FCA consults on contractual certainty post-Brexit

On 8 January, the FCA published a consultation paper on contractual certainty post-Brexit. The paper sets out the FCA's proposals to implement the Financial Services Contracts Regime (FSCR) so that EEA firms can fulfil their existing contractual obligations in the UK after exit day. The FSCR allows for the continuity of existing contracts for EEA firms that either do not submit a notification to enter the TPR, or are unsuccessful in securing, or do not apply for, full UK authorisation through the TPR route (and leave the TPR). The FSCR will apply automatically to these firms, allowing them to continue to service UK contracts entered into before exit day or before exiting the TPR for a limited period, provided that they meet the conditions of the FSCR. Firms will fall into one of two categories: supervised run-off or contractual run-off. The FSCR will be time-limited depending on the type of regulated activity being performed. It will apply for a maximum of five years for all contracts except insurance contracts, for which there is a maximum of 15 years. Gibraltar-based firms currently passporting into the UK will be able to continue to operate as they do now without needing to enter the FSCR. Unlike the TPR, the FSCR does not allow EEA firms to take on new business after 29 March 2019. Similarly, EEA-based managers, depositaries and trustees of UK authorised funds cannot continue to manage or provide services to these funds after exit day under the FSCR. These firms and fund managers will need to enter the TPR. The draft rules are set out in the Exiting the European Union: Financial Services Contracts Instrument 2019. The rules relating to fees are due to come into force on 1 April, with the remainder of the instrument potentially coming into force on exit day. The deadline for comments is 29 January. The FCA intends to provide feedback and publish final rules shortly before exit day.

FCA directs fund operators to make temporary permissions notifications

On 7 January, the FCA published the following directions it has given under regulation 64(1) of the Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2019 and regulation 78A(6) of the Alternative Investment Fund Managers Regulations 2013 (as amended, in particular by the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019): (i) a Direction to operators of collective investment schemes that are EEA UCITS; and (ii) a Direction to operators of AIFs, EuVECA, EuSEF and certain EEA AIFMs. The FCA directs the fund operators to notify the FCA if they intend to operate under the TPR. The Regulations create a temporary marketing permissions regime that enable the above funds to be marketed in the UK on the same terms and subject to the same conditions as they were able to before exit day for a limited period. Notifications must be made by the end of 28 March, by submitting the temporary permission notification form using the Connect system. The TPR will come into force when the UK leaves the EU, if there is no transition period.

FCA information on notification process for DRSPs entering temporary authorisation regime

On 7 January, the FCA updated its webpage on the Brexit temporary authorisation regime for DRSPs to include information on the notification process for data reporting services providers (DRSPs) wishing to enter the regime. The Data Reporting Services Regulations 2017, amended by the Markets in Financial Instruments (Amendments) (EU Exit) Regulations 2018, provide that an entity established and authorised under MiFID II to provide data reporting services in an EEA member state can notify the FCA that it wishes to provide a data reporting service in the UK from exit day. If the FCA determines that a notification is valid, a DRSP may be deemed as authorised for up to one year after exit day while enabling it to seek authorisation in the UK on a permanent basis. DRSPs may submit a complete application for full authorisation (or for verification) in the UK, or, submit the deemed authorisation notification form. The FCA will decide within 28 days if the notification is valid. If a DRSP applies for full authorisation, it will determine the application within six months of receiving the completed application. Applicants should send the completed application form or deemed authorisation notification form, along with supporting documentation, to, by 15 February. If a DRSP fails to meet this deadline, it will be unable to provide a data reporting service within the deemed authorisation regime, and on exit day it will have to be authorised under the Regulations to provide a data reporting service in the UK. The webpage also sets out the supervisory notification obligations of DRSPs deemed to be authorised under the Regulations to the FCA. DRSPs will only be able to provide a service in the UK once they have demonstrated conformance with the FCA's technical specification and successfully on-boarded to its market data processor system.

FCA opens applications for CRAs and TRs to operate post-Brexit

On 7 January, the FCA published a press release announcing that applications for credit rating agencies (CRAs) and trade repositories (TRs), which are looking to offer services in the UK after exit day (29 March), are now open. When the UK leaves the EU, the FCA will become the UK regulator of CRAs and TRs. Consequently, any legal person wishing to issue credit ratings, or TR wishing to offer its services in the UK, on or after exit day will need to be registered, certified or recognised by the FCA. To support the process, the FCA has updated its CRA and TR webpages which set out further details.

Notification window for temporary permissions regime opens

On 7 January, the FCA published a press release announcing that the notification window for firms and funds wishing to enter the TPR is now open. The FCA has also published: (i) a document explaining how inbound passporting EEA firms should notify the FCA if they wish to enter the regime; (ii) a notification form for MiFID tied agents; (iii) a notification form for e-money institution agents; (iv) a notification form for payment institution and registered account information service provider agents; and (v) a questionnaire for firms that receive or hold client assets in connection with investment business or insurance mediation. The notification window closes at the end of 28 March 2019. Once it has closed, firms that have not submitted a notification will not be able to use the TPR. The TPR will allow EEA-based firms currently passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation, if the UK leaves the EU on exit day without a transition period. It will also allow EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK.

