Skip to content

Key Regulatory Topics: Weekly Update 3 - 9 Dec 2021

In another busy week, we saw HM Treasury begin consulting on amendments to the Building Societies Act 1986, the FCA and HM Treasury launch their widely publicised review of the appointed representative regime, the HoC European Security Committee query the future direction of travel for the AML regime in the UK post-Brexit and the FCA continue to develop its thinking on the new consumer duty.

Capital markets

FCA Primary Market Bulletin 37

On 9 December, the FCA published the 37th edition of its primary market bulletin. This edition: (i) covers the implementation of the FCA’s postponed rules that require issuers to publish their annual financial reports in a structured format. The FCA reminds issuers that mandatory filing comes into force for financial years starting on or after 1 January 2021 for filing from 1 January 2022; (ii) explains the importance of adequate business continuity procedures for Primary Information Providers (PIPs). These must be sufficient to ensure the PIP can continue to satisfy its PIP obligations with minimal disruption if there is an outage or other breakdown in business continuity. In considering whether the PIP satisfies this requirement, the FCA will consider whether the PIP has arrangements in place for an alternative PIP to receive and disseminate regulated information on its behalf. The FCA also suggests issuers may want to consider having more than one PIP account; and (iii) reviews sponsor requirements to identify and manage conflicts of interest, including some feedback on the range of submissions the FCA has received since its Technical Note 701.3. The FCA notes that the majority of sponsors have not submitted a conflict guidance request since the introduction of the technical note, which may suggest there is some misunderstanding or misinterpretation of the guidance. It attempts to provide some clarity.  

Bulletin

Consumer/Retail

Please see the Other Developments section for a report from the EBA on the application of its guidelines on the remuneration of sales staff.

HoC Treasury Committee letter to the FOS on action plan commitments 

On 7 December, the HoC Treasury Committee published the letter it sent to the FOS requesting further information on the action plan the FOS has launched in response to the recent independent periodic review. The Committee consider that the publication of the review offers a good basis for a further evidence session in 2022, but ask the FOS to first respond to questions on: (i) the Committee’s previous concerns including what impact the action plan will have on the current backlog of cases and whether an increase in the levy will be necessary; (ii) those that will be responsible for designing and delivering the change programme; (iii) the April 2022 commitments made by the FOS, which include publishing the refreshed strategy with key milestones, designing a target operating model and moving towards this, and developing its digital portal; and (iv) the development of existing intelligent automation solutions. 

Letter

Second FCA consultation on new consumer duty

On 7 December, the FCA began its second consultation on a new consumer duty, setting out more developed proposals following feedback from the first consultation. The FCA states that the new rules will explicitly set a higher standard of care across all retail markets and extend rules focused on product governance and fair value, which already exist in certain sectors, across all sectors. They will also ensure that firms consider the needs of their customers including those with characteristics of vulnerability and how they behave, at every stage of the product or service lifecycle. The FCA’s proposals for the consumer duty comprise of: (i) a new consumer principle that would replace Principles 6 and 7 for retail business and require firms to act to deliver good outcomes for retail customers; (ii) rules relating to the four consumer duty outcomes, which represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers. These outcomes relate to: the governance of products and services, price and value, consumer understanding and consumer support; and (iii) crosscutting rules, which set out how firms should act to deliver good outcomes and therefore provide greater clarity on the FCA’s expectations under the new principle. They will also help firms interpret the 4 consumer duty outcomes. The crosscutting rules require firms to: (a) act in good faith; (b) avoid foreseeable harm; and (c) enable and support retail customers to pursue their financial objectives. Alongside the consultation, the FCA has published draft guidance to help firms prepare before the introduction of the new duty. The deadline for comments is 15 February 2022. The FCA intends to publish a policy statement with final rules by 31 July 2022. The FCA proposes that firms should have until 30 April 2023 to fully implement the consumer duty.

Consultation

Infographic

Press release

Webpage

FCA discussion paper on compensation framework review

On 6 December, the FCA published a discussion paper on ways in which the aspects of the compensation framework that the FCA is responsible for could be improved. The main objectives of the paper are: (i) to explain the FSCS’s role, within a wider regulatory system and in the context of work underway to tackle the root-cause of the high costs which are falling to the FSCS; (ii) to start a discussion about the purpose of the compensation framework and about the principles that should underpin its design; (iii) to explore opportunities for improving the current compensation framework; and (iv) to generate views and ideas that could be developed into specific policy proposals for future consultation by the FCA. The FCA proposes four key principles for the framework: (a) the FSCS is a fund of last resort and should not be the first line of defence for protecting customers of authorised firms from harm; (b) FSCS protection for a particular regulated activity and category of individual should increase consumer confidence in the financial services sector. The availability of protection, and the benefits it brings to consumers, should be commensurate to the benefits to financial services markets; (c) the funding model should be robust, be adaptable to a changing external environment, economical and practical to implement; and (d) funding classes should provide sufficient funding for compensation whilst remaining sustainable, therefore some degree of cross subsidy may be needed in practice. The deadline for comments is 4 March 2022. The FCA intends to publish a Feedback Statement during 2022 and to engage with stakeholders directly during Q1 2022. 

