Key Regulatory Topics: Weekly Update 6 - 12 March 2020
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Our weekly update on key regulatory topics affecting the financial services sector. If you would like to receive this update by email and be added to our marketing mailing list please contact regulatorychange@allenovery.com.
Brexit
Please see our Prudential Regulation section for updates on: (i) a speech published by the BoE on the ideal post-EU regulatory framework; and (ii) HMT’s policy statement on prudential standards in the Financial Services Bill.
Please see our Markets and Markets Infrastructure section for updates on: (i) HMT’s consultation on market access arrangements for financial services between the UK and Gibraltar; and (ii) the FCA’s new webpages for the Securities Financing Transactions Regulation (SFTR).
Please see our Other Developments section for an update on HMT’s recommendations for the FPC.
Capital markets
Please see our Sustainable Finance section for an update on the FCA’s proposals to enhance climate-related disclosures by listed issuers and to clarify existing ESG disclosure obligations.
Please see our Markets and Markets Infrastructure section for an update on ESMA’s supervision of CRAs, TRs and monitoring of TC-CCPs and TC-CSDs, regarding preparations for the Benchmarks Regulation.
ESMA’s draft regulatory technical standards (RTS) under the Benchmarks Regulation (BMR)
On 9 March, ESMA published a consultation paper on its draft RTS under the BMR. The draft RTS cover: (i) governance arrangements (Article 4, BMR); (ii) methodology (Article 12, BMR); (iii) reporting of infringements (Article 14, BMR); (iv) mandatory administration of a critical benchmark (Article 21, BMR); and (v) non-significant benchmarks (Article 26, BMR). The deadline for comments is 9 May. ESMA will consider the feedback it will receive in Q2 and expects to publish a final report and submit the draft technical standards to the EC by 1 October.
Conduct
FCA’s comparison of banking providers’ fraud controls
On 9 March, the FCA published its comparison of banking providers’ fraud controls. This is intended to enable consumers to compare how banks protect their customers against fraud, and to help them to make more informed choices about their banking providers. The information was provided by UK Finance, which provides detail on various firms’ approaches to fraud prevention and what controls they have in place.
Consumer/Retail
Please see our Sustainable Finance section for the House of Commons Treasury Committee’s announcement that action is needed to help consumers understand the ‘carbon footprint’ of financial products.
Please see our Conduct section for an update on the FCA’s comparison of banking providers’ fraud controls, to help consumers make more informed choices about their banking providers.
FCA issues research on mortgage switching
On 10 March, the FCA announced that it has released its latest research into mortgage switching. In that regard, the FCA have published its mortgage switching research report (Report), and Occasional Papers No. 54 and 55 (see details below). The FCA believes that there is a case for intervening to help mortgage consumers who do not switch and will issue a consultation paper in Q2 on potential remedies and proposed rule changes. The FCA’s Report found that the factors that contribute to consumers’ decisions not to switch mortgages include a lack of time, a fear of the application process and consumers’ relative contentment with their current deal. The FCA’s Occasional Paper No. 54 studies the sources of household inertia and concludes, inter alia, that: (i) on average, external remortgages yield better outcomes for borrowers; (ii) home equity extraction plays a significant role in the decision to remortgage externally; (iii) borrowers with high loan-to-value and high realised house price appreciation are more likely to remortgage externally; (iv) the monetary benefits of remortgaging are counteracted by non-pecuniary costs; (v) brokers have a positive effect on the likelihood to remortgage externally; and (vi) the costs of taking action are higher for low income households. In its Occasional Paper No. 55, the FCA explores the drivers of inattention and product preferences in the mortgage market and some of the conclusions are that: (a) mortgage borrowers exhibit a strong preference for products from ‘familiar’ lenders; (b) making borrowers aware of alternatives has only a limited effect on their choices; (c) it is important for policy makers and researchers to consider the ‘portfolio’ of consumers’ product holdings rather than focus on individual markets; and (d) adopting a cross-market perspective could be necessary to understand competitive behaviour and market outcomes.
Covid-19
Please see our Publications section for our piece on Covid-19 which outlines ten key points for effective contingency planning.
Please see our Prudential Regulation section for an update of BoE’s measures for Covid-19.
Please see our Other Developments section for an update on the government’s Spring Budget which announces a £12 billion plan to provide support for public services, individuals and businesses whose finances are affected by Covid-19.
ECB’s temporary capital and operational relief for Covid-19 and EBA’s actions to mitigate impact on the EU banking sector
On 12 March, the ECB announced that it will provide temporary capital and operational relief in reaction to Covid-19. The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance, the capital conservation buffer and the liquidity coverage ratio. Banks will also be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 capital, for example Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements. The EBA encourages competent authorities (CAs) to make use of such flexibility embedded in the regulatory framework. Also, the ECB is discussing individual measures with banks, such as adjusting timetables, processes and deadlines. The ECB will consider rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections and internal model investigations. To mitigate the impact of Covid-19 on the EU banking sector, the EBA has decided to postpone the EU-wide stress test exercise to 2021. In addition, the EBA recommends that CAs plan supervisory activities, including on-site inspections, in a pragmatic and flexible way, and possibly postpone those deemed non-essential. CAs could also give banks some leeway in the remittance dates for some areas of supervisory reporting. The EBA is in close contact with the European Systemic Risk Board to ensure that microprudential and macroprudential measures are fully aligned.
