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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 2 November 2017.
The House of Lords’ EU Financial Affairs Sub-Committee heard evidence on post-Brexit financial regulation and supervision from the Bank of England (BoE) deputy governor for financial stability, Sir John Cunliffe, and the Prudential Regulation Authority (PRA) CEO, Sam Woods. The Committee was looking at potential ways to maintain equivalence or some other form of close relationship between the UK and EU regulatory regimes in order to preserve market access. The hearing took place on Wednesday 1 November. At the hearing, Sam Woods said that the BoE believed that up to 75,000 jobs in UK financial services could be lost as a result of Brexit with 10,000 going on the day Britain left the EU. The figures came from a 2016 estimate by consultants at Oliver Wyman Group and Sam Woods said that whilst the figures are a ‘moving feast’, depending on the exit deal the UK secures with the EU, they are plausible in the long term.
The Financial Conduct Authority (FCA) issued consultation paper CP17/36, ‘Reviewing the funding of the Financial Services Compensation Scheme (FSCS): feedback from CP16/42’, final rules, and new proposals for consultation. Comments are required by 30 January 2018.
The FCA released details of the responses it had received to its PPI claims deadline campaign. In September 2017 the FCA received nearly 10,000 calls on its PPI helpline and 400,000 visits to its PPI website.
The FCA welcomed announcements made by the European Commission and the US Securities and Exchange Commission (US SEC) in relation to Directive 2014/65/EU (MiFID II) inducements and research reforms and their interaction with US regulation. The Commission issued guidance to clarify how EU investment firms subject to MiFID II should interact when they seek out brokerage and research services from broker-dealers in non-EU countries. Meanwhile, the US SEC announced measures to facilitate cross-border implementation of MiFID II’s research provisions by publishing three related no-action letters.
The Financial Conduct Authority (FCA) published position limits on certain commodity derivative contracts which are traded on UK trading venues. The limits have been established by exercising the power of direction under Regulation 16 of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (MIFID Regs) in accordance with Article 57 of Directive 2014/65/EU (MIFID II).
Two Commission Delegated Regulations and two Commission Implementing Regulations laying down regulatory technical standards (RTS) and implementing technical standards (ITS) relating to MiFID II were published in the Official Journal of the EU.
A corrigendum to Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFIR) was published in the Official Journal of the EU. The corrigendum makes a minor correction to the first subparagraph of Regulation (EU) No 600/2014, Article 47(3). No substantive change has been made. The amendment inserts a missing word to aid grammatical clarity.
In a move welcomed by the European Commission, the European Parliament, Council and Commission agreed on aspects of the review of the Bank Recovery and Resolution Directive (BRRD) and of the Capital Requirements Regulation (CRR) and Directive (CRD) with a view to reduce risk in the banking sector and continue efforts to complete the banking union. The Commission believes the agreement to ‘fast-track’ selected parts of the 2016 EU banking reform package will ‘further strengthen the resilience of the EU banking sector while mitigating negative impacts’.
The Committee on Economic and Monetary Affairs of the European Parliament (ECON) published its report on a proposal to amend the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchies (BRRD Insolvency Hierarchy Directive).
The European Banking Authority (EBA) announced the final timeline of the 2018 EU-wide stress test. The exercise is expected to be launched at the beginning of 2018, with the results to be published by 2 November 2018. Together with the competent authorities, the EBA is now finalising the methodology and templates, and will aim to share them with participating banks ahead of the launch. The overall timeline for the stress test has been extended, to take into account the challenges that the implementation of IFRS 9 poses as regards the availability of starting point data in early 2017.
The EBA published a consultation paper on draft guidelines on the management of interest rate risk arising from non-trading book activities (EBA/CP/2017/19). The draft guidelines update the existing guidelines published in May 2015 and are expected to be applied by competent authorities and institutions from 31 December 2018. The consultation closes on 31 January 2018.
The EBA published consultation papers on draft guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA/CP/2017/18) and draft guidelines on institution's stress testing (EBA/CP/2017/17). Both consultations close on 31 January 2018.
An opinion of the ECB of 20 September 2017 on a proposal for a regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties was published in the Official Journal.
The EBA has published its final recommendation on the coverage of entities in banking group recovery plans. Addressed to both competent authorities and institutions, the recommendation builds on the legal frameworks established by the Capital Requirements Directive (CRD), the Bank Recovery and Resolution Directive (BRRD) and Commission Delegated Regulation (EU) 1075/2016. It aims to define common criteria to identify entities that need to be covered in group recovery plans, and the extent of such coverage.
