Brexit – Chancellor’s Mansion House speech
On 20 June, HMT published the speech delivered by Philip Hammond, Chancellor of the Exchequer, at the Mansion House. In his speech, Mr Hammond commented on Brexit and financial services, stating that any fragmentation of financial services would result in poorer quality, higher priced products. Avoiding fragmentation of financial services is a "huge prize" for the European economies and should be approached using the following principles: there needs to be a new process for establishing regulatory requirements for cross-border business between the UK and the EU. It must be evidence-based, symmetrical and transparent. It must also reflect international standards; co-operation agreements need to be reciprocal, reliable, and prioritise financial stability. They must also enable timely and co-ordinated risk management; and any arrangements must be permanent and reliable for the businesses regulated under the regimes.
Brexit – start of negotiations between EU and UK
On 19 June, Michel Barnier, the EU Chief Negotiator, and David Davis, Secretary of State for Exiting the EU, launched the first round of Brexit negotiations. The negotiations will focus on: issues related to citizens' rights; the structure of the negotiations and forthcoming issues; the financial settlement; the Northern Irish border; and other separation issues. Following the first round, Michel Barnier said that the Brexit negotiators reached agreement on dates, on organisation and on priorities for the negotiations. In a first step, the uncertainty caused by Brexit must be lifted to make sure that the withdrawal of the UK happens in an orderly manner. Then, in a second step, the scope of the future EU-UK future relationship must be discussed. The working languages of the negotiations will be English and French, with interpretations provided by the EC. David Davis confirmed that the UK would be leaving the Customs Union and the Single Market, which means that there will be no "soft Brexit" as expected due to the outcome of the UK parliamentary elections, during which the Conservative party of Prime Minister Theresa May lost its majority in Parliament.
FCA consults on Handbook changes to reflect application of Benchmarks Regulation
On 22 June 2017, the FCA published a consultation paper on proposed Handbook changes to reflect the application of the Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (BMR) (CP17/17). Among other things, in CP17/17, the FCA proposes: That the senior managers regime (SMR) will continue to apply to any benchmark firms that are already subject to it, but that the certification regime will not apply in relation to benchmark activities. The approved persons regime (APR) will continue to apply to other firms, subject to some modifications. In applying the APR and SMR, the FCA will require the identification of the senior person who has been given responsibility for benchmark activities; To maintain the requirement for a minimum level of financial resources only for administrators of the most important benchmarks, that is, benchmarks designated as "critical" by the Commission; To clarify that it expects administrators to forward all reports they receive from their contributors about suspected manipulation of a benchmark. The FCA is also considering requiring contributors that are already supervised to report suspicions of manipulation directly; Any contributors it compels under the BMR to provide input data for, and any administrator it compels under the BMR to continue publishing, a critical benchmark, will be given a right to make representations to the FCA about the decision to compel them; That the Handbook will apply the BMR provisions on supervised contributors to contributors supervised by the FCA that are branches in the UK of third-country firms.
Sound compensation practices – FSB consultation on supplementary guidance to principles on sound compensation practices relating to misconduct risk
On 20 June, the FSB published a consultative document on supplementary guidance to its principles and standards on sound compensation practices. The FSB is consulting on guidance to supplement the principles and guidance to address the link between compensation and conduct. The FSB believes that compensation tools can play an important role in addressing misconduct risk by providing ex ante incentives for good conduct and ex post adjustment mechanisms that ensure appropriate accountability. The guidance takes the form of recommendations on better practice. The recommendations also set out best practice for supervisors for monitoring and assessing the effectiveness of firms' compensation policies and procedures in managing misconduct risk. The deadline for comments is 30 August.
IOSCO report on order routing incentives
On 19 June 2017, the International Organization of Securities Commissions (IOSCO) published a final report on order routing incentives (FR08/2017). The report examines the regulatory conduct requirements for brokers or firms to manage conflicts of interest associated with routing orders and obtaining best execution. The report confirms the findings from surveying the regulatory conduct requirements on brokers to manage conflicts of interest associated with order routing and obtaining best execution, where applicable, and assesses how this interacts with market practices around order routing incentives.
