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Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 30 November 2017.
The European Commission made two legislative proposals to amend the founding Regulations of the European Medicines Agency (EMA) and the European Banking Authority (EBA). This follows an agreement by the EU27 leaders to move the EMA and the EBA from London to Amsterdam and Paris, respectively. The proposals are strictly limited to confirming the new seats of the agencies in the two founding Regulations.
The House of Commons European Scrutiny Committee produced a report on Brexit and the UK’s financial services sector, interim arrangements, and the possibility of a ‘cliff-edge’ departure. The report also discusses the status of EU legislative proposals on resolution and recovery, and capital requirements.
On 29 November 2017, the House of Lords EU Financial Affairs Sub-Committee heard evidence from the Financial Conduct Authority (FCA)’s CEO, Andrew Bailey and the chair of Barclays, John McFarlane.
The London Market Group (LMG) published a proposal for the UK government that sets out a mechanism that would enable the EU and UK to maintain access to their insurance markets and control over their respective regulatory systems, once the UK leaves the EU.
The FCA published the minutes of a board meeting held in London on 18 and 19 October 2017. The board discussed the Delivering Effective Supervision project, with its vision of pre-emptive and collaborative supervision using proven project methodology, milestones and deadlines, and noted the importance of understanding individual firms’ culture, governance arrangements and business models, as this is the backdrop to many of the issues which arise in firms.
Benoît Cœuré, a member of the executive board of the European Central Bank (ECB), said that central banks have made significant progress in integrating big data into their policy analysis and decision-making. However, speaking at a conference on 'Economic and financial regulation in the era of big data' in Paris, Mr Cœuré warned that the use of such data presents operational challenges, as well as analytical, legal and ethical concerns.
The Chancellor of the Exchequer, Philip Hammond, replied to a letter from the chair of the Treasury Select Committee, Nicky Morgan MP, in which Ms Morgan sought information about diversity amongst senior appointments made by the Treasury to the Bank of England. Mr Hammond said that out of six appointments made since 2016, three were male and three female, but he acknowledged ‘the broader challenge of improving diversity at all stages of the process for senior appointments’.
The chair of the Treasury Select Committee, Nicky Morgan MP, said Philip Hammond’s Autumn 2017 Budget was ‘a common-sense approach, with a welcome emphasis on issues beyond Brexit’. The Committee will begin scrutiny of the measures contained in the Budget shortly, with a report to be published in early 2018.
The Right Honourable the Lord Burnett of Maldon delivered a speech at the launch of TheCityUK's Legal Services Report 2017. Lord Burnett highlighted several legal innovations mentioned in the report, including the introduction of the financial list, the financial markets test case scheme and the shorter and flexible trials pilot scheme. He also welcomed the establishment of Business and Property Courts, which bring together judicial expertise in finance, business and markets, property, intellectual property, and technology and construction law.
The Financial Stability Board (FSB)’s regional consultative group (RCG) for Asia met in Sydney, where it discussed vulnerabilities in the global financial system, including complacency in global markets about risks and their potential impact on Asia, and the decline of correspondent banking. Discussing FinTech, e-payments and the regulation of virtual currencies, the RCG noted the need to balance financial innovation and financial stability through risk-focused, proportionate regulatory approaches.
The European Commission published a report (COM (2017) 661 final) to the European Parliament and the Council of the EU on the review of Articles 13 (Group Resolution Plan), 18 (Impediment to resolvability: group treatment) and 45 (MREL) as regards the EBA’s powers to conduct binding mediation to take account of future developments in financial services law.
The EBA decided to formally repeal its December 2013 guidelines on the criteria for identifying retail deposits subject to different outflows for the purpose of liquidity reporting under the Capital Requirements Regulation (Regulation (EU) 575/2013) (CRR). The guidelines have been superseded by the Liquidity Coverage Ratio (LCR) Delegated Regulation ((EU) 2016/322) (which became applicable in September 2016) and are no longer applicable for liquidity reporting purposes.
Commission Delegated Regulation (EU) 2017/2188 of 11 August 2017 amending the CRR as regards the waiver on own funds requirements for certain covered bonds was published in the Official Journal of the EU. The regulation shall enter into force on the twentieth day following its publication. It shall apply from 1 January 2018.
The Bank of England (BoE) published its November 2017 financial stability report, focusing on the results of the annual stress test, and concluding that the UK financial system is resilient to a ‘very broad range of risks’, that banks are strong enough to keep lending in a scenario more severe than the financial crisis, and that they are three times stronger than they were ten years ago. The stress test included deep recessions in the UK and abroad, large falls in asset prices, and large fines for past misconduct. The BoE also announced that it is raising the UK countercyclical capital buffer (CCyB) rate from 0.5% to 1% to lock in banks’ resilience.
