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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 28 September 2017.
Theresa May used her speech in Florence to set out proposals for a two-year transition period after the UK leaves the EU in March 2019. May said existing EU market access arrangements should apply during that period and promised Britain would pay its ‘fair share’ into the EU budget. She also used her speech to reiterate that EU citizens are a valuable part of UK society, and the government wants them to stay post-Brexit. She addressed uncertainty around EU law by suggesting UK courts should be able to take account of Court of Justice judgments, with a view to ensuring ‘consistent interpretation’. Lawyer from Pinsent Masons, Kingsley Napley and Mischon de Reya and Carter Thomas suggest the speech is an attempt to break the current stalemate in negotiations. They believe the transitional period will be welcomed by EU citizens living in the UK. However, the lack of detail regarding entitlements still leaves a lot of room for uncertainty.
The International Regulatory Strategy Group (IRSG) published a report on 'A new basis for access to EU/UK financial services post-Brexit', which makes detailed proposals on the terms of a free trade agreement (FTA) under which financial services suppliers in the EU and UK would have access to each other’s markets after Brexit. The IRSG's proposals are intended to achieve a level of mutual access for EU and UK firms as close as possible to the current levels of access within the EU framework.
The chief executive of the Association for Financial Markets in Europe (AFME), Simon Lewis, welcomed the UK government’s call for an implementation period following the UK’s withdrawal from the EU, saying ‘we urge the negotiators to reach agreement as soon as possible on the items under discussion in phase one of the negotiations in order to have clarity on transitional arrangements’.
The Financial Conduct Authority (FCA) published the September 2017 edition of its regulation round-up. Topics discussed in the round-up include anti-money laundering (AML) and MiFID II.
The Financial Stability Board (FSB) and the International Monetary Fund (IMF) published a second progress report on the implementation of phase two of the G20 Data Gaps Initiative (DGI-2), which aims to address data gaps identified after the global financial crisis and promote the regular flow of timely and reliable statistics for policy use. The report shows ‘substantial progress’ has been achieved during the first year of DGI-2, despite challenges in the implementation of some recommendations.
Insurance Europe (IE) expressed ‘grave concerns’ over the current scope and text of the European Commission’s proposal for a regulation on a Single Market Information Tool (SMIT). IE says the regulation would give the Commission the power to require potentially commercially sensitive data from firms and use it in infringement proceedings against a Member State and for policy development, without the proposal containing clear constraints. IE says the rules as proposed lack proportionality, justification, safeguards and a proper legal basis.
The chair of the supervisory board of the European Central Bank (ECB), Danièle Nouy, warned that when the banking sector grows too large, an economy can become ‘overbanked’, causing serious harm to the health of the banks and the entire economy, and encouraged banks to look towards mergers as a way out of their present difficulties.
The Joint Committee of the European Supervisory Authorities (ESAs)—European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA)—published a report highlighting the main risks for the EU financial system. The ESAs focus on the risks to the stability of the European financial sector in the current uncertain political and economic environment, particularly with respect to the UK’s withdrawal from the EU.
The Financial Policy Committee (FPC) released a statement following its 20 September 2017 meeting. The FPC assessed the outlook for UK financial stability by identifying the risks faced by the UK financial system and assessing the resilience of the system to them. The FPC found that, overall, risks to UK financial stability from the domestic environment were broadly unchanged at a standard level, but warned that there are signs in some markets, globally and domestically, of excessive weight being placed on recent benign conditions as an indicator of future risks. This behaviour encourages greater risk-taking, potentially building up greater vulnerabilities.
ICSA and the Investment Association jointly launched guidance to help company boards weigh up the interests of their stakeholders when making strategic decisions. It covers, among other matters, identifying key stakeholders, the composition of the board, and the development of directors.
The Securities and Exchange Commission (SEC) announced two new initiatives to address cyber-based threats and protect retail investors. The SEC will set up a cyber unit that will focus on targeting cyber-related misconduct, and establish a retail strategy task force that will develop proactive, targeted initiatives to identify misconduct impacting retail investors.
Leading emerging market regulators agreed to accelerate the development of sustainable finance, and discussed cyber resilience at the International Organization of Securities Commissions (IOSCO) Growth and Emerging Markets (GEM) Committee annual meeting and conference.
The president of the ECB and chair of the European Systemic Risk Board (ESRB), Mario Draghi, said that while there has been a return to stability since the financial crisis, it is important to reflect on lessons learned and where further work is needed.
