Weekly highlights—15 March 2018

Brexit

FCA launches survey for EEA inbound passported firms in advance of Brexit

The Financial Conduct Authority (FCA) issued a survey following the government's announcement in December 2017 that, if necessary, it will legislate to provide a temporary permission scheme for European Economic Area (EEA) firms and funds passporting into the UK prior to the UK exiting the EU. The FCA is asking firms which passport into the UK (either via a branch or on a cross-border services basis) or market funds in the UK to complete the short online survey by 11 May 2018.

Illustrative examples of secondary legislation to be introduced under EU (Withdrawal) Bill

The government updated its guidance page on the European Union (Withdrawal) Bill to include illustrative examples of the draft statutory instruments (SIs) which would be introduced once the Bill becomes law. The example instruments cover a range of legal subject areas including employment rights, health and safety, contractual and non-contractual obligations and transport.

Economic and fiscal report outlines first Brexit divorce bill payment plan

The cost of leaving the EU will see Britain paying for 45 years, until 2064, according to data produced by the Office for Budget Responsibility (OBR). The Treasury supervisory body noted that it was forced to base its predictions on ‘broad-brush assumptions’ as a ‘meaningful basis upon which to predict the precise end-point of the Brexit negotiations’ is yet to be found, but estimated that the total cost of leaving the EU would be £37.1bn.

Responses to Philip Hammond’s Brexit speech

The Investment Association, the Confederation of British Industry and the Association of British Insurers all responded to the chancellor of the exchequer’s Brexit speech on financial services:

  • the Investment Association published a response from its chief executive, Chris Cummings, in which Mr Cummings welcomed the government’s recognition that the asset management industry needs clarity and certainty as it plans for Brexit
  • the Confederation of British Industry responded strongly backing Philip Hammond’s position and saying ‘trying to forge a new trading relationship with our largest trading partner that does not include financial services is like building a ship with no sails’
  • the director general of the Association of British Insurers, Huw Evans, responded welcomed Philip Hammond’s commitment to seeking a deal, and saying ‘it would defy common sense not to’

UK guarantees Gibraltar financial services firms’ access to UK markets until 2020

The Department for Exiting the European Union (DExEU) issued a government statement following the JMC(GEN) in which it stated that the UK will guarantee Gibraltar’s financial services firms’ access to UK markets as now until 2020.

Financial Conduct Authority updates

FCA publishes addendum to Quarterly Consultation Paper No 20

The FCA published an addendum to consultation paper CP18/6: Quarterly Consultation Paper No 20. According to the FCA, it is necessary to make a change to the legal instrument as published in appendix 3 of CP18/6 relating to the removal of the appointed representatives annual reporting requirement.

Prudential Regulation Authority updates

David Thorburn resigns from the Prudential Regulation Committee

The Bank of England (BoE) announced that David Thorburn has resigned from the Prudential Regulation Committee (PRC), with a view to returning to the private sector. HM Treasury has begun the process to appoint a successor.

Authorisation, approval and supervision

EBA issues revised list of ITS validation rules

The EBA issued a revised list of validation rules in its Implementing Technical Standards (ITS) on supervisory reporting, highlighting those which have been deactivated either for incorrectness or for triggering IT problems. The EBA says competent authorities throughout the EU should be aware that data submitted in accordance with these ITS should not be formally validated against the set of deactivated rules.

Northern Ireland credit unions registrar functions transferred to FCA

The Financial Services Act 2012 (Mutual Societies) Order 2018 has been published and will come into force on 6 April 2018. The Order provides for functions of the Registrar of Credit Unions for Northern Ireland relating to co-operative and community benefit societies and credit unions to be transferred to the FCA. Functions of the registrar which relate to the determination of disputes will be transferred to the county court in Northern Ireland.