Remuneration policy – PRA updates policy statement
On 19 June, the PRA updated its remuneration rules webpage to inform firms that it has updated a remuneration policy statement (RPS) table. The notes section of RPS table 7 (malus) has been updated to notify firms that they may include information in relation to the malus applied to buy-out awards within Part C of table 7. The RPS templates allow firms to record remuneration policies, practices and procedures and assess compliance with the rules in the Remuneration Part of the PRA Rulebook. They were last updated earlier in June.
FCA consults on advising on pension transfers
On 21 June 2017, the FCA published a consultation paper (CP17/16) setting out its proposals for advice relating to pension transfers where consumers have safeguarded benefits, primarily for transfers from defined benefit to defined contribution pension schemes. The FCA proposals aim to reflect the current environment and the increased demand for pension transfer advice. The new rules outline its expectations of advisers and pension transfer specialists to ensure that consumers receive advice that considers all relevant factors. The consultation closes on 21 September 2017. The FCA intends to publish the final rules in a policy statement in the first quarter of 2018.
New FCA cyber security guide for firms
On 22 June 2017, the FCA published, among other things, a new guide on good cyber security. The FCA has designed the guide to help firms, particularly smaller businesses, become more resilient to cyber attacks and to respond appropriately to cyber incidents. The FCA hopes the guide will help firms to review their approach to cyber security. More specifically, the guide: Helps firms develop their cyber security strategy by identifying potential areas of strength or weakness; Provides some useful questions to ask about the way firms manage and protect their people, processes and technology; Explains when firms may need to report a cyber incident, how to report it, and to whom; And sets out how to link with the UK networks for sharing threat information.
IMF speech at FATF plenary considers shared AML and CFT priorities
On 22 June 2017, the Financial Action Task Force (FATF) published a speech by Christine Lagarde, International Monetary Fund (IMF) Chair, on the IMF and FATF working together to combat money laundering and terrorist financing. Ms Lagarde identified the following as three current, shared priorities: Fighting corruption and tax evasion; combating the financing of terrorism (CFT); and maintaining correspondent banking relationships.
FinTech consultation – responses to EC consultation
On 21 June, the EC published the responses to its consultation on FinTech, which was published in March. 226 responses were received and the EC intends to publish a summary of responses at a later stage. The respondents include the EBA, EIOPA and the PSR. Areas of concern identified by the EBA include; Big data; Crowdfunding; AML and counter-terrorist financing framework; Cloud computing services; Outsourcing. Similarly, EIOPA outlined their existing and future work in relation to InsurTech and digitalisation, including the use of Big Data by financial institutions, cyber risks and supervisory approaches to financial innovation. It also refers to other topics addressed in the consultation that are relevant to the insurance and pension sectors, including; automation of financial advice, blockchain, artificial intelligence (AI) and peer-to-peer (P2P) insurance. The PSR summarises the work that it is carrying out relating to FinTech and how it has established the Payments Strategy Forum to help deliver a strategy involving innovation and industry collaboration.
EC inception impact assessment on reducing barriers to cross-border distribution of investment funds
On 22 June 2017, the EC published an inception impact assessment (Ares(2017)3132069) (dated 21 June 2017) on reducing barriers to the cross-border distribution of investment funds. The initiative set out in the impact assessment (also referred to as a roadmap) aims to improve the functioning of the single market for EU investment funds by reducing national regulatory barriers to the cross-border distribution of funds. It relates to the Commission's work on the Capital Markets Union (CMU). Identified policy areas for addressing the regulatory barriers include: marketing; administrative requirements; regulatory fees; notification requirements; and online distribution.
PRA "Dear CEO" letter to insurance firms sets out observations based on feedback from 2017 monitoring-the-market questionnaire
On 22 June 2017, the FCA published a "Dear CEO" letter, from David Rule, PRA Executive Director, Insurance, to insurance firms, setting out observations based on feedback from a recent questionnaire, entitled "monitoring-the-market" The letter sets out the PRA's headline observations, with further detail on each observation being set out in the Appendix to the letter. Given the review's findings, the PRA is concerned that some firms may have insufficiently captured current market conditions and the potential impact of broadening terms and conditions in their risk management. Over the course of 2017, it will therefore carry out the following supervisory initiatives to improve its understanding of how individual firms are being affected by current market conditions: The PRA is assessing underwriting and exposure management in detail for selected lines of business in a number of large corporate insurers, to understand how changes in terms and conditions are reflected in the monitoring process and carried through to planning, reserving and capital assessment; Where these firms participate in broker facilities, managing general agents (MGAs) or other delegated underwriting arrangements, the PRA will be assessing how they ensure that they understand the impact of business written on their overall risk profile and their results; Across a number of smaller Lloyd’s managing agents, the PRA is conducting a thematic review of distribution practices to understand trends in strategies employed by firms, how distribution channels are evolving and the quality and cost of obtaining this business. Firm-specific and thematic findings from this exercise will be communicated to the contributing firms towards the end of 2017.
