Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 21 February, a draft version of the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 was laid before Parliament, and an explanatory memorandum has been published. The purpose of the Regulations is to make minor and technical amendments to UK primary and secondary legislation and to retained EU legislation relating to financial services in preparation for a no-deal Brexit. They also revoke certain SIs and EU legislation, particularly legislation relating to the Single Supervisory Mechanism and the Single Resolution Mechanism. They also introduce transitional provisions relating to, among other things, insurance business transfers and disclosures concerning credit agreements. The Regulations will enter into force on exit day, with the exception of amendments to SIs made under the European Union (Withdrawal) Act 2018, which will come into force immediately before exit day and a transitional provision relating to EEA overseas investment exchanges, which will come into force on the day before the day on which exit day falls.
Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019
FCA Brexit briefings for regulated firms
On 15 February, the FCA announced that it is holding two briefings for regulated firms to give firms a clearer understanding of its approach to managing the impact of Brexit. The events will take place on 11 March (London) and 14 March (Edinburgh) (both will also have a live webcast). They are aimed at senior level staff in regulated firms who are involved in Brexit preparations. The FCA particularly encourages smaller firms to attend. At the briefings, Nausicaa Delfas, FCA Executive Director of International, will explain how the FCA has been preparing for Brexit and its expectations of firms. The session will also include a panel Q&A session where firms can discuss any concerns they may have. Firms are asked to submit questions in advance, when they register.
Please see the Markets and Markets Infrastructure section for ESMA’s 2019 work programme for credit rating agencies, trade repositories and third-country CCPs and CSDs.
Please see the Insurance section for EIOPA's framework for identifying conduct risks.
FCA updated information on current account services
On 15 February, the FCA announced that it had published new and updated information relating to current account services offered by banks and building societies. Under rules in the Banking Conduct of Business Sourcebook, firms are required to publish data showing how long it takes each firm to open a current account for new customers, and how long it takes them to replace customers' debit cards. The rules came into force in August 2018. In addition, firms have published updated information on major operational and security incidents that they have reported to the FCA. Also, under a voluntary industry agreement, they continue to publish information on the services that they provide to vulnerable consumers. The information is to help consumers and small businesses find the right service for them, get the most out of it, and get help if things go wrong. It will also help others such as comparison services and the media to compare current accounts.
Treasury Committee publishes evidence on economic crime
On 21 February, the Treasury Committee published evidence in relation to the Economic Crime inquiry. The evidence was provided by Stephen Jones, Chief Executive of UK Finance, Susan Allen, Head of Retail Business Banking at Santander UK and Chris Rhodes, Chief Product and Propositions Officer at Nationwide Building Society.
Guidance on telling HMRC your organisation has failed to prevent the facilitation of tax evasion
On 21 February, HMRC published detailed guidance for those with authority from a company to report on its behalf any failure by the organisation to prevent the criminal facilitation of tax evasion and any failure to prevent offences under Part 3 of the Criminal Finances Act 2017.
Market Abuse (Amendment) (EU Exit) Regulations 2019
On 18 February, the Market Abuse (Amendment) (EU Exit) Regulations 2019 were made. They will take effect on exit day, with the exception of Regulations 1 (Citation and commencement), 2 (Amendment of the Criminal Justice Act 1993), 3 (Amendment of the Financial Services and Markets Act 2000) and 6 (Amendment of the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016) which came into force on 19 February.
Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 made
On 21 February, the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The Regulations ensure that the regime established under the European Long-term Investment Fund Regulation continues to operate effectively after Brexit. The Regulations make amendments to Regulation (EU) 2015/760 on European long-term investment funds and the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018. Part 1 and 2 of the Regulations come into force on 21 February and Part 3 will come into force on exit day.
Venture Capital Funds (Amendment) (EU Exit) Regulations 2019 made
On 21 February, the Venture Capital Funds (Amendment) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to correct deficiencies in the retained version of the EuVECA Regulation. The Regulations were laid before Parliament in November 2018. The Regulations will come into force on exit day.
Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019 made
On 21 February, the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The Regulations contain amendments to the Alternative Investment Fund Managers Regulations 2013 and the Alternative Investment Fund Managers (Amendment) Regulations 2013. They also amend the retained versions of: (i) Commission Delegated Regulation (EU) 231/2013 supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision, as well as other delegated and implementing regulations under the AIFMD; and (ii) Commission Implementing Regulation (EU) 447/2013 establishing the procedure for AIFMs that choose to opt in under the AIFMD. The Regulations revoke Commission Implementing Regulation (EU) 448/2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM and Commission Delegated Regulation (EU) 2015/514 on the information to be provided by competent authorities to ESMA under Article 67(3) of the AIFMD.
Collective Investment Scheme (Amendment etc) (EU Exit) Regulations 2019 made
On 20 February, the Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The Regulations ensure that the regime established under UCITS for investment funds and their managers continues to operate effectively after Brexit. It contains amendments to the retained provisions of delegated acts made under UCITS (Commission Regulation 2010/583 and Commission Delegated Regulation (EU) 2016/438), as well as UK legislation including FSMA and related secondary legislation. The Regulations were laid before Parliament in December 2018. The Regulations will come into force on exit day, except for certain provisions specified in Regulation 1(3).
IA guidance about fund communication
On 20 February, the IA published its fund communication guidance. The guidance has been published following the FCA's June 2017 Asset Management Market Study final report, which highlighted the difficulty for investors of knowing what to expect from their fund and how to assess whether it was performing against its stated objectives. The IA has worked with consumer representatives and is aiming to promote the use of consistent terminology in communications from fund managers about their funds. Informed by consumer research, the guidance examines key disclosure requirements and contains information about how to implement clearer communications. The guidance also includes a list of frequently used terms that can be explained in more simple language. The guidance is not mandatory, but is described by the IA as a way of addressing industry-wide issues.
HMT update on asset management taskforce
On 18 February, HMT published a press release announcing that its asset management taskforce has been revamped. Five new senior executives have joined the taskforce. The taskforce has also been asked to investigate what new international opportunities the UK's asset management industry could take advantage of after Brexit, and to explore ways to promote responsible investment.
PRA policy statement on adjusting for reduction of loss absorbency where Solvency II own fund instruments are taxed on write down
On 20 February, the PRA published a policy statement on adjusting for the reduction of loss absorbency where Solvency II own fund instruments are taxed on write down (PS4/19). PS4/19 is relevant to UK insurance firms within the scope of Solvency II, the Society of Lloyd's, and firms that are part of a Solvency II group that will determine and classify capital instruments under the Solvency II own funds regime, together with their advisors. It contains the PRA's feedback to responses to its consultation on adjusting for the reduction of loss absorbency. The PRA had made changes to its draft policy to clarify points made by respondents. The changes aim to provide more clarity on the impact of PRA policy on internal models and the treatment of instruments that would normally convert to equity (but may write down instead in some defined circumstances). The PRA has also established that mutual member accounts are not impacted by the new policy. The new policy comes into effect for all instruments issued on or after 21 February.
FCA final report on market study on competition in the wholesale insurance broker sector
On 20 February, the FCA published the final report of its wholesale insurance brokers market study. The market study was launched in November 2017 to assess how competition was working in the sector. The FCA has examined the competitive landscape and market power, the conduct of brokers, whether tacit co-ordination between brokers is likely, and possible industry changes that might affect competition. It has published its final report, without first consulting on an interim report, as, overall, it has not found evidence of significant levels of harm that merit the introduction of any intrusive remedies. The FCA has, however, identified some areas of concern which have scope for improvement including in relation to conflicts of interest, the information that firms disclose to clients and certain specific contractual agreements between brokers and insurers. The FCA considers that these issues can be addressed within its usual supervisory processes. It will now work with firms to address the concerns found in these areas. It intends to continue to monitor the market as part of its normal supervision function to assess developments arising from the impact of EU withdrawal, possible further consolidation in the industry and as a consequence of any changes in business models.
