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Key Regulatory Topics: Weekly Update 23 Dec - 7 Jan 2020

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

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

Please see our Brexit financial services webpage which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators’ publications. 

FCA and PRA on passporting in and out of Gibraltar after the transition period

On 31 December, the FCA published a new webpage on Gibraltar passporting arrangements, with the PRA publishing its respective webpage on 4 January. The regulators explain that the transitional arrangements preserving passporting rights between the UK and Gibraltar after the end of the transition period have been extended until 31 December 2021 and can be further extended until such time as the permanent arrangements of the Gibraltar Authorisation Regime are in place. The webpages set out information for firms on how to apply, the application process and applicable timelines, as well as other specifics for certain passporting arrangements.

FCA webpage

PRA webpage

European Union (Future Relationship) Act 2020 (Commencement No. 1) Regulations 2020

On 31 December, the European Union (Future Relationship) Act 2020 (Commencement No. 1) Regulations 2020 (SI 2020/1662) were made. These Regulations brought into force the provisions of the European Union (Future Relationship) Act 2020. Regulation 2 brings the majority of the provisions set out in these Regulations into force on implementation period completion day (31 December 2020) and Regulation 3 brings provisions on powers to make regulations about movement of goods, the EU and Euratom and related organisations and bodies, and funding of the PEACE PLUS programme into force on 1 March 2021.

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FCA on use of the Temporary Transitional Power to modify the UK’s derivatives trading obligation

On 31 December, the FCA published a statement on its use of the Temporary Transitional Power (the TTP) to modify the UK’s derivatives trading obligation (the UK DTO). The FCA welcomes the announcement that the UK and EU have agreed a trade and cooperation agreement and the associated joint declaration on financial services regulatory cooperation. However, without mutual equivalence, some firms, in particular the branches of EU firms in London, will be caught by a conflict of law between the EU DTO and the UK DTO. The FCA is therefore using the TTP to modify the application of the UK DTO. Where firms that are subject to the UK DTO trade with, or on behalf of, EU clients that are subject to the EU DTO, they will be able to transact or execute those trades on EU venues providing that: (i) firms take reasonable steps to be satisfied the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence; and (ii) the EU venue has the necessary regulatory status to do business in the UK (such venues include those that are a Recognised Overseas Investment Exchange, have been granted the relevant temporary permission, or are certain that they benefit from the Overseas Person Exclusion). This modification of the application of the UK DTO applies to UK firms, EU firms using the UK’s temporary permissions regime, and branches of overseas firms in the UK. Transactions concluded by an EEA UCITS fund or an EEA AIF are currently outside the scope of the UK DTO. This relief under the TTP also does not apply to trades with non-EU clients, proprietary trading conducted, for example, to hedge a firm’s own risk exposure, and trades between UK branches of EU firms. These trades remain subject to the UK DTO. The FCA will consider by 31 March 2021 whether market or regulatory developments warrant a review of its approach.

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European Union (Future Relationship) Act 2020 passed and future relationship agreements signed

On 30 December, the European Union (Future Relationship) Act 2020 received Royal Assent. The Act makes provision to implement into UK law the three main future relationship agreements: the UK-EU trade and cooperation agreement, the UK-EU security of classified information agreement, and the UK-Euratom nuclear cooperation agreement. The future relationship agreements came into force as agreed at the end of the transition period after: (i) the Council of the EU (the CEU) unanimously adopted the trade and cooperation agreement and security of information agreement on 29 December; and (ii) on 30 December, the CEU President and EC President signed the three agreements on behalf of the EU and the UK Prime Minister on behalf of the UK. The UK government published a draft trade and cooperation agreement on 24 December, alongside a summary, and the related joint declarations on financial services regulatory cooperation. The EC also published related Q&As.

