Key Regulatory Topics: Weekly Update 31 July - 6 August 2020
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Our weekly update on key regulatory topics affecting the financial services sector.
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Capital Markets
FCA speech on capital market regulation and Covid-19
On 3 August, Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA delivered a speech on capital market regulation and Covid-19. Mark discusses a recent enforcement case on which the FCA took action highlighting the importance of a capital market where: (i) the FCA has visibility of what is happening; (ii) there are clear rules and regulations in place that permit effective monitoring; (iii) there are disciplines around disclosure of inside information and in respect of key transactions; and (iv) the FCA is able to supervise and enforce standards to stifle harm, impose sanctions and redress the costs of dishonesty. While the focus during the Covid-19 pandemic has been to provide immediate mortgage and retail credit and lending relief, the FCA has also been active in capital markets providing relief in the way of extended submission deadlines and measures to enable companies to more easily raise new capital. Mark notes that this has enabled the UK’s market to remain liquid and that the FCA believes that the balance between urgency, need, efficiency, avoidance of uncertainty and investor protection has been struck in the right place.
Consumer/Retail
FCA report on relending by high-cost lenders
On 6 August, the FCA reported on the findings from its review of relending by firms in the high-cost lenders portfolio, which include that: (i) it is not always the case that firms are only agreeing to refinance when they reasonably believe it is not against the customer’s best interests to do so – firms should ensure that relending leads to positive customer outcomes and does not cause harm; (ii) relending causes both the level of debt and repayment amount to increase nearly every time further borrowing is taken, in some cases to the point where it is no longer affordable or sustainable for some customers - rigorous affordability assessments are key to avoiding harm; (iii) relending accounts for a high proportion of business (for most firms more than 80%) and drives profitability in many firms, which gives rise to customer harm; (iv) marketing materials need to be more balanced for customers to be able to make more informed decisions – they generally focus on the ease, convenience and benefits of taking more credit, failing to present a fair and prominent indication of relevant risks; (v) there was some evidence of marketing materials exploiting customer bias to adversely influence their behaviour by making relending seem like common practice; (vi) some firms marketing materials are not complying with the financial promotion rules - all marketing materials must be clear, fair and not misleading; (vii) firms are using online accounts as a vehicle to offer additional credit - online account messages encouraging customer to reborrow could constitute marketing and must not restrict access to customer accounts; and (vii) some firms are making an early settlement charge when customers refinance and requiring customers give notice if they wish to settle their existing loan early – the FCA expects these actions to stop. The report also includes a consumer report completed by PWC and an annex setting out the relevant statutory provisions, FCA rules, and guidance.
PRA policy statement on FSCS temporary high balances coverage extension – Covid-19
On 4 August, the PRA published a policy statement on the Financial Services Compensation Scheme (FSCS) temporary high balances (THB) coverage extension. The statement contains the final policy in the form of amendments to the Depositor Protection Part of the PRA Rulebook and the updated Statement of Policy (SoP) ‘Deposit Guarantee Scheme’. The PRA’s proposals included to increase the THB coverage period from six months to twelve months up until 31 January 2021 in order to mitigate the consumer protection issues caused by the impact of Covid-19 on residential property and investment markets, and access to banking services for some depositors. The PRA implemented the proposals as consulted on, which became effective on 6 August.
FCA call for input – ongoing support for mortgages and consumer credit consumers – Covid-19
On 31 July, the FCA issued a call for input asking for early views on what support will be required for consumers once they come to the end of their second payment deferral and whether the current guidance should be extended past 31 October. Where consumers are unable to resume payments once their current temporary arrangements end, the FCA is looking for the following outcomes: (i) consumers get appropriate forbearance that is in their interests; (ii) consumers receive a consistent level of treatment and good outcomes, whoever their lender is; (iii) firms have the systems and processes to provide their customers with the help they need; (iv)firms recognise vulnerability and respond to vulnerable consumers' needs; and (v) consumers receive the support they need in managing their finances. If further guidance is necessary considering the responses, the FCA expects to publish final guidance in early-September for mortgages, and in late-September for consumer credit. The deadline for comments is 7 August.
