Includes developments in relation to: vulnerable customers; the UK-EU relationship in financial services; future parliamentary scrutiny of financial services regulations; PSD2; market soundings; ELTIF Regulation; and funeral plan providers

Click on the headings below to access each section:

GENERAL

Issue 1165 / 23 June 2022

HEADLINES

  1. Financial Conduct Authority
    1. Vulnerable customers - FCA publishes webpage on firms’ progress towards embedding guidance in FG21/1-16 June 2022
    2. Data strategy - FCA publishes update-23 June 2022
    3. Innovation in ESG data and disclosures - FCA publishes evaluation paper of digital sandbox-23 June 2022

Financial Conduct Authority

Vulnerable customers - FCA publishes webpage on firms’ progress towards embedding guidance in FG21/1 - 16 June 2022

The FCA has published a webpage that provides an update on the progress firms have made towards embedding its guidance on the fair treatment of vulnerable customers (FG21/1) (the Guidance), published in February 2021.

The FCA notes that it has seen good examples of individual firms taking positive action to understand the needs of customers in vulnerable circumstances and meeting those needs. However, it has also seen inconsistent practice and identified areas where the FCA expects to see improvement from firms. Among other things, these include:

  • monitoring and evaluation: firms need to further develop and improve their management information on the outcomes they are delivering for customers in vulnerable circumstances;
  • product and service design: the FCA expects firms to consider the needs of customers in vulnerable circumstances when developing products and services, and across the entire customer journey; and
  • senior leaders creating the right cultures and driving strategies: firms should consider whether they have clear lines of accountability for senior leaders and how they can demonstrate how vulnerability features in the considerations of senior and executive committees and in information provided to boards.

New webpage: Ensuring the fair treatment of customers in vulnerable circumstances

Updated webpage: Treating vulnerable consumers fairly

Data strategy - FCA publishes update - 23 June 2022

The FCA has published an update to its data strategy, established in January 2020, highlighting the progress it has made in improving its use of data and its plans to identify and prevent harm sooner.

Among other things, the FCA states that it is using advanced analytics and new sources of data to identify high-risk financial adverts, and that it is scanning approximately 100,000 websites created every day to identify those that appear to be scams. In 2021, 564 promotions were amended or withdrawn (double the number of previous years), and between May 2021 and April 2022 the FCA added 1,966 possible scams to its consumer warning list (over a third more than during the same period the previous year).

Looking forward, the FCA plans to:

  • recruit for a significant number of skilled roles across artificial intelligence, analytics and data science, as well as cloud engineering and digital technology;
  • continue using advanced analytics and new sources of data to identify inappropriate financial adverts; and
  • provide its staff with a dashboard for all the financial companies it regulates and sectors it oversees, to make it easier to identify and focus on the highest risk cases.

The FCA also notes that, following the Russian invasion of Ukraine, it has developed and implemented a sanctions screening tool to support the monitoring of the effectiveness of a firm’s controls in identifying organisations or individuals that have been sanctioned.

FCA Data strategy update 2022

Press release

Innovation in ESG data and disclosures - FCA publishes evaluation paper of digital sandbox - 23 June 2022

The FCA has published an evaluation paper discussing the lessons learned following the conclusion of its digital sandbox sustainability pilot (the Pilot), which ran between November 2021 and March 2022 and which focused on developing technological solutions for enabling transparency in environmental, social and governance (ESG) disclosure and reporting.​​​​​​​

Participants of the Pilot unanimously agreed that the initiative has had a significant impact on innovation acceleration, and were pleased that the Pilot is able to bridge the gap between financial services and sustainability. However, participants gave mixed feedback on the data assets available for the Pilot. In some cases, data did not yet exist to meet participants’ requirements or could not be procured within acceptable timeframes.

The FCA notes that the Pilot demonstrated that collaboration and access to data can stimulate innovation in the market. It is committed to establishing a permanent operating model for a digital testing environment based on the Pilot. The FCA is also exploring methods to make the Pilot data assets openly accessible in a way that complies with data protection laws.

