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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 2 August 2018.
The Association for Financial Markets in Europe (AFME) and the International Swaps and Derivatives Association. (ISDA) published a joint paper examining the challenges faced by UK and EU firms and their clients seeking to transfer their legacy cross-border over-the-counter (OTC) derivative contracts to an appropriately licensed EU-27 affiliate in advance of Brexit.
The International Underwriting Association (IUA) issued a second Brexit contract continuity clause. In June 2018 the IUA published a policy clause to help companies manage insurance contracts as the UK leaves the EU, and this has now been followed up with a supporting document for when risks are underwritten on a subscription market basis.
Insurance Europe wrote a joint letter to the European Commission calling for legal certainty about the transfer of personal data between the UK, the EU and the European Economic Area (EEA) ahead of Brexit to avoid business disruption and adverse effects for European consumers. The letter was co-signed by DigitalEurope, the Trans-Atlantic Business Council and the European Association of Craft, Small and Medium-sized Enterprises (UEAPME).
The Financial Conduct Authority (FCA) published Handbook Notice No 57, which includes changes to the FCA Handbook made by the FCA board on 28 June and 26 July 2018, together with feedback on consultation papers that will not have a separate policy statement. The notice also includes changes made by the Board of the Financial Ombudsman Service (FOS) to its rules and standard terms on 25 July 2018 and approved by the FCA board on 26 July 2018.
The FCA published its regulation round up for July 2018. Hot topics include the final report on the FCA’s retirement outcomes review, and the report on the FCA and Practitioner Panel survey for 2018.
The Prudential Regulation Authority (PRA) published its latest regulatory digest, which highlights key regulatory news and publications delivered in July 2018. This issue provides summaries of various banking and insurance publications and updates, including the PRA's final policy documents relating to a series of improvements to the implementation of Solvency II, including PS18/18 and SS7/18 'Solvency II: Matching adjustment', PS19/18 and SS8/18 'Solvency II: Internal models—modelling of the matching adjustment' and PS20/18 'Solvency II: Internal models update', including an update to SS12/16 'Solvency II: Changes.
The Financial Markets Law Committee (FMLC) wrote to the Ministry of Justice and to the European Commission, highlighting issues of legal uncertainty about the treatment of Level 2 EU legislation when the relevant Level 1 act has been repealed or recast. According to the FMLC, these issues will be further complicated by Brexit.
The Court of Appeal overturned a decision upholding a challenge to the jurisdiction of the English courts to determine a claim to certain declaratory relief. The claim concerned swap transactions, and the appellant was seeking declarations to give effect to no-advice and non-reliance clauses applicable to the transaction agreements. Difficulty arose from the fact that although the transaction agreements themselves were governed by English law and conferred exclusive jurisdiction on the English courts, the parties had entered into a previous agreement including for advisory services which was governed by Italian law and conferred exclusive jurisdiction on the court of Milan. The court was required to consider which jurisdiction clause applied to disputes regarding whether the swap transactions could be challenged on the ground of non-compliance with advisory obligations. Written by Jonathan Edwards, barrister at Radcliffe Chambers.
The PRA published a consultation paper (CP18/18) setting out its proposed rules for a technical correction to the Solvency II firms: Insurance General Application Part of the PRA Rulebook, along with some consequential changes and minor administrative amendments related to the extension of the Senior Managers and Certification Regime (SM&CR). The consultation closes on 1 October 2018.
HM Treasury published a response to its April 2016 consultation on claims management secondary legislation and confirmed its final approach to defining the scope of claims management activities for the purposes of FCA regulation and the temporary permissions regime. The government has also set out its policy intent for transitional provisions and published a draft statutory instrument (SI), including transitional and consequential provisions.
The FCA announced that its financial promotions team has learned that some firms are using their FCA-authorised status in a promotional way, which it says could lead to consumer harm and is against the FCA's rules. The FCA warns firms not to use their authorisation status in that way and, if they are, to cease doing so.
The PRA published a consultation paper (CP17/18) setting out its proposed approach to implementing recent European Banking Authority (EBA) rules and guidance relating to the definition of default in the Capital Requirements Regulation (575/2013) (CRR). The PRA is proposing to update Supervisory Statement SS11/13 on internal ratings based (IRB) approaches and to amend the Credit Risk Part of the PRA Rulebook. The consultation closes on 29 October 2018.
The EBA published its first report on the functioning of resolution colleges. The report summarises the EBA's assessment of the quality of the colleges' organisation, discussions held and general output. Overall, the report finds that good progress has been achieved since the introduction of the Bank Recovery and Resolution Directive (BRRD) in 2015, also considering that most colleges are only in their second year of operation. However, the report also notes that resolution is a complex matter which requires further progress and continued effort to ensure college members are well prepared to deal with the failure of a cross-border bank.
