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Welcome to the weekly Financial Services highlights from the Lexis®PSL Financial Services team for the week ending 19 January 2017.
On 11 January 2017 the Governor of the Bank of England (BoE), Mark Carney, gave evidence to the Treasury Committee on the BoE’s Financial Stability Report 2016. He told the Committee it is ‘highly advisable’ that the government seeks agreement to transitional arrangements, and does this at the start of the negotiations. He also warned the UK's negotiating counterparts in the EU that they, more than the UK, are vulnerable to financial stability risks during the period of transition.
On 12 January 2017, TheCityUK released a report setting out its key priorities for the UK-based financial and related professional services industry in the Brexit negotiations. The report calls for, among other things, clear and up-front transitional arrangements and legal continuity.
On 17 January 2017, Theresa May confirmed the government will not look to remain in the single market post-Brexit and will instead push for the ‘freest possible trade’ deal with European countries. The Prime Minister has also confirmed the final deal between the UK and the EU will be put to a Parliamentary vote. However, Ms May insisted, should the government fail to get the deal it wants, ‘no deal will be better than a bad deal’. Legal experts have expressed concern the two-year time frame to make provisional arrangements will not be long enough to develop an adequate deal for industry, the financial services sector in particular. Meanwhile, corporate lawyers tell LexisNexis the trade deal the government seeks may see the European Court of Justice continue to play a significant role in UK law post-Brexit.
In her speech on negotiating for Brexit, Theresa May indicated the government will aim for a ‘phased process of implementation’ for the UK’s future legal and regulatory framework for financial services. The government may also seek to take in elements of the current Single Market arrangements in certain areas, such as the freedom to provide financial services across national borders.
On 12 January 2017, the European Banking Authority (EBA) published a letter which endorsed new rules for the accounting treatment of leases under IFRS 16, saying the requirement to recognise assets and liabilities arising from a lease will clear up problems in the IAS 17 rules and will not raise significant difficulties for banks or regulators.
On 13 January 2017, the British Bankers’ Association (BBA) responded to two consultations by the Basel Committee on Banking Supervision (BCBS) taskforce on expected loss provisioning (TFP) on the interaction between regulatory capital and accounting capital after the introduction of IFRS 9. The BBA welcomed the proposed transition period but recognised the ‘philosophical difficulty’ this poses in the absence of a defined ‘end state’ as is currently the case.
On 10 January 2017, a Bill to make provision for the creation of mutual guarantee societies received its first reading in Parliament. It aims to increase and improve small and medium enterprise (SME) lending. The Bill is expected to have its second reading debate on Friday 24 February 2017.
At its meeting on 11 January 2017, the House of Commons European Scrutiny Committee considered, among other items, proposed amendments to EU legislation relating to resolution and recovery, capital requirements and central counterparties. The Committee also considered the proposed EU Proposed Regulation on requirements for a prospectus and a European Central Bank (ECB) Opinion on the proposed Regulation.
On 16 January 2017, the Prudential Regulation Authority (PRA) published Administration Instrument 2017 making minor corrections to its Rulebook. The corrections are not substantive, do not change PRA policy, and are unlikely to result in costs for firms.
On 11 January 2017, the BoE published a letter from its governor, Mark Carney, setting out a number of reasons why the BoE would not want to adopt the recent proposal of Sir John Vickers that the Bank should supplement its current approach to stress testing by publishing parallel results that take market-based measures of equity capital, rather than regulatory capital, as a starting point. One of the reasons Mr Carney said the BoE was reluctant to adopt the proposal was the risk of the two sets of results contradicting one another.
On 12 January 2017, Commissioner for competition, Margrethe Vestager, spoke at the SKAGEN funds conference in Copenhagen, considering some of the challenges and opportunities faced by banks and the financial industry in 2017, ten years on from the financial crisis. The Commissioner noted the healthier state of Europe’s banks, and emphasized the role played by EU state aid rules.
