On 17 July 2017, the Financial Conduct Authority (FCA) published a report which gives the findings from its thematic review into firms’ assessment of customer understanding of transactions delivered by retail banks and building societies to consumers.
The FCA had previously commissioned a survey of 17 retail banks and building societies to review how they assess their customers’ understanding of the products they bought. The results of the survey were published in April 2016, and the FCA said that it would continue to monitor this area and undertake follow up work. The survey was conducted in response to one of the recommendations of the Parliamentary Commission on Banking Standards' (PCBS) final report.
The FCA has now completed its follow up work through a thematic review involving 18 retail banks and building societies, some of which were part of the previous survey.
The FCA found that:
- firms are increasingly alert to the importance of assessing customer understanding;
- some firms have made good progress in developing practices to help ensure their customers have a reasonable opportunity to understand the products they have bought;
- a few firms continue to confuse customer understanding with customer satisfaction;
- the most developed systems and practices for checking customer understanding are undertaken post-sale, for example, through customer contact exercises;
- practices appeared least developed in the area of online sales, but a number of firms were taking steps to develop this area further.
In the report, the FCA sets out examples of how firms are trying to ensure that customers have a reasonable opportunity to understand a transaction in line with the PCBS recommendations. The FCA encourages firms to take note of these examples when considering how to develop further their responses to the PCBS recommendations.
On 17 July 2017, the FCA published the terms of reference for its investment platforms market study, which will consider platforms and other firms that allow investors or their advisers to access retail investment products through an online portal.
The FCA's study will explore how investment platforms compete to win new, and retain existing consumers, to help it assess how it can improve competition within this market and develop better consumer outcomes.
In the study, the FCA will:
- explore whether platforms help investors make good investment decisions, and if their solutions offer investors value for money;
- look at how platforms compete in practice and whether they use their bargaining power to get investors a good deal;
- assess whether relationships between investment platforms and other platforms, advisers, asset managers, and fund ratings providers, work in the interests of investors.
The investment platforms market study will cover:
- platforms and other firms that offer access to retail investment products through an online portal;
- retail investors who access retail investment products through an online portal;
- intermediaries, including financial advisers and wealth managers who use intermediated platforms to access different retail investment providers on behalf of their clients;
- product and wrapper providers who use platforms to distribute their products;
- technology providers to whom platforms outsource services; and
- fund ratings and data providers whose information platforms use and distribute.
This market study follows on from the asset management market study final report published in June 2017, which highlighted a number of potential competition issues in the platforms sector.
Comments on the terms of reference are requested by 8 September 2017. The FCA aims to publish an interim report by summer 2018, setting out its analysis and preliminary conclusions including, where appropriate, possible remedies to address any concerns identified. This will be followed by the final report.
On 19 July 2017, the FCA updated its webpage on the introduction of the commodity derivatives position limits and reporting regime under the MiFID II Directive.
The FCA says that, under MiFID II, firms or individuals who trade in commodity derivatives on a professional basis may, under Article 2(1)(j) of the MiFID II Directive, be able to make use of an exemption from authorisation (which the FCA refers to as the "ancillary activity exemption"). This is through an assessment of their trading activities in accordance with the tests set out in the Commission Delegated Regulation setting out regulatory technical standards (RTS) for the criteria to establish when an activity is considered to be ancillary to the main business (the FCA refers to this as "RTS 20").
Firms or individuals who rely on this exemption are required to notify the FCA annually through Connect. The notification form is available on the Connect landing page. In order assist those firms and individuals in completing the notification form, the FCA has published a notification guide on the ancillary activity exemption.
A notification lasts for 12 months from the date it was first made (or from 3 January 2018 for notifications made before that date). The notification must be renewed before the end of that period using Connect.
On 17 July 2017, the FCA updated its MiFID II webpage on data reporting services providers (DRSPs).
Among other things, the FCA gives the information that as the Data Reporting Services Regulations 2017, SI 2017/699, which create a new regulatory regime governing DRSPs and transpose Title V and parts of Title VI of the MiFID II Directive, came into force on 3 July 2017, it is now able to accept formal applications from entities wishing to provide data reporting services (DRSs). For applications received from 3 July 2017, it will determine an application for an authorisation or verification within six months, beginning from the date on which it receives the completed application. With one exception; any entity wishing to provide the service of a non-equity consolidated tape provider from 3 September 2019 should apply for authorisation by 3 March 2019.
The webpage now also contains a list of all the DRSP authorisation and supervision forms. Some of the forms are already available, and others, indicated in the list by an asterisk, will be available from the fourth quarter of 2017.
The FCA also gives the information that the authorisation fee to operate a DRS is £5,000 for the first application and a discount of 50% for each additional DRS application. The discount applies whether the applications were made at the same time or later. The fee is not refundable, even if the application is unsuccessful. The FCA consulted on the DRSP annual supervisory fees in its November 2015 consultation paper, CP15/34, and indicated that it expects the fee to fall within the range of £20,000 to £30,000. It intends to consult on the full flat-rate fee shortly.
On 18 July 2017, the FCA published a new webpage on the market data processor (MDP) entity portal. The MDP system will receive MiFID II market data from the UK financial industry and also market data, where applicable, from non-UK EEA financial market participants. The MDP system will interface to the European Securities and Markets Authority's new financial instrument reference data system, including transparency calculations and double volume cap, and the existing transaction reporting exchange mechanism.