The EBA published its risks and vulnerabilities report, together with the 2017 EU-wide transparency exercise, which provides key data for 132 banks across the EU. The data shows improved resilience in the EU banking sector, in a benign macroeconomic and financial environment, but NPLs, cybersecurity, and the long-term sustainability of current business models are areas of concern.
In its biannual Financial Stability Review, the ECB found that systemic stress indicators for the euro area have remained low over the past six months. Better growth prospects as well as lower fiscal and external imbalances contributed to reduced systemic stress indicators for the euro area.
The ECB published the findings of a thematic review on International Financial Reporting Standard (IFRS) 9, assessing the preparedness of institutions for implementing the standard. According to the ECB, banks in the euro area are working intensively to implement IFRS 9, which enters into force on 1 January 2018. The report also outlines key supervisory expectations for the ongoing implementation and application of IFRS 9.
The chair of the supervisory board of the ECB, Danièle Nouy, said that euro area banks need to adapt to a complex and changing environment, while acting in a sustainable manner. Speaking at the 2017 Handelsblatt conference on European banking regulation in Frankfurt, Ms Nouy called for more consolidation of the European banking sector and said that European banks must do more to tackle the problem of non-performing loans (NPLs).
The European Union Agency for Network and Information Security (ENISA) warned that data protection mechanisms in the upcoming General Data Protection Regulation, 2016/679/EU (GDPR), should not only focus on whether measures are in place or not, but also on to what extent such measures are sufficient in ensuring compliance with the regulation’s provisions. ENISA’s latest report, in which this finding appears, was created to clarify the terminology of certification and other relevant concepts within GDPR certification, and give recommendations about certification for the future.
The FCA published a letter dated 31 August 2017 that it sent to remuneration committee (RemCo) chairs outlining the FCA's findings and observations from the 2016/17 annual remuneration round. The letter also provides information regarding the FCA's approach to the supervision of remuneration for 2017/18.
At the third Counter-Terrorism Financing (CTF) Summit held in Kuala Lumpur between 20-23 November 2017, an alliance of Asia-Pacific countries agreed to build an information hub to share financial crime intelligence to combat the terrorism financing risks posing a threat to the region.
In a speech given at the 3rd Joint Regional Counter-Terrorism Financing Summit 2017, Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim said that persons converting cryptocurrencies into fiat money currencies will come under Malaysia's anti-money laundering law.
The FCA issued a statement of objection to four asset management firms, namely Artemis Investment Management LLP (Artemis), Hargreave Hale Ltd (Hargreave Hale), Newton Investment Management Limited (Newton) and River & Mercantile Asset Management LLP (River & Mercantile), alleging that the four firms have breached competition law by sharing sensitive information in relation to prices for initial public offerings (IPOs).
The FCA published the final version of its summary of the independent skilled person’s review of RBS’s treatment of small and medium-sized enterprise customers transferred to its Global Restructuring Group (GRG). This version contains a number of drafting changes as recommended by the specialist advisors to the Treasury Select Committee, who were asked by the committee to assess whether the FCA’s interim summary was a fair and balanced account of the findings of the skilled person’s report.
Commission Delegated Regulation (EU) 2017/2194 of 14 August 2017 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council on markets in financial instruments (MiFIR) with regard to package orders was published in the Official Journal of the EU.
The European Securities and Markets Authority (ESMA) published the results of its peer review on the guidelines on certain aspects of the compliance function under the Markets in Financial Instruments Directive 2004/39/EC (MiFID). The guidelines cover national competent authority (NCA) supervision of investment firms’ compliance functions, and particularly how those functions carry out risk assessments, monitor compliance obligations, report to senior management and fulfil their advisory role. The review found a high level of compliance by the majority of EEA NCAs, although significant weaknesses were identified in the supervisory approaches of Cyprus, Iceland and the Netherlands.
The Council of the EU issued a compromise text on the proposal for a Regulation amending Regulation (EU) No 649/2012 (EMIR).
The ECB is seeking views on the high-level features of a new unsecured overnight interest rate. The consultation document provides an overview of the factors supporting the ECB’s decision to publish an unsecured overnight rate and aims to collect stakeholders’ feedback on the design features and timing of publication of the new rate. Responses are sought by 12 January 2018.
The ECB launched a call for expressions of interest to participate in the working group on Euro risk-free rates for the euro area. This call is also being issued on behalf of the Belgian Financial Services and Markets Authority (FSMA), ESMA and the European Commission. Financial sector representatives and non-banking institutions or associations will be invited to join or contribute to the new working group. The ECB has also published the working group's terms of reference, and its work will be guided by them.
