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Key Regulatory Topics: Weekly Update 7-13 August 2020

14 August 2020

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

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Brexit

Financial Markets Law Committee’s (FMLC) response to Government’s consultation on the departure from retained EU case law by UK courts and tribunals

On 12 August, the FMLC published a letter sent to the Ministry of Justice, detailing its response to the Government’s consultation on the departure from retained EU case law by UK courts and tribunals. Currently, section 6(4) of the Withdrawal Act 2018 states that the UK Supreme Court (UKSC) and the High Court of Justiciary in Scotland have jurisdiction to depart from retained EU case law.  The Government’s consultation sets out two options: (i) to extend the ability to depart from retained EU case law to the Court of Appeal (CA) and equivalent courts; or (ii) in addition to the CA and equivalent courts, to extend the ability to depart from retained EU case law to the High Court of Justice and its equivalent courts. In response, amongst other things, the FMLC urges the Government to not extend the ability to diverge from retained EU case law as set out in either option. The FMLC states that the consultation expresses concerns about the practical impact of permitting only the UKSC and the Court of the Justiciary to deviate from retained case law – if these concerns seem inevitable and damaging, the FMLC suggests that the Government could consider electing for Option 1 and extend the ability to depart from retained EU case law to the CA and equivalent courts. If the ability to depart from retained EU case law is extended to the lower courts, the FMLC would recommend that a stricter test is imposed than the one applied by the UKSC.

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Conduct

FCA publishes webpage on the new annual reporting requirement and good practice under the SM&CR – solo-regulated firms

On 13 August, the FCA published a new webpage on conduct rules in respect of reporting for solo-regulated firms. This states that the new annual reporting requirement requires solo-regulated firms falling under the Senior Managers and Certification Regime (SM&CR) to inform the FCA whether the firm has taken disciplinary action against individuals who are not Senior Managers for breaches of the FCA Conduct Rules. The FCA states that the following information should be included, amongst other things: (i) details about the individual who has committed the breach; (ii) details about what Conduct Rules have been breached; and (iii) details about the disciplinary action taken. Additionally, the FCA has updated its webpage on the SM&CR for solo-regulated firms by providing tables that detail good and poor practice for: (1) fitness and propriety in respect of the Certification Regime; and (2) the Conduct Rules. 

FCA – New Webpage on Conduct Rules

FCA – Updated Webpage on SM&CR

Covid-19

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

PRA suspends relevant guidance levels on fixed rate lending limits in the Building Societies Specialist Sourcebook for six months

On 11 August, the PRA published a letter (dated 31 July) agreeing to suspend the relevant guidance levels on fixed rate lending limits in the Building Societies Specialist Sourcebook for an initial period of six months, in light of the desire of some Building Societies to be able to react more quickly in the current environment. The PRA still expects boards to undertake the appropriate risk assessment (as detailed in Supervisory Statement 20/15) before undertaking any such change. The PRA also asks Building Societies to inform them (after the event) of any changes Building Societies make in this respect. The PRA will review this Covid-19 related measure prior to 31 January 2021.

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EBA updates report on the implementation of Covid-19 policies

On 7 August, the EBA published an updated version of its report on the implementation of selected Covid-19 policies, including a new FAQs section which provides answers to technical and interpretive questions raised by supervisors and institutions following the publication of the guidelines on Covid-19 reporting and disclosure. Given that new issues may continue to arise, the EBA states that it may update the report at a later stage.

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Financial Crime

The Wolfsberg Group statement on developing an effective Anti Money-Laundering / Combating the Financing of Terrorism (AML/CTF) programme

On 12 August, the Wolfsberg Group published a statement on developing an effective AML/CTF programme. The statement outlines the steps that Financial Institutions (FIs) can take to enhance their AML/CTF regimes to meet the key elements of an effective programme, which were set out in the Group’s December 2019 statement on effectiveness: (i) complying with AML/CTF laws and regulations; (ii) providing highly useful information to relevant government agencies in defined priority areas; and (iii) establishing a reasonable and risk-based set of controls to mitigate the risks of an FI being used to facilitate illicit activity. As policy makers and supervisors continue to develop this approach, the Group suggests the additional following steps that FIs could take to improve their AML/CTF programmes: (a) assess risk in defined priority areas; (b) implement/enhance controls; (c) prioritise resources; (d) engage with law enforcement; and (e) demonstrate AML/CTF programme effectiveness. 

