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Key Regulatory Topics: Weekly Update 7 – 14 May 2020

14 May 2020

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

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Conduct

Lending Standards Board (LSB) business plan & budget 2020-21

On 13 May, the LSB published its business plan & budget for 2020-21. The LSB has four strategic priorities for the decade, namely to: (i) set high standards to reflect what it can learn from its oversight work and to respond to the new opportunities and challenges of the market, including the growth of FinTech; (ii) deliver independent oversight to provide assurance that standards are being met, to highlight good practice and to ensure weaknesses are remedied; (iii) ensure wider reach by taking a thought leadership role and by disseminating good practice through its publications and events and by expanding its market reach; and (iv) raise awareness of the LSB so that new entrant firms embrace its Standards and so that its findings are increasingly influential. The LSB will, amongst other things: (a) review the current Contingent Reimbursement Model Code for Authorised Push Payments (the CRM Code) which governs the response to push payment scams and update the Standards of Lending Practice for personal customers; (b) undertake major thematic oversight reviews; (c) undertake firm-specific compliance exercises in roughly a quarter of participating firms; (d) consult with firms on how the reintroduction of an annual, light touch self-attestation programme would work; (e) publish reports and hold follow-up events on all of its thematic oversight reviews; and (f) work with participating firms to raise awareness of the LSB’s work and Standards. 
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Consumer/retail 

Please see our Prudential Regulation section for an update on the PRA's policy statement on credit risk: probability of default and loss given default estimation.

The Individual Savings Account (Amendment No. 3) (Coronavirus) Regulations 2020

On 14 May, HMT published The Individual Savings Account (Amendment No. 3) (Coronavirus) Regulations 2020. These Regulations amend the Individual Savings Account Regulations 1998. They provide for the withdrawal charge in respect of a Lifetime ISA for the period beginning on 6th March 2020 and ending on 5th April 2021 to be reduced from 25% to 20%. HMT have also published an explanatory memorandum for these Regulations. The Regulations come into force on 4th June.
The Individual Savings Account (Amendment No. 3) (Coronavirus) Regulations 2020
Explanatory Memorandum

PRA policy statement on retirement interest-only (RIO) mortgages 

On 14 May, the PRA published a PS detailing feedback to responses to its OCP 25/19 on RIO mortgages. The PRA has decided to maintain the proposals as consulted, but has provided additional clarification in its supervisory statements (SS) as follows: (i) the material payment amount could be zero, provided a borrower meets the lender’s RIO underwriting criteria; (ii) when approving a RIO mortgage for a borrower with a defaulted interest-only mortgage, a new lender does not need to treat the new RIO mortgage as a distressed restructure as a result of the original loan being converted to RIO, provided that the firm’s underwriting practices consider fully the IO default in the credit decision process; and (iii) the PRA is open to firms modelling RIO mortgages along with other mortgages once they have sufficient data to demonstrate they meet CRR requirements and have received permission to do so. The PRA's final policy is contained in the updates to: (a) SS 11/13 ‘Internal Ratings Based (IRB) approaches’ (Appendix 1); and (b) SS10/13 ‘Standardised approach’ (Appendix 2). The policy will take effect on 1 January 2022.
PRA Policy Statement

PRA SS11/13

PRA SS 10/13

FOS clarifies approach to complaints during Covid-19 pandemic

On 7 May, the FOS published a letter in response to the FCA, clarifying how it will approach complaints during the Covid-19 pandemic. The FOS states that statute and the FCA’s own rules continue to provide an appropriate framework for making decisions, which should give financial businesses the certainty that complaints will be dealt with fairly. The FOS will take account of the FCA’s revised expectations of what constitutes compliance with its rules, guidance and standards, as well as good industry practice at this time. This includes guidance which gives firms additional flexibility to help them deal with difficult conditions. The FOS confirms that it does not make decisions with the benefit of hindsight. Additionally, the FCA has updated its webpage on how firms should handle complaints during the Covid-19 pandemic to provide links to these letters. 
FOS Letter
FCA Letter 
FCA Webpage 

Covid-19

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

Please see our dedicated Covid-19 webpage containing links to a number of articles and insights to keep up-to-date with developments and assist with effective contingency planning.

