Includes developments in relation to: Brexit; PSD2; MiFID II; CCP resolution; and the PEPP Regulation.

General

issue 1098 / 25 February 2021

HEADLINES

  1. European Central Bank
    1. Markets in Cryptoassets – ECB publishes opinion–22 February 2021
  2. Bank of England
    1. Data Collection Transformation Plan – BoE publishes paper–23 February 2021
  3. Prudential Regulation Authority
    1. Higher paid material risk takers – PRA statement on definition–25 February 2021
  4. Financial Conduct Authority
    1. Vulnerable customers – FCA publishes final guidance on fair treatment of vulnerable customers –23 February 2021
    2. MoU – FCA publishes MoU with EHRC–23 February 2021
    3. Transformation programme – FCA announces four executive appointments–25 February 2021
  5. Prudential Regulation Authority and Financial Conduct Authority
    1. Data Collection – PRA and FCA publish joint Dear CEO letter –23 February 2021

European Central Bank

Markets in Cryptoassets – ECB publishes opinion – 22 February 2021

The European Central Bank (ECB) has published an opinion on the proposal for a regulation on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (the Regulation).

The ECB welcomes the aim of the Regulation in addressing the different levels of risk posed by each type of cryptoasset, balanced with the need to support innovation. It observes, however, that further adjustments are necessary in several areas, including: aspects of the Regulation relating to the responsibilities of the ECB, the Eurosystem and the European System of Central Banks (ESCB) concerning the conduct of monetary policy; the smooth operation of payment systems; and the prudential supervision of credit institutions and financial stability.

The ECB suggests that the Regulation should clarify, among other things:

  • that it does not apply to the issuance by central banks of central bank money based on distributed ledger technology (DLT) or in digital form as a complement to existing forms of central bank money; and
  • the scope of its application. Notably, the ECB calls for clarification on the distinction between cryptoassets that may be characterised as financial instruments, thereby falling under the scope of the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), and those which would fall under the scope of the Regulation.

The Opinion also contains a technical working document setting out the ECB’s specific drafting proposals for amendments to the Regulation.

ECB Opinion

Cover Note

Bank of England

Data Collection Transformation Plan – BoE publishes paper – 23 February 2021

The Bank of England (BoE) has published a paper on its plan to transform its ability to collect data from the UK financial sector over the next decade.

This transformation plan follows a discussion paper on transforming data collection which was published in January 2020, and is the Bank’s response to tackle strains put both on the current data collection process, and on the suppliers of data within the financial sector. These strains include technological advances and automation that mean that more data than ever before is being created and captured.

Central to the Bank’s aims are three reforms:

  • Defining and adopting common data standards which identify and describe data in a consistent way throughout the financial sector. The common standards should be open and accessible for use by all who need them.
  • Modernising reporting instructions to improve how they are written, interpreted and implemented.
  • Integrating reporting to move to a more streamlined, efficient approach to data collection. This reform entails making data collection more consistent across domains, sectors and jurisdictions, and designing each step in the data process with the end-to-end process in mind.

To help deliver these reforms, the Bank, alongside the FCA, is seeking to set up a multi-year and multi-phased transformation programme. During each phase the Bank aims to deliver a series of ‘use cases’ focusing on particular collections of data or types of collection of data. The first phase is expected to take place over the next 24 months, and will only affect a small number of selected use cases. The second phase, taking place over roughly the subsequent three years, will focus on expanding the transformation into new areas with an increased focus on integration. Subsequent phases will scale the transformation to maximise value.

BoE paper: Transforming data collection from the UK financial sector

Updated webpage

Press release

Prudential Regulation Authority

Higher paid material risk takers – PRA statement on definition – 25 February 2021

The PRA has published a statement on the definition of ‘higher paid material risk taker’ following the identification of an error in this definition in Rule 1.3 of the Remuneration Part of the PRA Rulebook.

The definition currently sets the requirement that an individual would be treated as a ‘higher paid material risk taker’ when both: (i) their annual variable remuneration exceeds 33% of their total remuneration; and (ii) their total remuneration exceeds £500,000. The PRA has identified this as an error, and an individual should instead be treated as a ‘higher paid material risk taker’ when either of those above points are satisfied. Due to this error, the PRA intends to consult on amending the rule at the earliest opportunity.

The FCA has also updated its webpage on the dual-regulated firms Remuneration Code to reflect this statement published by the PRA. It explains that it intends to consult at the next suitable opportunity to make a corresponding amendment to its dual-regulated firms Remuneration Code to ensure its requirements remain consistent with the PRA.

PRA statement on definition of higher paid material risk taker

Financial Conduct Authority

Vulnerable customers – FCA publishes final guidance on fair treatment of vulnerable customers – 23 February 2021

The FCA has published its finalised guidance on the fair treatment of vulnerable customers (FG21/1).

