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Key Regulatory Topics: Weekly update 17-23 April 2020

24 April 2020

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

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Brexit

Draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 laid before Parliament

On 21 April, a draft of the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 was laid before Parliament. Amongst other things the regulations: (i) ensure that, during the Transition Period, the correct domestic versions of EU regulations (and in the future, the domestic legislation replacing them) are referred to in The Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 and the Financial Services and Markets Act 2000 (Qualifying EU Provisions) (No. 2) Order 2013 and can be enforced under FSMA; (ii) ensure that changes made to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511) operate effectively at the end of the Transition Period, equalising the regulatory treatment of EEA member states and other third countries:  (iii) amend the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 to add to the Schedule new BTS adopted under: the Transparency Directive (Directive 2004/109/EC); the Securitisation Regulation (Regulation (EU) 2017/2402); and the Markets in Financial Instruments Regulation (Regulation (EU) 600/2014). It also makes a minor amendment to the Regulations to clarify that references to specified EU Regulations are to the version of those EU Regulations as they are amended from time to time; (iv) amend Articles 37 and Article 38(2) of the Markets in Financial Instruments Regulation (“MiFIR”) replacing references to ESMA with references to the FCA and to the Bank of England; (v) revoke elements of the European System of Financial Supervision Regulations that will not be relevant in a UK-only context at the end of the Transition Period; (v) make certain clarifications and amendments to the HMTs equivalence assessment powers. A draft explanatory memorandum was also included. 

 

Capital Markets

ESMA updates Q&A on APMs in light of Covid-19

On 17 April, ESMA updated its Q&A guidelines on alternative performance measures (APMs), with a new Question 18 on the application of the APM Guidelines in the context of Covid-19 – how should an issuer present the impact of Covid-19 for the purpose of the APM Guidelines? ESMA acknowledges that, due to the impacts of the Covid-19 pandemic on their operations, issuers may decide to disclose new, or adjust, APMs. ESMA advises that issuers use caution when making adjustments to or introducing new APMs solely with the objective of depicting the impacts that Covid-19 may have on their performance and cash flows, assessing whether the APMs would provide transparent and useful information to the market, improve comparability, reliability or comprehensibility of information disclosed. ESMA urges that instead of APM adjustments, issuers improve their disclosures and include narrative information in their communication documents in order to explain how Covid-19 impacted and/or is expected to impact their operations and performance, the level of uncertainty and the measures adopted or expected to be adopted to address the outbreak.

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Consumer/Retail

FCA proposals for motor finance and high cost credit customers – Covid-19

On 17 April, the FCA proposed additional help for motor finance and high cost credit customers.  The FCA consulted on temporary guidance for motor finance firms, rent-to-own, buy-now pay-later and pawn broking agreements and coronavirus and temporary guidance for high-cost short-term credit firms.  The FCA was open to receiving comments on its proposed draft guidance by 5pm on 20 April and expects to finalise proposals by Friday 24 April, with them coming into force shortly afterwards. For motor finance firms, the FCA expects firms to provide a 3-month payment freeze to customers who are having temporary difficulties meeting finance or leasing payments due to coronavirus. The FCA also propose that: i) firms should not change customer contracts in a way that is unfair; and  ii) where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution.  For high-cost short-term credit (including payday loans), the FCA propose a 1 month interest-free payment freeze to customers facing payment difficulties due to the coronavirus pandemic. After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way. High-cost-short-term-lenders are also reminded, like all lenders, to consider whether immediate formal forbearance may be more suitable if a customer was already in financial difficulty before the impact of coronavirus.  Firms that enter into RTO, BNPL, or pawn broking agreements will be expected to provide a 3-month payment freeze to customers facing payment difficulties due to coronavirus.

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Covid-19

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. 

Please see the FCA's webpage providing information for firms regarding its Covid-19 response which is updated on a regular basis. 