ESRB to identify financial stability implications of the newly introduced guarantee schemes and fiscal measures made in response to Covid-19

On 14 May, the ESRB have published a letter to the Economic and Financial Affairs Council stating that the ESRB has started work on identifying financial stability implications of the newly introduced guarantee schemes and fiscal measures, with three main objectives: (i) identifying the implications of such measures for financial stability; (ii) establishing minimum requirements for monitoring frameworks that help understand the effects of such measures; and (iii) outlining future work on cross-border and cross-sectoral effects of such measures. The ESRB has also published an issues note on liquidity in the corporate bond and commercial paper markets, the procyclical impact of downgrades and implications for asset managers and insurers.

ESRB Letter

ESRB Issues Note

FCA statement on how firms should handle post and paper documents during the current pandemic

On 13 May, the FCA published a statement on how firms should handle post and paper documents during the current pandemic. Whilst the FCA expects firms to comply with the requirements for post and paper-based processes (both incoming and outgoing), it understands that in the current circumstances some firms may not be able to comply fully with them. Where this is the case, firms should notify the FCA as soon as possible via the email provided in the statement. The FCA states, amongst other things, that firms should try to ensure that all customers are not disadvantaged because of delays and make particular efforts to contact customers who do not use online services. Additionally, firms should demonstrate any steps that they have taken to mitigate the impact of non-compliance with postal and paper processes and then return to full compliance as soon as practical. The FCA also expects firms to provide general updates on how it will treat incoming and outgoing post, and cheques, through its website and other public channels (such as social media). Furthermore, firms should ask those who have sent instructions or cheques which have not been processed to contact the firm urgently by telephone or electronic means. 
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BoE Interim Financial Stability Report (IFSR) sets out the FPC’s view of the performance of the financial system through Covid-19 disruption and outlook for UK financial stability

On 7 May, the BoE published its IFSR, setting out the FPC’s view of the performance of the financial system through the Covid-19-related disruption and its outlook for UK financial stability. This Report is also the record of the judgements taken by the FPC at its meeting held on 5 May. The report considers: (i) recent performance of the financial system after the Covid-19 shock, specifically the continued importance of the transition away from LIBOR; (ii) supporting the real economy during the period of economic disruption; (iii) the UK banking sector resilience amid Covid-19, comparing the impact of the desktop stress test with the BoE's 2019 stress test; and (iv) UK corporate sector financing amid Covid-19, specifically the finance needs of smaller businesses and the impact on household debt. 
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PRA reprioritise work in light of Covid-19

On 7 May, the PRA published a statement on its plans to support firms and enable them, and the PRA, to focus their resources on the highest priority work in light of Covid-19: (i) Climate Change - recognising current pressures on firms, and in light of the responses to the December 2019 Discussion Paper on the Climate Biennial Exploratory Scenario, the PRC and FPC have agreed to postpone the launch of the exercise until at least mid-2021; (ii) LIBOR transition - in light of the developments, including the FSR statement on LIBOR, the PRA and FCA have decided to resume full supervisory engagement on LIBOR from 1 June 2020, including data reporting at the end of Q2; (iii) Insurance Stress Test – it will not be publishing the results of last year’s test (IST2019) and will postpone the next Insurance Stress Test to 2022; and (iv) Stressed VAR - the CRR requires firms to review the choice of historical data at least annually and, although in normal circumstances, the PRA have set an expectation of quarterly reviews, in the current circumstances it will permit firms to delay this review until December.

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Financial crime

HMT statement on cross-border information-sharing within corporate groups

On 12 May, HMT published a Government statement on cross-border information-sharing within corporate groups, advising regulated entities of when it is acceptable to share information. The statement reminds these entities of the relevant FATF international standards, guidance and its revisions to Interpretive Note to Recommendation 18 (INR.18). The Government states that UK-based groups should ensure that their foreign operations meet UK requirements, to the extent that host countries’ laws and regulations permit, as required by Regulation 20 of the Money Laundering Regulations. Furthermore, it remains important to promptly file a Suspicious Activity Report (SAR) with the financial intelligence unit, regardless of any information sharing. The Government also states that personal data from the UK should only be shared in a way that is consistent with the General Data Protection Regulation (GDPR) and the Data Protection Act 2018 (DPA), and it also reminds entities of the Information Commissioner's Office (ICO) guidance on international transfers as a useful resource in relation to cross-border sharing of personal data.