Prudential requirements

The EBA publishes consultation on how to manage non-performing exposures

The European Banking Authority (EBA) launched a consultation on its guidelines for credit institutions on how to effectively manage non-performing exposures (NPEs) and forborne exposures (FBEs). The guidelines target high-NPE banks with the aim of achieving a sustainable reduction of NPEs to strengthen the resilience of their balance sheets and support lending into the real economy. The guidelines are designed to ensure that consumers who have taken out loans are treated fairly at every stage of the loan life cycle. The consultation runs until 8 June 2018.

House of Commons European Scrutiny Committee considers legislative proposals for banking reforms

The House of Commons European Scrutiny Committee considered the proposals of the European Commission for amendments to the Capital Requirements Directive 2013/36/EU (CRD IV), the Capital Requirements Regulation (EU) 575/2013 (the CRR) and the Bank Recovery and Resolution Directive 2014/59/EU (BRRD), as part of the Commission’s banking reform risk reduction measures. The Committee has decided not to clear the proposed measures from scrutiny and has requested further information. It did, however, agree to grant a scrutiny waiver ahead of the proposed agreement of a general approach at the Economic and Financial Affairs (ECOFIN) Council of 13 March 2018. The Committee’s concerns have been drawn to the attention of the Treasury Committee.

RTS under the BRRD published in the Official Journal

Commission Delegated Regulations (EU) 2018/344 and (EU) 2018/345 of 14 November 2017 supplementing the BRRD have been published in the Official Journal.

Commission publishes draft RTS supplementing the CRR

The European Commission adopted a Delegated Regulation supplementing the CRR with regard to Regulatory Technical Standards (RTS) on the specification of the assessment methodology under which competent authorities permit institutions to use advanced measurement approaches (AMAs) for operational risk.

EBA Opinion raises no objection to French tightening of large-exposure limits

The EBA published an Opinion following the notification by the French High Council for Financial Stability (HCSF) of its intention to tighten the large-exposure limits applicable to large and highly indebted non-financial corporations (NFCs) resident in France, or groups of connected NFCs assessed to be highly indebted and based in France. Based on the evidence submitted, the EBA does not object to the adoption of the proposed measure, which the HCSF intends to apply only to global or other systemically important institutions (G-SIIs and O-SIIs) with the aim of accounting for changes in the intensity of macroprudential/systemic risk that could pose a threat to financial stability in France.

AG gives opinion on procedure for supervising prudential requirements under the CRD/CRR

Advocate General Campos Sanchez-Bordona gave a preliminary ruling to the Federal Administrative Court of Austria in relation to the procedure for supervising prudential requirements under the CRR and CRD IV. This is the first time the European Court of Justice has ruled on certain aspects of the procedure for supervising the prudential requirements to which the EU legislature compels credit institutions and investment firms to submit.

BCBS follow-up reports on Basel III RCAP assessments and updated Handbook for jurisdictional assessments

The Basel Committee on Banking Supervision (BCBS) published details of follow-up actions taken by BCBS member jurisdictions to address deviations from the Basel standards that were identified as part of the Committee's Regulatory Consistency Assessment Programme (RCAP). This covers assessments that were completed and published as of end-2016.

Industry comments on the BCBS’s latest discussion paper released

Regulatory financial institutions provided comments on the BCBS’s discussion paper ‘The regulatory treatment of sovereign exposures’. The Global Financial Markets Association, the Institute of International Finance and the International Swaps and Derivatives Association (the associations) believe that the discussion paper ‘provides the opportunity to reflect on the trading book treatment of sovereign exposures’. The associations state that in sharing the industry’s considerations regarding the regulatory treatment of sovereign exposures in the trading book, they believe ‘it is critically important to dynamically review the incentives created by regulation as they can have significant implications for low-risk assets like sovereign bonds’.

Presidency of the Council of the EU on proposals for amendments to the banking prudential requirements

The Presidency of the Council of the European Union published a ‘general approach’ note on completing the Banking Union, setting out three political issues that remain outstanding before a general approach can be reached. It covers outstanding issues concerning the implementation of the fundamental review of the trading book (FRTB), minimum requirement for own funds and eligible liabilities (MREL) subordination, and the scope of the CRR and CRD IV.