The governing council of the ECB adopted Decision ECB/2017/37 amending Decision ECB/2014/40 on the implementation of the third covered bond purchase programme (CBPP3). The amendment, which enters into force on 1 February 2018, reflects the decision adopted by the governing council on 4 October 2017 to exclude conditional pass-through covered bonds from purchases under the CBPP3 if they are issued by an entity with a first-best issuer rating below Credit Quality Step 3.
The European Supervisory Authorities (ESAs) released a statement saying that in light of challenges for certain counterparties (CCPs) to exchange variation margin for physically-settled FX forwards by 3 January 2018, they are conducting a review of the requirements. However, any changes to the EU rules will need to be implemented through legislation. In the meantime, they encourage national supervisors to enforce the requirements in a proportionate manner.
The Futures Industry Association (FIA) welcomed the European Commission’s ongoing efforts to deliver positive equivalence determinations for jurisdictions where third-country CCPs, which provide services to EU firms, are established. The FIA also proposes an extension of transitional provisions under the CRR, saying it is critical to ensure continuous access to these markets whilst outstanding equivalence decisions are made.
The FCA published a further set of position limits on commodity derivative contracts which are traded on UK trading venues. The list includes bespoke and de minimis commodity derivative contracts which are aggregated for position limit purposes and their venue product codes (VPCs). The limits will apply from 3 January 2018 to positions held in the spot month and the other months' periods for each commodity derivative.
The BoE and the FCA issued a press release announcing the next phase of work with market participants on Libor transition. From January 2018, the market-led working group on sterling risk-free rates will have an extended mandate and broader participation.
The FCA announced that all 20 panel banks will continue to support the Libor benchmark until 2021, when a transition will be made to alternative rates. Based on this support, the FCA now expects the focus to shift towards developing alternative rates and working towards a smooth transition.
Fifteen central banks in the European System of Central Banks (ESCB), including the ECB, simultaneously issued Statements of Commitment to the Foreign Exchange Global Code of Conduct. The remaining ESCB central banks will do so in 2018. The ECB says the statements demonstrate commitment to adhering to the principles of the Code when acting as foreign exchange market participants and ensuring that their internal practices and processes are aligned with the principles of the Code.
ESMA registered NEX Abide Trade Repository AB as a trade repository (TR) under EMIR, with effect from 24 November 2017. NEX Abide Trade Repository AB is based in Sweden and covers the following derivative asset classes: commodities, credit, foreign exchange, equities and interest rates.
ESMA published two sets of Central Securities Depositories (CSD) Regulation compliance tables. The tables cover the guidelines on participant default rules and procedures under Regulation (EU) No 909/2014 (ESMA70-151-294), and the guidelines on CSD access to the trading feeds of central counterparties and trading venues (ESMA70-151-298). All Member States, territories and EEA/EFTA states comply or intend to comply with each set of guidelines.
The governor of the BoE, Mark Carney, delivered a speech assessing the progress of the Fair and Effective Markets Review (FEMR), two and a half years after it set out a series of ‘ambitious’ recommendations to restore confidence in fixed income, currency and commodities (FICC) markets. The review was a response to the series of post-crisis scandals in FICC markets, where misconduct was revealed on a scale that, said Mr Carney, impaired their ability to function fairly and effectively. Mr Carney said the FICC Market Standards Board (FMSB) had already made an important contribution in establishing common standards of market practice that are well understood, widely followed and dynamically relevant.
The FSB published responses to its consultation on proposed governance arrangements for the unique product identifier (UPI). The consultation was launched in October 2017 and closed on 17 November 2017. The FSB expects to publish conclusions from the consultation in 2018.
The International Organization of Securities Commissions (IOSCO) published a report which sets out good practices on the voluntary termination process for investment funds, ie collective investment schemes and other fund structures such as commodity, real estate and hedge funds.
IOSCO published the final version of its report on the fourth biannual hedge funds survey. IOSCO says the surveys help it gain a better insight into the global hedge fund industry, promote global co-operation on possible risks in the sector, and provide a forum for the discussion of potential regulatory options or recommendations if required. This one draws on data as of 30 September 2016.
The European Commission published feedback received on its inception impact assessment on a proposal for an EU framework on crowd and peer-to-peer (P2P) finance, issued in October 2017. Feedback was provided by 41 bodies, including HM Treasury and the UK Crowdfunding Association.
