Weekly highlights—27 September 2018

Weekly highlights—27 September 2018
Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 27 September 2018.


Alternative Brexit plan calls for major MiFID II changes

A Brexit-supporting think tank set out an alternative plan for Britain's exit from the EU on Monday that calls for swathes of Europe's financial rule books to be scrapped.

Financial Conduct Authority updates

FCA’s regulation round up for September 2018 now available

The Financial Conduct Authority (FCA) published its regulation round up for September 2018. Hot topics include the consultation on extending the Senior Management and Certification Regime (SM&CR) to claims management companies, and the FCA’s approach to final regulatory technical standards and draft European Banking Authority guidance under the revised Payment Services Directive.

Prudential Regulation Authority updates

PRA reports on the impact of climate change on the UK banking sector

The Prudential Regulation Authority (PRA) published a report examining the financial risks from climate change that impact UK banks, building societies and PRA-designated investment firms. It assesses how banks are responding to these risks, and clarifies the PRA’s supervisory approach. The report is based on a PRA survey covering 90% of the UK banking sector, bilateral meetings with firms and stakeholders, and the findings from the Bank of England’s broader climate-related work.

Financial stability

BIS Quarterly Review finds emerging market economies facing pressure

The Bank for International Settlements (BIS) published the September 2018 issue of its Quarterly Review, which says emerging market economies (EMEs) have come under pressure recently, pushing bond yields higher and domestic currencies lower. BIS says asset prices in EMEs were shaken by the strong dollar, trade tensions, and signs of a slowdown in China. The impact differed across countries, with some facing crises, but contagion was limited.

Authorisation, approval and supervision

FCA consults on applying SM&CR to CMCs (CP18/26)

The FCA published consultation paper ‘CP18/26: Claims management companies: how we propose to apply the Senior Managers and Certification Regime'. It sets out the draft rules and guidance for claims management companies (CMCs) relating to the Senior Managers and Certification Regime (SM&CR). The proposed rules would apply to CMCs serving customers in, or constituted under the laws of, England & Wales or Scotland. Comments are requested by 6 December 2018.

PRA article says SM&CR's success is a model for overseas regulators

The PRA published an article on the SM&CR as part of its Quarterly Bulletin for Q3 2018. According to the article, experience suggests that the regime is providing a positive discipline on firms and their key decision-makers, and some overseas jurisdictions are looking at the SM&CR as a model for similar reforms.

ECB publishes guide to on-site inspections and internal model investigations

Following the completion of a public consultation, the European Central Bank (ECB) published a guide to on-site inspections and internal model investigations. The guide was drafted in close co-operation with the national competent authorities (NCAs), and aims to explain how ECB Banking Supervision conducts inspections and to provide a useful document for banks subject to such inspections.

Prudential requirements

MEPs vote on proportional and risk-based approach to prudential rules for non-systemic investment firms

MEPs from the European Parliament's Committee on Economic and Monetary Affairs (ECON) voted for proportional and risk-based oversight for investment firms, paired with tightened equivalence rules for third-country firms to ensure a level playing field. The ECON MEPs agreed with the Commission proposal saying that smaller non-systemic investment firms should be subject to tailor made rules on supervision and capital requirements, as they are a lot less exposed to credit risk and bank runs.

ESRB recommends reciprocity for Belgian macroprudential policy measure

recommendation of the European Systemic Risk Board (ESRB) of 16 July 2018 amending recommendation ESRB/2015/2 on the assessment of cross-border effects of and voluntary reciprocity for macroprudential policy measures has been published in the Official Journal of the EU. The ESRB has added a new macroprudential policy measure from Belgium to the list of measures which are recommended to be reciprocated.

BCBS discusses policy and supervisory issues

The Basel Committee on Banking Supervision met in Basel on 19-20 September to discuss policy and supervisory issues, and members' implementation of post-crisis reforms. Committee members reiterated their expectation of full, timely and consistent implementation of the Basel III standards for internationally-active banks. The next meeting of the Basel Committee is scheduled for 26-27 November 2018 in Abu Dhabi.

