Includes developments in relation to: the G20 Leaders Declaration; the Consumer Duty; Cross-border payments; BRRD; PRIIPs; IFD; Solvency II; and anti-money laundering.

Click on the headings below to access each section:

General

  • Financial policies in the wake of COVID-19 - FSB publishes final report
  • Global financial stability - FSB publishes 2022 annual report
  • Climate scenario analysis - FSB and NGFS publish joint report
  • G20 leaders’ Declaration: the G20 Bali Summit
  • Greenwashing - ESAs publish call for evidence
  • Sustainable Finance Disclosure Regulation - ESAs publish Q&As on the SFDR RTS
  • FPC remit and recommendations - HM Treasury publishes letter to the Bank of England
  • Consumer Duty - FCA publishes speech
  • Future funding model - FOS publishes feedback statement
  • Employee survey results 2022 - FSCB publishes report
  • Decentralised autonomous organisations - Law Commission launches call for evidence

Banking and Finance

  • Cross-border payments - FSB publishes final report on developing implementation approach
  • BRRD - EBA publishes Consultation Paper on amendments to guidelines on improving resolvability

Securities and Markets

  • Liquidity risk management recommendations - IOSCO publishes final report on thematic review
  • MiFID II - ESMA publishes Consultation Paper on technical standards for passporting rights
  • PRIIPs KID - ESAs update Q&As document
  • LIBOR cessation - IBA publishes feedback statement on cessation of USD LIBOR ICE Swap Rate

Asset Management

  • IFD - EBA publishes final report on draft RTS on specific liquidity measurement

Insurance

  • Solvency II Review - ESRB publishes letters on Liquidity Risk Management
  • Challenging times for insurers - EIOPA publishes speech
  • Solvency II Review - HM Treasury publishes consultation response
  • Solvency II - PRA publishes Feedback Statement (FS1/22)

Financial Crime

  • Fighting Fraud - House of Lords publishes report
  • AML/CTF - HM Treasury publishes updated advisory notice on high risk third countries
  • APP scams - Memorandum of Understanding between the LSB and PSR published

Enforcement

  • Senior Managers and Certification Regime - FCA publishes Final Notice to director
  • FCA v London Property Investments (UK) Ltd and others, [2022] EWHC 2862 (Ch)

GENERAL

Issue FR1183 / 17 November 2022

HEADLINES

  1. Financial Stability Board
    1. Financial policies in the wake of COVID-19 - FSB publishes final report - 14 November 2022 
    2. Global financial stability - FSB publishes 2022 annual report - 16 November 2022
  2. Financial Stability Board and Network of Central Banks and Supervisors for Greening the Financial System
    1. Climate scenario analysis - FSB and NGFS publish joint report - 15 November 2022 
  3. G20 
    1. G20 leaders’ Declaration: the G20 Bali Summit - 16 November 2022
  4. European Supervisory Authorities 
    1. Greenwashing - ESAs publish call for evidence - 15 November 2022
    2. Sustainable Finance Disclosure Regulation - ESAs publish Q&As on the SFDR RTS - 17 November 2022
  5. HM Treasury
    1. FPC remit and recommendations - HM Treasury publishes letter to the Bank of England - 17 November 2022
  6. Financial Conduct Authority
    1. Consumer Duty - FCA publishes speech- 17 November 2022
  7. Financial Ombudsman Service
    1. Future funding model - FOS publishes feedback statement - 16 November 2022 
  8. Financial Services Culture Board
    1. Employee survey results 2022 - FSCB publishes report - 16 November 2022
  9. Law Commission
    1. Decentralised autonomous organisations - Law Commission launches call for evidence - 16 November 2022

Financial Stability Board

Financial policies in the wake of COVID-19 - FSB publishes final report - 14 November 2022 

The Financial Stability Board (FSB) has published a report looking at financial policies in the wake of the COVID-19 pandemic, aimed at supporting equitable recovery and addressing the scarring effects of the pandemic, the Russian invasion of Ukraine and other events on the financial sector.

Following the “speedy, sizeable and sweeping policy response” to the COVID-19 pandemic, the report considers exit strategies through the lens of financial stability and the capacity of the financial system to support strong and equitable growth. This analysis is conducted against a backdrop of the Russian invasion of Ukraine, weaker global economic growth and higher inflation, all of which have emerged since the pandemic. To this end, the report discusses specific policy challenges, such as ensuring the effectiveness of domestic policies and preventing scarring by addressing debt overhang issues. It also sets out measures the FSB is taking to tackle these challenges.

FSB final report: Financial policies in the wake of COVID-19: supporting equitable recovery and addressing effects from scarring in the financial sector

Webpage

Press release

Global financial stability - FSB publishes 2022 annual report - 16 November 2022

The FSB has published its latest annual report, which was delivered to the G20 leaders ahead of their summit in Bali this month.