On 13 January 2017, the EBA published a summary of the results of its latest semi‐annual Risk Assessment Questionnaire (RAQ), which was conducted among banks and market analysts between October and November 2016.
On 14 January 2017, Commission Delegated Regulation (EU) 2017/72 of 23 September 2016 supplementing Regulation (EU) 575/2013 of the European Parliament and of the Council (Capital Requirements Regulation) with regard to regulatory technical standards specifying conditions for data waiver permissions was published in the Official Journal of the EU.
On 18 January 2017, the European Central Bank (ECB) published details of a speech given by the chair of the Supervisory Board of the ECB, Danièle Nouy, in which she said supervision creates value, and that it is regulators’ ability to look beyond national borders that allows them to spot problems early.
On 13 January 2017, the UK government announced it is considering whether to reform the law on corporate liability for economic crime, and issued an open call for evidence on the extent to which the identification doctrine is deficient as a tool for enforcement against large companies. The call for evidence closes on 24 March 2017.
On 13 January 2017, the FCA announced it had successfully prosecuted two men for insider dealing. Manjeet Mohal, a former employee of Logica plc, was sentenced to ten months' imprisonment, suspended for two years, in respect of two counts of insider dealing. He was also ordered to undertake 180 hours of community work. His neighbour, Reshim Birk, was sentenced to 16 months' imprisonment, suspended for two years, and ordered to undertake 200 hours of community work.
On 16 January 2017, the UK government published its response to an International Development Committee report on how to tackle corruption overseas. While the government has said it is committed to ensuring that the Overseas Territories and Crown Dependencies (OTCDs) meet Financial Action Task Force Standards, it disagrees with the Committee’s recommendation that it should influence OTCDs to create public beneficial ownership registers. It has also disagreed with the recommendation to publish country-by-country reports on the tax paid by UK-based multinational enterprises.
On 16 January 2017, the Serious Fraud Office (SFO) announced that a Deferred Prosecution Agreement (DPA) had been reached between Rolls-Royce PLC and the SFO, following approval by Sir Brian Leveson QC, President of the Queen's Bench division. Transparency International UK comments that while the DPA will cause those undertaking bribery to think again about their actions, more should be done to ensure those involved are prosecuted individually.
On 16 January 2017, the Complaints Commissioner published its final report on a claim for financial compensation for the erroneous listing of a company on the ‘warnings’ webpage of the Financial Conduct Authority (FCA) between September 2013 and April 2015. The FCA undertook a thorough investigation into the complaint and admitted its errors. It offered a £500 payment to the company for distress and inconvenience, but concluded that it did not have sufficient evidence of direct loss to consider a payment for financial compensation.
On 16 January 2017, the FCA and the PRA issued a consultation paper (FCA CP17/1, PRA CP1/17) on the Financial Services Compensation Scheme—Management Expenses Levy Limit (MELL) 2017/18. Feedback should be submitted by 13 February 2017.
On 16 January 2017, the Financial Services Compensation Scheme (FSCS) published its budget and plans for 2017/18 in support of the consultation by the PRA and the FCA on the Financial Services Compensation Scheme—Management Expenses Levy Limit 2017/18 (FCA CP17/1, PRA CP1/17). The FSCS is setting out its proposed budget on the basis of activity rather than input for transparency purposes.
On 16 January 2017, the PRA published a Policy Statement ‘Deposit Protection Limit’ (PS 1/17). The Policy Statement provides feedback to responses received on the PRA’s consultation paper CP41/16, issued in November 2016, final rules and an updated version of Supervisory Statement ‘Depositor and dormant account protection’ (SS18/15).
On 17 January 2017, the US Department of Justice announced that Deutsche Bank will pay US$7.2bn settlement for misleading investors during its sale of residential mortgage-backed securities (RMBS) between 2006 and 2007. This is the largest RMBS resolution for the conduct of a single entity.
On 12 January 2017, the European Securities and Markets Authority (ESMA) issued an opinion which called on EU institutions to modify the scope of the product intervention powers given to national competent authorities (NCAs) and ESMA under the Markets in Financial Instruments Regulation (MiFIR) so that they apply directly to fund management companies. ESMA says the change is necessary to create a level playing field and address the risk of regulatory arbitrage.
