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Key Regulatory Topics: Weekly Update 2 October - 8 October 2020

16 October 2020

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

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Please see the Other Developments section for the BoE’s financial policy summary and record of the meeting of its Financial Policy Committee on 30 September 2020.

HMT response to HL EU Services Sub-Committee on post-Brexit relationship in financial services

On 8 October, the House of Lords EU Services Sub-Committee published a letter (dated 21 September 2020) from John Glen, Economic Secretary and City Minister, responding to its letter seeking clarity on the post-Brexit future relationship in financial services. Mr Glen states that: (i) the EU has decided to make, at most, limited equivalence decisions with respect of the UK and therefore the Government is considering next steps; (ii) the upcoming guidance document will set out in more detail the process and the principles that underpin the UK’s equivalence framework, noting that the UK is committed to an outcomes-based approach; (iii) the EU has been clear that they would prefer to agree to regulatory cooperation outside of the FTA, rather than as an Annex as suggested by the UK, this however does not inherently introduce any limitations on future engagement; (iv) the Government will shortly be publishing a consultation paper on a future regulatory framework model which aims to ensure an agile and responsive framework by allowing the UK financial services regulators to use their expertise and experience to lead on developing regulatory requirements for firms. Engagement with Parliament and stakeholders will be a key part of this. The Government will carefully consider the responses received to this first consultation, and use these to inform a second more detailed consultation in 2021.

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Please see the FinTech section for the FCA’s finalised rules banning the sale of crypto-derivatives to retail consumers.

FCA speech on mortgages and Covid-19 - enabling positive consumer outcomes

On 8 October, the FCA published a speech by Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations on mortgages and Covid-19 - enabling positive consumer outcomes. He states that firms will need to: (i) review solutions offered to borrowers regularly as their circumstances change, with many facing a loss of income; (ii) continue actively planning how to resource customer-supporting functions, how to ensure that training and competence frameworks are effective, and how to monitor and mentor staff; (iii) continue to monitor third party outsourcing firms to check that they are delivering expected good customer outcomes; (iv) deliver outcomes that are right for the individual borrowers - rather than adopting ‘one size fits all’ solutions, ensuring that outcomes are monitored where more automated responses are required; (v) prioritise support for borrowers that are most at risk of harm, or who face the greatest financial difficulties; (vi) and communicate clearly with customers, signposting them to additional appropriate support where relevant. If the FCA see significant issues, it will intervene, however where it is evident that firms are trying to do the right thing the FCA wants to be able to work with them to ensure that issues are resolved, considering the current difficult environment.

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FCA finalised guidance on cancellations and refunds – Covid-19

On 2 October, the FCA finalised its guidance outlining its expectations for insurance and card providers when helping consumers who are trying to claim money back following a cancelled trip or event. The FCA’s amendments include:; (i) clarification of  the expectations for (debit and credit) card providers; and (ii) confirmation that the guidance does not provide a set route for consumers to get a refund. The guidance is designed to ensure that firms handle enquiries and claims from consumers in a reasonable timescale, fairly and in a way that minimises inconvenience to the consumer. It will be effective for 6 months from 2 October 2020 to 2 April 2021. Before the end of this period, the FCA will evaluate and consider whether it should make the guidance permanent.

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Please see the other sections for product specific updates relating to Covid-19.

Financial crime

Please see the Markets and Markets Infrastructure section for a BoE speech on operational resilience during a time of uncertainty.

Please see the FinTech section for the FCA’s finalised rules banning the sale of crypto-derivatives to retail consumers.


