Please see the Prudential Regulation section for updates on: (i) the record of the FPC meeting held on 12 March; and (ii) HMT’s recently published letter on the EC’s proposed package of reforms in relation to BRRD II, CRR V and CRR II.
FCA publishes statement and speech on approach following agreement on transition period
On 28 March, the FCA published: (i) a statement on Brexit issues following the political agreement reached between the UK and the EU on a transition period. In the statement, the FCA states that firms and funds will continue to benefit from passporting between the UK and EEA during the transition period. Obligations derived from EU law will continue to apply and firms must continue with implementation plans for EU legislation that is due to come into effect before the end of 2020. Consumer rights and protections derived from EU law will also continue to apply. The FCA confirms that, in the light of the agreement on the transition period and the UK government's commitment to providing for a temporary permissions regime as a backstop, firms and funds currently benefitting from an EU passport need not apply for authorisation at this stage. UK firms and funds passporting into the EEA should discuss with their relevant EU regulator the implications of a transitional period for their contingency planning; and (ii) a speech by Andrew Bailey, FCA Chief Executive, on the transition period. In the speech, Mr Bailey argues that the transition period provides an opportunity for deeper co-operation between UK and EU regulators so that they can enact solutions to key risks arising from Brexit, such as market access and contractual continuity. In particular, he calls for an agreement between the UK and the EU on the treatment of existing financial services contracts.
PRA and BoE announce approach to authorisation and supervision of international banks, insurers and CCPs following agreement on Brexit transition period
On 28 March, the BoE published a press release providing an update on its regulatory approach to preparations for Brexit. In the press release, the BoE announces the publication of the following documents: (i) a "Dear CEO" letter from Sam Woods, BoE Deputy Governor, Prudential Regulation, and PRA Chief Executive Officer, on firms' preparations for Brexit; (ii) a "Dear CEO" letter from Sir Jon Cunliffe, Deputy Governor, Financial Stability, on non-UK CCPs operating in UK post-Brexit; (iii) a PRA policy statement on the PRA's approach to branch authorisation and supervision for international banks (PS3/18), and a related supervisory statement (SS1/18); and (iv) a PRA policy statement on the PRA's approach to branch authorisation and supervision for international insurers (PS4/18), and a related supervisory statement (SS2/18).
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
ESMA publishes Q&As version 28 (corporate aspects) on prospectuses
On 28 March, ESMA published the 28th updated version of its Q&As on prospectuses. New Question 102 is designed to assist in the identification of profit forecasts. ESMA's answer proceeds from a detailed analysis of the definition of "profit forecast" in Article 2(10) of the Prospectus Regulation (Regulation 809/2004). Amongst other things, ESMA points out that (i) a forecast need not refer to a precise figure, or even a minimum or maximum figure, for the likely level of profits or losses. It may also refer to a range of figures, particularly where a minimum or maximum figure is mentioned or implied; (ii) the expression "likely level of profits or losses" may refer to the profit or loss for the year but it may equally refer to other measures of profitability where these convey an expectation of future performance. In the context of financial measures that may be viewed as profit forecasts, ESMA adopts a “substance over form” approach; (iii) stated hope or aim may on its own amount to a profit forecast, particularly if a specific figure is stated; and (iv) forecasts are distinct from trend information required by item 12 of Annex 1 of the Prospectus Regulation. Forecasts should be clearly identified as such. ESMA states that the definition of a profit forecast should be carried over to the new prospectus regime from July 2019.
ESMA publishes final report and guidelines on internalised settlement reporting under CSDR
On 28 March, ESMA published a final report (ESMA70-151-1258) containing guidelines on internalised settlement reporting under Article 9 of CSDR. The guidelines, which are set out in Annex III to the final report, cover internalised settlement reporting and the exchange of information between NCAs and ESMA in relation to internalised settlement. They are designed to ensure the common, uniform and consistent application of Article 9 of the CSDR by clarifying the scope of the data to be reported by settlement internalisers, and the types of transactions and operations that should or should not be included. The guidelines will be translated into the official EU languages and published on ESMA's website. They will apply from the date of their publication. Within two months of the date of publication of the translations of the guidelines, NCAs will have to confirm to ESMA whether they comply or intend to comply with the guidelines, giving reasons for non-compliance.
