Please see our EU27 "no-deal" Brexit Law Tracker that summarises the domestic measures that Governments in EU27 member states are publishing in order to prepare for the UK’s withdrawal from the EU.
Please see our article, 'Brexit - English law and courts: should recent developments change your approach?'
Please see the product sections for updates on the various draft SIs published this week in anticipation of a hard Brexit.
Please see the Capital Markets section for the FCA’s forms and directions on Brexit registration and conversion regimes for CRAs.
Please see the Financial Crime section for the FCA's Primary Market Bulletin No 21: no-deal Brexit impact on short selling and market abuse.
Please see the Markets and Markets Infrastructure section for the UK and US authorities' statement on post-Brexit continuity of derivatives trading and clearing.
Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 made
On 28 February, the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to establish a run-off regime for EEA financial institutions that currently operate in the UK on the basis of EU legislation and that do not enter into the various UK temporary regimes available to these firms after Brexit. HMT published a draft version of the Regulations in December 2018. The Regulations will come into force on the day after the day on which they are made.
FCA policy statement on Brexit
On 28 February, the FCA published a policy statement on Brexit (PS19/5). In PS19/5, the FCA sets out its near-final proposals on: (i) amendments to the FCA Handbook and to binding technical standards resulting from Brexit; (ii) the establishment of a temporary permissions regime for EEA entities operating in the UK and the financial services contracts regime; (iii) the establishment of regulatory regimes for credit rating agencies, trade repositories and securitisation repositories; and (iv) its approach to EU level 3 material, FCA non-Handbook guidance and forms. The FCA intends to publish the final instruments on 28 March if the UK-EU withdrawal agreement is not ratified.
PRA and BoE policy statement on Brexit
On 28 February, the PRA and the BoE published a joint policy statement on Brexit (PS5/19). The policy statement: (i) confirms the BoE’s intention to provide firms with broad transitional relief in relation to changes to their regulatory obligations in the event that the UK withdraws from the EU in March without an implementation period; (ii) confirms the BoE’s approach to changes to their rules and BTS as a result of Brexit; and (iii) sets out the roles and responsibilities that the BoE will be taking on in March if the UK leaves the EU without an implementation period.
Near-final FCA directions using Brexit temporary transitional powers
On 28 February, the FCA published two near-final draft transitional directions: (i) near-final draft FCA transitional direction. This is accompanied by Annex A (application of the "standstill" in the transitional direction to amendments made in statutory instruments and exit instruments amending technical standards) and Annex B (application of the standstill in the transitional direction to amendments made in the FCA Handbook); and (ii) near-final draft FCA prudential transitional direction. This includes Annex 1, which comprises section A (application of the prudential standstill direction (that is, Part 3 of the prudential transitional direction) to amendments made in statutory instruments and exit instruments amending binding technical standards) and section B (application of the direction to amendments made in the FCA Handbook). The FCA has also published a related explanatory note.
In the explanatory note, the FCA explains that the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, which have been laid before Parliament, grant the FCA powers to make transitional directions to mitigate disruption caused by EU exit-related changes to firms’ obligations. The purpose of the transitional directions is to give effect to the FCA's use of the temporary transitional power if the UK leaves the EU on a no-deal basis. The directions give regulated persons time to adapt to changes to UK financial services regulation caused by Brexit. The FCA set out its approach in a statement published on 1 February. Continuity is generally achieved by applying the standstill, enabling firms to continue to comply with the pre-exit version of an obligation for a limited time. In addition, temporary permission firms are allowed substituted compliance for home state obligations. However, in some cases, firms must comply with post-exit obligations, where the FCA considers this to be important for its statutory objectives. If there is a no-deal Brexit, the transitional directions will take effect from exit day until midnight on 30 June 2020. After this date, all onshored changes will apply without modification. Both transitional directions include guidance to help firms understand the temporary transitional power. The PRA and the BoE have also published near-final directions using their temporary transitional powers.
Near-final PRA and BoE directions using Brexit temporary transitional powers
On 28 February, the BoE published the following near-final directions made by it and the PRA using temporary transitional powers under Part 7 of the FSMA Regulations: (i) PRA direction, together with general guidance; and (ii) BoE direction, together with general guidance. The FSMA Regulations give the PRA and the BoE the power make transitional directions to mitigate disruption caused by EU exit-related changes to firms’ obligations. The directions are intended to provide transitional relief across the board, postponing the application of onshoring changes to firms' obligations. They will deliver a standstill for firms, which will continue to be subject to pre-exit requirements for a period of 15 months until 30 June 2020. At the end of this period, all onshoring changes (that is, amendments to rules and legislation made using powers under the European Union (Withdrawal) Act 2018 will apply. The BoE and the PRA will have the ability to extend this period to a maximum of two years if circumstances warranted it. The directions contain a list of areas that are excepted from the general transitional provision, as well as a number of specific transitional provisions. The final directions will apply without firms needing to take any action to benefit from the transitional relief. The PRA has published policy guidance on its transitional direction in relation to firms' obligations under the CRR, Solvency II and the Securitisation Regulation and general guidance relating to the PRA Rulebook. The PRA and the BoE will make the final directions once the FSMA Regulations are made, if the UK leaves the EU on a no-deal basis. They invite firms to contact them where they think additional relief or additional time may be necessary. The PRA and BoE's approach to the use of the transition power is set out in section A of their joint policy statement on Brexit (PS5/19), also published on 28 February.
Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 2) Regulations 2019 published by HMT
On 27 February, HMT published a draft version of the Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 2) Regulations 2019, together with a draft explanatory memorandum. The purpose of the Regulations is primarily to make minor amendments to financial services statutory instruments made under the European Union (Withdrawal) Act 2018. Among other things, the Regulations make amendments to: (i) the EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018 and the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 relating to the financial services contracts regime. These Regulations are revised to require firms that enter contractual run-off (CRO) under the FSCR to inform their UK consumers of their status under the CRO, and to disclose any changes to consumer protection; and (ii) the Financial Conglomerates and Other Financial Groups (Amendment) (EU Exit) Regulations to ensure that provisions in those Regulations are temporarily modified to allow the FCA and the PRA to use their temporary transitional arrangements effectively. The Regulations also make minor amendments to the Long-term Investment Funds (Amendment) (EU Exit) Regulations and the retained version of Commission Delegated Regulation (EU) 2015/61 on the liquidity coverage ratio. The Regulations will come into force at the end of the period of 25 days beginning with the day on which the Regulations are made, apart from the amendments to the Financial Conglomerates and Other Financial Groups (Amendment) (EU Exit) Regulations relating to transitional provisions, which come into force immediately before exit day.