FCA extends regulatory reporting deadlines for submissions due up to 30 June – Covid-19

On 22 April, the FCA outlined the temporary measures it has introduced for firms that are due to submit regulatory returns by 30 June, given the impact of Covid-19. The FCA lists the regulatory returns for which it has extended the submission deadlines. The FCA is clear that returns not included in the list do not have an extension. The FCA states that firms will not be required to submit the Employers' Liability Register compliance return for 2020. For SMEs (paying less than £10,000 in fees and levies in 2020/2021) the administrative fee for late returns has been waived until 30 June (this also applies to any returns not listed on the webpage).

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New FCA webpage on PII and Covid-19

On 21 April, the FCA set out its position on the impact the Covid-19 crisis is having on professional indemnity insurance (PII) for financial advisers. The FCA have engaged with the International Underwriting Association and have spoken directly with individual insurers and brokers. Its discussions indicate that PII cover remains available in the market and the crisis is not preventing insurers from undertaking the renewals process. Firms need to continue to meet their regulatory obligations with regards to having PII policies in place, including when manufacturing, distributing and writing a contract of insurance. Where the FCA see evidence that insurers’ ability to process renewals is being affected, it will consider taking action in line with our approach to supervision. Where an individual firm has concerns it will be unable to secure appropriate PII cover, including at the point of renewal, it should notify the FCA.

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FCA extends time limits for obtaining professional qualifications – Covid-19

On 20 April, the FCA updated its webpage on its response to the Covid-19 pandemic, adding a section on professional qualification exams. The FCA explains that while it expects firms to ensure that all employees have the skills, knowledge and expertise needed to discharge their responsibilities, it has no intention of taking action against a firm or accountable individual that is not able to ensure that an employee has attained an appropriate qualification within the required 48 months because the relevant examinations were cancelled or postponed. The FCA is also extending the normal 48 month limit to obtain a required qualification by 12 months. The effect of these changes is that firms may apply a time limit of up to 60 months where examinations were cancelled or postponed, up to and including 31 October.

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FCA expectations for wet-ink signatures in light of Covid-19 

On 20 April, the FCA set out its expectations of firms when dealing with the need for 'wet-ink' signatures. The FCA states that its rules do not explicitly require wet-ink signatures in agreements, nor do they prevent firms from using electronic signatures in agreements. The validity of electronic signatures is a matter of law and firms should consider the legal position themselves. Firms must also consider any related requirements set out in the FCA's Principles for Businesses, especially the risks and harms in relation to Principles 2, 3 and 6. The FCA as expects firms to consider the client’s best interests rule (COBS 2.1.1R) and the fair, clear and not misleading rule (COBS 4.2.1R) to ensure that, when a client signs a document electronically, this does not make it more difficult for the client to understand what they are agreeing to. The FCA confirms that it will accept electronic signatures for all interactions with it. 

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EU finance ministers statement on continuing bank lending – Covid-19

On 17 April, the CEU published a statement (dated 16 April) by EU finance ministers on continuing bank lending and maintaining a well-functioning insurance sector amid the Covid-19 pandemic. The statement stresses the importance: (i) of making full use of the flexibility provided for in the prudential and accounting framework to continue to finance households and corporates, including SMEs experiencing temporary difficulties; (ii) that all authorities continue to take an ambitious and coordinated approach when further specifying how to make best use of the available flexibility to ensure that the various initiatives announced by MSs and financial institutions are taken into account and that there is a level playing field amongst MSs; and (iii) that all banks that have not already decided to do so to refrain from making distributions during this period and to use the freed capital and available profits to extend credit or other urgent financing needs arising from the ongoing crisis. The statement also welcomes the supervisory flexibility expressed by European supervisory authorities regarding deadlines of supervisory reporting and public disclosure.

