Includes developments in relation to: change in control and cryptoasset firms; net-zero transition; ‘strong and simple; prudential framework; RAO; and disclosure of inside information
Click on the headings below to access each section:
Issue 1172 / 11 August 2022
- Prudential Regulation Authority
- Financial Conduct Authority
- Glasgow Financial Alliance for Net Zero
Prudential Regulation Authority
Occasional consultation paper CP3/22 - PRA publishes policy statement (PS7/22) - 8 August 2022
The PRA has published a policy statement (PS7/22) providing feedback on responses to its occasional consultation paper (CP3/22), published in March 2022. The policy statement contains, among other things, an updated supervisory statement (SS) on the UK leverage ratio framework (SS45/15) and an updated statement of policy on the PRA's approach to the publication of Solvency II technical information. It deletes legacy supervisory statements and SS3/13, SS4/15 and SS29/15.
We note in particular that the changes in PS7/22 include:
- updates to the PRA’s approach to publishing Solvency II technical information for the valuation of insurance liabilities for each relevant currency;
- changes to the reporting requirements in the PRA Rulebook and relevant UK Technical Standards (UKTS) reflecting the implementation of Basel standards; and
- amendments to the PRA Rulebook and relevant UKTS following the introduction of the Investment Firms Prudential Regime.
The implementation date for the changes is 1 September 2022, except for those relating to the Investment Firms Prudential Regime, for which the implementation date is 12 August 2022. The instruments making the policy changes can be found in the appendices to the policy statement.
Financial Conduct Authority
Change in control and cryptoasset firms - FCA publishes notification forms - 11 August 2022
The FCA has updated its webpage on change in control notification forms to include links to several forms for use by persons intending to acquire control over an FCA registered cryptoasset firm (namely, the corporate controllers form; partnership controllers form; individual controllers form; and trust controllers form).
Any person who decides to acquire 25% or more control of an FCA registered cryptoasset firm must receive prior FCA approval before completing the transaction. These persons must comply with the change in control regime set out in Part 12 of the Financial Services and Markets Act 2000 (FSMA), as modified by Schedule 6B to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017).
These requirements were introduced through amendments to the MLRs 2017 made by the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022 (SI 2022/860) and entered into force on 11 August 2022.
Glasgow Financial Alliance for Net Zero
Net-zero transition - GFANZ publishes guidance on portfolio management for consultation - 9 August 2022
The Glasgow Financial Alliance for Net Zero (GFANZ) – a practitioner-led, global coalition of financial institutions working to accelerate the world’s transition to net-zero greenhouse gas emissions by 2050 – is consulting on a draft report that sets out guidance for financial institutions on implementing and selecting portfolio alignment metrics. It follows the publication of GFANZ’s draft net-zero transition plan framework for the financial sector in June 2022, and builds on prior work conducted in 2020 and 2021 by the portfolio alignment team.
The draft report notes:
“Measuring portfolio alignment will provide transparency on whether the financial sector is reallocating capital flows to support the transition to a net-zero economy and builds on the implementation of sound real-economy transition plans, science-based net-zero pathways, and the articulation of said plans and pathways in financial sector transition plans.”
According to the draft report, portfolio alignment metrics should be “simple to use, transparent, science-based, broadly applicable, aggregable, and incentive optimal.” Four categories of metrics are being used by financial practitioners today: (i) binary metrics; (ii) maturity scale alignment metrics; (iii) benchmark divergence metrics; and (iv) implied temperature risk metrics. As it stands, they are deployed to help financial institutions assess those companies that are 1.5 degrees C-aligned and those that need to transition to become 1.5 degrees C-aligned.
The draft report refers to barriers to the wider adoption of portfolio alignment metrics as well as challenges associated with the choice of emission unit and scope. To address these issues, GFANZ has been working to enhance its previously developed key design judgement framework (the Framework) and the draft report provides refined guidance on design choices for five of the eight judgements outlined in that Framework. For example, on the choice of measurement units (Judgement 3), quantitative case studies in the draft report examine whether oil and gas companies should be assessed based on production units, physical or economic intensities or absolute emissions. The draft report also provides practical implementation guidance on single-scenario benchmark construction (Judgement 1), outlining the implementation of the fair share carbon budget approach, and the selection of benchmark scenarios (Judgement 2), with input from the GFANZ workstream on sectoral pathways.
The deadline for responses is 12 September 2022. The recommendations and guidance are voluntary. GFANZ will publish an updated report containing final recommendations and guidance in autumn 2022, before COP27.