Discussion paper

Financial crime

HoC European Security Committee on implications for UK of EU AML legislative package

On 3 December, the HoC European Scrutiny Committee published a letter written to John Glen, Economic Secretary to the Treasury, on the implications for the UK of the EU reforming its AML and CTF regime. The Committee ask a number of questions on the UK Government’s reform plans and intentions, including: (i) what progress has been made on HMT’s review of the UK’s AML/CFT regime and how supportive are stakeholders of changes; (ii) how the review fits into the Government’s wider review of retained EU law. Also, how the Government intends to involve Parliament and how soon does it expect to make concrete recommendations for changes to retained EU law; (iii) what approach the Government will take to assess whether to diverge from the EU and whether these assessments will be made public; (iv) as Article 653 of the UK/EU Trade and Cooperation Agreement requires that the EU and the UK each maintain a comprehensive AML/CTF regime, to what extent can the Government deregulate in this area, given that it may be perceived as a weakening of the regime; (v) how might divergence affect existing or future equivalence decisions and the continued participation of UK financial institutions in the Single Euro Payment Area; (vi) is ML an area in which the Government would welcome closer regulatory cooperation with the EU; and (vii) what progress has been made towards the signature of the UK/EU MoU on financial services, and whether the forum this MoU envisages provide space for discussions on AML/CTF issues, The Committee looks forward to receiving the Government’s response in January. 

Letter

FinTech

Please see the Markets and Markets Infrastructure section for ECON’s reports on DORA and the Digital Finance Package supporting Directive, as well as IOSCO’s consultation on proposed recommendations on the use of innovation facilitators in growth and emerging markets. 

UK and Singapore agreement in principle on Digital Economy Agreement

On 9 December, the UK and Singapore reached agreement in principle on a Digital Economy Agreement (DEA). The UK and Singapore have made, amongst others, the following commitments: (i) to not impose customs duties on electronic transmissions; (ii) to make specific commitments to promote the participation of women and SMEs in the digital economy; (iii) to digitise more trade administration documents, as well as promote interoperability; (iv) to work towards mutual recognition of electronic authentication and digital signatures; (v) to ban unjustified restrictions on the cross-border flow of data; (vi) to protect the rights of consumers online, including through laws and regulations to ban misleading, deceptive, fraudulent, and unfair commercial practices that may harm consumers; (vii) to make commitments on the transfer of financial information and not to introduce unjustified data localisation requirements; (viii) to promote transparency for accessing electronic payments and to cooperate on international standards and promote interoperability between markets; (ix) to greater cooperation for innovative financial services, such as FinTech and RegTech. The DEA will include a letter committing both parties to revitalising the existing UK-Singapore FinTech Bridge; (x) to establish a dialogue on the use of LegalTech; (xi) to work together on emerging technology, such as AI; and (xi) to share best practice on single window systems, which provide traders with a single gateway to submit information to government. With the UK in the design phase of its single window, the UK Government states that there is real value in sharing expertise and lessons learnt with Singapore, which already operates a single window system. In addition, the UK and Singapore have agreed three MoUs, on cybersecurity, digital identities and the digital facilitation of trade. 

Press release

Summary

Fund regulation

Please see the Prudential Regulation section for a number of notification forms, published by the FCA, in relation to the new Prudential Sourcebook for MiFID investment firms. 

Please see the Markets and Markets Infrastructure section for a press release from the ESRB summarising the discussions that were held at the 44th meeting of its General Board, including policy options to address risks in MMFs.

Markets and markets infrastructure

Please see the FinTech section for the announcement that the UK and Singapore have reached agreement in principle on a Digital Economy Agreement (DEA).

EUR Risk Free Rates Working Group supports recommendation on replacement of USD LIBOR 

On 9 December, ESMA published a statement from the EUR Risk Free Rates Working Group. The Working Group support the CFTC Market Risk Advisory Committee (MRAC) recommendation to adopt SOFR instead of USD LIBOR in all new cross currency swaps activity with a USD LIBOR leg in the interdealer market from 13 December. The Working Group recommends alignment in EU interdealer cross currency swap markets, and recognises that this helps market participants to meet the target of ceasing new use of USD LIBOR as of the end of 2021 (except for certain risk management exceptions) per guidance from US and UK authorities. The Working Group also recommends the adoption of €STR for the EUR leg of EUR vs USD cross currency swaps in the EU interdealer market as of 13th December.