On 12 January 2017, the General Secretariat of the Council of the EU recommended that the Council confirm that it has no objection to two delegated regulations adopted by the European Commission supplementing the Markets in Financial Instruments Directive (MIFID II) (2014/65/EU) with regard to position limits for commodity derivatives and the ancillary activities exemption:
Commission Delegated Regulation supplementing MiFID II with regard to RTS for the criteria to establish when an activity is considered to be ancillary to the main business - intention not to raise objections to a delegated act, and
Commission Delegated Regulation supplementing MiFID II with regard to RTS for the application of position limits to commodity derivatives - intention not to raise objections to a delegated act
On 12 January 2017, ESMA published a briefing summarising the technical data reporting requirements under MiFID II and MiFIR, as well as related reporting requirements under the Market Abuse Regulation. The briefing clarifies which entities will be responsible for reporting different categories of data, which regulator it must be reported to, and when the reporting requirement commences.
On 12 January 2017, ESMA issued two opinions (ESMAO3-445018618-7 and ESMA/03-445018618-8) confirming that a Swedish pension scheme arrangement can benefit from an exemption from the clearing obligation under Article 89(2) of Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).
On 12 January 2017, the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) published an update on developments within the LEI System.
On 13 January 2017, the Bank for International Settlements (BIS) published a report into the sterling ‘flash event’ on 7 October 2016. Drawing on granular high-frequency data, it includes a forensic study of the event window, a comparison with similar historic episodes, and a discussion of the relevant policy implications. The BIS says the event does not represent a new phenomenon, but rather a new data point in what appears to be a series of flash events that are now occurring in a broader range of markets than was previously the case. While such events are generally short-lived and without immediate consequences for financial stability, the report highlights the risk that flash events undermine confidence in financial markets and stresses the need for further analytical work in this area.
On 17 January 2017, ESMA issued the official translations of its final guidelines on commodity derivatives under the Market Abuse Regulation.
On 17 January 2017, the International Capital Market Association (ICMA) responded to the Fixed Income, Currencies and Commodities Markets Standards Board (FMSB)’s draft New Issue Process Standard for the Fixed Income Markets. ICMA suggest that a sufficient transition period of at least six months should be provided following publication of the final standard to allow widespread familiarisation throughout the market and consequential implementation of any changes to prior practices.
On 17 January 2017, ESMA published the 16 December 2016 response by the Securities and Markets Stakeholder Group (SMSG) to ESMA’s consultation on MiFID II product governance (2016/1436). Over all, the SMSG supports the proposals, saying they are not overly complicated and should reduce the risk of misselling.
On 18 January 2017, the EBA and ESMA called for clarification of the requirements for credit, market, and counterparty credit risk in the CRR with EMIR. The aim is to ensure that only risks not already covered by specific financial resources for activities unrelated to clearing are to be covered by CRR requirements. ESMA and the EBA said this exclusion should also be extended to activities covered by interoperability arrangements.
On 12 January 2017, the Financial Stability Board (FSB) published final policy recommendations to address structural vulnerabilities from asset management activities that could potentially present financial stability risks. The recommendations incorporate feedback from the FSB’s June 2016 consultation.
On 17 January 2017, HM Treasury issued a explanatory note about a draft Legislative Reform Order (LRO) which would amend the Limited Partnerships Act 1907 (LPA 1907) to introduce a private fund limited partnership (PFLP) structure. A consultation on the proposal closed in October 2015.
On 13 January 2017, the FCA updated the information sheets that lenders must attach when notifying consumers that they are in arrears or default, but the new versions do not become operative until 14 April 2017.
On 16 January 2017, HM Treasury announced that from April 2017, savers under 40 will be able to open a Lifetime Individual Savings Account (ISA), HM Treasury has confirmed. A Help to Save scheme, aimed at people on low incomes, will be available from 2018. The saving schemes have been introduced via the Savings (Government Contributions) Bill, which received Royal Assent on 16 January 2017.
