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Key Regulatory Topics: Weekly update 5 - 11 June 2020

12 June 2020

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

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Government response to the financial services after Brexit inquiry

On 11 June, the Government published its response (dated 27 May) to the EU financial Affairs Sub-Committee following its review on financial services after Brexit. The review included several conclusions and recommendations on financial services after Brexit. The Government, among other things: (i) explains that its priority with respect to the Political Declaration commitments on equivalence is to seek equivalence across all the c.40 equivalence regimes; (ii) agrees that its position in the EU-UK FTA discussions must reflect the importance of financial services to the UK and EU economy and that this should include transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions, while respecting the principles of autonomy; (iii) with regards to the risks to financial stability and disruption to financial services that could materialise at the end of the Transition Period the letter summarises the UK action including the TPR and notes the FPC’s determination that further action is needed by the EU through positive equivalence decisions; (iv) notes that work is ongoing in designing the UK’s future approach to financial regulation, and that the Government is committed to the highest standards of regulation and appropriate levels of supervisory oversight; and (v) agrees that the Government should take the opportunities after Brexit to develop closer bilateral relations with jurisdictions with which it shares a common approach to promoting cross-border financial services and that the UK recognises the value in continued engagement at multilateral fora and is committed to the development of global standards in areas of common interest. 

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Capital Markets

High Level Forum (HLF) final report on EU capital markets union (CMU)

On 10 June, the EU HLF published its final report on the CMU setting out 17 proposed recommendations aimed at progressing the EU’s capital markets initiative. The press release notes that completing the CMU has now become particularly urgent in order to speed up the EU’s recovery from the Covid-19 pandemic. The proposed recommendations address the obstacles that have discouraged EU financial operators from taking up or scaling up financial activity. Between now and 30 June, the EC will seek feedback from stakeholders on the report. The EC intends to publish an action plan on the CMU in Q4 2020.

Press release

Final report

BCBS FAQs on Basel framework in relation to the reform of benchmark rates

On 5 June, BCBS published a set of FAQs on the Basel framework which cover the following elements in relation to the reform of benchmark rates: the definition of capital, market risk, counterparty credit risk, and the standardised approach to operational risk. 

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FCA Insight article – ‘Conduct, culture and Covid-19’ 

On 10 June, the FCA published an Insight article on the challenges and opportunities that Covid-19 has created for workplace culture and conduct. The article looks at the increased risks and changes to management styles brought about by working separately. To foster healthy cultures, the FCA notes that the best approach will depend on the nature and culture of each business, but there are some considerations that should apply to any firm: (i) purpose – providing direction and motivation; (ii) leadership integrity; (iii) identifying new risks and opportunities brought about by the crisis; (iv) psychological safety – ensuring employees can speak up and are listened to; (v) ensuring a continued focus on diversity and inclusion; (vi) paying attention to the mental health and wellbeing of employees – employees will have experienced the crisis differently, facing different challenges which require different solutions; and (vii) using insights from behavioural science, such as replacing informal behavioural cues and committing to good conduct.

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Please see the other sections for product specific updates relating to Covid-19.

BoE’s speech on Covid-19 and financial system resilience

On 9 June, the BoE published a speech by Sir Jon Cunliffe who is the BoE Deputy Governor Financial Stability, and a member of the Monetary Policy Committee, Financial Policy Committee, and Prudential Regulation Committee, on lessons to be learned on financial system resilience in response to Covid-19. Key points in the speech include: (i) that the recent FPC desktop stress test indicates that considerable resilience remains in the core banking system to deal with more adverse outcomes; (ii) the coming months will reveal more about how well the post-financial crisis reforms work under stress, with a particular focus on the usability of the capital and liquidity buffers intended to absorb a tail event shock; (iii) money market funds have been a source of vulnerability in the system; (iv) with the possibility of further negative Covid-19 developments, there is a risk of further financial instability. Sir Cunliffe concludes that: (a) we need to look at how the system as a whole has performed under stress and whether and how it might be strengthened - such a comprehensive assessment, cannot be done by one jurisdiction or one international standard setter; and (b) in this respect, one of the other, major planks of the post financial crisis reforms, the creation of the FSB – has put us in a far better position than ten years ago.