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Financial Crime

Wolfsberg Group updates Correspondent Banking Due Diligence Questionnaire (CBDDQ)

On 17 April, the Wolfsberg Group released version 1.3 of its CBDDQ along with updated supporting FAQs, Completion Guidance and Capacity Building Guidance. In order to maintain the adoption rate of the CBDDQ as the industry transitions away from the Wolfsberg AML Questionnaire, the changes to the CBDDQ have been incremental and are focused on improving its ease of use and enhancing its readability; one question has been eliminated and some of the wording has been clarified. The Wolfsberg Group calls upon the banking industry and supervisors to continue the acceleration of the adoption of the CBDDQ as the standard for higher risk correspondent banking activity. The Wolfsberg Group warns that firms which have not been incorporating the CBDDQ may expect to find that a Wolfsberg AML Questionnaire will no longer be deemed sufficient by their correspondents.

 

Fund Regulation

FCA updates webpage on expectation for funds in light of Covid-19

On 22 April, the FCA updated its webpage on its expectations regarding funds in light of Covid-19. The update adds a new section headed AIFMD transparency reporting, which states that the FCA does not intend to change the usual deadlines for reporting transparency information to it under the AIFMD Level 2 Regulation (Regulation 231/2013/EU). Firms that suspect they may not be able to meet the usual deadlines should inform their usual supervisory contact or contact the FCA to explain the reasons. 

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Markets and Markets Infrastructure 

IBOR Fallback Rate Adjustments Rule Book

On 23 April, ISDA and Bloomberg Index Services Limited (BISL) published the IBOR Fallback Rate Adjustments Rule Book, setting out the methodology, rules and conventions that BISL will implement to calculate the rate adjustments in line with ISDA’s consultations. Due to the fundamental differences in the nature of IBORs and the risk free rates (RFRs), key adjustments are necessary if RFR fallbacks are to take effect in contracts that were originally negotiated to reference the IBORs. ISDA ran public consultations to finalise the adjustment methodologies for derivatives contracts and subsequently issued a tender invitation for a vendor to perform and distribute these necessary adjustments, with BISL subsequently being selected. ISDA has also published a tentative fallback implementation timetable. 

CEU final compromise texts of Regulation and Directive on European crowdfunding service providers

On 20 April, the Council of the EU published (dated 13 March): (i) a final compromise text for the Regulation on European crowdfunding service providers ECSPs for business (compromise text 1); and (ii) a final compromise text for the Directive making amendments to MiFID II relating to crowdfunding (compromise text 2). These texts are addendums to a note from the Council's General Secretariat to its Permanent Representatives Committee (COREPER), which states that these documents would be published once COREPER gave its endorsement that the Council should adopt these texts as their first reading positions. 

ESMA and MAS sign MoU on Singapore's financial benchmarks

On 17 April, ESMA and the Monetary Authority of Singapore (MAS) signed a memorandum of understanding (MoU) completing the process to allow the use of Singapore's financial benchmarks in the EU. The signing of the MoU follows the EC's equivalence decision recognising Singapore’s regulatory framework on financial benchmarks as equivalent to the requirements under the BMR. The MoU and the equivalence decision will allow financial institutions in the EU to continue using, as reference rates in their contracts, both SIBOR and the Singapore Dollar Swap Offer Rate, which are financial benchmarks regulated in Singapore. Under the MoU, ESMA and MAS will share information and supervisory activities on Singapore-regulated financial benchmarks.

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ECSDA updates the CSDR settlement fail penalties framework

On 17 April, the European Central Securities Depositories Association (ECSDA) updated the CSDR Settlement fail penalties framework. It can be used by CSDs and their participants as a market practice on how CSDs should develop harmonised settlement fail penalties mechanisms, under the CSDR and its standards. Although the document is meant to be evolving, along with the evolution of the views of the competent authorities on the matters under their review, it can be used by the CSDs and their participants to start developing IT systems to comply with CSDR Settlement Fail penalties-related requirements. The latest changes include the introduction of the term "Penalties Business Days" (PBD) to help CSDs manage the processing of cross-CSD settlement fails penalties.

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Payment Services and Payment Systems

PSR new deadline for responses to call for Input on UK'S New Payment Architecture – Covid-19
On 20 April, the PSR announced that the new deadline for comments for its call for input entitled: 'Competition and Innovation in the UK's New Payments Architecture', would be 1 May at 5pm. 