ESMA recommends action by financial market participants for Covid-19 impact
On 11 March, ESMA published a statement recommending action by financial market participants for Covid-19 impact. These are: (i) Business Continuity Planning; (ii) market disclosure as issuers should disclose as soon as possible any relevant significant information concerning the impacts of Covid-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation; (iii) financial reporting as issuers should provide transparency on the actual and potential impacts of Covid-19 based on both a qualitative and quantitative assessment of their business activities; and (iv) fund management in regard to asset managers continuing to apply the requirements on risk management.
ECB’s letter on contingency preparedness for Covid-19
On 6 March, the ECB published a letter to all Significant Institutions on contingency preparedness in the context of Covid-19, reminding them of the critical need to address potential pandemic risk in their contingency strategies. Supervised entities are expected to review their business continuity plans and consider what actions can be taken to enhance preparedness to minimise the potential adverse effects of the spread of Covid-19. The ECB suggested that appropriate preparation for business continuity in the context of a potential pandemic may include: (i) establishing adequate measures of infection control; (ii) assessing to which extent contingency plans include a pandemic scenario which provides for scaling measures commensurate with the institution’s geographic footprint and business risk; (iii) assessing how quickly measures foreseen under the pandemic scenario of the contingency plan could be implemented and how long operations could be sustained; (iv) assessing whether alternative and sufficient back-up sites can be established; (v) assessing and urgently testing whether large scale remote working or other flexible working arrangements for critical staff can be activated and maintained; (vi) assessing and testing the capacity of existing IT infrastructure; (vii) assessing the risks of increased cyber-security related fraud; and (viii) entering into dialogue with critical service providers.
Financial crime
Please see our Other Developments section for updates on: (i) the FCA’s proposed changes to its Handbook, including minor amendments to the Decision Procedure and Penalties manual and the Enforcement Guide to implement the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 as well as consequential changes to the Financial Crime Guide; and (ii) the FCA’s insights from Cyber Coordination Groups (CCGs).
Financial Action Task Force’s (FATF’s) guidance on digital identity (digital ID)
On 6 March, the FATF published guidance for government authorities, regulated entities and digital ID service providers on digital ID, recommending a risk-based approach using digital ID systems for customer identification and verification and to support ongoing due diligence. The approach consists of two elements: (i) understanding of the assurance levels of the digital ID system’s main components to determine it is a reliable and independent source of information; and (ii) making a broader, risk-based determination of whether the particular digital ID system provides an appropriate level of reliability and independence in light of the potential money laundering, terrorist financing, fraud, and other illicit financing risks at stake. The FATF, inter alia, explains how to leverage digital ID assurance frameworks and standards for assessing reliability and independence, setting out a decision process for regulated entities to guide decisions about whether the use of digital ID to meet some elements of CDD is appropriate.
Fintech
Please see our Other Developments section for an update on HMT’s response to its Call for Evidence on Regulatory Coordination, stating the potential for RegTech to improve processes for collecting data from firms.
BoE’s discussion paper on the opportunities, challenges and design of a potential Central Bank Digital Currency (CBDC)
On 11 March, the BoE published a discussion paper (DP) on the opportunities, challenges and design of a potential CBDC. The BoE in its DP notes that although the BoE has not yet made a decision on whether to introduce a CBDC, it could present a number of opportunities to assist the BoE in achieving its objectives of maintaining monetary and financial stability such as supporting a more resilient payments landscape and providing safer payment services. The BoE goes on to observe that CBDC has the potential to allow households and businesses to make fast, efficient and reliable payments, and to benefit from an innovative, competitive and inclusive payment system. The BoE states that CBDC could build on the BoE’s renewal of the Real-Time Gross Settlement (RTGS) service and complement private sector initiatives to improve payments. Though the BoE notes that if significant deposit balances are moved from commercial banks into CBDC, there may be implications for: (i) the balance sheets of commercial banks and the BoE; (ii) the amount of credit provided by banks to the wider economy; and (iii) how the BoE implements monetary policy and supports financial stability. The BoE outlines an illustrative ‘platform’ model of CBDC designed to enable households and businesses to make payments and store value. This could serve as the platform to which private sector Payment Interface Providers would connect in order to provide customer‑facing CBDC payment services. Payment Interface Providers could also build ‘overlay services’. Although a CBDC is often associated with Distributed Ledger Technology (DLT), the BoE does not presume any CBDC must be built using DLT, and there is no inherent reason it could not be built using more conventional centralised technology. Finally, the BoE notes that any eventual decision to introduce a CBDC would involve HM Government, Parliament and regulatory authorities, and engagement with society more generally. The BoE will be hosting a webinar for further discussion on this on April 7.
