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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 21 June 2018.
The UK government published a letter from the economic secretary to the Treasury, John Glen, to the chair of the House of Commons European Scrutiny Committee, Sir William Cash (dated 7 June 2018), on the legislative proposals for reforms to the European System of Financial Supervision (ESFS).
A crisis over the failure of cross-border financial contracts post-Brexit will pose a significant risk to financial stability and to 36 million insurance policyholders across the UK and EEA, the financial and professional services industry group TheCityUK said. Additionally, £26tn of outstanding uncleared derivatives contracts could be impacted if the UK and EU fail to agree on a solution.
The Bank of England (BoE) and the Prudential Regulation Authority (PRA) published their annual reports and accounts 2018 (PRA annual report/BoE annual report).The reports provide information on the BoE and PRA activities and finances for the preceding year.
The European Banking Authority (EBA) published its 2017 annual report, which provides a detailed account of the work the Authority achieved in the past year and anticipates the key areas of focus in the coming years.
The European Insurance and Occupational Pensions Authority (EIOPA) published its annual report for 2017. The report provides a comprehensive overview of EIOPA's activities during the year, including its work on strengthening supervisory convergence, enhancing consumer protection and maintaining financial stability.
The BoE published a policy statement on the fees regime for the supervision of financial market infrastructure (FMI), setting out responses to the BoE's March 2018 consultation on the fees regime for FMI, fee rates for 2018/9 and a statement of policy on the final fee-levying regime.
EIOPA published a speech given by its chair, Gabriel Bernardino, on European supervision in a changing environment. According to Mr Bernardino, EIOPA's three current top priorities are further enhancing supervisory convergence, reinforcing consumer protection in an era of digital transformation, and maintaining financial stability.
The chief of the Financial Conduct Authority (FCA) acknowledged the difficulty many firms are facing in grappling with two new sets of sprawling EU financial services rules, confirming to UK lawmakers that the regulator will launch a ‘call for evidence’ next month that could lead to reforms.
The EBA issued a consultation paper on draft regulatory technical standards (RTS) on the conditions to allow institutions to calculate KIRB in accordance with the purchased receivables approach under Article 255 of the Capital Requirements Regulation (CRR) Amendment Regulation (EU) 2017/2401. The deadline for comments is 19 September 2018. A public hearing will take place at the EBA premises on 4 September 2018 from 2pm to 4pm UK time.
The EBA published its first binding mediation decisions between two resolution authorities, the Single Resolution Board (SRB) and the National Bank of Romania (NBR). The decisions were issued following a request from the NBR for the EBA to assist in settling a dispute with the SRB concerning the resolution planning for two banking groups.
MEPs on the European Parliament’s Economic and Monetary Affairs Committee (ECON) agreed a roadmap for banks to deal with losses, by ensuring that they hold enough capital and debt not to need taxpayer bailouts and defining conditions for remedial measures. The draft rules amend the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR), in order to incorporate international standards on loss absorption and recapitalisation.
ECON backed EU plans to adopt the Basel III rules, in order to enhance EU banks’ resilience and financial stability. It said that amending the CRD IV and the CRR should help boost the EU economy by increasing lending capacity and creating deeper and more liquid capital markets.
The House of Commons European Scrutiny Committee (the Committee) considered the European Commission's proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral. Given its concerns over certain aspects of the proposal, the Committee has retained the proposal under scrutiny and has drawn certain information to the attention of the Treasury and the Business, Energy & Industrial Strategy Committees.
The European Central Bank (ECB) published a letter to banks with some aggregated information on the first outcomes of the ECB’s targeted review of internal models (TRIM) investigations, as well as an interim update on the preliminary results of its credit risk on-site investigations.
In his role as executive director for supervisory risk specialists and regulatory operations at the BoE, Lyndon Nelson gave a speech entitled Resilience and continuity in an interconnected and changing world. Among other things, Mr Nelson stated that the Financial Policy Committee (FPC) plans to publish a joint discussion paper (DP) with the FCA, on a common framework between the regulators around their supervisory expectations of firms' resilience to coping with operational threats such as cybercrime.