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Prudential Regulation

EBA statement on additional supervisory measures in the COVID-19 pandemic

On 22 April, the EBA provided further clarity on how additional flexibility will guide supervisory approaches in relation to market risk, the Supervisory Review and Evaluation Process (SREP), recovery planning, digital operational resilience and ICT risk and securitisation. To mitigate the impact of exceptional volatility triggered by the Covid-19 pandemic on the prudential requirements for market risk, the EBA is proposing to adjust the capital impact by amending its standards on prudent valuation. In particular, the EBA is proposing to introduce the use of a 66% aggregation factor to be applied until the 31 December under the so-called core approach. Furthermore, acknowledging the increased operational challenges faced by banks in the area of reporting, the EBA also intends to delay reporting for the first FRTB-SA figures to September 2021. Finally, the EBA highlights the flexibility in the prudential requirements available to competent authorities for banks using internal VaR models. The EBA also recognises the need for a pragmatic approach to SREP assessments in 2020, focusing on the most material risks and vulnerabilities driven by the crisis. On recovery planning activities for institutions, the EBA believes the focus should be placed on understanding which recovery options are necessary and available under the current stressed conditions. The EBA emphasises the importance of digital operational resilience. In this respect, the EBA calls on institutions to ensure business continuity, adequate ICT capacity and security risk management. The new EBA ICT and security risk management Guidelines will guide financial institutions and supervisors to focus on priority areas. Finally, the EBA provides further clarity on the prudential application of the definition of default and forbearance as well as how the EBA Guidelines on legislative and non-legislative moratoria on loan repayments apply to securitisations.  

PRA Q&A on the usability of liquidity and capital buffers in light of Covid-19 

On 20 April, the PRA published a set of Q&A on the usability of liquidity and capital buffers and their operation as set out in the PRA rules and guidelines and in response to the Covid-19 outbreak. The document is relevant to all firms to which CRD IV applies. It covers commonly asked questions on topics including: (i) how the use of liquidity buffers can support the economy and the implications for a bank of using its liquidity buffers; (ii) what capital buffers are and the implications for a bank of using its capital buffers; and (iii) the expected period banks will have to restore these two buffers.

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EBA updates its list of risk indicators, IMF-FSI mapping and respective guides

On 20 April, the EBA updated its guidance note on how to report the International Monetary Fund (IMF) Financial Soundness Indicators (FSIs) and issued a revised methodological guide on how to compile risk indicators and detailed risk analysis tools. FSIs provide insight into the financial health and soundness of countries’ financial institutions as well as corporate and household sectors, thus supporting the economic and financial stability analysis. These updates are mainly driven by the recently published 2019 IMF FSI Guide, as well as, by the review of the EBA reporting framework, that entails, amongst other, changes in securitisations information and in non-performing and forborne exposures. The EBA has also published a revised list of EBA Risk Indicators and the EBA detailed risk analysis tool (DRAT).

FCA updates statement on financial resilience expectations for FCA solo-regulated firms – Covid-19

On 17 April, the FCA published an updated version of its statement on expectations on financial resilience for FCA solo-regulated firms: (i) if a firm is planning to draw down a buffer, it should contact the FCA or its named FCA supervisor; (ii) firms should maintain an up-to-date wind-down plan that takes consideration of the current market impact of the Covid-19 crisis - government schemes to help firms through this period can be part of a firm’s plans for how they will meet debts as they fall due; (iii) if a firm is concerned it will not be able to meet its capital requirements, its debts as they fall due, or if its wind-down plan has identified material execution risks, it should contact the FCA or its named FCA supervisor, with its plan for the immediate period ahead; (iv) if a firm is considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision, it should satisfy itself that each distribution is prudent given market circumstances and consistent with its risk appetite; (v) non-bank lenders subject to IFRS9 are reminded that the standard should be implemented in a well-balanced and consistent way that reflects not only the potential impact of the coronavirus crisis, but also the support provided by governments and central banks domestically and internationally to protect the economy.

