Weekly highlights—5 July 2018

Welcome to the weekly Financial Services highlights from the Financial Services team for the week ending 5 July 2018.

Brexit

European Union (Withdrawal) Act 2018 (Commencement and Transitional Provisions) Regulations 2018

SI 2018/808: Various provisions of the European Union (Withdrawal) Act 2018 will come into force in the UK on 4 July 2018. The provisions include the regulation-making power which allows regulations to be made to create exceptions from the general rule, which prevents challenges to retained EU law post-Brexit on the grounds that an EU instrument was invalid. Transitional provisions are also made in relation to certain enactments.

EIOPA on insurers’ duty to inform customers about the impact of the withdrawal of the UK from the EU

The European Insurance and Occupational Pensions Authority (EIOPA) published an opinion addressed to national supervisory authorities about the duty of insurance undertakings and insurance intermediaries to inform customers about the possible impact of the withdrawal of the UK from the EU.

Treasury Committee sets out expectations for publication of Brexit impact assessments

The Treasury Select Committee published three letters on the publication of Brexit impact analysis, addressed to the chancellor of the exchequer, the Financial Conduct Authority (FCA), and the Bank of England (BoE):

HoC Library issues briefing paper on Brexit and financial services

The House of Commons Library published a briefing paper on the UK’s financial services sector and Brexit.

Regulatory architecture

Treasury Committee still concerned with senior levels diversity at Bank of England

The Treasury Committee published its reports on the appointment of Professor Jonathan Haskel to the Monetary Policy Committee (MPC) and Bradley Fried to the chair of the Court of the BoE. It believes that the appointments of both persons meet the ‘requirements of personal independence and professional competence’. However, it also still has concerns regarding the ‘lack of diversity at the senior levels of the BoE’.

Authorisation, approval and supervision

PRA and FCA publish policy statements on extending the SM&CR

The Prudential Regulation Authority (PRA) and the FCA published policy statements on the extension of the Senior Managers and Certification Regime (SM&CR) to insurers and FCA solo-regulated firms. The policy statements set out near-final rules and provide feedback to responses to consultation papers published in 2017.

FCA proposes directory of financial services workers

The FCA is consulting on a new directory to help consumers and firms check the status and history of individuals working in financial services. It would include all those who hold senior manager positions requiring FCA approval and those whose roles require firms to certify that they are fit and proper. This would include those in consumer-facing roles, such as mortgage and investment advisers. Feedback is sought by 5 October 2018.

FCA policy statement on regulated fees and levies 2018/19

The FCA published policy statement PS18/13: FCA regulated fees and levies 2018/19, including feedback on consultation paper CP18/10: FCA Regulated fees and levies: Rates proposals 2018/19, and ‘made rules’. Firms can use the FCA’s online fees calculator to calculate their individual fees based on the final rates in the policy statement. This includes FCA periodic fees and the Financial Ombudsman Service, Money Advice Service, Pension Wise pensions guidance and illegal money lending levy final rates in appendix 1.

PRA policy statement on regulated fees and levies: rates proposals 2018/19

The PRA published a policy statement (PS13/18), providing feedback to responses to consultation paper CP7/18: Regulated fees and levies: rates proposals 2018/19. It sets out the final fee rates and rules to recover the PRA’s annual funding requirement for the financial period 1 March 2018 to 28 February 2019, the ring-fencing implementation fee for the same financial period, and final rules to implement changes to the Fees part of the rulebook.

PSR issues policy statement on regulatory fees

The Payment Systems Regulator (PSR) published policy statement PS18/12: PSR regulatory fees, setting out the new regime that will be in place from 2018/19. Publication of the policy statement marks the end of the PSR’s review of its fee regime, begun in 2017.

ECB issues SREP methodology for LSIs

The European Central Bank (ECB) published SSM LSI SREP Methodology 2018 edition, which sets out a methodology for the supervisory review and evaluation process (SREP) of less significant institutions (LSIs), which has been developed by the ECB and national competent authorities. The methodology is based on the European Banking Authority SREP guidelines and builds on the significant institutions methodology and national SREP methodologies in place.

Prudential requirements

PRA publishes policy statement on large exposures and regulatory reporting

The PRA published a policy statement (PS14/18), providing feedback to responses to the consultation paper CP20/17 ‘Changes to the PRA’s large exposures framework’. It contains updates on the PRA rules on large exposures and regulatory reporting, supervisory statement (SS) 16/13 Large exposures, SS34/15 Guidelines for completing regulatory reports, and a simplified worked example of the application of the large exposures limits at the level of the UK consolidated group. Changes to the rules and expectations will take effect from Friday 29 June 2018.