The guidance aims to foster improvements in the way firms treat their vulnerable customers to ensure that they receive the same fair treatment and outcomes as other customers throughout the customer journey, from product design through to customer engagement and communications.

The guidance establishes that the FCA will continue to hold firms accountable for the treatment of vulnerable customers and firms will be asked to demonstrate how their business model, the actions they have taken and their culture ensures the fair treatment of all customers, including vulnerable customers.

The guidance further explains that in order to achieve good outcomes for vulnerable customers, firms should:

  • understand the needs of their target market/customer base;
  • ensure their staff have the right skills and capability to recognise and respond to the needs of vulnerable customers;
  • respond to customer needs throughout the product design, flexible customer service provision and communications; and
  • monitor and assess whether they are meeting and responding to the needs of customers with characteristics of vulnerability and make improvements where this is not happening.

This guidance affects all FCA regulated firms and their appointed representatives, industry groups and trade bodies, professional bodies, consumer organisations and organisations that promote the interests of vulnerable consumers, and consumers and consumer advisers.

As stated in a previous edition of this bulletin, the FCA published a consultation on the guidance in July 2020. Following this, the FCA has published a feedback statement summarising its policy decisions taken in response to the feedback. In summary, most respondents supported the FCA’s proposals; therefore, the FCA is implementing them as consulted on, subject to minor changes.

Finalised Guidance  

Feedback Statement

Webpage

Infographic

Press release

  1.  

MoU – FCA publishes MoU with EHRC – 23 February 2021

The FCA has published the memorandum of understanding (MoU) that it has entered with the Equality and Human Rights Commission (EHRC).

The MoU sets out the framework that supports the working arrangements between the FCA and the EHRC in light of their respective responsibilities under the Financial Services and Markets Act 2000 (FSMA) and the Equality Act 2010. The MoU further establishes the basis on which co-operation, co-ordination and information sharing between the two organisations can occur.

In particular, the MoU considers the FCA’s approach to the Public Sector Equality Duty (PSED)—as introduced by the Equality Act 2010—under which public authorities are required to have due regard to the need to eliminate unlawful discrimination, harassment and victimisation and other conduct prohibited by the Equality Act 2010. The MoU outlines that whilst the FCA does not have any enforcement powers under the Equality Act 2010, which is the sole reserve of the EHRC, it is likely that a breach of the Equality Act will also be a breach of the FCA’s Principles for Businesses. The MoU states that the FCA can and will use its expertise of financial services markets to assist the EHRC in its enforcement work, for example by advising on the financial services markets it regulates.

Alongside the MoU, the FCA and the EHRC will develop a more detailed action plan (which will not be published) on how they will work together. The FCA and the EHRC will monitor the functioning and effectiveness of the MoU and action plan, and will review it one year after the date of signature. This review will be followed by further periodic reviews to evaluate their continuing fitness for purpose.

The MoU was signed and entered into force on 19 February 2021.

MoU between the FCA and EHRC

Transformation programme – FCA announces four executive appointments – 25 February 2021

The FCA has announced four new appointments to its executive team as part of its transformation programme to build a data-led regulator that is able to make fast and effective decisions. The appointments are:

  • Stephanie Cohen - Chief Operating Officer;
  • Jessica Rasu - Chief Data, Information and Intelligence Officer;
  • Sarah Pritchard - Executive Director, Markets; and
  • Emily Shepperd – Executive Director, Authorisations.

FCA press release announce new senior appointments

Prudential Regulation Authority and Financial Conduct Authority

Data Collection – PRA and FCA publish joint Dear CEO letter – 23 February 2021

The PRA and the FCA have published a joint Dear CEO letter providing an update on the work they have done in transforming the way they collect data. The letter affirms their commitment to work in partnership with firms to tackle challenges relating to data collection.

The letter states that the PRA and FCA recognise that reporting is one of the most demanding parts of regulation; therefore, they have been working on projects looking at the future of data collection. These projects have highlighted that the challenges facing regulators and firms in areas of data collection can be summarised in three questions:

  • How can we ensure our data collections are worthwhile and valuable exercises for regulators and industry to invest in?
  • How can industry best understand and interpret our reporting instructions so that high quality data is provided?
  • How can we remove legacy data, process and technology siloes and streamline the reporting process?

The PRA and FCA aim to tackle these three questions through a work programme that delivers on three areas of reform, which are:

  • Integrating reporting – increasing consistency in designing and delivering data collection for value, reuse and efficiency.
  • Modernising reporting instructions – rethinking the way reporting requirements are designed and expressed, and improving the ease with which they can be interpreted and implemented by firms.
  • Defining and adopting common data standards – standardising how financial data is described, defined and sourced at an operational level within firms.

The PRA and FCA are running a Town Hall in late April for firms who are dual-regulated to discuss how progress will be made, and provide more detail about the resources required.

See also the article above on the Bank of England’s Data Collection Transformation Plan.