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EBA agrees with EC's amendments to standards on risk weights to specialised lending exposures

On 17 April, the EBA published an opinion in response to the EC's intention to amend the EBA's final draft regulatory technical standards (RTS) on assigning risk weights to specialised lending exposures under the CRR. The EBA is of the view that the proposed changes, despite their substantive nature, do not alter the draft RTS in a significant manner, as they still maintain a good balance between the flexibility and risk sensitivity required for the IRB approach and the need for a harmonised regulatory framework. The EBA identifies three substantive changes: (i) institutions may consider a sub-factor or a sub-factor component as irrelevant [to?] a certain type of specialised lending exposure; (ii) institutions may consider additional relevant information (an ‘additional risk driver’) for a type of specialised lending exposure, jointly with the sub-factor which most closely corresponds to that additional risk driver and (iii) a simplification of the rules on overlapping criteria at the level of the sub-factor or of the sub-factor components. The RTS will apply from one year after their publication in the OJ. 

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Sustainable Finance

EC accepts CEU's position on adoption of a sustainable investment framework Regulation

On 23 April, the EC outlined its view, in a communication from the EC to the EP, concerning the position of the CEU on the adoption of a Regulation on the establishment of a framework to facilitate sustainable investment 2018/0178 (COD), and amending Regulation 2019/2088 on sustainability-related disclosures in the financial services sector. The position of the CEU reflects the political agreement reached between the EP and the CEU on 16 December 2019. The political agreement introduced several changes which include an extension of the scope of the Regulation: (i) creating an additional obligation on the EU to apply the taxonomy for the purposes of any public measures, standards or labels, setting out requirements on financial market participants or issuers in the area of financial products or corporate bonds that are marketed as ‘environmentally sustainable’; (ii) requiring all financial market participants, as defined in the Disclosure Regulation, to disclose how and to what extent the investments that underlie their financial product support economic activities that are aligned with the taxonomy if they wish to advertise them as environmentally sustainable; and (iii) large financial and non-financial companies that already have to publish a nonfinancial statement will need to disclose how and to what extent their activities are associated with those covered by the taxonomy. The EC supports the results of the inter-institutional negotiations and can therefore accept the CEU's position at first reading. 

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Joint ESA Consultation on ESG Disclosures

On 23 April, the ESAs (ESMA, EBA and EIOPA) began consulting on proposed RTS on content, methodologies and presentation of disclosures under the Sustainable Finance Disclosure Regulation (SFDR). The draft RTS relate to several disclosure obligations under the SFDR including the publication of: (i) the details of the presentation and content of the information in relation to the principle of ‘do not significantly harm’; (ii) a statement on an entity’s website on the due diligence policy in respect of the adverse impact of investment decisions on sustainability factors in relation to climate and other environment-related impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters; and (iii) pre-contractual information on how a product with environmental or social characteristics meet those characteristics and if an index has been designated as a reference benchmark, whether and how that index is consistent with those characteristics. The deadline for comments is 1 September. Six of the RTS must be delivered to the Commission by 30 December 2020 and one must be delivered by 30 December 2021.

Other Developments

FSB consultation on Effective Practices for Cyber Incident Response and Recovery

On 20 April, the FSB began consulting on its consultative document on a toolkit of effective practices for cyber incident response and recovery (CIRR). The toolkit will assist institutions in their CIRR activities before, during and after a cyber-incident, providing a number of options to limit any related financial stability risks depending on the particular cyber incident and type of organisation. The FSB considers that the toolkit may also be useful for national authorities as they consider their approaches to regulation or supervision, or respond to a cyber-incident within the sector. The toolkit lists 46 effective practices that institutions have adopted and is structured across seven components: governance, preparation, analysis, mitigation, restoration, improvement, and co-ordination and communication. The deadline for comments is 20 July, with October as the expected publication date for the final toolkit. 

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