Key Regulatory Topics: Weekly update 19 – 25 June 2020
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Our weekly update on key regulatory topics affecting the financial services sector.
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Brexit
Please see our section on Recovery and Resolution for HMT’s consultation on its transposition of BRRD II.
Please see our section on Markets and Market Infrastructure for: (i) the FCA’s discussion paper on the UK prudential regime for MiFID investment firms (IFPR); (ii) the HoC’s statement on its proposals to amend the UK Benchmarks Regulation; (iii) the FCA’s draft application forms for TR registration and conversion under the UK SFTR; and (iv) the written statement made by the Chancellor of the Exchequer, Rishi Sunak, on the UK’s legislative plans in relation to forthcoming regulatory reforms.
Draft texts of the equivalence determinations for financial services (amendment etc.) (EU exit) Regulations 2020 laid before Parliament
On 25 June, a draft version of the Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020 was published on legislation.gov.uk, together with an explanatory memorandum. The measures in this instrument add to those made in the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020, which was laid in May. It also contains minor amendments and deficiency fixes to existing financial services EU Exit instruments. The instrument among other things: (i) makes provisions for UK regulators to establish cooperation arrangements with the relevant regulatory authority/ies for an EEA state, and to take regulatory decisions concerning EEA firms or products before the end of the Transition Period, for the retained EU law financial services regimes including the BMR, CRAR CSDR, EMIR, MiFIR and SFTR; and (ii) allows EEA firms to apply and UK regulators to make decisions on regulatory decisions in respect of the regimes set out in schedule 3.
EP completes report on the proposed mandate for negotiations with the UK
On 24 June, the EP published its report on the proposed mandate for negotiations with the UK. The report was adopted by the EP at first reading on 18 June. The adopted texts have also been published.
Capital Markets
ECON draft report on EU CMU
On 19 June, the EP’s Committee on Economic and Monetary Affairs (ECON) issued a draft report on further development of the Capital Markets Union (CMU) focusing on improving access to capital market finance, in particular by SMEs, and further enabling retail investor participation. The draft report takes the form of a motion for an EP resolution covering: (i) financing business; (ii) promoting long-term and cross-border investments and financial products; (iii) market architecture; (iv) retail investors; (v) financial education; (vi) digitalisation; and (vii) the EU’s role in global markets. It recommends, among other things that the current reporting frameworks under MiFID II and EMIR should be simplified as they are very costly and complex.
Consumer/Retail
Please see our section on Covid-19 for the FCA’s announcement of further delays to its work programme due to the pandemic.
Please see our Markets and Market Infrastructure section for the written statement made by the Chancellor of the Exchequer, Rishi Sunak, on the UK’s legislative plans in relation to forthcoming regulatory reforms.
ECJ ruling on application of DMD to interest rate agreements amending existing loan agreements
The ECJ has ruled on a reference for a preliminary ruling concerning the application of the Distance Marketing Directive (DMD) in relation to the right of withdrawal in relation to amendments to loan agreements altering the initially set interest rates. The disagreement concerned agreements, made at a distance, between a bank and an individual on the interest rates that applied to three loans already in place. The individual later withdrew from the follow-up agreements on the grounds they had not been informed of any right of withdrawal before being bound by them, as required under the DMD. The outcome of the main proceedings depended on whether the agreed amendments are to be regarded as being capable of categorisation as ‘contracts concerning financial services’, under Article 2(a), within the meaning of that provision, where the amendment does no more than alter the interest rate initially agreed, but does not extend the term of the loan or alter its amount, and where the original clauses of the loan agreement provided for the agreement of such an amendment or, failing such agreement, the application of a variable interest rate. The ECJ ruled that an agreed amendment as such cannot be categorised as a ‘contract concerning financial services’ under the DMD.
EC inception impact assessment on the review of the Consumer Credit Directive
On 23 June, the EC published an inception impact assessment after its evaluation of the Consumer Credit Directive (CCD) found that the CCD does not fully achieve its objectives. The main problems include: (i) inadequate scope – the emergence of new operators (e.g. peer-to-peer lending platforms) and new forms of consumer credit (e.g. short-term, high-cost loans and instant microloans, often below the €200 threshold for loans to be covered by the CCD) has meant that the CCD is sometimes ineffective in protecting consumers from these new trends that fall out of scope; (ii) content and disclosure of information – the requirements for providing information in advertising and at the pre-contractual stage do not reflect the growing use of digital devices in credit contracts and the information provided to consumers in accordance with the Directive is often too complex to be understood; (iii) insufficient safeguards to ensure responsible lending/borrowing – the vagueness of the provisions on assessing creditworthiness can allow for credits to be granted without thorough assessment of the consumer’s ability to repay, which also leads to divergence among Member States; and (iv) exceptional situations – the CCD does not contain provisions (such as hardship clauses, forbearance, etc.) to protect lenders’ and borrowers’ interests in the event of exceptional and systemic economic disruption, such as that caused by Covid-19. The EC expects a proposal to revise the CCD is likely, and it is indicatively planned for Q2 2021. The deadline for comments on the assessment is 1 September.