Amended draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 26 February, an amended draft version of the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 was laid before Parliament, and a draft explanatory memorandum has been published. The Regulations revoke certain statutory instruments and EU legislation, including legislation relating to the single supervisory mechanism and the single resolution mechanism. In addition, they introduce transitional provisions relating to, among other things, insurance business transfers and disclosures concerning credit agreements. The Regulations will enter into force on exit day, with the exception of amendments to statutory instruments made under the European Union (Withdrawal) Act 2018, which will come into force immediately before exit day and a transitional provision relating to EEA overseas investment exchanges, which will come into force on the day before the day on which exit day falls.
FCA sectoral guidance on firms' EU departure preparations
On 26 February, the FCA published a suite of sectoral guidance to support regulated firms in finalising their preparations for Brexit. The guidance is located on separate webpages that contain specific information for firms in five different industry sectors in the UK: (i) general insurers and intermediaries; (ii) life insurers about pensions and retirement income; (iii) participants in wholesale markets (including wholesale banks, wholesale markets and asset managers); (iv) retail investment firms; and (v) banking and payment sectors. Among other things, the guidance sets out the FCA's expectations about how UK firms should service their EEA customers in a no-deal scenario and how they should address other industry-specific issues arising from Brexit.
Please see the Financial Crime section for the FCA’s Primary Market Bulletin No 21: no-deal Brexit impact on short selling and market abuse.
FCA forms and directions on Brexit registration and conversion regimes for CRAs
On 25 February, the FCA updated its webpage on CRAs to reflect the entry into force of transitional provisions under the CRA Regulations. The CRA Regulations contain provisions that came into force on 14 February introducing conversion and temporary registration regimes for CRAs wishing to issue ratings in the UK on or after exit day. The FCA sets out details of directions and forms relating to: (i) the registration conversion regime - this allows UK-based CRAs to convert their existing ESMA registration into an FCA registration. The FCA expects firms wishing to make a valid notification under the regime to comply in full with its direction on the regime and submit the conversion form to it by midnight on 4 March; (ii) the certification conversion regime - this allows ESMA-certified CRAs to extend their certification to the UK. The FCA expects firms wishing to make a valid notification under the regime to comply in full with its direction on the regime and submit the conversion form to it by midnight on 4 March; and (iii) the temporary registration regime - this offers temporary registration to CRAs that submit an advance application for registration with the FCA before exit day, provided they are a UK-incorporated entity in the same group as a CRA with an existing ESMA registration. The FCA expects firms making an application to comply in full with its direction on the regime and submit the registration form before 11pm on 29 March. The FCA has also published a registration form for new UK-based CRAs wishing to apply for registration under the UK's post-Brexit regulatory regime for CRAs. The FCA will process applications for new CRAs after exit day.
Please see the Markets and Markets Infrastructure section for the FCA’s statement on onshoring ESMA temporary intervention measures on retail CFD and binary option products.
Feedback statement to FCA call for input on PRIIPs Regulation
On 28 February, the FCA published a feedback statement to its call for input (CfI) on the PRIIPs Regulation: initial experiences with the new requirements (FS19/1). The CfI, which was published in July 2018, generated a high level of interest. In FS19/1, the FCA summarises the feedback received to the specific questions raised in the CfI, which related to the following topics: (i) scope of the PRIIPs Regulation - respondents expressed considerable uncertainty regarding the application of the PRIIPs Regulation for certain types of investment. Corporate bonds were identified as a key concern. The FCA would strongly support EU-level clarifications on the scope of the PRIIPs Regulation for corporate bonds; (ii) summary risk indicators (SRIs) - the FCA is particularly concerned that the prescribed methodology for calculating the SRI can result in KIDs for products such as venture capital trusts having a significantly lower risk rating than it, and the industry, would generally consider appropriate. It is actively discussing this and the other SRI issues raised with the EC and the ESAs; (iii) performance scenarios - the FCA shares respondents' concerns about misleading performance scenarios. It has been working closely with the ESAs to address this issue and will continue to push for changes at EU level for a solution; and (iv) transaction costs - the FCA has concluded that unrepresentative transaction costs in KIDs stem from poor application of the PRIIPs methodology. It will continue to work with market participants to increase understanding and ensure compliance. Annex 3 to FS19/1 outlines the findings of an FCA supervisory review of asset managers' compliance for products with zero, negative or unduly high transaction costs. Firms and individuals engaged in calculating transaction costs are encouraged to review these findings and discuss them with the FCA.
The FCA believes that the concerns raised regarding uncertainty about scope and the unintended effects of compliance with PRIIPs requirements are particularly serious and may risk causing consumer harm if not addressed. In these areas, it is seeking and encouraging swift and effective action from the EU institutions. The FCA will also consider the extent to which domestic interpretive guidance could mitigate concerns around performance scenarios, SRIs and PRIIPs Regulation scope. This work will take into account the UK’s future relationship with the EU, in light of Brexit.
Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019 made
On 27 February, the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to ensure that the regime established under the PRIIPs Regulation continues to operate effectively after Brexit. The Regulations amend the Packaged Retail and Insurance-based Investment Products Regulations 2017 and the retained versions of the PRIIPS Regulation and Commission Delegated Regulation (EU) 2016/1904 on product intervention powers. The Regulations will come into force on exit day.
