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Key Regulatory Topics: Weekly Update 22 - 28 July 2022

28 July 2022

While the regulatory apparatus has undoubtedly slowed for the summer, this week saw a key development in the UK, with the FCA’s final rules and guidance on a new Consumer Duty. The FCA considers it will lead to a major shift in financial services, fundamentally improving how firms serve consumers. The UK Law Commission has also published a detailed consultation paper exploring proposals to reform the law relating to digital assets. For those following the EU’s legislative proposal for a Regulation on digital operational resilience for the financial sector, the European Parliament has this week published the text provisionally agreed with the Council in trialogue negotiations. 

Consumer/retail

Please see our Investigations Insight blog for a post on the FCA’s final rules for the new Consumer Duty in which we highlight the key changes to be aware of (also briefly summarised below). 

FCA final rules on new Consumer Duty

On 27 July, the FCA confirmed its rules and guidance on the new Consumer Duty. The duty consists of a new Consumer Principle, cross‑cutting rules, and rules relating to four key outcomes identified by the FCA that it intends to achieve under the new duty: products and services, price and value, consumer understanding and consumer support. Changes to the rules in response to feedback from the last consultation include: (i) further guidance on how firms can apply the price and value rules specifically to existing products and services and how they can conduct the review in a proportionate manner; (ii) new requirements that the duty should be reflected in firms’ strategies, governance, leadership and people policies, including incentives at all levels. Firms should have a champion at board level who, along with the Chair and the CEO, ensures that the duty is discussed regularly and raised in all relevant discussions; (iii) firms must notify the FCA if they become aware that another firm in the distribution chain is not complying with the duty. The FCA has also added corresponding guidance on senior management functions responsibilities; (iv) more information about the types of data firms could use to monitor outcomes, and other factors which may impact on firms’ monitoring. During the implementation period, firms should expect the FCA to ask them to share their approach to monitoring the duty; (v) new rules requiring firms to specifically consider redress where foreseeable harm is identified and (vi) phased, extended implementation period of the new rules – for new and existing products or services that are open to sale or renewal, the rules come into force on 31 July 2023, and for closed products or services, the rules come into force on 31 July 2024. The FCA has also made amendments to the finalised guidance, which include adding more examples of how specific elements of the duty would work in practice across different retail markets. The FCA expects to build on the guidance as it embeds the duty through its ongoing interactions with firms and provide more sector specific guidance over time. The FCA has stated on its authorisation information page that, while the implementation period ends in 2023/4, its assessment of firms is forward looking and therefore any firm or individual applying for authorisation or to vary their permissions will have to demonstrate that they can meet the requirements of the Consumer Duty from now on. A post-implementation review will consider whether Handbook changes will be required in order to correct any conflicts and to assess whether the duty is having the intended effect or is leading to any unintended consequences.

Press release

Policy statement

Finalised guidance

Handbook Instrument

Authorisation webpage

FOS Ombudsman News No. 173

On 27 July, the FOS published issue 173 of its Ombudsman News. In this issue, the FOS focuses on: (i) its new online guidance for consumers and businesses in relation to complaints that involve gambling-related harm. The guidance describes the types of complaint that the FOS receives and its approach to resolving these complaints. It also includes case studies as examples; and (ii) the extension of the regulatory perimeter to pre-paid funeral plan providers from 29 July, meaning that customers of funeral plan providers will be able to bring a complaint to the FOS if they are not able to resolve it directly with their provider.

Ombudsman news

Fintech

Please see our Digital Hub blog for a post setting out five key takeaways from the UK Law Commission’s consultation paper on digital assets (also briefly summarised below).