Statement

ESRB General Board discuss MMF, CCP, private sector and cyber risks

On 9 December, the ESRB published a press release summarising the discussions that were held at the 44th meeting of its General Board. The General Board: (i) took note that the risk of an abrupt broad-based asset price correction had increased further amid continued exuberance in some financial market segments. It noted that these developments highlighted the need to strengthen the policy framework for non-banks to enhance the resilience of the financial system; (ii) in this context, the General Board continued its exchange of views on policy options to address risks in MMFs and central counterparties CCPs. Amongst other risks, the General Board discussed those stemming from the large-scale use of substantially systemic clearing services provided by UK-based CCPs, in particular in times when a UK-based CCP might come under stress. It saw a need to strengthen ESMA’s powers over Tier 2 CCPs to ensure closer cooperation between EU and non-EU authorities in resolving such stress. The General Board also agreed that, from a financial stability perspective, reducing those risks would require developing the offer of clearing services within the EU. Furthermore, it may be advisable to reflect on the allocation of supervisory powers within the EU and strengthen the role of EU-level supervision in parallel with an increase in clearing activity that might take place at some EU-based CCPs; (iii) concluded that the risk of spill overs from the non-financial private sector to the financial system had declined further but remained elevated. It emphasised that, despite the recent return of bank profitability in the EU to pre-pandemic levels, the medium-term profitability outlook remained challenging, reflecting narrow interest margins in the low interest rate environment, the unfavourable cost-to-income ratios of many banks and limited cross-border bank consolidation; and (iv) considered a systemic cyber incident co-ordination framework for financial authorities (EU-SCICF) and welcomed a report on "Mitigating systemic cyber risk”, which outlines the EU-SCICF and a macroprudential strategy to mitigate systemic cyber risk. The report will be published at the start of 2022.

Press release

Directive on credit servicers and credit purchasers published in OJ

On 8 December, Directive (EU) 2021/2167 on credit servicers and credit purchasers (the Non-Performing Loans (NPL) Directive) was published in the OJ. The Directive sets out a common framework and requirements for loan servicers (credit servicers) and loan purchasers, including NPL investors (credit purchasers). Member states are expected to adopt measures implementing the Directive by 29 December 2023 and to apply those measures from 30 December 2023. The Directive will enter into force on 28 December. Entities already carrying out credit servicing activities on 30 December 2023 will be allowed to continue carrying out those activities in their home member state until the earlier of 29 June 2024 or the date on which they obtain an authorisation under the Directive.

Directive

EBA consults on draft RTS on requirements for crowdfunding service providers

On 8 December, the EBA began consulting on draft regulatory technical standards (RTS) specifying the information that crowdfunding service providers must provide to investors under Article 19(7) of the Regulation on European Crowdfunding Service Providers (ECSPR). The draft RTS specify: (i) the elements, including the format, that are to be included in the description of the method to calculate credit scoring and to suggest loan pricing; (ii) the information and factors that crowdfunding service providers need to consider when carrying out a credit risk assessment and conducting a valuation of a loan; (iii) the factors that a crowdfunding service provider must consider when ensuring that the price of a loan it facilitates is fair and appropriate; and (iv) the minimum contents and governance of the policies and procedures required for information disclosure and of the risk- management framework for credit risk assessment and loan valuation. The deadline for comments is 8 March 2022. After considering feedback, the EBA expects to submit the draft RTS to the EC in May 2022.

Press release

Consultation

IOSCO consults on use of innovation facilitators in growth and emerging markets

On 7 December, IOSCO began consulting on proposed recommendations on the use of innovation facilitators in growth and emerging markets. The consultation covers three types of innovation facilitators (IFs): innovation hubs, regulatory sandboxes, and regulatory accelerators. IOSCO’ consultation presents: (i) definitions and the risks and opportunities posed by IFs; (ii) the global trends and an overview of emerging markets’ regulatory initiatives; (iii) examples of the current practices in advanced markets; and (iv) also discusses the role of conducting a policy assessment in developing IFs. IOSCO proposes four recommendations for emerging market member jurisdictions to consider when setting up innovation facilitators, which cover: (a) considerations prior to the establishment of innovation facilitators; (b) definition and disclosure of objectives and functions of innovation facilitators; (c) defined eligible entities and the criteria for application; and (d) mechanisms for cooperation and exchange of information with both local and foreign relevant authorities. The report also includes a decision tree for regulators to consider when looking at establishing an innovation facilitator and assessing what type of innovation facilitator to set up. The deadline for comments is 6 February 2022.

Press release

Consultation 

ECON adopts report on DORA proposal and Digital Finance Package supporting Directive

On 7 December, the EP published the text of the reports, adopted by ECON, on the proposed Regulation on digital operational resilience for the financial sector (DORA) and the proposed Directive amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2015/2366 and (EU) 2016/2341. ECON adopted both reports on 1 December. They set out a draft EP legislative resolution with suggested amendments to the proposed legislation. The reports have now been tabled for EP’s first reading in plenary. 

DORA procedure file

DFP Supporting Directive procedure file

FSB 2021 implementation progress on G20 OTC derivatives market reforms

On 3 December, the FSB published a progress report on the implementation of the G20’s OTC derivatives market reforms: (i) there was significant progress in implementing final higher capital requirements for non-centrally cleared derivatives (NCCDs), which are now in place in 15 out of 24 FSB member jurisdictions. Interim higher capital requirements for NCCDs are in force in 23 FSB member jurisdictions, unchanged since the 2020 progress report; (ii) margin requirements for NCCDs are in force in 16 jurisdictions. The final implementation phase will take effect on 1 September 2022 and some jurisdictions that have yet to implement the requirements expect to do so by that date; (iii) trade reporting requirements for OTC derivatives transactions are in force in 23 FSB member jurisdictions, unchanged since the 2020 progress report, with preparation ongoing in the final jurisdiction. Some jurisdictions report they have further strengthened the functioning of trade repositories and the reporting requirements; (iv) central clearing requirements are in force in 17 FSB member jurisdictions, unchanged since the 2020 progress report. Some jurisdictions are taking steps toward implementation of mandatory central clearing, including authorisation of a central counterparty (CCP) in the jurisdiction; and (v) there have been few developments in jurisdictions regarding platform trading requirements, which are in force in 13 FSB member jurisdictions, unchanged since the 2020 progress report. 