European Union (Future Relationship) Act 2020

CEU adoption

CEU and EC Presidents’ press release

Draft trade and cooperation agreement

Summary explainer

Joint declarations

EC Q&As 

PRA policy statement on final changes before end of the transition period

On 28 December, the PRA published a policy statement (PS30/20) before the end of the transition period, on changes to its rules, as well as the use of temporary transitional directions. The PS includes the final: (i) PRA Rulebook (EU Exit) Instrument 2020; (ii) PRA Transitional Direction; (iii) PRA general guidance; (iv) CRR guidance note on transitional powers; (v) Solvency II guidance note on transitional powers; (vi) Securitisation Regulation guidance note on transitional powers; and (vii) PRA Rulebook guidance note on transitional powers. The PRA explains that no changes have been made to the material published in  near-final form as part of PS27/20 on 18 December 2020. The PRA’s transitional direction and the majority of the provisions in the rulebook instrument came into force at the end of the transition period on  31 December 2020. The transitional direction delays onshoring changes that fall within the PRA's remit. It will apply until 31 March 2022, unless otherwise stated in the direction or it is varied or revoked before then.

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Insolvency Service Debt Respite Scheme (Breathing Space) guidance

On 24 December, the Insolvency Service (IS) published guidance for creditors and money advisors about the debt respite scheme (Breathing Space) which comes into force on 4 May 2021. The IS guidance comprises two documents to help navigate the regulations: (i) Debt Respite Scheme (Breathing Space) guidance for creditors; and (ii) Debt Respite Scheme (Breathing Space) guidance for money advisers. The guidance documents explain, among other things: (a) creditors/money advisers’ responsibilities; (b) how to start a breathing space and what to do before starting; (c) client eligibility for a breathing space; and (d) what to do during a breathing space and how to end it.

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

FCA Covid-19 financial resilience survey data

On 7 January, the FCA published the data it has obtained as a result of carrying out its Covid-19 financial resilience survey during 2020. The survey, which is one of the data sources used to monitor financial resilience, was sent to 23,000 solo-regulated firms to understand the real-time effect the pandemic is having on the finances of the firms the FCA prudentially regulates. Key results include: (i) between February (pre-lockdown) and June (during the impact of the first lockdown), firms across the sectors experienced significant change in their total amount of liquidity; (ii) 59% of firms expected Covid-19 to have a negative impact on their net income, with 3% of these firms expecting the impact to be 76%+ within the next 3 months of the survey being taken; (iii) the payments & e-money sector has the lowest proportion of profitable firms - the greatest decrease in profitable firms between February and June was seen in the retail lending sector (10%) followed by payments & e-money (9%); and (iv) proportionately, retail lending had made most use of the available government support. The FCA will repeat the survey as the situation evolves.

Press release

Survey data


HMT consultation and call for evidence on UK regulatory approach to cryptoassets and stablecoins

On 7 January, HMT published a consultation on the UK regulatory approach to cryptoassets and stablecoins and opened a call for evidence on investment and wholesale uses of cryptoassets, and the broader use of DLT in financial markets. This document represents the first stage in the consultative process and focuses on establishing a sound regulatory environment for stablecoins, where the government judges that risks and opportunities are most urgent. The government will strategically assess new and emerging risks as this market continues to mature. The deadline for responding to the consultation and call for evidence is 21 March 2021.

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ECB letter to EP on a digital euro

On 30 December, the ECB published a letter (dated 22 December) responding to the EP’s questions on its plans for a digital euro. The ECB explains that the Eurosystem is currently conducting conceptual analysis and practical experimentation on the technical solutions that might support the issuance of a digital euro in the future, including: (i) on both centralised and decentralised approaches, which will rely on certain technologies, be they blockchain or others; (ii) on possible international spill-over effects of a digital euro, both within and outside the EU; and (iii) on the role of commercial banks in a digital euro system and the possible impact on their provision of credit. The ECB explains that a digital euro should be made available on an equal basis in all euro area countries through supervised intermediaries, which could leverage their existing customer-facing services and avoid the costly duplication of processes. A digital euro would also be designed so as to be an attractive means of payment, not a form of investment, and thus avoid the associated risk of large shifts from private money (for example commercial bank deposits) to a digital euro. The Eurosystem is assessing the tools that could be used to avoid such shifts with a view to safeguarding the stability of the banking sector, monetary policy transmission, and the retail payments system. The ECB considers that the issuance of a digital euro would not in itself restrict banks’ ability to grant loans that would be disbursed by crediting deposit accounts of the loan recipients. Moreover, the private sector would be able to build new businesses based on digital euro-related services. The ECB reminds the EP of its ongoing public consultation on the design, and financial and social issues surrounding the possible introduction of a digital euro, which closes on 12 January 2021.

