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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 25 October 2018.
SI 2018/Draft: Consistent with the government's objective of providing continuity to businesses and consumers as far as possible, HM Treasury confirmed that the policy approach set out in MiFID II legislation will not change after the UK has left the EU. This SI once finalised will support the fair, stable and transparent operation of UK financial markets after EU withdrawal, and provides for investors to have the same protections they currently enjoy. However, to ensure that the MiFID II regime continues to operate effectively once the UK is outside of the EU, certain deficiency fixes to the legislation will be necessary.
SI 2018/Draft: This draft enactment is made in exercise of legislative powers under the European Communities Act 1972 and the European Union (Withdrawal) Act 2018 in preparation for Brexit. This draft enactment proposes to amend and repeal UK primary and subordinate legislation and retained EU legislation in relation to recovery and resolution of credit institutions and investment firms in order to address deficiencies in retained EU law arising from the withdrawal of the UK from the EU. The proposed amendments and repeals are laid to bring up to date certain references in the relevant legislation to the European legislation, ensuring the legislation continues to operate effectively at the point at which the UK leaves the EU. It comes into force partly on exit day.
After Brexit, the Financial Conduct Authority (FCA) will become the UK regulator of trade repositories. On 5 October 2018 the Treasury published a draft of the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018. This SI makes provision for the FCA to register trade repositories operating in the UK once the UK leaves the EU. The draft statutory instrument includes a conversion regime, which will allow trade repositories established in the UK to convert their European Securities and Markets Authority (ESMA) registration into registration with the FCA. It also includes a temporary registration regime, which will offer temporary registration to trade repositories that apply for registration with the FCA before exit day, if they are a UK legal entity and are part of the same group as a trade repository with an existing ESMA registration. The FCA published a draft application form for registration as a trade repository and asks that trade repositories should let it know if they intend to offer services to UK markets from exit day.
The Bank of England (BoE) confirmed to the Treasury Select Committee that it will provide the committee with an analysis of the economic effect of different Brexit scenarios. The letter from BoE governor Mark Carney follows a request made by the committee chair, Nicky Morgan MP, for the BoE, along with HM Treasury and the FCA, to provide views on the impact of the Brexit Withdrawal Agreement and future framework, once it has been negotiated, and for analysis regarding the impact of Brexit on their ability to deliver their objectives.
The Association for Financial Markets in Europe (AFME) published a letter, dated 12 October 2018, from AFME's chief executive, Simon Lewis, to the vice-president of the European Commission, Valdis Dombrovskis, requesting clarification and reassurance that steps will be taken to address the risks to financial and market instability in the event that the UK leaves the EU without a withdrawal agreement including a transition period.
The managing director for Brexit and head of recovery and resolution at the AFME, Oliver Moullin, warned that, with less than six months until the UK is due to leave the EU, there remains 'very significant uncertainty' for Europe's financial services industry. He said reaching a withdrawal agreement that includes a transition period should be the priority for all stakeholders involved, in order to ensure an orderly withdrawal, preserve financial stability and avoid market disruption.
The managing director for external relations and strategic issues at TheCityUK, Gary Campkin, gave a speech to the CSI Global Services Summit 2018 in Washington DC, in which he discussed Brexit and UK/US relations.
The International Swaps and Derivatives Association (ISDA) published a webinar on the 'cliff-edge' risks of a no-deal Brexit for over-the-counter (OTC) derivatives. The webinar addresses the potential effects of such a scenario under EU law and any available mitigation under existing EU law, 'hiatus risk', and recommendations on steps that can be taken now to address these risks.
A top US regulator threatened to deny Europe's financial services firms access to US futures markets unless the European Union drops new plans for the oversight of foreign clearing houses after Brexit. Christopher Giancarlo, the chairman of the US Commodity Futures Trading Commission, said on 17 October 2018, that EU plans to amend the European Market Infrastructure Regulation (EMIR) in response to Britain's imminent departure from the bloc were 'completely irresponsible' and could be met with a fierce backlash from Washington.
The FCA published its regulation round up for October 2018. Hot topics include Brexit consultations, new resolution data reporting requirements not applicable to FCA firms, a firm feedback survey, and the FCA's discussion paper on the impact of climate change and green finance on financial services.
The FCA published CP18/32: Recovering the costs of the Office for Professional Body Anti-Money-laundering Supervision (OPBAS): proposed fee rates for 2018/19. Responses are sought by 14 December 2018. Feedback, along with the FCA's rules, will be published in a policy statement in January 2019.