The MDP entity portal is a web application for external users and provides an interface to the MDP system. The portal is designed to offer access to the industry test environment (ITE) for connectivity and conformance testing, to facilitate requests for transaction reporting sample data (see below) and to enable entities that have established connectivity to the MDP system to submit market data to monitor their own file submissions.
The MDP entity portal is available for the ITE and will be available for the production environment from 3 January 2018.
The webpage gives details of transaction reports data extracts and how to register for an MDP administrator user account.
On 17 July 2017, the FCA published a new webpage on passporting under the MiFID II Directive, which gives links to the following MiFID II passporting application forms:
- service passport (notice of intention to provide cross-border services or to amend existing cross-border services passport);
- branch passport (notice of intention to establish a branch or change branch particulars in another EEA state);
- tied agent notification (notice of intention to use a tied agent established in another EEA state or to amend the details of a tied agent established in another EEA state);
- MTF/OTF notification (notice of intention to provide arrangements to facilitate the access to a multilateral trading facility (MTF) or an organised trading facility (OTF) from another EEA state or to amend details of these arrangements).
Firms will need to make a passporting application under MiFID II if they:
- will be conducting activities that have been implemented as new MiFID II activities (such as operating an OTF, activities relating to emission allowances or binary bets);
- will become newly authorised under MiFID II and need to passport from 3 January 2018.
The FCA says that firms should submit establishment passport notifications as early as possible after the MiFID II passporting gateway opens on 31 July 2017. MiFID II gives home competent authorities a three month window to assess establishment notifications. After the notification has been assessed by the home competent authority and communicated to the host competent authority, there is a maximum of two months before the passport becomes effective.
Firms should submit service passport notifications by 2 December 2017 as this deadline will help the FCA assess notifications and send them to relevant regulators in the EEA before MiFID II takes effect on 3 January 2018. The FCA says that for all notifications received after 2 December 2017 it will not be possible to guarantee that the relevant notifications will be issued to the regulators concerned before 3 January 2018.
On 19 July 2017, the FCA published a statement on the use of the interbank rate in online currency converter tools.
The FCA says that it is concerned that payment and e-money institutions may have used currency converter tools in relation to their currency transfer services in a misleading way. Tools which convert currency at the interbank rate may be used in such a way as to give consumers the misleading impression that the rates shown are available to them, rather than the materially inferior rate that they are likely to achieve. Furthermore, consumers may not become fully aware of the inferior rate they are likely to achieve until an advanced stage in the customer journey, commonly after a customer registration process has been undertaken. At that stage, consumers may be unlikely to shop around.
The FCA has previously and publicly (see this webpage) reminded firms offering currency transfer services of its concerns relating to the use of the interbank rate in currency converter tools, on their websites and in other promotional and marketing material.
The FCA has also previously advised that if it considered firms were not acting in accordance with its expectations in this area, it may take action. It subsequently commenced investigations into a number of payment institutions whose promotions it considered to be potentially misleading as a result of their use of the interbank rate (which was not available to customers) in an online currency converter tool, and in other promotional material. Since the investigations commenced, a number of firms have taken steps to ensure they do not risk misleading customers as to the conversion rate they will achieve if they use the firm's currency transfer services. However, the FCA is aware that there are a number of firms who are still using the interbank rate in a currency converter tool, and in other promotional material relating to their currency transfer services, in a potentially misleading way.
The FCA says that it is determined to ensure that payment and e-money institutions engaged in currency transfer services do not use the interbank rate in a potentially misleading way. Therefore it is actively considering further investigations and action in this area. In doing so, it will have particular regard to any firms which do not take appropriate steps in the light of this statement.
Additionally, following engagement with HM Treasury, and as announced by HM Treasury on 19 July 2017, the FCA's rule-making powers are to be extended in relation to payment services (see item 7.1 below) This will allow the FCA to apply rules to financial promotions issued by payment and e-money institutions. The FCA plans to consult on making new rules using these powers as a priority.
Following the UK’s vote in June 2016 to leave the EU, some daily-dealt property funds, and subsequently a number of unit-linked funds, had to suspend dealing in units and/ or apply pricing adjustments temporarily. This was because assets could not be realised quickly enough to meet redemption demand and due to the lack of certainty of property values.
The FCA kept in close contact with all the authorised property funds and affected unit-linked providers during this period. Since then, it has looked at firms across the value chain, including depositaries, platform providers, wealth managers and financial advisers to see how they deal with liquidity risks.
On 20 July 2017, the FCA published details of the findings from its review into these fund suspensions and pricing adjustments in order to help property funds respond to any future events which may impact on their liquidity.
The FCA says that the current regulatory regime goes some way to addressing the potential for unfair treatment of customers as a result of fund suspensions and pricing adjustments. However, it wanted to review how the regulatory regime had worked in practice in the period following the referendum, and whether there were lessons that both the FCA and firms across the value chain should learn, to help the FCA to improve its response to any similar future market events.
The FCA's overall findings were that:
- the use of suspensions, deferrals and other liquidity management tools were effective in preventing market uncertainty from escalating further;
- the quality of liquidity monitoring and management varies between different property funds;
- the valuation of real estate assets poses challenges under stressed market conditions and firms need to consider how best to deal with this issue;
- firms could be clearer in their communications, including to end-customers, following significant market events.
