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Key Regulatory Topics: Weekly Update 19 October 2018 - 25 October 2018

19 October 2018

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector. If you would like to receive this update by email and be added to our marketing mailing list please contact​​​.​


Please see the product sections for updates on the various draft SIs published this week in anticipation of a hard Brexit.

Please refer to the Markets and Markets Infrastructure section for an update on the FCA’s draft application forms for trade repository registration¬ post-Brexit.

Please refer to the Brexit section for an update on the BoE’s speech: Good cop/Bad cop and the FCA’s speech on Brexit and financial services: where have we got to?  

Bank and PRA issue Dear CEO letters on EU withdrawal

On 25 October, the BoE and the PRA issued the following Dear CEO letters on EU withdrawal: (i) Dear CEO letter addressed to non-UK CSDs, from Sir Jon Cunliffe, BoE Deputy Governor for Financial Stability; (ii) Dear CEO letter addressed to non-UK CCPs, from Sir Jon; and (iii) Dear CEO letter addressed to all firms authorised and regulated by the PRA, as well as EEA firms undertaking cross-border activities into the UK from the rest of the EU via passporting, from Sam Woods, BoE Deputy Governor and PRA CEO.

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BoE and PRA consult on Brexit package of measures on changes to binding technical standards, FMI rules and PRA Rulebook

On 25 October, the BoE and the PRA published a package of consultation papers that propose changes to the relevant onshored BTS, the rules for FMIs and the PRA Rulebook, which arise from the UK's withdrawal from the EU: (i) BoE and PRA joint consultation paper, ‘The Bank of England's approach to amending financial services legislation under the European Union (Withdrawal) Act 2018’ (CP25/18); (ii) BoE and PRA joint consultation paper, ‘UK withdrawal from the EU: Changes to PRA Rulebook and onshored Binding Technical Standards’ (CP26/18); (iii) BoE consultation paper, ‘UK withdrawal from the EU: The Bank of England’s approach to resolution statements of policy and onshored Binding Technical Standards’; and (iv) BoE consultation paper, ‘UK withdrawal from the EU: Changes to FMI rules and onshored Binding Technical Standards’. The proposals include further guidance on the process for authorisation and recognition for incoming EEA firms and non-UK FMIs, including the temporary permissions and recognition regimes. The package of measures does not reflect any policy changes other than those related to EU withdrawal, and builds on previous communications to firms on their preparations around EU withdrawal. The deadline for comments on all four consultation papers is 2 January 2019. 

Consultation Paper CP25/18 

Consultation Paper CP26/18

BoE Consultation Paper - Approach to resolution statements of policy and onshored Binding Technical Standards

BoE Consultation Paper - UK withdrawal from the EU: Changes to FMI rules and onshored Binding Technical Standards

Draft Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 published by HMT

On 25 October, HMT published a draft version of the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, together with an explanatory note. The purpose of the Regulations is to ensure that BTS and rules made under FSMA continue to operate effectively after the UK’s exit from the EU. HMT has not undertaken a consultation on the instrument, but the instrument was published in draft, along with an explanatory policy note, in April. The instrument will not change any of the regulatory requirements that apply to regulated entities. The financial services regulators plan to undertake public consultation on any changes they propose to make to BTS or rules made under FSMA using the powers delegated to them by the instrument.

Draft Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 

Explanatory Memorandum 

AFME calls on authorities to urgently address Brexit cliff edge risks

On 22 October, AFME published a press release on avoiding a Brexit cliff edge in financial services.

AMFE outlines three cliff edge risks that the industry cannot tackle alone, and which need addressing urgently: (i) continued access to CCPs - it has been suggested that EU27 banks could move positions to EU CCPs. However, this would be unrealistic in the limited time available and would involve systemic risk. It is also questionable whether the market alone could supply sufficient liquidity for such significant shifts of positions between CCPs. Also, there is currently no available alternative for clearing some products in the EU27. In the absence of clarity, there is a real risk that UK CCPs may have to start delivering termination notices to their EU27 clearing participants from as early as December. This is likely to have a highly disruptive and adverse impact on firms, markets and end-users; (ii) continued servicing of existing contracts - firms should be able to continue to perform contractual obligations under existing OTC derivatives contracts in most member states. However, it may not be possible to perform essential "lifecycle" events, including exercising options, or transferring collateral, unwinds or portfolio compressions. Lifecycle events occur frequently. The inability to perform them could impair the ability of banks and clients to manage exposures and risks. Also, transferring legacy clients onto new contracts in advance of Brexit would be hugely challenging, particularly in a no-deal scenario. The scale of this exercise would be unprecedented, and there is a risk that clients and counterparties may delay or refuse consent to such a novation process; and (iii) cross-border data transfers - the ability to continue to transfer data is vital to support cross-border business. Firms may have a presence in several countries but often manage certain functions, such as HR or financial crime monitoring, from a centralised location, as well as engaging with vendors and suppliers based in other member states. As a result, cross-border data transfers are essential for maintaining day-to-day operations. AFME advises that it recently reiterated its concerns in a letter to the EC, urging them along with member states and regulators to provide certainty on the steps that will be taken to address these risks.