Risk management and controls

FCA publishes discussion paper on culture in financial services

The FCA published a discussion paper on transforming culture in financial services. It contains a series of essays on what a good culture might look like, the role of regulation and regulators, how firms might go beyond incentives, and how to change behaviour for the better.

FSB publishes final Supplementary Guidance on compensation practices

The Financial Stability Board (FSB) published the final version of its Supplementary Guidance to the FSB Principles and Standards on Sound Compensation Practices, following a public consultation launched in June 2017. The guidance provides firms and supervisors with a framework to consider how compensation practices and tools, such as in-year bonus adjustments, malus or clawback, can be used to reduce misconduct risk and address misconduct incidents.

BSB Statement of Principles promotes high standards of professionalism

The Banking Standards Board (BSB) published the BSB Statement of Principles for strengthening professionalism—the role of the firm. The intention of the Principles is to help firms consider their own internal practices, and to reflect the legitimate expectations of customers and clients of UK banks and building societies. The work builds on regulatory initiatives, such as the Senior Managers and Certification Regimes (SMCR), and reflects the expectations of customers and clients of UK banks and building societies.

ECB launches new Euro Cyber Resilience Board

The European Central Bank (ECB) chaired the first meeting of a new Euro Cyber Resilience Board (ECRB), which is intended to be a high-level forum for pan-European financial market infrastructures, critical service providers and competent authorities. The objective of the ECRB is to enhance the cyber resilience of the EU financial system in line with international standards by fostering trust and collaboration and facilitating joint initiatives among market participants and with competent authorities.

Financial crime

JMLSG consults on AML guidance revision

The Joint Money Laundering Steering Group (JMLSG) published proposedrevisions to two of the sectors in Part II of its Guidance on the prevention of money laundering and the financing of terrorism for the UK. The proposed revisions, to sector 12: Asset finance, and sector 17: Syndicated lending, do not change the substance of the guidance, but seek to describe in more current terms the way the sectors work, how to assess the risks in the sector and how to identify who the customers are. Comments on the proposed revisions should be received by 30 March 2018.

Council adopts position on directive to fight fraud and counterfeiting of non-cash payments

The Council of the EU adopted its position on the proposed directive on combating fraud and counterfeiting of non-cash means of payment. Once the European Parliament has defined its position, currently planned for June 2018, trilogue negotiations will start with a view to reaching an agreement as soon as possible.

ECB publishes summary of first meeting of working group on euro risk-free rates

The ECB published the minutes of the inaugural meeting of the working group on euro risk-free rates. Opening the meeting, Benoît Cœuré, a member of the ECB executive board, explained the ECB’s initiative to produce an overnight interest rate based on data already available to the Eurosystem under the Money Market Statistical Reporting (MMSR) Regulation. The ECB aims to start releasing a daily rate before 2020. Mr Cœuré concluded that co-ordination, co-operation and transparency across market segments, products and users are essential for the success of the benchmark reform and the possible transition to alternative rates.

Enforcement and redress

Nicky Morgan asks chief ombudsman for comment on findings of Dispatches programme

The chair of the Treasury Committee, Nicky Morgan MP, wrote to the chief ombudsman and CEO of the Financial Ombudsman Service (FOS), Caroline Wayman, following Channel 4’s Dispatches investigation, aired on 12 March 2018. Channel 4 said its investigation found ‘staff with inadequate training or understanding of financial products judging cases, with some having reached decisions in favour of the banks, without properly reading case files’.

