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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 24 May 2018.
The European Insurance and Occupational Pensions Authority (EIOPA) issued an opinion on the solvency position of insurers in light of the withdrawal of the UK from the EU. The opinion calls upon national supervisory authorities to ensure that the risks for the solvency position of insurance and reinsurance undertakings arising from the UK becoming a third country are properly identified, measured, monitored, managed and reported.
The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) signed a memorandum of understanding to assist co-operation and co-ordination between the bodies by setting out the respective statutory regulatory responsibilities and the arrangements for the exchange of relevant information. Its purpose is also to aid transparency and understanding on how the FRC and FCA work, for firms, Parliament and the public.
The FCA and the Insolvency Service signed a memorandum of understanding that establishes a framework for co-operation between the two bodies and governs the exchange of information between them.
The FCA published its May 2018 regulation round-up. The issue includes updates on Brexit, the Payment Accounts Directive, the FCA's feedback report on its five Conduct Questions and the Bank of England's (BoE) consultation on the new payments messaging standard.
The Economic and Monetary Affairs Committee of the European Parliament (ECON) published the final report on the further harmonisation of EU capital markets with long-term sustainable objectives.
The House of Commons Treasury Committee launched a new inquiry into Maxwellisation and published oral evidence given on 16 May 2018 by Andrew Green QC and Fraser Campbell of Blackstone Chambers, who wrote a review of Maxwellisation for the Committee in 2016.
The General Secretariat of the Council of the EU issued a Note setting out the state of play of legislative proposals in the financial services arena. This is in advance of the upcoming Economic and Financial Affairs Council (ECOFIN) meeting due to take place on 25 May 2018, where the progress of these legislative proposals is expected to be discussed.
Valdis Dombrovskis of the European Commission spoke to the European Parliament's Committee on Economic and Monetary Affairs (ECON) about banking union, capital markets union (CMU) and sustainable finance. According to Mr Dombrovskis, the Commission will publish several new proposals before the end of May 2018 on sustainable finance, SME growth markets, and sovereign bond-backed securities (SBBS).
The International Capital Markets Association’s (ICMA) asset management and investors council (AMIC) issued a position paper on the ongoing review of the European Systemic Risk Board (ESRB).
The ECB issued an opinion on proposals to amend the European Securities and Markets Authority (ESMA) Regulation (EU) No 1095/2010 and related legal acts, and proposals to amend MiFID II (Directive )and Solvency II (Directive 2009/138/EC). The proposed new regulation and directive designed to implement these changes form part of a comprehensive package of proposals to reform the European system of financial supervision.
The European Banking Authority (EBA) launched a second consultation on draft regulatory technical standards (RTS) specifying an economic downturn (which follows on from the first consultation launched in March 2017) and a consultation on a set of guidelines related to the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. This package is part of the EBA's broader work on the review of the internal ratings-based (IRB) approach aiming at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements. The closing date for responses is 22 June 2018.
The Prudential Regulation Authority (PRA) is consulting on its proposed approach to the EU Securitisation Regulation and certain aspects of the revised Capital Requirements Regulation (CRR)’s banking securitisation capital framework. Consultation paper (CP) 12/18 also proposes to update firms on the PRA’s expectations with regard to significant risk transfer (SRT) securitisation. Feedback is sought by 22 August 2018.
Commission Delegated Regulation (EU) 2018/728 of 24 January 2018 supplementing the CRR with regard to RTS for procedures for excluding transactions with non-financial counterparties established in a third country from the own funds requirement for credit valuation adjustment risk was published in the Official Journal of the EU.
Commission Implementing Regulation (EU) 2018/688 of 23 March 2018 amending Implementing Regulation (EU) 2016/2070 as regards benchmarking portfolios, reporting templates and reporting instructions was published in the Official Journal of the EU.