CMA letter to BEIS outlining proposals for reform of the competition and consumer protection regimes
On 25 February, the CMA published a letter from Andrew Tyrie, CMA Chair, to the Secretary of State for BEIS setting out preliminary advice on legislative and institutional reforms to safeguard the interests of consumers and to maintain and improve public confidence in markets. In summary, the proposals consist of: (i) a new statutory duty on the CMA, and the courts, to treat the interests of consumers, and their protection from detriment, as paramount. An overriding statutory duty to promote the consumer interest would give clear legislative authority to the CMA to address consumer detriment, including new and emerging forms of detriment, and including the protection of vulnerable consumers; (ii) a more effective and flexible regime for market studies and market investigations, including the possibility of introducing powers to adopt interim measures and aligning the scope of phase 2 market investigations with that of phase 1 market studies; (iii) strengthening consumer law enforcement, by empowering the CMA to decide whether consumer protection law has been broken; declare the fact publicly; direct businesses to bring infringements to an end; and impose fines. Fines could also apply to firms that have breached undertakings provided to the CMA. The CMA's decisions would be subject to appeal, just as they are in competition cases; (iv) improving individual and board responsibility for competition and consumer law; (v) reducing risks to whistle-blowers, through appropriate financial compensation, and providing stronger protections of confidentiality. A reporting requirement on auditors to report suspected infringements of competition law identified during the course of their usual work to the CMA and the Financial Reporting Council could also supply useful information (and provide a strong incentive on boards and senior management to maintain high standards in their firms); (vi) broadening the CMA's information-gathering powers, for example, to include fines for non-compliance with both competition and consumer protection law enforcement investigations; introducing civil fines for the provision of false or misleading information; and making the CMA subject to a statutory requirement to conduct its investigations swiftly; (vii) simplifying and expediting court scrutiny of the CMA's decisions. The CMA suggests moving away from the current "full merits" standard review of Competition Act decisions, either to a judicial review standard, or to a new standard of review, setting out specified grounds of permissible appeal; or by amending the CAT's rules of procedure, to facilitate a faster review process for example, by restricting the admissibility of new evidence and ensuring less reliance on oral testimony; and (viii) changes to the mergers regime to cope with the increase in the CMA's caseload after Brexit, including compulsory and suspensory notification above a threshold.
Please see our blog on the first OFSI penalty for breach of financial sanctions.
Please see our blog on HMRC making it easier to self-report (or whistle blow) on facilitation of tax evasion.
HMT publishes updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions
On 26 February, HMT published an updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. On 26 February, the FATF published two statements identifying jurisdictions with strategic deficiencies in their AML and counter-terrorism financing regimes. In response to the latest FATF statements, HMT advises firms to note the following: (i) consider the Democratic People's Republic of Korea (DPRK) as high risk and apply counter measures and enhanced due diligence measures in accordance with the risk; (ii) consider Iran as high risk and apply enhanced due diligence measures in accordance with the risk; and (iii) for the Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen, take appropriate sanctions to minimise associated risks which may include enhanced due diligence measures in high risk situations. Additionally, the DPRK, Iran, Syria, Tunisia and Yemen are subject to sanctions measures which require firms to take additional measures.
FCA Primary Market Bulletin No 21: no-deal Brexit impact on short selling and market abuse
On 22 February, the FCA published its 21st Primary Market Bulletin. The bulletin sets out the new regulatory obligations that issuers and market makers will need to comply with in relation to short selling and market abuse, in the event that the UK leaves the EU without an implementation period.
Outcomes of the FATF plenary meeting 20-22 February
On 20-22 February, the FATF held a plenary in Paris. The issues discussed included: (i) operations and streamlining the FATF, including strengthening the governance and accountability of the FATF and appointing the incoming FATF vice-president for 2019-2021; (ii) combating the financing of terrorism, including a public statement on FATF's current actions; (iii) mitigating risks from virtual assets; (iv) mutual evaluations and reviews, including the mutual evaluation reports of China and Finland, follow-up reports for the mutual evaluations of Italy and Norway, issuing a statement on Brazil's progress in addressing the deficiencies identified in its mutual evaluation report and identifying jurisdictions with strategic AML and countering the financing of terrorism deficiencies; (v) adoption of a report to the G20 finance ministers and Central Bank governors; and (vi) approval of risk-based approach guidance papers for public consultation for lawyers, accountants and trust and company service providers.
EC speech on progress of FinTech action plan
On 26 February, the EC published a speech by Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union on the progress of the EC's March 2018 FinTech Action plan. Among other things, Mr Dombrovskis: (i) urges the EP and member states to step up efforts to adopt the EC's proposals to allow EU crowdfunding platforms to operate across the EU based on a single licence; (ii) announces that on 2 April, together with the ESAs, the EC will launch a European Network of Innovation Facilitators. This network will allow supervisors to learn from each other through continuous information sharing. It will also enable companies to reach EU scale more easily, by creating a referral mechanism when firms need to go beyond their national markets; (iii) explains that the EC will make every effort to ensure that well-functioning communication interfaces, or APIs, are ready and tested in time for 14 September, when banks will have to make available an interface for fully secured communication with authorised third-party providers under Commission Delegated Regulation (EU) 2018/389 supplementing PSD2 with regard to RTS on strong customer authentication and common and secure open standards of communication; and (iv) suggests that the EU may be on the verge of a pan-European, fast bank-to-bank payment network that will allow consumers to use instant payments in Euro across borders like cash, bank transfers or cards. He explains that the EC is considering whether a stronger regulatory push is needed to speed up the process of developing pan-European payment solutions, and suggests that the review of the PAD in 2019 may provide an opportunity to pursue concrete actions.
Please see our paper, 'Non-bank lending in the European Union'. This paper has been produced in partnership with the Alternative Credit Counsel.
Please see the Consumer/Retail section for the feedback statement to FCA call for input on PRIIPs Regulation.
Please see the Prudential Regulation section for an update on political agreement reached on Investment Firms Regulation and Directive.
Findings of FCA multi-firm review into disclosure of costs by asset managers
On 28 February, the FCA set out the key findings of its multi-firm supervisory review into disclosure of costs by asset managers. The FCA launched the review in the light of the introduction in January 2018 of new costs and charges disclosure requirements under MiFID II and the PRIIPs Regulation and following concerns about poor cost disclosure. The review focused on asset managers in their capacity as manufacturers of investments. It looked only at distributor firms to assess whether cost disclosures were markedly different between these two groups of firms. The review comprised two workstreams: transaction costs, where the FCA looked at a sample of 16 firms, and a desk-based review of the effectiveness and consistency of 26 product cost disclosures across various information sources. The FCA sets out the findings of the two workstreams, which include: (i) most of the 16 asset managers reviewed in the transaction costs workstream calculate transaction costs in compliance with the relevant requirements. However, the FCA identified problems with several of the firms and products sampled. These issues increase the risk that firms understate the cost of investing and, therefore, that customers could be misled. The FCA outlines the key issues identified; and (ii) under the costs disclosure workstream, the FCA found that many costs disclosures are unclear and often fail to disclose all related costs and charges. The FCA outlines the key issues identified and emphasises that it wants asset managers to take a holistic approach to disclosing costs. The FCA is concerned about its review observations and expects to see improvements in the coming weeks and months. In the "next steps" section of the webpage, it sets out some examples of the kind of steps that asset managers should take to ensure compliance with relevant requirements. The FCA encourages asset managers to review both how they calculate transaction costs and how they disclose their costs and charges, to ensure their disclosures are clear, fair and not misleading. It adds that further action in this area could include more detailed investigations into specific firms, individuals or practices.