FCA bans the sale of crypto-derivatives to retail consumers

On 6 October, the FCA finalised rules prohibiting the marketing, distribution and sale in or from the UK to all retail clients, of derivatives and ETNs that reference certain types of unregulated, transferable cryptoassets. Retail clients with existing holdings can remain invested following the prohibition, until they choose to disinvest. There is no time limit on this and the FCA does not require or expect firms to close out retail clients' positions unless consumers ask for this. The FCA’s supervision in this area will focus on: (i) attempts to avoid the effect of the new handbook rules by either inappropriately ‘opting up’ retail clients to become elective professional clients or moving retail consumers to associated non-UK entities; and (ii) the conduct of inward passporting firms operating under the Temporary Permissions Regime. The FCA received 527 responses to the consultation, with 97% opposing the proposal. The ban will come into effect on 6 January 2021.

Press release

Policy statement

Technical annex


FCA launches digital sandbox pilot to assist innovative companies tackling Covid-19 challenges

On 5 October, the FCA together with the City of London Corporation, opened application windows for its digital sandbox pilot, to support innovative firms tackling challenges caused by the Covid-19 pandemic. The digital sandbox will pilot features including: (i) access to synthetic data assets to enable testing, training and validation of prototype technology solutions, for example transactional banking data sets, SME lending data and customer accounts; (ii) an API market place where digital service providers list and provide access to services via APIs; (iii) an integrated development environment in which applicants can develop and test their solutions; (iv) a collaboration platform to facilitate an ecosystem of key organisations that will provide support and input to digital sandbox participants; and (v) an observation deck to enable regulators and other interested parties to observe in-flight testing at a technical level, to inform policy thinking in a safeguarded environment. The FCA has identified three key areas of importance: (1) preventing fraud and scams; (2) supporting the financial resilience of vulnerable consumers; and (3) improving access to finance for SMEs. The deadline for applications is 30 October 2020. The FCA has also opened its regulatory sandbox to applications for the 7th cohort, with the same focus as that of the digital sandbox pilot. The deadline for applications is 31 December 2020.

Press release

Digital sandbox pilot

Regulatory sandbox


Fund regulation

Please see the section on Sustainable Finance for the FCA’s planned consultation for climate-related financial disclosures for asset managers.


ESMA announces update to reporting under the MMF Regulation

On 2 October, ESMA announced an update of the validations of the technical instructions for reporting under the Money Market Funds (MMF) Regulation. Following feedback received by market participants after the publication of the validation rules, ESMA has decided to implement amendments on the validations. The proposed changes are not related to the published XML schemas. The changes only add new warning type validations or provide clarifications on existing validation rules in order to fix inconsistencies or ease the understanding of the rules. As the updates have no effect on the data processing the deadline for the reporting remains unchanged. For MMF Managers the time for submission of the first quarterly reports to NCAs remains September 2020 (for quarterly reports for both the first and second quarter reporting periods).

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Markets and markets infrastructure

Please see the Other Developments section for ESMA’s 2021 annual work programme.


ECON draft report on proposed Regulation amending BMR

On 8 October, the EP’s Economic and Monetary Affairs Committee (ECON) published a draft report (dated 6 October 2020) on the proposed Regulation amending the BMR as regards the exemption of certain third-country FX benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. The rapporteur broadly supports the proposal as published by the EC, as it addresses the problem in a concise way, with a focus on targeting the risk of a potential severe disruption in financial markets. However, the rapporteur suggests changes in relation to: (i) waiving margin and collateral requirements in cases of mandatory replacement of a benchmark; (ii) updating the list of FX benchmarks; and (iii) limiting the intervention power of the EC.

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Council adopts position on proposed Regulation amending BMR

On 7 October, the Council of the EU announced that its permanent representatives committee (COREPER) has agreed the Council's negotiating position on the proposed Regulation amending the BMR as regards the exemption of certain third-country FX benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. The new rules give the EC the power to designate a statutory replacement rate to take the place of all references to a benchmark whose cessation would result in significant disruption to the functioning of financial markets in the EU. The Council in its negotiating mandate: (i) takes the view that the EC’s powers should apply to a broader range of contracts and financial instruments that reference a benchmark than is proposed by the EC, including both financial contracts and instruments that are subject to the law of an EU member state and certain third-country law contracts; (ii) provides for the possible statutory replacement of benchmarks that do have a fall-back provision for the cessation of a benchmark, but where the application of that clause would challenge financial stability and disrupt the market in a member state; and (iii) states that that the current rules allowing EU supervised entities to make use of third-country benchmarks should continue to apply until the end of 2025 and not 2021, thus allowing a smooth transition to a list of exempted benchmarks to be drawn up by the EC. On the basis of this negotiating mandate, the presidency will start negotiations with the EP as soon as the EP has adopted its position.