The Prudential Regulation Authority (PRA) published occasional consultation paper 24/18, which sets out proposed changes to PRA Rulebook Parts, supervisory statements, statements of policy and forms. Feedback is sought by 22 November 2018 for chapter 2, and 22 January 2019 for chapters 3-7. The consultation covers:
The PRA alerted Level One UK deposit-takers and international banks that it is changing the way that it supervises compliance with the requirements of the Remuneration Part of the PRA Rulebook. The update affects remuneration proportionality Level One firms only.
The European Banking Authority (EBA) announced that individual results for the banks participating in the 2018 EU-wide stress test, along with detailed balance sheets and exposure data as of end 2017, will be published on 2 November 2018 at 17:00 UK time (18:00 CET). The stress test was launched on 31 January 2018. The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3% in 2020, resulting in the most severe scenario to date.
The Basel Committee on Banking Supervision (BCBS) issued a statement warning banks against 'window-dressing' their leverage ratios by making temporary reductions of transaction volumes in key financial markets around reference dates. The BCBS says the practice is unacceptable, as it undermines the intended policy objectives of the leverage ratio requirement and risks disrupting the operations of financial markets. Banks and supervisors should ensure ongoing compliance with the BCBS's leverage ratio such that it accurately reflects the resilience of banks and to mitigate any possible disruption to the operations of financial markets that results from window dressing.
The BCBS is consulting on whether a targeted and limited revision of the leverage ratio's treatment of client cleared derivatives may be warranted. The consultative document 'Leverage ratio of client cleared derivatives' follows BCBS's findings of a review of the impact of the leverage ratio on banks' provision of client clearing services. In addition, BCBS is considering key policy objectives of G20 leaders both to prevent excessive leverage and improve the quality and quantity of capital in the banking system and to promote central clearing of standardised derivatives contracts.
The Financial Stability Board (FSB) Plenary met in Ottawa, where it discussed market developments and vulnerabilities in the global financial system. Members considered that the core of the financial system is much more resilient than before the global financial crisis, with strengthened bank capital and liquidity. At the same time, non-bank financial intermediation has grown, adding to diversity of funding, but with associated maturity and liquidity transformation risks, and concentrations in holdings of risky assets.
The EBA published its detailed annual work programme for 2019, describing its specific activities and tasks for the year and highlighting the key strategic areas of work from 2019 to 2021. The EBA says its main areas of focus will be:
The Bank for International Settlements (BIS) published a speech made by the head of its monetary and economic department, Claudio Borio, at a conference on the new bank provisioning standards: implementation challenges and financial stability implications. Mr Borio said the new expected credit loss provisioning standard (IFRS 9) would be likely to mitigate the procyclicality of the financial system to some extent relative to the previous incurred loss model. But he said the new standard 'falls short by a significant margin of what one would like from a financial stability perspective'.
The Treasury Committee published its report on the re-appointment of Sir Jon Cunliffe as deputy governor for financial stability at the BoE. The Committee says it is satisfied that Sir Jon has the professional competence and personal independence to be re-appointed, 'and wishes him every success in his role'.
The Single Financial Guidance Body (SFGB), the new service established by the Financial Guidance and Claims Act 2018, appointed three non-executive directors to its board. The SFGB provides free and impartial help on money matters. Tim Jones, financial services executive and former CEO of the National Employment Savings Trust, Professor Elaine Kempson, emeritus professor at the University of Bristol, and Moray McDonald, managing director for products with the Royal Bank of Scotland, have joined the SFGB as non-executive directors. The appointments complete the board and follow the earlier announcements of Sir Hector Sants as chair of the SFGB, John Govett as CEO, and Ann Harris and Mike Dailly as non-executive directors.
The Competition and Markets Authority (CMA) updated the administrative timetable for its investigation into claims that consumers, typically those who stay with their provider on default or roll over contracts, are paying more than new customers, following a super-complaint from Citizens Advice. The Citizens Advice calls this a 'loyalty penalty' and the super-complaint states that Citizens Advice is concerned about five 'essential markets', namely the savings accounts, mortgages, household insurance, mobile and broadband markets. The statutory deadline for the CMA's response is 27 December 2018.
