Key Regulatory Topics: Weekly Update 8 - 14 Jan 2021
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Our weekly update on key regulatory topics affecting the financial services sector.
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Please see the other sections for product-specific updates relating to Brexit.
Please see our Brexit financial services webpage, which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators’ publications.
A&O Publication - Brexit certainty at last? An overview of the new EU-UK trading relationship
Following months of protracted negotiations and coming four and a half years after the UK voted to leave the EU, 24 December 2020 saw the EU and UK finally agree the shape of their future relationship. In this publication, we consider the structure of the Trade and Cooperation Agreement, the key provisions most relevant for our clients and the process for ratification. You can find the publication here.
MoUs between the FCA and European Authorities following end of Brexit transition period
On 14 January, the FCA updated its list of MoUs that it has entered into with European authorities in the areas of securities, investment services and asset management, insurance and pensions, and banking, which came into effect on 1 January 2021. The full list now includes: (i) a multilateral MoU with EU and EEA NCAs covering supervisory cooperation, enforcement and information sharing relating to, among others, market surveillance, investment services and asset management activities; (ii) an MoU with ESMA covering supervision of credit rating agencies and trade repositories; (iii) a multilateral MoU with EU and EEA NCAs covering supervisory cooperation, enforcement and information exchange between UK and EU/EEA national supervisors in the field of insurance regulation and supervision; (iv) an MoU with EIOPA covering information exchange and mutual assistance between the UK authorities and EIOPA in the field of insurance regulation and supervision; (v) an MoU with the EBA covering information exchange and mutual assistance between the UK authorities and the EBA in the field of banking; and (vi) individual MoUs with EU and EEA NCAs covering supervisory cooperation and information-sharing arrangements in the field of banking (which can be found on the PRA website).
Consumer / Retail
UKRN second set of performance scorecards in essential service sectors
On 14 January, the UK Regulators Network (UKRN) published a document, Moving Forward Together - Scorecards II, as part of the performance scorecards initiative, which provides insight into how effectively companies in water, energy, telecoms and personal current accounts are delivering for their consumers. Working with Ofgem, Ofcom, Ofwat, CCW and the FCA, the UKRN have brought together key consumer metrics covering service quality, price differentials and satisfaction levels.
FCA consults on update to mortgage and consumer credit repossessions guidance – Covid-19
On 13 January, the FCA began consulting on draft guidance for mortgage firms and consumer credit firms, setting out its proposed approach to repossessions from 31 January 2021. The FCA proposes extending the current guidance on mortgage repossessions that firms should not enforce repossessions, except in exceptional circumstances, such as a customer requesting that proceedings continue, until 1 April 2021. The current consumer credit guidance means that before 31 January 2021 firms should not terminate a regulated agreement or repossess goods or vehicles under the agreement that the customer needs, except in exceptional circumstances. The FCA proposes to change this so that consumer credit firms will be able to repossess goods and vehicles from this date. However, this should only be as a last resort, and subject to complying with relevant government public health guidelines and regulations, for example on social distancing and shielding. Importantly, firms will also be expected to consider the impact on customers who may be vulnerable, including because of the pandemic, when deciding whether repossession of goods or vehicles is appropriate. The FCA explains that for customers who remain in payment difficulties under a relevant consumer credit agreement, continuing to restrict repossessions may not be in their interests. The shorter terms and higher interest rates on these agreements, combined with the depreciating value of the goods or vehicles, means that they could end up owing more in the long term if repossessions are prevented. The deadline for comments is 18 January 2021.
HMT response to consultation on expanding the dormant assets scheme
On 9 January, HMT responded to its joint consultation paper with the Department for Digital, Culture, Media and Sport on expanding the dormant assets scheme established under the Dormant Bank and Building Society Accounts Act 2008. The scheme strives to reunite people with their forgotten financial assets and where that’s not possible, support social and environmental initiatives. After ten years of operation, the current scheme is reaching a mature state, with significantly fewer funds flowing through the system each year. Having considered the responses to the consultation the government intends to legislate to include within the scheme: (i) proceeds of dormant life insurance and retirement income policies; (ii) proceeds of dormant shares or units in collective investments; (iii) dormant investment asset distributions and proceeds; (iv) proceeds of, or distributions from, dormant shares; and (v) unclaimed proceeds from corporate actions. Participants must first make efforts, based on industry best practice, to reunite assets with their owners. Only cash will be transferred into the scheme; any non-cash assets must first crystallise or be converted to cash before being eligible for transfer. Definitions of dormancy and reclaim values will be tailored to asset classes based on market practice and, where relevant and appropriate, existing regulations, to ensure as far as possible, that only genuinely dormant assets are transferred into the Scheme. The government recognises and welcomes the strong interest in the ways future funds can best be spent. Accordingly, it will consider whether this is an area that should be reviewed.