PRA clarifies the interaction between proposals for applying SM&CR to firms in temporary permissions regime

On 7 January, the PRA published a note that clarifies the interaction between the FCA’s and the PRA's proposals for applying the SM&CR to firms in the TPR. The note includes a set of FAQs on how the two sets of proposals would apply to dual-regulated, EEA firms currently operating in the UK via an establishment passport through a branch (EEA branches). The FAQs include the following: (i) what will be the process for obtaining deemed TPR approval for PRA senior management functions? (ii) why do the FCA and the PRA have different proposals for applying the SM&CR to firms in the TPR?; and (iii) how will the FCA and the PRA proposals for applying the SM&CR to firms in the TPR interact in practice? The FCA and the PRA consulted on their proposals for applying the SM&CR to firms in the TPR that currently operate as an EEA branch in October. The points in the note are subject to the outcome of the consultations.


FCA Dear CEO letter on misleading financial promotions that suggest or imply unregulated activities are regulated

On 9 January, the FCA published a Dear CEO letter on clarity about unregulated activities in financial promotions. The FCA has recently become aware of some firms issuing financial promotions that suggest or imply that all of their activities are regulated by the FCA or PRA, or both, when this is not the case. These financial promotions are unlikely to provide consumers with the clarity that the FCA rules require. Consumers could be left unable to understand whether products or services that are promoted are regulated. As a result, the FCA reminds firms' senior managers and boards: (i) of what constitutes fair, clear and unambiguous financial promotions – the rules are clear that if a firm names the FCA or PRA, or both, as its regulator in a financial promotion that refers to aspects of its business that are not regulated, the promotion should make clear those unregulated aspects; (ii) of the FCA rule in the General Provisions manual that requires firms not to indicate or imply that they are regulated or otherwise supervised by the FCA in respect of business for which they are not regulated by the FCA – a similar rule applies for firms that are also regulated by the PRA; (iii) that before firms approve a financial promotion for communication by an unauthorised person, they must confirm that the promotion complies with the FCA's financial promotion rules – this includes ensuring that the financial promotions approved are fair, clear and not misleading; and (iv) that the FCA has the power, under section 137S of FSMA, to direct a firm to withdraw an advert or its approval of an advert, or to prevent an advert from being used in the first place. Commenting on the letter in a related press release, Jonathan Davidson, FCA Executive Director of Supervision - Retail and Authorisations, said that it is completely unacceptable for firms to market unregulated investments by implying to customers that all of their business is regulated. The FCA is committed to stamping out this misleading practice.


Please refer to the Fund Regulation section for ESMA’s first annual statistical report on the performance and costs of retail investment products in the EU.

EBA report on cost and past performance of structured deposits

On 10 January, the EBA published a report on cost and past performance of structured deposits. The report includes a mapping of the specific regulatory requirements on pre-contractual disclosure and reporting applicable to structured deposits at EU and national level. It forms part of the ESAs response to the EC's October 2017 request for recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products as part of the CMU initiative. Of the products covered by the EC's request, structured deposits is the only product category that falls under the EBA's consumer protection remit and for which it is therefore providing a response. The EBA concludes that since the market for structured deposits in the EU is small and data on costs and performance is not widely available, it would be challenging to report comprehensively with the information it has been able to obtain. It therefore sets out steps that the EBA will take to obtain more accurate and standardised data in the future. When replying to any future requests from the EC for reports on cost and past performance of structured deposits, the EBA may take specific initiatives to obtain more accurate data on market volumes to enhance the quality of its response. However, given the small market size, a comprehensive response may not be needed unless there is a significant change in the market for structured deposits.

Draft Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019 laid before Parliament

On 9 January 2019, a draft version of the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019 was published, together with a draft explanatory memorandum. The purpose of the Regulations, which have been laid before Parliament, is to ensure that the regime established under the Regulation on KIDs for PRIIPs (PRIIPs Regulation) continues to operate effectively after Brexit. The draft Regulations amend the Packaged Retail and Insurance-based Investment Products Regulations 2017 and the retained versions of the PRIIPS Regulation and Commission Delegated Regulation (EU) 2016/1904 on product intervention powers. The Regulations will come into force on exit day. HMT published a draft version of the Regulations and related explanatory information document on 22 November 2018.

FCA letter to HMT on improving mortgage switching options

On 9 January, the FCA published a letter from Andrew Bailey, FCA Chief Executive, to Nicky Morgan, House of Commons Treasury Committee Chair, on improving switching options for mortgage customers who are currently unable to do so. The letter outlines how the FCA plans to address regulatory barriers to switching "mortgage prisoners". The FCA defines mortgage prisoners as customers on a so-called reversion interest rate who would benefit from switching but are unable to do so, despite being up-to-date with payments on their existing mortgage. These include an FCA estimate of 20,000 mortgage customers with firms that are no longer lending commercially, despite being authorised to do so. In addition, the FCA estimates there are a further 120,000 customers of firms that are not authorised to lend who could potentially benefit from switching and are unable to do so. The key issue for these customers is that their mortgages are held by a firm that does not, or cannot, offer the customer a new loan so internal switches are generally unavailable. The FCA believes the solution is for customers to switch to an active lender, with whom they may be able to get a better deal. It wants to remove regulatory barriers that may be preventing this from happening. Consequently, the FCA intends to consult on changes to its responsible lending rules, with the aim to deliver a more proportionate affordability assessment. It proposes to move the affordability assessment from an absolute test to a relative test. Therefore, the test would be whether the new mortgage costs are more affordable than the current mortgage costs. The FCA's focus will be on customers who are seeking to move to a cheaper mortgage, and are not borrowing more, to ensure that a new mortgage is more affordable for these customers. The FCA states that there also needs to be a willingness from the industry to offer re-mortgaging opportunities to customers, once the regulatory barriers are removed. Following a recent roundtable event with the industry to discuss this, the FCA will continue its work with firms and trade bodies on the practicalities of re-mortgage options and how these options will be communicated to affected customers. The FCA will publish its consultation paper setting out its proposals to remove regulatory barriers to switching in spring 2019, alongside the final report on its mortgage market study.