FCA proposes further support for consumer credit customers – Covid-19
On 19 June, the FCA announced proposals which would provide continued support for users of certain consumer credit products, who are facing a financial impact because of the exceptional circumstances arising from Covid-19. The proposals outline the support firms would be expected to provide credit card and other revolving credit (store card and catalogue credit) and personal loan customers. The proposals include: (i) at the end of a payment freeze, firms should contact their customers to find out if they can resume payments – and if so, agree a plan on how the missed payments could be repaid; (ii) for customers still facing temporary payment difficulties, firms should provide them with support by reducing payments on their credit card and personal loans to a level they can afford for 3 months; (iii) customers who already have an arranged overdraft on their main personal current account, may request up to £500 interest-free for a further 3 months, and be provided further support in the form of lower interest rates on borrowing above the interest-free buffer and repayment plans for those who would benefit from them; (iv) customers that have not yet had a payment freeze or an arranged interest-free overdraft of up to £500 would be able to request one up until 31 October; (v) any payment freezes or partial payment freezes offered under this guidance should not have a negative impact on credit files. The FCA expects firms to be particularly aware of the needs of their vulnerable customers. The deadline for comments was 22 June.
Draft guidance on credit cards
Draft guidance on personal loans
Covid-19
Please see the other sections for product specific updates relating to Covid-19.
FCA announces further delays to its work programme due to Covid-19
On 25 June, the FCA updated its webpage setting out the expected delays to its planned work for 2020 due to the Covid-19 pandemic under the ‘delays to publications and other activity’ section. Some of the work that has been further delayed includes: (i) the joint PRA-FCA work with the Climate Financial Risk Forum to develop industry led guidance on how to integrate climate related risks into business decision making across the financial services sector will be published in Q3 2020; (ii) the research for guidance for firms on the fair treatment of vulnerable customers is expected later this year; (iii)) the new directory of certified persons will be published later on in 2020; (iv) the interim report on the FCA’s credit information market study has been delayed to 2021; and (v) the FCA’s consultations on mortgage switching and investment platforms have also been delayed to 2021.
PRA on implementation of the EBA Guidelines to address gaps in reporting data and public information
On 24 June, the PRA issued a statement on the EBA’s guidelines addressing gaps in reporting data and public information in the context of Covid-19. The PRA states that it has considered how to approach these guidelines in light of the FCA and PRA approach to payment deferrals, and in light of the data the PRA is already collecting from UK credit institutions in relation to payment deferrals. The PRA does not consider it necessary at this time to extend the supervisory reporting elements of the Guidelines on Covid-19 reporting and disclosure to UK credit institutions. Firms are therefore not expected to prepare or transmit to the PRA the reporting templates contained within the Guidelines on Covid-19 reporting and disclosure. The PRA is considering how the disclosure elements of the Guidelines on Covid-19 reporting and disclosure are to be applied in a manner reflecting both the proportionality measures in the Guidelines and also the letter from Sam Woods to UK deposit-takers on the IFRS 9 and capital requirements aspects of initial and further payment deferrals and FCA guidance. The PRA will provide further details in due course.
Financial Crime
Please see our section on Fintech for Valdis Dombrovskis’ speech on legislative proposals for cryptoassets and digital operational resilience.
Please see our Markets and Market Infrastructure section for the written statement made by the Chancellor of the Exchequer, Rishi Sunak, on the UK’s legislative plans in relation to forthcoming regulatory reforms.
FCA reminds cryptoasset businesses to register before the end of June
On 22 June, the FCA issued a press release reminding firms which carry out cryptoasset activity in the UK that they have to be registered with the FCA to comply with the MLRs 2017, which made the FCA the relevant AML/CTF supervisor. From 10 January 2020, all pre-existing business carrying on cryptoasset activity in the UK have needed to be compliant with the MLRs 2017 and must register with the FCA by the 30 June 2020 or cease carrying on business. This is in order for the FCA to be able to process applications in time for the 10 January 2021 deadline. New cryptoasset businesses, i.e. those that began operating after 10 January 2020, must register before conducting any business.
JMLSG Covid-19 update
On 22 June, the JMLSG provided an update in light of the ongoing Covid-19 pandemic. Firms are asked to ensure that, while operating within the legislative framework, they are satisfied that their policies, procedures and processes continue to reflect their risk-based approach, including any temporary adjustments required for Covid-19. The JMLSG notes that the Covid-19 lockdown is likely to disrupt the administration of documents used for identification and verification and therefore firms should consider whether policies and procedures need to be adapted to take this into account, having been risk assessed and documented accordingly – for example extensions are now in place for the validity of photocard drivers’ licences.
