Key Regulatory Topics: Weekly Update 3 – 9 September 2021
09 September 2021
Of particular note this week, the FCA and PRA have published a joint Dear CEO letter sent to firms that carry out trade finance activity to reiterate their regulatory expectations of such firms, and the Chair of the FCA and PSR gave a speech regarding crypto-token regulation.
FCA not extending temporary guidance on delaying mortgage capital repayments
On 8 September, the FCA published an updated version of its webpage on policy statement (PS20/11). PS20/11 included temporary guidance on maturing interest-only and part-and-part mortgages, which came into force on 31 October 2020. The guidance allowed borrowers with an interest-only or part-and-part mortgage due to mature between 20 March 2020 and 31 October 2021 to delay repayment of their capital until 31 October 2021. This was subject to being up to date with their payments and maintaining their monthly interest payment. This temporary guidance was a short-to-medium term Covid measure to provide support to borrowers whose repayment strategy may have been affected by Covid. The guidance expires on 31 October and having reviewed market conditions the FCA does not intend to extend it. The FCA explains that the harms the guidance was designed to protect against have not materialised to the extent originally thought possible. So the FCA does not think it is in borrowers’ interests to extend the temporary guidance. The FCA has confirmed that it will keep market conditions and the need for further interventions under review.
Please see the Fintech section for the FCA’s speech on the risks of token regulation in the context of financial crime.
Please see the Markets and Markets Infrastructure section for the regulators’ Dear CEO letter on trade finance activity.
On 7 September, the International Organisation of Securities Commissions (IOSCO) published a final report on the use of artificial intelligence (AI) and machine learning (ML) by market intermediaries and asset managers. IOSCO notes that the use of this technology by market intermediaries and asset managers may create significant efficiencies and benefits for firms and investors, including increasing execution speed and reducing the cost of investment services. However, this use may also create or amplify certain risks, which could potentially have an impact on the efficiency of financial markets and could result in consumer harm. The final report therefore provides guidance to assist IOSCO members in supervising market intermediaries and asset managers that utilise AI and ML. The guidance consists of six measures that reflect expected standards of conduct by market intermediaries and asset managers – these measures include an expectation that regulators will consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML and that regulators will require firms to adequately test and monitor the algorithms to validate the results of an AI and ML technique on a continuous basis.
OFSI frozen assets reporting 2021
On 6 September, the Office of Financial Sanctions Implementation (OFSI) published its annual frozen asset review and reporting form. Financial sanctions legislation requires that all funds or economic resources belonging to or owned, held, or controlled by a designated person must be frozen. Under the Sanctions and Anti-Money Laundering Act 2018, HM Treasury, through OFSI, can request information possessed for the purpose of monitoring compliance with the legislation. As part of a HM Treasury review, all persons that hold or control funds or economic resources belonging to or owned, held, or controlled by a designated person are required to provide a report with the details of these assets. The report must include details of all funds or economic resources frozen in the UK as well as those overseas where these funds or economic resources are subject to UK financial sanctions legislation. If an entity or individual possesses this information they are required to complete such a report and submit it to OFSI by 15 October. A failure to comply with financial sanctions legislation or seeking to circumvent its provisions is a criminal offence. Such conduct could lead to either a criminal conviction or civil action by OFSI.
FCA speech on the risks of token regulation
On 6 September, Charles Randell, Chair of the FCA and PSR gave a speech to the Cambridge International Symposium on Economic Crime regarding the risks of token regulation. Mr Randell notes that speculative crypto tokens are not regulated by the FCA and consumers are not covered or protected by the Financial Services Compensation Scheme in the event of losses. As a result, Mr Randell states that, in considering the regulation of crypto, legislators need to consider 3 issues: (i) how to make it harder for digital tokens to be used for financial crime; (ii) how to support useful innovation; and (iii) the extent to which consumers should be free to buy unregulated, purely speculative tokens and to take the responsibility for their decisions to do so.
Green Fintech Challenge and Digital Sandbox
On 6 September, the FCA announced that applications for both the Green FinTech Challenge 2021 and the Second Digital Sandbox pilot were open. Both are intended to assist firms and regulators in overcoming some of the challenges that moving to a net zero economy will raise in the area of sustainability and climate change. The FCA is keen to ensure that firms consider which service is more appropriate for their requirements and has published a guide to help firms understand which to apply for.
