Key Regulatory Topics: Weekly Update 9 - 15 April 2021
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In this week’s update, we would like to draw your attention to the PRA’s new webpage on holding company approvals and our recent publication on this topic.
Brexit
Please see our Consumer/Retail, Markets and Markets Infrastructure and Other Developments sections for product-specific updates relating to Brexit.
Conduct
Please see our Consumer/Retail section for an update on the FCA’s Dear CEO letter on obtaining deposits via Deposit Aggregators (i.e., providers of intermediary services who sit between savings account providers and retail customers).
FSB report on peer review on the implementation of financial sector compensation reforms in the UK
On 14 April, the FSB published a report on its peer review on the implementation of financial sector compensation reforms in the UK. The review focuses on the steps taken by the PRA and the FCA to implement the FSB’s Principles and Implementation Standards (P&S) for Sound Compensation Practices and to assess the effectiveness of financial sector compensation reforms in the UK. The FSB states that the PRA and the FCA have implemented reforms that are consistent with the P&S. The FSB notes that in combination with the SM&CR, the remuneration regime has helped firms become more disciplined in mapping responsibilities, and has resulted in greater consistency and transparency on acceptable remuneration practices. Notwithstanding this progress, the review concludes that steps can be taken to further strengthen the financial sector compensation framework in a few areas by: (i) reviewing the interaction between the UK’s remuneration framework and the SM&CR, including how their interplay rewards diligent and proactive risk management; (ii) streamlining data collection for so-called ‘level one’ banks and investment firms and collecting remuneration data from a broader range of firms; (iii) considering other supervisory approaches for assessing the effectiveness of the remuneration regime, such as additional thematic reviews and onsite visits; and (iv) providing additional guidance on remuneration for the insurance sector to promote clarity and consistency of outcomes. The report includes recommendations to the PRA and the FCA on these issues. In addition, the PRA and the FCA have published a joint statement welcoming the findings of the report.
Consumer/Retail
Please click here to listen to the 6th episode of our In Credit Podcast series. In this episode of In Credit, A&O consumer finance team Joanne Owens, Victoria Ferres and Sophie Skeet are joined by A&O Consulting executive director Claire Haydon to discuss the FCA’s long-awaited finalised guidance on vulnerable customers. This guidance applies to all firms where the FCA’s Principles for Businesses apply, regardless of sector and to the supply of products or services to retail customers even if a firm does not have a direct client relationship with the customer. In this episode, the panellists explain how firms should understand the harms their customers may be vulnerable to throughout the whole customer journey so that those firms can ensure that vulnerable customers receive the same fair treatment and outcomes as other customers.
Please see our Markets and Markets Infrastructure section for an update on ESMA’s conclusions of its Board of Supervisors’ meeting on 23 February.
Please see our Payment Systems and Payment Services section for an update on the LSB’s blog post on the power of prevention in the fight against APP fraud.
FCA Dear CEO letter on obtaining deposits via Deposit Aggregators
On 14 April, the FCA published a Dear CEO letter highlighting the risks associated with the increasing volumes of deposits that are placed with banks and building societies (firms) via Deposit Aggregators and how to mitigate them. Deposit Aggregators are providers of intermediary services who sit between savings account providers and retail customers. The letter also outlines some of the key responsibilities for which firms will be held accountable. Specifically, the letter includes commentary on: (i) depositor protection, financial promotions and customer awareness; (ii) managing liquidity risk; and (iii) senior management oversight. In terms of next steps, the FCA expects firms to: (a) have discussions at the appropriate level and consider addressing any aspects that are directly relevant to their business models; (b) consider the extent to which their deposit books rely on business sourced via Deposit Aggregators and whether this requires any action to be taken; (c) consider measures to achieve a faster customer repayment by the Financial Services Compensation Scheme (FSCS) in the event of need; (d) look at widening the information provided to the FSCS, FCA or PRA to include both information about the Deposit Aggregators used by firms and the level of deposits coming via them, and whether they use a ‘direct’ or ‘trust’ model which will support swift pay-out; and (e) consider the level of transparency regulated firms have regarding the beneficial owners of deposits sourced from Deposit Aggregators.
