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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 13 July 2017.
The House of Commons Library published a briefing paper bringing together responses from financial organisations about the impact of the UK’s vote to leave the EU. The paper says that the decision to leave the EU will have significant implications for the financial services sector, which is of especial importance to the UK economy.
The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, delivered a speech at a Reuters Newsmaker event in London. Mr Bailey gave an update on the FCA's work on Brexit and its impact on financial services. Mr Bailey also addressed open markets in financial services, freedom of location and free trade as being important to the functioning of the global economy.
The Confederation of British Industry (CBI) called on negotiators on both sides of the UK-EU talks to agree transitional arrangements as soon as possible, in order provide firms with continuity and certainty, and protect jobs and trade flows. The CBI has proposed that the UK seeks to stay inside the EU single market and a customs union until a final deal is in force.
The Bank of England (BoE) published its annual report and accounts for 2017. Highlights from the past year include implementation of the BoE's One Bank strategy and ongoing work on Brexit and financial stability. The BoE has launched a new strategic plan, Vision 2020, which will seek to improve the BoE's communications and prioritisation, and make its structures more fluid.
The Prudential Regulation Authority (PRA) published its annual report and accounts for the year ended 1 March 2017, in which it reviews its activities during the previous 12 months and sets out its key initiatives for the coming year. Priorities for 2017/18 include preparations for Brexit, ongoing implementation of Solvency II, the Senior Managers and Certification Regime (SM&CR) and the Senior Insurance Managers Regime (SIMR), and laying the groundwork for new ring-fencing requirements in 2019.
The PRA published its second annual competition report, setting out key policy areas in which the PRA has delivered against its secondary competition objective (SCO) by facilitating effective competition during the past year. It also summarises how the PRA has continued the process of embedding the SCO into PRA policy and supervisory decision-making during the past year.
The European Parliament issued a briefing paper which includes a chapter on the latest developments in completing the banking union, including action against non-performing loans, risk reduction strategies, and the benchmarking exercise to shed light on the features of loan enforcement and insolvency systems which have an impact on banks’ balance sheets.
The European Central Bank (ECB) responded to the European Commission’s consultation on the operations of the European Supervisory Authorities (ESAs). Among the points raised in its response, the ECB says that while the establishment of the European Securities and Markets Authority was a major step in fostering the convergence of national supervisory practices, the supervision of securities markets still occurs at the national level, fragmenting the application of EU legislation and keeping EU capital markets segmented.
The PRA issued a policy statement (PS) providing feedback to responses to its consultation paper (CP) 4/17 ‘Regulated fees and levies: rates proposals 2017/18’, and setting out the final fee rates and rules.
The PRA published policy statement 18/17 (PS18/17) providing feedback to responses to consultation paper 46/16 (CP46/16) 'IFRS 9: changes to reporting requirements'. PS18/17 sets out the PRA's final rules to update its Capital Requirements Regulation (Regulation (EU) No 575/2013) (CRR) regulatory reporting requirements and expectations in light of the introduction of the International Financial Reporting Standard 9 (IFRS 9) from 1 January 2018.
The Prudential Regulation Authority (PRA) published consultation paper CP12/17, which sets out proposed adjustments to the PRA's Pillar 2A capital framework. It is relevant to all banks, building societies and PRA-designated investment firms. The consultation closes on 12 October 2017.
Commission Delegated Regulation (EU) 2017/1230 of 31 May 2017 supplementing the CRR with regard to regulatory technical standards (RTS) further specifying the additional objective criteria for the application of a preferential liquidity outflow or inflow rate for cross-border undrawn credit or liquidity facilities within a group or an institutional protection scheme was published in the Official Journal on 8 July 2017.
The European Banking Authority (EBA) issued official EU language versions of three guidelines on bail-in under the Bank Recovery and Resolution Directive (BRRD). The guidelines cover the treatment of liabilities, the treatment of shareholders, and the rate of conversion of debt to equity in bail-in situations.