The FMLC wrote a letter to Gunnar Hokmark, MEP, the Rapporteur for the BRRD in the European Parliament, highlighting the practical uncertainties of a proposal being considered by the Parliament to amend the BRRD which suggests a two-day pre-resolution moratorium, followed by a ten-day break before the in-resolution moratorium begins.
Chloe Smith, Minister for the Constitution, announced a new government counter fraud profession (GCFP), which will launch on 9 October 2018, for specialists working to fight fraud and economic crime. It aims to build a new counter fraud community of specialists across government, benefitting both individuals and organisations.
The Financial Action Task Force (FATF) published a report looking at the techniques and tools used by professional money launderers (PMLs), in order to help authorities target, prosecute and dismantle them. This is the first time the FATF has undertaken a project which concentrates on PMLs that specialise in enabling criminals to evade anti-money laundering and counter terrorist financing safeguards and sanctions in order to enjoy the profits from illegal activities.
The Solicitors Regulation Authority (SRA) found that reports of money laundering, cybercrime and suspicious investment schemes have climbed to record levels. The SRA states that criminals are increasingly looking to law firms as a means of stealing tens of millions of pounds from businesses and the general public.
The EBA published an update to the Joint Committee (JC) Guidelines on complaints-handling, which includes an extension of their scope of application to the authorities supervising the new institutions established under the recast Payment Service Directive (Directive (EU) 2015/2366) (PSD2) and the Mortgage Credit Directive (Directive 2014/17/EU) (MCD). This extension will ensure that an identical set of requirements for complaints-handling continues to apply to all financial institutions across the banking, investment and insurance sectors.
Nicky Morgan MP, chair of the House of Commons Treasury Committee, wrote to the FCA to express the committee's doubt as to whether the FOS is ready to handle small and medium-sized enterprise (SME) cases.
The FCA provided an update on its investigation into the treatment by the Royal Bank of Scotland (RBS) of SME customers transferred to its Global Restructuring Group (GRG). The FCA says that, based on its investigation, it has concluded that bringing a prohibition case against any member of GRG senior management would not have reasonable prospects of success.
The Upper Tribunal published its decision in the case of Alistair Rae Burns v the FCA. The decision relates to an independent financial adviser firm which advised on the suitability of transferring occupational pension and personal pension benefits into a self-invested pension scheme and whether the firm's director failed to take reasonable steps to manage the firm's business so as to ensure that it complied with relevant requirements and standards of the regulatory system.
The Upper Tribunal published its decision in the case of Plaxedes Chickombe and 44 others v the FCA and Barclays Partner Finance as Interested Party. The decision relates to consumer credit agreements entered into through the intermediation of an unauthorised broker and whether the decision of the FCA to validate the agreements was reasonably open to the FCA.
The UK Supreme Court declined to consider an appeal of the Court of Appeal's decision in the case of the FCA v Grout,  EWCA Civ 71. The Court of Appeal had applied the Supreme Court's test from Macris v the FCA  All ER (D) 196 (Apr) and decided on 31 January 2018 that Mr Grout, a former trader with JP Morgan Chase Bank NA, had not been identified in warning and decision notices given by the FCA.
The FCA published consultation paper CP18/22: Handbook changes to reflect the application of the EU Securitisation Regulation and the amendment to the Capital Requirement Regulation. The Securitisation Regulation and related amendment to the CRR came into effect on 18 January 2018. Most of their provisions will come into effect on 1 January 2019. The FCA is consulting on a number of changes to ensure that its Handbook is consistent with the directly applicable EU Securitisation Regulation and CRR amendment.
The EBA published its final draft regulatory technical standards (RTS) specifying the requirements for originators, sponsors and original lenders related to risk retention as laid down in the new EU securitisation framework (STS Regulation). The final draft RTS, which replace the current Commission Delegated Regulation (EU) 625/2014 on risk retention, aim to provide clarity on the requirements relating to risk retention, thus reducing the risk of moral hazard and aligning interests.
The EBA published its final draft RTS setting out conditions for securitisation to be deemed homogeneous. Homogeneity is one of the crucial requirements for a securitisation transaction to be assessed as simple, transparent and standardised (STS) and to be eligible for more risk-sensitive risk weights under the new EU securitisation framework. Homogeneity is also a key element for investors when assessing the underlying risks and performing their due diligence.
The European Commission published a communication on the intention to endorse, with amendments, the draft RTS and Implementing Technical Standards (ITS) submitted by the European Securities and Markets Authority (ESMA) with regard to the details of securities financing transactions (SFTs) to be reported to trade repositories in accordance with Articles 4(9) and 4(10) of the Securities Financing Transactions Regulation (Regulation (EU) 2015/2365) (SFTR) and to amend, accordingly, the ITS with regard to the details to be reported to trade repositories in accordance with Article 9(6) of the European Market Infrastructure Regulation (Regulation (EU) No 648/2012) (EMIR).