FCA follow-up work on general insurance appointed representatives
On 22 June 2017, the FCA published its regulation round-up for June 2017. Among other things, it provides an update on the FCA's follow-up work relating to general insurance appointed representatives. The FCA’s work, following on from its thematic review (TR16/6) relating to principals and their appointed representatives, has identified issues including: Widespread failings in principals' oversight of their appointed representatives and significant shortcomings with appointed representatives involved in the sale of warranty insurance products. The FCA advises firms that have appointed representatives to consider the findings of TR16/6. It suggests that firms may wish to undertake a gap analysis of their current activities against the findings and their regulatory obligations, and address any identified shortcomings.
Access to insurance for cancer sufferers – FCA call for input
On 20 June, the FCA published a call for input on access to insurance. The call for input follows, and addresses access issues raised in, the FCA's May 2016 occasional paper on access to financial services in the UK. The occasional paper discussed problems that some consumers can face when trying to find insurance to meet their needs (whether they can find insurance at all or at a price that they can afford). The call for input focuses on access issues experienced by those who have, or have had, cancer. The FCA is seeking views supported by examples of the challenges firms face in providing travel insurance for such consumers and the reasoning for pricing differentiations in quoted premiums. The deadline for comments is 5 September. The FCA intends to publish a feedback statement with its findings from the call for input, which will set out its next steps in light of the responses received, in late 2017.
Solvency II – EIOPA supervisory assessment of ORSA
On 19 June, EIOPA published a supervisory assessment of the first supervisory experiences of implementation by European reinsurance companies of the ORSA process under Article 45 of Solvency II. EIOPA's analysis is based on observations collected by NSAs in the EEA up to the end of 2016. The analysis shows that the majority of reinsurance companies have made good progress in implementing the ORSA process. Despite this positive progress, EIOPA reports the need for further improvements. In particular, there needs to be greater involvement of the administrative, management or supervisory bodies in the ORSA. Board members have to play a more active role in the ORSA process and to take into account this risk assessment in their strategic decision-making processes .EIOPA's analysis also indicates the over-reliance of insurers on the standard formula with regard to risk management. EIOPA therefore stresses the importance of assessing thoroughly significant deviations of companies' risk profiles from the standard formula to properly determine their overall solvency needs.
PPI complaints – FOS consultation on amending voluntary jurisdiction rules to reflect FCA final rules and guidance
On 19 June, FOS published a consultation on proposed amendments to its voluntary jurisdiction (VJ) rules to reflect the FCA's final rules and guidance on PPI complaints. The FOS remains of the view that it would be appropriate to amend the VJ to mirror the FCA's changes to the compulsory jurisdiction (CJ) time limits regarding PPI complaints, subject to the FCA's approval. It considers that this will avoid consumer and business confusion. Currently, the FOS deals with a "small, but not insignificant number" of PPI sales complaints under the VJ (predominantly against overseas insurers) and any changes to the VJ time limits will have an impact on those businesses and their customers. Since the FCA's final rules and guidance differ significantly from the proposals on which the FOS consulted in December 2015, the FOS is now consulting on the changes which are: prospective complainants will have to submit their PPI complaint by 29 August 2019, or lose the right to have their complaint assessed by the firm or the FOS; and the FOS also proposes to adopt in its VJ the new FCA guidance on complaints about payment protection contracts. The deadline for comments is 12 July.
MiFIR - Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 published
On 22 June 2017, the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (SI 2017/701) were published, with an explanatory memorandum. A transposition note setting out how the MiFID II Directive (2014/65/EU) is being transposed into UK law, and a final impact assessment (dated 6 February 2017), have also been published alongside the Regulations.
