Key Regulatory Topics: Weekly Update 2- 8 September 2022
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We delayed sending our update on Friday out of respect for HM Queen Elizabeth II. The partners and staff of Allen & Overy send their sincerest condolences to the Royal Family upon the death of Her Majesty Queen Elizabeth II. Our thoughts and prayers are with them as we mourn the Queen and celebrate a life of dedication.
Consumer/retail
FOS quarterly complaints data Q1 2022/23
On 7 September, the FOS published its quarterly complaints data on financial products and services for the period covering April to June 2022. Highlights include: (i) the FOS received 65,740 new enquiries and 35,029 new complaints about financial products, with the most complained-about product being current accounts, followed by credit cards; (ii) the FOS continues to see a high number of complaints from victims of fraud and scams. Scams related to fake investment opportunities made up around a third of the “authorised” scam complaints received, and is the fastest growing issue as a proportion of the complaints the FOS sees about these scams. Just over half of the investment scams received related to cryptocurrencies, where consumers were promised an investment that did not materialise, or were persuaded to open a cryptocurrency account and inadvertently sent money to a fraudster; (iii) complaints about unregulated collective investment schemes and other non-mainstream investments had the highest uphold rate at 74%; and (iv) the FOS is mindful of the new challenges that the worsening economic environment and the rising cost of living could bring. The FOS will continue to engage with industry bodies, businesses and the FCA about their expectations for complaint volumes over the coming months.
HMT letter on proposals for FCA to be given a ‘have regards’ to financial inclusion
On 6 September, the HoC Treasury Committee published a letter from Richard Fuller, Economic Secretary to the Treasury, with regards to proposals for the FCA to be given a ‘have regards’ to financial inclusion. The Government recognises the strong interest in these proposals, however its position remains that the FCA’s existing objectives and regulatory principles are well-aligned with financial inclusion objectives and that a separate ‘have regards’ to financial inclusion would not lead to tangible improvements over the current arrangements. Mr Fuller considers that many financial inclusion issues, including those highlighted by the Committee, are complex and require several organisations to work together to come to a solution. He expects further discussions about the issue to take place during the passage of the Financial Services and Markets Bill.
IMCO report on proposed CCD II
On 5 September, the EP’s Internal Market and Consumer Protection Committee (IMCO) published its report on the EC’s legislative proposal for CCD II. The report sets out a draft EP legislative resolution. The EP will vote on the report in a future plenary session, following which it will commence trialogue negotiations with the EC and the Council.
Financial crime and sanctions
FCA speech on fighting financial crime
On 7 September, the FCA published a speech given by Sarah Pritchard, FCA Executive Director, Markets, on fighting financial crime. Points of interest include: (i) a whole system response is required to effectively limit the threat. Ms Pritchard calls on firms to embed financial crime checks in their systems from day one, but to develop them in line with evolving threats and to use the power of data and tech; (ii) the FCA’s work on sanctions is ongoing, using data and intelligence to identify firms with potential weaknesses in controls, and then using data tools to test the effectiveness of those firms’ sanction screening systems. The FCA will warn firms that if they use vendor solutions for their sanction screening processes, they need to make sure that solution is tailored and suitable for their customer and business profile; (iii) the FCA cautions that the cost of living crisis will lead to criminals trying to exploit people even more through scams such as loan fee fraud and APP facilitated scams. The FCA is asking firms to plan how they are going to respond to the risks of the cost of living crisis; and (iv) later this month, the FCA will hold a techsprint, together with the PSR, focusing on tech solutions that could help prevent APP fraud in real time.
OFSI 2022 frozen assets reporting notice
On 2 September, OFSI published its 2022 frozen assets reporting notice. Every year, HMT carries out a review to update its records to reflect any changes to frozen assets during the reporting period. As part of this review, HMT requests all persons that hold or control funds or economic resources belonging to, owned, held, or controlled by a designated person, to provide a report to OFSI with the details of these assets. Firms that possess this information or have previously reported frozen assets (including since February 2022), are requested to complete such a report and submit it to OFSI by 11 November. Firms that submitted a report last year, but no longer hold the assets of the designated person, should submit a nil return. OFSI notes that failure to comply with financial sanctions legislation or seeking to circumvent its provisions is an offence.
