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Allen & Overy's weekly update on Key Regulatory Topics - 6 April 2018 – 12 April 2018

17 April 2018

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector. If you would like to receive this update by email please contact


Please see the “Other” section for an update on the Joint Committee of ESAs’ report on the risks and vulnerabilities in EU financial system.
CBI publishes report on the future of UK regulation
On 11 April, the CBI published a report, Smooth operations, which outlines the regulatory needs of 23 industry and service sectors, following the transition period for the UK's withdrawal from the EU. The report is based on conversations with UK businesses and trade associations. Some 18 out of the 23 industry and service sectors stated that they preferred convergence or alignment for the majority of regulation in their areas that mattered. However, sectors such as agriculture, shipping and tourism felt that rule changes could benefit the British economy and consumers. The report stresses the importance of negotiators taking into account the complexity and interconnected nature of modern businesses when working on the future relationship between the UK and the EU and points out, among other things, that changes to rules for one sector could affect businesses in other sectors. It comments that ensuring regulatory certainty and continuity is the right approach for the UK government to take for as long as the negotiations are on-going, and that firms would be very concerned to hear of the European Union (Withdrawal) Bill 2017-19 being used to achieve anything but the certainty and continuity that the government has committed to. Based on the results of the consultation, the report proposes three principles to help guide negotiators on each side: (i) where rules are fundamental to the trade or transport of goods, the UK and EU must negotiate on-going convergence; (ii) in the negotiation of the new relationship, both sides should look to set a new international precedent in the trade of services and digital products; and (iii) alignment will need to come with mechanisms for influence and enforcement that benefit both sides.
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AIMA publishes position paper on the impact of Brexit on the alternative investment industry
On 9 April, AIMA published a position paper on the impact of Brexit on the alternative investment industry. The aim of the paper is to offer an assessment of what needs addressing during the transition period, regardless of whether there is an agreement on mutual recognition. The analysis is based on the assumption that the UK will leave the EU's single market and that many existing cross-border provisions in EU legislation will cease to apply for UK firms. In particular, the paper discusses: (i) what the UK should do during the transition period and that the UK should seek an equivalence determination in respect of UK rules by the EC, that covers the relevant sectoral legislation in which equivalence determinations exist; (ii) how the UK should seek a deal with the EU that ensures that UK firms' relationships with EEA investors and clients that existed before Brexit can continue uninterrupted after Brexit by virtue of grandfathering provisions; and (iii) unilateral openness. AIMA believes that the UK should generally opt for an approach that prioritises openness over reciprocity. In section 2 of the paper AIMA: (a) sets out some of the pieces of legislation that are relevant from the perspective of the cross-border activities of the UK's alternative asset management industry; (b) identifies the key cross-border provisions that will be impacted by Brexit; and (c) explains why a combination of the policy conditions it outlines in the paper would help ensure that firms can move from the existing framework to a new one with minimal disruption to the services they provide to investors. Section 3 focuses on the way in which the UK should approach the task of restructuring the domestic regulatory framework as it "on-shores" existing EU regulatory requirements. The annex to the paper sets out a number of technical questions that will need to be addressed, assuming the UK leaves the single market.
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Please see the FinTech section for an update on the FCA’s published statement on cryptocurrency derivatives.
CPMI and IOSCO publishes framework for supervisory stress testing of CCPs
On 10 April, CPMI and IOSCO published guidance relating to the supervisory stress testing of CCPs. The framework is one part of the CCP work plan that the G20 asked the FSB, CPMI, IOSCO, and the BCBS to develop in April 2015. The guidance provides authorities with a framework to support their design and implementation of supervisory stress tests for CCPs. It is designed to support tests conducted by one or more authorities that examine the potential macro-level impact of a common stress event affecting multiple CCPs. Among other things, such supervisory stress tests could help authorities better understand the scope and magnitude of the interdependencies between markets, CCPs and other entities such as participants, liquidity providers and custodians. This type of supervisory stress test is different from other stress testing activities conducted by authorities seeking to evaluate the resilience of individual CCPs.
