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Key Regulatory Topics: Weekly Update 23 to 29 October 2020

29 October 2020

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

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Risk Free Rate and LIBOR Cessation – What does this mean for fund finance?

In this article, we intend to focus on the particular impact that IBOR transition will have on borrowers and lenders who are active in the fund finance sector. A&O has acted on a significant number of loan facilities that provide for the use of the new ‘Risk Free Rates’ and are therefore uniquely positioned to explain and advise banks and borrowers on the issues they are now facing.
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Please see our Markets and Markets Infrastructure section for product specific updates relating to Brexit.

Please see our Other Developments section for an update on the FCA publishing Handbook Notice 81.


Capital Markets

ESMA sets out the priorities that EEA corporate reporting enforcers will consider when examining listed companies’ 2020 annual financial reports

On 28 October, ESMA published its annual public statement on European Common Enforcement Priorities, setting out the priorities that EEA corporate reporting enforcers will consider when examining listed companies’ 2020 annual financial reports. The 2020 enforcement priorities for financial statements prepared in accordance with International Financial Reporting Standards (IFRS), reflect the need to provide adequate transparency regarding the consequences of the Covid-19 pandemic, which are expected to affect several areas of the 2020 annual financial reports. The key areas are: (i) the application of IAS 1 Presentation of Financial Statements with a focus on going concern, significant judgements and estimation uncertainty and the presentation of Covid-related items in the financial statements; (ii) the application of IAS 36 Impairment of Assets, where the recoverable amount of goodwill, intangible assets and tangible assets may be impacted by the deterioration of the economic outlook of various sectors; (iii) the application of IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures; and (iv) specific issues related to the application of IFRS 16 Leases. ESMA will collect data on how European listed entities have applied the priorities and ESMA will report on findings regarding these priorities in its report on the 2021 enforcement activities.
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FCA policy statement on extending the implementation deadlines for the SM&CR and conduct rules

On 28 October, the FCA published a PS on extending the implementation deadlines for the SM&CR and conduct rules. This sets out the FCA’s final rules and summarises the feedback received to its consultation paper 20/10. The FCA confirms that it will extend the deadline for the following requirements from 9 December 2020 to 31 March 2021 as consulted on: (i) the date the conduct rules come into force, for staff who are not senior managers, certification staff or board directors; (ii) the date by which relevant employees must have received training on the conduct rules; (iii) the deadline for submission of information about directory persons to the register; and (iv) references in the FCA’s rules to the statutory deadline for assessing certified persons as fit and proper following agreement with HMT. The FCA will also extend the implementation deadlines for claims management companies (CMCs) by an equivalent period – a CMC receiving full authorisation on or after 9 December 2019 will have just over 15 months after the date of its full authorisation to meet these same requirements. The FCA encourages all firms to meet the original deadline of 9 December wherever possible. The text making the Handbook amendments is in the Individual Accountability (FCA-Authorised Firms) (COVID-19 and Extension of Deadlines) Instrument 2020 (FCA 2020/64).
FCA Policy Statement
FCA 2020/64

FCA updates information on publication date for directory persons data – dual and solo regulated firms

On 26 October, the FCA updated its webpage on the directory of certified and assessed persons, confirming the publication dates for directory persons data submitted by firms under the SM&CR. The FCA states that dual-regulated firms must submit their directory persons data no later than 13 November – the FCA will begin to publish this data on the financial services register from 23 November. Solo-regulated firms must submit their directory persons data by 31 March 2021 using the single entry submission form – earlier dates apply if they wish to use the multiple entry submission form and/or if they wish their data to appear from earlier dates starting in December. The FCA will begin to incrementally display data from solo-regulated firms as it is submitted, and the data will start to be published from 14 December.
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Please see our Markets and Markets Infrastructure section for an update on the EP adopting targeted changes for investment firms to support the post-Covid-19 recovery.

Please see our Other Developments section for an update on the FCA publishing Handbook Notice 81.

FCA Dear CEO letters on portfolio strategy to mortgage intermediaries and claims management companies (CMCs)

On 29 October, the FCA published a Dear CEO letter on portfolio strategy to mortgage intermediaries. In the letter, the FCA: (i) sets out its view of the key risks mortgage intermediaries pose to their consumers or the markets in which they operate; (ii) outlines its expectation of mortgage intermediaries, including how firms should be mitigating these key risks; and (iii) describes its supervisory strategy and programme of work to ensure that firms are meeting its expectations, and harms and risks of harm are being remedied and/or mitigated. The FCA published a similar letter to CEOs of CMCs on 26 October.
FCA Letter – Mortgage Intermediaries
FCA Letter – CMCs

FCA terms of reference for review into change and innovation in the unsecured credit market

On 23 October, the FCA published a webpage for its review of unsecured credit market regulation, which will be chaired by Christopher Woolard. The FCA states that the review will concentrate on how regulation can better support a healthy unsecured lending market. The review will take into account the impact of Covid-19 on: (i) employment security and credit scores; and (ii) changes in business models and new developments in unsecured lending, including the growth of unregulated products in retail and the workplace. Furthermore, the FCA lists the terms of reference for the review, which are to: (a) examine the current state of the unsecured credit market in the UK; (b) examine changes in regulation, noting those areas that have been subject to regulatory oversight in recent years from a variety of bodies and comparing likely harms or dynamic effects seen in those areas; (c) examine the immediate effect of Covid-19 on demand for unsecured credit and on the role of credit information; (d) report on possible trends and potential future pressures; (e) identify areas of growth in demand from consumers for credit including from non-traditional providers of credit; (f) present an assessment of the benefits and harms evident in the market and those that may be expected as the market develops; (g) compare international approaches to these issues where relevant; and (h) make conclusions and recommendations to the FCA Board on: management of harms in the sector, gaps in understanding or data, potential changes in regulation for the FCA to consider, advice on potential changes to the overall system that the FCA may wish to consider with other authorities or the Government, as well as possible innovations to support a sustainable market. A call for input will be published in early November.
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FCA confirms measures to support closed book and interest-only/part-and-part mortgage borrowers – Covid-19