Dear CEO letter on trade finance activity
On 9 September, the FCA and PRA published a joint Dear CEO letter sent to firms that carry out trade finance activity, to reiterate their expectations of such firms. The regulators expect firms to demonstrate that they have taken a risk sensitive approach to their control environment to ensure that the inherent risks within trade finance activity are effectively mitigated. Recent assessments of individual firms have highlighted several significant issues relating to both credit risk analysis and financial crime controls. These issues have exposed firms to unnecessary risks that are material in both a conduct and prudential context. The letter focuses on the regulators’ expectations in relation to (i) risk assessments, including a requirement for firms to undertake a holistic assessment of financial crime risks; (ii) counterparty analysis. A firm’s policies and procedures should also set out when it may be appropriate to conduct due diligence on other parties; (iii) transaction approval; and (iv) transaction payments.
IOSCO statement on credit sensitive rates
On 8 September, IOSCO published a statement on credit sensitive rates. Credit sensitive rates are interest rate benchmarks that seek to measure the credit risk component of unsecured borrowing in certain markets. These rates have started to emerge as a possible alternative to USD LIBOR. In the statement, IOSCO: (i) highlights that alternative financial benchmarks must be compliant at all times with its principles on financial benchmarks (IOSCO Principles); (ii) calls for greater attention to Principle 6 and Principle 7 - IOSCO notes that benchmark administrators of credit sensitive rates should assess whether the systemic benchmarks that are used extensively are based on active markets with high volumes of transactions, representing the underlying interest they intend to measure, and whether such benchmarks are resilient during times of stress. IOSCO goes on to note that benchmark administrators of credit sensitive rates should also consider how their benchmarks would continue to meet Principles 6 and 7 over time if their use became widespread, given some of these rates are based on similar markets to LIBOR and may replicate many of LIBOR’s shortcomings, as noted by authorities in the US and UK; (iii) explains that benchmark users should consider the robustness and reliability of the benchmarks they choose and ensure they have reliable fallback mechanisms that can be used, should their chosen benchmarks cease or become unrepresentative; and (iv) notes that users of benchmarks place considerable value on a benchmark being IOSCO-compliant - to continue to give market confidence in the reliability and integrity of financial benchmarks, IOSCO will be monitoring closely how the IOSCO badge is used in compliance assessments of the relevant credit sensitive rates. Andrew Bailey, Bank of England (BoE) Governor and Co-Chair of the FSB's Official Sector Steering Group, welcomed the IOSCO statement, noting that credit sensitive rates may well fail to comply with the IOSCO Principles if their use became widespread.
Delegated Regulation on FRANDT commercial terms for clearing services under EMIR published in OJ
On 8 September, Delegated Regulation (EU) 2021/1456 supplementing EMIR ((EU) 648/2012) specifying the conditions under which commercial terms for clearing services for OTC derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT) was published in the OJ. The Delegated Regulation comes into force on 9 September (that is, the day after its publication in the OJ). It will apply from 9 March 2022.
The Critical Benchmarks (References and Administrators' Liability) Bill
On 8 September, the Critical Benchmarks (References and Administrators' Liability) Bill was introduced to the House of Lords and had its first reading The Bill is intended to support the orderly wind-down of critical benchmarks, protecting both users of these benchmarks and the integrity of the UK’s financial markets. The Bill will support the effective operation of the powers granted to the FCA under the Financial Services Act 2021 to oversee the wind-down of a critical benchmark. In particular, the Bill will provide legal certainty as to how contractual references to a critical benchmark should be treated where the FCA exercises powers under the
Benchmarks Regulation (BMR) to provide for the continuity of an unrepresentative critical benchmark. The Bill will also grant an immunity to the administrator of a critical benchmark that is designated under Article 23A of the BMR where the administrator acts in accordance with specific requirements imposed upon it by the FCA.
European Commission adopted Delegated Regulation amending PRIIPs KID RTS
On 7 September, the European Commission adopted a delegated regulation amending the regulatory technical standards (RTS) laid down in Commission Delegated Regulation (EU) 2017/653 which considers key information documents (KID) for packaged retail and insurance-based investment products. The RTS are amended in relation to (amongst other things), the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by PRIIPs offering a range of investment options. The delegated regulation is now subject to scrutiny by the European Parliament and the Council of the EU and is scheduled to apply from 1 July 2022.