The chairman of the US Securities and Exchange Commission (SEC), Jay Clayton, issued a statement regarding the importance of cybersecurity to the agency and market participants, and setting out the SEC’s approach to cybersecurity as an organisation and as a regulatory body.
The EBA revised its guidelines on internal governance, with the aim of further harmonisng arrangements, processes and mechanisms across the EU, as called for by the Capital Requirements Directive 2013/36/EU (CRD IV). The EBA says weaknesses in corporate governance in a number of institutions have contributed to excessive and imprudent risk-taking, creating systemic global problems. The guidelines put more emphasis on the duties and responsibilities of the management body in its supervisory function in risk oversight, including the role of their committees, and seek to improve the status of the risk management function, enhancing the information flow between it and the management body and ensuring effective monitoring of risk governance by supervisors.
The European Commission published a draft regulation amending regulations on adopting certain international accounting standards.
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposal for a regulation of the European Parliament and of the Council on a framework for the recovery and resolution of central counterparties and amending the ESMA Regulation ((EU) No 1095/2010), European Markets and Infrastructure Regulation (EMIR) ((EU) No 648/2012), and the Securities Financing Transactions Regulation (SFTR) ((EU) 2015/2365). The report sets out amendments and calls on the European Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal. The report will now be forwarded to the Council, the Commission and the national parliaments.
The Prudential Regulation Authority (PRA) published supervisory statement SS6/17 which sets out a waiver for the requirement to disclose template 'EU CCR5-B—Composition of Collateral for exposures to CCR' in the European Banking Authority (EBA) Guidelines on disclosure requirements, under Part Eight of the Capital Requirements Regulation (Regulation (EU) 575/2013) (CRR) (the EBA Guidelines). It also sets out the PRA's expectations in respect of certain aspects of firms' compliance with the waiver.
The PRA updated its CRD firms—reporting requirements taxonomy webpage by including information on its requirements relating to forecast capital data (known as Capital+) ahead of 1 October 2017, when the requirements take effect.
The PRA published a dear-CEO letter from its deputy governor, Sam Woods, on the likely transitional arrangements for IFRS 9 expected credit loss accounting. The Basel Committee and European legislative bodies are concerned about the impact of IFRS 9 on credit institutions’ regulatory capital. Mr Woods said the current draft legislation amending the CRR suggests use of the transitional arrangements will be ‘at the option of the individual firm’.
The ECB published a guide on materiality assessment for changes to counterparty credit risk models. The guide, which comes after a public consultation, explains the approval criteria for changes to the internal models directly supervised banks use to calculate capital requirements for counterparty credit and credit valuation adjustment risks. The ECB says the guide draws as much as possible on the approaches already defined by the EBA for other risk types, and indicates how the ECB intends to interpret the existing legal framework.
The Council of the EU decided not to object to the Delegated Regulation of 4 September 2017 (C(2017) 5959 final) supplementing the CRR with regard to regulatory technical standards (RTS) for disclosure of encumbered and unencumbered assets. This Delegated Regulation can now enter into force unless the European Parliament objects to it.
The ECB delivered its opinion on the proposal for a Regulation on the recovery and resolution of central counterparties (CCPs). The ECB says it strongly supports the European Commission’s initiative but suggests a number of ways in which the proposal could be ‘enhanced’.
The Global Association of Central Counterparties (CCP12) and the European Association of CCP Clearing Houses (EACH) published a joint press release on the CPMI-IOSCO consultation 'Framework for supervisory stress testing of central counterparties (CCPs)’. CCP12 and EACH support the efforts taken by CPMI and IOSCO to establish a high-level framework for supervisory stress tests (SSTs) that can be used as a guidepost for regulators conducting multi-jurisdictional and local CCP stress tests.
A member of the supervisory board of the ECB, Pentti Hakkarainen, urged EU banks to take responsibility for solving their ongoing issues with non-performing loans (NPLs), and highlighted efficiency and technology as the key to sustainable profitability. In a speech at the ESRB annual conference, Mr Hakkarainen said that banks need to be 'bold and dynamic' in addressing the challenges they are currently facing.
A member of the supervisory board of the ECB, Ignazio Angeloni, said more needs to be done to reduce bank risks across the euro area, and called for more transparent and even-handed supervision. Speaking at the XXXI Conference ‘Adolfo Beria di Argentine’ in Courmayeur, Mr Angeloni said that while the ECB has established itself as a 'credible and independent' supervisor within less than three years, progress is still needed on several fronts.
The results of the Bank of England (BoE) 2017 stress test scenarios for the seven major UK banks and building societies will be published on 28 November 2017. Alongside the annual cyclical scenario (ACS), the 2017 test includes, for the first time, a second, biennial exploratory scenario (BES). The BoE has received banks’ initial stress testing submissions and is in the process of analysing the results.