The Regulations implement parts of the MiFID II Directive and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR). The Regulations were made on 21 June 2017 and laid before Parliament on 22 June 2017. Aspects of the Regulations come into force on three different dates, namely 29 June 2017, 3 July 2017, 31 July 2017, to enable certain specific actions to take place under FSMA, as detailed in Regulation 1. For all other purposes, the Regulations come into force on 3 January 2018.
MiFIR - SMSG's own-initiative report to ESMA on product intervention powers under MiFIR
On 22 June 2017, ESMA's Securities and Markets Stakeholder Group (SMSG) published an own-initiative report (dated 16 June 2017) on product intervention under the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) (ESMA22-106-264). The report sets out a number of issues where the SMSG advises ESMA to take immediate action on the entry into force of MiFIR, namely: ensure, that existing Member State actions are justified and proportionate, and to take action if needed; take measures to streamline the procedure leading to adoption of a national product intervention measure, by giving guidance on, for instance, the features of the consultation process or the proportionality test; give guidance on the content and format of Member States’ notification obligation to other NCA’s and ESMA on the details and context of any prohibition or restriction (art. 42 (3); and keep a publicly available and up to date register of all national product intervention measures.
MiFID II – EC Implementing Regulation on format of position reports by investment firms and market operators published in OJ
On 21 June, EC Implementing Regulation (EU) 2017/1093 laying down ITS with regard to the format of position reports by investment firms and market operators under the MiFID II was published in the OJ. The EC adopted the Implementing Regulation on 20 June. It enters into force on 11 July (that is, 20 days after publication in the OJ). It applies from 3 January 2018.
MiFID II – EC publishes text of legislation amending systematic internaliser definition
On 19 June, the EC published the text of a draft Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the specification of the definition of systematic internalisers (SIs). Delegated Regulation (EU) 2017/565 supplements the MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms. Articles 12 to 16 expand on the definition of an SI as set out in Article 4(1)(20) of the MiFID II. The EC’s draft text inserts a new Article 16a about participating in matching arrangements into Delegated Regulation (EU) 2017/565. The provision will apply from 3 January 2018. The deadline for comments is 17 July.
MiFIR – ESMA consultation on trading obligation for derivatives
On 19 June, ESMA published a consultation paper on the trading obligation for derivatives under the MiFIR. MiFIR lays down two tests to determine the trading obligation: the venue test (that is, a class of derivatives must be admitted to trading or traded on at least one admissible trading venue); and the liquidity test (that is, whether a derivative is sufficiently liquid and there is sufficient third-party buying and selling interest). In addition, ESMA outlines its proposed approach regarding the register that it will maintain for the purposes of the trading obligation (section 5), and discusses the proposed application schedule and phase-in of the trading obligation (section 8). The consultation paper also includes a new data analysis of those derivatives that are subject to the clearing obligation under EMIR, in particular fixed-to-float single currency interest rate swaps (IRS) and index credit default swaps (CDS) (sections 6 and 7). ESMA has considered these types of derivatives for the purpose of the MiFIR trading obligation, based on the analysis undertaken for the discussion paper and the feedback provided by stakeholders. The proposed draft RTS implementing the trading obligation are included in Annex IV of the consultation paper. A high-level cost-benefit analysis (CBA) is outlined in Annex III to the consultation paper. The final draft RTS will be accompanied by a detailed CBA. The deadline for comments is 31 July.
MiFID II – Delegated Regulation on RTS specifying information to be notified by investment firms, market operators and credit institutions published in OJ
On 17 June, Delegated Regulation (EU) 2017/1018 supplementing the MiFID II with regard to RTS specifying information to be notified by investment firms, market operators and credit institutions was published in the OJ. The Delegated Regulation applies to investment firms and market operators operating a MTF or an OTF. It also applies to credit institutions providing one or more investment services or performing investment activities that wish to use tied agents under the right of the freedom to provide services or the freedom of establishment. The Delegated Regulation enters into force on 7 July (that is, 20 days after its publication in the OJ). It applies from 3 January 2018.
