Includes developments in relation to: Cryptoassets; Brexit; Financial Services Act 2021; IFPR; COVID-19; BMR; and Solvency II.

Click on the headings below to access each section:

General

Issue 1126 / 9 September 2021

HEADLINES

  1. European Systemic Risk Board
    1. COVID-19 - Monitoring the financial stability implications of support measures- 8 September 2021
  2. Prudential Regulation Authority
    1. Remuneration - PRA publishes consultation paper on identification of material risk takers-8 September 2021
  3. Financial Conduct Authority
    1. Quarterly consultation No. 33 - FCA publishes consultation paper CP21/27-3 September 2021
    2. Cryptoasset Regulation - FCA publishes speech-6 September 2021
    3. Green FinTech challenge - FCA updates webpage to announce launch of second application window- 6 September 2021
    4. Financial Services Act 2021 - FCA guidance on new cancellation and variation power - 9 September 2021

European Systemic Risk Board

COVID-19 - Monitoring the financial stability implications of support measures - 8 September 2021

The European Systemic Risk Board (ESRB) has published a note on monitoring the financial stability implications of support measures to protect the real economy from the effects of COVID-19.

The analysis is based both on data shared by the European Banking Authority (EBA) and the European Central Bank (ECB), and data collected for Q4 2020 and Q1 2021 under an ESRB recommendation (ESRB/2020/8). The ESRB identifies, among other things, that:

  • fiscal support continues to play a role in sustaining the economic recovery and the functioning of credit markets;
  • while banks are increasingly provisioning for balance sheet risks, they may be underestimating macroeconomic risks; and
  • looking ahead, banks and supervisors need to pay attention to the fact that the link between economic and financial losses has become weaker during the pandemic.

Publication: Monitoring the financial stability implications of COVID-19 support measures

Prudential Regulation Authority

Remuneration - PRA publishes consultation paper on identification of material risk takers - 8 September 2021

The PRA has published a consultation paper (CP18/21) setting out its proposed changes to the requirements on the identification of material risk takers (MRTs) for the purposes of the PRA’s remuneration regime.

The PRA’s proposals would result in changes to the Remuneration Part of the PRA Rulebook, updates to Supervisory Statement SS2/17 ‘Remuneration’ and the revocation of the onshored Commission Delegated Regulation (EU) 604/2014 concerning PRA-regulated firms.

The proposed amendments put an end to the duplicative and partially-diverging requirements that currently apply to the identification of MRTs (in part, a product of the transposition of Capital Requirements Directive (EU) 2019/878 (CRD V) in the UK), and promote clarity by consolidating legislative requirements within the PRA Rulebook.

The PRA states that rationalising the MRT identification regime would be beneficial for firms by reducing the burden of complying with two sets of requirements regarding the identification of MRTs. Subject to currency threshold amendments, the substance of the provisions remains the same, and so the PRA does not expect firms will incur additional costs.

The consultation, which is relevant to banks, building societies and PRA-designated investment firms (including third country branches) closes on 8 November 2021, and final rules are expected in Q4 2021.

Consultation paper: Remuneration: Identification of material risk takers (CP18/21)

Webpage

Financial Conduct Authority

Quarterly consultation No. 33 - FCA publishes consultation paper CP21/27 - 3 September 2021

The FCA has published its Quarterly Consultation No.33 (CP21/27) inviting comments on miscellaneous amendments to its Handbook.  

The amendments are minor and reflect, among other things, the cessation of LIBOR and changes to legal expenses insurance reporting. The deadline for comments depends on the particular amendment, and is either 27 September 2021, 4 October 2021 or 11 October 2021.

Quarterly Consultation No. 33 (CP21/27)

Webpage

Response form

  1.  

Cryptoasset Regulation - FCA publishes speech - 6 September 2021

The FCA has published a speech by Charles Randell, Chair of the FCA, on risks associated with cryptoassets. In his speech, Mr Randell signals that the “tide of regulation is turning” as it has become more generally accepted that “we can’t allow online business to operate in ways we wouldn’t tolerate with any other business”.

To this end, he warns that while platforms’ efforts to crack down on fraudulent advertisements are welcome, a permanent and consistent solution to the problem of online fraud from paid-for advertising requires legislation. A two-pronged approach will be required, one that involves (i) appropriate regulation (including self-regulation by online platforms) and robust enforcement by the authorities; and (ii) greater consumer awareness about online scams.

