Key Regulatory Topics: Weekly Update 30 April – 6 May 2021
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Related news and insights
Blog Post: 04 April 2024
EU court’s judgment sheds new light on how the ECB should apply national administrative measures
Publications: 03 April 2024
Publications: 03 April 2024
Publications: 02 April 2024
Brexit
Please see the Other Developments section for a speech given by Nikhil Rathi, FCA Chief Executive, on the UK regulatory landscape post-Brexit.
Capital markets
FCA consults on changes to listing rules for certain SPACs
On 30 April, the FCA began consulting on proposed changes to the listing rules for certain special purpose acquisition companies (SPACs). There is currently a general presumption that the FCA will suspend the listing of a SPAC when it identifies a potential acquisition target. The FCA propose to amend its listing rules to provide an alternative route to market for SPACs demonstrating higher levels of investor protection. This route would only apply if the SPAC has structural features embedding important investor protections, and if it provides adequate disclosures to mitigate key risks for investors. The features the FCA are proposing include: (i) setting a minimum amount of £200m to be raised when a SPAC’s shares are initially listed, to encourage a high level of institutional investor participation; (ii) ensuring monies raised from public shareholders are ring-fenced to either fund an acquisition, or be returned to shareholders, less any amounts agreed to be used for the running costs of the SPAC; (iii) ensuring shareholder approval for any proposed acquisition, based on sufficient disclosure of key terms and a confirmation that terms are fair and reasonable if any of the SPAC’s directors have a conflict of interest relating to a target company; (iv) a ‘redemption’ option allowing investors to exit a SPAC prior to any acquisition being completed, and a time limit on a SPAC’s operating period if no acquisition is completed; and (v) sufficient disclosures being provided to investors on key terms and risks from the SPAC IPO through to the announcement and conclusion of any reverse takeover deal. SPAC issuers unable to meet the conditions, or those choosing not to, will continue to be subject to a presumption of suspension. The deadline for comments is 28 May. The FCA intends to introduce amendments by the summer.
Consumer/retail
Please see the Other Developments section for a speech given by Charles Randell, FCA chair, on outcomes-focused regulation in a post Covid-19 world.
FOS ombudsman news issue 160
On 6 May, the Financial Ombudsman Service (FOS) published issue 160 of ombudsman news. Amongst other things, the FOS highlight a new webpage on complaints involving economic and domestic abuse. As well as information for consumers, the webpage provides information for businesses on how the FOS handles complaints that a business has done something wrong or should have done more when economic or domestic abuse has impacted an individual. The FOS notes that the FCA's guidance on the fair treatment of vulnerable customers is often relevant in this context and that UK Finance's financial abuse code of practice may also be relevant.
EBA report on mystery shopping activities of national competent authorities
On 3 May, the EBA reported on mystery-shopping activities of national competent authorities (NCAs) with a view to sharing experience, learning valuable lessons and identifying good practices for the benefit of the EBA and NCAs that use or intend to use mystery-shopping in the future. The report covers initiatives in respect of products that fall within the scope of action of the EBA’s consumer protection mandate, i.e. retail banking products and services (mortgages, deposits, payment accounts, payment services and electronic money). It summarises the most common approaches used by the NCAs, based on the information collated primarily covering the period from 2015 to 2020. It reviews the objective, subject matter and product scope of these activities, the methodologies used by NCAs and follow-up actions taken by NCAs following the mystery shopping. The report explains that mystery shopping allows NCAs to obtain greater insight into the conduct of financial institutions. This, in turn, encourages them to take corrective actions better to comply with applicable requirements, and eventually enhances the protection of consumers. Among the good practices identified by the NCAs, most of them concern common procedural aspects such as organising training for NCAs’ inspection and supervisory staff, identifying target customer profiles, and defining agreed ‘rules’ of customer’s behaviour.
Covid-19
Please see the other sections for product-specific updates relating to Covid-19.
