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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 26 July 2018.
The government published a draft SI entitled ‘EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018’, that will, subject to parliamentary approval, deliver a temporary permissions and recognition regime for inbound passporting EEA firms after the UK’s withdrawal from the EU. The government also published explanatory notes, while the Bank of England (BoE) published related commentary and the Financial Conduct Authority (FCA) set out in detail an updated approachto the temporary permissions regime for both firms and investment funds.
The BoE published a letter from its executive director, financial market infrastructure, David Bailey, to the chief executives of operating systems designated under the Settlement Finality Directive (SFD). Mr Bailey sets out the BoE's plans for the future UK framework for settlement finality designation of EU systems and clarifies the means through which overseas central counterparties (CCPs), central securities depositories (CSDs) and payment systems can benefit from UK settlement finality designation.
The European Commission published a Communication outlining different scenarios which could come from the Brexit negotiations and considers the consequences and impact on the EU. The Commission released the Communication to encourage the leaders in Member States to prepare for all potential outcomes to reduce the risk of negative repercussions.
The House of Lords Secondary Legislation Scrutiny Committee set out its approach to its role as sifting committee for the regulations introduced under the EU (Withdrawal) Act 2018. The committee has been given the power to recommend instruments proposed by ministers in negative force, which can come into force without a debate in Parliament, to be affirmative instruments, and therefore subjecting them to debate before they come into force.
The European Commission outlined its ongoing work in preparation for all outcomes of the UK's withdrawal from the EU and calls on Member States and private parties to step up preparations for Brexit.
The executive director of international at the FCA, Nausicaa Delfas, delivered a speech on the FCA's preparations for the UK's withdrawal from the EU, what the FCA expects of regulated firms, and the FCA's future vision. Additionally, the FCA published a webpage on 'preparing your firm for Brexit', which sets out issues for FCA solo regulated firms to consider.
SI 2018/Draft: This draft enactment is laid in exercise of the legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit. This enactment proposes amendments to retained direct EU EMIR Regulation (EU) 648/2012 on over the counter (OTC) derivatives, CCPs and trade repositories in relation to the recognition of third country counterparties. Consequential amendments and transitional provisions are also proposed. It comes into force in part on the day after the day on which these Regulations are made, and in full on exit day.
SI 2018/Draft: This enactment is made in exercise of legislative powers under the European Union (Withdrawal) Act 2018 in preparation for Brexit. This enactment amends UK legislation in relation to extending reciprocal treatment to borrowers whose loans are secured on land in an EEA state, and to bodies incorporated in an EEA state which is no longer appropriate when the UK is no longer an EU member State nor a party to the EEA Agreement. It comes into force on 29 March 2019.
The FCA published its annual report and accounts, which looks back on the key pieces of work undertaken by the organisation throughout 2017/18, as well as providing some insights into the year ahead. The FCA also published separate reports on competition, diversity and anti-money laundering.
An opinion of the European Central Bank (ECB) of 11 April 2018 on a proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority, EBA) and related legal acts was published in the Official Journal of the EU.
The FCA responded to the Environmental Audit Committee’s report on Greening finance: embedding sustainability in financial decision making, which included several recommendations for the FCA.
The House of Commons European Scrutiny Committee published an update on the European Commission’s green finance proposals on classification of investments, disclosures and low carbon benchmarks. The overall aim of the proposals is to channel more investment into sustainable activities by incorporating environmental, social and governance (ESG) considerations into investment industry practices.
The G20 published a communique following a meeting of finance ministers and central bank governors on 21 and 22 July 2018. The communique covers a number of aspects that are relevant to the regulation of various financial services sectors.
The FCA issued a policy statement (PS18/18) outlining its final policy and Handbook amendments on its approach to the recognition of codes of conduct in unregulated markets for the purposes of the Senior Managers & Certification Regime (SM&CR), as proposed in consultation paper (CP17/37). The FCA adopted its proposals with some changes, though it has decided not to consult on requiring authorised firms to observe proper standards of market conduct for their unregulated activities at this time.
The European Securities and Markets Authority (ESMA) published the methodology that it will use when conducting peer reviews of the activities of competent authorities. The peer reviews are intended to strengthen consistency in supervisory outcomes, and the methodology has been developed to allow for objective assessment and comparison between the authorities reviewed.
ESMA fined Danske Bank, Nordea Bank, SEB, Svenska Handelsbanken and Swedbank EUR 495,000 each for negligently breaching the Credit Rating Agencies Regulation (CRAR). ESMA found that the five banks infringed the CRAR by issuing credit ratings without being authorised by ESMA to do so.
