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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 26 April 2018.
The Economic and Monetary Affairs Committee of the European Parliament (ECON) voted to support the Commission's proposal to relocate the European Banking Authority (EBA) from London to Paris. Members of ECON regretted that the European Parliament was not involved in the selection process and requested Parliament's full entitlement as co-legislator in the ordinary legislative procedure (on an equal footing with the Council) to be respected in future selection procedures for the location of European agencies.
The Lloyd's Market Association drafted a model clause (referred to as the Brexit binding authority sunset endorsement) to assist in managing the transition of binding authority business to Lloyd's Brussels Subsidiary in respect of Brexit. The model clause prohibits the binding of business with an EEA regulatory risk location after 31 December 2018, in line with Lloyd's guidance published in market bulletin Y5166.
The vice-president of the European Commission, Valdis Dombrovskis, delivered a speech discussing Brexit at the City Week international financial services forum, saying all parties (firms and supervisors) should continue their work to prepare for all scenarios. Mr Dombrovskis said that while equivalence was not a perfect scenario for firms or for supervisors, it has proven to be a pragmatic solution that works in many different circumstances, and could work for the UK after Brexit as well.
The CEO of the Financial Conduct Authority (FCA), Andrew Bailey, spoke at the City Week international financial services forum, saying the FCA wants to work closely with the European Securities and Markets Authority (ESMA) and national EU regulators to ensure the stability and effectiveness of global markets. Mr Bailey said a Brexit transition period was necessary to avoid cliff edge risks and to allow firms and authorities to put into effect their plans only once they know what the final agreement looks like.
The FCA published its April 2018 regulation round-up. The issue is introduced by the FCA’s director of general insurance and conduct specialists in supervision and retail authorisations, Keith Jackson, who looks at transparency in insurance renewals. This month's 'Hot Topics' are the FCA's business plan, fees consultation paper and sector views, the FCA's approach to supervision and enforcement, and the FCA's campaign to raise awareness of loan fee scams.
The FCA published its memorandum of understanding (MoU) with the Financial Services Commission, Mauritius. The MoU sets out a statement of intent to establish a framework for mutual assistance and to facilitate the exchange of information.
The government is consulting on the draft secondary regulations that will enable the transfer of claims management regulation to the FCA, with a focus on the scope of regulation and the FCA’s consultation requirements. Feedback is sought by 1 June 2018.
The EBA launched a call for research papers for its seventh policy research workshop, which will take place in London on 28–29 November 2018 on the topic of reaping the benefits of an integrated EU banking market. The workshop aims to bring together economists from national supervisory authorities and leading academics to stimulate discussion on how to assess and discuss concrete measures to better promote the single and more efficient EU banking market. The submission deadline is 27 July 2018.
HM Treasury and the Treasury Department of the United States formed a US-UK financial regulatory working group to formalise the bilateral regulatory co-operation engagement between the two countries. The working group is intended to promote financial stability, investor protection, fair, orderly, and efficient markets, and capital formation between both countries.
The EBA published the minutes of a meeting of its Banking Stakeholder Group, held on 21 February 2018. At the meeting, the EBA executive director provided an update on ongoing regulatory developments, including Brexit, the Basel III reforms, non-performing loans (NPLs), and the European Supervisory Authorities’ 12 February 2018 warning to consumers on virtual currencies.
The Department for Exiting the European Union (DExEU) published an explanatory memorandumsubmitted by HM Treasury to Parliament on 16 April 2018 regarding the European Commission's package of proposals to address NPLs in Europe. The government says that it supports the Commission's proposals, which are unlikely to affect UK firms due to the relatively low levels of NPLs in the UK.
The Basel Committee on Banking Supervision (BCBS) issued the fourteenth progress report on adoption of the Basel regulatory framework, setting out the adoption status of Basel III standards for each BCBS member jurisdiction as at the end of March 2018. Although noting progress in a number of areas, the report found limited implementation of some technical standards whose deadlines passed in 2017. These include the standardised approach for measuring counterparty credit risk exposures and the capital requirements for bank exposures to central counterparties and for equity investments in funds.
Commission Implementing Regulation (EU) 2018/634 of 24 April 2018 amending Implementing Regulation (EU) 2016/1799 as regards the mapping tables specifying the correspondence between the credit risk assessments of external credit assessment institutions and the credit quality steps set out in Regulation (EU) No 575/2013 of the European Parliament and of the Council (Capital Requirements Regulation) was published in the Official Journal of the EU.
The International Swaps and Derivatives Association (ISDA) and the Association of Financial Markets for Europe issued a joint response to the European Commission's exploratory consultation on the implementation of the Basel III international prudential standards.
