Welcome to this month’s highlights from the Lexis®PSL Banking & Finance team which cover the key news updates from June 2017.
FCA issues Policy Statement on prohibition of banks’ restrictive contractual clauses
The Financial Conduct Authority (FCA) has published a policy statement, PS17/13: Investment and corporate banking: prohibition of restrictive contractual clauses, which sets out rules to ban clauses that restrict competition without being clearly beneficial to clients. A particular cause of concern is when banks use clauses in contracts, mandates or engagement letters that oblige clients to award or offer future primary market services to that bank. According to the FCA, such clauses can restrict a client’s choice in future transactions.
Loan Market Association updates
LMA urges JMLSG to rethink revisions to guidance on money laundering and terrorist financing
The Loan Market Association (LMA) has raised a number of concerns with the wording of the revisions to Parts II and III of the Joint Money Laundering Steering Group’s (JMLSG) guidance on the prevention of money laundering and the financing of terrorism in the UK financial services industry. The LMA was responding to a consultation by the JMLSG on the revisions to the guidance which reflect the provisions of the proposed new Money Laundering Regulations published by HM Treasury on 15 March 2017. The new Money Laundering Regulations are being put in place to implement the Fourth Money Laundering Directive (MLD4).
The LMA response raises a number of concerns with the wording of the guidance, in particular that it does not sufficiently consider the practical impact of anti-money laundering and counter-terrorist financing processes with respect to syndicated lending activity, nor the fact that deals will differ quite materially with regards to money laundering risk.
LMA revises secondary trading terms and conditions
The LMA has released revised secondary trading T&Cs without the pricing panel mechanism for resolving disputes over the reasonableness of the BISO purchase price. The T&Cs will now require the party entering into the substitute transaction to do so on arm’s length terms and in good faith. In addition, the purchase price for the substitute transaction must be reasonable in the circumstances.
The documents went live on 27 June 2017.
EU emissions trading system
The Council of the European Union’s negotiating position on extending provisions for aviation activities in the EU emissions trading system (ETS) beyond 2016 has been agreed by EU ambassadors. The proposed new European Commission regulation follows an agreement reached in October 2016 by the International Civil Aviation Organisation to introduce a global market-based measure from 2021. The EU aims to join the first phase of this measure, which is voluntary. Implementation of this measure has also now been formally agreed, the Council said.
Obligations of an issuer under letters of credit
We previously reported on the decision in the case of Deutsche Bank AG, London Branch v CIMB Bank Berhad  EWHC 1264 (Comm),  All ER (D) 171 (May), in which the High Court considered a novel point concerning the nature of an issuing bank’s rights and obligations towards a confirming bank that makes payment to a beneficiary under a letter of credit.
The facts in the case, the arguments from both the confirming bank and issuing bank and the decision of the court are considered further in News Analysis: Letters of credit: Issuer reimbursement obligation (Deutsche Bank AG v CIMB).
Working group launched to co-ordinate trade finance digitisation
The International Chamber of Commerce (ICC) Banking Commission has launched a working group to co-ordinate all work on trade finance digitalisation. The group is seeking to identify strategies for overcoming constraints of digitalisation, such as reliance on paper-based practices and uncertainty over standards. The ICC said the trade finance sector was undergoing a vast transformation, focused heavily on automation and digitalisation.
According to the ICC, the working group will have three main activities:
- ‘e-compatibility’ of ICC rules for trade finance—evaluating ICC rules to allow banks to accept data rather than documents
- standards—developing a set of minimum standards for the digital connectivity of service providers
legal status—examining the legal and practical issues related to the validity and value of data and documents in digitised form
Recast Regulation on Insolvency 848/2015
From 26 June 2017, the bulk of the provisions of the Recast Insolvency Regulation (EU) 2015/848 became effective and replaced the Regulation on Insolvency (EC) 1346/2000 in relation to insolvency proceedings opened after 26 June 2017. For information on the resources and materials available on Lexis®PSL Restructuring & Insolvency, see news analysis: Recast Regulation on Insolvency: materials available on LexisPSL R&I
- The Insolvency Act 1986 (IA 1986), the Insolvency (England and Wales) Rules 2016 and the Insolvency (Scotland) Rules 1986 have been amended to make them compatible with the Recast Insolvency Regulation (EU) 2015/848, See: The Insolvency Amendment (EU 2015/848) Regulations 2017
- The Insolvency Service has published guidance on the Recast Insolvency Regulation (EU) 2015/848
Debt Capital Markets
FX Global Code is published
A code of conduct for the wholesale foreign exchange (FX) market, the FX Global Code, has been released. The Code comprises a set of guidelines, developed under the auspices of the Markets Committee of the Bank for International Settlements. It was created by the central bank Foreign Exchange Working Group (FXWG) in partnership with a private sector Market Participants Group, and its aim is to achieve a robust, fair, liquid, open, and appropriately transparent global FX marketplace. The release of the Code completes a two-year effort by the FXWG.
Key trends and latest developments in the derivatives market examined
What are the key documentation trends in the derivatives markets for the first half of 2017? In News Analysis: Examining key trends in the derivatives market—H1 review 2017, Doug Shaw, counsel, and Hannah Patterson, managing associate at Linklaters, review the derivatives market and take a look at the latest developments.
European Commission presents new initiatives for completing the Capital Markets Union
The European Commission has taken a number of further steps aimed at driving forward the Capital Markets Union (CMU). This includes publication of a Mid-Term Review which reports on the progress so far in implementing the 2015 action plan. It states that, since September 2015, the Commission has delivered 20 out of 33 measures announced in the CMU Action Plan. As part of the Commission’s efforts to achieve a CMU that has a tangible impact, it also launched a public consultation and held a public hearing to gather views on the next steps.
