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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 21 September 2017.
The chancellor of the exchequer, Philip Hammond, said his goal is to ensure that the UK remains the financial services centre of the world and the global hub of FinTech. Mr Hammond said an integral part of delivering a ‘smooth and orderly’ Brexit is through the negotiation of a time-limited interim period. An outcome that protects UK financial services will require detailed negotiation and a flexible and innovative approach, as ‘no existing trade agreement, nor third-country access to the EU, supports the scale of reciprocal trade in financial services that exists between the UK and the EU’.
The Association of British Insurers (ABI) welcomed the decision by Nicky Morgan MP, chair of the Treasury Committee, to write to the Chancellor on the issue of how cross-border pensions and insurance contracts will be managed after Brexit. The ABI had previously warned that unless negotiations over how to handle long-standing contracts are part of the first phase of Brexit negotiations, there may not be time to resolve them effectively.
The Bank of England (BoE) published its quarterly bulletin for Q3 2017. The issue contains articles on Islamic finance, the Corporate Bond Purchase Scheme, and public disclosures by banks (under the revised Capital Requirements Directive) and insurers (under the Solvency II Directive) of information about their financial position, risk profile and corporate governance practices (‘Pillar 3 disclosures’).
The European Commission published proposals concerning the European Systemic Risk Board (ESRB) and the three European Supervisory Authorities (ESAs), namely the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Banking Authority (EBA). The proposals seek to upgrade and improve the supervisory convergence tools, governance and funding of the ESAs, and give new responsibilities to ESMA. The proposals also seek to ensure that supervision keeps up to pace with technological innovation, and introduce targeted amendments to the efficiency of the ESRB.
The European Commission published the text of a draft Delegated Regulation on the final system of contributions to the administrative expenditures of the Single Resolution Board (SRB). Pursuant to Articles 57 to 59 of Regulation (EU) No 806/2014, the SRB is responsible for devoting the necessary financial and human resources to the performance of the tasks conferred on it. The text provides for the determination and raising of administrative fees for all entities that are subject to the Single Resolution Mechanism.
The chair of the supervisory board of the ECB, Danièle Nouy, delivered a speech examining how regulatory arbitrage works and what can be done about it. Ms Nouy said strict rules were ‘put in place for a reason, and working around them defeats that purpose’. Defining arbitrage as banks structuring their activities in a way that reduces the impact of regulation without a corresponding reduction in the underlying risk, Ms Nouy warned of the risks post-Brexit of back-to-back booking and third-country branches unsupervised by the ECB.
The vice-chair of the supervisory board of the European Central Bank (ECB), Sabine Lautenschläger, called for more harmonisation of banking supervision and regulation at the European level, saying there is too much national ‘variety’. Ms Lautenschläger said it was time to develop a ‘truly European banking sector’, and said national regulatory variation can ‘only be justified when it reflects country-specific risks’.
The vice-chair of the supervisory board of the ECB, Sabine Lautenschläger, delivered a speech on striking the balance between regulation, supervision and market discipline, saying that while the banking sector rests on more solid foundations than before, some issues still need to be resolved. Ms Lautenschläger said that at the time of the crisis it was commonly held that a global rule book was necessary to prevent recurrences but it was not now clear whether everyone still subscribes to that view. Ms Lautenschläger worried that this suggests people are starting to forget the lessons learned from the crisis.
The vice-president of the European Commission, Valdis Dombrovskis, delivered a speech on Capital Markets Union, technological innovation and global regulatory co-ordination, in which he said fragmented capital markets are holding back innovative businesses, and called for the completion of the Banking Union and ‘a true single market for capital’, by completing the Capital Markets Union by 2019.
An external member of the BoE’s Financial Policy Committee (FPC), Donald Kohn, delivered a speech at the joint Financial Stability Institute and Bank for International Settlements conference on supervisory policy implementation in the current macro-financial environment. Mr Kohn discussed co-operation and co-ordination across monetary, macroprudential, and microprudential policies, saying because each policy works at least in part by affecting the cost and availability of credit, how each is carried out can affect the primary objectives of the other policies.