FCA reminds consumer credit firms of post-Brexit changes
On 13 April, the FCA published a new webpage on changes for consumer credit firms post-Brexit. Specifically, the FCA lists out the changes that will come into force from 1 June, affecting firms subject to: (i) Regulation 8 of the Disclosure Regulations; (ii) Regulations 10 and 11 of the Disclosure Regulations; and (iii) CONC 2.7.2R(4)(a) in the FCA Handbook.
Covid-19
Please see the other sections for product-specific updates relating to Covid-19.
Fintech
Please see our Other Developments section for an update on the FCA’s speech on regulating the UK as a global financial centre.
Fund regulation
Please see our Other Developments section for an update on the FCA’s speech on regulating the UK as a global financial centre.
Markets and Infrastructure
Please see our Other Developments section for an update on the FCA’s speech on regulating the UK as a global financial centre.
ESMA’s final report highlights need for increased efforts on EMIR and SFTR data quality
On 15 April, ESMA published its final report on EMIR and SFTR data quality. The report covers the progress made to date in improving EMIR data quality for regulatory and supervisory use and concludes that, while good progress has been made, additional efforts are needed by national competent authorities (NCAs) and ESMA to further improve EMIR data quality. The report is the first review of data quality since the introduction of the EMIR and SFTR reporting regimes. It also reviews the quality of data reported by trade repositories and gives an overview of actions taken by both ESMA and the NCAs to improve data quality.
ESMA responds to the European Systemic Risk Board (ESRB) on the procyclical impact of downgrades of corporate bonds on markets and entities across the financial system
On 13 April, ESMA published a letter (dated 29 March) from its Chair, Steven Maijoor, replying to the ESRB’s letter on the procyclical impact of downgrades of corporate bonds on markets and entities across the financial system. In the letter, Mr Maijoor replies to some of the key issues mentioned in the ESRB’s letter – specifically, Mr Maijoor focuses on the two actions proposed in the ESRB’s letter regarding the transparency of Credit Rating Agency (CRA) methodologies and contractual references to credit ratings, by providing an overview of: (i) the current state of play from a regulatory perspective, highlighting aspects of the CRA Regulation and ESMA’s activities that are relevant in the context of the ESRB’s letter; (ii) ESMA’s preliminary observations on the definition of ratings, the rating “through-the-cycle” concept and the timely incorporation of information in credit ratings by CRAs; and (iii) possible follow-up work on contractual references to credit ratings and the transparency on some of the more technical aspects of CRA methodologies.
ESMA updates statement on the implementation of Legal Entity Identifier (LEI) requirements for third-country issuers under the SFTR reporting regime
On 13 April, ESMA updated its statement on the implementation of LEI requirements for third-country issuers under the SFTR reporting regime. The updated LEI statement maintains ESMA position as described in its original statement that was published on 6 January 2020 and provides an extended timeline for the reporting of LEIs of third-country issuers of securities used in Securities Financing Transactions (SFTs) until 10 October 2022. The updated statement also sets out the expectations towards Trade Repositories and counterparties, as well as the relevant supervisory actions to be carried out by authorities.
FSB FAQs on global securities financing data collection and aggregation
On 12 April, the FSB published a FAQs on global securities financing data collection and aggregation. The FAQs have been prepared by the FSB’s Data Experts Group on Securities Financing Transactions (SFTDEG) to help the national implementation of the FSB’s data standards and processes for collecting and aggregating global data on SFTs (the SFT Data Standards). As market practices evolve, the SFTDEG will continue to update the FAQs as needed going forward.
EC Implementing Decision on equivalence of US designated contract markets (DCMs) under EMIR published in the OJ
On 12 April, EC Implementing Decision (EU) 2021/583, amending Implementing Decision (EU) 2016/1073 on the equivalence of designated contract markets in the US in accordance with EMIR, was published in the OJ. The text explains that since the adoption of Implementing Decision (EU) 2016/1073, a number of additional DCMs established in the USA have obtained authorisation from the CFTC to trade in derivatives. In light of the information received from the CFTC, those additional DCMs comply with the legally binding requirements that are equivalent to the requirements for EU regulated markets laid down in Title III of Directive 2014/65/EU. The Implementing Decision came into force on 15 April (three days after publication in the OJ).