Delegated Regulation amending list of high-risk 3rd countries under MLD IV published in OJ
On 19 June, the Commission Delegated Regulation amending the list of high-risk third countries with strategic AML/CTF deficiencies under MLD IV was published in the OJ. Bosnia-Herzegovina, Ethiopia, Guyana, Lao People's Democratic Republic, Sri Lanka and Tunisia are no longer considered to present AML/CTF deficiencies and have been removed from the list. The Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Panama and Zimbabwe have been added. The delegated regulation will come into force on 9 July – 20 days after its publication in the OJ.
Fintech
Please see our section on Payment Services and Payment Systems for a chapter of the BIS’s Annual Report, on central banks and payments in the digital era.
EC speech on legislative proposals for cryptoassets and digital operational resilience
On 24 June, the EC published a speech by Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), on the EC’s strategy on digital finance. The EC aims to: (i) deepen the single market for digital financial services and assess the merits of an EU-wide open finance policy; (ii) present legislation on an EU wide framework for cryptoassets by the end of 2020 to provide legal certainty and a passport for markets in crypto-assets; and (iii) present legislation requiring all financial institutions to comply with standards of operational resilience - setting out: (a) effective channels for reporting cyber incidents; (b) tools for testing the cyber-resilience of financial firms; and (c) a financial oversight mechanism for outsourcing to third party ICT providers such as cloud services.
Fund Regulation
Please see our section on Markets and Market Infrastructure for the IOSCO consultation on the use of AI/ML by market intermediaries and asset managers.
Please see our section on Prudential Regulation for the FCA discussion paper on a new UK prudential regime for MiFID investment firms (IFPR).
ESMA official translations for guidelines on the reporting to NCAs under the MMF Regulation
On 22 June, ESMA issued the official translatinos of its guidelines on standardised procedures and messaging protocols when reporting to NCAs under Article 37 of the MMF Regulation. The guidelines will apply from 22 August.
Markets and Markets Infrastructure
Please see our section on Recovery and Resolution for the EP and Council of the EU’s announcements that they have reached an agreement on the CCP Recovery and Resolution Regulation.
ESRB on ESMA report on post trade risk reduction services relating to the EMIR clearing obligation
On 25 June, the ESRB published its opinion on ESMA’s report on post trade risk reduction services (PTRRS) with regards to the clearing obligation under EMIR. Under EMIR, the ESRB and EMIR are required to report under which conditions, trades that directly result from PTRRS, including portfolio compression and counterparty rebalancing, should be exempted from the clearing obligation. The ESRB’s points include that: (i) overall, PTRRS are designed to reduce outstanding risk, contributing to making the non-centrally cleared OTC markets safer and more resilient to shocks from the failure of market participants; (ii) while PTRRS reduce risks, residual and emerging risks must be duly understood, disclosed and addressed; (iii) the assessment of risk-reduction benefits is counterparty-specific; and (iv) from a macroprudential perspective, PTRRS are beneficial if they reduce the overall systemic risk. The ESRB concludes that while the use of PTRRS in non-centrally cleared OTC markets can help to reduce aggregate risk exposures, exempting their use from the clearing obligation may introduce the risk of regulatory arbitrage and circumvention. Any exemptions should: (a) demonstrably reduce risk; (b) be limited to multilateral portfolio compression and other specific justified types of PTRRS; (c) be limited to market risk neutral, non-price forming transactions; and (d) be limited to non-centrally cleared transactions.
CPMI-IOSCO report on issues related to CCP default management auctions
On 25 June, the Committee on Payments and Market Infrastructures (CPMI) and IOSCO published a report together with a cover note, outlining certain issues that CCPs should consider regarding default management auctions processes. Topics covered include: (i) the roles and responsibilities of relevant stakeholders in an auction, including the CCP Board, experts and a default management group; (ii) considerations for a successful default management auction such as a framework for approaching hedging risk and certain design elements; (iii) the operational issues to consider when planning and executing a default management auction; (iv) issues to consider when deciding whether to permit client participation in an auction; and (v) the default of a common participant across multiple CCPs. The paper also outlines several areas for further industry work, based on its June 2019 discussion paper, divided according to whether there is: (a) broad industry consensus – such as with methods of communication; (b) differing views - such as with the governance of a CCP’s default management process; and (c) an emerging practice – such as synchronising default management processes.