BANKING AND FINANCE
Issue 1172 / 11 August 2022
- European Banking Authority
- UK Parliament
- Bank of England
- Recent cases
European Banking Authority
CRR - EBA publishes consultation paper on draft RTS on the determination by originator institutions of the exposure value of SES in securitisations - 9 August 2022
The European Banking Authority (EBA) has published a consultation paper (EBA/CP/2022/11) on draft regulatory technical standards (RTS) specifying the determination by originator institutions of the exposure value of synthetic excess spread (SES), under Article 248(4) of the Capital Requirements Regulation (575/2013/EU).
The draft RTS, set out in chapter 4 of the consultation paper, specify the calculation of the exposure value of certain elements that should be included in the exposure value of SES, taking account of the relevant losses expected to be covered by SES. The proposals reflect a more risk sensitive prudential framework concerning synthetic securitisation by contractually designating certain amounts to cover losses of the securitised exposures during the life of the transaction. These amounts, which encumber the originator institution's income statement like an unfunded guarantee, were not previously risk weighted.
The deadline for comments is 14 October 2022. A related public meeting will take place on 6 September 2022. The final draft RTS will be submitted to the Commission for adoption, after which they will be scrutinised by the European Parliament and Council of the EU before their publication in the Official Journal of the European Union.
EBA Consultation Paper: Draft Regulatory Technical Standards Specifying the determination by originator institutions of the exposure value of synthetic excess spread pursuant to Article 248(4) of Regulation (EU) No 575/2013 (EBA/CP/2022/11)
Please see the General section for an item on policy statement 7/22 which includes consequential amendments arising from the introduction of the CRR Rules in the PRA Rulebook.
‘Strong and simple’ prudential framework - House of Commons Treasury Sub-Committee publishes letter - 10 August 2022
The House of Commons Treasury Sub-Committee on Financial Services Regulations (the Sub-Committee) has published a letter sent to the PRA regarding its proposed ‘strong and simple’ framework (the Framework), on which the PRA published a consultation paper (CP5/22) in April 2022. The letter follows the Sub-Committee’s inaugural meeting on 20 July 2022, during which it took evidence from two ‘challenger banks’ as well as representatives from the banking industry and the building society sector on the proposed Framework.
A number of concerns were raised during that session, including:
- a lack of clarity on the PRA’s overall strategy when developing the Framework means that firms do not know whether the simpler-firm regime thresholds are appropriate;
- the £15 billion balance sheet cap on the simpler-firm regime should be brought in line with the £25 billion balance sheet threshold for the minimum requirement for own funds and eligible liabilities (MREL), to prevent additional complexity;
- the creation of cliff-edges by setting upper limit thresholds within the Framework. In addition, it is not yet clear how firms will transition between ‘layers’ within the Framework; and
- the requirement for 85% of a firm’s obligors to be based in the UK in order for a firm to qualify for the simpler-firm regime may lead to existing customers who live abroad being de-banked by their lender, or prospective customers living abroad having fewer lenders from which to secure a mortgage or loan.
During the session, the Sub-Committee heard that, of the 35 new banks formed in the UK since the 2008 financial crisis, none have yet scaled up to a point where they can compete with the larger players. MPs were told that increasing the proposed £15 billion balance sheet ceiling for smaller firms to qualify for a simpler regime to at least £25 billion could allow medium-sized firms to compete with high street banks.
The Sub-Committee has requested the PRA’s views on increasing the proposed threshold and its views on how firms would transition between layers within the Framework, by 2 September 2022.
Bank of England
Financial Services and Markets Bill - House of Commons Treasury Committee publishes letter from Bank of England - 11 August 2022
The House of Commons Treasury Committee has published a letter (dated 27 July 2022) from Andrew Bailey, Governor of the Bank of England (the Bank), on the Financial Services and Markets Bill (the Bill). The letter follows Mr Bailey’s appearance at the Treasury Select Committee on 11 July 2022, where he received questions from members of the committee related to the Bill following the Bank’s latest financial stability report.
The Bank welcomes the Future Regulatory Framework measures contained in the Bill and supports the proposals for regulators to have increased responsibility for setting regulatory requirements, acting within a strong policy and accountability framework set and overseen by Parliament. The Bank also welcomes the increased accountability mechanisms set out in the Bill, which Mr Bailey notes “strike an appropriate balance” between the desire for independent regulators to be more responsive to new risks and opportunities and the need for Parliament, stakeholders, and the public at large to hold regulators to account.
The PRA expects to publish a discussion paper in September 2022 that will set out the Bank’s vision for implementing the Future Regulatory Framework.