Financial crime
EBA consultation on RTS to establish an AML and CFT central database
On 6 May, the EBA began consulting on draft regulatory technical standards (RTS) to establish an AML and CFT central database. It has also published a summary of the draft data protection impact assessment on the database, which analyses the risks arising from the processing of personal data and establishes the controls that will be put in place by the EBA to mitigate the risks identified. The revised EBA Regulation that came into effect in January 2020 requires the EBA to establish and keep up to date a central database with information on AML/CFT weaknesses that competent authorities (CAs) have identified in respect of individual financial institutions. The database will also contain information on the measures CAs have taken to rectify those material weaknesses. Information from this database will be used by individual CAs and the EBA to make the fight against ML/TF in the EU more targeted and effective in the future. The draft RTS specify: (i) the definition and the materiality of weaknesses identified by CAs; (ii) the type of information collected and how such information will be communicated to the EBA; (iii) how the EBA will analyse and disseminate the information contained in the central database; and (iv) the rules to ensure the effectiveness of the database, the confidentiality of the data contained in the database, as well as how the database will interact with other notifications that competent authorities are required to provide to the EBA and the provisions to ensure the protection of personal data. The deadline for comments is 17 June. In parallel, the EBA is seeking the view of the European Data Protection Supervisor.
Draft data protection impact assessment summary
UK Government Economic Crime Plan: Statement of progress
On 5 May, the UK Government published the first statement of progress of its 2019-22 Economic Crime Plan covering the period from July 2019 to February 2021. The Economic Crime Plan sets out how the UK’s public and private sectors will work together to confront economic crime through seven strategic priorities and 52 actions. Overall the Government reports it has now delivered on 20 of the 52 actions and sets out a full breakdown of progress against each action. The Economic Crime Strategic Board agreed in February that further momentum was needed in some areas, setting out seven further actions focusing on joint public and private delivery to target public and private resources over the remainder of the Economic Crime Plan: (i) design and deliver a comprehensive Fraud Action Plan; (ii) bolster public-private operational action to tackle known vulnerabilities enabling the flow of illicit finance within and out of the UK; (iii) improve the effectiveness and efficiency of the whole system response to economic crime, increasing high value intelligence to law enforcement and reducing low value activity that costs business and delivers little benefit; (iv) continue to deliver SARs reform, including the next stages of the rollout of the new IT infrastructure and the increase in UKFIU staffing; (v) finalise the Sustainable Resourcing Model to support economic crime reform; (vi) develop legislative proposals to tackle fraud, money laundering, seize more criminal assets, and to strengthen corporate transparency (e.g. Companies House reform); and (vii) capitalise on the G7 Presidency to strengthen the overall international response to illicit finance and anti-corruption.
Fintech
Digital Regulation Cooperation Forum policy paper on strengthening digital regulatory cooperation
On 4 May, the Digital Regulation Co-operation Forum (DRCF) (made up of the CMA, the ICO, Ofcom and since April, the FCA) published a policy paper setting out its views on how to achieve coherence in regulatory approaches across digital services in response to a request from the Department of Digital, Culture, Media and Sport. The organisations believe that the DRCF will allow them to be agile and to act with pace to deliver coherent regulation in the public interest, while still providing transparency and accountability for industry and wider stakeholders. The DRCF recommends that: (i) the Government review information sharing gateways of digital regulators to ensure that they are suitable for expected cross-regulatory engagement in the future, and support the actions of our regulators in their functions with respect to online markets; and (ii) the Government adopts measures to incorporate regulatory coherence and cooperation in the duties of digital regulators. Options include: (a) aligned supplementary duties, for example to promote benefits for consumers, data subjects and citizens; (b) duties to consult; and (c) duties to cooperate. The DRCF also sees merit in the Government considering mechanisms that allow it to provide input on its strategic priorities with respect to digital services and platforms.
Law Commission call for evidence on digital assets
On 30 April, the Law Commission launched a call for evidence on digital assets. The call for evidence is the first step in Law Commission’s work to make recommendations for reform to the Government. It seeks views about, and evidence of, the ways in which digital assets are being used, treated and dealt with by market participants. The call for evidence seeks evidence and views on various issues, including: (i) digital assets and possessability; (ii) transferability of digital assets; (iii) ownership and possession of digital assets; (iv) classifying digital assets as goods; (v) digital asset tokens; (vi) bailment of digital assets; (vii) security over digital assets; and (viii) conversion of digital assets. The deadline for comments is 30 July. The Law Commission aims to publish a consultation paper on digital assets at the end of 2021, building on the UK Jurisdiction Taskforce's Legal Statement on cryptoassets and smart contracts and the Law Commission’s consultation on electronic trade documents.
