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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 25 January 2018.
The Association for Financial Markets in Europe (AFME) published a paper highlighting potential cliff-edge risks that Brexit could create for market efficiency and financial stability in wholesale financial services. The paper focuses on issues which may require intervention from policymakers and regulators in the UK and EU27.
The House of Lords EU Financial Affairs Sub-Committee published the transcript of oral evidence given by Bank of England (BoE) officials at an evidence session on 1 November 2017 held as part of its inquiry into financial regulation and supervision following Brexit.
The Futures Industry Association (FIA) launched three new Brexit working groups, via which FIA members can provide their direct input into FIA’s Brexit work. FIA aims to hold the first working group call for each group in early February 2018, and will circulate agendas in due course. Each working group will be chaired by FIA’s head of Europe, Simon Puleston Jones, and will operate under the direction of the FIA board’s Brexit working group.
The chair of the Treasury Select Committee, Nicky Morgan MP, commented on reports that the government may never publish a position paper on the future of financial services after Brexit, saying failure to publish ‘sends all the wrong signals’. Ms Morgan said financial services will be one of the most challenging elements of the Brexit negotiations, and a paper ‘articulating a clear sense of direction, and a desired end-state, could have boosted confidence that the government is up to the task’.
The Financial Conduct Authority (FCA) published Handbook Notice No. 51, which includes changes to the FCA Handbook made by the FCA board on 7 December 2017, 3 January 2018 and 18 January 2018, together with feedback on consultations that will not have a separate policy statement. It also describes changes made on 12 December 2017 by the board of the Financial Ombudsman Service (FOS) to its rules, guidance and standard terms for voluntary jurisdiction participants.
The FCA published its January 2018 regulation round-up, summarising its publications throughout the first month of the year. Key hot topics include the implementation of PSD2 on 13 January 2018 and an issue regarding consumer misdirection to the FCA in marketing materials provided to consumers by regulated firms.
The FCA and its Practitioner Panel launched their annual survey of regulated firms, with the aim of better understanding the issues affecting firms and helping the FCA improve the way it works. The survey will be carried out on the FCA’s behalf by Kantar Public, and the FCA encourages firms contacted by email to take the time to respond. The results will be presented to the Practitioner Panel and the FCA board, and will be published in Q3 2018.
The European Parliament's committee on economic and monetary affairs (ECON) published a working document on the proposals to amend the European System of Financial Supervision (ESFS), consisting of three European Supervisory Authorities (ESAs), namely the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), and the European Systemic Risk Board (ESRB).
The International Capital Market Association (ICMA)’s asset management and investors council (AMIC) published its response to the proposals to review the ESAs and the ESRB. Whilst AMIC welcomes many of the very positive aspects of the proposals, it also has some significant concern with several elements of the texts. AMIC says the proposals should be revisited if the framework is to be successful in increasing supervisory convergence and addressing the challenge of the UK leaving the EU.
The Financial Guidance and Claims Bill received its second reading in the House of Commons on 22 January 2018, and will now be considered by a Public Bill Committee. The Bill aims to ensure that members of the public are able to access free and impartial money guidance, pensions guidance and debt advice, and high-quality claims handling services.
The BoE released the minutes of the real time gross settlement system (RTGS) renewal programme transition working group meeting in December 2017. At the meeting, the group agreed its terms of reference, heard a progress report, and discussed a draft questionnaire the BoE will send to stakeholders to establish their preferences regarding the sequence in which new functionality is delivered and to understand what constraints members face that might impact timelines.
The chair of the supervisory board of the European Central Bank (ECB), Danièle Nouy, said the list of priorities for EU banks, from a regulatory perspective, remains unchanged from January 2017: adapt business models to remain profitable, improve risk management to remain stable, and deal with legacy assets to free balance sheets. Ms Nouy said good progress has been made but now is the time to deal with the challenges as the conditions are the best they’ve been since the financial crisis.
The FCA published consultation paper CP18/4 in relation to the EU Money Market Funds (MMF) Regulation, and on the FCA's approach to its fees to meet the cost of authorising and supervising funds under the Regulation.
The European Commission published a Draft Delegated Act amending the Commission Delegated Regulation on the Liquidity Coverage Ratio ('LCR'). The Commission says it is proposing limited amendments to Commission Delegated Regulation (EU) 2015/61 of 10 October 20142 (the LCR Delegated Regulation) to improve its practical application and enable it to achieve its objectives. Feedback is sought by 21 February 2018.
The European Commission adopted a Delegated Regulation (C(2018) 256 final) supplementing the Capital Requirements Regulation (Regulation (EU) 575/2013) (CRR) with regard to regulatory technical standards (RTS) on the procedures for excluding transactions with non-financial counterparties (NFC) established in a third country from the own funds requirement for credit valuation adjustment (CVA) risk.
The European Commission published its first progress report on the reduction of non-performing loans (NPLs) in Europe. The report notes that the EU banking sector is ‘in a much better shape than in previous years’ and that high stocks of NPLs in certain banks and Member States are being reduced, but says NPLs continue to pose risks to economic growth and financial stability.