The European Forum of Deposit Insurers published two non-binding guidance papers, on the Deposit Guarantee Scheme Directive requirement for deposit guarantee schemes (DGSs) to compensate depositors of a failed bank in seven working days, and on the investment policies DGSs must pursue in order to comply with the directive:
EFDI non-binding guidance paper: deposit guarantee schemes’ investment policy
The European Commission published a number of the responses it has received to its consultation on the fitness check on supervisory reporting. The consultation sought feedback on ways in which supervisory reporting could be simplified and streamlined. It closed on 14 March 2018.
The vice-president of the European Commission, Valdis Dombrovskis, delivered a speech at a conference in New York on the transatlantic economy ten years after the crisis: macro-financial scenarios and policy responses. Mr Dombrovskis outlined the actions taken by the EU in the light of the financial crisis, and the steps still needed to protect EU financial stability.
A proposal from the European Commission will guarantee a high level of protection for whistleblowers who report breaches of EU law by setting new, EU-wide standards. The new law will establish safe channels for reporting both within an organisation and to public authorities, and will protect whistleblowers against dismissal, demotion and other forms of retaliation.
The Financial Stability Board published a toolkit that firms and supervisors can use to tackle the causes and consequences of misconduct. ‘Strengthening governance frameworks to mitigate misconduct risk’ identifies 19 tools that firms and supervisors could use to strengthen governance frameworks in order to mitigate cultural drivers of misconduct, strengthen individual responsibility and accountability, and address the ‘rolling bad apples’ phenomenon.
TheCityUK, the industry-led body representing UK-based financial and related professional services, published a report entitled 'Governing cyber risk: a guide for company boards', which outlines a new framework for boards to meet the growing cyber threat. The report also found that many companies were yet to meet the standards published in the report and need to do more to address the risks.
Barclays PLC issued a statement confirming that the FCA and Prudential Regulation Authority (PRA) have concluded their investigations into Barclays and its group chief executive officer, Jes Staley, in relation to an attempt by Mr Staley to identify the author of an anonymous letter in 2016. In respect of Mr Staley, the FCA and PRA issued confidential draft warning notices setting out their reasons for proposing enforcement actions. No enforcement action will be taken with regard to Barclays.
On 19 April 2018, The European Parliament adopted the Fifth Anti-Money Laundering Directive (MLD5), saying the new rules would bring more transparency to improve the fight against money laundering and terrorist financing across the EU. On 20 April 2018, the European Parliament published the provisional text of its legislative resolution adopting MLD5, indicating the changes made to the original July 2016 proposal of the European Commission.
The European Parliament published an analysis of recent money-laundering cases from an EU banking supervisory perspective. This briefing looks at breaches or alleged breaches of anti-money laundering (AML) rules by single supervisory mechanism supervised banks and discusses which indicators may point to a potential money laundering problem. The briefing also outlines the respective roles of European and national authorities in applying AML legislation that have been further specified in MLD5 adopted on 19 April 2018.
The Financial Action Task Force (FATF) published details of the outcome of its annual private sector consultative forum on 23–24 April 2018 in Vienna, Austria, hosted by the United Nations Office on Drugs and Crime. The forum is an opportunity for the FATF and its members to engage directly with the private sector on AML/counter-terrorist financing issues.
Transparency International UK (TI) published correspondence between it and the Serious Fraud Office (SFO), on the subject of deferred prosecution agreements (DPAs). In a letter dated 9 March 2018, TI said that while it accepted that DPA’s were a useful tool in the prosecutor’s armoury, there was a danger that a discounted DPA settlement could encourage corrupt acts if companies come to see the fines as a calculable cost of business that can be factored into a risk/reward analysis.
The FCA published an update explaining the impact of the FCA's implementation of the re-cast Markets in Financial Instruments Directive (MiFID II) and Insurance Distribution Directive (IDD) on the basic advice regime. It also directs firms to further information which the FCA has previously published on providing streamlined advice to consumers.
The chair of the Treasury Committee, Nicky Morgan MP, wrote to the chief ombudsman and CEO of the Financial Ombudsman Service (FOS), Caroline Wayman, regarding the proposed terms of reference for the independent review of the FOS. The review was commissioned by Ms Wayman in response to concerns raised in Channel 4's Dispatches programme.
The FCA published data which indicates that complaints about payment protection insurance resulted in a 13% increase in the number of complaints made to financial services firms in the second half of 2017.
ESMA published an extract from its confidential database of enforcement decisions on financial statements. The extract includes a selection of ten decisions taken by national enforcers between August 2016 and July 2017. ESMA is publishing the extracts to provide issuers and users of financial statements with relevant information on the appropriate application of the International Financial Reporting Standards.