Fund regulation
Please see our Other Developments section for an update on HMT delivering its Spring Budget 2020 which announces a review of the UK funds regime and a consultation on alternative fund structures.
HMT consults on proposals to simplify the process for allowing investment funds set up overseas to be marketed in the UK
On 11 March, HMT published its consultation on the overseas fund regime, specifically on proposals to simplify the process for allowing investment funds set up overseas to be marketed in the UK. This consultation sets out the government’s proposal for a new process for allowing investment funds domiciled overseas to be sold to UK investors, to replace the existing regime, which is not viable over the long-term. The proposed ‘overseas funds regime’ (OFR) will introduce two new regimes based on the principle of equivalence: one for retail investment funds and one for money market funds (i.e. funds invested in liquid assets).
FCA’s proposals for a more proportionate listing regime for open-ended investment companies (OEICs)
On 9 March, the FCA published a consultation paper on its proposals for a more proportionate listing regime for OEICs. The consultation sets out how the FCA propose to make the necessary changes to the Listing Rules to create a more proportionate listing regime for OEICs in standard listing, whilst ensuring existing investor protections are maintained. The FCA propose to change the Listing Rules applicable to OEICs to dis-apply or amend existing requirements that: (i) are disproportionate because they prescribe transparency and safeguards; and (ii) are not relevant or are inoperable for OEICs because they do not take account of the specific features of OEICs’ business models or structures. The FCA also want to make consequential changes which will align its listing requirements for OEICs more closely with standard listing for shares in LR14 Standard listing. The deadline for feedback is 9 June.
Markets and markets infrastructure
Please see our Other Developments section for an update on the FCA’s proposed changes to its Handbook, regarding amendments to MiFID II on the tick size regime.
FCA’s statement on LIBOR contractual triggers
On 11 March, the FCA published a new webpage which includes a statement on how the FCA would announce LIBOR contractual triggers. The announcements will: (i) be made via the Regulatory News Service at the same time as, or very shortly followed by, a posting of a fuller statement on the FCA’s website; (ii) be clear that it is being made in the awareness that it will engage certain contractual triggers that are activated by pre-cessation or cessation announcements made by the FCA; (iii) be clear about the LIBOR currencies and tenors it relates to; and (iv) include the date of cessation, or, if applicable, the date from which the relevant LIBOR settings are not going to be representative.
FCA’s new webpages for the Securities Financing Transactions Regulation (SFTR)
On 11 March, the FCA published three new webpages for the SFTR. The first webpage gives an explanation of the SFTR as well as an implementation timetable, and details that the SFTR directly applies in the UK during the transition period (referred to as the EU SFTR). At the end of the transition period, this Regulation will be onshored into UK under the European Union (Withdrawal) Act 2018 (EUWA) and this is referred to as the UK SFTR. During the transition period, trade repositories (TRs) remain regulated by the European Securities and Markets Authority (ESMA) for EU SFTR services. The second webpage is on the EU SFTR reporting obligation, giving an explanation on how to fulfil the SFTR reporting obligation. The final webpage is on the SFTR library, which covers, inter alia: (i) Brexit and the transition period; (ii) the EUWA and onshoring; (iii) EU legislation and other documents; and (iv) supporting regulatory and implementing technical standards.
FCA EU SFTR Reporting Obligation Webpage
Working Group on Sterling Risk-Free Reference Rates (RFRWG) detail the use of the SONIA Index, the weighting approaches for observation periods and the path to discontinuation of LIBOR
On 11 March, the BoE published a statement on behalf of RFRWG on the use of the SONIA Index and weighting approaches for observation periods. The key messages are: (i) the RFRWG welcomes the Bank of England discussion paper of 26 February (in which market participants are encouraged to respond by 9 April) announcing that it intends to publish a daily SONIA Compounded Index from July 2020; (ii) in the SONIA bond market, use of the SONIA Compounded Index should standardise and simplify the calculation method for SONIA-linked instruments and should reduce operational risk by facilitating reconciliation of interest amounts between market counterparties; (iii) use of the SONIA Compounded Index would be compatible with any financial product that uses a backward-shifted observation period which weights the SONIA rate according to the number of days that apply in the observation period (the shift approach) but it should not impact bond issues using the lag approach, which weights the SONIA rate according to the number of days that apply in the interest period; and (iv) the RFRWG does not make any recommendation as to whether the lag or shift should be preferred. The RFRWG also published a roadmap which is intended to act as a guide for lenders, borrowers and infrastructure providers in determining steps to meet the timeline for the discontinuation of LIBOR, and the roadmap emphasises the RFRWG’s key priority of ceasing issuance of Sterling LIBOR-based cash products maturing beyond 2021 by the end of Q3.