The FCA recognises that the suspensions that followed the EU referendum raise broader questions about open-ended funds’ investments in illiquid assets, including whether the current regulatory regime may need to be revised. It addressed these policy issues in its February 2017 discussion paper.
The FCA sets out its approach to the review, provides its detailed findings and also its key findings by sector, divided into authorised fund managers, unit-linked providers, depositaries, platform providers, wealth managers and financial advisers.
The FCA says that it expects all firms that were affected by either the suspension of property funds or the application of fair value pricing adjustments will, if they have not already done so, review how they dealt with this event. This should include examining relevant policies and procedures and considering whether there are any improvements that could be made that would enable them to deal more effectively with a similar market event.
The FCA is providing feedback to all firms that have participated in its review. In some cases, individual firms will have to implement remediation measures to ensure they comply with the FCA's expectations and requirements.
The findings of the FCA's review will be considered alongside the responses to the discussion paper, including whether the current regulatory regime needs to be revised. The findings will be summarised in a feedback statement in due course.
On 14 July 2017, the FCA published a webpage containing its latest Policy development update, current as of 13 July 2017. This contains information on the FCA's recent and upcoming publications. The webpage is updated on the first Friday of each month.
On 20 July 2017, the FCA published the text of a memorandum of understanding it has entered into with the Hong Kong Securities and Futures Commission.
On 14 July 2017, the FCA announced that it has fined David Watters £75,000 for failing to exercise due skill, care and diligence in his role as compliance oversight officer, firstly at FGS McClure Watters (FGS) and then Lanyon Astor Buller Ltd (LAB).
Following an investigation, the FCA found that Mr Watters failed to take reasonable steps to ensure that the process in place at FGS and LAB, for giving advice on enhanced transfer value (ETV) pension transfer exercises, was adequate and met regulatory standards. This led to a serious risk of unsuitable advice being given to customers of FGS and LAB about the merits of transferring their pension, from a defined benefit to a defined contribution scheme, as part of an ETV pension transfer exercise.
Full details are given in the Final Notice.
2.1 Settlement accounts: Bank of England updates policy document
On 19 July 2017, the Bank of England published an updated policy document on settlement accounts.
The Bank says that a new generation of non-bank payment service providers (PSPs) is now eligible to apply for a settlement account in the Bank's real-time gross settlement (RTGS) system. Holding their own settlement account at the Bank enables these non-bank PSPs to apply, for the first time, for direct access to the UK's sterling payment systems that settle in sterling central bank money, including Faster Payments, Bacs, CHAPS, LINK, Visa and, once live, the new digital cheque imaging system.
These changes will enable non-bank PSPs to compete on a more level playing field with banks. In turn, reduced dependencies on bank competitors for access to payment systems will allow non-bank PSPs to offer a wider range of payment services.
Before non-bank PSPs can open a settlement account, they will need to demonstrate compliance with a risk management framework that has been developed by the Bank, the Financial Conduct Authority (FCA), HM Treasury, HM Revenue & Customs and the Payment Systems Regulator. A number of legislative changes also need to complete their passage through Parliament. As a consequence, the Bank’s expectation is that the first non-bank PSPs will join RTGS during 2018.
To assist firms interested in exploring direct access to UK payment systems and RTGS, the Bank, the FCA and the major payment systems operators have published a separate guide providing more detail on the requirements and application process. In the first instance, interested firms should contact the relevant payment systems operator to discuss these issues further. In a separate press release, the FCA says that under the framework non-bank PSPs applying for RTGS access will be subject to a supervisory assessment by it. Applications will first need to be reviewed by the payment schemes and the Bank. They will then be referred to the FCA at the appropriate point. Once accepted for access to RTGS, non-bank PSPs will then be subject to on-going strengthened supervisory oversight from the FCA.
See also item 7.1 below for the Payment Services Regulations 2017 and HM Treasury's response to the consultation paper on implementation of the revised Payment Services Directive.
2.2 PRA PS20/17: Regulatory reporting - responses to CP6/17
On 20 July 2017, the Prudential Regulation Authority (PRA) published a policy statement, PS20/17, on responses to its June 2017 consultation paper, CP6/17, on regulatory reporting. The PRA received one response to CP6/17, which agreed with its proposals. It is therefore making the final rules as consulted on, without any changes.
The policy statement contains the following:
- the final rules: the PRA Rulebook: CRR Firms: Regulatory Reporting Amendment Instrument 2017, PRA 2017/30, which come into force on 1 October 2017;
- an updated Supervisory Statement SS34/15 on guidelines for completing regulatory reports. A related webpage gives details of when the different chapters of the supervisory statement come into force;
- updated templates PRA101 and instructions, PRA102 and instructions, PRA103 and instructions and PRA108 and instructions.
On 20 July 2017, the PRA published a policy statement, PS19/17, which provides feedback to responses to its February 2017 Occasional Consultation Paper, CP2/17. The PRA received three responses to chapters 2, 5 and 6 of the consultation paper. Feedback to responses and details of minor adjustments to the final rules are set out in chapter 2 of the policy statement.
The PRA is considering the response received to chapter 2 (on credit risk mitigation - secured guarantees) and will provide feedback in a separate PRA publication.