Mr Randell went on to ponder the thorny question of whether speculative tokens should be brought within FCA regulation, observing that “it is difficult for regulators around the world to stand by and watch people, sometimes very vulnerable people, putting their financial futures in jeopardy”. He further notes that, given the decentralised way speculative tokens are created, any effective system of regulation would require a business seeking registration or authorisation with the FCA to bring themselves within reach.

More specifically Mr Randell suggested that in regulating digital tokens, legislators need to consider: (i) how to make it harder for digital tokens to be used for financial crime; (ii) how to support useful innovation; and (iii) the extent to which consumers should be free to buy unregulated, purely speculative tokens and to take responsibility for their decisions to do so.

Mr Randell concluded by summarising two cases where regulators should be given powers to take action in this space: (i) where cryptoasset promotions mislead consumers that speculative tokens are regulated; and (ii) where unregulated activities such as speculative tokens pose risks to FCA-authorised firms in terms of conduct and prudential soundness.

FCA Speech by Charles Randell: The risks of token regulation

  1.  

Green FinTech challenge - FCA updates webpage to announce launch of second application window - 6 September 2021

The FCA has updated its Green FinTech Challenge webpage to announce the launch of a second application window. The Green FinTech Challenge is aimed at firms looking to deliver innovation to aid the transition to a net zero economy that is either regulated business or supports regulated business in the UK financial services market, providing firms with access to support services and reduced time-to-market at potentially lower cost.

The FCA states that it is particularly interested in firms that are developing innovations in the area of ESG data and disclosure, such as products and services that will:

  • enable transparency in disclosure and reporting on sustainability by companies along the investment chain; and
  • help consumers better understand the ESG characteristics of relevant products and providers they engage with, as well as provide visibility around alternatives aligned with their needs and preferences.

The FCA has also published a webpage that explains how its Green FinTech Challenge and digital sandbox are different. The deadline for applications is 15 November 2021.

Updated webpage: Green FinTech Challenge 2021

Green FinTech Challenge and Digital Sandbox: which service to apply for

Financial Services Act 2021 - FCA guidance on new cancellation and variation power - 9 September 2021

The FCA has published a consultation paper (CP21/28) on proposed changes to its Handbook and Enforcement Guide to reflect the new cancellation and variation power granted to it under the Financial Services Act 2021. This power is set out in Schedule 6A to the Financial Services and Markets Act 2000 (FSMA), and allows the FCA to vary or cancel firms’ permissions more quickly and efficiently if they are no longer using them.

The FCA proposes, among other things:

  • to amend chapters 6 and 7 of the Supervision manual (SUP) to describe the new power and how the FCA will use it;
  • to amend the Enforcement Guide to refer to the FCA’s possible use of the power alongside investigations; and
  • to add guidance to the Compensation sourcebook (COMP) and the Dispute Resolution: Complaints sourcebook (DISP) to provide clarity about what happens to Financial Services Compensation Scheme (FSCS) claims and complaints when the FCA annuls a decision to cancel.

The consultation closes on 29 October 2021.

Consultation paper: New cancellation and variation power: Changes to the Handbook and Enforcement Guide (CP21/28)

Webpage

Press release

Response form

Beyond Brexit

Issue 1126 / 9 September 2021

HEADLINES

  1. HM Treasury
    1. Brexit SI - Revised draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021- 7 September 2021
  2. TheCityUK
    1. The UK’s status as a financial centre - TheCityUK publishes report setting out regulatory strategy- 7 September 2021

HM Treasury

Brexit SI - Revised draft Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021 - 7 September 2021

HM Treasury has published a revised draft version of the Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021, together with an explanatory memorandum.

The draft Regulations, which were originally published in July 2021, address deficiencies in retained EU law relating to the non-discriminatory access regime for exchange-traded derivatives and the low carbon regime. They also make technical amendments to certain exemptions to the financial promotions regime for relevant markets to ensure that they apply to UK markets following the UK’s departure from the EU.

A government webpage indicates the original version was withdrawn on 31 August 2021 to correct typographical errors, with the revised version also being laid on 31 August 2021. The draft Regulations are stated as coming into force on 13 October 2021.

Draft SI: The Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021

Explanatory memorandum

Impact assessment

Webpage

Updated webpage

TheCityUK

The UK’s status as a financial centre - TheCityUK publishes report setting out regulatory strategy - 7 September 2021

TheCityUK has published a report containing an international strategy for the UK-based financial and related professional services industry, with the aim of making the UK the world’s leading international financial centre within five years. The report highlights how the UK has, by some metrics, seen its share of global business decline relative to its international competitors such as New York and Hong Kong over the past decade.

