April version of PRA and BoE policy statement on Brexit and related final policy materials
On 18 April, the PRA and the BoE published a further version of their joint policy statement on amendments to financial services legislation under the European Union (Withdrawal) Act 2018 (EUWA), which supplements the version published in February. In preparation for a hard Brexit, the BoE and PRA published final policy materials including EU Exit Instruments, Supervisory Statements and a Statement of Policy. These generally have the effective date of ‘exit day’, which is defined in the (amended) EUWA to mean 31 October at 11pm (UK time). These materials were published as ‘near-final’ in Section B of the February version. The instruments and statements published alongside this policy statement are now final. As required by the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, the BoE and PRA have made the EU Exit Instruments following HMT’s formal approval and the FCA’s consent to the joint FCA-BoE and joint FCA-PRA EU Exit Instruments. The BoE and PRA have not changed the policy or significantly altered the text of the published materials since their publication as ‘near-final’. Section B of this policy statement sets out the limited updates to these materials since they were published as ‘near-final’. The BoE and PRA have not yet published final versions of the BoE and PRA transitional directions and transitional guidance materials (published as ‘near-final’ in Section A of the February version). In light of the extension to Article 50, the BoE and PRA will consider whether to make any changes to these directions and guidance materials. The BoE will publish further information on this in due course.
Six further FCA BTS instruments for no-deal Brexit
On 18 April, the FCA updated its Brexit policy statement and transitional directions webpage to highlight the publication of the following final instruments containing amendments to onshored EU regulations containing binding technical standards: (i) Technical Standards (Bank Recovery and Resolution Directive) (EU Exit) Instrument 2019; (ii) Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) Instrument 2019; (iii) Technical Standards (Financial Conglomerates Directive) (EU Exit) Instrument 2019; (iv) Technical Standards (Markets in Financial Instruments Directive) (EU Exit) (No 3) Instrument 2019; (v) Technical Standards (European Market Infrastructure Regulations) (EU Exit) (No 3) Instrument 2019; and (vi) Technical Standards (European Market Infrastructure Regulations) (EU Exit) (No 4) Instrument 2019.
Please refer to the Financial Crime section for an update regarding the EP’s resolution on SME growth market reform.
Market Abuse Regulation: Annual and interim results preparation
Please see our briefing note on the FCA’s guidance on How to Approach the Preparation of Financial Information and the application of the rules in relation to inside information.
Adopted text of EP’s first reading on Exposures in the form of covered bonds and Covered bonds and covered bond public supervision
On 18 April, the EP adopted the provisional version of text on the proposal for a regulation amending Regulation (EU) No 575/2013 regarding exposures in the form of covered bonds. The EP also adopted the provisional version of text on the proposal for a directive on the issue of covered bonds and covered bond public supervision, amending Directive 2009/65/EC and Directive 2014/59/EU. The next step is for the Council to adopt the proposed regulation.
FCA Chief Executive speech on future of financial conduct regulation
On 23 April, the FCA published a speech by Andrew Bailey, FCA Chief Executive, on the future of financial conduct regulation. The speech suggests that: (i) there should be a debate about the future of regulation in a public interest framework; (ii) the FCA will undertake further work to examine the role of its principles; and (iii) the FCA will consider the most efficient and proportionate options for achieving the substance of a duty of care.
Please refer to the Conduct section for an update regarding the FCA’s Chief Executive speech on the future of financial conduct regulation.
FCA: new webpage on treating customers fairly
On 23 April, the FCA published a new webpage on Consumer credit – Treating customers fairly. The goal of the website is to help firms understand what they are required to do under the FCA rules and what the FCA expects of them. Firms need to consider the fair treatment of customers throughout the entire customer journey - both before and after entering into a contract.