Digital assets project webpage
Markets and markets infrastructure
IOSCO report on thematic review of trading venues and intermediaries’ business continuity plans
On 6 May, IOSCO published the final report on its thematic review of business continuity plans (BCPs) for trading venues and intermediaries. The review assessed the extent to which IOSCO member jurisdictions have implemented regulatory measures consistent with the recommendations and standards set out in IOSCO’s 2015 Trading Venues Report and BCP Report. The two recommendations state that regulators should require trading venues to: (i) have in place mechanisms to help ensure the resiliency, reliability and integrity of critical systems; and (ii) establish, maintain and implement as appropriate a BCP. The two standards state that regulators should require market intermediaries to: (a) create and maintain a written BCP identifying procedures relating to an emergency or significant business disruption; and (b) update their BCP in the event of any material change to operations, structure, business, or location and conduct an annual review of it to determine whether any modifications are necessary in light of changes to the market intermediary's operations, structure, business, or location. IOSCO found that 13 of the 33 participating jurisdictions have been found to be “fully consistent” with the two recommendations and the two standards. The review concludes with a number of recommendations for regulators to consider to improve consistency of regulatory frameworks with the recommendations and standards. These include that IOSCO members: (1) include in regulatory frameworks the necessary or appropriate powers for the regulator to set and enforce requirements or clear expectations on the establishment and proper maintenance and update of BCPs by trading venues and intermediaries; (2) enhance their regulatory frameworks to include more specific and detailed guidance to address the issues and topics raised in the Trading Venues Report and the BCP Report; (3) ensure regulatory frameworks require enterprise-wide BCPs for both trading venues and intermediaries, rather than only disaster recovery or contingency measures for IT systems; (4) adopt measures to require or encourage industry or market-wide scenario or stress testing of BCPs; (5) ensure that requirements aimed at critical systems sufficiently cover all aspects of business that fall within the definition of “critical systems” in the recommendations; and (6) provide regulators with the ability to obtain a copy of the BCP as well as the power to challenge the trading venues’ Board and/or senior officers in relation to material deficiencies of the BCP arrangements or in relation to the Board or senior management responsibility for the establishment and maintenance of the BCP.
FMSB standard on expected behaviours for participants executing Large Trades
On 6 May, the FICC Markets Standards Board (FMSB) published a standard setting out the expected behaviours for participants executing Large Trades (as defined in the standard) in the wholesale fixed income, commodity and currency (FICC) markets. The Standard is intended to: (i) reduce information asymmetries between dealers and clients in relation to the execution of Large Trades and enhance the understanding of clients as to the method of execution and potential impact of Large Trades on the market and price the client receives; (ii) clarify and codify the principles governing the pre-hedging of Large Trades. Principle 11 of the FX Global Code (FXGC) sets out pre-hedging guidelines for client trades executed in the FX market and this Standard extends principles compatible with the FXGC to the fixed income and commodities markets; (iii) establish clear expectations with regard to client confidentiality given the potentially heightened impacts of information leakage in the context of Large Trades both within a firm and outside where knowledge of an anticipated transaction among other market participants, if acted upon, could move the market price against the client; and (iv) ensure that clients communicate with dealers in a transparent manner so as to not have a detrimental impact on the effectiveness of the execution of a Large Trade by the dealer. The 10 core principles set out in this Standard are applicable to the execution of all Large Trades between dealers and clients, including those executed using an algorithmic execution method.
EC adopts BMR Delegated Regulations on benchmark manipulation system controls and administrator governance arrangements
On 6 May, the EC adopted two draft Delegated Regulations supplementing the BMR. Draft Delegated Regulation (C(2021) 3125) supplements the BMR with regard to regulatory technical standards (RTS) specifying the characteristics of the systems and controls for the identification and reporting of any conduct that may involve manipulation or attempted manipulation of a benchmark. The draft Delegated Regulation specifies: (i) the adequate systems and effective controls that an administrator shall have in place to ensure the integrity of input data in order to detect, identify and report any conduct that may involve manipulation or attempted manipulation of a benchmark; and (ii) that an input data integrity policy shall be in place to document the systems and controls in place for ensuring the integrity of the benchmark. Draft Delegated Regulation (C(2021) 3123) supplements the BMR with regard to RTS specifying the requirements to ensure that an administrator's governance arrangements are sufficiently robust. The draft Delegated Regulation specifies: (a) the content of an administrator’s governance arrangements, whose organisational structure is to contain the decision-making procedures, the allocation of functions and responsibilities, and the reporting lines; (b) the persons involved with the provision of a benchmark whose responsibilities are to be defined in the governance arrangements of the administrator; and (c) that an administrator’s governance arrangements are to ensure a clear definition of the responsibilities allocated to the persons involved with the provision of a benchmark and the procedures which must be followed for the proper discharge of those responsibilities. The Council of the EU and the EP will now scrutinise the draft Delegated Regulations. They will enter into force on the twentieth day following that of their publication in the OJ and will apply from 1 January 2022.
