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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 26 October 2017.
The European Council called for the EU and UK to ‘consolidate the convergence’ achieved in the first five rounds of negotiations to be able to move to the second phase of negotiations as soon as possible. Taking into account the assessment presented by the Michel Barnier and reaffirming its guidelines of 29 April 2017, the European Council welcomed the progress made on citizen’s rights and Ireland, particularly the protection of the Good Friday Agreement. However, the Council notes that while the UK has stated it will honour its financial obligations, there has not been a firm and concrete commitment to settle these obligations.
The House of Commons Treasury Committee launched a new inquiry into the UK’s economic relationship with the EU. The inquiry will consider transitional arrangements, preparedness for 'no deal', and the long-term economic relationship. The first evidence session was held on 25 October 2017.
The chief executive of TheCityUK, Miles Celic was scheduled to appear before the House of Lords EU Select Committee on 24 October 2017 to give evidence on the implications of a ‘no deal’ Brexit, for the financial services sector and the economy as a whole. The evidence session formed part of the ongoing inquiry, ‘Brexit: deal or no deal’? which is examining the key components of any implementation, or transition period and the consequence of a failure to reach an agreement.
The CEO of the London Clearing House, Daniel Maguire, and the head of Europe at the Futures Industry Association, Simon Puleston Jones, gave evidence to the House of Lords’ EU financial affairs sub-committee concerning the UK's central counterparty (CCP) sector and Brexit on 25 October 2017.
The Financial Conduct Authority (FCA) published the October 2017 edition of its regulation round-up. Topics discussed include the FCA's work to implement the Insurance Distribution Directive (IDD) in the UK. The round-up also includes information on the extension of the Senior Managers and Certification Regime (SM&CR) and the launch of the FCA's Asset Management Authorisation Hub.
The FCA published Handbook Notice No 48, which includes changes to the FCA Handbook and other materials made by the FCA board in September and October 2017, together with feedback on consultations that will not have a separate policy statement published by the FCA. It also describes changes made by the Board of the Financial Ombudsman Service (FOS) to its rules, guidance and standard terms on 11 September 2017.
Following President Juncker’s state of the union address in September 2017, the European Commission adopted its 2018 work programme, with plans to complete the President’s ten political priorities before the end of its mandate. The work programme offers a number of proposals that follow on from regulatory fitness and performance reviews of current laws, with a number of main focuses for achieving its goals.
The Treasury Committee launched a new inquiry into women in finance, focusing on HM Treasury's Women in Finance Charter and the progress made against it.
The General Secretariat of the Council of the EU recommended that the Council confirm that it would not object to the delegated regulation adopted by the European Commission on 14 September 2017 on the final system of contributions to the administrative expenditures of the Single Resolution Board (SRB).
The Committee on Economic and Monetary Affairs of the European Parliament (ECON) published a draft resolution 'Banking Union—Annual Report 2017' covering developments since the European Parliament's 'Banking Union—Annual Report 2016' adopted in February 2017. The draft report focuses on supervision of the banking sector, development of the regime for resolution of failing banks and deposit insurance.
The Council of the EU published a Presidency issues note of the Economic and Financial Affairs Council (ECOFIN) meeting, to be held on 7 November 2017, with regard to the Review of the European System of Financial Supervision (ESFS). The Presidency requests Ministers to express views as to how the powers of the European Supervisory Authorities (ESAs) should be strengthened, and those elements of the ESFS review package which should be prioritised.
The chair of the supervisory board of the ECB, Danièle Nouy, gave a speech calling for greater co-operation between supervisors, particularly in relation to multinational banks, saying supervisors need to share information, agree on risk assessments, prepare for potential crises and learn from each other. Ms Nouy said it would be a ‘serious mistake’ to believe that national rules will be enough and called on all countries to follow through with Basel III and finalise it as quickly as possible.