Report

BoE policy statement on extension of derivatives clearing obligation to contracts referencing TONA

On 3 December, the BoE published a policy statement on the proposal to add Overnight Index Swaps (OIS) that reference TONA to the scope of contracts subject to the derivatives clearing obligation. The BoE’s final policy maintains the proposal in the consultation to add TONA OIS contracts with an original maturity between 7 days and 30 years to the clearing obligation. However, the BoE has amended the date on which this change will come into force from 6 December 2021 to 31 January 2022. The BoE’s final policy has been implemented via amendments to the on shored version of Commission Delegated Regulation (EU) 2015/2205 supplementing EMIR with regard to regulatory technical standards on the clearing obligation (Binding Technical Standard (BTS) 2015/2205). The BoE will continue to monitor developments in the USD interest rate derivatives market and, where possible, co-ordinate with the Commodity Futures Trading Commission on changes to respective clearing obligations. The BoE expects to consult on changes to the clearing obligation relating to the contact types referencing USD LIBOR in 2022.

Policy statement

Payment systems and payment services

PSR framework for New Payments Architecture central infrastructure services

On 9 December, the PSR published a policy statement setting out the regulatory framework it will implement to address risks to competition and innovation arising from the behaviour of a provider of central infrastructure services (CIS) for the New Payments Architecture (NPA). The framework places obligations on Pay.UK, which is responsible for delivery of the NPA, including that it: (i) is the primary interface and decision-maker for CIS provision; (ii) set CIS user prices and do so using a methodology that adheres to certain pricing principles and is subject to the PSR’s non-objection; (iii) set the rules and standards for the NPA CIS and ensure that these facilitate competition and innovation; and (iv) ensure that a CIS provider does not use, or disclose to any other party including its affiliates, information and data for anything other than CIS provision. The framework also requires that if a CIS provider or an affiliate participates in a payment system that competes, or can be expected to compete, with the NPA payment system or is active in NPA overlay services, the CIS provider functions must be operationally separate from other parts of its (or an affiliate’s) business. If a CIS provider has no such interests, it must notify the PSR if this might change due to any proposed action or change in circumstances and in any event report annually on its position. Alongside the regulatory framework, the PSR has also published illustrative directions on how it plans to implement the framework. The PSR intends to publish and consult on draft directions closer to the go-live date for the NPA before giving them to Pay.UK and any relevant CIS provider.

Press release 

Policy statement

Annexes and illustrative directions

EPC payment threats and fraud trends report 2021

On 6 December, the European Payments Council (EPC) published its 2021 report on payment threats and fraud trends. The document: (i) provides an overview of the most important threats and other “fraud enablers” in the payments landscape and for each threat sets out the impact, context and suggested controls and mitigations; (ii) elaborates on how the identified threats impact the payment-relevant processes; and (iii) sets out the types of fraud related to specific payment instruments and supporting schemes. The EPC’s conclusions include: (a) the main attack focus over the past year has continued to be the trend of shifting away from malware to social engineering attacks. Whereas in the past consumers, retailers and SMEs had been the main focus, the last year more and more company executives, employees (through CEO fraud), financial institutions and payment infrastructures appear to become preferred targets; (b) malware remains a major threat but more particularly ransomware has become the top cyber threat faced by European cybercrime investigators. Raising awareness campaigns is one of the best tools to mitigate the risks and their impact. Similar awareness must be in place for the employees of PSPs; (c) the competitive market drive for user-friendliness and simplicity leads to increased pressure on security resources and difficult trade-offs to be made by PSPs; (d) increasing regulation in Europe on one hand increases the security barrier with respect to fraud (e.g. strong customer authentication) but at the same time also “opens up” the payment value chain which introduces new security challenges; (e) for SEPA Credit Transfer and Direct Debit transactions, the criminals’ use of impersonation and deception scams, as well as online attacks to compromise data, continued to be an important factor behind fraud losses related to these types of payments. There has been an increase in Authorised Push Payment fraud; and (f) an important aspect to mitigate the risks and reduce the fraud related to payments is the sharing of fraud intelligence and information on incidents amongst PSPs. However, often this is being limited by rules and regulations related to data protection, even more so in the case of cross-border sharing. It is to be expected that the new EBA guidelines on fraud reporting will support an improved information sharing and the availability of more accurate fraud figures.