EBA launches annual transparency exercise

The EBA launched its fifth annual EU-wide transparency exercise. In December 2018, together with the risk assessment report (RAR), the EBA will release over 900,000 data points on around 130 EU banks. The data will cover capital positions, risk exposure amounts, sovereign exposures and asset quality.

Risk management and controls

Credit reference agency fined £500,000 for personal data breach

Equifax Ltd, a credit reference agency, was fined £500,00 by the Information Commissioner’s Office (ICO) for failing to protect the personal information of up to 15 million UK citizens during a cyber attack in 2017. Between 13 May and 30 July 2017, a cyber attack in the US led to the leaking of the personal data of 146 million customers globally. As the UK arm of the American parent company Equifax Inc, after an investigation conducted in affiliation with the FCA, the ICO found Equifax Ltd to be responsible over the security of the data of its UK customers.

Nicky Morgan writes to Cashplus, RBS and Barclays CEOs over IT failings

The chair of the Treasury Select Committee, Nicky Morgan MP, wrote to the CEOs of Cashplus, RBS and Barclays seeking information about the firms’ IT problems. Ms Morgan sought a ‘full description of the causes and consequences’ of the incidents, including what controls were in place to prevent such incidents and why they failed. She requested replies from all three firms by 28 September 2018.

Financial crime

Council of the EU non-objection to delegated act adding Pakistan to AML/CTF high risk list

The Council of the EU decided not to object to a delegated act to the anti-money laundering and terrorist financing (AML/CTF) directive, as regards the addition of Pakistan to the list of high-risk third countries. According to the anti-money laundering directive, third-country jurisdictions which have strategic deficiencies in their anti-money laundering regimes that pose significant threats to the financial system of the EU must be identified in order to protect the proper functioning of the internal market.

EBA will not open a breach of Union law investigation against Malta over AML failings

The EBA notified the European Commission and members of the European Parliament of the outcome of its enquiries into the application by the Malta Financial Services Authority (MFSA) of EU AML laws. The EBA has decided not to open a breach of Union law investigation into the MFSA, reflecting the recent supervisory actions taken by the MFSA and the current requirements of Union law.

Deutsche Bank ordered to accept outside AML controller

Germany’s financial regulator said that it has ordered Deutsche Bank AG to accept a third-party supervision to ensure it complies with controls against money laundering and terrorism financing.

Fraudsters skim £503m off UK accounts in first half of 2018

British financial firms saved customers from losing £706m ($929m) to fraudsters in the first half of 2018, but criminals were still able to siphon off £503m using deceptions ranging from investment and romance scams to impersonating banks or authorities, according to an industry study.

Enforcement and redress

Following Upper Tribunal decision FCA issues fine and ban in Final Notice to Alistair Rae Burns

The FCA issued a Final Notice to Alistair Rae Burns, former chief executive of TailorMade Independent Limited (TMI), a firm of independent financial advisors, who wrongly advised clients to transfer their pensions into SIPPs. The FCA fined Mr Burns £60,000 and prohibited him from performing any senior management or significant influence function in relation to regulated activity in financial services. The Final Notice follows a rejection by the Upper Tribunal of Mr Burn's reference of the FCA decision.

Markets and trading

FCA publishes Market Watch 56

The FCA published the 56th edition of Market Watch, the FCA's newsletter on current market conduct and transaction reporting issues. This edition has items on market abuse surveillance and payment for order flow (PFOF).

ESMA updates EMIR and MiFIR data reporting Q&As

The European Securities and Markets Authority (ESMA) has updated its Q&As on MiFIR data reporting and its Q&As on the implementation of European Market Infrastructure Regulation (EMIR). For further information, see LNB News 26/09/2018 112.

ESMA agrees to limit tick sizes for systematic internalisers’ quotes to shares and depositary receipts

ESMA published its opinion on proposed amendments to Commission Delegated Regulation (EU) 2017/587 (RTS 1). ESMA agreed to limit the application of tick sizes to quotes of systematic internalisers (SIs) to shares and depositary receipts. The opinion and revised draft regulatory technical standards (RTS) have been sent to European Commission for endorsement.