Webpage

Digital sandbox sustainability pilot evaluation report

BEYOND BREXIT

Issue 1165 / 23 June 2022

HEADLINES

  1. UK Parliament
    1. The UK-EU relationship in financial services - The House of Lords European Affairs Committee publishes report-23 June 2022
    2. Future parliamentary scrutiny of financial services regulations - House of Commons Treasury Committee publishes Report-23 June 2022

UK Parliament

The UK-EU relationship in financial services - The House of Lords European Affairs Committee publishes report - 23 June 2022

The House of Lords European Affairs Committee (the Committee) has published its first report of session 2022-23 on the UK-EU relationship in financial services. In the report, the Committee concludes that the overall outlook for the UK financial services sector post-Brexit is positive.

The Committee notes that London has retained its position as the world’s second largest financial centre, and that far fewer financial services jobs have moved from the UK to the EU as a result of Brexit than some had anticipated. However, the Committee warns the government against complacency as “it is not yet clear whether the impact of Brexit on the sector has fully played out”.

Commenting on the absence of EU equivalence decisions, the Committee observes that whilst this is “a political, rather than technical, approach on the part of the EU”, the UK financial sector has not viewed this as a matter of fundamental concern. As such, the Committee cautioned against basing the UK’s strategy for financial services on the equivalence process, which is not only outside of the government’s control, but is also unlikely to bear fruit. It further raised concerns about the EU’s increasing emphasis on “open strategic autonomy”, as this “focus on control and market location is philosophically different to the UK’s approach, and…could increase barriers to cross-border trade in financial services”.

The Committee also notes that “the government seems reluctant to recognise the importance of the UK-EU relationship, seeming unwilling to fully engage with the EU institutions, or to acknowledge that developments in the EU still have significance for the UK”, and urges the government to conclude a Memorandum of Understanding (MoU) on regulatory cooperation with the EU as a mechanism for strategic dialogue.

Finally, the Committee welcomes the government’s plan to give more powers to the financial services regulators, subject to appropriate mechanisms for scrutiny and accountability, as this will allow for more flexible and proportionate regulation. It also urges the UK to establish new rules in forward-looking and novel areas such as fintech and green finance where there is currently limited regulation.

Press Release

House of Lords (European Affairs Committee) First Report of Session 2022-23: The UK-EU relationship in financial services

Future parliamentary scrutiny of financial services regulations - House of Commons Treasury Committee publishes Report - 23 June 2022

The House of Commons Treasury Committee (the Committee) has published its report on future parliamentary scrutiny of financial services regulations (the Report), following the UK’s withdrawal from the EU. The Report follows the Committee’s July 2021 report entitled ‘The Future Framework for Regulation of Financial Services’, which concluded that, “it would not be proportionate for Parliament or its committees to carry out, as a necessary part of the rule-making process, the detailed and comprehensive textual scrutiny which the European Parliament’s Economic and Monetary Affairs Committee conducts.”

The Report sets out how the Committee will examine new regulatory proposals for financial services. It notes that, following the UK’s withdrawal from the EU, the number of regulatory initiatives will grow as regulators assume responsibility for drafting measures that would previously have been drafted by the European Commission.

The Committee believes that the most effective point at which it could intervene in the development of financial services regulatory proposals would be the consultation paper stage, when proposals are in draft texts but when there is still scope for influence through amendments. It plans to establish a sub-committee to lead the scrutiny of regulatory proposals, which will have the power to “send for persons, papers and records”, will be able to seek written evidence and take oral evidence, and be able to agree reports which would then be delivered to the full Committee for consideration. Factors that will be considered by the sub-committee include the following:

  • Is the policy justified and desirable? Is the balance between service providers, consumers and others the right one? Do the benefits outweigh any drawbacks?
  • Is the regulator acting within their delegated power?
  • Is the drafting of the necessary standard?

The sub-committee will take a view on what form of scrutiny is appropriate for each regulatory proposal. The Report notes that, for maximum flexibility, the Committee will initially appoint all of its members to the sub-committee, which will be chaired by the main Committee’s chair.