FCA response to CMA report on investment consultancy market investigation
On 26 February, the FCA published a letter (dated 21 February) from Christopher Woolard, FCA Executive Directive of Strategy and Competition, to John Wotton, CMA inquiry chair. The letter sets out the FCA's response to the CMA's final report on its market investigation into the supply and acquisition of investment consultancy services and fiduciary management services to and by institutional investors and employers in the UK. The FCA's follow-up work to the CMA's recommendations includes the following: (i) once certain CMA remedies are in place, the FCA will consult on relevant new rules for firms offering fiduciary management services. These relate to matters including firms offering both fiduciary management and investment consultancy services being required to separate the marketing of fiduciary management services from the provision of investment consultancy advice, fiduciary management providers being required to disaggregate fees for current customers, and firms offering fiduciary management services providing more information about their fees to prospective customers, including transition and exit costs, asset management fees and custodian fees; (ii) certain parts of the CMA's remedies will sit alongside, and be additional to, existing obligations under MiFID II, which will impact firms subject to MiFID II. The FCA will continue to support the CMA in preparing its notification to the EC relating to this; (iii) the FCA will work with HMT and the CMA to take forward the extension of its regulatory perimeter to capture the full scope of investment consultancy services, including asset allocation advice. Among other things, this would allow the FCA to consult on rules to incorporate the CMA's remedies into its regulation; and (iv) the FCA will continue to maintain its oversight of transparency of asset management fee reporting. It will also continue to engage with the cost transparency initiative in its status as an observer.
Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2019 made
On 22 February, the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to correct deficiencies in the retained version of the European Social Entrepreneurship Funds Regulation. The Regulations were laid before Parliament in November 2018. The Regulations will come into force on exit day.
Council of EU invites COREPER to approve final compromise texts of proposed Regulation and Directive on cross-border distribution of collective investment funds
On 22 February, the Council of the EU published an "I" item note with accompanying addenda setting out the final compromise texts of: (i) the proposed Directive on the cross-border distribution of collective investment funds; and (ii) the proposed Regulation on facilitating cross-border distribution of collective investment funds. In the "I" item note, the Council invites COREPER to approve the final compromise texts. It also asks COREPER to confirm that the Council Presidency can indicate to the EP that, should the EP adopt its positions on the two proposals, as set out in the addenda, at first reading, the Council would approve the EP's positions and adopt the acts in the wording that corresponds to the EP's positions. The Council and the EP reached political agreement on the proposals on 5 February. The EP has indicated that it plans to consider them at its plenary session of 15 to 18 April. The proposed Regulation sets out a harmonised framework concerning certain aspects of the cross-border distribution of funds, such as marketing communications and member states' marketing requirements. The proposed Directive contains amendments to the UCITS Directive and the AIFMD relating to, among other things, pre-marketing and the discontinuation of marketing.
Please see the Consumer/Retail section for the feedback statement to FCA call for input on PRIIPs Regulation.
Please see the Markets and Markets Infrastructure section for the draft Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 laid before Parliament.
Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 made
On 28 February, the Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to amend UK legislation implementing the Solvency II framework, which includes the Solvency II Directive and Delegated Regulation (EU) 2015/35, to ensure that it works effectively in the event of a "hard Brexit". Under the Regulations, certain key functions currently carried out by EIOPA and the EC will be transferred to the PRA, the BoE's Prudential Regulation Committee and HMT – this includes HMT determining whether the prudential regime of a third country is equivalent, with the PRA undertaking the technical assessment of third country regimes that underpin such equivalence decisions. The Regulations also make amendments to FSMA and the Solvency 2 Regulations 2015. The Regulations will come into force on exit day.
IAIS application paper on proactive supervision of corporate governance
On 27 February, the IAIS published an application paper on proactive supervision of corporate governance, which has been adopted by its executive committee. The application paper supports the practical application of the IAIS' ICPs related to corporate governance, mainly ICP 7 (corporate governance) and ICP 8 (risk management and internal controls). It sets out good practices relating to the organisation and functioning of supervisors, with the aim of promoting proactive supervision of corporate governance. It aims to raise awareness of, and seeks to address, the organisational, cultural, and procedural challenges faced by supervisors in detecting problems in corporate governance and taking appropriate steps at an early stage. The paper recognises that there is no one-size-fits-all approach to proactive supervision as there is a variety of organisational and governance structures among insurers. There are different steps that supervisors may decide to take, both organisational and procedural, direct and indirect, separately or together, to foster proactiveness. Whichever steps are taken, proactive supervision should be carried out proportionately to the issues identified, using an approach customised to the circumstances, including relevant supervisory objectives, laws and regulations. The paper contains four sections that address key aspects of fostering and supporting proactive supervision: (i) the role of the supervisor's own organisation, culture and processes, including the obstacle of supervisory forbearance; (ii) the relevant and timely information required to enable a supervisor to carry out proactive supervision; (iii) the development of an early warning system of potential corporate governance-related indicators (in the form of, yellow and red flags) that may signal the need for investigation and, potentially, further steps; and (iv) how effective communication by the supervisor with both insurers and the wider public can promote proactive supervision. The IAIS consulted on the draft application paper in November 2018.