The European Commission published a draft implementing regulation on the extension of the transitional periods related to own funds requirements for exposures to CCPs set out in the Capital Requirements Regulation (EU) 575/2013 (CRR) and the European Market Infrastructure Regulation (EU) 648/2012 (EMIR). The draft implementing regulation extends to 15 June 2018 the transitional periods under Article 497(2) of CRR and Article 89(5a) of EMIR.
The European Commission adopted a delegated regulation specifying the conditions according to which a competent authority will set the threshold for the materiality of a credit obligation past due for the purpose of the identification of default in accordance with Article 178(1)(b) of the CRR. The delegated regulation is based on draft regulatory technical standards (RTS) submitted by the European Banking Authority (EBA) in September 2016.
The Prudential Regulation Authority (PRA) published a clarification on the 2017 stress test scenario regarding how firms should incorporate IFRS 9 into the stress testing and capital planning carried out as part of their ICAAP obligations from 2018. The clarification applies to firms to which the Capital Requirements Directive IV (CRD IV) applies and which apply any of the IFRS, FRS 101 or FRS 102 and which have opted to use IFRS 9 for their financial instruments in relation to ICAAPs based on accounts as at 31 December 2017 or a later date.
The BCBS released the final guidelines on identification and management of step-in risk. This refers to the risk that a bank provides financial support to an entity beyond, or in the absence of, its contractual obligations should the entity experience financial stress.
The Basel Committee on Banking Supervision (BCBS) published its 13th report on the progress made by Basel Committee members in adopting Basel III standards, as of end-September 2017. The report monitors the adoption of the standards into national law or regulation, in time for them to become effective by 2019.
ECON published a briefing note discussing the evolution of the Basel III framework and its ongoing revisions. Progress has been made in the areas including discussions over the net stable funding ratio (NSFR) and agreement.
The International Association of Deposit Insurers (IADI) is seeking views on two research papers. The papers look at resolution issues for financial co-operatives, and at Shariah governance for Islamic deposit insurance systems. Feedback is sought by 17 November 2017.
The FCA announced that it is investigating the circumstances surrounding a cybersecurity incident that led to the loss of UK customer data held by Equifax Ltd on the servers of its US parent.
Mark Johnson, the former head of global foreign exchange cash trading at HSBC Bank plc, a subsidiary of HSBC Holdings plc (together HSBC) has been found guilty by a New York court of orchestrating a scheme to defraud an HSBC client through a multimillion-dollar scheme commonly referred to as ‘front running’.
The FCA urged the public to alert it if they have been contacted by a company offering what they think could be a fraudulent investment. The FCA request comes in response to new research showing that more than a fifth (22%) of over 55s surveyed who suspect they have been contacted about a fraudulent investment in the last three years, did not tell anyone about it. The most common reason given for not reporting was not knowing who to report to (49%).
SI 2018/Draft: A new code of practice (CoP) on the exercise of functions of certain regulatory bodies under the Proceeds of Crime Act 2002 will be brought into operation on 31 January 2018. This follows changes extending or creating functions, made by the Criminal Finances Act 2017.
The FCA fined Merrill Lynch International (MLI) £34,524,000 for failing to report 68.5 million exchange traded derivative transactions under the European Market Infrastructure Regulation (EMIR) between 12 February 2014 and 6 February 2016. As MLI agreed to settle at an early stage of the investigation, it received a 30% reduction in the original £49,320,000 fine.
Rent-to-own firm BrightHouse (a trading name of Caversham Finance Limited), is to pay nearly £15m to customers for lending which may not have been affordable and payments which should have been refunded. The FCA identified in late 2014 that the firm’s lending application affordability assessment processes and collections processes did not always deliver good outcomes for customers, particularly those who were at a higher risk of falling into financial difficulty.
The FCA banned Adrian and Christine Whitehurst, former directors of debt management firm First Step Finance Limited for dishonestly misappropriating client money in pursuit of a luxury lifestyle.
The FCA published the data on the number of complaints reported by firms for the first half of 2017. In total, 3.32 million complaints about financial services were recorded by firms in the first half of 2017. This compares to 3.04 million in the second half of 2016.