The CityUK’s strategy takes a three-pronged approach, focusing on:

  • Securing the UK’s international financial centre ecosystem by making it more globally competitive: among other things, this will involve introducing a regular review of the UK’s financial regulatory regime to ensure that it is proportionate, coherent and achieving stated goals in the most efficient way possible, and expediting the process for determining regulatory approvals;
  • Growing the UK’s share of key global financial and related professional services markets: the UK should aim to liberalise trade with developed markets such as the US and the EU, conclude regulatory agreements (especially recognition and deference agreements) that enable UK financial institutions to supply products and services across borders, and secure investment protection provisions; and
  • Building global market capability in the key areas of future global demand: this section includes recommendations that the UK should make the UK a global hub for data and technology, and should aspire to be a world-leader in green and sustainable finance. An important first step is to work with G7 and G20 jurisdictions to create international standards for green disclosures and develop principles to allow different countries’ ESG finance taxonomies to communicate with one another.

Publication: Making the UK the leading global finance centre: An international strategy for the UK-based financial and related professional services industry

Press release

Banking and Finance

Issue 1126 / 9 September 2021

HEADLINES

  1. Basel Committee on Banking Supervision
    1. Basel III - BCBS publishes speech on global co-operation- 8 September 2021
  2. International Organization of Securities Commissions
    1. Credit sensitive rates - IOSCO publishes statement - 8 September 2021
  3. European Commission
    1. BRRD - European Commission adopts Delegated Regulation setting out RTS for contractual recognition of write down and conversion powers- 8 September 2021
  4. Official Journal of the European Union
    1. Delegation and internal tasks - ECB decisions published in OJ- 6 September 2021
  5. European Banking Authority, European Central Bank and EU Prudential Supervisors and Central Banks
    1. Basel III - EU implementation of outstanding reforms- 7 September 2021
  6. European Central Bank
    1. SSM - ECB speech on obstacles to banking sector integration in EU legislation- 9 September 2021
  7. HM Treasury
    1. IFPR - HM Treasury publishes consultation paper on amending Banking Act 2009- 7 September 2021
  8. Bank of England
    1. RTGS and CHAPS - Bank of England publishes annual report- 6 September 2021
  9. Prudential Regulation Authority and Financial Conduct Authority
    1. Trade finance activity - PRA and FCA publish joint letter- 9 September 2021
  10. Financial Conduct Authority
    1. COVID-19 - FCA updates webpage relating to temporary guidance on delaying mortgage capital repayments-8 September 2021 
  11. UK Finance
    1. UK CBDC - UK Finance publishes report-8 September 2021

Basel Committee on Banking Supervision

Basel III - BCBS publishes speech on global co-operation - 8 September 2021

The Basel Committee on Banking Supervision (BCBS) has published a speech by BCBS Secretary General, Carolyn Rogers, on Basel III and global co-operation.

Ms Rogers uses her speech to emphasise the connection between multilateralism and financial stability, stating that “multilateralism lies at the heart of the work of the Basel Committee” and that, looking ahead, “there is no shortage of cross-border financial stability issues that will require global cooperation”. She also uses her speech to respond to some of the arguments circulating against the full implementation of Basel III in the EU, registering her concern that some stakeholders continue to lobby against consistent and timely implementation.

Speech by BCBS Secretary General, Carolyn Rogers: Basel III and global co-operation: Where do we go from here?

International Organization of Securities Commissions

Credit sensitive rates - IOSCO publishes statement - 8 September 2021

The International Organization of Securities Commission (IOSCO) has published a statement on credit sensitive rates. Credit sensitive rates are interest rate benchmarks that seek to measure the credit risk component of unsecured borrowing in certain markets. These rates have started to emerge as a possible alternative to USD LIBOR.

In the statement, IOSCO highlights that alternative financial benchmarks will need to be compliant at all times with its principles on financial benchmarks (IOSCO Principles). In particular, it focuses on Principles 6 and 7, calling on benchmark administrators to assess (in line with those Principles) whether the systemic benchmarks that are used extensively are based on active markets with high volumes of transactions, representing the underlying interest they intend to measure and whether such benchmarks are resilient during times of stress.

IOSCO further explains that benchmark users should consider the robustness and reliability of the benchmarks they choose and ensure they have reliable fallback mechanisms that can be used, should their chosen benchmarks cease or become unrepresentative. Finally, IOSCO notes that users of benchmarks place considerable value on a benchmark being IOSCO-compliant, and states that it will be monitoring closely how the IOSCO ‘badge’ is used in compliance assessments of the relevant credit sensitive rates.

Bank of England Governor Andrew Bailey has welcomed the IOSCO statement, noting that credit sensitive rates may well fail to comply with the IOSCO Principles if their use became widespread.

