1 | ARTHUR COX FINANCIAL REGULATORY Group Briefing RegBrief, July/August 2015 RECENT BRIEFINGS OF INTEREST Some key regulatory developments have been the subject of specific Arthur Cox briefings over the last two months, links to which are as follows: BRIEFING TOPIC LINK TO BRIEFING Bank Recovery and Resolution Directive – FAQs Link to Briefing Central Bank updates Q&As on Shanghai-Hong Kong Stock Connect, AIFMD, UCITS and Directors’ Time Commitments Link to Briefing Credit Servicing is now a regulated business Link to Briefing ESMA advice on extension of AIFMD passport to Non-EU AIFMs and AIFs Link to Briefing ESMA delays opinion on the extension of the AIFMD passport to non-EU entities and publishes update to AIFMD Q&A Link to Briefing ESMA issues consultation on UCITS V remuneration Link to Briefing European Long-Term Investment Funds Link to Briefing Investor Monies – Revised Regulations and Guidelines Link to Briefing New Court review process available for rejected personal insolvency proposals Link to Briefing Reminder for Investment Firms: Client Assets Key Information Document required from 1 October 2015 Link to Briefing KEY CONTACTS For further information please speak to your usual Arthur Cox contact or one of the following lawyers: ORLA O’CONNOR PARTNER +353 1 618 0521 firstname.lastname@example.org ROBERT CAIN PARTNER +353 1 618 1146 email@example.com This document contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate. 2 | ARTHUR COX FINANCIAL REGULATORY REGBRIEF, JULY/AUGUST 2015 Other key legal and regulatory developments during the last two months are summarised below: ANTI-MONEY LAUNDERING » Virtual currencies: On 26 June 2015, the Financial Action Task Force (FATF) adopted Guidance for a Risk-Based Approach to Virtual Currencies, setting out how specific FATF Recommendations should apply to convertible virtual currency exchangers in the context of virtual currency payment products and services, and identifying antimoney laundering (AML) and counter terrorist financing (CTF) measures that could be required. It also identifies obstacles to applying mitigating measures. » Crowdfunding: On 1 July 2015, the European Securities and Markets Authority (ESMA) published Questions & Answersintended to promote common supervisory approaches between national competent authorities when applying AML and CTF rules to investment-based crowdfunding platforms. While some investmentbased crowdfunding platforms are automatically subject to the Third Anti-Money Laundering Directive (Directive 2005/60/EC) by virtue of being regulated under the Markets in Financial Instruments Directive (MiFID) (Directive 2004/39/EC), others are not (perhaps being regulated under different EU rules, domestic legislation or not at all). The ESMA Questions & Answers are aimed at platforms not regulated under MiFID. CSD REGULATION » Buy-in process: On 30 June 2015, ESMA issued a Consultation Paper on the operation of the buy-in process under the central securities depositaries regulation (Regulation (EU) 909/2014) (the CSD Regulation) whereby, when a failing participant does not deliver the financial instruments referred to in Article 5(1) of the CSD Regulation to the receiving participant within 4 business days after the intended settlement date, a process is initiated whereby those instruments will be available for settlement and delivered to the receiving participant within an appropriate time-frame. The consultation closed on 6 August 2015 and final draft regulatory technical standards (RTS) are now awaited. » Penalties for settlement fails: On 5 August 2015, ESMA published its final Technical Advice to the European Commission (the Commission) on suggested content for Level 2 measures dealing with penalties for settlement fails (the CSD Regulation provides for a daily cash penalty to be applied for failed settlement instructions) and the substantial importance of a central securities depositary (CSD) (the CSD Regulation requires home and host competent authorities to put in place formal cooperation arrangements for the supervision of a cross-border CSD where its activities are “of substantial importance for the functioning of the securities markets and the protection of the investors” in the host Member State). CONSUMER CREDIT ACT CHARGES » Bureaux de Change and Money Transmission Businesses:The Central Bank of Ireland (the CBI) has updated its Information on the Charge Approval Process for bureaux de change and money transmission businesses under Section 149A of the Consumer Credit Act 1995 (as amended). COST OF FUNDING FINANCIAL REGULATION » New consultation on moving to full industry funding: On 3 July 2015, the Department of Finance and the CBI published a Joint Consultation Paper on funding the cost of financial regulation in Ireland with the aim of moving from partial to full industry funding. Among other matters, the Consultation Paper seeks views on whether interested parties feel that it is appropriate for taxpayers to continue to fund a significant proportion of the cost of financial regulation activity, whether industry should instead be required to fully fund the cost of financial regulation activity, whether a move to full funding should commence in 2016 and whether that move should take place in a single step. The consultation closes on 25 September 2015. CRD IV » Levels of banking group supervision: The Commission was required under CRD IV (Regulation (EU) 575/2013 (the CRR) and Directive 2013/36/EU) to report on the appropriateness or otherwise of the two levels at which a banking group can be supervised i.e. on a consolidated