Capital Markets Union

European Commission issues proposals for package of measures to develop the CMU

The European Commission published a package of measures to develop the Capital Markets Union (CMU). The package includes:

  • a proposal for a directive amending the UCITS (Directive 2009/65/EC) and AIFMD (Directive 2011/61/EU) in relation to cross-border distribution of collective investment funds
  • a proposal for a regulation on facilitating the cross-border distribution of collective investment funds, which also amends Regulation (EU) 345/2013 and Regulation (EU) 346/2013
  • a proposal for an enabling EU framework on covered bonds
  • a proposal for an enabling framework on European crowdfunding service providers (ECSP) for businesses
  • a proposal on the law applicable to the third-party effects of assignments of claims, and
  • a communication on the applicable law to the proprietary effects of transactions in securities

Commission unveils sustainable finance and FinTech action plans, and proposals for a Regulation on crowdfunding and directive amending MiFID II

During a speech given in Brussels, European Commission vice-president Dombrovskis unveiled action plans on sustainable finance, FinTech and a proposal for a regulation on crowdfunding. The action planon sustainable finance is aimed at steering the financial sector to help reach Europe's climate change goals. The action plan on Fintech is aimed at making sure innovative financial companies can access capital, scale up in Europe and compete globally. The Commission also published a proposal for a Directive amending the MiFID II.

European Commission calls for ‘stronger push’ towards CMU by 2019

The European Commission sent a communication to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions, saying it is time to ‘accelerate delivery’ on completing the CMU by 2019. The Commission says that the need to progress with CMU is made even more urgent by Brexit, which calls for ‘an even stronger push for more developed, integrated and better supervised capital markets’.

Industry responses to European Commission's proposals on CMU and sustainable finance

The Association for Financial Markets in Europe (AFME), Insurance Europe and Invest Europe responded to the European Commission’s 8 March 2018 announcements on the CMU and sustainable finance:

Press release: Sustainable finance plan needs to be practical and flexible (Invest Europe)

Press release: Appropriate and balanced policy actions to support insurers' role in sustainable finance are welcome (Insurance Europe), and

Press release: Brexit could be a catalyst for more integrated European capital markets (AMFE)

Markets and trading

FCA issues policy statement on its powers in relation to LIBOR contributions

The FCA issued a policy statement (PS18/5) setting out the approach, criteria and methodology that it proposes to apply if it needs to use powers to compel banks to contribute to LIBOR. The policy statement is primarily relevant to banks that are current or potential submitters to LIBOR, and the administrator of LIBOR, ICE Benchmark Administration Limited. Parties who use LIBOR, for example in hedging products or loan agreements, may have an interest. No action needs to be taken in response to the policy statement.

Treasury and BoE consult on fees regime for financial market infrastructure supervision 2018/2019

HM Treasury and the BoE launched a consultation paper setting out further details on the proposal to introduce a new funding structure for the supervision of financial market infrastructure, including the fee levels for 2018/2019. HM Treasury is also consulting on a statutory instrument (SI). Feedback is sought by 9 May 2018.

ESMA publishes double volume cap data, triggering waiver suspensions

The European Securities and Markets Authority (ESMA) published trading volumes and calculations regarding the double volume cap (DVC) under MiFID II and MiFIR. The purpose of the DVC mechanism is to limit the amount of trading under certain equity waivers to ensure the use of such waivers does not harm price formation for equity instruments. More specifically, the DVC limits the amount of dark trading under the reference price waiver and the negotiated transaction waiver.

European Parliament publishes second part of proposed EMIR amendments

The European Parliament published a second set of proposed amendments to the text of a proposal for a regulation amending the European Markets Infrastructure Regulation (Regulation (EU) 348/2012) (EMIR) as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories.

ESMA publishes consultation responses on its draft guidelines on APC margin measures for CCPs

ESMA published the responses received to its consultation on draft guidelines on anti-procyclicality (APC) margin measures for CCPs. The draft guidelines in relation to the anti-procyclicality margin measures are made under Article 28 of the Commission Delegated Regulation (EU) 153/2013 of 19 December 2012 (RTS) and of Article 10 of the RTS on disclosure.

Response published on ESMA draft standards under Prospectus Regulation

The International Capital Market Association (ICMA) responded to ESMA’s consultation on draft RTS under the new Prospectus Regulation.

