Key Regulatory Topics: Weekly Update 22 - 28 May 2020

Capital markets

FCA confirms additional temporary relief for listed companies facing the challenges of corporate reporting for half yearly financial reports

On 27 May, the FCA published the 28th edition of its Primary Market Bulletin, providing a Covid-19 update. In the bulletin, the FCA confirms additional temporary relief for listed companies facing the challenges of corporate reporting; this relief will permit listed companies which need extra time to complete their half yearly financial reports an additional month in which to publish them. The FCA also provides a statement on market practice on going concern assessments. Although the measures taken for the publication of annual and half-yearly financial reports will go some way to addressing Covid-19 related uncertainties in the ‘going concern’ assessment by allowing more time to perform these assessments, the FCA understands that issuers may face difficulties where the auditor’s review of the assessment highlights a need for auditors to include remarks in their opinion. Thus, it is likely that more companies’ financial statements will need to include such disclosures. The FCA emphasises that it is vital that investors are properly informed as to the impact of Covid-19; the FCA is continuing to urge issuers and auditors to be clear and transparent about these impacts in their financial statements. It is equally important investors and intermediaries understand what these disclosures mean and react appropriately. Furthermore, the FCA has provided commentary on conflicts of interest and issuers’ engagement with shareholders at this time, as well as issuers’ role in delivering ‘soft pre-emption’ in placings. The FCA continues to encourage issuers to engage with shareholders to ensure investors are appropriately informed and aware of the issuer’s actions, stating that shareholders are likely to find it helpful if issuers are as open as possible about the implications of coronavirus on their business. The FCA encourages issuers to contribute to delivering ‘soft pre-emption rights’ by exercising their right to be consulted on, and to direct, bookrunners’ allocation policies.
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Conduct

Please see our Financial crime section for an update on the FCA’s expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to Covid-19.

Consumer/retail

FCA consults on updated draft guidance for firms on mortgages in the context of Covid-19

On 22 May, the FCA published a consultation on its updated draft guidance for firms on mortgages in the context of Covid-19. The guidance applies to mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. The FCA states, amongst other things, that where a firm has dealt with customers at the end of a payment deferral period before the guidance came into force, it should review whether the outcome the customer has received is likely to be consistent with what the customer would have received under the guidance – if it is not consistent, the firm should make reasonable efforts to contact affected customers and give them an opportunity to take up any further help they may be eligible for. The guidance is split into the following sections: (i) customers who have not yet had a payment deferral and customers who had a payment shortfall prior to 20 March – where such customers are experiencing or reasonably expect to experience payment difficulties as a result of Covid-19, and wish to receive a full payment deferral, a firm should grant a customer a full payment deferral for 3 monthly payments, unless it can demonstrate it is obviously not in a customer’s best interests; (ii) fair treatment of customers at the end of a payment deferral period; (iii) understanding customers’ needs and circumstances at the end of a payment deferral period; (iv) customers able to resume full payments – firms must give such customers at the end of a period of payment deferral information about how to access different options to repay any sums covered by a payment deferral, in good time before they are bound by any default arrangement the firm puts in place; (v) customers unable to resume full payments – firms should offer such customers a further full or partial payment deferral for 3 monthly payments, based on what the customer considers they can currently afford to repay; (vi) interaction with MCOB provisions – unless otherwise specified, any sums that are subject to a payment deferral under the guidance should not be considered to be a payment shortfall; (vii) repossessions – firms should not commence or continue repossession proceedings against customers before 31 October; and (viii) debt help – assisting firms who wish to help customers dealing with financial difficulty. Unless renewed or updated, the guidance expires on 31 October. The deadline for comments on the draft guidance was 26 May.