PRA to integrate systemic risk buffer (SRB) and leverage ratio frameworks

The PRA published consultation paper CP4/18: UK leverage ratio: Applying the framework to systemic ring-fenced bodies and reflecting the systemic risk buffer, which sets out how the PRA proposes to reflect the systemic risk buffer (SRB) framework in the UK leverage ratio framework. Responses are requested by 25 September 2018.

ECON publishes final reports on BRRD and SRM amendments

The European Parliament's Committee on Economic and Monetary Affairs (ECON) published its final reports on the European Commission's proposals to amend the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) Regulation.

The proposals were made by the Commission in November 2016 as part of its larger package of changes to banking legislation. The reports were adopted by ECON on 25 June 2018 and have been tabled for plenary.

ECON adopts final reports on CRD IV and CRR amendments

ECON adopted its final reports on two European Commission proposals to amend the Capital Requirements Directive (CRD IV) and Regulation (CRR).

The proposals were made by the Commission in November 2016 as part of its larger package of changes to banking legislation. The reports, which have been tabled for plenary, recommend a number of amendments in some key areas.

BCBS approves technical amendment to net stable funding ratio

The Basel Committee on Banking Supervision (BCBS) approved a technical amendment which is related to the treatment of extraordinary monetary policy operations in the net stable funding ratio.

Euro Summit announces progress on banking union

Following its meeting on 29 June 2018, the Euro Summit adopted a statement in which it said that the European Commission's proposed package of banking reforms should be adopted by year-end, and work should begin on finalising the European Deposit Insurance Scheme (EDIS). The Summit also agreed to strengthen the European Stability Mechanism (ESM), which will provide the common backstop to the Single Resolution Fund (SRF).

ECB report on recovery plans for significant institutions

The ECB published a report setting out best practices it has identified after analysing three successive cycles of recovery plans. It aims to help significant institutions (SIs) further shape their plans, and clarifies the supervisory experience in relation to certain recovery plan-related requirements that have already been set by existing legislation.

Commission withdraws proposed restriction on proprietary trading

The European Commission announced that it is withdrawing the proposal to stop the largest and most complex banks from engaging in proprietary trading. The proposal built on the recommendations of the Liikanen report, presented in October 2012 by the high-level expert group on reforming the structure of the EU banking sector. But the Commission says its purpose has now been achieved by other means.

Responses to Basel Committee’s consultation on minimum capital requirements for market risk

The BCBS published the responses to its consultation on revisions to the minimum capital requirements for market risk. The consultation concerned proposals to address issues that the Committee had identified in the course of monitoring the implementation and impact of the standard, which was issued in January 2016. The consultation closed on 20 June 2018.

EBA non-objection to Swedish macroprudential risk proposal

The European Banking Authority (EBA) published an Opinion following the notification by Finansinspektionen, the Swedish Financial Supervisory Authority (FSA) of its intention to change the method it currently uses to apply a risk weight floor for Swedish mortgages through Pillar 2 by replacing it with a requirement within the framework of Article 458 of the CRR. The new proposed measure is primarily driven by structural changes in the Swedish banking market and aims at enhancing the resilience of Swedish banks to potential severe downward corrections in residential real estate markets.

PRA issues Regulatory Digest for June 2018

The PRA issued its Regulatory Digest for June 2018. The Digest is aimed at people working in the UK financial services industry and highlights key regulatory news and publications delivered for the month.

Record of FPC’s June 2018 meeting published

The BoE published a record of the Financial Policy Committee (FPC)’s meeting on 19 June 2018.

Risk management and controls

FSB consults on draft cyber lexicon

The Financial Stability Board (FSB) published a draft cyber lexicon for public consultation. It comprises a set of 50 core terms related to cyber security and cyber resilience in the financial sector. The lexicon is intended to support the work of the FSB, standard-setting bodies, authorities and private sector participants, eg financial institutions and international standards organisations. Feedback is sought by 20 August 2018.

Treasury Committee publishes further TSB correspondence

The Treasury Committee published further correspondence relating to TSB’s IT migration problems. In one of the letters, Mark V Brown, the general secretary of the trade union TBU—which represents over 4,000 TSB staff—said the ‘fiasco’ could have been avoided if TSB bosses had listened to concerns raised by those working on the project. In another letter, the TSB chair Richard Meddings sets out further details of the bank’s response.

Court of Justice: Personal identification details to be removed from requests for preliminary rulings

From 1 July 2018, the Court of Justice will replace, in all its public documents, the name of natural persons involved in requests for a preliminary ruling by initials. The change follows the coming into force of the new General Data Protection Regulation and aims to ensure the protection of the data of natural persons, while guaranteeing that citizens are informed and have the right to open courts. Any additional element likely to permit identification of the persons concerned will also be removed.