HMT consults on market access arrangements for financial services between the UK and Gibraltar
On 11 March, HMT published a consultation paper on market access arrangements for financial services between the UK and Gibraltar. This discusses proposals aimed to recognise the special historic status of Gibraltar, the unique market access arrangements that were in place ahead of EU exit and the changes to the legal basis of the bilateral economic relationship brought about by both the UK and Gibraltar leaving the EU. The consultation: (i) sets out the background to the UK-Gibraltar financial services relationship, and the institutional framework that underpins the existing market access arrangements; and (ii) invites views on key features of the proposed Gibraltar Authorisation Regime (GAR), such as the arrangements to access and exit the GAR regime, and the consumer protection obligations on firms operating in the UK market. The GAR regime covers the following: (a) alignment; (b) cooperation; (c) accessing the UK market; (d) supplementary protections; (e) changes to market access; and (f) wind-down and contractual continuity arrangements. The deadline for responding to the consultation is 11 May.
ESMA consults on the MiFID II/MiFIR review report on transparency regime for non-equity instruments and the trading obligation for derivatives
On 10 March, ESMA published a consultation paper on its MiFID II/MiFIR review report on the transparency regime for non-equity instruments and the trading obligation for derivatives. ESMA’s objective for this review is to simplify the current complex trade reporting regime in order to create a uniform set of rules in the EU while trying to improve the overall trade transparency available to market participants for non-equity instruments. The deadline for comments is 19 April and ESMA intends to submit its final review report to the EC in July.
FCA’s and BoE’s letter on how the discontinuation of LIBOR may affect trade associations’ members and stakeholders
On 9 March, the FCA and BoE published a letter to trade association chairs and CEOs on how the discontinuation of LIBOR may affect their members and stakeholders. It is expected that the transition will affect most British businesses in some way, including small non-financial organisations. A task force of the RFRWG for both lenders and borrowers concluded that SONIA is suitable for use as an alternative to LIBOR in around 90% of future Sterling lending by value. The letter notes that firms with existing LIBOR-referencing arrangements that mature after end-2021 will need to convert these to alternative arrangements such as SONIA or Bank Rate; alternatively, they will need to include robust fallback provisions, if they want to be certain how interest rate payments will be calculated after end-2021. The letter goes on to explain that any stakeholder firms that use LIBOR-referencing products from their bank will be contacted by their bank about moving to alternative products. The RFRWG, FCA, BoE and UK Finance are hosting a free webinar on 20 March to discuss the key tasks needed to make the transition away from LIBOR.
ESMA’s report on supervision of credit rating agencies (CRAs), trade repositories (TRs) and monitoring of third-country central clearing counterparties (TC-CCPs) and central securities depositories (TC-CSDs)
On 9 March, ESMA published its annual report to highlight its direct supervisory activities during 2019 regarding CRAs and TRs, as well as its work programme to outline its main priorities for 2020, and its activities regarding the recognition and monitoring of TC-CCPs and TC-CSDs. For CRAs, ESMA has identified the following priorities: (i) identify (and mitigate where necessary) risks in outstanding credit ratings; (ii) ensure that CRAs employ robust and well-structured rating processes and understand the impact of new technologies; (iii) ensure that CRAs use methodologies that are robust, systematic, continuous and subject to validation; (iv) engage with CRAs to address identified concerns on IT and information security controls, including cybersecurity and cloud outsourcing; (v) ensure credit ratings are accessible and usable for investors; and (vi) engage with CRAs to address identified concerns on the organisational aspects of their control environment that undermine the independence of control functions and enhance compliance’s monitoring activities. For Trade Repositories, the priorities for 2020 are: (a) data quality and access by authorities, focusing on the Data Quality Action Plan; (b) assessing internal controls around IT processes and software changes; and (c) reviewing the effectiveness of the Information Security function and of the business continuity and disaster recovery plans. For TC-CCPs, ESMA will prioritise the set-up of the new processes corresponding to EMIR 2.2 recognition, reassessment of recognition decision, set-up and implementation of the new monitoring of Tier 2 CCPs and monitoring of the potential risks TC-CCPs might introduce in the EU for Tier 1. For TC-CSDs, ESMA will prioritise adopting a new recognition decision regarding the UK CSD, monitoring the impact of Brexit on the TC-CSD regime and assessment of possible recognition applications. ESMA also sets out its preparations regarding the new supervisory mandates conferred upon it under the SFTR, the Securitisation Regulation, the Benchmarks Regulation and MiFIR.
Payment services and payment systems
Please see our FinTech section for an update on the BoE’s discussion on the opportunities, challenges and design of a potential Central Bank Digital Currency (CBDC).
Please see our Other Developments section for an update on the FCA’s insights from Cyber Coordination Groups (CCGs), which discusses the need to identify threats to payment systems.
