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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 22 March 2018.
The Financial Conduct Authority (FCA) published an exchange of letters between its CEO, Andrew Bailey, and the director general of the Association of British Insurers (ABI), Huw Evans. Mr Evans had written to the FCA to clarify ABI members' duties to treat their customers fairly and other relevant regulatory requirements in the context of changes that may happen when the UK leaves the EU.
The European Commission published an updated draft of the Withdrawal Agreement currently being negotiated between the UK and the EU, highlighting progress made in the latest round of technical talks, including agreement in principal on the terms of transition. Although described as a ‘significant step’ in the Brexit negotiations, a number of issues remain subject to agreement and clarification, including the priority issues specific to Ireland and Northern Ireland. Richard Eccles, partner at Bird & Bird, discusses the Northern Ireland/Ireland aspect of the agreed text.
The chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, delivered a speech on the capital markets union (CMU) and the review of the European Supervisory Authorities (ESAs), Brexit, and the impact of PRIIPs and MiFID II. On Brexit, Mr Maijoor warned against intra-EU regulatory arbitrage, saying financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied.
The Financial Markets Law Committee (FMLC) wrote to the Ministry of Justice to draw attention to potential legal uncertainties arising from provisions in clause 6 of the European Union (Withdrawal) Bill, which will, post-Brexit, govern the interpretation by UK courts of EU concepts.
The FCA published its Approach to supervision document and its Approach to enforcement document, following the FCA's commitment to publish a series of documents that would explain its approach to regulation in more depth when the FCA launched its Mission.
The outgoing chair of the FCA, John Griffith-Jones, delivered a speech on the regulator’s achievements over the last five years. At an event hosted by TheCityUK, Mr Griffith-Jones said that, despite having to make difficult and sometimes unpopular decisions, the FCA had established itself as a ‘world-leading regulator’.
The FCA published its March 2018 regulation round-up. The issue is introduced by the FCA’s director of supervision—retail and authorisations, Jonathan Davidson, who looks at consumer credit regulation, while this month’s ‘Hot Topic’ is Transforming culture in financial services.
The FCA published the March 2018 edition of its Data Bulletin. This edition focuses on how the pensions and retirement income market is evolving, and includes both market data and new data from the FCA's Financial Lives Survey.
The European Central Bank (ECB) published its Single Supervisory Mechanism (SSM) Supervisory Manual: 'European banking supervision: functioning of the SSM and supervisory approach'.
The chair of the Financial Stability Board (FSB), Mark Carney, wrote to the G20 leaders and central bank governors ahead of their meeting in Buenos Aires on 19-20 March, setting out the FSB’s priorities under the Argentine Presidency. The letter notes that the current backdrop of strong and balanced global growth is underpinned by a resilient global financial system that is ‘the product of determined efforts by the G20 and FSB over the past decade’.
The European Systemic Risk Board (ESRB) published a summary compliance report on implementation of its December 2012 recommendation on funding of credit institutions (ESRB/2012/2). The recommendation sought to improve funding conditions and restore the resilience of credit institutions and confidence in them.
The Banking Standards Board (BSB) published its annual review 2017/2018, which highlights the BSB's work in 2017 and plans for 2018. The report also summarises the results of the BSB's 2017 survey and assessment of behaviour, competence and culture in UK banking. The 2017 survey results showed improvements from 2016 on 25 out of 36 questions and a decline in none.
The government published a statement of intent for the programme for the use of £55m in funding from dormant bank and building society accounts to improve financial inclusion, which was announced in January 2017. The programme will be designed jointly by the Department for Digital, Culture, Media and Sport and the Big Lottery Fund, working closely with HM Treasury, the Department for Work and Pensions and the Financial Conduct Authority.
To describe the activity of the agent in the present case, as in any sense an integral part of the business activity of the defendant, an 'authorised person' regulated by the Financial Conduct Authority, was a complete distortion of the true position on the facts. The Court of Appeal, Civil Division, accordingly dismissed the claimants appeal on the issue of vicarious liability. The judgment is available at:  EWCA Civ 431.