The report warns that the outlook for global financial stability is particularly challenging amidst high inflationary pressures, elevated debt levels, lower growth and much tighter global financial conditions. In particular the report notes that:

  • market turbulence could be amplified by elevated valuations of some assets, forced sales from sudden unwinding of leveraged positions of non-bank financial institutions and liquidity mismatches in some types of funds. The FSB has intensified its monitoring of vulnerabilities and its continued support of international cooperation in the aftermath of COVID-19 and the Russian invasion of Ukraine;
  • key priorities in relation to the FSB’s analytical and policy work include strengthening resilience of non-bank financial intermediation, enhancing central counterparty (CCP) resilience and achieving internationally consistent and comprehensive regulation of cryptoassets; and
  • progress in implementing Basel III reforms continues, but is inconsistent. Implementation of over-the-counter derivatives reforms is well advanced but further progress is incremental. Work is ongoing to close gaps in the operation of resolution plans for banks and to implement effective resolution regimes for insurers and CCPs.

FSB: Promoting global financial stability: 2022 Annual Report

Webpage

Press release

Financial Stability Board and Network of Central Banks and Supervisors for Greening the Financial System

Climate scenario analysis - FSB and NGFS publish joint report - 15 November 2022 

The FSB and the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) have published a joint report outlining initial findings from a survey of the different approaches taken by financial authorities to climate scenario analysis exercises.

The report seeks to outline effective climate scenario analysis, and to contribute to capacity building by advancing a common understanding of the impact of climate change on financial stability. The report explains that the impact of climate risks is concentrated in certain sectors. However, it is noted that tail risks and spillovers associated with climate change-related developments may not be as manageable, and that measures of exposure and vulnerability are likely understated.

The FSB and NGFS conclude that the development of these exercises is at an early stage, and their findings have not translated into prudential policies.

FSB: Climate scenario analysis by jurisdictions: initial findings and lessons

FSB webpage

FSB press release

NGFS press release 

G20 

G20 leaders’ Declaration: the G20 Bali Summit - 16 November 2022

The G20 leaders have published a Declaration following their summit in Bali held on 15-16 November 2022. The Declaration outlines various steps to achieve inclusive and resilient global recovery, and sustainable development that delivers jobs and growth.

These steps include:

  • staying agile and flexible in its macroeconomic policy responses and cooperation, ensuring long-term fiscal sustainability, with central banks committed to achieving price stability;
  • protecting macroeconomic and financial stability and remaining committed to using all available tools to mitigate downside risk, noting the steps taken since the global financial crisis to strengthen financial resilience and promote sustainable finance and capital flows; and
  • unlocking further investments for low and middle-income developing countries, through a greater variety of innovative financing sources and instruments.

More specifically, the Declaration signals that the G20:

  • on financial stability: believes the global financial system needs to be reinforced and asks the FSB and the International Monetary Fund (IMF) to continue their monitoring efforts;
  • on sustainability: welcomes the progress made across the G20 international organisations and networks, and in the private sector, to address the G20’s Sustainable Finance Roadmap. It looks forward to the finalisation of the International Sustainability Standards Board’s (ISSB) standards;
  • on cross-border payments: supports the continued implementation of the G20 Roadmap for Enhancing Cross-Border Payments, and encourages central banks and the payments industry to continue working collaboratively on the Roadmap’s initiatives to enhance cross-border payments; and
  • on combating money laundering and terrorism: recognises the need for the international community to step up its efforts to combat these matters, and reaffirms its commitment to delivering the strategic priorities of the Financial Action Task Force (FATF).

G20 Declaration

Press release

European Supervisory Authorities 

Greenwashing - ESAs publish call for evidence - 15 November 2022

The European Supervisory Authorities (ESAs), comprising the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, have published a call for evidence on greenwashing. In particular, the ESAs are interested in collecting:

  • stakeholder views on the key features, drivers and risks associated with greenwashing;
  • examples of potential greenwashing practices relevant to various segments of the sustainable investment value chain and of the financial product lifecycle; and
  • any available data to help the ESAs obtain a better understanding of the scale of greenwashing and identify areas which pose high risk of greenwashing.

The ESAs note that this call for evidence uses the term ‘greenwashing’ broadly, recognising that sustainability-related claims can be linked to all aspects of the environmental, social and governance (ESG) spectrum.

The deadline for responses is 10 January 2023. Following this, it is expected that the ESAs will produce a progress report by the end of May 2023 and a final report by end of May 2024.

ESAs Call for evidence on better understanding greenwashing

EBA press release

Sustainable Finance Disclosure Regulation - ESAs publish Q&As on the SFDR RTS - 17 November 2022

The ESAs have published a Q&A document on the SFDR Delegated Regulation (Commission Delegated Regulation (EU) 2022/1288) (SFDR RTS).