ESMA publishes consultation on supplementary guidance on assessing "as stringent as" requirements under CRA Regulation endorsement regime
On 27 March, ESMA published a consultation paper on supplementary guidance on how to assess whether a requirement is "as stringent as" the requirements set out in the CRA Regulation for the purposes of the endorsement regime (ESMA33-9-235). In the consultation, ESMA seeks views on supplementary guidance intended to clarify the general principle that ESMA relies on when assessing whether alternative internal requirement can be considered as stringent as a CRA Regulation requirement. The supplementary guidance takes the form of a new section 5.3 to the November 2017 guidelines (at pages 50 to 53 of the consultation paper), which sets out a non-exhaustive list of alternative internal requirements that ESMA considers to be at least as stringent as a requirement set out in one of the relevant endorsement provisions of the CRA Regulation. In cases where no alternative internal requirement is provided in the Guidelines, ESMA recommends that the endorsing CRA ensures that the third-country CRA directly fulfils the requirements set out in the relevant endorsement provisions of the CRA Regulation. The deadline for comments on the consultation is 25 May. ESMA intends to publish a consolidated version of the guidelines, including the new section 5.3, in the third quarter of 2018. The proposed supplementary guidance will apply to credit ratings issued on or after 1 January 2019 and to existing credit ratings reviewed after that date.
ESMA publishes final report on guidelines for position calculation by trade repositories
On 27 March, ESMA published a final report containing guidelines for position calculation by TRs under ESMA (ESMA70-151-1272). The guidelines, set out in Annex III to the final report, apply to TRs registered or recognised by ESMA. They create a framework for TRs to calculate positions in derivatives in accordance with Article 80(4) of EMIR. They aim to provide regulatory authorities with consistent and harmonised position data, focusing on the time of calculations, the scope of the data used in calculations, and calculation methodologies. ESMA proposes that four separate datasets of calculations are used (position sets, collateral position sets, currency position sets, and currency collateral position sets). The guidelines provide specific instructions on the aggregation of certain data fields and how those should be calculated by TRs before the data is provided to regulatory authorities. The guidelines will start to apply on 3 December and require an annual assessment of compliance.
ESMA updates Q&As on CSDR
On 23 March, ESMA published an updated version of its Q&As (ESMA70-708036281-2) on the implementation of the CSDR. Two new Q&As have been added, relating to: (i) the assessment of CSD links to be made by the competent authorities in the context of the authorisation procedure; and (ii) whether links between CSDs participating in T2S are interoperable links as defined in the CSDR. ESMA has also updated an existing Q&A on the implementation of Article 35 of the CSDR, to specify the extent of the flexibility that can be granted to CSDs in their use of international standards to communicate with their participants or with other market infrastructures.
ESMA updates Q&As on Benchmark Regulation
On 23 March, ESMA published an updated version of its Q&As on the implementation of the BMR. One new Q&A has been added (Q&A 6.1), which considers how supervised contributors should apply Article 16 of the BMR during the transitional period.
FSB launches survey on legal barriers to OTC derivatives trade reporting
On 23 March, the FSB launched a survey on the legal barriers to the reporting of full transaction information about OTC derivatives. The FSB has also published guidance on completing the survey. The FSB explains that its members have raised concerns that restrictions on reporting complete OTC derivatives transaction information to trade repositories can limit its usefulness to authorities in carrying out their regulatory mandates, including monitoring and analysing systemic risk and market activity. The responses to the survey will provide input to the FSB's ongoing work to evaluate the extent to which its member jurisdictions have met their commitments to remove such legal barriers. These may arise from client confidentiality, data protection, blocking statutes, or other official requirements, either in FSB member jurisdictions or other jurisdictions where counterparties may be located. Such barriers may require trade reports to be de-identified, making them significantly less valuable to regulators. The survey closes on 25 April. The FSB will report to the G20 leaders' summit in Buenos Aires, which will be held on 30 November and 1 December, on the implementation of the OTC derivatives reforms and on the extent to which member jurisdictions have met their commitments to remove legal barriers for trade reporting.
Please see the Remuneration and Corporate Governance section for an update on the FCA’s recently published policy statement and finalised guidance on staff incentives and performance management in consumer credit firms.
FCA publishes guidance consultation on financial crime systems and controls: insider dealing and market manipulation
On 27 March, the FCA published a guidance consultation on amending its Financial Crime guide for firms (GC18/1). The guide consolidates the FCA's guidance on financial crime. Although it is not binding on firms, the guidance is intended to enhance firms' understanding of the FCA's expectations, and firms are expected to take note of it and use it to inform their own financial crime systems and controls. The proposed changes to the guide are set out in the Appendix to GC18/1. These include: (i) updating Part 1 of the guide with an additional chapter on insider dealing and market manipulation (chapter 8). The new chapter will outline the FCA's observations of good and bad market practice around the requirement to detect, report and counter the risk of financial crime, as it relates to insider dealing and market manipulation; (ii) making minor amendments to other parts of the guide to reflect recent regulatory changes, and ensure that the guide remains up to date; (iii) renumbering the guide to improve its current presentation in the online Handbook, to make it more accessible and searchable. The FCA explains that the guidance consultation provides firms with an opportunity to comment on its proposals on how it expects them to comply with the requirements of SYSC6.1.1R. In particular, the FCA points out that where firms separate their surveillance function from their financial crime or money laundering reporting officer (MLRO) teams, it is important that they ensure that there is adequate communication between the two areas such that the firm can effectively counter the risk of insider dealing and market manipulation. The deadline for comments is 28 June. The FCA expects to publish a response to feedback received in the autumn. It is proposed that the guidance will come into effect on 1 October.