Government faces EU probe over VAT treatement of commodity derivatives

The European Commission announced infraction proceedings to be directed against the UK concerning VAT treatment of certain commodity derivatives trading under the Terminal Markets Order (TMO). Letter of formal notice requests a response from the UK government within two months.

Investment funds and wealth management

IOSCO report sets out protection measures for senior investors

The International Organization of Securities Commissions (IOSCO) published a report on senior investor vulnerability, saying ageing and associated levels of physical and cognitive decline increasingly affect the capabilities of investors in markets worldwide. The report notes that many investors are now assuming greater responsibility for their own retirement and financial future, and aims to raise awareness of the vulnerability of senior investors and the ways to improve their protection.

Spring Statement 2018: New fund proposed for knowledge-intensive companies

The government announced a consultation on the creation of a fund structure within the enterprise investment scheme that invests in knowledge-intensive companies. The consultation closes on 11 May 2018.

Green Investment Bank ‘failed to live up to original expectations’

The Public Accounts Committee found that the Green Investment Bank (GIB) failed to live up to original ambitions of encouraging investment in the green economy and creating an institution that lasts, to meet the UK’s climate change obligations. The Committee has said that the GIB’s intentions were not adequately protected in the sell-off. Committee deputy chair, Sir Geoffrey Clifton-Brown, said the manner in which GIB was sold off is ‘deeply regrettable’.

Insurance and pensions

Council approves Insurance Distribution Directive postponement

The Council of the EU adopted the Directive postponing the application date of the Insurance Distribution Directive (2016/97/EU) (IDD) to 1 October 2018. The Directive also extends to 1 July 2018 the deadline given to member states to transpose the new rules into national laws and regulations.

Revised I/A item note on IDD delay

The Council of the EU published a revised I/A item note on the proposed delay of the transposition deadline of the IDD to 1 July 2018 and the application date to 1 October 2018. The note, which asks the Permanent Representatives Committee (Coreper) to confirm the delay, has been amended to say that the German delegation will abstain.

I/A item note on EU/US insurance bilateral agreement

The Council of the EU published an I/A item note asking Coreper to recommend that the Council adopts, as an ‘A’ item on the agenda of one of its forthcoming meetings, the draft Council decision on the conclusion of the bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance.

EIOPA chair delivers keynote address concerning sustainable pensions

The chair of the European Insurance and Occupational Pensions Authority (EIOPA), Gabriel Bernardino, gave a keynote address about sustainable pensions at the Handelsblatt Annual Conference in Berlin, in which he commented on the progress made by governments, regulators and the industry since last year's conference, and focused on sustainability and whether ‘sustainable finance’ means ‘sustainable pensions’.

Payment services and systems

PSR publishes annual access and governance report, and consults on its Directions

The Payment Systems Regulator (PSR) published a third annual report updating stakeholders on developments in access and governance, saying it has been ‘a record year for new participants’ gaining access to the interbank payment systems of Bacs, Faster Payments and CHAPS. The PSR says it expects operators in 2018 to continue to progress work that will result in the first non-bank payment service provider (PSP) becoming a direct participant in at least one of the payment systems, and to continue to evolve models that lower complexity and cost for direct access. The PSR is also reviewingits 2015 Directions on access, governance and participants’ relationships with the PSR, in order to ensure that they remain relevant and proportionate, reflecting market realities, changes to legislation and potential future developments.

PSD2 RTS published in the Official Journal

Commission Delegated Regulation (EU) 2018/389 of 27 November 2017 supplementing Directive 2015/2366/EU of the European Parliament and of the Council (Second Payment Services Directive, PSD2) with regard to RTS for strong customer authentication and common and secure open standards of communication was published in the Official Journal of the EU.