FCA updates statement on firms handling of complaints during Covid-19
On 31 July, the FCA updated its statement on how firms should handle complaints during coronavirus. The FCA clarify that: (i) firms have now had enough time to embed new ways of working - therefore, a failure to comply with requirements in chapter 1.6 of the Dispute Resolution: Complaints sourcebook (DISP), or other complaint handling requirements, should only arise in exceptional circumstances connected to the impact of Covid-19 and any firm that is facing difficulties in complying should contact the FCA; (ii) senior managers continue to be accountable for effectively overseeing how their firms handle complaints - where firms are experiencing reduced complaint handling capacity, they are expected to prioritise paying complainants promptly if they have been offered redress and accepted that offer (including compensation awarded by the FOS; (iii) it expects them to co-operate with the FOS on any complaints that it is considering, and respond to requests for information in a timely fashion, as required by DISP 1.4.4R.; and (iv) claims management companies (CMCs) are expected to allow firms the time requested in their holding responses, to give a final response before referring complaints to the FOS, if the CMC consider this amount of time reasonable. The FCA intends to review and update the statement by the end of October 2020.
FCA guidance consultation on cancellations and refunds – Covid-19
On 31 July, the FCA began consulting on guidance for firms to help their customers identify their quickest and easiest options to claim for any cancelled travel or events considering the unprecedented number of trips, holidays and other events cancelled since the start of the Covid-19 pandemic. The guidance is aimed at insurance and card providers applying to any situation where an insurance provider refers a consumer to a card provider for a claim. The FCA’s guidance aims to: (i) help consumers identify their options to claim for any cancellations as quickly and easily as possible, from the provider that is likely to produce the best possible outcome for them; (ii) reduce the risk of consumers being passed between firms, where this is not in the consumer’s interest; (iii) reduce potential inconvenience and frustration for consumers who are struggling to claim for cancelled travel arrangements or events; and (iv) increase consumer understanding of the benefits of the different options available. The FCA proposes that it should be effective for 6 months following the publication of the finalised guidance. The deadline for comments is 13 August.
Covid-19
Please see the other sections for product specific updates relating to Covid-19.
LSB update to the Standards of Lending Practice for business customers – CBILS and BBLS
On 5 August, the Lending Standards Board updated it standards of lending practice for business customers to take account of the Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS). The LSB previously issued an update on 4 May and has since been working with the FCA to ensure that the update is recognised as it is the LSB’s view that this recognition will provide firms with clarity regarding their SM&CR obligation to observe proper standards of market conduct. As part of this review process, the LSB decided that some further changes were necessary to provide more clarity and to recognise that the government may issue further guidance relating to the scheme.
Financial Crime
Please see our Investigations Insight blog for a post on the key takeaways from the French Anti-Corruption Agency’s 2019 report, which sets out its main actions over the course of last year as regards training and awareness, enforcement and cooperation. Whilst noting that France dropped from 21st to the 23rd on the Corruption Perceptions Index published by Transparency International in 2019, notably ranking behind the UAE and Estonia, the Head of the French Anti-Corruption Agency notes in the Report’s introduction that time is up for a change in French culture.
Please see the section on prudential regulation for the EBA’s consultation on revised guidelines on internal governance under CRD V and IFD, which clarifies that managing ML/TF risk is a part of sound internal governance arrangements and credit institutions’ risk management framework.
HMT AML/CTF 2018/19 annual supervision report – FATF mutual evaluation findings
On 6 August, HMT published its Anti-money laundering and counter-terrorist financing: Supervision report, 2018-2019. The report covers the findings of FATF's mutual evaluation report into the UK in December 2019 which include: (i) all regulated activities under the FATF Standards are supervised for AML/CTF compliance however, the quality of supervision varies among the 25 AML/CTF supervisors which range from large public organisations to small professional bodies; (ii) The statutory supervisors (FCA, HMRC and the Gambling Commission) and the largest legal sector supervisor (which supervises around 90% of solicitors in the UK) have a stronger understanding of the ML/TF risks present in the sectors than the other 22 professional bodies that supervise most accountants and the remainder of the legal sector; (iii) systemic AML/CTF failings identified at some large multinational UK firms over the last decade raise questions, but the assessors recognise that there is an increasing trend in levying penalties for serious failings; (iv) supervisors’ outreach activities, and fitness and propriety controls are generally strong. Recommended actions include that: (a) the FCA and HMRC should consider how to ensure appropriate intensity of supervision for all the different categories of their supervisory population from low risk to high risk; (b) HMRC should ensure that it properly takes into account ML/TF when risk rating firms subject to their supervision; (c) supervisors should continue to ensure, in accordance with the increased trend for levying penalties, that proportionate, dissuasive and effective sanctions are applied for violations of AML/CTF and sanctions obligations; (d) supervisors should routinely collect statistics and feedback on the impact of supervisory actions, by introducing systems for maintaining statistics on the numbers and trends of findings to enable them to better target their supervisory activities and outreach, and demonstrate the impact of their supervision on AML/CTF compliance; (e) the FCA should consider the wider use of criminal background checks as part of its processes to ensure that criminals and their associates are prevented from owning or controlling financial institutions; (f) supervisors should ensure that their guidance is timely and fit-for purpose, meeting the needs of the range of firms within the sectors they supervise and (g) progress plans be implemented to extend AML/CTF requirements and related supervision to virtual currency exchange providers.