The governor of the BoE, Mark Carney, gave a speech on changes made to the financial regulation since the 2008 crisis, saying the programme of G20 reforms made the global financial system safer, simpler and fairer. Mr Carney argued that the measures are creating a system that can serve households and businesses 'in bad times as well as good', and that the new system can deepen financial inclusion, better meet the needs of ageing populations and help fund the transition to a low carbon economy.
The European Parliament's Committee on Economic and Monetary Affairs (ECON) published suggested amendments to the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities. The regulation envisages private issuance of sovereign bond-backed securities (SBBS) via special purpose entities without joint liability. ECON says SBBS could, if widely adopted, lead to a number of significant improvements in the functioning of the Euro area.
The European Central Bank (ECB) delivered its opinion on (1) the proposal for a directive of the European Parliament and of the Council of the European Union (the Council) on the issue of covered bonds and covered bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/EU; and (2) the proposal for a regulation of the European Parliament and of the Council on amending Regulation (EU) No 575/2013 as regards exposures in the form of covered bonds (CON/2018/37).
SI 2018/1076: Miscellaneous amendments are made to pieces of legislation to extend the reporting requirements on financial institutions in existing overseas territories sanctions orders to certain other businesses and professions. These reporting requirements are to inform the governor of the relevant overseas territory if they know or suspect that a customer is the subject of an asset freeze under the relevant order or has committed an offence in relation to the asset-freezing measures under the order. The Order will come into force on 7 November 2018.
The House of Lords Select Committee on the Bribery Act 2010 (BrA 2010) heard evidence on how the UK deals with bribery cases, whether there is sufficient funding and resources, and what improvements could be made to BrA 2010. The committee heard from the City of London Police, the Serious Fraud Office (SFO) and the FCA on 23 October 2018.
The Financial Action Task Force (FATF) announced the outcomes from the first plenary meeting of FATF-XXX in Paris on 17-19 October 2018. The main issues discussed included operations and streamlining the FATF, major strategic initiatives, mutual evaluations, follow-up reviews and compliance, and other strategic initiatives.
The SFO charged Andreas Hauschild with conspiracy to defraud in relation to its investigation into the manipulation of the Euro Interbank Offered Rate (Euribor). Hauschild was charged on 20 October 2018, following his arrest in Italy in August 2018. The next hearing will take place on 24 October 2018.
UK Finance published a speech by its chair, Bob Wigley, in which he said the UK's global reputation as amongst the most resilient to cyber threats means it will continue to attract and retain international businesses. He said UK Finance was working closely with its members, the BoE, GCHQ and the National Cyber Security Centre to address the risks.
UK Finance published a report by Simon Walker, former director-general of the Institute of Directors, on his review into the complaints and alternative dispute resolution (ADR) landscape for the UK's small-to-medium enterprise (SME) market, which recommends new routes for SMEs to challenge banks without going to court. UK Finance also published its response to Mr Walker's report.
The chair of the Treasury Committee, Nicky Morgan MP, wrote to the chief ombudsman and chief executive of the Financial Ombudsman Service (FOS), Caroline Wayman, to express the Committee's concerns about the FOS's review of cases handled during the early stages of its reorganisation in 2016.
The Commission published Implementing Regulation (EU) 2018/1557 of 17 October 2018 in the Official Journal of the EU. It amends Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to Regulation (EU) 2016/1011 (the Benchmarks Regulation). The Swedish competent authority ('Finansinspektionen') notified ESMA of its proposal to recognise the Stockholm Interbank Offered Rate ('STIBOR') as a critical benchmark given its importance to financial markets in Sweden. STIBOR has now been added to ESMA's list.
The FCA published Evaluation paper 18/2: the impact of bringing additional benchmarks into the regulatory and supervisory regime, which examines the effects of bringing additional benchmarks into the regulatory and supervisory regime in 2015 under the FCA's Benchmarks (Amendment) Instrument 2015 (the Benchmarks Instrument 2015).
ECON published suggested amendments (26-62) to the proposal for a regulation on the promotion of the use of SME growth markets. The proposed regulation is a capital markets union initiative aimed at reducing dependence on bank lending, diversifying market-based sources of financing for SME enterprises, and promoting the issuance of bonds and shares by SMEs on public markets. Proposed amendments are set out in bold and italics.
ESMA published its first Annual Statistical Report on the EU derivatives markets. Based on data submitted under EMIR, the report provides the first comprehensive market-level view and finds that, in Q4 2017, the market amounted to €660tn of gross notional outstanding transactions.