Financial crime

FATF and MENAFATF joint plenary meeting in Paris, 27-29 June 2018

The Financial Action Task Force (FATF) and the Middle East and North Africa Region FATF (MENAFATF) held a joint plenary meeting in Paris on 27-29 June 2018, co-chaired by FATF President Santiago Otamendi of Argentina and MENAFATF President Abdul Hafiz Mansour (of Lebanon).

FCA conduct requirements

FCA's Handbook Notice 56 includes final benchmark rules

The FCA published Handbook Notice No. 56, which includes changes to the FCA Handbook made by the FCA board on 24 May and 28 June 2018, together with feedback on consultation papers that would not have a separate policy statement. The changes include new rules to implement the EU Benchmarks Regulation (BMR) and the Payment Services Regulations 2017​.

Enforcement and redress

FCA consults on clarification of PPI commission disclosure rules

The FCA issued a consultation paper on new guidance about the handling of certain regular premium payment protection insurance (PPI) complaints. The FCA’s proposed guidance deals with an uncertainty that has emerged since the rules were made following the Supreme Court judgment in Plevin v Paragon Personal Finance Ltd [2017] UKSC 23. The guidance clarifies that firms should assess commission disclosures not only at the point of sale but on an on-going basis, and that this should be assessed under the FCA’s general complaint handling rule. Feedback is sought by 4 September 2018.

FCA to pay compensation for clone scam which took advantage of ‘woefully inaccurate’ Financial Services Register

The Complaints Commissioner issued the final report on complaint number FCA00459, which was made by an investor who purchased bonds from a company purporting to be a credit union in 2016.

Markets and trading

EBA updates ITS on benchmarking of internal models

The EBA published an update to its implementing technical standards (ITS) on benchmarking of internal approaches. The ITS include all benchmarking portfolios that will be used for the 2019 benchmarking exercise.

PRA updates PS31/17 to include final benchmarking changes

The PRA updated policy statement PS31/17 to include the EU Benchmarking Regulations Instrument 2018, now that the legislative framework for the PRA to implement the EU Benchmark Regulation is in place. The instrument comes into force on 29 June 2018.

European Parliament report on regulatory powers for CCPs

The European Parliament published its report on the draft decision of the European Parliament and of the Council amending Article 22 of the Statute of the European System of Central Banks and of the ECB (10850/2017—ECB/2017/18—C8-0228/2017—2017/0810(COD)). The report makes various amends to the text proposed by the ECB.

ESMA issues statement on the clearing obligation for pension scheme arrangements

The European Securities and Markets Authority (ESMA) issued a statement on the clearing obligation for pension scheme arrangements (PSAs). The statement seeks to limit, as far as possible, disruption to certain PSAs that may face potential challenges clearing their over-the-counter (OTC) derivative contracts on 17 August 2018, when the current, and final, exemption from the clearing obligation under the European Market Infrastructure Regulation (EMIR) expires.

ESMA executive director on LEIs and MiFID II

ESMA published a speech by executive director Verena Ross, on the implementation of the legal entity identifier (LEI) rules in Europe, with a focus on the new requirements envisaged by MiFID II. Ms Ross set out the objectives of MiFID II and why LEIs are key, ESMA’s assessment of the first months of implementation, and the next steps.

EMMI publishes feedback on Euribor hybrid methodology consultation

The European Money Markets Institute (EMMI) published feedback on the responses received to its first consultation paper on a hybrid methodology for Euribor. The consultation period closed on 15 May 2018, and EMMI says the responses showed ‘broad support’ for the proposals. Some of the changes foreseen aim to simplify the current Euribor publication process and will be implemented as of 3 December 2018.

ECB announces methodology for calculating euro short-term rate (ESTER)

The governing council of the ECB decided on the final methodology for calculating the euro short-term rate (ESTER)—an overnight unsecured rate based entirely on money market statistical reporting (MMSR), which will start to be published by October 2019.

Commission issues correction to impact assessment on proposal for regulation on SBBS

The European Commission issued a correction to the first version of its impact assessment concerning its proposal for a regulation on sovereign bond-backed securities (SBBS). The proposed text for the regulation, together with the first version of the impact assessment, were published by the Commission on 24 May 2018.

Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018

Provisions are made introducing consequential amendments to the Financial Services and Markets Act 2000  to implement part of Regulation (EU) 2017/1129 (Prospectus Regulation). Among other things, the new provisions make minor amendments to the UK transposition of Directive 2014/65/EU on markets in financial instruments (recast) (MiFID II), particularly relating to requirements for publishing a prospectus. These changes come into effect on 21 July 2018.