On 23 October, the FCA published a policy statement, confirming the following measures: (i) a new rule (which came into force from 23 October) that makes it easier for lenders to offer switching options to consumers who are in a closed book within the same financial group – this mirrors the flexibility that active lenders have under the FCA’s existing rules when their existing customers wish to switch; and (ii) final guidance (which comes into force on 31 October) stating that firms should allow borrowers to delay repayment of the capital at maturity on interest-only and part-and-part mortgages up to 31 October 2021, provided borrowers are up-to-date with payments and they continue to make interest payments.
FCA Policy Statement
FCA Mortgages (Intra-Group Switching) Instrument 2020

FCA extends deadline for contacting mortgage prisoners – Covid-19

On 23 October, the FCA provided an update to confirm that it has extended the window for firms contacting mortgage prisoners about switching options by 6 weeks, to 15 January 2021. The FCA explains that this extension is to help firms manage an operational challenge arising from the Covid-19 crisis; lenders have not been able to offer switching options for mortgage prisoners as quickly as originally anticipated, and the delay in availability of switching options has caused the time available for sending out these communications to become compressed.
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Please see the other sections for product specific updates relating to Covid-19.

FCA update webpages on mutual societies in light of Covid-19

On 28 October, the FCA updated its information on mutual societies in light of the Covid-19 pandemic. Firstly, the FCA updated its webpage on annual returns and accounts in light of societies experiencing delays because of the pandemic. While the FCA asks societies to take steps to submit their returns as soon as reasonably practicable, it maintains its position that it will not take any action before 31 October to follow-up on any delayed submission where the delay is 3 months or less. For annual returns and accounts due for submission by 30 April 2021, the FCA will not take any action to follow-up on delayed submissions, where the delay is 3 months or less. Secondly, the FCA updated its webpage on its responsibilities in respect of mutual societies, stating that it is aware that some mutual societies are considering a number of options, including postponing scheduled member meetings such as Annual General Meetings (AGMs), as a result of the pandemic. Amongst other things, the FCA states that societies should take reasonable steps to ensure that they meet any obligations that they are under as soon as reasonably practicable, and should consider alternative arrangements. The FCA also emphasises that: (i) the rules of an individual society govern the relationship between a society and its members – the FCA plays no role in determining disputes over society rules; (ii) the Corporate Insolvency and Governance Act 2020 has made it easier for societies to hold meetings virtually; (iii) where, following Government guidance, the postponement of a general meeting results in a breach of a legislative requirement, it may fall to the FCA to make a decision about what, if any, action it takes – the FCA does not consider it to be in the public interest for it to take action in this context where it can see that a society is taking steps to ensure that they meet the legislative obligation as soon as reasonably practicable; and (iv) for those societies that have listed securities, they should continue to consider and comply with their obligations under MAR and the relevant FCA listing rules.
FCA Webpage – Annual Returns and Accounts
FCA Webpage – The FCA’s Responsibilities


Financial Crime

Please see our Markets and Markets Infrastructure section for an update on ESMA’s final report on the amendments to the Market Abuse Regulation (MAR) for the promotion of the use of SME Growth Markets (GMs).

FATF statement on counter proliferation financing

On 23 October, the FATF published a statement on counter proliferation financing, confirming that it has adopted amendments to its recommendations. The new obligations seek to ensure that apart from implementing the existing requirements under Recommendation 7, financial institutions as well as designated non-financial businesses and professions (DNFBPs) should identify and assess the risks of potential breach, non-implementation or evasion of targeted financial sanctions when dealing with their customers, and take appropriate mitigating measures commensurate with the level of risks identified. The FATF will develop Guidance to assist countries and the private sector in assessing and mitigating the proliferation financing risk. The FATF will also begin the process of revising its methodology for assessing these new obligations. As part of a phased approach, the FATF will begin assessing jurisdictions for implementation of these requirements at the start of the next round of mutual evaluations, to allow time to put the necessary domestic measures in place. The FATF expects all countries and regions to take concrete steps to ensure implementation of the new obligations, and to determine the appropriate sequence and timeframe for implementation at national level. The FATF published its updated Recommendations on 28 October.
FATF Statement
FATF Updated Recommendations

FCA responds to HOC Treasury Committee questions on UK approach to combatting financial crime after the US Financial Crimes Enforcement Network (FinCen) papers leak

On 23 October, the FCA published a letter responding to questions from the HOC Treasury Committee in respect of the release to the media of papers filed with FinCen. The FCA has written to all FCA authorised firms identified in the recent coverage which have a presence in the UK to request further information, and is considering whether any immediate supervisory mitigation steps are required and whether to open enforcement investigations. Amongst other things, the FCA addresses its response to what needs to be done to further secure the financial system from economic crime, given the information in the FinCen files: (i) the Government published its Economic Crime Plan in July 2019 – this includes the way in which the FCA approaches supervision to deal with existing firms, making greater use of data to identify firms or areas that are potentially vulnerable to money launderers and the extension of the FCA’s remit to deal with new risks posed by cryptoassets; (ii) emerging technologies such as artificial intelligence and machine learning have the potential to help firms monitor and identify suspicious transactions more effectively and efficiently; (iii) increased information sharing between banks and public agencies can help the detection and prevention of crime; and (iv) whether privacy enhancing technologies (PETs) can be used to share data and knowledge across institutional and jurisdictional boundaries without compromising privacy laws. Furthermore, the FCA hopes that the release of the information does not impact on firms’ SARs reporting – the FCA is examining the potential impact on ongoing investigations and will continue to do so as further material comes to light.
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HOC Treasury Committee launches new Economic Crime inquiry