AFME published its suggested approach to record-keeping in connection with communications between an issuer and research analysts in equity initial public offerings as required by Chapter 11A of the Conduct of Business sourcebook (COBS) in the FCA Handbook.
The European Money Markets Institute (EMMI) published the second stakeholder consultation on the hybrid methodology for Euribor, as part of EMMI's aim to deliver a reformed and robust methodology that meets regulatory and stakeholder expectations. Feedback is sought by 30 November 2018.
ESMA published a list of the contact points of national supervisory authorities for communication in the MiFID II framework on supervisory co-operation, authorisation, acquisitions and passporting. The document aims to facilitate communication on the topics of:
The FCA published 'Occasional paper 46: Fixing the fix? Assessing the effectiveness of the 4pm fix', which examines the most important benchmark in the foreign exchange (FX) market, the World Markets/Reuters (WM/R) 4pm Closing Spot Rate, also known as 'the 4pm fix'. The paper studies trading around the benchmark between 2012 and 2017 and focuses on the 2013 allegations that major banks had been colluding to rig the 4pm fix, and the 2015 reform of the benchmark methodology. The authors classify and measure the usefulness of the 4pm fix rate in three areas: how closely it represents rates throughout the day (representativeness), the extent to which market participants can replicate the rate through their own trading (attainability), and how resilient it is to manipulation (robustness).
The FCA published a research note on the representativeness of the LBMA silver price. The FCA said questions had been raised about the benchmark's representativeness, but the study found no evidence to support this.
The Futures Industry Association (FIA) held a debate on 'Digital assets: Emerging derivatives products' at its annual Futures & Options Expo in Chicago on 18 October 2018, in which industry experts discussed whether the marketplace for derivatives backed by digital assets is changing too rapidly, or not fast enough.
HM Treasury published its response to the feedback it received on its 'Mutual deferred shares: consultation on technical policy details'. The document summarises the feedback received and sets out the government's response. The government decided not to lay the regulations to give effect to the provisions in the Mutuals Deferred Shares Act 2015.
The CEO of the Chartered Banker Institute, Simon Thompson, called on the FCA to do more to publicly support the chartered professional bodies as an independent source to prove honesty and good intent of individuals, whilst demonstrating that their members have relevant knowledge and skills.
The BIS published a speech by the chair of its Financial Stability Institute, Fernando Restoy, on the European banking union project. Mr Restoy explained that the measure of the project's success should be based on the progress made to deliver a more integrated market for banking services and to remove the remaining links between domestic fiscal conditions and the perceived soundness of banks and the value of their liabilities. Progress, he argued, is incomplete on both fronts.
The FCA published an update on the progress of its payment protection insurance (PPI) consumer communications campaign and supporting supervisory work. The report provides an update on the progress of the FCA's consumer communications campaign and supervisory work in support of the 29 August 2019 deadline for PPI complaints.
The ECB delivered its opinion on the proposal for a regulation of the European Parliament and of the Council of the EU amending Regulation (EC) No 924/2009 as regards certain charges on cross-border payments in the EU and currency conversion charges (CON/2018/38).
The Payment Systems Regulator (PSR) published a specific direction to LINK Scheme Holdings Ltd (LINK), the operator of the LINK ATM system. The direction is designed to make sure LINK does all it can to fulfil the public commitments it made at the beginning of 2018 regarding the ongoing availability of access to free-to-use ATMs for UK consumers. The PSR is requiring LINK to fully develop its policies and processes for applying and implementing its public commitments and to report to the PSR on a regular basis.
UK Finance published guidance on implementing the requirements under the regulatory technical standards (RTS) supplementing the revised Payment Services Directive (PSD2) with regard to strong customer authentication and common and secure open standards of communication. The RTS will apply from 14 September 2019, with some provisions relating to testing applying from 14 March 2019.
The retail payments authority formerly known as the New Payment System Operator (NPSO) changed its name and brand to Pay.UK. It said that changing its identity was a logical progression following the consolidation of the UK's three retail payment schemes (Bacs, Faster Payments and the Cheque and Credit Clearing Company) under the remit of the NPSO earlier in 2018 and better promotes its core purpose of transforming the UK's payment infrastructure.
Pay.UK (formerly the NPSO) announced a new 'confirmation of payee' service, which will be able to be rolled out by banks, building societies and payment providers in 2019 to reduce the risk of payments being sent to the wrong account. The preventative confirmation of payee safeguard is one of a package of measures being introduced across the payments industry, which also includes help for customers if they fall victim to authorised push payment fraud.