Notification to amend firm details for an Annex I financial institution
On 24 March, the FCA updated its MLRs Annex 1 financial institutions notification form.
ESMA updates Q&As on MAR
On 23 March, ESMA published an updated version of its Q&As on MAR. The update is to Q&A 5.1, which considers the disclosure of inside information related to Pillar II requirements under Article 17 of MAR.
FMLC publishes paper on DLT and governing law highlights issues of legal uncertainty and recommends possible solution
On 28 March, the FMLC published a paper on DLT and governing law: issues of legal uncertainty. The FMLC explains that DLT systems involve databases that are shared across digital networks. As they are often borderless, spanning several jurisdictions, market infrastructures, regulated firms, members of the public and others conducting transactions can be left vulnerable to multiple (and potentially inconsistent) assertions of governing law. This uncertainty as to governing law is neither a satisfactory nor a viable outcome. These issues arise out of a lack of clarity as to where assets and their records are located in a DLT environment. The increase in potential applications of DLT in the financial markets has heightened the need for the development of an international conflict of laws framework for financial transactions and systems using DLT. In the paper, the FMLC: (i) focuses on the proprietary effects of DLT transactions in financial instruments or assets; (ii) examines governing law and related conflicts of law issues in the context of DLT systems; (iii) outlines possible connecting factors to be used when identifying the governing law for the proprietary effects of transactions conducted on a DLT system; and (iv) considers possible solutions and sets out its recommended solution. The FMLC concludes that, subject to a special rule in respect of tokens referencing an immovable asset, the proprietary effects of transactions on a DLT arrangement should be governed by the system of law chosen by the network participants for the DLT system. This approach is sometimes referred to as “elective situs”. Under this approach, participants in the DLT system would be able, contractually, to choose the law governing ownership, transfer and use of assets. The FMLC recommends that any solution is promoted and put into effect by a body such as the Hague Convention, UNIDROIT or the ISDA, to ensure it is adhered to on an international basis.
BoE undertakes proof of concept to understand how renewed RTGS service could support DLT settlement models
On 28 March, the BoE published a briefing announcing that it is undertaking a PoC to understand how the renewed RTGS service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on DLT. The briefing states that the BoE has concluded that DLT is not yet sufficiently mature to provide the core for the next generation of RTGS. However, it places a high priority on ensuring that the renewed RTGS service is capable of interfacing with DLT as and when it is developed in the wider sterling markets. This has led to the BoE deciding to undertake the PoC. Under the PoC, the BoE is partnering with a range of firms developing payment arrangements using innovative technologies. The BoE considers that multiple PoC participants will give a broader insight into the range of functionality the BoE may need to offer to support this sector. PoC participants have access to a cloud-based system developed by the BoE that replicates a version of the prefunded net settlement arrangement a renewed RTGS service will offer to the major UK retail payment systems. The PoC is exploring whether innovative settlement systems are able to interface with that functionality and identifying ways in which the renewed RTGS service functionality could be expanded. The BOE intends for the majority of the enhanced RTGS functionality to be live by the end of 2020.
ECB finalises guides on bank and FinTech bank licensing
On 23 March, the ECB published the final versions of its: (i) guide to assessments of licence applications. This guide sets out the general process and the requirements for the assessment of credit institution licensing applications. It applies to all licence applications to become a credit institution within the meaning of CRR, including initial authorisations for credit institutions, applications from FinTech companies, authorisations in the context of mergers or acquisitions, bridge bank applications and licence extensions; and (ii) guide to assessments of FinTech credit institution licence applications. This guide is directed at entities with a FinTech business model that are considering applying for a banking licence. The guides are not legally binding. Instead, their aim is to support applicants and all entities involved in the process of authorisation to ensure a smooth and effective procedure and assessment.
EC Delegated Regulation on RTS under ELTIF Regulation published in OJ
On 23 March, EC Delegated Regulation (EU) 2018/480 supplementing the ELTIF Regulation with regard to RTS was published in the OJ. It will enter into force on 12 April.
EIOPA publishes consultation on revisions to Solvency II ITS and guidelines on reporting and disclosure
On 28 March, EIOPA published a consultation paper (EIOPA-CP-18/002) on amendments to the ITS on reporting and disclosure relating to Solvency II. EIOPA has separately published to the consultation paper: (i) a proposed implementing regulation amending Commission Implementing Regulation (EU) 2015/2450, which contains the ITS on the templates for the submission of information to supervisory authorities (EIOPA-BoS-18/099); and (ii) a proposed implementing regulationamending Commission Implementing Regulation (EU) 2015/2452, which contains the ITS on the procedures, formats and templates of the solvency and financial condition report (EIOPA-BoS-18/098). EIOPA has also published an impact assessment (EIOPA-BoS-18/110) (dated 20 March 2018), which sets out the background to the consultation. EIOPA states that the supervisory reporting templates need to be adapted to reflect changes made by Commission Delegated Regulation (EU) 2017/1542, which made amendment to the Solvency II Delegated Regulation ((EU) 2015/35) capital charges attached to investments by insurance companies in infrastructure corporates. EIOPA is also seeking to address a number of errors identified in Implementing Regulations 2015/2450 and 2015/2452. EIOPA is also consulting on an amendment (EIOPA-BoS-18/138) to its guidelines on financial stability reporting (EIOPA-BoS-15/107). The deadline for responses is 11 May.