The Q&As address the following topics:

 

  • the current value of all investments in principal adverse impacts (PAI) and Taxonomy-aligned disclosures (including the definitions of ‘current value’ and ‘all investments’);
  • PAI disclosures (including the use of mandatory indicators; the calculation and adjustment of PAI figures and other indices; and the scope of disclosures for different types of financial market participants (FMPs)); 
  • financial product disclosures (including adjustments to disclosure templates; approaches to assessing good governance; the scope of ‘financial product’; and the application of disclosure requirements);
  • multi-option products (including collection of disclosure templates; and approaches to disclosures in relation to the point of reporting versus the whole reference period); 
  • taxonomy-aligned investment disclosures (including calculation of metrics for financial undertakings with several activities and green bonds; approaches to Article 9 products; scope of third-party reviews; and challenges arising from lack of available data); and
  • clarification that: (i) the SFDR requirements only apply to intermediaries and/or financial advisers providing advice and so will not apply to certain insurance intermediaries; and (ii) the disclosure transparency obligations under Articles 8 and 9 of the SFDR do not apply to execution-only investment firms.

ESA Questions and Answers on the SFDR Delegated Regulation

HM Treasury

FPC remit and recommendations - HM Treasury publishes letter to the Bank of England - 17 November 2022

HM Treasury has published a letter from the Chancellor of the Exchequer to the Governor of the Bank of England setting out the remit, recommendations and priorities for the Financial Policy Committee (the FPC) in 2022/23. The Treasury is required to provide such recommendations and guidance to the FPC annually on the approach it should take in pursuit of its statutory objectives.

Recommendations of note include:

  • it is important that lessons are learned from the recent dysfunction in the gilt market and the vulnerabilities associated with leveraged funds that this exposed. The FPC should support this work to ensure appropriate levels of resilience in the UK financial system;
  • to identify and address systemic risks and vulnerabilities, the FPC should seek to work in a collaborative manner with the PRA and the FCA, but also with the Payment Systems Regulator, the Pensions Regulator, industry participants and academics; and
  • the government aims to align private sector financial flows with environmentally sustainable and resilient growth, in a manner consistent with the role that the financial system will play in supporting the UK’s energy security. 

The FPC must respond to the government, describing any action it has taken or intends to take in response to a specific recommendation.

Financial Policy Committee Remit and Recommendations

Webpage

Financial Conduct Authority

Consumer Duty - FCA publishes speech - 17 November 2022

The FCA has published a speech delivered by Nikhil Rathi, CEO of the FCA, on matters relating to the new Consumer Duty. In particular, it was highlighted that:

  • the FCA does not intend to move its phased implementation deadlines again, although it aims to take a pragmatic approach to overseeing implementation and requests that firms continue to be open about their implementation progress;
  • the FCA intends to engage with firms to understand how the Consumer Duty may be used to develop a framework for deployment of AI and other technologies in pursuit of resolving consumer-related issues, including identifying vulnerable customers and collecting accurate customer feedback. The FCA anticipates that the Consumer Duty will enable it to move more quickly to facilitate new technological developments across the financial services sector; and
  • the FCA aims to monitor the impact of the Consumer Duty to ensure that it does not lead to excessive risk aversion in firms, or the withdrawal of products for certain hard-to-reach groups. The FCA indicates that it supports accelerated roll-out of banking hubs and other proposals to support the transition to digital for individuals and small businesses.

Speech by Nikhil Rathi, FCA CEO at the UK Finance annual dinner: Rolling regulation forwards

Financial Ombudsman Service

Future funding model - FOS publishes feedback statement - 16 November 2022 

The Financial Ombudsman Service (FOS) has published a Feedback Statement on changes to its funding model. This follows the Discussion Paper on future funding published in June 2022.

The Feedback Statement indicates that the FOS will:

  • consult in its 2023/24 Plans and Budget consultation on: (i) changing its compulsory and voluntary jurisdiction levies to recover fixed costs; (ii) introducing a 12-month time limit for disputing case fees; and (iii) trialling changes to the group fee account arrangements set out in the Discussion Paper;
  • continue to assess and improve its processes to enable differential case fees, with a view to consulting in its 2024/25 Plans and Budget consultation on: (i) differential case fees by case stage and/or by product type; and (ii) charging an initial case fee at conversion; and
  • will not progress the following areas: (i) pursuing legislative changes to be able to charge professional representatives; (ii) charging businesses for delays due to non-compliance; (iii) discounts for bulk closures; and (iv) charging case fees based on case complexity.

The FOS plans to publish its 2023/24 Plans and Budget consultation in December 2022. Following this, it will consider the feedback and ask the FCA and the FOS Board to approve a final budget for 2023/24 by 31 March 2023.

FOS Feedback Statement: Creating a funding model for the future

Press release

Financial Services Culture Board

Employee survey results 2022 - FSCB publishes report - 16 November 2022

The Financial Services Culture Board (FSCB) has published its employee survey results for 2022. The survey was sent to over 122,000 employees at 23 financial services firms, and is intended to assess employees’ views of firm culture (the Survey).

Its key findings include that:

  • sustained improvement has been evident across all firms in scores relating to leadership, taking responsibility and to speaking up. Of these areas, leadership has seen the greatest improvement, with the number of employees concluding that their senior leaders ‘meant what they said’, increasing from 62% in 2016 to 73% in 2022;
  • the period from 2020 onwards has seen more positive scores around personal resilience and wellbeing. The proportion of employees describing their firms as ‘supportive’ and ‘inclusive’ has doubled over the past three years; and
  • less progress has been seen on questions relating to customers and in areas of responsiveness and shared purpose.