MARKETS AND MARKETS INFRASTRUCTURE
Findings of FCA's multi-firm review into MiFID II costs and charges disclosures
On 28 February, the FCA set out the key findings of its multi-firm supervisory review of MiFID II costs and charges disclosure. The review focused on disclosures on firms' websites and their communications to retail clients. It involved a sample of 50 firms, identified from a number of MiFID investment firms operating in the retail investments sector, whose costs and charges disclosures did not appear to fully comply with the disclosure requirements introduced under MiFID II. The FCA found that, in the months after 3 January 2018, high numbers of firms were not complying with the updated costs and charges disclosure requirements. By the second half of 2018, levels of compliance had improved and most firms were satisfying the requirements. However, some firms still have work to do. The review's findings suggest that, overall, the industry has been slow to comply. The FCA sets out: (i) examples of good practice that demonstrate compliance with or, in some cases, go beyond the costs and charges disclosure requirements. It considers that firms may find these examples helpful as they as they continue to embed compliance with these requirements; (ii) area of improvement, in the form of examples of practices the FCA expects firms to address; (iii) information on the interaction between the costs and charges disclosure requirements in MiFID II, the PRIIPs Regulation and the UCITS Directive. Many of the firms reviewed raised concerns about what they consider to be contradictory or conflicting disclosure rules. The FCA notes that the interaction is not seamless and that customers value clarity as much as transparency. However, firms must comply with all relevant requirements when disclosing costs and charges; and (iv) next steps for firms - the FCA expects all firms to review their costs and charges disclosures to ensure they are satisfying all relevant requirements for their "ex-ante" costs and charges disclosures, and complying with the relevant rules. Firms should be particularly alert to the need to disclose all transaction and incidental costs and charges. All communications to customers about firms' MiFID business must be fair, clear and not misleading. The FCA will be following up with firms where issues have been identified. Where it does not see improvement in firms' costs and charges disclosures, it will consider whether further action is required, which could include more detailed investigations into specific firms, individuals or practices.
EEA Joint Committee Decision incorporating CSDR into EEA Agreement published in OJ
On 28 February, Decision 18/2019 of the EEA Joint Committee concerning the incorporation of the CSDR into the EEA Agreement was published in the OJ. The decision states that Annex IX (Financial Services) to the EEA Agreement should be amended to incorporate the CSDR. The decision specifies adaptations to the reading of certain provisions in the CSDR for the purposes of the EEA Agreement, intended to make it legally effective in the context of the EEA. The decision was made on 8 February. Its date of entry into force specified as 9 February, provided that all notifications under Article 103(1) of the EEA Agreement have been made.
Money Market Funds (Amendment) (EU Exit) Regulations 2019 made
On 26 February, the Money Market Funds (Amendment) (EU Exit) Regulations 2019were made, and an explanatory memorandum has been published. The purpose of the Regulations is to amend the retained versions of the MMF Regulation and Commission Delegated Regulation (EU) 2018/990, which supplements the MMF Regulation, to ensure that they function effectively after Brexit. The Regulations also amend the Technical Standards Regulations to assign responsibility to the FCA for implementing technical standards relating to the MMF Regulation set out in Commission Implementing Regulation (EU) 2018/708. The Regulations were laid before Parliament in January. The Regulations will come into force on exit day, with the exception of amendments relating to the Technical Standards Regulations, which came into force on 27 February.
EC consults on Implementing Decision on equivalence of Japan Financial Services Agency under EMIR
On 26 February, the EC published for consultation the text of an Implementing Decision on the recognition of the legal, supervisory and enforcement arrangements of Japan for derivatives transactions supervised by the Japan Financial Services Agency (JFSA) as equivalent to the valuation, dispute resolution and margin requirements of Article 11 of EMIR. The draft Implementing Decision states that for the purposes of Article 13(3) of EMIR, the legal, supervisory and enforcement arrangements of Japan for valuation and dispute resolution that are applied to transactions regulated as OTC derivatives by the JFSA or OTC commodity derivatives by the Japanese Ministry of Economy, Trade and Industry and the Japanese Ministry of Agriculture, Forestry and Fisheries and that are not cleared by a CCP will be considered as equivalent to the corresponding requirements set out in paragraphs 1 and 2 of Article 11 of EMIR, where at least one of the counterparties to those transactions is established in Japan and registered with the JFSA as a financial instrument business operator or a registered financial institution. Article 2 of the Implementing Decision sets out the conditions that must be satisfied for those legal, supervisory and enforcement arrangements to be deemed equivalent. The Implementing Decision is stated as coming into force 20 days after publication in the OJ.
FCA speech on impact of MiFID II investment research requirements on independent research providers
On 26 February, the FCA published a speech by Andrew Bailey, FCA Chief Executive, which outlines some of the challenges and concerns relating to investment research requirements under the MiFID II package of measures that came into force on 3 January 2018. Mr Bailey explains that the unbundling of research remains one of the most debated aspects of the changes introduced under MiFID II. His comments are based on a multi-firm review of buy-side asset managers, sell-side brokers and independent research providers that the FCA has been carrying out since summer 2018. Mr Bailey concludes that the rules are already having a positive impact, with changes in behaviour that are starting to deliver the intended effect of reducing conflicts of interest, improving accountability and producing cost savings for investors. However, Mr Bailey points out that market is still evolving, and that it is likely that the right pricing equilibrium for research, and the full benefit of competition, are yet to be felt. In this regard, the speech outlines concerns that have been identified by independent research providers. Key concerns relate to the scope of the MiFID inducements regime, pricing and other unintended consequences. Addressing these issues, Mr Bailey states that the FCA: (i) will consider whether changes to the "trial period" exemption may be beneficial to ensure they have the intended effect; (ii) has found that the evidence, so far, on the research coverage of smaller companies is inconclusive, and does not suggest the dramatically negative impact that some predicted. Evidence also suggests that the liquidity of their shares has been maintained; and (iii) is keen to scrutinise and test the impact of low pricing, which raises competition questions relating to the future of a sustainable and diverse research market. It will consider carefully the findings of the EC's study on the impacts of the MiFID II reforms on the research market. It will provide more formal feedback in the second quarter of the year.
FSB seeks feedback on impact of financial regulatory reforms on SME financing
On 25 February, the FSB issued a press release seeking feedback on the impact of financial regulatory reforms on the provision of financing to SMEs. The FSB has also published a summary of the views expressed at a roundtable held by the FSB on this topic in December 2018. Stakeholders are invited to provide feedback on a number of issues including the following: (i) whether, and if so how, financial regulatory reforms such as Basel III have affected bank financing to SMEs; (ii) how the impact (if any) of financial regulatory reforms varies across banks operating in different geographies and with different size and business models; (iii) the potential impact of the G20 financial reforms or other domestic financial regulations (if any) on financing to SMEs; and (iv) whether, and if so how, financial reforms have prompted a shift in the provision of SME financing, such as between banks and other financial institutions. Stakeholders are also asked to provide feedback on the main trends in SME financing since the financial crisis, and how they differ across jurisdictions, sectors, firms' size and age. The evaluation forms part of a broader FSB examination of the effects of post financial crisis reforms on financial intermediation. The deadline for comments is 18 March. The final report, reflecting the feedback from the consultation, will be published in October.