The defendant had acted in breach of mandate over nine monthly periods, as the actual risk profile of the claimant's portfolio had exceeded that agreed. The Queen's Bench Division further held that the defendant had also breached its contractual obligation to operate a stop loss policy under which it was required automatically sell any investment if that investment made a loss of 5%. The judgment is available at:  EWHC 2999 (QB).
The FCA published a report on the compliance function in wholesale banks. The report summarises what the FCA was told during a review of the compliance function in wholesale banks, as well as making some of its own observations.
SI 2017/1144: a change is made to section 1B(3)(a) of the Credit Unions Act 1979 to increase the number of potential members of a credit union for the locality common bond from two million to three million. This change is effective from 6 April 2018.
The Law Commission published its final draft of the Goods Mortgages Bill, which is intended to replace the Bills of Sale Acts to govern how individuals use existing goods as security. The Commission recommends the Acts be repealed in their entirety, and recommends among other things that a goods mortgage should be a ‘charge’, rather than a transfer of ownership.
Two regulations amending and correcting implementing technical standards (ITS) relating to Directive 2009/138/EC of the European Parliament and of the Council (Solvency II) were published in the Official Journal of the EU:
Commission Implementing Regulation (EU) 2017/2190 of 24 November 2017 amending and correcting Implementing Regulation (EU) 2015/2452 laying down ITS with regard to the procedures, formats and templates of the solvency and financial condition report according to Solvency II
The International Association of Insurance Supervisors (IAIS) published an application paper on ‘Product oversight in inclusive insurance’, containing guidance for supervisors, regulators and policymakers when considering, designing and implementing regulations and supervisory practices on product oversight in inclusive insurance markets. The IAIS says effective oversight of products which are offered to customers is fundamental to maintaining fair, safe and stable insurance markets and a key responsibility and activity of the insurance supervisor.
The IAIS extended the deadline for responding to its public consultation on the draft revised Insurance Core Principles (ICPs) 8, 15 and 16, the ComFrame material integrated with these ICPs, and the proposed definitions of enterprise risk management-related terms. The consultation was launched on 8 November 2017.
The FCA published a consumer warning stating that it has stopped Larksway Investments Limited (Larksway) from providing insurance brokerage services to customers. This means Larksway cannot arrange insurance for customers and cannot provide insurance services to existing customers.
The IAIS published the November edition of its newsletter following its annual conference in Kuala Lumpur. This edition touches on the IAIS's projects to further promote a more stable global financial system.
EIOPA announced that Kathleen Köhn has been elected by the EIOPA board of supervisors as chair of EIOPA's InsurTech task force. Ms Köhn is a senior officer in the insurance and pension fund supervision department at the German Federal Financial Supervisory Authority.
The ECB published its 2016 Eurosystem oversight report. The Eurosystem comprises the ECB and the national central banks (NCBs) of those countries that have adopted the euro. The report summarises the Eurosystem's work in pursuing the conduct of oversight, as one of its basic functions, to promote the safety and efficiency of payment, clearing and settlement systems, with a particular focus on the safety (resilience) aspect at both euro area level and beyond. The Eurosystem also carried out oversight of payment instruments, as their usage requires a high degree of safety and efficiency to maintain confidence in the euro and promote an efficient economy.
The European Commission adopted a Delegated Regulation supplementing the revised Payment Services Directive (2015/2366/EU) (PSD2) with regulatory technical standards (RTS) for strong customer authentication and common and secure open standards of communication.
A European Commission report on the application of the Single Euro Payments Area Regulation (SEPA) concluded that it is being correctly applied across the EU and there is currently no need for a follow-up legislative proposal. The report does, however, identify IBAN discrimination by payees as an area to be ‘closely observed’.
The chair of the Treasury Select Committee, Nicky Morgan MP, wrote to the chair of LINK, the cash machine network, seeking assurances that the proposed 20% reduction of the interchange fee, which funds free-to-use ATMs, will preserve the existing geographic spread of ATMs, and will have no negative impact on financial inclusion.
The director of retail banking supervision at the FCA, Karina McTeague delivered a speech on retail banking, payment systems and PSD2. Speaking at the Westminster Business Forum on retail banking and payments, Ms McTeague said the FCA is working with HM Treasury, the EBA and the Open Banking Implementation Entity to update the existing regulatory regime for PSD2, and is currently in the evidence-gathering stage of the strategic review of retail banking.
The FCA published a speech given by its executive director of strategy and competition, Christopher Woolard, at the Future of Retail Banking 2017 conference. The speech focused on PSD2 and the Open Banking standard on data sharing, which together will allow big data and financial services to come together for the first time in the retail space, and the regulator's ambitions for retail banking in this changing environment.
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