Dear CEO letter

Beyond Brexit

Issue 1098 / 25 February 2021

HEADLINES

  1. European Central Bank
    1. Post-Brexit supervisory co-operation – ECB publishes MoU with BoE and FCA –19February 2021
  2. Prudential Regulation Authority
    1. Approaches to credit risk after the transition period – PRA statement on EBA Guidelines and EU RTS–25 February 2021

European Central Bank

Post-Brexit supervisory co-operation – ECB publishes MoU with BoE and FCA – 19 February 2021

The European Central Bank (ECB) has published a memorandum of understanding (MoU) that it has entered into with the Bank of England (BoE)—acting in its capacity as the PRA—and the FCA on post-Brexit supervisory cooperation, effective from 1 January 2021.

The purpose of the MoU is to formalise supervisory cooperation and information sharing agreements. It focuses on information exchange and supervisory cooperation in the field of prudential supervision of supervised entities and their cross-border establishments.   

The press release accompanying the MoU notes that, in order to enhance transparency and accountability, the ECB’s Governing Council recently decided to publish existing supervisory MoUs as well as those signed in the future. The ECB has therefore published a first group of agreements, including this MoU, and in future will publish MoUs as soon as other signatory authorities have consented to publication.

Memorandum of Understanding between the European Central Bank and the Bank of England and the Financial Conduct Authority  

Press release

Webpage 

Prudential Regulation Authority

Approaches to credit risk after the transition period – PRA statement on EBA Guidelines and EU RTS – 25 February 2021

The PRA has published a statement clarifying its approach to published European Banking Authority (EBA) and EU regulatory technical standards (RTS) relating to the standardised and internal ratings based (IRB) approaches to credit risk following the end of the Brexit transition period.

  • Final draft RTS on the specification of the nature, severity and duration of an economic downturn – In its policy statement on probability of default (PD) and loss given default (LGD) estimation for credit risk, the PRA wrongly assumed that the draft RTS would be onshored into UK legislation by the end of the transition period. It will now consult on proposals to incorporate these requirements into UK regulation.
  • Guidelines on credit risk mitigation (CRM) for institutions applying the IRB approach with own estimates of LGD -  Although the guidelines do not apply in the UK, the PRA will consider them when making decisions related to the CRM framework as part of its implementation of Basel 3.1 standards.
  • Final draft RTS on assigning risk weights to specialised lending exposures and final draft RTS on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the IRB approach – Neither of these RTS apply in the UK as they were not onshored at the end of the transition period, but the PRA will continue to apply high standards in respect of capital requirements for specialised lending exposures and its approach to model assessment.
  • Guidelines for the estimation of LGD appropriate for an economic downturn and guidelines on the application of the definition of default – The PRA expects firms to comply with these guidelines.
  • Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures – The PRA expects firms to comply with these guidelines, except for paragraph 135 where it expects firms to comply with the guidelines in line with paragraph 13.A1 of its supervisory statement on IRB approaches (SS11/13).
  • RTS for the materiality threshold for credit obligations past due (Commission Delegated Regulation (EU) 2018/171) – These were onshored at the end of the transition period and continue to apply in the UK.

There is an implementation deadline of 1 January 2022 (subject to exceptions) and firms should continue to submit model change applications in line with their required submission timings.

PRA statement on EBA Guidelines and EU RTS relating to approaches to credit risk following the end of the transition period

Banking and Finance

Issue 1098 / 25 February 2021

HEADLINES

  1. European Commission
    1. Crisis management and deposit insurance framework – European Commission launches public consultation–25 February 2021
  2. European Central Bank
    1. Cross-border payments – ECB publishes opinion on the proposal for a regulation–25 February 2021
  3. European Banking Authority
    1. CRR – EBA publishes final draft technical standards on indirect exposures arising from derivatives with an underlying a debt or equity instrument –19 February 2021
    2. PSD2 – EBA opinion on obstacles to provision of third party services –19 February 2021
    3. IFD – EBA consults on technical standards on supervisory co-operation–24 February 2021
  4. Bank of England
    1. Resolvability Assessment Framework – BoE publishes Dear CEO letter–24 February 2021
  5. European Payments Council
    1. SEPA Direct Debit Schemes – EPC publishes guidelines on the appearance of mandates–23 February 2021

European Commission

Crisis management and deposit insurance framework – European Commission launches public consultation – 25 February 2021

The European Commission has launched a public consultation on its review of its crisis management and deposit insurance (CMDI) framework, together with a consultation document.

The CMDI framework sets out the rules for handling bank failures while protecting depositors. It consists of three pieces of EU legislation working together with relevant national legislation: the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD), the Single Resolution Mechanism (SRM) Regulation (806/2014), and the Deposit Guarantee Schemes Directive (2014/49/EU) (DGSD).