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Department for International Trade gives update on withdrawal preparations

In a letter dated 20 October, the Secretary of State for International Trade updated the Chair of the House of Commons International Trade Committee on progress made by the DIT in its preparations for the UK's withdrawal from the EU. WTO members had until 24 October to assess the draft UK goods schedule submitted on 24 July to the WTO members for certification. The DIT: (i) anticipates that a number of WTO members may have reservations about the handling of Tariff Rate Quotas, and will continue engaging with them to address any substantive concerns; (ii) acknowledges that a move to formal negotiations under Article XXVIII of the General Agreement on Tariffs and Trade would provide a mechanism for completing the legal process; and (iii) confirms that although the UK goods schedule would remain uncertified during that process, this will not affect trade, and the UK would continue to trade on the terms in the draft schedule. The DIT has shared the draft UK services schedule informally with the WTO members, and is now preparing a final version, retaining its rectification approach. The DIT: (i) intends to start the certification process for the services schedule towards the end of the autumn, which will include 45 days for WTO members to object; and (ii) confirms that the draft schedule would form the basis for UK trade pending resolution of any issues. The UK's market access offer for accession to the WTO GPA was circulated to GPA parties on 5 June. The letter states that: (i) the DIT has engaged with all GPA parties since then; and (ii) at a meeting of the GPA Committee on 17 October, parties agreed to return in November to discuss the UK's accession with a view to providing provisional acceptance should discussions end before the meeting.

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HMT response to consultation on mutual deferred shares 

On 23 October, HMT published its response to its August 2016 consultation on mutual deferred shares (MDS). HMT consulted on a draft version of the Mutuals' Deferred Shares Regulations 2016, which were intended to allow friendly societies and mutual insurers to issue MDS, a new type of capital created by the Mutual Deferred Shares Act 2015. In the response, HMT states that, following the consultation, it received feedback from mutual insurers and their representatives that mutual insurers would only be able to issue MDS if they both qualified as tier 1 regulatory capital and would not alter the tax treatment of any mutual that issued MDS. HMT states that it has not been possible to design MDS that meet both these criteria and consequently it has decided not to lay the Regulations. It may reconsider its position if any material factors change in the future.

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FCA progress report on PPI complaints deadline campaign

On 24 October, the FCA published a report on the progress of its consumer communications campaign and supervisory work in support of the deadline for PPI complaints. In March 2017, the FCA set a deadline of 29 August 2019 for consumers to make PPI complaints or lose their right to have them assessed by firms or the FOS. In August 2017, the FCA launched a campaign intended to create awareness of the deadline. In the report, the FCA summarises the supervisory work it has undertaken to ensure that firms are making it easier for consumers to act and are handling consumers' checking enquiries and complaints fairly. The FCA found that firms have responded positively to its aims and measures. There has also been an increase in consumer action since the launch of the campaign with an increase in checking enquiries and complaints. The FCA states that its supervisory work will now focus on ensuring that firms maintain and further improve their accessibility and handling, correct any areas where shortcomings are identified and prepare to deal fairly and effectively with complaints in the final run-up to the deadline. The FCA's campaign will focus on increasing its impact on certain consumer groups and strengthening consumer's understanding of what to do before the deadline and how to complain. The FCA intends to publish a final report on PPI in early 2020. The FCA's aim is that this report will provide a definitive review of the overall impact of the FCA's measures and draw the PPI issue to a close.

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HMT publishes updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions

On 25 October, HMT published an updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. The MLRs 2017 require firms to put policies and procedures in place in order to prevent activities related to money laundering and terrorist financing. 

On 19 October, the FATF published two statements identifying jurisdictions with strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes. These statements can be found in Annex A and Annex B of the notice. 

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FCA, SFO and Police give evidence on the Bribery Act 2010

On 23 October, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, and Hannah von Dadelszen, Head of Fraud at the SFO, gave evidence to the Bribery Act Committee. The following issues were covered: FCA and SFO collaboration; investigations; FCA fines; DPAs and international strategy.