The appendices to the policy statement contain the following:
- the PRA Rulebook: CRR Firms, Non-CRR Firms, Solvency II Firms, Non-Solvency II Firms: Senior Managers Regime Amendment Instrument 2017, PRA 2017/26, which comes into force on 24 July 2017;
- the PRA Rulebook: Non-Solvency II Firms: Insurance Company - Reporting (Amendment) Instrument 2017, PRA 2017/27, which comes into force on 24 July 2017;
- the PRA Rulebook: CRR Firms: Remuneration Instrument 2017, PRA 2017/28, which comes into force on 24 July 2017;
- the PRA Rulebook: CRR Firms: Ring-Fencing (Amendment) Instrument 2017, PRA 2017/29, which comes into force on 1 January 2019;
- reporting templates and instructions RFB001 to RFB008, see under the heading "Ring-fenced body data items on this webpage;
- an updated version of Supervisory Statement SS34/15 on guidelines for completing regulatory reports. A related webpage gives details of when the different chapters of the supervisory statement come into force;
- an updated version of Supervisory Statement SS9/13 on securitisation.
3.1 Lending Standards Board to oversee the Access to Banking Standard
The industry-wide agreement will see customers affected by closures receive improved notification of potential branch closures; greater clarity on the reasons for the closure, as well as banks providing more direct and proactive help for those seeking to access banking via other means in the run up to the closure.
The LSB will oversee the operation of the standard, and ensure that the 12 banks and building societies which have signed up to it fulfil their requirements, and that the intended outcomes for customers are reached. The LSB will independently monitor and report on the standard's application by those banks and buildings societies, as well as identifying and sharing best practice.
3.2 The use of league tables during pitch presentations: UK Finance/AFME guidance
UK Finance and the Association of Financial Markets in Europe (AFME) have published guidance with the aim of assisting clients in understanding the sources and methodology used by firms when preparing league tables for inclusion in pitch presentations.
The guidance establishes the minimum information that UK Finance and AFME believes should be made available to clients with respect to league tables. The guidance applies to applies to investment bank employees producing league tables for use in client pitch presentations and league table providers who have endorsed the guidance. These are Thomson Reuters, Bloomberg and Dealogic.
In the July 2017 issue of its Regulation Round-up, the Financial Conduct Authority (FCA) says that the guidance is a response to its findings that banks routinely present league tables to clients in a way that inflates their own position. It aims to ensure clients are presented with information that is clear and not misleading and that the UK maintains a healthy competitive approach. The FCA says that alongside this, league table providers have reviewed their transaction recognition criteria to reduce the incentives for banks to undertake loss-making transactions purely to generate a higher position in league tables.
4.1 Council of the European Union not to object to Commission Delegated Regulations relating to Solvency II, MiFIR and EMIR
On 19 July 2017, the Council of the European Union published the minutes of the meeting held in its configuration as the Agriculture and Fisheries Council on 17 and 18 July 2017.
Among other things, at the meeting, the Council decided not to object to the following European Commission Delegated Regulations:
- Commission Delegated Regulation amending the Solvency II Delegated Regulation concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates);.
- Commission Delegated Regulation supplementing the Markets in Financial Instruments Regulation (MiFIR) as regards the exemption of certain third country central banks in their performance of monetary, foreign exchange and financial stability policies from pre-and post-trade transparency requirements;
- Commission Delegated Regulation amending Commission Delegated Regulation (EU) 151/2013 with regard to regulatory technical standards specifying the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing data under the Regulation on over-the-counter derivatives, central counterparties and trade repositories (known as EMIR).
The Delegated Regulations can now enter into force unless the European Parliament objects. If the Parliament does not object, they will be published in the Official Journal of the European Union.
4.2 FICOD REFIT analysis: European Commission conclusions
On 18 July 2017, the European Commission published a staff working document setting out the conclusions of its analysis of the Financial Conglomerates Directive (FICOD) under its Regulatory Fitness and Performance (REFIT) programme. A summary of the document has also been published.
The staff working document outlines the Commission Services' analysis of whether FICOD remains fit for purpose. It highlights a number of ways in which the effectiveness, efficiency, relevance, coherence and EU added value of FICOD has evolved and changed since its adoption in 2002.
The conclusions reached include:
- it remains important to keep in place a framework for the supervision of mixed-activity financial groups, a framework that is provided by FICOD;
- FICOD has, in general, functioned well and there is no evidence of failures of financial institutions which could have been seen as due to weaknesses in FICOD provisions;
- the consideration of group risks is still an important part of ensuring financial stability and investor protection. Many respondents to the consultation highlighted that the supervisory framework and co-operation laid down in FICOD was, and remains, a useful tool for promoting a closer relationship between supervisory authorities across Member States, and across sectors;
- since the adoption of the original FICOD in 2002, the regulatory landscape in which financial conglomerates operate has changed significantly. The development of enhanced sectorial regimes, and in particular the enhanced group supervision regime under Solvency II, has changed the relevance and application of FICOD, leading to a certain number of inconsistencies. However, the framework still functions to capture group risks and gives supervisors oversight over these cross-sector groups. In some instances the gaps and inconsistencies are addressed by supervisors in the application of the FICOD framework and therefore do not fundamentally undermine the effectiveness of the FICOD framework;
- in addition to changes in the regulatory framework, there have also been a number of changes in the market which has led to the emergence of different types of mixed financial activity groups which FICOD did not envisage due its original focus on bancassurance groups. Further market monitoring will be necessary to accompany these new developments and identify any new issues of group supervision arising from them.