The Prudential Regulation Authority (PRA) published its Regulatory Digest for October 2017. It covers the key highlights, news and publications delivered by the PRA during October 2017.
The EBA published its final guidelines on the supervision of significant branches. Prompted by the increasing demand to establish branches across the EU, the guidelines are designed to facilitate co-operation and co-ordination between the competent authorities involved in the prudential supervision of significant branches of EU institutions established in another Member State. In particular, the guidelines aim to facilitate co-operation and co-ordination of supervision of the largest and systemically important branches, the so-called 'significant-plus' branches.
The FCA is consulting on proposals for recovering the costs of establishing and running the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). The OPBAS will oversee the adequacy of the anti-money laundering (AML) supervisory arrangements of the 22 professional body AML supervisors listed in Schedule 1 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The consultation will run until 8 January 2018.
The House of Lords announced its second reading of the Sanctions and Anti-Money Laundering Bill on 1 November 2017. The Bill is intended to enable the UK to implement sanctions post-Brexit—both those it is obliged to as a UN member and for UK foreign policy purposes.
The 2017 national risk assessment (NRA) of money laundering and terrorist financing found that high-end money laundering and cash-based money laundering remain the greatest areas of money laundering risk to the UK. The NRA aims to underline the risks and pinpoints areas where businesses may be currently vulnerable, as well as inform the government, businesses and law enforcement agencies on how best to plug these gaps.
A number of provisions within the Criminal Finances Act 2017 (CFA 2017) came into force on 31 October 2017, including those which introduce a new procedure in the Proceeds of Crime Act 2002 for entities within the regulated sector to share information relating to suspicion that a person is engaged in money laundering, for the purpose of developing a joint disclosure report to the National Crime Agency. CFA 2017, s 36 introduces a similar procedure into the Terrorism Act 2000.
The FCA published a final notice (dated 23 October 2017) issued to Foreman Financial Services Ltd (FFSL), cancelling its permission under Part 4A of the Financial Services and Markets Act 2000. The FCA issued the final notice as FFSL failed to satisfy the FCA that it was conducting its affairs in an appropriate manner having regard to the interests of consumers.
The European Parliament has approved new rules to create a European framework for simple, transparent and standardised (STS) securitisations, as well as new rules on preferential capital treatment for STS securitisations. The rules are aimed at reviving securitisations in the EU, which declined after the US sub-prime crisis in 2008.
The European Securities and Markets Authority (ESMA) published six new questions in its Q&As on the implementation of its guidelines on the alternative performance measures (APMs) for listed issuers. The new Q&As clarify definitions, scope, reconciliation and how to apply the fair review principle. The guidelines apply to APMs disclosed by issuers or persons responsible for drawing up a prospectus.
The European Parliament updated its procedure file to indicate that a debate in plenary on the European Commission's Action Plan on Retail Financial Services has been scheduled for 13 November 2017, with a vote in plenary scheduled for the following day. A report on the Action Plan by the Committee on Economic and Monetary Affairs was tabled for plenary on 23 October 2017.
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published its report on the European Commission's action plan on retail financial services. The report was discussed at an ECON plenary session on 23 October 2017. The Commission published its action plan on 23 March 2017, setting out ways to provide European consumers with greater choice and better access to financial services across the EU. The action plan focuses on technology, and innovative online services, with the aim to drive progress towards a more integrated market for financial services.
The Treasury Select Committee published a letter dated 24 October 2017 from the Chief Executive of the FCA, Andrew Bailey, setting out replies to a series of questions on the FCA’s investigation into the Equifax cyber security breach. Mr Bailey explained the regulatory context, the nature of the investigation, and the FCA’s expectations of firms’ cyber security policies. He also clarified the division of responsibilities between the FCA and the Information Commissioner’s Office.
The ECB published a decision dated 10 October 2017, which amended Decision ECB/2007/7 concerning the terms and conditions of TARGET2-ECB. The changes are intended to reflect amendments recently made by the Governing Council to Guideline ECB/2012/27.
The Financial Conduct Authority (FCA) charges consumer credit firms annual fees based on the data in the CCR002 or CCR007 forms. The regulator has therefore published a webpage to assist firms in determining what they need to report about their total annual income to ensure they are charged correctly.