Parliament made available on its website various correspondence between the chair of the Treasury Committee and various ministers, regulators and financial industry executives concerning several different issues.
The Committee on Economic and Monetary Affairs (ECON) published a draft agenda for its next meeting, to be held on 25 September 2017. The meeting will include a welcome for the ECB president Mario Draghi for the third Monetary Dialogue of the year. He will present the ECB perspective on the latest economic and monetary developments ahead of the discussion with ECON members.
The director of supervision for retail and authorisations at the FCA, Jonathan Davidson, delivered a speech on culture, conduct and the Senior Managers and Certification Regime (SMCR). As the FCA consults on the extension of the SMCR to another 47,000 firms, Mr Davidson said that creating an ethical culture is a ‘sound business proposition’ as it promotes engagement, better teamwork and more innovation, as well as cutting back sickness and staff turnover rates.
The EBA published a discussion paper on 'Significant risk transfer in securitisation' (EBA-DP-2017-03) putting forward for public discussion proposals to strengthen the regulation and supervision framework of significant risk transfer (SRT) and to improve regulatory certainty and a level playing field for institutions transferring risk through securitisation. The consultation runs until 19 December 2017.
The Basel Committee on Banking Supervision (BCBS) published an updated version of its Q&As on the definition of capital incorporated in the Basel III framework. Two flowcharts are also included in the annexes, designed to aid understanding of the application of the Basel III transitional arrangements to capital instruments issued by banks. The Q&As aim to promote consistent global implementation of Basel III.
The Prudential Regulation Authority (PRA) published UK-specific reporting clarifications for FINREP financial statements templates. The clarifications are intended to help firms in complying with the financial statements reporting requirements, as set out in paragraph 2.9 of PS36/16 'Financial statements—responses to Chapter 3 of CP17/16'. The clarifications will be applicable to firms submitting from 2018 Q1 onwards.
The BoE published a public working draft (PWD) of the standalone ring-fencing taxonomy that will make up part of v3.0 of the BoE Banking XBRL Taxonomy, while the PRA also published details of banks' ring-fencing transfer scheme (RFTS) court dates.
Regulation (EU) 2017/1539 of the ECB of 25 August 2017 laying down the date of application of Regulation (EU) 2017/1538 amending Regulation (EU) 2015/534 on reporting of supervisory financial information to less significant supervised entities which are subject to national accounting frameworks was published in the Official Journal of the EU.
Regulation (EU) 2017/1538 of the ECB of 25 August 2017 amending Regulation (EU) 2015/534 on reporting of supervisory financial information was published in the Official Journal of the EU.
The Financial Conduct Authority (FCA) and the PRA notified the ESAs that they will comply with the guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector, except for provisions relating to the identification of acquirers of indirect qualifying holdings. The guidelines come into force on 1 October 2017.
The ECB imposed penalties totaling €11.2m on Banca Popolare di Vicenza S.p.A. in L.C.A. after the Italian bank was found to be in breach of reporting and public disclosure requirements, and the large exposures limit, between 2014 and 2016.
The government published the Data Protection Bill which it believes will make data protection laws fit for the digital age. The Bill will replace the Date Protection Act 1998 (DPA 1998) and sets new standards for protecting general data, giving people control over their own data and providing new rights to move and delete personal data. It will preserve existing exemptions which the government says have worked well in DPA 1998, to ensure businesses and organisations can continue to support research, financial and legal services, and journalism. It also includes specific measures to allow action against terrorist financing, money laundering and child abuse. Lawyers from Jurit LLP and Linklaters advice that businesses should prioritise making themselves compliant with the new rules. However, they suggest the Information Commissioner’s Office (ICO) will be gentle when it comes to using its new abilities to sanction.
The European Commission proposed a wide-ranging set of new measures to strengthen cybersecurity across the EU, including an EU cybersecurity agency and a new European certification scheme to guarantee the safety of digital products and services. The Commission will also seek to bolster law enforcement of these issues by widening the existing definition of offences to include counterfeiting of non-cash means of payment, such as virtual currencies.
The Treasury Select Committee (TSC) published a letter from the FCA chief executive, Andrew Bailey, to the chair of the TSC, Nicky Morgan, concerning the reported leak to the BBC of the report into the treatment of small and medium enterprise (SME) customers referred to the Royal Bank of Scotland’s global restructuring group (RBS GRG).