The FCA’s director—authorisations, Sarah Rapson, delivered a speech on the FCA’s approach to authorisation, at the Association of Professional Compliance Consultants (APCC) annual conference. Ms Rapson explained that the FCA uses authorisation primarily to prevent harm and to improve conduct standards and culture in firms. She said it is used in a proportionate manner, and the FCA does not operate a zero-failure regime: to prevent all firm failure or harm to consumers would be unachievable. It would also be undesirable as it would stifle innovation and competition
The International Swaps and Derivatives Association (ISDA) responded to the European Commission’s ‘fitness check’ of supervisory reporting requirements with several key recommendations, including suggesting a ‘report once/permission access to data once’ regime, where firms would produce a single dataset which the relevant regulators could ‘cut to suit their particular regulatory objectives’.
The European Commission launched a consultation on the impact of recent amendments to the Basel III framework. The consultation aims at gathering evidence on the potential impacts of those reforms on the EU banking sector and the wider economy, as well as on implementation challenges for EU institutions. Contributions are sought by 12 April 2018.
The Bank of England (BoE) published a statement by the Financial Policy Committee (FPC) from its policy meeting on 12 March 2018. At the meeting, the FPC reviewed the outlook for UK financial stability, risks to UK financial stability from Brexit, and risks from crypto-assets. It also finalised the main elements of the design of the 2018 stress test of major UK banks.
The BoE published the scenario that it will be stress-testing banks against in 2018. The BoE will conduct one stress test, the annual cyclical scenario (ACS), which tests the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs. The stresses applied to the economic and financial market prices and measures of activity in the 2018 ACS will be the same as in the 2017 test.
The European Banking Authority (EBA) published its report on the functioning of supervisory colleges in 2017, summarising its assessment of the colleges’ activities against the EBA 2017 colleges action plan and the relevant regulation. While the report says progress has been made over the last two years, there is room for improvement in some areas.
The FSB published two reports on correspondent banking relationships—a progress report on the FSB action plan to assess and address the decline in correspondent banking, and a stocktake on remittance service providers’ access to banking services, including recommendations to improve accessibility. The reports have been delivered to G20 finance ministers and central bank governors.
The Directorate-General for Internal Policies of the European Parliament published a briefing note Non-performing loans in the banking union—stocktaking and challenges, which gives a short introduction to the topic of non-performing loans (NPLs), takes stock of the current situation in the Euro area, touches on the impact of NPLs on credit supply, and summarises the activities taken at the European level to address the problem.
The EBA published a report assessing the current Credit Risk Mitigation (CRM) framework as part of its work on the regulatory review of the internal ratings-based (IRB) approach. The report is part of the fourth and last phase of the EBA's roadmap on the IRB approach, which also includes a review of supervisory practices, a harmonised definition of default and clarifications on modelling approaches to be used by institutions.
The Council of the EU published Presidency compromise texts on the European Commission's proposed amendments to Directive 2013/36/EU (the Capital Requirements Directive or CRD IV), Regulation (EU) 575/2013 (the Capital Requirements Regulation or CRR), Directive 2014/59/EU (the Bank Recovery and Resolution Directive or BRRD), and Regulation (EU) 806/2014 (the Single Resolution Mechanism (SRM) Regulation):
The Association for Financial Markets in Europe (AFME) welcomed the European Commission’s proposals for the development of a secondary market for non-performing loans (NPLs), saying it is an important initiative which should enable banks to accelerate the reduction of NPLs on their balance sheets. AFME said high levels of NPLs have ‘long tied up valuable bank financing which might otherwise have been deployed in supporting economic growth’.
The ECB published an addendum to its March 2017 guidance to banks on non-performing loans (NPLs). The addendum supplements the qualitative guidance, and specifies the ECB’s supervisory expectations for prudent levels of provisions for new NPLs. It is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision.
ESMA issued the official translations of its guidelines on stress tests scenarios under Article 28 of the Money Market Funds (MMF) Regulation (EU) 2017/1131. National competent authorities to which the guidelines apply must now notify ESMA within two months whether they comply or intend to comply with the guidelines.
The vice-chair of the supervisory board of the ECB, Sabine Lautenschläger, delivered a lecture at the Florence School of Banking and Finance, where she said banks must be able to fail or the economy will suffer in the long run. But they must be able to do so in an orderly manner, or financial stability will suffer in the short run. Ms Lautenschläger said the new European resolution framework helps to make orderly failure possible, but while stronger regulation and supervision can do their bit, ‘in the end it is up to the banks themselves to ensure they lead long and healthy lives’.