ISDA finds US market participants consistently clear more OTC derivatives than required by CFTC rules

The International Swaps and Derivatives Association (ISDA) published a research note which analyses the volume of cleared derivatives in the US to determine the impact of incentives which exist in addition to regulatory clearing requirements, such as netting and capital benefits, and the rollout of margining requirements for non-cleared derivatives. The paper finds that market participants consistently clear more transactions than required under the Commodity Futures Trading Commission (CFTC)'s clearing rules.

ESMA publishes feedback to securitisation repositories consultations

ESMA published the responses received to its consultations on securitisation repositories.

ISDA CEO on benchmark reform

ISDA published an article in its derivatiViews series on benchmark reform by its CEO Scott O'Malia, who says that reforms to interest rate benchmarks will have a big impact across financial markets and that making sure the entire market appreciates the scale of the issue and takes early action is a priority.

ESMA publishes annual report for 2017

ESMA published its annual report for 2017. ESMA chair Steven Maijoor said the year was ‘defined by the preparation for MiFID II/MiFIR’, with ESMA prioritising preparing markets and national competent authorities to ensure convergent supervision.

ISDA issues its review for June 2018

ISDA issued its review for June 2018. The review is a compendium of links to new documents, research papers, press releases and comment letters from ISDA.

Investment funds and wealth management

AIC says FCA should take urgent action to prevent consumers being misled by investment company KIDs

The Association of Investment Companies (AIC) published research which it says demonstrates why consumers are being misled by key information documents (KIDs) issued under the PRIIPs Regulation and why the FCA needs to act now to protect consumers.

Industry bodies agree framework for pension and investment transfers

The Transfers and Reregistration Industry Group (TRIG), which comprises representatives from 10 major industry trade bodies, published a framework for firms to work to in delivering fast, efficient transfers of investment products and assets between different financial businesses and pension schemes. TRIG also published a request for proposal for organisations interested in participating in the ongoing governance of the framework. The deadline for submissions is 31 August 2018.

ESMA hosts workshop for national supervisors on closet indexing

ESMA held a supervisors' workshop for national competent authorities to promote supervisory convergence in national competent authorities supervision of 'closet indexing'. This is the practice whereby asset managers claim to manage their funds in an active manner whilst in fact staying very close to a benchmark and charging management fees in line with actively managed funds.

Consumer credit, mortgage and home finance

Commission announces upcoming evaluation of the Consumer Credit Directive

The European Commission announced that it intends to carry out a full-fledged evaluation of the functioning of the Consumer Credit Directive (Directive 2008/48/EC), including whether its rules are fit for purpose in light of recent changes to the market. The evaluation is planned to start in Q3 2018, with completion scheduled for Q4 2019. The deadline for feedback on the Commission's roadmap is 27 July 2018.

Insurance and pensions

PRA and FCA publish policy statements on extending the SM&CR

The Prudential Regulation Authority (PRA) and the FCA published policy statements on the extension of the Senior Managers and Certification Regime (SM&CR) to insurers and FCA solo-regulated firms. The policy statements set out near-final rules and provide feedback to responses to consultation papers published in 2017.

FCA publishes final findings of its retirement outcomes review, and acts to protect consumers' pension pots

The FCA published the final findings of its retirement outcomes review, which looks at how the retirement income market is evolving since the pension freedoms were introduced in April 2015. As a result, the regulator has published Occupational Paper No. 38, which considers ways in which the FCA could encourage those approaching retirement to engage with the free government guidance available to them and with their pension provider. The FCA also launched a consultation on a package of measures designed to protect consumers, improve engagement and promote competition in the retirement income market.

EIOPA submits draft IDD RTS for professional indemnity insurance and for financial capacity of intermediaries

EIOPA submitted, as required by Article 10(7) of the Insurance Distribution Directive (Directive (EU) 2016/97), the draft regulatory technical standards (RTS) to the European Commission adapting the base euro amounts for professional indemnity insurance and financial capacity of insurance intermediaries

PRA consults on equity release mortgage portfolios

The PRA published Consultation Paper CP13/18, setting out further proposed detail on the PRA’s expectations in respect of firms investing in equity release mortgage (ERM) portfolios, as set out in chapter 3 of Supervisory Statement 3/17. Feedback is sought by 30 September 2018.

PRA provides updates on Solvency II consultations

The PRA updated its Solvency II webpage to provide updates on its proposed changes in relation to minor model change reporting and proposed changes to the reporting format, which were consulted on in consultation papers CP27/17 and CP11/18, respectively.