basis, and at an individual level. In its Report dated 5 August 2015, the Commission concluded that amendments at this time to CRD IV to deal with this topic are not necessary and it wants to reflect further on the matter. » Supervisory reporting: Commission Implementing Regulation (EU) 1278/2015 was published in the Official Journal on 31 July 2015, but applied from 1 June 2015. It sets out implementing technical standards (ITS) for the supervisory reporting by institutions, and includes definitions, instructions and templates. » Recent consultations: Recent European consultations relating to CRD IV include: » a 6 July 2015 Consultation Paperby the European BankingAuthority (EBA) on draft RTS dealing with conditions that national competent authorities should take into account when tightening capital requirements by setting higher risk weights or higher minimum loss given default values for mortgage exposures under Articles 124 and 164 of the CRR; 3 | ARTHUR COX FINANCIAL REGULATORY REGBRIEF, JULY/AUGUST 2015 » a 15 July 2015 consultation (which can be viewed at the consultation webpage) by the Commission on how CRD IV is working in practice, in particular whether it has affected the capital levels held by banks, whether its requirements are proportionate to the risks that it seeks to mitigate and whether any of the CRD IV rules could be simplified without compromising CRD IV’s objectives; and » a 5 August 2015 Consultation Paper on procedures for excluding transactions with nonfinancial counterparties (NFCs) established in a third country from the own funds requirement for credit valuation adjustment risk. The proposed RTS align the treatment of NFCs established in a third country with the treatment of EU NFCs. » Assessing the suitability of members of management and key function holders:In November 2012, the EBA had issuedGuidelines on the assessment of the suitability of members of the management body and key function holders (the 2012 Guidelines) under the old Banking Consolidation Directive (Directive 2006/48/EC). On 22 July 2015, it published its June 2015 Peer Review Report in which it noted that the 2012 Guidelines had not led to convergent supervisory practices among the 28 EU Member States and 3 EEA jurisdictions in many areas. The Report did indicate some best practices, including those of assessing candidates for key positions by performing interviews, the application of the proportionality principle and the criteria used to assess suitability. In light of its findings, the EBA signalled its intention to update the 2012 Guidelines and will run a public consultation on its proposals in early 2016. It may also submit an opinion to the Commission proposing legislative changes to facilitate convergent supervisory practices. CREDIT UNIONS » Draft regulations published: The CBI has published, as part of its Feedback Statement on its previous consultation on the commencement of the remaining sections of the Credit Union and Co-operation with Overseas Regulators Act 2012 (the 2012 Act), its final draft regulations dealing with reserves; liquidity; lending; investments; savings; borrowing; systems, controls and reporting arrangements; and services exempt from additional services requirements. These regulations are expected to come into force on 31 December 2015 when the remainder of the 2012 Act is commenced. DEPOSIT PROTECTION » Change to UK protection limit: The UK’s Prudential Regulation Authority announced, on 3 July 2015, that it was reducing (with effect from that date) the existing deposit protection limit for deposits protected under the Financial Services Compensation Scheme from £85,000 to £75,000 (however, the £85,000 limit will apply until the end of 2015 to depositors who were already entitled to that level of compensation at 3 July 2015). » Cooperation agreements between Schemes: The EBA has begun a consultation on draft guidelines in relation to cooperation agreements between deposit guarantee schemes (Schemes) under the Deposit Guarantee Schemes Directive (Directive 2014/49/EU). The Directive requires effective cooperation between Schemes and authorities, in particular where a cross-border bank fails and there is a need to make payments to depositors. The Directive requires written agreements to be put in place between Schemes to facilitate this, and the proposed guidelines set out the objectives and basic content of those agreements. The draft guidelines also give additional guidance on the process of paying depositors where a cross-border institution fails. The consultation closes on 29 October 2015. EUROPEAN MARKET INFRASTRUCTURE REGULATION (EMIR) » Extending the scope of interoperability arrangements: On 2 July 2015, ESMA published its Final Report on the extension of the scope of interoperability arrangements under Title V of EMIR (Regulation (EU) 648/2012) to transactions in classes of financial instruments other than transferable securities and money-market instruments, which constitute the current scope of EMIR. The Final Report sets out how the concept of interoperability emerged in the EU, the applicable EU regulatory framework, and a description of the current interoperability arrangements between EU central counterparties (CCPs) for different product types such as EU equities, EU government bonds and EU exchange traded derivatives (ETDs). In conclusion, the Final Report notes that EMIR’s interoperability provisions are riskfocussed and high level, raising the same costs and benefits if extended to over-the-counter (OTC) derivatives. As regards a potential extension of EMIR’s interoperability