4.3 IDD: European Commission consults on a draft Delegated Regulation on distribution of insurance-based investment products
On 20 July 2017, the European Commission published for consultation a draft Delegated Regulation supplementing the Insurance Distribution Directive (IDD) with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products.
The IDD provides a specific chapter with additional conduct of business requirements for the sale of insurance-based investment products. These rules are necessary to guarantee a consistent standard of protection for retail investors. Insurance-based investment products are often sold as potential alternatives or substitutes to retail investment products sold under the MiFID II Directive. To avoid regulatory arbitrage, the IDD contains specific provisions on preventing and managing conflicts of interests, disclosing costs and charges for the customers, accepting commissions and other third party payments (inducements) and providing investment-related advice. These provisions are largely aligned with the standards set under MiFID II.
The draft Delegated Regulation is based on three empowerments in the chapter on additional conduct of business requirements for the sale of insurance-based investment products. It aims at specifying the criteria and practical details for the application of the rules on conflicts of interest, on inducements and on the assessment of suitability and appropriateness. To ensure coherence and facilitate a comprehensive view of the rules applicable to insurance-based investment products, it appears appropriate to combine the delegated acts under the three empowerments in the present Delegated Regulation.
The draft Delegated Regulation is based on technical advice provided by the European Insurance and Occupational Pensions Authority (EIOPA) to the Commission on 1 February 2017. The Commission says that it deviates from EIOPA's advice in the following ways:
- in the indicative list of situations to be taken into account as minimum criteria for the assessment of conflicts of interest (Article 3(3)) it omits a point mentioning specifically the reception of monetary or non-monetary benefits, in order to better reflect differences in the treatment of inducements in the IDD and the MiFID II Directive;
- in the provision on inducements (Article 8) it differs from the technical advice in the form of presentation of the non-exhaustive list of criteria deemed relevant for the assessment of a possible detrimental impact on the quality of the service to the customer and by omitting a provision on organisational requirements. This is due to the limitation of the Commission's empowerment in Article 29(4) of the IDD.
Comments on the draft Delegated Regulation are requested by 17 August 2017. Comments should be provided via the feedback link on this webpage. The Delegated Regulation will enter into force on the twentieth day following that of its publication in the Official Journal of the European Commission. It will apply from 23 February 2018.
4.4 ECAIs: ESAs consult on amendments to ITS on mapping under CRR and Solvency II
On 18 July 2017, the Joint Committee of the three European Supervisory Authorities (ESAs) (that is, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority (ESMA)) published a consultation, consisting of two consultation papers, to amend the implementing technical standards (ITS) on the mapping of credit assessments of external credit assessment institutions (ECAIs) for credit risk.
The consultation papers are:
- consultation paper on draft ITS amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs’ credit assessments under Article 136(1) and (3) of the Capital Requirements Regulation (CRR);
- consultation paper on draft ITS amending Implementing Regulation (EU) 2016/1800 on the allocation of credit assessments of ECAIs to an objective scale of credit quality steps in accordance with the Solvency II Directive.
The above implementing Regulations, which were adopted by the European Commission on 7 and 11 October 2016 respectively, aim at ensuring that only credit ratings issued by ECAIs, that is, those credit rating agencies (CRAs) registered under the CRA Regulation, can be used for calculating capital requirements of financial institutions and insurance undertakings.
Since the adoption of these Implementing Regulations, ESMA has withdrawn the registration of one CRA and five additional CRAs have been recognised. The Implementing Regulations will, therefore, need to be amended to reflect the allocation of appropriate risk weights to the newly established ECAIs and to remove the reference to the de-registered ECAI. The mappings for the other 25 ECAIs covered in the Implementing Regulations remain unchanged.
The Joint Committee has specified an approach that establishes the correspondence, or mapping, between credit ratings and the credit quality steps defined in the CRR and the Solvency II Directive. The Joint Committee has also published individual draft mapping reports illustrating how the methodology was applied to produce the five additional mappings under the CRR mandate. Links to these mapping reports are given on this EBA webpage.
The Joint Committee is to hold a public hearing on the draft ITS in London on 4 September 2017. Comments on the consultation papers are requested by 18 September 2017.
4.5 CRD IV: EBA final draft RTS and ITS specifying information requirements for the authorisation of credit institutions
On 14 July 2017, the European Banking Authority (EBA) published a report containing the following final draft technical standards:
- final draft regulatory technical standards (RTS) on the information applicants shall provide to competent authorities when applying for authorisation as credit institutions, made under Article 8(2) of the CRD IV Directive. The RTS are contained in chapter 3 of the report and include a comprehensive list of information to be provided in an application by undertakings seeking to obtain the authorisation referred to in Article 8(1) of the CRD IV Directive. The list of information concerns matters such as identification details and historical information regarding the applicant credit institution, including its existing licences, the activities proposed to be carried out by the applicant credit institution, and information on the financial situation of the applicant credit institution, the programme of operations, initial capital, management body and other relevant persons, shareholders and members. Flexibility is also provided, in accordance with clear criteria, allowing competent authorities to vary the scope of required information. The draft RTS also specify obstacles that could prevent the effective exercise of the supervisory functions, and include examples of these;
- final draft implementing technical standards (ITS) related to the templates to be used for the provision of such information, made under Article 8(3) of the CRD IV Directive. The ITS are contained in chapter 4 of the report and set out a form to be used by undertakings seeking to obtain the authorisation referred to in Article 8(1) of the CRD IV Directive, as well as relevant procedures and requirements relating to the submission of such applications and to the approach to be taken in respect of incomplete applications.
