Key Regulatory Topics: weekly Update 8 October to 14 October 2021
15 October 2021
Please see the section for an update on FCA Handbook Notice 91, which summarises the legislative changes made to the FCA Handbook by the Consumer Credit (Fixed Instalment Plan Repayment Allocation) (Amendment) Instrument 2021.
FCA Analysis of Firms’ 2017-2020 REP-CRIM data
On 7 October, the FCA published an analysis of the annual financial crime reporting obligation (REP-CRIM) submissions of the firms which it supervises for the three reporting periods between 2017 and 2020. This analysis aims to provide industry practitioners insights on trends and developments, which should help inform the arrangements and risks of their respective firms. The key observations of the report include: (i) firms reported a substantial decrease of Politically Exposed Persons (PEPs) as customers, from 111,000 PEP customers in 2017/2018 to approximately 89,000 in 2019/2020 and 2018/2019, in part attributed to the amendment of the FCA’s 2017 guidance to exclude reporting certain domestic customers as PEPs; (ii) retail banking firms reported approximately 390,000 high-risk customers in 2019/2020. This is almost half the high-risk customers reported by all firms, and reflects the sector’s business models which increase their exposure and vulnerability to being used for the purposes of money laundering; (iii) the number of suspicious activity reports (SARs) reported to the National Crime Agency (NCA) witnessed a 22% increase, from 394,048 in 2017/2018 to 480,202 in 2019/2020; (iv) the number of firms reporting automated sanctions screening is increasing year on year, with a 16.5% increase over these three reporting periods. Nevertheless, the investment management sector has the highest number of firms that do not use automatic screening; and (v) in 2019/2020, firms which submitted the REP-CRIM collectively employed approximately 17,000 full-time equivalent staff in financial crime roles, compared to roughly 15,700 in 2017/2018.
European Parliament’s In-depth Analysis: Preventing money laundering in the banking sector
On 1 October, the EP published a paper aimed at preventing money laundering in the banking sector, by reinforcing the supervisory and regulatory framework. This paper provides an overview of current initiatives and actions aimed at reinforcing the anti-money laundering (AML) supervisory and regulatory framework in the EU, in particular from a Banking Union perspective. This briefing includes: (i) the EU framework for fighting money laundering, including legislation (5th AML Directive) and various Commission and Council Action Plans; (ii) an overview of AML prevention relevant authorities at the EU and national level; (iii) the 2019 review of the founding regulations of the European Supervisory Authorities; and (iv) the latest proposed changes to the AML framework, as proposed by the Commission in July.
FSB Progress Report on regulation, supervision and oversight of “global stablecoin” arrangements
On 7 October, the Financial Stability Board (FSB) published a report on the progress made regarding the implementation of its recommendations for regulation, supervision and oversight of “global stablecoin” arrangements. The report: (i) discusses key market and regulatory developments since the publication of the FSB high-level recommendations; (ii) takes stock of the implementation of the FSB high-level recommendations across jurisdictions; (iii) describes the status of the review of the existing standard-setting body (SSB) frameworks, standards, guidelines and principles; and (iv) identifies areas for consideration for potential further international work. Among other things, the report notes that: (i) while the current generation of so-called stablecoins are not being used for mainstream payments on a significant scale, vulnerabilities in this space have continued to grow over the course of 2020-2021; (ii) the implementation of the FSB high-level recommendations across jurisdictions is still at an early stage; (iii) jurisdictions have taken, or are considering, different approaches towards implementing the high-level recommendations. This could give rise to the risk of regulatory arbitrage and harmful market fragmentation; (iv) standard-setting bodies (including BCBS, CPMI, and IOSCO) are still assessing whether and how existing international standards may apply to stablecoin arrangements; (v) by using the FSB high-level recommendations in developing their own domestic regulatory approaches, authorities have identified several issues relating to the implementation of the recommendations that may warrant further consideration, and where further work at international level could be useful; and (vi) the FSB will continue to support the effective implementation of the FSB high-level recommendations and facilitate coordination among SSBs. The FSB will undertake a review of its recommendations in January 2022, to identify how any gaps could be addressed by existing frameworks. If needed, the FSB will update its recommendations.