Press release

Note on Council position


FMLC comments on EC’s proposed Regulation amending BMR

On 6 October, the Financial Markets Law Committee sent a letter to the EC highlighting some issues of uncertainty with regards to the EC’s proposed Regulation amending the BMR as regards the exemption of certain third-country FX benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation. In the event no deal is agreed on Brexit, the proposed amendment to the BMR will not be automatically implemented in the UK and it will not affect contracts with UK consumers or entities, except insofar as they are contracts with an EU supervised counterparty, unless the UK decides to mirror both the legislation and the subsequent statutory replacement rate decision. The FMLC considers this unlikely with the announcement that the forthcoming Financial Services Bill would include provisions to empower the FCA to help those who cannot amend their contracts by directing the administrator of LIBOR to change the methodology used to compile the benchmark, creating a screen rate. The differences in the two proposed approaches could potentially create difficulties where contracts exist between UK and EU entities in the absence of careful coordination. Additionally the proposal provides an exemption from the regime for spot FX rates in restricted currencies. One criterion (to be further defined in a Delegated Act) that must be satisfied under this is that supervised entities use the FX benchmark on a frequent, systematic and regular basis in derivative contracts for hedging against third-country currency volatility. The FMLC considers this is likely to create a lack of clarity regarding which rates will qualify under the EC’s initial assessment and until it is further defined. This will leave market participants little time to prepare for the end of the transitional period if key rates are not included in the exemption. The proposal also places a reporting requirement upon Competent Authorities to support the determination of which spot FX rates are to be included in the exemption, but the FMLC does not consider there is sufficient clarity on what data to base these reports. The FMLC notes further clarity is also required for non-deliverable contracts.

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EP adopts regulation and directive on crowdfunding platforms

On 5 October, the EP announced that it had adopted at second reading the Regulation on European crowdfunding service providers (ECSPs) for business and the Directive making amendments to MiFID II relating to crowdfunding. The uniform set of criteria will apply to all ECSPs up to offers of EUR 5m, calculated over a period of 12 months per project owner. Investors would be provided with a key investment information sheet drawn up by the project owner for each crowdfunding offer or at platform level. Crowdfunding service providers would need to give clients clear information about the financial risks and charges they may incur, including insolvency risks and project selection criteria. A prospective ECSP would need to request authorisation from the NCA of the member state in which they are established. Through a notification procedure in a member state, ECSP would also be able to provide their services cross-border.

Press release

ECSPs Regulation

Directive amending MiFID II


ISDA proposal for greater collaboration between derivatives and SFT markets

On 5 October, ISDA identified opportunities and set out a proposal for greater collaboration between derivatives and securities financing transaction (SFT) markets in a new whitepaper. ISDA highlights areas where institutions could benefit from greater harmonisation in documentation, as well as improvements in post-trade processing and automation, including: (i) leveraging the existing overlap in terminology to create a common documentation standard for derivatives and SFTs, and obtain a single set of legal opinions on close-out netting for each jurisdiction; (ii) creating solutions to enable firms to implement legal, regulatory or market practice changes (for instance, interest rate benchmark reform) on a consistent basis across derivatives and SFT markets; and (iii) developing common standards and taxonomies to facilitate automation and interoperability across derivatives and SFT markets, and enable a consistent trade record for confirmation and reporting on a broad scale. ISDA also proposes expanding the ISDA Master Agreement to cover SFTs as well as derivatives, setting out specific SFT provisions to be added to the schedule of the ISDA Master Agreement, along with publication of an SFT definitional booklet.