In light of the new Consumer Duty, and the importance of firms having evidence from which they can assess their performance, the Survey asked four additional questions. The responses indicated that: 

  • just over half of employees stated it was as easy to cancel a product or service at their firm as to obtain it;
  • two thirds of employees said that their team routinely analysed customer feedback and complaints to help improve;
  • three quarters of employees believe that their firm’s products and services took into account the needs of different consumers; and
  • almost eight out of ten respondents felt that their firm was equipped to assist vulnerable customers with different needs.

The FSCB states that it will continue to work on the link between the results of the Survey and achieving tangible outcomes at firms.

FSCB employee survey results: key findings

Press release

Law Commission

Decentralised autonomous organisations - Law Commission launches call for evidence - 16 November 2022

The Law Commission (the Commission) has published a call for evidence on the characterisation of decentralised autonomous organisations (DAOs), how they might operate under English law and whether any areas of English law relevant to DAOs require potential reform. This follows the government’s request that the Commission produce a scoping paper on the description and legal status of DAOs.

A DAO is a novel type of technology-mediated social structure or organisation of participants made up of several composite elements. The distinctive element is that many of the actions and functions of this type of organisational structure (both in terms of governance and its activities) can be redesigned to use and/or facilitate the creation, modification and maintenance of open-source software-based systems.

The Commission seeks views on whether:

  • DAOs would meet the criteria necessary to be characterised as unincorporated associations or general partnerships under English law;
  • the current law presents any problems relating to the use of joint ownership arrangements or trust structures as constituent parts of a DAO’s overall organisational structure;
  • the law relating to the formation of corporate bodies presents difficulties for DAOs that choose to use one or more incorporated entities in its organisational structuring;
  • any or all of the available existing legal forms are unsuitable or unattractive for DAOs that wish to use them as part of their organisational structuring;
  • other jurisdictions provide a legislative approach to legal forms that is more effective for, or attractive to, DAOs;
  • a new form of legal entity or recognition specifically tailored to DAOs should be introduced; and
  • there are any circumstances in which a smart contract or a software protocol could or should be treated as having legal personality.

The Commission also seeks views on additional points, including:

  • how the distinction between an incorporated company involved in software development and an open-source software protocol operates as a matter of law; and
  • how DAOs, or their constituent parts, structure their governance and decision-making processes.

The deadline for responses to the call for evidence is the 25 January 2023.

Law Commission: Decentralised autonomous organisations (DAOs): Call for evidence

Webpage

Press release

Issue FR1183 / 17 November 2022

HEADLINES

  1. Financial Stability Board
    1. Cross-border payments - FSB publishes final report on developing implementation approach - 17 November 2022
  2. European Banking Authority
    1. BRRD - EBA publishes Consultation Paper on amendments to guidelines on improving resolvability - 15 November 2022 

Financial Stability Board

Cross-border payments - FSB publishes final report on developing implementation approach - 17 November 2022

The Financial Stability Board (FSB) has published a final report on developing an approach to monitor progress towards meeting the targets set out in the G20 Roadmap for Enhancing Cross-Border Payments, after the endorsement of the Roadmap in October 2020. This follows an interim report published in July 2021 and the FSB’s October 2021 final report, which set out global quantitative targets to achieve cheaper, faster, more transparent and accessible cross-border payments across the wholesale, retail and remittances sectors.

The report provides an update on the FSB’s progress, a high-level overview of the main data sources, a more detailed discussion of each key performance indicator (KPI), and next steps.

The report notes that substantial progress has been made in evaluating and identifying the main data sources for each of the three market sectors and any outstanding gaps. However, given the lack of pre-existing KPIs and the need for further discussions with potential data providers to develop reliable estimates, the FSB is not yet able to provide a full set of estimates of current performance.

Developing these estimates will, therefore, take several more months. The next step is to engage with relevant data providers and establish processes for ongoing monitoring.

FSB Final Report: Developing the Implementation Approach for the Cross-Border Payments Targets

Press release

European Banking Authority

BRRD - EBA publishes Consultation Paper on amendments to guidelines on improving resolvability - 15 November 2022 

The European Banking Authority (EBA) has published a Consultation Paper (CP2022/12) on amendments to its guidelines (Guidelines) about improving resolvability under the Banking Recovery and Resolution Directive (2014/59/EU) (BRRD).

In particular, the proposed amendments to the Guidelines would:

  • introduce a requirement for institutions to submit an annual resolvability self-assessment, setting out how they will meet the resolvability capabilities outlined in the Guidelines and how they have gained assurance of their adequacy;
  • require authorities to develop a multi-annual testing programme for institutions under their remit, to obtain assurance of firms’ resolvability while providing sufficient visibility to banks; and
  • introduce a master playbook for the most complex banks to ensure a holistic approach to resolution planning.