EC study on the application of the Interchange Fee Regulation (IFR) for card-based payment transactions
On 11 March, the EC published its study on the application of the IFR. It covers: (i) the state of the payment sector; (ii) the effects of the IFR on fees and costs for card-based payments; (iii) the effects of the IFR on consumer prices; and (iv) the effects of the IFR on structure and competition in the card payment markets. The study shows that the IFR has reduced the interchange fees for card-based payments and generated a decline in merchants’ costs of accepting card payments. This has led to higher acceptance of card payments and is expected to lead to lower consumer prices. However, the study notes that acquiring margins and scheme fees from international card schemes have increased, reducing some of the benefits and the study notes that if they continue to increase, it may further reduce or eliminate the benefits of the IFR.
Payment Systems Regulator’s (PSR’s) annual review of Specific Direction 8 (SD8)
On 10 March, the PSR published a report responding to its call for views on its annual review of SD8 as well as stakeholder submissions that were made in response. In its report, the PSR conclude that: (i) LINK’s (the UK‘s largest ATM network) commitment is a sensible short-term measure to help maintain widespread access to cash for people who need it, and SD8 should stay in place for the time being. The PSR also published a summary of its discussion at its roundtable held in October 2019 on understanding how people use and access cash, which covers: (a) a high-level summary of the feedback on insights from its BritainThinks research and in responses to its call for views; (b) a discussion tracking outcomes such as exploring the best way to measure and track consumer outcomes in relation to access to cash; and (c) a discussion on effective local community engagement.
Prudential regulation
Please see our Sustainable Finance section for the House of Commons Treasury Committee’s announcement that action is needed to help consumers understand the ‘carbon footprint’ of financial products, which details that the BoE has recently launched a climate stress test.
Please see our Covid-19 section for an update on the ECB’s temporary capital and operational relief for Covid-19 and the EBA’s actions to mitigate its impact on the EU banking sector.
Financial Policy Committee’s (FPC’s) measures on countercyclical capital buffer (CCyB) and BoE’s measures for Covid-19
On 11 March, the PRA published a statement announcing measures by the FPC, including their decision to set the UK CCyB rate at 0% which supports the continued provision of financial services to the real economy, including the supply of credit. This is expected to support up to £190 billion of bank lending to businesses. The PRA expects firms not to increase dividends and other distributions in response to this policy action and will monitor firms’ distributions against this expectation. Any proposals relating to potential dividend or share buybacks should be consistent with the obligations enshrined in the PRA’s Fundamental Rules for a firm to act in a prudent manner and maintain adequate financial resources at all times. The PRA expects firms to identify a Senior Manager to: (i) lead the effective discussion, oversight, and scrutiny of any proposals relating to dividend distributions or share buybacks relating to the reduction of the UK CCyB rate; and (ii) discuss these matters with the PRA if called upon to do so. The FPC expects to maintain the 0% rate for at least 12 months, meaning that any subsequent increase would not take effect until March 2022 at the earliest. The PRA is willing to accept applications from firms to recalculate Transitional Measures on Technical Provisions (TMTP) as at 31 March. Furthermore, the BoE has announced measures to respond to the economic shock from Covid-19 in its supervisory statement. The MPC has lowered the Bank Rate by 50bps to 0.25% and has introduced a new Term Funding Scheme to support lending to SMEs which will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, the Bank Rate. Additional funding will be available for banks that increase lending, especially to small-and medium-sized enterprises.
BoE Supervisory Statement on Covid-19
HMT policy statement on prudential standards in the Financial Services Bill
On 11 March, HMT published a policy statement on prudential standards in the anticipated Financial Services Bill. Although parts of the CRRII applied from June 2019, a number of provisions are due to apply in the EU from June 2021. As this is after the end of the transition period, these elements will not automatically apply in the UK. HMT therefore intends to take powers to enable the implementation of updated prudential rules for banks in the UK. CRDV must be transposed into national legislation by 28 December 2020. In line with the UK’s commitments under the EU Withdrawal Agreement, it is the Government’s and the PRA’s intention to transpose CRDV by this date. Most Basel 3.1 revisions are not included in CRRII and CRDV and have not yet been legislated for in the EU. HMT thus intends to take powers to enable the implementation of these most recent revisions to the Basel standards through the Financial Services Bill, demonstrating the Government’s ongoing commitment to implementing leading global standards in financial services. As the IFR/IFD will only apply in the EU from June 2021, after the transition period, this regime will not automatically apply in the UK. Therefore, HMT intends to take powers to enable the introduction of an updated prudential regime for investment firms in the UK. Public consultations will be launched on the implementation of the Basel standards, on CRRII provisions, and on the prudential regime for investment firms in due course. The Financial Services Regulators will also set out their own plans for consultation and stakeholder engagement on amendments to their rulebooks in due course.