ESMA study looks at funds’ use of credit default swaps

ESMA published a study on data reported under EMIR, which finds that funds that are part of a large group are more likely to use credit default swaps (CDS). According to the report, a high reliance on CDS is seen, in particular, among fixed income funds that invest in less liquid markets, and alternative funds that implement hedge-fund-like strategies. ESMA says the main driver of net CDS exposures is fund size.

ESMA finds liquidity deterioration in stressed financial markets for corporate and sovereign bonds

ESMA published a working paper examining liquidity in EU fixed income markets, providing a broad overview of market liquidity in EU sovereign bond and corporate bond markets.

ESMA publishes market volatility analysis

ESMA published an article (originally published as part of ESMA’s 6 September 2018 TRV report) setting out in detail its analysis of volatility in financial markets. ESMA notes that the potential of market volatility to undermine financial stability as well as to impose unexpected losses on investors, is a subject of concern for securities market regulators, and is a key element of ESMA's market monitoring.

IOSCO report on retail OTC leveraged products, statement on risks of binary options for retail investors

The Board of the International Organization of Securities Commissions (IOSCO) issued a final report providing guidance for securities regulators on addressing the risks arising from the marketing and sale of OTC leveraged products to retail investors (FR17/2018). At the same time, IOSCO has issued a public statement on the risks of binary options and the response of regulators for mitigating the risks and harm to retail investors transacting in these products.

ISDA and CCMC propose solution to different CFTC and SEC derivatives rules

The International Swaps and Derivatives Association (ISDA) and the Center for Capital Market Competitiveness (CCMC) published a paper, entitled ‘A Regulatory Safe Harbor for Derivatives’, setting out a proposed solution to problems caused by differences in the timing and substance of the rules implemented and/or proposed by the two primary US markets regulators—the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). The paper argues that a comprehensive and consistent regulatory framework for the US derivatives market is an important objective from public policy, risk mitigation and market liquidity perspectives, but that the objective is undermined by the different rules.

ISDA CEO gives speech at ISDA Europe conference

The CEO of ISDA, Scott O'Malia, has made some opening remarks at the ISDA Europe regional conference in London. Mr O'Malia focused on the changes facing the derivatives market and the fact that many of those changes will reach a critical point in 2020, particularly in relation to margin requirements, benchmarks and Brexit, which will together put a huge strain on the ability of firms to comply. Mr O'Malia emphasised that early preparation for these will be critical and that ISDA has been working hard to develop solutions to help.

Scott O’Malia discusses SEC/CFTC ‘safe harbor’ proposal

ISDA CEO, Scott O’Malia, wrote an article on ISDA and the Center for Capital Market Competitiveness (CCMC)’s proposal to resolve the problem of the lack of harmonisation between Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) rules. Under the proposal, the two commissions would use their respective exemptive authorities to establish a safe harbor. This would allow firms to rely on their compliance with one commission’s rules to satisfy comparable requirements set by the other commission.

ECB speech on interest rate benchmark reform

Benoît Cœuré, a member of the executive board of the ECB, gave a speech entitled ‘Waiting for ESTER: the road ahead for interest rate benchmark reform’ at the ECB's Money Market Contact Group meeting in Frankfurt. Mr Cœuré comments in detail on benchmark reform and explains how the ECB is working hard to publish the new Euro short-term rate 'ESTER' by October 2019 at the latest.

Joint board of appeal of ESAs gives decision in appeal against ESMA decision

The joint board of appeal of the European Supervisory Authorities (ESAs), ie the EBA, the European Insurance and Occupational Pensions Authority (EIOPA) and ESMA, has given its decision in an appeal brought by an individual, ‘V’, against ESMA. Pursuant to Article 17 of Regulation (EU) No 1095/2010 (the ESMA Regulation), V had sought to appeal against a decision of the chair of ESMA of 29 August 2017 not to open a formal investigation into the Cyprus Securities and Exchange Commission (CySEC) in relation to certain dealings in binary options and contracts for differences.