Algebris (UK) Ltd and another v Single Resolution Board (Case T 570/17)  - 1 June 2022 - Resolution tools - Single Resolution Mechanism - Charter of Fundamental Rights
The European General Court has dismissed an action seeking an annulment of a decision by the European Commission (the Commission) endorsing the resolution scheme for Banco Popular Español SA under the Single Resolution Mechanism (SRM) Regulation (806/2014). The applicants were investment fund managers that held Additional Tier 1 capital instruments and Tier 2 capital instruments issued by Banco Popular before the resolution. Among other things, the applicants argued that certain actions of the Commission and the Single Resolution Board were in breach of principles established by the Charter of Fundamental Rights of the EU (the Charter). In particular, the applicants claimed that the resolution process for Banco Popular had breached their right to property under Article 17(1) of the Charter, as the resolution scheme involved the write-down of capital instruments, and their right to be heard under Article 41(2)(a) of the Charter, as the decision had been made without their having the opportunity to make representations.
The Court held that the resolution process pursued an objective of general interest under Article 52(1) through the pursuit of ensuring the stability of the financial markets and consequently was capable of justifying a limitation on these rights. Consequently, it issued a judgment dismissing the applicants’ action in seeking to annual the Commission’s decision to endorse a resolution scheme.
SECURITIES AND MARKETS
Issue 1172 / 11 August 2022
- European Commission
- European Securities and Markets Authority
- UK Jurisdiction Taskforce
CCP Recovery and Resolution - European Commission publishes report on treatment of CCP equity in the write-down and conversion tool - 10 August 2022
The European Commission (the Commission) has published a report (COM(2022)393) sent to the European Parliament and the Council of the EU on the treatment of central counterparty (CCP) equity in the write-down and conversion tool, under the Regulation on the recovery and resolution of central counterparties (CCPs) ((EU) 2021/23) (CCPRRR).
Under Article 27(7) of the CCPRRR, the resolution authority must write down and convert any instruments of ownership, debt instruments and other unsecured liabilities immediately before or together with the application of another resolution tool. This is not required if a different sequence is applied that would minimise deviations from the ‘no creditor worse off’ (NCWO) principle and better achieve the resolution objectives.
The Commission concludes that it cannot at this time make a recommendation on amendments to Article 27(7) because technical work is still ongoing. In particular, further work is needed to ensure that the principle of CCP equity absorbing losses first and being fully loss absorbing in resolution can be applied. There is also limited practical experience as the resolution planning rules of the CCPRRR will only apply from 12 August 2022.
The deadline for the Commission to submit a report on the implementation of the CCPRRR is February 2026.
European Securities and Markets Authority
EMIR - ESMA publishes Memorandum of Understanding with South African authorities - 10 August 2022
The European Securities and Markets Authority (ESMA) has published a Memorandum of Understanding (MoU) it has entered into with South Africa’s Financial Sector Conduct Authority (FSCA), Prudential Authority and the South African Reserve Bank, on the exchange of information regarding central counterparties (CCPs) under the European Market Infrastructure Regulation (648/2012/EU) (EMIR).
The European Commission adopted Commission Implementing Decision (EU) 2022/900 regarding the equivalence of the regulatory framework of South Africa for CCPs under EMIR in June 2022. The MoU will take effect on the date that it is signed by the South African authorities. It will replace the MoU entered into between ESMA and the FSCA (formerly known as the Financial Services Board) in November 2015.
UK Jurisdiction Taskforce
Digital securities - UK Jurisdiction Taskforce publishes legal statement for consultation - 3 August 2022
The UK Jurisdiction Taskforce (UKJT) has published a ‘Legal Statement on Digital Securities’ for consultation (the Legal Statement). The Legal Statement follows the UKJT’s November 2018 statement on the status of cryptoassets and smart contracts. In April 2021, the UKJT published its ‘digital dispute resolution rules’ to be incorporated into on-chain digital relationships and smart contracts.
Several jurisdictions have introduced bespoke legislative frameworks to cater for digital securities but no similar framework has been introduced in the UK. The Legal Statement explores the way in which English law can support the issue and transfer of equity or debt securities on blockchain and distributed ledger technology (DLT) systems. It focuses on equity or debt securities constituted or evidenced by reference to a blockchain or distributed ledger rather than conventional securities whose performance is linked to, or which are collateralised by, digital assets. It refers to questions around issuance (for example, whether a blockchain or DLT-based system can be used as a register of digital securities and needs to comply with the requirements of the Uncertificated Securities Regulations 2001); the stapling of rights and interests to digital securities; and transfers (including, whether a transfer must meet the requirements of section 136(1) or section 53(1)(c) of the Law of Property Act 1925). A separate ancillary question relates to corporate requirements for UK companies (for example, whether a blockchain or DLT-based system can serve as a register of members or debenture holders for the purposes of complying with sections 113 and 743 of the Companies Act 2006).