IOSCO consultation on the use of AI/ ML by market intermediaries and asset managers
On 25 June, IOSCO began consulting on proposed guidance on the use of artificial intelligence (AI) and machine learning (MI) by market intermediaries and asset managers. The consultation proposes six measures to assist IOSCO members in creating appropriate regulatory frameworks to supervise market intermediaries and asset managers that use AI and ML. The proposed measures seek to ensure that market intermediaries and asset managers have the following features: (i) appropriate governance, controls and oversight frameworks over the development, testing, use and performance monitoring of AI and ML; (ii) ensuring staff have adequate knowledge, skills and experience to implement, oversee, and challenge the outcomes of the AI and ML; (iii) robust, consistent and clearly defined development and testing processes to enable firms to identify potential issues prior to full deployment of AI and ML; and (iv) appropriate transparency and disclosures to investors, regulators and other relevant stakeholders. The deadline for comments is 26 October.
FMSB consultation on algorithmic trading in FICC markets
On 24 June, the FICC Markets Standards Board (FMSB) published a new Statement of Good Practice on Algorithmic Trading in FICC Markets to serve as a transparency draft for market consultation. The Statement sets out 10 Good Practice Statements in relation to both the governance of, and conduct risks associated with, the use of algorithms. Its purpose is to enhance the integrity and effective functioning of FICC markets by promoting good conduct and governance practices applicable to participants engaged in algorithmic trading or operating trading venues that allow or enable algorithmic trading across all FICC asset classes and markets. The deadline for comments is 21 August.
FCA draft application forms for TR registration under UK SFTR
On 24 June, the FCA published two draft forms relating to the Brexit conversion and registration regimes for trade repositories (TRs) under the retained EU law version of the SFTR. The draft forms are prepared further to the Treasury’s announcement that it would bring forward legislation to enable trade repositories to apply in advance to operate in the UK immediately following the end of the Transition Period. The draft advance application for registration form is relevant for TRs that wish to apply for registration by the FCA under the UK SFTR and the FCA has also published accompanying notes. The draft notification for conversion form is relevant for those firms wishing to convert from their current ESMA-registered status to the FCA.
HoC written statement –UK intentions regarding implementation of key regulatory reforms
On 23 June, the House of Commons published a written statement made by Rishi Sunak, on the UK’s legislative plans for the near future in relation to forthcoming regulatory reforms. In general, the UK intends to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant. During the Transition Period, and under the terms of the Withdrawal Agreement, the UK will implement EU legislation that requires transposition before the end of 2020 including CRD V and BRRDII – HMT is considering how best to implement aspects of files that do not come into force until after the 31 December. HMT plans to set out further detail on upcoming legislation in due course, which will include: (i) amendments to the BMR to ensure continued market access to third country benchmarks until end-2025 - HMT will publish a policy statement in July; (ii) amendments to MAR to confirm and clarify that both issuers and those acting on their behalf must maintain their own insider lists and to change the timeline issuers have to comply with when disclosing certain transaction undertaken by their senior managers; (iii) legislation to improve the functioning of the PRIIPs regime in the UK and address potential risks of consumer harm in response to industry and regulator feedback - HMT will publish a policy statement in July; and (iv) legislation to complete the implementation of the EMIR REFIT to improve trade repository data and ensure that smaller firms are able to access clearing on fair and reasonable terms. It is also notable that in relation to: (a) SFTR - as part of onshoring, the UK will not implement the reporting obligation for NFCs; (ii) CSDR -the UK will not be implementing the new settlement discipline regime under CSDR; and (iii) LIBOR – HMT has issued a separate written statement setting out detail on the UK’s approach to legislative steps that could help deal with ‘tough legacy’ contracts that cannot transition from LIBOR before end-2021.
HoC announces proposals to amend UK Benchmarks Regulation and enhance the FCA’s powers
On 23 June, the House of Commons issued a statement made by Rishi Sunak, Chancellor of the Exchequer, on the UK Government’s intentions to: (i) amend the UK’s existing regulatory framework for benchmarks to ensure it can be used to manage different scenarios prior to a critical benchmark’s eventual cessation - it will amend the UK BMR to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR; (ii) extend the circumstances in which the FCA may require an administrator to change the methodology of a critical benchmark and clarify the purpose for which the FCA may exercise this power - new regulatory powers would enable the FCA to direct a methodology change for a critical benchmark, in circumstances where the regulator has found that the benchmark’s representativeness will not be restored and where action is necessary to protect consumers and/or to ensure market integrity; (iii) strengthen existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, whilst giving the regulator the ability to specify limited continued use in legacy contracts; and (iv) refine ancillary areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the orderly wind down of a critical benchmark, including that administrators have adequate plans in place for such situations. The UK Government intends to take these measures forward in the forthcoming Financial Services Bill. The FCA has welcomed the Government’s announcement to give the regulator enhanced powers. The FCA will publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally.
