Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 22 February 2018.
AFME and Clifford Chance publish Brexit FAQs on wholesale financial services contracts
The Association for Financial Markets in Europe (AFME), together with Clifford Chance, published FAQs on the potential operational and documentation impacts of Brexit on banking customers’ contractual activities. As banks begin implementing their Brexit contingency plans, clients are likely to see impacts in respect of existing cross-border contracts and will be required to put in place arrangements for new business following Brexit. The FAQs address questions such as which clients may be in scope, which contracts may be affected, how they may be impacted and consequential operational impacts that need to be considered.
Financial Conduct Authority updates
FCA publishes regulatory round-up for February 2018
The Financial Conduct Authority (FCA) published its monthly regulatory round-up for February 2018. Among other things, the FCA reminds firms that they have until 12 March 2018 to respond to the FCA’s ‘approach to authorisation’ and the ‘approach to competition’.
FCA submits RBS GRG report to Treasury Committee but refuses to publish, Treasury Committee publishes the report
On 16 February 2018, the chief executive of the FCA, Andrew Bailey, said that the FCA had been unable to obtain the consents needed for it to publish the section 166 report into the Global Restructuring Group (GRG) of the Royal Bank of Scotland (RBS). Instead, the FCA provided a copy of the report directly to the House of Commons Treasury Select Committee, as the committee requested in correspondence with the FCA earlier this month.
On 20 February 2018, the Treasury Committee published the final, unredacted skilled persons’ report into RBS’s treatment of small business customers in its GRG. Commenting on the publication, the chair of the Committee, Nicky Morgan MP, said ’The findings in the report are disgraceful. The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property’.
Treasury Committee publishes Charles Randell correspondence
The Treasury Select Committee published correspondence between its chair, Nicky Morgan MP, and the permanent secretary to the Treasury, Sir Tom Scholar, on incoming FCA chair Charles Randell’s membership, between 2006-11, of Ingenious Film Partners 2 LLP. The Committee has also published a letter from Mr Randell setting out what he had told the assessment panel for his FCA appointment.
IMF Article IV consultation—financial services aspects
The International Monetary Fund (IMF) published a report on the UK following an Article IV consultation.
Authorisation, approval and supervision
BoE report on FMI supervision sets out achievements and priorities
The Bank of England (BoE) published its annual report on its supervision of financial market infrastructures (FMIs), for the period 23 February 2017 to 20 February 2018. The Bank says that over the course of the year it has continued to invest in developing its supervisory approach ‘to ensure it remains at the leading edge internationally’, and that it has strengthened the board in the BoE that oversees FMI supervision and increased its access to specialist supervisory resources.
PRA proposes guidance on eligibility of guarantees for credit risk mitigation under CRR
The Prudential Regulation Authority (PRA) published a consultation paper (CP6/18) setting out proposed changes to Supervisory Statement (SS) 17/13 ‘Credit risk mitigation’ to clarify expectations regarding the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the Capital Requirements Regulation (CRR). The consultation closes on 16 May 2018.
ECJ considers supervision of non-centralised banking group under SSM
The Court of Justice of the EU (ECJ) considered the supervision of a non-centralised banking group under the Single Supervisory Mechanism (SSM) in two related cases—Crédit Mutuel Arkéa (CMA) v European Central Bank (ECB) (Case T‑52/16) and CMA v ECB (Case T‑712/15).
Presidency compromise texts—amendments to CRD IV, BRRD and SRM Regulation
The Council of the EU published Presidency compromise texts of proposed amendments to the Capital Requirements Directive IV (CRD IV), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRM Regulation):
- Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (Interinstitutional File: 2016/0364 (COD))
- Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/59/EU on loss-absorbing and recapitalisation capacity of credit institutions and investment firms and amending Directive 98/26/EC, Directive 2002/47/EC, Directive 2012/30/EU, Directive 2011/35/EU, Directive 2005/56/EC, Directive 2004/25/EC and Directive 2007/36/EC (Interinstitutional File: 2016/0362 (COD)), and
Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 806/2014 as regards loss-absorbing and recapitalisation capacity for credit institutions and investment firms (Interinstitutional File: 2016/0361 (COD))
FCA—Dear CEO letter relating to quality of prudential regulatory returns
The chief executive of the FCA, Andrew Bailey, wrote a ‘Dear CEO‘ letter to firms expressing the FCA’s concerns about the quality of prudential regulatory returns and reporting practices.