MiFID II – FCA guidance on applications for permissions
On 19 June, the FCA published a press release containing information about MiFID II and applications for permissions. The press release states that firms who need to change their regulatory permissions as a result of MiFID II should submit a complete application for authorisation or a VoP now, to ensure that the FCA can determine it before MiFID II takes effect. The FCA expects firms to be busy considering what impact MiFID II will have on their business and act accordingly. Applications must be complete by 3 July to be sure that the FCA can determine applications in time for 3 January 2018. The FCA hints that most applications are not complete when they are submitted. Therefore, firms who have not already submitted applications must do so as a matter of urgency. This will help the FCA identify what, if any, further information is needed to complete an application. The FCA warns that it cannot guarantee that any application that is only complete after 3 July will be determined by 3 January 2018.
MiFID II – Implementing Regulation on format and timing of the communications and publication of suspension and removal of financial instruments published in OJ
On 16 June, EC Implementing Regulation (EU) 2017/1005 laying down ITS with regard to the format and timing of the communications and the publication of the suspension and removal of financial instruments under the MiFID II has been published in the OJ. ESMA published its final report on the draft ITS in December 2015. The EC adopted the Implementing Regulation on 15 June 2017. It enters into force on 5 July (that is, 20 days after publication in the OJ). It applies from 3 January 2018.
Please see the Other section for updates on changes to the head of the PSR.
ECB to develop service for settlement of instant payments (TIPS)
On 22 June 2017, the ECB published a press release announcing that it will develop a new service for the settlement of instant payments. The new service, referred to as TARGET instant payment settlement (TIPS), is intended to help facilitate instant money transfers, offered via banks, so that instant retail payments can be made across Europe. It will be available all day and on every day of the year. The service will be developed in close co-operation with the EU banking industry. To encourage take-up, it will be offered to banks at a low price for at least the first two years of operation. TIPS is scheduled to start operating in November 2018.
CMA publishes consultation on regulated payment systems appeals rules and guide
On 20 June 2017, the CMA published for consultation draft rules of procedure to govern appeals that may be made to it under section 79 of the Financial Services (Banking Reform) Act 2013 in respect of certain decisions made by the PSR under the Act. The CMA is at the same time also consulting on a draft guide that is intended to assist participants involved in such appeals. The CMA invites comments on the draft Rules and Guide by 12 July 2017.
Payment services – PSR remedies decision on market review into the ownership and competitiveness of infrastructure provision
On 20 June, the PSR published a remedies decision on its market review into the ownership and competitiveness of infrastructure provision (MR15/2.5). The remedies decision sets out the PSR's final decision on the remedies that it has decided to implement, including an analysis of responses received to its December 2016 consultation. The PSR is: mandating competitive procurement exercises for Bacs, FPS and LINK when they purchase central infrastructure services. This will ensure fair, open and transparent procurement of central payment systems infrastructure and will enable new technology providers to enter the market and drive new and innovative products and services; and introducing ISO 20022 messaging standards in future procurement exercises for Bacs and FPS. Again, this aims to lower barriers and encourage new entrants to the market. The PSR is not imposing a divestment remedy because of the Mastercard acquisition of VocaLink, which currently supplies the central infrastructure for all three systems. The PSR states in a related press release that it expects the industry to start preparations for its procurement exercises immediately, so that users of payments systems, including consumers, can see the benefits from 2020.
BCBS report on range of practices in implementing CCyB policy
On 22 June 2017, the Basel Committee on Banking Supervision (BCBS) issued a report (BCBS407) on the range of practices in implementing the countercyclical capital buffer (CCyB) policy. The report details the various national CCyB policy frameworks and operational aspects, underlining the varying discretionary elements of jurisdictions' CCyB policy frameworks and practices. The BCBS' review helps to clarify implementation of domestic CCyB policies. It identifies that CCyB policy frameworks differ markedly with respect to: Their governance structures; The number of indicators used to identify periods of excess credit and systemic risk; The degree of reliance on formal versus judgmental approaches in making CCyB decisions; Their communication and reciprocity practices. The report also outlines some issues that were identified in the context of the cross-jurisdiction comparisons. There may be further discussion on these in due course, once there is more experience with regard to the CCyB policy.