Claims management company We Fight Any Claim’s attempt to judicially review the Financial Conduct Authority’s Payment Protection Insurance (PPI) measures has failed. The Court of Appeal declined permission to appeal against an Administrative Court decision refusing permission to bring the claim. The Court of Appeal’s decision is final and cannot be further reviewed or appealed.
The FOS published issue 142 of its monthly update. It contains articles on the FCA’s PPI campaign, Q2 statistics, Q&As, and details about upcoming events.
The European Commission published a report to the European Parliament and Council on progress in international efforts to mitigate the risks associated with securities financing transactions (SFTs). The report concludes that recommendations by the Financial Stability Board (FSB) have largely been addressed in the EU through the adoption of the Securities Financing Transactions Regulation (SFTR) and other financial services legislation and guidelines, and so no further regulatory action is needed at this time.
The European Securities and Markets Authority (ESMA) published nine opinions agreeing the FCA's proposed position limits for commodity derivatives under Article 57 of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). With effect from 3 January 2018, when MiFID II must be implemented into national law, limits will apply to the net position a person can hold in commodity derivative contracts.
ESMA updated its Q&As on prospectus related issues. The changes do not relate to the substance of the Q&As and come as a result of the Prospectus Regulation (EU) 2017/1129 becoming applicable on 20 July 2017.
The Securities and Markets Stakeholder Group (SMSG) responded to ESMA’s consultations on the format and content of the prospectus and EU growth prospectus under the Prospectus Regulation. The SMSG says the draft technical advice ‘succeeds in realigning the technical requirements to the goals set out in level 1 while achieving the necessary continuity in the interest of supervision and practitioners’.
ESMA published the responses it received to its consultation on its guidelines on certain aspects of the MiFID II suitability requirements.
ESMA published a compliance table indicating which competent authorities comply or intend to comply with ESMA’s guidelines on the calibration of circuit breakers and publication of trading halts under MiFID II. The guidelines were published on 6 April 2017.
A draft European Parliament motion been published for a resolution to raise no objections to the Commission delegated regulation of 22 September 2017 amending Commission Delegated Regulation (EU) No 149/2013 with regard to RTS on indirect clearing arrangements.
The ECB published the results of the September 2017 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets (SESFOD). The survey found that, on balance, credit terms offered to counterparties in both securities financing and OTC derivatives transactions over the three-month reference period remained basically unchanged. There was also little change reported in market liquidity and functioning, but respondents did report less favourable non-price terms and conditions in new or renegotiated OTC derivatives master agreements.
ESMA made available a video of its conference on the state of European financial markets, which took place in Paris on 17 October 2017. The video includes all the keynote addresses, panel debates and Q&A sessions.
SR 2017/217: Sections 4, 8 and 16(1)(b)), and Part 2 of Schedule 1 to the Credit Unions and Co-operative and Community Benefit Societies Act (Northern Ireland) 2016 (CCBSA (NI) 2016) come into force on 6 April 2018.
The FCA provided further detail on its strategic review of banking business models, originally launched in April 2017 as a programme of discovery work—the Strategic review of retail banking business models.
The chair of the Treasury Select Committee, Nicky Morgan MP, commented on the FCA’s publication of its summary of the independent review of RBS’s treatment of customers transferred to its Global Restructuring Group (GRG). Ms Morgan said the FCA had taken too long to publish the report and the summary was ‘not before time’.
The European Central Bank (ECB) published its aggregated supervisory banking statistics for the second quarter of 2017 and a note on the methodology used in preparing the statistics.
The government issued a call for evidence on its plan to create a six-week ‘breathing space scheme’ and statutory debt management plan. The new scheme could include legal protections that would shield individuals from further creditor action once a plan to repay their debts is in place. Views are sought by 16 January 2018.
The FCA announced it is undertaking a thematic review of the debt management sector, in line with the commitment in the regulator's 2017/18 business plan.