Law Commission consults on proposed reforms for digital assets including NFTs

On 28 July, the Law Commission began consulting on new proposals to reform the law relating to digital assets. The Commission argues that the law must go further to acknowledge digital assets’ unique features, which in turn would provide a strong legal foundation for the digital assets industry and for users. Through these reforms, the legal system would help to create an environment that is more conducive to digital assets and their markets. The Law Commission notes however, that it makes relatively few proposals for law reform because it considers that the common law of England and Wales is, in general, sufficiently flexible to accommodate digital assets. Its proposals relate to: (i) explicitly recognising a distinct category of personal property under the law, “data objects” which is better able to accommodate the unique features of digital assets; (ii) options for how this distinct category of personal property could be developed and implemented under current law; (iii) clarifying the law around ownership and control of digital assets; and (iv) clarifying the law around transfers and transactions involving digital assets, due to the unique consequences that a transfer of a cryptoasset results in a change to its data and therefore the creation, essentially, of a new token; (iv) clarifying the allocation of losses when a crypto-custodian becomes insolvent; (v) options to address the use of cryptoassets as collateral; and (v) proposals in relation to the enforcement of rights in the context of litigation. The deadline for comments is 4 November.

Press release

Consultation summary

Consultation paper

Markets and markets infrastructure

Please see the ‘Regulatory Reform Post Brexit’ section for the FSMA 2000 (Consequential Amendments of References to Rules and Miscellaneous Amendments) Regulations 2022.

EBA consults on draft RTS on homogeneity of underlying exposures in STS securitisations

On 28 July, the EBA began consulting on draft RTS specifying the criteria for the underlying exposures in securitisation to be deemed homogeneous. Such specification is part of the requirements under the Securitisation Regulation, and as amended by the Capital Markets Recovery Package. The homogeneity requirement aims to facilitate the assessment of underlying risks in a pool of underlying exposures and to enable investors to perform robust due diligence. The draft RTS: (i) will amend Commission Delegated Regulation (EU) 2019/1851 (existing RTS) and will be applicable to all securitisations, including asset-backed commercial paper (ABCP), non-ABCP, and on-balance-sheet securitisations; (ii) carry over the provisions on homogeneity set out in the existing RTS with some modifications. While extending the scope to on-balance-sheet securitisations, they establish the same criteria for the assessment of homogeneity for all securitisations; (iii) make adjustments to one of the homogeneity factors, the type of obligor, to reflect the current market practices and the credit risk assessment approaches applied to corporate and SME loans in the context of synthetic securitisations. To ensure consistency, similar changes are made to the respective homogeneity factor for all relevant asset types; and (iv) specify further the asset type for credit facilities provided to enterprises, where similar underwriting standards are applied as for individuals. The deadline for comments is 28 October. The draft RTS will subsequently be submitted to the EC for endorsement, following which they will be subject to scrutiny by the EP and the Council before being published in the OJ.

Press release

Consultation

RTS on STS notification requirements for on-balance-sheet synthetic securitisations

On 26 July, Delegated Regulation (EU) 2022/1301 amending the RTS laid down in Delegated Regulation (EU) 2020/1226 as regards the information to be provided in accordance with the simple, transparent and standardised (STS) notification requirements for on-balance-sheet synthetic securitisations, was published in the OJ. The amendments relate to the extension of the STS securitisation framework to on-balance sheet synthetic securitisations by the Covid-19 Securitisation Regulation Amending Regulation ((EU) 2021/557). The amendments aim to ensure consistency across all STS notifications where possible and: (i) specify the information originators must submit to ESMA; (ii) distinguish between those STS criteria for which a simple confirmation is sufficient, and those for which greater explanation is required; and (iii) restrict the information to be published in STS notifications for securitisations where no prospectus is required to non-sensitive commercial information. The Delegated Regulation enters into force on 15 August (20 days following its publication in the OJ).