Law Society publishes Criminal Finances Act 2017 guidance

On 4 January, the Law Society published guidance for solicitors on the corporate offences of failure to prevent the criminal facilitation of tax evasion introduced by the Criminal Finances Act 2017, with effect from 30 September 2017. This failure to prevent can risk criminal liability to solicitors' firms not only as a result of their employees’ actions, but also the actions of others with whom they are associated. The Introduction states: “The guidance will also be relevant to in-house legal teams.”


ESMA advice to EU institutions on ICOs and cryptoassets

On 9 January, ESMA published advice on ICOs and cryptoassets. The advice is addressed to the EC, the EP and the Council of the EU. In it, ESMA clarifies the existing EU rules applicable to cryptoassets that qualify as financial instruments under MiFID II, and sets out its position on gaps and issues in the current regulatory framework. ESMA has been working with national competent authorities on analysing the different cryptoasset business models, risks and potential benefits they may introduce, and how they fit within the existing framework. ESMA has a number of concerns with the existing framework regarding cryptoassets, in particular, about risks posed to investor protection and market integrity. The most significant risks identified are fraud, cyberattack, money laundering and market manipulation. The gaps and issues identified fall into two categories: (i) for cryptoassets that qualify as financial instruments, as the existing rules were not designed with cryptoassets in mind, there are areas that require potential interpretation or reconsideration of specific requirements to allow for an effective application of existing regulations; and (ii) where these assets do not qualify as financial instruments, the absence of applicable financial requirements leaves investors exposed to substantial risks. As a minimum, ESMA believes that AML requirements should apply to all cryptoassets and activities involving cryptoassets. There should also be appropriate risk disclosure in place so consumers can be made aware of the potential risks before committing funds to cryptoassets. To ensure a level playing field and adequate investor protection, ESMA considers that the gaps and issues identified are best addressed at the EU level. As a number of the issues are beyond ESMA's remit, it believes that the advice allows the EU institutions to consider possible ways in which the gaps and issues may be addressed and subjected to further analysis. ESMA will continue to actively monitor market developments around cryptoassets.

EBA advice to EC on cryptoassets

On 9 January, the EBA published a report setting out advice on cryptoassets for the EC. In the report, the EBA sets out the results of its assessment of the applicability and suitability of EU law to cryptoassets. It explains that the relatively low level of cryptoasset activity currently observed in the EU does not appear to give rise to implications for financial stability. However, typically, cryptoasset activities do not constitute regulated services within the scope of EU banking, payments and electronic money law. As a result, risks arise with regard to consumer protection, operational resilience and market integrity that are not addressed at the EU level. Cryptoasset activities may also give rise to other risks, including money laundering risks. The EBA has noticed that, as a result of the development of national regulatory responses driven by consumer protection considerations, divergences between member states are starting to emerge presenting risks for the level playing field. Market developments also point to the need for a further review of EU AML legislation. In addition, cryptoassets give rise to other issues that are beyond the EBA's scope and competence, such as accounting and tax treatment. For these reasons, the EBA advises the EC to carry out a comprehensive cost benefit analysis, taking account of issues inside and outside the financial sector, to determine what action, if any, is required at the EU level at this stage. The analysis should specifically consider the opportunities and risks presented by cryptoasset activities and new technology that may entail the use of cryptoassets. The EBA also advises the EC to take account of the October 2018 recommendations of the FATF regarding what the FATF calls "virtual asset" activities (and any further standards or guidance issued by the FATF). The EBA plans to take a number of actions itself, in 2019, to enhance the monitoring of firms' cryptoasset activities, including with regard to consumer-facing disclosure practices. It will also continue to monitor market developments.