The Independent Evaluation Office (IEO) of the BoE completed its broad-based evaluation of the effectiveness of the BoE’s approach to providing sterling liquidity insurance through its published market facilities, known as the sterling monetary framework (SMF). The report found ‘positive evidence of progress across numerous aspects of sterling liquidity provision’, but made a number of recommendations.
The EBA published an updated list of credit institutions exempted from or subject to a higher cap on inflows in the calculation of the liquidity coverage ratio (LCR) in accordance with the provisions laid down in the LCR Delegated Regulation. Three new institutions have been added to the previous list published in May 2017.
The ECB published the results of the January 2018 euro area bank lending survey. The figures show Euro area banks continued to adjust to regulatory and supervisory actions in the second half of 2017 by further strengthening their capital positions. At the euro area level, banks reported a broadly neutral impact on credit standards from regulatory and supervisory actions across all loan categories, with the exception of consumer credit and other lending to households, where they had a slightly tightening effect. Supervisory actions narrowed credit margins in loans to firms, had a broadly neutral impact on housing loans, and widened margins in consumer credit.
The Prudential Regulation Authority (PRA) reported that the introduction of new liquidity reporting template PRA110 will be delayed until 1 July 2019. On 13 July 2017, the PRA published consultation paper CP13/17: 'Pillar 2 liquidity'.
The World Federation of Exchanges (WFE) published best practice guidelines on cyber security for exchanges and central counterparties (CCPs), focusing on staff training, awareness and behaviour. The report aims to be a reference point for dialogue with regulatory authorities as they consider how best to strengthen the system in response to increasingly sophisticated cyber-criminals, and to provide a common set of industry best practices to be considered when designing or benchmarking staff training and awareness programmes.
The EBA will formally launch the 2018 EU-wide stress test on 31 January 2018 at 5:00pm UK time. Along with the announcement, the EBA will publish the common macroeconomic scenarios for the exercise.
The FCA published a specialist Sourcebook for professional body supervisors, setting out the FCA’s expectations in relation to anti-money laundering (AML) supervision. The Sourcebook will apply to the professional body supervisors listed below, which the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) will supervise from 1 February 2018. OPBAS aims to improve consistency of professional body AML supervision in the accountancy and legal sectors, although it will not directly supervise legal and accountancy firms.
The European Parliament is ready to start talks with the Council of the EU and the Commission on two laws targeting the financing of terrorism and organised crime. The two laws aim to clamp down on the funding of terrorism and other organised crime, by countering money laundering as well as easing cross-border freezing and confiscation of the proceeds of crime.
The Department for Exiting the European Union published a letter from the economic secretary to the Treasury, John Glen, to the chair of the European Scrutiny Committee, Sir William Cash, regarding the proposed Fifth Money Laundering Directive (MLD 5). In the letter, dated 17 January 2018, Mr Glen responds to a number of questions raised by the Committee in its November 2017 report on the proposal, and asks the Committee to clear the proposal from scrutiny so that the government can vote on the final text.
The ESAs issued an opinion addressed to competent authorities on how innovative financial products impact on firms’ money laundering and terrorist financing (ML/TF) risk exposure. The report focuses on customer due diligence (CDD) obligations, which it says can offer considerable scope for financial innovation that can improve the effectiveness and efficiency of AML/CFT controls. Nevertheless, there is a risk that innovation in this field, if ill understood or badly applied, may weaken firms’ ML/TF safeguards and, subsequently, undermine the integrity of the markets in which they operate.
The Council of the EU confirmed that it does not intend to raise objections to a Commission Delegated Regulation amending Delegated Regulation (EU) 20161675, which supplements the Fourth Money Laundering Directive (MLD4) (Directive 2015/849/EU). The amendments include adding Sri Lanka, Trinidad and Tobago and Tunisia to the list of high-risk third countries in the table in point I of the annex.
The Commission's anti-fraud strategy provides a policy framework for prevention, detection, investigation and reparation in relation to the protection of the financial interests of the EU. It is complemented by anti-fraud strategies at the level of Commission Services and Executive Agencies, which are regularly updated. The European Commission's Anti-Fraud Office is looking to carry out an evaluation of the current Commission anti-fraud strategy.
The Sanctions and Anti-Money Laundering Bill had its third reading in the House of Lords on 24 January 2018. Members were expected to discuss a range of subjects including a register of beneficial owners of overseas entities and regulations on money laundering and terrorist financing.
The FCA is consulting on its plan to give more small businesses access to the FOS, following a review of the protections available to small and medium sized enterprises (SMEs) as users of financial services. Currently, only individual consumers and around 5.5m micro-enterprises (the smallest type of business) can access the Ombudsman if they have a dispute with a financial services firm. Firms that cannot access the FOS would need to use the court system, but the FCA believes that many smaller businesses within this group struggle to do so. Feedback is sought by 22 April 2018.