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EBA inquiry into dividend arbitrage trading schemes and action plan to enhance the future regulatory framework

On 12 May, the EBA published the results of its inquiry into dividend arbitrage schemes. This inquiry looked into the actions of prudential and anti-money laundering (AML) and countering the financing of terrorism (CFT) supervisors in dealing with such schemes. The resulting report sets out the EBA’s expectations of credit institutions and national authorities under the current regulatory framework. The EBA’s inquiry showed that national authorities do not share the same understanding of dividend arbitrage trading schemes, due to differences in Member States’ domestic tax law. The inquiry concluded that facilitating, or handling proceeds from tax crimes undermines the integrity of the EU’s financial system and, therefore, sets out a number expectations of credit institutions and national authorities under the current regulatory framework. The EBA also decided on a 10-point action plan for 2020/21 to enhance the future framework of prudential and AML requirements covering such schemes. In its action plan, the EBA states, amongst other things, that it will amend its: (i) prudential Guidelines on SREP, Internal Governance and on the Assessment of the Suitability of Members of the Management Body and Key Function Holders; and (ii) Guidelines on money laundering and terrorist financing (TF) risk factors, its Guidelines on Risk-Based AML/CFT Supervision, and its biennial Opinion on ML/TF Risks. Additionally, the EBA will allocate explicit time to such schemes during its staff-led AML/CFT implementation reviews of national authorities, and monitor AML/CFT colleges for financial institutions that are exposed to significant ML/TF risks associated with tax crimes. The EBA will then carry out a second formal inquiry into the actions taken by financial institutions and national authorities to supervise compliance with the amended requirements.
EBA Press Release
EBA Report on Inquiry
EBA Action Plan

EC to further strengthen the EU's fight against money laundering and terrorist financing

On 7 May, the EC published an ambitious and multifaceted action plan, which sets out the concrete measures that it will take over the next 12 months to better enforce, supervise and coordinate the EU's rules on combating money laundering and terrorist financing, with the aim of removing any weaknesses in the EU's rules. The action plan is built on the six following pillars: (i) effective application of EU rules; (ii) a single EU rulebook; (iii) EU-level supervision; (iv) a coordination and support mechanism for Member State Financial Intelligence Units; (v) enforcing EU-level criminal law provisions and information exchange; and (vi) the EU's global role. The EC has also published a Q&A, and has launched a consultation on this action plan, the deadline for comments being 29 July. Additionally, the EC has published a more transparent, refined methodology to identify high-risk third countries that have strategic deficiencies in their anti-money laundering and countering terrorist financing regimes that pose significant threats to the EU's financial system. The EC has also adopted a new list of third countries with strategic deficiencies through a new Delegated Regulation which will be submitted to the Council of the EU and the EP to consider for approval within one month (with a possible one-month extension). If neither objects, it will be published in the OJ and will enter into force 20 days after such publication. The Article adding third countries to the list is expressed to apply from 1 October 2020. The EC has provided a later application date for this Article because of the COVID-19 pandemic. It believes the later date should give sufficient time for effective implementation. The EC envisages no major implementation issues for the delisting changes, so considers it reasonable to require delisting of countries without undue delay.
EC Press Release
EC Action Plan
EC Consultation
EC Q&A
EC Revised Methodology
EC Delegated Regulation

Fintech

Please see our Conduct section for an update on the LSB's business plan & budget for 2020-21.

FCA update webpage on requesting innovation hub support

On 13 May, the FCA updated its webpage on requesting innovation hub support, in light of Covid-19. The update expresses the FCA’s particular interest in firms who want to help people, and the financial systems that they rely on, deal with the effects of the Covid-19 outbreak. The FCA emphasises that it is still supporting innovative firms looking to launch financial services products and services that meet its criteria. In particular, the FCA is keen to hear from firms developing businesses, products or services intended to help: (i) improve access to credit or funding for consumers or small businesses; (ii) individuals or companies to access cash, charitable donations, government aid or other financial help; (iii) distribute funds or other forms of support during periods of isolation; (iv) improve the speed or efficiency in assessment and resolution of insurance claims; (v) firms identify their vulnerable customers; and (vi) improve the identification of scams from, for example, phishing or push payment fraud.
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ECB stress that state-of-the-art technology is vital in financial services