The EBA says that these final draft RTS and ITS aim to promote convergence of supervisory practices regarding the assessment of the applications by prescribing a common set of information to be submitted to the competent authorities, while securing a proportionate and workable approach that takes into account difference in the applicants' size and proposed business models.
The EBA consulted on the draft RTS and ITS in November 2016 and feedback on the consultation is set out in section 5.2 of the report. The EBA says that changes to the draft RTS and ITS have been made as a result of the responses received.
The draft RTS and ITS are being submitted to the European Commission, for it to decide whether to endorse them. The EBA encourages the Commission to adopt the RTS and ITS at the earliest possible opportunity to support the consistent, efficient and rigorous assessment of any applications for authorisation to be submitted by entities seeking to relocate in the context of the UK's withdrawal from the EU.
4.6 CRR: EBA amends decision on the quality of unsolicited credit assessments of certain ECAIs for the assignment of risk weights
On 18 July 2017, the European Banking Authority (EBA) published a revised decision confirming the quality of unsolicited credit assessments assigned by certain external credit assessment institutions (ECAIs) for calculating institutions' capital requirements.
Institutions may use unsolicited credit assessments of an ECAI for determining their capital requirements only if the EBA has confirmed that those unsolicited ratings do not differ in quality from solicited ratings of that same ECAI. In May 2016, the EBA published a decision, which was published in the Official Journal of the European Union on 22 July 2016, allowing the use of unsolicited credit assessments for 22 ECAIs in the context of the Capital Requirements Regulation (CRR). The revised decision amends this list in light of the recognition of five additional ECAIs and the de-registering of one ECAI and confirms that unsolicited credit assessments do not differ in quality from solicited ratings. In addition, the revised decision also considers an ECAI that issued only solicited ratings when the EBA decision was published and started issuing unsolicited ratings subsequently.
The revised decision is based on a quantitative and qualitative analysis, a report on which has also been published.
The revised decision will enter into force on the twentieth day following that of its publication in the Official Journal.
On 17 July 2017, the European Insurance and Occupational Pensions Authority (EIOPA) published amendments and corrections to the following implementing technical standards (ITS) made under the Solvency II Directive:
- ITS on the templates for the submission of information to the supervisory authorities (ITS on reporting); and
- ITS with regard to the procedures, formats and templates of the solvency and financial condition report (ITS on disclosure).
These amendments concern the guidelines on reporting for financial stability purposes and the guidelines on the supervision of branches of third-country insurance undertakings. The aim of the amendments is to provide legal certainty and to facilitate correct reporting as well as disclosure process for insurance undertakings. The publication is the outcome of EIOPA’s analysis and stakeholders’ feedback received from its April 2017 call for comments.
In order to align the legal basis and the taxonomy release, EIOPA has also released the final taxonomy version 2.2.0 including all the relevant amendments and the feedback received to the 2.2.0 public working draft (see section on webpage headed DPM and taxonomy 2.2.0).
On 20 July 2017, the European Securities and Markets Authority (ESMA) published an opinion on asset segregation and applying depositary delegation rules to central securities depositaries (CSDs).
The opinion sets out suggestions to the EU institutions for possible clarifications of the legislative provisions under both the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive relating to:
- the asset segregation requirements in case of delegation of safe-keeping duties by the appointed depositary of a fund; and
- how the depositary delegation rules should apply to CSDs.
The purpose of the opinion is:
- to provide an EU framework with strong client asset protection, especially in insolvency, for the safe-keeping of assets which are, in accordance with both AIFMD and UCITS Directive, required to be held in custody; and
- to provide clarification in the AIFMD and UCITS Directive regarding the application of the relevant depositary rules in the case of CSDs, ensuring a consistent approach across the EU.
The opinion is the final step in ESMA's work on these topics which began with its December 2014 consultation paper and was followed by a July 2016 call for evidence.
On 17 July 2017, the European Securities and Markets Authority (ESMA) published a document setting out a common procedure and template for national competent authorities (NCAs) to adhere to in reporting the parameters to halt or constrain trading used by the trading venues under their jurisdiction to ESMA.
Article 48(5) of the MiFID II Directive provides that “Member States shall require a regulated market to be able to temporarily halt or constrain trading if there is a significant price movement in a financial instrument on that market or a related market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction”.
The second paragraph of Article 48(5) of MiFID II establishes that “Member States shall ensure that a regulated market reports the parameters for halting trading and any material changes to those parameters to the competent authority in a consistent and comparable manner, and that the competent authority shall in turn report them to ESMA”.