The risk exposure of the insurance sector in the EU ‘remains overall stable with some slight improvements in the solvency ratios of groups and life solo undertakings’, the European Insurance and Occupational Pensions Authority (EIOPA) found. In its updated risk dashboard, EIOPA finds, among other things, profitability of the sector has shown ‘positive signs both for life and non-life’. Meanwhile, the inflation rate forecast is decreasing while unemployment rates continue to decrease.
The FCA published finalised guidance for firms on how to calculate redress for unsuitable defined benefit (DB) pension transfers. The guidance is for respondents who receive a complaint about advice they gave to transfer all or part of the cash value of accrued benefits under a DB pension scheme into a personal pension scheme.
The European Commission published a study examining consumers’ decision-making in the non-life insurance market when purchasing domestically and cross-border. The study highlights a number of factors that prevent consumers from getting the best deals and limit cross-border insurance purchases. It makes several policy recommendations to improve consumers’ decision-making, as well as to encourage cross-border purchasing of insurance.
The Treasury Committee has published a report on the Solvency II Directive, in which it recognises problems with the Directive and how it has been implemented in the UK. It calls on the Prudential Regulation Authority (PRA) to work more closely with industry and consider ways to maximise proportionality. The Committee also says that the Treasury should consider making the facilitation of effective competition one of the PRA's primary objectives.
The chair of EIOPA, Gabriel Bernardino, published an article looking at the tensions and interactions between macroprudential and microprudential approaches to supervision. Mr Bernardino argues that a focus on microprudential supervision alone is not enough to ensure financial stability, and says well defined objectives, adequate co-ordination and co-operation, and a proper regulatory framework are required.
EIOPA submitted its first set of advice to the European Commission on the review of specific items in the Solvency II Delegated Regulation. The advice makes recommendations to simplify the calculation of capital requirements in the Solvency Capital Requirement (SCR) standard formula.
EIOPA has published two wide-ranging interviews given by its chair, Gabriel Bernardino. Mr Bernardino discusses the methodology and purpose of stress tests, the rise of InsureTec and the need for new regulations to take IT changes into account when setting implementation timescales.
The PRA published a policy statement (PS) 'Authorisation and supervision of insurance special purpose vehicles' (PS26/17) which feeds back on responses to consultation paper 42/16 and sets out the PRA's final approach and expectations in relation to the authorisation and supervision of insurance special purpose vehicles (ISPVs), subject to the Risk Transformation Regulations 2017 (RTR) being passed through Parliament.
The FCA published policy statement PS17/24, which sets out its near-final rule changes required to the FCA Handbook to incorporate the new regulated activity of insurance risk transformation.
The European Payments Council (EPC) published a consultation paper containing a revised version of its mobile contactless Single Euro Payments Area (SEPA) card payments interoperability implementation guidelines. These guidelines are designed to be a reference for all stakeholders working on mobile contactless payments in Europe (based on card payments).
The European Banking Authority (EBA) is consulting on draft regulatory technical standards (RTS) which specify 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. The consultation runs until 5 January 2018.
Derivatives marketplace the CME group announced the upcoming launch of bitcoin futures in Q4 2017, pending all relevant regulatory review periods. The new contract will be cash-settled and based on the CME CF bitcoin reference rate (BRR), which serves as a once-a-day reference rate of the US dollar price of bitcoin.
The FSB has published a report that considers the financial stability implications of the growing use of artificial intelligence (AI) and machine learning in financial services. AI and machine learning are being used in a range of applications across the financial system to assess credit quality, to price and market insurance contracts and to automate client interactions.
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Chris is a member of the New York Bar with more than two decades of experience as a financial services and capital markets lawyer in London. Before joining LexisNexis in 2016, Chris worked as a Senior Professional Support Lawyer at Linklaters LLP, supporting the firm’s market-leading Financial Regulation Group, with a particular focus on MiFID II. Chris also worked as Legal Analyst at Bloomberg, where he drafted analytical articles on EU, UK and US financial services law and regulation for Bloomberg journals and developed practical guidance content for the award-winning Bloomberg LAW legal research platform. Prior to that, Chris was a partner in the U.S. law group at Allen & Overy, advising issuers and underwriters on a wide range of capital markets and corporate finance transactions including SEC-registered and Rule 144A debt and equity offerings and mergers and acquisitions, as well as providing general U.S. securities law advice. He also co-founded the firm’s Microfinance Working Group and advised on a variety of matters including two landmark securitisations of loans to microfinance institutions.
Chris has written extensively on legal and regulatory issues for numerous publications and lectured on financial regulation, microfinance and capital markets.
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