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FCA consultation on one-off increase to levies to part-fund Government support package for debt advice services

On 9 June, HMT announced an extra £37.8 million support package will be available to debt advice providers so they can continue to provide essential services to help more people who are struggling with their finances due to Covid-19. The Money and Pensions Service (MaPS), will oversee the allocation of the funds. The funding consists of £20.6 million from the Government and £14.2 million raised through a one-off increase to the Financial Services Levy. In a public statement, the FCA explains that it is responsible for collecting funding amounts requested by Government for free-to-consumer debt advice provided by MaPS. The FCA does this through the debt advice levy, which funds MaPS, and the Devolved Authorities’ debt advice levy. Given its role as collection agent for these levies, the FCA will consult on details in due course. In a public statement MaPS welcomes the support package and that it will set out the process for allocating funds in the coming weeks. 

HMT announcement

FCA statement

MaPS statement

ESRB takes second set of actions in response to Covid-19 emergency

On 8 June, the ESRB announced a second set of macroprudential actions in response to the Covid-19 emergency: (1) with regards to implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy, the ESRB has decided to establish an EU-wide framework to monitor the financial stability implications of the support measures - with this framework, the ESRB intends to complement and enhance what is being done at the national level by fostering the exchange of experiences and the early identification of cross-sectoral and cross-border issues; (2) the ESRB has published a recommendation that introduces minimum requirements for national monitoring of financial stability implications of measures taken to protect the real economy in response to Covid-19, and establishes a framework for reporting to the ESRB – this  does not create new reporting requirements for financial institutions, as the ESRB will rely on the reporting and data collected by national macroprudential authorities and member institutions; (3) in a communication to EIOPA, the ESRB has strongly encouraged EIOPA to finalise and operationalise a liquidity monitoring framework for (re)insurers as a response to Covid-19; (4)  the ESRB also recommends that the Pillar 2 provisions in the Solvency II regulatory regime be enhanced in the medium term to enable supervisors to require individual (re)insurers with a vulnerable liquidity profile to hold a liquidity buffer; (5) the ESRB has continued to monitor developments in the corporate bond market, including possible implications of large-scale corporate bond downgrades across the financial system; (6) the ESRB has published a recommendation on the restriction of distributions during the pandemic, together with a background report; and (7) with regards to liquidity risks arising from margin calls, the ESRB has published a recommendation aimed at: (i) limiting cliff effects in relation to the demand for collateral; (ii) enhancing CCP stress test scenarios for the assessment of future liquidity needs; (iii) limiting liquidity constraints related to margin collection; and (iv) promoting international standards related to mitigating procyclicality in the provision of client clearing services and in securities financing transactions. 

ESRB announcement 

Recommendation on reporting and monitoring 

Communication to EIOPA

Recommendation on restriction of distributions 

Recommendation addressing liquidity risks 

BoE and PRA statement on ESRB recommendation on restriction of distributions – Covid-19

On 8 June, the BoE and PRA issued a joint statement on the ESRB’s recommendation on the restriction of distributions. The statement confirms that the recommendation applies to UK authorities during the Transition Period. 

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Financial Crime

Please see our Investigations Insight Blog entitled ‘Active U.S. enforcement of anti-money laundering rules continues unabated’ - this blog post discusses the U.S. Department of the Treasury’s National Strategy for Combating Terrorist and Other Illicit Financing (2020 Strategy), and how it details the key priorities of the U.S. government regarding the enforcement of the Bank Secrecy Act and its broader agenda on efforts related to AML/CFT. The full article originally appeared in the New York Law Journal on 3 June 2020.