EBA discussion paper on treatment of structural FX under Article 352(2) of the CRR
On 22 June 2017, the EBA published a discussion paper (EBA/DP/2017/01) on the treatment of foreign exchange (FX) positions of a structural nature under Article 352(2) of the CRR. The EBA has decided to produce own initiative guidelines on the implementation of the Article 352(2) structural FX provision to ensure that there is harmonised EU interpretation and implementation and is now seeking views from stakeholders. The deadline for responses is 22 September 2017.
EBA draft RTS on amendments to CRR RTS on CVA risk
On 22 June 2017, the EBA published its final report (EBA/RTS/2017/07) on amendments to Commission Delegated Regulation (EU) No 526/2014, which supplements the CRR and contains regulatory technical standards (RTS) for determining proxy spread and limited smaller portfolios for CVA risk. The draft RTS propose limited amendments and aim to further specify cases where alternative approaches can be used for the purposes of identifying an appropriate proxy spread and LGD MKT (that is, the market implied loss given default (LGD) of the counterparty).
CRR – EBA launches 2016 CVA risk monitoring exercise and reports on 2015 exercise
On 21 June, the EBA published a press release announcing the launch of its 2016 CVA risk exercise, together with instructions and template for the exercise. The purpose of the exercise is to monitor the impact of transactions exempted from the CVA risk charge. The exercise will be based on data with reference date of 31 December 2016. The EBA expects firms to complete the exercise by 14 September. The EBA has also published a report on the outcome of its 2015 CVA risk monitoring exercise, which it launched in November 2015 in parallel with a consultation on guidelines on the treatment of CVA risk under the SREP. The EBA states that it has put on hold its work on the guidelines on CVA risk under the SREP until further notice because of continued developments in the CVA risk framework at international level. It will closely monitor the work of the Basel Committee on Banking Supervision (BCBS) on this issue and, if needed, will review whether further guidance is needed to achieve greater consistency in appropriate risk-based supervisory measures.
CRR – PRA consultation on compliance with EBA guidelines on disclosure on composition of collateral for exposures to CCR
On 21 June, the PRA published a consultation paper on compliance with the EBA's guidelines on disclosure in relation to the composition of collateral for exposures to counterparty credit risk (CCR) (CP10/17). In the consultation, the PRA seeks views on a draft supervisory statement on compliance with the EBA's guidelines on disclosure (EBA/GL/2016/11), which were most recently updated on 7 June. The PRA is proposing to establish a quantitative threshold waiving disclosure of its template EU CCR5-B (composition of collateral for exposures to CCR) for firms when either the collateral received or the collateral posted is below the threshold. The proposed supervisory statement sets out the proposed waiver condition, as well as the PRA's expectations on firms' monitoring of the waiver condition and discretion regarding disclosure. The deadline for comments is 21 August. The PRA intends for the proposed waiver to apply to disclosures from 31 December (that is, the date on which the EBA's guidelines on disclosure apply).
Financial reporting – BoE publishes materials for IFRS 9 exercise accompanying the 2017 concurrent stress test
On 20 June, the BoE published the materials to be used by the seven major UK banks and building societies participating in the IFRS 9 exercise running alongside the 2017 concurrent stress test (CST), to prepare for the 2018 CST. The BoE explains on its website that the materials, which have previously been provided to the participating firms, include scenarios (anchored on the 2017 annual cyclical scenario), data templates, a guidance document and an extract of the data dictionary that is to be used specifically for the IFRS 9 exercise. The point estimate exercise will cover all seven participating banks. The UK retail credit cards exercise will cover participating banks, except for Standard Chartered. Participating banks are required to complete all aspects of the IFRS 9 exercises. The deadline for submission for the point estimate exercise data is 1 September, and for the credit cards exercise, 30 September. The BoE explains that the materials have been designed to specify different economic outcomes to those of the baseline and stress scenarios provided for the 2017 CST; this is consistent with the need to take a range of scenarios into account under IFRS 9. The BoE also points out that the scenarios are not an indication of what is expected from participating banks should they need to produce additional scenarios for the purposes of IFRS 9 going forward.
Residential mortgage risk weights – PRA policy statement
On 19 June, the PRA published a policy statement on residential mortgage risk weights (PS13/17).