On 23 October, the HOC Treasury Committee launched a new economic crime inquiry to review what progress has been made in combatting such crime. The inquiry will have two strands: (i) anti-money laundering systems and the sanctions regime, including the FinCEN papers and the work of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS); and (ii) consumers, including emerging trends as a result of Covid-19 and Authorised Push Payment Fraud. The Committee will continue to examine economic crime related to Bounce Back Loans as part of its ongoing inquiry into the economic impact of Covid-19.
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Serious Fraud Office (SFO) revises its Operational Handbook on Deferred Prosecution Agreements (DPAs)

On 23 October, the SFO revised a section in its Operational Handbook on DPAs. The guidance does not make any significant changes from existing practice – rather, it highlights the relevant factors in considering whether a DPA, as opposed to a prosecution, is in the public interest. These factors include those contained within the Code for Crown Prosecutors and further non-exhaustive factors that should be considered, including additional public interest factors against prosecution. The section also covers relevant considerations for cases where a DPA is under consideration and where there is a parallel investigation by an overseas and/or other UK agency.
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FCA to participate in the Global Financial Innovation Network (GFIN) cross-border testing of financial products and services

On 29 October, the FCA announced that it will be among 23 regulators across 5 continents taking part in the cross-border testing initiative organised by GFIN. To support the application process, GFIN has developed several tools and solutions to improve the cross-border testing framework for a new cohort of firms, including: (i) a single-entry application form for firms; (ii) cross-border testing FAQs to help firms understand the process; (iii) an evolved Regulatory Compendium clarifying the remit and interests of participating regulators and the types of innovation services available; and (iv) an extension of the application window to 9 weeks to allow firms more time to consider and prepare their applications. Firms interested in applying to take part in cross-border testing should review the list of participating regulators and their respective regulatory compendiums and submit an application via the GFIN website before the 31 December deadline.
FCA Statement
GFIN Application Form
GFIN Regulatory Compendium

Regulatory co-operation agreement on FinTech between Reserve Bank of India (RBI) and FCA

On 28 October, the RBI and FCA published a memorandum of understanding in respect of their regulatory co-operation agreement on FinTech. The purpose of the agreement is to provide a framework for collaboration and referrals between the innovation functions of each authority. The agreement also sets out how the authorities plan to share and use information on innovation in their respective markets.
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Financial Markets Law Committee (FMLC) response to proposal to expand the perimeter of the financial promotions regime to include cryptoasset promotions

On 25 October, the FMLC published its response to the Government’s consultation on its proposal to expand the perimeter of the financial promotions regime to include cryptoasset promotions. Section 21 of the Financial Services and Markets Act 2000 (FSMA) contains the financial promotion restriction, which provides that an unauthorised person must not communicate an invitation or inducement to engage in investment activity or claims management activity. The Cryptoasset Promotions Proposal, if adopted, will apply the restriction to unregulated cryptoassets. For this purpose, the Cryptoasset Promotions Proposal sets out a definition of a “qualifying cryptoasset”. The FMLC’s response to the consultation highlights concerns relating to the definition: (i) certain terms in the definition, such as “fungible” and “transferable”, may not offer the specificity and certainty required to determine which cryptoassets fall within the proposed regime; and (ii) the FMLC makes an observation related more generally to attempts being made around the world to define cryptoassets for the purposes of regulation – the FMLC would encourage authorities to consider the uncertainty which might be caused by a proliferation of conflicting or overlapping definitions.
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Fund Regulation

European Fund and Asset Management Association (EFAMA) updates Cyber Security Program Basics for investment management companies

On 28 October, EFAMA announced that it has updated its Cyber Security Program Basics for investment management companies in light of the concerns raised by the Covid-19 global pandemic. The following updates to the core principles (set out in the Cyber Security Program Basics) in the form of best practices have been made: (i) business continuity planning; (ii) information technology controls; (iii) inventory and control of software & hardware; (iv) principle of least privilege; (v) work from home considerations; and (vi) secure configuration. EFAMA believes that this document will be of particular added-value to small-sized investment management companies, as they may lack the resources needed to fully meet the more demanding international standards.
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Markets and Markets infrastructure

Please see our Covid-19 section for the FCA’s updated webpages on mutual societies in light of Covid-19.

Please see our Other Developments section for an update on the FCA publishing Handbook Notice 81.