BoE workshop discusses options for CHAPS liquidity
The BoE published the minutes of a January 2018 workshop which discussed the possibility of offering on-demand repo liquidity generation in CREST as a means to source CHAPS liquidity. The workshop was part of a BoE programme to renew its real time gross settlement service (RTGS), and the discussion will be used to inform the redesigned service.
Risk management and controls
Lloyd’s Market Association issues guidance on GDPR information notice
The Lloyd’s Market Association (LMA) published guidance to assist insurance market participants with their use of the General Data Protection Regulation (GDPR) Core Uses Information Notice, which the LMA published in 28 November 2017. The guidance has been issued jointly with Norton Rose Fulbright.
MEPs set out list of actions to tackle terrorist financing
The European Parliament’s Foreign Affairs Committee called on the EU Council, Commission and External Action Service to adopt a number of measures to cut off the flow of funds to terrorists. They pointed out that funding for terrorist groups is supplied not only from outside Europe, but also within it, for example by international non-profit organisations, charities, foundations and networks, acting as a cover for abusive practices. Sources include illicit trade in goods, firearms, oil, drugs, cigarettes and cultural objects, but also slavery and child exploitation. The MEPs said it was vital to share intelligence proactively and monitor suspicious organisations and transactions, pre-paid cards and virtual currencies.
Views sought on Sanctions and Anti-Money Laundering Bill
The House of Commons Public Bill Committee is seeking input from those with expertise or a special interest in the Sanctions and Anti-Money Laundering [Lords] Bill, which is currently passing through Parliament. Views are sought in writing and cannot be taken into consideration after the Committee stage concludes, which is expected to be not later than 6 March 2018. The Committee will first meet on 27 February 2018.
FCA conduct requirements
CLLS response to FCA consultation on industry codes of conduct and extension of Principle 5
The City of London Law Society (CLLS) published its response to the FCA’s November 2017 consultation on industry codes of conduct and the extension of the application of Principle for Businesses 5 (Principle 5) to unregulated as well as regulated activities (CP17/37). The CLLS does not support regulatory recognition of industry codes or the extension of Principle 5.
Enforcement and redress
FOS consults on changes to FEES rules
The Financial Ombudsman Service (FOS) published a consultation on changes to the fees manual (FEES) of the FCA Handbook for participants joining the voluntary jurisdiction (VJ) part way through the year. The consultation is open until 5pm on 1 March 2018.
Markets and trading
FCA research paper says benchmark precision reduces manipulation
The FCA published a research note on the regulation and precision of benchmarks. The report argues that, in financial markets, dealers may take advantage of information asymmetries and extract a rent from buy-side traders. The authors seek to demonstrate that an increase in the precision of a benchmark reduces ‘noise’ in market prices and increases expected demands by overcoming traders’ and regulators’ inability to penalise dealers sufficiently. ‘Regulations that increase precision can therefore have positive effects on the overall market’.
BoE working paper examines algorithmic trading around 2015 Swiss franc cap removal
A staff working paper published by the BoE concluded that algorithmic trading contributed to the deterioration of market quality following the removal of the cap on the Swiss franc on 15 January 2015. Based on these findings, the authors conclude that there is some value in maintaining a diversity of trader types to help keep markets resilient through different trading conditions.
ESMA launches stakeholder survey
The European Securities and Markets Authority (ESMA) launched a short stakeholder survey in order to help it achieve its mission successfully. It is seeking input from all market participants and other stakeholders regarding the way they interact with ESMA. The survey is open for comments until 30 March 2018.
ESMA launches interactive single rulebook
ESMA launched its interactive single rulebook, which is a new service for market participants and other interested stakeholders across the EU. The tool launched with the level one text of the UCITS Directive, and links to all relevant level two and level three measures already available elsewhere on ESMA’s website.
FCA publishes market infrastructure MoU review
The FCA published a 2017 performance statement on the operation of its memorandum of understanding (MoU) with the BoE on market infrastructure. The BoE and the FCA concluded that the MoU’s arrangements for co-operation remain effective, with appropriate co-ordination and no material duplication. Industry respondents acknowledged the efforts made on co-operation and emphasised its growing importance given the changing environment.