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ECB consultation on cyber resilience oversight expectations
On 10 April, the ECB published for consultation a draft version of the cyber resilience oversight expectations (CROE) for FMIs. The CROE are based on guidance on cyber resilience for FMIs that was published by CPMI and IOSCO in June 2016. The 2016 guidance was immediately applicable and the CROE form part of the oversight expectations, setting out assessment criteria for supervisors to use. The CROE also provides FMIs in the euro area with steps on how to implement the guidance and enhance their cyber resilience. In line with the guidance, the CROE covers five primary risk management categories: (i) governance; (ii) identification; (iii) protection; (iv) detection; and (v) response and recovery. It also covers three overarching components that relate to testing, situational awareness, and learning and evolving. The CROE use a maturity model that provides supervisors and FMIs with a benchmark against which they can evaluate FMIs' current level of cyber resilience, measure progression and establish priority areas for improvement. The deadline for comments is 5 June.
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CPMI and IOSCO publishes technical guidance on harmonisation of critical data elements
On 9 April, CPMI and IOSCO published a report providing technical guidance to authorities on harmonised definitions, formats and usage of a set of critical data elements for OTC derivative transactions reported to trade repositories, excluding the UTI and the UPI. The guidance helps achieve the goal set by the G20, in 2009, for all OTC derivatives contracts to be reported to trade repositories, as part of a commitment to improve transparency, mitigate systemic risk and prevent market abuse. The report provides guidance on the harmonisation of data elements related to: (i) dates; (ii) counterparties; (iii) regular and other payments; (iv) valuation and collateral; (v) prices and quantities; (vi) packages; and (vii) links and custom baskets. An accompanying press release states that CPMI and IOSCO will soon develop a framework for the maintenance and governance of critical OTC derivatives data elements other than the UTI and UPI.
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EC publishes "New Deal for Consumers" package
On 11 April, the EC published its "New Deal for Consumers" package. The package comprises 16 documents, some yet to be published. The initiative comprises two proposals for Directives: (i) a proposal for a Directive on better enforcement and modernisation of EU consumer protection rules(2018/0090 (COD)) - this will amend the Unfair Contract Terms Directive (93/13/EEC), the Consumer Price Indications Directive (98/6/EC), the Unfair Commercial Practices Directive (2005/29/EC) and the Consumer Rights Directive (2011/83/EU). This proposal's aim is to ensure better enforcement and to modernise EU consumer protection rules, in particular in the light of digital developments; and (ii) a proposal for a Directive on representative actions for the protection of the collective interests of consumers(2018/0089 (COD)), and repealing the Injunctions Directive (2009/22/EC) - this proposal's aim is to improve the tools for stopping illegal practices and facilitating redress for consumers whose rights have been infringed.  The main themes are improved enforcement measures, better protection for online consumers, and EU harmonisation: (a) the proposals will, among other things, empower qualified entities to launch representative actions on behalf of consumers and introduce stronger sanctioning powers for member state consumer authorities; (b) there will be greater online protection for consumers in the form of new disclosure rules concerning the identity of traders and the existence of paid advertisements. In addition, consumers will have similar rights in respect of "free" digital services as they do in respect of paid services, such as information rights and the right to cancel within 14 days; and (c) the new regime will also deal with the practice of offering products of differing quality but in the same format within different member states. The next step is for the EC’s proposals to be discussed by the EP and the Council.