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Fund regulation

FCA form for notification to amend recognised EEA UCITS

On 7 January, the FCA updated its webpage on amending a recognised fund, adding a new notification form relating to changes to an EEA UCITS scheme and any sub-funds which are in the temporary marketing permissions regime (TMPR) as required by Regulations 65 and 66 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.

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ESMA launches common supervisory action with NCAs on supervision of costs and fees of UCITS

On 6 January, ESMA announced that it is launching a common supervisory action (the CSA) with national competent authorities (NCAs) on the supervision of costs and fees of UCITS, to be conducted during 2021. The CSA’s aim is to assess the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework, and the obligation of not charging investors with undue costs. For this purpose, NCAs will take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020. The CSA will also cover entities employing Efficient Portfolio Management techniques to assess whether they adhere to the requirements set out in the UCITS framework and ESMA Guidelines on ETFs and other UCITS issues. The work will be done on the basis of a common methodology developed by ESMA. 

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Markets and infrastructure 

CFTC and ESMA sign enhanced MoU related to certain recognised CCPs

On 7 January, ESMA announced that it has signed the enhanced memorandum of understanding (MoU), entered into with the US Commodity Futures Trading Commission (CFTC) regarding co-operation and the exchange of information with respect to certain registered derivatives clearing organisations established in the US that are central counterparties (CCPs) recognised by ESMA under EMIR. Through the MoU, ESMA and the CFTC express their desire for enhanced cooperation as to the larger US CCPs operating in the European Union with provisions that expand upon the collaboration set out in the 2016 CFTC-ESMA MoU related to recognised CCPs.


Press release

ISDA paper on Covid-19 and CCP Risk Management Frameworks

On 7 January, ISDA published a paper setting out the results of an analysis conducted by its Clearing Member Committee regarding how central counterparty (CCP) risk management frameworks reacted to the Covid-19 pandemic, based on feedback from CCPs. ISDA explains that the findings show CCPs were able to withstand the most volatile market period since 2008. While there were three small member and some client defaults/close-outs in the US and Europe, none affected market stability or the capacity of clearing members to meet their financial obligations. Other than these defaults, no CCP reported near misses or issues with members paying margin. The stability of the system reflects the resiliency of CCPs, high levels of capital among clearing members and quick intervention by central banks to bolster liquidity. ISDA is however concerned by the significant increase in both variation margin (VM) and initial margin (IM). ISDA explains that VM reflects the profits and losses of members and redistributes liquidity, so a large increase in VM was unavoidable given the extreme market volatility. But procyclical IM drains liquidity from the market at greater levels during times of stress, and the increases seen globally were concerning. ISDA recommends: (i) in line with the Principles for Financial Market Infrastructures, CCPs adopt forward-looking and relatively stable and conservative margin requirements that are specifically designed to limit the need for destabilizing, procyclical changes; (ii) that anti-procyclicality (APC) tools are calibrated to ensure margin increases in response to volatility are less extreme in future; (iii) greater transparency of CCP models to enable predictability of margin levels during benign and stressed markets for clearing participants; (iv) the introduction of a standard for the measurement of procyclicality in CCP models, enabling the ratio between margin in stressed versus normal times to be measured in a common way; and (v) that the frequency of public quantitative disclosures are increased, at a minimum, for essential data points like IM, default fund contributions and backtesting breaches to monthly disclosures.