ESMA updates SFD lists
ESMA updated its Settlement Finality Directive (SFD) list of designated payment and securities settlement systems, together with its SFD list of authorities designated to be notified of insolvency proceedings.
Financial Services and Markets Act 2000 (Benchmarks) (Amendment) Regulations 2018
SI 2018/204: The transitional provision in respect to financial benchmarks administered in the UK on or before 30 June 2016 now applies also to benchmarks administered after 30 June 2016 and during the specified transitional period. The Regulations will come into force on 26 February 2018.
Investment funds and wealth management
Commission study makes recommendations to promote EU private placements
The European Commission published a study on the development of the private placement of debt in the EU. The main objectives of the study are to identify best practices for and assess potential regulatory obstacles to the development of private placement markets in the EU. The study was carried out for the Commission by the Boston Consulting Group and Linklaters LLP.
ESRB publishes recommendation on leverage and liquidity in investment funds
The European Systemic Risk Board (ESRB) published a recommendation report on action to address systemic risks related to liquidity mismatches and the use of leverage in investment funds. Published alongside the report is Annex 1, which sets out the compliance criteria for the recommendations, and Annex 2, which sets out the economic rationale and assessment.
FCA and FOS respond to report on growing culture of social impact investing in UK
The Department for Digital, Culture, Media and Sport (DCMS) published letters from Andrew Bailey, FCA chief executive, and Caroline Wayman, chief ombudsman and FOS chief executive, responding to a DCMS Advisory Group report on growing a culture of social impact investing in the UK.
Consumer credit, mortgage and home finance
Lloyd’s Market Association publishes updated consumer wording guidance
The Lloyd’s Market Association (LMA) published an updated version of its consumer wordings guidance (v4.0). The LMA/Clyde & Co joint guidance has been drafted as general guidance, intended to assist managing agents with the drafting of new ‘consumer’ products and/or the adaptation of existing ‘commercial’ wordings to produce ‘consumer’ versions that reflect current regulatory requirements and best practice.
Insurance and pensions
Committee calls for ‘urgent action’ on pensions mis-selling scandal
The Work and Pensions Committee published a report on British Steel Pension Schemes and has said another major mis-selling scandal is erupting on defined benefit (DB) pension transfers. It has called on the responsible authorities to take urgent action, saying the FCA should ban contingent fees on DB transfers and sort out an online register of advisers. Arron Slocombe, partner at the pensions team for Baker & McKenzie LLP, says the immediate issue in the mis-selling was a lack of proper financial guidance.
ECON report endorses delay of IDD
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a report on the proposal to delay the application of the Insurance Distribution Directive. ECON recommends that the deadline for Member State transposition be postponed to 1 July 2018, and that the amending directive has retroactive effect from 23 February 2018.
Views sought on proposed use of digital technology in inclusive insurance
The International Association of Insurance Supervisors (IAIS) launched a consultation seeking views on its draft application paper on the use of digital technology in inclusive insurance. The aim of the paper is to provide guidance to supervisors, regulators and policymakers when considering, designing and implementing regulations and supervisory practices in respect of, the use of digital technology in inclusive insurance. The deadline for responses is 16 March 2018.
IAIS extends consultation on activities-based approach to systemic risk
IAIS extended its consultation on an activities-based approach (ABA) to mitigating systemic risk in the insurance sector. The new deadline for comments is 25 February 2018.
IE consultation response says insurance ‘not systemically risky’
Insurance Europe (IE) responded to the IAIS consultation on an activities-based approach (ABA) to systemic risk. IE argues that traditional insurance is not systemically risky and systemic risk from individual insurers can only originate from a very limited number of activities undertaken on a large scale in the wrong conditions. IE says that that, while the IAIS’ work is at a very early stage and many more aspects need to be clarified, a proportionate and properly-designed ABA could address ‘domino’, as well as ‘tsunami’ views of risk, given the focus on risk management and preventative actions, fulfilling many of the objectives of the current entity-based approach.
