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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 16 November 2017.
The government confirmed that Parliament will get to vote on the final deal put in place for Brexit before the UK leaves the EU. Speaking to MPs, the Secretary of State for Exiting the European Union David Davis outlined plans for a Withdrawal Agreement and Implementation Bill which is expected to cover issues including an agreement on citizens’ rights, the financial settlement and any implementation period agreed during the negotiations. Mr Davis said the Bill means the ‘major polices will be directly implemented into domestic law by primary legislation—not by secondary legislation under the EU (Withdrawal) Bill’—to allow for Parliamentary scrutiny and oversight.
At a speech given at UBS, the secretary of state for exiting the European Union, David Davis, provided some insights into what the UK government is doing in its Brexit negotiations to maintain the City of London's position as the world's leading financial centre. He maintains that it is in the interests of both the UK and the EU to do so.
The House of Lords EU Financial Affairs sub-committee continued its inquiry into financial regulation and supervision post-Brexit by taking oral evidence from representative of the banking, insurance and FinTech industries.
The Council of the EU published a list of FAQs relating to the relocation of the European Medicines Agency (EMA) and the European Banking Authority (EBA) after Brexit. Among other things, the FAQs detail the timeline for deciding new host cities for the two organisations, the candidates as well as how the vote for host cities will work. The votes will take place on 20 November 2017.
Yves Mersch, a member of the executive board of the European Central Bank (ECB), said that the ECB strongly welcomes the European Commission's proposals to strengthen the role played by EU central banks in the supervision and regulation of EU and third-country central counterparties (CCPs). Speaking at the Cumberland Lodge Financial Services Summit in Windsor Great Park, Mr Mersch warned that Brexit creates uncertainties not only for CCPs but also for other financial market infrastructures (FMIs).
A letter to the Chancellor of the Exchequer from the EU Financial Affairs Sub-Committee has called for urgent agreement of a post-Brexit standstill transition period for the financial services sector. The Committee’s aim is to alert the Chancellor to the weight of evidence it has received during its current inquiry into the future of financial regulation and supervision following Brexit.
The chair of the supervisory board of the ECB, Danièle Nouy, delivered a speech on forging a European banking market, saying a European-wide regulatory perspective gives a better vantage point than nationally, allowing the ECB to compare banks from across the euro area, so that it can spot joint problems, shared vulnerabilities and contagious links. Ms Nouy said that when the ECB acts it is not influenced by national interests, which in the past have often stood in the way of decisive and necessary action.
The Financial Conduct Authority (FCA) published Handbook Notice No 49, which includes changes to the FCA Handbook and other materials made by the FCA Board on 9 November 2017, together with feedback on the corresponding consultations. Changes include a new MiFID 2 guide and a change to the Prudential sourcebook for Investment Firms (IFPRU) to help ensure full implementation of the Capital Requirements Directive (CRD).
The ECB published a report on the supervision of less significant institutions (LSIs). The report examines the organisation of banking supervision by the Single Supervisory Mechanism (SSM), which comprises the ECB and the national competent authorities (NCAs) of participating Member States, and sets out developments and challenges for the sector, as well as the types of supervisory activity conducted.
The FCA published consultation CP17/38: Regulatory fees and levies: policy proposals for 2018/19, setting out its proposed policy changes on how FCA fees will be raised from 2018/19. Comments are sought by 15 January 2018.
The EBA published its final guidelines on the treatment of connected clients as defined in the Capital Requirements Regulation (EU) 575/2013 (CRR), aiming at supporting institutions in identifying all possible connections among their clients, in particular when control relationships or economic dependency should lead to the grouping of clients because they constitute a single risk. The guidelines apply to all areas of the CRR where the concept of 'group of connected client' is used, including the EBA technical standards and the EBA guidelines that refer to that concept. For further information see LNB News 14/11/2017 22.
The EBA published a consultation on draft Regulatory Technical Standards (RTS) specifying the different methods of prudential consolidation, which can be applied when certain conditions and criteria are met. The aim of these draft RTS is to ensure that the appropriate method of prudential consolidation is applied for the calculation of the CRR requirements on a consolidated basis.
The EBA published two reports on the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements. The reports cover benchmarking exercises on credit risk for large corporate, institutions, and sovereign portfolios (collectively referred to as ‘low default portfolios’—LDPs) and market risk. The results confirm previous findings, with the majority of risk-weights (RWs) variability explained by fundamentals.