The FOS published issue 144 of its ombudsman news, with articles on insurance pricing and consumer switching, holiday clubs and solar panels, as well as its regular Q&A section and details on live events in Nottingham, Reading and Wrexham.
The Upper Tribunal (Tax and Chancery) handed down the decision of judge Timothy Herrington in UK Innovative TI Limited and Iain Clifford Stamp (the applicants) v The Financial Conduct Authority (FCA)  UKUT 0136.
The EBA is consulting on draft guidelines which aim to provide a harmonised interpretation of the criteria for securitisations to be eligible as simple, transparent and standardised (STS). The EBA says the guidelines will play a crucial role in the new EU securitisation framework, by providing a single point of consistent interpretation of the STS criteria to originators, sponsors, investors and competent authorities throughout the EU. The consultation runs until 20 July 2018.
ESMA updated its transitional transparency calculationsfor bonds under MiFID II/MiFIR. The update relates to the liquidity assessment for bond instruments except for exchange traded notes and exchange traded commodities. Trading venues are expected to apply the new results from 23 April 2018.
The European Parliament published a draft report by ECON and Committee on Constitutional Affairs on the proposal of the European Central Bank (ECB) to amend the Statute of the European System of Central Banks and of the ECB (the Statute) in order to give the ECB the power to regulate clearing systems, in particular central counterparties (CCPs). The rapporteurs support the proposal but have recommended some changes to clarify the ECB's new powers.
The DExEU published letters from the economic secretary to the Treasury, John Glen, to the chair of the House of Commons European Scrutiny Committee, Sir Bill Cash, and the chair of the House of Lords European Union Committee, Lord Boswell of Aynho, which respond to questions raised by the two committees about the proposed regulation amending the ESMA Regulation (Regualtion (EU) 1095/2010) and the European Markets Infrastructure Regulation (EMIR) as regards to the procedures and authorities involved for the authorisation of CCPs and the recognition of third-country CCPs.
The ISDA revealed significant progress has been made with moving standardised derivatives trades to CCPs, as approximately 77% of interest rate derivatives notional outstanding is now cleared.
The chair of ESMA, Steven Maijoor, delivered a speech on resilience, recovery and resolution for CCPs. Mr Maijoor said the resolution of CCPs should focus on residual scenarios where a CCP is unable to implement its recovery plan or where the implementation of the recovery plan may negatively affect financial stability.
The International Organization of Securities Commissions published a consultation report on good practices for audit committees in supporting audit quality, which is intended to assist audit committees of issuers of listed securities in promoting and supporting audit quality. The closing date for comments is 24 July 2018.
The Bank of England implemented reforms to the sterling overnight index average benchmark. Previously, the benchmark was based on a market for brokered deposits which has limited transaction volumes. It will now use a different methodology, which captures a broader scope of overnight unsecured deposits by including bilaterally negotiated transactions alongside brokered transactions.
ESMA published a letter to the director general, European Commission DG for financial stability, financial services and capital markets union, Olivier Guersent, in which ESMA states that it will aim to deliver its final report on draft technical standards for disclosure templates under the Securitisation Regulation to the Commission in mid-July 2019, ie six months in advance of the deadline under the Securitisation Regulation.
ISDA published its future of derivatives survey, which considers the issues facing the derivatives industry to gauge how the market will develop and evolve. The survey shows that participants are largely optimistic about the future of the derivatives market, but several key challenges are likely to focus industry attention and resources, including ongoing regulatory compliance, the rollout of regulatory initial margin requirements, Brexit and benchmark reform.
ISDA published a guide to navigating derivatives trading on US/EU trading venues. It analyses the implications of trading venue recognition between the US and EU, and flags areas where further alignment of rules is necessary. It also sets out the steps US and EU persons would have to take when trading on an US or EU trading venue, and highlights complexities due to a lack of equivalence for clearing, reporting and registration requirements.
The FCA published a Dear CEO letter on irredeemable preference shares and other similar capital instruments following Aviva plc's recent announcement that it is to cancel certain irredeemable shares.
ESMA announced that its staff recently participated in a Global Financial Markets Association webinar on legal entity identifiers (LEIs). The ESMA staff presented on the topic of LEI requirements under MiFID II and the upcoming LEI requirements under other sectoral legislation such as the Central Securities Depositories Regulation, the Securities Financing Transactions Regulation, and the Prospectus Regulation.