EP adopts targeted changes for investment firms to support the post-Covid-19 recovery

On 29 October, the EP announced that the Economic and Monetary Affairs MEPs adopted targeted changes for investment firms, granting EU companies access to a diverse range of funding and supporting the post-Covid-19 recovery. Targeted adjustments to MiFID II aim to facilitate economic recovery by removing unnecessary administrative burdens while maintaining a balance between investor protection and compliance costs for firms. The changes apply mostly to professional clients and eligible counterparties such as insurers, pension funds, or public institutions and include: (i) information on costs and charges suspended for professional clients and eligible counterparties, except for investment advice and portfolio management; (ii) ex-post information on costs and charges should be supplied without delay and clients should be able to receive such information over the phone prior to concluding a transaction; (iii) retail clients to receive information in digital format instead of on paper, but should be given at least 8 weeks notice and the choice to continue receiving information on paper or switch to digital format; (iv) certain product governance requirements no longer apply to corporate bonds with make-whole clauses – this protects investors against losses in case an issuer opts for early repayment by guaranteeing them a payment equal to the net present value of the coupons; and (v) certain changes to the position limits regime in respect of commodity derivatives. Additionally, MEPs have asked the EC to present a proposal for a review of both MiFID and MIFIR by 31 July 2021, considering issues related to: (a) market structure; (b) data; (c) trading and post trading; (d) research rules; (e) rules on payment of inducements to advisors; (f) the level of professional qualifications of advisers in Europe; (h) client categorisation; and (g) Brexit.
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ESMA final report on the amendments to the Market Abuse Regulation (MAR) for the promotion of the use of SME Growth Markets (GMs)

On 29 October, ESMA published its final report on the amendments to MAR for the promotion of the use of SME GMs. ESMA confirms that the final report and draft regulatory technical standards (RTS) and implementing technical standards (ITS) largely reflect the original proposals included in the consultation paper. In respect of the RTS on liquidity contracts: (i) the relevant requirements applying to those liquidity contracts are set out in the body of the RTS, while the actual contractual template includes specific parameters and criteria to ensure compliance with MAR requirements while allowing flexibility for investment firms and issuers; and (ii) the RTS maintain the obligation to open a liquidity account dedicated to the contract and the limits to resources, as well as conditions to be complied with for the trading activity of the liquidity provider. In respect of the ITS, the new template for insider lists, to be used by SMEs in jurisdictions that opt for including in them all persons who have access to inside information, only contains the minimum fields that are necessary for supervisory purposes. As the delivery of the final report had to be delayed, ESMA considers the likelihood that the RTS and the ITS to be adopted by the end of the year, on time for the application date of the relevant provision (Article 1) of the SME GM Regulation (1 January 2021) as very limited. The report has been sent to the EC, and ESMA is submitting the proposed RTS and the proposed ITS for endorsement in the form of Commission Delegated Regulations. In addition, ESMA expects to submit a report to the EC to discuss the functioning of the SME GMs regime in the EU under MiFID II by end 2020.
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FCA – market making exemptions and net short positions reporting Brexit updates

On 28 October, the FCA published information for firms preparing for Brexit. First, the FCA published a webpage for firms that intend to use market making exemptions from January 2021. Amongst other things, the FCA reminds firms that under the onshored Short Selling Regulation (SSR), any firm wishing to use the exemption for transactions due to market making activities will be required to join a UK trading venue and notify the FCA of their intention to use the market maker exemption in writing 30 days ahead of their intended use. Secondly, the FCA published a webpage for firms that report net short positions. In terms of reporting obligations after the transition period, the FCA states that: (i) under the onshored SSR, position holders will be required to report their net short positions in shares at the 0.20% threshold; (ii) the reporting thresholds for UK sovereign debt and uncovered positions in UK sovereign credit default swaps will remain the same; and (iii) to determine whether a position in shares should be notified to the FCA, position holders will have to consult the FCA FIRDS for a particular share and also the UK List of exempted shares to see if that share is exempt – if a share is not exempt, position holders should send their notification to the FCA. The UK List of exempted shares will be published on the FCA’s website from 1 January 2021.
FCA Webpage – Market Making Exemptions
FCA Webpage – Net Short Positions Reporting

UK Finance and Lending Standards Board (LSB) best practice guidance on the transition of small to medium sized enterprise (SME) customers to non-LIBOR linked products

On 28 October, UK Finance and the LSB published a document making strategic recommendations on good practice for the transition of SME customers to non-LIBOR linked products with the aim of facilitating good customer outcomes and enhancing consistency of approach across the financial services industry. The recommendations cover the following areas: (i) alternative reference rates – what firms can consider when selecting alternative reference rates, such as SONIA; (ii) engaging with customers – how firms can ensure that the information is delivered in a way that enables them to make informed decisions, and what firms can be doing to ensure that all necessary measures are taken to manage risks arising from LIBOR transition that could result in poor customer treatment; (iii) approaching the transition of existing LIBOR contracts – how firms can ensure that all existing LIBOR contracts are identified, that appropriate rates are selected, customers are given sufficient information and support to make an informed decisions, and that firms take steps to manage risks related to the transitions; and (iv) governance and oversight – how firms can put governance and oversight processes in place to help to ensure the end-to-end customer journey, from initial engagement to post-sale communications.
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ESMA adds UK venues to opinions on third-country trading venues (TCTVs)

On 27 October, ESMA announced that it has updated the list of TCTVs in the context of the opinions on post-trade transparency and position limits under MiFID II and MiFIR. ESMA has proceeded with the assessment of UK venues against the criteria of the opinions related to transparency and the position limits provisions. The UK venues have received a positive assessment and have been added to: (i) the annex to the opinion related to post-trade transparency; and (ii) the annex to the opinion related to position limits. Consequently, from 1 January 2021: (a) EU investment firms will not be required to make transactions public in the EU via an EU APA if they are executed on one of the UK trading venues on the transparency list; and (b) commodity derivative contracts traded on UK trading venues on the position limits list will not be considered as economically equivalent over-the-counter (EEOTC) contracts for the EU position limit regime. ESMA has also updated the related guidance to take into account feedback received from market participants on the identification of bonds and U.S Treasuries, as well as on the treatment of venues without a market identifier code (MIC). The date of application is 10 November.
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ESMA clarifies whether endorsement of credit ratings from the UK can proceed following the end of the transition period

