Key regulatory topics: weekly update - 20-26 March 2020
Headlines in this article
Related news and insights
Publications: 03 April 2024
Publications: 03 April 2024
News: 26 March 2024
A&O advises CVC on the financing of its investment in Monbake
Publications: 22 March 2024
Our weekly update 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 regulatorychange@allenovery.com.
Brexit
Please see our Markets and Markets Infrastructure section for an update on the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020 being published.
Please see our Prudential Regulation section for an update on the Financial Policy Committee's (FPC's) financial policy summary of their March meetings and its checklist of actions for the end of the transition period.
HOL statement confirms that the Temporary Transitional Power (TTP) will be retained
On 25 March, the HOL published a statement by John Glen (the Economic Secretary to the Treasury) on financial services in respect of preparation for leaving the EU. This confirms that the department will retain the regulators’ TTP and shift its application such that it is available for use by the UK regulators for a period of two years from the end of the transition period. The statement highlights that this will allow the BoE, the PRA and the FCA to phase-in changes to UK regulatory requirements so that firms can adjust to the UK’s post-Transition Period regime in an orderly way, in line with the objectives already set by Parliament.
Capital markets
Please see our Prudential Regulation section for an update on the Islamic Finance Standards Board (IFSB) consulting on its exposure drafts for guiding principles for investor protection in Islamic capital markets and for disclosures for takāful/retakāful undertakings.
FCA requests a delay to the announcement of preliminary financial accounts
On 21 March, the FCA published a letter requesting a delay to the announcement of preliminary financial accounts. Listed companies and the audit profession are facing unprecedented practical challenges during the COVID-19 crisis, thus the FCA believes that the usual practice of issuing preliminary financial statements earlier than required is adding unnecessarily to the pressure on these entities at this moment. The FCA also published a Q&A on this moratorium on the publication of preliminary financial accounts which confirms, inter alia, that the delay is not compulsory. In its press release, the FCA reminds firms that the Market Abuse Regulation remains in full force and listed companies are still required to announce inside information to the market as soon as possible unless a valid reason to delay disclosure under the regulation exists.
Conduct
Please see our Consumer/Retail section for an update on the FCA's guidance for mortgage providers in the context of COVID-19.
Please see our Other Developments section for an update on the recent PRA's Occasional Consultation Paper.
FCA's updated webpage on the directory of certified and assessed persons under the Senior Managers and Certification Regime (SM&CR)
On 25 March, the FCA updated its webpage on the directory of certified and assessed persons under the SM&CR. Following the COVID-19 pandemic, the FCA have delayed the publication of the directory of certified and assessed persons, which was due to be published on the FS Register by the end of March, for at least a month. The timing of the launch is now under review.
Consumer/retail
Please see our COVID-19 section for updates from HMT, the BoE and the FCA summarising the UK government's proposals in response to COVID-19.
Please see our Payment Services and Payment Systems section for an update on the PSR's implementation of Confirmation of Payee (CoP) in light of COVID-19.
The Lending Standards Board (LSB) updates standards of lending practice for business customers on product sale
On 26 March, the LSB published an updated version of its standards of lending practice for business customers on product sale. These updates take account of short term measures to support lending to SMEs impacted by the COVID-19 pandemic. The LSB recognises that there may be exceptional circumstances, beyond the control of registered firms, which necessitate industry or government led initiatives, such as the Coronavirus Business Interruption Loan Scheme (CBILS), to support the continued provision of finance to SMEs.
FCA's guidance on applications where the CBILS applies
On 20 March, the FCA published guidance stating that where a customer is applying for a business loan to which the CBILS applies, the fact that the customer may, at the time of the application, be temporarily experiencing exceptional financial pressures does not mean that the firm is prevented by CONC 5.2A.5R from making the loan. If it is reasonable to expect increases in the customer’s income, or decreases in expenditure in the longer term, then the FCA conclude that this could be relevant to whether the loan is affordable. Additionally, forecasts from the business owner on expected levels of income and expenditure connected to the pandemic may also be relevant in assessing affordability. The FCA also states that the terms of the loan will also be relevant. If a loan has been granted on the basis that there will be a future increase in income, but the customer’s income does not in fact increase in line with expectations to enable the customer to make repayments, the firm should consider deferring or limiting the obligation to repay until the customer’s income has reached an appropriate level where they can make these repayments. The FCA highlights that the extent and scope of a proportionate creditworthiness assessment depends on, inter alia, the consequences for the customer if they fail to make a repayment on time.