Fintech
Digital Regulatory Cooperation Forum terms of reference
On 5 September, the CMA published the terms of reference of the Digital Regulatory Cooperation Forum (DRCF). The DRCF is comprised of the FCA, CMA, ICO and Ofcom. The DRCF is a voluntary cooperation forum that facilitates engagement between regulators on digital policy areas of mutual interest. The objectives of the DRCF include to: (i) promote coherent regulatory policy making, using the collective expertise of its member regulators to explore and respond to policy challenges; (ii) collaborate to ensure that regulation and other enforcement tools applied to the digital landscape are implemented by its member regulators in a coherent way; (iii) enhance regulatory capabilities by pooling knowledge and resources to ensure that its member regulators have the skills, expertise and tools needed to carry out their functions effectively in digital markets; (iv) anticipate future developments by developing a shared understanding of emerging digital trends, to enhance regulator effectiveness and inform strategy; (v) promote innovation by sharing knowledge and experience, including regarding innovation in the approaches of regulators; and (vi) strengthen international engagement with regulatory bodies.
Markets and markets infrastructure
CPMI and IOSCO report on access to central clearing and portability
On 8 September, CPMI and IOSCO published a report, which aims to increase common understanding of new access models that enable clients to directly access CCP services, and of effective porting, or transferring, practices for their positions. The purpose of this paper is to: (i) develop knowledge and understanding regarding these new access models; (ii) develop knowledge and understanding of current porting processes at CCPs; (iii) examine and analyse possible solutions to facilitate access and portability arrangements; and (iv) consider in particular the potential benefits, risks and challenges that these new possible solutions may bring with respect to access (Principle 18 of the Principles for financial market infrastructures), tiering (Principle 19) and portability (Principle 14). CPMI and IOSCO will monitor market developments in this area and consider whether to engage further in the future.
FCA portfolio letter to benchmark administrators
On 8 September, the FCA sent a portfolio letter to benchmark administrators setting out its supervisory priorities for the sector: (i) disclosure – the FCA has concerns that some benchmark administrators have not accurately described the economic reality that their benchmarks measure. It is particularly concerned in relation to ESG benchmarks and Credit Sensitive Rates. The FCA expects all benchmark administrators to promote transparency by reviewing their benchmark statements and methodologies to ensure they contain key disclosures and remain accurate; (ii) quality of data and data controls – the FCA has observed occurrences of poor practices and are concerned these may impact the reliability and representativeness of benchmarks. It perceives particular risk with data inputs to cryptoasset benchmarks as these often measure fragmented, opaque markets, and expects firms to notify it of their intention to start administering cryptoasset benchmarks before these are made available. The FCA plans to conduct multi-firm work on quality of data including non-price data inputs and incident reporting, to identify shortfalls and outliers; (iii) operational resilience – the FCA plans to collect further information from administrators to conduct a baseline assessment of operational resilience, including the risk and plans around cyberattacks. It will also consider how effectively firms meet their obligations under Principle 11 and disclose material incidents in a timely manner; (iv) oversight and governance – the FCA is concerned that some of the risks identified in the letter may be exacerbated by conflicts of interest, weaknesses in oversight and ineffective governance; and (v) competition – the FCA is concerned as to whether unnecessarily complex licensing arrangements and other barriers to switching between benchmarks could be leading to an increase in prices that is not commensurate with increasing costs or improved service quality. The FCA expects benchmark administrators to engage with the Wholesale Data market study it aims to launch in November.
ESMA updates Q&As on MiFID II and MiFIR transparency
On 5 September, ESMA updated its Q&As on transparency topics under MiFID II and MiFIR. ESMA has included a new Q&A in the section on third country issues to confirm that transactions executed between two branches of the same legal entity, or a branch and its parent company, are not subject to transparency or transaction reporting requirements, as they do not entail a change in the ownership of financial instruments.
FCA trade and securitisation repositories portfolio letter
On 5 September, the FCA sent its first portfolio letter to trade repositories (TRs) and securitisation repositories (SRs) outlining the key risks of harm and its supervisory expectations for the sector. For TRs, the key risks of harm include: (i) data quality systems and controls; and (ii) concentration risk – the relatively small number of providers in the market may potentially: (a) exacerbate operational resilience risk resulting in outages impacting regulators’ ability to access data, or the loss or compromise of that data, as well as potential disruption for market participants subject to UK EMIR or UK SFTR reporting obligations; (b) limit the ability of market participants to switch provider; and (c) lead to lower incentives for TRs to provide high quality services and compete on prices offered to clients. For SRs, the key risks relate to: (1) business model viability and adequate financial resources – the first UK SRs were registered earlier this year and therefore the UK securitisation market and associated macro-economic conditions are still developing; (2) data quality systems and controls; and (3) outsourcing services to unregistered third parties. The FCA also highlights that it expects TRs and SRs to ensure that they maintain their UK presence and the strength and independence of their UK compliance function post-registration.