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Covid-19

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

FCA allows individuals to carry over Continuing Professional Development (CPD) in exceptional circumstances as a result of Covid-19

On 27 May, the FCA published a new webpage on allowing firms to defer individuals’ CPD to the next CPD year because of exceptional circumstances, in respect of Covid-19. The FCA recognises that there could be exceptional circumstances when individuals may have difficulty completing the required minimum CPD hours, and expects this to have an impact on firms: (i) who must ensure their retail investment advisers complete the required minimum 35 hours of CPD and get independent verification from an accredited body that the firm has met this requirement; and (ii) carrying on insurance distribution activities, who must ensure that each relevant employee completes a minimum of 15 hours of professional training or development in each 12-month period. The FCA has set out the conditions for when firms may carry over CPD hours to the following 12 month CPD period, detailing what circumstances can count as ‘exceptional’ and what firms will need to take into account.
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FSB, BCBS, CPMI, IAIS and IOSCO discuss responses to Covid-19 with the private sector

On 27 May, the FSB, BCBS, CPMI, IAIS and IOSCO announced that financial policymakers have discussed the responses to Covid-19 with the private sector in a meeting that brought together senior representatives from central banks, regulatory authorities and finance ministries as well as about 30 international banks, insurance firms, asset managers, market infrastructures and credit rating agencies. The meeting explored the effectiveness of prudential and other financial policy measures taken to date, including experiences with their implementation. Participants also discussed policy issues going forward, notably how financial institutions can better cope with the challenges resulting from rising solvency risks, and exchanged views on potential areas that may warrant further policy coordination. The discussion at the meeting will help inform ongoing work in the FSB, BCBS, CPMI, IAIS, and IOSCO, and serve as input into the FSB’s report on Covid-19 policy responses to the July G20 meeting.

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Business Banking Resolution Service (BBRS) report on the impact of Covid-19 loan schemes on business banking dispute resolution

On 22 May, the BBRS published a report on the impact of Covid-19 loan schemes on business banking dispute resolution. The BBRS has been established on behalf of the seven biggest UK lenders in response to the Simon Walker Review which suggested changes to the complaints and alternative dispute resolution procedures for SMEs. The service is being piloted (with seven participating banks) and will be fully launched later this year, extending the service to more SMEs and banks across the UK. The BBRS’ core aim is to deliver fair and reasonable outcomes by fulfilling two responsibilities: (i) seek resolution for historical complaints which could go back to 2001; and (ii) review current complaints for companies that are outside the Financial Ombudsman Service’s jurisdiction. The BBRS state that all of those involved in business banking disputes need to be ready for an increase in the volume of cases each requiring patient and careful attention. The BBRS polled a representative sample of 500 UK small businesses decision makers and owners about their experiences with the current Covid-19 support schemes. The BBRS state that the results show that the aid schemes have the potential to create a wave of post-crisis disputes. Although the regulatory framework for the Government’s pandemic related loan schemes is yet to be determined, the BBRS state that it is ideally placed to consider complaints where they are within its scope and cannot be resolved by participating banks themselves.
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Financial crime

Please see our blog post on FCA enforcement priorities during and after the pandemic. This blog post looks at the FCA’s guidance and information for firms in April and May in the context of enforcement, including the FCA’s warnings in its Market Watch 63 published on 27 May.

FCA’s expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to Covid-19

On 27 May, the FCA published edition 63 of its Market Watch. This sets out the FCA’s expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to Covid-19. Amongst other things, the FCA state that it expects all market participants, including issuers, advisors and anyone handling inside information to continue to act in a manner that supports the integrity and orderly functioning of financial markets. This includes complying with all their obligations under relevant regulation including MAR. During this time, the FCA encourage a particular focus on: (i) ensuring inside information continues to be appropriately identified and handled by all persons involved in the information chain so that it is not misused for insider dealing or for commercial advantage; (ii) ensuring inside information is appropriately disclosed by issuers so that investors are not misled; (iii) maintaining robust market surveillance and suspicious transaction and order reporting (STORs) by relevant market participants, in the context of changes in market conditions and the current use of alternative working arrangements; (iv) meeting the transparency and short position covering requirements under the Short Selling Regulation (SSR) for market participants to support the effective functioning of the market; and (v) identifying and managing conflicts of interest by market participants that may arise around capital raising events.
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Markets and markets infrastructure

ESMA updates Q&As on: (i) MiFID II and MiFIR investor protection and intermediaries topics; (ii) the Securitisation Regulation; and (iii) practical questions regarding reporting of OTC derivatives under EMIR.