Foreign Secretary welcomes first EU sanctions against malicious cyber actors
The Foreign and Commonwealth Office (the office) have issued a press release welcoming the announcement (On 30 July) of the first set of sanctions to be imposed under the EU’s cyber sanctions regime against nine individuals and organisations from North Korea, China and Russia. The office notes that the UK has laid the statutory instrument for an autonomous UK cyber sanction regime to enable the UK to continue to implement the regime at the end of the transition period.
Funds and Fund Management
FCA consults on liquidity mismatch in authorised open-ended property funds
On 3 August, the FCA began consulting on measures to address the potential harm caused by a mismatch in liquidity in certain UK authorised funds that invest directly in property. The FCA proposes introducing a notice period of up to 180 days for these funds, which it hopes could eliminate the potential for some investors to gain at the expense of others, and reduce the likelihood of liquidity runs on funds leading to ‘rapid sales’ of assets which may disadvantage remaining fund investors – ‘first mover advantage’. A redemption request would be processed at the end of this notice period, at which point the investor would receive the value of their investment, based on the unit price of the fund at the first valuation point following the end of their notice period. Redemption requests would be irrevocable, so that investors cannot place orders and withdraw them before the end of the notice period if market conditions change. The FCA clarifies that fund managers will be expected to treat this as a significant change under the Collective Investment Schemes sourcebook and notify investors before any change comes into effect. The FCA is aiming to publish a policy statement and final handbook rules as soon as possible in 2021. The deadline for comments is 3 November.
Markets and Markets Infrastructure
FCA speech on critical tasks on LIBOR transition in the second half of 2020
On 3 August, the FCA published a speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA on the critical tasks ahead of the industry in the second half of 2020 on LIBOR transition. Highlights include: (i) the next 4 to 6 months are arguably the most critical period in the transition away from LIBOR; (ii) ISDA is close to finalising the protocol and other documentation through which outstanding derivatives contracts that reference LIBOR can transform, more or less seamlessly, to work on the new RFRs - firms will need to sign the protocol within the four-month adherence period that ISDA will offer after the protocol is published this summer; (iii) the FCA welcomes the legislation put forward to give it additional powers to enhance its ability to manage the LIBOR end-game, but notes that these should not be relied upon and that it will only use its powers in respect of legacy transactions if doing so is necessary to protect consumers or market integrity; (iv) the existence of the powers does not mean that firms do not need the protocol, as the FCA may not be comfortable using the powers unless there has been wide take up of the protocol; and (v) ISDA's protocol is necessary but not sufficient – the FCA will be expecting firms to be able to show that they have robust fallback documentation in place before LIBOR ceases or becomes unrepresentative.
Payment Services and Payment Systems
PSR on getting the right outcomes for the victims of APP scams
On 6 August the PSR published a statement made by Genevieve Marjoribanks, Head of Policy on getting the right outcomes for the victims of APP scams. Whilst positive steps have been taken since the development of the contingent reimbursement model (CRM) code, the PSR wants more to be done and to see the industry doing everything it can to prevent APP scams and protect consumers. One area where the PSR wants to see improvements made is the percentage of losses that are reimbursed by CRM code banks. It expects the vast majority of APP scam cases assessed under the Code to be repatriated or reimbursed – the current average is 40%. The PSR also wants to see the establishment of a sustainable, long-term model for reimbursement. While the Code signatory banks have agreed to fund reimbursement in cases where the scams occur through no fault of the bank or customer, some Code signatories are saying that funding has only been provided on an interim basis until the end of this year. The PSR believes the most obvious option for funding reimbursement is by PSPs committing to self-funding these costs. In the short term, the PSR would support the Lending Standards Board (LSB), the body responsible for overseeing the CRM Code, amending the Code to make it clear that self-funding, as well as shared funding, is an option. Such a move would clarify the issue for PSPs, while prioritising the protection of consumers and allowing industry to focus its attention on finding new and innovative ways to raise standards of scam prevention. However, if the voluntary approach under the Code proves unsuccessful, then, Genevieve states, the industry needs to find a way to embed a high standard of consumer protection as the norm.