CPMI calls for ideas on solutions to expand PvP settlement
On 7 October, BIS released a statement from CPMI, where it called for ideas on solutions to expand payment-versus-payment (PvP) settlement mechanisms. This emerges as a response to the 2019 BIS Triennial FX survey (Triennial), which illustrated that FX settlement risk remains significant with the proportion of total trades settled globally with PvP protection estimated to be below 40%. As part of the G20 cross-border payments roadmap, CPMI is currently developing proposals for increased PvP adoption by encouraging enhancements to existing PvP arrangements. CPMI is now inviting interested parties, including commercial banks, e-money operators and other fintech companies, to share their views on potential solutions to expand PvP settlement to a wider range of transactions, by responding to specific questions. The information collected will assist CPMI in facilitating the increased adoption of PvP under Building Block 9 of the cross-border payments programme. Interested parties need to e-mail their responses by 12 November. CPMI will hold a Q&A workshop on 5 November for engaging parties to ask follow-up questions.
IOSCO and CPMI consult on the application of the Principles for Financial Market Infrastructures to stablecoin arrangements
On 6 October, IOSCO and CPMI published a consultative report on the application of the Principles for Financial Market Infrastructures (PFMI) to stablecoin arrangements. The report offers additional guidance on how certain aspects of the PFMI apply to the novel features of stablecoin arrangements (SAs). The view of IOSCO and CPMI is that the SA’s function of transferring of coins between users (‘transfer function’) is comparable to the transfer function performed by other types of financial market infrastructure (FMI). Therefore, a SA performing a transfer function is considered an FMI for the purpose of applying the PFMI, and if the SA is determined by relevant authorities to be systemically important, the PFMI principles applying to payments system will entirely apply to such SA. The report provides: (i) considerations to assist relevant authorities in determining whether an SA is systemically important. Authorities should consider the size of the SA, the nature and risk profile of the SA’s activity, the interconnectedness and interdependencies of the SA, as well as its substitutability; and (ii) guidance on the application of the PFMI with respect to these features of SAs. The guidance relates to governance (principle 2), comprehensive risk management (principle 3), settlement finality (principle 8) and money settlements (principle 9). The deadline for comments is 1 December.
Markets and markets infrastructure
ECSDA updates CSDR Penalties Framework
On 5 October, European Central Securities Depositories Association (ECSDA) published the updated version of its CSDR Settlement Fails Penalties Framework. This framework applies to all central securities depositaries (CSDs) subject to the EU Central Securities Depositories Regulation (909/2014) or similar regulation. It aims to create a harmonised set of rules for settlement discipline mechanisms. The previous version of the framework was published by ECSDA in December 2020.
ISDA updates RFR conventions and IBOR fallbacks
On 4 October, the International Swaps and Derivatives Association (ISDA) published an updated version of its risk-free rates (RFRs) conventions and IBOR fallbacks product table. The table sets out how the fallbacks in ISDA’s amended documentation would function for various different products, including certain non-linear products. The chart also sets out the standard conventions for the same products that reference IBORs, and the standard for such products that reference RFRs as of the date of this document. The table is intended to help counterparties understand how the fallbacks would function in their legacy and new derivatives that reference IBORs. ISDA expects to update this document from time to time to reflect developments, including new conventions and publication of new benchmarks.
CMA responds to government’s consultation on proposals for reforming competition policy
On 4 October, the CMA published its response to the consultation issued by the Department for Business, Energy and Industrial Strategy (BEIS) in July, on proposals to reform competition and consumer policy. The Consultation proposals include the bolstering of the CMA’s powers, enhancement of consumers’ rights and ensuring that those consumer rights are robustly enforced. In its response, the CMA states that it welcomes the government’s commitment to legislative reform, and that it stands ready to offer the government assistance and support as they are taken forward. However, the CMA notes that the government has not taken forward some of the CMA’s February 2019 recommendations, including: (i) the proposals for the CMA, and the courts, to have an overriding duty to promote the interests of consumers; (ii) aligning the scope of the market investigation reference test with the market study’s ‘adverse effects on consumers’ assessment; and (iii) a new statutory requirement on the CMA to conduct its investigations swiftly, while respecting parties’ rights of defence. The CMA further notes that the consultation proposes important but incremental, rather than radical, change to the competition regime, and that there are no proposals to transform the key elements of UK competition law.