EIOPA framework for identifying conduct risks
On 20 February, EIOPA published a framework for assessing conduct risk through the lifecycle of an insurance product. The purpose of the framework is to identify the drivers of conduct risk and how these are detrimental to consumers. The aim is to help take stock of the issues faced by consumers and provide input on the types of risks EIOPA and NCAs should focus on. The framework focuses on conduct risk throughout the full product lifecycle: from before a contract is entered into through to the point at which all contractual obligations have been satisfied. The risks set out in the framework cover: (i) business model and management risks - risks arising from how undertakings structure, drive and manage their business and form relationships with other entities in the value chain; (ii) manufacturing risks - risks arising from how products are manufactured by insurance undertakings before being marketed and how they are targeted to customers; (iii) delivery risks - risks arising from how products are brought to the market and from the interaction between customers and insurance undertakings or intermediaries at the point of sale; and (iv) product management risks - after-sales risks relating to how products are managed and how insurance undertakings or intermediaries interact with and service customers until all obligations under the contract have ceased. The framework is not intended to set out supervisory processes at national level, but should support NCAs in identifying conduct and consumer protection risks sufficiently early and clearly for effective conduct supervision. EIOPA expects the framework to contribute to the effective implementation of its conduct supervision strategy, and anticipates further work in linking the identified conduct risks with the tools for assessing their impact and supervisory importance.
EIOPA recommendations for insurers in event of no-deal Brexit
On 19 February, EIOPA published recommendations providing guidance on the treatment of UK insurance undertakings and distributors with regard to cross-border services in the EU in the event of the UK leaving the EU without a deal. The nine recommendations are addressed to NCAs and their general objective is to minimise the detriment to policyholders with cross-border insurance contracts. They are issued in accordance with Article 16 of the EIOPA Regulation and are based on Solvency II, the Insurance Distribution Directive (IDD), EIOPA guidelines and other relevant EIOPA instruments. The recommendations relate to matters including the following: (i) orderly run-off - NCAs should prevent that UK undertakings concluding new insurance contracts or establishing, renewing, extending, increasing or resuming insurance cover under the existing insurance contracts in their jurisdiction as long as they are not authorised for such insurance activities under EU law. This is without prejudice to policyholder rights to exercise an option or a right in an existing insurance contract to realise their pension benefits; (ii) authorisation of third-country branches - in accordance with Article 162 of Solvency II, UK insurance undertakings may seek authorisation to carry out cross-border business through a branch in a Member State; (iii) portfolio transfer - if it was initiated before the withdrawal date, the NCAs should allow the finalisation of portfolio transfer from UK insurance undertakings to EU27 insurance undertakings; (iv) change in the habitual residence or establishment of the policyholder - if a policyholder with habitual residence or, in the case of a legal person, place of establishment in the UK, concluded a life insurance contract with a UK insurance undertaking and afterwards the policyholder changed its habitual residence of place of establishment to a EU27 Member State, NCAs should take into account in the supervisory review that the insurance contract was concluded in the UK; and (v) distribution activities - NCAs should ensure that UK intermediaries and entities that intend to continue or commence distribution activities to EU27 policyholders and for EU27 risks after the UK's withdrawal, are established and registered in the EU27 in line with the relevant provisions of the IDD. Competent authorities must confirm to EIOPA whether they comply or intend to comply with the recommendations within two months of the translated versions being issued. They will apply as of the date the UK leaves the EU.
EC requests EIOPA technical advice on Solvency II review
On 15 February, EIOPA published a request (dated 11 February) from the EC for technical advice on the review of Solvency II. The EC seeks EIOPA's advice on: (i) long-term guarantee measures and measures on equity risk (Article 77f); (ii) specific methods, assumptions and standard parameters used when calculating the solvency capital requirement standard formula (Article 111(3)); (iii) rules and supervisory authorities' practices on the application of Article 129 (calculation of the minimum capital requirement); (iv) the supervision of insurance and reinsurance undertakings in a group (Article 242(2)); and (v) other items related to the supervision of insurance and reinsurance undertakings. Beyond the above, other parts of the Solvency II framework have been identified by the EC, or by stakeholders, as deserving reassessment (for example, the supervision of cross-border activities or the enhancement of proportionality principles, including as regards reporting). Apart from Solvency II, the scope of the review may extend to delegated and implementing regulations as appropriate. The advice is due by 30 June 2020. In the request for advice, it sets out the principles that EIOPA should take into account when providing the advice which includes a detailed holistic impact assessment of all relevant effects, qualitative and quantitative, at EU level and on each Member State.
MARKETS AND MARKETS INFRASTRUCTURE
Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 made
On 21 February, the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The purpose of the Regulations is to address deficiencies within EMIR, as well as UK legislation including FSMA, to ensure that the UK continues to have an effective regulatory framework for CCPs, TR and OTC derivatives after the UK has left the EU. The Regulations also revoke Commission Delegated Regulation (EU) No 1003/2013 and Commission Delegated Regulation (EU) No 667/2014. The Regulations will come into force on exit day.