FMLC letter on uncertainties in draft ITS under Directive on credit services and credit purchasers
On 2 September, the FMLC published a letter it sent (dated 30 August) to the EBA outlining uncertainties it has identified in relation to the draft ITS specifying disclosure templates to be used for the provision of information in connection with the sale of non-performing loans (NPLs) under the Directive on credit servicers and credit purchasers. The issues highlighted by the FMLC include: (i) the treatment of large, syndicated corporate loans. It is unclear, for example, if the involvement of a single EU bank in the initial lending syndicate will bring the whole loan into scope or only that portion of the loan funded by the EU bank; (ii) where there are multiple EU banks in a lending syndicate but they don't all classify the loan as non-performing in accordance with Article 47a of the CRR at the same time or at all; (iii) the servicing framework set out in the Directive, which largely exempts servicing by regulated financial institutions from needing separate licensing. It is unclear why MiFID investment firms, who regularly manage assets on behalf of clients, have not also been exempted in the same way; (iv) that by bringing a loan into scope on the basis of its classification in accordance with Article 47a of the CRR, it is unclear whether a loan can become non-performing for purposes of the Directive where it is held in the trading book or when held by a non-bank, two scenarios not covered by Article 47a CRR assessments; and (v) there are a number of transitional issues, including the transitional provisions around the requirements for data provision. In addition to clarifying these issues, the FMLC recommends that the EBA or the ESAs issue interpretive guidance.
Prudential regulation
Please see the ‘Sustainable Finance’ section for the NGFS’s updated set of climate scenarios for forward looking climate risks assessment.
PRA letter on Strong and Simple prudential framework
On 6 September, the HoC Treasury Sub-Committee on Financial Services Regulations published a letter from Sam Woods, PRA chief executive, addressing the Committee’s concerns about the PRA's proposals for a Strong and Simple prudential framework. These include: (i) the lack of clarity on the simpler-firm regime thresholds – Mr Woods explains why the PRA has focused on the simplest regime for the smallest firms first. Once the definition of these firms is settled, the PRA will publish a consultation focused mainly on non-capital aspects of the simpler regime in H1 2023 and capital-related elements in 2024. The PRA is also considering the opportunities to tailor rules for larger, non-systemic domestic firms. Mr Woods considers it likely that there will be at least one other layer between the simplest firms and the full Basel standards that apply to the largest firms; (ii) the proposed £15 billion balance sheet threshold on the simplest regime – Mr Woods notes that this is at the upper end of the suggested responses to the discussion paper and that setting it any higher (i.e. to match the MREL £25 billion threshold suggested by the Committee) would make it more likely that the degree of simplification of the regime would have to be reduced; (iii) cliff-edges between layers of the framework – Mr Woods considers that a simpler regime cannot be developed without introducing new thresholds of some kind. The PRA will consult on how simpler firms will transition between the layers of the framework when it consults on prudential requirements for simpler-regime firms; (iv) the simpler-regime domestic activity criterion causing issues for international customers – Mr Woods states that the PRA will study the evidence on this issue carefully. He states that the PRA intends to design a criterion that does not unintentionally enable internationally active banks to avoid the Basel standards by being within the simpler regime.
RTS on own funds requirement for investment firms based on fixed overheads under IFR
On 5 September, Commission Delegated Regulation (EU) 2022/1455 supplementing the IFR with regard to RTS for own funds requirement for investment firms based on fixed overheads was published in the OJ. Under Article 13 of the IFR, the fixed overheads requirement must amount to at least one quarter of the fixed overheads of the preceding year, unless a competent authority makes an adjustment after considering that there has been a material change in the activities of the investment firm. The RTS set out: (i) the deductions from the expenses used to calculate the fixed overheads requirement; (ii) additional deductions for commodity and emission allowance dealers; and (iii) the conditions for a material change to have occurred in the activity of an investment firm. The Delegated Regulation will enter into force on 25 September (20 days following its publication in the OJ).