Press release

White paper


ESMA guidelines on portability of information between securitisation repositories under the Securitisation Regulation and updated Q&As

On 5 October, ESMA finalised its guidelines on portability of information between securitisation repositories under the Securitisation Regulation. The guidelines provide clarification on: (a) the transfer of securitisation information by a securitisation repository from which registration has been withdrawn to other securitisation repositories; and (b) the content of the policies for the orderly transfer of data which a securitisation repository has to establish for the transfer of securitisation information to other securitisation repositories where requested by a reporting entity or where otherwise necessary. ESMA will consider the guidelines for the purpose of its supervision as of 1 January 2021, except for the Guidelines relating to Article 78(9)(c) of EMIR, which ESMA will consider for the purpose of its supervision as of 18 June 2021. ESMA has also updated its Securitisation Regulation Q&As, containing some modifications, as well as new questions on: (i) Covid-19-related debt moratoria; and (ii) primary income in case of buy-to-let.

Guidelines and final report



Prudential regulation

PRA letter to credit unions on Covid-19

On 7 October, the PRA sent a letter to the directors of credit unions (CUs) on Covid-19. In the letter the PRA: (i) reminds CUs of their obligation to be open, transparent and honest with the PRA at all times and the need to timely submit accurate financial data; (ii) states that CUs that change their strategic approach to new lending and credit control must consider and accept the associated risks and the potential financial impact in the short, medium, and long term, and ensure they have focused management information that allows them to measure the success of their approach; and (iii) stresses the importance of a CU’s cure rate as an indicator of this success. The PRA has published a model direction modifying a PRA rule on minimum provisioning requirements to ensure CUs have the capacity to cure bad debts. The modification will come into effect for all consenting CUs on Saturday 2 January 2021, and will be available until Saturday 31 December 2022. The modification is identical in effect to a modification currently available to all CUs, which expires on Saturday 1 January 2021. CUs that have consented to the current modification must also consent to the new modification. A list of CUs consenting to the modification will be published on the PRA’s website.




PRA consults on market risk: calculation of RNIV, and sVaR – Covid-19

On 6 October, the PRA began consulting on proposals to update its expectations regarding (i) the measurement of risks not in value at risk (RNIV); and (ii) the meaning of ‘period of significant financial stress relevant to the institution’s portfolio’ for stressed value at risk (sVaR) calculation. Market volatility related to the Covid-19 outbreak has highlighted elements of the market risk framework that may lead to an excessively pro-cyclical increase in own funds requirements during periods of stress. The PRA’s proposed expectations are intended to attenuate this pro-cyclicality in own funds requirements for market risk. This is relevant to all CRD IV firms. The drafted changes to SS13/13 would take effect from the date of publication of the final policy. The deadline for comments is 6 November 2020.

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EBA final guidelines on the appropriate subsets of sectoral exposures in the application of a systemic risk buffer

On 2 October, the EBA published its finalised guidelines (dated 30 September), on the appropriate subsets of sectoral exposures to which a competent or designated authority may apply a systemic risk buffer under CRD V. The objective of the guidelines is to set a common framework to harmonise the design of the appropriate subsets of sectoral exposures to the application of a SyRB, facilitating a common approach throughout the EU, but also supporting reciprocation of the SyRB measures between Member States. This framework consists of dimensions and sub-dimensions from which the relevant authority can define a subset of exposures. The guidelines: (i) include detailed definitions of elements used in each dimension and sub-dimension, along with examples of application; (ii) recommend a set of criteria to be used by the relevant authority when assessing the systemic relevance of the risks stemming from the subset of sectoral exposures, which is a pre-condition when defining a subset of sectoral exposures; and (iii) advocate for appropriate coordination and cooperation between the competent authority and the designated authority in order to avoid the risk of overlaps, double counting of risk and inefficient risk targeting. The deadline for competent or designated authorities to report whether or not they comply with the guidelines will be two months after the publication of the official translations on the EBA website. The guidelines will apply from 29 December 2020.