PSR on consumer protection and driving innovation and competition in real-time payments
On 4 August, the PSR published a statement made by Genevieve Marjoribanks, Head of Policy on consumer protection and driving innovation and competition in real-time payments. Genevieve explains that the PSR wants UK consumers to have choice when it comes to making payments, including access to world-leading real-time payment services and that the best way to deliver this is through competition and innovation. The PSR wants to identify new ways of driving competition and innovation in interbank payments while ensuring that they serve the best interests of everyone who uses them. The PSR is therefore starting a new piece of work to assess whether additional protections for people making real-time payments using Faster Payments (FPS) should be introduced. It aims to address the following: (i) what benefits could various types of protection offer consumers, from refunds and guarantees to transaction-risk analysis and improved communication between banks and their customers; (ii) what role do fledgling innovations like digital identity have in the identification of payers and/or authentication of payments; (iii) are new measures necessary to continue to safeguard consumers, or can we be confident that the market will provide consumer protection solutions without the need for regulatory intervention; and (iv) if additional protections are necessary, should they be introduced by individual PSPs or should FPS itself have additional protections built into it? At this stage, the PSR is just sharing its thinking and proposed approach.
Prudential Regulation
BCBS consults on principles for operational risk and operational resilience
On 6 August, BCBS began consulting on proposed principles for operational resilience that aim to mitigate the impact of potentially severe adverse events by enhancing banks' ability to withstand, adapt to and recover from them. The proposed operational resilience principles focus on: (a) governance; (b) operational risk management; (c) business continuity planning and testing; (d) mapping interconnections and interdependencies; (e) third-party dependency management; (f) incident management; and (g) resilient cyber security and ICT. BCBS is of the view that operational resilience is also an outcome of effective operational risk management. Activities such as risk identification and assessment, risk mitigation (including the implementation of controls) and ongoing monitoring work together to minimise operational disruptions and their effects when they materialise. Given this natural relationship between operational resilience and operational risk, BCBS is also consulting on proposing updates to its principles for the sound management of operational risk (PSMOR). Specifically, BCBS is proposing a limited number of updates to: (i) align the PSMOR with the recently finalised Basel III operational risk framework; (ii) update the guidance where needed in the areas of change management and ICT; and (iii) enhance the overall clarity of the principles document. The deadline for comments on both consultations is 6 November.
Revisions to the principles for the sound management of operational risk
Principles for operational resilience consultation
FCA consults on update to dual-regulated firms’ remuneration code – CRD V
On 3 August, the FCA began consulting on proposals to amend its dual-regulated firms remuneration code and relevant -handbook guidance to reflect changes made by CRD V. The proposals include to: (i) add examples of categories of staff who must be included as material risk takers; (ii) replace the FCA’s proportionality thresholds with exemptions from some remuneration rules for firms below a certain size and for individuals with remuneration below a certain level; (iii) revise the criteria for assessing whether a UK branch of a third country firm is in scope; (iv) amend the minimum deferral periods; (v) amend the minimum clawback period; (vi) require firms to have gender neutral remuneration policies and practices; and (viii) permit listed firms to award variable remuneration in the form of share-linked instruments and equivalent non-cash instruments. The FCA proposes that firms apply these requirements from the next performance year beginning on/after 29 December. The deadline for comments is 30 September.
EBA final draft ITS on disclosure and reporting on MREL and TLAC
On 3 August, the EBA published its final report and final draft ITS on disclosure and reporting on the G-SII requirement for own funds and eligible liabilities (TLAC) and the minimum requirements for own funds and eligible liabilities (MREL). The EBA sought to maximise efficiency for entities when complying with their disclosure and reporting obligations and to facilitate the use of information by authorities and market participants. For these purposes, MREL and TLAC are presented in an integrated manner, both in the reporting and disclosure templates. The reporting and disclosure requirements are enshrined in a single set of ITS and a mapping between the quantitative information that has to be disclosed and the data that has to be reported is provided. The ITS also seek to maximise the consistency and comparability of disclosures under these ITS with the templates and definitions included in the relevant BCBS Pillar 3 standards in order to reinforce market discipline. The final draft ITS were submitted to the European Commission for adoption. The provisions on the disclosures on TLAC apply immediately after the adoption and entry into force of the ITS. The provisions on disclosures on MREL apply from 1 January 2024 at the earliest. The first reference date for reporting in accordance with the ITS is the 30 June 2021 (reporting framework 3.0) both for MREL and TLAC.
PRA consults on implementation of CRD V
On 31 July, the PRA began consulting on proposed changes to its rules, supervisory statements and statements of policy in order to implements elements of CRD V. CRD V introduces further measures, implementing Basel III’s enhanced Pillar 2 approach to the management and control of interest rate risk in the banking book (IRRBB). It also introduces a number of EU-specific measures designed to further harmonise micro and macro-prudential supervision and to introduce greater proportionality in prudential requirements. This consultation focuses on implementing CRD V requirements in relation to: (i) Pillar 2; (ii) remuneration policies; (iii) intermediate parent undertakings; (iv) governance; and (v) third-country branch reporting. The PRA plans to consult in autumn 2020 on draft rules to implement the remaining elements of CRD V not covered by this consultation. The deadline for comments is 30 September.