Joint Committee of ESAs report on regulatory sandboxes and innovation hubs

On 7 January, the Joint Committee of the ESAs published a report on regulatory sandboxes and innovation hubs. In the report, the ESAs set out a comparative analysis of the innovation facilitators established to date in the EU, further to the mandate specified in the EC's FinTech Action Plan, which was published in March 2018. The ESAs also set out best practices regarding the design and operation of innovation facilitators, informed by the results of the comparative analysis and the experiences of the national competent authorities in running the facilitators. The best practices are intended to provide indicative support for competent authorities when considering the establishment of, or reviewing the operation of, innovation facilitators. In addition, the ESAs set out options to promote co-ordination and co-operation between innovation facilitators and support the scaling-up of FinTech across the EU. The options comprise of the development of joint ESA own-initiative guidance on co-operation and co-ordination between innovation facilitators, and the creation of an EU network to bridge innovation facilitators established at the member state level. Annex A to the report sets out a list of existing regulatory sandboxes and innovation hubs. The ESAs will continue to monitor national developments regarding innovation facilitators and take such steps as are appropriate to promote an accommodative and common approach towards FinTech in the EU. In particular, the ESAs will explore the options available for enhancing cross-border co-ordination and co-operation between national innovation facilitators, in conjunction with the EC's and the ESAs' further work on FinTech and define further steps, as appropriate, in 2019.


Please see the Brexit section for an update regarding the FCA’s directions to fund operators to make temporary permission notifications.

Please refer to the Prudential Regulation section for the Council of EU’s position on proposed Investment Firms Regulation and Directive.

ESMA first annual statistical report on retail investment products finds performance highly impacted by charges

On 10 January, ESMA published its first annual statistical report on the performance and costs of retail investment products in the EU. The report covers UCITS, alternative investment funds sold to retail investors and structured retail products. It highlights in particular the significant impact of costs on the final returns that retail investors make on their investments. Issues raised by ESMA include: (i) for UCITS funds the charges, taken all together, reduce their gross returns by one quarter on average – retail investors are impacted to a much higher extent than institutional investors, with retail clients paying on average twice as much as institutional clients. On-going costs such as management fees make up over 80% of the total costs paid by customers; (ii) in terms of overall returns, passive equity funds consistently outperform active equity funds – much of this is down to the fact that costs for actively managed equity funds are significantly higher than for passively managed funds and ETFs; (iii) there is significant variation in costs and gross performance across member states; and (iv) the lack of available and usable cost and performance data, especially for retail AIFs and SRPs, is a significant issue from an investor protection perspective.

EC report on operation of AIFMD

On 10 January, the EC published a report on the operation of the AIFMD. The report was prepared by KPMG, which the EC contracted in 2017 to carry out research on how the AIFMD has worked in practice and to what extent its objectives have been met. It provides and assesses evidence for the EC's mandatory review of the AIFMD under Article 69 of the Directive. KPMG carried out a general survey of the stakeholders most affected by the AIFMD and an evidence-based survey. The report sets out the key findings from these surveys. In particular, it concludes that the AIFMD has clearly played a major role in helping to create an internal market for AIFs and a harmonised and stringent regulatory and supervisory framework for AIFMs. Moreover, it assesses that most of the provisions have contributed to the achievement of the Directive's specific and operational objectives, have done so effectively, efficiently and coherently, remain relevant and have EU added value. The report also identifies certain areas that require further analysis. These include: (i) inadequate and duplicative reporting requirements, and overlapping reporting obligations with other EU legislation; (ii) harmonisation of the calculation methodologies for leverage across the AIFMD, the UCITS Directives and other relevant legislation; (iii) impairments to the effectiveness of the valuation rules due to the binary choice between internal or external valuation, and the differing national interpretations of the extent of the liability of external valuers; (iv) the coherence of the remuneration rules with other pieces of legislation and guidelines; (v) excessive investor disclosure requirements, which means they are ignored or prevent investors from obtaining a clear understanding of the AIF's investment proposal; (vi) inconsistencies between the investor disclosure rules and other EU investor disclosure regimes, which give rise to duplicative, and potentially inconsistent, disclosures; and (v) a lack of transparency regarding the differing national rules and supervisory processes relating to the marketing passport, due to member states adopting different approaches about which activities constitute "marketing". The EC will continue its work on the AIFMD review, focusing on the areas identified, and will report to the co-legislators in 2019.


Please refer to the Markets and Markets Infrastructure section on the draft Commission Delegated Regulations under MiFID II and IDD on sustainable finance.

Please refer to the Consumer/Retail section for the draft Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019.

EIOPA report on cost and past performance of retail insurance and pension products

On 10 January, EIOPA published its first report on costs and past performance of retail insurance and pension products. EIOPA has produced the report in response to an October 2017 request from the EC for it (and the other ESAs) to produce periodic reports on costs and past performance of the main categories of retail investment products. In the report, EIOPA provides aggregate data on the costs of insurance-based investment products (IBIPs) across the EU and, to a limited extent, certain personal pension products. It also sets out the net performance for the period between 2013 and 2017. The report is based on data derived from KIDs. However, given an absence of data on past performance in the KID, EIOPA had to ask insurers for additional data. Similar requests were necessary for PPPs. EIOPA describes the analysis set out in the report as a pilot exercise, carried out to identify issues that can be addressed for future reports. It explains that, given data quality and comparability limitations, a significant portion of the sample could not be used and, consequently, market coverage is limited. Due to these limitations, data at member state level has only been included on an anonymous basis, and conclusions on possible comparisons between different products have been avoided. The report shows that costs vary depending on the type of product, premium, risk category and jurisdiction. Variations in asset management costs related to different categories are a major factor. EIOPA has concluded that, due to the differences between products, there are significant challenges with comparing performance. To address the issues with consistency and quality of data in the future, EIOPA plans to further develop common definitions of costs, as well as common methods for calculating past performance. To address issues resulting from the complexity of the exercise, it considers that future iterations can be simplified and streamlined.