PRA publishes further update on outstanding Solvency II issues
On 28 March, the Treasury Committee published a letter from Sam Woods, BoE Deputy Governor, Prudential Regulation, and PRA CEO, to Nicky Morgan, Committee Chair. The letter provides a further update on several outstanding issues relating to the committee's October 2017 report on Solvency II. The letter covers the following topics: (i) risk margin - since February, the PRC has had a further discussion on the PRA's supervisory approach to use of future risk mitigation and transfer mechanisms. The PRA is close to completing its policy work on this, which it undertook in response to proposals by firms that are currently reinsuring longevity risk on a substantial portion of new business. Once the work is completed, it expects to consult on the outcome with a view to implementation of any new policy by the end of 2018; (ii) DVA - the PRA considers that EIOPA's November 2017 opinion, which aims to reinforce supervisory convergence in the approach to the way that modelling of DVA is reviewed by NCAs, is a material policy development. The opinion has prompted a review of the PRA's policy position in this area, which is nearly complete. The PRA plans to consult on any necessary updates to its policy in the next few weeks; and (iii) external audit of the SFCR - after reviewing the costs and benefits of the ongoing additional assurance provided by external audit, the PRA plans to consult on removing the requirement for smaller firms from the end of 2018. The PRA estimates that over 150 firms would no longer be subject to the audit requirement under this proposed rule change.
EC publishes speech on Solvency II reforms
On 27 March, the EC published a speech given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and CMU on reforms to the legislative framework established under the Solvency II. In the speech, Mr Dombrovskis considers issues including: (i) simple, transparent and standardised (STS) securitisation – the EC intends to adopt amendments to the capital requirements in Solvency II to take into account the STS framework set out in the Securitisation Regulation; (ii) a review of the Solvency II Delegated Regulation - the EC will aim to make targeted amendments to the Delegated Regulation intended to help insurers invest in growth creation, to improve proportionality, particularly in relation to reporting, and to remove inconsistencies; (iii) a review of the Solvency II Directive – the EC will "shortly" ask EIOPA to collect additional information over the next few years on the impact of Solvency II on long-term investments. Mr Dombrovskis states that any major reforms intended to address the impact of the Solvency II on insurance companies' long-term business will be a topic for the review of the Solvency II Directive in 2020; and (iv) sustainability – the EC intends to clarify the sustainability duties of various actors in the investment chain, such as institutional investors and insurance distributors. By 2019, the EC intends to revise its guidelines for corporate disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures. The EC will also consider incorporating sustainability into prudential rules through amendments to Solvency II. It will send a request for advice to EIOPA on this issue later in 2018.
ESMA updates MiFID II Q&As on market structures and transparency
On 28 March, ESMA published: (i) an updated version of its Q&As on transparency topics under MiFID II and MiFIR (ESMA70-872942901-35). A new Q&A has been added to section 4 (non-equity transparency); and (ii) an updated version of its Q&As on market structures topics under MiFID II and MIFIR (ESMA70-872942901-38). The answer to a question in section 3 (DEA and algorithmic trading) has been amended, a new Q&A has been added to section 5.1 (multilateral and bilateral systems: general), and the answer to a question in section 5.3 (multilateral and bilateral systems: systematic internalisers) has been amended.
ESMA publishes report on temporary product intervention measures on CFDs and binary options
On 27 March, ESMA published a report (ESMA35-43-1000) setting out temporary product intervention measures it agreed on 23 March, which prohibit the provision of binary options and restrict the provision of CFDs to retail investors. A set of related FAQs (ESMA71-98-125) have been published alongside the measures. The report sets out additional information on the measures that have been agreed under ESMA's product intervention power under Article 40 of MiFIR. The measures are considered necessary by ESMA and NCAs to address significant investor protection concerns relating to CFDs and binary options offered to retail investors that arise from issues such as their complexity and lack of transparency and particular product characteristics. ESMA will adopt the measures in the official languages of the EU "in the coming weeks", after which it will publish a notice on its website. The measures will be published in the OJ and will start to apply one month (for binary options) and two months (for CFDs) after their publication in the OJ. In a statement supporting the above measures, also published on 27 March, the FCA explains that it expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients.