European Parliament to consider proposed Directive on credit servicers and credit purchasers
On 7 September, the European Parliament’s procedure file on the proposed Directive on credit servicers and credit purchasers was updated to indicate that the Parliament would consider the proposed Directive during the plenary session scheduled for 18 to 21 October.
Revised draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021
On 6 September, HMT published a revised draft version of this statutory instrument (SI) which was originally published in July 2021. The SI is being made to address deficiencies in retained EU law in relation to the non-discriminatory access regime for exchange-traded derivatives (ETDs), which requires trading venues and central counterparties to grant each other non-discriminatory access. In addition, the SI makes amendments to the low carbon benchmark regime post-Brexit, as well as making technical amendments to certain exemptions to the financial promotions regime for relevant markets to ensure that they apply to UK markets following Brexit. The original version was withdrawn on 31 August to correct typographical errors and the revised version was laid on the same day. The draft regulations are expected to come into force on 13 October.
Bank of England strategy for RTGS and CHAPS
On 6 September, the Bank of England (BoE) published its Real-Time Gross Settlement (RTGS) system and CHAPS Annual Report for 2021. The Annual Report focuses on the BoE’s strategy for RTGS and CHAPS, how it delivered that strategy, and the main strategic focus for the year ahead. The BoE's main focus will be on RTGS renewal, as well as increased resilience, widened access, greater innovation, increased interoperability and improved user functions for the financial system.
PRA consults on identification of material risk takers for remuneration regime purposes
On 8 September, the PRA published a consultation paper on the identification of material risk takers (MRTs) for the purposes of its remuneration regime (CP18/21). In CP18/21, the PRA sets out its proposed changes in respect of the applicable requirements on the identification of MRTs, which would result in: (i) changes to the Remuneration Part of the PRA Rulebook to insert the criteria for identifying MRTs and relevant definitions. The PRA proposes to make these insertions without substantive policy amendments and amended only as needed for consistency with PRA Rulebook style (see Appendix 1); (ii) updates to the PRA's Remuneration Supervisory Statement (SS2/17) to reflect the rule changes and the amended process for excluding an employee identified solely based on the quantitative criteria (see Appendix 2); and (iii) the revocation of the application of the onshored version of Commission Delegated Regulation (EU) 604/2014 (RTS 2014) as regards PRA-regulated firms (see Appendix 3). CP18/21 is relevant to banks, building societies and PRA-designated investment firms, including third country branches. It is not relevant to credit unions or PRA-authorised insurers. The PRA explains that the proposed amendments to the PRA Rulebook and the revocation of the RTS 2014 will rationalise the MRT identification regime, remove duplications and promote clarity by consolidating all legislative requirements within the PRA Rulebook. The PRA considers this will be beneficial for firms by reducing the burden of complying with two sets of requirements regarding the identification of MRTs. The deadline for comments to CP18/21 is 8 November. The PRA proposes that the implementation date for the changes resulting from CP18/21 would be from the first performance year starting after the publication of the final rules. Subject to the extent and nature of the feedback received, the PRA currently intends this to be in Q4.
European implementation of outstanding Basel III reforms
On 7 September, the EBA, the ECB and a group of EU prudential supervisors and central banks wrote to Mairead McGuinness, European Commissioner for Financial Services, Financial Stability, and Capital Markets Union in relation to the timely and consistent implementation of outstanding Basel III reforms. In March, Commissioner McGuiness announced that the EC would adopt a legislative proposal in July but this timing has subsequently been delayed until October. The letters highlight that further postponements or deviations would impact the credibility of European banking regulation and confidence in European banks. The implementation of the output floor is given as an example of one area where implementation approaches that are inconsistent with international agreements would leave shortcomings in the existing framework relating to specific risks that are not addressed.
PRA statement on Remuneration Benchmarking and High Earners 2020 submissions
On 3 September, the PRA published a statement on remuneration benchmarking and high earners 2020 submissions. Firms are required to submit Remuneration Benchmarking Information Reports and High Earners Reports to the PRA in accordance with Chapters 17 and 18 of the Remuneration Part of the PRA Rulebook. In order to facilitate compliance with these rules, the PRA has made available certain reporting templates on RegData, which is accessible via the FCA’s website. For third country branches that previously passported into the UK, the reporting schedules relating to the 2020 reporting period have been updated on RegData. For firms that have not already done so, the PRA expects submission of these reports by Thursday 30 September 2021.