Payment services and systems
Commission responds to EBA concerns regarding PSD2 technical standards
The European Banking Authority (EBA) published a letter from Olivier Guersent of the European Commission to Andrea Enria, EBA chair, regarding changes that the Commission made to the EBA’s regulatory technical standards (RTS) on strong customer authentication and common and secure open standards of communication under the revised Payment Services Directive (PSD2). The RTS were adopted by the Commission on 27 November 2017.
ECB publishes speech on European retail payments markets developments
The European Central Bank (ECB) published a speech by Yves Mersch, ECB executive board member, on European retail payments markets developments. In the speech, Mersch recaps that since the launch of instant payments in euro in November 2017 the European retail payments market has entered a new era. Given this development, retail customers and businesses are now looking for payment solutions that are tailored to their specific needs.
CPMI finds room for improvement in cross-border retail payments
The Committee on Payments and Market Infrastructures (CPMI) published a report in which it finds there is scope to improve the infrastructure for retail payments across borders. While innovations such as mobile or e-banking have made cross-border payments more convenient, the CPMI says better choice and diversity of clearing and settlement arrangements is needed to make these payments faster and cheaper.
PSR publishes specific direction 7
The Payment Systems Regulator (PSR) published specific direction 7 relating to direct debit facilities management and switching providers for BPSL.
ECB regulation on pension funds statistical reporting requirements published in the Official Journal
Regulation (EU) 2018/231 of the ECB of 26 January 2018 on statistical reporting requirements for pension funds was published in the Official Journal of the EU. The regulation shall enter into force on the twentieth day following that of its publication.
Fintech and virtual currencies
FCA seeks views on automated regulatory reporting
The FCA is seeking views on how technology can make it easier for firms to meet their regulatory reporting requirements and improve the quality of the information they provide. It follows a ’TechSprint’ between the FCA and the BoE in November 2017 where a proof of concept was developed which could make regulatory reporting requirements machine-readable and executable. The call for input outlines how the proof of concept was developed and asks for views on how the FCA can improve this process. Feedback is sought by 20 June 2018.
FCA and CFTC collaborate on FinTech innovation
The FCA and the US Commodity Futures Trading Commission (CFTC) signed a co-operation agreement to collaborate and support innovative firms through their respective FinTech initiatives—LabCFTC (created in May 2017) and FCA Innovate (created in October 2014). The arrangement focuses on information-sharing regarding FinTech market trends and developments. It also facilitates referrals of FinTech companies interested in entering each market, and sharing information and insight derived from each authority’s relevant sandbox, proof of concept or innovation competitions.
The Investment Association launches new FinTech accelerator for the asset management industry
The Investment Association (IA) is to launch VeloCity—a specialist FinTech accelerator for the asset management industry. IA says it aims to bring together FinTech firms with ‘market-viable’ technology tailored to the asset management sector, supported by industry practitioners from across the IA membership. IA says the new venture reflects the strong demand within the asset management industry for new technology solutions which will enhance the customer experience and increase business efficiency.
BCBS report examines the future of FinTech and its regulation
The Basel Committee on Banking Supervision (BCBS) published a paper looking at how FinTech may affect the banking industry and the activities of supervisors in the near to medium term. The paper analyses various potential scenarios and draws on surveys with bank supervisors, focusing on three technological developments (big data, distributed ledger technology and cloud computing) and three FinTech business models (innovative payment services, lending platforms and neo-banks).
Dates for your diary
|25 February 2018||Insurance and pensions||Deadline for responses to IAIS consultation on an activities-based approach (ABA) to mitigating systemic risk in the insurance sector.|
|28 February 2018||Insurance and pensions||Deadline for responses to the Financial Stability Board’s (FSB) consultation on a methodology for assessing the implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions in the insurance sector.|
|28 February 2018||Prudential requirements||Deadline for responses to the European Commissions consultation on fitness check on supervisory reporting.|
|28 February 2018||Authorisation, approval and supervision
|Deadline for responses to the BoE’s consultation papers:|
|28 February 2018||Solvency II||The European Insurance and Occupational Pensions Authority (EIOPA) to submit technical advice to the European Commission on the review of specific items in Solvency II Commission Delegated Regulation (EU) 2015/35.|
|1 March 2018||Enforcement and redress||Deadline for responses to the FOS consultation on changes to the fees manual (FEES) of FCA Handbook for participants joining the voluntary jurisdiction (VJ) part way through the year.|