Council of EU and EP political agreement on low-carbon benchmarks
On 25 February, the Council of the EU announced that it and the EP have reached provisional political agreement on the EC's proposed Regulation amending the BMR on low-carbon benchmarks and positive carbon impact benchmarks. The proposed Regulation: (i) establishes a new category of benchmarks that comprises of two types of financial benchmarks: an EU climate transition benchmark and a specialised benchmark that brings investment portfolios in line with the Paris climate change agreement; (ii) provides an obligation for all benchmarks, or families of benchmarks, to provide an explanation of how environmental, social and governance factors are reflected in their investment strategy, as well as how the methodology aligns with the target of reducing carbon emissions; and (iii) reviews existing provisions of the BMR by providing an extension of the transition regime for critical and third-country benchmarks until the end of 2021. Subject to technical finalisation of the text of the proposed Regulation, the political agreement will now be submitted to COREPER for endorsement. The EP and the Council will be called on to adopt the proposed Regulation at first reading. The EC has published a press release welcoming the agreement. The EP is due to consider the proposed Regulation at its plenary session of 25 to 28 March.
UK and US authorities statement on post-Brexit continuity of derivatives trading and clearing
On 25 February, the BoE, the FCA and the CFTC published a joint statement on measures intended to ensure the continuity of UK-US derivatives trading and clearing activities after Brexit. The measures relate to: (i) continued supervisory co-operation - the BoE and CFTC will update their MoU covering clearing activity, in connection with the UK's forthcoming recognition of CFTC-registered CCPs. The FCA and CFTC will also update their MoUs covering certain firms in the derivatives and the alternative investment fund industry; (ii) extension of existing CFTC relief and comparability for the UK - the CFTC intends that existing regulatory relief granted by the CFTC to EU firms, including UK firms, will be extended to UK firms when the UK leaves the EU. CFTC staff will issue new no-action letters to UK market participants confirming the continued application of existing no-action letters directed at EU market participants. The CFTC intends to grant new substituted compliance and exemption orders confirming that existing orders directed at the EU will be accompanied by new orders directed at the UK. The CFTC also has confirmed that UK CCPs currently registered with the CFTC will be able to continue providing services in the US on the same basis as at present; and (iii) UK equivalence for the US - US trading venues, firms and CCPs will be able to continue providing services in the UK. HMT has confirmed that the EC's decisions declaring the CFTC regulatory framework equivalent in relation to risk mitigation requirements, including margin requirements for uncleared derivatives, and in relation to trading venues, will continue to apply as a matter of UK law after Brexit. HMT, the BoE and the CFTC are co-operating on making equivalence and recognition decision relating to CFTC-registered CCPs. HMT intends to find equivalent those clearing regimes that have already been found equivalent by the Commission. HMT and the BoE expect to announce decisions regarding the CFTC regime and CFTC-registered CCPs as a matter of priority. The statement notes that, if there is a no-deal Brexit, US CCPs providing services in the UK and to UK firms will be able to continue to do so using the temporary recognition regime for non-UK CCPs.
Draft Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 laid before Parliament
On 25 February, a draft version of the Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019 was laid before Parliament, and an explanatory memorandum has been published. The E-Commerce Directive (ECD) allows EEA member state firms, excluding Solvency II insurers, to undertake regulated activities in online-only financial services in the UK without needing UK authorisation, or being subject to UK regulation. In November 2018, HMT announced that as the ECD would no longer apply in the UK after Brexit, the exclusion for EEA firms providing information society services (ISS) of a financial services nature in the UK would also no longer apply. The Regulations, which have been laid before Parliament: (i) revoke article 72A of the RAO, which contains the exclusion for ISS providers. They also make consequential amendments to other legislation, including FSMA and the Electronic Commerce Directive (Financial Services and Markets) Regulations 2002, relating to the disapplication of the ECD; and (ii) establish a run-off regime (the ECD run-off) for EEA ISS providers to service financial services contracts taken out before exit day under the ECD. This regime is intended to ensure that firms that do not gain the appropriate authorisation from the FCA, or enter any of the other temporary regimes for EEA firms, can continue to carry out business to the extent necessary to run off pre-existing contractual obligations in the UK, but not to undertake new business. The ECD run-off period will end five years after the date on which the Regulations come into force, although it may end earlier for individual firms depending on their circumstances. The Regulations also make minor amendments to Article 257 of the UK-retained Solvency II Delegated Regulation relating to the Securitisation Regulation. The Regulations will come into force on the day after the day on which they are made.
FCA statement on onshoring ESMA temporary intervention measures on retail CFD and binary option products
On 22 February, the FCA published a statement on the onshoring process for ESMA's temporary intervention measures prohibiting binary options and restricting contract for difference products (CFDs) sold to retail clients. In June 2018, ESMA decision notices on temporary product intervention measures prohibiting the provision of binary options and restricting the provision of CFDs were published in the OJ. ESMA has renewed these temporary measures since that date. The ESMA decision currently in force relating to binary options is due to expire on 1 April and the ESMA decision currently in force relating to CFDs is due to expire on 30 April. These decisions will become part of UK domestic law on 29 March under the European Union (Withdrawal) Act 2018, if the UK leaves the EU on a no-deal basis.
In December 2018, the FCA published two consultation papers (CP18/37 and CP18/38) on proposals to make ESMA's temporary product intervention measures permanent in the UK. The FCA states that it intends to publish a policy statement in March relating to binary options and a policy statement in April relating to CFDs and CFD-like options. It expects its finalised rules to apply very shortly after publication to coincide with the dates on which the ESMA restrictions expire. The FCA will consider adopting temporary product intervention measures to replicate the ESMA restrictions if it is unable to finalise its approach before the ESMA restrictions expire. These temporary measures will seek to ensure that there is no loss of protection for UK consumers in the period between the expiry of the ESMA restrictions and the application of the FCA's rules.
Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 made
On 22 February, the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to make amendments to correct deficiencies in UK legislation relating to FMI insolvency that reflects EU law, including the Settlement Finality Directive (SFD) and the Financial Collateral Arrangements Directive (FCAD). They also establish a temporary designation regime to enable non-UK FMIs to continue to benefit from UK protections currently provided for by the SFD. The Regulations were laid before Parliament in December 2018. The Regulations will come into force on exit day, with the exception of regulation 1 and provisions on the temporary designation regime, which will come into force on the day after the day on which the Regulations are made.
PAYMENT SERVICES AND PAYMENT SYSTEMS
Please see the FinTech section for the EC’s speech on progress of the FinTech action plan.
EEA Joint Committee Decision incorporating Interchange Fee Regulation into EEA Agreement published in OJ
On 28 February, Decision 21/2019 of the EEA Joint Committee concerning the incorporation of the Interchange Fee Regulation (IFR) into the EEA Agreement was published in the OJ. The decision states that Annex IX (Financial Services) to the EEA Agreement should be amended to incorporate the IFR. The decision specifies adaptations to the reading of certain provisions in the IFR for the purposes of the EEA Agreement, intended to make it legally effective in the context of the EEA. The decision was made on 8 February. Its date of entry into force is specified as 9 February, provided that all notifications under Article 103(1) of the EEA Agreement have been made.
ECB impact assessment report on SEPA migration
On 28 February, the ECB published an impact assessment report on the SEPA migration process relating to euro credit transfers and direct debits. The report is based on feedback provided to the European System of Central Banks from relevant stakeholders in each market in response to qualitative questionnaires. The purpose of the questionnaires was to obtain an understanding of the market's assessment of the SEPA migration process and its current view on the European retail payments landscape. The ECB concludes that stakeholders have a positive overall assessment of the outcome of SEPA migration, because of faster and cheaper cross-border credit transfers, as well as increases in competition and efficiency. However, the implementation of the SEPA schemes proved to be a challenge for stakeholders, with some finding the migration expensive because of changes to IT systems and business processes. In section 4 of the report, the ECB sets out the post-migration challenges highlighted by stakeholders, including IBAN discrimination (where an EBAN from another EU country is not accepted by the payer or the payee) and developing interoperable electronic mandate solutions for SEPA direct debit. The ECB considers that these challenges have been addressed by recommendations made by the Euro Retail Payments Board. The ECB emphasises that SEPA is still a work in progress and urges the ESB to keep up the momentum to achieve full integration of European payments. The ECB suggests that this is particularly important in the area of card payments, as SEPA has not been achieved for cards and European consumers are effectively reliant on international card schemes.
EBA letter on procedures for licensing e-money institutions and credit institutions
On 27 February, the EBA published a letter from Adam Farkas, alternate EBA chairman, to Markus Ferber MEP on the procedures for granting authorisation as an e-money institution (EMI) and as a credit institution (CI). The letter was written in response to a letter from Mr Ferber (dated 9 February) expressing concerns about the licensing processes for EMIs, and banking licences more generally. In the letter, Mr Farkas considers the authorisation processes under PSD2, which also apply to EMIs. He notes that all competent authorities have submitted that they comply with the EBA's detailed guidelines on authorisation and registration under PSD2, or intend to do so. He also notes that competent authorities may, but are not required to, require a payment institution (PI) (and consequently also an EMI) to establish a separate entity for payment services business where the non-payment services activities of the PI may impair the authority's ability to supervise the PI's compliance with their obligations under PSD2. Mr Farkas acknowledges that PSD2 does not contain any other provisions on an EMI's authorisation addressing issues arising from combining payment services information with other sensitive information obtained through other business activity. He suggests that the creation of a central electronic register under the PSD2 will improve the transparency of the authorisation status of PIs and EMIs. The EBA submitted its draft technical standards on this register in December 2017. Mr Farkas highlights initiatives that the EBA intends to take relating to authorisation procedures: (i) the EBA will review its guidelines on the authorisations of PIs and EMIs, with a view to converting them into binding technical standards. This review is unlikely to take place before 2020; (ii) the EBA is currently assessing the practices of competent authorities in assessing applications against the conditions for the authorisation of CIs, PIs and EMIs in EU legislation to review the extent to which authorities are acting consistently. It expects to complete this assessment in mid-2019; and (iii) CRD V will require the EBA to issue guidelines on a common assessment methodology for granting authorisations for CIs.
Council of EU asks COREPER to agree EP's first reading position on proposed Regulation amending Regulation on cross-border payments
On 22 February, the Council of the EU published an "I/A" item note from its General Secretariat to COREPER on the proposed Regulation amending the Regulation on cross-border payments as regards certain charges on cross-border payments in the EU and currency conversion charges. The General Secretariat asks COREPER to: (i) confirm its agreement to the position adopted by the EP at first reading on 14 February; and (ii) suggest that the Council approves the EP's position as an "A" item at a forthcoming meeting. The note states that, if the Council approves the EP's position, the legislative act will be adopted and then published in the OJ. The Regulation will enter into force 20 days after its publication in the OJ and the majority of its provisions will apply from 15 December.
FCA consults on publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS
On 28 February, the FCA published a consultation paper on publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS 19.8 (CP19/10). The proposals in CP19/10 relate to FCA-regulated relevant schemes within the defined contribution (DC) workplace market. In CP19/10, the FCA sets out proposed rules and guidance for the FCA Handbook relating to: (i) the publishing and disclosing of information about administration charges and transaction costs by scheme governance bodies to members of workplace pension schemes. This builds on the existing rules in chapter 19.8 of the FCA's Conduct of Business Sourcebook (COBS) that require asset managers to disclose and publish costs and charges information to the operator, trustee or manager of workplace pension schemes. Full details of the FCA's proposals in this area are set out in chapter 3 of CP19/10; and (ii) amendments to COBS, based on feedback to the FCA's July 2018 call for input on the PRIIPs Regulation: initial experiences with the new requirements. The FCA has published a feedback statement to the call for input (FS19/1) alongside CP19/10. The FCA proposes to amend certain COBS 19.8 rules that apply to DC workplace pensions and prescribe a methodology for calculating transaction costs. This methodology is similar to the PRIIPs methodology, but as the COBS 19.8 rules are outside the scope of the PRIIPs Regulation, the FCA can clarify it and vary the approach. Full details of the FCA's proposals in this area are set out in chapter 4 of CP19/10.