EC report on whether trades that directly result from post-trade risk reduction services should be exempted from the clearing obligation for OTC derivatives under EMIR
On 12 April, the EC published a report to the EP and Council of the EU on whether trades that directly result from post-trade risk reduction services should be exempted from the clearing obligation for OTC derivatives under EMIR. The report explains that Article 85(3)(c) of EMIR mandates the EC to report to the EP and the Council on whether trades that directly result from post-trade risk reduction services (PTRR services), including portfolio compression, should be exempt from the clearing obligation referred to in Article 4(1) of EMIR. Specifically, Article 85(3)(c) requires the EC to take into account the three following aspects, namely: (i) the extent to which PTRR services mitigate risk, in particular counterparty credit risk and operational risk; (ii) the potential for circumvention of the clearing obligation if an exemption was to be granted; and (iii) the potential disincentive to central clearing if an exemption was to be granted.
ESMA interim templates for simple, transparent and standardised (STS) synthetic securitisation notifications
On 9 April, ESMA published the interim STS notification templates for synthetic securitisations following amendments to the Securitisation Regulation. The interim templates allow originators to notify ESMA of synthetic securitisations that meet the STS criteria. ESMA explains that the amended Securitisation Regulation extends the STS framework to synthetic securitisations – as with traditional securitisations, only those synthetic securitisations that meet pre-defined STS requirements will be published on ESMA’s website. ESMA notes that until the date of the application of the RTS specifying the content and the format of STS notifications for synthetic securitisations, originators can make the necessary information available to ESMA in writing during the interim period.
Interim Notification Templates for STS synthetic securitisations
ESMA Board of Supervisors’ conclusions including views exchanged with the FCA
On 9 April, ESMA published a summary of conclusions of the meeting of its Board of Supervisors on 23 February. The conclusions include minutes of an exchange of views with Nikhil Rathi (CEO of the FCA) on the future cooperation between the FCA and ESMA. In particular, views were exchanged on the: (i) importance of international standards and their consistent application; (ii) EU’s and the UK’s commitment to promoting sustainable finance; (iii) status of the amendments to the Packaged Retail and Insurance-based Investment Products Regulation and its implementing acts; and (iv) Swiss LIBOR. The Board agreed to undertake a similar dialogue twice a year.
PRA webpage on holding company approvals
On 9 April, the PRA published a new webpage on holding company approvals. The PRA explains that Part 12B of the Financial Services and Markets Act 2000 (FSMA) requires certain parent financial holding companies and parent mixed financial holding companies established in the UK to apply to the PRA for approval, or exemption from the new requirement to be approved. The PRA encourages a company established in the UK as a parent financial holding company or a parent mixed financial holding company, on or before 29 December 2020, to submit its application for approval, or exemption, in June 2021 – the latest date by which a parent financial holding company or a parent mixed financial holding company benefitting from HMT transitional provisions must submit an application is 28 June 2021. The PRA states that a parent financial holding company or a parent mixed financial holding company that was established after 29 December 2020 must secure the PRA’s prior approval, or a prior exemption, from the requirement to seek approval.
Payment Systems and Payments Services
Lending Standards Board (LSB) blog post on the power of prevention in the fight against Authorised Push Payment (APP) fraud
On 12 April, the LSB published a blog post on the power of prevention in the fight against APP fraud. The LSB notes that recent statistics from UK Finance show that APP fraud has increased in value and volume from 2019 to 2020, with losses up 5 percent to £479 million and cases up 22 percent to 149,946. The LSB states that scams could also be significantly reduced with a collective effort across the banking industry and beyond to protect customers and tackle the fight against APP fraud – whether that is banks, non-traditional lenders and PSPs raising awareness to educate their customers on the signs and risks of APP scams, or working with industry oversight bodies to commit to voluntary standards and codes. Furthermore, the LSB notes that reimbursement, although critical, should be the last resort when it comes to protecting customers against APP fraud – prevention, detection and awareness measures must move up the agenda for banks, non-traditional lenders, PSPs, and customers alike to ensure that the customer is protected at every possible stage of the payment journey.
Prudential Regulation
Please see our News and Insights publication on the new operational resilience requirements and guidance for UK financial services firms. Following a year that saw firms’ operational resilience arrangements put to the test, the FCA, the PRA and the BoE have published their long-awaited final rules and guidance on operational resilience, alongside an additional paper published by the PRA on outsourcing and third party risk management.
Please see our Markets and Markets Infrastructure section for an update on ESMA’s response to the ESRB’s letter on the procyclical impact of downgrades of corporate bonds on markets and entities across the financial system.