The EBA published an Opinion addressed to the European Parliament, Council and European Commission concerning the regulatory perimeter under the Capital Requirements Directive (CRD IV)/CRR. These include the use of Articles 2(5) and 9(2) CRD IV and the interpretation of the terms ‘financial institution’ and ‘ancillary services undertaking’ as defined in the CRR. The Opinion is based on the results of a detailed assessment across the EU of the prudential treatment of ‘other financial intermediaries’ (OFIs), ie those entities carrying out credit intermediation activities that are not credit institutions nor other specified types of financial entity. The results of this assessment are included in a Report published alongside the Opinion.
The Council of the EU published the final compromise text of the proposed regulation amending the CRR as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and the large exposures treatment of certain public sector exposures denominated in non-domestic currencies of Member States.
The Council of the EU endorsed an agreement with the European Parliament on a draft directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy), and a draft regulation on transitional arrangements to phase in the regulatory capital impact of the International Financial Reporting Standard (IFRS) 9.
The European Commission published an Inception Impact Assessment (IIA) for a proposed Regulation amending the CRR as regards prudential backstops preventing under-provisioning of non-performing exposures.
The European Commission adopted Commission Delegated Regulations (C(2017) 7436 final and C(2017) 7438 final) setting out RTS for valuations under Articles 36 and 74 of the Bank Recovery and Resolution Directive 2014/59/EU (BRRD).
The Council of the EU published an "I" item note inviting the Permanent Representatives Committee (Coreper) to approve the final compromise text of the proposed directive amending the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchies (BRRD Insolvency Hierarchy Directive). The final compromise text was agreed on 25 October 2017 following negotiations between the Presidency of the EU, the European Parliament and the Commission.
The European Commission issued a consultation paper on common minimum levels of capital that EU banks must set aside to cover incurred and expected losses on newly originated loans that turn non-performing (NPLs). The consultation is part of the action plan to tackle NPLs in the EU agreed by all Member States at the ECOFIN Council in July 2017. Feedback is sought by 30 November 2017.
The EBA acknowledged the adoption by the European Commission of the Implementing Act amending Regulation (EU) 680/2014(Implementing Technical Standards (ITS) on Supervisory Reporting) with regard to amendments to COREP and Additional Monitoring Metrics for liquidity as well as other amendments.
The European Commission is seeking technical advice from the EBA to assess the potential impact for EU banks from adopting statutory prudential backstops for newly originated loans that turn non-performing (NPLs), and to consider possible calibration options.
The EBA published a report on the peer review carried out to evaluate the implementation of its guidelines on the criteria for the assessment and identification of other systemically important institutions (O-SIIs). While it finds that the majority of authorities comply with the guidelines, it says some requirements are not consistently and comprehensively applied in all jurisdictions.
The vice-chair of the supervisory board of the ECB, Sabine Lautenschläger, delivered a speech on the EU’s non-performing loan (NPL) problems, saying banks that manage to forcefully address NPLs can focus on the future and attract new investors and new business, instead of forever having to look to the past. ‘These banks can do their job: finance the economy’.
The ECB published two opinions (CON/2017/46 and CON/2017/47) on the European Commission's November 2016 proposed banking reform package. While the ECB is generally supportive of the proposed reforms, it suggests a number of changes to the Commission's proposals.
The FCA published a letter dated 27 October 2017 responding to a freedom of information (FOI) request on the section 166 skilled persons report produced on the treatment of small and medium sized enterprise customers referred to RBS Global Restructuring Group (GRG). The letter sets out some further information about the publication of the report, but also explains the FCA’s reasoning for not disclosing further information.
The FCA published the remuneration exclusions form, for use by FCA solo-regulated firms/groups to notify, or to seek prior approval from, the FCA to exclude individuals from identification as a material risk taker (MRT) in accordance with Article 4 of Commission Delegated Regulation (EU) No 604/2014 and relevant provisions of the Remuneration Codes (SYSC 19).
The Chartered Institute for Securities & Investment (CISI) said a proposal by the Financial Conduct Authority (FCA) to ban the offering or acceptance of inducements within the financial services profession could ultimately hurt consumers. CISI also objects to the FCA’s proposed narrowing of the scope of training and competence requirements.
Negotiations between the EU Parliament and Council have stalled on the 5th update of the Anti-money Laundering Directive. According to rapporteurs, talks broke down after the Council attended the final scheduled trilogue without a mandate and without a text as a basis for discussion.
