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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 18 October 2018.
SI 2018/Draft: This draft enactment is laid in exercise of legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit in order to ensure that the regulation establishing technical and business requirements for credit transfers and direct debits in euro can continue to operate effectively after the UK’s withdrawal from the EU. It comes into force on exit day.
SI 2018/Draft: This draft enactment is laid in exercise of legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit. This draft enactment amends UK primary legislation and EU retained legislation in order to address deficiencies in retained EU law in relation to short selling, the selling of securities which are either borrowed or not owned by the seller, arising from the withdrawal of the UK from the EU. This ensures that the legislation continues to operate effectively at the point at which the UK leaves the EU. It comes into force on exit day.
SI 2018/Draft: This draft enactment is laid in exercise of legislative powers under the European Communities Act 1972 and the European Union (Withdrawal) Act 2018 in preparation for Brexit and amends pieces of UK primary and secondary legislation in order to address deficiencies in retained EU law in relation to the UK’s deposit guarantee scheme, the Financial Ombudsman Service and certain inquiries and investigations.
SI 2018/Draft: This draft enactment is laid in exercise of legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit. This draft instrument amends pieces of UK primary and subordinate legislation in order to ensure that the Payment Services Regulations 2017, SI 2017/752 and the Electronic Money Regulations 2011, SI 2011/99 can continue to operate effectively after the UK’s withdrawal from the EU. This draft instrument will achieve this by using the section 8 powers of the European Union (Withdrawal) Act 2018 (EU(W)A 2018) to fix deficiencies in these regulations.
The Department for Exiting the European Union published the fourth tranche of technical notices designed to inform individuals, businesses and public bodies in the UK of the implications of exiting the EU in March 2019 without a deal in place. The 29 additional documents published on 12 October 2018 cover a range of subjects including EU funding for overseas territories, transport, import/export regulation, business regulation, product labelling and safety, consumer rights, energy regulation and travel.
Britain will continue to enforce European Union sanctions, including financial restrictions against countries and individuals, even if the UK leaves the bloc in March 2019 without a deal, the government said as it commits to ensuring that asset-freezing can continue. The Foreign Office said that it expects this to be the case even if the UK divorces the EU in a ‘hard’ Brexit, without securing an agreement. Britain said it will also work with the EU to enforce new sanctions after it leaves the bloc in March 2019 if it is in their mutual interest.
UK Finance published a briefing on equivalence in a future EU-UK trade framework for financial services. The paper examines the EU’s current approach to equivalence and offers practical recommendations for how an enhanced form of equivalence, respectful of the sovereignty and other objectives of each of the parties, could be achieved.
The chair of the Treasury Select Committee, Nicky Morgan MP, wrote to the Bank of England (BoE) and the Financial Conduct Authority (FCA) to clarify the content and timing of the analysis it requested regarding the impact of Brexit on their ability to deliver their objectives. Ms Morgan also asked the chancellor of the exchequer to allow Treasury officials to work with the committee’s new specialist advisor on Brexit.
HM Treasury published a speech by the chancellor of the exchequer, Philip Hammond MP, at the annual Investment Association dinner. Discussing Brexit, Mr Hammond said the government was 100% committed to getting a deal that allows UK financial services to flourish and grow. He said the government’s Future Partnership white paper proposes a framework that allows the benefits of UK-EU financial services trade to continue, and maintains open markets and deep regulatory co-operation.
The UK Treasury minister for financial services said that the City of London will remain a key financial centre after Brexit and dismissed stories that there would be a mass exodus of staff and operations to other European Union jurisdictions once Britain exits. City Minister John Glen told lawmakers he agreed with BoE estimations that around 5,000 financial services jobs would leave the UK by the Brexit day next March. But he said the extent of contingency planning being done by London’s banks and financial firms was modest and the situation was stable.
The European Parliament’s Brexit Co-ordinator, Guy Verhofstadt MEP, wrote to Seema Malhotra MP, a member of the Exiting the European Union Committee, setting out the EU’s understanding on the continuity of UK-EU contracts post-Brexit. In a letter dated 18 September 2018, Mr Verhofstadt said the vast majority are one-off or short-term year contracts like travel insurance, for which there are no cliff-edge risks. In the case of uncleared OTC derivatives, many of these expire before 30 March 2019 (when the UK ceases to be a member of the EU), and those which do not should ‘in principle’ remain valid.