The House of Commons European Scrutiny Committee considered the EU’s legislative proposals for banking reform set out in the proposed CRD V, CRR II and the Bank Recovery and Resolution Directive (BRRD II). The Committee has not cleared the proposed package of legislation from scrutiny and has requested further information. The Committee has, however, granted a scrutiny waiver for general approach at the meeting of the Economic and Financial Affairs Council (ECOFIN), which is due to take place on 25 May 2018.
The Loan Market Association (LMA) responded to a consultation by the PRA on the eligibility of guarantees used as unfunded credit mitigation under the CRR. The LMA highlights the importance of different credit protection products, including risk participations, export credit agency guarantees and credit risk insurance policies, which would potentially be severely impacted by the proposals in the event that they are published in their current form.
The Bank for International Settlements (BIS) published a speech on ring-fencing, cross-border resolution and the risks of fragmentation, by the vice chair for supervision of the board of governors of the Federal Reserve System, Randal K Quarles. Mr Quarles discussed US systems and controls, possible adjustments to the system, and how the US is working with other jurisdictions to build the foundation of the single-point-of-entry (SPOE) resolution framework.
The European Banking Authority (EBA) is to hold a public hearing to outline its draft answer to the Commission's call for advice on the European secured notes. The meeting will be held on 26 June 2018, from 10:00am to 12:00am UK time. The hearing comes ahead of the publication of the EBA's final report, which is expected by mid-July 2018.
The FCA updated its remuneration webpage. It sets out the main requirements certain firms are required to meet when setting pay and bonuses for staff.
The House of Commons select committee on foreign affairs published a report on Moscow's gold: Russian corruption in the UK. The report examines how to make sanctions against Russia more effective and how to ‘close the laundromat’ with a beneficial ownership register for foreign owned companies.
The Joint Money Laundering Steering Group (JMLSG) published revised versions of two of the sectors in Part II of its guidance on the prevention of money laundering and the financing of terrorism for the UK financial services industry. The revised sectors are 12: Asset finance and 17: Syndicated lending. The revisions to Parts 2 and 3 of Chapter 17 of the guidance relate specifically to syndicated lending and have been re-written by the Loan Market Association (LMA).
The executive secretary of the Financial Action Task Force (FATF), David Lewis, assessed the compliance of EU Member States with FATF recommendations and strategy on combatting terrorist financing. Speaking at a public hearing before the European Parliament Special Committee on Terrorism, Mr Lewis said that while EU Member States are taking positive action to keep pace with the FATF standards, more could be done to combat terrorist financing across the EU.
The FCA published a speech by its executive director of supervision—investment, wholesale and specialists, Megan Butler, delivered at the 5th Anti-Money Laundering TechSprint in London. Ms Butler discussed the potential for intelligent technologies like AI, robotics, natural language processing and machine learning to detect and disrupt criminal activity.
HM Revenue and Customs (HMRC) updated its guidance on failure to prevent criminal facilitation of tax evasion. It sets out how the corporate offences work, and includes processes and procedures that businesses can put in place to limit the risk of representatives criminally facilitating tax evasion.
The FCA published a decision notice, which sets out its decision to ban Darren Lee Newton from working in any regulated activity in the financial services sector. Mr Newton is disputing the FCA's decision and has referred the matter to the Upper Tribunal at which the FCA and Mr Newton will be able to present their cases. Accordingly, the decision notice has no effect pending the determination by the Tribunal.
ECON voted on 16 May 2018 to support the Commission's proposals to simplify clearing rules for small and non-financial counterparties and to temporarily exempt pension funds from clearing.
ECON voted on 16 May 2018 to approve plans to set up an ESMA supervisory committee for EU central counterparties (CCPs) and impose stricter rules on third-country ones, depending on systemic risk.
Two corrigenda to Delegated Regulations supplementing Regulation (EU) No 909/2014 of the European Parliament and of the Council (Central Securities Depositories Regulation (CSDR)) were published in the Official Journal of the EU:
The corrigenda make minor textual corrections.