The FCA issued a Final Notice to Mr Charles Palmer imposing a financial penalty of £86,691 for breaching Statement of Principle 6 of the FCA’s Statements of Principle for Approved Persons and making an order prohibiting him from performing any significant influence function in relation to any regulated activities carried on by any authorised or exempt person or exempt professional firm. This order took effect from 19 September 2017.
The PRA amended section 3.16 of the supervisory statement 18/15 ‘Depositor and dormant account protection’ to clarify the use of the Financial Services Compensation Scheme (FSCS) badge on the information sheet contained in Annex 1 of the Depositor Protection Part.
The Information Commissioner's Office fined Your Money Rights Limited £350,000 for making a record high 146 million illegal calls about payment protection insurance (PPI). People reported feeling harassed and threatened by the automated calls.
ESMA published a policy procedure under the Markets in Financial Instruments Regulation (EU) 600/2014 (MiFIR) laying out the steps for trading venues to temporarily opt out from providing access provisions for exchange-traded derivatives (ETDs).
The FCA said good progress is being made on new authorisations or variations of permission (VoPs) under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). The FCA says it has received applications from a significant number of firms seeking to operate a trading venue or become a data reporting services provider (DRSP), and has already determined a number of applications from DRSPs authorised to provide approved publication arrangements.
The International Swaps and Derivatives Association (ISDA) published recommendations for a comprehensive recovery and resolution framework for central counterparties (CCPs), and called on regulators to finalise and implement CCP recovery and resolution strategies. The ISDA says it hopes the guidance will help firms implement ‘robust, unambiguous and predictable’ mechanisms.
ISDA proposed a risk-based framework for evaluating and recognising the comparability of foreign-jurisdiction derivatives regulation regimes. ISDA says that while solid progress has been made since the financial crisis by the industry and regulators to improve the resilience of financial markets, ‘the hoped-for march towards global consistency and cross-border harmonisation has been much slower’. ISDA says the lack of consistency causes duplication, complexity and unnecessary compliance challenges for derivatives users.
The chief executive of ISDA, Scott O’Malia, told the ISDA Washington Policy Conference 2017 that derivatives market rules must be made more effective and less costly, while retaining existing protections. O’Malia’s opening remarks to the conference assessed the progress made in reforming the derivatives market, the importance of cross-border recognition and the necessity of improving the resilience of CCPs.
There is scope to streamline and simplify certain requirements in the derivatives regulatory framework to remove needless complexities ‘which impose a hefty compliance burden on intermediaries and end users for little benefit’, according to ISDA chairman Eric Litvack. He believes this risks deterring hedging, trading and investment. He is calling for a framework that is ‘safe, efficient and appropriate, that ensures resiliency of the financial system and encourages economic growth, market liquidity and effective risk management’.
Advocate general Campos Sánchez-Bordona handed down an opinion on Garlsson Real Estate SA, in liquidation, Stefano Ricucci, Magiste International SA v Commissione Nazionale per le Società e la Borsa (Consob). The case concerns market manipulation and whether a national law allowing for an administrative penalty and a criminal penalty for the same act infringes the principle of ne bis in idem.
The City of London Law Society (CLLS) updated its guide to the questions which a law firm should consider when seeking or providing an opinion letter under English law in a financial transaction. While the guide seeks to save time and costs for law firms and clients by explaining the issues and how they might be dealt with, it is not intended to lay down rules or a code of conduct.
The European Association of Corporate Treasurers (EACT) published a response to the European Commission’s proposals to reform the European Market Infrastructure Regulation (EMIR), published in May 2017 as part of the Regulatory Fitness and Performance (Refit) programme. Co-written with a number of other derivative end-user organisations, the response welcomes the Commission’s plans, saying they should help relieve burdens for businesses using derivatives to reduce their commercial and financing risks. EACT says the Commission’s proposals are an important simplification of existing EMIR requirements for corporates and would bring Europe closer to international practice, but the paper also sets out further streamlining suggestions ‘to build on the Commission’s proposals’.