PS13/17 is relevant to banks and building societies that use the IRB approach to calculate credit risk capital requirements relating to residential mortgage portfolios. It contains feedback to the PRA's July 2016 consultation paper on residential mortgage risk weights (CP16/19). The PRA has made several changes to the draft amendments to its supervisory statement on IRB approaches (SS11/13), which are explained in chapter 2 of the policy statement. The changes extend the timetable for firms to meet the new expectations, amend the definition and formulation of cyclicality, clarify the application of the cyclicality cap to historical modelling, and emphasise the PRA's expectation that firms should use margins of conservatism where there are low historical data. An updated version of SS11/13 is contained in Appendix 1 to the policy statement. The PRA has re-numbered paragraphs in the supervisory statement that followed inserted and deleted paragraphs. Firms are expected to meet the new expectations by the end of 2020. PS13/17 also states that firms should speak to their supervisors well in advance of this time to agree the date by which they will submit amended models for regulatory approval. In the meantime, applications from firms for IRB model changes based on the previous version of SS11/13 will be considered by the PRA, provided that the applications include credible plans to implement the revised expectations by the end of 2020.
BRRD – Council of EU agrees general approaches on legislative proposals for BRRD insolvency hierarchy Directive and CRR IFRS 9 Regulation
On 16 June, the Council of the EU published a press release announcing that, in its configuration as the ECOFIN, it has agreed its general approach on the following legislative proposals: a Directive amending the BRRD relating to the ranking of unsecured debt instruments in insolvency hierarchy (Insolvency Hierarchy Directive); and a Regulation amending the CRR relating to the transitional period for mitigating the impact on own funds of the introduction of IFRS 9 and the large exposures treatment of certain public sector exposures denominated in non-domestic currencies of member states (IRS 9 Regulation).
RECOVERY and RESOLUTION
Please see the Prudential Regulation section for an update on the Insolvency Hierarchy Directive.
BRRD – PRA consultation on recovery planning
On 21 June, the PRA published a consultation paper on recovery planning (CP9/17). In the consultation, the PRA seeks views on a new supervisory statement that would supersede its existing supervisory statement on recovery planning (SS18/13). SS18/13 was most recently revised in January 2015. The PRA intends to enhance the quality of firms' recovery plans and to increase the likelihood that these plans are credible and usable in stress situations. The revisions proposed by the PRA include additional expectations on firms concerning: providing sufficient analysis in their recovery plans to justify the choice, impact, timelines and dependencies of recovery options; providing a self-assessment of their recovery capacity (that is, the financial benefits that they could credibly realise in a period of stress); integrating indicators clearly into risk management processes and designing them to reflect the risks specific to firms' business models; and producing a concise implementation guide (referred to as a "playbook") that can be quickly digested and implemented in a period of stress. The deadline for comments is 21 September. The PRA intends to publish a final policy statement in the second half of 2017, which will specify when firms are expected to comply with the new supervisory statement.
BRRD – corrigendum to Delegated Regulation on ex ante contributions to resolution financing arrangements under BRRD published in OJ
On 20 June, a corrigendum to the text of Commission Delegated Regulation (EU) 2015/63 supplementing the BRRD with regard to ex ante contributions to resolution financing arrangements was published in the OJ Delegated Regulation 2015/63 determines how much individual firms should pay each year to their national resolution funds established under the BRRD, according to their size and risk profile. The corrigendum amends the definition of a promotional bank in Article 3(27) of the Delegated Regulation.
Ring fencing – BoE speech on implementation of ring-fencing regime
On 16 June, the BoE published a speech on ring-fencing by James Proudman, BoE Executive Director, UK Deposit Takers Supervision. Points of interest include: as it stands, only the five largest UK banking groups and some of their rapidly-expanding competitors will be in scope on 1 January 2019; firms with predominantly UK-focused retail banking activities are opting to build a "wide" ring-fence that will house the bulk of activities, with only a relatively small number of prohibited activities outside; separating the ring-fenced banks into distinct legal entities is not sufficient to ensure ring-fenced banks conduct business in a way that protects core banking services; the viability of a ring-fenced bank needs to be sufficiently separated from that of the broader group. Ring-fenced banks will need their own capital and pools of liquid assets to be able to stand resiliently on their own; the BoE is working with banks to ensure that they have suitable contingency plans in place to meet ring-fencing requirements by 2019 in case delays (for example, due to Brexit) occur; and the PRA is considering how to supervise banks with ring-fenced structures and whether this will require changes to its current supervisory approach and operating model.