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The Wolfsberg Group FAQs on Financial Institutions (FIs) managing money laundering risks 

On 7 August, the Wolfsberg Group published a document including a FAQ on how FIs can identify, mitigate and manage money laundering risks by undertaking Source of Wealth (SoW) and Source of Funds (SoF) checks on relevant customers, when appropriate and/or required by applicable regulation. The document is targeted predominantly at FIs’ Private Banking/Wealth Management customer segments and takes into consideration controls and procedures recognised in the Wolfsberg Anti-Money Laundering Principles for Private Banking. The FAQs cover generally understood descriptions of what is meant by SoW and SoF in the context of Financial Crime Compliance, the applicability of information collected, its corroboration and assessment, as well as on-going due diligence and monitoring.

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Fintech

EBA consults on the use of RegTech solutions and ways to support the uptake of RegTech across the EU

On 12 August, the EBA launched a RegTech industry survey to invite all relevant stakeholders, such as financial institutions and information and communications technology (ICT) third party providers, to share their views and experience on the use of RegTech solutions, on a best effort basis. The aim of the survey is to better understand the ongoing activity in this area, raise awareness on RegTech within the regulatory and supervisory community, and inform any relevant future policy discussion. The EBA is also seeking ways to facilitate the adoption and scale up of RegTech solutions across the EU whilst acknowledging and looking to address the underlying risks. In its survey, the EBA focuses on: (i) mapping and understanding the existing RegTech solutions; (ii) identifying the main barriers and risks related to the use of RegTech solutions; and (iii) identifying potential ways to support the uptake of RegTech across the EU. The EBA has prepared two separate RegTech questionnaires: one is to be completed by financial institutions, and the other one by ICT third party providers. Both questionnaires are composed of a general part, aimed at collecting aggregate information on all types of RegTech solutions in use, and a more detailed part, focussing on individual RegTech solutions in four specific areas of focus: (a) Anti Money-Laundering /Combating the Financing of Terrorism – ongoing monitoring of the business relationship and/or transaction monitoring; (b) creditworthiness assessments; (c) compliance with security requirements and standards (information security, cybersecurity, payment services); and/or (d) supervisory reporting. The EBA expects to report on the use of RegTech solutions in the first half of 2021.The deadline for comments is 30 September.

ECB Press Release

ECB Survey – Financial Institutions

ECB Survey – ICT Third Party Providers

 

Markets and Markets Infrastructure

FCA Dear CEO letter to firms providing non-discretionary investment services 

On 12 August, the FCA published a Dear CEO letter, stating that it expects firms providing non-discretionary investment services to prevent harm to clients, specifically in the context of money that the firm holds for its clients. The FCA notes that clients may have rebalanced their portfolios to mitigate volatility during Covid-19. As a result, a number of firms who hold client money have reported an increase in client money balances – in some cases significantly so – in their reporting from January to June 2020. The FCA states that firm’s relevant Senior Manager should consider whether the firm needs to hold client money balances which are unlikely to be reinvested, or whether it would be in the clients’ better interests to place these balances directly with the client’s own current or savings account providers. The FCA considers it good practice in this period for firms to communicate with clients about increased client money balances to ascertain whether these should be returned to them or continue to be held by the firm to facilitate further investment in the short term. In line with this, if it is in clients’ better interests during this period, the FCA expect firms to return client money balances which are unlikely to be reinvested in the short term. The FCA will continue to review client money balances and follow up with firms that report significantly increased balances.