On 28 May, ESMA published three updated Q&As. Firstly, the Q&As on MiFID II and MiFIR investor protection and intermediaries topics include a new answer on ‘MiFID inducements’, providing clarification on the application of the MiFID definition of “acceptable minor non-monetary benefits”. Second, the Q&As on the Securitisation Regulation provide clarification on different aspects of the templates contained in the draft technical standards on disclosure. In particular, the updated Q&As clarify how several specific fields in the templates should be completed. Additionally, the updated Q&As contain clarifications addressed to securitisation repositories. Finally, ESMA updated its Q&As on practical questions regarding data reporting issues under EMIR. The update adds a new Trade Repository Q&A which provides clarifications on reporting of OTC derivative contracts by a financial counterparty on behalf of a non-financial counterparty – pursuant to the Article 9(1a) of EMIR as amended by EMIR REFIT.

ESMA Q&As – MiFID II and MiFIR investor protection and intermediaries topics

ESMA Q&As – Securitisation Regulation

ESMA Q&As – Practical questions regarding data reporting issues under EMIR

IOSCO consults on updating its outsourcing principles to ensure operational resilience

On 28 May, IOSCO published a consultation document on updating its outsourcing principles. IOSCO states that since the publication of its earlier principles on outsourcing for market intermediaries and for markets, developments in markets and technology have increased regulatory attention on risks related to outsourcing and the need to ensure the operational resilience of regulated entities. Although the IOSCO Board agreed to delaying publication of its reports to allow firms and financial institutions to redirect their resources to focus on the challenges arising from the Covid-19 pandemic, the IOSCO Board has decided to publish the consultation report because of the need to ensure resilience in operational activities and to maintain business continuity in situations where both external and unforeseen shocks impact both firms and their service providers. The proposed Principles in the consultation report update IOSCO’s 2005 Outsourcing Principles for Market Intermediaries and the 2009 Outsourcing Principles for Markets by expanding their application to include trading venues, market participants acting on a proprietary basis, credit rating agencies and financial market infrastructures (as currently the Principles only apply to regulated entities that outsource tasks to service providers). The Seven principles in the report (each supplemented with guidance for implementation) cover the following areas: (i) due diligence in the selection and monitoring of a service provider; (ii) the contract with a service provider; (iii) information security, business resilience, continuity and disaster recovery; (iv) confidentiality issues; (v) concentration of outsourcing arrangements; (vi) access to data, premises, personnel and associated rights of inspection; and (vii) termination of outsourcing arrangements. IOSCO has extended its usual consultation period, and therefore the deadline for comments is 1 October.

IOSCO Consultation Document
IOSCO Consultation Report

Payment services and payment systems

Please see our Other developments section for an update on the FCA’s changes to its Handbook.

FCA consults on proposed guidance for payment firms on safeguarding customers’ funds in the context of Covid-19

On 22 May, the FCA published a consultation on proposed guidance for payment firms on safeguarding customers’ funds in light of Covid-19. This consultation proposes additional temporary guidance to strengthen payment firms’ prudential risk management and arrangements for safeguarding customers’ funds in light of Covid-19. The proposed guidance for safeguarding covers: (i) keeping records and accounts and making reconciliations; (ii) safeguarding accounts and acknowledgement letters; (iii) selecting, appointing and reviewing third parties; (iv) when the safeguarding obligation starts; (v) unallocated funds; (vi) annual audit of compliance with safeguarding requirements; (vi) Small Payment Institutions; and (vii) disclosing information on treatment of funds on insolvency to customers. The proposed guidance for prudential risk management covers: (a) governance and controls; (b) capital adequacy; (c) liquidity and capital stress testing; (d) risk-management arrangements; and (e) wind-down plans. The FCA have listed out specific questions in regard to the guidance, requesting comments in response, for which the deadline is 5 June.
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Prudential regulation