Draft Delegated Regulation C(2021) 3125
Draft Delegated Regulation C(2021) 3123
ESMA updated opinion on ancillary activity calculations under MiFID II
On 6 May, ESMA updated its opinion on ancillary activity calculations under MiFID II. The opinion provides the estimation of the market size of commodity derivatives and emission allowances for 2020. Market participants, under MiFID II are required to measure their own activity against total market sizes in commodity derivatives in order to assess whether they exceed the ancillary activity thresholds in MiFID II and consequently would have to apply for authorisation as an investment firm. ESMA has prepared these estimations based on data reported to the ESMA FITRS system as well as data reported to trade repositories under EMIR.
Delegated Regulations on rules of procedure for penalties imposed by ESMA published in OJ
On 6 May, Commission Delegated Regulation (EU) 2021/732 was published in the OJ. The Delegated Regulation amends Delegated Regulation (EU) No 667/2014, which supplements EMIR with regard to the rules of procedure for penalties imposed on trade repositories by ESMA. The amendments are with regards to the content of the file to be submitted by the investigation officer to ESMA, the right to be heard with regard to interim decisions and the lodging of fines and periodic penalty payments. This is to take account of the changes introduced by the EMIR Refit Regulation. Commission Delegated Regulation (EU) 2021/731 was also published in the OJ. This Delegated Regulation supplements EMIR with regard to rules of procedure for penalties imposed on third-country central counterparties (CCP) or related third parties by ESMA. The Delegated Regulation further specifies the rules of procedure for the exercise of ESMA’s power to impose fines or periodic penalty payments on third-country CCPs and related third parties to whom third-country CCPs have outsourced operational functions or activities. In particular, the rules of procedures should include provisions on the rights of the defence, temporal provisions, and the collection of fines or periodic penalty payments and the limitation periods for the imposition and enforcement of penalties. The Delegated Regulations will enter into force and apply on 7 May (the day after their publication in the OJ).
Delegated Regulation (EU) 2021/732
Delegated Regulation (EU) 2021/731
HMT to remove open access regime for exchange traded derivatives
On 5 May, HMT announced that it intends to permanently remove the open access regime for exchange traded derivatives when parliamentary time allows. This follows its review of the regime’s suitability for UK markets after the end of the transition period. HMT explains that the regime was originally designed to improve cross-border capital markets in the EU and is therefore not suitable in a UK-only context. HMT notes that this decision has no bearing on the UK’s continued support for the open access regimes in equity and OTC derivatives markets, which will continue to operate as normal.
LEI Regulatory Oversight Committee consults on revised technical guidance on harmonisation of critical OTC derivatives data elements
On 5 May, the Legal Entity Identifier (LEI) Regulatory Oversight Committee (ROC) began consulting on revisions to the technical guidance on the harmonisation of critical OTC derivatives data elements (CDE technical guidance). The ROC proposes corrections that are deemed necessary to facilitate the jurisdictional implementation of the CDE Technical Guidance. The proposed amendments do not change the substance of the data elements, but rather are introduced to: (i) eliminate factual errors and typos; (ii) align the format specifications with the ISO 20022 standard; and (iii) better clarify the content of the elements by avoiding ambiguities. Consequently, these amendments are deemed necessary to further improve the standardisation and understanding of the data. The deadline for comments is 26 May.