Press release

Finalised guidelines


PRA Dear CEO letter on thematic feedback from 2019/2020 round of written auditor reporting

On 2 October, the PRA set out its thematic feedback to firms and auditors from its review of written auditor reports that it received in 2020. Key findings include: (i) significant progress was made by firms to enhance controls around ECL models and data, but there were weaknesses in aspects of firms’ controls, consistent with these controls being relatively immature; (ii) weaknesses in underlying models and data had started to emerge prior to the start of the Covid-19 pandemic; (iii) there was limited progress in 2019 to reduce reliance on post-core model adjustments (PMAs) by updating models, with some PMAs that appear suitable for incorporation into the model being in place longer than 12 months; and (iv) a continuing limitation of firms’ ECL processes is the time they take to run end-to-end.  To incorporate late breaking events, firms have had to rely on tactical solutions that sit outside the normal control framework. The PRA expects firms to (a) consider the adequacy of their resourcing and infrastructure to monitor model performance and react to weaknesses identified, including the adequacy of management information to enable effective oversight of models and PMAs; (b) make appropriate use of PMAs based on expert judgement to ensure that provisions reflect actual credit risk expectations, and that those PMAs are the subject of high-quality governance; and (c) develop the capability to perform more comprehensive economic sensitivity analysis more quickly to inform governance and public disclosures. The PRA will be writing to firms again on this subject shortly.

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Sustainable finance

Reported delays to implementation timetable for the SFDR

It has been widely reported that the EC has advised trade associations that firms would have more time to comply with the requirements under the Sustainable Finance Disclosure Regulation (SFDR). Whilst the Regulation would still apply from March 2021, the regulatory technical standards would enter into force at a later date, reportedly from Q1 2022. No official announcement has been made by the EC, nor has there been a statement of forbearance from ESMA.

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FCA expands plans to introduce TCFD requirements

On 2 October, the FCA confirmed that intends to expand its proposed TCFD-aligned disclosure requirements to asset managers. The regulator has been consulting on whether premium listed issuers should be required to say whether they have disclosed in line with the TCFD recommendations and, if not, why they haven’t. In a letter to the Minister for Pensions and Financial Inclusion, the FCA’s Head of Strategy, Chris Woolard confirmed that the FCA expected to do further work to adopt the TCFD recommendations within its own rulebook, with a consultation on changes for asset managers expected to be launched in H1 2021. The proposals are expected to take into account the disclosures chapter of the Climate Financial Risk Forum guide, which was published earlier this year.

FCA letter

CFRF Forum Guide 2020 Disclosures Chapter


Other developments

Financial Policy Summary and Record of September FPC Meeting

On 8 October, the BoE published the financial policy summary and record of the meeting of its Financial Policy Committee (FPC) on 30 September 2020. The FPC summarises: (i) the resilience of the UK banking system, noting that it expects all elements of capital buffers to be used as necessary; (ii) the provision of financial services at the end of the Brexit transition period; (iii) global efforts to address issues in non-bank financial intermediation – the FPC sees a need to examine: (a) the mismatch between the liquidity of assets held in open-ended funds, including money market funds and the redemption terms offered by those funds; and (b) demands of non-bank financial intermediaries for liquidity in stress; (iv) the FPC’s ongoing domestic review of funds and productive finance to address distortions that discourage the use of funds with longer redemption notice periods or closed-ended funds. The FPC has also published: (1) a checklist of actions to avoid disruption to end-users of financial services at the end of the Brexit transition period; and (2) a table of other risks of disruption to financial services. The FPC’s next policy meeting will be on 30 November 2020.