DExEU explanatory memorandum on EC legislative proposals on service providers
On 27 March, the DExEU published an explanatory memorandum on the EC’s legislative proposals for a Regulation on European crowdfunding services providers and a Directive making consequential amendments to MiFID II. In the memorandum, DExEU sets out the UK government's concerns with the EC’s proposals.
ESMA updates MiFID II Q&As on commodity derivatives
On 27 March, ESMA published an updated version of its Q&As on commodity derivatives topics under MiFID II and MiFIR. The update includes new answers relating to: (i) position limits (see section 2) - - the Q&A: (a) clarifies the circumstances under which less liquid contracts may receive bespoke position limits established by the relevant NCA; and (b) introduces a tailored approach to the development and application of commodity position limits for spread contracts; and (ii) position reporting (see section 4) - the Q&A clarifies which NCA positions in an OTC commodity derivative contract, which is economically equivalent to more than one EU ETD contract, must be reported when the ETD contracts are not the same contract as defined in Article 5(1) of RTS 21.
ESMA publishes final report on amendments to RTS on systematic internalisers' quote obligations
On 26 March, ESMA published a final report on the amendments to Delegated Regulation (EU) 2017/587 (RTS 1) (ESMA70-156-354). In the final report, ESMA sets out the final version of a draft Delegated Regulation amending Delegated Regulation (EU) 2017/587. The report also summarises the feedback that ESMA received to its November 2017 consultation. It states that ESMA received strong support to its proposals from stakeholders and consequently it has not amended its proposals. ESMA has submitted the final report to the EC. The EC has three months to decide whether to endorse the proposed amendments to the RTS.
ESMA updates MiFID II Q&As on investor protection topics
On 23 March, ESMA published an updated version of its Q&As (ESMA35-43-349) on investor protection topics under MiFID II and MiFIR. ESMA has added new Q&As or updated existing Q&As relating to the following topics: (i) inducements; (ii) information on costs and charges; (iii) post-sale reporting; and (iv) the meaning of the term "ongoing relationship", which is used in various Articles of MiFID II and MiFIR.
EBA publishes consultation on extending complaints-handling guidelines to authorities responsible for supervising new firms under MCD and PSD2
On 27 March, the EBA published a consultation paper on the application of the existing Joint Committee Guidelines on complaints-handling to authorities competent for supervising new institutions under the MCD or the revised PSD2 (EBA/CP/2018/02). The EBA is proposing to extend the scope of the guidelines for authorities competent for supervising: (i) credit intermediaries and creditors that are not credit institutions, as defined in the MCD; and (ii) PISPs and AISPs, as defined in PSD2. In the case of AISPs that only provide account information services (referred to by the EBA as registered AISPs or RAISPs), the guidelines will only apply in respect of security-related complaints. The EBA proposes that competent authorities should ensure a proportionate regime when applying the guidelines to RAISPs, non-credit institution creditors and credit intermediaries, given that many of these entities are very small. A revised version of the guidelines is set out in the Annex to the consultation paper. The EBA intends for the revised guidelines to apply from 1 May 2019. The deadline for comments is 27 May.
PAYMENT SERVICES AND SYSTEMS
Please see the Mortgages section above for an update on the EBA’s recently published consultation paper on extending complaints-handling guidelines to authorities responsible for supervising new firms under MCD and PSD2.
EC publishes legislative proposal for amendments to Regulation on cross-border payments
On 28 March, the EC adopted a legislative proposal for a Regulation amending the Regulation on cross-border payments (Regulation 924/2009) as regards certain charges on cross-border payments in the EU and currency conversion charges (COM(2018) 163). The proposed Regulation: (i) establishes the principle that payment service providers in non-eurozone member states must align fees for cross-border payments in euro with charges for domestic payments made in the official currency of the member state. Currently this principle only applies to payment service providers in eurozone member states. This proposal does not cover cross-border transactions in currencies other than euro; and (ii) introduces requirements for payment service providers to ensure that consumers are made aware of the costs of currency conversion services applied to cross-border payments before the initiation of a payment transaction. This proposal applies to payments denominated in euro or in a currency of a member state other than the euro. The EBA will be responsible for developing RTS to ensure transparency and full price comparability of different currency conversion-service options available to users of payment services. The EC has also published FAQs, an impact assessment (SWD(2018) 84), and an executive summary of the impact assessment (SWD(2018) 85). The deadline for comments on the proposals is 23 May.
PSR publishes decision paper and further consultation on regulatory fees for 2018/19
On 28 March, the PSR published a combined consultation and decision paper on PSR regulatory fees for 2018/19 (CP18/8). In the paper, the PSR sets out its decisions on its fees allocation and collection methods that it consulted on in December 2017 (CP17/44). The decisions will take effect from 2018/19. The PSR makes further proposals on its fees allocation method relating to: (i) its approach to publishing annual fees figures in future; (ii) updated definition of relevant transactions for fees allocation; (iii) its approach to on-account fees collection from 2019/20 onwards; and (iv) refund of underspend, including the 2017/18 underspend. Separately, the FCA has published the Fees (Payment Systems Regulator) Instrument (No 6) 2018 (FCA 2018/9), made by the FCA Board on 22 March. The instrument comes into force on 1 April and makes amendments to FEES 9 and the Glossary. The FCA will calculate, bill and collect PSR fees from PSR fee payers directly, and the operators of payment systems will no longer be required to bill and collect fees from PSR fee payers. The deadline for comments on the consultation is 10 May. Confirmation of the PSR fee rates for 2018/19 will be published in June.