The FSB published two guidance documents to assist authorities in implementing the FSB’s standard on total loss-absorbing capacity (the TLAC standard) and facilitating the continued access to critical financial market infrastructure (FMI) services in resolution. It also published its sixth report on the implementation of post-crisis resolution reforms.
The European Commission is seeking views on possible initiatives for developing secondary markets for non-performing loans (NPLs), in a bid to tackle the issue. The consultation is looking particularly at ways to improve the market's functioning, and more specifically on loan servicing activities by third parties and transferring loans away from the originating bank. Feedback is also sought on a new instrument, ‘accelerated loan security’, made to increase protections against business borrower’s default to improve the functioning of the small and medium-sized business credit market. The deadline for responses to the potential measures is 20 October 2017.
The European Banking Authority (EBA) released data which it says will help to enhance the transparency and public accountability of deposit guarantee schemes (DGSs) across the EU, to the benefit of depositors, markets, policymakers, DGSs and Members States. The data relate to two key concepts in the DGS Directive: available financial means, and covered deposits, and provide an overview of the level of pre-funded resources available to each DGS in the EU to cover its potential liabilities to depositors. The data will be published annually.
The PRA published details of a speech given by its CEO and deputy governor, Sam Woods, which argues that while the major post-2008 reforms to prudential standards are now in place, the ongoing challenge is to secure the progress that has been made as memories of the crisis fade. Mr Woods warned of the danger of regulatory arbitrage and said some financial innovation was designed solely to reduce regulation.
The EBA launched a supplementary data collection aimed at supporting the response to the European Commission's call for advice on the new prudential framework for investment firms. This exercise follows up on the first data collection launched on 15 July 2016 and the EBA discussion paper published on 4 November 2016, in which the EBA consulted on its proposals for developing a new prudential framework.
The European Systemic Risk Board (ESRB) published a report on policy proposals to resolve non-performing loans (NPLs) in Europe. At the end of 2016, the stock of NPLs in the EU banking sectors was around €1trn, representing 5.1% of total loans. The proportion of NPLs to total loans is higher than in other advanced economies like the US or Japan, although with marked differences across countries.
In a judgment dated 26 May 2017, the High Court gave directions concerning ring-fencing transfer schemes relating to companies in four UK banking groups (namely Barclays, HSBC, Lloyds and Santander) in the case of Re Barclays Bank plc and others  EWHC 1482 (Ch) (26 May 2017). We will publish a digest on this case soon.
Decision (EU) 2017/1258 of the European Central Bank (ECB) of 5 July 2017 on the delegation of decisions on the transmission of confidential statistical information to the Single Resolution Board was published in the Official Journal of the EU.
The Single Resolution Board (SRB) published its annual report for 2016, saying that, with the support of the national resolution authorities, it drafted and adopted 92 resolution plans in 2016, covering the majority of banking groups in the banking union. It also collected relevant data from all major banking groups by using a specific liability data template, which supports its determination of the minimum requirements for own funds and eligible liabilities (MREL) and for making the bail-in resolution tool operational.
The FCA published finalised guidance (FG17/5) on the treatment of politically exposed persons (PEPs) for anti-money laundering (AML) purposes. This follows the FCA's previous open consultation (GC17/2) in March 2017 which proposed guidance in connection with PEPs under section 333U of the Financial Services and Markets Act 2000 (FSMA 2000). Section 333U contained a duty on the FCA to issue guidance in connection with PEPs prior to the coming into force of the fourth money laundering directive or any subsequent EU measures. Section 333U of FSMA 2000 has yet to commence but the FCA has a duty under regulation 48(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which came into effect on 26 June 2017, to issue guidance about the enhanced customer due diligence measures in respect of PEPs.
The Council of the EU published a cover note, attached to which is a letter (dated 30 June 2017) from Commissioner Vĕra Jourová, to the Presidency of the Council of the EU, concerning the assessment of high-risk third countries under the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4).
The G20 released an action plan on countering terrorism, calling for the implementation of existing international commitments, including the UN Global Counter-Terrorism Strategy, compliance with relevant resolutions and targeted sanctions by the UN Security Council. The G20 seeks to make the international financial system ‘entirely hostile to terrorist financing’ and commits to deepening international co-operation and exchange of information, including working with the private sector, which it says has a critical role in global efforts to counter terrorism financing.