FCA feedback statement on a new duty of care
On 23 April, the FCA published a feedback statement to its July 2018 discussion paper on a duty of care and potential alternative approaches. The FCA identified options for change that are most likely to address potential deficiencies in consumer protection, which include: (i) reviewing how it applies the regulatory framework – in particular, its application of the Principles in its authorisations, supervisory and enforcement functions, and how transparently it communicates with firms about this; and (ii) new/revised Principles to strengthen and clarify firms’ duties to consumers, including considering a potential private right of action for Principles breaches. Andrew Bailey, Chief Executive of the FCA said, "I'm pleased that so many people shared their views with us as part of this process. Inevitably, there were a range of opinions about what would secure the right level of protection for consumers. Given their long-lasting impact, we now want to weigh-up possible changes, including whether reworking our Principles of Business is the right way forward. I will continue to push this forward as getting the right answer on this question is essential to the FCA delivering on its Mission." The FCA will undertake further work to examine these options and will outline next steps in the autumn, seeking detailed views on specific options for change.
MAR and PR: EP resolution on SME growth market reform (corporate aspects)
On 18 April, the EP resolved at first reading to adopt, with amendments, the EC’s proposed regulation to amend both MAR and the new Prospectus Regulation (PR) in relation to the promotion of the use of SME growth markets. The amendments include: (i) reframing Article 17(4) of MAR, relating to the obligations on an SME growth market issuer that has delayed the disclosure of inside information; (ii) clarification of Article 18(2) regarding the obligation to establish insider lists, which rests on both issuers and persons acting on their behalf or on their account; and (iii) two new requirements in Article 33 of MiFID II, stipulating the EC must establish an expert stakeholder group by six months after entry into force of the amending regulation to monitor the success and functioning of SME growth markets. The next step is for the Council to adopt the proposed regulation.
FCA thematic review and Dear CEO letter on fair treatment of with-profits customers
On 25 April, the FCA published a thematic review report and a Dear CEO letter on the fair treatment of with-profits customers. The FCA assessed the practices of a sample of firms in areas that present some of the highest potential risks of significant harm to with-profits customers. The review did not find evidence of widespread customer harm arising from firms’ practices across the assessed areas, however, there were some areas of poor practice, in particular, weaknesses in assessments for, and distribution of, excess surplus in funds and insufficiently robust fund-level capital management approaches. Customer harm may occur in the future if these practices continue. In the limited instances where the FCA found practices presenting a higher risk of customer harm a key cause was a failure of governance. In particular, the review found ineffective oversight and challenge by senior individuals and the board. The FCA also identified a widespread need for firms to do more to use their run off plans fully. The FCA expects with profits operators to use this review to improve how they work, to consider the findings and examples of good and poor practice and assess whether they need to make any changes to their management of the business. If firms do not address the areas of poor practice highlighted, the FCA will consider further action.
MARKETS AND MARKETS INFRASTRUCTURE
EC equivalence decision for Japan adopted for certain EMIR Art 11 requirements (including margin)
On 25 April, the EC adopted their draft decision on recognising the legal, supervisory and enforcement arrangements of Japan for derivatives transactions supervised by the Japan Financial Services Agency as equivalent to certain bilateral risk mitigation provisions (Article 11) of EMIR. The adoption was timed to coincide with the EU-Japan summit. The decision will enter into force 20 days after its publication in the OJ.
FCA report on payment for order flow
On 23 April, the FCA published a report on payment for order flow (PFOF) as an update on its supervisory work on conflicts of interest. The initial concerns about PFOF focused on brokers’ activities in relation to listed derivative contracts on the former London International Financial Futures and Options Exchange. Listed derivatives remain the core focus of the FCA’s PFOF work, although these contracts are now mainly traded on Eurex, ICE Futures Europe, and other regulated markets. The report found that: (i) nearly all firms stopped charging liquidity providers when sourcing exclusive liquidity for a specific client, regardless of client classification; (ii) firms found it difficult to consistently determine whether their activity legitimately constitutes the broad dissemination of non-exclusive liquidity which may allow them to effectively manage the conflicts of charging both sides of a trade; (iii) firms could take further steps to improve the systems and controls they use to manage conflicts of interest for specific areas of their businesses; and (iv) some firms routed client orders to overseas affiliates which charged liquidity providers PFOF. The FCA will continue to monitor firms’ compliance on PFOF and provide initial feedback to the firms that participated in the review. In some cases, it will require firms to implement measures to ensure compliance with the relevant regulatory requirements.