The BoE published a working paper on multiplex network analysis of the UK over-the-counter (OTC) derivatives market.
The PRA published the MiFID II Passporting Amendment Instrument 2018. Made on 30 January 2018, it came into force on 5 February 2018. The Passporting Part of the PRA Rulebook now requires firms wishing to passport to use the template forms located in the Commission Implementing Regulation (EU) 2017/2382.
The ECB published a summary of the responses it received to its second consultation on developing a euro unsecured overnight interest rate, which closed on 20 April 2018. The ECB received 48 responses, with broadly positive feedback. Concerns were raised about the proposed trimming level, and about confidentiality and market manipulation related, in particular, to the publication of the ‘percentage of volumes reported by the five largest banks’.
ESMA published a positive opinion on the position limits proposed by the FCA for the ICE Low Sulphur Gasoil 1st Line Future and Option commodity contract, as well as other balance of the month (Balmo) contracts that are based on identical core (underlying) contractual specifications, terms and conditions, as shown on the FCA's website.
ICMA published an overview of the first liquidity assessment for bonds subject to the pre- and post-trade requirements of MiFID II/MiFIR which ESMA published on 2 May 2018. The liquidity assessment became applicable on 16 May 2018 and will be valid until 15 August 2018. The overview includes the list of liquid bonds.
The International Swaps and Derivatives Association (ISDA) wrote to the European Commission in response to the Commission’s request for feedback on its proposal for a Regulation on the law applicable to the third-party effects of assignments of claims.
The FCA published a press release setting out its expectations of firms offering automated investment services. In its 2017/18 business plan the FCA stated that it would monitor developments and review services providing automated investment services to help inform its regulatory strategy. The FCA also announced its intention to review new entrants to the market. The press release discusses the reviews the FCA has undertaken.
The director of supervision—retail and authorisations at the FCA, Jonathan Davidson, delivered a speech on building societies and the future of retail banking. Mr Davidson said building societies should focus on healthy competition for the benefit of the consumer and the society, rather than unhealthy competition such as loosening underwriting standards or chasing significant differentials in front-to-back book pricing.
The FCA is consulting on new guidance (GC18/2) outlining factors financial services firms should consider under the Consumer Rights Act 2015—which implements Council Directive 93/13/ECC—when drafting and reviewing variation terms in their consumer contracts. The guidance is relevant to all consumer contracts issued by firms following the entry into force of the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 (UTCCR). The consultation closes on 7 September 2018 and finalised guidance will be issues by the FCA in December 2018.
The FCA published new versions of the information sheets that consumer credit firms must use to accompany arrears and default notices. Firms are required to use the new versions from 27 July 2018.
Council Directive 93/13EEC should be interpreted as meaning that a national court giving judgment in default and which had the power, under national procedural rules, to examine of its own motion whether the term upon which the claim was based was contrary to national public policy laws, was required to examine of its own motion whether the contract containing that term fell within the scope of that directive and, if so, whether that term was unfair. The Court of Justice of the European Union so held, among other things, in proceedings concerning the reimbursement by the respondent student of registration fees and costs of a study trip, together with interests and a costs indemnity. The judgment is available at: C-147/16.
The CEO of the Money Advice Service (MAS), Charles Counsell, delivered a speech, Investing in quality—the future of debt advice, at the Institute of Money Advisers conference. Mr Counsell said debt advice is worth between £445m and £960m a year to the UK economy, with other intangible benefits. His speech set out the work of the new single financial guidance body that will take on many of the functions MAS currently performs, along with the functions of what is currently Pension Wise and The Pensions Advisory Service.
EIOPA published a letter and mandate from the European Commission asking EIOPA to provide the Commission with information on the impact of Solvency II on long-term insurance and reinsurance activities. The Commission is seeking the information as part of its review of Solvency II, which is due to be completed by the end of 2020.