SI 2017/739: Certain provisions of the Criminal Finances Act 2017 relating to the corporate offences of failure to prevent facilitation of tax evasion and preventing facilitation of tax evasion offences will be brought into force from 17 July 2017 and 30 September 2017.
The Financial Action Task Force (FATF) produced a report for the G20 leaders' summit, which provides an overview of FATF’s recent work in conjunction with the G20 in the global anti-money laundering and counter-terrorist financing arenas and suggests possible avenues for further effort and next steps.
The International Securities Services Association (ISSA) published its financial crime compliance sample questionnaire for use by custodians performing due diligence on account holders. It is required to be answered on a legal entity (LE) level per country, so financial institution should answer the questionnaire either at head office level, covering all branches in the same country as the head office, or at the level of each foreign branch that is active in the securities business. The questionnaire should not cover more than one LE and should therefore also be completed by each subsidiary and affiliate that is active in securities business.
The FCA published the findings of a follow-up review of how firms handle complaints about packaged bank accounts. The review follows a thematic review published in October 2016. While the FCA finds some progress has been made, it says more needs to be done with regard to customer outcomes, final response letters and record-keeping.
The FCA made available on its website an unredacted version of a final notice (dated 9 March 2012) issued by its predecessor, the Financial Services Authority, to Bank of Scotland plc. Previously, only redacted versions of the notice had been made available.
The European Securities and Markets Authority (ESMA) published two new Q&As on investor protection and intermediaries topics under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). The questions cover securities financing transactions, and the scope of activities covered by the requirements in Article 16(7) of MiFID II.
ESMA updated its Q&A documents regarding the implementation of MiFID II and MiFIR. The updates include new guidance on MiFIR data reporting, commodity derivative position limits and reporting, and market structure.
ESMA updated its opinion on MiFID II's ancillary test for commodity derivatives. The update corrects a typing error in the tables containing the estimations for the ancillary activity market size calculations.
The European Commission adopted a Commission Delegated Regulation (C(2017) 4644 final) setting out RTS for the information to be provided under MiFID and MiFID II by proposed acquirers of a qualifying holding in an investment firm. This information must be provided by the proposed acquirer at the time of the initial notification and is aimed at ensuring that competent authorities are provided with adequate and proportionate information in order to assess the acquisition.
ESMA issued final regulatory technical standards (RTS) regarding the aggregation and publication of derivatives data by trade repositories (TRs). ESMA’s RTS define the operational standards for aggregation and comparison of aggregate position data across TRs, which is important to assess risks associated to those markets.
ESMA published its guidelines on the co-operation between authorities under the Central Securities Depositories Regulation (CSDR). The purpose of the guidelines is to ensure consistent, efficient and effective supervisory practices within the EU in respect of co-operation arrangements between supervisory authorities.
ESMA published three consultation papers (CPs) on the Prospectus Regulation, which aim to make it easier and cheaper for companies, and in particular smaller companies, to access capital and improve prospectus accessibility for investors. The three CPs contain draft technical advice on the format and content of the prospectus, on the EU growth prospectus and on scrutiny and approval. Feedback is sought by 28 September 2017.
The FCA published the Prospectus Rules (Miscellaneous Amendments) Instrument 2017, which amends the FCA Handbook and Prospectus Rules sourcebook so as to build in provisions of the Prospectus Regulation which shall apply from 20 July 2017.
ESMA issued a public consultation on its guidelines on internalised settlement reporting under Article 9 of the Central Securities Depositories Regulation (CSDR) (ESMA70-151-45). Comments are sought by 14 September 2017.
ESMA launched a consultation seeking views on certain aspects of the EU Short Selling Regulation, following a request from the European Commission for technical advice. ESMA has asked for responses to be submitted by 4 September 2017.
ESMA published a report providing an overview of the implementation of IFRS 13: fair value measurement by European issuers. The report assesses the level of compliance of IFRS financial statements with the requirements in IFRS 13 and the comparability amongst entities.