The chair of the Single Resolution Board, Elke König, delivered a speech at a European Parliament hearing, in which she discussed the European Court of Auditors report, the release of the non-confidential version of documents related to the resolution of Banco Popular, the recent failure of the Latvian ABLV Bank, and amendments to the banking package. Ms König said that calls for a greater use of proportionality by resolution authorities had to be balanced by the granting of greater flexibility and discretion.
Commission Delegated Regulation(EU) 2018/405 of 21 November 2017 correcting certain language versions of the CRR was published in the Official Journal of the EU.
The Department for Business, Energy & Industrial Strategy (BEIS) launched a consultation in relation to new proposals to improve the corporate governance of companies when they are in or approaching insolvency. The consultation closes on 11 June 2018.
In its latest report on trends, risks, and vulnerabilities (TRV), ESMA warns that markets, infrastructures and investors in the EU remain at risk, and says it has concerns about retail investors investing in speculative and risky products, such as virtual currencies and initial coin offerings (ICOs).
The Joint Committee of the ESAs published its final report on Big Data, analysing its impact on consumers and financial firms. Overall, the ESAs have found that while the development of Big Data poses some potential risks to financial services consumers, these are currently outweighed by the benefits of this innovation, and that many of the risks are mitigated by existing legislation.
The FSB provided the G20 finance ministers and central bank governors with a progress update on the development of a cyber lexicon report. The lexicon will aim to support the financial sector cyber security and cyber resilience work of the FSB, standard-setting bodies, authorities and private sector participants. The FSB aims to deliver the final lexicon to the G20 Summit in November 2018.
With the General Data Protection Regulation (GDPR) coming into force on 25 May 2018, firms will be required to notify personal data breaches to the competent supervisory authority. Insurance Europe (IE) developed a template as a possible way to meet this obligation, which it says could be of particular interest to SMEs, who could rely on it instead of undertaking a descriptive exercise in the midst of a data breach, for which they may not have the resources.
The chief Executive of the Financial Conduct Authority (FCA), Andrew Bailey, gave a speech at the 'Transforming culture in financial services' conference in London.
The Financial Action Task Force (FATF) published a report to the G20 for March 2018, ahead of the meeting of finance ministers and central bank governors. The report sets out FATF’s ongoing work to fight money laundering and terrorist financing (AML/CTF). The FATF said it will also continue its work on FinTech and virtual currencies, including considering how to promote and ensure a more coherent and consistent approach by countries to mitigating the risks and supporting financial innovation.
The European Parliament announced that MEPs have approved the nomination of 45 members to the new Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance. The work of the committee, which has a 12-month mandate, will include examining ‘national schemes providing tax privileges’, VAT fraud and the problems of ensuring tax compliance in the digital economy, and assessing the Commission’s own assessment and screening process for listing countries as high-risk third countries under the Fourth Money Laundering Directive (MLD4).
Christian Bittar, an ex-Deutsche Bank trader, pleaded guilty to conspiracy to defraud in connection with the investigation by the Serious Fraud Office (SFO) into the manipulation of the Euro Interbank Offered Rate (EURIBOR). Mr Bittar pleaded guilty on 2 March 2018. A court order restricting reporting of the plea was lifted on 15 March 2017.
The joint head of bribery and corruption at the SFO, Camilla de Silva, gave a speech on investigative techniques, priorities and the future use of deferred prosecution agreements (DPAs) within the SFO.
The FCA agreed a package of redress totalling over £2.1m with PerfectHome (a trading name of Temple Finance Limited), a rent-to-own firm which provides household goods to customers on hire purchase agreements. The redress will be made up of cash payments and balance write-offs for 37,000 customers.
The Complaints Commissioner issued the final report on complaint FCA00376, which related to an allegation that the FCA improperly influenced the Financial Ombudsman Service (FOS) in its handling of complaints against a firm. The Commissioner did not uphold the complaint of improper influence by the FCA because there was no clear evidence to demonstrate it. But the Commissioner found the absence of a contemporaneous documentary explanation of the FCA's purpose in sharing information with the FOS unsatisfactory.