Regulatory reform post Brexit
PRA discussion paper on approach to policy-making post-Brexit
On 8 September, the PRA published a discussion paper describing how it proposes to approach policy-making as it takes on wider rulemaking responsibilities following the UK’s departure from the EU. The PRA’s ambitions include: (i) to look more broadly at the ways in which it can facilitate competitiveness and growth, taking advantage of the additional opportunities under the FSM Bill to review areas of policy that have previously been fixed in UK legislation. The PRA highlights in particular, providing firms with predictability over potential changes; being open to international firms and business; considering the market impact of its proposals on UK competitiveness and growth relative to approaches taken in other jurisdictions; and making the regulatory framework more accessible and user-friendly, increasing the amount of engagement from stakeholders. The PRA intends to engage with a broader range of stakeholders and make greater use of discussion papers; (ii) to establish and maintain published policy material (i.e. rules and other materials such as supervisory statements) that is consistent with its objectives, clear in intent, straightforward in presentation, and as concise as possible. The PRA intends to phase out the use of EU terminology, with a focus on using ‘plain English’. It aims to deliver an updated website for the Rulebook by the end of 2023; and (iii) to increase the data it collects in order to facilitate more responsive and dynamic policymaking, and to allow it to account more effectively for the characteristics of UK firms and the UK financial sector. The PRA intends to launch a review of data collection in banking starting in 2023. The deadline for comments is 8 December. This paper is the first in a series of planned publications as the PRA develops its approach, and will be followed by a consultation after the FSM Bill receives Royal Assent. Responses to this will inform the PRA’s final Policy Approach document, which it intends to be the policy equivalent of the PRA's Approach to Supervision publications.
FSM Bill second reading in HoC and call for evidence
On 7 September, the Financial Services and Markets Bill 2022-23 (FSM Bill) had its second reading in the HoC. Points of interest in the debate include: (i) Richard Fuller, Economic Secretary to the Treasury, confirmed that the intervention power, enabling HMT to direct a regulator to make, amend or revoke rules where there are matters of significant public interest, will be included in the FSM Bill; (ii) Mr Fuller also asserted that there were no plans to merge the FCA and the PRA; (iii) concerns were shared that the FSM Bill does not sufficiently address concerns in relation to ESG, shadow banking and mortgage prisoners; and (iv) Rishi Sunak urged for reforms in relation to the Prospectus Directive, PRIIPs and the ring-fencing regime. A call for evidence has also been launched on the FSM Bill for submissions to the HoC Public Bill Committee, which will scrutinise the FSM Bill line by line between 20 September and 25 October. Early submission is advised, as the Committee will not consider evidence once it concludes its consideration of the Bill and will not revisit an amendment to the Bill once it has been dealt with.
HMT, PRA and FCA responses to Treasury Committee report on future of financial services regulation
On 7 September, the HoC Treasury Committee published the responses of HMT, the PRA and the FCA to its report on the future of financial services regulation. The report sets out a series of recommendations to the Government and regulators in the context of the Future Regulatory Framework. In their response, the PRA agrees that independence of the BoE is vital to maintaining the effectiveness of financial regulation. The regulator also agrees with the Committee’s assessment that pursuing international competitiveness in the short term by lowering the UK’s strong standards would not result in sustainable economic growth. The FCA supports the Committee’s position on regulatory independence, but disagrees with the recommendation that the regulator should ‘have regard’ to financial inclusion, arguing it would not increase the FCA’s existing ability to act in line with the objectives set for it.
Sustainable finance
NGFS updates climate scenarios for forward looking climate risks assessment
On 6 September, the Network for Greening the Financial System (NGFS) updated its set of climate scenarios for forward looking climate risks assessment. The update includes: (i) the most recent country-level climate commitments made at the COP26 in 2021, and the latest GDP and population pathways; (ii) projections of the potential losses from extreme weather events (floods and tropical cyclones), in addition to the specific impacts of chronic climate changes on the macroeconomy. The NGFS also published: (a) a “Climate Scenarios Sensitivity Analysis to Macroeconomic Policy Assumptions” document, which explores the policy conditionality of the updated scenarios, and assesses the sensitivity of the results to assumptions related to fiscal and monetary policy; and (b) a guidance note summarising “Practical Lessons for the Development of Climate Scenarios with Extreme Weather Events from Emerging Markets and Developing Economies”, which aims to complement existing climate risk assessment literature by providing central banks and prudential supervisory authorities with a practical framework for assessing physical climate risks with extreme weather events. The NGFS states that the objective for the next revisions to the scenarios will be to improve their design and to promote their wide use by a broad range of stakeholders.
Other developments
FCA Quarterly Consultation No 37
On 2 September, the FCA published Quarterly Consultation No 37. The FCA is proposing to make the following changes to the Handbook: (i) changes to the Glossary of definitions, DEPP, COLL and EG to reflect amendments made to the individually recognised overseas collective investment schemes regime under section 272 of FSMA, together with other minor changes to COLL to reflect the UK’s withdrawal from the EU; (ii) changes to reporting requirements in the Supervision manual, specifically reporting form FSA035; (iii) changes to PERG, CONC and MCOB to align with recent changes to the regulatory perimeter in respect of credit agreements entered into with high net worth borrowers; and (iv) changes to clarify the definition of a ‘significant SYSC firm’ in relation to the SMCR. The deadlines for comments are 26 September for (iii) and (iv), 3 October for (ii) and 10 October for (i).