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The Short Selling (Notification Thresholds) Regulations 2021

On 6 January, the Short Selling (Notification Thresholds) Regulations 2021 were published on, together with an explanatory memorandum. This instrument amends the retained EU regulation on short selling and certain aspects of credit default swaps (the SSR). It lowers the initial notification threshold for the reporting of net short positions to the FCA, in relation to the issued share capital of a company that has shares admitted to trading on a trading venue, from 0.2% to 0.1%. This change will allow the FCA to more effectively monitor short selling activity at a time of increased market volatility, and to act against any short selling activity that impacts on the integrity of the market. The lower threshold will take effect from 1 February 2021 and will apply indefinitely. The FCA has stated that in the interim period between the end of the Transition Period and 1 February 2021, persons will continue to be able to make notifications to the FCA at the 0.1% threshold if they wish to do so. Amending the threshold under Article 5 of the SSR will result in the UK requirements differing from the requirements under the EU SSR and the associated ESMA decision. In the UK, the 0.1% threshold will apply in respect of shares admitted to trading on UK regulated markets and UK multilateral trading facilities, whereas in the EU the 0.1% threshold will apply only in respect of shares admitted to trading on EU regulated markets.


Explanatory memorandum

FCA amends list of equivalent non-UK regimes in relation to certain DTR provisions

On 5 January, the FCA amended the list of third countries it regards as equivalent in relation to certain provisions of DTR 4 (Periodic Financial Reporting), 5 (Vote Holder and Issuer Notification Rules) and 6 (Continuing Obligations and Access to Information).

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FCA indicative list of financial instruments subject to notification requirements

On 1 January, the FCA published an indicative list of financial instruments subject to notification requirements by virtue of section 89F(1)(b)(iii) of FSMA and according to DTR 5.3.1R (Notification of Voting Rights arising from the Holding of Certain Financial Instruments). The FCA is required to review this list on an ad-hoc basis after taking account of developments in financial markets. Provided that they satisfy the conditions set out in DTR 5.3.1R(1)(a) or DTR 5.3.1R(1)(b), the financial instruments subject to the notification requirements are: transferable securities, options (which include calls, puts or any combination thereof), futures, swaps, forward rate agreements, contracts for differences and any other contracts or agreements with similar economic effects which may be settled physically or in cash. Furthermore, financial instruments that satisfy the DTR conditions set out above and reference shares to which voting rights are attached, are also subject to notification requirements namely: irrevocable convertible and exchangeable bonds referring to already issued shares, financial instruments referenced to a basket of shares or an index and which comply with the criteria laid down in Article 4(1) of Commission Delegated Regulation (EU) 2015/761 as it applies in the UK, warrants, repurchase agreements, rights to recall lent shares, contractual buying pre-emption rights, conditional contracts or agreements other than options and futures, hybrid financial instruments, combinations of financial instruments and shareholders’ agreements having DTR 5.3.1R financial instruments as an underlying. The FCA notes that there may be overlaps within these two categories, and in such cases notification is required under one of them.

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Corrigendum to Delegated Regulation supplementing EMIR on rules of procedure for penalties imposed on trade repositories by ESMA published in OJ

On 29 December, a corrigendum to Commission Delegated Regulation (EU) No. 667/2014 supplementing EMIR with regard to rules of procedure for penalties imposed on trade repositories by ESMA was published in the OJ. The corrigendum amends Articles 6(5) and 7(5) of the Delegated Regulation to replace references to Article 58 of the ESMA Regulation with references to Article 60.

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Payments services and payment systems

Please see the FinTech section for the product-specific updates relating to payment services and payment systems. 

Pay.UK report on effect of Covid-19 on switching attitudes and behaviours in the UK

On 6 January, Pay.UK published a report commissioned by the Current Account Switch Services (CASS) on how the Covid-19 pandemic has affected current account switching attitudes and behaviours in the UK. Over the course of the pandemic, CASS has seen a significant drop in the number of switches that have been conducted, most notably between March and April 2020, at the peak of initial lockdowns. However, recently these numbers have bounced back, as seen through its quarterly dashboards and this trend is predicted to continue. Key findings include: (i) consumer awareness of CASS has remained high, and attitudes towards CASS and the simplicity of the switching process are generally positive; (ii) the impact of the pandemic on switching bank accounts has led to more people feeling financially vulnerable, and financially vulnerable people and some SMEs think switching could be risky. These people and businesses may benefit from more positive support on how to switch accounts; (iii) 76% of consumers consider cash rewards to be an important factor for switching accounts; and (iv) the main reasons why consumers do not switch remain satisfaction with their current provider and not seeing a reason to switch. 