On 8 May, the ECB published a blog post, stating that the pandemic has revealed the need for banks to fully embrace the latest technology, otherwise they risk going extinct. The ECB note, amongst other things, that this new reality raises additional challenges such as increasing exposure to cyber threats and IT failures. Nonetheless, the ECB state that the largest euro area banks have so far maintained robust operational resilience, and even as malicious activity spikes, they have not suffered any major setbacks. The ECB is adapting to the growing need for digitalisation by: (i) continuing to monitor banks’ capability to implement their business continuity plans in the current circumstances; (ii) keeping a close eye on new emerging risks – for example, with banking operations running remotely, concentration risks are heightened and banks must retain control of their operations as well as avoid becoming too dependent on certain technology and IT infrastructure providers, including cloud services; (iii) acknowledging that banks’ boards and internal control functions must fully understand the main risks related to innovative technologies and the operational challenges; and (iv) acknowledging that banks must step up their investment in real-time backup systems so that they can keep customer data secure. 
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TheCityUK report on enhancing the UK's approach to innovation

On 7 May, TheCityUK published a report on enhancing the UK's approach to innovation. The content of the report draws on interviews with more than 20 individuals holding senior positions in UK, US and European FinTechs, financial institutions, and UK and US regulators. The report includes discussion of the following themes, detailing findings and recommendations for each: (i) clarifying regulatory support and engagement; (ii) building on success by delivering new initiatives; (iii) integrating innovation across the supervisory framework; and (iv) strengthening support of FinTech expansion into overseas markets. 
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Fund regulation

Please see our Prudential Regulation section for an update on the ESRB's recommendation on liquidity risks in investment funds.

The Financial Markets Law Committee (FMLC) respond to HMT's consultation on its proposal for an Overseas Fund Regime (the “proposed OFR”)

On 11 May, the FMLC published its response to HMT's consultation on the proposed OFR which states, amongst other things, that: (i) in respect of timing and overlap, the compressed timeline within which the Temporary Marketing Permission Regime (TMPR) will cease and the proposed OFR needs to be established results in uncertainty around timing as it is not clear whether the regimes will overlap; (ii) for equivalence criteria, clarity is needed on which types of vehicles are eligible, which specific areas of the Third Country’s regime will be examined by the “outcomes-based equivalence” assessment as well as which aspects of law HMT might consider important to include as an additional requirement; (iii) a clear and transparent process for the modification and withdrawal of equivalence decisions would provide legal certainty and operational continuity; (iv) it is expected that firms will have to report to the FCA changes that impact the fund's eligibility for recognition meaning that it is important that there is clarity as to the nature of these reporting requirements and the types of changes to the fund that may impact eligibility – also, an additional requirement that such changes are reported to the FCA will increase the burden on the fund, impacting its efficiency; (v) greater clarity might be achieved if the status of recognised funds under the new regime from a financial promotions perspective were made clear within the COBS rules, incorporating any differences between different types and classes of recognised funds; and (vi) clarification would prove helpful on the timeline of the recognition process under section 272 of FSMA, including the period within which the FCA will be required to make a decision.
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Markets and markets infrastructure

Please see our Covid-19 section for an update on the PRA reprioritising its work in light of the current pandemic.

Please see our Prudential Regulation section for updates on the: (i) ESRB's recommendation on liquidity risks in investment funds; and (ii) PRA's policy statement on credit risk: probability of default and loss given default estimation.

ISDA summarise responses to its consultation on how to implement pre-cessation fallbacks in derivatives

On 14 May, ISDA published a report prepared by The Brattle Group summarising the responses to ISDA’s 2020 consultation on how to implement pre-cessation fallbacks in derivatives. The consultation asked whether ISDA should publish a supplement to the 2006 ISDA Definitions so that the Rate Options for LIBOR in the relevant currencies (USD, GBP, CHF, JPY, EUR) all contain fallbacks that would apply upon the first to occur of: (i) a permanent cessation trigger; or (ii) a ‘non-representativeness’ pre-cessation trigger, as well as publish a protocol to allow adherents to include the amended definitions (i.e., the definitions with the combined permanent cessation and pre-cessation fallback provisions) in all of their legacy contracts with other adherents. 91% of the market participants responded “yes” to the consultation question. A key reason cited by several respondents is the need for consistency across asset classes and between cleared and non-cleared derivative markets – these respondents noted that the inclusion of a pre-cessation trigger for OTC derivative contracts would be in alignment with what is happening in the cash markets, as well as with the arrangements expected to apply to cleared derivatives like swaps. A number of market participants cited general support for the consultation, noting that it would be challenging to use non-representative benchmarks. Respondents who answered “yes” also brought up a number of other considerations – several respondents expressed concerns around the clarity of the announcement of the pre-cessation event, with some indicating that their response was conditional on the pre-cessation trigger being worded in a clear manner.
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ESMA thematic report on EU collateralised loan obligation (CLO) credit ratings – an overview of Credit Rating Agencies (CRAs) practices and challenges