Statement: Credit Sensitive Rates

European Commission

BRRD - European Commission adopts Delegated Regulation setting out RTS for contractual recognition of write down and conversion powers - 8 September 2021

The European Commission has adopted a Delegated Regulation supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) with regard to regulatory technical standards (RTS) for the contractual recognition of write down and conversion powers.

Under Article 55 BRRD, EU banks are required to insert a clause in contracts governed by the laws of non-EU countries to ensure that the powers of EU authorities to apply bail-in in case of bank failure is recognised. However, the BRRD II Directive ((EU) 2019/879) amended Article 55 of the BRRD to address the scenario where it is impracticable for institutions and entities subject to the BRRD to include bail-in contractual recognition clauses in liability contracts. In particular, new Article 55(6) of the BRRD gives the European Banking Authority (EBA) a mandate to draft RTS specifying conditions under which it would be legally, contractually or economically impracticable to include contractual recognition clauses.

To this end, the Delegated Regulation specifies those conditions and also specifies:

  • the conditions for the resolution authority to require the inclusion of the clauses in certain categories of liabilities, where it concludes that none of the conditions of impracticability notified to it are fulfilled; and
  • the reasonable timeframe for the resolution authority to require inclusion of those clauses.

The next step is for the Council of the EU and the European Parliament to consider the Delegated Regulation. If neither of them object, it will enter into force 20 days after it is published in the Official Journal of the EU.

Commission Delegated Regulation (EU) …/… supplementing Directive 2014/59/EU with regard to regulatory technical standards for the contractual recognition of write down and conversion powers (C(2021) 3697 final)

Official Journal of the European Union

Delegation and internal tasks - ECB decisions published in OJ - 6 September 2021

A number of European Central Bank (ECB) decisions have been published in the Official Journal of the EU (OJ), relating to tasks and procedures of the ECB when carrying out certain functions in a member state whose currency is not the Euro. These include, among others:

  • Decision (EU) 2021/1437 amending Decision (EU) 2017/934 on the delegation of decisions on the significance of supervised entities (ECB/2021/33);
  • Decision (EU) 2021/1438 amending Decision (EU) 2017/935 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2021/34); and
  • Decision (EU) 2021/1439 amending Decision (EU) 2018/546 on delegation of the power to adopt own funds decisions (ECB/2021/35).

All of these decisions enter into force on 26 September 2021.

Decision (EU) 2021/1437 amending Decision (EU) 2017/934 on the delegation of decisions on the significance of supervised entities (ECB/2021/33)

Decision (EU) 2021/1438 amending Decision (EU) 2017/935 on delegation of the power to adopt fit and proper decisions and the assessment of fit and proper requirements (ECB/2021/34)

Decision (EU) 2021/1439 amending Decision (EU) 2018/546 on delegation of the power to adopt own funds decisions (ECB/2021/35)

Decision (EU) 2021/1440 amending Decision (EU) 2019/1376 on delegation of the power to adopt decisions on passporting, acquisition if qualifying holdings and withdrawal of authorisations of credit institutions (ECB/2021/36)

Decision (EU) 2021/1441 amending Decision (EU) 2019/322 on delegation of the power to adopt decisions regarding supervisory powers granted under national law (ECB/2021/37)

Decision (EU) 2021/1442 on delegation of the power to adopt decisions on internal models and on extension of deadlines (ECB/2021/38)

Decision (EU) 2021/1443 nominating heads of work units to adopt delegated internal models and extension of deadlines decisions (ECB/2021/40)

European Banking Authority, European Central Bank and EU Prudential Supervisors and Central Banks

Basel III - EU implementation of outstanding reforms - 7 September 2021

The European Banking Authority (EBA) and European Central Bank (ECB), in addition to a group of EU prudential supervisors and central banks, have written separate letters to the European Commissioner for Financial Services, Financial Stability and Capital Markets Union, Mairead McGuinness, on the implementation of outstanding Basel III reforms.

Both letters highlight that further postponements to the implementation of the outstanding reforms in 2023 could have a negative impact on the confidence of the EU banking sector and credibility of the EU regulatory framework. They observe that it is crucial to avoid implementation approaches that are inconsistent with international agreements and that would, in addition, leave shortcomings in the existing framework. In particular, both letters draw attention to the potential impact of delays to the implementation of the output floor, which reduces variability in how banks risk-weight their assets and which is a key element of the Basel III framework.