The sub-committee will commence its work by scrutinising the PRA’s proposals for a ‘strong and simple framework’, which will amount to a significant change in prudential policy applying to banks and building societies. The sub-committee plans to invite written submissions and take oral evidence on the proposals before the summer recess starts on 21 July 2022.

House of Commons Treasury Committee Report: Future Parliamentary scrutiny of financial services regulations

Webpage

Press release

BANKING AND FINANCE

Issue 1165 / 23 June 2022

HEADLINES

  1. European Commission
    1. CRR - Commission Delegated Regulation amending RTS on calculation of credit risk adjustments published in OJ-21 June 2022
  2. Council of the European Union
    1. CMDI framework - Eurogroup publishes statement on the future of the banking union-16 June 2022
  3. European Banking Authority
    1. COVID-19-impacted data - EBA publishes four draft principles for banks -21 June 2022
    2. PSD2 - EBA publishes reply to European Commission’s call for advice on review-23 June 2022
  4. HM Treasury
    1. Buy now pay later products - HM Treasury publishes response to consultation paper-20 June 2022
  5. Financial Policy Committee
    1. Mortgage affordability test recommendation - Bank of England publishes FPC response to consultation-20 June 2022
  6. Prudential Regulation Authority
    1. Model risk management principles for banks - PRA publishes consultation paper (CP6/22)-21 June 2022
  7. Recent cases
    1. Barclays Partner Finance Applicants v The Financial Conduct AuthorityUKUT 00151 (TCC)-16 June 2022 -Right to claim compensation - Right to seek validation order - Section 28A FSMA

European Commission

CRR - Commission Delegated Regulation amending RTS on calculation of credit risk adjustments published in OJ - 21 June 2022

Commission Delegated Regulation (EU) 2022/954 amending the regulatory technical standards (RTS) laid down in Commission Delegated Regulation 183/2014/EU as regards the specification of the calculation of specific and general credit risk adjustments under the Capital Requirements Regulation (575/2013/EU), has been published in the Official Journal of the European Union.

Currently, the capital charge for a defaulted exposure may, under certain circumstances, increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets. The Commission Delegated Regulation amends the existing RTS on credit risk adjustments by introducing a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.

The European Commission adopted the Commission Delegated Regulation on 12 May 2022. It will come into force on 11 July 2022.

Commission Delegated Regulation (EU) 2022/954 of 12 May 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) No 183/2014 as regards the specification of the calculation of specific and general credit risk adjustments

Council of the European Union

CMDI framework - Eurogroup publishes statement on the future of the banking union - 16 June 2022

The Eurogroup (an informal body that brings together ministers from the euro area countries to discuss euro-related matters) has published a statement on the future of the banking union. The statement sets out that, as an immediate step, work on the banking union should focus on strengthening the common framework for bank crisis management and national deposit guarantee schemes (CMDI), as set out in the Bank Recovery and Resolution Directive (2014/59/EU), the Single Resolution Mechanism Regulation (806/2014/EU) and the Deposit Guarantee Schemes Directive (2014/49/EU).

The Eurogroup agrees that the following elements should underpin a strengthened CMDI framework:

  • a clarified and harmonised public interest assessment;
  • broader application of resolution tools in crisis management at the European and national level, including for smaller and medium-sized banks, where the funding needed for effective use of resolution tools is available, particularly through the minimum requirement for own funds and eligible liabilities (MREL), and industry-funded safety nets;
  • further harmonisation of the use of national deposit guarantee schemes (DGSs) in crisis management; and
  • harmonisation of targeted features of national bank insolvency laws to ensure consistency with the principles of the EU CMDI framework.

The Eurogroup invites the European Commission to consider bringing forward legislative proposals for a reformed CMDI framework during this institutional cycle until early-2024, and further plans to review the state of the banking union to identify, “in a consensual manner”, possible further measures to strengthen and complete the banking union.