FCA's guidance for mortgage providers in the context of COVID-19
On 20 March, the FCA published guidance for mortgage providers which applies only in the exceptional circumstances of COVID-19. The guidance applies to mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. The guidance builds on Principle 6 and MCOB 2.5A.1R which the FCA may take it into account in enforcement cases. Firms should not commence or continue repossession proceedings against customers at this time, regardless of the stage that the proceedings have reached. On 25 March, the FCA updated the payment holiday aspects of the guidance, clarifying that where a customer is experiencing or reasonably expects to experience payment difficulties as a result of circumstances relating to COVID-19, and wishes to receive a payment holiday, a firm should grant a customer a payment holiday for 3 monthly payments, unless it can demonstrate it is reasonable and in the customer’s best interest to do otherwise. The FCA provides an example where a payment holiday may be appropriate, this being where there is or will be a reduction in household income that can be used to make mortgage or home finance payments. A firm should give customers adequate information to understand the implications of a payment holiday. The guidance applies in respect of a customer regardless of whether they are in a payment shortfall. The FCA will review the guidance in the next 3 months in light of the developments regarding COVID-19 and will issue amended guidance extending the period of the payment holiday if appropriate.
Covid-19
Please see our dedicated COVID-19 webpage containing links to a number of articles and insights to keep up-to-date with developments and assist with effective contingency planning.
Please see our Capital Markets, Conduct, Consumer/Retail, Markets and Markets Infrastructure, Payment Services and Payment Systems and Prudential Regulation sections for sector-specific issues that have arisen as a result of the challenges posed by the COVID-19 pandemic.
Please see the FCA's webpage providing information for firms regarding its COVID-19 response which is updated on a regular basis.
HMT, BoE and FCA summarise the UK government's proposals in response to COVID-19
On 25 March, the government published a letter by HMT, BoE and FCA, summarising its proposals in response to COVID-19 to UK banks. It is stressed that the priority for banks, building societies and the financial authorities should be to take all action necessary to ensure that the benefits of the measures passed so far are passed to businesses and consumers, which will require a willingness to maintain and extend lending. It is also stated that the action already taken by banks is welcomed which includes: (i) initial steps to deliver the CCFF and CBILs; (ii) offers for new or increased overdrafts; (iii) allowing repayment relief for loan or mortgage repayments; and (iv) the accurate recording of flexibilities extended to customers, in order to prevent adverse impacts on customers' credit files.FCA and BoE advise on bank branch opening
On 24 March, the FCA published a statement on bank branch opening. The FCA’s current advice to banks and building societies is that they should keep branches and contact centres open, where possible, as they are deemed essential for civil and commercial functions. The BoE published a statement which sets out the same advice. FCA Statement
BoE provides information for those seeking to participate in the COVID Corporate Financing Facility (CCFF) scheme
On 23 March, the BoE published a new webpage on the CCFF scheme, providing information for companies and banks acting on behalf of companies that would like to participate in the scheme. The webpage confirms that the scheme can be used by companies and their finance subsidiaries that make a material contribution to the UK economy and companies must do this via a bank. It is also confirmed that the scheme is open to firms that can demonstrate that they were in sound financial health prior to the shock, allowing the BoE to look through temporary impacts on firms’ balance sheets and cash flows from the shock itself; this means companies that had a short or long-term rating of investment grade, as at 1 March, or equivalent. Amongst other things, the webpage also provides a Q&A for companies.
FCA's and PRA's guidance on identifying key financial workers in light of COVID-19
On 20 March, the FCA and PRA published the steps that firms should take to help identify key workers in financial services. A key financial worker at a dual-regulated, FCA solo-regulated firm or PSR-regulated firm, or operators of financial market infrastructure, who fulfils a role which is necessary for the firm to continue to provide essential daily financial services to consumers, or to ensure the continued functioning of markets. The FCA expects only a limited number of people to be identified as key financial workers, and individuals that may be considered as providing essential services may be those essential in the: (i) overall
management of the firm; (ii) running of online services and processing; (iii) running of branches and providing essential customer services; (iv) functioning of payments processing and cash distribution services; (v) facilitating of corporate and retail lending as well as administrating the repayment of debt; (v) processing of claims and renewal of insurance; (vi) operation of trading venues and other critical elements of market infrastructure; (vii) risk management, compliance, audit and other functions necessary to ensure the firm meets its customers' needs and obligations under the regulatory system; and (viii) support to allow the functioning of the roles mentioned earlier.
Financial crime
Please see our Capital Markets section for an update on the FCA's request for a delay to the announcement of preliminary financial accounts.
Please see our Fintech section for an update on IOSCO's report on global stablecoin initiatives.
