. The data reported for 2020, and included in this Report, shows that NCAs’ activity on imposing sanctions and measures under MiFID II has increased compared to the past two years both in terms of sanctions and measures and pecuniary amounts. However, ESMA notes that there are still differences in the identification of sanctions and measures for the purpose of the reporting to ESMA, and the distinction among them. As a result, ESMA states that the figures in the report on the number of imposed sanctions and measures imposed should be read cautiously. The information reported to ESMA and included in this report will, amongst other things, inform ESMA’s ongoing work aimed at fostering supervisory convergence in the application of the MiFID II framework and contribute to ESMA’s goal to develop an EU outcome-focused supervisory and enforcement culture.
ESMA consults on draft guidelines on MiFID II remuneration requirements
On 19 July, ESMA published a consultation paper on draft guidelines on certain aspects of the MiFID II remuneration requirements. ESMA notes that the purpose of the draft guidelines is to enhance clarity and foster convergence in the implementation of certain aspects of the new MiFID II remuneration requirements, replacing the existing ESMA guidelines on the same topic, issued in 2013. The consultation builds on the text of the 2013 guidelines, which have been substantially confirmed (as well as clarified and refined where necessary). In addition, the consultation takes into account new requirements under MiFID II and the results of supervisory activities conducted by national competent authorities on the topic. By pursuing the objective of ensuring a consistent and harmonised application of the requirements, the proposed guidelines will make sure that the objectives of MiFID II can be efficiently achieved. ESMA believes that the implementation of these guidelines should strengthen investor protection. ESMA expects to publish the final report and guidelines by the end of Q1. The deadline for comments is 19 October.
ESMA report to EC on provision of banking-type ancillary services under CSDR
On 16 July, ESMA published a report (dated 8 July) to the EC on the provision of banking-type ancillary services under CSDR. ESMA explains that it in the context of the targeted review of CSDR launched by the EC at the end of 2020, it was asked to provide an assessment of the conditions under which banking-type ancillary services can be provided under CSDR. To facilitate the assessment, ESMA has addressed a survey on banking-type ancillary services in February 2021 to authorities and relevant market participants. The purpose of the report is to present the findings of this survey and ESMA’s proposals on this issue for the CSDR Targeted Review. In regard to the authorisation process to provide banking-type ancillary services, ESMA’s main conclusions are that: (i) only five authorisation procedures have been launched and four of them have been completed so far, and at this stage no other central securities depository (CSD) intends to apply; and (ii) no major shortfall was detected, and the main concerns were raised by consulted authorities, in particular as to the one-month consultation period currently foreseen in CSDR, which appears too short – thus, ESMA suggests extending it to three months, in line with the main CSDR authorisation process. In regard to the conditions under which banking-type ancillary services can be provided, ESMA’s main conclusions is that the main concern appears to be the strictness of the conditions governing the access by nonbanking CSDs to banking services, given that no designated credit institution has been created and that the threshold applying to the provision of such services by regular commercial banks does not allow to satisfy certain CSDs’ needs in commercial bank money, in particular to be able to offer settlement in foreign currencies. ESMA therefore makes several proposals for consideration in the context of the CSDR Targeted Review: (a) allowing banking CSDs to provide banking-type ancillary services to non-banking CSDs; (b) modifying the approach to access commercial banks; and (c) imposing less stringent requirements to non-banking CSDs offering only settlement in foreign currencies as banking-type services.
ESMA updates Q&As on Benchmark Regulation (BMR)
On 16 July, ESMA published an updated version of its Q&As on the BMR. This includes a new Q&A in respect of EU Climate Transition Benchmarks and EU Paris-Aligned Benchmarks. Specifically, the question addresses the disclosure requirements that an administrator of an EU Climate Transition Benchmark (EU CTB) or an EU Paris-aligned Benchmark should comply with.
Payment systems and payment services
PSR open letter to Specific Direction 10 (SD10) banks and UK Finance
On 22 July, the PSR published an open letter to the UK's six biggest banking groups (directed under the PSR's SD10) and UK Finance. This is in response to the SD10 banks and UK Finance correspondence to Chris Hemsley (Managing Director of the PSR) in June, outlining their plans and publicly committing to deliver the first part of Phase 2 of Confirmation of Payee (CoP). Amongst other things, the letter notes that the PSR are separately considering the feedback received to its call for views to decide whether it needs to take action on the remaining parts of Phase 2 – this includes the option to direct more payment service providers (PSPs) to implement CoP, to direct the collecting and sending of secondary reference data, and to end dual running in March 2022. The PSR does not want PSPs to change or slow down any plans to progress the other elements of Phase 2 while waiting for its decision on whether to mandate all, or some parts of it. The letter states that there has been definite progress to deliver this service by a broad range of PSPs– this means that it will be a very good outcome if PSPs and Pay.UK can deliver the different parts of Phase 2 without the need for PSR intervention.