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IIF report on key findings from survey on use of machine learning in AML

On 19 October, the IIF published a report on machine learning in AML. The report sets out a summary of the IIF's key findings from a survey of 59 institutions (54 banks and five insurers) on their use of AML machine learning techniques. The full report is not publicly available. The IIF explains that as the level of undetected illicit funds in the financial services sector remains too high, firms are increasingly turning to new technologies, including machine learning, to address the issue. The IIF found that 69% of firms surveyed already use¬ or experiment with machine learning techniques. Another 29% indicated that they are planning to apply new analytical techniques in the foreseeable future. Machine learning is not set to fundamentally change the approach of firms to AML, but rather to enhance and rethink processes for existing elements of the framework, such as transaction monitoring, risk assessments and KYC. The most prominent benefit is increased speed or automation of analysis that allows the AML process to respond to the latest developments in money laundering methods. By way of example, machine learning techniques are already helping to drive a reduction in false positive rates. The IIF also identified that improved performance in detection and risk management can be further increased with enhancements in information sharing and "feedback loops" between authorities and firms. A number of challenges to the use of machine learning technology were identified, including uncertainty about regulators' support for it as part of a firms' adequate risk-mitigation framework. The IIF recommends a stronger statement of support for the application of new technologies in the prevention of money laundering and other financial crimes, as well as a co-operative approach between the public and private sectors to determine best practice. Significantly, none of the firms surveyed were pursuing machine learning as a means to reduce staff. Firms are not currently looking to automate the decision-making process but instead aim to free the resources of AML analysts to focus on higher-risk cases. Overall, the IIF found that the application of machine learning techniques in AML is spreading quickly across the industry, and expects this trend to continue. It encourages interested parties to work together to resolve the key issues outlined in the report.

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Outcomes of the FATF plenary meeting 17-19 October

On 19 October, the FATF published the outcomes and issues from its plenary held in Paris from 17-19 October. The issues discussed included: (i) amendments to the FATF recommendations to address the regulation of virtual assets for money laundering and terrorist financing. The FATF will update its guidance to assist countries with the full and effective implementation of these requirements of the FATF standards. All countries will be encouraged to swiftly take the necessary steps to prevent the misuse of virtual assets; (ii) the publication of a plan for jurisdictions that have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF; and (iii) the publication of updated International Standards on combating money laundering and the financing of terrorism and proliferation. 

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Advice from ESMA stakeholder group on containing risk of ICOs and cryptoassets

On 19 October, ESMA published an own initiative report, produced by its Securities and Markets Stakeholder Group, on ICOs and cryptoassets. In the report, the group advises ESMA on the steps it can take to contain the risks of ICOs and cryptoassets, focusing mainly on risks for investors. To "inspire" potential regulatory initiatives, the report provides an overview of recent ICOs and crypto market developments, as well as the most important existing regulations on cryptoassets, ICOs, sandboxes and innovation hubs in 36 jurisdictions. The group advises ESMA to produce level 3 guidelines or aim at supervisory convergence on: (i) interpretation of MiFID II definitions of "transferable securities" and "commodities", clarifying whether transferable asset tokens that have features of transferable securities are subject to the MiFID II Directive and the Prospectus Regulation; (ii) interpretation of the MTF and OTF concepts, clarifying whether the organisation of a secondary market in asset tokens that qualify as MiFID II financial instruments is an MTF or OTF; (iii) the fact that when issuers of asset tokens are to be considered to organise an MTF or OTF, MAR applies to these MTFs and OFTs; and (iv) the fact that in all situations where an asset token is considered to be a MiFID II financial instrument, persons giving investment advice on those asset tokens, or executing orders in those asset tokens, are to be considered investment firms, so should have a licence as such unless they qualify for an exemption under MiFID II. As ESMA is not able to change the level 1 MiFID II text listing financial instruments, the group urges it to consider sending a letter to the EC asking it to consider adding second, transferable payment and utility tokens to the MiFID II list of financial instruments. If these tokens become MiFID II financial instruments, secondary markets in these tokens would also qualify as MiFID II MTFs or OTFs, subject to MAR, and advisors in respect of the tokens would become subject to MiFID II. Also, the group considers that, although sandboxes and innovation hubs should not be overly regulated, some co-ordination is necessary. It advises ESMA to provide guidelines with minimum criteria for national authorities that operate or want to operate a sandbox or innovation hub.