BEIS publishes consultation on modernising consumer markets
On 11 April, BEIS published a consultation seeking views on a range of modern consumer market issues. BEIS proposes reviewing: (i) competition and consumer regulation by focusing on the core principles of competition, free trade and high regulatory standards; (ii) improving consumer experiences in modern regulated markets; (iii) exploring the challenges of new digital markets; and (iv) ensuring consumers can get redress when the regulations are not followed. The BEIS Green Paper focuses in particular on competition efficiencies and vulnerable consumers in regulated markets, ensuring competition authorities have the tools to tackle restrictive and abusive practice in new digital sectors, and securing the benefits of open, portable data. This consultation seeks view on: (a) getting consumers better deals and better service in utilities markets; (b) helping consumers benefit from their data and remain protected when they buy and sell online; (c) how to improve the system of ADR; and (d) how to support local and national enforcers to work together to protect consumers. BEIS also notes that it will complete a review of the UK competition regime by April 2019, and that it is also consulting, as part of the Green Paper on a new Strategic Steer for the Competition and Markets Authority. The deadline for comments is 4 July.
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Home Secretary announces law enforcement crackdown on dark web
On 11 April, speaking at the CYBER UK Conference, the Home Secretary announced that as part of a £9 million fund, law enforcement’s response will be bolstered to tackle those who use the anonymity of the online space for illegal activities such as the selling of firearms, drugs, malware and people. More than £5 million will also be used to support the police to establish dedicated cyber crime units to investigate and pursue cyber criminals at a regional and local level. The funding is part of £50 million of newly allocated money to ensure police and prosecutors have the capabilities they need to tackle cyber crime at a national, regional and local level during 2018/2019.
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Mark Thompson appointed interim Director of the SFO
On 10 April, the Attorney General’s Office has announced that Mark Thompson, currently Chief Operating Officer at the Serious Fraud Office, will be appointed Director on 21 April on an interim basis pending the next permanent Director becoming available.
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AI powered ‘Robo-Lawyer’ helps step up the SFO’s fight against economic crime
On 10 April, the UK SFO announced a significant upgrade to its document analysis capability as artificial intelligence is made available to all of its new casework from this month. By automating document analysis, AI technology allows the SFO to investigate more quickly, reduce costs and achieve a lower error rate.
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Please see the “Other” section for an update on the Joint Committee of ESAs’ published report on the risks and vulnerabilities in EU financial system.
FCA publishes statement confirming cryptocurrency derivatives must be FCA authorised
On 6 April, the FCA published a statement confirming that, while cryptocurrencies are not currently regulated provided they are not part of other regulated products or services and the FCA does not consider them to be currencies or commodities under MiFID II, cryptocurrency derivatives are capable of being financial instruments under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must therefore comply with relevant provisions in the FCA's Handbook and directly applicable EU regulations. The FCA explains that it is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an ICO, will require authorisation. This includes: (i) cryptocurrency futures; (ii) cryptocurrency contracts for differences; and (iii) cryptocurrency options.
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Please see the Brexit section for an update on AIMA’s position paper on the impact of Brexit on the alternative investment industry.
EC adopts Delegated Regulation on investment requirements under MMF Regulation
On 10 April, the EC adopted a Delegated Regulation (C(2018) 2080 final) on simple, transparent and standardised securitisations and asset-backed commercial papers, requirements for assets received as part of reverse repurchase agreements and credit quality assessment methodologies under the MMF Regulation. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force twenty days after it is published in the OJ. It is likely to therefore apply from 21 July, with the exception of Article 1 which is likely to apply from 1 January 2019.
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PRA publishes "Dear CEO" letter on capital extractions by insurance firms in run-off
On 12 April, the PRA published a "Dear CEO" letter on capital extractions by insurance firms in run-off. In the letter the PRA observes that, during the last two years, the accompanying information for some capital extraction requests from insurance firms in run-off has been inadequate, particularly in relation to stress tests and reserving. The PRA reminds firms to consider closely its supervisory statement on capital extractions by run-off firms in the general insurance sector (SS4/14) when preparing a request for capital extraction for submission to the PRA. The letter seeks to provide further clarity on the PRA's expectations; it is not intended to supersede SS4/14. As firms in run-off have limited ability to generate new capital, they should be prudent and ensure that policyholders would maintain an adequate level of protection following any suggested capital extraction. Firms should also demonstrate clearly in their application to the PRA how the board has satisfied itself that the request is appropriate and meets the expectations in SS4/14. Furthermore, the letter sets out a non-exhaustive list of the types of information the PRA would expect to accompany a firm's capital extraction request.  The PRA encourages firms to engage with the PRA before making a capital extraction request, to avoid any unnecessary delays.