In March 2021, Commissioner McGuinness announced that the European Commission would adopt a legislative proposal on the implementation of the final Basel III standards in July 2021. The Commission has since indicated that the legislative proposal will be adopted by the European Parliament during its October 2021 plenary session.

EU prudential supervisors and central banks: Joint letter to the European Commission: The EU should stick to the Basel III agreement

ECB/EBA: Letter to the European Commission: EU implementation of outstanding Basel III reforms

European Central Bank

SSM - ECB speech on obstacles to banking sector integration in EU legislation - 9 September 2021

The European Central Bank (ECB) has published a speech by the Chair of the Supervisory Board of the ECB, Andrea Enria, on concrete actions the European banking sector can take to achieve progress towards an integrated prudential jurisdiction within the Single Supervisory Mechanism (SSM).

In the speech Mr Enria highlights the main obstacles to integration within EU banking legislation, including limitations placed on intra-group waivers, the fact that many national macro-prudential powers are delinked from EU legislation, and issues relating to transfer between deposit guarantee schemes.

Mr Enria further argues that if banking groups were to make greater use of branches and the free provision of services to develop cross-border business within the banking union, rather than subsidiaries, there might be significant efficiency gains in terms of simplified legal structures and corporate governance, savings related to annual accounts and internal audit, and lower overall regulatory requirements.

Speech by Chair of the Supervisory Board of the ECB, Andrea Enria: How can we made the most of an incomplete banking union?

HM Treasury

IFPR - HM Treasury publishes consultation paper on amending Banking Act 2009 - 7 September 2021

HM Treasury has published a consultation paper on amending the definition of ‘investment firm’ in section 48D of the Banking Act 2009 to reflect the FCA’s Investment Firms Prudential Regime (IFPR).

This follows the government’s decision to remove FCA-regulated ‘730k investment firms’ (investment firms subject to a EUR 730,000 initial capital requirement) from the scope of the UK resolution regime. As a consequence of this decision, a question has arisen as to whether short-term liabilities owed to FCA investment firms should continue to be excluded from the Bank of England’s bail-in power under section 48B of the Banking Act 2009. Sections 48B and 48D Banking Act 2009 relate to the liabilities owed to firms within the scope of the UK resolution regime. Currently, section 48B(8)(d) of the Banking Act 2009 means that the Bank’s bail-in power cannot be used to bail-in liabilities with an original maturity of less than seven days owed by the bank to a credit institution or 730k investment firm.

HM Treasury proposes to amend the definition of ‘investment firm’ in section 48D to capture PRA-designated investment firms and FCA-regulated investment firms with permission to underwrite or deal on own account (that is, those that will be subject to a £750,000 initial capital requirement under the FCA’s IFPR). This will mean that short-term liabilities owed to these firms will continue to be exempt from bail-in.

The government notes that if all FCA investment firms were removed from the exemption, the bail-in of a firm subject to the resolution regime could have significant implications for its FCA counterparties if their short-term exposures were written down.

The consultation closes on 5 October 2021.

Consultation paper: Amendment to Section 48D of the Banking Act 2009

Updated webpage

Bank of England

RTGS and CHAPS - Bank of England publishes annual report - 6 September 2021

The Bank of England has published its annual report on its Real-Time Gross Settlement (RTGS) and CHAPS services. The report focuses on the Bank’s strategy for RTGS and CHAPS and its main strategic focus for 2021/22.

The Bank observes that COVID-19 has driven changes in the use of the RTGS and CHAPS services, with a new RTGS peak value day of £943bn set on 14 September 2020. For CHAPS alone, a new record value day of £485bn was set on 30 November 2020.

Looking ahead, the Bank’s main focus will be on its RTGS Renewal Programme, and to realise the benefits of increased resilience, widened access, greater innovation and improved user functions for the financial system as a whole. The Bank is planning to consult on further enhancements for the RTGS service later in 2021.

Bank of England – RTGS and CHAPS Annual Report 2021

Press release

Prudential Regulation Authority and Financial Conduct Authority

Trade finance activity - PRA and FCA publish joint letter - 9 September 2021

The PRA and the FCA have sent a joint Dear CEO letter to firms that carry out trade finance activity, the purpose of which is to reiterate their expectations of such firms. The letter also asks firms to carry out a holistic assessment of financial crime risk if they have not already done so.

Observing that recent assessments of individual firms have highlighted significant issues relating to credit risk analysis and financial crime controls, the regulators set out a restatement of their expectations in the areas of risk assessment, counterparty analysis, transaction approval and transaction payments.