PSR publishes annual compliance reports 2017
On 27 March, the PSR published on its website the following reports in relation to the PSR’s access and governance report on payment systems 2018: (i) BPSL - compliance report 2017; (ii) C&CCC compliance report 2017; (iii) CHAPS Co compliance report 2017; (iv) FPSL compliance report 2017; (v) Link Scheme compliance report 2017; (vi) Mastercard General Directions Compliance Report 2017; (vii) and Visa General Directions Compliance Report 2017.
PSR publishes statement on card schemes subject to domestic interchange fee caps
On 27 March, the PSR published a statement on card schemes subject to domestic interchange fee caps in the UK in 2018.
Please see our eAlert: Pensions: what's new this week
FCA summary findings of non-advised drawdown pension sales review
On 28 March, the FCA published a summary of the findings of its non-advised drawdown pension sales review and a related webpage. For the purposes of the review, the FCA assessed a sample of non-advised drawdown sales by firms covering approximately 74% of the market by sales volume for the period from April 2015 to April 2017. It looked at all forms of communication with customers, including written, oral and online. The FCA found that firms are broadly meeting their obligations to communicate in a clear, fair and not misleading way with customers. Written, oral and online information generally meets FCA requirements and provides customers with the necessary information to make informed decisions about their retirement options. In addition, sales processes are continuing to evolve, with firms allowing online transactions and providing online tools and calculators to help customers make informed decisions. However, the FCA found that some customers appear not to be fully engaging with the information and are therefore potentially putting themselves at risk of harm. It also identified instances where firms in the review sample did not fully meet FCA requirements. The FCA has provided feedback to all firms that participated in the review. It has agreed actions with some firms and will follow up to ensure they are implemented. The FCA's findings will help inform its Retirement Outcomes Review (ROR) final report, which the FCA intends to publish during the first half of 2018. In addition, the findings and the ROR final report will also inform the FCA and the Pensions Regulator’s joint strategic approach to the pensions and retirement income sector, due to be published later in 2018.
FCA publishes policy statement on transfers advice and consultation
On 26 March, the FCA published a policy statement on advising on pension transfers (PS18/6). In PS18/6, the FCA sets out feedback to its June 2017 consultation paper (CP17/16). The final rules on pension transfer advice are set out in the Conduct of Business Sourcebook (Pension Transfers) Instrument 2018 (FCA 2018/15), the text of which is included in Appendix 1 to PS18/6. This instrument was made by the FCA Board on 22 March. Most of the new requirements will come into force on 1 April, with some coming into force on 1 October and others coming into force on 6 April 2019. The FCA is also seeking views on additional changes to its rules and guidance in this area. These are outlined in a consultation paper on improving the quality of pension transfer advice (CP18/7), published alongside PS18/6. The proposals include: (i) requiring advisers undertaking pension transfer advice to have the same qualifications as investment advisers; (ii) guidance clarifying the FCA's expectations that advisers should be exploring customers' attitudes to the general risks associated with a transfer, in addition to their attitude to investment risks; and (iii) guidance illustrating how firms can carry out an appropriate "triage" service (an initial conversation with potential customers), without stepping across the advice boundary. The FCA is also seeking views (but not proposing rule changes) on possible intervention on adviser charging structures, given the difficulty in managing the conflicts of interest that exist when providing transfer advice. The deadline for comments is 25 May. The FCA intends to publish feedback and final rules in a policy statement by early autumn 2018, at which time it will outline any proposed action on charging structures.
ECB consults on general topics chapter of guide to internal models under SSM
On 28 March, the ECB published for consultation a draft version of the first chapter of its guide to internal models under the SSM. The ECB has also published FAQs on the consultation and a press release. The ECB is consulting on the general topics chapter, which contains principles for non-model-specific topics, in particular for the IRB approach. The ECB intends to consult on the remaining model-specific chapters of the guide at a later date. These chapters will relate to the credit, market and counterparty credit risks chapters of the guide. The proposed general topics chapter of the guide contains the core elements of the preliminary TRIM guide and provides more detail in those areas where the ECB considered that clarification was required. The section on data quality in the TRIM guide is not included in the general topics chapter and will be consulted on at a later date. The deadline for comments on this chapter is 28 May.