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IAIS publishes consultation on climate change risks to insurers
On 12 April, the IAIS published for consultation a draft issues paper on climate change risks to the insurance sector. The IAIS has prepared the paper jointly with the Sustainable Insurance Forum. This paper discusses the current and potential future effect of climate change on the insurance sector, provides examples of current material risks and impacts, and describes how these risks and impacts may be relevant for the supervision and regulation of the sector. The conclusions of this paper include: (i) it is likely that all insurance businesses will be exposed to climate risks over the long term - therefore all insurers must achieve resilience to climate risks, regardless of size, specialty, domicile or geographical reach; (ii) there is an increasing consensus across the financial sector that the potential systemic impacts of climate change need a systemic global response - this is exemplified by work at the international level in the G20 and the FSB; and (iii) supervisors should seek to increase their understanding of climate risk. They should develop supervisory capabilities to evaluate insurers' underwriting and investment activities to achieve climate resilience. The deadline for comments on the paper is 29 April.
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PRA consults on modelling of volatility adjustment under Solvency II
On 11 April, the PRA published a consultation paper on considering applications from internal model firms that include a DVA under the Solvency II Directive. It sets out the PRA’s draft expectations of internal model firms when determining the risks that might arise from the DVA when calculating the SCR. In CP9/18, the PRA sets out its proposed expectations of internal model firms when determining the risks that might arise from the DVA when calculating the SCR. It is consulting on the possibility of allowing firms to apply DVA in internal models when calculating the SCR. CP9/18 highlights the proposed areas that firms should consider in their internal model and model change applications when seeking approval to apply the DVA. The PRA proposes a draft supervisory statement: Solvency II: Internal models – volatility adjustment in the modelling of market risk and credit risk stresses. This is set out in Appendix 1 to CP9/18. It also proposes to update supervisory statement 17/16: Solvency II: internal models – assessment, model change and the role of non-executive directors, to remove the expectation that firms would not assume any change to the level of VA when calculating the SCR. This is set out in Appendix 2 to CP9/18. The deadline for comments on the proposals is 11 July.
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PRA publishes consultation on external audit of public disclosure requirement
On 11 April, the PRA published a consultation paper on the external audit of the public disclosure requirement under the Solvency II (CP8/18). In CP8/18, the PRA sets out its proposal to amend the rule that requires parts of the SFCR to be externally audited. The SFCR is the key public disclosure under Solvency II and is intended to enhance transparency and comparability through the disclosure of essential information on the solvency and financial condition of a firm. The PRA proposes to amend Rule 1.1 of the External Audit Part of its Rulebook to remove the external audit requirement for the Solvency II public disclosures of certain small Solvency II firms, and certain Solvency II groups. It proposes that this change would be effective for financial years ending on or after 15 November. The proposed changes are set out in the appendix to CP8/18 in a draft version of the Solvency II Firms and Non-Authorised Persons: External Audit Amendments Instrument 2018. The PRA estimates that the proposed changes would remove the SFCR external audit requirement from the end of 2018 for more than 150 smaller UK Solvency II firms (including mutuals) and groups. The deadline for comments on the proposals in CP8/18 is 11 July.
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Notice of entry into force of EU-US bilateral agreement on insurance and reinsurance prudential measures published in OJ
On 9 April, a notice confirming the entry into force of the bilateral agreement between the EU and the US on insurance and reinsurance measures was published in the OJ. The notice states that the EU and the US have notified each other of the completion of the procedures necessary for the entry into force of the agreement. Consequently, the agreement entered into force on 4 April, under Article 8 of the agreement (which provides that the agreement will enter into full force seven days after the EU and the US exchange written notifications certifying that they have completed their respective internal requirements and procedures, or on such other date as they may agree) and a decision ((EU) 2018/539) was published in the OJ on 6 April.