Financial Action Task Force (FATF) update on the key outcomes of the FATF Plenary
On 24 March, the FATF published the March 2020 edition of its private sector business bulletin, providing an update on the key outcomes of the FATF Plenary held on 19-21 February. The strategic initiatives outlined in the bulletin are: (i) mitigating the money laundering / terrorist financing (ML/TF) risks of virtual assets, and in particular, that the FATF will report to the G20 in July on its analysis of ML/TF risks associated with stablecoins and the application of the FATF Standards to them; (ii) combating the laundering of proceeds of the illegal wildlife trade, and a final Guidance paper which will include a large number of case studies from countries that have experience in investigating the financial flows from the illegal wildlife trade; (iii) promoting more effective supervision, specifically developing guidance on risk-based AML/CFT supervision; (iv) the strategic review of the FATF Global Network assessment process; and (v) the FATF Presidency 2020-2022. The FATF Plenary agreed to re-rate the United States on one Recommendation to reflect the country's current level of technical compliance and the FATF will publish the follow-up report, setting out the actions the United States has taken to strengthen its measures to combat ML. The bulletin also covers the jurisdictions that are under increased monitoring and subject to a call for action.
Fintech
Please see our Financial Crime section for an update on the FATF's update on the key outcomes of the FATF Plenary.
Please see our Prudential Regulation section for an update on the Islamic Finance Standards Board (IFSB) consulting on its exposure draft of guiding principles for investor protection in Islamic capital markets.
The International Organization of Securities Commissions (IOSCO) report on global stablecoin initiatives
On 23 March, IOSCO published a report on global stablecoin initiatives that identifies the possible implications of global stablecoin initiatives for securities markets regulators. The Report finds that, depending on its structure, a global stablecoin may fall within securities market regulatory frameworks. Whether IOSCO Principles and Standards are relevant to stablecoins depends on the specific design of each initiative and its legal and regulatory characteristics and features. IOSCO’s Report describes a Hypothetical Case Study that is based on a hypothetical stablecoin used for domestic and cross-border payments. The hypothetical coin uses a reserve fund and intermediaries to try to achieve a stable price vis-a-vis a basket of low volatility currencies. The Report analyses how different IOSCO Principles and Recommendations, such as the IOSCO Policy Recommendations for Money Market Funds, the IOSCO Principles for ETFs, the Final Report on Crypto-Asset Trading Platforms and IOSCO work on Market-Fragmentation, Cyber Resilience, and Client Assets could apply to the case study or similarly structured stablecoins, depending on their proposed design or function. In parallel, together with the CPMI, IOSCO has carried out a separate preliminary analysis on the application of the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI) which is attached at Annex 1 of the Report. That preliminary analysis concludes that the PFMI apply to global stablecoin arrangements where such arrangements perform systemically important payment system functions or other FMI functions that are systemically important and could therefore apply to the Hypothetical Case Study.
Markets and markets infrastructure
Please see our Prudential Regulation section for an update on the Islamic Finance Standards Board (IFSB) consulting on its exposure drafts for guiding principles for investor protection in Islamic capital markets and for disclosures for takāful/retakāful undertakings.
Please see our Other Developments section for an update on the recent PRA's Occasional Consultation Paper.
ESMA consults on its report on post-trade risk reduction services with regards to the clearing obligation as well as its technical standards on reporting, data quality, data access and registration of Trade Repositories under EMIR REFIT
On 26 March, ESMA published two consultation papers. Firstly, ESMA published a consultation paper on its report on post trade risk reduction services with regards to the clearing obligation (EMIR Article 85(3a)). ESMA is looking into the different types of post-trade risk reduction services being offered, their purpose and whether there is a need for the new trades that these may generate to be exempted from the clearing obligation, and if such an exemption could lead to the risk of some counterparties circumventing the clearing obligation. ESMA will consider the feedback it receives from this consultation in Q2 and expects to publish a final report to the EC in mid-2020. The deadline for comments is 15 June. Secondly, ESMA also published a consultation paper on its technical standards on reporting, data quality, data access and registration of Trade Repositories under EMIR REFIT. The proposals on which ESMA is consulting address essential aspects related to enhancement of the quality of the reported derivatives data. ESMA also proposes to amend the regulatory technical standards on reporting of derivatives to Trade Repositories. The deadline for comments is 19 June.
ESMA Consultation Paper – EMIR Article 85(3a)
ESMA Consultation Paper – EMIR REFIT
ISDA and other industry associations request delay to initial margin deadlines for the Non-Centrally Cleared Swaps Margin
On 26 March, ISDA published a letter that it submitted on behalf of industry associations and their members to the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and global regulators. The letter requests a delay to initial margin deadlines for the Non-Centrally Cleared Swaps Margin, in light of the impact of the COVID-19 pandemic. Whilst ISDA highlights that its members have robust business continuity plans that are functioning well, the pandemic has caused disruption to their efforts to prepare for the final phases of regulatory initial margin (IM) compliance due to personnel, systems and other issues. ISDA also states, inter alia, that although the next regulatory deadline is September, there are critical near-term deadlines during Q2, particularly in respect of custodial onboarding, which will be impacted and have a knock-on effect on the ability of firms to meet the September deadline.