ESMA 2019 work programme for credit rating agencies, trade repositories and third-country CCPs and CSDs
On 19 February, ESMA published its 2018 annual report and 2019 work programme relating to its supervision of Credit Rating Agencies (CRAs), Trade Repositories (TRs) and its monitoring of Third Country Central Counterparties (TC-CCPs) and Third Country Central Security Depositories (TC-CSDs). The document outlines the supervisory and monitoring activities ESMA undertook in 2018 relating to CRAs, TRs, TC-CCPs and TC-CSDs. ESMA has identified the following supervisory priorities for 2019: (i) TR data quality and access by authorities, IT process and system reliability, business continuity planning, and the information security function (as identified by 2018 risk assessments for TRs). In the context of data quality, ESMA will specifically focus on its data quality action plan, the implementation of position calculation reports, and the implementation of guidelines on portability; (ii) for CRAs, the quality of the rating process, portfolio risk, and cybersecurity. ESMA will also survey a subset of CRAs to assess the current state of the cybersecurity risk environment; (iii) for both TRs and CRAs, there will be a focus on fees, the effectiveness of internal control systems, and the use of new technologies; (iv) recognition of UK CCPs in a no-deal Brexit scenario; and (v) assessing pending applications for recognition as TC-CCPs and TC-CSDs. This involves monitoring to ensure compliance with recognition criteria and equivalence conditions.
ESMA to renew prohibition on binary options for further three months from 2 April
On 18 February, ESMA announced that it has agreed to renew the prohibition of the marketing, distribution or sale of binary options to retail clients for a further three-month period from 2 April. ESMA published a decision notice on the prohibition in June 2018, which has been in effect since 2 July 2018. In November 2018, ESMA announced that it would extend the prohibition from 2 January for a further three-month period. ESMA is extending the prohibition again as it considers that a significant investor protection concern related to the offer of binary options to retail clients continues to exist. The measure will be renewed on the same terms as the previous renewal decision. ESMA intends to adopt the renewal measure in the coming weeks, following which it will publish an official notice on its website. The measure will then be published in the OJ. Under MiFIR, ESMA can only introduce temporary intervention measures for a three-month period, following which the measures must be renewed or they automatically expire.
PAYMENT SERVICES AND PAYMENT SYSTEMS
FCA Video Transcript: PSD2 and payment services regulation deep dive – Part 1
On 21 February, the FCA published a video which highlights firms’ need to comply with various aspects of PSD2, including: (i) complaints handling rules; (ii) rules around strong customer authentication; and (iii) rules regarding the facilitation of access for the newly regulated account information service providers and payment initiation service providers.
FCA Video transcript: PSD2 and payment services regulation deep dive - Part 2
On 21 February, the FCA published a video on their position regarding security measures in relation to the operational risk assessment introduced by PSD2. The video outlines what firms should do in case of a major incident in accordance with the EBA guidelines on Major Incident Reporting under PSD2. To better understand the FCA’s position, firms are advised to seek guidance from the FCA’s Approach Document that combines their approach to both the Payment Service Regulations and the Electronic Money Regulations in a single document which should be firms’ first port of call. The FCA also expects firms to be thinking about the possible impact of Brexit on their customers as well as the impact that it will have on their individual business models.
Interchange Fee (Amendment) (EU Exit) Regulations 2019 made
On 18 February, the Interchange Fee (Amendment) (EU Exit) Regulations 2019 were made, and an explanatory memorandum has been published. The Regulations will amend the Payment Card Interchange Fee Regulations 2015 and the retained version of the Interchange Fee Regulation to ensure that they function effectively in the event of a no-deal Brexit. A draft of the Regulations was published on 23 November 2018. The Regulations will come into force on exit day.