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FCA launches Green FinTech Challenge

On 19 October, the FCA announced the launch of a Green FinTech Challenge to support innovation and growth in the green finance sector. The challenge, which is part of FCA Innovate, encourages firms to apply to join the Green FinTech Challenge cohort if they require specific regulatory support and meet the criteria (that is, their propositions assist in the transition to a greener economy, will benefit UK markets and consumers, and show a need for Innovate services). It is open to start-ups, incumbents and technology providers. The FCA provides the following examples of green solutions that might be eligible to participate: (i) supporting capital flows and investment towards green products and services; (ii) driving efficiency in the issuance, distribution or adoption of green products and delivering new green financial products; and (iii) managing climate-related risk posed to market participants and environmental impact measurement. The FCA states that firms developing broader ethical, social impact or environmental, social and governance products and services may apply, on condition that there is a link with, or associated benefit to, the green finance agenda. Applications to be considered to participate in the challenge should be made by application form on or before 11 January 2019. Successful applicants will be notified by the end of the first quarter of 2019. The successful firms, which will be listed on the FCA website, will be supported to develop innovative products and services to assist in the UK's transition to a greener economy. They will benefit from dedicated Innovate advice, authorisation support (if required), live market testing within the regulatory sandbox and the receipt of guidance and informal steers. The challenge is a pilot approach for FCA Innovate. Once this challenge is completed, the FCA will consider whether it wishes to roll out further FinTech challenges. 

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EIOPA Chair talks about Solvency II review, proportionality and supervisory convergence

On 25 October, EIOPA published a speech (dated 18 October), given by Gabriel Bernardino, EIOPA Chair, on the review of the Solvency II Directive, proportionality and supervisory convergence. On the Solvency II "2020 review", Mr Bernardino refers to the advice EIOPA sent to the EC on targeted adjustments to the regime focusing on reducing complexity, increasing proportionality, removing technical inconsistencies and making corrections where necessary. EIOPA is happy to see the EC's announcement that most of the advice will be taken into account in its forthcoming proposals. Mr Bernardino understands that the EC has decided to postpone the review of the interest rate risk treatment for the 2020 review. He expects a similar decision to be taken regarding other areas, like the treatment of equity risk and the risk margin. EIOPA believes that the 2020 review should ensure that the Solvency II regime is adapted to new market conditions without fundamentally changing the basic principles of the risk-based regime. On proportionality, EIOPA prioritised a peer review on supervisory practices for the application of the proportionality principle on the governance requirements regarding key functions. It will publish the results soon, which will include recommendations addressed to supervisors. EIOPA is also considering how this principle should be applied to the exercise of supervisory powers. Mr Bernardino comments on a case brought to EIOPA's attention by the GDV relating to application of the principle in calculating the SCR, especially for small and medium-sized insurers. EIOPA will be discussing this issue with supervisors and hopes to publish a supervisory opinion in the coming months. Mr Bernardino ends his speech talking about supervisory convergence activities. He believes these show the limitations of EIOPA's current powers, and explains that this is why it has been calling for amendments to the EIOPA Regulation.

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PRA extends implementation date for Solvency II equity release mortgages proposals

On 25 October, the PRA published its July consultation paper on the Solvency II Directive and equity release mortgages to announce a change to the implementation date for the proposals. The PRA had initially stated that the proposals would come into force on 31 December. However, based on feedback to the consultation (which closed to responses on 30 September), the PRA has announced that the proposals will not be implemented before 31 December 2019. The PRA is giving careful consideration to the consultation responses it has received and the impact, if any, of the updated implementation date to the proposed phase-in period. It has decided to announce its position on the implementation date to clarify the position for insurers planning their year-end processes. The PRA states that it will publish final policy and supervisory statements in due course.

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EIOPA webpage on Solvency II illiquid liabilities workstream

On 24 October, EIOPA has published its workstream on illiquid liabilities, which relates to the review of the Solvency II Directive. On its webpage, EIOPA states that it has established a dedicated project group on illiquid liabilities to explore any new evidence on the features of liabilities, especially concerning their illiquidity characteristics. EIOPA is considering whether to issue a request for feedback in October or November to prepare a possible request for information early in 2019. The EC's call for information forms part of its general review of the Solvency II Directive which it is mandated to produce under Article 77f of the Directive no later than 1 January 2021 (the 2020 review).

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Please refer to the Brexit section for an update regarding AFME’s calls on authorities to urgently address Brexit cliff edge risks.

Please refer to the Other Developments section for an update on the FCA’s evaluation on the impact of bringing additional benchmarks into the regulatory and supervisory regime.