Please see the other sections for product-specific updates relating to Covid-19.
Third FCA Covid-19 financial resilience survey
On 8 January, the FCA announced that it was repeating its Covid-19 financial resilience survey for the third time. The survey has helped the FCA to obtain an accurate view of the impact of Covid-19 and supported its work to mitigate risks of harm to consumers, the market and competition within it. The FCA will send relevant firms the survey during the period of 13-19 January 2021 and completion is mandatory.
JMLSG on the implications of the end of the Brexit transition period on the JMLSG guidance
On 14 January, the JMLSG signposted the areas within its guidance that are impacted by the end of the Brexit transition period. The JMLSG explains that before legislative amendments to take Brexit into account were made, certain provisions in the MLRs were derived from the UK’s membership of the EU. There are still some references in the guidance based on the premise of the UK’s membership of the EU, which were in turn based on those provisions in the MLRs (prior to legislative amendments), which will be amended accordingly in due course. Affected areas include: (i) the definition of a ‘third country’ has become a country other than the UK, as opposed to outside the EEA; (ii) the same level of information is to be provided by UK payment service providers, regardless of whether funds are being transferred to/from EEA countries or any other third country; and (iii) specific references to observing ESA guidelines within the guidance. The JMLSG reminds firms that while the end of the Brexit transition period has not in itself increased the inherent AML/CTF risks, with regard to correspondent relationships involving the execution of payments, firms should take cognisance of the effectiveness of the AML/CTF regime of any third country when determining the extent of the due diligence measures to apply to respondents in that country.
MPs put tougher laws to ease prosecution of companies allowing financial crime on hold
On 13 January, the HoC debated a proposed amendment to the Financial Services Bill, to ease the prosecution of companies for failing to prevent financial crime. The amendment would introduce a new criminal offence holding individuals, corporates, and their directors to account for either facilitating or failing to prevent economic crime. It would also compel the government to publish a report into the standards of conduct and ethics of businesses regulated or authorised by the FCA, including consideration of the case for the establishment of a public inquiry. However, the vote on the amendment was abandoned, putting further reforms on hold. The government explained that it wished to wait for the outcome of the Law Commission’s review on corporate liability, which is due by the end of 2021.
FCA statement on financial crime systems and controls during Covid-19 pandemic to expire on 7 February 2021
On 8 January, the FCA updated its webpage that contains a statement on the FCA’s expectations as to firms' financial crime systems and controls during the Covid-19 pandemic, informing firms that the statement will no longer apply from 7 February 2021.
Please see the Sustainable Finance Section for ESMA’s letter to the EC on priority issues relating to the application of SFDR.
Markets and markets infrastructure
ECON adopts report on proposal for a directive of on credit servicers, credit purchasers and the recovery of collateral
On 14 January, the EP announced that its Economic and Monetary Affairs Committee (ECON) has adopted a report on the proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral. The measures foster the development of professional secondary markets for credit agreements originally issued by banks and qualified as non-performing. Third parties (credit purchasers) would be able to buy such NPLs across the EU. Credit purchasers (for example investment funds) are not creating new credit, but buying existing NPLs at their own risk. Therefore, they do not need special authorisation but will have to comply with consumer protection rules. Credit servicers, however are legal persons acting on behalf of credit purchasers and managing rights and obligations under a non-performing credit agreement such as payments collection or renegotiation of terms of the agreement. They will have to obtain authorisation and be subject to supervision by the member states’ competent authorities. The next step will be for the EP to consider the report in plenary. ECON MEPs also agreed to start negotiations with the Council of the EU and the EC.
Markets in Financial Instruments (Switzerland Equivalence) Regulations 2021
On 13 January, the Markets in Financial Instruments (Switzerland Equivalence) Regulations 2021 were published, together with an explanatory memorandum. This instrument is being made in order to specify that the legal and supervisory framework for stock exchanges in Switzerland meet at least equivalent outcomes to the UK’s corresponding regime. It will allow all investment firms subject to the trading obligation as set out in Article 23(1) of MiFIR, as it forms part of retained EU law (UK MiFIR) to trade shares that fall within scope of the share trading obligation on Swiss trading venues that have been recognised as equivalent. When HMT’s equivalence decision for Swiss trading venues enters into force on 3 February 2021, UK firms will be able to use BX Swiss AG and SIX Swiss Exchange AG to fulfil the share trading obligation.