provisions to derivatives, ESMA recommended drawing a distinction between ETD and OTC derivatives. Given that it perceives additional complexities in interoperability arrangements for OTC derivatives, ESMA recommended extending EMIR’s interoperability arrangements to ETDs only for the time being (and perhaps to OTC derivatives at a later date). It also recommended an amendment to the Markets in Financial Infrastructure Regulation (MiFIR) (Regulation (EU) 600/2014) whereby the current MiFIR requirement, in the case of request for access from a trading venue to a CCP or vice-versa, that the competent authority of the trading venue or that of the CCP grants access only where such access would not require an interoperability arrangement that 4 | ARTHUR COX FINANCIAL REGULATORY REGBRIEF, JULY/AUGUST 2015 has not already been agreed on and where the inter-CCP risk is covered, be removed in respect of ETDs. » Supervision of NFCs: On 16 July 2015, the CBI published its Feedback Statement on its Consultation Paper 90 on the supervision of NFCs under EMIR. The CBI confirmed that it had modified the supervisory model proposed in CP90 for NFC- to adopt a risk-based approach to their supervision. The modifications allow a two-tier approach whereby the originally-proposed EMIR Regulatory Return will be used by the CBI on an exceptional basis, mainly in cases of non-compliance. A shorter, more focussed EMIR Regulatory Return (without the third party assessor regime) will be sought annually from a targeted set of NFCs that have significant derivative positions but are not NFC+. » Interest rate swaps: On 6 August 2015, the Commission announced the publication of the provisional text of its delegated regulation setting out RTS for the introduction of a central clearing obligation for OTC interest rate swaps under EMIR, together with the provisional text of an annex setting out the classes of interest rate swap that are subject to the clearing obligation. » ESMA reports, and recommendations for change: On 13 August 2015, ESMA announced the publication of four reports on how the EMIR framework has been functioning. The reports deal with the use of OTC derivatives by NFCs; the efficiency of margining requirements to limit procyclicality; segregation and portability requirements; and ESMA’s response to the Commission’s consultation on a review of EMIR. ESMA recommended changes to EMIR in the areas of the clearing obligation, the recognition of third country CCPs and the improved supervision of trade repositories. FINANCIAL SERVICES OMBUDSMAN » Annual Report 2014: The Annual Report 2014 of the Financial Services Ombudsman (FSO) has been published. Notable points include: » this is the first Annual Report which sets out the number of complaints substantiated or partly substantiated against financial service providers in an entire calendar year; » the FSO received 4,477 complaints in 2014, down 42% on 2013, with the number of findings totalling 2,238, down 25% on 2013; » when compared with 2013, banking complaints reduced by 27%, insurance complaints reduced by 49% and investment complaints reduced by 65%; » reasons given by the FSO for these reduced numbers included its new ‘name and shame’ powers under the Central Bank (Supervision and Enforcement) Act 2013; 2014 was the first full calendar year in which this power was available to the FSO; and » 78% of complaints were not upheld in 2014, a 1% increase on 2013. FITNESS AND PROBITY » Updated FAQs: The CBI continues to update its Fitness and Probity FAQs. Responses updated in July 2015 covered topics such as what constitutes a Pre-Approval Controlled Function, the application of Section 21 of the Central Bank Reform Act 2010 and what systems are in place for recognising equivalent EU/EEA approvals. ICAVS » Updated FAQs: The CBI updated its ICAV Q&A on 12 August 2015. INSURANCE MEDIATION » Status update: On 30 June 2015, an informal deal was announced between the EU Council Presidency and the Parliament on the revised Insurance Mediation Directive; this was then formally approved by the EU Council’s Permanent Representatives Committee on 22 July 2015. The next step is for the Parliament to vote on the revised Directive in plenary session. MIFID » Waivers from pre-trade transparency requirements: On 26 August 2015, ESMA published its updated document on Waivers from Pre-Trade Transparency setting out its assessment of applications for waivers from pre-trade transparency requirements under MiFID. The waiver document is aimed at MiFID competent authorities and is intended to ensure that those competent authorities, in carrying out their supervisory activities, are aligned with the opinions provided by ESMA. The waiver document sets out a number of scenarios – it has been updated to include an additional scenario (in red on the final page). MIFID II » Technical standards: On 30 June 2015, ESMA published its Final Report on draft technical standards on authorisation, passporting, registration of third country firms and cooperation between competent authorities under MiFID II (MiFIR and the MiFID II Directive (Directive 2014/65/EU)). The Final Report covers most of the draft RTS and ITS which ESMA is expected to develop, with any remaining technical standards expected to be published by the end of this year. The Commission has three months to endorse these standards. 