The FCA announced that it is working with the BoE and various organisations on a six-month pilot to build upon a 'proof of concept' which has been developed to make regulatory reporting requirements machine readable and executable. This is part of the FCA's drive to use technology to make it easier for firms to meet their regulatory reporting requirements and to improve the quality of information they provide. The drive is known as the FCA's 'digital regulatory reporting' project.
The FCA and the Practitioner Panel published a report from their 2018 joint survey of FCA-regulated firms. The survey gives views across the financial services sector of the FCA's performance as a regulator. The FCA says that the results are the highest positive indicators since the survey began. The scores which the FCA uses to track for overall satisfaction and effectiveness have continued to increase. In particular, confidence around the FCA's competition objective (promoting effective competition in the interests of consumers) is up significantly from 60% to 72%.
An opinion of the ECB of 11 May 2018 on a proposal for a regulation amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (ESMA) and related legal acts; and on a proposal for a directive amending Directive 2014/65/ EU on markets in financial instruments (MIFID II) and Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) was published in the Official Journal of the EU.
The Prudential Regulation Authority (PRA) published an occasional consultation proposing minor regulatory reporting amendments. Responses are sought by 23 October 2018.
The EBA, in accordance with its Pillar 2 roadmap, published its final revised guidelines aimed at further enhancing institutions' risk management and supervisory convergence in the supervisory review and examination process (SREP). The three sets of guidelines focus on stress testing, particularly its use in setting Pillar 2 capital guidance (P2G), as well as interest rate risk in the banking book (IRRBB).
The EBA updated the list of common equity tier 1 (CET1) instruments of EU institutions and updated the CET1 report, which includes information on the underlying objectives of the monitoring as well as on the consequences of including or excluding instruments in or from the CET1 list. The EBA says monitoring of capital instruments contributes to the enhancement of the quality of institutions' capital across the EU and has been beneficial in the implementation of the Capital Requirements Regulation (CRR) and the provisions laid down in the related regulatory technical standards.
The EBA issued its reply to claims by Caius Capital LLP that the ECB had breached EU law by not disqualifying the CET1 classification of UniCredit capital instruments. The EBA found that there is no clear evidence of a breach of EU law by the ECB and therefore decided not to open a formal investigation.
The EBA published Q1 2018 risk dashboard, which summarises the main risks and vulnerabilities in the EU banking sector using quantitative risk indicators, along with the opinions of banks and market analysts from its risk assessment questionnaire. The EBA found ongoing improvements in the repair of the EU banking sector, but also residual risks in banks' profitability.
The chief executive of the PRA, Sam Woods, wrote to the chairs of the Treasury Committee, Energy and Industrial Strategy Committee and the Work and Pensions Committee, setting out the PRA’s approach to the auditing of regulated firms, with particular reference to large and complex firms, like Goldman Sachs. Mr Woods was replying to a 12 July 2018 letter from the chairs querying the PRA’s statements on the ability of Grant Thornton to audit Goldman Sachs.
SI 2018/897: Amendments are made to legislation to align the requirements between the UK’s ring-fencing legislation and the financial sanctions regimes, which would otherwise conflict. This will ensure that banking groups can maintain accounts held by sanctioned account holders in their existing locations while still complying with ring-fencing legislation. The Order will come into force on 31 October 2018 (updated from draft on 25 July 2018).
The European Commission is to refer Spain to the Court of Justice of the EU for failing to fully implement the Capital Requirements Directive (CRD) (Directive 2013/36/EU).
The Financial Action Task Force (FATF) published the consolidated processes and procedures for mutual evaluations and follow-up (Universal Procedures), which set out the core elements that form the basis for all assessments of countries' effective implementation of the 2012 FATF recommendations with respect to anti-money laundering (AML) and counter-terrorist financing (CTF). The assessments are conducted in accordance with the FATF 2013 assessment methodology.
A report from the FATF to the July 2018 G20 Finance Ministers and Central Bank Governors’ meeting has set out FATF’s ongoing work to fight money laundering and terrorist financing.
The Law Commission launched a consultation seeking views in its proposals to streamline and strengthen anti-money laundering laws to help banks and businesses provide better information to law enforcement agencies and help refocus attention on the most suspicious activity. The Law Commission proposes a number of measures to improve the law including in relation to statutory guidance and record keeping requirements. The consultation closes on 5 October 2018.
Christian Bittar and Phillipe Moryoussef have been sentenced to a total of 13 years, four months’ imprisonment for manipulating the Euro Interbank Offered Rate (EURIBOR) during the financial crisis. The former Deutsche Bank and Barclays Bank employees conspired together to submit false or misleading EURIBOR submissions for personal gain and to advantage the banks they worked for.