Report

Prudential regulation 

FCA IFPR MiFIDPRU notification forms 

On 9 December, the FCA published a number of notification forms in relation to the new Prudential Sourcebook for MiFID investment firms (MIFIDPRU): (i) Notification under MIFIDPRU 4.12.7R of the intended non-material change or extension to the use of an internal model; (ii) Notification under MIFIDPRU 5.9.3R of the concentration risk hard limit breach; (iii) Notification under MIFIDPRU TP 7.4R(2)(b) on treating pre-MIFIDPRU capital instruments as own funds under MIFIDPRU 3; (iv) Notification under MIFIDPRU TP 1.8R of the intended treatment of instruments which were issued and met the conditions to be classified as additional tier 1 instruments in accordance with the UK CRR before 1 January 2022; (v) Notification under MIFIDPRU 4.12.10R and 4.14.20R of the intended use of own delta estimates; and (vi) Notification under MIFIDPRU for which there is no dedicated notification form. The forms are available to download on a dedicated page of the FCA website.

Webpage

PRA modification by consent for treatment of assets representing claims on EEA central governments

On 9 December, the PRA published a new modification by consent in respect of certain rules in the Liquidity Coverage Ratio (LCR) part of the PRA Rulebook, which will allow any CRR firm or CRR consolidation entity to continue treating certain EEA government assets as Level 1 HQLA for the purpose of the LCR and Net Stable Funding Ratio (NSFR). Modifications will take effect on or after 1 January 2022, and remain in place until revoked, varied or superseded or the relevant rules are revoked or no longer apply to a firm. Firms are invited to apply for the rule modification by email. 

Waivers and Modifications webpage

Modification by consent

EBA update on monitoring of CET1 instruments of EU institutions

On 8 December, the EBA published an updated list of Common Equity Tier 1 (CET1) instruments of EU institutions, together with an updated CET1 report, which includes information on the underlying objectives of the monitoring as well as on the consequences of including or excluding instruments in or from the CET1 list. Since the first publication of the list, and based on the information received by each competent authority, the EBA has included in the list 18 new forms of instruments issued after the entry into force of the CRR. A few pre-CRR instruments, whose terms have been amended, have also been assessed with the aim of ensuring compliance with the new regulatory requirements stemming from the CRR and regulatory technical standards. The report includes some background information on the monitoring work done to establish the CET1 list so as to provide external stakeholders with further guidance on the content and objectives of such list. The main results of the monitoring and assessment of CET1 instruments are also summarised. The latest update includes, in particular, additional guidance in the context of (in)direct funding, refusal of redemption, redeemable shares, incentives for minimum dividends and minimum dividends. The report will be updated on a regular basis to reflect the EBA's findings from the assessment of different forms of CET1 instruments, either pre-CRR or new instruments.

Report 

Press release

PRA statement on returning to setting Pillar 2A requirements as Risk Weighted Asset percentage

On 8 December, the PRA announced that it would no longer be setting Pillar 2A requirements as a nominal amount and returning instead to that of a percentage of total Risk Weighted Assets (RWAs). The change was initially made in May 2020 to alleviate unwarranted pressure on firms in response to Covid-19. In 2022, all firms will be set Pillar 2A as a variable amount (with the exception of some fixed add-ons, such as pension risk). Supervisors will be in contact with firms that do not have a Supervisory Review and Evaluation Process assessment planned in 2022 to amend the requirements by end-2022.

Statement

ECB revised guide and questionnaire for fit and proper assessments 

On 8 December, the ECB published an updated guide for fit and proper assessments and a fit and proper questionnaire template for members of the management bodies of significant credit institutions under the SSM questionnaire The ECB has also published a feedback statement to the consultation on the amendments. The objective of this revised version of the guide to fit and proper assessments which replaces the previous May 2018 version, is to explain in greater detail the policy stances, supervisory practices and processes applied by the ECB when assessing the suitability of members of the management bodies of significant credit institutions and to specify the ECB’s main expectations. The questionnaire template is to be used as a guide as to the information that the ECB and NCAs expect to receive in order to assess the fitness and propriety of appointees. 

Guide

Questionnaire template  

Feedback statement 

Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021

On 7 December, the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021 were published, together with an explanatory memorandum and de minimis assessment. This instrument largely amends legislation to effect implementation of the IFPR and Basel III Standards. The amendments are: (i) further revocations of provisions in the CRR which will be either be replaced with rules made by the PRA or which do not need to be replaced; (ii) definitional changes and consequential amendments to legislation resulting from the introduction of the IFPR; (iii) consequential amendments made to the CRR and elsewhere as a result of the revocation of provisions in the CRR contained in the CRR (Amendment) Regulations 2021/1078 and their replacement with PRA rules; (iv) the removal of investment firms which are only regulated by the FCA from the provisions related to the resolution regime in the Banking Act 2009 and subsequent amendments to other legislation; and (v) to further address a small number of deficiencies arising from the withdrawal of the UK from the EU which have been identified during the process. The Regulations will enter into force on 1 January 2022, with the exception of amendments to the CRR (Amendment) Regulations 2021, which entered into force on 8 December.