CMA responds to government’s consultation on new pro-competition regime for digital markets
On 4 October, the CMA published its response to the government’s July proposals to create a new pro-competition regime for digital markets, by empowering the Digital Markets Unit (DMU). This consultation followed the advice of the CMA’s Digital Markets Taskforce, as well as the recommendations of the Digital Competition Expert Panel, chaired by Professor Jason Furman. The consultation, among others, proposed the establishment in legislation of a DMU to oversee the regime, and sought views on the criteria and mechanisms that will identify which firms fall within the scope of the new regime, as well as the objectives and scope of the DMU. In its response, the CMA strongly supports the government’s proposals to create a new pro-competition regime for digital markets, given that it holds the view that competition in these markets is not working as it should. In particular, the CMA highlights the following key aspects of the government’s proposals: (i) the Strategic Market Status (SMS) test – the CMA agrees that the regime should be focused on firms with substantial and entrenched market power in at least one activity for which digital technologies are a core component; (ii) Codes of Conduct – the CMA considers that these will be primordial in setting out the ‘rules of the game’ for SMS firms, with the objective of promoting fair trading, open choices and trust and transparency in digital markets. In the CMA’s view, the DMU should hold the power to devise legally binding obligations on firms, in line with the government’s objectives for the regime, that can be tailored to the business models of each firm; and (iii) working with other regulators – in the CMA’s view, the DMU will need to work closely with these regulators to ensure approaches are effectively coordinated, especially by requiring information-sharing and close joint-working between regulators. The CMA and the non-statutory DMU (established in shadow form in April) will continue to provide all practical support to the government in the development of the regime.
ESMA call for evidence on retail investor protections
On 1 October, ESMA published a call for evidence on a number of retail investor protection topics under MiFID II. These views will feed into ESMA’s technical advice to the EC on the development of its strategy for retail investment. ESMA is requesting information from stakeholders on three topics: disclosures, digital disclosures and digital tools and channels. The deadline for responses is 27 July.
Payment services and payment systems
Pay.UK/BoE Consultation response on Purpose Codes in ISO 20022 Payment Messaging
On 7 October, Pay.UK and the BoE published a consultation response paper summarising feedback received to their consultation on the draft UK Purpose Code list for the ISO 20022 payment messaging standard, and the BoE’s approach to implementing the recommended UK Purpose Code list in CHAPS. Purpose Codes are four letter codes which are carried across the payment chain, providing information to all users in the payments chain to indicate the reason a payment is being made. Among other things, the report concludes that: (i) the BoE and Pay.UK received broad agreement on the benefits of Purpose Codes, and broad support for shortening the UK Purpose Code List; (ii) the BoE and Pay.UK jointly developed the final recommended UK Purpose Code List in Annex B, and included two new Purpose Codes (governed and approved by ISO) covering “property payments” and “gambling”; and (iii) from spring 2024 onwards, the BoE will mandate the use of Purpose Codes for CHAPS payments between financial institutions and for property transactions, and after 2026 the Bank will explore mandating the use of Purpose Codes in CHAPS.
Commission Implementing Decision (EU) 2021/1753 on third countries equivalence for the purposes of the treatment of exposures under CRR, published in the OJ
On 4 October, the Commission Implementing Decision (EU) 2021/1753 on the equivalence of the supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures in accordance with the Capital Requirements Regulation (575/2013) (CRR) has been published in the OJ. Among other things, the Implementing Decision establishes a list of third countries and territories, listed in Annex VI to this Decision, which shall be considered as applying supervisory and regulatory arrangements equivalent to those applied in the Union for the purposes of Article 391, CRR. The Implementing Decision will enter into force on 24 October.
Recovery and resolution
Commission Implementing Regulation on ITS for contractual recognition of write down and conversion powers under BRRD published in OJ
On 4 October, the Commission Implementing Regulation (EU) 2021/1751 laying down implementing technical standards (ITS) supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) with regard to uniform formats and templates for notifications of determination of the impracticability of including contractual recognition of write down and conversion powers was published in the OJ. The Commission adopted the Implementing Regulation on 1 October. It will enter into force on 24 October.
OECD Reports on ESG investing, climate transition and financial markets
On 4 October, the OECD published two reports focused on sustainable finance and climate transition. The two reports are: (i) ESG Investing and Climate Transition: Market Practices, Issues and Policy Considerations. This report highlights the main findings from recent OECD research on ESG rating and investing. It offers policy considerations to strengthen ESG practices to foster global interoperability and comparability, as well as encourage greater alignment of environmental metrics with a low-carbon transition. This serves as an input report to the G20 Sustainable Finance Working Group; and (ii) Financial Markets and Climate Transition: Opportunities, Challenges and Policy Implications. This second report focuses on the critical contribution financial markets must play towards achieving an orderly transition to low-carbon economies, and the policies needed to support this.