On 27 October, ESMA published an update to its statement (of March 2019) on the endorsement of credit ratings from the UK. ESMA confirms that EU credit rating agencies (CRAs) will be able to endorse credit ratings elaborated in the UK after the end of the transition period. The statement covers detail on the: (i) implications of Brexit for UK based CRAs; (ii) UK legal and supervisory framework meeting the conditions for endorsement; (iii) objective reasons for elaborating a credit rating outside the EU; and (iv) final decision to endorse credit ratings lying with the CRA.
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ESMA clarifies application of the share trading obligation for shares (STO) after transition period

On 26 October, ESMA published a statement to clarify the application of the STO following the end of the UK’s transition from the EU. ESMA states that the trading of shares with EEA International Securities Identification Numbers (ISIN) on UK trading venues in UK pound sterling (GBP) by EU investment firms will not be subject to the EU STO. This currency approach supplements the EEA-ISIN approach outlined in a previous ESMA statement of May 2019. The revised guidance in the statement aims at addressing the specific situation of EU issuers whose shares are mainly traded on UK trading venues in GBP. ESMA, based on EU-wide data, regards that such trading by EU investments firms occurs on a non-systematic, ad-hoc, irregular and infrequent basis – therefore, those trades will not be subject to the EU STO under Article 23 of MiFIR.
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ESMA postpones applicability date of updated EMIR validation rules

On 26 October, ESMA announced that it has postponed the applicability date of the updated EMIR validation rules from 1 February to 8 March 2021, as a result of technical issues related to their implementation in light of the UK’s withdrawal from the EU.
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ESMA consults on draft Guidelines on common procedures and methodologies on supervisory review and evaluation process of central counterparties (CCPs) under Article 21 of EMIR

On 23 October, ESMA published a consultation paper on its draft Guidelines aimed at clarifying the common procedures and methodologies on supervisory review and evaluation process of CCPs under Article 21 of EMIR, in a manner that is appropriate to the size, structure and internal organisation of CCPs, and the nature, scope and complexity of their activities. The deadline for comments is 16 November.
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ECB announces new launch date for the Eurosystem Collateral Management System (ECMS)

On 23 October, the ECB published a press release to announce that it has decided to extend the launch date of the ECMS by a year, from November 2022 to November 2023. This development follows the Governing Council’s earlier decision to extend the timeline of the T2-T2S consolidation project by one year. It addresses the concerns of market participants that the current adverse environment would hamper their preparations. In the light of the new ECMS launch date, the market participants involved in the initiative to develop a Single Collateral Management Rulebook for Europe (SCoRE) have also expressed a preference to adjust its timeline. ECMS and SCoRE are related, as SCoRE will also lay down harmonised collateral management processes that will be used by ECMS participants. In this respect, the Eurosystem has initiated a discussion in its Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo).
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EC adopts Delegated Regulation to postpone entry into force of Delegated Regulation under the Central Securities Depositories Regulation (CSDR) containing RTS on settlement discipline

On 23 October, the EC adopted a Delegated Regulation amending Delegated Regulation (EU) 2018/1229 under the CSDR which contains the RTS on settlement discipline. Delegated Regulation (EU) 2018/1229 was due to enter into force on 1 February 2021; however, in August, ESMA published and submitted to the EC a final report which contained draft RTS and its proposal to postpone the date of entry into force of the settlement discipline regime until 1 February 2022. The Council of the EU and the EP will consider the Delegated Regulation – if neither object to it, the Delegated Regulation will be published in the OJ and will enter into force three days after its publication.
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International Swaps and Derivatives Association (ISDA) launches IBOR Fallbacks Supplement and Protocol

On 23 October, ISDA launched its IBOR Fallbacks Supplement and Protocol, stating that this marks a major step in reducing the systemic impact of an IBOR becoming unavailable while market participants continue to have exposure to that rate. The Supplement will amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on January 25, 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks. The Protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the Protocol. The Protocol has been open for adherence from 23 October, and will become effective on the same date as the Supplement (January 25, 2021). The BoE has announced that it has signed up to the Protocol.
ISDA Press Release
ISDA IBOR Fallbacks Supplement
ISDA IBOR Fallbacks Protocol
BoE Press Release

FCA update on Simple, Transparent and Standardised (STS) securitisations notifications for end of Brexit transition period

On 23 October, the FCA updated its webpage on securitisation, in respect of STS securitisations notifications for the end of the transition period. The FCA states that: (i) During the transition period, UK firms should continue to notify ESMA where a securitisation meets the STS requirements; (ii) The onshored Securitisation Regulation transfers the responsibility for maintaining a list of STS securitisations from ESMA to the FCA – from the end of the transition period, the FCA will maintain a list of securitisations duly notified as meeting UK STS criteria; (iii) To qualify as UK STS, the originators and sponsor of a securitisation (or in the case of ABCP programmes and transactions, the sponsor) must be established in the UK; (iv) the FCA must be notifed, using the onshored UK STS notification templates, for securitisations which meet the UK STS criteria under the onshored regulation and UK securitisations previously notified to ESMA as EU STS that meet the UK STS criteria; (v) the FCA will soon open its portal for access to the notification templates and submission of an STS notification before 11pm on 31 December, when the UK STS framework comes into effect; and (vi) EU securitisations notified to ESMA as meeting EU STS criteria before and up to 2 years after the end of the transition period, and which remain on ESMA’s list, will also qualify as UK STS for the life of the transaction.
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FMLC discusses legal uncertainty arising from LIBOR transition