The FATF and Egmont Group examined the risks linked to the concealment of beneficial ownership in corporate vehicles—such as companies and foundations—in a report published on 19 July 2018. The report emphasises the importance of implementing the FATF recommendations on beneficial ownership to ensure that authorities have access to accurate and timely information on the beneficial ownership and control of legal persons. This will, the FATF argues, enhance further risk analysis by governments, financial institutions and other professional service providers.
The Charity Commission disqualified two former trustees of the Families for Survival and Save the Age Ltd charities after finding serious misconduct and mismanagement. Following concerns over potential fraud and fundraising practices, two of the charities’ founding trustees were arrested and disqualified from acting as trustees of any charity.
The European Commission referred Greece and Romania to the European Court of Justice for not implementing the 4th Anti-Money Laundering Directive (MLD4) into national laws. Ireland implemented ‘only a very limited part of the rules’ and is therefore also referred to the Court.
SI 2018/861: Provisions are made to put into place the UK’s domestic enforcement regime for a new sanctions regime. Restrictive measures, including financial sanctions provisions, will be adopted in EU Council Regulation (EU) 2018/1001 with effect from 16 July 2018. The Regulations will come into force on 8 August 2018.
The FCA banned four former directors and shareholders of Secure My Money Limited, an online consumer credit broker now dissolved. The FCA found the firm took fees of over £7.2m from approximately 124,000 online customers by misleading them into believing they had been approved for short-term loans.
The FCA published its enforcement annual performance report for 2017/18. The report provides an overview of the FCA's enforcement activities during the year. It includes information on retail and wholesale conduct, confiscation orders, the FCA's work to counter unauthorised business, and the way it reinforces its Threshold Conditions.
The Office of the Complaints Commissioner published its annual report and accounts 2017/18, which reports on the complaints handled under the statutory Complaints Scheme during that period. Although he saw some improvements in the speed at which the FCA handled complaints, the Commissioner continued to find fault with the FCA’s complaints-handling process. In a response, the FCA accepted the Commissioner’s recommendations.
ESMA is consulting on revised guidelines on the information that is to be periodically reported to it by credit rating agencies (CRAs) for supervisory purposes. Feedback is sought by 26 September 2018.
ESMA issued a follow-up report regarding oversight by national competent authorities (NCAs) of the original MiFID suitability requirements. The follow-up report assesses the actions ten NCAs have undertaken since the earlier peer review conducted in 2016.
ESMA wrote to the European Commission, asking it to provide clarity to market participants and investors on the issue of the compatibility of the reverse distribution mechanism (RDM), or 'share cancellation’, with the MMF Regulation. ESMA believes that clarity on this issue to investors and market participants is essential to ensure a proper and consistent interpretation and implementation of the regulation.
The International Capital Market Association (ICMA) published an information brochure on Central Securities Depositories Regulation (EU) 909/2014 (CSDR) mandatory buy-ins, outlining the scope and regulatory requirements. The CSDR buy-in provisions are expected to come into force in September 2020 and will also apply to non-EU/EEA domiciled trading entities.
The BoE confirmed the Sterling overnight index average (SONIA) reference rates comply with the International Organization of Securities Commissions (IOSCO) benchmark principles. The BoE complies with the principles, and therefore with international best practice, in its administration of SONIA. The statement has been independently assured by Ernst and Young.
The Federal Reserve Bank of New York launched the Secured Overnight Financing Rate (SOFR), a new US benchmark widely seen as designed to replace the London Interbank Offered Rate (LIBOR). SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
The European Commission referred Slovenia and Spain to the European Court of Justice for failing to fully implement MiFID II as well as its supplementing Directive (Delegated Directive (EU) 2017/593). The Commission says the rules are ‘crucial building blocks for the proper functioning of securities markets and are essential for the continued operation of the European single market’.
The Committee on Payments and Market Infrastructures and IOSCO published a fifth update to the Level 1 assessment report on implementation monitoring of the Principles for financial market infrastructures (PFMI). The report says jurisdictions are reporting progress towards implementing international standards for payment systems, CSDs, securities settlement systems, CCPs and trade repositories.
The ESAs published further guidance on the key information document (KID) requirements for packaged retail and insurance-based investment products (PRIIPs). The guidance seeks to promote common supervisory approaches and practices based on ongoing work to monitor the implementation of the KID. It supplements material published in 2017 prior to implementation.
ESMA updated its Q&As on the application of the Undertakings for the Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD).