Commission Implementing Regulation (EU) 2018/730 of 4 May 2018 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 31 March 2018 until 29 June 2018, in accordance with Solvency II, was published in the Official Journal of the EU.
EIOPA published its first study on the modelling of market and credit risk. The results of the study show significant variations in asset model outputs, partially resulting from model specificities, which indicates the need for further supervisory actions. The study is a first step in an ongoing process of monitoring and comparing internal market and credit risk models. EIOPA proposes to perform regular annual studies to further develop supervisory tools and foster consistency of supervisory approaches in this area.
LMA and DAC Beachcroft have produced market guidance on the application of the General Data Protection Regulation (EU) 2016/679 (GDPR) in the insurance industry. The GDPR will replace the UK Data Protection Act 1998 and other national data protection legislation across Europe on 25 May 2018. The guide provides an overview of the regulation and aims to address at market level various points which have been raised at LMA presentations on the subject.
Insurance Europe published an overview of insurers' main obligations under the GDPR, which will apply from 25 May 2018.
Insurance Europe published its annual report for 2017-18. The report contains articles on overcoming the global insurance protection gap, why the upcoming reviews of the Solvency II rules are so important to European growth, how the European Commission’s proposed pan-European personal pension products can be made attractive to customers and providers, and why motor and cyber risk insurers need access to new data sources that are becoming available.
Insurance Europe responded to the European Commission's consultation on revised calibrations for simple, transparent and standardised (STS) securitisations in the Solvency II regulatory framework that governs insurers. While it supports the Commission's proposals, Insurance Europe notes that the proposed capital requirements remain significantly high compared to the historical default experience of these assets, and says that this issue should be examined more broadly as part of the 2020 review of Solvency II.
The International Underwriting Association (IUA) responded to a PRA consultation on proposed regulatory changes to credit risk insurance policies. The IUA said the changes could make policies more expensive and less readily available, and it warned that some London Market insurers could conclude that the product is no longer viable, which may have a subsequent impact on bank lending.
The European Commission announced that it is calling on the Court of Justice of the EU to impose a daily penalty of €48,919.20 on Spain for failure to fully implement the EU Payment Accounts Directive (Directive 2014/92EU). The penalty will apply from the day of the judgment until the Directive is fully enacted and in force in national law.
The Commodity Futures Trading Commission (CFTC)'s division of market oversight and division of clearing and risk have issued a joint staff advisory that gives exchanges and clearinghouses registered with the CFTC guidance for listing virtual currency derivative products. The advisory provides guidance on certain enhancements when listing a derivative contract based on virtual currency and clarifies the CFTC staffs' priorities and expectations in its review of new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a derivatives clearing organisation (DCO).
The Treasury Select Committee published evidence taken in its inquiry into the role of digital currencies in the UK, examining the opportunities and risks that digital currencies may bring to consumers, businesses, and the government.
The crypto-assets taskforce held its first meeting, exploring the impact of crypto-assets, the potential benefits and challenges of the application of distributed ledger technology in financial services, and assessing what, if any, regulation is required in response. Announced in April 2018 by the chancellor of the exchequer as part of the government’s FinTech sector strategy, the taskforce is part of the government and financial regulators’ efforts to understand and engage with the implications of new technologies in financial services.
HM Treasury announced the appointment of Georgina O’Leary, director of innovation, research and development at insurance firm Allstate, as the government’s new FinTech envoy for Northern Ireland. The government also announced that Richard Theo, co-founder and CEO of Wealthify, would become its new FinTech envoy for Wales.
The BoE published two working papers setting out research into the potential for monetary policy with a central bank digital currency and the design principles and balance sheet implications of central bank digital currencies.
The International Chamber of Commerce (ICC) 10th annual global survey found that 60% of banks have implemented, or are in the process of implementing, technology solutions to digitalise their trade finance operations. Only 9% of banks, however, reported that the solutions implemented have so far led to a reduction of time and costs in trade finance transactions.
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