The Financial Action Task Force (FATF) published the procedures that are the basis for the fourth round of mutual anti-money laundering/counter-terrorist financing (AML/CFT) evaluations by FATF members. The scope of the evaluations will involve two inter-related components for technical compliance and effectiveness.
The FCA published the application form for an MLR Individual of an Annex I Financial Institution, under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
Proceedings brought by the FCA seeking a prohibition order against the applicant, following his conviction for conspiracy to defraud, and for publication of the related decision notice would be stayed and limited respectively. The Upper Tribunal, Tax and Chancery Chamber, held that in the circumstances of the applicant's case, his referral of his convictions to the Criminal Cases Review Commission had justified the pragmatic approach that a stay ought to be granted. The publication of the FCA's decision notice would be allowed but would be limited to only certain information rather than the full notice itself. The judgment is available at:  UKUT 423 (TCC).
The applicant company's application for a stay of a reference made by it to the Upper Tribunal (Tax and Chancery Chamber)(the tribunal) was refused by the tribunal on the basis that a stay would not assist it in ensuring that there was a proper consideration of the issues and the need to avoid unnecessary delay in the proceedings. However, the FCA’s application for a direction that the reference be struck out was granted on the ground that there was no reasonable prospect of the applicant's case succeeding. The judgment is available at:  UKUT 422 (TCC).
Where the applicant had contended that he had been prejudicially identified in a decision notice given by the FCA to a company, in respect of which he had been a compliance director and a member of its board, he was not entitled to an extension of time, following a delay of almost 14 months, to make a reference to the Upper Tribunal (Tax and Chancery Chamber) (the UTT), concerning his third party rights, under s 393 of Financial Services and Markets Act 2000 (FSMA 2000). So held the UTT, which further ruled that, even if the reference had been admitted, the applicant's claim for third party rights would have been dismissed, because there had been no reference, in the final notice to the company, to any particular individual holding a position, and, accordingly, the applicant had not been 'identified', within the meaning of section 393 FSMA 2000. The judgment is available at:  UKUT 428 (TCC).
The FCA published a final notice stating that it has cancelled the Part IV permission of Mr Anthony Badaloo, a sole trading financial adviser operating as Church Hill Finance.
The Bank of England (BoE) issued a consultation paper on the detailed statement of procedure for the new Enforcement Decision Making Committee (EDMC). The consultation also includes amendments to the existing statements of policy and procedure. Feedback is sought by 2 February 2018.
The European Securities and Markets Authority (ESMA) opened a public consultation on proposed amendment of RTS 1 which details the implementation of the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). EMSA is proposing to amend RTS 1 to clarify that systematic internalisers’ (SI) quotes should reflect the price increments applicable to EU trading venues. The public consultation is open until 25 January 2018.
ESMA updated its Q&As on market structure and transparency under MiFID II and MiFIR.
ESMA added four new Q&As on the implementation of investor protection topics under MiFID II/MiFIR. The new Q&As cover, among others, the topics of post-sale reporting, record keeping, and inducements.
ESMA updated its Q&As regarding the implementation of MiFID II. The update clarifies the application of the trading obligation for shares to trade certain instruments on-venue.
ESMA updated its Q&As regarding commodity derivatives under MiFID II and MiFIR.
ESMA updated its Q&As regarding data reporting under MiFID II and MiFIR.
The FCA published a further set of position limits on certain commodity derivative contracts which are traded on UK trading venues. The limits have been established in accordance with Article 57 of MiFID II and will apply from 3 January 2018 to positions held in the spot month and the other months' periods for each commodity derivative.
A corrigendum to Commission Delegated Regulation (EU) 2017/1018 of 29 June 2016 supplementing MiFID with regard to RTS specifying information to be notified by investment firms, market operators and credit institutions was published in the Official Journal of the EU.
The FCA published the November 2017 issue of Market Watch, its newsletter on market conduct and transaction reporting issues.
Regulation (EU) 2017/1991 of the European Parliament and of the Council of 25 October 2017 amending Regulation (EU) No 345/2013 on European venture capital funds (EuVECA) and Regulation (EU) No 346/2013 on European social entrepreneurship funds (EuSEF) has been published in the Official Journal. Regulation (EU) 2017/1991 shall enter into force on the twentieth day following that of its publication in the Official Journal. It shall apply from 1 March 2018.
ESMA, the EU’s direct supervisor of credit rating agencies (CRAs), registered Kroll Bond Rating Agency Europe Limited as a CRA under Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (CRA Regulation), with effect from 13 November 2017.