ESMA and EBA consult on revised guidelines for assessing suitability of members of the management body and key function holders under CRD V and IFD
On 31 July, the EBA and ESMA launched a joint consultation on its revised joint guidelines on the assessment of the suitability of members of the management body and key function holders in order to takes into account the amendments introduced by CRD V and IFD. The draft joint guidelines: (i) clarify that the knowledge, experience and skill requirements are important aspects in the fit and proper assessment of members of the management body and key function holders as they contribute to identifying, managing and mitigating money laundering and financing of terrorism risks; (ii) clarify that being a member of affiliated companies or affiliated entities does not in itself represent an obstacle for a member of the management body to acting with independence of mind; (iii) specify that a gender-balanced composition of the management body is of particular importance and that institutions should respect the principle of equal opportunities for any gender and take measures to improve a more gender-balanced composition of staff in management positions; and (iv) take into account the recovery and resolution framework introduced by BRRD and provide further guidance in this regard - as part of early intervention measures and during resolution, the guidelines state that the suitability of newly appointed members of the management body and of the management body collectively is relevant and requires an assessment. The EBA has published a version of the consultation in tracked changes, so that the amendments are easily identified. The EBA expects the amended guidelines to enter into force sixth months after publication. The deadline for comments is 31 October.
Consultation paper – tracked changes
EBA consults on revised guidelines on internal governance under CRD V and IFD
On 31 July, the EBA launched a consultation to revise its guidelines on internal governance in order to take account of the amendments introduced by CRD V and IFD. Amongst other things, these Guidelines: (i) clarify that identifying, managing and mitigating ML/TF risk is part of sound internal governance arrangements and credit institutions’ risk management framework; (ii) specify and reinforce the framework regarding loans to members of the management body and their related parties - those loans may constitute a specific source of actual or potential conflict of interest and, therefore, specific requirements have been explicitly included in CRD and in the same way, other transactions with members of the management body and their related parties have the potential to create conflicts of interest and, therefore, the EBA is proposing guidance on how to properly manage them; (iii) in line with the requirement to have a gender-neutral remuneration policy, include new guidance on the code of conduct to ensure that credit institutions take all necessary measures to avoid discrimination and guarantee equal opportunities to staff of all genders; and (iv) now include explicit reference to ESG factors. The EBA has proposed a new requirement for the management body to aim to ensure a “sustainable business model” that takes into account all risks, including environmental, social and governance risks. This is intended to link management body responsibilities and ESG factors. The risk management framework requirements have also been amended to explicitly refer to ESG amongst the financial and non-financial risks that must be taken into account. The EBA has published a version of the consultation in tracked changes, so that the amendments are easily identified. The EBA expects the amended guidelines to enter into force on 26 June 2021. The deadline for comments is 31 October 2020.
Consultation paper – tracked changes
Sustainable Finance
Please see the section on prudential regulation for the EBA’s consultation on revised guidelines on internal governance under CRD V and IFD, The guidelines and risk management framework requirements now include explicit references to ESG.
Taxes/Levies
FCA consults on debt advice levy rates to provide additional funding for 2020/21 – Covid-19
On 5 August, the FCA began consulting on its debt advice levy rates in order to provide an additional £14.2m for the Money and Pensions Service (MaPS) and £2.087m for the provision of debt advice in the devolved authorities. The additional funds are essential in order to respond to the expected increase in debt advice due to Covid-19. The FCA proposes to allocate debt advice funding to fee-blocks on the same basis as it did in its April 2020 consultation (CP/20/6) and in 2019/20.The deadline for comments is 30 September. The FCA expects to publish its policy statement in Q4 2020.
Other Developments
BoE financial policy summary and record of FPC meetings – Covid-19
On 6 August, the BoE published its Financial Policy Summary and Record of the Financial Policy Committee (FPC) Meetings on 29 July and 3 August. In the meetings the FPC discussed: (i) The performance of the UK financial system during the Covid-19 pandemic; (ii) house indebtedness concerns in relation to Covid-19; (iii) the impact of Covid-19 on the UK corporate sector; (iv) the supply of finance for product investment and the distortions that might reduce this; (v) the resilience of the UK banking system considering the ongoing impacts of Brexit and Covid-19; (vi) the transition away from LIBOR and the temporary disruption to progress caused by Covid-19; and (vii) developments in the payments sector.