EBA publishes 2022 work programme
On 5 October, the EBA published its annual work programme for 2022, which describes the activities and tasks of the EBA as well as its key strategic areas of work for the coming year. For 2022, the EBA has five “vertical” strategic priorities: (i) to monitor and update the prudential framework for supervision and resolution – among other things, the EBA will focus on further developing its resolvability guidelines, monitoring the implementation of the framework and fostering convergence, and supporting the EC in the crisis management and deposit insurance review; (ii) to revisit and strengthen the EU-wide stress-testing framework – the EBA will focus on putting into practice the revised new framework and work on the new methodology for the next EU-wide stress test; (iii) to continue its work on its data strategy and leverage the European centralised infrastructure for supervisory data to bring more value to the EBA’s stakeholders through data – the EBA will start collecting from the ECB payment fraud data under the EBA Guidelines on fraud reporting for all EU countries, as well as data stemming from the new CRD/CRR package and supervisory data relating to investment firms; (iv) Digital Resilience, Fintech and Innovation – among other things, the EBA will start preparing a number of technical standards and guidelines for a supervisory role for crypto-asset issuers and a role in the oversight of third-party providers, which are new mandates deriving from the Digital Operational Resilience Act and Markets in Crypto-assets Regulation; and (v) to fight AML/CFT and contribute to a new EU infrastructure – among other things, the EBA intends to use its database proactively to ensure that ML/TF risks are addressed by competent authorities and financial institutions in a timely and effective manner.
ECB Banking Supervision’s post-pandemic priorities – the way forward
On 5 October, Edouard Fernandez-Bollo, member of the Supervisory Board of the ECB, delivered a speech at the SmithNovak Global NPL Summit, where he addressed the ECB Banking Supervision’s post-pandemic priorities. Mr Fernandez-Bollo highlighted: (i) the need to avoid risk complacency – the results of the recent stress test exercise conducted by the ECB are indicative of increased banking sector resilience and suggest that euro area banks could cope with further adverse economic developments. Nevertheless, Mr Fernandez-Bollo explained that various risks related to the pandemic still need to be addressed, and proactive and advanced risk management tools will be crucial to keep credit risks in check and safeguard the bank lending channel’s ability to support the real economy; (ii) the urgent need for banks to effectively incorporate climate risks into risk governance frameworks – in 2022, the ECB will conduct a full supervisory review of banks’ practices for incorporating climate risks into their risk frameworks, as it gradually rolls out a dedicated supervisory review and evaluation process (SREP) methodology that will eventually influence banks’ Pillar 2 capital requirements. The ECB will also carry out a supervisory stress test focusing on climate-related risks, the methodology for which will soon be shared with the banks under its supervision; and (iii) the need to address the structural challenges to the stability of the banking system, essentially by investing in digitalisation.
FCA publishes a number of skilled person reports commissioned in Q2 2021/22
On 5 October, the FCA published a report summarising the number of skilled persons reports commissioned in Q2 2021/22 (July – September 2021). The data published by the FCA shows that more than half of the skilled person reports it commissioned between July and September this year related to retail investments or investment management. This reflects concerns previously expressed by the regulator regarding the investment sector. For now, the FCA seems to be focusing on concerns regarding firm’s controls and risk management frameworks.
FOS consults on temporary changes to reporting the outcomes of proactively settled complaints
On 4 October, the FOS published a consultation paper on temporary changes to reporting the outcomes of proactively settled complaints, to help it move faster in reducing customer waiting times. The FOS explains facing a significant operational challenge following unprecedented demand for its help during the pandemic, as it received 90,000 more cases than expected, which businesses had been unable to resolve for their customers. This has made the progression of some complaints more difficult, with too many customers waiting too long for an answer to their complaint. The FOS is on track to exceed the complaint resolution target set out in its 2021/22 plans, however, it would still end the year with a significant queue. Therefore, the FOS is exploring a range of initiatives and innovations to move faster and help more customers. This includes a temporary proposed change to how the FOS publish firm-specific complaints data, to encourage financial businesses to settle some of their complaints proactively and pragmatically. The deadline for comments on the consultation is 18 October. The FOS will then consider all the feedback received, and publish a decision confirming how it will proceed by 1 November.