EBA final draft regulatory technical standards (RTS) specifying the methods of prudential consolidation under the CRR
On 15 April, the EBA published its final report on its draft RTS specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the CRR. The EBA notes that the final draft RTS specify the conditions for the application of the different methods of prudential consolidation – entities to be included in the scope of prudential consolidation are, in particular, institutions, financial institutions and ancillary services undertakings. The EBA states that following the approval of the Risk Reduction Measures Package, the draft RTS have been revised in order to reflect the changes introduced in the CRR and in the CRD, as well as the feedback received during the public consultation – in particular, the main changes deal with the newly introduced Article 18(8) of the CRR, allowing competent authorities to extend prudential consolidation also to certain non-financial undertakings. In this regard, the final draft RTS include several risk indicators to be taken into account by competent authorities in assessing whether an undertaking should be fully or proportionally consolidated for prudential purposes. The EBA proposes that the Delegated Regulation will enter into force on the 20th day following its publication in the OJ.
PRA policy statement on non-systemic UK banks – approach to new and growing banks
On 15 April, the PRA published a policy statement on non-systemic UK banks, specifically on its approach to new and growing banks. The policy statement provides feedback to responses to its consultation paper (CP) 9/20, and it also contains: (i) the final PRA Supervisory Statement (SS) 3/21; (ii) an updated SS31/15 ‘The Internal Capital Adequacy Assessment Process and the Supervisory Review and Evaluation Process’, containing a reference to SS3/21 in paragraph 5.25; and (iii) an updated Statement of Policy (SoP) ‘The PRA’s methodologies for setting Pillar 2 capital’, containing a reference to SS3/21. Following consideration of respondents’ comments to its CP, the PRA has made a number of changes to the draft SS to provide greater clarity on the PRA’s expectations in specific areas, including: (a) clarification on the scope of firms covered by the policy; (b) clarification on the PRA’s supervisory approach for new and growing banks in relation to exiting the market in an orderly way; (c) clarification on existing resolvability expectations that banks need to demonstrate on an on-going basis; (d) clarification on the expectations around a firm's path to achieving profitability; and (e) clarification on the expectations around board independence. The expectations took effect on 15 April.
Commission Delegated Regulation supplementing the CRR with regard to regulatory technical standards (RTS) for assigning risk weights to specialised lending exposures published in OJ
On 14 April, Commission Delegated Regulation (EU) 2021/598, supplementing the CRR with regard to RTS for assigning risk weights to specialised lending exposures, was published in the OJ. The Regulation specifies how institutions should take into account specific factors (financial strength, political and legal environment, transaction and asset characteristics, strength of the sponsor and developer, and security package) when assigning risk weights to specialised lending exposures in respect of which an institution is not able to estimate probabilities of default, or the institutions' probabilities of default estimates do not meet the requirements set out in the CRR. The Regulation will enter into force on 4 May (this being the 20th day following its publication in the OJ) and will apply from 14 April 2022.
Sustainable Finance
Please see our Markets and Markets Infrastructure section for an update on ESMA’s conclusions of its Board of Supervisors’ meeting on 23 February.
Please see our Other Developments section for an update on the FCA’s speech on regulating the UK as a global financial centre.
BIS Basel Committee on Banking Supervision (BCBS) reports on climate-related financial risks
On 14 April, the BCBS published two reports on climate-related financial risks. First, the BCBS published a report on climate-related risk drivers and their transmission channels – this report explores how climate-related financial risks can arise and impact both banks and the banking system. The main findings are that: (i) banks and the banking system are exposed to climate change through macro- and micro-economic transmission channels that arise from two distinct types of climate risk drivers; (ii) evidence suggests that the impacts of these risk drivers on banks can be observed through traditional risk categories; (iii) existing literature largely focuses on the impacts of climate risk drivers on those aspects of the economy relevant to banks’ credit risk, and to a lesser extent on market risk; (iv) the economic and financial market impacts of physical and transition risks can vary according to geography, by sector and by economic and financial system development; (v) climate-related events and risks are uncertain, and may be subject to non-linearities; (vi) to size climate-related financial risks, banks and regulators require plausible ranges of scenarios to assess the potential impacts of both physical and transition risk drivers on their exposures; (vii) there is a limited amount of research and accompanying data that explore how climate risk drivers feed into transmission channels and the financial risks faced by banks; (viii) traditional risk categories used by financial institutions and reflected in the Basel Framework can be used to capture climate-related financial risks; and (ix) a better understanding of risk drivers and their transmission channels across all risk types could be gained from further research by a broader community. Secondly, the BCBS published a report providing an overview of conceptual issues related to climate-related financial risk measurement and methodologies, as well as practical implementation by banks and supervisors. The key findings are that: (a) climate-related financial risks have unique features, necessitating granular and forward-looking measurement methodologies; (b) to date, measurement of climate-related financial risks by banks and supervisors has centred on mapping near-term transition risk drivers into counterparty and portfolio exposures; (c) banks and supervisors have predominantly focused on assessing credit risk, as they advance in applying methods to translate climate-related exposures into categories of financial risk; and (d) while banks and supervisors remain at an early stage of translating climate-related risks into robustly quantifiable financial risk, work continues to gather pace.