The Council of the EU adopted the European Commission conclusions on the EU capital markets union (CMU) action plan, which is aimed at securing a fully-fledged CMU by the end of 2019. The action plan highlights as priorities the need to strengthen capital markets so as to attract more investment, including foreign investment, for European companies and infrastructure projects, and the need to improve access to finance, in particular for European SMEs and start-ups, especially in innovative industries.
ESMA issued four new Q&As on the implementation of its guidelines for listed issuers on alternative performance measures (APMs), defined as measures of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The guidelines apply to APMs disclosed by issuers or persons responsible for drawing up a prospectus.
ESMA published Q&As on practical questions regarding the implementation of the Benchmarks Regulation (BMR). The questions concern the transitional provisions under the BMR, clarifying which benchmarks supervised entities will be allowed to use after 1 January 2018.
The FCA issued a statement on the Q&As published by ESMA on 5 July 2017 regarding the transitional provisions for the EU Benchmarks Regulation. The FCA says the Q&As are an important clarification for industry and will inform decisions on when to apply for authorisation or registration during the period January 2018 to December 2019.
The FCA published drafts of the forms that firms will need to use when applying to be a UK benchmark administrator in accordance with the EU Benchmarks Regulation. The draft forms have been made available as part of the FCA's consultation (CP17/17) on Handbook changes to reflect the application of the Benchmarks Regulation, which was launched on 22 June 2017. The FCA has asked for comments on the forms by 6 August 2017.
The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissioners (IOSCO) are consulting on proposed criteria for identifying simple, transparent and comparable short-term securitisations. They were designed to help the parties to such transactions to evaluate the risks of a particular securitisation across similar products and to assist investors with their conduct of due diligence on securitisations. Feedback is sought by 5 October 2017.
The European Money Markets Institute (EMMI) published guidelines for its Eonia Review data exercise. The guidelines outline the objectives of the exercise, its timeline, and the data analyses that EMMI will perform with the data collected from participating banks.
ESMA updated its Q&A document regarding the implementation of the Market Abuse Regulation.
ESMA wrote to the European Commission setting out its views on recent proposals for improvements in the way the EU deals with third countries on financial services. ESMA also highlights further areas where changes should be considered, including the third country regimes for credit rating agencies, trade repositories, benchmarks and possibly trading venues and data providers.
The Financial Stability Board (FSB) issued three sets of guidance and two reports on the recovery, resilience and resolvability planning of central counterparties (CCPs), setting out powers for resolution authorities to maintain the continuity of critical CCP functions. The guidance discusses the use of loss allocation tools and the steps authorities should take to establish crisis management groups for relevant CCPs and to develop resolution plans.
UK Export Finance (UKEF) is partnering with five of the UK’s biggest banks, to offer government-backed financial support to a wider range of businesses, including exporters and supply chain small and medium-sized enterprises (SMEs). The support, which is being delivered via a digital platform to ensure speed and efficiency, will also be extended to smaller companies that support big UK exporters giving them access to their clients’ international business.
A communication from the European Commission setting out guidelines on the application of Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (the PRIIPs Regulation) was published in the Official Journal of the EU. The communication does not contain or create new legal rules.
The International Organization of Securities Commissions (IOSCO) published a consultation on liquidity risk management recommendations for collective investment schemes (CIS), which seeks to address structural vulnerabilities arising from asset management activities. The consultation is accompanied by a second consultation report setting out practical information, examples and good practices regarding open-ended fund liquidity and risk management, to supplement its recommendations. Feedback on both consultations is sought by 18 September 2017.
ESMA published updated Q&As on the application of the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS).
The judge had been entitled to conclude that the balance had come down in favour of the preservation of the confidentiality of the claimant hedge fund manager's information sent to 36 potential investors, and that the grant of an injunction against the defendant global media news agency and financial journalist was a proportionate exception to their right to freedom of expression. Accordingly, the Court of Appeal, Civil Division, dismissed the defendants' appeals against the injunction. The judgment is available at: Brevan Howard Asset Management LLP v Reuters Ltd and another  EWCA Civ 950.
