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Key Regulatory Topics: Weekly Update 21-27 August 2020

21 August 2020

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

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Brexit

Please see our Markets and Markets Infrastructure section for an update on the FCA’s Market Watch 64.

Consumer/Retail

Please see our Prudential Regulation section for the PRA’s statement in relation to IFRS 9 and capital requirements, providing guidance to firms as Covid-19 specific payment deferrals come to an end.

Please see our Other Developments section for an update on the Financial Ombudsman Service (FOS) publishing its 153rd News Issue.

FCA consults on the next stage of support for mortgage borrowers – Covid-19

On 26 August, the FCA published additional draft guidance for firms, to ensure that consumers get the support that they need during the Covid-19 pandemic. The current guidance will continue to provide support for those impacted by Covid-19 until 31 October. The FCA expects the current guidance to expire on 31 October, but will keep this under review depending on how the wider situation develops. The draft guidance proposes that firms should consider the appropriateness, and use, of a range of different short and long-term support options to reflect the specific circumstances of their customers; this could include extending repayment terms or restructuring mortgages. Where consumers need further short-term support, the FCA states that firms should offer arrangements for no, or reduced, payments for a specified period to give customers time to get back on track. The FCA states that under the proposed guidance, firms should prioritise giving tailored support to borrowers who are at most risk of harm, or who face the greatest financial difficulties. Furthermore, the FCA confirms that where borrowers require further support from lenders, either at the end of payment holidays under its guidance, or where they are in need of support for the first time, this would be reflected on credit files in accordance with normal reporting processes. The deadline for comments is 1 September.
FCA Press Release
FCA Draft Guidance

Covid-19

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

Financial Crime

FCA consults on extending its annual financial crime reporting obligation

On 24 August, the FCA published a consultation paper on extending the scope of firms required to provide it with an annual financial crime report. The FCA intends to include firms that carry on regulated activities that it considers potentially pose a higher money laundering (ML) risk, irrespective of the firm’s revenue threshold. When assessing the ML risk of activities, the FCA considered the National Risk Assessment (NRA), as well as the risks posed by activities that involve handling payment flows and funds. Firms that would now be required to report include: (i) all FSMA authorised firms that hold client money or assets; (ii) all payment institutions except those that carry out at least one of: money remittance, account information services and/or payment initiation services, and EEA authorised payment institutions which are permitted to provide a payment service in the UK only under the freedom to provide services; (iii) all electronic money institutions; (iv) all Multilateral Trading Facilities and Organised Trading Facilities; and (v) all cryptoasset exchange providers and custodian wallet providers. The FCA is also consulting on removing two activities from the reporting obligation, which it considers to be outside the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, these being home finance mediation and making arrangements with a view to transactions in investments. The deadline for comments is 23 November.

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Fintech

Please see our Financial Crime section for the update on the FCA consulting on extending its annual financial crime reporting obligation to firms including all cryptoasset exchange providers and custodian wallet providers.

BIS’s speech on leveraging technology to support regulatory supervision

On 21 August, BIS published a speech (given on 19 August) by Benoît Cœuré, Head of the Bank for International Settlements Innovation Hub, on challenges and collaborative solutions in leveraging technology to support supervision. Challenges identified by Mr Cœuré include the lack of transparency around technological applications, which causes difficulties for both institutions and supervisors when they are unable to understand how undesired events occurred and what steps they may need to take to prevent any recurrence. Mr Cœuré suggests that these Fintech-related challenges may require regulators to reassess their current supervisory models and resources to ensure continued effective oversight of the banking system. Mr Cœuré believes that the talent pool, resources and need for expertise present major issues for both supervisors and financial institutions. In particular, supervisory authorities face an additional difficulty in competing with the private sector and tech firms to attract qualified personnel. To address this, Mr Cœuré advises authorities to focus on: (i) Fintech education; (ii) resource planning and training; and (iii) engagement with technology firms. Mr Cœuré also suggests that trusted collaboration between regulatory authorities, financial institutions and external technology experts may be necessary to overcome these challenges.
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Fund Regulation

European Fund and Asset Management Association (EFAMA) new edition of the European Fund Classification (EFC) Classification brochure

On 26 August, EFAMA published the second edition of the EFC Classification brochure. EFAMA states that since the first edition was published in April 2012, the fund industry has had to adapt significantly in response to the evolving market environment; new global and regional regulations have been implemented in the interest of investor protection, and fund houses have created, developed and launched new funds. EFAMA states that the main advantages of the EFC remain unchanged, as the EFC is the only classification method that: (i) uses a proven, stable holdings-based classification method; (ii) is reviewed on a quarterly basis to fully reflect ongoing fund repositioning activities; and (iii) is free-of-charge and non-commercial. The new edition introduces 'investment themes' in the classification of equity funds, next to the three main classification criteria: (a) sector; (b) geographical exposure; and (c) market capitalization. Twelve specific investment themes have been identified as particularly relevant in today's market: (1) Natural Resources; (2) Infrastructure; (3) Climate; (4) Agriculture; (5) Water; (6) Biotechnology; (7) Medtech; (8) Clean Energy; (9) Digitalisation; (10) Nutrition; (11) Global Trends; and (12) High Dividend.
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FCA and BoE launch survey for review of liquidity mismatch in open-ended funds

On 26 August, the FCA updated its webpage on information for firms in respect of Covid-19, announcing that the FCA and BoE have launched a survey for their review of liquidity mismatch in open-ended funds. In Q4 2019, the Financial Policy Committee (FPC) judged that the mismatch between redemption terms and the liquidity of some funds’ assets could become a systemic risk. It said there should be greater consistency between these, with specific focus on 3 principles: (i) measures of liquidity; (ii) pricing; and (iii) redemption notice period. The review will consider how a framework around these principles could be designed. Asset managers included in this survey are being asked to respond to the questions on a best-effort basis by 30 September.
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Markets and Markets infrastructure