BoE’s speech on the ideal post-EU regulatory framework
On 10 March, the BoE published a speech by Victoria Saporta (Executive Director of Prudential Policy). Ms Saporta sets out the ideal features of the institutional structure of prudential regulation, which entails: (i) dynamism, so that adjustments made to regulation incorporate updated international standards in a timely manner; (ii) time consistency, as the financial system may become unstable if it is always acting on short-term incentives; and (iii) legitimacy - to achieve this, the regulatory authority needs to be given a mandate. Such a mandate would provide a regulator with legitimacy by: (a) ensuring that there is democratic control over the shape of the regulatory regime; and (b) making it possible to hold the regulator to account.
PRA updates pre-Issuance Notification (PIN) requirements for PRA-authorised Capital Requirements Regulation (CRR) firms
On 10 March, the PRA published a policy statement on regulatory capital requirements, updating pre-Issuance Notification (PIN) requirements which are relevant to PRA-authorised CRR firms. The PRA sets out the responses made to the consultation on updating these requirements. The policy statement also contains the PRA’s final policy, these being: (i) amendments to the Definition of Capital Part of the PRA Rulebook (Appendix 1); (ii) an updated Supervisory Statement (SS) 7/13 ‘Definition of capital (CRR firms)’ (Appendix 2); (iii) an updated PIN form (Appendix 3); and (iv) an updated Common Equity Tier 1 (CET1) compliance template (Appendix 4). Annex I of the statement also contains the final policy, detailing a summary table of the PRA’s final clarification of ’sufficiently in advance’ notification and ‘substantially the same’ terms (as defined in the updated SS7/13). The PRA has changed its draft policy to require a firm to submit less information (than previously proposed) when the firm is amending the terms of an existing instrument, where that instrument will remain ‘substantially the same’ following that amendment. Such change to the final PRA rules will reduce the burden on firms which make minor amendments to an existing instrument, and firms will gain additional flexibility in the timing of such amendments and will not be required to obtain a new legal or accounting opinion. The PRA has also made changes to the draft amendments to SS7/13. This features changes to proposals on governance arrangements and the interpretation of CRR II terms. The final policy takes effect from 1 April.
Recovery and resolution
Please see our Covid-19 section for updates on: (i) ESMA recommendations to financial market participants regarding the impact of Covid-19; and (ii) the ECB’s letter to Significant Institutions on contingency preparedness for Covid-19.
EBA completes handbook on valuation for purposes of resolution in respect of management information systems (MISs)
On 10 March, the EBA completed its handbook on valuation for purposes of resolution under the BRRD by publishing chapter 10. This chapter relates to management information systems (MISs) and deals with the resolution authorities’ (RAs’) assessment, in the context of the resolvability assessment, of the institutions’ capability to provide data and information to support a robust valuation in the event of resolution. It is addressed to the RAs with a view to strengthening the convergence of resolution practices across the EU. It sets out the EU’s best practices and high quality methodologies and processes, supporting the RAs in their interaction with those institutions destined for resolution for the purposes of the development or adjustment of the Valuation MIS. The Valuation MIS approach focuses on the institutions’ internal capabilities, intended as a combination of internal data aggregation capabilities and internal valuation models that are suitable for the valuation for resolution. The EBA also published a data dictionary for benchmarking purposes which is meant to be used by institutions to perform a self‐assessment aimed at mapping the internally available data and information. The explanatory note for the data dictionary details the separate modules that the data fields are listed in, these being: (i) loan book split into loan tape, counterparty and collateral modules; (ii) financial assets; (iii) other non-financial assets; (iv) liability modules split into deposits, debt securities issued, provisions, pension and other liabilities; and (v) derivatives and off-balance-sheet items. The table published in Annex III provides detail on the interplay between internal valuation models and the data dictionary.
Sustainable finance
Please see our Other Developments section for an update on the government’s Spring Budget, including its aim of a greener economy.
Please see our Prudential Regulation section for the HMT’s recommendations for the Financial Policy Committee (FPC), including the need to keep climate change risks as relevant to its primary objective.
House of Commons Treasury Committee announce that action is needed to help consumers understand the ‘carbon footprint’ of financial products
On 10 March, the House of Commons Treasury Committee announced in a press release that action is needed to help consumers understand the ‘carbon footprint’ of financial products. The Chair of the Treasury Committee has written to the BoE and FCA about: (i) helping consumers navigate the market from a sustainability and climate risk perspective; (ii) whether it would be viable for them to implement a rating system on financial products; and (iii) whether the Bank should consider asking firms to hold additional capital against assets that are particularly exposed to climate risk (this being the brown penalising factor). Mark Carney’s (Governor of the BoE) response to this, states, inter alia: (a) several ways that asset managers, pension funds and insurers could report the level of preparedness for the transition of a given portfolio; (b) that the BoE has recently launched a climate stress test that will run through 2021 to examine the resilience of the largest banks, insurers, and the financial system to different climate pathways, which will also provide additional data on the links between climate risks and write-downs for different types of assets; (c) possible impediments to implementing the brown penalising factor; and (d) that the BoE are approaching the point of Task Force on Climate-related Financial Disclosures (TCFD) disclosures becoming mandatory. Andrew Bailey’s (Chief Executive of the FCA) response details, inter alia, four initiatives undertaken by the FCA to improve climate-related disclosures: (1) adoption of Taskforce on Climate-related Financial Disclosures (TCFD) aligned disclosures; (2) EU disclosure initiatives under the Sustainable Finance Action Plan; (3) a Climate Financial Risk Forum (CFRF); and (4) consumer access to sustainable retail investment products.