Please see our Sustainable finance section for an update on the Network for Greening the Financial System (NGFS) guiding central banks and supervisors towards better management of climate-related and environmental risks.

EC adopts draft Delegated Regulation supplementing the CRR in respect of regulatory technical standards (RTS) for prudent valuation under Article 105(14)

On 28 May, the EC adopted a Delegated Regulation, supplementing the CRR in respect of RTS for prudent valuation under Article 105(14). This draft Delegated Regulation introduces a temporary adjustment aimed at mitigating increases in aggregated amounts of additional valuation adjustments (‘AVA’) under the prudent valuation framework, and their excessive effect on amounts deducted from banks’ own funds as a result of the current period of extreme market volatility. This draft Delegated Regulation amends Delegated Regulation (EU) 2016/101 by providing an aggregation factor of 66% for this specific period of extreme volatility in market prices and systemic shock, in place of the aggregation factor to be used under normal market conditions, set at 50%. As it is expected that the extreme market volatility will recede with the subsiding of the pandemic within the next months, the EC states that such provision should be of a transitional nature and should apply until 31 December.
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EBA thematic note on the first insights into the Covid-19 impacts on the EU banking sector

On 27 May, the EBA published a thematic note on the first insights into the Covid-19 impacts on the EU banking sector. This concludes that: (i) banks have built material capital and liquidity buffers, not least driven by post-GFC regulation; (ii) banks have successfully managed to move most of their staff from physical offices to remote working locations; (iii) many countries have already started on the road back to normality; (iv) in the medium term, asset quality is expected to deteriorate significantly; (v) capital levels should help banks withstand the impact of Covid-19; and (vi) profitability might remain subdued for an even longer period.
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ECB financial stability review

On 27 May, the ECB published its May 2020 financial stability review. This states that the Covid-19 pandemic has caused one of the largest and sharpest economic contractions in recent history. The review also assesses how the financial system has operated so far during the pandemic and considers the financial stability implications of the potential economic after-effects of the pandemic, taking account of the financial vulnerabilities identified before the pandemic, including those related to financial market functioning, debt sustainability, bank profitability and the non-bank financial sector. It also sets out policy considerations for both the near term and the medium term. It does so to promote awareness of systemic risks among policymakers, the financial industry and the public at large, with the ultimate goal of promoting financial stability. By providing a financial system-wide assessment of risks and vulnerabilities, the Review also provides key input to the ECB’s macroprudential policy stance. The ECB states that: (i) the pandemic has greatly amplified existing vulnerabilities of the financial sector, corporates and sovereigns; (ii) policy responses to the pandemic are essential to preserve financial stability; and (iii) Euro area banks, although now better capitalised, are likely to face significant losses and further pressure on profitability.