European Central Bank (ECB) opinions (CON/2017/39 and CON/2017/42) on amending Regulation (EU) No 648/2012 (EMIR) was published in the Official Journal of the EU.
The director of market oversight at the FCA, Julia Hoggett, gave a speech on MAR and the market abuse regime as a whole, covering the approach which firms need to adopt to achieve effective compliance and the way in which the FCA is currently set up to surveil the markets.
The General Court issued its judgment in Case T-180/15 Icap and Others v Commission, in which it partially annulled the infringement decision (including the provision imposing a €14.96m fine) issued to Icap, a leading interdealer broker, for its alleged participation in cartels relating to the Yen interest rate derivatives (YIRD) sector (Case AT. 39861 Yen interest rate derivatives). Icap had been charged for allegedly facilitating the illicit activities of five international banks (all of whom had admitted their involvement and settled with the Commission in December 2013) in relation to six of the seven cartels uncovered by the Commission in the YIRD sector. However, the General Court judgment details a number of defects with the Commission’s decision. In particular, the General Court was not satisfied that Icap’s participation could be confirmed in one of the cartels, that Icap’s involvement in three other cartels was as long as stated and, finally, that the Commission had adequately explained the methodology it employed in determining the level of fines imposed (six fines making up the overall €14.96m fine imposed). On the basis of the above considerations, the General Court annulled in part the Commission decision—including the part setting out the calculations of the level of fines imposed.
The Association for Financial Markets in Europe (AFME) responded to the European Commission’s consultation on post-trade in a capital markets union (CMU), which sought views on the main trends and challenges faced by post-trade services providers and users, and the best ways to remove barriers, including through financial technology. AFME says it is in favour of dismantling post-trade barriers, but it says a strategic plan for a comprehensive European post-trade reform should be developed.
The International Swaps and Derivatives Association published a survey of Asia-Pacific derivatives markets showing that the last decade has seen significant growth in the region, with Hong Kong and Singapore now pre-eminent in regional trading of foreign exchange (FX) and interest rate derivatives (IRD).
The European Commission opened a consultation on institutional investors and asset managers’ duties regarding sustainability. The consultation follows the July 2017 recommendation by the High Level Expert Group on sustainable finance that the Commission clarify that the fiduciary duties (loyalty and prudence) of institutional investors and asset managers explicitly include material environmental, social and governance (ESG) factors and long-term sustainability. Feedback is sought by 22 January 2018.
The FCA publicly censured Capita Financial Managers Limited (CFM) and agreed that CFM will pay up to £66m to investors who suffered loss as a result of investing in the Guaranteed Low Risk Income Fund, Series 1 (later renamed the Connaught Income Fund, Series 1) (the Fund), which is now in liquidation. The payment will be made via the FCA.
ESMA issued statements on the risks posed to investors by initial coin offerings (ICOs) and the rules that apply to firms dealing in them. ICOs are growing rapidly around the world and ESMA is concerned that investors may not be aware of the risks, and firms may not be complying with applicable EU legislation.
An independent review commissioned by the government has set out how the financial services industry and government can work together to increase social impact investments in the UK. The independent advisory group behind the review found that, while there is a growing interest among individuals for their investments to have a positive impact on society, as well as produce financial returns, the market for social impact investment remains underdeveloped.
The European Parliament adopted a resolution tabled by the Committee on Economic and Monetary Affairs (ECON) on the European Commission's Action Plan on Retail Financial Services. The resolution was included in ECON's report dated 20 October 2017 and will now be forwarded to the Council of the EU and the Commission.
The Prudential Regulation Authority (PRA) is consulting (CP24/17) on a draft supervisory statement (SS) setting its proposed expectations of firms regarding the application of the Solvency II matching adjustment (MA) within the calculation of the Solvency Capital Requirement (SCR). The PRA is seeking to update and consolidate all of its expectations regarding the modelling of the MA in internal models into a single SS in order to provide clarity. Feedback is sought by 9 March 2018.
The PRA published a consultation paper (CP23/17) in which the regulator seeks views on a draft supervisory statement (SS) on effective financial management and planning by insurance firms and groups.
The International Association of Insurance Supervisors (IAIS) opened a consultation on its draft revisions of some of its insurance core principles (ICPs), namely ICP 8 (Risk Management and Internal Controls), ICP15 (Investments), ICP 16 (Enterprise Risk Management for Solvency Purposes). The consultation also covers the ComFrame material integrated with these ICPs, and the proposed definitions of terms related to Enterprise Risk Management for Solvency Purposes. Feedback is sought by 8 January 2018.