The consultation aims to gather views and experience with the current CMDI framework, as well as on its possible evolution. Among other things, questions include whether:

  • the CMDI framework has achieved certain objectives;
  • the measures available in the current legislative framework have fulfilled the intended policy objectives and contributed effectively to the management of banks’ crises;
  • any major issues relating to the depositor protection require clarification of the current rules; and
  • the tools and powers in the BRRD should be made exclusively available in resolution or whether similar tools and powers should be also available for those banks for which it is considered that there is no public interest in resolution.

The consultation closes on 20 May 2021.

European Commission consultation on the CMDI framework

Consultation webpage

Questionnaire

Inception impact assessment

Roadmap webpage

European Central Bank

Cross-border payments – ECB publishes opinion on the proposal for a regulation – 25 February 2021

The European Central Bank (ECB) has published an opinion on the European Commission’s proposal for a regulation on cross-border payments in the European Union.

The proposed regulation aims to codify the existing Regulation on cross-border payments, Regulation (EC) 924/2009, as last amended by Regulation (EU) 2019/518. The ECB generally welcomes the codification exercise, and notes that instruments affected by the codification do not contain substantive changes.

In its opinion, the ECB makes a specific observation in relation to article 4(1) of the proposed Regulation which aims to supplement the transparency and information requirements set out in the Second Payment Services Directive (EU) 2015/2366 (PSD2) with regard to currency conversion services. Article 4(1) requires payment service providers and parties providing currency conversion services to express the total currency conversion charges as a percentage mark-up over the latest available euro foreign exchange reference rates issued by the ECB.

The ECB notes that it has published euro foreign exchange reference rates (ECBRRs) since 1998 on the basis of a framework approved by the ECB Governing Council in 1998 and amended in 2015 (the ECBRR Framework). The aim of the ECBRR Framework is to discourage trading on the ECBRR and limit their use to reference purposes.

The ECB is concerned that the reference to ECBRRs in the proposed regulation could create incentives for some market participants to trade at the ECBRRs, and therefore recommends that the reference is removed and replaced by an appropriate reference to a foreign exchange benchmark rate which falls within the scope of the Benchmarks Regulation (EU) 2016/1011 and may be used in the context of the currency conversion charges.

ECB opinion on the proposal for a regulation on cross-border payments in the Union

European Banking Authority

CRR – EBA publishes final draft technical standards on indirect exposures arising from derivatives with an underlying a debt or equity instrument – 19 February 2021

The European Banking Authority (EBA) has published final draft regulatory technical standards specifying how institutions should determine exposures arising from derivative and credit derivative contracts not entered into directly with a client but whose underlying debt or equity instrument was issued by a client. These draft regulatory technical standards, which derive from Article 390(9) of the Capital Requirements Regulation (575/2013/EU) (CRR) as amended by the CRR II Regulation (2019/876), will ensure appropriate levels of consistency through different aspects of the regulatory framework for the calculation of large exposures.

The draft regulatory technical standards propose a methodology for the calculation of indirect exposures for different categories of derivative contracts and credit derivative contracts with a single underlying debt or equity instrument, namely:

  • options on debt and equity instruments;
  • credit derivative contracts; and
  • other derivatives having as their underlying a debt or equity instrument.

They also provide a separate methodology for the calculation of exposures stemming from contracts with multiple underlying reference names. The proposed methodologies are expected to be easy to implement and applicable by all institutions in a standardised manner.

Report

Press release

  1.  

PSD2 – EBA opinion on obstacles to provision of third party services – 19 February 2021

The European Banking Authority (EBA) has published an Opinion on supervisory actions national competent authorities (NCAs) should take to ensure banks remove any remaining obstacles that prevent third party providers from accessing payment accounts, which restrict EU consumers’ choice of payment services.

The EBA states that the Opinion will contribute to a level playing field across the EU and to a consistent application and supervision of relevant requirements under the Payment Services Directive (2015/2366) (PSD2) and the EBA Regulatory Technical Standards on strong customer authentication and common and secure communication.

The Opinion sets out the EBA’s expectations on the actions NCAs should take to ensure that remaining obstacles are removed from the interfaces of account servicing payment service providers (ASPSPs). National authorities should first assess the progress made by ASPSPs in their respective jurisdictions and, in cases where obstacles have not been removed, they should take supervisory actions by 30 April 2021.

The EBA also expects that, in cases where obstacles continue to exist following this deadline, NCAs should take more effective supervisory measures to ensure compliance with the applicable law, including, but not limited to, by revoking exemptions from the contingency mechanism already granted to ASPSPs and/or by imposing fines.

Opinion

Press release

IFD – EBA consults on technical standards on supervisory co-operation – 24 February 2021

The European Banking Authority (EBA) has published the following consultation papers on technical standards supplementing the Investment Firms Directive ((EU) 2019/2034) (IFD):

  • Consultation paper on draft regulatory technical standards (RTS) and implementing technical standards (ITS) on information exchange between competent authorities of home and host member states. The RTS specify which information concerning investment firms should be provided by the competent authorities of a home member state to the competent authorities of a host member state. The ITS establish standard forms, templates and procedures for the information-sharing requirements set out in the RTS.
  • Consultation paper on draft RTS on colleges of supervisors for investment firm groups. These RTS specify the conditions under which colleges of supervisors should exercise their tasks in accordance with Article 48 of the IFD. The RTS cover the establishment and functioning of colleges, the planning and co-ordination of supervisory activities in going-concern situations and the planning and co-ordination of supervisory activities in preparation for and during emergency situations.