The Joint Committee of the ESAs published final guidelines (JC/GL/2017/16) to prevent the abuse of electronic funds transfers for terrorist financing and money laundering purposes. The guidelines explain what payment service providers (PSPs) should do to comply with their obligations under Regulation (EU) 2015/847 to detect transfers of funds that lack information on the payer or the payee, and to determine whether to execute, reject or suspend such transfers of funds.
The EBA is consulting on amendments to the implementing technical standards (ITS) on supervisory disclosure. The ITS specify the format, structure, contents list and annual publication date of the supervisory information to be disclosed by competent authorities. The proposed amendments will incorporate the changes to the EU legal framework and the establishment of the Single Supervisory Mechanism (SSM). Feedback is sought by 22 December 2017.
The Financial Services Compensation Scheme (FSCS) published a new agreement on how deposit-takers communicate about FSCS protection. The agreement is aimed at improving consumer awareness of the FSCS’s guarantee for deposits in banks and building societies and how their money is protected under the scheme.
The EBA and ESMA published joint guidelines to assess the suitability of members of management bodies and key function holders. The guidelines aim to harmonise and improve suitability assessments within EU financial sectors, and to ensure sound governance arrangements in financial institutions in line with CRD IV and the Markets in Financial Instruments Directive (EU) 2014/65/EU (MiFID II).
The European Commission adopted two delegated regulations (C(2017) 6270 final and C(2017) 6268 final) with regard to indirect clearing arrangements under EMIR and Regulation (EU) 600/2014 on markets in financial instruments and amending EMIR (MiFIR).
The European Commission adopted a Delegated Regulation (C(2017) 6337 final) amending Delegated Regulation (EU) 2017/571 supplementing MiFID II with regard to RTS on the authorisation, organisational requirements and the publication of transactions for data reporting services providers. The new Delegated Regulation sets out requirements for consolidated tapes for non-equity instruments and will enter into force on the 20th day following its publication in the Official Journal of the EU.
The European Parliament updated its procedure file regarding the proposed Commission Delegated Regulation (C(2017) 3890 final) supplementing MiFIR with regard to exempting certain third countries' central banks in their performance of monetary, foreign exchange and financial stability policies from pre- and post-trade transparency requirements.
The Council of the EU decided not to object to the Delegated Regulation of 28 August 2017 (C(2017) 5812 final) amending Delegated Regulation (EU) 2017/565 as regards the definition of systematic internalisers under MiFID II. The new Delegated Regulation can now enter into force unless the European Parliament objects to it.
The Association for Financial Markets in Europe (AFME) published a new guide on MiFID II/MiFIR post-trade reporting requirements. The purpose of the guide is to provide a structured approach to meeting the post-trade transparency obligations defined under Article 6, 10, 20, and 21 of MiFIR, and covers various issues.
The FCA will act proportionately when deciding whether to take enforcement action against firms covered by MiFID II which have not transitioned in time for 3 January 2018, Mark Steward, director of enforcement and market oversight at the FCA said. His remark comes as analysis shows there has been a 75% increase in the number of FCA investigations over the past year.
The executive director of ESMA, Verena Ross, gave an update on the regulator's latest deliverables and upcoming publications with respect to MiFID II and MiFIR in a keynote address at the AFME European Compliance and Legal Conference in London. Ms Ross also shared a few considerations from a regulatory perspective on Brexit.
The Financial Services and Markets Authority (FSMA), ESMA, the ECB and the European Commission announced the launch of a new working group to identify and adopt a risk-free overnight rate.
The European Association of Corporate Treasurers (EACT) wrote to the European Commission and ESMA seeking a postponement in the application of the revised RTS for EMIR reporting that will enter into force in November 2017, due to the proposed changes in EMIR reporting obligations in the EMIR Refit review. The letter was co-written with European Issuers and the Coalition of Derivatives End-Users.
The European Parliament and Council published a Regulation amending the Regulation on European venture capital funds and the Regulation on European social entrepreneurship funds (EuVECA and EuSEF).
ESMA published an opinion on the accepted market practice (AMP) notified by the Comissão do mercado de valores mobiliários (CMVM) of Portugal, which replaces the AMP under the Market Abuse Directive established in August 2008.
The EBA Banking Stakeholder Group (BSG) responded to the EBA discussion paper on the treatment of structural FX (EBA/DP/2017/01). The response sets out some general comments by the BSG, as well as answers to the specific questions included in the discussion paper.