BoE consults on 2018/19 fees for non-UK CCPs applying for UK recognition

On 25 October 2018, the BoE published a consultation paper on 2018/19 fees for non-UK CCPs applying for UK recognition. The BoE is seeking views on proposed fees for applications for non-UK CCPs seeking UK recognition both before and after the UK withdraws from the EU. If adopted, the Central Counterparties (Amendments, etc, and Transitional Provisions) (EU Exit) Regulations 2018 will give the BoE power to require non-UK CCPs to pay fees in connection with the discharge of any of its functions before exit day. This power is expected to come into effect by the fourth quarter of the year. The BoE anticipates that the fee-raising power will be available during the implementation period between 29 March 2019 and 31 December 2020. The BoE advises that its proposal to levy an application fee for non-UK CCP recognition applications is consistent with the approach it takes to UK CCPs. It proposes a fee of £35,000 for each application. The BoE considers that this is a fair, reasonable and proportionate fee based on a calculation of its expected work effort and the associated costs it anticipates will be incurred in handling all aspects of non-UK CCP recognition applications. This includes a review of information submitted by applicants and the establishment of co-operation arrangements with relevant competent authorities. The fee would be consistent for all applications, regardless of whether there is more than one application from a given jurisdiction. The application fee would be payable once a non-UK CCP has been formally recognised. There will be no fee for notification of intent to apply for recognition, and no fee for entry into the TRR. The TRR will allow eligible non-UK CCPs, for which recognition decisions have not been made, to continue providing clearing services in the UK for a limited period post-withdrawal. Comments can be made on the proposals until 2 January 2019. The BoE will consider feedback received, with a view to any arrangements commencing in the first quarter of 2019 if it decides to levy fees.

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FCA evaluates impact of bringing additional benchmarks into regulatory and supervisory regime

On 22 October, the FCA published an evaluation paper (18/2) that considers the impact of bringing seven additional benchmarks into its regulatory and supervisory regime. The paper evaluates the Benchmarks (Amendment) Instrument 2015 (FCA 2015/6) (Benchmarks Instrument), by which the FCA made amendments to its Handbook to reflect the additional benchmarks. The FCA published the final version of the Benchmarks Instrument in its policy statement (PS15/6), which was published in March 2015. Points of interest in the paper include the following: (i) most stakeholders believed that the FCA rules made benchmarks more robust to manipulation and more representative of the underlying market, reassuring users about the integrity of the benchmarks; (ii) the FCA's empirical findings support the above claims and find that trading costs and liquidity improved for already liquid markets (especially in swap markets); and (iii) for less liquid markets, the fines, the methodology changes, and the FCA's regulatory intervention may have increased the perceived regulatory risk, worsening liquidity and participation. In light of its work, the FCA has identified some lessons that it can apply to current and future work to help it understand the trade-offs regulation of benchmarks need to solve. The FCA welcomes views on the evaluation paper. Alongside the paper, the FCA has also published occasional paper 46, which focuses on the most important benchmark in the FX market (WM/R 4pm Closing Spot Rate). It is based on trading around the benchmark between 2012 and 2017, with a unique dataset that allowed the FCA to identify the actions of individual traders. The data provided new insights into how trading decisions affected the properties of the fix benchmark, and how the presence of the fix, affected trading patterns. In addition, the FCA has published a research note on the main benchmark for silver (LBMA Silver Price), which underwent changes in its methodology in August 2014. The research note assesses the representativeness of the benchmark from March 2017 to September 2017.

Evaluation Paper (18/2) 

Occasional Paper 46 

Research Note 

FCA draft application forms for trade repository registration post-Brexit

On 22 October, the FCA updated its webpage on registering as a trade repository to include: (i) a draft application form for trade repositories to complete and submit to the FCA for registration under Regulation 5(2) of the draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 (Trade Repositories Regulations); (ii) a draft conversion form for trade repositories to convert their current ESMA registered-status into FCA registration under regulation 17(2) of the draft Trade Repositories Regulations; and (iii) accompanying guidance notes. The forms can be submitted to the FCA, by email, from 1 January 2019. Although the forms can be submitted for pre-review by the FCA, trade repositories cannot apply until the rules have been made and they have paid an application fee. The draft Trade Repositories Regulations, among other things, make provision for the FCA to register trade repositories operating in the UK post-Brexit. 

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Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018 published by HMT

On 22 October, HMT published a draft version of the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, together with an explanatory note. The purpose of the Regulations is to: (i) make technical changes to the CSDR to ensure that the framework for CSDs operates effectively after Brexit (see Part 3 of the Regulations). The CSDR has been implemented in the UK through the Central Securities Depositories Regulations 2014 and Central Securities Depositories (Amendments) Regulations 2017. Amendments to these are set out in Part 2 of the Regulations; (ii) transfer the power to make equivalence decisions from the EC to HMT; (iii) transfer powers from ESMA to the BoE enabling the BoE to recognise third-country CSDs after exit day; and (iv) amend the CSDR transitional regime so that third-country CSDs can continue to provide services relating to the UK after exit day. Third-country CSDs will need to notify the BoE before exit day of their intention to provide services in the UK following exit. Third-country CSDs within the transition will be subject to Part 18 of FSMA rather than the CSDR until their application for recognition has been determined, or the time limit for such application has expired (this will be six months from their jurisdiction being determined equivalent by HMT). HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. It intends to lay the Regulations before Parliament before exit day. Regulation 1 and Part 5 of the Regulations (Notification requirements) will enter into force on the day after the day on which they are made, with the remainder coming into force on exit day. The BoE, and the PRA as appropriate, will be updating the relevant BTS to reflect the changes introduced through the Regulations. The BoE intends to consult on the changes in the autumn. Although the FCA will be involved in the process, it will not consider the BTS as part of its formal process or consult on the changes.

Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018 

Explanatory Information 

Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 published by HMT

On 22 October, HMT published a draft version of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018, together with an explanatory note. The purpose of the Regulations is to amend aspects of onshored EMIR and related UK legislation (including the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013) to ensure that the UK continues to have an effective regulatory framework for OTC derivatives, CCPs and TRs after exit day. Among other things, the Regulations: (i) ensure that requirements imposed by EMIR continue to apply in the UK and transfer responsibilities in this regard to the BoE, PRA and FCA as appropriate; (ii) transfer the power to make third-country regime equivalence decisions from the EC to HMT; (iii) establish a temporary intragroup exemption regime, which will initially last three years, to ensure that intragroup transactions can continue to be exempted from EMIR requirements where this is the case to date; (iv) revoke and replace EMIR provisions relating to TR appeals, fines, supervisory fees, penalties and other supervisory requirements so that they are aligned with relevant provisions in FSMA; and (v) delete provisions relating to sharing information with other EEA authorities and the oversight of CCPs by colleges. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. It intends to lay the Regulations before Parliament before exit day. The Regulations will come into force on exit day. The Regulations sit alongside the Central Counterparties (Amendment, etc, and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018. 

Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018

Explanatory Note  


PSR specific direction to LINK regarding protected ATMs

On 22 October, the PSR published a specific direction relating to the adoption of appropriate policies, measures and reporting obligations regarding protected ATMs (as defined in the direction). It is cited as the "Specific Direction: Protected ATMs 2018: LINK". The direction requires LINK Scheme Holdings Ltd (LINK), the operator of the LINK ATM system, to ensure it does all it can to fulfil the commitments it made, at the beginning of 2018, regarding the ongoing availability of access to free-to-use ATMs for UK consumers. It is made in accordance with section 54(2)(a) of the Financial Services (Banking Reform) Act 2013. Under the direction, LINK must: (i) identify all relevant protected ATMs; (ii) identify the characteristics necessary to effectively run its policies and measures in relation to its commitment to maintain the broad geographic spread of protected ATMs by incentivising, or otherwise ensuring the maintenance, reopening or replacement of certain protected ATMs; and (iii) utilise appropriate and effective systems and mechanisms to do so. The PSR consulted on the direction in September. It has published a summary of the responses to the consultation, together with the PSR's feedback to the responses. The direction came into force on 19 October. It will continue in force until 2 January 2022, unless earlier varied or revoked by the PSR. It is subject to review by the PSR after 12 months and, if still in place, after 24 months.

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Please refer to the Other Developments section for an update on the EBA’s work programme for 2019.

Implementing Regulation on closely correlated currencies under CRR published in OJ

On 22 October, Commission Implementing Regulation (EU) 2018/1580, amending Implementing Regulation (EU) 2015/2197 laying down ITS as regards closely correlated currencies in accordance with the CRR, was published in the OJ. Implementing Regulation (EU) 2018/1580 updates the list of closely correlated currencies in the Annex to Implementing Regulation (EU) 2015/2197. This is necessary to ensure that the currency pairs referred to in the Annex continue to reflect the actual correlation between the relevant currencies. The list uses 31 March 2017 as the end date for the purpose of computing the three and five-year data series required to assess currency pairs in accordance with Article 354(3) of the CRR. The new Implementing Regulation is based on draft ITS the EBA submitted to the EC. As the amendments to Implementing Regulation (EU) 2015/2197 do not involve significant substantive changes, the EBA decided not to consult on them. Implementing Regulation (EU) 2018/1580 was adopted by the EC on 19 October and will enter into force on 11 November (that is, twenty days after publication in the OJ).