Draft Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations 2019 laid before Parliament

On 8 January, a draft version of the Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations 2019, which have been laid before Parliament, was published, together with a draft explanatory memorandum and draft impact assessment. The purpose of the Regulations is to amend UK legislation implementing the Solvency II framework, which includes the Solvency II Directive and Delegated Regulation (EU) 2015/35, to ensure that it works effectively in the event of a “hard Brexit”. Among other things, under the Regulations: (i) EEA groups with subsidiaries based in the UK will be subject to group supervision by the PRA; (ii) certain key functions currently carried out by EIOPA and the EC will be transferred to the PRA, the BoE's Prudential Regulation Committee and HMT – this includes HMT determining whether the prudential regime of a third country is equivalent, with the PRA undertaking the technical assessment of third country regimes that underpins such equivalence decisions; (iii) EU assets and exposures held by UK insurers will no longer be subject to preferential risk charges when setting capital requirements for insurers that use the standard formula – instead they will be subject to the requirements for third countries; (iv) the existing Solvency II binding technical standards, developed by EIOPA, will be brought into UK law and responsibility for them will be transferred to the PRA; (v) there will be a prohibition on pledging of assets; and (vi) definitions currently in the Solvency II Directive, which will become inoperable after exit day, will be brought into UK legislation. Once made, the Regulations will come into force on exit day.


EC draft Delegated Regulation extending MiFID II trade transparency exemption to People's Bank of China

On 10 January, the EC published the text of a draft Delegated Regulation amending Commission Delegated Regulation (EU) 2017/1799 as regards the exemption of the People's Bank of China from the pre- and post-trade transparency requirements in MiFIR. Article 1(9) of MiFIR empowers the EC to adopt delegated acts to exempt certain third-country central banks from MiFID II pre- and post-trade transparency requirements. Commission Delegated Regulation (EU) 2017/1799 specifies the third-country central banks that benefit from the exemption. The draft Delegated Regulation adds the People's Bank of China to the list of exempted institutions. The EC invites feedback on the draft Delegated Regulation by 6 February.

Draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 published by HMT

On 8 January, HMT published a draft version of the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (the Regulations), together with explanatory information. The Regulations will make amendments to retained EU law relating to the Benchmarks Regulation to ensure that the regime for financial benchmarks continues to operate effectively in the UK once the UK has left the EU. The Regulations will also make minor changes to delegated acts under the Benchmarks Regulation to ensure they function after exit day. This includes amending the list of critical benchmarks to remove benchmarks administered in the EU. Changes that the Regulations will make include: (i) creating a UK register of benchmarks, which the FCA will be responsible for maintaining from exit day – UK approved benchmarks and benchmark administrators will be migrated onto the UK register on exit day and the remaining 27 EU member states' approved benchmarks will be temporarily migrated onto the UK register on exit day; (ii) maintaining pre-exit day application refusal of authorisation or registration decisions from administrators located within the EU – these prohibitions will remain valid in the UK until an application is approved in the UK; and (iii) non-legislative functions of EU institutions will be transferred to the FCA. Any legislative functions, such as the EC's power to adopt delegated acts, will be transferred to HMT. This includes the power to update the list of critical benchmarks. Once made, the Regulations will come into force on exit day.

FCA consults on recovering costs of regulating securitisation repositories post-Brexit

On 8 January, the FCA published a consultation paper on recovering the costs of regulating securitisation repositories post-Brexit. ESMA is responsible for regulating securitisation repositories up until 29 March. Once the UK leaves the EU, the FCA will become responsible. The draft rules are set out in the Fees (Securitisation Repositories) Instrument 2019. The deadline for comments is 11 February. The FCA will provide feedback and publish the final rules in its March handbook notice. The FCA intends to consult separately on the authorisation and supervision of securitisation repositories shortly. The Securitisation Regulation came into force on 3 January.

ESMA updates MiFID II Q&As on transparency topics

On 4 January, ESMA published an updated version of its Q&As on transparency topics and commodity derivatives topics under MiFID II and MiFIR. The new Q&As provide clarification on the following topics: (i) publication of request for market data transactions; (ii) the default transparency regime for equity instruments; (iii) the default large-in-scale and size-specific-to-the-instrument transparency thresholds for bonds; and (iv) the correct application of the field "price multiplier" when reporting electricity contracts. ESMA last updated the Q&As for the commodity derivatives topics in October and the transparency topics in November.