House of Commons Treasury Committee Press Release
EU technical expert group report on sustainable finance (TEG) on taxonomy for sustainable finance
On 9 March, the TEG published its final report on taxonomy for sustainable finance, setting out TEG’s final recommendations to the EC. The recommendations relate to the overarching design of the Taxonomy, as well as guidance on how users of the Taxonomy can develop Taxonomy disclosures. The TEG also published a technical annex to supplement the report, containing: (i) a full list of revised or additional technical screening criteria for economic activities which can substantially contribute to climate change mitigation or adaptation; and (ii) methodological statements to support the above recommendations.
TEG guidance on the EU green bond standard (EU GBS)
On 9 March, the TEG published a usability guide for the EU GBS. This covers, inter alia: (i) explanation of what the EU GBS is and its benefits; (ii) proposing a “use-of-proceeds approach”; (iii) identifying eligible green projects; (iv) applying the EU Taxonomy at Project level; (v) how to design a Green Bond Framework; (vi) how to implement verification; (vii) regional scope of the EU GBS; and (viii) regulatory disclosure requirements. In Annex 1, a draft model of the EU GBS is included. The EC is planning to hold a public consultation for three months from mid-March which will form the basis for the Renewed Sustainable Finance Strategy that will be presented in Q3. Part of the consultation will be dedicated to a possible legislative initiative on an EU Green Bond Standard.
FCA’s proposals to enhance climate-related disclosures by listed issuers and to clarify existing ESG disclosure obligations
On 6 March, the FCA published a consultation paper on its proposals to enhance climate-related disclosures by listed issuers and to clarify existing ESG disclosure obligations. The FCA proposes a new climate-related disclosure rule in its Listing Rules (LR) to promote adoption of the Task Force on Climate-related Financial Disclosures’ (TCFD’s) recommendations and recommended disclosures, which will require commercial companies with a UK premium listing (including sovereign-controlled commercial companies) to include a statement in their annual financial report, setting out: (i) whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures in their annual financial report; (ii) an explanation if they have not made disclosures consistent with some or all of the recommendations and/or disclosures, or where they have included some or all of the disclosures in another document; and (iii) where in their report (or other document) the various disclosures can be found. The FCA also proposes a technical note to clarify existing disclosure obligations.
Other developments
HMT’s response to its Call for Evidence on Regulatory Coordination
On 11 March, HMT published its response to its Call for Evidence on Regulatory Coordination. For its response in regard to regulatory coordination, the Regulatory Initiatives Grid (the Grid) will be launched over the summer, which will provide an indicative two-year forward look of major upcoming regulatory initiatives affecting the financial services sector. The Grid will be managed by a coordinating Forum: the Financial Services Regulatory Initiatives Forum (the Forum) with a membership comprising the Bank of England, PRA, FCA, PSR, CMA, and HMT (as an observer member), as the main contributors to the Grid. The Forum members will review the functioning of the Grid and Forum after one year and consider any improvements that may be made. Other bodies (such as the Information Commissioner’s Office (ICO), The Pensions Regulator (TPR) and Financial Reporting Council (FRC) will be invited to attend and contribute to the Grid on an ad hoc basis when responsible for a major initiative affecting the sector. In respect of data collection, responses highlighted the potential for regulatory technology (RegTech) to improve processes for collecting data from firms. The government is considering the specific suggestions made in respect of the statutory framework for information sharing between regulators. The government will use the next phase of the review to develop a more coherent approach to Financial Services regulation in the UK, so that it provides for a clearer split of regulatory responsibilities. This will include looking at how stakeholders are engaged in the regulatory process and how the impact of proposed initiatives is assessed. The next phase will form part of government’s upcoming White Paper on Financial Services, to be published in the Spring.
HMT deliver Spring Budget and announce a Reforming Regulation Initiative and review of the UK funds regime
On 11 March, the government published its Spring Budget for 2020, delivered by Rishi Sunak. Among other things, the government will introduce a Financial Services Bill which will ensure that the UK maintains its regulatory standards and remains open to international markets. Additionally, the government is launching a Reforming Regulation Initiative to collect ideas for regulatory reform, and has opened a consultation to improve the system of UK regulation, with particular interest in the needs of small businesses. The Budget launches the Comprehensive Spending Review and announces a £12 billion plan to provide support for public services, individuals and businesses whose finances are affected by Covid-19. The Budget also sets out plans to invest in innovation such as increasing R&D investment to £22 billion per year by 2024‑25. For the government’s aim of growing a greener economy, the government announced a Carbon Capture and Storage Infrastructure Fund and will introduce a Green Gas Levy to help fund the use of greener fuels. The Budget announced that the government is pursuing a review of the UK funds regime, thus reviewing VAT charged on fund management fees, and has separately published a consultation for the tax treatment of asset-holding companies in alternative fund structures which will run until 20 May.