The FCA published policy statement 18/21 (PS 18/21) in which the regulator confirmed plans to extend access to the Financial Ombudsman Service to more small and medium-sized enterprises. The changes will mean that SMEs with an annual turnover below £6.5m and fewer than 50 employees, or an annual balance sheet below £5m will now be able to refer unresolved complaints to the FOS. The FCA also published consultation paper 18/31 (CP 18/31) in which the FCA proposed raising the maximum amount of compensation the FOS can require financial services firms to pay.
The FCA published consultation paper CP18/30: EU Securitisation Regulation Implementation (DEPP and EG). The FCA is consulting on a number of changes to ensure that its Handbook is consistent with the Regulation and related amendment to the Capital Requirements Regulation. Feedback is sought by 2 November 2018. The government also confirmed that the FCA will be the UK’s competent authority responsible for the supervision of compliance with the Regulation.
The FCA published FCA Mission: Approach to Competition, October 2018, setting out how the regulator promotes competition in UK financial markets.
The Prudential Regulation Authority (PRA) published consultation paper CP22/18, in which it proposes to delay terminating the existing ‘daily flows’ and ‘enhanced mismatch’ liquidity reports (FSA047 and FSA048) for six months to 1 January 2020. The PRA is also proposing to reduce the reporting frequency of the FSA047 and FSA048 reports to align with the PRA110 report in cases where it would otherwise differ from 1 July 2019. Feedback is sought by 12 November 2018.
The Basel Committee on Banking Supervision (BCBS) issued the final version of its stress testing principles, which replace the principles for sound stress testing practices and supervision published in May 2009. The BCBS says the new principles have been updated to reflect that stress testing is now both a critical element of risk management for banks and a core tool for banking supervisors and macroprudential authorities.
Sabine Lautenschläger, a member of the executive board of the ECB and vice-chair of the supervisory board of the ECB, outlined the roles and priorities of the ECB with respect to financial stability, macroprudential and microprudential policy, and banking supervision in a speech at the Central Bank of Malta. She said that liquidity remains a concern and will be the focus of stress tests in 2019.
As part of its working paper series, the ECB published working paper (WP) No. 2182, a framework for early-warning modeling with an application to banks. The WP sets out a framework for deriving early-warning models with optimal forecasting properties and applies it to predicting distress in European banks.
SI 2018/Draft: Draft amendments are made to miscellaneous pieces of legislation in order to transfer the regulation of claims management activities from the Claims Management Regulation Unit in the Ministry of Justice to the FCA. The Order sets out the types of claims management activities which will be regulated by the FCA and the restrictions on the promotion of those activities. It also specifies those activities which will be excluded from regulation by the FCA in England, Wales, and Scotland. This Order will come into force in part on 1 April 2019.
The Council of the EU published a consolidated version of a proposed regulation amending Regulation (EU) No 1093/2010 as regards the location of the seat of the European Banking Authority (EBA) as a result of the outcome of the negotiations between the Council and the European Parliament.
The Financial Markets Law Committee (FMLC) published a letter addressed to the UK Department for Business, Energy & Industrial Strategy (DBEIS) in response to a proposal for a new national security and investment regime, in which the FMLC sets out a number of concerns on which clarification would be helpful.
UK Finance announced that the new Financial Abuse Code of Practice is to be rolled out across the financial services industry over the next 12 months. The timescale is designed to ensure firms’ frontline staff are provided with training to ensure victims of financial domestic abuse are provided with the most appropriate response by their financial institution. The Code was developed with input from representatives from charities, victim support groups and government departments, alongside UK Finance’s Financial Abuse Project Group and Consumer Advisory Group.
The FCA published draft guidance, GC18/4: Senior Managers and Certification Regime—Proposed guidance on statements of responsibilities and responsibilities maps for FCA firms. This aims to give FCA solo-regulated firms practical assistance and information on preparing statements of responsibilities (SoRs) and responsibilities maps. It may also be of interest to dual-regulated firms already subject to the SM&CR, when preparing new SoRs and responsibilities maps, or reviewing existing ones. Comments are requested by 10 December 2018.
The executive director of supervision—investment, wholesale and specialists division—at the FCA, Megan Butler, wrote to the chair of the Women and Equalities Committee, Maria Miller MP, setting out the work of the FCA to combat sexual harassment in the firms it regulates. The letter, dated 28 September 2018, follows on from Ms Butler’s evidence to the committee as it prepared its report on sexual harassment in the workplace.