BoE summary and response to market feedback on ‘Supporting Risk-Free Rate transition through the provision of compounded SONIA’
Having reviewed feedback to its February discussion paper, the BoE published a summary and response, which sets out is position: (i) given near universal support from respondents, the Bank has confirmed it will publish a daily SONIA Compounded Index, which will commence in early August - the precise date will be confirmed in due course; and (ii) given a lack of consensus on both the usefulness of SONIA “period averages” and the conventions underpinning such rates, in line with the position set out in the February discussion paper, the Bank will not be producing them as of yet.
Payments services and payment systems
BIS chapter on central banks and payments in the digital era
On 24 June, BIS published a chapter of its 2020 Annual Report, to be released on 30 June, on central banks and payments in the digital era. The key focuses of the chapter are that: (i) central banks play a pivotal role in maintaining the safety and integrity of the payment system, acting as guardians of the stability of money and payments – the Covid-19 pandemic and resulting strain on economic activity around the world have confirmed the importance of central banks in payments; (ii) digital innovation is radically reshaping the provision of payment services - central banks are embracing this innovation by promoting interoperability, supporting competition and innovation, and operating public infrastructures; and (iii) central banks, as critical as ever in the digital era, can themselves innovate - in particular, central bank digital currencies can foster competition among private sector intermediaries, set high standards for safety and risk management, and serve as a basis for sound innovation in payments.
Prudential Regulation
Please see our Other Developments section for the FPC’s record of the decisions it has taken since 7 May this year.
HMT letter on UK approach to CRR Amending Regulation
On 25 June, a letter was published from John Glen, Economic Secretary to the Treasury, to Lord Kinnoull, Chair of the House of Lords European Union Committee, on the CRR Amending Regulation. Mr Glen notes that since we have left the EU we have no engagement in the institutional decision making process. However, we do seek to engage through normal diplomatic channels. On the CRR proposal, the government broadly supports the package especially to mitigate the impact of IFRS9, but highlights a few areas where the UK Government would like to see changes including: (i) the proposal to introduce a temporary measure to apply favourable treatment of unrealised gains and losses for exposures to certain public sector entities, which is a deviation from Basel – The PRA would be able to take action under the Pillar 2 framework to mitigate financial stability concerns; (ii) as regards the bringing forward of elements of CRR2 – Sam Woods Deputy Governor for Prudential Regulation at the BoE has raised concerns in relation to the treatment of certain software assets – as it is a deviation from the Basel standards – and the supervisors can address potential vulnerabilities that stem from excessive risk associated with software assets under the Pillar 2 framework. The letter then breaks down the proposals in relation to the leverage ratio – it contains measures offsetting the impact of excluding central bank exposures from the calculation of the leverage ratio and delaying the application of the new leverage ratio buffer requirement for G-SIBs to 1 January 2023. Mr Glen notes that these provisions have already been implemented for some UK firms under the UK's leverage ratio regime. Mr Glen flags that only the elements of the CRR that apply before the end of the transition period will become retained EU law - there is further clarity provided in the Annex.
CRR Amending Regulation published in OJ – Covid-19
On 25 June, Commission Delegated Regulation (EU) 2020/866, made in response to the Covid-19 pandemic, was published in the OJ supplementing the CRR with regard to RTS for prudent valuation under 105(14). The Delegated Regulation will enter into force on 26 June, the day following its publication in the OJ. The Regulation was adopted at first reading by the Council of the EU (CEU) on 24 June and by the EP in a vote on 18 June.
Commission Delegated Regulation
Provisional texts adopted by EP
EBA final draft ITS on institutions’ Pillar 3 disclosures and final draft ITS on supervisory reporting
On 25 June, The EBA published its final reports (dated 24 June) on new ITS on public disclosures by institutions and final draft ITS on supervisory reporting that implements changes introduced in CRR2 and the Prudential Backstop Regulation. The disclosure ITS optimise the Pillar 3 policy framework for credit institutions by providing a single overarching package that brings together all previous pieces of regulation and incorporates all prudential disclosures, thus facilitating implementation by institutions and improving clarity for users of such information. The ITS implement the disclosures in a way to ensure that market participants have sufficient and comparable information to assess the risk profiles of institutions, in line with the BCBS Pillar 3 standards and with the increased standardisation of institutions' public disclosures. The CRR2 definitions for ‘small and less complex institutions’ and ‘large institutions’ support proportionality of Pillar 3 disclosures. In addition, the ITS include thresholds to trigger additional disclosures for large banks based on their risk profiles. The reporting ITS reflect the changes brought in by the CRR2 and the Prudential Backstop Regulation and include new reporting requirements on counterparty credit risk and net stable funding ratio, non-performing exposures minimum coverage and changes to different areas of reporting, including own funds, credit risk, large exposures, leverage ratio, FINREP and G-SII indicators. These ITS include several proportionality measures, including simplified net stable funding ratio reporting for small and non-complex institutions. The first disclosure and reporting reference dates will be 30 June 2021.