ESMA reminds firms of the MiFID II rules on reverse solicitation
On 13 January, ESMA published a statement to remind firms of the MiFID II requirements on the provision of investments services to retail or professional clients by firms not established or situated in the EU. ESMA explains that since the end of the Brexit transition period, some questionable practices around reverse solicitation have emerged. For example, some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their Terms of Business or through the use of online pop-up “I agree” boxes whereby clients state that any transaction is executed on the exclusive initiative of the client. ESMA reminds firms, among other things that: (i) as provided in recital 111 of MiFID II “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”. This is true “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”; (ii) every communication means used, such as press releases, advertising on internet, brochures, phone calls or face-to-face meetings should be considered to determine if the client or potential client has been subject to any solicitation, promotion or advertising. Such a solicitation, promotion or advertising should be considered regardless of the person through whom it is issued: the third country firm itself, an entity acting on its behalf or having close links with such third country firm or any other person acting on behalf of such entity; and (iii) the provision of investment services in the EU without proper authorisation exposes service providers to the risk of administrative or criminal proceedings.
HMT provides clarity as to recognition of third country CCPs and EMIR 2.2
On 12 January, HMT published a letter (dated 11 January) from John Glen, Economic Secretary to HMT, sent to Lord Kinnoull, House of Lords European Union Committee Chair responding to his questions and clarifying certain aspects of EMIR 2.2: (i) EMIR 2.2 introduced new elements to the third country CCP recognition process. The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020 (S.I. 2020/646) transferred the power to make two delegated acts that further specify how the third country framework will apply in practice to the BoE. The BoE has identified this as a priority and will set out further details in due course; (ii) Under EMIR 2.2, ESMA shall assess Tier 2 UK CCPs for comparable compliance against Article 16 (Capital Requirements), Title IV (Requirements for CCPs) and Title V (Interoperability Arrangements). ESMA is yet to make any statement as to its approach and therefore Mr Glen cannot speculate on ESMA’s intentions; and (iii) the BoE-ESMA MoU is broadly similar to the cooperation arrangements the BoE formalised with the United States’ Commodity Futures Trading Commission in October 2020 and the BoE is satisfied that the arrangements concluded do not compromise its regulatory autonomy or jeopardise its statutory objectives. The MoU includes provisions on cooperation and information-sharing arrangements with respect to UK CCPs.
IBA launches ICE Term SONIA reference rats as a benchmark for use in financial instruments
On 11 January, the IBA announced in a press release that it has launched ICE Term SONIA Reference Rates (ICE TSRR) as a benchmark for use in financial instruments by licensees. The ICE TSRR are designed to measure expected (i.e. forward-looking) SONIA rates over one, three, six and 12 month tenor periods, and are based on a Waterfall Methodology using eligible prices and volumes for specified SONIA-linked interest rate derivative products. The launch of the ICE TSRR as a benchmark follows the conclusion of a testing period which started on June 25, 2020, during which IBA made available an initial, beta version of the ICE TSRR for information and testing purposes.
FCA, BoE and RFRWG on completing sterling LIBOR transition by end-2021
On 11 January, the FCA and BoE published identical press releases highlighting the need for firms to complete the transition from sterling LIBOR by the end of 2021. The Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published an update to its priorities and roadmap for the final year of transition to help businesses to finish planning the steps they will need to take in the coming months. The RFRWG’s top priority is for markets and their users to be fully prepared for the end of sterling LIBOR by the end of 2021. In particular, the RFRWG recommends that: (i) from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021. All businesses with existing loans in sterling should already have heard from their lenders about the transition, and those seeking a new or refinanced loan today should be offered a non-LIBOR alternative. Throughout the remainder of the year, existing contracts linked to sterling LIBOR should be actively transitioned where possible; and (ii) firms no longer initiate new linear derivatives linked to sterling LIBOR after the end of March 2021, other than for risk management of existing positions or where they mature before the end of 2021. The RFRWG welcomes the development of term SONIA reference rates (TSRRs) which are beginning to be made available by various providers. Alongside this, the RFRWG has engaged closely with the FMSB to support development of a market standard for appropriately limited use of TSRRs, consistent with the RFRWG’s objectives and existing recommendations on use cases of benchmark rates. The proposed FMSB standard is under review by key stakeholders during January and is expected to be released for public comment in February.
FCA revises expectation on market trading and reporting – Covid-19
On 8 January, the FCA updated the market trading and reporting section of its webpage providing information for firms on Covid-19. Given the extended duration of the working from home arrangements, the FCA now expects firms to record all relevant communications (including voice calls) when working outside the office. Firms should continue to take all steps to prevent market abuse risks. This could include enhanced monitoring, or retrospective reviews. The FCA will continue to monitor for market abuse and, if necessary, take action.