The consultations close on 23 April 2021, and the EBA intends to finalise the technical standards by the end of June 2021.

Consultation paper on draft RTS on information exchange between competent authorities of home and host member states

Consultation paper on draft RTS on colleges of supervisors for investment firms

Press release

Bank of England

Resolvability Assessment Framework – BoE publishes Dear CEO letter – 24 February 2021

The Bank of England (BoE) has published a letter sent by Dave Ramsden (BoE Deputy Governor for Markets and Banking) to CEOs of the eight UK banks in the scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle. The letter sets out the BoE’s expectations of banks in their preparations for submitting their RAF in October 2021.

The letter reminds banks that a key principle of the RAF is that firms are responsible for their own resolvability and that they must be able to achieve the three resolvability outcomes specified in the BoE’s statement of policy on the RAF by January 2022. The letter also sets out examples of good practice concerning: (i) firms’ governance over and testing of their resolvability arrangements; and (ii) firms’ approach to designing resolving capabilities.

The BoE intends to engage with firms later in 2021 on the operational arrangements for the first RAF cycle.

BoE Dear CEO letter on firms’ RAF preparations

Press release

European Payments Council

SEPA Direct Debit Schemes – EPC publishes guidelines on the appearance of mandates– 23 February 2021

The EPC has published version 7 of its guidelines on the appearance of mandates for the Single Euro Payments Area (SEPA) Direct Debit (SDD) Core Scheme and the SDD Business-to-Business Scheme.

The guidelines provide guidance on the visual presentation of mandates issued by creditors as part of their offer to debtors for the use of SDD as a way of making payments. They seek to illustrate several ways to reduce the mandate size without losing any essential content and remaining compliant with the relevant scheme rulebook.

The guidelines supplement section 4.7.2 of the SDD Core and SDD B2B Scheme Rulebooks, which define the rules for the content of SDD Core and SDD B2B mandates respectively.

EPC Guidelines

Webpage

Securities and Markets

Issue 1098 / 25 February 2021

HEADLINES

  1. European Commission
    1. MiFID II – European Commission outlines next steps for review–23 February 2021
  2. European Securities and Markets Authority
    1. GameStop share trading – ESMA publishes statement on regulatory implications– 23 February 2021 
    2. MiFIR – ESMA publishes annual report on application of waivers and deferrals for non-equity instruments–24 February 2021
    3. BMR – ESMA consults on methodology to calculate a benchmark in exceptional circumstances–25 February 2021
    4. EMIR – ESMA publishes final report on guidelines for consistency of CCP SREPs–24 February 2021
    5. Crowdfunding – ESMA publishes Q&As–25 February 2021
  3. HM Treasury 
    1. CCPs – HM Treasury consults on expanded resolution regime–24 February 2021
  4. Working Group on Sterling Risk-Free Reference Rates
    1. Derivatives – Working Group publishes paper on ending new use of GBP LIBOR–24 February 2021

European Commission

MiFID II – European Commission outlines next steps for review – 23 February 2021

The European Commission has published a speech given by Mairead McGuinness (European Commissioner for Financial Services, Financial Stability and Capital Markets Union (CMU)) which, among other things, outlines the next steps of the Commission’s review of the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

Ms McGuinness explains that the Commission intends to adopt a legislative proposal relating to the review of MiFID II at the end of 2021. She also indicated that the proposal may address the following issues:

  • strengthening transparency requirements – there has been a decline in the volume of trading in shares executed on transparent regulated exchanges and an increase in usage of more opaque alternative venues, such as trading through banks’ internal books;
  • consolidated tape – the Commission intends to establish the right conditions for a consolidated tape that collects and aggregates indispensable trade transparency data reported by all EU executive venues in equity and corporate bonds; and
  • retail investment and investor protection – the Commission thinks there may be merit in looking at the investor’s journey from beginning to end with the aim of ensuring that retail investors seize the investment potential of the internal market.

Speech by Mairead McGuinness covering the next steps for MiFID II/MiFIR review

European Securities and Markets Authority

GameStop share trading – ESMA publishes statement on regulatory implications – 23 February 2021  

The European Securities and Markets Authority (ESMA) has published an introductory statement made by Steven Maijoor to the European Parliament’s Economic and Monetary Affairs Committee (ECON) on the recent developments around trading in GameStop shares and related phenomena.