The CEO of the FCA, Andrew Bailey, gave a speech on trust and ethics from a regulator's perspective at the launch of the St Mary’s University School of Business and Society in London. He explained that the financial crisis of a decade ago, and the subsequent revealing of serious conduct problems in too many areas of financial services, has without doubt severely damaged any sense of trust. Mr Bailey considers that trust in finance has changed over time. The FCA is trying to restore trust in the financial system by, amongst other things, introducing the SM&CR and encouraging a good culture in firms.
UK Finance and the Association for Finance in Europe (AFME) responded to the FCA consultation paper, CP18/19: Introducing the directory, which aims to help consumers and firms check the status and history of individuals working in financial services. UK Finance and AFME say they support greater transparency for customers, but that the proposals go too far, requiring firms to publish information which will be of little use to the public and imposing a significant administrative burden on firms for little benefit.
The Council of the European Union adopted a new Directive to criminalise money laundering. The Directive will introduce new criminal law provisions to disrupt and block access by criminals to financial resources, including those used for terrorist activities. Once the Directive is published in the EU Official Journal, Member States have up to 24 months to transpose it into national law.
The International Bar Association launched cybersecurity guidelines aimed at smaller law firms, based on the assumption that all large firms have already implemented cybersecurity strategies. The volume of valuable personal and commercially sensitive information held by law firms of all sizes makes them an attractive target for cybercriminals and smaller firms are less likely to have the infrastructure in place to protect themselves from the potentially devastating impact of data breaches.
The European Commission published a proposal for a decision to be adopted by the Council of the EU, on behalf of the EU, within the European Economic Area (EEA) Joint Committee, concerning an amendment to Annex IX (Financial Services) to the EEA Agreement which will incorporate the Fourth Money Laundering Directive (EU) 2015/849 (MLD4) and the Second Wire Transfer Regulation (EU) 2015/847 (WTR2).
The European Parliament announced it is to raise no objections to the Commission Delegated Regulation of 17 November 2017 supplementing the Markets in Financial Instruments Regulation (Regulation (EU) 600/2014) (MiFIR) with regard to regulatory technical standards (RTS) on the trading obligation for certain derivatives (C(2017)07684–2017/2979(DEA)).
ESMA published two decisions (Decision of the board of supervisors on delegation to the ESMA chair of the assessment regarding third country trading venues for the purposes of Articles 20 and 21 of MiFIR and Decision of the board of supervisors on delegation to the ESMA chair of the assessment regarding third country trading venues for the purposes of Articles 57(4) of MiFID) of the ESMA board of supervisors on the delegation to the ESMA chair of the assessment regarding third-country trading venues for the purposes of Articles 20 and 21 of MiFIR and Article 57(4) of Directive 2014/65/EU (MiFID II).
The Council of the EU confirmed that it does not intend to object to 10 delegated acts adopted by the European Commission on 13 July 2018, which supplement Regulation (EU) 2016/1011 (the Benchmarks Regulation).
ESMA published its annual report on prospectus activity in the EEA for 2017. The report shows that in 2017 the number of prospectus approvals across the EEA increased by around 1.9% compared to 2016 (from 3,499 to 3,567), putting an end to a decade-long decline observed since the start of the financial crisis.
The BoE published minutes of the Money Markets Committee meeting on 3 September 2018. Items discussed include market conditions and EU Money Market Fund Reform, as well as updates on the UK Money Markets Code and the Risk Free Rate Working Group.
The International Capital Markets Association (ICMA) published its quarterly report for Q4 2018, which assesses market practice and regulatory policy relating to international capital markets. The report includes an assessment of the impact of a cliff-edge Brexit, risk-free rates and the industry’s position at a crossroads due to technological developments.
The International Swaps and Derivatives Association (ISDA) published a paper on clearing incentives, systemic risk and margin requirements for non-cleared derivatives. ISDA says it is becoming increasingly clear that certain aspects of the current rules related to initial margin (IM) do not effectively align with their stated goals of mitigating systemic risk and promoting central clearing. Instead, they impose unnecessary costs and may impede economic and risk management activity.
ISDA updated its Model Netting Act (the 2018 Act), a template for jurisdictions considering legislation to ensure the enforceability of close-out netting. It provides guidance and model provisions for legislators seeking greater legal certainty under local law for netting. The 2018 Act and accompanying guide expand upon previous versions, with updates to reflect the widespread adoption of bank resolution regimes, the introduction of mandatory margin requirements and the growth of Islamic finance.