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HMT letter on EU crowdfunding service provider proposals

On 11 August 2020, the Government published a letter from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Scrutiny Committee Chair, providing an update on the EC's proposed Regulation on European Crowdfunding Service Providers (ECSP) for Business and the related proposal for a Directive making consequential amendments to MiFID II relating to crowdfunding. Mr Glen states that the final compromise text has been published by the EC and that the legislation will not come into force during the transition period. The Government will therefore consider whether similar changes in UK law would enhance the competitiveness of the UK’s crowdfunding and (peer-to-peer) P2P lending sectors in its new trading environment, while also ensuring that consumer investors are adequately protected. Amongst other things, Mr Glen states that a report is to be compiled by the EC 24 months after the Regulation comes into force, which will consider the appropriateness of expanding the scope of the Regulation to third countries. Mr Glen states that the Government will review the outcome of this report. Additionally, the Government has published a near identical letter by Mr Glen, sent to Lord Kinnoull (Chair of the House of Lords European Union Select Committee).

HMT Letter – to Sir William Cash

HMT Letter – to Lord Kinnoull 

IOSCO final report on liquidity provision in the secondary markets for equity securities

On 11 August, IOSCO published a final report on liquidity provision in the secondary markets for equity securities. The report identifies some of the key elements of market making programs that may help promote the provision of liquidity, strengthen investor confidence and foster fair and efficient markets. The report identifies several common themes which regulators could consider as key elements in relation to market making programs and/or other liquidity provision incentive arrangements, in particular: (i) registration of market makers; (ii) obligations imposed on market makers; (iii) balancing the obligations and benefits of the programs; (iv) monitoring compliance with the program; and (v) public disclosure about the programs. This report and the key elements identified were prepared prior to the Covid-19 pandemic. IOSCO is discussing possible future work relating to the impact of the pandemic on market making and liquidity in equity securities markets.

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Payment Services and Payment Systems

BoE confirms it will go-live with ISO 20022 in April 2022 

On 10 August, the BoE confirmed that it will go-live with ISO 20022 in April 2022, as currently planned. The BoE will then enable enhanced data to be sent and received during the first half of 2023. The BoE is undertaking further analysis on whether this should occur before or after the planned cutover to the new core settlement engine in April 2023, and to understand any implications for its delivery plan. The BoE will publish an update and supporting documentation in September.

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EC confirms no right for banks to refuse access to basic bank accounts based on consumers’ location within the EU

On 7 August, the EP published an answer from the EC responding to a written question. The question (dated 2 July) starts by explaining that banks are not entitled to refuse access to basic bank accounts simply on the grounds that applicants are not resident in the country where they are located, based on Article 15 of the Payment Accounts Directive (PAD) – in practice, however, banks frequently avail themselves of an exception to this rule where granting access to a basic payment account would effectively be in breach of EU anti-money laundering law. Partly as a result of this, individuals and companies may still encounter difficulties in opening a bank account outside their country of residence. Thus, the question posed is if the EC considers that automatic refusal of access to a basic payment account is at odds with the principles of the internal market. In its answer, the EC states that it agrees that automatic refusal to a consumer of a payment account with basic features on the ground of his residence in another Member State is not in accordance with the PAD or EU money laundering laws. 

EP Question

EC Answer 

Prudential Regulation

EBA draft guidelines on criteria for use of data inputs in the risk measurement model under the CRR

On 12 August, the EBA published a consultation paper on draft guidelines on criteria for the use of data inputs in the risk-measurement model referred to in Article 325bc of the CRR under the Internal Model Approach (IMA) for market risk. The guidelines aim to clarify the qualitative conditions that the data related to modellable risk factors should meet to be used in the institution’s expected shortfall calculations. In particular, these Guidelines clarify that the data used to compute the expected shortfall risk measure should be: (i) accurate; (ii) appropriate; (iii) frequently updated; and (iv) complete and overall consistent in its use in the expected shortfall risk measure. These guidelines are part of the deliverables included in the roadmap for the new market and counterparty credit risk approaches published on 27 June. The deadline for comments is 12 November. 

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ECB report on banks’ internal capital adequacy assessment process (ICAAP) practices

On 11 August, the ECB published a report on banks’ ICAAP practices. The report summarises the results of a structured analysis of ICAAP practices based on the ICAAP packages which a representative sample of significant institutions (SIs) submitted in 2019, describing the range of ICAAP practices observed in a sample of 37 banks. The ECB undoubtedly acknowledges that many banks have made a considerable effort towards improving their ICAAPs over recent years and also that they have made clear progress. However, the report also revealed several ICAAP areas that are less developed, all of which meriting attention as weak practices in those areas could undermine the overall effectiveness of the ICAAPs. 