The proposed Handbook text is contained in the Pension Schemes (Publication and Disclosure of Costs and Charges) Instrument 2019, a draft version of which is included in Appendix 1 to CP19/10.
CP19/10 closes to responses on 28 May. The FCA will consider the feedback received and publish final rules in a policy statement later in the year, with the intention that the final rules will come into force from April 2020.
Please see the Consumer/Retail section for the FCA's response to CMA report on investment consultancy market investigation.
Political agreement reached on Investment Firms Regulation and Directive
On 26 February, the Council of the EU announced that it and the EP have reached political agreement on the proposed IFR and IFD - the package of measures setting out new prudential requirements and supervisory arrangements for investment firms. In the press release, and in the EP's press release on the agreement (dated 27 February), the Council and the EP highlight the following issues on which agreement was reached: (i) equivalence - the IFR will amend MiFIR to strengthen the equivalence regime applying to third country investment firms. The EC will be required to assess capital requirements applicable to firms providing bank-like services to make sure that those are equivalent to those applicable in the EU. The EC may also apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms, where activities performed by third country firms are likely to be of systemic importance; (ii) tick-size regime - the IFR will amend MiFIR to apply the tick size regime to systematic internalisers; and (iii) disclosure requirements - investment firms will be subject to additional disclosure requirements about their investments and their voting behaviour during shareholder meetings. The EP and Council intend to adopt the legislation at first reading.
EBA consults on draft guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGDs
On 25 February, the EBA published a consultation paper on draft guidelines on credit risk mitigation (CRM) for institutions applying the IRB approach by using their own estimates of loss given defaults. The guidelines complement the EBA's March 2018 report on the CRM framework, which focused on the standardised approach and the foundation IRB approach (F-IRB). EBA and the industry have flagged that the complexity of the current provisions in the CRR on the CRM framework, due to numerous references and cross-references, raises a significant number of implementation issues. The EBA's report provided some clarity on the application of the CRM framework in the context of the standardised approach and F-IRB, but it also noted the limited guidance provided in the current CRR provisions on CRM under the advanced IRB approach (A-IRB). The guidelines therefore focus on clarifying how the current CRR provisions apply to the eligibility and methods of different CRM techniques, namely funded credit protection (FCP) and unfunded credit protection (UFCP), available to institutions under the A-IRB. This is supplemented by additional detailed guidance on eligibility requirements and treatment of FCP and UFCP. The EBA believes that the guidelines should help eliminate the differences in approaches remaining in the CRM area, due to different supervisory practices or bank-specific choices. The guidelines will apply from 1 January 2021. Institutions will have to incorporate the requirements into their rating systems by that time, although supervisors may accelerate this transition at their discretion. The deadline for comments is 25 May. The EBA is also working on the EC's May 2018 call for advice on the impact of the final Basel III framework, which includes revisions on some specific aspects of the CRM. It will therefore consider those parts of the CRM framework that are envisaged to change in the Basel III framework in the context of the call for advice.
EBA handbook on valuation for purposes of resolution under BRRD
On 22 February, the EBA published its handbook on valuation for purposes of resolution under BRRD. The handbook is addressed to EU resolution authorities. It is intended to be a support document relating to valuations requested before resolution and after resolution under Articles 36 and 74 of the BRRD respectively. It is non-binding and is subordinate to the text of the BRRD itself and RTS relating to valuations under the BRRD set out in Commission Delegated Regulation (EU) 2018/344 and Commission Delegated Regulation (EU) 2018/345. Although the handbook covers all types of valuations to be performed for the purposes of resolution, it focuses on the valuation informing resolution authorities' decision on the adoption of the resolution tool(s) (referred to by the EBA as "Valuation 2"). It also deals with the valuation process, including the appointment and interaction with the valuer, the conditions for its independence, and suggestions about potential contents of the valuation report. Chapter 10 of the handbook, on management information systems, is currently in development. The EBA intends to complete this chapter at a later date. The EBA consulted on a draft version of the handbook in November 2018.
Please see the Markets and Markets Infrastructure section for the Council of EU and EP's political agreement on low-carbon benchmarks.
EBA final report on outsourcing guidelines
On 25 February, the EBA published a final report setting out guidelines on outsourcing. The guidelines update and will replace the guideless on outsourcing that the EBA's predecessor, the Committee of European Banking Supervisors (CEBS), issued in 2006. While the CEBS guidelines applied exclusively to credit institutions, the new guidelines aim to establish a more harmonised framework for all financial institutions that are within the scope of the EBA's mandate, including credit institutions, investment firms and payment institutions. The guidelines set out specific provisions for these financial institutions' governance frameworks regarding their outsourcing arrangements and the related supervisory expectations and processes. In particular: (i) each financial institution's management body remains responsible for that institution and all of its activities at all times. This means that the management body should ensure that sufficient resources are available to appropriately support and ensure the performance of those responsibilities, including overseeing all risks and managing the outsourcing arrangements; (ii) financial institutions that outsource to service providers located in third countries are expected to ensure that EU legislation and regulatory requirements (for example, on protection of personal data) are complied with and that the competent authority can effectively supervise financial institutions; (iii) the guidelines set out which arrangements with third parties are to be considered as outsourcing and provide criteria for the identification of critical or important functions that have a strong impact on the financial institution's risk profile or on its internal control framework. If such critical or important functions are outsourced, stricter requirements apply to these outsourcing arrangements; and (iv) competent authorities are required to effectively supervise financial institutions' outsourcing arrangements, including identifying and monitoring risk concentrations at individual service providers and assessing whether such concentrations could pose a risk to the stability of the financial system. The EBA has integrated its 2017 recommendation on outsourcing to cloud service providers into the guidelines. The guidelines will enter into force on 30 September and the EBA expects institutions to review and amend existing outsourcing arrangements to ensure they are compliant. The CEBS guidelines on outsourcing and the EBA's recommendation on outsourcing to cloud service providers will be repealed at the same time. The EBA consulted on the draft guidelines in June 2018. It sets out a summary of the feedback it received, together with its own analysis, in section 5.2 of the final report.