EBA discussion paper on proportionality assessment methodology
On 22 July, the EBA published a discussion paper aiming at gathering some preliminary input on how to standardise the proportionality assessment methodology for credit institutions and investment firms. The EBA notes that the proportionality assessment methodology entails two separate steps: (i) the definition of four different classifications; and (ii) the definition of the metrics applicable to the different categorisations in view of assessing whether there is need for proportional treatment of the different categories of institutions. The first step proposes three different categorisations for credit institutions and a categorisation for investment firms. The EBA already uses part of the proposed classifications in its work involved with the Basel III monitoring exercise (that is, classifications I and classification II). However, it has identified the need to expand the classifications to align them with those provided by the CRR II (classification III) and the Investment Firms Regulation (classification IV). Although all categorisations comprise a different mixture of size and risk profile discriminatory criteria, the discrimination according to size is more predominant in two categorisations of credit institutions (classification I and classification III), while the business model categorisation (classification II) addresses the risk profile of credit institutions based on the stock of exposures, international activity and systemic importance. Finally, the categorisation of investment firms (classification IV) constitutes a well-balanced mixture of size and risk profile discriminatory factors. After addressing the comments of market participants, the EBA intends to finalise this document and make it a point of reference for proportionality assessment. The deadline for comments is 22 October.
The Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021
On 21 July, the Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021 was published. In the explanatory memorandum that was also published, it is explained that the instrument is made pursuant to sections 9I(2) and 9L of the Bank of England Act 1998. It makes amendments to the following Orders which have been previously made under the same provisions: (i) the Bank of England Act 1998 (Macro-prudential Measures) Order 2013/644; (ii) the Bank of England Act 1998 (Macro-prudential Measures) (No.2) Order 2015/905; (iii) the Bank of England Act 1998 (Macro-prudential Measures) Order 2015/909; and (iv) the Bank of England Act 1998 (Macro-prudential Measures) Order 2016/1240. The intention of these amendments is to ensure that the macro-prudential measures Orders appropriately track the PRA’s new powers that are being introduced under the Financial Services Act 2021.
PRA policy statement on remuneration – correction to the definition of ‘higher paid material risk taker’
On 20 July, the PRA published a policy statement providing feedback to responses to its consultation paper 9/21 ‘Remuneration: Correction to the definition of ‘higher paid material risk taker’. It also contains the PRA’s final policy: (i) amendments to the Remuneration Part of the PRA Rulebook (through the PRA Rulebook: CRR Firms: Remuneration Instrument 2021); and (ii) an updated Supervisory Statement (SS) 2/17 ‘Remuneration’. Having considered the responses, the PRA has decided to publish the policy as proposed. All changes outlined in the policy statement took effect from 23 July.
Basel Committee on Banking Supervision (BCBS) consults on an amendment to the process for reviewing the global systemically important bank (G-SIB) methodology
On 20 July, BCBS published a consultation on a technical amendment to the Basel Framework to reflect a new process for reviewing the G-SIB assessment methodology. BCBS plans to replace the existing three-year review cycle with a process of ongoing monitoring and review. The proposed process will include monitoring: (i) recent developments in techniques or new indicators that can be used for the assessment of systemic risk; (ii) emerging evidence on the effectiveness of the G-SIB regime; and (iii) structural changes that could impact the effectiveness of the regime – only if this monitoring work reveals evidence of material unintended consequences or material deficiencies with respect to the framework’s objectives will BCBS consider changes to the regime. The deadline for comments is 3 September.
ECB blog on credit risk management practices of banks
On 19 July, the ECB published a blog on credit risk management practices of banks in the single supervisory mechanism. The ECB notes that not all the banks that it supervises have sufficiently strong credit risk practices in place to make the European banking sector resilient. The ECB is worried that some of these issues seem structural, relevant not just in the context of the pandemic but also in the future when we are back to business as usual – the issues also affect banks that have not suffered significant credit risk impacts in previous years. The ECB is asking banks to act now to avoid lasting problems down the road to ensure the economic recovery is as strong as possible. The blog outlines the best practices that the ECB would like to see more broadly adopted. Furthermore, the blog notes the eight areas of deficiencies in a number of banks giving cause for concern emerging from the ECB’s detailed assessment, including: (i) early warning systems that are not sufficiently granular, where indicators are mainly backward-looking, thresholds are frequently not well calibrated and regular back-testing of indicators and triggers is not being performed as frequently as required; (ii) a significant number of banks do not always include clear and granular criteria in their policies to effectively identify financial difficulties; (iii) banks that have not collected updated information in a structured way or adopted additional unlikely-to-pay (UTP) triggers that would make it possible to capture pandemic specificities; (iv) concern as to whether banks are assigning loans consistently to stage 2 whenever there is evidence of a significant increase in credit risk; (v) banks using biased approaches which artificially stabilise provisions; (vi) a number of banks lack the robust governance and high-quality risk management frameworks needed to properly estimate overlays; (vii) banks not complying with the ECB’s NPL guidance on frequently monitoring and updating immovable collateral valuations when warranted and lacking a clear linkage between their market risk reviews and effective collateral revaluations; and (viii) some inadequate practices in the way banks include the potential impact of Covid-19 in their strategic and business planning, which could have an impact on their preparation for an increase in distressed debtors.