The FCA published the September 2017 issue of Market Watch, its newsletter on market conduct and transaction reporting issues.
ESMA published a letter to the International Accounting Standards Board (IASB) regarding a request for information on the post-implementation review of the IFRS 13 fair value measurement.
ESMA published the responses received to its consultation on guidelines on internalised settlement reporting under Article 9 of the Central Securities Depositories Regulation (EU) No 909/2014 (CSDR). ESMA received 16 responses, and will consider the feedback with a view to finalising the guidelines by Q1 2018.
ESMA published the minutes of the joint meeting of the Board of Supervisors and the Securities and Markets Stakeholder Group held on 6 July 2017, and of a separate meeting of the Securities and Markets Stakeholder Group held on 6-7 July 2017.
On 14 September 2017, the Competition and Markets Authority (CMA) launched a phase 2 market investigation into investment consultancy and fiduciary management services following a market investigation reference from the FCA. This follows the FCA’s publication in June 2017 of the final report into its Asset Management Market Study, concluding there were reasonable grounds for suspecting features of the investment consultancy market were preventing, restricting or distorting competition. Although the three largest investment consultants offered a package of undertakings in lieu to the FCA to address the concerns identified, the FCA rejected this package after concluded that it was not confident that it would provide a comprehensive solution. The CMA’s deadline for its investigation is 13 March 2019.
The CMA announced the appointment on 19 September 2017 of the inquiry group for its in-depth phase 2 investigation into investment consultancy and fiduciary management services following a market investigation reference from the Financial Conduct Authority (FCA). The group comprises John Wotton as chair, supported by Lesley Ainsworth, Bob Spedding and Tim Tutton.
The European Parliament published the text of the legislative resolution, adopted on 14 September 2017, on the proposed Regulation amending the European Venture Capital Funds Regulation (EU) 345/2013 (EuVECA) and the European Social Entrepreneurship Funds Regulation (EU) 346/2013 (EuSEF).
A leading global clearing house, LCH, announced that its RepoClear service has introduced a new model which brings the advantages of clearing repos on the buy side. The service aims to widen the number of repo trades available for netting. An asset manager, Insight Investment, has used the service, acting for a pension fund. The first trade took place on Tradeweb Markets.
The FCA issued a policy statement (PS17/20) on transaction cost disclosure in workplace pensions. The FCA says that, by setting out a methodology for calculating transaction costs in a consistent way, and by placing obligations on firms to respond to requests for information about costs, it is building the foundations that will enable scheme governance bodies to meet their obligations to review and consider the value for money of transaction costs and administration charges.
Commission Delegated Regulation (EU) 2017/1542 of 8 June 2017 amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates) was published in the Official Journal of the EU.
EIOPA published new Q&As on technical standards made under Solvency II.
EIOPA published a second set of Solvency II statistics on the European insurance sector. The statistics contain country breakdowns and distributions of key variables based on Solvency II reporting from solo insurance and reinsurance undertakings for Q4 of 2016.
The International Association of Insurance Supervisors (IAIS) published an Application Paper on the regulation and supervision of mutuals, co-operatives and community-based organisations in increasing access to insurance markets.
The FCA and the Payment Systems Regulator (PSR) laid out (FCA press release/PRA press release) how they will monitor and enforce the Payment Services Regulations 2017 (PSRs 2017), which come into effect from January 2018 and implement the revised Payment Services Directive (PSD2). Existing payment institutions and e-money institutions need to be re-authorised or re-registered and the FCA recommends that firms consider whether they need to act now. This includes businesses providing account aggregation or online payment initiation services. Applications will open on 13 October 2017.
The PSR completed its annual monitoring of the Current Account Switching Service (CASS), and found it compliant with the Payment Account Regulations 2015. Following a review of information and evidence submitted by Bacs on behalf of CASS, the PSR says CASS continues to meet the criteria for designation as an alternative switching scheme.
The Faster Payments Standards Library announced significant enhancements to its service. The interactive, free-to-use HTML resource launched in January 2017 for developers at FinTechs, challengers, aggregators, software vendors and others across the payments industry now includes a new validation tool and 88 individual message schema.
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