The statement details the events in the second half of January where shares of firms such as US videogame retailer, GameStop, and US movie theatre company, AMC Entertainment, were heavily promoted by certain internet sites and on social media, which encouraged huge purchases by retail investors using leverage, catalysing forced buying from short sellers and underwriters of options. As of result of these events, GameStop and AMC share prices surged by 1,745% and 839% respectively in January 2021, with consequential growth in their market capitalisation and their share trading volumes.

Whilst stating that the likelihood of similar events happening in the EU appears limited, Mr Maijoor highlights that the observed extreme price volatility combined with the broad participation of retail investors raises investor protection concerns. The statement emphasises the importance of financial education as a means to attaining better outcomes for retail investors.

The speech also highlights several areas of concern, which include:

  • Online brokers’ business models: Mr Maijoor observes that online brokers such as RobinHood have grown in popularity, and have led to an increase in retail trading. He calls for further investigation of the role of these brokers, and he suggests that specific aspects of the business models of these online brokers may incentivise the adoption of risky short-term trading strategies by retail investors, which raises concerns about the transparency of the brokers’ fee structures.
  • Zero commission trading: Mr Maijoor highlights that zero-commission trading needs to be looked at in more detail as ‘payments for order flow’ from third parties such as market makers may substitute commissions that are otherwise paid by clients, creating conflicts of interest and resulting in less transparency for retail clients. He recommends that the practice of payment for order flow should be carefully assessed against the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) requirements on conflicts of interest, best execution and inducements.
  • Market abuse: Mr Maijoor explains that while a simple intention to buy the shares of an issuer on which large short sale positions are established does not constitute market abuse, coordinated strategies to buy in certain conditions and at a certain point in time with the objective to inflate the share’s price could constitute market manipulation. He further notes that posting false or misleading information about an issuer or financial instrument on social media may also represent market manipulation.

The statement emphasises that ESMA will continue to monitor developments in this area and may take further action where appropriate.

Introductory statement by Steven Maijoor       

  1.  

MiFIR – ESMA publishes annual report on application of waivers and deferrals for non-equity instruments – 24 February 2021

The European Securities and Markets Authority (ESMA) has published its annual report on the application of waivers and deferrals for non-equity instruments under the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

The report analyses waivers for non-equity instruments for which it issued an opinion to the relevant national competent authority (NCA) between 1 January and 31 December 2019. The report also contains an overview of the deferrals regime for non-equity instruments applied indifferent EU Member States.

Among other things, ESMA found that the Netherlands submitted the largest number of notifications for pre-trade transparency waivers in 2019. This reflected the establishment of subsidiaries of trading venues operating in the UK in the Netherlands as a consequence of Brexit.

ESMA will publish the next annual report in the second half of 2021, covering the analysis of the application of the waivers and deferrals regimes in 2020.

ESMA annual report on the application of waivers and deferrals for non-equity instruments

Press release

  1.  

BMR – ESMA consults on methodology to calculate a benchmark in exceptional circumstances – 25 February 2021

The European Securities and Markets Authority (ESMA) has published a consultation on draft guidelines detailing the obligations applicable to administrators that use a methodology to calculate a benchmark in exceptional circumstances under the Benchmarks Regulation (EU) 2016/1011 (BMR).

In the accompanying press release, ESMA observes that during exceptional circumstances such as the COVID-10 pandemic, administrators can use an alternative methodology to calculate a benchmark, and that this methodology should be made publicly available.

In light of this, the consultation paper seeks input on clarifications and specifications regarding the adjustments of benchmarks in exceptional circumstances in relation to three areas:

  • transparency of methodology;
  • oversight function; and
  • record keeping requirements.

The draft guidelines, which are in section V of the consultation paper, also ensure that benchmarks administrators have in place a transparent framework when consulting on material changes to the methodology in a short time period.

The draft guidelines further amend the guidelines on non-significant benchmarks with regard to the key elements of the methodology and the oversight function, first published in December 2018.

The consultation closes on 30 April 2021, and final guidelines are expected in Q3 2021.

Consultation paper

Response form

Press release

  •  

EMIR – ESMA publishes final report on guidelines for consistency of CCP SREPs – 24 February 2021

ESMA has published its final report on guidelines to clarify common procedures and methodologies for the supervisory review and evaluation process (SREP) of central counterparties (CCPs) by their national competent authorities (NCAs). The guidelines were consulted on in October 2020 and aim to ensure consistency in format, frequency and depth of CCP SREPs. They cover review and evaluations of:

  • capital and organisational requirements;
  • business continuity;
  • conduct of business;
  • prudential requirements; and
  • interoperability arrangements.

The guidelines can be found in Annex I to the report and will apply from the date that they are published on ESMA’s website. NCAs will then have two months to notify ESM whether they comply or intend to comply with the guidelines.

ESMA final report on guidelines on common procedures and methodologies on SREP of CCPs

Press release

  1.  

Crowdfunding – ESMA publishes Q&As – 25 February 2021

The European Securities and Markets Authority (ESMA) has published its first set of Q&As relating to the Regulation of European crowdfunding service providers for business ((EU) 2020/1503) (Crowdfunding Regulation).