ESMA updates Q&As on Prospectus Regulation
On 5 May, ESMA updated its Q&As on the Prospectus Regulation. It includes three new Q&As providing clarification as to: (i) the application of Article 4(1) of the CRA Regulation to credit rating disclosure in prospectuses; (ii) how to determine home Member State in the context of global depository receipts over shares; and (iii) the publication of supplements to prospectuses when new audited annual financial information is published by a non-equity issuer.
BCBS, CPMI and IOSCO survey clients and non-bank intermediaries on margin calls – Covid-19
On 5 May, BCBS, CPMI and IOSCO published a voluntary survey on margin calls which is open to clients (i.e., entities that participate in these markets through an intermediary) and non-bank intermediaries. The survey looks at both initial and variation margins in derivatives and securities markets and covers: (i) margin in cleared and uncleared markets during the March 2020 market turmoil, including clearing member-client dynamics; (ii) margin practice transparency, predictability and volatility during the March market turmoil across various markets, jurisdictions and margining models; and (iii) liquidity management preparedness of market participants (especially nonbanks) to meet margin calls. Separately the Committees are collecting data from central counterparties and bank intermediaries. As part of the work programme to enhance the resilience of the non-bank financial intermediary (NBFI) sector, the G20 agreed that the FSB should coordinate with the Committees to look at issues around margin calls during the early stages of the Covid-19 pandemic. The results of the survey will feed into the overall FSB NBFI work and will be delivered to the G20. The deadline for comments is 17 May.
Survey for non-bank intermediaries
ACER updated transaction reporting guidance and FAQs on REMIT
On 3 May, the Agency for the Co-operation of Energy Regulators (ACER) updated its guidance and FAQs (all dated 30 April) relating to the Regulation on wholesale energy market integrity and transparency (REMIT): (i) Transaction Reporting User Manual (TRUM) - Annex II of TRUM describes several examples of transaction reporting relating to contracts reportable to ACER under the REMIT Implementing Regulation ((EU) No 1348/2014). The update reflects market design evolution by adding new examples on market coupling and additional transaction reporting examples based on ACER's analysis and interaction with national reporting authorities and stakeholders; (ii) Manual of Procedures on transaction data, fundamental data and inside information reporting - ACER has updated Annex VII, which describes the data fields for inside information and the new electronic formats for reporting transaction data, fundamental data and inside information; (iii) FAQs on REMIT transaction reporting - ACER has provided new FAQs on data fields related to standard contracts, derivatives related to standard contracts, general questions about non-standard contracts and the reporting of electricity transportation contracts; and (iv) FAQs on REMIT fundamental data and inside information. ACER has provided a new FAQ on electricity nominations and a new general FAQ relating to REMIT inside information collection.
FAQs on REMIT transaction reporting
FAQs on REMIT fundamental data and inside information
Law Commission consults on electronic trade documents
On 30 April, the Law Commission began consulting on proposed reforms to allow for legal recognition of electronic version of trade documents such as bills of lading and bills of exchange. The proposals highlight three criteria that electronic trade documents would need to meet so that they can be “possessed” in the eyes of the law and therefore used for global trade as an alternative to paper versions: (i) the document is a trade document of the kind listed in the Law Commission’s draft legislation: bills of lading; bills of exchange; promissory notes; ships’ delivery orders; warehouse receipts; marine insurance policies; cargo insurance certificates; and warehouse receipts; (ii) the electronic document is capable of exclusive control. That is, the electronic trade document must be on a system that ensures that only one person (or group) has control of the electronic document at any one time; and (iii) the electronic document must be fully divested on transfer. The deadline for comments is 30 July. The responses will help the Law Commission to develop final recommendations for reform, and a final draft Bill, which it aims to publish in early 2022.