On 13 May, ESMA published a thematic report on EU CLO credit ratings, providing an overview of CRAs practices and challenges. This report presents the merits and risks of CRAs’ practices in areas such as the rating process, the CLO rating methodologies and its specific aspects: (i) calibration of the rating parameters; and (ii) sensitivity of CLO credit ratings to macroeconomic variables or to rating downgrades or defaults in the portfolio of underlying loans. In reviewing CRAs' practices and methodologies for rating CLOs, ESMA makes a number of observations on risks relating to the: (a) internal organisation of CRAs – specifically, a smooth and ongoing exchange of information between internal teams is key to ensure a holistic assessment of CLO creditworthiness; (b) interactions with CLO issuers – ESMA states that it is key that CRAs ensure the independence of their rating process from any influence from their commercial teams and/or arrangers; (c) model/third party dependencies leading to potential operational risks; (d) rating methodologies, modelling risks and commercial influence; and (e) thorough analysis of CLOs – in particular, ESMA notes that some recent evolutions in CLOs contracts have weakened investor protection by introducing more flexibility for CLO managers and by generally reducing transparency with the addition of unclear clauses. ESMA also states that it expects CRAs to continue to perform regular stress-testing simulations and to provide market participants with granular information on the sensitivity of CLO credit ratings to key economic variables.
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The Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) spotlight review on the critical role of data management in the financial system

On 11 May, the FICC FMSB published a spotlight review on the critical role of data management in wholesale FICC markets and financial systems. This focuses on seven sources of data risk vital to stability, fairness and effectiveness: (i) business continuity and operational risk; (ii) security and confidentiality risk; (iii) commercial trading risk; (iv) aggregate exposure risk; (v) regulatory enforcement risk; (vi) ownership and rights risk; and (vii) security and conduct risk. The benefits of data standardisation are also explored. Additionally, eight key components to promote effective data governance and standardisation are discussed: (a) data lifecycle; (b) data policies; (c) data taxonomy; (d) mapping data sources; (e) data movement and lineage; (f) data classification; (g) data leakage detection; and (h) data quality. It is emphasised that the seven sources of data risk do not impact all firms equally, so firms need to undertake careful analysis of their own organisations, systems and processes in order to consider how best to combine the eight key components to promote effective data governance and standardisation. It is also stated that market participants are increasingly moving to more centralised data strategies, with significant scope for efficiency gains in terms of longer term cost reduction, risk reduction, and allowing better use of data to drive value for commercial purposes.
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ESMA updates CRAs Supervision section of its Covid-19 webpage

On 11 May, ESMA updated its Covid-19 webpage, specifically the CRAs Supervision section. This states that ESMA is continuously engaging with CRAs to assess the impact of COVID-19 on their businesses and operations. In its engagement, ESMA focuses on business continuity and adherence to key requirements of the CRA Regulation concerning, for example, the proper application of methodologies, conflicts of interest, internal controls, transparency and governance. In addition, ESMA is closely monitoring CRAs’ rating actions through enhanced data analytics to assess the possible impact of ratings actions on financial stability.

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EC adopts Delegated Regulation to delay the entry into force of a Delegated Regulation under CSDR containing regulatory technical standards (RTS) on settlement discipline

On 8 May, the EC adopted a Delegated Regulation (C(2020) 2842 final) which amends Delegated Regulation (EU) 2018/1229 supplementing the CSDR in respect of RTS on settlement discipline. This follows ESMA's report of 4 February, suggesting to the EC to postpone to entry into force of Delegated Regulation (EU) 2018/1229. The EC state that a delay in the entry into force of the relevant rules to 1 February 2021 is required in order to ensure a date of entry into force which allows the appropriate IT adjustments to be made in a timely manner. The EP and Council of the EU will consider the adopted Delegated Regulation, and if they do not object to it, it will be published in the OJ. It will enter into force three days after such publication.
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BoE's risk management approach to collateral referencing LIBOR for use in the Sterling Monetary Framework (SMF) - Market Notice