ESMA says that NCAs should ensure that the following items are covered in their report to ESMA:
- description of instrument or class of financial instrument;
- general description of the volatility mechanism;
- whether the trading venue for which a report is submitted uses a static or dynamic reference price;
- a description of the reference price that activates the mechanism of management volatility;
- the lower and upper limits for activation of trading halts;
- the frequency of regular updates;
- information on the duration of the halts;
- a description of the mechanism used to resume trading.
4.10 IFRS 9: ERSB report on financial stability implications
On 17 July 2017, the European Systemic Risk Board (ESRB) published a report on the financial stability implications of International Financial Reporting Standard (IFRS) 9. The EU adopted IFRS 9 in November 2016 for mandatory application from 1 January 2018.
The ESRB concludes that IFRS 9 represents a major improvement in comparison with International Accounting Standard 39 and is expected to bring substantial benefits from a financial stability perspective. Together with the greater clarity and certainty associated with its principles-based approach to the classification and measurement of financial instruments, the earlier and fuller recognition of impairment losses under the new expected credit losses model is expected to have positive effects on financial stability.
The ESRB report also contains policy considerations to prevent or mitigate any potential negative financial stability implications of IFRS 9. It identifies potential channels and developments through which IFRS 9 may interact with various players involved, regulation and the evolution of the aggregate economy. This interaction might influence the net impact of IFRS 9 on financial stability. These channels and developments include the usage of fair value and four areas related to the new expected credit loss model: modelling risk, lending behaviour, procyclicality, and considerations regarding less sophisticated banks.
The ESRB says that these policy considerations should not be understood as formal ESRB warnings or recommendations, as defined by Article 16 of the ESRB Regulation.
5.1 Consumers and competition: FSCP position paper
In 2016, the Financial Services Consumer Panel (FSCP) commissioned an evidence review and consumer survey to inform and stimulate debate about consumers’ role in driving competition in retail financial services markets. On 17 July 2017, the FSCP published a report on the review. The FSCP says that its research is about retail banking markets, but the conclusions are also applicable to other financial services retail markets.
The research shows that financial services firms capitalise on retail consumers’ behavioural biases. Firms appear to compete vigorously, but they strive to inhibit consumers’ ability to shop around, by developing complicated products, with obscure or misleading prices and terms and conditions.
While competition authorities have begun to realise this, they still rely too much on active consumer engagement to drive competition. This will not work because the number of engaged consumers is not large enough to drive competition or to make firms change their behaviour, and even those who are engaged cannot usually assess whether switching would get them a better deal.
This highlights the scale of the challenge to competition authorities: firms will continue to exploit loyal customers if information remedies and a reliance on switching are the only proposed solutions.
To remedy this, the FSCP has published a position paper which calls for:
- competition authorities to take robust and effective action to tackle firms’ exploitation of consumers’ behavioural biases and over-complicated products and pricing;
- the Financial Conduct Authority (FCA) to be tough on firms that penalise their loyal and trusting customers;
- the FCA to develop robust measures of consumer outcomes, and require firms to make these widely available, and incorporate them in digital comparison tools;
- competition authorities and regulators to act now to make sure the new generation of automated shopping around and switching services do not simply repeat the problems of the past and further weaken rather than strengthen consumers’ position in the financial services market.
6.1 Insurance linked securities: HM Treasury publishes final drafts of regulations
On 20 July 2017, HM Treasury announced the publication of new regulations to introduce a competitive regulatory and tax regime for insurance linked securities (ILS). The regulations will be laid before Parliament after the summer recess and will come into force in autumn 2017.
ILS allow insurance and reinsurance firms to transfer risk to the capital markets, meaning that risk can be managed more effectively for businesses and consumers.
The following final draft regulations have been published:
- the Risk Transformation Regulations 2017, which will come into force on 31 October 2017;
- the Risk Transformation (Tax) Regulations 2017, which will come into force on the day after the day on which they are made.
HM Treasury has also published a document which sets out the Government’s response to the November 2016 consultation on draft ILS regulations and also sets out the final approach to the tax and regulation of ILS vehicles in the UK. It contains information on the responses received and further information on:
- the corporate structure for multi-arrangement ILS vehicles to be used in the UK;
- the tax treatment for ILS vehicles and their investors;
- the approach to authorisation and supervision of ILS vehicles by the Prudential Regulation Authority and the Financial Conduct Authority.
6.2 Measures to support syndicates following a once-in-a-generation loss: Society of Lloyd's report
On 18 July 2017, the Society of Lloyd's published a report which sets out six guiding principles explaining how Lloyd’s would respond to a market turning event, an insurable loss so significant it results in a rapid upturn in pricing.
The six principles are categorised into two areas: crisis management, to ensure the market responds to a crisis effectively, pays claims as quickly as possible and remains solvent, and opportunities to support the market.
Lloyd's recommends that managing agents consider in advance the possible implications of a market turning event and prepare suitably proportionate, robust and well-tested contingency plans. These should reflect Lloyd's approach of reactive and proactive planning following a market turning event.
7.1 PSD2: Payment Services Regulations 2017 and HM Treasury response to consultation on implementation
On 19 July 2017, HM Treasury published its response to the February 2017 consultation paper on implementation of the revised Payment Services Directive (PSD2). The Payment Services Regulations 2017, SI 2017/752, were laid before Parliament on the same day, together with a related explanatory memorandum.