Summary and record

Additional documents


MEPs approve changes in the EC

On 7 October, the EP approved the appointment of Mairead McGuinness as Commissioner and Executive Vice-President Valdis Dombrovskis’s change of portfolio. Mairead McGuinness (Ireland), currently Vice-President of the EP, will be Commissioner in charge of Financial Services, Financial Stability and Capital Markets. McGuinness must now be formally appointed by the Council of the EU in agreement with the Commission President, Ursula von der Leyen.

Press release

Decision on Dombrovskis

Decision on McGuinness


BoE speech on operational resilience in a time of uncertainty – Covid-19

On 6 October, the BoE published a speech given by Nick Strange, Senior Technical Advisor, Supervisory Risk Specialist on operational resilience in a time of uncertainty looking at early results of its recent consultation (CP29/19), and lessons learnt from the pandemic. Key points include: (i) The BoE expects to publish a policy statement on its operational resilience proposals in Q1 2021; (ii) respondents are generally supportive of the BoE’s approach, but call for consistency in its implementation across supervisors, as well as with other overlapping international standards and domestic policies; (iii) firms must be prepared for fast, short-lived and asymmetric threats such as cyber-attacks, idiosyncratic operational or key third party failures; (iv) as temporary solutions to Covid-19 become more long-term, firms will need to adapt to high levels of remote working, focusing on end point and network security; (v) temporarily relaxed controls will need to be enhanced with detailed risk assessments of new solutions, real time security monitoring and patch management (vi) cyber risk is increasing and firms must understand the operational resilience of key third party suppliers; (vii) perfect alignment between international regulatory bodies is rare, but core principles are usually aligned, for example with the recent BCBS consultation on operational resilience; and (viii) firms should have a coherent narrative between what is ‘critical’, or would support a firm’s viability for OCIR (recovery and resolution), and what is ‘important’ for important business services (operational resilience) –certain work will meet the requirements of both.

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FCA updates policy development update webpage

On 2 October, the FCA updated its webpage providing information on its recent and upcoming publications. Additions in this update include: (i) a policy statement on the delay to the implementation of the ESEF requirements for annual financial reports, due in Q4 2020 and; (ii) a consultation paper on the new regulatory regime for funeral plans, due for in Q4 2020. The FCA has delayed the expected publication date of the policy statement on a single easy access rate from Q4 2020 to 2021.

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ESMA 2021 annual work programme

On 2 October, ESMA published its 2021 work programme setting out its priorities and areas of focus for the next 12 months. In addition to transversal themes implementing ESMA’s new mandates including direct supervision of certain benchmarks and data service providers, the key areas of focus are: (i) to build an EU common risk-based and outcome-focused supervisory culture, focusing on areas such as: (a) fund liquidity risk and liquidity management tools; (b) retail investment products costs and performance, quality and usability of data; (c) supervision of ESG reporting and ESG data usage; and (d) the implementation of EMIR; (ii) in terms of peer reviews, to work on: (a) peer reviews on supervision of crossborder activities of investment firms; (b) NCAs’ handling of relocation to the EU27 in the context of the UK’s withdrawal from the EU; (c) supervision of CCPs and CSDs; and (d) on the scrutiny and approval procedures of prospectuses; (iii) to integrate the new focus on financial innovation and ESG into ESMA’s risk analysis, providing data for risk-based supervision and to support policy and convergence work; (iv) in relation to the single rulebook: (a) legislative reviews of MiFID and AIFMD and identifying possible rulebook changes in support of the CMU; and (b) following the EMIR review and the EMIR Refit changes, review technical standards where necessary which, depending on market developments, may include the clearing thresholds and obligation; and (v) on third country central counterparty supervision as critical financial market infrastructures under EMIR 2.2 and prepare for the new supervisory mandates regarding Benchmarks and Data Service Providers.

Press release

Work programme