Eurogroup statement on the future of the Banking Union

European Banking Authority

COVID-19-impacted data - EBA publishes four draft principles for banks - 21 June 2022

The European Banking Authority (EBA) has published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using internal ratings based (IRB) models. The draft principles are based on the policy laid down in the Capital Requirements Regulation (575/2013/EU) (CRR) and the EBA’s November 2017 Guidelines on the probability of default (PD) and loss given default (LGD) (EBA/GL/2017/16) (the Guidelines).

The principles relate to:

  • assessing data representativeness: the guidance on the assessment of data representativeness laid down in the Guidelines should be applied in the case of COVID-19-impacted data;
  • IRB risk parameters: a significant decrease in applied IRB risk parameters compared to pre-crisis levels indicates a potential lack of representativeness and should be analysed in more depth;
  • default and loss rates: in the case of non-representativeness of the default and loss rates observed during the pandemic, a recalibration should be postponed to lower long-run averages; and
  • validation and recalibration of downturn LGD: potential downward recalibrations should be postponed at least until the effects of the pandemic have fully materialised in the observed loss rates.

The principles will be part of a supervisory handbook, which the EBA plans to publish later in 2022. The handbook aims to ensure a harmonised approach in the use of COVID-19 data, especially where the use of moratoria and other public measures may have led to changes in default rates.

Principles that should be applied in ensuring representativeness of the IRB-relevant data impacted by the COVID-19 pandemic and related measures

Press release

  1.  

PSD2 - EBA publishes reply to European Commission’s call for advice on review - 23 June 2022

The European Banking Authority (EBA) has published an opinion and report in response to the European Commission’s October 2021 call for advice on the review of the Payment Services Directive ((EU) 2015/2366) (PSD2).

The EBA puts forward more than 200 proposals that would contribute to the development of the single EU retail payments market and ensure a harmonised and consistent application of the legal requirements across the EU.

The EBA’s proposed amendments to PSD2 include:

  • merging PSD2 and the Electronic Money Directive (2009/110/EC);
  • clarifying the application of strong customer authentication (SCA) and the transactions in scope;
  • addressing new security risks for customers such as where customers are tricked into initiating a payment transaction;
  • addressing concerns about authentication approaches that have led to the exclusion of certain groups in society from using payment services online; and
  • adjusting the prudential requirements, in particular, in relation to initial capital, own funds, the use of professional indemnity insurance, the proposal for recovery and wind-down for significant payment institutions and possible consolidated (group) supervision.

Opinion of the European Banking Authority on its technical advice on the review of Directive (EU) 2015/2366 on payment services in the internal market (PSD2) (EBA/Op/2022/06)

EBA letter to John Berrigan: European Commission Call for advice to the European Banking Authority (EBA) regarding the review of Directive (EU) 2015/2366) (PSD2) (EBA-2022-D-3992)

Press release

HM Treasury

Buy now pay later products - HM Treasury publishes response to consultation paper - 20 June 2022

HM Treasury has published its response to its consultation paper on the regulation of interest-free buy now pay later (BNPL) products, published in October 2021. The consultation sought stakeholder views on the scope of BNPL regulation, that is, what activities should be regulated, as well as the regulatory controls that should be applied to the products.

In the response, the government confirms its intention to:

  • expand the scope of regulation beyond the BNPL-only scope proposed in the consultation so that it includes short-term interest-free credit (STIFC) provided by third-party lenders;
  • allow exemptions for specific agreements where there is a limited risk of potential consumer detriment, and where regulation would otherwise adversely impact day-to-day business activities; and
  • take an approach to regulatory controls for in-scope agreements that will tailor the application of the Consumer Credit Act 1974 (CCA) to these products.

The government is also minded to extend the scope of regulation to capture STIFC agreements which are provided directly by merchants where they are offered online or at a distance, subject to further stakeholder feedback which is requested by 1 August 2022.

Given the anticipated complexity of the legislation implementing the new regulatory regime, the government intends to publish a second consultation seeking views on draft legislation by end-2022. Following consultation on this draft legislation, the government aims to lay secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime. This will enable the FCA to consult on its approach for the new regime and undertake a cost-benefit analysis.