Global Foreign Exchange Committee's (GFXC's) statement on FX Market Conditions
On 26 March, the GFXC published a statement on FX Market Conditions. The GFXC states that given the intense volatility seen in global financial markets this month, it is possible that FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings. In addition, FX market participants may face more operational constraints reflecting lockdown in some financial centres. Thus, the GFXC states that significant volatility and price movements may be observed during FX fixings. To reduce the impact of such volatility, the GFXC draws on Principles in its Global Code to give numerous recommendations to market participants.
FCA, FRC and PRA announce actions on corporate reporting to address COVID-19 challenges
On 26 March, the FCA, FRC and PRA published a joint statement announcing a series of actions on corporate reporting, issuing a series of statements: (i) a statement of policy from the FCA, allowing listed companies that are required to comply with DTR 4.1.3R an extra 2 months to publish their audited annual financial reports as well as a Q&A in respect of this policy; (ii) company guidance from the FRC for preparing financial statements in the current uncertain environment which is complemented by guidance from the PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9; and (iii) guidance from the FRC for audit firms seeking to overcome challenges in obtaining audit evidence. The FRC also published a document on reporting.FCA, FRC and PRA Joint Statement
FCA Statement of Policy and Q&A
PRA's letter on IFRS 9, capital requirements and loan covenants in respect of COVID-19
On 26 March, the PRA published a letter to CEOs on IFRS 9, capital requirements and loan covenants in respect of COVID-19. The letter sets out the PRA's guidance in three areas: (i) consistent and robust IFRS 9 accounting and the regulatory definition of default; (ii) the treatment of borrowers who breach covenants due to COVID-19; and (iii) the regulatory capital treatment of IFRS 9. In respect of compliance with IFRS 9, the PRA has set out guidance in the annex to the letter to assist firms in making well-balanced and more consistent expected credit loss estimates and in determining how to treat payment holidays and similar schemes for accounting and regulatory purposes.
ESMA clarifies the position on coordinated supervisory actions on the application of the SFTR which the FCA supports
On 26 March, ESMA published a revised version of its 19 March public statement on coordinated supervisory actions on the application of SFTR. ESMA expects competent authorities not to prioritise their supervisory actions towards counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations pursuant to SFTR or MiFIR, regarding SFTs concluded between 13 April 2020 and 13 July 2020, and SFTs subject to backloading under SFTR, and to generally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. The FCA has now updated its webpage on the SFTR, in line with
ESMA’s revised statement.
ESMA's statement on accounting implications of economic support and relief measures
On 25 March, ESMA issued a public statement on some accounting implications of the economic support and relief measures adopted by EU Member States in response to the COVID-19 outbreak. In view of the upcoming periodic information to be published by European issuers, the statement provides guidance to issuers and auditors on the application of IFRS 9 Financial Instruments, specifically as regards the calculation of expected credit losses (ECLs) and related disclosure requirements. Read more
FCA's statement on the impact of COVID-19 on firms' LIBOR transition plans
On 25 March, the FCA published a statement on the impact of COVID-19 on firms' LIBOR transition plans. The FCA, BoE and members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have discussed the impact of the coronavirus on firms’ LIBOR transition plans over the coming months. The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet. The transition from LIBOR remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms. Particularly in segments of the UK market that have made less progress in transition and are therefore still more reliant on LIBOR, such as the loan market, it is likely to affect some of the interim transition milestones. Alongside other international authorities, the BoE, FCA and RFRWG will continue to monitor and assess the impact on transition timelines, and will update the market as soon as possible. Read more
The Working Group on Sterling Risk-Free Reference Rates (RFRWG) summarises responses on its consultation on credit adjustment spread methodologies for fallbacks in cash products referencing GBP LIBOR
On 24 March, the RFRWG summarised the responses received on its consultation on credit adjustment spread methodologies for fallbacks in cash products referencing GBP LIBOR. The consultation identified a strong consensus in favour of the historical 5 year median approach in line with the approach adopted by ISDA, as the preferred methodology for credit adjustment spreads across both cessation and pre-cessation fallbacks for cash products maturing beyond end-2021. The majority of respondents: (i) stated that there were no other methodologies that should have been included in the consultation paper; (ii) felt that it would be problematic to have different credit adjustment spreads on when the fallbacks take effect; and (iii) highlighted the benefits of an internationally consistent spread methodology to be applied in fallbacks across different currencies. The BoE updated its webpage to include this summary. The RFRWG will discuss the results at its forthcoming meetings, including consideration of potential next steps on how these results can help catalyse further transition in sterling cash markets.
Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020
On 24 March, a draft of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment etc and Transitional Provision) (EU Exit) Regulations 2020 was published with an explanatory memorandum. It is explained that this instrument ensures that EMIR, as retained EU law, continues to function effectively in the UK. Part 2 of the instrument makes changes to FSMA to expand the UK’s existing CCP supervisory framework to cover third county CCPs, in order to ensure that the BoE is able to undertake the necessary supervisory responsibilities required under EMIR 2.2. Part 3 of this instrument ensures that the references to the EMIR regulation in UK legislation are up to date and also makes changes to a number of EU Exit instruments made under section 8 of the EUWA which addressed deficiencies in EMIR arising as a result of exit, and some updates are necessary to ensure the deficiency fixes now operate effectively with the changes introduced by EMIR 2.2. Part 4 of the instrument addresses deficiencies in EMIR, as amended by EMIR 2.2. Draft Regulations
ESMA's overview table on NCA's compliance with its guidelines on exemption for market making activities and primary market operations
On 20 March, ESMA published an overview table on national competent authorities' (NCAs') compliance with its guidelines. The UK is not compliant with the guidelines on exemption for market making activities and primary market operations under Regulation (EU) 236/2012.
ESMA's actions to mitigate the impact of COVID-19 regarding the new tick size regime for systematic internalisers (SIs) under MiFIR which the FCA supports
On 20 March, ESMA published a statement on its actions to mitigate the impact of COVID-19 on the EU financial markets regarding the new tick size regime for SIs under MiFIR. ESMA understands that the compliance with the new tick size requirements as of 26 March 2020 could create unintended operational risks for EU market participants in the current market situation in the context of the increasing spread of the COVID-19 pandemic. For instance, changes to critical trading technology infrastructures at a moment when the business operations are handled from different geographical locations can create additional operational risks for certain EU markets participants at a time of heightened volatility in markets. Thus, ESMA does not expect competent authorities (CAs) to prioritise their supervisory actions in relation to the new tick-size regime introduced in MiFIR towards SIs, as of 26 March and until 26 June. ESMA expects CAs to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner. On 23 March, the FCA updated its webpage on information for firms on COVID-19 responses to support ESMA's statement on these upcoming changes. The FCA will not prioritise supervision of the new requirements at this time and expects firms to focus on minimising the potential for operational disruption.
ESMA clarifies the application of MiFID II requirements on the recording of telephone conversations
On 20 March, ESMA published a public statement which clarifies issues related to the application of MiFID II requirements on the recording of telephone conversations. It draws on ESMA's previous clarification and provides that; (i) firms may permit relevant persons to use mobile devices to undertake activities relating to transactions concluded when dealing on own account and the provision of client order services; (ii) firms are required to establish, implement and maintain an effective recording of telephone conversations and electronic communications policy; and (iii) the policy should cover, amongst other factors, the fact that data must be retained for a period of at least 5 years and relevant persons should be prevented from being able to delete records. If these arrangements cannot be put in place, firms are required to adopt any alternative arrangements to ensure full compliance with existing regulatory requirements such as the use of recordable electronic communications as an alternative to telephone conversations. ESMA however recognises that, considering the exceptional circumstances created by the COVID-19 outbreak, some scenarios may emerge where, notwithstanding steps taken by the firm, the recording of relevant conversations may not be practicable. If firms are unable to record voice communications, ESMA expects them to consider alternative steps such as written minutes or notes of telephone conversations.The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2020 (the Amendment Order)
On 20 March, the Amendment Order was published as well as an explanatory memorandum. In order for the
BoE to be able to operate the COVID Corporate Financing Facility (CCFF), which it does through COVID Corporate Financing Facility Limited (the Company), it is necessary to exempt the Company from the requirement under section 19 of the Act for authorisation in respect of the carrying on of any regulated activity other than insurance business. Thus, the Amendment Order amends the Financial Services and Markets Act 2000 (Exemption) Order 2001 to include the Company in that exemption.
FCA extends deadline for the Interest Rate Hedging Products (IRHP) Lessons Learned Review report
On 20 March, the FCA announced that it extended the deadline for the IRHP Lessons Learned Review report. The Independent Reviewer examining the FSA's and the FCA's supervisory intervention in relation to IRHPs has informed the FCA that the deadline for submission of his report must be extended until early 2021 as a result of necessary precautions to be taken in response to COVID-19. FCA Press Release – IRHPESMA extends consultations response dates
On 20 March, ESMA announced that it has extended the response date for all ongoing consultations with a closing date on, or after, 16 March by four weeks, as a result of COVID-19 significantly impacting the activities and priorities of all market stakeholders. This concerns the following consultations on the: (i) guidelines on internal controls for CRAs; (ii) MiFIR report on SI; (iii) guidelines on securitisation repository data completeness and consistency thresholds; (iv) MiFID II/ MiFIR review report on the transparency regime for equity; (v) draft Regulatory Technical Standards under the Benchmarks Regulation; (vi) draft technical standards on the provision of investment services and activities in the Union by third-country firms under MiFID II and MiFIR; and (vii) MiFIR Review Report on Transparency for Non-equity TOD. Read more
Payment services and payment systems
Please see our Fintech section for an update on IOSCO's report on global stablecoin initiatives.