Delegated Regulation

RTS and ITS on commodity derivatives position limits, management controls and reporting under MiFID II

On 26 July, two Delegated Regulations and an Implementing Regulation, supplementing MiFID II in response to changes made by the Covid-19 MiFID II Amending Directive ((EU) 2021/338), were published in the OJ: (i) Delegated Regulation (EU) 2022/1302 setting out RTS for the application of position limits to commodity derivatives and procedures for applying for exemption from position limits. The Delegated Regulation repeals and replaces Commission Delegated Regulation (EU) 2017/591, also making amendments based on experience over previous years with the existing methodology; (ii) Delegated Regulation (EU) 2022/1299 setting out RTS specifying the content of position management controls by trading venues. The RTS aim to ensure a more harmonised implementation of the position management controls by trading venues by specifying the content of position management controls and taking into account the characteristics of the trading venues concerned; and (iii) Implementing Regulation (EU) 2022/1300 setting out ITS on the format of position reports by investment firms and market operators. The ITS update the table on position reports as reporting no longer applies to certain commodity derivatives. The Regulations enter into force on 15 August (20 days following their publication in the OJ).

RTS 2022/1302

RTS 2022/1209

ITS 2022/1300

Prudential regulation

Please see the ‘Regulatory Reform Post Brexit’ section for the FSMA 2000 (Consequential Amendments of References to Rules and Miscellaneous Amendments) Regulations 2022.

EBA consults on supervisory handbook for the validation of internal ratings based systems

On 28 July, the EBA began consulting on its supervisory handbook for the validation of internal ratings based systems. The handbook: (i) clarifies the role of the validation function as part of corporate governance, in particular, in terms of scope of work and interaction with the credit risk control unit. It provides some general guidance on the expectations relative to the validation function, as already laid out in Article 185 of the CRR, it builds on the EBA RTS and guidelines which are part of the ‘IRB repair roadmap’ and provides a detailed description of the areas which the validation function is expected to assess; (ii) does not present any specific methodology to be used by the validation function, but specifies which elements of institutions’ rating systems are expected to be assessed by the validation function. As such, it covers both the tasks related to the pure model performance assessment, mirroring the CRR distinction between risk differentiation and risk quantification, as well as the tasks dealing with the modelling environment, such as data quality and model implementation assessment; (iii) clarifies the validation function tasks relationship with other functions related to the corporate governance, such as the credit risk control unit and the internal audit; and (iv) provides a set of expectations and good practices on the work of the validation function depending on its position in the model cycle, as well as some additional guidance for the validation of rating systems when using external data, when outsourcing some validation tasks, as well as in a situation of data scarcity. The deadline for comments is 28 October.

Press release

Consultation paper

PRA consults on changes to approach to identifying other systemically important institutions

On 22 July, the PRA began consulting on proposals to amend the criteria and scoring methodology it uses to identify other systemically important institutions (O-SIIs). O-SIIs are firms that are systemically important in a domestic context. The PRA intends to streamline the approach following Brexit and reduce costs of the annual identification process. The PRA proposes to: (i) reduce complexity in the O-SII identification approach, by removing the need to carry out two parallel scoring methodologies and ensure the PRA’s approach more accurately identifies O-SIIs by ensuring that the methodology captures and puts sufficient weight on key activities for the real economy, such as retail banking and payments; and (ii) simplify the O-SII identification process and ensure this relies solely on existing regulatory returns, reducing the complexity and burden on firms. The deadline for comments is 22 September. The PRA intends to carry out the 2022 O-SII designation process under the revised approach.

Consultation

EBA report on use of specific exemptions included in large exposures regime

On 22 July, the EBA published a report on the use of some exemptions included in the large exposures regime. The report analyses banks’ use of the various exemptions from different perspectives and quantifies the impact of a potential removal of individual exemptions. Overall, the report shows that some of the assessed exemptions are widely used across the EU and their removal would have a material impact while other exemptions are widely used across the EU but their removal would not have material impact. In addition, some exemptions are relevant only for some countries or appear to be rarely used. The report provides detailed quantitative evidence about the use of the exemptions, as of June 2021, but does not contain any policy recommendations. The EBA has started a specific data-collection exercise regarding the use of some of the large exposures exemptions/exclusions provided in the CRR as amended by the CRR II.

Press release

Report

Regulatory reform post Brexit 

Please see our website for the first in a series of publications on the Financial Services and Markets Bill. This week, we provide an overview of the Bill’s key proposals, as well as how and when they will affect market participants.