HM Treasury Consultation: Regulation of Buy-Now Pay-Later: Response

Press release

Financial Policy Committee

Mortgage affordability test recommendation - Bank of England publishes FPC response to consultation - 20 June 2022

The Bank of England has published a response from the Financial Policy Committee (FPC) following the FPC’s consultation paper on the withdrawal of its mortgage affordability test recommendation, published in February 2022.

The FPC notes that the majority of respondents were supportive of its proposal to withdraw the affordability test and maintain the ‘LTI flow limit’, which limits the number of mortgages that can be extended at loan to income (LTI) ratios at or greater than 4.5. The FPC will therefore withdraw the affordability test recommendation with effect from 1 August 2022. Lenders do not need to make any changes as existing affordability assessment practices are subject to the FCA’s mortgage conduct of business framework and will remain so. The FPC notes that it will be up to individual lenders as to whether they wish to make any changes to their own lending practices and to determine the timing of any such changes after this date.

An FPC Response - Consultation on withdrawal of the affordability test Recommendation

Press release

Prudential Regulation Authority

Model risk management principles for banks - PRA publishes consultation paper (CP6/22) - 21 June 2022

The PRA has published a consultation paper (CP6/22) setting out a proposed set of five principles for banks which the PRA considers to be key in establishing an effective model risk management (MRM) framework. The expectations are set out in a proposed new supervisory statement, ‘Model risk management principles for banks’, in the appendices to CP6/22.

The PRA considers MRM as a risk discipline in its own right, and proposes to embed these principles, in a proportionate manner, as supervisory expectations for all regulated UK-incorporated banks, building societies, and PRA-designated investment firms. The proposed principles, which are intended to address specific shortcomings currently observed in UK banks, and which complement existing requirements and supervisory expectations in force on MRM, relate to:

  • model identification and model risk classification;
  • governance;
  • model development, implementation and use;
  • independent model validation; and
  • model risk mitigants.

The PRA notes that while the proposals may be relevant to insurance firms, given the ongoing review of the Solvency II Directive (2009/138/EC), it has decided not to extend the proposals to insurers at this time. The PRA intends to consider at a later date whether there is a need to strengthen MRM practices for insurers.

The deadline for responses is 21 October 2022.

PRA Consultation Paper: Model risk management principles for banks (CP6/22)

Appendices to CP6/22

Recent cases

Barclays Partner Finance Applicants v The Financial Conduct Authority UKUT 00151 (TCC) - 16 June 2022 - Right to claim compensation - Right to seek validation order - Section 28A FSMA

The Upper Tribunal has drawn a distinction between the compensation regime available to consumers under section 28A(2) of the Financial Services and Markets Act 2000 (FSMA) and the enforceability of a regulated credit agreement under section 28A(3) FSMA. In doing so, it confirmed that the right to apply for compensation exists independently of the right to apply for a validation order, as these are “separate rights, and each has to be independently invoked. The fact that a consumer has invoked the compensation process does not of itself invoke the validation process and the converse also applies.”

Barclays Partner Finance Applicants v The Financial Conduct Authority UKUT 00151 (TCC)

Webpage

SECURITIES AND MARKETS

Issue 1165 / 23 June 2022

HEADLINES

  1. European Commission
    1. Equivalence of China and Israel under EMIR - European Commission adopts two Implementing Decisions
  2. European Securities and Markets Authority
    1. Market soundings - ESMA updates MAR Q&As-23 June 2022
  3. Financial Conduct Authority
    1. Accessing and using wholesale data - FCA launches trade data review-22 June 2022

European Commission

Equivalence of China and Israel under EMIR - European Commission adopts two Implementing Decisions

The European Commission (the Commission) has adopted two Commission Implementing Decisions on the equivalence of the regulatory framework for central counterparties (CCPs) in China and Israel to the requirements of the European Market Infrastructure Regulation (648/2012/EU) (EMIR).

The Commission Implementing Decisions allow CCPs in these jurisdictions to apply for recognition by the European Securities and Markets Authority. Once recognised, they will be able to provide central clearing services in the EU to EU clearing members and trading venues.