The Loan Syndication and Trading Association (LSTA) published a note on trigger events and the September 2018 consultation by the Alternative Reference Rates Committee (ARRC) on proposed LIBOR fallbacks. Feedback on the ARRC consultation is sought by 8 November 2018.
ISDA extended the deadline for responses to its consultation on certain aspects of fallbacks for derivatives referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW. Originally due by 12 October 2018, responses will now be accepted until 22 October 2018.
New research conducted by the Alternative Investment Management Association, GPP and Edgefolio provides a road map for all emerging and start-up hedge fund managers as they approach $1bn in assets under management (AUM). The research lays out six key factors that emerging managers should consider while growing their businesses, which includes deploying an effective marketing strategy, aligning investor and manger interests, devising a fee structure to grow a heathy fund, underwriting the business for the immediate future and knowing when to build a permanent team.
The chair of the House of Commons Treasury Committee, Nicky Morgan MP, expressed concerns regarding whether the polling industry's business model risks damaging the integrity of UK financial markets. Following correspondence with the British Polling Council (BPC), Ms Morgan said that she will be writing to the FCA to seek the financial regulator's view on the matter.
The ECB published an interview with the chair of its supervisory board, Danièle Nouy, covering a range of issues including the fall out from and regulatory response to the financial crisis, bank profitability and non-performing loans.
The ECB published a speech by the chair of its supervisory board, Danièle Nouy, speech entitled ‘Ethics in banking—from Gordon Gekko to George Bailey’, at the 7th Congress of the Solvay Schools and their Alumni in Brussels. Ms Nouy talked about the recent loss of trust in bankers since the financial crisis, whether this loss of reputation is merited, the different ways in which ethics in banking can be improved, and the importance of good governance, supervision and culture.
Yuchai Dongte Special Purpose Automobile Company Ltd's (Yuchai's) claim against Suisse Credit Capital (2009) Ltd (Suisse Credit) for payment pursuant to a letter of credit for US$3m, plus interest, succeeded. The Commercial Court held that, on the true construction of the contract, Suisse Credit was the issuer of the letter of credit (LC2), while another company, Suisse Bank Offshore Ltd, was a nominated bank, and that LC2 had not excluded the obligations of the issuer. Further, the court ruled that there had been no shared assumption to the effect that Suisse Credit was not the issuer and, therefore, there was no estoppel by convention. The full judgment is available at:  EWHC 2580 (Comm).
Articles 1(3) and 10(1) of Directive (EC) 94/19, as amended by Directive (EC) 2009/14, should be interpreted as precluding, first, national legislation according to which the determination that deposits had become unavailable was concomitant with the insolvency of that credit institution and the withdrawal of that institution's banking licence and, second, derogation from the time limits provided by those provisions for the purposes of determining that deposits had become unavailable and of reimbursing those deposits on the ground that the credit institution had to be placed under special supervision. The Court of Justice of the European Union so ruled, among other things, in proceedings concerning the harm that the applicant claimed to have sustained due to the late payment of the guaranteed deposit on the basis of deposits made to a current account opened with a bank which had subsequently become unavailable. The full judgment is available at: C-571/16.
The FCA published a Dear CEO letter regarding the issues surrounding the increase in complaints about unaffordable lending (including complaints about a ‘chain’ of loans over an extended period) and to set out how it expects high-cost short-term credit (HCSTC) firms to manage the impact.
The European Commission published the 2018 Consumer Markets Scoreboard, which monitors how EU consumers rate the performance of 40 goods and services sectors. According to the report, financial services remains one of the particularly problematic areas for consumers in most EU Member States.
The Intermediary Mortgage Lenders Association (IMLA), which represents 43 UK banks, building societies and specialist lenders, called for the government to clarify the future of the Help to Buy Equity Loan Scheme to prevent destabilisation of the housing market and preserve the ability to offer first time buyers home financing.
Article 4(14) of Directive (EC) 2007/64 should be interpreted as meaning that a savings account which allowed for sums deposited without notice and from which payment and withdrawal transactions could be made solely by means of a current account did not come within the concept of 'payment account'. The Court of Justice of the European Union so held in proceedings concerning the lawfulness of the standard terms and conditions of the contracts offered by the respondent Austrian bank. The full judgment is available at: C-191/17.
The executive board of the ECB adopted a decision amending Decision ECB/2007/7 concerning the terms and conditions of TARGET2-ECB. The changes reflect amendments recently made to Guideline ECB/2012/27 of the ECB regarding the terms and conditions of TARGET2-ECB and clarify some other points in the terms and conditions.