BoE publishes record of FPC 12 March 2018 policy meeting
On 27 March, the BoE published the record of the meeting of its FPC meeting held on 12 March. An overview of the FPC's discussions at the meeting was set out in a statement published by the BoE on 16 March. The record summarises the discussions and outlines the latest progress made on implementing the FPC's existing recommendations and directions. Much of its content is reflected in the statement, but more detail is provided, particularly on the FPC's analysis of material risks arising from Brexit. The FPC also sets out information on the following issues, which were not covered in the statement: (i) SRB framework review - the FPC concluded that, at this stage, there was no evidence that warranted any changes to its SRB framework; and (ii) reciprocity for macro-prudential measures - the FPC reiterated its existing policy of reciprocating foreign macro-prudential actions where appropriate. It also agreed to take non-CCyB macro-prudential measures imposed by overseas authorities into account when designing the annual cyclical scenario (ACS) as part of its stress testing of the UK banking system in future, to the extent that those measures provided new information about material risks to UK financial stability from overseas.
HMT publishes letter on progress of BRRD II, CRR V and CRR II package of reforms
On 26 March, the DExEU published the latest in a series of letters from John Glen, Economic Secretary to the Treasury, to Sir William Cash, HoC European Scrutiny Committee Chair, on the EC’s proposed package of reforms referred to as BRRD II, CRD V and CRR II. This latest letter is dated 21 March. Amongst other things, Mr Glen outlines developments at a recent meeting of ECOFIN, at which it was agreed that more time was required to find an acceptable solution to the remaining open issues, namely: (i) the framework for setting the EU's MREL; (ii) the implementation of the FRTB; and (iii) exemptions from the scope of the CRR and CRD IV. The letter then goes on to address a number of issues on which the HoC European Scrutiny Committee requested information in its seventeenth report of the 2017-19 parliamentary session published on 13th March. In particular Mr Glen reports that: (a) HMT estimates that around 16 or 17 UK-based banking groups would be caught by the IPU requirements under the EC’s original proposal, post-Brexit. This number includes both domestic UK banks and international banks that are UK-based. HMT is analysing how the most recent changes in the Council of the EC’s text would affect this position; (b) there is currently limited information on how many UK-based firms already have an established holding company in another EU member state; (c) the challenges for the banking sector that have arisen as a result of Brexit that necessitate restructuring include authorisation and regulatory capital requirements. In addition, Mr Glen reports that contractual continuity is one of the major exit-related financial services cliff-edge risks that has been identified by the BoE; and (d) other challenges include restrictions on data transfer and cross-border access to FMI. The government’s proposals for an implementation period which will allow firms to only make one set of changes as we move into a post-Brexit financial services agreement with the EU, would mitigate uncertainty and support firm restructuring. The government’s proposed framework for the inclusion of financial services as part of its future economic partnership with the EU would secure mutual market access and prevent firms from needing to restructure to continue operations. Mr Glen advises that the Bulgarian Presidency of the Council plans to reach a general approach on the package at the May meeting of ECOFIN. Discussions have begun in the European Parliament with a view to the ECON holding a vote in May. The government expects trialogue negotiations to begin in June and to conclude by the end of 2018. Mr Glen is confident that formal adoption of the package will occur before the UK withdraws from the EU.
Basel III – BCBS outlines key themes for 2018/19 work programme
On 23 March, the BCBS published a press release summarising discussions at a meeting held on 15 and 16 March. At the meeting, the BCBS discussed its work programme and strategic priorities for 2018/19. A revised version of the work programme (including a version for publication) will be submitted to the BCBS' oversight body, the Group of Central Bank Governors and Heads of Supervision, for endorsement. The work programme centres on four broad themes: (i) finalising existing policy initiatives and initiating targeted policy development; (ii) ensuring full, timely and consistent implementation of the BCBS' post-crisis reforms; (iii) promoting strong supervision; and (iv) evaluating and monitoring the impact of post-crisis reforms, as well as assessing emerging risks. Amongst other things, the BCBS discussed its work on amending to the revised market risk framework. The BCBS expects full, timely and consistent implementation of the revised market risk framework by 1 January 2022. It also agreed on: (a) a revised assessment framework for GSIBs; and (b) a set of criteria and capital treatment for short-term simple, transparent and comparable securitisations. The revised assessment framework for GSIBs and the accompanying standard for the agreed criteria will be published in due course. Furthermore, as part of its regular horizon scanning, it also exchanged views on recent market and supervisory developments, including the impact on the banking system of volatility in financial markets in the first quarter of 2018, and implications of crypto-assets. The BCBS' next meeting will be held on 19 and 20 September.