Electronic trade documents project webpage
Payment systems and payment services
SIPS Amending Regulation and related ECB Decisions published in OJ
On 5 May, Regulation (EU) 2021/728 amending the Regulation on oversight requirements for systemically important payment systems (SIPS Regulation) was published in the OJ. The Amending Regulation: (i) allows, where a pan-European payment system has been overseen by a national central bank (NCB) for five years or more prior to becoming a SIPS, for the designation of both the NCB and ECB as competent authorities; (ii) introduces alongside the existing criteria for the classification of a payment system as a SIPS, an additional forward-looking methodology; (iii) sets out due process procedures prior to a payment system being identified as a SIPS, which include the ECB issuing a written notice when initiating the identification process and stating the reasons for its decision; and (iv) sets out the procedure for the declassification of a payment system as a SIPS, including the possibility of an earlier declassification base on a case-by-case evaluation. ECB Decision (EU) 2021/729 and ECB Decision (EU) 2021/730 have also been published in the OJ. These Decisions make consequential amendments to respectively: (a) ECB Decision (EU) 2017/2098 on procedural aspects concerning the imposition of corrective measures for non-compliance with the SIPS Regulation; and (b) ECB Decision (EU) 2019/1349 on the procedure and conditions for exercise by a competent authority of certain powers in relation to oversight of SIPS. The ECB has also set out some clarifications in response to the consultation on the Amending Regulation on the consultation webpage.
Prudential regulation
BoE speech on operational resilience and outcomes in practice
On 5 May, the BoE published a speech given by Lyndon Nelson, PRA Deputy CEO and BoE Executive Director, Regulatory Operations and Supervisory Risk Specialists, on operational resilience and outcomes in practice where he discusses the new operational resilience framework (the final rules were published in March). Points of interest include: (i) the PRA and FCA’s joint intention is to operate the same regime. Differences in language in the regulators’ policies is only in order to fit in with the legal drafting norms of each regulator and to be sympathetic with the structure of their respective rulebooks. Work done for one regulator can and should be leveraged to meet the requirements of the other; (ii) Mr. Nelson feels confident that the regulators’ approach will deliver the Basel principles for the UK and describes how the key features of the Basel policy are present in new operational resilience framework; (iii) the regulators understand and expect that tasks such as mapping and testing will evolve and will grow in sophistication over time. So by 31 March 2022, the implementation date, firms will be expected to be able to set out a compelling gap analysis – firms will know where their major shortcomings are and therefore which areas need more work; (iv) each regulator has yet to determine their final approach to impact tolerances; and (v) Mr Nelson highlights that the BoE has also published its policy on outsourcing and third party risk management. He explains that institutions can sometimes find it challenging to oversee effectively cloud service providers. This can be due to the dominant position of the main cloud service providers, which in turn can limit the ability of institutions to negotiate appropriate contractual safeguards and implement effective business continuity plans and cost strategies. He explains that the operational resilience policy helps here – the identification of important business services, determining the maximum tolerance for disruption to those services and taking measures so that firms can remain within those tolerances under plausible scenarios, provides the right level of focus on cloud services and where substitutability is important.
BoE speech on future regulation of building societies
On 5 May, the BoE published a speech by Sam Woods, BoE Deputy Governor for Prudential Regulation and PRA CEO, on initiatives relating to the regulation of building societies. Points of interest include: (i) Mr Woods explains the proposals for a new ‘strong and simple’ regime for small banks and building societies, highlighting the discussion paper published last week. He explains there are three key trade-offs when designing a strong and simple framework: scope, simplification and strength of the framework. The different possibilities of addressing these are discussed in the paper; (ii) Mr Woods covers the link between two ongoing reviews that are relevant for large building societies – the review of the leverage ratio and the review of MRELs (minimum requirements for own funds and eligible liabilities). He expects the regulators’ to publish further information on the reviews in the summer; (iii) Mr Woods discusses the initial conclusions from its September 2020 consultation on mortgage risk-weights. The PRA is assessing the likely impact of the proposals against the original assessment – including whether both mortgage floors are needed, the exact calibration, and the timing of any implementation; and (iv) Mr Woods concludes that the PRA is moving into a new phase of making regulatory rules now the UK has left the EU. It will mean even more engagement with firms on the key issues.
EBA discussion paper on NPL data templates
On 4 May, the EBA published a discussion paper on a review of its standardised data templates for non-performing loan (NPL) transactions. The EBA hopes to reinforce the dialogue with market participants with a view to making the existing NPL data templates more user‐friendly, less complex, and proportionate so that the NPL data templates strike the right balance between the cost of information provided and the ability of users of the data to effectively price the potential transaction. The discussion paper proposes a number of changes to the existing templates such as restructuring of the data categories, designing asset classes, reduction of data fields, categorisation of these data fields as critical and non‐critical, and presents proportionality considerations. The deadline for comments is 31 August. The EBA intends to prepare a revised version of the data templates and publish this revised version by December. However, the EBA notes that the adoption of the proposed Directive on credit servicers, purchasers and recovery of collateral may mandate the EBA to turn these data templates into implementing technical standards, for which the EBA would have to publish a consultation paper.