Press release


Prudential regulation

PRA statement on the EU requirement on prudential treatment of software assets

On 30 December, the PRA published a statement on the EU requirement on prudential treatment of software assets, following the EU’s adoption on 23 December 2020 of the EBA regulatory technical standards bringing into force Article 36(1)(b) of CRRII. This article exempts software assets from the deduction requirement for intangible assets from CET1 and under the EU Withdrawal Agreement is now applicable to PRA-regulated firms. The PRA explains that it is concerned that exempting software assets from the CET1 capital deduction requirements could undermine the safety and soundness of UK firms, as it has found no credible evidence that software assets can absorb losses effectively in stress. The PRA intends to consult in due course to maintain the earlier position whereby all software assets continue to be fully deducted from CET1 capital. In the meantime, the PRA recommends firms not to base their distribution or lending decisions on any capital increase from applying this requirement. Firms should also take into account any significant software assets included in their regulatory capital in making capital management decisions.

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PRA policy statement on implementation of CRD V

On 28 December, the PRA published a policy statement (PS29/20) on CRD V. The PS provides the final policy to consultation paper (CP22/20) on a new rule to designate the PRA subsidiaries of parent financial or mixed financial holding companies (FHCs, MFHCs) as responsible for ensuring compliance with the group’s CRR consolidated prudential requirements until the date on which its parent FHC or MFHC application for approval or exemption has been finally determined. This is necessary to ensure the continuity of consolidated supervision, and to enable the PRA to continue to supervise, monitor, exercise discretions, impose additional requirements, and enforce against breaches of obligations which apply on a consolidated basis. The PS also contains the final PRA Rulebook instruments, Statements of Policy, Supervisory Statements, and templates that were published in near-final form in PS26/20 on CRD V. The changes largely came into effect on 29 December 2020.

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Recovery and resolution

SRB and BoE bank resolution cooperation agreement comes into force

On 6 January, the SRB announced that a bank resolution cooperation agreement between it and the BoE came into force on 1 January 2021, to facilitate bank resolution while maintaining financial stability within the EU and UK. The cooperation arrangement sets out the framework for consulting, cooperating and exchanging information when preparing for and implementing bank resolution in the UK and the Banking Union, in line with the rules in both jurisdictions. The arrangement is based on reciprocity and proportionality, and recognises the complex nature of cross-border bank operations. The BoE has updated its resolution webpage to refer and link to the arrangement.

Press release

Cooperation agreement

BoE resolution webpage

Other developments

FMLC report on the use of electronic signatures in authenticating global notes

On 31 December, the FMLC published a report discussing the validity of electronic signatures when authenticating global notes and the status of electronic execution in law. The FMLC explains that as a result of the Covid-19 pandemic, legal uncertainty has arisen as to the need for “wet ink” signatures in contracts in cases where electronic execution might not be possible. An example of a key financial markets activity which, in normal circumstances, requires a “wet ink” signature is that of the signing, authentication and effectuation process for global notes. In reaction to the new circumstances, and to facilitate the conduct of business as smoothly as possible, the FMLC understands that the International Central Securities Depositories have suggested temporary amendments to their procedures which incorporate electronic signatures and include a requirement to check the legal validity of electronic signatures of global notes under the issuing laws of the global notes. In this context, the FMLC appraised the validity of electronic signatures under European, English, Irish, German, Luxembourgish and Dutch law. The FMLC concluded that the law in these jurisdictions supports electronic signatures subject to the specific formal requirements set out at the European level in the eIDAS Regulation and those prescribed in the law of each jurisdiction.

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