The BoE published a paper setting out a framework for engagement between the BoE’s Executive and the Financial Policy Committee (FPC) with regard to the Bank’s sterling monetary framework (SMF), in particular with regard to those operations providing liquidity insurance to the financial system. The framework was agreed by the BoE’s Executive and the statutory FPC on 21 June 2017.
The BoE hosted the 10th annual seminar of the International Association of Insurance Supervisors (IAIS), attended by nearly 300 delegates. The conference saw the first stakeholder session on the development of an activities-based approach to systemic risk assessment. The IAIS reiterated plans for a consultation on initial findings expected later in 2017, to be followed by a consultation by the end of 2018.
The European Insurance and Occupational Pensions Authority (EIOPA) issued an opinion, setting out principles to foster supervisory convergence and to ensure consistency in the authorisation process for (re)insurance undertakings relocating from the UK post-Brexit. The principles cover granting authorisation and approvals, governance and risk management, the outsourcing of critical and important activities, and the ongoing supervision and monitoring by EIOPA.
Accessing pension pots early has become ‘the new norm’, according to the interim findings of the Retirement Outcomes Review published by the Financial Conduct Authority (FCA). The review is the first major comprehensive study into how the retirement income market is changing since the pension freedoms, and the FCA is inviting feedback on the initial findings and recommendations. It aims to publish a final report in the first half of 2018.
The search for yield on Solvency II capital is changing insurer behaviour, according to the executive director of insurance supervision at the BoE, David Rule. Speaking at a meeting of the Association of British Insurers in London, Mr Rule said that the BoE is trying to understand how risks are changing, including through more in-depth supervisory reviews, and will use all its available supervisory tools to ensure that UK insurers are adequately capitalised and managing their risks prudently.
EIOPA published technical information for Solvency II relevant risk free interest rate (RFR) term structures with reference to the end of June 2017.
EIOPA published the technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of June 2017.
The Council of the EU said it will not object to a Commission Delegated Regulation amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates).
The FCA published an undertaking by London General Insurance Company Limited concerning an ambiguous term in its extended warranty protection policy, which Nationwide offers its FlexPlus customers. The FCA said the term could cause customers confusion over what was covered by the policy, and that it breached the Consumer Rights Act 2015 requirement for transparent, plain and intelligible language.
The EBA published final guidelines on the information to be provided to national competent authorities by applicants for authorisation as payment and electronic money institutions or registration as account information service providers under the Payment Service Directive (EU) 2015/2366 (PSD2). Separate sections of the guidelines apply to payment institutions, account information service providers, electronic money institutions and competent authorities.
The EBA published final guidelines under PSD2, on the criteria on how to stipulate the minimum monetary amount of the professional indemnity insurance (PII) or other comparable guarantee for payment initiation services (PIS) and account information services (AIS). The guidelines will apply from 13 January 2018.
The Competition and Markets Authority cleared the anticipated consolidation of Bacs Payment Schemes Limited, Faster Payments Scheme Limited and Cheque & Credit Clearing Company Limited, following a phase 1 investigation.
Advocate General Campos Sánchez-Bordona of the Court of Justice of the EU handed down an opinion on a preliminary reference concerning the interpretation of certain provisions in PSD2 (American Express Co v The Lords Commissioners of HM Treasury (Case C-643/16)). The Advocate General opined that the Court of Justice of the EU should rule that the questions referred for a preliminary ruling by the High Court of Justice of England & Wales, Queen’s Bench Division (Administrative Court) are inadmissible or if the Court is to answer the questions, it should do so in the manner set out in Part IV of the Advocate General’s opinion.
The BoE released summaries of proofs of concept (PoCs) from the third round of its FinTech Accelerator programme. The PoCs covered analysis of large-scale supervisory data sets, executing high-value payments across currencies and borders, identifying and applying cross-cutting legal themes from regulatory enforcement actions, and measuring performance of the BoE’s internal projects portfolio.
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