ECB Press release

ECB Review Report

EBA opinion on measures in accordance with Article 458 of the CRR

On 27 May, the EBA published its opinion on the measures in accordance with Article 458 of the CRR. The EBA previously received notification from the Haut Conseil de Stabilité Financière (HCSF, the French macroprudential authority) of its intention to apply Article 458(9). This notification concerned the extension of a measure introduced by the HCSF in 2018 in application of Article 458(2)(d)(ii) of the CRR to tighten, for French global or other systemically important institutions only, the large-exposure limits applicable to large and highly indebted non-financial corporations (NFCs) resident in France or groups of connected NFCs assessed to be highly indebted and based in France. Based on the evidence provided and the additional information received by the HCSF, and on the recommendation of the ESRB, the EBA acknowledges that the objectives of this measure are to ensure risk diversification across the biggest lenders for highly indebted corporate clients and to send a signal towards financial institutions and investors regarding the high leverage of large French NFCs. Furthermore, the EBA state that the measure helps to promote financial stability and prevent future systemic shocks to the French and EU economies. Thus, the EBA does not object to the 1-year extension of the period of application of the current measure (which will be applied from 1 July 2020 to 30 June 2021). Though, the EBA strongly encourages the French authorities to monitor closely the developments during the Covid-19 pandemic and to be ready to de-activate the measure promptly if its application leads to unintended consequences for the continued credit supply during the downturn. The EBA has also provided additional observations on French NFCs in light of the pandemic.

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EP’s Economic and Monetary Affairs Committee (ECON) draft report on the proposal for a regulation amending the CRR in response to Covid-19

On 25 May, the EP’s ECON published a draft report on the proposal for a regulation amending the CRR as regards adjustments in response to the Covid-19 pandemic. This contains the draft EP legislative resolution, detailing the amendments that are proposed.
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HOC letter on the proposed Regulation containing amendments to the CRR as regards adjustments in response to the Covid-19 pandemic

On 22 May, the HOC published a letter from Sir William Cash, Chair of the European Scrutiny Committee, to John Glen, Economic Secretary to the Treasury, on the proposed Regulation containing amendments to the CRR as regards adjustments in response to the Covid-19 pandemic. The European Scrutiny Committee express their disappointment in the Explanatory Memorandum on the EC proposal on 20 May, given that it contained very little information on the Government’s position. Thus, the European Scrutiny Committee ask John Glen to respond by 10 June, expecting him to: (i) set out the Government’s position on the proposed changes made to the EU’s prudential framework in more detail, especially with respect to the proposed amendments that do not flow from the Basel Committee’s recommendations and the package’s expected impact on the lending by the British banking industry during this crisis; and (ii) clarify whether the Government has sought or is seeking any changes to the draft Regulation, and whether it has been successful in securing them.
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PRA statement regarding guidance on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges of Covid-19

On 22 May, the PRA published a statement regarding guidance on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges of Covid-19. The first payment deferrals are now coming to an end and the FCA has published, in draft form, its updated guidance on how lenders should treat borrowers at the end of the initial deferral period. As a consequence, firms are assessing the capital and accounting treatment for exit from, and in some cases extension of, payment deferrals. This statement sets out the PRA’s high-level view on the implications of that draft updated guidance for the guidance it has issued previously. The statement focuses on mortgage products, but the PRA expects the guidance to be broadly relevant to similar government-endorsed schemes, and similar measures by lenders, to respond to the adverse economic impact of Covid-19. In summary, the PRA’s view is that eligibility for, and use of, Covid-19 related payment deferrals or extensions to those deferrals granted in accordance with the FCA’s proposed guidance would not automatically result in a loan: (i) being regarded as having suffered a significant increase in credit risk (‘SICR’) or being credit-impaired for ECL purposes; or (ii) triggering a default under CRR. That means: (a) its guidance has not changed for payment deferrals related to Covid-19 that are granted to borrowers for the first time; and (b) borrowers coming to the end of an existing payment deferral will have different abilities to pay and varying financial situations. The rest of the guidance provides detail on: (1) the regulatory definition of default; and (2) identifying whether a significant increase in credit risk or credit impairment has occurred for IFRS 9. The PRA will provide further detail when the FCA has finalised its guidance.
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Sustainable finance

Network for Greening the Financial System (NGFS) guides central banks and supervisors towards better management of climate-related and environmental risks