Government confirms DWP will be lead department for new Single Financial Guidance Body
On 28 March, the HoC Treasury Committee published an exchange of letters between Nicky Morgan, Committee Chair, and John Glen, Economic Secretary to HMT, concerning departmental accountability of the new Single Financial Guidance Body (SFGB). In her letter (dated 7 March 2018), Ms Morgan notes that the government's intention is for the SFGB to be sponsored by the DWP. In her view, the work of the SFGB is more integrated with the work of HMT, and that integration will only grow over time. In his letter (dated 15 March 2018), Mr Glen accepts that the SFBG will deliver guidance that spans both HMT and DWP policy areas. However, he points out that the creation of the SFBG is "not primarily about regulation or interaction with industry". The decision to have a single government department as the lead sponsor for the SFGB was informed by a number of factors, including responses to the government consultation on the SFGB, the Farnish Review and the committee itself. This decision does not change departmental policy responsibilities or mean that HMT will not have an important role in setting the SFGB's direction. Once the SFGB has been established, the DWP and HMT will have a common responsibility in ensuring it is adequately supported to deliver its statutory functions in an effective and efficient manner. Key elements of the SFGB's accountability and governance arrangements are set out in the Financial Guidance and Claims Bill. However, the relationship between the SFGB and the DWP will be set out in a published framework document. In addition, details of the respective role of DWP and HMT ministers will be set out in a memorandum of understanding between the departments. The Bill has yet to finish its progress through Parliament and the SFGB will be established no earlier than autumn 2018. A joint programme of work is underway with HMT and the DWP to develop plans for transitioning from the existing organisations to the SFGB.
RECOVERY AND RESOLUTION
Please see the Prudential Regulation section for an update on HMT’s recently published letter on the EC’s proposed package of reforms in relation to BRRD II, CRR V and CRR II.
REMUNERATION AND COPRORATE GOVERNANCE
FCA publishes policy statement and finalised guidance on staff incentives and performance management in consumer credit firms
On 27 March, the FCA published a policy statement (PS18/7) on staff incentives, remuneration and performance management in consumer credit. In PS18/7, the FCA sets out the final text of a new section 2.11 in its CONC 2.11 on remuneration and performance management policies, procedures and practices. These rules will apply to firms that are engaged in credit-related regulated activity and are not subject to any of the existing remuneration codes in the SYSC (that is, SYSC 19A to SYSC 19F). Amongst other things, the FCA will require firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices. Appendix 1 to PS18/7 contains the FCA Handbook instrument making these changes: the Consumer Credit (Staff Incentives, Remuneration and Performance Management) Instrument 2018 (FCA 2018/19). It comes into force on 1 October. The FCA has also published finalised guidance (FG18/2) (dated March 2018) on staff incentives, remuneration and performance management in consumer credit. Firms are expected to comply with the guidance before 1 October. The FCA states that it may, at a later date, undertake separate work to review how consumer credit firms have responded to the new rules and guidance.
FOS confirms plans and budget for 2018/19 and summarises feedback to consultation
On 28 March, the FOS published its plans and budget for 2018/19. Points of interest include, in particular: (i) the FOS expects to receive 380,000 new complaints, including 220,000 complaints about PPI. It expects to resolve 410,000 complaints, including 250,000 about PPI; (ii) the FOS will meet the 90-day timeframe under the ADR Directive for responding to complaints. It is also aiming to resolve half the complaints referred within half of that period of time; (iii) following development and testing in previous years, the FOS will launch its new case handling system and online portal, where businesses and their customers can share information with the FOS online and easily check on the progress of a FOS investigation; and (iv) the FOS is preparing for potential changes to its remit, such as extending access to SMEs.
ECB publishes speech on supervisory priorities and annual report for 2017 supervisory activities
On 26 March, the ECB published its annual report on supervisory activities for 2017 (dated March 2018), which sets out the ECB's key achievements during 2017 under the SSM. The ECB also published a speech on the annual report given by Daniele Nouy, Chair of the ECB's Supervisory Board, at a meeting of the EP’s ECON. Comments of interest in the speech include the following: (i) the TRIM is being conducted by the ECB in close co-operation with NCAs until 2019. It is progressing according to plan. Cases of non-compliance with the regulatory framework in respect of issues such as model governance and model validation have already been addressed through supervisory decisions; (ii) the ECB is closely monitoring banks' relocation plans. It is seeing an increasing number of banks taking decisions on their Brexit plans, and starting to relocate to the euro area. The ECB is continuing to work on policy stances to ensure that banks are adequately prepared for Brexit and have suitable governance structures, are well managed, and have a sustainable business model for entities located in the banking union. Banks wishing to relocate to, or expand activities in, the euro area, and needing authorisation post-Brexit, need to submit applications to the ECB and NCAs by the second quarter of 2018 at the latest; (iii) Supervisory priorities for 2018 - three of the ECB's supervisory priorities have been carried over from 2017: (a) the business models and profitability drivers of banks will remain a supervisory focus; (b) credit risk will continue to be a priority, with the emphasis still being on NPLs, as well as on scrutinising exposure concentrations; and (c) in the priority area of risk management, the TRIM will continue, and the ECB will continue to push for the improvement of banks' internal processes for capital and liquid adequacy; and (iv) progress on the banking union.