On 23 October, the FMLC published a paper to survey the uncertainties in the context of LIBOR transition and the steps being taken by authorities around the world so as to draw attention to any residual issues. The FMLC gives an overview of its views as to the risks arising in respect of benchmark reform and, specifically, from the transition from LIBOR. The FMLC also provides: (i) analysis of uncertainties arising from the UK’s impending withdrawal from the EU and the complexities it adds to the adoption of a successor rate; and (ii) a survey of the specific ways in which it may be possible to mitigate the legal uncertainties in this context—including by legislative, regulatory or market action. The FMLC concludes that the possibility of amending the feeds on the Bloomberg and Reuters LIBOR01 pages so that a successor rate is displayed instead, under the LIBOR rubric appears to offer the best prospect for avoiding disruption in the wholesale financial markets – continuing to publish values on these screens under the LIBOR rubric should provide comfort that adjustments to the rate-setting process for LIBOR will not give rise to contractual uncertainty for so long as the rate which is set by that process is published on the LIBOR01 Screen. Furthermore, the FMLC states that the publication of a strong legal opinion could provide the market with reassurance that the adjustments are not such as have taken the rate outside the market standard contractual definitions.
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Payment Services and Payment Systems

Please see our Financial Crime section for an update on the HOC Treasury Committee launching its new Economic Crime inquiry.

BoE revised approach and final schemas document for CHAPS & RTGS ISO 20022 migration

On 28 October, the BoE published its revised approach and final schemas document for CHAPS & RTGS ISO 20022 migration. This document supersedes all of the following previously published Bank of England ISO 20022 documents, and is the new baseline document that stakeholders should refer to as part of ISO 20022 migration. Amongst other things, the document provides: (i) detail on the revised ISO 20022 migration approach, including an updated timeline and further detail on how the ISO 20022 schemas will be implemented in CHAPS and RTGS; (ii) the BoE’s initial ISO 20022 Change Management Framework; (iii) a high-level update on industry readiness and testing, especially focusing on CHAPS Direct Participants; and (iv) technical detail for CHAPS and reserves and settlement account holders. The BoE will summarise feedback to Section II of the July Industry Review and provide a further update on its policy objectives, such as the use of Purpose Codes, LEIs and structured data, in a policy statement later in the year.
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ECB consults on its draft Eurosystem oversight framework and assessment methodology for electronic payment instruments, schemes and arrangements

On 27 October, the ECB published a consultation on its draft oversight framework for electronic payment instruments, schemes and arrangements (PISA framework). The framework is aimed at the governance bodies of the schemes and arrangements. In the draft framework, the ECB, amongst other things: (i) defines the payment instruments, payment schemes and payment arrangements covered by the framework; (ii) explains the role of governance bodies as addressees of the framework and expectations vis-à-vis these entities; (iii) outlines the co-ordination envisaged with payment system overseers and/or supervisory authorities; (iv) offers considerations on establishing a proportionate oversight approach; (v) risks and the applicable oversight principles for payment schemes and arrangements; and (vi) indicates how the oversight activities will be organised. The ECB has also published a consultation on the assessment methodology for the PISA framework. The Eurosystem’s oversight requirements are set out in the form of principles included in the framework – the PISA assessment methodology is aimed at ensuring the consistent and harmonised application of these principles by specifying key considerations and assessment questions. The underlying methodology is based on the ECB’s revised assessment methodology for payment systems (published in June 2018) – in view of the different scope of the PISA framework, some key considerations and assessment questions have been adjusted and streamlined as appropriate, complemented by relevant content from the previous assessment guides for payment schemes and enriched by new requirements which take market developments into account. The assessment methodology combines and replaces guidance that was previously provided in documents for each payment instrument. Finally, the ECB has published a consultation on the exemption policy which defines the criteria used to identify the payment schemes/arrangements which fall within the scope of the PISA framework, as well as criteria to determine those which are exempt. The deadline for comments on the consultations is 31 December.
ECB Oversight Framework
ECB Assessment Methodology
ECB Exemption Policy

European Payments Council (EPC) criteria for participation in the Single Euro Payments Area (SEPA) for communities of banks or financial institutions outside the EEA

On 23 October, the EPC published a document setting out criteria for participation in SEPA for communities of banks or financial institutions outside the EEA. The EPC states that the geographical scope of the SEPA Schemes is set out in its list of SEPA Scheme countries. The EPC has established criteria and procedures for determining whether a community of banks or financial institutions (that are equivalent to payment service providers (PSPs) in the EEA), from a non-EEA country or territory that is not yet within the geographical scope of the SEPA Schemes should be considered eligible to participate in the SEPA Schemes. The following conditions which are essential for the inclusion of a country or territory as part of the geographical scope of the SEPA Schemes relate to: (i) relationship with the EU; (ii) ensuring a level playing field with other SEPA Scheme participant; (iii) other legal and regulatory criteria; (iv) market and operational criteria; and (v) preserving the integrity of the SEPA schemes. The EPC confirms that the criteria does not apply to PSPs that are licensed in EEA countries. By way of reminder, on 7 March 2019, the EPC published its approval of UK Finance’s application for the continued participation of UK PSPs in the EPC SEPA payment schemes post the UK’s exit from the EU, provided that the UK maintains its compliance with the relevant SEPA participation criteria.
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Prudential Regulation

Please see our Markets and Markets Infrastructure section for an update on the EP adopting targeted changes for investment firms to support the post-Covid-19 recovery.