ESMA provided access to the template which will be used to publish the first set of figures necessary for investment firms to assess whether they are systematic internalisers in specific financial instruments on 1 August 2018.
The UK government's Department for Exiting the European Union (DExEU) published a letter from the economic secretary to the Treasury, John Glen MP, to the chair of the European Union Committee, Lord Boswell of Aynho, clarifying the government's position on the European Commission's proposals on crowdfunding.
The European Commission published a communication and Q&A which aim to clarify the rights and protections of intra-EU investors following the ECJ's judgment in Slovak Republic v Achmea BV Case C-284/16, which determined that investor-state arbitration contained in intra-EU bilateral investment treaties (intra-EU BITs) between Member States is not compatible with EU law.
IOSCO is preparing to launch its second annual World Investor Week (WIW), from 1–7 October 2018. IOSCO says the 2017 event successfully promoted investor education and protection, and highlighted the various initiatives of securities regulators in those two areas around the globe.
The FCA published a Discussion Paper on price discrimination in the cash savings market, setting out a range of options to address issues faced by longstanding customers, including introducing a basic savings rate (BSR). Feedback is sought by 25 October 2018.
The Competition and Markets Authority (CMA) revoked the Open Banking remedy directions it issued to Barclays Bank on 19 December 2017 under the Retail Banking Market Investigation Order 2017, on confirmation by the implementation trustee that Barclays was compliant with Article 14.1 of the Order.
The FCA published Occasional Paper 39: Estimating the benefits of interventions that affect consumer behaviour, the aim of which is to help the FCA assess the benefits of the regulator's interventions, while recognising the challenges.
The FCA published Occasional Paper 40, on the impact of automatically enrolling customers into just-in-time arranged overdraft alerts and early warning alerts for overdrafts and unpaid items. Part of the FCA’s ongoing high-cost credit review, the paper follows up on Occasional Paper 36, which found that mandating automatic enrolment of consumers into text message alerts before they incur unarranged overdraft and unpaid item charges leads to a substantial reduction in these types of charges. The FCA subsequently decided to test whether alerts in addition to those already mandated would be beneficial.
The Lending Standards Board (LSB) and the Money Advice Trust published a report that explores the impact of vulnerable circumstances on people who run small businesses. The report draws on insight gathered from LSB registered firms, as well as interviews with money advisers and clients of the Money Advice Trust's Business Debtline. The research found that there is often a direct link between a business's financial difficulties and the person running the business experiencing some form of vulnerable circumstance, such as a mental health problem or serious illness.
The European Insurance and Occupational Pensions Authority (EIOPA) published its risk dashboard based on Q1 2018 data. EIOPA say the results show the risk exposure of the insurance sector in the EU remains stable overall with a decline in macro and insurance risks and an increasing trend in market risks.
The International Association of Insurance Supervisors (IAIS) announced that, subject to executive committee action at its meeting in Moscow on 25 July 2018, it will hold a number of stakeholder events on climate risk, digital technology, and index-based insurances.
EIOPA published a new set of Q&As.
Draft regulations to ban pensions cold calling are being consulted upon by HM Treasury. The consultation will close on 16 August 2018, and the government intends to lay the regulations in autumn 2018.
The Payment Systems Regulator (PSR) set out its plans to carry out a market review into card-acquiring services and has published draft terms of reference for consultation. The PSR is proposing to carry out this market review having taken into account the concerns that have been brought to its attention. The regulator wants to ensure that the supply of card-acquiring services is competitive and works in the interests of merchants, and ultimately consumers.
The PSR published its annual report and accounts 2017/18. The PSR says it has made substantial progress in a number of areas, particularly in opening up access to payment systems, fighting against authorised push payment (APP) fraud, and ensuring consumers continue to have widespread access to cash through free-to-use ATMs.
The BoE, the FCA, the PRA and the PSR completed their third review of the memorandum of understanding (MoU) in relation to UK payment systems. The FCA and PSR also agreed a protocol setting out a framework for co-operation with regard to access to bank accounts.
The PSR published the results of a survey of over 100 stakeholders across the payments sector seeking perceptions of the payments industry. The survey also sought views of the PSR’s performance and reputation, and the accessibility and impact of the PSR’s communications and engagement activities.
The chair of the Treasury Committee, Nicky Morgan MP, wrote to the chief executive of PayPoint, Dominic Taylor, following reports on 21 July 2018 that PayPoint’s pre-paid energy terminals had failed, leaving many households across the UK without gas or electricity.
The BoE announced that it has completed a proof of concept (PoC) to understand how a renewed real-time gross settlement (RTGS) service could support settlement in systems operating on innovative payment technologies, such as those built on distributed ledger technology.
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