Regulations

Explanatory memorandum

De minimis assessment 

ECB SSM supervisory priorities for 2022-24

On 7 December, the ECB published its supervisory priorities for the SSM for 2022-24. The ECB has identified three priorities, each with corresponding vulnerabilities to be addressed: (i) for banks to emerge from the pandemic healthy. Vulnerabilities include deficiencies in banks’ credit risk management frameworks and exposures to Covid-19 vulnerable sectors and leveraged finance; (ii) seize the opportunity to address structural weaknesses via effective digitalisation strategies and enhanced governance. Two deficiencies are identified: in banks’ digital transformation strategies and in management bodies’ steering capabilities; and (iii) tackle emerging risks. These include climate-related and environmental risks, IT outsourcing and cyber resilience and also counterparty credit risk. For each priority, the ECB has developed a set of strategic objectives and underlying work programmes, spanning the next three years, which aim to address the most material vulnerabilities. 

Supervisory priorities 

Delegated Regulations supplementing the IFD published in OJ

On 7 December, three Delegated Regulations supplementing the IFD were published in the OJ: (i) Commission Delegation Regulation (EU) 2021/2153 supplementing the IFD with regard to regulatory technical standards (RTS) specifying the criteria for subjecting certain investment firms to the requirements of the CRR. It will enter into force and apply from 27 December; (ii) Commission Delegation Regulation (EU) 2021/2154 supplementing the IFD with regard to RTS specifying appropriate criteria to identify categories of staff whose professional activities have a material impact on the risk profile of an investment firm or of the assets that it manages. It will enter into force and apply from 12 December; and (iii) Commission Delegation Regulation (EU) 2021/2155 supplementing the IFD with regard to RTS specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration. It will enter into force and apply from 12 December. 

2021/2153

2021/2154

2021/2155

HMT consults on amendments to the Building Societies Act 1986

On 6 December, HMT began consulting on amendments to the Building Societies Act 1986. Whilst the Government believes the 1986 Act broadly remains fit for purpose, it recognises that there is interest and rationale in making further updates to the 1986 Act to allow building societies to compete on a more level playing field with banks and to promote competition within the financial services sector. The consultation requests views on proposals in relation to: (i) the funding limit - subject to some exemptions, such as own funds, building societies are required to raise at least 50% of their funding from their members’ deposits in savings accounts. While the Government believes the 50% requirement is appropriate, it proposes a number of potential exceptions from the funding limit calculation. The Government also asks whether there are future trends that have the potential to cause future funding difficulties for building societies; and (ii) modernising the corporate governance framework – amongst other proposals, the Government proposes to allow real-time virtual participation at member meetings. The deadline for comments is 28 February 2022. 

Consultation 

EC adopts Delegated Regulation on conditions for prudential consolidation under Article 18 CRR

On 3 December, the EC adopted a Delegated Regulation containing draft regulatory technical standards (RTS) specifying the conditions for the application of different methods of prudential consolidation or of the equity method in the cases referred to in paragraphs 3 to 6 and in paragraph 8 of Article 18 of the CRR. In line with the BCBS Guidelines on the identification and management of step-in risk the draft RTS also include a list of elements to be taken into account by competent authorities in assessing whether an undertaking should be fully or proportionally consolidated for prudential purposes, considering the risk of step-in for the banking group. In order to ensure consistency with the own funds framework established in the CRR and to avoid the recognition of undue capital benefits, the draft RTS specify the conditions for the inclusion in the consolidated own funds of the amounts of Common Equity Tier 1 items and of the Additional Tier 1 and Tier 2 capital instruments issued by the undertakings included in the prudential scope of consolidation and owned by persons other than such undertakings, in those cases where consolidation is required pursuant to Article 18(3) to (6) or (8) of the CRR. The Delegated Regulation will enter into force on the 20th day following that of its publication in the OJ.

Delegated Regulation

BoE review of approach to setting a minimum requirement for own funds and eligible liabilities

On 3 December, the BoE published a policy statement on its review of the minimum requirement for own funds and eligible liabilities (MREL) framework. The final MREL policy incorporates two significant changes to ensure it is proportionate: (i) it provides new and growing firms with a clear, stepped and flexible glide-path to meeting their endstate MRELs. Growing firms will now have an advance ‘notice period’ of ordinarily three years before the start of their transition to end-state MREL, and six years starting from the point at which their transition begins to meet their end-state MREL in full, with either one or two intermediate steps to smooth any ‘cliff-edge’. There will also be scope for firms to request a flexible two year add-on, should circumstances warrant it; and (ii) the BoE will make a case-by-case judgement when setting the resolution strategy for firms that exceed, or expect to exceed, the threshold of more than 40,000 to 80,000 transactional accounts. Currently firms that exceed this threshold are likely to be set a partial transfer strategy if their balance sheet is less than £15-25 billion. The BoE will consider factors including whether the firm provides significant amounts of transactional banking services or other critical functions. The BoE will provide firms with a notice period setting the point in time at which they would need to start their transition to meeting MREL. The BoE has also initiated work to be carried out in consultation with the banking industry and regulators with a view to developing alternative processes which may reduce disruption to transactional accounts in the event of an insolvency procedure. The BoE considers that recent innovations in technology in the banking system such as Open Banking and ‘linked accounts’ technology may afford opportunities to mitigate disruptions that may occur on the insolvency of a failing mid-tier firm whose business model is dominated by transactional account banking. Subject to the outcomes of this work, the BoE is considering whether it could significantly raise or remove the indicative 40,000 to 80,000 transactional accounts threshold for the adoption of a partial transfer strategy and, therefore, an MREL that is above a firm’s total capital requirement. This work will take some time to complete and so the BoE does not envisage being able to make any consequential changes to resolution strategies and MRELs for individual firms before end-2022 at the very earliest. The BoE has published a separate webpage asking for ideas for potential technological solutions. The BoE also confirms that non-Common Equity Tier 1 own funds instruments issued from non-resolution entity UK subsidiaries to holders outside the group will no longer be eligible to count towards MREL. The revised Statement of Policy will be effective from 1 January 2022. 