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Delegated Regulation delaying application date of IDD Delegated Regulations published in OJ
On 6 April, the EC Delegated Regulation ((EU) 2018/541) to delay the application of two Delegated Regulations supplementing the IDD was published in the OJ. The two Delegated Regulations relate to the product oversight and governance requirements for insurance undertakings and insurance distributors (Delegated Regulation (EU) 2017/2358) and information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (IBIPs) (Delegated Regulation (EU) 2017/2359). The proposal to postpone the application date of the Delegated Regulations from 23 February to 1 October is intended to align with the proposal to delay the application date of the IDD itself. The Amending Regulation will enter into force on 26 April (that is, the twentieth day following publication in the OJ).
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Please see the FinTech section for an update on the FCA’s statement on cryptocurrency derivatives.
ESMA publishes letter to EC requesting clarification on ancillary activity test
On 10 April, ESMA published a letter (dated 9 April) from Steve Maijoor, ESMA Chair, to Valdis Dombrovskis, EC Vice President, relating to the exemption from authorisation as an investment firm  that is available to non-financial entities when their commodity derivative trading activity is ancillary to their main business as set out in MiFID II. In the letter, Mr Maijoor refers to EC Delegated Regulation (EU) 2017/592 of 1 December 2016 (RTS 20), which provides for the criteria and tests to be performed to establish whether an activity is to be considered to be ancillary to the main business. He explains that over the last few months there have been questions about how the tests should be performed (in particular, whether tests should be performed at group or a single entity level). He states that based on the level 1 and 2 texts, there are indications that those tests should be performed at group level. However, in the context of some drafting amendments that were introduced to RTS 20 by the EC, it has also been argued that the ancillary tests should be performed at a single entity level.
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ESMA agrees commodity derivative position limits under MiFID II/MiFIR
On 9 April, ESMA published three opinions on position limits regarding commodity derivatives under MiFID II/MiFIR. ESMA’s opinions agree with proposed position limits regarding: (i) feed wheat; (ii) jet kerosene; and (iii) gasoline. In a related press release, ESMA states that it found that the proposed position limits are consistent with the objectives established in MiFID II and with the methodology developed for setting those limits. ESMA will continue to assess the notifications received and issue opinions in order to ensure that the position limits are set in accordance with the MiFID II framework.
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FCA publishes speech on opportunities of PSD2 and open banking
On 10 April, the FCA published a speech by Karina McTeague, FCA Director of Retail Banking Supervision (which was given on 1 March), on PSD2 and open banking. Points of interest in the speech include the following: (i) the FCA is seeing a range of applications to provide the newly regulated PIS and AIS - in particular, it is seeing firms that already operate extensively in other countries seeking to move into the UK market and provide PIS. The FCA is keen for firms to work to realise the potential benefits of AIS and PIS; (ii) from a consumer protection and market integrity perspective, the FCA is interested in the successful delivery of the CMA’s open banking API requirements and the wider adoption of APIs by the industry - the FCA urges all firms to participate in the work towards adopting common standards around APIs; (iii) although the EU regulatory technical standards under PSD2 on strong customer authentication and common and secure communication are not expected to come into force until the second half of 2019, the FCA expects firms to continue adhering to the principles of safety and security from 13 January; and (iv) the FCA is aware of the challenges relating to the implementation of PSD2 and open banking - however, it expects firms to put the fair treatment of customers at the heart of their business models and fulfil their role in helping customers understand and take steps to protect themselves from the risks associated with fraud.
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Please see the “Other” section for an update on the Joint Committee of ESAs’ report on the risks and vulnerabilities in EU financial system.