Dear CEO letter: Trade Finance Activity

Financial Conduct Authority

COVID-19 - FCA updates webpage relating to temporary guidance on delaying mortgage capital repayments - 8 September 2021 

The FCA has updated its webpage on policy statement PS20/11, ‘Mortgages: Removing barriers to intra-group switching and helping borrowers with maturing interest-only and part-and-part mortgages’, which aimed at helping borrowers whose repayment strategy may have been affected by the COVID-19 pandemic, as well as borrowers with ‘closed book’ mortgages who lacked switching options.   

The FCA observes that its temporary guidance, which came into force on 31 October 2020, allowed borrowers with an interest-only or part-and-part mortgage due to mature between 20 March 2020 and 31 October 2021 to delay repayment of their capital until 31 October 2021. 

This guidance will expire on 31 October 2021. Having reviewed market conditions, the FCA does not intend to extend the guidance, and so borrowers who have benefited from the guidance should aim to repay their capital as soon as possible. The FCA suggests that firms may want to contact borrowers who delayed their capital repayment to discuss their position and how they plan to make the repayment.

The FCA also advises that it is in the course of updating its data on the characteristics of ‘mortgage prisoners’, and reviewing the effect of its interventions in this area (the modified affordability assessment and intra-group switching), as set out in the terms of reference for its Mortgage Prisoner Review.

Updated webpage: PS20/11: Policy Statement: Mortgages: Removing barriers to intra-group switching and helping borrowers with maturing interest only and part-and-part mortgages

UK Finance

UK CBDC - UK Finance publishes report - 8 September 2021

UK Finance has published a report on a retail UK Central Bank Digital Currency (CBDC), questioning whether a retail CBDC (“effectively electronic money, issued by a central bank, available to all households and businesses”) is a threat or an opportunity for the payments industry.

The report explains that in April 2021 Rishi Sunak, the Chancellor of the Exchequer, announced a new Taskforce between HM Treasury and the Bank of England to explore the viability of a UK CBDC. The Bank released its consultation paper on 7 June 2021 looking closely at the opportunities and risks of new forms of digital money, including a UK CBDC.

To help further this debate, UK Finance’s paper explores what a CBDC is, how it could impact the UK payments system and what issues UK banks should consider. It also considers the opportunities and risks for the Bank, the government and the commercial market, as well as the possible impact on consumers.

Report: Retail CBDC – A threat or opportunity for the payments industry?

Webpage

Securities and Markets

Issue 1126 / 9 September 2021

HEADLINES

  1. International Organization of Securities Commissions
    1. Artificial intelligence and machine learning - IOSCO guidance for market intermediaries and asset managers - 7 September 2021
  2. European Commission
    1. PRIIPs KID - European Commission adopts Delegated Regulation amending RTS - 7 September 2021
  3. Official Journal of the European Union
    1. EMIR - Delegated Regulation on FRANDT commercial terms for clearing services published in OJ - 8 September 2021
  4. UK Parliament
    1. BMR - Critical Benchmarks (References and Administrators’ Liability) Bill publication and first reading- 8 September 2021

International Organization of Securities Commissions

Artificial intelligence and machine learning - IOSCO guidance for market intermediaries and asset managers - 7 September 2021

The International Organization of Securities Commissions (IOSCO) has published a final report on the use of artificial intelligence and machine learning (AIML) by market intermediaries and asset managers.

The report describes how such firms currently use AIML to reduce costs and increase efficiency. It notes that the rise in the use of electronic trading platforms and the increasing availability of data have led firms progressively to use AIML in their trading and advisory activities, as well as in their risk management and compliance functions.

The report then goes on to provide guidance to assist IOSCO members in supervising market intermediaries and asset managers that use AIML. It sets out six measures that seek to ensure that market intermediaries and asset managers have: appropriate governance, controls and oversight frameworks; staff with adequate knowledge, skills and experience; robust testing processes; and appropriate transparency and disclosures to investors and regulators. For example, regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AIML, and should require firms to understand their reliance on and manage their relationship with third party providers.

IOSCO members are encouraged to consider these measures carefully in the context of their legal and regulatory framework.

Report: The use of artificial intelligence and machine learning by market intermediaries and asset managers (FR06/2021)

Press release

European Commission

PRIIPs KID - European Commission adopts Delegated Regulation amending RTS - 7 September 2021

The European Commission has adopted a Delegated Regulation amending the regulatory technical standards laid down in Commission Delegated Regulation (EU) 2017/653 on key information documents (KID) for packaged retail and insurance-based investment products (PRIIPs KID Delegated Regulation). Among other things, the Delegated Regulation amends the PRIIPs KID Delegated Regulation by setting out:

  • new methodologies underpinning the calculation of appropriate performance scenarios and a revised presentation of these scenarios;
  • a modified methodology underpinning the calculation of transaction costs; and
  • modified rules for PRIIPs that offer a range of options for investment.