On 17 January 2017, the FCA announced it had taken criminal action in a case related to its consumer credit powers. Mr Dharam Prakash Gopee appeared at Westminster Magistrates Court charged with offences under the Consumer Credit Act 1974 (CCA 1974) and the Financial Services and Markets Act 2000 (FSMA 2000). The case against Mr Gopee was sent to Southwark Crown Court for trial, and a Plea and Trial Preparation Hearing is provisionally listed to be heard on 14 February 2017.
On 12 January 2017, the Treasury Committee published submissions received in relation to its inquiry into the Solvency II Directive, launched in September 2016. The inquiry is intended to explore the impacts of Solvency II, and the options available to the UK post-Brexit.
On 13 January 2017, US and EU representatives announced the conclusion of ‘successful negotiations’ on an agreement aimed at ensuring ongoing, robust insurance consumer protection and enhanced regulatory certainty for insurers and reinsurers operating in the US and the EU.
On 13 January 2017, Insurance Europe, a federation of European national insurance associations, published a position paper on the complexity of insurance-based investment products (IBIPs) for purposes of the Insurance Distribution Directive (IDD) and the packaged retail and insurance-based investment products (PRIIPs) Regulation. The paper notes that while the requirements under the two pieces of legislation are related, the differences in regulatory aims should be acknowledged when developing criteria under the IDD and PRIIPs Regulation for what products should be considered complex.
On 13 January 2017, the European Insurance and Occupational Pensions Authority (EIOPA) welcomed the EU/US covered agreement on insurance and reinsurance measures covering reinsurance, group supervision and exchange of information between supervisors.
On 16 January 2017, EIOPA issued new sets of questions and answers (Q&As) on implementing technical standards (ITS) under Directive 2009/138/EC (Solvency II).
On 17 January 2017, the EU-US Insurance Project met in Frankfurt to discuss cyber security efforts in financial services, and to enhance transatlantic coordination on these and related issues.
On 17 January 2017, EIOPA and the Bermuda Monetary Authority (BMA) signed a memorandum of understanding (MoU) agreeing further exchange of information and cooperation. EIOPA and the BMA will participate in each other’s regulatory colleges.
On 17 January 2017, a wide-ranging report on Open Banking, big data and the digitalisation of everyday life issued by New City Agenda has made a number of calls on UK regulators to develop strategies to safeguard consumers and ensure social inclusivity.
On 17 January 2017, the Competition and Markets Authority (CMA) issued its notice of acceptance of final undertakings from Bacs as part of its phase 2 investigation into the retail banking market in Great Britain. Bacs commits to delivering the improvements required by the CMA retail banking market investigation within a year, including the extension of the redirection service operated by the Current Account Switch Service (CASS), designed to give further assurance to customers that all their payments will be switched from their old account to their new one, removing concerns about switching banks.
On 18 January 2017, the CMA announced it is to consider proposed undertakings in lieu offered by MasterCard UK Holdco Limited, a subsidiary of MasterCard International Incorporated (MasterCard), and VocaLink Holdings Limited (VocaLink) in relation to the anticipated acquisition of VocaLink by MasterCard. Under the proposed undertakings in lieu, Mastercard and VocaLink have proposed a package of remedies aimed at reducing the cost to the LINK ATM network of switching from VocaLink to alternative suppliers of infrastructure services. This includes VocaLink making its connectivity infrastructure available to a new supplier of infrastructure services to LINK; VocaLink transferring or licensing to LINK the intellectual property rights relating to the LINK LIS5 messaging standard, which members of the network use to communicate when customers use cash machines; and VocaLink contributing to LINK members’ switching costs. The CMA’s provisional view is that the proposed undertakings in lieu, or a modified version of them, are acceptable as a suitable remedy to the competition concerns identified during the phase 1 investigation. The CMA will hold a consultation in due course on the proposed undertakings. The deadline for a decision is 15 March 2017.
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