Draft Commission Delegated Regulations under MiFID II and IDD on sustainable finance

On 4 January, the EC published the following draft Delegated Regulations designed to ensure investment firms and insurance distributors take environmental, social and governance (ESG) issues into account when advising customers: (i) Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of ESG considerations and preferences into investment advice and portfolio management under MiFID II; and (ii) Delegated Regulation amending Delegated Regulation (EU) 2017/2359 as regards the integration of ESG considerations and preferences into investment advice for insurance-based investment products under the IDD. The draft Delegated Regulations have been produced under Articles 24(13) and 25(8) of MiFID II, and Article 30(6) of the IDD, respectively. The publication followed a consultation. Although there was generally strong support to enhance the focus on non-financial objectives within the investment process, some stakeholders were reluctant to change their newly-implemented MiFID II or IDD processes. However, the EC is convinced of the urgency of moving ahead with its sustainable finance proposals, and believes the proposed timeline for application of the draft Delegated Regulations provides sufficient flexibility. (Although each explanatory memorandum states that the draft Delegated Regulations provide for an 18-month transition period, the draft legal texts state that they will apply 12 months after they come into force.) The EC has made a number of amendments to the draft Delegated Regulations in response to other comments received. The EC can only officially adopt the draft Delegated Regulations once the new disclosure provisions for sustainable investments and sustainability risks have been agreed at the EU level. However, it advised, in a press release, that publication of the drafts should enable firms to start preparing to take ESG considerations and preferences into account. In August 2018, the EC issued a call for technical advice from EIOPA and ESMA relating to its sustainable finance proposals. Once adopted by the EC, the draft Delegated Regulations will enter into force twenty days after publication in the OJ, unless the EP or the Council of the EU objects.


UK Finance applies on behalf of financial services industry for UK to remain in SEPA after Brexit

On 10 January, UK Finance published a press release announcing that it had made an application to the European Payments Council (EPC) on behalf of the UK financial services and payments industry to maintain participation in the SEPA after Brexit. UK Finance states that it is clear from its conversations with EPC members that the SEPA community supports the UK remaining in the SEPA payment schemes and that the EPC has previously published a position paper publicly supporting the UK's continued participation in SEPA. The EPC Board is due to make a final determination on the application on 7 March.


Please refer to the Insurance section for a report by EIOPA on cost and past performance of retail insurance and pension products.


Please refer to the Other Developments section for a letter from the ECB Supervisory Board Chair on SSM firms' variable remuneration policies.

ECB recommendation on dividend distribution policies: January 2019

On 10 January, the ECB published a recommendation on dividend distribution policies, which relates to credit institutions paying dividends in 2019 for the 2018 financial year. The ECB explains that credit institutions need to continue preparing for a timely and full application of the CRR and the CRD IV. They also need to prepare for the end of the transitional period provided by Regulation (EU) 2017/2395 (IFRS 9 Regulation) to mitigate the potentially significant negative impact on common equity tier 1 capital resulting from expected credit loss accounting under IFRS 9 in a challenging macroeconomic and financial environment. This exerts pressure on credit institutions' profitability and, as a result, on their capacity to build up their capital bases. Further, while credit institutions need to finance the economy, a conservative distribution policy is part of an adequate risk management and sound banking system. For this reason, the same method that was set out in ECB recommendation ECB/2017/44 should be applied. The recommendation is addressed to significant supervised entities and significant supervised groups, as defined in paragraphs (16) and (22) of Article 2 of the SSM Framework Regulation. It is also addressed to national competent authorities and designated authorities with regard to less significant supervised entities and less significant supervised groups, as defined in paragraphs (7) and (23) of Article 2 of the SSM Regulation. These authorities are expected to apply the recommendation to such entities and groups as they deem appropriate. Credit institutions that are not able to comply with the recommendation because they consider themselves legally required to pay out dividends should contact their joint supervisory team immediately. Separately, the ECB has also published a letter on credit institutions' variable remuneration policies, noting that they, like dividend distribution policies, may have a significant impact on a firm's capital base

PRA consults on eligibility of financial collateral for credit risk mitigation

On 10 January 2019, the PRA published a consultation paper (CP1/19) setting out proposed changes to its supervisory statement on CRM (SS17/13) relating to the eligibility of financial collateral as funded credit protection under the CRR. Following a review of firm practice in the capitalisation of certain kinds of secured financing transactions including non-recourse loans, the PRA proposes further guidance on its expectations of firms by adding a new chapter to SS17/13. This is because the PRA had observed practices by some firms that may have resulted in collateral being recognised as eligible for CRM purposes when it should not have been. The criteria set out in the CRR for recognising financial collateral as eligible for CRM purposes include that "the credit quality of the obligor and the value of the collateral shall not have a material positive correlation" (Article 207(2)). In relation to non-recourse loans, a significant fall in the value of the financial collateral can itself bring about the default of the obligor. Therefore, creditworthiness of the obligor can depend materially on the value of the financial collateral and the risk mitigation provided by the collateral may be compromised. The PRA proposes clarification on: (i) how Article 207(2) of the CRR applies in these circumstances; and (ii) its expectations of how firms should treat collateral with a material positive correlation for CRM purposes. The consultation closes on 10 April 2019.