On 7 May, the BoE published a Market Notice detailing its risk management approach to collateral referencing LIBOR for use in the SMF. The BoE states that a haircut add-on will be applied to all LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from 1 April 2021, 40 percentage points from 1 September 2021 and 100 percentage points from 31 December 2021. The dates from which the BoE will apply the increasing haircuts on LIBOR-linked collateral have been pushed back. Additionally, the Market Notice specifies that from 1 April 2021, rather than 1 October 2020 as in the previous market notice, any LIBOR-linked collateral issued on or after that date and maturing after 31 December 2021 will be ineligible for use in the Sterling Monetary Framework. In respect of Loan Portfolios containing both LIBOR Linked Loans and other loans, SMF participants may choose to either remove the LIBOR Linked Loans from the Loan Portfolios, or alternatively split these Loan Portfolios subject to them meeting the BoE's standard collateral eligibility requirements. The BoE will monitor market developments in relation to fallback language and will keep under review the potential to distinguish between LIBOR Linked Collateral with robust fallback language and that without, as market practice develops. The BoE intend to update the list of eligible securities that are impacted by this policy monthly.

BoE Market Notice
BoE List of Eligible Securities

Payment systems and payment services

Please see our FinTech section for an update on the FCA updating its webpage on requesting innovation hub support.

Please see our Conduct section for an update on the LSB's business plan & budget for 2020-21.

EBF implementation guidance on cross-border payments regulation

On 13 May, the EBF published implementation guidance on the cross-border payments regulation (Regulation 518/2019) which amends the Regulation on cross-border payments (Regulation 924/2009) as regards charges on cross-border payments in the Union and currency conversion charges. The guidance presents questions and responses prepared by the EBF Payment Systems Committee. The document may be updated from time to time as necessary. 
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FCA provide information on reporting under the Payment Accounts Regulations (SUP16.22)

On 7 May, the FCA updated its webpage on the Payments Account Directive, providing information on reporting under the Payment Accounts Regulations. Although the submissions covering the reporting period 1 March 2018 to 29 February 2020 are now due and in normal circumstances the FCA would expect to receive these within two months of the end of the relevant reporting period (by 30 April), the FCA state that it has extended the deadline to 30 June for this reporting period. 
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Advocate General Campos Sánchez-Bordona opinion on a preliminary reference concerning the application of PSD2 to contactless payment cards

The CJEU has published an opinion of Advocate General Campos Sánchez-Bordona on a preliminary reference for Case C-287/19 (30 April being the date of judgment), concerning the application of PSD2 to contactless payment cards. Overall, the opinion concludes: (i) the near field communication (NFC) functionality of a personalised multifunctional payment card must be classified as a payment instrument within the meaning of Article 4(14); (ii) the making of low-value contactless payments using the NFC functionality of a personalised multifunctional payment card constitutes an instance of that card being used 'anonymously' within the meaning of Article 63(1)(b); (iii) a banking institution issuing a personalised multifunctional payment card to which NFC functionality has been added may avail itself of the derogation provided for in Article 63(1)(a) only if it can demonstrate that it is not technically feasible to block that card or prevent its further use in the event of loss, theft, misappropriation or unauthorised use; and (iv) the possibility of tacit acceptance of changes to the framework contract, which is permitted under Article 52(6)(a) where agreed between the user and the provider of the payment service, must be strictly interpreted and may not be applied to changes to the essential elements of that framework contract, such as ones relating to the addition of NFC functionality to a payment card. 
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Prudential regulation

Please see our Covid-19 section for an update on the PRA reprioritising its work in light of the current pandemic.

ESRB recommendation on liquidity risks in investment funds

On 14 May, the ESRB published a recommendation on liquidity risks in investment funds. The recommendation is designed to enhance preparedness for responding to potential future adverse shocks that could lead to a deterioration in financial market liquidity. The ESRB has identified two segments as particularly high priority areas for enhanced scrutiny from a financial stability perspective: (i) investment funds with significant exposures to corporate debt – shortly following the onset of Covid-19 pandemic, there were significant redemptions from investment funds investing in corporate debt; and (ii) investment funds with significant exposures to real estate – the public health restrictions necessary to contain the spread of Covid-19 could result in a reduction in the volume of real estate market transactions and an increase in valuation uncertainty. The ESRB state that the Covid-19 shock requires significant coordination both between supervisory authorities responsible for different segments of the financial markets and across borders. It recommends that ESMA: (a) coordinate with the national competent authorities to undertake a focused piece of supervisory exercise with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of these two segments of the investment funds sector to potential future adverse shocks, including any potential resumption of significant redemptions and/or an increase in valuation uncertainty; and (b) report to the ESRB on its analysis and on the conclusions reached regarding the preparedness of the relevant investment funds. The ESRB has requested that ESMA submit a communication to the EP, the EC, the Council of the EU and the ESRB by 31 October, to detail its actions undertaken in response to the recommendations and to substantiate any inaction. ESMA has published a statement in support of the ESRB’s recommendations. The ESRB have also published a public statement on the use of liquidity management tools by investment funds with exposures to less liquid assets, stating that it has been assessing potential financial vulnerabilities that could amplify the economic consequences of the Covid-19 pandemic. The ESRB emphasises, amongst other things, the importance of the availability and timely use of liquidity management tools, especially in times of stressed market conditions.