FCA discussion paper on new UK prudential regime for MiFID investment firms
On 23 June, the FCA published a discussion paper setting out the technical details of, and the FCA’s view on the EU’s IFR/IFD, in order to seek stakeholder views to assist in developing the UK’s prudential regime for MiFID investment firms (IFPR). Significant changes introduced by the IFR/IFD, that are discussed include: (i) an update to the initial capital required for authorisation; (ii) changes to the rules on the definition of capital; (iii) new own funds requirements, including the introduction of the K-factor approach; (iv) new rules on prudential consolidation, group risk and concentration risk; (v) applying liquidity requirements to all investment firms; (vi) a new approach for investment firm’s internal risk and prudential assessments, and the supervision of those requirements; (vii) new requirements on remuneration policies; and (viii) changes to reporting and disclosure requirements. The deadline for comments is 25 September.
HMT policy statement on prudential standards in the Financial Services Bill
On 23 June, HMT issued a policy statement providing an update on its intentions on implementing prudential standards in the Financial Services Bill 2019-21 (FS Bill) relating to CRR II, CRD V, Basel 3.1 and the Investment firms prudential regime – IFR/IFD (IFPR). In relation to the implementation process, HMT intends to: (i) delegate responsibility for the implementation of firm requirements to the Regulators, subject to an enhanced accountability framework - the vast majority of the updated banking regime will be implemented in PRA rules, and the vast majority of the IFPR will be implemented in FCA rules; and (ii) to legislate to create additional requirements for the Regulators to consider specifically when using their rule-making powers to introduce and maintain these regime, which the Regulators will be required to set out how they have been taken into account, balanced and traded-off. To enable the Regulators to make rules on the CRR II/ Basel 3.1 prudential standards, the FS Bill will: (a) delete articles of the retained CRR where appropriate to do so; and (b) provide HM Treasury with a power to delete further elements of CRR using secondary legislation where additional flexibility may be required – such as with regards to Basel 3.1. HMT also intends, with regards to the IFPR implementation, to: (1) amend retained CRR to disapply its application for FCA-regulated investment firms; and (2) amend retained MIFIR to update the equivalence provisions for third country investment firms under Title VIII. The UK will endeavour to introduce the IFPR and CRR II prudential standards by Summer 2021, broadly consistent with the EU’s timetable, though this is dependent on the FS Bill’s passage through Parliament. Implementation of CRD V will be consulted on over the summer, whilst the UK will aim towards implementing Basel 3.1 in line with the 1 year delay as a result of Covid-19. The UK will implement targeted deviations from EU regimes where necessary to reflect: (A) the number, size and nature of investment firms and credit institutions within the UK; and (B) the structure of the UK market and how it operates. When legislating for the IFPR, HMT has identified one targeted deviation from the EU in that systemic investment firms will not be required to apply for authorisation as a credit institution.
BCBS consults on amendment to capital rules for non-performing loan securitisations
On 23 June, BCBS began consulting on a proposed technical amendment to address a gap in the regulatory framework, setting out a prudent treatment for securitisations of non-performing loans. The technical amendment establishes a 100% risk weight for certain senior tranches of non-performing loan securitisations. The risk weight applicable to the other positions are determined by the existing hierarchy of approaches, in conjunction with a 100% risk weight floor and a ban on the use of certain inputs for capital requirements. The present amendment does not change the applicable capital requirements to securitisations of performing assets. BCBS proposes that this amendment to the securitisation standard will come into effect by no later than 1 January 2023. The deadline for comments is 23 August.
ESRB decision on the cancellation or certain reports on actions and measures under recommendations on CCyB and the EU macro-prudential policy framework published in OJ – Covid-19
On 22 June an ESRB decision (dated 2 June) on the cancellation of certain reports on actions and measures taken pursuant to Recommendation ESRB/2014/1, on guidance for setting CCyB rates, and Recommendation ESRB/2015/2, on the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures, was published in the OJ. Due to the Covid-19 outbreak, addressees of the Recommendations are no longer requested to submit reports that were due by 30 June.