Spring Statement 2018: views sought on cash and digital payments in the new economy

HM Treasury is seeking views on the role of cash and digital payments in the new economy. The government is intends for the consultation to help them discover what further work must be done to remove barriers to digital payments—paving the way for future and keeping pace with changes in the ways that people pay for goods and services. The consultation ends on 5 June 2018.

TARGET2 collective agreement comes into force on 20 March 2018

The ECB announced that a collective agreement between the national central banks (NCBs) operating TARGET2 component systems and the central securities depositories (CSDs) operating on the TARGET2-Securities (T2S) platform will come into force on 20 March 2018.

Fintch and virtual currencies

Leading cryptocurrency exchange granted UK licence

Coinbase, one of the world’s largest cryptocurrency exchanges, been granted a licence from the FCA. The company said this licence acted as an endorsement of its anti-money laundering and processing standards. Chris Hill, commercial technology partner at Kemp Little, thought the licence could give investors confidence to do business with such entities in future. Jonathan Rogers, partner at Taylor Wessing, says the demonstrable compliance Coinbase has shown to receive this licence could be an important part of cryptocurrency becoming part of the mainstream, while Bradley Rice, senior regulation lawyer at Ashurst, believes the move was 'bigger than cryptocurrencies' in its import. Nigel Rowley, managing partner at Mackrell Turner Grant, says the licence was a 'positive step' for the cryptocurrency market, but warned lawyers to remain cautious about the market.

BIS report highlights risks of central bank digital currencies

The Bank for International Settlements (BIS) published a report on central bank digital currencies (CBDCs), analysing their potential implications for payment systems, monetary policy implementation and transmission, as well as for the structure and stability of the financial system. BIS says some central banks have started to consider whether they might, at some stage in the future, issue digital currencies of their own, in part because cash is rapidly disappearing.

ECB’s Benoît Cœuré on the balance between financial regulation and innovation

Benoît Cœuré, a member of the executive board of the ECB, gave a speech on the balancing act between encouraging FinTech innovation, and safe regulation. Mr Cœuré said pre-emptively drawing in the reins in the name of financial stability could stifle innovation, prevent FinTechs from developing important economies of scale, and deprive small businesses and households of the benefit of technological progress. But allowing risks to accumulate in an unregulated sector may undermine financial stability and undo the benefits of past regulatory efforts.

LSB roundtable explores how FinTech can help vulnerable clients

The Lending Standards Board (LSB) published details of a roundtable meeting it held with its registered firms, FinTechs and the wider industry on how digital offerings can be developed to help identify and support vulnerable customers. The LSB says the evolution of digital technologies provides a unique opportunity to service the needs of vulnerable customers through features such as the automation of functions, easy access to third party help, and smart analytic tools able to prompt support at the right time.

EBA chair outlines new FinTech roadmap

The chair of the EBA, Andrea Enria, outlined the EBA's regulatory and supervisory roadmap for FinTech. In a speech at the Copenhagen Business School, Mr Enria said that the EBA's priorities in the coming years will include rigorous but proportionate policing of the perimeter, accommodative but safe sandbox regimes, and sharing of intelligence and best practice among supervisors and with market participants via a knowledge hub.

Dates for your diary

Date Subject Event
16 March 2018 Insurance
Fintech
Deadline for responses to the International Association of Insurance Supervisors (IAIS) consultation seeking views on its draft application paper on the use of digital technology in inclusive insurance.
18 March 2018 Securitisation Regulation Deadline for responses to ESMA consultation papers:
• Consultation Paper: Draft technical standards on content and format of the STS notification under the Securitisation Regulation (ESMA33-128-33).
• Consultation Paper: Draft technical standards on disclosure requirements, operational standards, and access conditions under the Securitisation Regulation (ESMA33-128-107).
• Consultation Paper: Draft technical standards on third-party firms providing STS verification services under the Securitisation Regulation (ESMA33-128-108).
20 March 2018 Solvency II Deadline for responses to the Prudential Regulation Authority (PRA) consultation paper ‘CP27/17: Solvency II—Internal models update’.
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