FSMA 2000 (Consequential Amendments of References to Rules and Miscellaneous Amendments) Regulations 2022

On 22 July, the Financial Services and Markets Act 2000 (Consequential Amendments of References to Rules and Miscellaneous Amendments) Regulations 2022 were published, together with an explanatory memorandum. Their primary purpose is to make consequential changes as a result of the Financial Services Act 2021. The changes are made to reflect the transfer of certain prudential requirements set out in UK legislation to the PRA, in order to implement remaining aspects of the Basel 3 standards, and to reflect the FCA's introduction of the Investment Firms Prudential Regime. The Regulations update references and terms in the Financial Conglomerates and Other Financial Groups Regulations 2004, and also make amendments to Commission Delegated Regulation (EU) 2015/355 to update references to rules made by the PRA and the FCA. The Regulations come into force on 17 August.

Regulations

Explanatory memorandum

Sustainable finance

ESAs first annual report on extent of voluntary disclosure of principal adverse impact under SFDR

On 28 July, the ESAs published the first annual report on the extent of voluntary disclosure of principal adverse impact under Article 18 of the SFDR. Based on a survey of NCAs, the ESAs have developed a preliminary, indicative and non-exhaustive overview of good examples of best practices, and less good examples of voluntary disclosures. The report’s findings include: (i) the extent of compliance with voluntary disclosures varies significantly across respondents, but, overall, the first disclosures since the application of the SFDR are not very detailed - this is expected to change for the disclosures made for the 2022 reporting period once the SFDR Delegated Regulation applies; (ii) there is an overall low level of disclosure on the degree of alignment with the objective of the Paris Agreement – when disclosure of alignment is made, it is often vague; and (iii) there is a low level of compliance with the details required for explaining why financial market participants do not take into account the adverse impact of their investment decisions. The report also includes a set of recommendations for NCAs to ensure appropriate supervision of financial market participants’ practices, such as running regular surveys in their own market to determine whether supervisory entities comply with Article 4 SFDR disclosures. The ESAs note that future reports will: (a) offer meaningful guidance more generally once the SFDR Delegated Regulation has come into effect; and (b) cover voluntary disclosures under Article 7(1), which will only be fully applicable from 30 December.

Press release

Report

RTS on content and presentation of sustainability-related disclosures under SFDR

On 25 July, Commission Delegated Regulation (EU) 2022/1288 supplementing the SFDR with regard to RTS specifying: (i) the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’; (ii) the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impact; and (iii) the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports, was published in the OJ. The Delegated Regulation will enter into force on 14 August (20 days after its publication in the OJ). It will apply from 1 January 2023.

Delegated Regulation

Other developments

DORA inter-institutional negotiations provisional agreement texts

On 28 July, the EP published the texts of the provisional inter-institutional agreements that have been reached in trialogue negotiations for the proposed Regulation on digital operational resilience for the financial sector (DORA) and the related Amending Directive. ECON approved both texts on 12 July. The EP and the Council will now need to formally adopt the proposals. The EP’s procedure files indicate that it expects to consider them during its plenary session on 9-10 November.

DORA provisional text

DORA Amending Directive provisional text

Joint statement of UK-US Financial Regulatory Working Group meeting

On 26 July, the UK-US Financial Regulatory Working Group published a joint statement following their sixth meeting. The Working Group meeting focused on seven themes: (i) international and bilateral cooperation – to promote multilateral cooperation around risk management in global derivatives and banking markets; (ii) benchmark transition – noting the importance of maintaining a coordinated approach in the lead up to the cessation of remaining USD LIBOR settings at the end of June 2023; (iii) financial innovation – committing to strengthen regulatory outcomes for stablecoins across jurisdictions; (iv) sustainable finance; (v) non-bank financial intermediation – discussing the need to strengthen the resilience of the sector, including strengthening liquidity risk management practices; (vi) operational resilience; and (vii) cross-border regimes. The working group will conduct follow-up work on these topics and other issues of mutual interest through bilateral engagement and in multilateral fora ahead of the next Working Group meeting, which is expected to occur later in 2022.

Statement