The mid-term review also sets the timeline for the new actions that will be unveiled in the coming months. The Commission will continue its work on enhancing the supervisory framework for integrated capital markets, increasing the proportionality of the rules for listed SMEs and investment firms, harnessing the potential of FinTech and promoting sustainable investment.
The mid-term review sets out nine new priority actions:
- strengthen the powers of the European Securities and Markets Authority (ESMA) to promote the effectiveness of consistent supervision across the EU and beyond
- deliver a more proportionate regulatory environment for SME listing on public markets
- review the prudential treatment of investment firms
- assess the case for an EU licensing and passporting framework for FinTech activities
- present measures to support secondary markets for non-performing loans (NPLs) and explore legislative initiatives to strengthen the ability of secured creditors to recover value from secured loans to corporates and entrepreneurs
- ensure follow-up to the recommendations of the High Level Expert Group on Sustainable Finance
- facilitate the cross-border distribution and supervision of UCITS and alternative investment funds (AIFs)
- provide guidance on existing EU rules for the treatment of cross-border EU investments and an adequate framework for the amicable resolution of investment disputes, and
- propose a comprehensive EU strategy to explore measures to support local and regional capital market development
The Commission has also released a set of Q&As on the mid-term review action plan. The action plan sets out a programme of actions which aim to establish the building blocks of an integrated capital market by 2019.
European Commission launches initiative on an integrated covered bond framework
The European Commission has also published an Inception Impact Assessment (IIA) which aims to inform stakeholders about the Commission’s work in order to allow them to provide feedback on the intended initiative and to participate effectively in future consultation activities.
Covered bonds are debt securities issued by a credit institution and collateralised against a pool of assets that can cover claims at any point in time. They are considered secure and a key long-term funding instrument in the EU economy. The initiative to promote greater integration in EU covered bond markets falls under the CMU. As part of the CMU mid-term review adopted by the Commission on 7 June 2017, the Commission announced the adoption in Q1 2018 of a legislative proposal for an EU-framework for covered bonds.
Covered bonds are regulated at national level and the regimes vary. In recent years the structure of covered bonds has changed, introducing new risks. In addition, the size of the covered bond market and the importance for bank funding has the potential of having a negative impact on financial stability. The main objective of the IIA is to develop a common set of EU requirements allowing the safe use of an EU covered bond label across the single market and justifying a preferential treatment in terms of capital requirements. The Commission says this should help develop the market and clarify the treatment of covered bonds in case of resolution.
To achieve these objectives, the IIA sets out three possible policy options:
- to build on the current system and try to improve it by promoting market-led initiatives or national regulatory action
- to recognise the fact that the current EU rules outline only a few high level principles and contain several loopholes that would need to be filled in order to reach an effective and necessary level of harmonisation
- to fully harmonise both the structural and prudential aspects of covered bond regulation in order to ensure that only covered bonds complying with these detailed standards could be qualified as covered bonds and receive preferential treatment
The IIA is provided for information purposes and does not prejudice the final decision of the Commission on whether the initiative will be pursued or on its final content.
Regulation of derivatives and capital markets products
Commission sets out criteria for STS securitisation
The European Commission has announced that the European Parliament, the Council of the EU and the Commission have agreed on a package that sets out criteria for simple, transparent and standardised (STS) securitisation. The new regulatory framework sets out a risk-sensitive, transparent and prudential treatment of securitisation. At the same time, the package also aims to ensure an appropriate capital treatment of securitisation instruments in general.
Political agreement will be followed by further technical talks to finalise the text. The permanent representatives committee (COREPER) of the Council of Ministers is expected to endorse the agreement ahead of the European Parliament’s plenary vote.
Regulation for banking and finance lawyers
The Information about People with Significant Control (Amendment) Regulations 2017 SI 2017/693 came into force on 26 June 2017. It implements aspects of Article 30 of Council Directive 2015/849/EU on the prevention of money laundering and terrorist financing (requiring a central register of beneficial ownership information for corporate and other legal entities), in relation to companies, including unregistered companies, and limited liability partnerships. It also makes minor changes to and extends the scope of Part 21A of the Companies Act 2006 (CA 2006), which requires companies to keep a register of people with significant control (PSC) over the company (a PSC register) and extends its application to LLPs, and the Register of People with Significant Control Regulations 2016, SI 2016/339, to bring the UK’s domestic regime into compliance with the Directive’s requirements.
- Under the PSC regime, reporting entities are now required to update their own registers within 14 days, and to update the information held on the central register at Companies House within a further 14 days. This is a significant change from the previous position where centrally-held PSC information was updated via the annual confirmation statement. In addition, the scope of the regime has been extended to cover unregistered companies, companies listed on prescribed markets such as AIM or the NEX Exchange Growth Market, and eligible Scottish partnerships. For more information, see News Analysis: Beneficial ownership—enhancement of the PSC regime.
Companies House has provided guidance on changes to the PSC regime. From 26 June 2017, PSC will not be updated on the confirmation statement (CS01). Instead, entities will need to tell Companies House (CH)—on forms PSC01 to PSC09—whenever there is a change.
The Fourth Money Laundering Directive
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692), which implement the Fourth Money Laundering Directive and the Second Wire Transfer Regulation in the UK, entered into force on 23 June 2017.