The deadline for responses is 23 September 2022. A sub-committee of the UKJT will prepare the Legal Statement for publication after a public consultation has been held.
Issue 1172 / 11 August 2022
- European Central Bank
- Financial Conduct Authority
European Central Bank
UCITS and AIFM Directives - ECB publishes opinion on proposed amendments - 10 August 2022
The European Central Bank (ECB) has published an opinion (CON/2022/26) (dated 9 August 2022) on the proposed Directive amending the Alternative Investment Fund Managers (AIFMs) Directive (2011/61/EU) (AIFMD) and the Directive relating to undertakings for collective investment in transferable securities (UCITS) (2009/65/EC) (the UCITS Directive), regarding delegation arrangements, liquidity risk management, supervisory reporting, provision of depository and custody services, and loan origination, by alternative investment funds (AIFs). The European Commission (the Commission) adopted the legislative proposal for the Directive in November 2021.
Although the ECB welcomes the Commission’s proposals, it highlights a number of issues for consideration, including in relation to:
- liquidity management and macroprudential tools: the ECB notes that the proposed Directive should aim to limit the liquidity mismatch between the assets and liabilities of AIFs by means of measures that specifically target either assets or liabilities. The ECB also suggests how the ability of certain AIFs to withstand liquidity risks could be strengthened.
- reporting: the ECB supports the development of integrated supervisory data collection, but stresses that the integration of the underlying reporting infrastructure must not interfere with or otherwise prejudice the ECB’s competence to adopt statistical regulations for its own purposes; and
- European System of Central Banks (ESCB) access to detailed data in the AIF sector: the proposed Directive should require ESMA, which currently receives individual AIF data from NCAs, to make that data available to the ECB and other relevant ESCB central banks.
The ECB has set out specific drafting proposals in a technical working document accompanied by explanatory texts.
Opinion of the European Central Bank of 9 August 2022 on a proposal for a directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds (CON/2022/26)
Financial Conduct Authority
Supervision of alternative investment funds - FCA publishes portfolio letter - 9 August 2022
The FCA has published a portfolio letter which it has sent to the CEOs of alternative investment funds, referring to the FCA’s view of the key risks of harm in the ‘alternatives’ portfolio and outlining the FCA’s expectations in this context. The letter notes that the alternatives portfolio encompasses a broad range of business models, from global hedge funds and private equity firms to smaller providers. While “alternative firms mostly deal with professional investors and counterparties capable of managing their own interests… this description is not accurate across the whole portfolio, with many firms dealing with retail or elective professional investors…These firms have a very different risk profile from a regulatory perspective, including the risk that investors are misclassified and subsequently denied appropriate protections.”
The FCA’s portfolio priorities are consistent with its 2022 business plan commitments, which include the integrity of the markets and market abuse, ESG (Environmental, Social and Governance), and consumer needs. More specifically, the FCA is concerned with:
- investment strategies that carry inappropriate levels of risk for their target client: the FCA notes that the main risk warning rules come into force on 1 December 2022, with the remainder on 1 February 2023. The FCA also highlights the new consumer duty, under which rules and guidance for new and existing products or services open to sale or renewal come into force on 31 July 2023, and later on 31 July 2024 for closed products or services. The FCA will publish final rules for the promotion of cryptoassets once HM Treasury formalises legislation to bring these into its remit. In the coming months, the FCA will be issuing a questionnaire asking all portfolio firms for information about their business model, products, investor categorisations and associated control framework, and will follow up with those firms exhibiting characteristics that increase the potential of consumer harm;
- conflicts of interest: the letter draws firms’ attention to recent enforcement action in this respect. Boards should review their procedures to ensure conflicts are avoided, managed or disclosed in a way that minimises harm to investors and markets;
- market integrity and disruption: the FCA highlights its analysis which shows firms overestimating liquidity in the context of stressed or fast-moving markets, and leveraged structures coming under strain. In light of this, the FCA encourages firm boards to ensure that risk functions are appropriately resourced, contemporaneous, and commensurate with the levels of portfolio and business risk being taken; and
- market abuse: the FCA stresses that firms must ensure that controls under the retained EU law version of the Market Abuse Regulation (595/2014/EU) are tailored to their business models. In the case of non-compliance, the FCA will consider criminal, civil or supervisory sanctions.