AARC consults on LIBOR fallback options

The Alternative Reference Rates Committee (ARRC) is consulting on LIBOR fallback language for syndicated business loans and for floating rate notes. The ARRC warns that LIBOR cessation has the potential to disrupt $200trn of US dollar contracts, including $4trn of syndicated loans and $500bn of collateralised loan obligations (CLOs). Feedback is sought by 8 November 2018.

Regulation of capital markets

AFME and European associations publish progress report on CMU

The Association for Financial Markets in Europe (AFME), together with nine other trade and finance associations, published a report tracking progress made on the European Commission’s capital markets union (CMU) project, through seven key performance indicators (KPIs). The report found growing intra-EU activity between EU Member States in private equity, M&A transactions, debt issuance, and cross-border holdings of portfolio assets. However, intra-EU integration remains below pre-crisis levels, suggesting more progress is needed towards a fully integrated capital market.

AFME annual review 2018: Re-wiring Europe's capital markets

AFME published its 'Annual review 2018: Re-wiring Europe's capital markets'. The review includes discussion of the impact of Brexit on Europe's wholesale markets and calls for the industry to focus on tackling longer term structural issues. It also considers the impact of FinTech, the role of the ESAs, and progress towards capital markets union (CMU). Each of AFME's divisions also provides an update.

ESMA chair discusses technological innovation and capital markets

ESMA published a speech by its chair, Steven Maijoor, on new technologies and capital markets, in which he discussed the ‘balancing act’ of responding to the risks that new technologies and entrants may bring, while at the same time trying not to stifle innovation. Mr Maijoor discussed automated advice, data-driven variable pricing, AI, machine learning and the use of pattern-matching and data analytic to detect market abuse.

Investment funds and wealth management

ECON draft reports suggest changes to proposals on cross-border distribution of funds

ECON has published draft reports on the European Commission's proposals for a new directive and regulation on the cross-border distribution of collective investment funds.

  1. Draft report on the proposal for a directive of the European Parliament and of the Council amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds, and

  2. Draft report on the proposal for a regulation of the European Parliament and of the Council on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013

While the rapporteur generally agrees with the proposals and the general approach adopted by the Council of the EU, he suggests a number of amendments.

Consumer credit, mortgage and home finance

FCA updates FAMR baseline measures

The FCA published consumer research which tracks movements in the baseline measures set out in the Financial Advice Market Review (FAMR) Baseline Report issued in June 2017.

Insurance and pensions

Bank of England seeks further feedback on insurance XBRL taxonomy

The Bank of England (BoE) published a public working draft (PWD) of the standalone internal model output (IMO) and market risk sensitivities (MRS) taxonomy, alongside related technical artefacts, that will make up part of the BoE's insurance XBRL taxonomy to be used for regulatory submissions. Firms and software vendors are invited to provide feedback on the data point modelling, annotated templates, validations, and XBRL taxonomy by 28 September 2018.

New report highlights strengths of Lloyd's managing agents in InsurTech 'arms race'

The Lloyd's Market Association (LMA) published a new report by Oxbow Partners on InsurTech-led change in the Lloyd's market. The report explains why and how InsurTech has become relevant for corporate and specialty insurers and reinsurers, and it provides some strategic 'guiderails' to help managing agents develop their response.

EIOPA Fausto Parente interview on PEPP

Fausto Parente, executive director of EIOPA, gave an interview to Lukas Blekaitis of the Lithuanian news agency ELTA, on personal pensions. Mr Parente discussed the main challenges for national pensions systems and the pan-European personal pension product (PEPP).

Link between work patterns and women’s access to senior positions

The Association of British Insurers (ABI) published a report assessing the challenges, and their scale, that women face when trying to reach high-level jobs in the insurance industry. The report analyses evidence from inside and outside the insurance industry, and highlights motherhood, sexism and part-time employment as major barriers between women and senior positions.