Policy Statement

Statement of Policy

Improving depositor outcomes webpage

Recovery and resolution

FSB 2021 Resolution Report

On 7 December, the FSB published its tenth report on the implementation of its resolution reforms. The report takes stock of progress made in implementing FSB resolution policies and enhancing resolvability across the banking, financial market infrastructure, and insurance sectors. It also sets out the FSB’s priorities in the resolution area going forward. The FSB states that since their adoption ten years ago, the FSB Key Attributes of Effective Resolution Regimes have set the standard for the reform of resolution regimes and resolution planning across all sectors. Progress towards resolvability has been significant, but the FSB´s recent evaluation of the “too big to fail” reforms found that a number of gaps need to be addressed to fully realise the benefits of the resolution reforms. In addition, digital innovation is giving rise to new challenges for resolution planning, including in relation to the reliance on third-party service providers and cloud services, and the need to assess resolvability of non-traditional market participants. The experience during the Covid-19 pandemic demonstrated that crisis management groups and the cross-border cooperation and information sharing arrangements underpinning them are the back-bone of effective cooperation in times of crisis. However, support by fiscal authorities and central banks during the pandemic was extremely substantial and jurisdictions’ cross-border resolution frameworks have not been tested in earnest. In relation to banks, the report found that work remains to improve the resolvability of global systemically important banks (G-SIBs). Work continues on allocating total loss-absorbing capacity resources within groups, G-SIBs' capabilities for access to funding in resolution, and valuation and continuity of access in resolution to FMIs. Also, cross-border issues still need addressing in relation to funding in resolution and bail-in execution – the FSB will shortly publish a practices paper that summarises the issues on this. In relation to CCPs, the report found that uncertainty remains around the resolvability of CCPs given their systemic role in the financial system. A preliminary report will be published in early 2022 and will inform options for new or revised international policy on the use, composition or amount of financial resources for CCP recovery or resolution.  

Report

Sustainable finance

Delegated Regulation on technical screening criteria under Taxonomy Regulation 

On 9 December, Commission Delegated Regulation (EU) 2021/2139 supplementing the Taxonomy Regulation by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives, was published in the OJ. It will enter into force on 29 December and apply from 1 January 2022.

Delegated Regulation

Other developments 

EBA report on the application of guidelines on remuneration of sales staff

On 9 December, the EBA published a report on the application of its guidelines on the remuneration of sales staff. The assessment, on which the report is based, focused on the internal arrangements of institutions for designing, approving, and monitoring the remuneration policy and practices for sales staff, in particular the practices on awarding variable remuneration (VR) to sales staff. The EBA’s assessment revealed that financial institutions in the sample focus more on prudential requirements and commercial interests than on consumer protection requirements and that, in terms of governance structures, the design, approval and monitoring of the remuneration policies and practices are often handled by the same function, which gives rise to the risk of an inaction bias when reviewing the remuneration policies and practices. The EBA has identified 17 distinct good practices, which include: (i) for financial institutions to involve the HR, compliance and risk management functions in the design of the policies; (ii) to involve shareholders before granting VR in excess of 100% of fixed remuneration; (iii) to apply a mix of quantitative and qualitative criteria when determining the VR of sales staff; (iv) not to make sales performance the determining criterion for the promotion of staff; (v) to implement measures that explicitly dis-incentivise sales staff from acting in a way that gives rise to consumer detriment; (vi) to include in the key performance indicators that determine variable remuneration some measurements of customer satisfaction or, conversely, customer detriment; and (vii) to ensure that payout curves for VR do not set incentives to maximise sales at a specific point.

Press release

Report

BoE update on transforming data collection communication to firms 

On 8 December, the BoE provided an update on the progress of the joint transformation programme, which is being led by the BoE, FCA and industry to transformation data collection from the UK financial sector. The communication also describes the proposed activities for early 2022, the expected resource needs for FY22/23 and engagement with stakeholders for input to solution designs. The joint transformation programme is taking a use case approach in the work to research, design and test solutions to address the issues the regulators and industry face. The BoE states that there has been good progress made on the three use cases. The programme team has identified a range of challenges in the areas of data standards and reporting instructions, as well as the difficulties end users have accessing and using the data to make decisions and/or manage risk. They are now in the alpha solution design phase where they are designing and testing solutions and features to tackle priority issues. In early 2022 the BoE plans to: (i) in Q1 2022, move from the ‘discovery’ stage to ‘design’ stage for all phase one use cases. In the ‘design’ phase the programme will explore and design solutions to address the challenges identified in the discovery phase. The BoE will also, in consultation with industry, select and confirm the use cases for the next phase. The BoE expects these use cases to be more complex and higher value; (ii) focus on its approach to scaling based on the outcomes of phase one; (iii) communicate more frequently, at least every two months; and (iv) from July 2022 to June 2023, move to the ‘delivery’ stage of the phase one use cases. The BoE does not expect its work on transforming data collection to trigger any mandatory change that will require firm implementation in 2022.