EC adopts RTS for contractual recognition of write down and conversion powers under BRRD
On 8 September, the EC adopted a Delegated Regulation supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) with regard to regulatory technical standards (RTS) for the contractual recognition of write down and conversion powers. BRRD II amends Article 55 of BRRD to address the scenario where it is impracticable for institutions and entities subject to BRRD to include bail-in contractual recognition clauses in liability contracts. New Article 55(6) of BRRD gives the EBA a mandate to draft RTS specifying conditions under which it would be legally, contractually or economically impracticable to include contractual recognition clauses. The Delegated Regulation specifies: (i) the conditions under which it would be legally, or otherwise, impracticable to include the clauses in certain categories of liabilities; (ii) the conditions for the resolution authority to require the inclusion of the clauses in certain categories of liabilities, where it concludes that none of the conditions of impracticability notified to it are fulfilled; and (iii) the reasonable timeframe for the resolution authority to require inclusion of the clauses. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them object, it will enter into force 20 days after it is published in the OJ.
HMT Consultation on amendments to Section 48D of the Banking Act 2009
On 7 September, HMT published a consultation on proposed changes to Section 48D of the Banking Act 2009 which arise as a result of the Government’s decision to remove FCA regulated 730k investment firms from the scope of the UK resolution regime. The removal of FCA 730k investment firms from the resolution regime will require a number of consequential amendments to both primary and secondary legislation. One of these amendments raises the question of whether short-term liabilities owed to FCA investment firms should continue to be excluded from the BoE’s bail-in power under Section 48B of the Banking Act 2009. Sections 48B and 48D of the Banking Act 2009 relate to the liabilities owed to firms within the scope of the UK resolution regime. Currently S48B(8)(d) of the Banking Act 2009 means the BoE’s bail-in power cannot be used to bail-in liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or 730k investment firm. The Government is proposing to amend the definition of ‘investment firm’ in Section 48D to capture PRA-designated investment firms and FCA-regulated investment firms with permission to underwrite or deal on own account (i.e. those that will be subject to the new £750,000 initial capital requirement under the FCA’s new rules). This would mean that short-term liabilities owed to these firms will continue to be exempt from bail-in. The proposed amendment would be made using the ‘Power to amend the definition of “excluded liabilities”’ under S48F(1) of the Banking Act 2009. The consultation runs until 5 October.
Please see the Fintech section for the FCA’s announcement regarding the Green Fintech Challenge and the Second Digital Sandbox pilot.
EBA speech: How can we make the most of an incomplete banking union?
On 9 September, the ECB published a speech by Andrea Enria, Chair of the Supervisory Board of the ECB, on actions the European banking sector can take to achieve progress towards an integrated prudential jurisdiction within the SSM and the current institutional and regulatory environment. Mr Enria discusses the numerous legal prudential obstacles to the free circulation of capital and liquidity within banking groups in the euro area. While legislative reforms aimed at removing these obstacles are clearly possible, he considers such legislation unlikely in the near future, and surely not before a fully fledged EDIS is put in place. Mr Enria proposes that to achieve progress now, other avenues should be pursued. One suggestion is to continue relying on groups that focus mainly on subsidiaries to expand their business across the banking union. A contractual approach could be developed through intragroup guarantees, which could be made enforceable, and therefore credible, using supervisory tools at the European level. Another avenue that Mr Enria describes as “more radical and challenging, but potentially more promising”, would be for banks to review their cross-border organisational structure more actively. Mr Enria refers in particular to the possibility of relying more extensively on branches and the free provision of services, rather than subsidiaries, to develop cross-border business within the banking union and the Single Market. Mr Enria encourages banks interested in exploring these avenues to liaise with the ECB at an early stage to discuss possible options.
BCBS speech on Basel III and global co-operation
On 8 September, the BCBS published a speech by Carolyn Rogers, BCBS Secretary General, on Basel III and global co-operation. In her speech, Ms Rogers considers the importance of global co-operation to ensuring financial stability. She states that multilateralism lies at the heart of the work of the BCBS and that, looking ahead, there is no shortage of cross-border financial stability issues that will require global co-operation. She notes that over the coming years, the BCBS will tackle a range of challenges impacting the global banking system, including the impact of prolonged low interest rates, digitisation of finance, cyber threats and climate change. In relation to global co-operation and Basel III, Ms Rogers states that implementing Basel III in a full, timely and consistent manner is an important and powerful demonstration of a commitment to global co-operation. She notes that the EC is shortly expected to adopt its legislative proposal on transposing the final Basel III reforms into EU law.