FCA Primary Market Bulletin Issue No. 29 – inside information best practice note

On 9 June, the FCA published its 29th Primary Market Bulletin, which discusses the feedback received from stakeholders, the changes the FCA has made in response and the final note, with regards to best practice on identifying, controlling and disclosing inside information. The note is aimed at government departments, industry regulators and public bodies and the FCA recommends that they review their operating policies and procedures in line with the suggested approaches to systems and controls in the note. The guidance includes: (i) a number of considerations when determining if information is inside information as well as some examples; (ii) internal protocols that will assist in classifying and handling information (iii) systems and controls in how to correctly disclose inside information when it is necessary and determining when this is compliant with MAR; and (iii) how to deal with leaks. 

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Europol launches the European Financial and Economic Crime Centre and issues strategic report

On 5 June, Europol launched the new European Financial and Economic Crime Centre (EFECC) to enhance the operational support provided to Member States and EU bodies in the fields of financial and economic crime and to promote the systematic use of financial investigations. According to previous reports by Europol, 98.9% of estimated criminal profits are not confiscated and remain at the disposal of criminals and the Covid-19 pandemic in Europe has provided ample evidence that criminals are quick to adapt their criminal schemes to changing conditions to exploit fears and vulnerabilities. Europol has also published a report providing an overview of the most threatening phenomena in the area of economic and financial crime including various types of fraud, the production and distribution of counterfeit goods, money laundering and others.

Press Release

Europol Report


Fund Regulation

EC reports on application and scope of the AIFMD

On 10 June, the EC reported to the EP and the Council of the EU assessing the application and scope of the AIFMD. The report looks at the impact of AIFMD on AIFs, AIFMs, investors, monitoring and assessment of systemic risk, investment in private companies and investment in/or for the benefit of developing countries. The EC explains, amongst other things, that the AIFMD has: (i) improved the monitoring of risks to the financial system and the cross-border raising of capital for investments in alternative assets; and (ii) played a role in creating an internal market for AIFs and reinforcing the regulatory and supervisory framework for AIFMs in the EU. The report states the EC is still assessing whether there is a need for any proposals, including amendments to the AIFMD.

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Markets and Markets Infrastructure

FMSB spotlight review: ‘LIBOR transition – Case studies for navigating conduct risks’

On 11 June, the FICC Markets Standards Board (FMSB) published a Spotlight Review on LIBOR transition with practical case studies to support firms when considering the risks to fairness and effectiveness as the market moves to risk-free rates as more sustainable and representative benchmarks. The review builds on existing FMSB principles and expectations combining the broad expertise of FMSB’s IBOR Transition Working Group participants, and explores ways in which firms can manage the uncertainties and associated risks of the transition through the lens of non-prescriptive good practice observations. The paper includes four practical case studies which cover cash and derivative products and performance benchmarks. The case studies are relevant across the sell-side, buy-side and corporates. The case studies focus on the issuance or sale of new RFR-linked products and buy-side risks, where uncertainties and associated risks to market fairness or effectiveness could arise during the transition, and considers the ways in which market participants could seek to manage these risks in a manner that promotes fair and effective markets. As LIBOR transition progresses, the FMSB intends to add to the review to include additional case studies focusing on areas of uncertainty and risk that are of particular concern to market participants.

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WFE guidance on non-default loss

On 11 June, the World Federation of Exchanges (WFE) published guidance setting out how CCPs can ensure that certain non-credit losses that might rarely occur in relation to central clearing are allocated in a transparent, predictable and equitable manner. The guidance addresses the treatment of such ‘non-default losses’ (NDLs) in the context of CCPs’ mission to manage the timely and effective reduction of counterparty credit risk within the financial system.