Please see our Prudential Regulation section for an update on the EBA's statements on the application of the prudential framework regarding Default, Forbearance and IFRS 9 measures as well as consumer and payment issues in light of COVID-19.
ECB announce the moving forward of the T2-T2S consolidation project
On 25 March, the ECB announced the moving forward of the T2-T2S consolidation project. SWIFT intends to delay the original migration date to ISO 20022 for cross-border payments by one year, from November 2021 to the end of 2022. This will not affect the launch date of the Eurosystem Single Market Infrastructure Gateway (ESMIG) and T2 which are being rolled out as part of the T2-T2S consolidation project and are scheduled to go live in November 2021. The possible delay in migration to ISO 20022 for cross-border payments impacts the plans to adopt ISO 20022 for correspondent banking business. In the interim period between November 2021 and the end of 2022, European banks will have to maintain their capability to send SWIFT Message Type (MT) payments and reporting messages in addition to the new infrastructure for ISO 20022. They would also need to implement a market practice for payments in T2 which have a cross-border dimension. As using both legacy and new messaging standards for a certain period of time would result in delaying the benefits of fully-fledged ISO 20022 messages, the ECB encourages European banks to discuss with SWIFT how to manage the proposed phasing effectively and how to ensure a safe transition of their correspondent banking business after the new T2-T2S consolidated platform goes live. Read more
Contactless limit in the UK to be increased to £45
On 24 March, UK Finance announced that the spending limit for contactless card payments will be increased from £30 to £45, with a national roll-out beginning from 1 April. The decision to raise the limit was taken following consultation between the retail sector and the finance and payments industry. It also follows similar recent increases in several other European countries. The process has been expedited as part of the industry’s response to the COVID-19 outbreak to support consumers who choose to pay using contactless at this time.
Payment Systems Regulator (PSR) updates the implementation of Confirmation of Payee (CoP) in light of COVID-19
On 20 March, the PSR updated the implementation of CoP as a result of people and businesses having to adapt their ways of working in light of the COVID-19 pandemic. The PSR have considered their regulatory approach to the system and have informed directed banks of the following if they are unable to fully implement CoP by 31 March: (i) banks must take appropriate steps to roll out CoP, taking into account the impacts of COVID-19, even if that means they do not meet the original deadline; (ii) the PSR expects the directed banks to ensure customers who would have benefitted from the protections of CoP are not otherwise disadvantaged from any COVID-19 related delay, including refunding victims of fraud if CoP would have prevented it from happening; and (iii) the PSR will keep the arrangements under review as the wider impacts of COVID-19 become clearer. Where directed banks provide appropriate protection to people, the PSR will not take formal action in respect of delays to the introduction of CoP ahead of 30 June. The PSR also highlights measures individuals can take to protect themselves against fraud, and will be working with the FCA to ensure appropriate action is taken to prevent it.
Prudential regulation
Please see our COVID-19 section for an update on the HMT, BoE and FCA summarising the UK government's proposals in response to COVID-19.
FCA’s expectations on financial resilience for FCA solo-regulated firms
On 26 March, the FCA published a statement on its expectations on financial resilience for FCA soloregulated firms. Firms who have been set buffers can use them to support the continuation of the firm’s activities. The FCA states that firms should be planning ahead and ensuring the sound management of their financial resources. If a firm needs to exit the market, planning should consider how this can be done in an orderly way while taking steps to reduce harm to consumers and markets. If a firm is concerned it will not be able to meet its capital requirements, or its debts, they should contact their FCA supervisor with its plan for the immediate period ahead. Firms that are prudentially regulated by the PRA should consider the PRA’s requirements and discuss their concerns with them, as well as keeping the FCA notified of any significant developments.
EBA statements in light of COVID-19: the application of the prudential framework
On 25 March, the EBA published a statement which confirms that it supports the measures taken and proposed by national governments and EU bodies to address the adverse systemic economic impact of the COVID-19 pandemic in the form of general moratorium, payment holidays stemming from public measures or industry-wide payment relief initiatives taken by credit institutions (referred to as public and private moratoria in this statement). As a result of those measures, the EBA is seeking to clarify a number of aspects on the functioning of the prudential framework with the aim to provide clarity to the EU banking sector on how to handle in a consistent manner, aspects related to: (i) the classification of loans in default; (ii) the identification of forborne exposures; and (iii) the accounting treatment. The EBA also published a statement on consumer and payment issues in light of COVID-19 and it calls on, inter alia: (a) financial institutions offering general temporary measures to note that the acceptance of temporary measures should not automatically lead to negative implications for the consumer’s credit rating; and (b) payments services providers (PSPs) to contribute to measures that limit the spread of COVID-19 and to facilitate consumers’ ability to make payments without the need for physical contact, by making use of the existing exemption from strong customer authentication (SCA) available for contactless payments at the point of sale. The EBA also published a statement listing its postponed activities, including extending the deadlines of some of its open consultations and data collection, as well as rescheduling public hearings.