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EBA final draft implementing technical standards (ITS) and guidelines on supervisory reporting and disclosures for CRR Amending Regulation – Covid-19

On 10 August, the EBA published documents relating to the CRR Amending Regulation. Firstly, the EBA published a final report on draft ITS on supervisory reporting by institutions. The EBA has further updated the ITS to accommodate minor technical changes made by the CRR Amending Regulation on own funds, non-performing exposure (NPE) backstop and leverage ratio. The EBA has drafted the ITS to apply from 28 June 2021, with the exception of specific requirements concerning the leverage ratio buffer. Secondly, the EBA has published guidelines on supervisory reporting and disclosure requirements in compliance with the CRR Amending Regulation. The EBA has issued these guidelines to provide clarification and help institutions implement the reporting and disclosures that are linked to the regulatory measures adopted in the context of Covid-19. The guidelines clarify how to report the CRR Amending Regulation adjustments that have an impact on templates related to the leverage ratio, own funds and credit risk. The clarification provided in these guidelines will apply until the reporting reference date of 31 May 2021 and until and including the last disclosure reference date prior to the 28 June 2021. Finally, the EBA has also published amended guidelines on uniform disclosures under Article 473a of the CRR on the transitional period for mitigating the impact of the introduction of IFRS 9 on own funds to ensure compliance with the CRR Amending Regulation. In light of the urgency of the situation, the EBA is not consulting on the ITS or guidelines. 

EBA Final Report – Draft ITS 

EBA Final Report – Guidelines 

EBA Final Report – Amended Guidelines 

Recovery and Resolution

FMLC response to HMT’s consultation on the transposition of BRRD II

On 11 August, the FMLC published a letter, responding to HMT’s consultation on the transposition of BRRD II. The response details, amongst other things: (i) the transposition of BRRD II and the UK’s withdrawal from the EU; and (ii) contractual recognition of resolution stay power. The FMLC would urge HMT to align, at least in the short-term, the UK’s framework in this area, with that of the EU. Also, if there are aspects of BRRD II which HMT is transposing but intends to discard after the end of the transition period, the FMLC considers that clarity around this would greatly help ensure legal certainty and reduce the operational burden on market participants. The EBA has published draft RTS for contractual recognition of stay powers which aim to support the effective application of temporary restrictions on early termination rights in relation to financial contracts governed by the law of a Third Country – the new proposals diverge in form, although not in substance, from the stay recognition requirements that are already in place in a number of jurisdictions, including in the UK, France and Germany. The FMLC recommends that HMT ensure that implementation of the final RTS does not impact the solutions for the contractual recognition of resolution stays which are already in place.

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Single Resolution Board (SRB) operational guidance to banks on the implementation of the bail-in tool

On 10 August, the SRB announced that it has published new documents that provide operational guidance to banks on playbooks and instructions for bail-in data sets, which are accompanied by an explanatory note. The SRB states that the documents are not a new set of SRB policies, but rather a guide to help banks ensure the required preparation for bail-in application during the resolution planning phase. The following documents were published: (i) a Q&A for publication of bail-in guidance; (ii) bail-in data instructions; (iii) bail-in data explanatory note; and (iv) operational guidance on bail-in playbooks. 

SRB Press Release

SRB Q&A

SRB Bail-in Data Instructions

SRB Bail-in Data Explanatory Note

SRB Operational Guidance 

Other Developments

FCA policy development update (PDU) for August

On 7 August, the FCA updated its PDU webpage. This summarises publications that the FCA has issued recently, as well as its proposed future publications. This update, for instance, indicates that a consultation paper on exit fees in investment platforms and comparable firms is due for publication in 2021. Furthermore, a policy statement to CP20/5 on open-ended investment companies for proposals to facilitate standard listing is due for publication in Q4.

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