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EC consults on three draft delegated regulations in relation to third country CCPs under EMIR

On 11 June, the EC began consulting on three draft delegated regulations with regards to: (i) specifying the criteria to be applied by ESMA when determining whether a third-country CCP is systemically important or likely to become systemically important for the financial stability of the EU or of one or more of its Member States; (ii) the minimum elements to be assessed by ESMA when assessing third-country CCPs' requests for comparable compliance and the modalities and conditions of that assessment; and (iii) fees charged by the ESMA to third country CCPs. ESMA has consulted on and provided the EC with technical advice on each of the delegated regulations, and the Expert Group of the European Securities Committee has provided its views on the provisional content. The deadline for comments on the consultations is 9 July. After the consultations, the Council of the EU and the EP will consider the draft delegated regulations and if neither object, they will be published in the OJ and will enter into force the day after their publication.

DDR – comparable compliance system

DDR – identifying systemically important CCPs

DDR – ESMA fees 

ESMA and FCA statements on MiFIR open access provisions for exchange traded derivatives (ETDs) – Covid-19

On 11 June, ESMA issued a public statement aiming to: (i) clarify the application of the MiFIR open access provisions (OAP) for trading venues (TVs) and CCPs in light of Covid-19; and (ii) coordinate the supervisory actions of NCAs by setting out the issues they should consider when assessing OAP requests. In a separate public statement the FCA supports ESMA’s approach and sets out its expectations for firms in line with this. When making or assessing open access requests, TVs should continue to prioritise the maintenance of orderly markets and the continuity of their critical services to the market even if this may delay the assessment of an open access request. Where a recipient delays an assessment, it should communicate its position to the requester without delay. The FCA will monitor any requests received by FCA-regulated venues.

ESMA statement

FCA statement

ESMA renews its Decision requiring net short position holders to report positions of 0.1% and above – Covid-19

On 10 June, in shares traded on EU regulated market to notify the relevant NCA if the position exceeds 0.1% of the issued share capital. The measure applies from 17 June 2020 for a period of three months.

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PRA/FCA update on next steps on LIBOR transition – Covid-19

On 10 June, the PRA provided an update on its webpage relating to the January 2020 joint letter with the FCA to nominated Senior Managers of major banks and insurers supervised in the UK with responsibility for LIBOR transition. A number of the milestones included in this letter have since been revised to take into account the impact of the Covid-19 pandemic. Where appropriate, supervisors have contacted the relevant firms to confirm that the supervisory expectations related to the RFRWG targets – contained in the original letter - continue to apply to the amended target on new GBP LIBOR linked lending maturing after 2021.   

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ISDA, EBF and FIA request extension to derogation from EMIR clearing requirements for intragroup transactions

On 9 June, ISDA, EBF and FIA published a letter to the EC and ESMA (dated 2 June), to extend the current temporary derogation from clearing requirements for intragroup transactions with non-EU affiliates until 21 December 2023 for all other jurisdictions under the Clearing RTS that supplement EMIR. The derogation is provided where an EU counterparty and a third-country counterparty to an OTC derivative subject to the clearing obligation meet the conditions for an intragroup transaction and no equivalence decision has been adopted in respect of the relevant third country under EMIR – no equivalence decisions  have yet been adopted. The trade associations also urge the EC to adopt equivalence decisions as soon as possible for all jurisdictions that have implemented clearing obligations that aim to comply with the G20's OTC derivative market reform agenda.

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ESMA guidance on certain aspects of the compliance function under MiFID II

On 5 June, ESMA issued its final guidelines on the MiFID II compliance function with the aim of enhancing the value of existing standards by providing additional clarifications on certain specific topics. The guidelines cover: (i) responsibilities of the compliance function, including guidelines on compliance risk assessment, monitoring and reporting obligations, and advisory and assistance obligations; (ii) organisational requirements of the compliance function, including guidelines on effectiveness, skills, knowledge, expertise and authority, permanence and independence, and outsourcing of the compliance function; and (iii) competent authority review of the compliance function. The guidelines will apply from two months of the date of publication of the guidelines on ESMA’s website in all EU official languages.