Commission Implementing Regulation (EU) 2017/2015 of 9 November 2017 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 30 September 2017 until 30 December 2017, in accordance with Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), was published in the Official Journal.
The European Insurance and Occupational Pensions Authority (EIOPA) published new Q&As on templates for the submission of information to the supervisory authorities, and the procedures, formats and templates of the solvency and financial condition report. There are also answers on Commission Delegated Regulation (EU) 2015/35 supplementing Solvency II, and on the Guidelines on the loss-absorbing capacity of technical provisions and deferred taxes.
EIOPA published new sets of questions and answers (Q&As) on Commission Delegated Regulation (EU) 2015/35 supplementing Solvency II, as amended. The Q&As address, among other things, the validation process referred to in Article 261a(1)(a) of the Delegated Regulation.
EIOPA released a new set of statistical information on the European insurance sector based on Solvency II regulatory reporting. This set continues the series of quarterly statistics on solo undertakings launched on 28 June 2017. It contains country breakdowns and distributions of key variables based on reporting from solo insurance and reinsurance undertakings for the first quarter of 2017.
EIOPA published an update of the symmetric adjustment of the equity capital charge for end-October 2017, replacing the version published on 8 November 2017. The new symmetric adjustment is now 3.39% instead of the previously published 3.40%.
The European Union Agency for Network and Information Security (ENISA) published a report on commonality of risk assessment language in cyber insurance. It says that while several risk assessment languages and frameworks exist in cyber-insurance, the industry has yet to take steps in the direction of harmonisation. The report aims at further investigating this issue by identifying the incentives and barriers for adopting a common framework and makes recommendations towards the cyber insurance industry and EU policy makers to promote this harmonisation.
The International Association of Insurance Supervisors (IAIS) published an application paper on the governance of insurance groups. The IAIS is a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions. The mission of the IAIS is to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.
The Department for Work and Pensions (DWP) published guidance which explains the information requirements where members hold rights to safeguarded-flexible pension benefits and suggests best practice for those charged with delivering them.
The House of Commons Work and Pensions Committee questioned HM Treasury, the FCA and DWP on pension freedoms, scams and engaging the public with pension planning. The Oral Evidence session took place on 15 November 2017.
Commission Delegated Regulation (EU) 2017/2055 of 23 June 2017 supplementing Directive (EU) 2015/2366 of the European Parliament and of the Council (PSD2), with regard to RTS for the cooperation and exchange of information between competent authorities relating to the exercise of the right of establishment and the freedom to provide services of payment institutions, was published in the Official Journal of the EU.
Two ECB amending decisions and a guideline on the Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET2) were published in the Official Journal of the EU;
The European Payments Council published implementation guidelines for the Single Euro Payments Area (SEPA) rules for implementing the interbank ISO 20022 XML message standards based on version 1.1 of the 2017 SEPA Instant Credit Transfer (SCT Inst) rulebook, which takes effect on 21 November 2017 at 08:00 CET.
The EBA Banking Stakeholder Group (BSG) responded to the EBA’s consultation on its guidelines on fraud reporting under PSD2.
The director of retail banking supervision at the FCA, Karina McTeague, spoke on risk, legislative change and the increasing rate of innovation in the payments landscape. Ms McTeague discussed ways in which PSD2 opens up opportunities for businesses to develop new services to help consumers manage their money, to compare financial products, or to pay for things online.
EU banks need to get ready for harsher competition from FinTech companies, according to Ignazio Angeloni, a member of the supervisory board of the ECB. In an interview published in the ECB's Supervisory Review, Mr Angeloni also discusses how the banking landscape has changed since the financial crisis and considers whether integration has progressed and whether cross-border consolidation will happen.
The FCA issued two warnings about the risks of investing in cryptocurrency contracts for difference (CFDs), and the risks of investing in binary options. From 3 January 2018, firms offering binary options will be regulated by the FCA and will no longer be licensed by the Gambling Commission. The FCA already regulates CFDs.
The EBA's Banking Stakeholder Group (BSG) published a proposal (dated 20 July 2017) addressed to the EBA on regulatory sandboxes, amid concerns that as more European countries set up regulatory sandboxes, there are risks of creating a fragmented ecosystem of national sandboxes with different regimes.
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