ICE Benchmark Administration Limited (IBA), the administrator of London Interbank Offer Rate (LIBOR) since February 2014, published the ICE LIBOR output statement as part of its attempts to evolve LIBOR. IBA's objective in evolving LIBOR through the use of the output statement is to publish, in all market circumstances, a wholesale funding rate anchored in unsecured, wholesale funding transactions to the greatest extent possible.
The Covered Bond Investor Council (CBIC) of the International Capital Market Association published a position paper in which it welcomes the European Commission’s legislative proposal on covered bonds. The CBIC says that investors ‘appreciate the blueprint this law will provide to countries that do not yet have a covered bond law’.
The FCA published three interactive documents related to fund structuring options, collective versus individual portfolio management, and authorisation options under the Alternative Investment Fund Managers Directive (AIFMD). The documents contain explanatory diagrams for each of these topics, with links to additional information.
The European Parliament published an implementation appraisal briefing on the Directive on Undertakings for Collective Investment in Transferable Securities and the Directive on Alternative Investment Fund Managers.
ECON voted in favour of a draft report on the further harmonisation of EU capital markets with long-term sustainable objectives. Proposals include encouraging divestments from fossil fuels and unsustainable energies, reorienting economic policy towards supporting sustainable technologies and businesses, phasing out subsidies to fossil fuels, pricing environmentally harmful assets according to their long-term risk profile, and establishing a 'Green Finance Mark' by the end of 2019 that will recognise standards in sustainability that may help to guide investment decisions.
The Debt Advice Steering Group (DASG), the independent cross-sector group whose mission is to co-ordinate and improve the debt advice sector, agreed to back the direction of travel set out by the Wyman review of funding of debt advice in England, Wales, Scotland and Northern Ireland. The review was published in January 2018 and the DASG has considered responses from almost 30 organisations.
HM Treasury has given more than £5.5m funding towards tackling and cracking down on unlawful lending. The funding is intended to help increase the amount of money seized from loan sharks, in order to support those most vulnerable.
The FCA is urging the public to be alert to the growing threat of loan fee scams, saying over £3.5m was lost to loan fee fraud in 2017. The FCA says related reports to its consumer helpline increased by 44% from 2016–2017.
The respondent's policy, not to allow existing mortgagors to change to interest-only mortgages, did not make it impossible or unreasonably difficult for the appellant to access the service and section 21(1) of the Disability Discrimination Act 1995, requiring reasonable adjustments, did not apply. Accordingly, the Court of Appeal, Civil Division, dismissed the appellant's appeal against the recorder's order for her to give the respondent possession of the property. The judgment is available at:  EWCA Civ 854.
The PRA published two consultations on Solvency II reporting requirements. Consultation paper (CP) 10/18 concerns proposed updates to internal model output (IMO) reporting, and CP11/18 proposes changes to the reporting format for a number of regular insurance reporting submissions. The deadline for responses to CP10/18 is 13 July 2018, and the deadline for CP11/18 is 1 June 2018.
The European Insurance and Occupational Pensions Authority (EIOPA) published its supervisory convergence plan for 2018–2019 for the insurance sector, focusing on the implementation of Solvency II and conduct of business supervision. EIOPA says it will be prioritising the implementation of the common supervisory culture, addressing the risks to the internal market and to the level playing field which may lead to supervisory arbitrage, and the supervision of emerging risks.
EIOPA published its strategy for conduct of business (CoB) supervision: next steps, following on from its 2015 ‘Strategy towards a comprehensive risk-based and preventive framework for CoB supervision’. EIOPA says a renewed emphasis is necessary on driving supervisory convergence in practical CoB supervision, including notably the supervision of the IDD, and on further enhancing market monitoring and conduct risk assessment.
EIOPA published its decision regarding the submission of occupational pensions information. With this decision, in line with its mandate, EIOPA defined a single framework for regular information requests towards national competent authorities regarding the provision of occupational pension information to effectively monitor and assess the European occupational pensions sector, with a particular focus on effects to financial stability.
Commission Implementing Regulation (EU) 2018/633 of 24 April 2018 amending Implementing Regulation (EU) 2016/1800 laying down implementing technical standards with regard to the allocation of credit assessments of external credit assessment institutions to an objective scale of credit quality steps, in accordance with Directive 2009/138/EC of the European Parliament and of the Council (Solvency II), has been published in the Official Journal.
The Association of British Insurers (ABI) outlined the steps required to create a drawdown comparison tool. To bring the tool to fruition, the ABI believes joint action is required from the pensions industry and the FCA, while responsibility for making the tool available should sit with the new Single Financial Guidance Body.
A corrigendum to Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market (Second Payment Services Directive, PSD2) was published in the Official Journal of the EU. The corrigendum makes several textual changes and corrections.
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