The Council of the EU published a Presidency compromise text on the European Commission’s proposal to amend Regulation (EU) No 806/2014 (the Single Resolution Mechanism (SRM) Regulation) as regards loss-absorbing and recapitalisation capacity for credit institutions and investment firms. The compromise text will be presented to the Council for adoption on 25 May 2018.
The European Commission approved, under EU rules, Cypriot measures to facilitate the liquidation of Cyprus Cooperative Bank (CCB) under national Cypriot law. These measures include the sale of some CCB assets and deposits to Hellenic Bank. Non-governmental deposits will remain fully protected at all times. The transaction will remove approximately €6bn of non-performing loans from the Cypriot banking sector and thereby contribute to its recovery. The transaction is subject to standard regulatory reviews.
The ECB updated its manual for the Asset Quality Review (AQR) of euro area banks. The manual contains the methodology for assessing the valuations of bank assets from a prudential perspective. The update incorporates the implications of the entry into force of the new accounting standard IFRS 9.
Anil Kashyap, a member of the Bank of England’s FPC, gave a speech entitled ‘Come with me to the FPC’ at the Official Monetary and Financial Intuitions Forum (OMFIF). Mr Kashyap explained the background to the establishment of the FPC, its purpose and remit, its committee membership and its operational processes.
The FCA published a guide to cyber security, setting out the basics of developing and implementing policies and responses. Based around a series of questions, the guide asks firms to consider who has access to their networks, whether and where malware and antivirus protection is installed, and how vulnerabilities are monitored.
The FCA published a new webpage setting out information on Chapter 19F (MiFID remuneration incentives) of the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).
In its response to the Department for Business, Energy & Industrial Strategy’s consultation in relation to proposals to improve the corporate governance of companies when they are in, or approaching, insolvency, the Investment Association (IA) called for a single authority to take responsibility for sanctioning directors who do not meet their duties and has proposed a series of other recommendations.
The Treasury Committee published the reply it received from the TSB chair, Richard Meddings, following the Committee’s 7 June 2018 letter on the bank’s IT problems. The Treasury Committee had called on the board to consider CEO Paul Pester’s position, saying it had ‘lost confidence’ in his ability to provide a full and frank assessment of the IT problems at the bank, or to deal with them in the best interests of its customers. But Mr Meddings said the CEO continued to have the full support of the board, and the bank was ‘now functioning at, or close to, normal for the majority of TSB customers’.
Although the claimants had established that there had been breaches of certain of the Conduct of Business Sourcebook (COBS) rules, no loss had been sustained by them as a result. Therefore, the Chancery Division dismissed the claimants' claim, under section 138D of the Financial Services and Markets Act 2000 (FSMA 2000), for damages for alleged breaches of the COBS rules. The judgment is available at:  EWHC 1027 (Ch).
The European Parliament's policy department published a series of five studies on the mis-selling of financial products in the EU at the request of ECON. The studies are as follows:
The FCA published a speech given by its director of enforcement and market oversight, Mark Steward, on whether the banking industry has improved in the 10 years since the financial crisis. Mr Steward noted that while better conduct and regulation can reduce the incidence of misconduct, things will continue to go wrong, so enforcement and supervision are crucial.
The Complaints Commissioner issued final report FCA00425, which relates to a complaint that the two minded to refuse letters issued to the complainant were the wrong outcome and that the application process to become approved as a CF30 and the use of the minded to refuse letters was unfair. The Commissioner did not uphold the complaint but noted that this was one of a number of complaints in which there has been some confusion about minded to refuse letters. The Commissioner is concerned there is a lack of clear information on the FCA's website about the process and the options available to firms and individuals, and is separately pursuing with the FCA how the process might be improved.
The Complaints Commissioner issued final report FCA00431, which relates to an application for a Consumer Credit Licence which took two and a half years to process. The application was eventually successful. The Commissioner concluded that there was unreasonable delay and lack of care amounting to maladministration in the processing of the application and that the response to the complaint sought to minimise the FCA's failings, and did not properly consider the impact of those delays upon the business. The Commissioner recommended the FCA offer a payment on an ex gratia basis of at least £5,000 and an apology to the complainant.
Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (the Fifth Money Laundering Directive, MLD5) was published in the Official Journal of the EU. It amends Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the Fourth Money Laundering Directive (MLD4)), and Directives 2009/138/EC and 2013/36/EU.
The FCA published a speech by its executive director of strategy and competition, Christopher Woolard, entitled ‘Technology and global ties: turning the tide on financial crime’. Mr Woolard concluded that new technologies have given criminals sophisticated tools to bend the financial system to their own ends, but these same technologies, when used for good, could also be game changers in the fight against financial crime.
The PRA issued a policy statement (PS12/18) on algorithmic trading, providing feedback to responses to its February 2018 consultation paper (CP5/18). It contains the final supervisory statement (SS5/18). The SS applies to all algorithmic trading activities of a firm including in respect of unregulated financial instruments such as spot foreign exchange (FX). SS5/18 will take effect from 30 June 2018.
ECON, together with the Constitutional Affairs Committee, backed the ECB proposal to bring central counterparties (CCPs) within the scope of the ECB’s regulatory powers.
The European Securities and Markets Authority (ESMA) announced that the temporary period allowing for a smooth introduction of the use of legal identity identifiers (LEIs), originally brought-in in December 2017, will not be further extended. It will cease on 2 July 2018.
The BoE published a working paper on the impact of the leverage ratio (LR) on client clearing. The paper suggests that the LR has had a disincentivising effect on client clearing, both in terms of daily transactions as well as the number of clients, but this impact seems to be driven by a reduced willingness to take on new clients.
The FCA published an occasional paper which uses proprietary data reported to the FCA under the European Market Infrastructure Regulation (EMIR) to examine the underlying drivers of the flash crash in the spot rate for pound sterling vs US dollar (GBP/USD) in October 2016. The paper contributes to the research on flash crashes and the potential risks they pose.
The Bulgarian Presidency of the Council of the EU published a revised proposal for a consolidated compromise text on the recognition and supervision of third-country CCPs. Among other things, the text has been amended to indicate that the access criteria and requirements of the central bank of issue for opening an overnight deposit account should not amount to an obligation to relocate all or part of the clearing services of the CCP.
ESMA published an updated list of third-country CCPs recognised to offer services and activities in the EU.
The FCA published a list of third-country supervisory authorities with which it has co-operation agreements that meet the requirements set out in Article 32(2) of Commission Delegated Regulation (EU) 2017/565 supplementing the MiFID II Directive as regards organisational requirements and operating conditions for investment firms (MiFID Org Regulation). The FCA is required to publish the list pursuant to Article 32(3) of the MiFID Org Regulation.
ESMA updated its Q&As on the Benchmarks Regulation, with a new topic: should prospectuses include reference to the register of administrators and benchmarks?
ESMA published the 2018 update of its technical instructions for transaction reporting under MiFIR, together with updated validation rules and message schemas. The changes will become applicable in Q4 2018 or Q1 2019.
The economic secretary to the Treasury, John Glen MP, issued an explanatory memorandum on the proposal of the European Commission for a regulation amending the Benchmarks Regulation on low carbon benchmarks and positive carbon impact benchmarks.
The working group on sterling risk-free reference rates (RFRWG), which was initiated by the BoE in 2015, published a provisional timeline setting out milestones for the transition to risk-free reference rates (RFRs) in sterling markets. The timeline will be updated on a regular basis with amendments and additional detail to reflect ongoing progress on plans for benchmark transition.
ICE Benchmark Administration (IBA) published issue 5 of its LIBOR Code of Conduct. Issue 5 supersedes issue 4, which was published on 17 March 2017.
US regulator the Financial Industry Regulatory Authority (FINRA) announced details of a multi-phased effort to overhaul its registration and disclosure programs, including the Central Registration Depository (CRD)—the central licensing and registration system which FINRA operates for the US securities industry and its regulators. FINRA says the new technology will lead to enhanced efficiencies and reduced compliance costs for firms.