On 26 September 2017 the Futures Industry Association (FIA) published a letter of 15 August 2017, asking the US Commodity Futures Trading Commission (CFTC) for an extension of existing no-action relief as well as additional relief regarding the reporting obligations under the CFTC’s ownership and control reports (OCR) rule. FIA explained that the companies subject to these obligations are not able to fully comply with the OCR rule and reiterated its position that the CFTC should conduct a formal rulemaking to address the challenges that the rule poses for intermediaries and their customers.
The International Organization of Securities Commissions (IOSCO) published the responses received to its consultative report on harmonisation of critical OTC derivatives data elements (other than UTI and UPI), third batch, issued in June 2017. The consultation is part of a joint Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) and IOSCO project to develop global guidance on the harmonisation of data elements reported to trade repositories, and is important for the aggregation of data by authorities.
The Investment Association and the Pensions and Lifetime Savings Association published a joint report looking at how asset managers, asset owners and service providers discharge their stewardship responsibilities with respect to UK companies. According to the industry bodies, the report demonstrates that the investment chain is 'working as intended’. The report, 'Stewardship in Practice', is based on figures as at 30 September 2016. It summarises the responses to two questionnaires—one for asset managers and service providers, and another for asset owners.
The Legal Entity Identifier (LEI) Regulatory Oversight Committee (ROC) is consulting on a proposed limited update to the way relationships affecting funds are recorded in the global LEI system (GLEIS), with the objectives of making sure that the implementation of relationship data is consistent throughout the GLEIS and provides a means to facilitate a standardised collection of fund relationship information at the global level. Responses, via the questionnaire annexed to the explanatory document, are sought by 26 November 2017.
The International Capital Market Association (ICMA) responded to two consultations by IOSCO on investment fund liquidity risk management. ICMA broadly agreed with the suggested amendments to IOSCO’s 2013 liquidity risk management recommendations, but did make some suggestions to bring them in line with current market practice. It also urged caution on stress tests, which could be misleading on a systemic level. ICMA's responses can be found here:
AMIC response to IOSCO Consultation Report on Open-ended Fund Liquidity and Risk Management—Good Practices and Issues for Consideration
The Law Commission published a full version of the draft Goods Mortgages Bill, together with a document setting out its response to its July 2017 consultation and an update on the changes it has made to the draft Bill since then. At the same time, HM Treasury, the sponsoring department, has launched a short, targeted consultation asking stakeholders about their support for the aims of the Bill, and its suitability for the Law Commission’s special parliamentary procedure for uncontroversial bills. The consultation also sets out the government’s proposals for how goods mortgages should be registered. Feedback on the HM Treasury consultation is sought by 13 October 2017.
The Competition and Markets Authority (CMA) published its final report for its market study into how digital comparison tools (DCTs) are working for consumers, businesses and the economy. The CMA has noted the many benefits of DCTs for consumers, including finding that generally DCTs help people shop around by making it easier to compare prices and force businesses to up their game. However, the CMA also found concerns, especially on DCTs’ transparency, accessibility and clarity about their use of personal information. To address this, CMA recommendations include all sites should follow the ‘CARE’ rule, namely they should be 'Clear, Accurate, Responsible and Easy to use'; all sites should be clear about how they make money and about how they protect personal information; and comparing across different sites should be as easy as possible. The CMA has expressed strong concerns about contracts between suppliers and DCTs which act as price parity/most favoured nation clauses—as such, the CMA has opened a separate investigation into the use of certain retail most favoured nation clauses by a price comparison website (PCW) in relation to home insurance products.
The CMA announced the launch of its investigation into suspected breaches of the Competition Act 1998 (CA 1998), Chapter I prohibition and Article 101 TFEU in the use of certain retail most favoured nation clauses by a price comparison website in relation to home insurance products. In its final report into DCTs, published today, the CMA found that certain types of contracts between suppliers and DCTs can limit suppliers’ ability to offer a lower price on one platform than on another. The CMA has not yet reached a view on whether there is sufficient evidence of an infringement of competition law for it to issue a statement of objections to any of the parties to the agreement or agreements under investigation. A decision on whether to proceed with or close the investigation is expected in March 2018.
The FCA welcomed the CMA market study of DCTs. The study, which looked at car and home insurance, and credit cards, found that customers, including the vulnerable, mainly have positive views and experiences of DCTs. But the FCA said there was room for improvement in making such sites more user-friendly for the vulnerable, and it was also found that certain types of contracts between suppliers and DCTs can limit suppliers’ ability to offer a lower price on one platform than on another. The FCA will work with the CMA to further investigate some of the issues that arose. The Association of British Insurers (ABI) also drew attention to the issue of price comparison websites using contracts which restrict the prices insurers can offer to customers elsewhere—so-called most favoured nation clauses.