House of Commons European Scrutiny Committee considers PEPP Regulation
On 19 February, the House of Commons European Scrutiny Committee published its fifty-fifth report of the 2017-19 parliamentary session. In section 9 of the Report, the Committee considers the EC's proposed pan-European Personal Pension Product (PEPP) Regulation, and concludes that: (i) the Committee is particularly pleased that national regulators can curtail the passporting rights of providers to market PEPPs on a cross-border basis from other EU countries where necessary to protect savers; and (ii) the delegated acts due to be adopted under the PEPP Regulation highlight an accountability issue created by the proposed Brexit transition period. During that time, the UK will be subject to EU legislation debated and approved without the government having voting or representation rights in EU bodies. The PEPP Regulation is cleared from scrutiny by the Committee. The Committee previously considered the PEPP Regulation in July 2018 and had received a request for clearance so that the UK could vote in favour of its adoption.
COREPER endorses texts of amendments to CRR II, CRD V, BRRD II and SRM II
On 15 February, the Council of the EU published a press release announcing that COREPER had endorsed the EC's legislative proposals for banking reforms adopted by the EC in November 2016. These reforms consist of proposals for CRR II, CRD V, BRRD II and the SRM II Regulation. The Council has also published an "I" item note (dated 14 February) from the Council's General Secretariat to COREPER inviting COREPER to approve the following final compromise texts (all dated 14 February) with a view to reaching an agreement at first reading with the EP: (i) compromiseproposal for CRR II; (ii) compromise proposal for CRD V; (iii) compromise proposal for BRRD II; and (iv) compromise proposal for the SRM II Regulation. The press release states that the next steps will be for the EP and Council to be called upon to adopt the proposed regulations at first reading after the texts have undergone a legal linguistic review. The Council and EP reached provisional political agreement on the proposals in December 2018. The EP is scheduled to consider the proposals at its plenary session to be held between 15 and 18 April.
Please see the Prudential Regulation section for an update on COREPER's endorsement of amended BRRD II and SRM II Regulation texts.
SRB framework for valuation
On 19 February, the Single Resolution Board (SRB) published its framework for valuation, together with accompanying Q&A. The BRRD and the SRM Regulation provide the framework governing the powers of resolution authorities to intervene and resolve failing, or likely to fail, banks. To support and inform the decisions of the resolution authorities regarding resolution actions, the framework relies on valuations for a number of purposes. These include: (i) determining whether or not the conditions for resolution or the write-down or conversion of capital instruments are met (valuation 1); (ii) where the resolution authorities determine that an entity meets the conditions for resolution, informing the decision about the implementation of resolution tools (valuation 2); and (iii) determining if shareholders and creditors of an institution would have received better treatment if the entity under resolution had entered into normal insolvency proceedings (valuation 3). The framework aims to provide information about the expectations of the SRB regarding the principles and methodologies for valuation 2 and valuation 3. It also describes what is expected from the valuer, the characteristics of the valuation report, including explanations of certain assumptions or deviations, and the relationship between the implementation of resolution tools and the characteristics of the valuation. The SRB intends the framework to be useful for banks within its remit.
FinDatEx platform launched to improve European data exchange between financial institutions
On 18 February, a press release from the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA), Insurance Europe, the European Savings and Retail Banking Group (ESBG), the European Association of Cooperative Banks (EACB), and the European Structured Investment Products Association (EUSIPA) announced the launch of financial data exchange templates (FinDatEx) to improve data exchange. FinDatEx is a platform that supports the development and use of standardised templates to exchange data between European financial sector institutions. In particular, it aims to collectively decide on the need to develop standards, organise standardisation work, and disseminate agreed templates. The following templates have been made available on FinDatEx: (i) a PRIIPs template (to support the PRIIPs Regulation); (ii) a "comfort" PRIIPs template, which includes additional data points to assist KID production for insurance companies; (iii) a target market MiFID template (to support MiFID II); and (iv) a Solvency II tripartite data exchange template (to support Solvency II).
MoU between FCA and ICO
On 18 February, the FCA published the MoU that it has entered into with the ICO. The MoU relates to the arrangements between the FCA and the ICO in carrying out their respective responsibilities under legislation that includes FSMA, the GDPR and the Data Protection Act 2018. The purpose of the MoU is to establish a framework for co-operation, co-ordination and information sharing. It covers how each regulator determines policies and guidance, how investigatory and enforcement powers are used, and confidentiality and data breach reporting. It will be reviewed biennially. The FCA and Information Commissioner have determined that they do not exchange sufficient quantities of personal data to warrant entering into a separate data sharing agreement, but this will be kept under review. Publication of the MoU follows a February 2018 statement from the FCA and ICO about regulated firms complying with the GDPR.