EBA consults to amend its technical standards on currencies with constraints on the availability of liquid assets
On 16 July, the EBA published a consultation on amendments to its Implementing Technical Standards (ITS) on currencies with constraints on the availability of liquid assets in the context of the liquidity coverage ratio, supplementing the CRR. Based on the updated data analysis, which demonstrates that there is no longer a shortage in the supply of liquid assets in the Norwegian Krone (NOK) currency, the EBA proposes to amend the ITS by removing NOK from the list. The EBA states that since this amendment will lead to an empty list, in order to keep its regulatory efforts proportionate to their impact, it will not update the corresponding regulatory technical standards. Such an update will be proposed if during a future assessment the EBA observes that a currency will have to be added to the list. The deadline for comments is 16 October.
Recovery and resolution
BoE consultation on approach to setting a minimum requirement for own funds and eligible liabilities (MREL) and operational guide on executing bail-in
On 22 July, the BoE published: (i) a consultation paper reviewing its approach to setting a minimum requirement for own funds and eligible liabilities (MREL); and (ii) an operational guide on executing bail-in, The consultation paper is the second stage of the MREL Review and sets out the BoE’s proposed changes to its MREL framework. It considers the resolution strategy thresholds, the calibration of MREL, instrument eligibility, and the application of MRELs within banking groups and proposes a new, longer and more gradual transitional path for firms growing into MREL requirements. Dave Ramsden (Deputy Governor, Markets and Banking) states that recent developments in payments technology and innovations might change how the BoE would approach resolving smaller firms with large numbers of transactional accounts – the BoE will work with the industry, FSCS, FCA and PRA to review and develop alternative processes which could avoid the disruption to banking customers and services caused by insolvency. This could allow the BoE to significantly raise or remove the current transactional accounts threshold for MREL requirements if successful. In addition, the BoE has clarified its approach to legacy MREL instruments. Moreover, the operational guide provides additional information on how the Bank might execute a bail-in, providing practical information on the process through which liabilities (including those held to meet MREL) can be written down or converted to equity to recapitalise a bank in resolution in the UK alongside the draft ‘base’ or ‘illustrative’ legal instruments it might make. It is intended to increase awareness and understanding of the actions that may take place as part of a bail-in resolution in the UK, and to enhance the transparency and credibility of the tool. The guide covers pre-resolution contingency planning, the "resolution weekend", the bail-in period, and the end of bail-in and exit from resolution. It includes a timeline to help firms understand the capabilities and arrangements they will need to have in place in business-as-usual to enable them to achieve the three outcomes necessary to be considered resolvable. Alongside the operational guide, the BoE has published a template: (a) bail-in resolution instrument; (b) supplemental resolution instrument; and (c) onward transfer instrument.
Please see our Fund Regulation section for an update on the FCA Dear Chair letter on authorised ESG and sustainable investment funds.
Department for Business, Energy and Industrial Strategy (BEIS) consults on reforming competition and consumer policy
On 20 July, BEIS published a consultation on reforming competition and consumer policy. The government is proposing to change the law so that prepayment schemes like Christmas savings clubs have to safeguard customers’ money, protecting consumers’ cash as they save for the holidays. For the used car and home improvement sectors, the government will make it mandatory for businesses to take part in arbitration or mediation where disputes arise over a transaction. Furthermore, the government: (i) will require businesses to make it clear exactly what consumers are signing up for and letting them cancel easily; (ii) is proposing rules that make it automatically illegal to pay someone to write, or host, a fake review; (iii) is putting forward tough penalties for non-compliance, with new powers for the Competition and Markets Authority (CMA) and similar enforcers to hit unscrupulous traders who breach consumer law with fines of up to 10% of their global turnover, and civil fines for businesses who refuse or give misleading information to enforcers; and (iv) is considering several options when firms breach the commitments given to enforcers that they will change their ways. To speed up processes, the CMA will also be able to enforce consumer law directly rather than having to go through a court process. Moreover, the government is proposing a package of reforms to ensure the UK has a ‘best in class’ competition regime in line with the ambition set out in the Plan for Growth. The proposals would allow the CMA to: (a) impose stronger penalties for companies that don’t comply with its investigations or orders, with new powers for fixed penalties of up to 5% of annual turnover and additional daily penalties up to 5% of daily turnover while non-compliance continues; (b) disqualify company directors who make false declarations to the regulator; (c) accept voluntary binding commitments from businesses at any stage in its investigations, rather than having to wait till the end - leading to quicker outcomes and reduced costs for both businesses and the regulator; and (d) block a wider range of harmful mergers, including so-called ‘killer acquisitions’ where big businesses snap up prospective rivals before they can launch new services or products. In addition, the government proposes that mergers between small businesses, where each party’s turnover is less than £10 million, be removed from the CMA’s merger control altogether. Going forward, the government will provide the CMA with more regular steers on which areas of the economy to focus its investigations on. The CMA will also need to produce regular ‘State of Competition’ reports looking at the vibrancy of competition in the UK’s markets.