ESRB monitoring report on financial stability implications of Covid support measures
On 8 September, the ESRB published a note on monitoring the financial stability implications of support measures to protect the economy from the effects of Covid. The note summarises the analysis conducted after the publication in February 2021 of the final report produced by the ESRB Working Group on monitoring financial stability implications of fiscal measures to protect the economy in the context of Covid. The ESRB identifies five key conclusions: (i) fiscal support continues to play a role in sustaining the economic recovery and the functioning of credit markets; (ii) while banks are increasingly provisioning for balance sheet risks, they may be underestimating macroeconomic risks; (iii) looking ahead, banks and supervisors need to pay attention to the fact that the link between economic and financial losses has become less tight during the pandemic; (iv) addressing financial stability issues that could arise from increased corporate debt in a timely manner is crucial; and (v) the policy response of authorities will have to become more differentiated over time – in response to Covid, all Member States reacted swiftly and implemented large fiscal support measures. Yet, the ESRB notes that different sectoral structures and pre-existing vulnerabilities will contribute to a less synchronised economic recovery and that therefore macroprudential authorities must continuously monitor and assess the different risks to financial stability and stand ready to move from crisis mode to prevention mode as required.
FCA cancellation and variation powers: Handbook and Enforcement Guide changes
On 9 September, the FCA published a consultation paper on proposed changes to its Handbook and Enforcement Guide to reflect the new cancellation and variation power granted to it under the Financial Services Act 2021. The changes proposed are to the: (i) Handbook Glossary – the introduction of a new term to define the new power; (ii) Supervision manual – a description of the new power and the process the FCA is required to follow when using it; (iii) Enforcement Guide - again, to describe the new power and process and refer to the FCA’s possible use of them alongside investigations; (iv) Compensation sourcebook - with guidance to make it clear that, if the FCA annuls a decision to cancel, the FSCS may be able to pay compensation in respect of claims against the relevant firm that arose in the period between cancellation and annulment; and (v) Dispute resolution: Complaints sourcebook - with guidance to make it clear that, if the FCA annuls a decision to cancel, the FOS may be able to consider complaints that arose in the period between cancellation and annulment. The FCA also propose a rule that will delay the deadline for submitting the relevant firm’s complaints return if the due date was between the decision to vary or cancel taking effect and its annulment. In a related press release, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said that 'It is part of [the FCA’s] transformation and drive to be more assertive, drawing on an innovative approach and using new streamlined processes to make important regulatory interventions.’ The deadline for comments is 29 October.
The CityUK Report – Making the UK the leading global financial centre
On 7 September, the CityUK published a report setting out a strategy for making the UK the leading global financial centre. The aim of the strategy is to help the UK become the world’s leading international financial centre by: (i) securing the existing open ecosystem that makes up the UK’s market; (ii) growing the UK’s share of key global financial and related professional services markets; and (iii) building the UK’s capabilities around the four core areas of future global demand - financial and related professional services data and technology, global ESG markets, international investment opportunities and risk management. The report states that all three elements need to run in parallel and identifies a number of implementation pathways which it suggests could be taken forward by industry working together with government and regulators.
Autumn 2021 budget date announced
On 7 September, the government launched Spending Review 2021, which will conclude on 27 October 2021 alongside an Autumn Budget and set out the government’s spending priorities for the Parliament.
FCA Quarterly Consultation Paper No. 33 (CP21/27)
On 3 September, the FCA published its quarterly consultation paper no. 33 (CP21/27). The FCA is seeking commentary on a number of changes to different parts of its Handbook, including: (i) changes to SUP reporting requirements for legal expenses insurance; (ii) removing authorisation forms from the Handbook; (iii) making amendments to in order to reflect the Money and Pensions Service (MaPS) branding changes; (iv) consequential changes to PRR and LR to ensure alignment with prospectus regime guidance; and (v) PERG changes to reflect the UK Emissions Trading Scheme