Under the draft Guidelines attached to the consultation, firms would be expected to submit their first self-assessment report by 31 December 2024, and, where applicable, their first master playbook by 31 December 2025. Resolution authorities would have to communicate the first resolvability testing programme by 31 December 2025.

The deadline for responses is 15 February 2023.

EBA Consultation Paper: Guidelines amending guidelines on improving resolvability for institutions and resolution authorities

EBA resolvability testing guidelines: Background and key measures

Webpage

Press release

 

SECURITIES AND MARKETS

Issue FR1183 / 17 November 2022

HEADLINES

  1. International Organization of Securities Commissions
    1. Liquidity risk management recommendations - IOSCO publishes final report on thematic review - 16 November 2022
  2. European Securities and Markets Authority 
    1. MiFID II - ESMA publishes Consultation Paper on technical standards for passporting rights - 17 November 2022
  3. European Supervisory Authorities
    1. PRIIPs KID - ESAs update Q&As document - 14 November 2022
  4. ICE Benchmark Administration
    1. LIBOR cessation - IBA publishes feedback statement on cessation of USD LIBOR ICE Swap Rate - 14 November 2022

International Organization of Securities Commissions

Liquidity risk management recommendations - IOSCO publishes final report on thematic review - 16 November 2022

The International Organization of Securities Commissions (IOSCO) has published a final report (FR13/22) on a thematic review of its liquidity risk management recommendations.

The report sets out the results and observations of the review and the extent to which participating IOSCO member jurisdictions have implemented the necessary regulatory measures relating to the eighteen key recommendations in IOSCO’s 2018 Recommendations for Liquidity Risk Management for Collective Investment Schemes (CIS), as previously reported in this Bulletin.

The review considered five recommendations relevant to the CIS design process, three recommendations on liquidity management and two recommendations on liquidity contingency planning. The report makes a number of observations, including: 

  • seven of the 14 participating jurisdictions were fully consistent with all ten recommendations, but IOSCO observed shortcomings in the other participating jurisdictions in relation to one or more of the recommendations;
  • four of the 11 additional jurisdictions received a rating for all ten recommendations of ‘final adoption measures taken and in force’. Two additional jurisdictions received a rating of ‘drafting adoption measures not published’ for almost all recommendations, which indicates that they had not taken any published steps to implement most of the recommendations; and
  • participating jurisdictions were broadly consistent across all recommendations. For additional jurisdictions, there was a relatively high level of implementation for recommendation 1 (drawing up an effective liquidity risk management process compliant with local jurisdictional liquidity requirements) and 17 (implementation of additional liquidity management tools to protect investors from unfair treatment or prevent the CIS from diverging significantly from its investment strategy) but implementation of other recommendations was lacking.

IOSCO: Thematic review on liquidity risk management recommendations: final report (FR13/22)

Press release

European Securities and Markets Authority 

MiFID II - ESMA publishes Consultation Paper on technical standards for passporting rights - 17 November 2022

The European Securities and Markets Authority (ESMA) has published a Consultation Paper on a review of the technical standards under Article 34 of the Markets in Financial Instrument Directive (2014/65/EU) (MiFID II) relating to the provision of investment services across the EU and passporting rights.

Article 34 of MiFID II requires ESMA to develop draft regulatory technical standards (RTS) and implementing technical standards (ITS) to: (i) specify the information to be provided by firms wishing to provide cross-border services without the establishment of a branch; and (ii) to prescribe the standard forms, templates and procedures for transmitting the required information.

ESMA and the national competent authorities (NCAs) have noted the continued increase in cross-border activities provided under the MiFID II regime relating to freedom to provide services. This requires NCAs to increase their focus on the supervision of cross-border activities and on cooperation. ESMA notes that the information the home state NCA receives through the investment services and activities passport notification plays a role in the NCA increasing its scrutiny of a firm’s cross-border activities or its plans to conduct such activities.

ESMA’s consultation proposes a number of changes to the current RTS and ITS by requiring firms to provide further information at the notification stage regarding:

  • the marketing channels the firm will use in host Member States;
  • the languages in which the firm is able to deal with client complaints;
  • the Member States in which the firm will actively use its passport, and the categories of clients targeted; and
  • the firm’s internal organisation in relation to its cross-border activities.

The consultation closes on 17 February 2023. ESMA expects to publish a final report and submit draft technical standards to the European Commission for endorsement by the end of 2023.

ESMA Consultation Paper: review of the technical standards under Article 34 of MiFID II

Press release

European Supervisory Authorities

PRIIPs KID - ESAs update Q&As document - 14 November 2022

The Joint Committee of the European Supervisory Authorities (ESAs), comprising the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, has published an updated version of its Q&A document relating to the key information document (KID) requirements for packaged retail and insurance-based investment products (PRIIPs) under Commission Delegated Regulation (EU) 2017/653.

The updated version includes the following new sections: (i) ‘what is the product?’; (ii) past performance; (iii) investment funds; and (iv) autocallable products. These updates flow from amendments made to the original delegated rules in Commission Delegated Regulation (EU) 2017/653 by Commission Delegated Regulation (EU) 2021/2268, which will apply from 1 January 2023. The ESAs also note that some of the Q&As relate to requirements which may no longer be relevant from 1 January 2023.