The Commission intends for amendments also to be made to the Undertakings for the Collective Investments in Transferable Securities Directive (2009/65/EC) (UCITS) and the Regulation on Packaged Retail and Insurance-based Investment Products (1286/2014/EU) (PRIIPs) to avoid investors receiving two pre-contractual disclosure documents.

A related press release states the Delegated Regulation will be subject to scrutiny by the European Parliament and the Council of the EU. However, the Delegated Regulation is scheduled to apply from 1 July 2022.

Commission Delegated Regulation (EU) …/… amending the regulatory technical standards laid down in Commission Delegated Regulation (EU) 2017/653 as regards the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by packaged retail and insurance-based investment products (PRIIPs) offering a range of options for investment and alignment of the transitional arrangement for PRIIP manufacturers offering units of funds referred to in Article 32 of Regulation (EU) 1286/2014 as underlying investment options with the prolonged transitional arrangement laid down in that Article (C(2021) 6325 final)

Annexes

Implementing and Delegated Acts: full list

Webpage

Press release

Official Journal of the European Union

EMIR - Delegated Regulation on FRANDT commercial terms for clearing services published in OJ - 8 September 2021

Delegated Regulation (EU) 2021/1456 supplementing the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR) specifying the conditions under which commercial terms for clearing services for over-the-counter (OTC) derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT) has been published in the Official Journal of the EU.

The Delegated Regulation comes into force on 9 September 2021, and will apply from 9 March 2022 (subject to transitional provisions for commercial terms for clearing services agreed before 9 September 2021).

Commission Delegated Regulation (EU) 2021/1456 supplementing Regulation (EU) 648/2012 by specifying the conditions under which the commercial terms for clearing services for OTC derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent

UK Parliament

BMR - Critical Benchmarks (References and Administrators’ Liability) Bill publication and first reading - 8 September 2021

The Critical Benchmarks (References and Administrators’ Liability) Bill has been introduced to Parliament and has had its first reading in the House of Lords. The UK Parliament has published the text of the Bill, together with explanatory notes.

The Bill supports the effective operation of the powers granted to the FCA under the Financial Services Act 2021 to oversee the wind-down of a critical benchmark. In particular, the Bill is intended to provide legal certainty as to how contractual references to a critical benchmark should be treated where the FCA exercises powers under the UK Benchmarks Regulation (EU) 2016/1011 (BMR) to provide for the continuity of an unrepresentative critical benchmark.

The Bill also grants immunity from claims for damages to the administrator of a critical benchmark that is designated under Article 23A of the BMR where the administrator acts in accordance with specific requirements imposed upon it by the FCA.

Critical Benchmarks (References and Administrators’ Liability) Bill (HL 49)

Explanatory notes

Impact assessment

Human rights memorandum

Bill webpage

Lords Hansard: First reading

Minutes of Proceedings

Insurance

Issue 1126 / 9 September 2021

HEADLINES

  1. Prudential Regulation Authority
    1. Solvency II - PRA publishes consultation paper on the definition of an insurance holding company- 6 September 2021

Prudential Regulation Authority

Solvency II - PRA publishes consultation paper on the definition of an insurance holding company - 6 September 2021

The PRA has published a consultation paper on its proposed approach to interpreting and applying the definition of an insurance holding company for the purposes of the Group Supervision Part of the PRA Rulebook (CP 17/21). In so doing, the PRA seeks to set out its approach to distinguishing an insurance holding company from a mixed-activity insurance holding company.

The consultation paper includes the following proposals:

  • Changes to the definition of ‘insurance holding company’: the PRA proposes to interpret the term ‘mainly’ (contained in the definition of ‘insurance holding company’ in its Glossary Part) by reference to the proportion of a group’s assets, revenues or capital requirements that are derived from insurance or reinsurance subsidiaries, or ancillary insurance services undertakings; and
  • Proposed changes to Chapter 1 of Supervisory Statement SS9/15 on Solvency II group supervision: the PRA proposes to clarify its expectations on the information required from firms in order to distinguish an insurance holding company from a mixed-activity insurance holding company. The PRA proposes to publish this clarification as further guidance in SS9/15. The PRA also proposes to amend or remove references to the EU or EU-derived law throughout SS9/15 to reflect the UK’s withdrawal from the EU.

Comments can be made on the proposals until 6 December 2021. The PRA proposes that the implementation date for the changes would be 28 February 2022.