ECB publishes an opinion on a proposed Regulation amending the EBA Regulation
On 12 April, the ECB published an opinion (CON/2018/19) (dated 11 April) on a proposed Regulation amending (among other things) the EBA Regulation (Regulation 1093/2010). The proposed Regulation forms part of the EC’s legislative proposals for reforms to the ESFS, which were published in September 2017. In the opinion, the ECB welcomes the proposed Regulation's objective of fostering effective and consistent prudential supervision and regulation across the EU. It supports further integration of the supervisory framework at EU level for the banking sector and strengthening supervision by re-examining the current set-up of the ESAs. The opinion sets out the ECB's general observation that the banking union and the CMU are at different stages of progress. Therefore, the review of the ESAs should not necessarily produce three identical outcomes for the three ESAs, but should address their respective mandates and functions. The ECB considers that certain of the proposed amendments to the EBA Regulation do not adequately distinguish between the scope of the ECB's micro-prudential supervisory tasks and the EBA's competence to set regulatory standards to promote supervisory convergence. It states the importance of avoiding duplication or inappropriate allocation of tasks, as this could blur the responsibilities of the two authorities and render the system less effective overall. A technical working document accompanied by an explanatory text is appended to the opinion, setting out the ECB's proposed amendments to the text of the proposed Regulation. Read more
ECB publishes opinion on proposed Regulation amending ESRB Regulation published in OJ
On 6 April, an opinion (CON/2018/12) by the ECB on the proposed Regulation amending the Regulation on EU macro-prudential oversight of the financial system and establishing ESRB (Regulation (EU) 1092/2010) was published in the OJ. The opinion sets out the ECB's general observation that the ESRB has played a central and successful role in preventing or mitigating systemic risks to financial stability in EU that may arise within the financial system. On this basis, the ECB supports the limited number of targeted changes to the ESRB's governance and operational framework that are proposed by the EC, with the aim of further strengthening the ESRB's efficiency and effectiveness and enabling it to better fulfil its mandate.
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EBA publishes 2016 report on high earners in EU banks
On 10 April, the EBA published its 2016 report on high earners in EU banks. For the purposes of the 2016 report, the EBA has analysed the data that has been provided by NCAs as at the end of 2016, and compared it to the 2015 and 2014 data. The EBA will continue to benchmark remuneration trends biennially (for example, for the performance years 2017 and 2018, a benchmarking exercise will take place in 2019). In addition, the EBA will review the application of the RTS on identified staff under EC Delegated Regulation (EU) No 604/2014.
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ECB publishes speech on risk appetite frameworks
On 10 April, the ECB published a speech, "Risk appetite frameworks: good progress but still room for improvement", given by Daniele Nouy, ECB Supervisory Board Chair, at the International Conference on Banks' Risk Appetite Frameworks. In her speech, Ms Nouy explains that a bank's risk appetite framework includes the policies, processes, limits, controls and systems it puts in place to define, communicate and monitor how much risk it is willing to take on. Supervisors expect risk appetite frameworks to be comprehensive, effectively governed, consistently used and fully integrated into strategic decision-making. Ms Nouy acknowledges that banks' risk appetite frameworks are now better structured and subject to clearer governance. Most banks have clarified the role of the relevant stakeholders involved in the risk appetite framework and many banks' internal auditors have reviewed the effectiveness of risk appetite frameworks. However, she highlights four areas in which banks need to improve: (i) risk appetite frameworks still do not cover enough risks, particularly non-financial risks; (ii) the governance of risk appetite frameworks must be improved - boards and banks' risk functions need to play a larger role in defining and reviewing risk appetite frameworks; (iii) risk appetite limits need to be set and used comprehensively - banks need to break these limits down to business lines, entities and countries and need to work on how they calculate and apply limits; and (iv) banks need to improve how they embed risk appetite frameworks in their strategic processes.