Adopted text of EP’s first reading position on EMIR 2.2
On 18 April, the EP published the provisional edition of the text of the legislative resolution adopted by it at first reading on the proposed Regulation amending the EMIR supervisory regime for EU and third-country CCPs (EMIR 2.2). The new rules, already agreed with the EU ministers, enable ESMA to set up a new Supervisory Committee for EU CCPs and impose stricter rules on third country ones, depending on systemic risk. ESMA will give opinions on key decisions of national supervisors of EU CCPs and will become the EU supervisor for third-country CCPs. Systemically-important third country CCPs will be classified according to the systemic risk they present to the financial stability of the EU or one or more member states. The recognition of third country CCPs and their classification should be systematically reviewed (at least every five years) depending on the size, complexity and the extent to which the financial instruments cleared by the CCP are denominated in Union currencies. Under the new rules, ESMA, in agreement with the central banks of issue, may conclude that a third-country CCP is of such substantial systemic importance that even compliance with the rules does not sufficiently ensure the financial stability of the EU or a member state and therefore recommend that the EC prohibits it from being recognised. The withdrawal of the recognition could be limited to a particular clearing service, activity or class of financial instruments.
Adopted text of EP’s first reading position on EMIR Refit Regulation
On 18 April, the EP published the provisional edition of the text of the legislative resolution adopted by it at first reading on the proposed Regulation to amend EMIR. The next step is for the Council to adopt the proposed regulation.
FCA Dear CEO letter identifies key harms posed by wholesale market broking firms and sets out its related supervision strategy
On 18 April, the FCA published a Dear CEO letter highlighting its view of the key harms that brokerage firms operating in wholesale financial markets pose to their clients and markets. The letter also sets out the FCA’s strategy to mitigate the drivers of those harms. The four key drivers of harm in this sector identified by the FCA are: (i) compensation arrangements which incentivize poor conduct by linking broker remuneration directly to the commission they earn; (ii) governance arrangement which do not give boards and senior managers the tools they need to properly oversee their staff and business, and act accordingly; (iii) workflows which do not recognize that a broker may be performing different regulated activities or acting in different capacities from time to time; and (iv) a culture and mindset which underestimates the risk of brokers committing or facilitating market abuse and financial crime through their role as market intermediaries, combined with poor monitoring controls. The FCA urges firms to consider the four key drivers of harm highlighted in this letter and to take appropriate steps to mitigate any problems that could apply. It will be exploring the four key drivers in their engagement with large and small brokerage firms throughout this year and next as well as proactively working with wider engagement and communication strategies to identify harms and ensure appropriate measures are put in place.
PAYMENT SERVICES AND PAYMENT SYSTEMS
Opinion of the EBA on the nature of passport notifications regarding agents and distributors
On 24 April, the EBA published an Opinion on the nature of passport notifications of payment institutions (PIs) and electronic money institutions (EMIs) using agents and distributors located in another Member State. The Opinion provides clarity on the criteria that NCAs should use for determining when the use of an agent or distributor triggers an ‘establishment’ of the appointing institution in the host Member State or falls under the free provision of services. The Opinion also clarifies the consequences that the existence of an ‘establishment' has on the obligations applicable to PIs and EMIs under the 2EMD, the PSD2 and MLD4, and on the allocation of responsibilities between the home and host NCAs.
Regulation amending CRR on statutory prudential backstop for NPEs published in OJ
On 25 April, Regulation (EU) 2019/630, amending the CRR as regards minimum loss coverage for NPEs, was published in the OJ. The amendments require a deduction from own funds where NPEs are not sufficiently covered by provisions or other adjustments. They complement rather than replace the NCA’s powers under CRD IV to require an institution to apply a specific provisioning policy or treatment of assets in terms of own funds requirements. As such, NCAs will be able to go beyond the requirements in the proposals to ensure sufficient coverage for NPEs. The proposals seek to introduce a "clear set of conditions" for classifying NPEs which build on that in Commission Implementing Regulation 680/2014 laying down implementing technical standards with regard to supervisory reporting of institutions. The provisioning requirements increase the longer an exposure has been non-performing and there are provisions to encourage the recognition of write-offs in a timely manner. Secured NPEs are treated more favourably and the eligibility criteria for credit protection and for fully and completely secured mortgages, including applicable value adjustments are used to determine which parts of NPEs are to be treated as secured. The amendments enter into force on the 26 April. However, "to facilitate a smooth transition", the new rules won’t apply to exposures originated prior to 26 April unless and until the terms of that exposure are modified in a way which increases the institution’s exposure.