ESMA updated its Q&As regarding its temporary product intervention measures on the marketing, distribution or sale of contracts for differences (CFDs) and binary options to retail clients based on Article 40 of Regulation (EU) No 600/2014 (MiFIR). ESMA confirmed that structured finance products are not within scope of the restrictions on CFDs and binary options, and that turbo certificates are not within scope of the restrictions on CFDs.
The International Organization of Securities Commissions (IOSCO) published its final report into mechanisms used by trading venues to manage extreme volatility and preserve orderly trading. The report explores the measures currently in use by trading venues in member jurisdictions to address the risks to orderly markets resulting from extreme volatility events.
The European Central Bank (ECB) published the results of the June 2018 survey on credit terms and conditions in euro-denominated securities financing and OTC derivatives markets. The survey revealed that between March and May 2018, credit terms experienced the largest tightening in a year, which is in contrast to the easing that respondents anticipated during the last survey in March 2018.
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published a draft report on the European Commission's proposal to amend Directive 2014/65/EU on markets in financial instruments (MiFID II) in order to exempt crowdfunding service providers from the obligations under that directive. ECON has recommended one change to the recitals.
The UK government published a letter from HM Treasury to Andrew Bailey, CEO of the FCA, confirming the designation of the FCA as the competent authority responsible for the authorisation and supervision of compliance of third-party verifiers with the obligations set out in Article 28 of the EU Securitisation Regulation.
The European Free Trade Association (EFTA) Surveillance Authority (SA) registered Nordic Credit Rating AS (NCR) as a credit rating agency under Regulation (EC) 1060/2009 on credit rating agencies (the CRA Regulation), as incorporated into the Agreement on the EEA Agreement. This decision comes into effect on 3 August 2018. NCR is based in Oslo, Norway, with a branch in Stockholm, Sweden. It intends to issue corporate ratings.
ISDA published the ISDA 2018 US Resolution Stay Protocol. The US Resolution Stay Protocol is intended to help market participants comply with stay regulations issued in the US by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The regulations require global systemically important banks (G-SIBs) to include contractual stays on early termination rights within qualified financial contracts (QFCs).
The FMLC sent a letter in response to the European Commission's proposed regulation on the 'third-party effects' of the assignment of claims. The proposed regulation applies the law of the assignor's habitual residence to the proprietary and third-party effects of an assignment, with various carve outs. The FMLC reiterates its previously published view that the law of the underlying claim, rather than the law of the assignor's habitual residence, should apply in this context.
The Fixed Income, Currency and Commodities (FICC) Markets Standards Board (FMSB) published its Behavioural Cluster Analysis (BCA) study, which reviewed the behavioural patterns in 390 cases of misconduct in financial markets over an extended period of time (225 years stretching back to 1792) and covering 26 countries and multiple asset classes. This review indicates that the behavioural patterns evident in misconduct events are not unique to each case but that the same 25 behavioural patterns are evident in market misconduct cases and these consistently repeat and recur over time.
Following a post-implementation review of its crowdfunding rules, the FCA launched a consultation on new rules for loan-based crowdfunding platforms. In its consultation paper CP18/20, the FCA is proposing changes designed to address the ways in which the loan-based crowdfunding model has developed since the FCA introduced the rules for the sector in 2014. The deadline for comments is 27 October 2018.
The FCA is seeking input from firms and consumers on their initial experiences of the requirements introduced by the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The FCA aims to publish a feedback statement on the call for input in early 2019. The responses will also inform its future engagement on the PRIIPs legislation with the European Supervisory Authorities and other national competent authorities. Feedback is sought by 28 September 2018.
ESMA found that six national regulators, including the UK’s, need to improve their supervision of Undertakings for Collective Investments in Transferable Securities (UCITS) engaging in efficient portfolio management techniques (EPM). ESMA's recent peer review, which assessed the level of compliance of six national competent authorities (NCAs) with its guidelines on EPM found a number of shortcomings in certain NCAs' approaches when supervising the use of EPM by UCITS.
The FCA published a statement on selling high-risk speculative investments to retail clients following ESMA action on CFD products. In June 2018, ESMA finalised temporary measures to restrict the sale, marketing and distribution of CFDs to retail clients. These measures apply across the EU from 1 August 2018.
ECON published a draft report on the European Commission's proposed European Crowdfunding Service Providers (ECSP) Regulation. The draft report sets out over 100 amendments to the proposed Regulation.
ISDA updated its global calendar of compliance deadlines and regulatory dates for the OTC derivatives space. The OTC calendar sets out regulatory initiatives from around the world that will impact on derivatives up to September 2023.
The FCA issued policy statement PS18/19 on assessing creditworthiness in consumer credit, in which it summarises and responds to feedback on consultation paper CP17/27 and also publishes final rules and guidance In the Consumer Credit sourcebook (CONC).
