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Now that the threat of a no-deal Brexit has subsided (for now), financial services practitioners may breathe a sigh of relief, but this is no time to relax. There are plenty of other changes on the horizon that should keep financial institutions
and their advisors busy until the end of 2019 and beyond. This article provides a quick overview of five of the most important developments:
On 9 December 2019, the Financial Conduct Authority (FCA) is extending the Senior Managers and Certification Regime (SM&CR) to solo-regulated firms. From this date, the SM&CR will apply to almost all firms authorised under the Financial Services
and Markets Act 2000 and to branches of non-UK firms with permission to carry out regulated activities in the UK. The FCA created the SM&CR to expand the scope of individual liability, focusing on senior management responsibility and creating
a firm-wide ‘culture of accountability’ in order to reduce consumer harm and strengthen market integrity. The SM&CR marks a fundamental shift in the FCA’s regulatory approach to individuals and compliance with the SM&CR
is a top supervisory and enforcement priority for the FCA.
Most solo-regulated firms’ SM&CR preparations should be well underway; so-called ‘Enhanced’ firms should have submitted appropriate documentation to the FCA in order to transition their relevant employees from the Approved Persons
Regime to the SM&CR. By day one of the extension, all firms are required to have identified those employees who meet the definition of one or more Certification Functions and trained their Senior managers and Certification staff in the Conduct
Rules. Among other requirements, firms will have 12 months in which to train their remaining staff in the Conduct Rules and certify their Certification staff as ‘fit and proper’. For all SM&CR firms it is critical to embed a
culture of individual engagement and accountability at all levels. Increasingly, the FCA, and indeed other international bodies like the Financial Stability Board, consider that the process of cultural change, of assessing and managing culture, and
corresponding governance should be a top priority for financial services firms.
Comprehensive coverage on the extension of the SM&CR and the regulator’s expectations on developing a culture of accountability can be found in our sub-topic: Authorisation, approval and supervision > Senior Managers and Certification Regime
Senior Managers and Certification Regime
Note: Senior Managers and Certification Regime policy development and key dates
Note: Practical steps FCA solo-regulated firms should take to prepare for the SM&CR
Note: The FCA’s expectations around culture in financial services firms
Note: The Directory—a public register of key individuals working in financial
Note: Application of the SM&CR to claims management companies
On 22 September 2019, 13 years after the launch of the United Nations (UN)-supported
Principles for Responsible Investment
(PRI), the UN Environment Programme Finance Initiative’s (UNEP FI)
Principles for Responsible Banking
(PRB) were launched. The PRB aim to strategically align banks with the UN Sustainable Development Goals (SDGs) and the UN Paris Agreement on Climate
Change and - like the PRI - contain mandatory reporting requirements for signatories. Both the PRI and the PRB have a significant number of signatories globally and it is likely that further banks, asset owners, investment managers and service
providers will sign up to these principles.
In addition to the global, voluntary PRB and PRI - and a wide range of industry best practice guidance for different asset classes - there are proposals for EU regulations (and amendments to delegated acts under the recast Markets in Financial Instruments
Directive 2014/65/EU (MiFID II) and the Insurance Distribution Directive (EU) 2016/97) on:
For further information about these EU regulatory developments, see the European Commission’s webpage
on green finance
and our sustainable finance timeline.
On 30 September 2019, Bank Overground published an article
reminding the market to prepare to transition from the London interbank offered rate (LIBOR) to alternative, more robust benchmarks such as overnight risk-free rates (RFRs) by end-2021, when it is expected that LIBOR will be discontinued. The article
noted that despite progress in establishing RFRs, many new contracts maturing beyond 2021 continue to reference LIBOR. In particular, LIBOR-linked lending continues to dominate in loan markets, and many new long-dated derivative contracts continue
to reference LIBOR.
In a speech given in June 2019, the Bank of England (BoE)’s executive director for markets, Andrew Hauser, called the transition from LIBOR ‘as complex a task as any the financial sector has faced over the past decade, involving a global network of
market participants and public authorities, and touching most systems, products and markets in some way’. There are significant regulatory barriers, as outlined in letters to the European Commission, the Basel Committee on Banking Supervision, the Prudential Regulation Authority and the FCA which BoE’s working group on sterling RFRs (RFR WG) published on 23 October 2019. The issues highlighted by the RFR WG include:
For updates on the transition to RFRs, see Benchmarks
Regulation – timeline.
In April 2019, the European Parliament and the Council of the EU reached political agreement on a revised version of the European Commission’s 2017 proposal to overhaul the prudential regime for investment firms in the EU. The intention is
to create a framework that is more proportionate and risk-sensitive. Under the new regime, most investment firms will be subject to new, simpler prudential rules, while large, systemic firms that carry out bank-like activities and pose similar risks
as banks will be regulated and supervised like banks.
The new regime will take the form of a new regulation, which will include amendments to CRR and MiFIR, and a new directive,
which will include amendments to the Capital Requirements Directive 2013/36/EU (CRD IV) and MiFID II. Other changes include:
The Council is expected to adopt the final texts shortly. The new legislation will enter into force 20 days after publication in the Official Journal of the EU and will take effect in 2021. Given the magnitude of changes, however, investment firms should
familiarise themselves with the changes and start preparing now
For more information, see our Practice Notes: Review
of the prudential framework for investment firms
for Brexit: CRR and prudential regulation—quick guide.
In August 2019, the House of Commons Treasury Committee published a report
entitled “The work of the Financial Conduct Authority: the perimeter of regulation”, in which the Committee argued for increased powers to be granted to the FCA following a string of scandals including the failure of London Capital and Finance
and wider questions around the regulation of so called ‘mini-bonds. In particular, the Committee recommended that:
In October 2019, the Treasury Committee published the government’s and FCA’s responses to the Committee’s report. In its response, the FCA stated that it shared the Committee’s:
However, the government does not see the case for providing a formal power for the FCA to request changes to the perimeter, arguing that ministers should decide on the perimeter of regulation. It also said that turning data on unregulated entities over
to the FCA would substantially increase the regulator's workload and so hinder its ability to supervise the nearly 60,000 financial services companies for which it already has responsibility. Whether or not the FCA will be granted enhanced powers
to enforce against consumer harms therefore remains to be seen.
For more information, see our sub-topic: Regulated
activities—specified activities and investments.
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