Report on Transmission Channels
Report on Measurement Methodologies
Other Developments
FCA’s speech on regulating the UK as a global financial centre
On 13 April, the FCA published a speech by Nausicaa Delfas (Executive Director of International and Interim Chief Operating Officer) on regulating the UK as a global financial centre. First, Ms Delfas notes that post-Brexit, in the wholesale market, the FCA is already acting to better tailor its rules and practices – the intention is to take measures that are proportionate, meet real needs and concerns, and give extra flexibility to market participants, without compromising the protections that the FCA considers are necessary for both markets and consumers. In particular, three examples are noted in the speech: (a) the Double Volume Cap (DVC) provision in UK MIFIR; (b) the FCA currently designing the mechanics of the forthcoming Long-Term Assets Funds regime together with HMT; and (c) the Investment Firms Prudential Review (IFPR). The speech also addresses the FCA’s long-term approach to regulating the UK as a global financial centre and notes, among other things that: (1) several important areas must be addressed, including sustainable finance – for the first time, alongside other regulators, the FCA has been asked by HMT to formally integrate into the way it regulates, the goal of moving to a net zero economy in the UK by 2050, and the FCA intends to consult by mid-2021 on proposals for disclosures aligned with the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) by asset managers, life insurers and FCA-regulated pension providers; and (2) the FCA is considering the recommendations of Lord Hill’s review of the UK Listings Regime, and Ron Kalifa’s review of UK FinTech. In terms of the FCA’s approach to international firms, Ms Delfas notes that the: (i) standards that the FCA applies to international firms seeking authorisation will be the same as those that it applies in its ongoing supervision of firms; (ii) the FCA has also clarified that it expects firms seeking authorisation to have an active place of business in the UK to enable the FCA to effectively supervise their UK activities; (iii) the FCA will look carefully at a firm whose home jurisdiction’s insolvency rules are not well aligned with the UK’s; (iv) the FCA is closely involved in the negotiations for a mutual recognition agreement with Switzerland, and other bilateral work, and it has also been working closely with US counterparts to ensure UK firms' access to US markets continues and is strengthened; (v) the FCA will support the government in its ongoing Free Trade Agreement negotiations with the US; (vi) the FCA has provided technical advice to HMT as part of their recent agreement on the UK–EU Memorandum of Understanding – this will be one of the pillars of the UK’s future relationship with the EU; and (vii) the FCA has signed Memoranda of Understanding with regulators across Europe, and with the European Supervisory Authorities.
FCA policy development update
On 9 April, the FCA published its policy development update for April, summarising its proposed future publications. Specifically, upcoming publications include: (i) a consultation paper (CP) on exit fees in investment platforms and comparable firms, due for publication this year; and (ii) a CP on FCA regulated fees and levies, rates proposals 2021/22, due for publication in April. The update also lists out quarterly CPs that are expected to be published.
FCA launches new version of Financial Services Register Extract Service (RES)
On 9 April, the FCA updated its webpage on obtaining a data extract from the Financial Services Register to announce the launch of its new version of the RES. The FCA states that as part of its Transformation Programme and Data Strategy, it is making a significant investment in its data and technology across the FCA. As a result, the FCA is improving data quality in the Register and the RES and addressing other data quality issues. The FCA has also made some changes to the technology behind the RES that will result in improvements to the service.