ESMA received a request from the European Commission asking the European Supervisory Authorities (ESAs)—namely the EBA, the European Insurance and Occupational Pensions Authority (EIOPA), and ESMA itself—to issue recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products.
ESMA carried out a first analysis on fund performance measures, developing initial metrics to analyse the impact of ongoing fees, one-off charges and inflation on the returns of mutual funds. Key preliminary results for the EU fund industry show a substantial reduction in net returns available to investors, especially in the retail sector, and weakly cost- or price-sensitive investment decisions by retail investors.
The executive director of strategy and competition at the FCA, Christopher Woolard, delivered a speech on competition in the asset management industry at the Securities Industry and Financial Markets Association's 2017 Annual Meeting. Mr Woolard set out how the FCA has devised a package of reforms that aim to ensure enhanced protection for investors, greater clarity on what they’re buying and a better understanding of what they’re paying.
The PRA published the first in a short series of consultation papers on reform to the implementation of the Solvency II Directive (Directive 2009/198/EC), starting with the matching adjustment (MA). MA has the effect of cushioning certain life insurers’ capital resources, subject to conditions and prior approval, when they can demonstrate that the cash flow of a designated portfolio of assets is matched to the life insurance liabilities. The consultation closes on 31 January 2018.
EIOPA published an update on internal model consistency projects (IMCPs), which aim to strengthen EU supervisory consistency and convergence. The update covers the progress of three related IMCPs: its market and credit risk benchmarking study, its modelling of sovereign exposures, and its modelling of dynamic volatility adjustment.
EIOPA published two new Q&As on Commission Implementing Regulation (EU) 2015/2450 with regard to the templates for the submission of information to the supervisory authorities according to the Solvency II, and three Q&As on Commission Delegated Regulation (EU) 2015/35 supplementing the Solvency II Directive.
The FCA expressed concern at the way general insurance firms have implemented the transparency in insurance renewals rules, which came into effect in April 2017. The FCA says the rules are ‘relatively straightforward’ and warns firms that upcoming changes such as the IDD and the SMCR are more complex. The FCA said firms and those accountable need to ensure that they effectively manage regulatory change, as under-preparation is ‘not acceptable’.
The International Association of Insurance Supervisors (IAIS) published tables showing the status of the Insurance Core Principles and ComFrame. The Insurance Core Principles and ComFrame are designed to provide a globally accepted framework for the supervision of the insurance sector. The tables form part of IAIS’ mission to promote effective and globally consistent supervision of the insurance industry, with the objective of developing and maintaining fair, safe and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability.
A draft European Parliament motion, dated 19 October 2017, was published for a resolution to raise no objections to the Commission delegated regulation of 21 September 2017 supplementing the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products.
The claimants brought a claim against the defendant professional indemnity insurer (QBE), seeking an indemnity, under an insurance policy, in respect of an insured financial adviser's liability to them for negligent investment advice concerning two financial instruments, the Keydata bond and the Meteor plan. The claimants had already obtained judgment against the financial adviser in respect of the investment advice it had received. The Commercial Court, in allowing (in part) QBE's application for summary judgment, held that an insolvency exclusion in the insurance policy issued by QBE applied to exclude the financial adviser's liability to the claimants in respect of the investment advice given concerning the investments. That was because, in each case, it had been the inability of the Keydata and the other relevant parties, to pay their debts as they had fallen due, which had given rise to the relevant claim, loss or liability. Accordingly, QBE bore no obligation of indemnity, under the policy, and the claimants had no real prospect of succeeding in their claim against it. The judgement can be found at  EWHC 2597 (Comm).
The Association of British Insurers welcomed confirmation from Pensions Minister Guy Opperman that the Department for Work and Pensions will take forward development of the Pensions Dashboard.
The FCA published a report outlining how the regulatory sandbox has met its objectives over the first year of operation. The report sets out the sandbox’s overall impact on the market, including the adoption of new technologies, increasing access and improving experiences for vulnerable consumers, and lessons learnt from individual tests.
along with the updated validation rules for the reports submitted under the revised technical standards will apply from this date.
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