BEIS and Department for Digital, Culture, Media & Sport (DCMS) consult on a new pro-competition regime for digital markets
On 20 July, BEIS and DCMS published a consultation paper on a new pro-competition regime for digital markets. Through these reforms, the government will drive greater dynamism in the tech sector, empower consumers as well as drive growth across the economy. BEIS and DCMS is seeking feedback on the government’s proposals for the regime including: (i) the criteria and mechanisms that will identify which firms fall within scope of the regime; (ii) the objectives for the Digital Markets Unit and how it will work with other regulators; (iii) its approach to a new code of conduct to promote open choices, fair trading and trust and transparency; (iv) its approach to ‘pro-competition interventions’ that will address the root causes of market power; (v) the powers that the Digital Markets Unit will need to ensure the regime is effective; and (vi) the changes being considered for a distinct merger regime for firms within scope of the regime. An impact assessment of the proposals has also been published. The deadline for comments is 1 October.
UK FTA with Iceland, Norway and Liechtenstein
On 20 July, the Department for International Trade (DIT) published the full text of the FTA between Iceland, the Principality of Liechtenstein and the Kingdom of Norway and the UK. An explanatory memorandum was also published (accessible on the documentation webpage), which amongst other things, explains that the FTA is aimed at growing the economic relationship between the United Kingdom and these three important trading partners. In a summary of the FTA that was also published, the government states that: (i) the UK, Norway, Iceland and Liechtenstein have agreed provisions on cross-border trade in financial services and investment that provide legal certainty and predictability for business, regulators and consumers; (ii) the FTA provides rules that ensure firms are not subject to discriminatory treatment due to nationality and ensure financial service suppliers and investors do not face limitations such as economic needs tests, restrictions on corporate form and foreign equity caps; (iii) the FTA includes rules that protect the UK’s regulatory and supervisory ability to ensure financial stability, market integrity and protect investors and consumers; (iv) the FTA contains a commitment on cross-border delegation of portfolio management; and (v) the FTA contains commitments that seek to expand future opportunities for British financial services. The government has also published a joint declaration on financial services, affirming their intention to support financial services market access through deference arrangements at each Party’s discretion. Furthermore, joint declarations have been published on the extension of provisions relating to trade in services and investment to: (a) the Bailiwicks of Guernsey and Jersey, and the Isle of Man; and (b) Gibraltar.
FCA statement on its work plan updates in response to Covid-19 pandemic
On 16 July, the FCA published a statement providing updates on its work plans, in response to the Covid-19 pandemic. The FCA has provided updates on 4 key pieces: (i) assessing Suitability Review (ASR 2) – the FCA has decided not to continue planned work on ASR 2 in 2021/22; (ii) diagnostic review of business models – the FCA is not undertaking further work on this theme, given that the success of its analysis has meant that it has embedded its methodology and findings into wider business model analysis; (iii) review of rules extending SME access to the Financial Ombudsman Service – the FCA is delaying the start of the review to allow it to include upcoming developments with SME complaints within the scope of its review, and it will assess this position by April 2023; and (iv) de-anchoring remedy for credit cards – the FCA has engaged stakeholders on its research findings, the practicalities of making an intervention and whether there would likely be counteracting effects or unintended consequences of a de-anchoring measure on consumers and/or firms, though further work remains on hold due to the pandemic. As set out in policy statement 18/4, the FCA intends to review the effectiveness of the credit card market study remedies in 2022 after they have been fully implemented by firms and in operation for long enough to assess consumer outcomes – the FCA’s planning for this post implementation review has begun and the outcome of this work will indicate whether there is still a need for a de-anchoring remedy and whether this would address any new harms.