The Cheque and Credit Clearing Company Limited (C&CCC) appointed a new independent chair, Richard Anderson, to it's board. Mr Anderson was appointed on 16 October 2018, and replaces Jane Bevis, who stepped down for health reasons after more than three years in the role.
The European Insurance and Occupational Pensions Authority (EIOPA) published its risk dashboard for Q2 2018, showing broadly unchanged risk levels for the EU insurance sector. EIOPA says macro risks continue at medium level amid continued economic recovery and less expansionary monetary policy, but a potential future deterioration in the assessment due to political and international trade tensions cannot be excluded.
The PRA published PS26/18: 'Strengthening accountability: Implementing the extension of the SM&CR to insurers'. The PS provides feedback to responses to PRA CP18/18: 'Strengthening accountability: Implementing the extension of the SM&CR to insurers'; a rule instrument with amendments to the final rules for the implementation of the extension of the Senior Managers and Certification Regime (SM&CR) to insurers; and a technical correction to the Insurance General Application Part of the PRA Rulebook. The final rules in this PS will apply with effect from 10 December 2018.
The FCA and the Pensions Regulator (TPR) published 'Regulating the pensions and retirement income sector: our joint regulatory strategy'(FS18/3). The FCA and TPR set out their joint regulatory strategy for the pensions and retirement income sector, following on from their call for input: 'Regulating the pensions and retirement income sector: Our strategic approach' in March 2018. The regulators also published a summary of the feedback from stakeholders in response to that call for input.
The European Supervisory Authorities wrote to the European Financial Reporting Advisory Group (EFRAG) cautioning against any further delays in the endorsement of IFRS 17, the new accounting standard for insurance contracts. At the same time, EIOPA published its analysis of IFRS 17 insurance contracts, in light of the standard's upcoming implementation on 1 January 2021.
Insurance Europe (IE) responded to the European Commission's consultation on 'Stocktaking of the Commission's better regulation approach'. IE says it supports the Commission's better regulation agenda and its objectives to improve internal processes and stakeholder consultation across the policy-making process. But IE also warns that in many cases stakeholders are not given enough time to provide input and policymakers do not allow themselves enough time to properly analyse that input and take it on board.
At the EIOPA Occupational Pensions Stakeholder Group's inaugural meeting on 17 October 2018, its members elected Bernard Delbecque as its chair. Mr Delbecque is senior director for economics and research at the European Fund and Asset Management Association (EFAMA). Aleksandra Maczynska, executive director at Better Finance, and Falco Valkenburg, vice-chair of the board at the Actuarial Association of Europe (AAE), were elected as the group's vice chairs.
The chair of ESMA, Steven Maijoor, gave the keynote speech at the Banco de Espana CEMFI FSI High-Level Conference in Madrid. The main subjects addressed in the speech were the introduction of the new accounting standard IFRS 9 Financial Instruments since 1 January 2018 and IFRS 17 (the new accounting standard for insurance contracts).
The ESMA published a report by the Securities and Markets Stakeholder Group (SMSG) on initial coin offerings (ICOs) and crypto-assets. The aim of the report is to give advice to ESMA on steps it can take to contain the risks of ICOs and crypto assets. It includes a taxonomy of crypto assets, based on the Swiss FINMA distinction between payment tokens, utility tokens, asset tokens and hybrids, an overview of recent ICOs and market developments, and an analysis of the main existing regulations on crypto assets, ICO's and FinTech sandboxes and innovation hubs in the EU and European Economic Area Member States, Gibraltar, Switzerland, Jersey, Guernsey and the Isle of Man.
The BoE published the slides from a speech by its governor, Mark Carney, on AI and the global economy, given at a University of Toronto conference on machine learning and the market for intelligence. Mr. Carney argued that in the field of finance, AI had the potential to improve customer choice, services and pricing, increase access to credit for households and small-to-medium enterprises, substantially lower cross-border transaction costs, and improve the diversity and resilience of the system.
The executive director of strategy and competition at the FCA, Christopher Woolard, spoke at the FCA's Innovating for a Greener Great Britain event in London about the FCA's developing approach to going green. The FCA also launched a Green FinTech Challenge, which is aimed at firms developing green solutions that need specific regulatory support to bring their proposition to market.
The FSB Regional Consultative Group (RCG) for Europe met on 19 October 2018, discussing improvements made to the financial system over the past decade and sustainable finance developments in Europe.
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