Communication

FCA report on implementation of recommendations from Gloster and Parker reports

On 8 December, the FCA published a report setting out the work it has undertaken to implement the recommendations and lessons from the Independent Investigation into the FCA’s Regulation of London Capital & Finance plc (the Gloster Report) and the Independent Review into the FSA and FCA's handling of the Connaught Income Fund Series 1 and connected companies (the Parker Report). In summary, the FCA states that it has: (i) improved the knowledge and capability of its staff, leading to a more assertive approach; (ii) taken a better coordination approach to tackling the significant harm that fraud causes through prevention, protecting consumers and pursuing and disrupting fraudsters; and (iii) reinforced its data capability to get better insights, enabling more effective supervision and enforcement. The FCA will publish a final update within its 2022 annual report. 

Independent review webpage

Report

FCA announces changes to Executive Committee

On 6 December, the FCA announced two changes to its Executive Committee: (i) Megan Butler is stepping down from her role as Executive Director of Transformation in the spring. Emily Shepperd, standing Executive Director of Authorisations will now lead the FCA’s transformation programme; and (ii) Stephen Roman has been appointed as General Counsel, joining the FCA from the Government Legal Department, where he is Director General of Litigation, Justice and Security. David Scott has held the role of General Counsel on an interim basis while the FCA recruited a permanent appointee. David will continue to work at the FCA part-time during a handover period.

Press release

FCA Quarterly Consultation 34

On 3 December, the FCA published its 34th quarterly consultation paper on proposed changes to the Handbook:(i) a minor amendment to the Enforcement Guide to reflect the EU Exit Passport Regulations; (ii) amendments to MAR 9 to include wind-down guidance when a data reporting services provider wishes to cancel its data reporting service authorisation; (iii) changes to RTS 22 as onshored to remove the requirement to report certain Securities Financing Transactions under UK MiFIR; (iv) consequential changes to SUP 8 to align with the revised procedure for making decisions on Waiver applications; and (v) amendments to FCA forms in line with our interpretative guide on completing our forms after the UK’s withdrawal from the EU. The deadline for comments for the changes to RTS 22 is 17 January 2022. For the rest of the proposals it is 10 January 2022. 

Consultation 

FCA consultation and HMT call for evidence on appointed representatives regime

On 3 December, the FCA began consulting on changes to its rules and guidance for the appointed representative (AR) regime. The FCA states that it is seeing a wide range of harm across all sectors where firms have ARs. To begin tackling this, the FCA is consulting on two main areas of change: (i) additional information on ARs and notification requirements for principals. This will allow the FCA to more easily identify potential risks within principals and ARs. It will also help it better assess whether the principal has the expertise, systems and controls to effectively oversee ARs and to target the FCA’s supervisory interventions more effectively; and (ii) clarifying and strengthening the responsibilities and expectations of principals in the rules and providing additional guidance for principals on their responsibilities, and the FCA’s expectations of how they should act and oversee their ARs. The FCA is also seeking views on: (a) the risk from regulatory hosting arrangements and business models where ARs are large in size relative to the principal; (b) strengthening prudential standards to reflect the harm posed to consumers and markets by firms with business models that include ARs; and (c) proposals to reduce potential harm, including by setting limits on AR arrangements. The FCA is also proposing to simplify the structure of SUP 12 where possible, although this does not affect the substance of the requirements. The FCA expects to publish a follow-up Policy Statement and final rules in H1 2022. In addition to these proposed changes to the regime, the FCA is exploring with HMT whether legislative change is needed and encourages responses to the Call for Evidence that HMT published the same day. The government wants to ensure it has a full and up-to-date understanding of how the AR regime is currently used. It is also  gathering evidence on potential challenges to the safe operation of the AR regime and possible future reforms that might be considered to address those challenges. The government’s view is that more evidence is required before it can decide whether legislative reform, in addition to the rule changes the FCA proposes to make, is necessary. The deadline for comments to the consultation and call for evidence is 3 March 2022.

Press release

HMT Call for Evidence

FCA consultation 

EC speech on 2022 work priorities

On 3 December, the EC published a speech given by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union (CMU), which sets out the EC’s ongoing priorities. Work the EC plans to undertake in 2022 includes: (i) CMU: (a) rules to make listing easier for EU companies, especially SMEs; and (b) work towards an SME IPO fund, including a feasibility study on a scheme for banks to refer SMEs to other sources of funding if the bank cannot or does not want to lend to them; (ii) central clearing - early next year the EC will put forward a series of measures to build the capacity of EU-based CCPs and Ms McGuinness will propose an extension of the equivalence decision for UK CCPs; and (iii) AML - in order for the AML Authority to be set up by 2023, Ms McGuinness notes that trilogue discussions will need to be completed by the end of 2023. 

Speech