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Commission adopts Delegated Regulation containing RTS specifying criteria for assessing impact of institution's failure under BRRD

On 25 October, the EC adopted a Delegated Regulation (C(2018) 6901 final) setting out regulatory technical standards (RTS) specifying the criteria for assessing the impact of an institution's failure on financial markets, on other institutions and on funding conditions under Article 4(6) of BRRD. Annexes to the Delegated Regulation have been published separately. The EBA submitted the final draft RTS to the EC in December 2017. The RTS have been developed taking into account, where appropriate and to the extent possible given that national practices are still evolving, experience acquired in the application of the EBA guidelines on simplified obligations issued under Article 4(5) of the BRRD. Under the RTS, the authorities should have regard to the criteria by following a two-stage approach. They should: (i) select institutions that could potentially benefit from simplified obligations based on a number of quantitative criteria measured on the basis of a set of quantitative indicators; and (ii) verify whether institutions selected as potentially eligible for simplified obligations in stage 1 also meet the qualitative criteria. The RTS are also intended to facilitate co-operation among competent and resolution authorities in conducting these assessments, including as regards cross-border groups. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the OJ. The EBA's guidelines should no longer be in force after the Delegated Regulation enters into force.

Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 laid before Parliament

On 23 October, a draft version of the Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 was published, together with an explanatory memorandum. The purpose of the Regulations is to ensure that the regime established by the BRRD, and in particular the SRR established under the Banking Act 2009, functions effectively after Brexit. This is the version that has been laid before Parliament and reflects changes to the draft that HMT published on 8 October. It appears that few changes have been made to the earlier version of the Regulations, although the secondary legislation to be amended by the Regulations now includes the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009. The Regulations will come into force on exit day, with the exception of certain provisions specified in regulation 1(3).

Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 ​

Explanatory Memorandum 


BoE speech: Good cop/Bad cop

On 25 October, the BoE published a speech by Sam Woods, the Deputy Governor for Prudential Regulation and the Chief Executive of the Prudential Regulation Authority, on the two different roles that the regulator often plays, ‘good cop and bad cop’ in relation to operational resilience and Brexit. On operational resilience, Mr Woods describes the regulatory framework as “thoroughly under-developed” when compared to financial resilience. The lack of operational resilience could impact on the safety of firms and/or financial stability. In relation to Brexit, Mr Woods states that firms should be continuing to work on their contingency plans and reiterates that “we all need to be ready for a range of outcomes”. 

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FCA speech on Brexit and financial services: where have we got to?

On 25 October, the FCA published a speech by Andrew Bailey, Chief Executive of the FCA, on planning for Brexit. Highlights of the speech include: (i) the FCA is on course to be ready for a hard Brexit and confirms that it has adequate resources to handle it; and (ii) the permanent arrangement post Brexit must allow for close alignment with the EU, without the UK being a rule taker.

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Government provides Treasury Select Committee with update on progress of EU NPLs package

On 25 October, HMT published a letter from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Scrutiny Committee Chair, providing an update on the EC's legislative package on NPLs. Mr Glen explains that the proposed Regulation and Directive are progressing at different speeds. The Presidency of the Council of the EU has nearly reached a compromise position on the proposed Regulation. Negotiations are expected to progress to the general approach in November. The UK has among the lowest level of NPLs in the EU and is unlikely to be as affected by the proposal as other member states. As a result, the government has opted to support the proposed Regulation while pushing for compromises that would retain an appropriate level of supervisory flexibility. However, Mr Glen advises that it is unclear how the proposed Directive will evolve over the course of the Council negotiations, or whether it will pass at all in its current form. The letter has been copied to Lord Boswell, House of Commons EU Committee Chair. The EC adopted these legislative proposals in March.

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EC 2019 work programme

On 23 October, the EC published a communication outlining its work programme for 2019. Of interest are the number of priority pending financial services legislative proposals. These are the proposals on which the EC wants the EP and the Council of the EU to take swift action. They include proposals on: (i) sustainable finance; (ii) cross-border investment funds; (iii) crowdfunding services; (iv) the pan-European personal pension product; (v) banking; (vi) CCPs; (vii) the European deposit insurance scheme; and (viii) AML. The EC published its 2018 work programme in October 2017. 

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EBA work programme for 2019

On 23 October, the EBA published its work programme for 2019. The EBA's strategic priorities for 2019 are: (i) leading the Basel III implementation in the EU. The EBA expects to have a significant number of regulatory mandates in the next three years resulting from the endorsement of the package of reforms relating to CRR II, CRD V and BRRD II as well as the implementation of the final Basel III reforms; (ii) understanding risks and opportunities arising from financial innovation. The EBA's work on FinTech issues will focus on policy areas including prudential risks for institutions and the impact of FinTech on the business models of institutions, the impact of FinTech on the resolution of credit institutions and investment firms and consumer protection and retail conduct of business issues; (iii) collecting, disseminating and analysing banking data. The EBA states that the finalisation of its data infrastructure and analytical project will enable it to act as an EU-wide data hub for competent authorities and the public; (iv) ensuring a smooth relocation of the EBA to Paris; and (v) fostering the increase of the loss-absorbing capacity of the EU banking system. The EBA is seeking to ensure that decisions on MREL taken by resolution authorities are supported by credible and consistent resolution-planning work and clarity on the expected composition and quality of MREL. On Brexit, the EBA states that it is actively involved in the co-ordination of competent authorities' work on firms' contingency planning and preparedness and analysis of risks and policy implications for the EU institutions. It is also co-ordinating the work on supervisory co-operation between the authorities, including their development of MoU templates. The work programme also lists 37 specific activities that the EBA intends to undertake in 2019, including the timings for the main outputs of those activities and the resources allocated to each activity.