The Commission Implementing Decisions will enter into force 20 days after their publication in the Official Journal of the European Union.

Commission Implementing Decision (EU) …/… of XXX on the equivalence of the regulatory framework of the People’s Republic of China for central counterparties that are authorised to clear OTC derivatives in the interbank market and supervised by the People’s Bank of China to their requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council (C(2022) 4301 final)

Commission Implementing Decision (EU) …/… of 22.6.2022 on the equivalence of the regulatory framework for central counterparties in Israel to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council (C(2022) 4306 final)

Press release

European Securities and Markets Authority

Market soundings - ESMA updates MAR Q&As - 23 June 2022

The European Securities and Markets Authority (ESMA) has updated its Q&As on the Market Abuse Regulation (596/2014/EU) (MAR) to clarify the scope of Article 11(1a) MAR, which concerns the circumstances under which an offer of securities addressed solely to qualified investors for the purposes of negotiating the contractual terms and conditions of their participation in an issuance of bonds will not constitute a market sounding. The Q&As confirm that the scope of Article 11(1a) MAR is narrow, and does not encompass the offering of bonds to potential investors contacted after the terms and conditions have been determined.

Updated Q&As on the Market Abuse Regulation (MAR) (ESMA70-145-111)

Financial Conduct Authority

Accessing and using wholesale data - FCA launches trade data review - 22 June 2022

The FCA has launched its trade data review (the Review) following its January 2022 Feedback Statement (FS22/1), which sets out its findings on the use of data in wholesale markets.

The FCA notes that, as set out in FS22/1, it has concerns that ownership of trade data by trading venues (which include UK regulated markets, multilateral trading facilities and organised trading facilities) may give market power, resulting in:

  • increases in data charges that may be increasing costs to end investors above those the FCA would expect in a competitive market;
  • a level and structure of data charges that may be affecting asset managers’ investment decisions and limiting competition between asset managers; and
  • a level and structure of data charges that may be limiting the efficiency of trading activity in a way that affects price formation.

The FCA is also concerned that current regulatory provisions for free delayed data may not be effective. The Review is looking at these areas, and if the FCA finds evidence that competition is not working well for users of trade data it will assess the harm this is causing and propose remedies.

To this end, the FCA will issue a questionnaire to users of trade data in July 2022, and it aims to publish the Review’s findings and any next steps in January 2023. The FCA will publish more information on its planned work on competition in the markets for benchmarks and credit rating data later this year.

Updated webpage

ASSET MANAGEMENT

Issue 1165 / 23 June 2022

HEADLINES

  1. Council of the European Union
    1. UCITS Directive and AIFMD - Council of EU publishes general approach on amendments-17 June 2022
  2. European Parliament
    1. ELTIF Regulation - ECON adopts report on proposed amending regulation-20 June 2022

Council of the European Union

UCITS Directive and AIFMD - Council of EU publishes general approach on amendments - 17 June 2022

The Council of the EU (the Council) has published the text of its general approach to the proposed Directive amending the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Directive relating to undertakings for collective investment in transferable securities (UCITS) (2009/65/EC) (UCITS Directive) as regards delegation arrangements, liquidity risk management, supervisory reporting, the provision of depository and custody services, and loan origination by alternative investment funds.

Among other things, the Council stresses the importance of consistent harmonisation in the area of liquidity risk management, and supports the creation of an EU framework for loan-originating funds.

The Council may now begin negotiations with the European Parliament in order to agree on a final version of the proposed Directive.

Proposal for a Directive of the European Parliament and of the Council amending Directives 2011/61/EU and 2009/65/EC as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds (9768/1/22 REV 1)

Press release

European Parliament

ELTIF Regulation - ECON adopts report on proposed amending regulation - 20 June 2022

The European Parliament’s Economic and Monetary Affairs Committee (ECON) has adopted its report (the Report) on the proposed regulation to amend the Regulation on European long-term investment funds (ELTIFs) ((EU) 2015/760) (ELTIF Regulation). The amending regulation forms part of the European Commission’s (the Commission’s) Capital Markets Union package, published in November 2021.