Among other things, HM Treasury's response says that:
- the Government has decided to extend the Financial Conduct Authority's (FCA) existing powers to make conduct rules for firms regulated under the Financial Services and Markets Act 2000 to firms regulated under PSD2 and the E-money Directive;
- the Government is working closely with the Open Banking Implementation Entity and its Implementation Trustee to ensure the successful rollout of Open Banking and PSD2 from January 2018;
- the Bank of England will set out more detail on how non-bank payment service providers (PSPs) can hold a settlement account with the Bank, and safeguard funds there, in due course. The intention is for firms to be able to start applying for accounts from the first quarter of 2018, with the first non-bank going live in the Bank’s real time gross settlement system later in 2018. (The Bank published this information on 19 July 2017, see item 2.1 above);
- the Government intends to also allow PSPs to include in their framework contracts a clause which enables consumers to choose whether they wish to change how they receive their statement. Customers will have the choice over whether they wish to have the statement actively provided or just made available on request, whether they wish to receive it in an alternative manner which allows the information to be stored and reproduced, and whether they wish to receive it more frequently than monthly;
- there will be no extension of right of termination to overdrafts as the Government considers the market is working sufficiently well and that there is no need for an explicit right of termination at this time;
- the Government has also decided to limit the extent of other proposals which seek to clarify the relationship between PSD2 and the Consumer Credit Act, but to proceed with those on information and transparency requirements, bearing in mind the need to ensure compatibility with PSD2;
- the Government has decided to extend the surcharging ban to all retail payment instruments, but not to commercial payment instruments;
- the Government confirms that, from 13 January 2018, account servicing payment service providers (ASPSPs) will have to allow access to payment accounts for all registered or authorised third party providers (TPPs), unless they have an objective reason (such as fraud) to deny access. The FCA set out further detail on blocking TPPs for fraud in its draft approach document. ASPSPs will not have to provide access to unregulated or unauthorised TPPs;
- the Government anticipates that until the strong customer authentication and communications regulatory technical standards (RTS) come into effect (not before January 2019), TPPs will be able to access consumers' accounts via screen scraping, or via application programming interfaces (APIs) such as those designed to the Open Banking API Standard. The Government strongly encourages all TPPs and ASPSPs to use APIs in accordance with the Open Banking Standard;
- the Government confirms that TPPs operating before 12 January 2016 can continue to perform the same activities outside of regulation from 13 January 2018, but only until that point at which the RTS come into effect. It is important to note however that where a TPP continues to operate outside of regulation, it does not have a right of access. If TPPs wish to benefit from the right of access that PSD2 brings they will need to get registered or authorised with the FCA;
- the Government confirms that ASPSPs will only be expected to provide equivalent access to that available online to customers. The Government also maintains its view that direct debits are out of scope of payment initiation services unless this facility already exists within a user’s online payment account. The PSD2 definition of payment initiation services also does not extend to cancelling or amending existing direct debits or standing orders.
Alongside the response document HM Treasury and the FCA have published a supplementary document containing their expectations for the third party access provisions in PSD2. This document is intended to support firms in their PSD2 implementation, given the short period left for firms to take steps to meet their obligations for 13 January 2018.
Last week's FIG Bulletin reported that, on 12 July 2017, the Competition and Markets Authority (CMA) updated its merger inquiry webpage to give the information that it had investigated and cleared the anticipated merger of Bacs Payment Schemes Limited, Faster Payments Scheme Limited, and Cheque & Credit Clearing Company Limited.
On 19 July 2017, the CMA published the text of its decision.
7.3 SEPA instant credit transfer scheme interbank implementation guidelines: EPC publishes new version
On 19 July 2017, the European Payments Council (EPC) published version 1.1of the Single Euro Payments Area (SEPA) instant credit transfer scheme interbank implementation guidelines.
The guidelines set out the SEPA rules for implementing the interbank credit transfer ISO 20022 XML message standards for implementing SEPA instant credit transfers (SCT Inst) which takes effect on 21 November 2017..The EPC has also published SEPA XML schema definitions related to the guidelines.
8.1 Implementation monitoring of PFMI: CPMI/IOSCO fourth update to level 1 assessment report
On 14 July 2017, the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) published the fourth update to the level 1 assessments of implementation monitoring of the principles for financial market infrastructures (PFMI), which reflects the status of jurisdictions' legal, regulatory or policy frameworks as of 6 January 2017.
Level 1 assessments are based on self-assessments by individual jurisdictions of how they have adopted, within their regulatory and oversight frameworks, the PFMI's 24 principles for financial market infrastructures and four of the five responsibilities for authorities.
The results show that some progress has been made among those participating jurisdictions that had not completed their implementation measures at the time of the previous update in 2016. 20 of the 28 jurisdictions assessed have now completed their implementation measures for all FMI types (it was 19 jurisdictions in the previous update). The next update of the level 1 assessment will be conducted in 2018.
Alongside their updates to the level 1 assessment, the CPMI and IOSCO continue to monitor jurisdictions' progress at levels 2 and 3. These assessments consider, respectively, the completeness of jurisdictions' implementation measures and their consistency with the PFMI, and consistency in the outcomes of such frameworks.
On 14 July 2017, Intercontinental Exchange announced that ICE Benchmark Administration Limited (IBA) has been chosen as the new administrator of the LBMA Silver Price. IBA is expected to assume responsibility in autumn 2017.
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