The Q&As aim to promote a convergent application of the provisions of the Crowdfunding Regulation and to provide responses to possible questions posed by the general public market participants and competent authorities. This first set of Q&As clarify the use of special purpose vehicles (SPVs), addressing the following topics:

  • the circumstances and conditions in which an SPV can be created for the provision of crowdfunding services;
  • the types of instrument that can be offered to investors via an SPV;
  • whether an SPV can give exposure to more than one underlying asset;
  • the type of underlying asset an SPV can give exposure to; and
  • when an asset should be deemed to be illiquid or indivisible within the meaning of the Crowdfunding Regulation.

ESMA will continue to develop the Q&As going forward.

ESMA Q&As on Crowdfunding Regulation

Press release

HM Treasury 

CCPs – HM Treasury consults on expanded resolution regime – 24 February 2021

HM Treasury has published a consultation paper on an expanded resolution regime for central counterparties (CCPs). The UK’s current resolution regime for CCPs is set out in the Banking Act 2009 in the form of a modified version of the special resolution regime (SRR) for banks. This regime pre-dates international standards for the resolution of CCPs set out in the Financial Stability Board’s (FSB) key attributes for effective resolution regimes for financial institutions.

HM Treasury is consulting on plans to revise and expand the UK CCP resolution regime to bring it in line with these standards. This will involve giving the Bank of England additional powers to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds.

These new powers would enable the Bank to take full control of a CCP when necessary and use a number of tools without reliance on the CCP’s rulebook, meaning that the Bank could take faster and more extensive action to stabilise a CCP. These powers would also limit risks to public funds by ensuring CCPs and clearing members ultimately bear the losses arising from a CCP failure, rather than taxpayers, whilst still stabilising the CCP, preventing contagion and providing reassurance to the market.

Chapter 2 of the consultation paper set out a summary of the proposed new regime, which HM Treasury states is not significantly different from the EU CCP Recovery and Resolution Regulation ((EU) 2021/23) which was published in the Official Journal of the EU in January 2021.

The consultation is open until 28 May 2021, and HM Treasury will legislate to establish the expanded regime when parliamentary time allows. 

HM Treasury consultation on expanding the resolution regimes for CCPs

Webpage

Working Group on Sterling Risk-Free Reference Rates

Derivatives – Working Group publishes paper on ending new use of GBP LIBOR – 24 February 2021

The Working Group on Sterling Risk-Free Reference Rates (Working Group) has published a paper aimed at supporting market participants in meeting its quarterly 2021 milestones for ending new use of GBP LIBOR in derivatives.  The Working Group has also published an updated version of its priorities and roadmap document.

The Working Group’s milestones include the need to cease initiation of new:

  • GBP LIBOR-linked linear derivatives expiring after the end of 2021, by the end of March 2021;
  • GBP LIBOR-linked non-linear derivatives and exchange-traded futures and options expiring after the end of 2021, by the end of June 2021; and
  • cross-currency derivatives (with a LIBOR-linked sterling leg) expiring after the end of 2021, between the start of April and the end of September 2021.

The Working Group states that any new GBP LIBOR-linked derivatives entered into after the relevant milestones and expiring after the end of 2021 should be based on SONIA.

The paper does, however, set out five limited circumstances in which it might be appropriate to enter into new GBP LIBOR-linked derivatives beyond these recommended milestones. Examples of these exceptional circumstances include certain GBP LIBOR hedging transactions, market making in support of a client activity related to existing GBP LIBOR contracts, and novations of GBP LIBOR transactions.

Working Group paper on ending new use of GBP LIBOR-linked derivatives

Updated roadmap and priorities document

Updated Webpage

Insurance

Issue 1098 / 25 February 2021

HEADLINES

  1. International Association of Insurance Supervisory
    1. IAIS roadmap – IAIS publishes roadmap for 2021-22–23 February 2021
  2. European Commission
    1. PEPP Regulation – European Commission adopts Delegated Regulations on supervisory reporting and product intervention–24 February 2021
  3. European Insurance and Occupational Pensions Authority
    1. Union-Wide Strategic Supervisory Priorities - EIOPA publishes report–19 February 2021

International Association of Insurance Supervisory

IAIS roadmap – IAIS publishes roadmap for 2021-22 – 23 February 2021

The International Association of Insurance Supervisors (IAIS) has published its roadmap for 2021–22 which sets out details of its anticipated project and activities for 2021-22. Its high-level goals are:

  • assessing and responding to global market trends and developments which present opportunities, challenges and risks;
  • setting and maintaining globally recognised standards for insurance supervision that are effective and proportionate;
  • sharing good supervisory practices and facilitating understanding of supervisory issues; and
  • assessing and promoting observance of IAIS supervisory materials.

Table I in the roadmap provides a summary of roadmap projects, grouped by the high-level goals, as set out in the Strategic Plan. Table 2 contains the list of projects with their objectives.