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FCA consults on 2018/19 regulated fee and levy rate proposals
On 9 April, the FCA published a consultation paper on regulated fee and levy rate proposals for 2018/19 (CP18/10). In CP18/10, the FCA sets out the proposed 2018/19 regulatory fees and levies for itself, the FOS, MAS,  the Pension Wise service and HMT’s illegal money lending expenses. The FCA explains that for 2018/19 its annual funding requirement (AFR) is £543.9 million. This is an increase of £17 million (that is, 3.2%) over the AFR for 2017/18. The increase is driven by an additional inflation-aligned £19.2 million (that is, 3.8%) increase in the FCA's on-going regulatory activities budget, an additional £2.5 million for EU withdrawal costs and an additional £0.3 million for the set-up costs of the supervision of OPBAS. The deadline for comments on CP18/10 is 1 June. The FCA will consider responses and will publish a policy statement including feedback on the consultation and final rules, subject to FCA Board approval, in July.
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PRA consults on regulated fees and levies for 2018/19
On 9 April, the PRA published a consultation paper on regulated fees and levies for 2018/19 (CP7/18). In CP7/18, the PRA sets out proposals relating to, in particular: (i) the annual funding requirement (AFR). The AFR will be made up of the budgeted cost of on-going regulatory activities (ORA) and costs associated with Brexit. The proposed ORA for 2018/19 is £236.3 million and the estimated costs associated with Brexit are £8.3 million. Consistent with the approach taken in 2017/18, the PRA proposes to recover certain costs incurred in relation to Brexit through the EU withdrawal fee; (ii) amendments to the ring-fencing implementation fee rules; (iii) amendments to the IFRS 9 implementation fee rules; (iv) amendments to the model maintenance fee rules. The PRA proposes to make a minor amendment to the rules to clarify how group models should be treated; and (v) non-directive general insurers and unreported fee data. The deadline for comments on CP7/18 is 21 May. An accompanying webpage states that the proposed implementation date for the amended rules is 1 July.
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Joint Committee of ESAs’ report on risks and vulnerabilities in EU financial system: April 2018
On 12 April, the Joint Committee of the ESAs published its spring 2018 report (JC 2018 07) on the risks and vulnerabilities in the EU financial system. The Joint Committee identifies the following as the main risks to the EU financial system: (i) Brexit – uncertainties around the terms of the UK's withdrawal from the EU could expose the EU27 and the UK to economic and financial instability and weaken market confidence, particularly if negotiations end in a disorderly way. The lack of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and the continuity of financial contracts, and create operational challenges; (ii) asset repricing -  the risks related to valuations and repricing of risk premiums could reduce profitability and asset quality across sectors. Asset quality in the banking sector has recently improved and volumes of NPLs disposals are increasing. However, the amount of NPLs on banks' balance sheets remains high, which needs to be addressed by banks and supervisors; (iii) cyber risks - these risks threaten data integrity and business continuity and are particularly dangerous because of possible multiplier effects leading to further business risks such as supply chain risk and reputational risk. Similarly, risks related to virtual currencies and crypto-assets have recently materialised; and (iv) climate change and the transition to a lower carbon economy - this raises concerns about the sustainability of investments across large parts of the financial sector. Climate change can affect asset quality through different transmission channels, which could in turn affect the solvency position of financial institutions. In the light of the risks identified, the Joint Committee recommends a series of policy actions by the ESAs, national competent authorities and financial institutions. These recommended actions are set out in the report.
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HMT publishes summary of responses to consultation on proposed changes to CRD scheme
On 12 April, HMT published a summary of responses to its consultation on proposed changes to the BoE’s CRD scheme. HMT consulted on the proposed changes in February. The consultation set out the government's proposals to: (i) move from a fixed ratio to a ratio that is indexed to yields on a portfolio of gilts and is calculated every six months; (ii) leave all other parameters of the CRD scheme unchanged - this includes the current value bands, with the threshold value band remaining at over £600 million; and (iii) continue to monitor the effectiveness of the CRD scheme, conduct a further formal review within five years and publish a report on that review. HMT contacted all eligible institutions under the CRD scheme and invited them to respond, including 146 institutions that currently pay into the CRD scheme, as well as trade associations. It received three individual responses, which are summarised in the summary of responses. The remaining eligible institutions did not offer any views on the proposed changes. To inform the next review of the CRD scheme and as part of the continued monitoring of its effectiveness, HMT advises that the BoE intends to carry out further analysis of alternative funding arrangements.