The FCA published research on the ways in which the size of repayments made by consumers may be influenced by the ways in which repayment options are presented to them. Together with the measures introduced in policy statement 18/4 Credit card market study: Persistent debt and earlier intervention—feedback to CP17/43, and final rules which take effect on 1 September 2018, the research forms part of the FCA's efforts to limit the use of credit cards for longer-term borrowing, while preserving their flexibility for millions of users.
UK Finance, the Building Society Association (BSA) and the Intermediary Mortgage Lenders Association (IMLA) announced a cross-industry voluntary commitment to help existing borrowers on reversion rates to switch to a better deal in certain circumstances. The initiative was launched in response to the Mortgages Market Study interim report, which was published by the FCA in May 2018.
The PRA published policy statement PS21/18: Solvency II: Changes to reporting format, which provides feedback on the responses to consultation paper 11/18: Solvency II: Changes to reporting format, and contains the PRA's final policy.
The PRA issued a modification by consent of the Solvency II Group Supervision rules 20.1 and 20.2 with reference to US-parented undertakings. This modification is available to insurance and reinsurance undertakings authorised by the PRA, the parent undertaking of which is an insurance holding company or mixed financial holding company which has its head office in the United States.
The International Association of Insurance Supervisors (IAIS) issued two major public consultation documents collectively addressing ComFrame in its entirety, with one focused on the qualitative components and the second on the risk-based global Insurance Capital Standard (ICS) Version 2.0. The deadline for comments is 30 October 2018.
The IAIS published responses (together with a summary of main comments) to its consultation on integrating ComFrame materials into Insurance Core Principles (ICPs) 8, 15 and 16.
The IAIS published for public consultation a draft Issues Paper—Increasing Use of Digital Technology in Insurance and its Potential Impact on Consumer Outcomes.
The European Insurance and Occupational Pensions Authority (EIOPA) published the third in a series of papers with the aim of contributing to the debate on systemic risk and macroprudential policy. The new paper builds on and supplements the previous ones by carrying out an initial assessment of other potential tools or measures to be included in a macroprudential framework designed for insurers.
The FCA published Evaluation Paper 18/1, in which it evaluates its September 2015 add-on guaranteed asset protection (GAP) insurance intervention. This is the first of a new series of evaluations of the FCA's past interventions, which will be made available on its website.
The IAIS and the Sustainable Insurance Forum (SIF) released an Issues Paper on Climate Change Risks to the Insurance Sector. The objectives of the Issues Paper are to raise awareness for insurers and supervisors of the challenges presented by climate change, including current and contemplated supervisory approaches for addressing these risks.
EIPOA issued its discussion paper on resolution funding and national insurance guarantee schemes. This has been issued as a follow-up to the EIOPA Opinion on the harmonisation of recovery and resolution frameworks for (re)insurers across the Member States published in 2017.
The EBA published its final draft RTS specifying the framework for cooperation and the exchange of information between competent authorities under the revised Payment Services Directive (PSD2). The RTS also clarify the type of information as well as the templates to be used by payment institutions when reporting to the competent authorities of the host Member States on the payment business activities carried out in their territories. These RTS help consumers use payments services with confidence across the EU as they ensure consistent and efficient supervision of payment institutions operating across borders.
The FCA published consultation paper CP18/21: General standards and communication rules for the payment services and e-money sectors, which consults on rules and guidance to improve conduct standards and communications in the payment services and e-money sectors. The consultation also proposes new standards for the communication of payment services and e-money involving a currency conversion.
The Payment Services Regulator (PSR) issued five new specific directions to the operators of the Bacs, LINK and FPS payment systems:
Specific directions and requirements are the decisions that the PSR adopts under the Financial Services (Banking Reform) Act 2013, which relate to individual named industry participants.
The PSR published a report summarising the outcome of its research into contactless mobile payments (CMPs) and its understanding of the sector following its call for information exercise in 2016 and 2017. The PSR says it has not been told of any prevented innovation or practices in tokenisation service provision that would require an in-depth assessment of the issues at this point, though it retains the option to investigate and act in future as necessary.
ECON published a draft report containing amendments to a European Commission proposal to amend the Cross-Border Payments Regulation (Regulation (EC) No 924/2009).
The PSR’s Panel published its annual report for 2017-18, highlighting work done on the cards market, the problems faced by small business users of payment services, the impact of Brexit on payment service providers, and developing a clear vision for the next 10-20 years of how the payments landscape will develop.
The FCA updated its finalised guidance (FG16/5) for firms when outsourcing to the 'cloud' and other third-party IT services. The final guidance was originally published in July 2016 and has been updated to reflect the publication of the EBA recommendations in December 2017 and changes to relevant legislation.
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