On 27 May, the NGFS announced its conclusion that prudential supervisors around the world are stepping up to integrate climate-related and environmental risks into their work, as well as there being a positive trend among financial institutions to better account for climate related risks of their assets. The NGFS conclude this from its publications: (i) a Guide for Supervisors gathering leading practices of the supervisory community and issuing five recommendations for courses of action to be taken by NGFS members and beyond; and (ii) a Status Report on financial institutions’ experiences from working with green, non-green and brown financial assets and a potential risk differential offering an overview of industry definitions and practices regarding environmental related risks’ quantification and mitigation. The NGFS recommends that members of the NGFS as well as the broader community of banking and insurance supervisors: (a) determine how climate-related and environmental risks transmit to the economies and financial sectors in their jurisdictions and identify how these risks are likely to be material for the supervised entities; (b) develop a clear strategy, establish an internal organisation and allocate adequate resources to address climate-related and environmental risks; (c) identify the exposures of supervised entities that are vulnerable to climate-related and environmental risks and assess the potential losses should these risks materialise; (d) set supervisory expectations to create transparency for financial institutions in relation to the supervisors’ understanding of a prudent approach to climate-related and environmental risks; and (e) ensure adequate management of climate-related and environmental risks by financial institutions and take mitigating action where appropriate. The recommendations of the NGFS are non-binding but aim to contribute to developing an international approach that is as harmonised as possible. Based on the findings in its Guide and experiences to date, the NGFS will work (amongst other things) on the following issues further: (1) looking into the data and methodologies necessary for supervisors to improve climate-related and environmental risks assessments; and (2) investigating the transmission channels through which environmental risks materialise as a source of financial risk.
NGFS Press Release

NGFS Guide

NGFS Status Report

Other developments

EC adjusts Work Programme for 2020

On 27 May, the EC published a Communication which, alongside confirming the delivery of Europe’s Recovery Plan, adjusts the 2020 Work Programme (specifically its Annexes) by updating the timing of some of the proposed actions. The EC states that the delivery of the Programme, as a result of the Covid-19 crisis, needs strengthened ambitions and different timings. The slight delays foreseen for a number of initiatives reflect the need to learn and integrate lessons from the crisis, to allow time for proper consultation or to ensure that better regulatory principles are respected. It also allows time for the proposals to be thoroughly discussed with relevant stakeholders. Initiatives which are essential or support the immediate recovery will be adopted as initially planned, including the: (i) Strategy for Smart Sector Integration; (ii) Renovation Wave Strategy; (iii) Strategy for Sustainable and Smart Mobility; (iv) Digital Services Act; (v) Reinforcing of the Youth Guarantee; and (vi) White Paper on an Instrument on Foreign Subsidies. A number of urgent major initiatives, which were delayed because of the pandemic, will be adopted as swiftly as possible, notably the New Pact on Migration or the Updated Skills Agenda for Europe. Others will be delayed until later in the year or to early next year so they can be well prepared and consulted on. The EC has also updated its factsheet for the Work Programme.

EC Communication

EC 2020 Work Programme – Updated Annexes

EC Factsheet

FCA makes changes to Handbook – Handbook Notice 77

On 22 May, the FCA published Handbook Notice 77, setting out changes to its Handbook. On 13 May, the Board of the FCA made changes to its Handbook through the following instruments: (i) Covid-19 Premium Finance Instrument 2020 – this makes changes to CONC 6.7; (ii) Payment Services Regulations 2017 (Payment Account) Instrument 2020 – this amends PERG 15.3, ensuring consistency with the CJEU judgement on the concept of a payment account under PSD2; and (iii) Supervision Manual (Reporting No 14) Instrument 2020 – this makes changes to SUP 15 Annex 3R (the firm details form). The instrument listed first came into force on 18 May, and both of the subsequent instruments came into force on 22 May. The Handbook also provides feedback on consultations that will not have a separate policy statement published by the FCA, including: (a) CP19/33 (on the Payment Services Regulations 2017 (Payment Account) Instrument 2020); and (b) CP20/4 (on the Supervision Manual (Reporting No 14) Instrument 2020).
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