Recovery and Resolution
Political agreement on CCP Recovery and Resolution Regulation
On 23 June, the EP and Council of the EU (CEU) announced that they had struck a deal on a common set of rules for central counterparties (CCPs) and their authorities to prepare for and deal with financial difficulties. The EP highlight the following agreed principles: (i) to distinguish between a “default event” when one or more clearing members fail to honour their financial obligations and a “non-default event” such as a business failure incurring losses - CCPs will need to draw up comprehensive and effective plans for dealing with both cases; (ii) a prohibition or restriction of dividends and bonuses in case of a default event caused by mismanagement; (iii) to introduce an additional, pre-funded second skin in the game to be used after the default fund, which would be further defined by ESMA; (iv) a closed list of resolution tools including cash calls (additional contributions) to non-defaulting members twice as big as a default fund, variation margin gains haircutting - reduction of the value of any gains payable by CCP to non-defaulting members, sale of business and government stabilisation tools as a last resort -they also envisage a review clause in order to re-assess the list; (v) that when a CCP in a non-default case reduces payments to non-defaulting clearing members and clients it should recompense them, once its health is restored, through cash payments or ownership in future profits; and (vi) contractual arrangements allowing clearing members to pass losses on to their clients in case of the resolution should also include, the right for clients to any compensation that clearing members receive - these provisions should also apply to indirect clients. Following finalisation of technical work, the text will be submitted to EU ambassadors for endorsement with a view to reaching an agreement in the form of a (pre-negotiated) CEU position at first reading. It will then undergo a legal linguistic revision The CEU states that, with certain limited exceptions, the new framework will start applying 18 months after the date of entry into force of the Regulation.
HMT consults on its transposition of BRRD II - Brexit
On 23 June, HMT began consulting on its transposition of BRRD II. Of particular note, HMT states that it is not intending to transpose the requirements in BRRD II that do not need to be complied with by firms until after the end of the EU Exit Transition Period, in particular Article 1(17) which revises the framework for MREL requirements across the EU. HMT state that the UK already has in place a MREL framework in line with international standards (FSB’s TLAC standard). The HMT seeks views on: (i) the introduction of the concepts of ‘resolution entities’ and ‘resolution groups’ which derive from the same terms used in the FSB ’s TLAC standard; (ii) the power for the resolution authority to prohibit certain distributions where the entity fails to meet its combined buffer requirement, when considered in addition to its MREL requirements; (iii) the power for the resolution authority to suspend any contractual payment or delivery obligations after a firm is deemed failing or likely to fail, but before entry into resolution; (iv) restrictions on the selling of subordinated eligible liabilities to retail clients; (v) amendments to the requirements on the contractual recognition of bail in, to address circumstances in which it would be legally or otherwise impractical to include a contractual term; and (vi) a requirement for entities to include, in financial contracts governed by third country law, a term by which the parties recognise that the financial contract may be subject to the exercise of powers by the resolution authority to suspend or restrict obligations. The deadline for comments is 11 August.
Sustainable Finance
Please see our section on Covid-19 for the FCA’s announcement of further delays to its work programme due to the pandemic.
Taxonomy Regulation published in OJ
On 22 June, Regulation EU 2020/852 of the EP and the CEU of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 was published in the OJ. The Regulation shall enter into force on 12 July, the twentieth day following its publication. Articles 4, 5, 6 and 7 and Article 8(1), (2) and (3) shall apply: (a) in respect of the environmental objectives referred to in points (a) and (b) of Article 9 from 1 January 2022; and (b) in respect of the environmental objectives referred to in points (c) to (f) of Article 9 from 1 January 2023.
Other Developments
Corporate Insolvency and Governance Act 2020 – Covid-19
On 25 June, the Corporate Insolvency and Governance Act 2020 received royal assent and became law, to come into effect on 26 June 2020. The measures introduced by the Act will relieve the burden on businesses during the Covid-19 outbreak and allow them to focus all their efforts on continuing to operate. The Act introduces a new moratorium to give companies breathing space from their creditors while they seek a rescue. It also introduces a new restructuring plan sanctioned by the court that will bind creditors to the plan.
FCA to comply with EBA Guidelines on ICT and Security Risk management
On 25 June, the FCA announced that it has notified the EBA that it intends to comply with the EBA’s guidelines on ICT and security risk management published in November 2019. All credit institutions, investment firms and PSPs will be expected to make every effort to comply with the Guidelines from 30 June 2020 when they enter into force. The FCA suggests that firms refer to the EBA’s further guidance on the use of flexibility in relation to Covid-19 and the implementation of the Guidelines. Consistent with this further guidance, the FCA will apply reasonable supervisory flexibility when assessing the implementation of the Guidelines given the ongoing Covid-19 crisis. In line with previous FCA guidance to firms in the current situation, the FCA encourages firms to particularly focus on the provisions within the Guidelines relating to information security, ICT operations and business continuity to maximise their ability to provide services on an ongoing basis and to limit losses in the event of severe business disruption. The FCA is currently consulting on new requirements for operational resilience and expects to publish final rules in Q1 2021, including providing further information on the links between its operational resilience policy and the EBA Guidelines.