Public Roadmap

Press release

European Commission

PEPP Regulation – European Commission adopts Delegated Regulations on supervisory reporting and product intervention – 24 February 2021

The European Commission has adopted the following Delegated Regulations supplementing the Regulation on a pan-European personal pension product (PEPP) (PEPP Regulation) ((EU) 2019/1238):

  • Commission Delegated Regulation on additional information for the purposes of the convergence of supervisory reporting, which specifies the additional information that must be gathered by competent authorities, referred to in Article 40 of the PEPP Regulation.
  • Commission Delegated Regulation on product intervention, which specifies the criteria and factors to be applied by the European Insurance and Occupational Pensions Authority (EIOPA) in determining when there is a significant investor protection concern and, therefore, when its exercise of temporary and precautionary product intervention powers in relation to a particular PEPP product is warranted.

The PEPP Regulation introduces an EU-wide complementary personal pension savings framework, responding to an ageing population in Europe. The Council of the EU and the European Parliament will consider the Delegated Regulations next and, if neither object, they will be published in the Official Journal of the European Union and come into force on the 20th day following their publication.

Commission Delegated Regulation on additional information for the purposes of the convergence of supervisory reporting

Commission Delegated Regulation on product intervention

European Insurance and Occupational Pensions Authority

Union-Wide Strategic Supervisory Priorities - EIOPA publishes report – 19 February 2021

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report identifying business model sustainability and adequate product design as the two new Union-wide strategic supervisory priorities for national competent authorities (NCAs). These new priorities stem from Article 29(a) of the revised EIOPA Regulation (1094/2010), which requires EIOPA to identify up to two priorities of Union-wide relevance at least every three years.

EIOPA states that NCAs will focus their supervisory activities on monitoring the impact of the prolonged low-yield environment and the COVID-19 crisis on the business model sustainability and development of insurers and institutions for occupational retirement provision. NCAs will also monitor the impact of the COVID-19 crisis on products and will ensure that product and oversight governance requirements, and other relevant consumer protection and conduct of business related requirements, are adequately implemented to address the deficiencies which emerged in the crisis.

EIOPA observes that NCAs will take these priorities into account when drawing up their work programmes, and notify EIOPA accordingly. EIOPA will then discuss the relevant activities by the NCAs in the following year, and may follow up with guidelines, recommendations to NCAs, and/or peer reviews.

Webpage

Press release

Enforcement

Issue 1098 / 25 February 2021

HEADLINES

  1. Financial Conduct Authority
    1. Breach of PSRs – FCA publishes final notice issued to Premier FX–25 February 2021
  2. Recent cases
    1. CFL Finance Ltd v Laser Trust & another [2021] EWCA Civ 228,23 February 2021

Financial Conduct Authority

Breach of PSRs – FCA publishes final notice issued to Premier FX – 25 February 2021

The FCA has published the final notice it has issued to Premier FX Ltd (in liquidation), previously an authorised payment institution (API).

The final notice censures Premier FX for failing to safeguard its customers’ money and for misuse of its payment accounts under the Payment Services Regulations 2009 and the Payment Services Regulations 2017 (collectively, the PSRs).

The FCA found that Premier FX seriously misled its customers by informing them that it was able to hold their funds indefinitely, that their funds would be held in a secure, segregated client account, and that their funds would be protected by the Financial Services Compensation Scheme. None of these claims were true. Premier FX was not permitted to hold its customers’ funds indefinitely as this may have constituted accepting deposits, which is separately regulated under the Financial Services and Markets Act 2000.

Were Premier FX not in liquidation with a significant liability to its creditors (most of whom are consumers), the FCA states that it would have imposed a substantial financial penalty.

FCA final notice imposed on Premier FX

Updated webpage

Press release

Recent cases

CFL Finance Ltd v Laser Trust & another [2021] EWCA Civ 228, 23 February 2021

On 23 February 2021, the Court of Appeal handed down a judgment relating to when, if ever, the Consumer Credit Act 1974 (the CCA) applies to agreements settling litigation.

The Court of Appeal stated that the CCA does not apply to an agreement by which a creditor agrees for no consideration to allow a debtor more time to pay. However, if the debtor and the creditor enter into an agreement pursuant to which, for consideration, the creditor agrees to accept payment by instalment, then the debtor has been provided with credit within the meaning of the CCA, and the agreement would fall under the CCA. Insofar as the debtor enters into the agreement to pay at a future date, it does not matter if they initially put up a defence against being liable for the payment due.

Following this, the Court of Appeal ruled that the settlement agreement concerned provided the debtor with credit under the CCA, and therefore had to be compliant with the CCA. Further, the Court of Appeal ruled that the settlement agreement was unenforceable for non-compliance with several sections of the CCA, and the respondent was allowed to make a cross-appeal of the judgment handed down by the High Court.

CFL Finance Ltd v Laser Trust & another [2021]