Joint Statement on the EU-U.S. Joint Financial Regulatory Forum
On 4 October, the EC published a joint statement by participants of the EU-US Joint Financial Regulatory Forum following a meeting held on 29 and 30 September. Participants included representatives of the EC, EBA, ESMA, EIOPA, and ECB, and officials from the US Department of the Treasury, the Board of Governors of the FRB, and representatives from the Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), and the Securities and Exchange Commission (SEC). The Forum focused on various themes which included: (i) market developments and current assessment of financial stability risks – in the light of the uncertain economic outlook, participants recognised that cooperative international engagement to mitigate financial stability risks remains essential; (ii) sustainable finance – participants recognised the importance of addressing climate-related challenges for the financial sector and discussed their priorities relating to sustainable finance, along with addressing climate-related financial risks; (iii) multilateral and bilateral engagement in banking and insurance – participants discussed the implementation of Basel III reforms, the treatment of foreign bank branches; (iv) regulatory and supervisory cooperation in capital markets – participants discussed progress in their respective legislative and supervisory efforts to ensure a smooth transition away from LIBOR, exchanged views on the upcoming EU reviews of the AIFMD and of the MiFIR, and took stock of ongoing discussions regarding data transfers and the registration of EU funds in the United States; and (v) financial innovation – participants shared views on developments regarding financial innovation and recent efforts by the EU and the US to improve operational resilience in the financial sector. They also discussed considerations regarding any potential central bank digital currencies and exchanged views on recent developments including regulatory proposals involving new forms of digital payments. Participants will continue to engage on these topics ahead of the next Forum meeting, which is expected to take place in early 2022.
BoE’s report on the Bank’s official market operations 2019-2021
On 4 October, the BoE published the first in-depth evaluation of its market operations. Following a recommendation by the Bank’s Independent Evaluation Office, every three years the BoE publishes such evaluation, allowing for a stocktake of policy developments over a broader time period. This first report provides a factual update on the Bank’s official market operations over 1 March 2019 to 28 February 2021, and details some of the important policy developments and debates over the past three years, as well as the BoE’s response to Covid. The report: (i) explains the structure and objectives of the Bank’s market operations; (ii) summarises Sterling Monetary Framework (SMF) membership growth over the review period; (iii) outlines the Bank’s Covid response over 2020; (iv) describes the Bank’s monetary policy operations and the key policy debates and developments in this area; (v) outlines usage of the Bank’s liquidity insurance facilities over the review period; (vi) summarises ongoing work to review the Bank’s policy toolkit in response to new challenges (evolving market structures, the operational implications of the ELB, climate risks and digital money); (vii) outlines developments in the Bank’s communication with participants, market contacts and the general public; and (viii) discusses the Bank’s risk management framework and developments in this area over the past three years.
FCA Handbook Update
On 1 October, the FCA published Handbook Notice 91, which summarises the legislative changes made to the FCA Handbook by the FCA Board on 30 September. The Handbook Notice describes the changes made to the Handbook by the following two instruments: (i) Consumer Credit (Fixed Instalment Plan Repayment Allocation) (Amendment) Instrument 2021 (FCA 2021/35). This instrument amends Chapter 6.7 of the Consumer Credit sourcebook (CONC) to offer firms a greater variety of fixed instalment plans as a feature of their credit card products, to support innovation and competition in the credit card market. This instrument came into force on 1 October; and (ii) Handbook Administration (No 57) Instrument 2021 (FCA 2021/37). This instrument makes minor changes to various modules of the FCA Handbook, including amendments to the Glossary definition of ‘execution-only transaction’ to insert a reference to COBS 10A inadvertently omitted during MiFID II implementation, the Glossary definition of ‘higher paid material risk taker’ to ensure that its rules and guidance on remuneration for dual-regulated firms remain consistent with the PRA, and to SUP to change references of ‘Contact Centre’ to ‘Supervision Hub’ for clarity and consistency. The instrument comes into force on 1 October. These changes were not consulted on separately because they are minor amendments which correct or clarify existing provisions which have previously been consulted on. None of these amendments represent any alteration in FCA policy.
ESMA Summary of Conclusions
On 1 October, ESMA published a summary of conclusions of its management board. Topics discussed included: (i) exceptionally delaying the second payment by Credit Rating Agencies (CRAs); (ii) supervision of data reporting service providers and benchmark administrators; (iii) the 2021 supervisory convergence heat map; (iv) the level of existing and emerging risks in EU financial markets, in particular cyber security, procyclicality risk in central clearing and the impact of Covid-19; and (v) the Union Strategic Supervisory Priorities.