Queen’s speech 2017: financial services implications
On 21 June, the Queen's Speech was made to both Houses of Parliament, setting out the government's legislative priorities for the 2017-19 parliamentary session. The measures announced include: Financial Guidance and Claims Bill; Good Mortgages Bill (this will repeal the Bill of Sales Act); and Data Protection Bill. The government has also published details of the Bills that it intends to bring forward to implement Brexit. These include the Repeal Bill, which will repeal the European Communities Act 1972 and convert EU law into UK law. It will create temporary powers for Parliament to make secondary legislation, enabling corrections to be made to laws that do not operate appropriately once the UK has left the EU.
ESAs – EC feedback statement on operation of ESAs
On 21 June, the EC published its feedback statement (dated 20 June) on its consultation paper on the operations of the ESAs (that is, ESMA, EIOPA and the EBA), which was published in March.
Points of interest in the feedback statement include: the vast majority of the respondents strongly support the ESAs' mandate on supervisory convergence; many respondents highlight the need to respect the principles of subsidiarity and proportionality and national competent authorities' room for discretion in their day-to-day supervision; the vast majority of respondents identify weaknesses in the definition and application of ESAs' tasks and powers on guidelines and recommendations; there are divergent views on the ESAs' governance structure, with approximately a third of respondents providing a broadly favourable opinion of it; almost half of the respondents did not reply to the questions relating to supervisory architecture, while a few explained that there is no optimal architecture of financial supervision and that it is difficult to choose a model in abstract terms; and some respondents thought Brexit and its implications needed to be considered more fully, arguing that substantial changes should wait until after the UK's departure from the EU.
SSM – ECB letter to banks on competence to exercise supervisory powers granted under national law
On 20 June, the ECB published a letter (dated 31 March) that it has sent to banks within the scope of the SSM on its competence to exercise supervisory powers granted under national law. In the letter, the ECB notes that, in summer 2016, it informed banks of certain supervisory powers, listed in Annex 1 to the letter. These powers included powers concerning activities of significant institutions in third countries, outsourcing of activities and powers in relation to shareholders. The ECB Supervisory Board, in co-operation with the EC, has concluded that, in addition to the powers listed in Annex 1, the ECB is directly competent to exercise a number of other supervisory powers granted under national law. These powers relate to, the approval of: acquisitions by significant institutions of holdings in a non-credit institution or a non-EU credit institution; mergers or de-mergers involving significant institutions; the appointment of key function holders in significant institutions; specific banking activities relating to licensing; and strategic decisions of significant institutions. The ECB requires significant institutions to submit all requests, applications or notifications relating to the supervisory powers listed in the letter directly to the ECB, copying in the relevant NCA.
FCA appointments – John Griffith-Jones to leave FCA and PSR
On 18 June, the FCA published a press release announcing that John Griffith-Jones, Chair of the FCA and the PSR, has confirmed that he will leave both organisations on 31 March 2018. This date is the end of his term of office. HMT will now commence the process for recruiting a new Chair for the FCA.
ESMA new webpage on use of delegation agreements as supervisory convergence tool
On 16 June, ESMA published a new webpage on delegation agreements. ESMA explains that working towards increased supervisory convergence is beneficial to both EU supervisors and financial market participants. To achieve this, it is possible for a NCA to delegate tasks and responsibilities to another NCA or to ESMA. The purpose of the delegation is to reduce the duplication of supervisory tasks, to foster co-operation, to streamline supervisory processes, and also to reduce the burden imposed on financial market participants. This delegation power is set out in Article 28 of the ESMA Regulation (Regulation 1095/2010), under which an NCA can delegate tasks and responsibilities under the legal acts within ESMA's remit, provided the following conditions are met: the delegate authority gives its consent; where responsibilities are delegated, the delegation results in the reallocation of competences between the delegating and delegate authorities; any enforcement, administrative or judicial procedure relating to the delegated responsibilities, if any, is governed by the national law of the delegate authority; any potential arrangements set out by member states concerning the delegation of responsibilities by NCAs are complied with; and in the case of the delegation of tasks and responsibilities between NCAs, ESMA is informed of the proposed delegation agreement at least one month before the agreement is entered into.