Customers of two failed investment firms, Beaufort Securities Limited (BSL) and Beaufort Asset Clearing Services Limited (BACSL), may be eligible for compensation, as the Financial Services Compensation Scheme (FSCS) declared the firms in default.
The ECB launched its second public consultation on developing a euro unsecured overnight interest rate. The ECB is seeking views on the defined methodology of the new rate, as well as on key operational and technical parameters. Feedback is sought by 20 April 2018.
ESMA issued an opinion providing further guidance on the treatment of packages under the trading obligation for derivatives which the Markets in Financial Instruments Regulation (MiFIR) introduced on 3 January 2018. Packages allow investment firms and their clients to conduct trades for risk management and hedging purposes.
The Investment Association (IA) in partnership with Dechert LLP published a global survey on payment for research, a review of the research payment rules in 33 key global jurisdictions following the implementation of the recast Markets in Financial Instruments Directive (MiFID II) on 3 January 2018.
The FSB launched a survey to gather feedback from financial institutions that are actively involved in infrastructure financing by providing investments and sponsorship, insurance against financial and non-financial risks, and advice on transactions. The survey seeks first-hand information from experienced market participants on recent and expected trends in infrastructure finance, and on the relevant drivers of these trends. It also seeks views on the extent to which G20 financial regulatory reforms agreed post-crisis have influenced the cost and availability of financing for infrastructure, and on how significant regulations compare to other factors, such as the macro-economic environment. The deadline for responses is 6 April 2018.
The chair of the Treasury Committee, Nicky Morgan MP, wrote to the chief executive of the FCA, Andrew Bailey, seeking information about the FCA's approach to Aviva plc's recent statements regarding the cancellation of preference shares.
The Court of Justice of the EU (ECJ) considered whether both criminal and administrative penalties can be imposed for a single market abuse offence in the case of Garlsson Real Estate and others v Commissione Nazionale per le Società e la Borsa (Consob) (C-537/16).
ESMA published the responses received to its consultation on draft RTS under the new Prospectus Regulation (Regulation (EU) 2017/1129). ESMA received 28 responses.
The Council of the EU adopted negotiating directives authorising the Commission to negotiate, on behalf of the EU, a convention establishing a multilateral court for the settlement of investment disputes. The court would be a permanent body to settle investment disputes under future and existing investment treaties. For the EU, the court would eventually replace the bilateral investment court systems included in EU trade and investment agreements.
The FCA published a webpage on closet trackers—passive funds that look and charge like they are active. The FCA says it continues to review potential closet tracker funds and closet constrained funds as part of its ongoing supervision of UK-authorised funds, in order to ‘deliver high levels of investor protection and maintain a competitive market environment’. The FCA says its priorities are clear, fair and not misleading promotional material and investment objectives.
The director of supervision—retail and authorisations at the FCA, Jonathan Davidson, delivered a speech at the Credit Summit in London on getting affordability right in consumer credit. According to Mr Davidson, a firm whose business model is predicated on selling products to customers who can't afford to repay them is not acceptable, nor is it a sustainable long-term strategy.
The FCA published a speech by its executive director of strategy and competition, Christopher Woolard, on Beyond regulation: thinking creatively about consumer credit, delivered at the Responsible Finance Conference, in Glasgow. Mr Woolard said regulation alone could not tackle all the problems and challenges in so large and complicated sector, and it was only by working with all stakeholders and proposing innovative solutions that progress could be made.
The FCA published an update on its review of the motor finance sector, setting out its findings so far and the areas of concern that it will focus on for the remainder of the review. The review was included in the FCA's business plan 2017-18 and is expected to be completed in September 2018.
Citizens Advice called for borrowers from doorstep lenders to be given the same level of protection as users of payday loans. This would prevent customers getting into problem debt, and save up to £123m in interest payments on up to 540,000 loans each year, the charity said.
Directive (EU) 2018/411 of the European Parliament and of the Council of 14 March 2018 amending Directive (EU) 2016/97 (Insurance Distribution Directive, IDD) as regards the date of application of Member States' transposition measures was published in the Official Journal of the EU. As a result, the application date of the IDD has been postponed to 1 October 2018 and the deadline given to Member States to transpose the new rules into national laws and regulations has been extended to 1 July 2018. Directive (EU) 2018/411 shall enter into force on the day of its publication in the Official Journal of the EU. It shall apply, with retroactive effect, from 23 February 2018.