Evaluation of BoE's approach to concurrent stress testing
On 24 April, the BoE published a report by its Independent Evaluation Office (IEO) evaluating the effectiveness of the BoE's approach to concurrent stress testing. The IEO found good evidence that the approach successfully delivers on its principal objective: to provide a forward-looking assessment of banks’ resilience and, linked to that, an orderly and repeatable process for policy Committees to inform the setting of firm and system-wide capital requirements. Since the framework has been introduced, the stress tests have allowed the BoE to judge transparently and in some cases demonstrate the need for banks to strengthen their capital positions, in a systematic even-handed way without provoking market disruption. The report shows that concurrent stress testing is delivering value to policymakers, participating firms and the industry more broadly. It serves both FPC and PRC needs by providing insights into risks affecting the system as a whole and a common and comprehensive scenario to compare firms against one another. This allows policymaking to be well integrated and well evidenced, which in turn supports significant credibility and accountability benefits. The openness of the exercise has proven particularly useful recently, as the tests have allowed the BoE to communicate its view of the resilience of the banking system under various Brexit scenarios. But the stress-testing framework is still maturing, and in this context the IEO has seen some opportunities for refinement. The BoE is planning to review and update its approach to stress testing later this year.
PRA Dear CFO letter provides feedback for deposit-taking firms on thematic findings of 2018 review of written auditor reports
On 18 April, the PRA published a Dear CFO letter, from Victoria Saporta, PRA Executive Director, Prudential Policy, which was sent to selected deposit-takers. The letter provides formal feedback to both firms and auditors on the thematic findings from the PRA’s written auditor reporting work. The key thematic findings include: (i) a pervasive issue regarding firms’ controls and management information around new Expected Credit Loss (ECL) models; (ii) greater reliance being placed on governance to identify implausible model outputs and to raise sufficient in-model adjustments and overlays to capture the risks and uncertainties that models missed; and (iii) provision cover was higher where realistic but severe downside scenarios were considered, and lower where such high-impact, low-probability scenarios were missing from firms’ analyses and more weight was given to base case scenarios.
Adopted text of EP’s first reading position on Regulation on disclosures relating to sustainable investments and sustainability risks
On April 18, the EP published the provisional edition of the legislative resolution adopted by it at first reading on the proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The next step is for the Council to adopt the proposed regulation.
FCA Handbook instrument introducing revised FCA supervisory principles
On 24 April, the FCA published the Supervision Manual (Supervisory Principles Amendment) Instrument 2019, which amended the FCA’s Supervision manual (SUP). The Instrument includes: (i) new supervisory principles under SUP 1A.3.2A which aim to guide the FCA’s supervisory work; and (ii) amends existing guidance in SUP 1A.3 and 1A4. The changes provide amongst other things that the FCA will: (i) be forward looking in its supervisory work to pre-empt or address poor conduct; (ii) focus on a firm’s strategy and business model and culture and governance; (iii) focus on individual as well as firm accountability; and (iv) take a proportionate and risk based approach.
FCA Mission: approach to enforcement and feedback statement
On 24 April, the FCA published its FCA Mission: approach to enforcement. The FCA state that the role of enforcement is to achieve fair and just outcomes in response to misconduct and to ensure its rules and requirements are obeyed. The FCA has used the responses to its "Our Approach to Enforcement" consultation paper published in March to inform this Approach to Enforcement and feedback statement.
FCA Mission: approach to supervision and feedback statement
On 24 April, the FCA published its FCA Mission: approach to supervision. The Approach to Supervision and feedback statement explains the purpose of, and the FCA’s approach to, supervising firms and individuals and the public value it delivers. The FCA has used the responses to its "Our Approach to Supervision" consultation paper published in March to inform this Approach to Supervision and feedback statement.