ESRB Recommendation

ESMA Statement

ESRB Public Statement

PRA PS on credit risk: probability of default and loss given default estimation

On 14 May, the PRA published a PS detailing feedback to its CP 21/19 on credit risk: probability of default and loss given default estimation. After considering the responses, the PRA has made several changes to the draft policy in the CP, these being: (i) extending the implementation deadlines for the EBA roadmap and the mortgage hybrid approach, including removing the transitional period outlined in paragraph 2.8 of PS7/19; (ii) amending the approach to discounting cured exposures; (iii) accepting temporary divergence between accounting impairment models and approved IRB models for defaulted exposures, due to the need to make timely changes to impairment models; and (iv) clarifying the use of SONIA, including for defaults that occurred before the first date SONIA is available from the BoE. The PRA has also set out its consideration of the cost-benefit impact of these changes relative to the draft policy. The final policy is set out in the updated SS11/13 and will take effect from 1 January 2022. The updated SS should be read in conjunction with SS1/19. 
PRA Policy Statement

PRA SS11/13

PRA convert Pillar 2A capital requirements as a nominal amount

On 7 May, in response to the economic shock from Covid-19, the PRA published a statement on converting Pillar 2A capital requirements from a Risk Weighted Assets (RWA) percentage to a nominal amount. The PRA do not believe that RWAs are a good approximation for the evolution of the risks captured in Pillar 2A in a stress. The PRA will continue to regularly assess the appropriate level of Pillar 2A and believe that the most proportionate approach is to set Pillar 2A as a nominal amount between assessments. The PRA will set Pillar 2A as a nominal amount in the 2020 and 2021 Supervisory Review and Evaluation Processes (SREPs). The PRA states that firms with a SREP in 2020 do not need to apply for a variation to their Pillar 2A requirements. The PRA invites all firms who do not have a SREP assessment due in 2020 to apply for a conversion of their current Pillar 2A requirement into a nominal amount using RWAs as of end-December 2019. Firms wishing to apply should use the form attached in Annex 1 to the statement by the end of 2020. Where the PRA judges that RWAs are a more accurate reflection of a firm’s risks between assessments, it may reject the application. 
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Regulation (EU) 2020/605 (Amending Regulation) amends Regulation (EU) 2015/534 on the reporting of supervisory financial information under the single supervisory mechanism (SSM) (Financial Reporting Regulation)

On 7 May, the Amending Regulation was published in the OJ, amending the Financial Reporting Regulation. Article 1 of the Amending Regulation sets out amendments to Annexes I, II, IV and V of the Financial Reporting Regulation reflecting Commission Implementing Regulation (EU) 2020/429. The ECB adopted the Amending Regulation on 9 April 2020. It enters into force on 27 May and applies from 1 June 2020.
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Recovery and resolution

PRA and BoE make changes to resolution measures in light of Covid-19

On 7 May, the PRA and BoE announced changes to resolution measures aimed at alleviating the operational burdens on PRA-regulated firms in response to the Covid-19 outbreak. This includes: (i) Resolvability Assessment Framework (RAF) - the dates for major banks to submit first reports on preparations for resolution and publicly disclose a summary of these reports have been extended by a year - these firms will now be required to submit their first reports to the PRA by October 2021 and make public disclosures by June 2022. The BoE will make its first public statement on these firms' resolvability by June 2022. The PRA published a direction for modification by consent, modifying rules 3.1 (1) and 4.1 (1) in the Resolution Assessment Part of its Rulebook; (ii) Valuation in Resolution - the compliance deadline for the Bank’s Statement of Policy on valuation capabilities to support resolvability has been extended by three months to 1 April 2021. The deadline for firms to implement the BoE's other Statements of Policy that relate to resolvability remains 1 January 2022; (iii) firms not being required to submit certain resolution pack information under PRA Supervisory Statement SS19/13 ‘Resolution Planning’ until the end of 2022, unless notified otherwise on an individual basis by the PRA; and (iv) 2021 MRELs will reflect the PRA’s policy changes to Pillar 2A capital setting also announced on 7 May and in addition, in line with the BoE's current policy, the Bank intends to exercise its discretion with respect to the transition time firms are given to meet higher MRELs. Firms not currently subject to a leverage-based capital requirement, but which subsequently become subject to one, will be given at least 36 months after that requirement takes effect to meet the higher MREL resulting from it. 
PRA Press Release
PRA Direction 

Sustainable finance

Please see our Covid-19 section for an update on the PRA reprioritising its work in light of the current pandemic.