PRA findings of internal audit review of the collections function
On 30 April, the PRA published a letter it sent to chief risk officers (CROs) of non-systemic UK deposit takers, which summarises the findings of its internal audit review of collections functions. The review focused on the effectiveness of controls in: (i) collection processes and control environment; (ii) governance and oversight; and (iii) regulatory reporting. The PRA are assured from the internal audit findings that the processes and controls in place for collection operations, from a prudential perspective, are largely adequate and effective across the majority of the firms. However, 20% of firms require significant strengthening in the collections function. Common areas needing improvement include: (a) policy and process documentation; (b) controls over collections activities, in particular oversight of operational controls and establish or improve Quality Assurance frameworks; (c) collections capacity planning and training, in particular ensuring contingency resource skills are suited to collection activities and the capacity plans accurately reflect Covid-19 solutions; (d) alignment of collection processes to regulatory reporting requirement, in particular definitions and rules, mainly for the definition of default and unlikely to pay indicators; (e) collections management information (including third party) mainly on forbearance metrics and trends; and (f) a significant number of Boards appeared to be generally unsighted on levels of forbearance. The PRA will continue to monitor firms’ collections functions in light of the Covid-19 pandemic impact on arrears and forbearance levels.
Recovery and resolution
ECB response to EC consultation on review of crisis management and deposit insurance framework
On 6 May, the ECB published its response to the EC’s consultation on the review of the crisis management and deposit insurance framework. The ECB welcomes the review as an important opportunity for revision. Its general remarks include that: (i) improving the crisis management framework and completing the banking union need to be achieved in parallel, since the objectives support each other; (ii) progress in facilitating cross-border banking within the EU should remain a priority. Small-scale amendments to the current framework would encourage the use of existing legal options already in place, such as cross-border liquidity waivers, and allow incremental progress on cross-border integration; (iii) improvements to the crisis management framework should cover all the different stages of a bank’s crisis, providing tools and powers to authorities to deal with a crisis before a bank is deemed failing or likely to fail. The early intervention framework should be clarified to make practical implementation easier; and (iv) broader application of the resolution framework would enhance the level playing field and access to best-practice resolution tools, but this does not remove the need to revisit the liquidation framework, as some banks would still not have access to resolution. The ECB supports the creation of a European administrative liquidation framework supported by a European Deposit Insurance Scheme to harmonise and improve the effectiveness of the crisis management framework for banks where there is no public interest in resolution and which therefore go into liquidation.
SRB operational guidance on liquidity and funding in resolution
On 30 April, the SRB published operational guidance on liquidity and funding in resolution. The SRB explains that banks are likely to face liquidity stress in resolution because of the reluctance of market participants, both wholesale and retail, to roll-over or provide funding to a bank in crisis. Even after a successful execution of the resolution strategy, liquidity stress may persist for some time due to the asymmetry of information regarding the viability of the resolved bank’s business model. Despite that, banks need to ensure that they continue to meet their obligations as they fall due during the different resolution phases. This guidance focuses on the first dimension of the SRB’s “expectations for banks”: the estimation of liquidity needs, and aims to enhance banks’ resolvability and preparedness for a potential resolution. In meeting these expectations, banks are invited to leverage on any capability already developed for supervisory purposes (e.g. recovery planning). However, banks are expected to be able to address the resolution-specific aspects in the guidance. Banks will be assessed on this element in the 2021 resolution planning cycle. There will be further guidance for the two remaining elements of the SRB’s “expectations for banks” in 2022: (i) to be able to measure, report and forecast their liquidity position and relevant liquidity metrics during the resolution process; and (ii) to be able to identify and mobilise assets (especially of lower quality and less liquid) that could be used as collateral to obtain liquidity in resolution anticipating any legal, regulatory and operational obstacles to their mobilisation under stressed conditions.