EBA consults on revised Guidelines on sound remuneration policies

On 29 October, the EBA published a consultation paper on revised Guidelines on sound remuneration policies. This review takes into account the amendments introduced by the fifth Capital Requirements Directive (CRD V) in relation to institutions’ sound remuneration policies and in particular the requirement that those remuneration policies should be gender neutral. The EBA explains that: (i) the principle of equal pay for male and female workers for equal work or work of equal value is laid down in Article 157 of the Treaty on the Functioning of the European Union (TFEU) and that institutions need to apply this principle in a consistent manner – the revised Guidelines specify that institutions should implement a gender-neutral remuneration policy; (ii) all institutions are required to apply sound and gender neutral remuneration policies to all staff and in particular, for the variable remuneration of staff, whose professional activities have a material impact on the institution's risk profile (identified staff), additional requirements apply – the revised Guidelines specify all those requirements, and the waivers, which apply to institutions based on their total balance sheet and to staff with a low variable remuneration (the waivers only apply to the deferral arrangements and pay out in instruments); (iii) the revised Guidelines clarify how the remuneration framework applies on a consolidated basis to investment firms and others financial institutions that are subject to a specific remuneration framework; and (v) the sections on severance payments and retention bonuses have been revised based on supervisory experience regarding cases of circumvention. The EBA invites comments solely on the proposed amendments shown in the tracked changes version. The deadline for comments is 29 January 2021.
EBA Consultation Paper
EBA Consultation Paper – Track Changes


Recovery and Resolution

EBA monitoring report on minimum requirement for own funds and eligible liabilities (MREL) and total loss absorbing capacity (TLAC) instruments accompanied by 15 recommendations

On 29 October, the EBA published its first monitoring report on MREL and TLAC instruments, informing stakeholders about the implementation review performed by the EBA on these instruments so far and presenting its views and current recommendations on specific features commonly seen in these instruments. The Report covers five main areas of assessment relevant to determine the quality of the TLAC / MREL instruments, namely: (i) availability; (ii) subordination; (iii) capacity for loss absorption; (iv) maturity and other aspects including governing law, tax and regulatory calls; and (v) tax gross-up clauses. The Report contains 15 recommendations in total, four in the area of subordination, seven in the area of capacity for loss absorption, three in the area of maturity and one on tax gross-up. In addition, the Report stresses the areas where further work from the EBA is ongoing. In particular, the Report highlights the importance to provide further guidance on the interaction between the clauses used for ESG capital issuances and the eligibility criteria for eligible liabilities instruments.
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PRA consults on updating the policy on operational continuity in resolution (OCIR) and BoE updates approach on assessing resolvability

On 28 October, the PRA published a consultation paper setting out its proposals to revise the OCIR policy. The purpose of the proposals is to improve firms’ resolvability and support the BoE’s approach to resolution as set out in its Statement of Policy (dated July 2019). The proposals would make amendments to the Operational Continuity Part of the PRA Rulebook (the Rules) (Appendix 1) and PRA OCIR expectations, and would result in a new Supervisory Statement (SS) (Appendix 2) on OCIR. The new SS would supersede SS9/16 on ensuring operational continuity in resolution. The PRA proposes to update the policy in four main ways: (i) require firms to consider the operational arrangements that support the viability of the firm, and its key drivers of revenue and profit in addition to those supporting its critical functions; (ii) changes regarding the way firms’ financial arrangements facilitate operational continuity – firms would only need to cover situations in which financial resources would be available within the group, but might not be accessible in a timely manner; (iii) firms should be capable of ensuring continuity while being restructured following resolution – the PRA has proposed a number of changes to provide greater clarity compared with the existing policy, as well as amendments to the policy requirements that facilitate continuity throughout post-resolution restructuring; and (iv) as the proportion of operational arrangements for which operational continuity must be ensured is likely to increase, the PRA has considered how it may be possible to reduce the burden on firms of implementing OCIR policy without compromising a firm’s safety and soundness, or its ability to be resolved in an orderly manner – the PRA’s proposals take account of the differences between arrangements that occur within individual legal entities, within a banking group, or with third parties, based on the risks that each poses to operational continuity in resolution. The PRA proposes that the changes resulting from CP20/20 come into force on 1 January 2022, and it intends to publish its final policy relating to OCIR in the first half of 2021. In addition, in light of these proposals, the BoE has published a consultation paper on updates to its approach on assessing resolvability, proposing amendments to the following BoE statements of policy: (a) approach to assessing resolvability; (b) restructuring planning; (c) management, governance and communication; and (d) valuation capabilities. The proposed amendments to the statements of policy are set out in an accompanying Appendix. The deadline for comments on both consultations is 31 January 2021.
PRA Consultation Paper
PRA Appendix 1
PRA Appendix 2
BoE Consultation
BoE Appendix

PRA consults on resolution assessments – amendments to reporting and disclosure dates – COVID-19