The European Insurance and Occupational Pensions Authority (EIOPA) published the second in a series of papers with the aim of contributing to the debate on systemic risk and macroprudential policy. Until now, the debate has mainly focused on the banking sector due to its prominent role in the recent financial crisis. Through the series of papers, EIOPA aims to ensure that any further extension of the debate to the insurance sector fully reflects the industry's specific nature.
EIOPA published an interview given by Dimitris Zafeiris, the head of its risks and financial stability department, for Insider.gr. According to Mr Zafeiris, the insurance sector can learn some lessons from experiences in the banking sector, and more work is needed on recovery and resolution tools and macroprudential policy.
The FCA and The Pensions Regulator (TPR) are consulting stakeholders and other interested parties to understand their views on risks and opportunities in the pensions and retirement income sector. The document sets out the two regulators’ definition of what makes up the pensions and retirement income sector, clarifies their respective regulatory remits, and sets out the areas of focus they would like to explore with stakeholders. Feedback is sought by 19 June 2018.
The Council of the EU adopted a decision approving the bilateral agreement between the EU and the USA on prudential measures regarding insurance and reinsurance. This is the final stage of authorisation of the agreement on behalf of the EU, which is now concluded. Some of the agreement's provisions have been applied provisionally since it was signed in September 2017.
In 2017 there was £12.3bn of pension buy-ins and buy-outs (also known as bulk annuities) by UK pension plans, according to analysis by Lane Clark & Peacock (LCP). This makes 2017 the second busiest year ever, behind 2014 at £13.2bn.
The Payment Systems Regulator (PSR) published its annual plan and budget 2018/19. The plan details landmark changes which have addressed some critical issues across the payments sector over the last 12 months, including the establishment of a collaborative steering group to ensure the contingent reimbursement model is designed in the best way to minimise the number of authorised push payment (APP) scams in the future, and protect victims of scams. It sets out the route the PSR will take over the course of the year towards continuing to realise its vision of payment systems that are reliable, safe and fit for purpose for everybody that uses and relies on them.
The European Payments Council (EPC) is forming a new ad-hoc multi-stakeholder group, covering the various sectors involved in the mobile payment ecosystem within the Single Euro Payments Area (SEPA). The group will develop mobile-initiated SEPA credit transfer (MSCT) interoperability implementation guidelines (including SEPA Instant Credit Transfer), while leveraging the relevant documentation developed in standardisation and industry bodies. Nominations are sought by 15 April 2018.
The PSR published a review of its board’s effectiveness, together with the minutes of its 24 January 2018 board meeting, which considered the review findings. Among other observations, the report recommended strengthening links between board members and the wider organisation, and maintaining strong collaborative relationships with the Financial Conduct Authority.
The PSR responded to UK Finance's annual fraud figures for 2017, which includes information on authorised push payment (APP) scams. The PSR said its work on payment scams had shown that there wasn’t good enough information about their size and nature. It asked the banks to change that and ‘we are now getting a glimpse of the true extent of APP fraud’. The PSR said it was ‘encouraged’ by the figures, but there was more work to do.
The executive director of strategy and competition at the FCA, Christopher Woolard, delivered a speech on ‘regulating innovation: a global enterprise’, saying collaboration with international colleagues had been a core part of the FCA’s FinTech story since it launched Project Innovate in 2014. Mr Woolard said the international dimension of FinTech is inextricable from its success as a sector, and the FCA is working with partners from around the world to consider options for a global sandbox.
The EBA published a FinTech roadmap setting out its priorities for 2018/2019. The roadmap also sets out the EBA's plans to establish a FinTech Knowledge Hub to enhance knowledge sharing and foster technological neutrality in regulatory and supervisory approaches.
The economic secretary to the Treasury and city minister, John Glen, spoke at the launch of UK FinTech week, saying the sector employs 60,000 people across 1,600 firms, which is more than work in New York’s sector, or in the combined FinTech workforce of Singapore, Hong Kong and Australia. To sustain that position, Mr Glen said competition, capital, and connectivity were all crucial.
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