Other developments
FCA speech on the UK regulatory landscape post-Brexit
On 6 May, the FCA published a speech given by Nikhil Rathi, FCA Chief Executive, on the UK regulatory landscape post-Brexit and beyond. Points of interest include: (i) the FCA will continue to be a regulator that supports open, competitive markets with responsible innovation. The FCA is mindful of the important role international firms play in helping ensure competition in UK markets; (ii) the FCA’s regulation of overseas firms is aimed at achieving the same high standards of conduct and behaviour as its regulation of domestic firms, and ensuring a level playing field. For EU firms currently accessing UK markets via the Temporary Permissions Regime, there will be a rigorous review of all firms seeking to enter the UK authorisation gateway; (iii) international regulatory cooperation with other supervisors and global standard-setting bodies is ever more vital – working towards the same outcomes as other regulators allows the regulators to defer to each other more and avoid duplication of regulatory requirements; (iv) the FCA recognises the increased flexibility that is available to the UK following Brexit and will use this for the benefit of UK financial markets and consumers. The UK was closely involved in the development of the EU’s regulatory framework and therefore any changes will focus on tailoring those elements to the specificities and needs of UK markets and not simply diverging for the sake of it; (v) other key areas of focus in international regulation include ESG and the sustainability agenda, and dealing with financial crime; and (vi) the FCA will provide an update on its transformation programme in July alongside the FCA’s business plan.
FCA speech on outcome-focused regulation post Covid-19
On 6 May, the FCA published a speech given by Charles Randell, FCA chair, on outcomes-focused regulation in a post Covid-19 world. Points of interest include: (i) the FCA is determined to transform to produce better outcomes for the post-Covid-19 world. The FCA needs to focus even more on defining the right outcomes, to measure them more and then act on the results faster with an enhanced data capacity. Through this the FCA will be able to target its interventions more effectively; (ii) being transparent about outcomes drives the FCA to act when required and increases its accountability; (iii) the FCA needs to embed a focus on consumer outcomes in its governance, board and executive processes, in the design of its organisation and in the objectives of its leaders. The FCA will use its 2021 board evaluation to ensure that oversight of the focus on outcomes is sufficiently clearly defined in the functioning of the board and its committees. Through improved governance, the FCA can help to ensure that the outcomes it works to deliver are specific, measurable, achievable, realistic and timely; (iv) the FCA needs to make sure it is collecting and using the right data, without needing to rely on market studies, which require some time to put together; (v) the FCA needs to be bold about stating and measuring the outcomes it is seeking, even when it can’t fully control the outcomes, with some elements lying outside the FCA’s powers; and (vi) the FCA needs to reset its expectation of how firms define the outcomes their customers can expect, ensuring that the FCA’s rules are not seen by firms as simply a box-ticking exercise. The FCA will be consulting on a new consumer duty shortly, which could embed a useful outcomes-focused approach.
FCA Handbook Notice 87
On 30 April, the FCA published Handbook Notice 87, which sets out changes to the FCA Handbook made by the FCA board on 25 March and 29 April: (i) Supervision Manual (Financial Crime Report) (Amendment No 2) Instrument 2021 (FCA 2021/13). The instrument makes changes to the Handbook to increase the FCA's collection of REP-CRIM data (the FCA's annual financial crime reporting obligation). It will come into force on 30 March 2022; (ii) Operational Resilience Instrument 2021 (FCA 2021/14). The instrument makes changes to the Handbook to help firms and the UK financial sector prevent, adapt, respond to, recover and learn from operational disruptions. It will come into force on 31 March 2022; (iii) UK Emission Trading Scheme (ETS) Instrument 2021 (FCA 2021/15). The instrument makes changes to the Handbook to reinstate provisions previously deleted as a consequence of the UK's departure from the EU ETS at the end of the Brexit transition period. The instrument comes into force on 30 April; (iv) Technical Standards (MAR) (UK ETS) Instrument 2021 (FCA 2021/16). The instrument makes consequential changes to certain technical standards under UK MAR that derive from HMT’s legislative amendments to UK MAR. These changes clarify the application of technical standards to auction platforms and auctioneers under the UK ETS and/or to UK Emission Allowance Market Participants. The instrument comes into force on 30 April; and (v) Collective Investment Schemes Sourcebook (Bearer Certificates) Instrument 2021 (FCA 2021/17). The instrument makes changes to the Handbook to reflect legislation that has abolished the rights of certain UK collective investment schemes to issue units or shares represented by bearer certificates. The instrument comes into force on 30 April.