EIOPA Insurance and Reinsurance Stakeholder Group elects chair and vice chair

EIOPA announced that Greg van Elsen has been elected chair of its Insurance and Reinsurance Stakeholder Group. At its inaugural meeting the group also elected Michaela Koller, the director general of Insurance Europe, as its vice chair, representing the insurance industry.

Payment services and systems

PSR consults on specific direction regarding protected ATMs (LINK) (PSR CP 18/2)

The Payment Systems Regulator (PSR) published consultation paper (CP18/2) which contains Draft Specific Direction 8 requiring the adoption of appropriate policies and measures and reporting obligations regarding protected ATMs.

PSR responds to UK Finance's latest fraud data

The PSR published a press release in response to UK Finance's latest fraud data, which shows the need for consumers to be better protected from authorised push payment (APP) fraud, where a fraudster tricks you into sending them money.

NPSO widens scope of procurement for New Payments Architecture

The New Payment System Operator (NPSO) announced initial details of a new procurement process for the clearing and settlement layer that will form the backbone of the New Payments Architecture (NPA). The NPA is a new conceptual model for payments in the UK, which will take over the processing of more than £6.7trn of Bacs, Faster Payments and potentially cheque payments every year, from 2021.

Dates for your diary

Date Subject Event
28 September 2018 Payment services and systems Deadline for responses to the BoE’s call for interest to gauge the demand for introducing synchronised settlement to the renewed Real-Time Gross Settlement (RTGS) service.
28 September 2018 Packaged Retail and Insurance-based Investment Products Regulation Deadline for responses to the FCA’s ‘Call for Input: PRIIPs Regulation—initial experiences with the new requirements’.
30 September 2018 Markets and trading Deadline for responses to the BoE’s Working Group on sterling risk-free reference rates consultation on term SONIA reference rates (TSRRs).
30 September 2018 Solvency II Deadline for responses to PRA consultation paper ‘CP13/18 Solvency II—Equity release mortgages’.
30 September 2018 Pensions The rules and guidance following FCA policy statement ‘PS17/16: Regulatory reporting—Retirement income data—Feedback on CP16/36 and final rules’ come into effect.
Q3 2018 Regulatory architecture The results of the FCA’s and its Practitioner Panel annual survey of regulated firms is expected to be published.
1 October 2018 Securitisation Regulation
Capital Requirement Regulation
Deadline for responses to FCA consultation ‘CP18/22: Handbook changes to reflect the application of the EU Securitisation Regulation and the amendment to the Capital Requirement Regulation’.
1 October 2018 Insurance Distribution Directive The Insurance Distribution Directive (IDD) will apply from this date.
1 October 2018 Senior Managers and Certification Regime Deadline for responses to PRA consultation ‘CP18/18: Strengthening accountability—implementing the extension of the SM&CR to insurers’.
1–7 October 2018 IOSCO World Investor Week The International Organization of Securities Commissions (IOSCO) announced that the 2018 World Investor Week (WIW) will take place between 1 and 7 October, and involve a range of events, workshops, conferences and other activities in some 80 IOSCO member jurisdictions.

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About the author:

Chris is a member of the New York Bar with more than two decades of experience as a financial services and capital markets lawyer in London. Before joining LexisNexis in 2016, Chris worked as a Senior Professional Support Lawyer at Linklaters LLP, supporting the firm’s market-leading Financial Regulation Group, with a particular focus on MiFID II. Chris also worked as Legal Analyst at Bloomberg, where he drafted analytical articles on EU, UK and US financial services law and regulation for Bloomberg journals and developed practical guidance content for the award-winning Bloomberg LAW legal research platform. Prior to that, Chris was a partner in the U.S. law group at Allen & Overy, advising issuers and underwriters on a wide range of capital markets and corporate finance transactions including SEC-registered and Rule 144A debt and equity offerings and mergers and acquisitions, as well as providing general U.S. securities law advice. He also co-founded the firm’s Microfinance Working Group and advised on a variety of matters including two landmark securitisations of loans to microfinance institutions.

Chris has written extensively on legal and regulatory issues for numerous publications and lectured on financial regulation, microfinance and capital markets.