ESMA plans to update risk parameters in its guidelines on stress test scenarios under the Money Markets Fund Regulation (MMFR)

On 27 August, ESMA published a statement to announce that it will update risk parameters in its 2019 guidelines on stress test scenarios under the MMFR. ESMA has assessed whether the scenarios envisaged in the 2019 guidelines are still appropriate and finds that applying the 2019 scenarios in the current market environment generally leads to absolute levels of stress similar to the levels observed in March 2020. However, for some parameters, the 2019 scenarios have been exceeded by the extreme market movements observed during the Covid-19 crisis and the relevant factors will be updated accordingly. ESMA will calibrate the risk parameters in collaboration with the European Systemic Risk Board (ESRB) and the ECB. ESMA expects to publish the 2020 update of the guidelines in Q4.
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FCA Market Watch 64 - newsletter on market conduct and transaction reporting issues

On 27 August, the FCA published the 64th edition of its Market Watch, specifically focussing on market conduct and transaction reporting issues. This edition provides important information to help MiFID II firms prepare for the end of the transition period. In respect of transaction reporting rules under MiFID II, the FCA states that it is crucial that the FCA receives reports to ensure market oversight and the integrity of financial markets – thus, firms and Approved Reporting Mechanisms should comply with the changes to their regulatory obligations by the end of the transition period on 31 December. Additionally, firms that are not able to comply fully with the regime immediately following the end of the transition period will need to be able to back-report missing, incomplete or inaccurate transaction reports as soon as possible. The FCA also states that as part of developing the post-exit MiFID regime, industry testing for its Financial Instruments Transparency System (FITRS) will open on 5 October. 
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Commission Delegated Regulation postpones entry into force of Central Securities Depositories Regulation (CSDR) RTS on settlement discipline

On 24 August, Commission Delegated Regulation (EU) 2020/1212 of 8 May 2020 amending the Commission Delegated Regulation (EU) 2018/1229 (RTS on settlement discipline), was published in the OJ. The entry into force of the RTS on settlement discipline has been delayed from 13 September 2020 to 1 February 2021.

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Prudential Regulation

PRA to end temporary approach to VAR back-testing exceptions

On 27 August, the PRA published a statement to update its temporary approach to VAR back-testing exceptions to mitigate the possibility of excessively pro-cyclical market risk capital requirements. In light of the amendments to the Capital Requirements Regulation (CRR) in response to the Covid-19 outbreak (the CRR ‘Quick Fix’), the PRA has decided to terminate its temporary approach to VAR back-testing exceptions from 30 September. From 1 October onwards, firms should no longer apply any commensurate reduction in RNIV capital requirements. For back-testing exceptions that occur between 1 January 2020 and 31 December 2021 that do not result from deficiencies in their internal model, firms should now apply to the PRA in accordance with CRR Article 500c to exclude those exceptions from the calculation of their back-testing addend.
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PRA statement on IFRS 9 and capital requirements – Guidance to firms as Covid-19 specific payment deferrals come to an end

On 26 August, the PRA published a statement on IFRS 9 and capital requirements, providing guidance to firms as Covid-19 specific payment deferrals come to an end. The PRA refers to the FCA’s draft guidance for firms in relation to mortgage payment deferrals (published on 26 August) which explains that, at the end of the existing Covid-19 specific payment deferrals, if the borrowers involved are not able to resume payments in full immediately with all deferred sums either paid in full or capitalised, tailored forbearance arrangements provided in accordance with the draft updated guidance should be considered. The PRA states that such tailored forbearance arrangements are likely to be as good an indicator of significant increases in credit risk (SICR), credit impairments or defaults as forbearance was prior to the pandemic. Prior to Covid-19, loans subject to forbearance would not automatically have been treated as having experienced a SICR or become credit impaired or in default - the PRA confirms that will also be the case with tailored forbearance provided in accordance with the draft updated guidance. The PRA states that while in some cases a judgment will need to be made, and the guidance in the PRA’s June letter on a framework for making holistic assessments of loans subject to payment deferrals for indicators of SICR or credit impairment will be relevant when making such judgments. The PRA’s earlier guidance which stated that payment deferrals are not necessarily good indicators of SICR, credit impairments or defaults, may still continue to be relevant to payment deferrals used outside of the UK, depending on the facts and circumstances involved. The earlier guidance on holistic assessments of loans also continues to be relevant where firms have limited data to assess the individual financial circumstances of the borrower.
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Other developments

Financial Ombudsman Service (FOS) News Issue 153

On 26 August, the FOS published its 153rd News Issue. Amongst other things, the issue covers: (i) the latest Q1 2020/21 complaints data; (ii) an insight summary on complaints resulting from Covid-19 and the impact on consumers and SMEs; and (iii) information for financial businesses in respect of Covid-19. In the insight summary, the FOS covers, amongst other things, the business disruption that was caused by lockdown; for example, as bank branches across the UK closed, the FOS had complaints from consumers saying that they were not able to access financial services because they did not use online banking. Furthermore, the FOS has received complaints from consumers in respect of being declined payment deferral arrangements or problems with their banks or lenders in setting up such arrangements. The FOS also notes that it is likely that cases relating to the initial impact of Covid-19 will arise for some time to come. Furthermore, the FOS states that the nature of Covid-19 related complaints will likely change as more people may face financial difficulties, especially as deferral arrangements come to an end.

FOS News Issue 153
FOS Insight Summary