Several additional concerns are covered in the FCA’s letter, including how senior managers and firm policies influence an organisation’s culture and evidence of staff being unable to speak up. Also noted is the FCA’s July 2021 discussion paper (DP21/2), which outlines the issues and benefits that diversity and inclusion would bring to the sector alongside potential policy interventions. The FCA intends to consult on this later in 2022. The FCA also refers in the letter to ESG based investment and its July 2021 communication to authorised fund managers.
Issue 1172 / 11 August 2022
- European Commission
- Financial Markets Law Committee
Solvency II - Commission Implementing Regulation on technical information for calculating technical provisions and basic own funds for Q3 2022 reporting published in OJ - 9 August 2022
Commission Implementing Regulation (EU) 2022/1384, which lays down technical information for the calculation of technical provisions and basic own funds for reporting under the Solvency II Directive (2009/138/EC) (Solvency II), has been published in the Official Journal of the EU.
The Implementing Regulation sets out the technical information that insurers and reinsurers should use when calculating technical provisions and basic own funds for reporting with reference dates from 30 June until 29 September 2022. The European Commission adopted the Implementing Regulation on 8 August 2022. It entered into force on 10 August 2022.
Commission Implementing Regulation (EU) 2022/1384 of 8 August 2022 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 30 June 2022 until 29 September 2022 in accordance with Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance
Please see the General section for an item on policy statement PS7/22 which includes updates to the PRA's approach to Solvency II technical information.
Financial Markets Law Committee
RAO - FMLC publishes report on “similar contracts of guarantee” in definition of a “contract of insurance” - 9 August 2022
The Financial Markets Law Committee (FMLC) has published a report on “similar contracts of guarantee” in the definition of “contract of insurance” in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO).
Article 3(1) of the RAO extends the meaning of the term “contract of insurance” for regulatory purposes. The report is concerned with the inclusion within the scope of insurance regulation, subject to certain qualifications, of “fidelity bonds, performance bonds, administration bonds, bail bonds, customs bonds or similar contracts of guarantee”. The FMLC explains that it is unclear which contracts fall within this description. The FMLC established a working group to consider the uncertainties arising from the phrase, “similar contracts of guarantee”, and makes the following recommendations on how these uncertainties may be mitigated:
- update the FCA guidance in PERG 6.7 to clarify the situations in which the definition might apply;
- amend the definition of a “contract of insurance” in the RAO so as to include a new activity-based exclusion, which would be made available to both UK insurance investment businesses and investment businesses established outside the UK (provided that in each case their investment business activity is sufficiently significant and central to their business that they are properly characterised as ‘investment firms’ for UK regulatory purposes); and
- amend the legislation to clarify the ways in which a contract of guarantee needs to be similar to the instruments listed in the RAO definition, including by providing that the similarity be grounded in something more than just being a protection contract.
Issue 1172 / 11 August 2022
- Financial Conduct Authority
Financial Conduct Authority
Disclosure of inside information - FCA publishes final notice - 5 August 2022
The FCA has published a final notice with respect to Sir Christopher Gent, a former non-executive Chairman of ConvaTec Group Plc (ConvaTec), and has issued a fine of £80,000 in relation to the unlawful disclosure of inside information. Sir Christopher disclosed inside information to individuals in senior positions at two of ConvaTec’s major shareholders before this information had been announced properly to the market. The disclosures concerned an expected announcement by ConvaTec relating to a revision of its financial guidance and the CEO’s plans for retirement.
The FCA considered that Sir Christopher acted negligently in disclosing the information, noting that: “[g]iven his training and experience, Sir Christopher should have realised that the information he disclosed was, or may have been, inside information and that it was not within the normal exercise of his employment to disclose it.” There is no evidence that Sir Christopher traded on the information or that he intended to make personal gain, or avoid loss, from making the disclosures. His actions amounted to unlawful disclosure of inside information under Article 10 and in breach of Article 14(c) of the EU Market Abuse Regulation.
Carrying on regulated activities without authorisation - FCA publishes statement - 10 August 2022
The FCA has published a statement referring guilty plea on 29 July 2022 at Southwark Crown Court of Mr Larry Barreto to two counts of carrying on regulated activities without authorisation. The charges relate to advice provided and arrangements made regarding a series of regulated mortgage contracts between June 2014 and March 2018. Mr Barreto is an unauthorised and prohibited person and as such could not provide regulated financial services.
Mr Barreto is also charged, along with Mr Tassib Hussain, with an offence of committing fraud by false representation. They both deny committing this offence and will face trial on 23 October 2023. Sentencing for the offences of carrying on unauthorised business will take place after the conclusion of the trial for the fraud offence.
The FCA commenced criminal proceedings against Larry Barreto and Tassib Hussain for fraud and unauthorised business in April 2021.