Firms should also submit regulatory data without undue delay.
ECB finalises guide on supervisory approach to consolidation in the banking sector
On 12 January, the ECB published a guide on its supervisory approach to consolidation for banks in the single supervisory mechanism (SSM). The ECB intends to clarify, within the current regulatory framework, the principles underpinning the prudential supervisory approach it follows when determining whether the arrangements implemented by a credit institution resulting from a consolidation ensure the sound management and coverage of its risks. The guide covers: (i) the overall approach to the supervisory assessment of consolidation projects; (ii) the supervisory expectations regarding consolidation projects; (iii) the supervisory approach to key prudential aspects of the consolidation transaction; (iv) the ongoing supervision of the newly combined entity; and (v) the application of this framework to consolidation transactions involving less significant institutions (LSIs). This guide does not cover banks under resolution. The ECB highlights that: (a) it will not penalise credible integration plans by setting higher Pillar 2 capital requirements. Furthermore, during the application process it will already communicate to the banks an indication of the capital levels the combined bank will need to maintain; (ii) supervisors expect the profits stemming from badwill (the difference between the re-evaluated book value of a bank and the price the acquirer pays) to play their role as capital of the combined bank. This means that banks are expected not to pay out in dividends profits stemming from badwill until the sustainability of the business model has been firmly established. The ECB expects the acquirer to take advantage of a relatively low acquisition price to increase sustainability; and (iii) the ECB will accept the temporary use of existing internal models, subject to a strong roll-out plan.
PRA consults on approach to supervision of international banks’ branches and subsidiaries
On 11 January, began consulting on its proposed approach to supervising the UK activities of PRA-authorised banks and designated investment firms that are headquartered outside of the UK, or are part of a group based outside of the UK. The PRA also proposes expectations for receiving information concerning risks in the wider group, and for co-operation from regulated entities and their supervisors, in order that it can be satisfied that firms are meeting threshold conditions. The PRA has published the draft supervisory statement ‘International banks: The PRA’s approach to branch and subsidiary supervision’ (Appendix), which will supersede SS1/18. The PRA explains that overall, its approach to the supervision of international banks remains stable and consistent following the UK’s withdrawal from the EU. The PRA consider that those firms which have operated in the UK for some time as either branches or subsidiaries should find the proposals to be in line with their experience of the PRA’s supervision. The proposed expectations on subsidiaries and systemic wholesale branches in the proposed SS are consistent with the PRA’s existing supervisory approach, and are intended to provide clarity to firms on what they need to do to meet the PRA threshold conditions. The BoE has also published a speech by David Bailey, BoE Executive Director Financial Market Infrastructure, in which he further sets out the PRA's approach to supervising international banks. Among other things, the speech covers: (i) what is meant by "responsible openness"; (ii) co-operation with home state supervisors; (iii) information sharing; (iv) governance; and (v) booking arrangements for trading activity. The consultation closes on 11 April 2021 and the PRA proposes the implementation date for the final policy would be in Q2 2021.
Recovery and resolution
ECA special report on resolution planning in the SRM
On 14 January, the European Court of Auditors (ECA) published a special report on resolution planning in the Single Resolution Mechanism (SRM). The ECA found that the SRM has made progress, but some key elements are missing and further steps are needed. The ECA report that policies did not yet address all relevant areas and revealed weaknesses. The resolution plans improved in quality but weren’t always in line with the requirements. Moreover, the SRB has not properly identified and dealt with obstacles to a bank’s resolvability. Meeting liquidity needs in resolution remains an issue of concern, the common backstop for the Single Resolution Fund might be insufficient to provide funding and the SRB is also yet to adopt its associated policy on “financial continuity”. Other important policies missing at SRB level include solid governance and information-sharing during bank resolution, given the need for extremely urgent decision-making. Moreover, despite the recommendation in the auditors’ report on their 2017 audit of the SRB, policies were still not binding on internal resolution teams (comprising SRB and NRA staff), allowing considerable discretion in drafting resolution plans. The ECA flag other key issues concerning the legislators: the need for better alignment between the resolution framework and the various national insolvency frameworks applicable to banks; the fact that the rules on burden sharing and State aid differ according to the option chosen (resolution or insolvency) to deal with a failing bank. Lastly, the auditors recommend that the legislation lay down objective and quantified thresholds for triggering early intervention measures and reaching the decision that a bank is failing or likely to fail.