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Prudential Regulation

EP’s ECON adopts report on proposed CRR Amending Regulation – Covid-19 

On 10 June, the EP’s Economic and Monetary Affairs Committee (ECON) published a report approving the proposed Regulation amending the CRR to provide more flexibility in response to the Covid-19 pandemic. With a view to striking a balance between a robust and stable banking system and securing much-needed credit for the EU economy, MEPs agreed to apply specific changes to the CRR, which will have to be coherently applied in the EU. Banks will have to monitor the effects of the pandemic on their balance sheets, pay close attention to non-performing loans and apply know-your-customer standards. The EP is scheduled to vote in plenary on the proposed Regulation on 19 June. 


Press release

EBA consultation on draft RTS specifying the prudential treatment of software assets

On 9 June, the EBA began consulting on draft RTS specifying the prudential treatment of software assets. As part of the Risk Reduction Measures package, the CRR has been amended introducing an exemption from the deduction of intangible assets from CET1 items for prudently valued software assets, the value of which is not negatively affected by resolution, insolvency or liquidation of the institution. These draft RTS specify the methodology to be adopted by institutions,  in particular, introducing a prudential treatment based on their amortisation, which is deemed to strike an appropriate balance between the need to maintain a certain margin of conservatism in the treatment of software assets as intangibles, and their relevance from a business and an economic perspective. The deadline for comments is 9 July. 

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Sustainable Finance

EC consultations on draft texts of six delegated legislation to integrate sustainability

On 8 June, the EC began consulting on the draft texts of six Commission Delegated Regulations and Directives as part of the EU’s action plan on sustainable finance, ensuring that sustainability risks and factors are taken account of and supplementing the UCITS Directive, AIFMD, MiFID II – with regards to product governance obligations and certain organisational requirements and operating conditions for investment firms, Solvency II and the Insurance Distribution Directive. The deadline for comments on all six consultations is 6 July. 



CDD - MiFID product governance

CDR - MiFID investment firms

CDR - Solvency II



Other developments

FCA’s finalised guidance – assessing adequate financial resources

On 11 June, the FCA published its finalised guidance on a framework to help financial services firms ensure they have adequate financial resources and to take effective steps to minimise harm. The document aims to provide more clarity on: (i) the role of adequate financial resources in minimising harm; (ii) the practices firms can adopt when assessing adequate financial resources; and (iii) how the FCA assesses the adequacy of a firm’s financial resources; and (iv) the meaning of ‘adequate financial resources’. The FCA expects firms to assess their adequate financial resources commensurate to the risk of harm and complexity of their business, starting by considering whether they have enough assets to cover their debts and liabilities. The FCA notes that the guidance does not place specific additional requirements on firms due to Covid-19, but that the crisis underlines the importance of firms ensuring they have adequate financial resources. 

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FCA Quarterly Consultation 28

On 5 June, the FCA published its 28th Quarterly Consultation paper. The proposed changes for consultation are: (i) a rule clarification to confirm the ability of the FSCS to declare in default firms and successors subject to the proposed new moratorium under the Insolvency Act 1986; (ii) amendments to CONC 7, to take account of the Bounce Back Loan Scheme; and (iii) changes to the OPBAS Sourcebook for Professional Body Anti-Money Laundering Supervisors. The deadline for comments for proposed changes (i) and (ii) is 5 July and 31 July for (iii). 

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FOS Ombudsman News Issue 152

On 5 June, the FOS published Issue 152 of ombudsman news which includes: (i) the FOS' annual complaints data and commentary on trends in complaints, based on the 2019/20 complaints data analysis; (ii) details on the FOS’ five year strategy; (iii) data on the first year of handling CMC complaints; and (iv) operational information about the FOS’ service for financial businesses in relation to Covid-19, detailing the FOS’ approach to complaints caused or affected by Covid-19. 

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ESMA announces new methodology for peer reviews

On 5 June, ESMA published its peer review methodology integrating the improvements to the process introduced by the revised ESMA Regulation. The methodology sets out: (i) the peer review framework; (ii) the determination of topics for peer reviews; (iii) the peer review process; (iv) the framework for the follow-up to peer review; and (v) the instruction of fast track peer reviews to be launched in case of an urgent convergence issue. 

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