The associated press release highlights the following aspects of the amendments proposed by ECON in the Report:

  • protecting investors: among other things, all ELTIFs marketed in the EU must be authorised, and the European Securities and Markets Authority must keep and update quarterly a central public register of authorised ELTIFs with updated links to their annual reports and, where available, the key information document; and
  • greener investments: the creation of an optional sub-category of ELTIFs marketed as environmentally sustainable, which should be subject to stricter requirements, and which should invest exclusively in assets that meet the taxonomy obligations and disclose what share of their assets comply with these requirements to avoid greenwashing. ECON also proposes complementing existing rules so that green bonds and financial products that aim to make sustainable investments are explicitly included in the list of investment assets eligible for ELTIFs.

ECON will now open negotiations with the Council of the EU, which adopted its position on the amending regulation in May 2022.

Press release

INSURANCE

Issue 1165 / 23 June 2022

HEADLINES

  1. Council of the European Union
    1. Solvency II - Council of the EU publishes general approach on amendments-17 June 2022
  2. European Insurance and Occupational Pensions Authority
    1. Non-affirmative cyber underwriting exposures - EIOPA publishes consultation paper-17 June 2022
    2. Exclusions in insurance products arising from systemic events - EIOPA publishes consultation paper-17 June 2022
  3. Financial Conduct Authority
    1. Funeral plan providers - FCA publishes update on authorisation status-17 June 2022
    2. Signposting to travel insurance customers with medical conditions - FCA updates webpage on policy statement PS20/3-17 June 2022

Council of the European Union

Solvency II - Council of the EU publishes general approach on amendments - 17 June 2022

The Council of the EU (the Council) has agreed its general approach on the proposed Directive amending the Solvency II Directive (2009/138/EC). The proposal aims to review the prudential framework that applies to the insurance sector in a comprehensive fashion, covering a broad range of topics including the quality of supervision, reporting, long-term guarantee measures and macro-prudential tools.

Among other things, the Council notes that it took the specificities of national insurance industries into account when it updated the capital requirements regime for the overall EU industry, and that it considered it useful to assign new tasks to the European Insurance and Occupational Pensions Authority (EIOPA). These include preparing a report on the assessment of risks related to biodiversity loss by insurers, along with natural disasters and climate-related risks, consistent with the European Green Deal.

The Council may now begin negotiations with the European Parliament in order to agree on a final version of the proposed Directive.

Press release

European Insurance and Occupational Pensions Authority

Non-affirmative cyber underwriting exposures - EIOPA publishes consultation paper - 17 June 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper on a supervisory statement on the management of non-affirmative cyber underwriting exposures.

EIOPA explains that cyber risk exposures could originate from both affirmative cyber insurance policies and cyber endorsements, for which some exclusions may not be clear, and in relation to insurance policies designed without explicitly taking cyber risk into consideration. EIOPA recommends that national competent authorities dedicate higher attention to insurance undertakings’ assessment of the terms and conditions of their existing insurance products. The consultation paper focuses on supervisory expectations and emphasises:

  • the need for a top-down strategy and risk appetite definition for (re)insurance undertakings to underwrite cyber risk;
  • the need to identify and measure risk exposures with the purpose of implementing sound cyber underwriting practices, with particular regard to the management of non-affirmative cyber exposures; and
  • the importance of cyber underwriting risk management and risk mitigation, including reinsurance strategy.

The deadline for responses is 18 July 2022.

EIOPA Consultation Paper on Supervisory Statement on management of non-affirmative cyber underwriting exposures (EIOPA-22/290)

Press release

  1.  

Exclusions in insurance products arising from systemic events - EIOPA publishes consultation paper - 17 June 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper on a supervisory statement on exclusions in insurance products related to risks arising from systemic events.

EIOPA explains that there is an increasing risk that insurance products may become unaffordable or unavailable for systemic events such as pandemics, climate change or large cyber-attacks. Simultaneously, products which may have originally covered these events, or which may have been silent in relation to the coverage for these events, may explicitly exclude them in the future. These systemic events also underline increasing consumer detriment caused by ambiguous contractual terms and lack of clarity on the coverage of losses arising from such events. EIOPA observes that this has led to disputes between policyholders and insurance undertakings, reputational risks for the sector as well as significant losses for all parties involved.