Results from EBA's 2018 annual assessment of consistency of internal model outcomes

On 10 January, the EBA published two reports setting out the results of its 2018 annual assessment of the consistency of internal model outcomes. In the reports, the EBA considers the consistency of risk weighted assets across all EU institutions authorised to use internal approaches for calculating capital requirements. The two reports are: (i) report on the results from the 2018 market risk benchmarking exercise – compared to the 2017 exercise, the EBA's analysis shows a reduction in the dispersion in the initial market valuation and risk measures. This improvement was expected and is mainly due to simplification in the market risk benchmark portfolios. Some variability in the results persists, which mainly stems from different interpretations and heterogeneous market practices adopted by banks. Some of these issues have been addressed and the quality of the data has improved. This report has provided input for national competent authorities on areas that may require their further investigation. The EBA advises supervisors to pay attention to the materiality of risk factors not in VaR measures, and report on the results from the 2018 high and low default portfolios exercise. Most of the results are broadly in line with previous exercises, with 50% of the difference in variability explained by the proportion of defaulted exposures in the portfolio and portfolio mix. The remaining could be attributed to differences in collateralisation and other institution-specific factors. The national competent authorities performed an assessment of the internal models that have been identified as outliers in this exercise. In comparison with previous exercises, their monitoring activities are increasingly noticing issues identified by the EBA exercise. The EBA views this as reassuring, as it indicates that the increased regulatory and supervisory attention paid to internal models is contributing to the consistency of RWA of internal models. The EBA summarises, in a related press release, that the results of its assessment confirm previous findings, with the RWs variability explained by fundamentals.

PRA policy statement on liquidity reporting

On 8 January, the PRA published a policy statement to its consultation paper on liquidity reporting: FSA047 and FSA048, and the proposal in CP16/18 to correct the level of consolidation of the PRA110 reporting requirements. The PRA consulted on its proposals in July and October 2018. Following its consultations, the PRA is updating the Regulatory Reporting Part of its Rulebook and its supervisory statement on guidelines for completing regulatory reports. The policy statement contains: (i) PRA Rulebook: CRR Firms: Regulatory Reporting (Repeal Of PRA Rulebook: CRR Firms: Regulatory Reporting PRA110 Amendment Instrument 2018) Instrument 2019, which takes effect from 11 January 2019; (ii) PRA Rulebook: CRR Firms: Liquidity Regulatory Reporting (Amendment) Instrument 2019 – the rules in come into force on either 1 July 2019 or 1 January 2020; and (iii) an updated version of the supervisory statement on guidelines for completing regulatory reports. These updates are effective immediately.

Council of EU agrees position on proposed Investment Firms Regulation and Directive

On 7 January, the Council of the EU published a press release announcing that COREPER has agreed its position relating to the proposed Investment Firms Regulation (IFR) and the proposed Investment Firms Directive (IFD). The IFR and the IFD will, for most existing investment firms, replace the existing prudential requirements for investment firms set out in the CRR and the CRD IV. The Council has also published its compromise proposals on the IFR and the IFD. The EP voted on its position in September 2018. The Council and the EP will now begin trialogue negotiations.


EFDI status report on DGS stress testing exercise

On 8 January, the EFDI published a status report on the results of a deposit guarantee scheme stress testing exercise. EFDI explains that Article 4(10) of the Deposit Guarantee Schemes Directive requires DGSs to carry out stress tests of their systems. It also recognises that the International Association of Deposit Insurers'core principle 6 requires DGSs to carry out contingency planning. Prior to the DGSD, EFDI had established a working group to issue guidance on approaches to stress testing. However, this group was revived in the light of the DGSD requirement, and was able to input into the EBA's May 2016 guidelines on stress testing under the DGSD. EFDI considers that the DGS community is committed to achieving compliance with the stress testing requirement, and also to develop and embed an ongoing culture of testing to enhance preparedness, and contribute to financial stability. However, there are some challenges that may hinder or prevent this from happening. The key concerns include the following: (i) it may be difficult to deliver the testing, as much of it is concentrated to the period Q3 2018 and Q2 2019; (ii) the ability of the community to deliver the testing as regards cross-border payout will require significant co-ordination; (iii) under the DGSD, the designated authority is not required to participate in the testing, but the EBA guidelines state that they should be consulted in development of the stress test plan; and (iv) there remain differing interpretations of the stress test indicators as defined in the guidelines. This could lead to an inability by the EBA to perform its planned peer review of tests, or investment in a testing programme that may generate suboptimal results, or both. The working group will continue to meet to discuss how to meet the stress testing requirements, as well as how to create an ongoing culture of collaboration and shared learning through testing across the community.


Please refer to the Markets and Markets Infrastructure section on the draft Commission Delegated Regulations under MiFID II and IDD on sustainable finance.


Letter from ECB Supervisory Board Chair on SSM firms' variable remuneration policies

On 10 January, the ECB published a letter, from Andrea Enria, ECB Supervisory Board Chair, on the variable remuneration policies of credit institutions in the SSM. The letter states that the ECB pays close attention to the dividend and remuneration policies of the financial institutions under its supervision. In particular, the ECB will focus on any impact that these policies may have on the maintenance of a sound capital base. The ECB underlines the need for firms to: (i) adopt a prudent, forward-looking stance when deciding on a remuneration policy; and (ii) duly consider the potentially detrimental impact of their remuneration policy on their ability to maintain a sound capital base, especially taking into account the transitional requirements set out in the CRD IV and the transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds under Article 473a of the CRR. When a firm makes variable remuneration award (including the use of clawback arrangements) under its remuneration policy, the ECB recommends it apply a policy that is consistent with a conservative (at a minimum, a linear) path towards its fully-loaded capital requirements, including the combined buffer requirement, and outcomes of the supervisory review and evaluation process. In addition, in their variable remuneration policy and capital management, the ECB expects firms to take into account the potential impact on capital demand due to future changes in the EU's legal, regulatory and accounting frameworks. The ECB advises that, in the absence of specific information to the contrary, the future Pillar 2 requirements and Pillar 2 guidance used in capital planning are expected to be at least as high as the current levels. Firms are asked to keep their ECB joint supervisory team regularly informed of any decisions regarding their remuneration policy. In the letter, the ECB mentions Recommendation ECB/2019/11 on dividend distribution policies, and notes that these policies may, like variable remuneration policies, have a significant impact on a firm's capital base.