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PRA occasional consultation paper on changes to its Rulebook

On 22 October, the PRA published an occasional consultation paper (CP24/18) on various changes to its Rulebook, supervisory statements, statements of policy and forms. The changes relate to: (i) amending the branch return reporting form (chapter 2). The proposed changes are set out in the draft CRR Firms: Non CRR Firms: Branch Rules Instrument 2018, which is in appendix 1. The draft amended form is in appendix 2. The proposed implementation date is 1 January 2019; (ii) updating the PRA's statement of policy on its approach to enforcement with regard to the imposition and amount of financial penalties for breaches by qualifying parent undertakings of ring-fenced bodies (chapter 3 and appendix 3); (iii) clarifying how the PRA's policy on written reports by external auditors to the PRA applies in group situations (chapter 4). The proposed changes to Auditors Part 4 are in the draft PRA Rulebook: Written Reports by Auditors to the PRA Instrument 2019 (appendix 4). Proposed changes to supervisory statement, Written reports by external auditors to the PR (SS1/16) are in appendix 5 to CP24/18. The PRA proposes that the changes apply to audits related to periods ending on 31 December or later; (iv) amending the Depositor Protection Part of the PRA Rulebook with regard to, among other things, updating references to money laundering and data protection legislation (chapter 5). The proposed changes are set out in the draft PRA Rulebook: CRR Firms, Non CRR Firms, Non Authorised Persons: Depositor Protection (Miscellaneous Amendments) Instrument 2018 (appendix 6); (v) amending the Policyholder Protection Part of the PRA Rulebook due to the deletion of Rule 21.42 and the detection of a typographical error (chapter 6). The proposed changes are set out in the draft PRA Rulebook: Solvency II Firms, Non Solvency II Firms, Non Authorised Persons: Policyholder Protection (Miscellaneous Amendments) Instrument 2018 (appendix 7); and (vi) revising the reporting templates for calculating risk based levies to reflect changes to the EBA's FINREP taxonomy (chapter 7). The consultation closes on 22 November for chapter 2 and 22 January 2019 for chapters 3, 4, 5, 6 and 7. Changes relating to chapters 3, 5, 6 and 7 will come into force on publication of the final policy.

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FSB reviews deliverables for G20 summit and considers 2019 work programme

On 22 October, the FSB published a press release following a plenary meeting. Points of interest include the following: (i) the FSB plenary discussed and endorsed reports relating to the implementation and effects of G20 financial regulatory reforms, the incentives to centrally clear OTC derivatives, the evaluation of infrastructure finance and the decline of correspondent banking relationships. The reports will be published and delivered to the G20 summit in November; (ii) the FSB will finalise guidance on financial resources in central counterparty resolution by 2020; (iii) having considered a report on member jurisdictions' actions to remove remaining barriers on trade reporting of OTC derivatives, the FSB will publish a report in November; (iv) the FSB discussed progress by the IAIS in developing a holistic framework to assess and mitigate systemic risk in the insurance sector. The IAIS will publish a consultation paper on the holistic framework in November; (v) with regard to the work to transform shadow banking into resilient market-based finance, the FSB has decided to replace the term "shadow banking" with the term "non-bank financial intermediation" in future communications. The FSB plans to publish the 2018 global monitoring report on non-bank financial intermediation at the end of the year; and (vi) plenary members have concluded their review of the FSB's processes and transparency and agreed on a set of measures to ensure its continued effective operation and further enhance its focus and ability to promote financial stability. The FSB will report further in November on the conclusions of the review, including recommendations for strengthening external outreach. In addition, plenary members discussed the main elements of the FSB work programme for 2019 and future years. Specific new initiatives include an evaluation on the effects to date of reforms to end too-big-to-fail, which will be launched in early 2019 and completed in 2020, and an initiative to explore ways to address the risk of market fragmentation. The FSB also intends to develop a project on financial stability implications of decentralised financial technologies (FinTech), and a project to develop effective practices relating to a financial institution's response to, and recovery from, a cyber incident. It intends to publish a progress report on this by mid-2019. The FSB will publish an overview of its work programme once a final version has been agreed.

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