The Council of the EU published a proposed update to the European Commission proposals for a Directive to amend the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) (UCITSIV Directive) and the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) with regard to cross-border distribution of collective investment undertakings, and a Regulation to facilitate cross-border distribution of collective investment undertakings and amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds.
The Treasury Committee published correspondence with the FCA on access to financial services for consumers with visual impairments. The Committee was concerned that details on how customers can access financial information in firm literature are often contained in the small print. In a letter of 28 March 2018, Committee chair Nicky Morgan MP asked whether the FCA had published specific recommendations on accessible formatting—and, if not, why and what action it would take.
HM Treasury published a summary of the submissions received to its call for evidence on how to design, implement, administer and monitor a six-week breathing space scheme for those struggling with debt. HMT was also consulting on a statutory debt management plan. The next stage of the implementation of the scheme will be to consult on a single policy proposal later in the summer of 2018.
The FCA published the latest analysis from its Financial Lives survey, finding notable differences between urban and rural areas. In rural areas, where there is greater reliance on bank branches, a higher proportion of people have difficulty getting to a bank and tend not to be able to use online banking. However, people in rural areas are more likely to be satisfied with their overall financial circumstances.
The government introduced regulations which will require trustees to produce a policy which assesses the sustainability of their investment decisions for pensions. For the first time, through this policy, members of pension schemes will have the power to have input over the impact of social and environmental factors on their investments.
The Council of the EU published a Presidency progress report on the work to strengthen the banking union and the European Commission proposal for the establishment of a European Deposit Insurance Scheme (EDIS). The report is intended to provide continuity and facilitate the task of the incoming Austrian Presidency.
The International Association of Insurance Supervisors (IAIS) published an issues paper on index-based insurances particularly in inclusive insurance markets. Index-based insurances are insurance contracts in which a claim is defined with reference to a pre-determined index (sometimes also referred to as parametric insurance). Index-based insurances are increasingly looked to as a means to manage weather and catastrophic events, support food security and enhance access to insurance.
The Council of the EU agreed its negotiating stance on a European Commission proposal that would make it easier for people to put money aside for their old age. EU ambassadors have asked the Council presidency to start negotiations with the European Parliament on the proposed pan-European pension product (PEPP), a new class of personal pension scheme, as soon as the Parliament is ready to negotiate.
The ECB issued a revised assessment methodology for payment systems. The methodology aims at ensuring a consistent and harmonised application of ECB Regulation 795/2014 on oversight requirements for systemically important payment systems (SIPS) and the principles for financial market infrastructures (PFMIs), which were adopted by the governing council of the ECB in June 2013 as a basis for the conduct of Eurosystem oversight in relation to all types of financial market infrastructures.
SI 2018/734: Provisions are made approving the scale of fees which the BoE may charge to the operators of recognised payment systems and specified service providers in relation to those recognised payment systems. The payment of these fees will reimburse the BoE for its costs incurred in connection with overseeing recognised payment systems and specified service providers to recognised payment systems. The Regulations will come into force on 10 July 2018.
The Treasury Committee published correspondence from Visa regarding the IT problems that hit card payments on 1 June 2018. The Committee says it is satisfied with Visa’s answers regarding the system failure, and it appears that the problems have been fully resolved.
The Financial Markets Law Committee (FMLC) published a report on FinTech: issues of legal complexity. The report contains a selection of previous publications by the FMLC on issues of legal uncertainty arising in the context of financial technology.
The Financial Reporting Council’s Financial Reporting Lab (the Lab) published a report looking at how current developments and use-cases of blockchain technology might impact corporate reporting processes in the future. The Lab concludes that, while cost, complexity and lack of standardisation of blockchains might be inhibiting factors, the growing use of blockchain means those involved in corporate reporting processes need to consider its potential disruptive impact.
In an interview given to French financial journal Les Echos, ECB supervisory board member Pentti Hakkarainen set out the ECB's approach to FinTech firms moving into banking, as well as the risks posed by such firms.
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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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