ECON votes to adopt draft reports on legislative proposals reforming ESFS

On 10 January, the ECON voted to adopt draft reports on the EC's legislative proposals to reform the ESFS, and published the following documents confirming the outcome of each vote: (i) a document confirming the outcome of the vote to adopt the draft report on the amended text of the proposed Omnibus Regulation, and a separate document confirming that ECON has voted to enter into interinstitutional negotiations on the legislative proposal; (ii) a document confirming the outcome of the vote to adopt the draft report on the amended text of the proposed Omnibus Directive, and a separate document confirming that ECON has voted to enter into interinstitutional negotiations on the legislative proposal; and (iii) a document confirming the outcome of the vote to adopt the draft report on the amended text of the proposed Regulation amending the ESRB Regulation (Regulation 1092/2010), and a separate document confirming that ECON has voted to enter into interinstitutional negotiations on the legislative proposal.

HMT updates House of Lords EU Committee on progress of proposed Omnibus Regulation

On 10 January 2019, HMT published a letter from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Scrutiny Committee Chair, on the progress of the proposed Omnibus Regulation, which forms part of the package of proposals to reform the ESFS.

FCA sector views: January 2019

On 9 January, the FCA published its sector views. These provide the FCA's annual analysis of the changing financial landscape, the resulting impacts on consumers and market effectiveness. The sector views are based on the data available and the FCA's views as at mid-2018. They enable the FCA to keep its priorities under review and focus its resources effectively for the 2019/20 business plan. Previously, the FCA has published its sector views alongside its business plan. The FCA has identified common drivers of change emerging across sectors and in the cross-sector themes chapter, it focuses on: (i) how technology is driving change in financial services (that is, FinTech); (ii) societal changes and their impact on the financial needs of different generations; (iii) the potential impact of Brexit; and (iv) the macro-economic environment. The remainder of the document groups all of the markets the FCA regulates into seven sectors, looking at the issues in each: retail banking, retail lending, general insurance and protection, pensions and retirement income, retail investments, investment management and wholesale financial markets.

ECB consolidated guide to assessments of credit institution licence applications

On 9 January, the ECB published a consolidated guide to assessments of licence applications by credit institutions. The guide applies to all licence applications to become a credit institution within the meaning of the CRR, including initial authorisations for credit institutions, applications from FinTech companies, authorisations in the context of mergers or acquisitions, bridge bank applications and licence extensions. One of its primary objectives is to promote awareness and enhance the transparency of the assessment criteria and processes for the establishment of a credit institution within the SSM. The guide is not legally binding and consists of a practical tool to support applicants and all entities involved in the authorisation process to ensure there is a smooth and effective procedure and assessment. It will be updated regularly to reflect new developments and experience gained in practice. The ECB published the first edition of the guide in March 2018. The second revised edition contains additional guidance related to the assessment of capital (section 5.1) and the programme of operations (section 5.2). This follows the ECB's consultation in September 2018.

Draft Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019 published by HMT

On 9 January, HMT published a draft version of the Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019, together with explanatory information. The Regulations amend primary and secondary UK legislation, including the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (Disclosure Regulations), so that the UK continues to have a robust legislative framework governing how UK regulators share confidential information with other authorities after Brexit. They also amend certain pieces of retained EU legislation, including the MAR. Changes that the Regulations make include: (i) amendments to ensure that the same restrictions and protections for how UK regulators share confidential information with third-country authorities apply to EEA member states after exit – this is necessary because UK regulators are currently able to share confidential information freely with EEA regulators without needing to enter into co-operation agreements. Once the UK is outside the EU, it would be inappropriate to continue to share information like this as there are different restrictions when sharing confidential information with other third countries. In practice, this means the UK will need to enter into co-operation agreements with EEA states so UK and EEA regulators can continue to share confidential information; and (ii) removing current UK legislative requirements to seek the consent of an ESA or EEA regulator before onwardly disclosing confidential information in cases where there is no equivalent provision in respect of third countries. In most cases, if a regulator currently wishes to onwardly disclose confidential information originating from an ESA or EEA regulator, it must seek their consent beforehand. Generally, these obligations only exist in respect of ESAs and EEA regulators and a UK regulator does not need to seek the consent of a third country in the same way. It would therefore be inappropriate to maintain these obligations in UK legislation after Brexit where they do not apply to third countries. HMT plans to lay the draft Regulations before Parliament before exit. Parts 1 and 3 of the Regulations come into force on the day after the day on which the Regulations are made. Part 2 comes into force on exit day.

FCA policy development update

On 4 January, the FCA updated its webpage, which sets out information on recent and future FCA publications. This update summarises the FCA's proposed future publications. The webpage was last updated on 7 December 2018.