On 28 October, the PRA published a consultation paper setting out its proposal to move back, by one year, the dates by which firms are first required to submit a report of their assessment of their preparation for resolution, and to first publish a summary of that report under Rule 3.1(1) and Rule 4.1(1) respectively of the Resolution Assessment Part of the PRA Rulebook (Rules). This would amend the dates in the Rules (Appendix 1) as follows: (i) Resolution Assessment 3.1(1), to reflect that the date by which firms must submit a report of their assessment would change from the first Friday in October 2020, to the first Friday in October 2021; and (ii) Resolution Assessment 4.1(1), to reflect that the date by which firms must publish a summary of the most recent report would change from the second Friday in June 2021 to the second Friday in June 2022. The PRA also proposes consequential amendments to Supervisory Statement (SS) 4/19 ‘Resolution assessment and public disclosure by firms’. The deadline for comments is 31 January 2021. The proposed rule changes follow the modification by consent published by the PRA in May 2020 to alleviate operational burdens on firms due to the impact of Covid-19.
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PRA consults on transposing the Bank Recovery and Resolution Directive II (BRRD II) – proposals relating to Contractual Recognition of Bail-in (CROB) and Stay in Resolution (Stays) rules

On 28 October, the PRA published a consultation paper on proposals relating to its CROB and Stays rules, aimed at supporting the UK’s transposition of the BRRD II. The PRA explains that in order to ensure a faithful transposition of BRRD II, most of the elements of the instrument which are relevant to CROB and Stays will come into force on Monday 28 December but will subsequently cease to have effect from IP completion day – the PRA refers to this process as ‘sunsetting’. To support the sunsetting process, the PRA proposes to: (i) temporarily suspend part of the CROB Part 5 of the PRA Rulebook from 28 December; (ii) reinstate the existing CROB Part, with minor amendments, to come into force immediately after IP completion day; (iii) amend the Stays Part of the PRA Rulebook from 28 December until IP completion day; and (iv) reintroduce the existing Stays Part, immediately after IP completion day. The deadline for comments is 30 November.
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Sustainable Finance

Task Force on Climate-related Financial Disclosures (TCFD) status report

On 29 October, the TCFD published its third annual status report, providing an overview of current disclosure practices in terms of their alignment with the TCFD’s recommendations. The report also: (i) highlights specific climate-related information a group of expert users identified as the most useful for making financial decisions; (ii) addresses the top implementation issues identified by nearly 200 preparers; and (iii) includes case studies by financial sector preparers on implementing the recommendations. Amongst other things, the report states that support for the TCFD framework has exceeded initial expectations, in both the private and public sectors. Key findings include: (a) nearly 60% of the world’s 100 largest public companies support the TCFD, report in line with the TCFD recommendations, or both; (b) disclosure of climate-related financial information has increased since 2017, but continuing progress is needed; (c) energy companies and materials and buildings companies lead on disclosure; (d) 1 in 15 companies reviewed disclosed information on the resilience of its strategy; (e) asset manager and asset owner reporting to their clients and beneficiaries, respectively, is likely insufficient; (f) expert users find the impact of climate change on a company’s business and strategy as the “most useful” for decision-making; and (g) expert users’ insights on the most useful information for decision-making may provide a road map for preparers. Furthermore, the TCFD has published guidance on climate-related scenario analysis for non-financial firms and on integrating climate-related risks into existing risk management processes. In addition, the TCFD has published a consultation to determine whether further TCFD financial sector guidance on forward-looking metrics is needed – the deadline for comments is 27 January 2021.
TCFD Report
TCFD Guidance – Scenario Analysis for Non-Financial Firms
TCFD Guidance – Risk Management Integration and Disclosure
TCFD Consultation

EC consultation on sustainable corporate governance

On 26 October, following studies into the root causes of short-termism and into supply chain due diligence requirements, the EC published a consultation to gather data and to collect the views of stakeholders with regard to a possible initiative on sustainable corporate governance. More specifically, the consultation aims to gather: (i) the views of stakeholders on the need and objectives for EU intervention as well as different policy options; (ii) data that can be used to better assess the costs and benefits of different policy options; and (iii) additional knowledge about certain specific issues, in particular as regards national frameworks, enforcement mechanisms and current jurisprudence. Furthermore, the consultation seeks feedback on: (a) whether directors’ duties of care should be more clearly defined in legislation; (b) whether the EC needs to strengthen enforcement mechanisms outside of internal board structures and general meetings of shareholders; (c) approaches to aligning directors’ remuneration with a long-term approach; and (d) mandatory due diligence in the supply chain – specifically, on potential interventions, including what the new due diligence requirements should cover. The deadline for comments is 8 February 2021. A formal proposal is expected to be published by the EC in Q2 2021, but further detail on the direction of the new initiative may be included when the EC publishes its Renewed Sustainable Finance Strategy (which is now expected to be in Q1 2021).
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Other Developments

FOS news issue 154

On 28 October, the FOS published the 154th edition of its news issue. Amongst other things, this issue includes: (i) a blog on the impact of Covid-19 on financial service complaints and SMEs; and (ii) half-yearly complaints data.
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FCA Handbook Notice 81

On 23 October, the FCA published Handbook Notice 81. The FCA has made changes to the Handbook, set out in the following instruments: (i) Conduct of Business (Cryptoasset Products) Instrument 2020; (ii) Conduct of Business (Cryptoasset Products) (Amendment) and Associated Exiting the European Union Amendments Instrument 2020; (iii) Technical Standards (Securities Financing Transactions Regulation) (EU Exit) (No 1) Instrument 2020; (iv) Technical Standards (Securities Financing Transactions Regulation) (EU Exit) (No 2) Instrument 2020; (v) Technical Standards (Markets in Financial Instruments Regulation) (EU Exit) (No 3) Instrument 2020; (vi) Handbook Administration (No 54) Instrument 2020; (vii) Covid-19 Mortgages Instrument (No. 2) 2020; (viii) Mortgages (Intra-Group Switching) Instrument 2020; and (ix) Fees (Credit Rating Agencies, Trade Repositories and Securitisation Repositories) Instrument 2020.
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