EBA Statement on Consumer and Payment Issues
EBA Statement on Postponed Activities
The Islamic Finance Standards Board (IFSB) consult on exposure drafts: guiding principles for investor protection in Islamic capital markets (ICM) and disclosures for takāful/retakāful undertakings
On 24 March, the IFSB published an exposure draft of guiding principles for investor protection in Islamic capital markets (ED-24), with the consultation period running until 24 May. The standard is intended to set out minimum requirements to be applied in the ICM for the protection of investors and the promotion of financial stability. The principles set out in the standard intend to achieve the following objectives, these being to: (i) address the Islamic finance-specific issues that need to be considered within regulatory frameworks for investor protection; (ii) define best practices for investor protection in relation to the ICM; (iii) support the development of robust investor protection frameworks for the ICM; and (iv) increase harmonisation of regulatory practice, to support the development of the ICM. The provisions in this standard for cryptoassets refer only to security tokens that confer ownership rights in underlying assets that provide a right to future profits, dividends or a residual interest in a business, where these are approved by the relevant Sharīʻah boards in the jurisdiction. On 25 March, the IFSB published another exposure draft for disclosures
(public and private) to promote transparency and market discipline for takāful/retakāful undertakings (ED-25), with the consultation period running until 25 May. The objectives of the standard are: (1) facilitating access to relevant, reliable and timely information by takāful market players and participants; (2) improving comparability and consistency to all disclosures made by takāful operators; (3) supporting financial consumer protection for participants; and (4) enabling market players to complement and support the implementation of the IFSB standards. It is recommended that RSAs implement both standards in their jurisdiction effective from January 2023 onwards.
Financial policy summary of the Financial Policy Committee (FPC) March meetings and checklist of actions for the end of the transition period
On 24 March, the FPC published a summary and record of its March meetings in respect of financial policy.
The backdrop to the Committee’s March meetings has been dominated by the outbreak and spread of COVID-19. The FPC judges that major UK banks are well able to withstand severe market and economic disruption. Major UK banks have Tier 1 capital levels of around 17.5% of risk‑weighted assets — more than three times higher than before the global financial crisis. The FPC further judges that household vulnerability is considerably lower than before the financial crisis. The FPC reduced the UK countercyclical capital buffer (CCyB) rate to 0% of banks’ exposures to UK borrowers with immediate effect, and it expects to maintain the
0% rate for at least 12 months. The FPC welcomed the PRC’s supervisory guidance that banks should not increase dividends or other distributions in response to these policy actions. The FPC welcomes the announcement by HMT and the BoE of a CCFF to provide additional help to firms to bridge through Covid‑19 related disruption to their cash flows. The FPC agreed with the RPC to cancel its 2020 annual stress test and it supports the FCA's decision to postpone its survey into open‑ended funds. The FPC also approved a checklist of actions that would mitigate risks to financial stability that could arise from disruption to households and companies if no further arrangements were put in place for cross-border trade in financial services for the end of the transition period. The FPC judged that, should the transition period end without the UK and EU agreeing specific arrangements for financial services, most risks to UK financial stability that could arise from disruption to cross-border financial services had been mitigated.
BoE activate the Contingent Term Repo Facility (CTRF)
On 24 March, the BoE announced in a Market Notice the activation of the CTRF. CTRF operations will run on 26 March and 2 April, in addition to the Bank’s regular liquidity insurance facilities including the Indexed Long-Term Repo (ILTR) and Discount Window Facility (DWF). Further operations will be announced as required, based on demand and market feedback. The size of the CTRF operations will be unlimited, and the price will be a fixed rate of Bank Rate plus 15bps, with a term of 3 months. Amongst other things, the Market Notice confirms that the institutions eligible to participate in the CTRF are banks and building societies that are signed up to the BoE's DWF. The BoE's press release explains that, inter alia, this step is designed to help alleviate frictions observed in money markets in recent weeks, both globally and domestically, as a result of the economic shock caused by the outbreak of Covid-19.
BoE and UK banks joint statement on COVID-19
On 23 March, the BoE and UK banks published a statement on COVID-19. This states, inter alia, that in recent days, the BoE and the government have worked closely with major banks to put in place a range of measures which give large scope to the financial system to provide help to both businesses and households during these times. The UK’s banks are in a strong position to provide further support to the economy and are ready and willing to do so, and they are rapidly getting systems in place.