The FCA found there are risks that older people’s financial services needs are not being fully met, ‘which can result in exclusion, poor customer outcomes and potential harm’. The finding follows the FCA’s ‘ageing population project’. The regulator concludes that these problems are instigated by a variety of causes, including policies and controls that ‘are not designed around consumer needs and unintended consequences of product and service design’. The FCA urges financial services firms to do more to combat this.
The Court of Justice ruled (case C-186/16) that when a financial institution grants a loan denominated in a foreign currency, it must provide the borrower with sufficient information to enable a prudent and well-informed decision. Therefore, the seller or supplier must communicate all relevant information to the consumer concerned to enable them to evaluate the economic consequences of a clause on their financial obligations.
The European Central Bank (ECB) published a draft Guideline amending Guideline ECB/2012/27 on a Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET2).
Unprecedented technological change, customer willingness to try new options, and the government and regulatory desire to do things differently are creating a perfect storm to transform UK payments, the head of policy at the Payment Systems Regulator (PSR), Paul Smith, said. Mr Smith discussed the establishment and strategy of the Payments Strategy Forum (PSF), the new payments architecture, the Payment Services Directive (PSD2), and Open Banking, saying that a joined-up, collaborative approach across the sector was key.
The Payment Systems Regulator (PSR) provided a brief update on its work to combat authorised push-payment scams, where people are tricked into making payments to a fraudster. The PSR published its initial findings in December 2016, having been asked by Which? to investigate.
The Payment Systems Regulator (PSR) published the minutes of its 5 July 2017 board meeting. Topics discussed included streamlining the format of the project risk register with a more strategic focus going forward, the Payments Strategy Forum’s draft new payments architecture blueprint, and a review of the operation of the second line of defence (2LOD).
The FCA published policy statement PS17/21 and near final rules on implementing the Insurance Distribution Directive (2016/97/EU) (IDD), setting out its response to its first consultation on the implementation of the IDD in consultation paper CP17/7. The FCA also published its third consultation paper on the implementation of the IDD (CP17/33).
The European Insurance and Occupational Pensions Authority (EIOPA) published a survey seeking stakeholder data to develop Q&A’s on the IDD, which came into force on 23 February 2016 and must be implemented into national laws by 23 February 2018. Comments on the questions raised are invited by close of business on 11 October 2017.
The European Commission published a delegated regulation which supplements the IDD with regard to product oversight and governance requirements for insurance undertakings and insurance distributors.
The European Commission published a delegated regulation which supplements the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products.
The United States and the European Union signed a bilateral agreement on prudential insurance and reinsurance measures. Both sides announced on 14 July 2017 their intention to sign the agreement, which is intended to boost consumer protection and cut costs and red tape for insurers and reinsurers operating across the Atlantic.
Work-based pensions hit a record high in 2016, with 7.5m policies now in force; an increase of 725,000 policies or almost 11% from 2015, according to new figures from ABI.
The chair of EIOPA, Gabriel Bernardino, gave an interview in which he discussed the pan-European personal pension product (PEPP), saying its main advantages are the portability of the product across Member States, more choice between products, a bigger market for providers and more capital available for long-term investments in the real economy. Mr Bernardino stressed that the PEPP would not replace existing national personal pension schemes, but would be a complementary regime.
The ECB launched a public consultation on two draft guides which explain the process of how entities can become banks and obtain a banking licence. Both guides aim to make the application process more transparent and help applicants in their preparations. The consultation on the guides runs from 21 September to 2 November 2017.
The FCA announced it has entered into a co-operation agreement with the Hong Kong Insurance Authority (IA) to ‘enhance collaboration in supporting FinTech innovation’. The FCA and the IA will cooperate on information sharing on innovation and referrals of innovative firms seeking to enter the counterpart's market. The FCA’s executive director of strategy and competition, Christopher Woolard, believes the agreement will help regulators ‘support global innovation in Fintech’.
The president of the ECB, Mario Draghi, responded to questions about Bitcoin and FinTech in a meeting with MEPs at the European Parliament. While the session was chiefly devoted to discussion of the ECB’s corporate bond purchase programme, Mr Draghi was asked if he favoured the Chinese approach of banning crypto-currencies or the Japanese approach of regulating them. Mr Draghi said it was not within the ECB’s powers to do either at this stage, and the ECB had no institutional view.
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