5 | ARTHUR COX FINANCIAL REGULATORY REGBRIEF, JULY/AUGUST 2015 MORTGAGE CREDIT DIRECTIVE » Passport notifications: The EBA has published final Guidelines on passport notifications for mortgage credit intermediaries under the Mortgage Credit Directive (Directive 2014/17/ EU). The guidelines are designed to ensure that information about intermediaries carrying out business in more than one Member State is exchanged consistently between national authorities. » APR calculations: The Commission has updated its webpage on the Directive to include helpful materials relating to calculating the annual percentage rate of charge (APR). PAYMENT ACCOUNTS DIRECTIVE » Transposition consultation: On 10 July 2015, the Department of Finance issued a Consultation Paper on the Payment Accounts Directive (Directive 2014/92/EU) which is due for transposition by September 2016. The Consultation Paper seeks views on a number of national discretions available to Ireland, including whether provisions regarding access to payment accounts should also apply to payment service providers other than financial institutions; whether the Directive should apply to credit unions, friendly societies and post office giro institutions; whether statements of fees and fee information documents should be provided as stand-alone documents, or incorporated into other documents containing information required by law; whether there is a need for a new website comparing fees beyond those that already exist; what constitutes “genuine interest” in connection with the opening of an account; and when credit institutions may refuse an application. PROSPECTUS LAW » Alternative performance measures: On 30 June 2015, ESMA published its Final Guidelines on alternative performance measures (APMs) for listed issuers, setting out principles that issuers should follow when setting out APMs in documents which qualify as regulated information. The Final Guidelines also deal with the labelling, calculation, presentation and comparability of APMs. Frequently used APMs include EBITDA, net debt, statements of financial position and statements of cash flow. The Final Guidelines will apply, from 3 July 2016, to issuers with securities traded on regulated markets, and persons responsible for drawing up a prospectus. » Prospectus issues under Omnibus II: On 1 July 2015, ESMA published its Final Report containing draft RTS on prospectus-related issues under the Omnibus II Directive (Directive 2014/51/EU). The four sets of draft RTS deal with procedures for approval of prospectuses, information to be incorporated by reference, the provisions relating to publication of the prospectus in Article 14(1)-(4) of the Prospectus Directive (Directive 2003/71/ EC) and the dissemination of advertisements and the provisions laid down in Article 15(4) of the Prospectus Directive. The Commission has three months to endorse the draft RTS. RETAIL BANKING PRODUCTS » New guidelines on manufacture and distribution: On 15 July 2015, the EBA published Guidelines on product oversight and governance arrangements for those involved in the manufacture and distribution of retail banking products such as mortgages, payment accounts, deposits and electronic money. The Guidelines will apply from 3 January 2017 and competent authorities and credit institutions are required to make every effort to comply with them. Once translations of the Guidelines are published on the EBA’s website, national competent authorities will have two months to ‘comply or explain’. The requirements for manufacturers deal with internal control functions, identifying target markets, product testing, disclosure, product monitoring, remedial actions and distribution channels. The requirements for distributors deal with internal arrangements, identification and knowledge of the target market, and information requirements. SECURITIES FINANCING » Political agreement reached: Political agreement at EU Council level was announced on 29 June 2015 in relation to the proposed regulation on the reporting and transparency of securities financing transactions (the SFT Regulation). The next step is for the Parliament to consider the EU Council’s position at first reading. The SFT Regulation is designed to improve transparency in three main areas: » monitoring the build-up of systemic risks in the financial system relating to securities financing transactions; » disclosing information on securities financing transactions to investors whose assets form part of those transactions; and » banks and brokers reusing, for their own purposes, collateral provided by their clients. STRESS TESTS » 2015 transparency exercise: The EBA has confirmed that, towards the end of this year, it will be carrying out a transparency exercise, publishing detailed data on EU banks’ balance sheets covering their composition of capital, leverage ratio, risk weighted assets by risk type, sovereign exposures and credit risk exposures. The sample of banks includes AIB, Bank of Ireland and permanent TSB. » 2016 stress test:The EBA has also confirmed that, for its 2016 EU-wide Dublin +353 1 618 0000 firstname.lastname@example.org Belfast +44 28 9023 0007 email@example.com London +44 207 823 0200 firstname.lastname@example.org New York +1 212 782 3294 email@example.com Silicon Valley +1 650 943 2330 firstname.lastname@example.org arthurcox.com 6 | ARTHUR COX FINANCIAL REGULATORY REGBRIEF, JULY/AUGUST 2015 stress test, some changes will be made to its approach when compared to its 2014 tests. For example, a bottom up approach will be taken, including a static balance sheet assumption and wide risk coverage to assess EU banks’ solvency, and the test will be more closely aligned with the cycle of the annual supervisory review and evaluation process to ensure the results of the stress test are incorporated as an input to that process.