IAIS consults on governance, cybersecurity and revised ICPs

The International Association of Insurance Supervisors (IAIS) is consulting on application papers on the composition and the role of the board and on the supervision of insurer cyber security. Feedback is sought by 13 August 2018. It also launched a consultation on revised ICPs 6 (changes in control and portfolio transfers) and 20 (public disclosure), which closes on 28 August 2018.

RICS introduces new rules for regulating firms’ insurance distribution activities

The Royal Institute for Chartered Surveyors (RICS) published new rules for its Designated Professional Body (DPB) scheme, to comply with new requirements in the EU’s Insurance Distribution Directive and the Markets in Financial Instruments Directive. The DPB scheme permits RICS to regulate the general insurance distribution activities of its firms, for the FCA.

Survey shows Solvency II brings benefits but deters long-term business

European insurance federation Insurance Europe (IE) published a press release in which it states that a survey of insurers from across Europe has shown that over three quarters of the respondents have seen a positive effect from the EU's 2016 Solvency II regulation on their risk management and governance practices, and on their management of assets and liabilities.

European Parliament publishes opinion on the proposed PEPP regulation

The European Parliament published an opinion of the Committee on the Internal Market and Consumer Protection (the Committee) for ECON on the proposal for a regulation of the European Parliament and of the Council on a pan-European Personal Pension Product (PEPP). In the opinion, the Committee noted that, at present, it is not possible to take a personal pension product into another Member State or arrange a pension product in another Member State to gain a fiscal advantage. It therefore welcomed the Commission's initiative for a PEPP and the proposal to encourage Europe's citizens to make arrangements for their private pensions.

Payment services and systems

Consolidation of UK retail payment systems now complete

The PSR confirmed that the New Payment Systems Operator (NPSO) took over the running and managing of the cheque paper and cheque image clearing systems on 1 July 2018. The NPSO has now completed the consolidation of the UK's retail interbank payment systems, having taken responsibility for the systems run by Bacs Payment Schemes Limited (Bacs) and Faster Payments Scheme Limited (FPS) on 1 May 2018.

EPC updates mobile contactless card payments guidelines

The European Payments Council (EPC) updated the mobile contactless card payments (MCPs) interoperability implementation guidelines. Last published in 2011, the guidelines provide an insight into MCPs through MCP use cases, description of MCP transaction aspects and further technical and security guidelines for the different components of a mobile contactless payment solution.

John Glen responds to European Scrutiny Committee on cross-border payments

The Department for Exiting the EU published a letter dated 22 June 2018 from the economic secretary to the Treasury, John Glen MP, to the chair of the European Scrutiny Committee, Sir William Cash MP. The letter responds to questions from the Committee on the European Commission's proposal for a regulation amending Rgulation (EC) 924/2009 as regards certain charges on cross-border payments in the EU and currency conversion charges.

Fintech and virtual currencies

Fresh round of firms enter FCA sandbox

The FCA announced that 29 firms were successful in their applications to begin testing in the fourth cohort of the regulatory sandbox. The sandbox offers firms the chance to test innovative products, services or business models in a live market environment, while ensuring that appropriate protections are in place. The application window for cohort 5 of the sandbox will open later in 2018.

EBA highlights operational risks of FinTech

The EBA published thematic reports on the impact of FinTech on incumbent credit institutions' business models and the prudential risks and opportunities arising for institutions from FinTech. The reports are the first products of the EBA's FinTech Roadmap and aim to raise awareness within the supervisory community and the industry on potential prudential risks and opportunities from current and potential FinTech applications and increase understanding of the main trends that could impact incumbents' business models and pose potential challenges to their sustainability.

PRA publishes Dear CEO letter on firms' existing or planned exposure to crypto-assets

The CEO of the PRA, Sam Woods, wrote to the CEOs of PRA-authorised firms to remind them of the relevant obligations under PRA rules, and to communicate the PRA's expectations regarding firms' exposure to crypto-assets.

Dates for your diary

Date Subject Event
6 July 2018 Risk management and controls Deadline for responses to FSB consultation on recommendations for consistent national reporting of data on the use of compensation tools to address misconduct risk.
9 July 2018 Authorisation, approval and supervision Deadline for responses to FCA discussion paper ‘DP18/3: Ex post impact evaluation framework’.
11 July 2018 Solvency II Deadline for responses to PRA consultation papers:

12 July 2018 Markets in Financial Instruments Directive Deadline for responses to the Personal Investment Management and Financial Advice Association’s (PIMFA) proposed MiFID II feedback template.
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