Updated version: Q&As on the PRIIPs Key Information Document (KID)

ICE Benchmark Administration

LIBOR cessation - IBA publishes feedback statement on cessation of USD LIBOR ICE Swap Rate - 14 November 2022

The ICE Benchmark Administration (IBA) has published a feedback statement on its intention to cease the publication of ICE Swap Rate settings based on USD LIBOR for all tenors immediately after publication on 30 June 2023. This follows a related Consultation Paper published in August 2022.

In an accompanying press release, the IBA recommends that users of the benchmark should take account of its upcoming cessation and should ensure their contractual and other arrangements linked to the benchmark contain appropriate fallback or other arrangements to address the cessation.

ICE SWAP Rate based on USD LIBOR - Feedback Statement on Consultation on Potential Cessation

Press release

ASSET MANAGEMENT

Issue FR1183 / 17 November 2022

HEADLINES

  1. European Banking Authority
    1. IFD - EBA publishes final report on draft RTS on specific liquidity measurement - 14 November 2022

European Banking Authority

IFD - EBA publishes final report on draft RTS on specific liquidity measurement - 14 November 2022

The European Banking Authority (EBA) has published a final report (RTS/2022/11) on draft regulatory technical standards (RTS) in relation to specific liquidity measurement for investment firms in accordance with Article 42(6) of the Investment Firms Directive (EU) 2019/2034 (IFD). The EBA consulted on the draft RTS in December 2021.

Article 42 of the IFD gives national competent authorities (NCAs) the power to impose additional Pillar 2 liquidity requirements on an individual investment firm, where that firm is exposed to liquidity risk or elements of liquidity risk that are material.

In order to have a harmonised application of the specific liquidity requirements, the RTS address in detail the main elements that may affect liquidity risk of an investment firm. In particular, in setting additional liquidity requirements NCAs must assess:

  • all elements specific to each service provided by the investment firm under Section A of Annex I to the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II); and
  • other elements that could have a material impact on liquidity risk, such as external factors, group structure and operational or reputational risks.

EBA Final Report: Draft RTS on specific liquidity measurement for investment firms in accordance with Article 42(6) of Directive (EU) 2019/2034

Webpage

INSURANCE

Issue FR1183 / 17 November 2022

HEADLINES

  1. European Systemic Risk Board
    1. Solvency II Review - ESRB publishes letters on Liquidity Risk Management - 16 November 2022 
  2. European Insurance and Occupational Pensions Authority
    1. Challenging times for insurers - EIOPA publishes speech - 16 November 2022
  3. HM Treasury
    1. Solvency II Review - HM Treasury publishes consultation response - 17 November2022
  4. Prudential Regulation Authority
    1. Solvency II - PRA publishes Feedback Statement (FS1/22) - 17 November 2022

European Systemic Risk Board

Solvency II Review - ESRB publishes letters on Liquidity Risk Management - 16 November 2022 

The European Systemic Risk Board (ESRB) has published two letters sent from the ESRB Secretariat to the Council Working Party and European Parliament (the Parliament) setting out its concerns in relation to liquidity risk amendments in the proposed Directive amending the Solvency II Directive (2009/138/EC).

The ESRB states in its (duplicate) letters that:

  • the views expressed in its earlier letters to the Parliament and Council of the EU - regarding areas where EU co-legislators could strengthen and enhance the proposed Directive to better address systemic risks - remain valid. Thus far, these views have not been reflected in proposals; and
  • the ESRB is concerned about amendments to the European Commission’s draft proposals, which weaken or remove powers aimed at enabling national competent authorities (NCAs) to identify and mitigate liquidity risks. This is a particular concern given the increasing risks to European financial stability.

The ESRB observes that recent market developments in the UK should be heeded by the European insurance sector, for the following reasons:

  • liquidity risk is pervasive and may even affect financial institutions that do not engage in liquidity transformation or which have long-term liabilities and pursue liability-driven investment (LDI) strategies; and
  • prevention is more efficient and less costly than crisis management, such that it is important for supervisors to be able to act pre-emptively to protect financial stability.

Finally, NCAs must be able to identify insurers who may have a vulnerable liquidity profile and act before liquidity risk materialises. The ESRB also notes that its emphasis on liquidity issues in its letters should not be interpreted as being at the expense of solvency.

In an Annex to the letters, the ESRB sets out its suggested amendments to the European Commission’s draft proposal.

ESRB Letter to Members of the Council Working Party on the Solvency II Review and Liquidity Risk Management

ESRB Letter to Members of the European Parliament on the Solvency II Review and Liquidity Risk Management

European Insurance and Occupational Pensions Authority

Challenging times for insurers - EIOPA publishes speech - 16 November 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has published a speech by Petra Hielkema, EIOPA’s Chair.