Consultation paper: Solvency II: Definition of an insurance holding company

Webpage

Financial Crime

Issue 1126 / 9 September 2021

HEADLINES

  1. Office of Financial Sanctions Implementation
    1. Frozen assets reporting - OFSI publishes 2021 reporting notice-6 September 2021

Office of Financial Sanctions Implementation

Frozen assets reporting - OFSI publishes 2021 reporting notice - 6 September 2021

The Office of Financial Sanctions Implementation (OFSI) has published its frozen assets reporting notice for 2021.

Financial sanctions legislation requires that all funds or economic resources belonging to or owned, held or controlled by a designated person must be frozen. Under the Sanctions and Anti-Money Laundering Act 2018, HM Treasury, through OFSI, can request information possessed for the purpose of monitoring compliance with the legislation.

To this end, the reporting notice requests that all persons that hold or control funds or economic resources belonging to or owned, held or controlled by a designated person to provide a report with the details of these assets. The report must include details of all funds or economic resources frozen in the UK as well as those overseas where these funds or economic resources are subject to UK financial sanctions legislation.

If an entity or individual possesses this information they are required to complete such a report and submit it to OFSI by 15 October 2021 using the template provided.

Financial Sanctions Notice: Frozen Assets Reporting 2021

Reporting template

Enforcement

Issue 1126 / 9 September 2021

HEADLINES

  1. Competition and Markets Authority
    1. PPI Market Investigation Order 2011 - CMA writes to banking group about further breaches - 9 September 2021 
  2. Recent Cases
    1. Parchetul de pe lângă Tribunalul Braşov v LG and MH (Case C-790/19) ECLI:EU:C:2021:661

Competition and Markets Authority

PPI Market Investigation Order 2011 - CMA writes to banking group about further breaches - 9 September 2021 

The Competition and Markets Authority (CMA) has published a letter sent to Lloyds Banking Group (LBG) about its non-compliance with the Payment Protection Insurance (PPI) Market Investigation Order 2011 (the Order). The PPI Order imposes the remedies set following the PPI market investigation, including a requirement that providers send customers Annual Review statements setting out information about the PPI policy. Annual Reviews are intended to help customers compare the cost of PPI.

In April 2021, LBG notified the CMA that it had breached the Order by failing to include the monthly PPI benefit value figures in Annual Reviews relating to some of its AXA (TSB) Mortgagesure PPI policies. In its 2021 mailing cycle, LBG identified that Annual Reviews for 23 customers did not include the monthly benefit values as required. LBG corrected the Annual Reviews in time to avoid a breach of the Order in 2021. However, having investigated the error further, LBG found that 41 customers were affected by the same error in 2019 and 26 of those customers were affected in 2020.

LBG identified this breach as a result of enhanced measures put in place following previous enforcement action taken by the CMA in February 2021 and October 2018.

LBG has proposed actions to address the system error in time for the next Annual Review mailing round. It is also sending apology letters and offering affected customers (with open and closed policies) the option to receive a refund of premiums with 8% interest. Due to the nature of the voluntary actions being taken by LBG, the CMA does not consider it necessary to take further formal enforcement action at this time.

Letter: Lloyds Banking Group’s breach of the Payment Protection Insurance Market Investigation Order 2011 in relaation to AXA (TSB) Mortgagesure policies

Lloyds Banking Group Action Plan

Webpage

Recent Cases

Parchetul de pe lângă Tribunalul Braşov v LG and MH (Case C-790/19) ECLI:EU:C:2021:661

Prevention of the use of the financial system for the purposes of money laundering and terrorist financing – MLD3 and MLD4 – Offence of money laundering – Laundering by the perpetrator of the predicate offence

The European Court of Justice (ECJ) has considered interpretation of the money laundering definitions in Article 1(2)(a) of the repealed Third Money Laundering Directive (2005/60/EC) (MLD3) and Article 1(3) of the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4). The Court of Appeal, Braşov, Romania, made a referral to the ECJ asking whether the same person could commit both an act constituting a money laundering offence and also the offence from which the laundered money derives (known as a ‘predicate offence’).

The ECJ concluded that Article 1(2)(a) of MLD3 must be interpreted as not precluding national legislation which provides that the offence of money laundering may be committed by the perpetrator of the criminal activity from which the money concerned was derived. It considers that the same conclusion applies as regards Article 1(3) of MLD4 as it simply replaced Article 1(2)(a) of MLD3 without making any substantial amendment.

Parchetul de pe lângă Tribunalul Braşov v LG and MH (Case C-790/19) ECLI:EU:C:2021:661