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EBA publishes annual report 2017
On 9 April, the ECB published its annual report for 2017. The annual report describes the tasks and activities of the ESCB and reports on the Eurosystem's monetary policy. The report covers: (i) the euro area's economic recovery; (ii) monetary policy in support of the euro area recovery and the return of inflation to a desirable level; and (iii) the resilience of the European financial sector. Alongside the report, the ECB has published feedback on the input provided by the European Parliament as part of its resolution on the ECB annual report for 2016.
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FCA publishes 2018/19 business plan
On 9 April, the FCA published its 2018/19 business plan. The priorities in this year's business plan reflect the high level of resources the FCA needs to dedicate to the UK withdrawal from the EU, given its impact on both FCA regulation and the firms it regulates. Alongside this work, the priority areas that the FCA will focus on during 2018/19 include the following: (i) firms’ culture and governance, which should drive behaviours and produce outcomes likely to benefit consumers and markets; (ii) high-cost credit, building on the significant impact already made in the market; (iii) tackling financial crime, including fraud, scams and AML, to make the UK financial services sector a hostile place for criminals and a safe place for consumers; (iv) data security, resilience and outsourcing, as technology plays a pivotal role in delivering financial products and services; (v) innovation, big data, technology and competition, which are driving change in markets; (vi) the treatment of existing customers, to ensure they do not get less attention or receive poorer outcomes than new customers; and (vii) long-term savings and pensions and intergenerational differences, which reflects the changing UK population and their financial needs. The FCA has also published its sector views for 2018, which highlight the issues and developments it has identified in the sectors it regulates. The FCA uses the sector views to help determine its priorities for the year ahead.
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FCA publishes discussion paper on evaluating impact of its interventions
On 9 April, the FCA published a discussion paper on its ex post (after the event) evaluation of the impact its interventions have had on consumers, firms and markets (DP18/3). DP18/3 outlines: (i) why the FCA does ex post impact evaluation; (ii) how the FCA chooses specific interventions to study; (iii) how the FCA ensures that its evaluations are robust, impartial and credible; and (iv) the key challenges in undertaking ex post impact evaluation. DP18/3 contains examples of previous impact evaluation work by the FCA (and the FSA before it). The deadline for comments on the discussion paper is 9 July.
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PRA publishes 2018/19 business plan
On 9 April, the PRA issued its business plan 2018/19, which sets out its strategy and work plan for the coming year and also its budget for 2018/19. Alongside the report, the PRA has also issued a report (dated March 2018) on the adequacy of PRA resources and the independence of PRA functions. It relates to the period of 1 March 2017 to 28 February. An accompanying covering letter from Mark Carney, BoE Governor, to Philip Hammond, Chancellor of the Exchequer, states that in future this will be published as part of the PRA's annual report. The annual report for the year ended 28 February will be published in the summer. In particular, the PRA’s strategic goals for 2018/19 are to: (i) have in place robust prudential standards comprising the post-crisis regulatory regime - in particular, the PRA refers to its work relating to the Solvency II Directive and the implantation of bank ring-fencing of core retail services from wholesale and investment banking; (ii) continue to adapt to changes in the external market and to hold regulated firms, and those who run them, accountable for meeting the PRA's standards; (iii) finalise its policy relating to the SIMR, including finalising its policy on the extension of the SM&CR to insurers; and (iv) develop its supervision of operational resilience to mitigate the risk of disruption to the provision of critical economic functions. The PRA will continue to develop the micro-prudential supervisory approach to operational resilience.
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