EBA further guidance – Covid-19
May-June record of FPC decisions
On 25 June, the BoE published the record of the FPC decisions taken since 7 May. The document sets out the decisions taken by the FPC in relation to: (i) UK Countercyclical Capital Buffer rate; (ii) the enduring approach for incorporating IFRS 9 into the capital framework; (iii) the risks to financial stability from the provision of cloud services; (iv) the transition from Libor; and (v) the FPC’s remit response.
FPC response to Chancellor's letter on remit and recommendations for 2020/21
On 25 June, the BoE published a letter from Andrew Bailey, BoE Governor and Chairman of the FPC, responding to a letter from Rishi Sunak, Chancellor of the Exchequer, on the remit and recommendations for the FPC for 2020/21. The FPC's full response to its remit and recommendations for 2020/21 is set out in an annex to the letter. It covers matters including: (i) the government's economic policy towards the financial services industry; (ii) the future relationship with the EU and the FPC’s commitment to robust prudential standards; (iii) risks from the non-bank financial sector – following the Chancellor’s recommendation the FPC is preparing a more detailed assessment of the oversight and mitigation of systemic risks from this sector and will publish its preliminary findings in the Financial Stability Report in early August 2020; (iv) risks from climate change – it is a strategic priority for the FPC and it notes that recognising current pressures on firms, and in light of the responses to the December 2019 Discussion Paper on the climate biennial exploratory scenario, the PRC and FPC agreed to postpone the launch of the climate biennial exploratory scenario exercise until at least mid-2021; and (v) the FPC’s coordination with the MPC on work such as the recent interim financial stability report.
Nikhil Rathi appointed as new Chief Executive of the FCA
On 22 June, HMT announced the appointment of Nikhil Rathi as the new permanent Chief Executive of the FCA. He will succeed Christopher Woolard, who has acted as interim Chief Executive since Andrew Bailey stepped down from the post in March. Nikhil is currently the Chief Executive of London Stock Exchange plc. From September 2009 to April 2014, he was Director, Financial Services Group at HM Treasury. In this role, he led HMT’s work on the UK’s EU and international financial services interests. Nikhil is expected to take up the role in the Autumn.
Firms to prepare for phased move to FCA’s new data collection platform RegData
On 22 June, the FCA provided some information on its new regulatory data collection platform, ‘RegData’, and the transition process from Gabriel. Firms will be moved in groups, to minimise the impact, determined by the nature of their reporting obligations and reporting schedules. Firms will not be able to access RegData until they and their users’ data have been moved from Gabriel. The FCA will email firms’ principal and associated users 3 weeks before their firm’s moving date. The FCA requests that firms, before their moving date, check that they have: (i) up-to-date contact details in Gabriel; (ii) nominated the correct principal user and assigned administrator rights correctly in Gabriel; and (iii) accurate information in Gabriel about all other active users – with any non-active users disabled.
EP roadmap to completing the Banking Union
On 19 June, the EP published a roadmap to completing the Banking Union. It sets out the main milestones of the process so far, with the first two pillars of common banking supervision and resolution having come into force in 2014 (SRB is operational as an independent body since January 2014 and SSM since November 2014). It outlines where work was before the coronavirus outbreak with regards to the Single Resolution Fund, the third and presumably final pillar – the European Deposit Insurance Scheme (EDIS), and the action plan to tackle non-performing loans. Finally, the roadmap highlights areas where further work is needed to complete the Banking Union, including: (i) the set up and features of the EDIS; (ii) bank’s sovereign exposures through analysis of various options (concentration charges, risk based contributions factoring in sovereign exposures and a possible safe asset portfolio), impact assessment of available options and possibly Commission legislative proposals; (iii) a crisis management framework - removing current overlaps between the early intervention and supervisory measures; and (iv) the removal of remaining obstacles to enhance cross-border integration.
Government response to the Lords Delegated Powers and Regulatory Reform Select Committee report on the CIG Bill 2020
On 19 June, the Government’s response to the Lords Delegated Powers and Regulatory Reform Select Committee report on the Corporate Insolvency and Governance Bill 2020 (CIG Bill) was published. To alleviate the Committee’s concerns, the Government among other things: (i) removed three of the Henry VIII powers and restricted a fourth in relation to the new moratorium procedures – the remaining powers were considered vital to respond to rapidly changing circumstances; (ii) restricted the scope of the Secretary of State’s power so that it may not be able to amend the provision preventing companies from being eligible for a moratorium if they are or have recently been subject to a moratorium or other insolvency procedure; (iii) restricted the Secretary of State’s power to amend corporate insolvency and governance legislation; and (iv) accepted the Committee’s recommendation on the need to limit the use of the power to change the duration of temporary provisions so that it can only be used where an extension is require to deal with Covid-19.