Ms Hielkema highlights various matters, including:

  • inflation remains a “force to be reckoned with” for the foreseeable future and insurers must set their reserving and pricing accordingly. The most direct impact of inflation on insurers themselves is through rising claims costs;
  • higher claims may result in rising premiums for policyholders;
  • a modest, gradual rise in interest rates is generally positive for insurers. There is likely to be some portfolio rebalancing, with a shift away from alternative asset classes into more traditional investments; and
  • there are high levels of uncertainty as a result of the Russian invasion of Ukraine, the energy crisis, the effects of the COVID-19 pandemic and the recent turmoil in the UK gilt market. If market movements are intense and fast, liquidity can be a risk for long-term investors such as pension funds and insurers.

A similar situation is less likely to materialise in the EU for various reasons. For example, EU pension funds and insurers hedge against interest rate risks to a lesser extent than their UK counterparts. Nonetheless, liquidity management is an important aspect for insurers to consider in the current market environment. The still sizeable spread between inflation and interest rates might motivate insurers to take risks and invest in less liquid assets with higher returns. This could be a source of vulnerability for the sector.

EIOPA Speech: Trying times and their effect on insurers

HM Treasury

Solvency II Review - HM Treasury publishes consultation response - 17 November 2022

HM Treasury has published its response to its Consultation Paper on the review of the UK Solvency II prudential regime for insurers. This follows publication of the consultation in April 2022.

In its response, HM Treasury summarises the feedback received from respondents to the Consultation Paper and sets out the government’s final reform package, introducing a ‘simpler, clear, and much more tailored regime’. In particular, the response notes:

  • the evidence collected supported the majority of the proposals as set out in the consultation, so the government will take these proposals forward;
  • the most challenging element is in relation to the matching adjustment, including both its eligibility requirements and fundamental spread component. The government has concluded that the eligibility requirements for the matching adjustment should, in addition to the proposals set out in the consultation document, be broadened to allow the inclusion of assets with highly predictable cash flows, subject to a number of safeguards set out by the PRA;
  • as set out in the Consultation Paper, there has been no consensus about the best approach to reform of the fundamental spread. The government has decided to leave the design and calibration of the fundamental spread in its original form. However, it will increase the risk sensitivity of the current fundamental spread approach to allow different notched allowances to be made within major credit ratings; and
  • the government will review whether the calibration of the fundamental spread remains appropriate in five years’ time. Prior to the government’s review, the PRA will assess the impact of the Solvency II reforms on its statutory objectives. It will also take forward a review jointly with the FCA to assess whether changes may be needed to the Financial Services Compensation Scheme (FSCS) levy for insurers.

For further information on this item, please see our standalone briefing.

HM Treasury: Review of Solvency II: Consultation - response

Updated webpage

Prudential Regulation Authority

Solvency II - PRA publishes Feedback Statement (FS1/22) - 17 November 2022

The PRA has published a Feedback Statement (FS1/22) on potential reforms to the Solvency II risk margin and matching adjustment, including feedback received to its Discussion Paper (DP2/22) published in April 2022.

DP2/22 set out the PRA’s position and sought views on key aspects of the potential reforms to Solvency II, as covered in HM Treasury’s consultation. These included:

  • a potential formulation for a Credit Risk Premium (CRP), an allowance for uncertainty around credit risk in the matching adjustment framework to correct a weakness in the current design;
  • a potential new suggested design and calibration of the risk margin; and
  • the extent to which combined potential reforms to the matching adjustment and risk margin might result in a package that is compatible with the PRA’s statutory objectives.

The Feedback Statement summarises the feedback received and, while it does not include the PRA’s views in response, it does include clarification points where feedback indicated a potential misunderstanding of the proposals. The PRA indicates that it took the feedback into account in its discussions with the Treasury on the reforms, which the Treasury has now confirmed will be taken forward (see item above in this section).

PRA Feedback Statement: Potential reforms to risk margin and matching adjustment within Solvency II (FS1/22)

FINANCIAL CRIME

Issue FR1183 / 17 November 2022

HEADLINES

  1. UK Parliament
    1. Fighting Fraud - House of Lords publishes report - 12 November 2022
  2. HM Treasury
    1. AML/CTF - HM Treasury publishes updated advisory notice on high risk third countries - 14 November 2022
  3. Lending Standards Board
    1. APP scams - Memorandum of Understanding between the LSB and PSR published -14 November 2022

UK Parliament

Fighting Fraud - House of Lords publishes report - 12 November 2022

The House of Lords Committee on the Fraud Act 2006 and Digital Fraud (the Committee) has published a report of its session titled ‘Fighting Fraud: Breaking the Chain’.

The key conclusions of the report are as follows:

  • fraud comprises 41% of all crime against individuals in England and Wales;
  • digital technology has led to new opportunities for fraudsters, and the COVID-19 pandemic has accelerated this trend as people have moved more of their lives online. However, those responsible for these new technologies are not doing enough to prevent the exploitation of their services; and
  • while the Fraud Act 2006 (the Act) is comprehensive, there are opportunities for improvement.