ESMA letter to EC on priority issues relating to SFDR application
On 14 January, ESMA published a letter (dated 7 January 2021) to the EC, on several important areas of uncertainty in the interpretation of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) that the ESAs have encountered during the course of the work on the SFDR draft regulatory technical standards. ESMA explains that while many of these interpretative uncertainties of SFDR may be clarified in due course, the ESAs have identified certain priority questions pertaining to the SFRD that would benefit from a more urgent clarification to facilitate an orderly application of SFDR from 10 March 2021: (i) the application of SFDR to non-EU Alternative Investment Fund Managers (AIFMs) and registered AIFMs; (ii) application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group; (iii) the meaning of “promotion” in the context of products promoting environmental or social characteristics; (iv) the application of Article 9 of SFDR; and (v) the application of SFDR product rules to portfolios and dedicated funds.
Financial Services Bill progresses through Parliament
On 14 January, the HoL held its first reading of the Financial Services Bill 2019-21. This stage is a formality that signals the start of the Bill's journey through the HoL. The second reading, the general debate on all aspects of the Bill, is scheduled to take place on 28 January 2021. On 13 January, the HoC held the report stage and third reading of the Financial Services Bill 2019-21.
FMLC highlights areas of legal uncertainty in Financial Services Bill
On 14 January, the FMLC published a letter (dated 13 January), sent to HMT, highlighting two areas of legal uncertainty arising from provisions in the Financial Services Bill (FS Bill) 2019-21. Firstly in relation to regulations about financial collateral arrangements, Clause 36 of the FS Bill is designed to fix a problem with the Financial Collateral Arrangements (No. 2) Regulations 2003, which implement Directive 2002/47/EC on financial collateral arrangements. The scope of the 2003 Regulations is broader than the Financial Collateral Arrangements Directive, which has led to concern that the 2003 Regulations might be ultra vires the powers in Section 2 of the European Communities Act 1972. Clause 36 of the Bill acts retrospectively to cure any lack of vires in the making of the 2003 Regulations. The FMLC urges the Government to consider adding a provision to Clause 36 of the Bill establishing a cut-off date for cases, at which time parties affected by the retrospectivity and aware of their rights had had an opportunity to start proceedings, so as to not interfere with asserted claims and to adhere to the ECHR standard for retrospective legislation. Secondly, in relation to benchmarks the FMLC notes that the Bill amends the UK’s onshored version of the BMR to provide an overarching legal framework which gives the FCA new and enhanced powers to manage the wind-down of a critical benchmark. The Bill empowers the FCA to help those who cannot amend their contracts by directing the administrator of LIBOR to change the methodology used to compile the benchmark, creating a so-called ‘Transition LIBOR’. The FMLC believes it is unclear: (i) the extent to which market participants can rely on the index beyond a wind-down period and/or beyond the limited range of “tough legacy” contracts highlighted by the FCA; and (ii) how the UK measures will interact with EU and US measures. The FMLC considers that the problem of potential conflict and overlap is a pressing one.
FCA Market Watch issue 66
On 11 January, the FCA published issue 66 of Market Watch, its newsletter on market conduct and transaction reporting issues. In this issue, the FCA sets out its expectations for firms on recording telephone conversations and electronic communications when alternative working arrangements are in place, including increased homeworking. The FCA expects firms: (i) to continue to comply with the recording obligations in its Senior Management Arrangements, Systems and Controls sourcebook (SYSC 10A), which remain the same. Firms will need to ensure that, if unmonitored and/or encrypted communication application such as WhatsApp are used for in-scope activities on business devices, they are recorded and auditable; (ii) to which the recording regime in SYSC 10A applies, to take reasonable steps to record telephone conversations and keep a copy of electronic communications of activities falling within scope of the recording rules. Firms must ensure that their recording policies can identify calls and communications that directly relate to the performance of in-scope activities; (iii) to have effective, up-to-date recording policies and be able to demonstrate to the FCA, on request, that their policies, procedures and management oversight meet the recording rules. This includes policies and procedures adopted for home working arrangements. Policies should identify which telephone conversations and electronic communications are subject to recording requirements. They must also contain procedures to follow where breaches or gaps are identified. Where new or amended recording policies are needed, these should be clearly set out in writing, documented and signed off under appropriate governance arrangements; and (iv) to provide enhanced or refreshed training to staff covering the use of new technologies and conduct risks arising, if new or amended policies are introduced. The FCA notes that there is no specific restriction on the technologies or apps firms can use for communications. However, in all cases firms must understand the recording obligations and have effective policies, controls and oversight to ensure that these are met.