Basel Committee on Banking Supervision (BCBS) coordinates policy and supervisory responses to COVID-19
On 20 March, the BCBS announced that it is coordinating policy and supervisory responses to COVID-19. It is continuing to address the banking and supervisory implications of COVID-19, and is actively coordinating with the FSB and other standard setting bodies on cross-cutting financial system issues. The BCBS advise that using capital resources to support the real economy and absorb losses should take priority at present over discretionary distributions. HQLA stocks should be used to meet liquidity demands. The BCBS is suspending consultation on all policy initiatives and postponing all outstanding jurisdictional assessments planned for this year under its Regulatory Consistency Assessment Programme. The BCBS will consider additional measures aimed at supporting the financial resilience of banks and the operational resilience of both the banking and supervisory community.
FSB coordinates financial sector work in response to COVID-19
On 20 March, the FSB announced that it is coordinating the work in the financial sector in response to COVID-19. The FSB encourages authorities and financial institutions to make use of the flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19. Members of the FSB, including the international standard setting bodies, are cooperating closely. They will continue to coordinate action to maintain global financial stability.
ECB Banking Supervision provides further flexibility to banks in reaction to COVID-19
On 20 March, the ECB Banking Supervision announced further measures which provide more flexibility to banks in reaction to COVID-19. The ECB has introduced supervisory flexibility regarding the treatment of non-performing loans (NPLs) which includes: (i) supervisors will exercise flexibility regarding the classification of debtors as “unlikely to pay” when banks call on public guarantees granted in the context of coronavirus and will also exercise certain flexibilities regarding loans under COVID-19 related public moratoriums; (ii) loans which become non-performing and are under public guarantees will benefit from preferential prudential treatment in terms of supervisory expectations about loss provisioning; and (iii) supervisors will deploy full flexibility when discussing with banks the implementation of NPL reduction strategies. Additionally, the ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions and that those banks that have not done this so far opt for the IFRS 9 transitional rules. The ECB Banking Supervision has also published a FAQs in regard to all of its supervisory measures in response to COVID-19.
BoE and PRA announce supervisory and prudential policy measures to address the challenges of COVID-19
On 20 March, the BoE and PRA published a statement announcing measures to alleviate operational burdens on PRA-regulated firms (‘firms’) and Bank-regulated financial market infrastructures (‘FMIs’) in the context of the COVID-19 outbreak. This includes: (i) the cancellation of the 2020 annual stress test; (ii) amendments to the biennial exploratory scenario timetable; (iii) recognising the importance of IFRS 9 as a forward-looking measure of losses; and (iv) the postponement of the joint BoE and FCA survey into openended funds. If firms are able to complete forecasts, the BoE and the PRA state that these should take into account relief measures such as repayment holidays. It is also the BoE's and the PRA's expectation that HMG’s policy on the extension of mortgage repayment holidays should not automatically be a sufficient condition to move participating borrowers into Stage 2 ECL. The BoE and the PRA also announced measures in respect to supervisory engagement, including: (a) delaying the implementation of certain proposals in respect of the Internal Ratings Based (credit risk modelling) framework; (b) extending the deadlines of two of its open consultations; (c) acknowledging that the existing timetable for implementing Basel 3.1 may prove to be challenging, and thus coordinating internationally to ensure that implementation will happen alongside other major jurisdictions; and (d) specific supervisory programmes for individual firms and FMIs. The first meeting of the Financial Services Regulatory Initiatives Forum will take place in April to assist co-ordination of regulatory initiatives.
Other developments
PRA publishes its Occasional Consultation Paper
On 26 March, the PRA published its Occasional Consultation Paper (CP3/20). This sets out its proposals to make minor amendments to the PRA's rules, supervisory statements (SS) and National Specific Templates, and the market risk sensitivities data item and associated instructions. CP 3/20 covers, inter alia: (i) liquidity – minor updates and amendments to instructions for completing PRA110; (ii) Non-Solvency II (LIBOR updates for small insurers) as well as Solvency II reporting (minor updates and corrections); (iii) the Senior Managers Regimes – application form updates; (iv) regulatory reporting – amendments to the Branch Return and updates to SS34/15 and minor amendments to PRA101; and (v) securitisation – updates to Significant Risk Transfer. The deadline for comments is 26 June.
BoE updates its webpage on passporting
On 24 March, the PRA updated its webpage on passporting. The update adds the PRA's request that until further notice, all passport notifications are submitted in accordance with the Capital Requirements and Solvency II Directives by email only to PRA-passporting@bankofengland.co.uk, and not sent by post.
Annual increase to the FOS award limits
On 23 March, the FCA announced the annual increase to the FOS award limits. From 1 April, the FOS award limits will change to: (i) £335,000 for complaints referred to the FCA on or after 1 April 2020 about acts or omissions by firms on or after 1 April 2019; and (ii) for complaints about acts or omissions by firms before 1 April 2020 and which are referred to our service after that date, the limit will remain at £160,000. For complaints referred to the FOS between 1 April 2019 and 31 March 2020 about acts or omissions by firms on or after 1 April 2019, the limit will be £350,000. For any complaints referred to the FOS before 1 April 2019, the limits will remain at £150,000.