The Committee has made a number of recommendations, including:

  • the government should establish a cabinet subcommittee with a clear mandate to tackle fraud, which would be chaired by, and accountable to, the Security Minister;
  • fraud should be written into the Strategic Policing Requirement, which sets out the top policing priorities. Currently, just 1% of law enforcement is focused on tackling economic crime;
  • a new corporate criminal offence of ‘failure to prevent fraud’ should be introduced, applicable across all sectors, which could be accompanied by significant financial penalties; and
  • a delay lasting no more than several hours on certain high-risk payments should be introduced, to give banks more time to analyse whether a payment may be fraudulent.

Fraud Act 2006 and Digital Fraud Committee: Fighting Fraud: Breaking the Chain

Enhanced summary

Press release

HM Treasury

AML/CTF - HM Treasury publishes updated advisory notice on high risk third countries - 14 November 2022

HM Treasury has published its updated money laundering advisory notice on high risk third countries. This follows and reflects the Financial Action Task Force’s statements identifying jurisdictions with strategic deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CTF) regimes, published in October 2022. 

The advisory note lists 26 jurisdictions in relation to which appropriate measures should be taken to minimise the associated AML/CFT risks, including enhanced due diligence in high-risk situations. It now omits Nicaragua and Pakistan given the significant progress in improving their respective AML/CFT regimes. Eight listed jurisdictions are subject to financial sanctions measures, which require firms to take additional measures and include Iran, Mali and the Yemen.

HM Treasury updated guidance: Money Laundering Advisory Notice: High Risk Third Countries

Lending Standards Board

APP scams - Memorandum of Understanding between the LSB and PSR published - 14 November 2022

The Lending Standards Board (LSB) and the Payment Systems Regulator (PSR) have signed a memorandum of understanding (MoU) recording the framework for their co-operation and communication when working together to provide protection for customers from authorised push payment (APP) scams.

The MoU states that the LSB and the PSR have a mutual regulatory interest in reducing consumer harm caused by APP scams. Their objectives are to:

  • improve detection and prevention of APP scams;
  • improve protections and outcomes for victims of APP scams, through reimbursement, repatriation and prevention measures;
  • determine how further enhancements can be made to the existing protections in place; and
  • provide payment system users with greater transparency about the performance of payment system providers in applying the contingent reimbursement model code until any resulting regulation or legislation supersedes it.

LSB and PSR Memorandum of Understanding

Press release

ENFORCEMENT

Issue FR1183 / 17 November 2022

HEADLINES

  1. Financial Conduct Authority
    1. Senior Managers and Certification Regime - FCA publishes Final Notice to director - 14 November 2022
  2. Recent Cases 
    1. FCA v London Property Investments (UK) Ltd and others,[2022] EWHC 2862 (Ch), 11 November 2022

Financial Conduct Authority

Senior Managers and Certification Regime - FCA publishes Final Notice to director - 14 November 2022

The FCA has published a final notice addressed to Mr Ashkan Zahedian, alongside Vast Cars Limited as an interested party, following Mr Zahedian’s guilty plea to charges of grievous bodily harm and possession of an offensive weapon in May 2020.

Mr Zahedian was the sole director of an authorised consumer credit firm, Vast Cars Limited, and was approved by the FCA as a senior manager. Mr Zahedian has been sentenced to three years’ imprisonment following his guilty plea. The FCA has removed his approval to perform the senior management function at Vast Cars Limited and imposed a prohibition order preventing him from working in financial services in the future.

Commenting on the Decision, Mark Steward, Executive Director of Enforcement and Market Oversight emphasised:

“Those authorised to provide financial services are required to meet and maintain high standards of character, fitness and properness. These were serious, violent criminal offences reflecting on Mr Zahedian’s character and justifying the finding that he is not a person to be working in financial services. The FCA will continue to uphold high standards of character and conduct.”

FCA Final Notice of Ashkan Zahedian

Press release

Recent Cases 

FCA v London Property Investments (UK) Ltd and others, [2022] EWHC 2862 (Ch), 11 November 2022

The FCA has obtained a judgment against London Property Investments (UK) Limited (LPI), NPI Holdings Limited, their director Daniel Stevens, and his father Anthony Kafetzis (the Defendants), for arranging mortgages without FCA authorisation and exploiting vulnerable customers.

The judgment found the Defendants arranged high-interest, unaffordable bridging loans for consumers at imminent risk of being evicted from their homes. They also registered restrictions against individuals’ properties, which were used by them to require those individuals to pay LPI substantial fees. In circumstances where these fees were not paid, the individuals could not sell or re-mortgage their property, trapping them in high interest bridging loans. The Defendants had also bought homes for less than their value from owners facing repossession, then rented the properties back to them.

The Defendants were not authorised to arrange mortgage contracts, nor sale and rent back agreements. LPI is now required to remove over twenty restrictions registered against several properties. A future trial will hear evidence from up to 88 further potentially affected individuals not party to the FCA’s original claim, and consider appropriate remedies.

The Financial Conduct Authority v London Property Investments (UK) Limited (trading as LPI Emergency Property Finance) & Ors [2022] EWHC 2862 (Ch)