HMT Consultation on the Reforming Regulation Initiative
HMT Consultation on Alternative Fund Structures
FCA’s insights from Cyber Coordination Groups (CCGs)
On 11 March, the FCA published its insights from four CCG discussions covering four themes: (i) cyber risk; (ii) identity and access management (IDAM); (iii) malicious emails; and (iv) third parties and supply chain. Regarding cyber risk, CCG members recognise that there needs to be closer industry collaboration to help financial institutions identify threats to payments systems as early as possible. CCG members cited the need to educate employees to better identify and report possible social engineering attacks. CCG members concluded that data held in cloud environments should be encrypted and protected by appropriate intrusion detection and prevention controls. For IDAM, the practices and insights shared covers: (a) governance; (b) automated tools to continuously monitor administrative and important accounts; (c) record keeping; (d) importance of privileges and passwords; and (e) security monitoring and testing. The CCG sub-sector groups shared the following practices and insights for dealing with malicious emails: (1) knowledge and understanding of normal email traffic; (2) maintaining a secure culture; and (3) treating email addresses as assets. For managing third parties, the following practices shared by the CCG sub-sector groups cover: (A) understanding third party suppliers; (B) establishing and maintaining control; (C) people, process, technology; and (D) working together through undertaking cyber exercises and learning with suppliers.
HMT’s recommendations for the Financial Policy Committee (FPC)
On 11 March, HMT published a letter from Rishi Sunak (Chancellor of the Exchequer) to Mark Carney, detailing the remit and recommendations for the FPC. Mr Sunak recommends that the FPC should examine how financial regulation and changes to the structure of the financial system may have affected the balance between financial stability and the supply of productive finance in the UK. Mr Sunak further notes that the expertise of the regulators, and particularly the FPC’s role within the UK regulatory framework, will be critical for supporting the government’s economic policy with regards to its overall post-EU exit strategy for financial services.
FCA’s call for input (CFI) on accessing and using wholesale data
On 9 March, the FCA published a CFI on accessing and using wholesale data to better understand: (i) how data and advanced analytics are being accessed and used; (ii) the value offered to market participants; and (iii) whether data is being competitively sold and priced. The CFI explores three areas on the supply and use of data and analytics in wholesale markets: (a) trading data; (b) benchmarks; and (c) market data vendor services. The FCA invites views from stakeholders across the wholesale sector, specifically suppliers, buyers and users of data and related products as well as any other stakeholders who interact with wholesale market participants. The deadline for feedback is 1 May. The FCA will then publish a feedback statement setting out its findings and any next steps. If it is found that competition is not working well, solutions may include a range of tools, a market study to diagnose the sources of market failures in detail, or targeted interventions such as supervisory and policy action or competition law enforcement.
FCA updates its policy development
On 6 March, the FCA updated its webpage on its policy development. This gives a summary of: (i) publications issued; (ii) upcoming publications; and (iii) quarterly consultation papers. Inter alia, upcoming publications include: (a) a consultation paper on exit fees in investment platforms and comparable firms expected this month; (b) a consultation paper on open-ended Investment Companies (Proposals to facilitate standard listing) expected in Q1; (c) a publication on FCA regulated fees and levies (rates proposals 2020/21) expected in April; and (d) a policy or feedback statement on the Single Easy Access Rate expected in Q2.
FCA proposes amendments to its handbook and makes a change to the Dispute Resolution: Complaints sourcebook (DISP)
On 6 March, the FCA published its 27th quarterly consultation paper, proposing changes to its handbook. The proposed changes, which have a consultation closing period of one month, are: (i) minor amendments to the Decision Procedure and Penalties manual and the Enforcement Guide to implement the Money Laundering and Terrorist Financing (Amendment) Regulations 2019; (ii) minor amendments to the Decision Procedure and Penalties manual to reflect the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) Regulations; (iii) clarification of notification procedures, include guidance, and changes to the Directory persons report; (iv) amendments to MiFID II relating to the tick size regime; (v) and changes to the Glossary terms for ‘multilateral development bank’ and ‘designated multilateral development bank’. The other proposed changes have a consultation closing period of two months, these being: (a) consequential changes to the Financial Crime Guide to reflect provisions in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019; (b) a proposal to add the Institute of Financial Accountants (IFA) to the list of bodies whose members can provide a statement of high net worth to individuals in order for certain credit and consumer hire agreements with them to be exempt from regulation; and (c) amendments to the notification form to amend firm details. The FCA also published a document of non-legal changes, which sets out an administrative change to DISP 3.7.4, amending the maximum money award which the Ombudsman may make for complaints referred on or after 1 April.