The PRA and the FCA are jointly consulting on the management expenses levy limit for the Financial Services Compensation Scheme (FSCS). The management expenses are the operating costs of the FSCS. The proposed levy limit for 2018/19 is £77.66m. Responses are sought by 16 February 2018.
The FSCS published its plan and budget for 2018/19, outlining its expected management costs and initial levy forecasts. The FSCS expects to levy the industry £336m for the nine months from 1 July 2018 to 31 March 2019, up from £320m in 2017/18 (which covered 12 months). The forecast is for nine months rather than 12 in order to align the FSCS’s levy and financial years.
The FSCS declared three SIPP operator firms in default, meaning consumers could get back money they lost as a result of their dealings with the firms. The FSCS says it has received approximately 150 claims for compensation against Brooklands Trustees Limited, Stadia Trustees Limited and Montpelier Pension Administration Services Limited.
ESMA published an extended version of its MiFID II/MiFIR transitional transparency calculations (TTCs) for equity and bond instruments, adding further instruments. The TTCs for these additional instruments are displayed alongside the already published TTCs that were published on 22 December 2017, which remain unchanged.
ESMA published a call for evidence on potential product intervention measures relating to the provision of contracts for differences (CFDs), including rolling spot forex and binary options, to retail investors. ESMA is proposing to restrict the marketing, distribution or sale of CFDs to retail clients, and banning the marketing, distribution or sale of binary options to retail clients. Feedback is sought by 5 February 2018.
ESMA released data on the third-country central counterparties (CCPs) which offer services and activities in the EU in accordance with Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on over the counter derivatives, central counterparties and trade repositories (EMIR).
ECON published a briefing note on MiFID II, MiFIR and PSD2 for the scrutiny session to be held on 25 January 2018. The briefing note covers third country equivalence decisions under MiFID II and MiFIR, and the RTS on strong customer authentication and secure communication (RTS SCA) under PSD2 adopted by the Commission on 27 November 2017 (C(2017) 7782 final).
The European Commission launched an inception impact assessment to explore the regulatory hindrances faced by sovereign bond-backed securities (SBBS) under the status quo. It will also look at the benefits of developing an SBBS market in terms of diversification of banks' balance sheets, de-risking, and expansion of the supply of euro-denominated low-risk assets. The Commission has suggested SBBS on several occasions as a possible measure to advance the completion of the banking union and the deepening of economic and monetary union. Feedback is sought by 20 February 2018.
The BoE published minutes of the meeting of its working group on sterling risk-free reference rates, which took place on 12 December 2017. The minutes summarise the development of sterling risk-free interest rates and the next phase of sterling Libor transition, including broadening the participation in the working group.
The FCA published a policy statement (PS18/2) which summarises the feedback it received to its consultation (CP17/29) on depositing client money in unbreakable deposits.
The FCA published policy statement PS18/1: Insurance Distribution Directive (IDD) implementation—Feedback and near-final rules to consultation paper CP17/33 and other IDD consultations. This is the FCA’s third policy statement setting out near-final rules for the implementation of the Insurance Distribution Directive (IDD).
The FCA published a statement on communications in relation to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The statement relates to concerns raised about the performance scenarios in the key information document (KID).
EIOPA translated into all EU languages its guidelines on insurance-based investment products (IBIPs) that incorporate a structure which makes it difficult for the customer to understand the risks involved. The guidelines are developed in line with Articles 30(7) and (8) of the IDD, and the translation marks the commencement of the two-month ‘comply or explain’ reporting process for competent authorities.
Commission Delegated Regulation(EU) 2018/72 of 4 October 2017 supplementing Regulation (EU) 2015/751 of the European Parliament and of the Council on interchange fees for card-based payment transactions (Interchange Fee Regulation) with regard to RTS establishing the requirements to be complied with by payment card schemes and processing entities to ensure the application of independence requirements in terms of accounting, organisation and decision-making process was published in the Official Journal of the EU.
The European Commission issued new requirements that ensure independence of payment card schemes and processing entities, to enhance competition in the card payment market. The new rules introduce detailed requirements regarding the separation of certain functions, which enter into effect on 7 February 2018. As a result of this separation, retailers will be able to choose the best processor for their card transactions, while consumers benefit from reduced processing costs in their daily payments in shops, restaurants, on-line or via a growing range of card-based mobile payment applications.
The managing director of the Payment Systems Regulator (PSR), Hannah Nixon, sent an open letter to the CEO of the New Payment System Operator (NPSO) setting out the initial priorities the PSR expects of the NPSO as it designs the target operating model (TOM) and develops and delivers the New Payments Architecture (NPA).
In its meeting on 18—19 October 2017 the board of the International Organization of Securities Commissions (IOSCO) discussed the growing usage of initial coin offerings (ICOs) to raise capital as an area of concern. Following this meeting, IOSCO issued a statement to its members regarding the risks of ICOs and referenced various approaches to ICOs taken by members and other regulatory bodies.
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