The Payment Systems Regulator (PSR) published its response to the second 'footprint report' of the UK's largest cash machine network, LINK, on access to cash points. The PSR is concerned about closures of free-to-use (FTU) ATMs, particularly 'protected' ones, ie those 1km or more away from another FTU machine. The PSR is working closely with, and receiving regular updates from, LINK's senior team to ensure it delivers on its commitments to protect the broad spread of free to use ATMs.
The European Payments Council published an interview with John Broxis, the managing director of PRETA S.A.S, a wholly-owned subsidiary of EBA Clearing, the provider of pan-European payment infrastructure solutions currently owned by 51 shareholder banks. PRETA aims to ensure the protection of people’s cyber, electronic and digital identity and develop solutions for online and mobile activities. Mr Broxis discussed the revised Payment Services Directive (PSD2) and the PRETA Open Banking Europe (OBE) directory project.
The PRA published several policy statements (PS22/18, PS23/18, PS24/18 and PS25/18) relevant to Solvency II insurers. Final associated supervisory statements are appended to the policy statements.
The European Commission adopted a proposal for a decision to be adopted by the Council of the EU, on behalf of the EU, within the EEA Joint Committee, concerning an amendment to Annex IX (Financial Services) to the EEA Agreement in order to incorporate Directive 2014/51/EU (Omnibus II) in respect of the powers of EIOPA and ESMA.
Europe’s three major European financial watchdogs said that they will focus on protecting financial services and insurance consumers across the bloc against poor practices in retail investment, anti-money laundering and financial technology over 2019. The European Supervisory Authorities, a joint committee made up of the EBA, the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), said, that they will support firms to safeguard customers by setting out guidance for, and possible amendments to, the EU’s Packaged Retail and Insurance-based Investment Product Regulation (PRIIPs). The rules require asset managers to provide investors with fact sheets, known as key information documents, but have triggered complaints that investors are being given ‘actively misleading’ information.
A global collection of nine insurance associations wrote a letter to chair of the International Accounting Standards Board, Hans Hoogervorst, outlining the industry’s concerns relating to the implementation of the International Financial Reporting Standard (IFRS) 17 for insurance contracts. The letter states that a number of vital issues still need to be resolved in order to ensure high quality and operational practicability of the new standard before it is implemented. The letter calls for a delay of two years, so that improvements can be made, and companies are given ample time to address the significant implementation challenges of IFRS 17.
The government released its response to the Treasury Committee’s 19th report of Session 2017–19, ‘Household finances: income, saving and debt’. Though the government welcomes the report, it rejected the Treasury Committee’s calls to reform pensions tax relief and abolish the Lifetime ISA.
The ECB published a speech by a member of its executive board, Peter Praet, on the consequences of population ageing for economic policy making, in particular for the reform of public pension systems and the effectiveness of macroeconomic policies.
The FCA published feedback statement 18/2, FS18/2 which summarises the feedback it received to its February 2018 call for input on how technology could achieve smarter regulatory reporting. The call for input outlined a 'proof of concept' developed at the FCA's November 2017 TechSprint which could potentially make it easier for firms to meet their regulatory reporting requirements and improve the quality of the data that they provide.
The EBA held a webinar on the impact of FinTech on incumbent credit institutions’ business models. The webinar looked at the profitability landscape in the EU banking sector and the key findings of the EBA’s July 2018 thematic report, as well as the EBA’s priorities on FinTech.
Patrick Armstrong, a senior risk analysis officer in the innovation and products team at ESMA, spoke at the 4th Luxembourg FinTech Conference about ESMA's approach to financial technology. He said that ESMA has so far taken a 'wait and see' approach to distributed ledger technology (DLT), but it will continue to monitor market developments to assess whether a regulatory response may be needed.
The British government needs to revamp how it regulates and taxes financial services to keep pace with the introduction of financial technology into the marketplace, a leading trade group said in a report. The Confederation of British Industry (CBI) said technology and regulatory shifts are creating new challenges for the sector that demand new tools to scrutinise the effect of regulation and taxation policies as they gets ready to leave the EU.
The PRA published a consultation paper (CP23/18) on a draft supervisory statement (SS) on banks’ and insurers’ approaches to managing the financial risks from climate change. Feedback is sought by 15 January 2019. The FCA also published a discussion paper (DP18/8) on the impact of climate change and green finance on financial services. Feedback on the discussion paper is sought by 31 January 2019.
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