Other developments

FCA statement on financial services exemptions in forthcoming Corporate Insolvency and Governance Bill

On 14 May, the FCA published a statement on financial services exemptions in the forthcoming Corporate Insolvency and Governance Bill. On 28 March, Business Secretary Alok Sharma announced new insolvency and corporate governance measures to help businesses affected by the Covid-19 pandemic. These measures are expected to be included in the Corporate Insolvency and Governance Bill. The Bill provides the following measures: (i) company moratorium – the Bill proposes to create a moratorium during which no legal action can be taken or continued against a company without leave of the court; (ii) suspension of Ipso Facto (Termination) clauses; and (iii) temporary suspension of wrongful trading provisions from 1 March for 3 months. The list of exclusions from the measures is expected to include banks, investment firms, insurers, payments and e-money institutions and certain market infrastructure bodies. In addition, the Bill proposes to provide a new Restructuring Plan which is expected to be available to financial services firms, through the appropriate safeguards including a role for the FCA and PRA. Furthermore, the Bill proposes to temporarily allow companies that are under a legal duty to hold an Annual General Meeting (AGM) or general meeting to hold a meeting by other means even if their constitution would not normally allow it. The Bill also proposes to provide further flexibility in respect of filing requirements to Companies House by allowing the Secretary of State temporarily to make further extensions.
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FSB key takeaways from its compensation workshop 2019

On 8 May, the FSB published its key takeaways from its compensation workshop which was hosted on 13 November 2019 for banks, insurance and asset management firms to discuss their experiences in implementing the FSB’s Principles for Sound Compensation Practices and their Implementation Standards. The key takeaways from discussion at the workshop cover six themes: (i) effectiveness; (ii) risk alignment; (iii) data use; (iv) governance; (v) compensation tools; and (vi) competition for talent. Generally, firms are at an early stage of developing frameworks to assess the effectiveness of their compensation policies and practices. Firms noted that banks are often more advanced on risk alignment work than firms in other parts of the financial sector. In respect of data use, there appears to be a correlation between directors holding (and not frequently selling) shares and bank profitability for banks. In general, firms reported that banks are at a more advanced stage than other firms in terms of embedding compensation decisions in their governance processes.

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The Financial Services Regulatory Initiatives Forum (FSRIF) launches the Regulatory Initiatives Grid

On 7 May, the FSRIF (comprised of the BoE, PRA, FCA, PSR and CMA, with HMT attending as an observer member) launched the Regulatory Initiatives Grid. The Grid's aim is to help the financial services industry and other stakeholders understand and plan for the timing of the initiatives that may have a significant operational impact on them. The Grid is organised by sector. It includes a ‘multisector’ chapter that covers initiatives that span more than one sector in addition to sector-specific chapters. The sector-specific chapters cover: (i) Banking; (ii) Consumer credit; (iii) Payment services and systems and market infrastructures; (iv) Insurance and reinsurance; (v) Pensions and retirement income; (vi) Retail investments; (vii) Investment management; (viii) Wholesale. It includes initiatives led by one or more Forum members. Future versions of the Grid may include initiatives from a broader set of UK bodies based on their participation in the Forum on an ad hoc basis. The Grid does not include initiatives led by international bodies if Forum members are not playing a substantial role in calibrating their implementation in the UK. The tables provide information on: (a) the lead Forum member; (b) a high-level description of the initiative; (c) milestones; (d) an estimated scale of operational impact; (e) a breakdown of the next four quarters and a column for the period beyond that horizon; and (f) whether timing has been amended for Covid-19 The Grid will be published at least twice a year. This first version provides detail on the timing of initiatives by quarter over a 12-month horizon although the Forum aim to change this to 24 months in future editions. The grid will initially run as a one-year pilot exercise. To make the grid as useful as possible, firms are strongly encouraged to engage with it and to contact the FSRIF via its dedicated email address to suggest how the grid can be developed.
Regulatory Initiatives Grid
FCA Webpage