The supervisory statement aims to promote supervisory convergence in how national competent authorities (NCAs) assess the treatment of exclusions in insurance contracts that arise from risks following systemic events. EIOPA notes that this should ultimately support insurers in following a customer-oriented approach in such events.

EIOPA therefore recommends NCAs to take into consideration the following factors:

  • insurance product manufacturers should assess whether applicable exclusions from coverage are clear and whether there is contract clarity for policyholders;
  • if the risk arising from a systemic event becomes uninsurable or there is a lack of clarity about whether the risk is covered or not, insurance manufacturers are expected to make an assessment of the terms and conditions and of the scope of coverage by considering the needs, objectives and characteristics of the identified target market; and
  • when new products are developed, the target market’s needs, objectives and characteristics need to be taken into account regarding exclusions as part of the product oversight and governance process.

The deadline for responses is 18 July 2022.

EIOPA Consultation Paper on Supervisory Statement on Exclusions in Insurance Products Related to Risks Arising from Systemic Events (EIOPA-22-288)

Press release

Financial Conduct Authority

Funeral plan providers - FCA publishes update on authorisation status - 17 June 2022

The FCA has published a list of funeral plan providers it intends to authorise when the pre-paid funeral plans industry comes under its regulation from 29 July 2022. The list contains 24 firms, including the largest funeral plan providers. The FCA notes that, together, these firms hold approximately 87% of existing customer plans.

The FCA explains that, from 29 July 2022, all funeral plan providers will need to follow its rules, which include a ban on cold calling and commission paid to intermediaries, and maintain high standards on governance and financial resilience. Funeral plan holders will be able to refer complaints about a firm to the Financial Ombudsman Service and will be covered by the Financial Services Compensation Scheme if their provider goes out of business.

The FCA is still assessing a small number of providers’ applications and will give an update on these as soon as possible.

Funeral plan provider application status

Press release

  1.  

Signposting to travel insurance customers with medical conditions - FCA updates webpage on policy statement PS20/3 - 17 June 2022

The FCA has updated the webpage on its February 2020 policy statement (PS20/3) on signposting to travel insurance for consumers with pre-existing medical conditions, announcing that it is delaying its post-implementation review of the rules by a year. The FCA explains that the impact of the COVID-19 pandemic on the travel insurance market has undermined the FCA’s ability to draw firm conclusions from a review conducted in 2022, and the FCA now intends to conduct the review between April and October 2023.

Updated webpage

FINANCIAL CRIME

Issue 1165 / 23 June 2022

HEADLINES

  1. Financial Action Task Force
    1. FATF Plenary meeting - FATF publishes outcomes-17 June 2022
  2. Financial Conduct Authority
    1. Market abuse and market manipulation - FCA publishes update on work-17 June 2022
  3. National Crime Agency
    1. Suspicious activity report - NCA publishes updated guidance-17 June 2022

Financial Action Task Force

FATF Plenary meeting - FATF publishes outcomes - 17 June 2022

The Financial Action Task Force (FATF) has published the outcomes of its plenary meeting, which took place on 14-17 June 2022. Among other things, delegates:

  • approved a report that will help the real estate sector better detect and prevent money laundering;
  • approved a white paper for public consultation on potential revisions to FATF Recommendation 25 on transparency and beneficial ownership of legal arrangements, with a deadline for comments of 1 August 2022;
  • agreed to start new work that includes a project on countering the laundering of proceeds from ransomware attacks and an update to the FATF best practices paper on combating the abuse of non-profit organisations; and
  • finalised a report that shares good practices and recommendations for combating money laundering and terrorist financing by sharing information while adhering to data protection and privacy legislation.

Outcomes FATF Plenary, 14-17 June 2022

Financial Conduct Authority

Market abuse and market manipulation - FCA publishes update on work - 17 June 2022

The FCA has published a press release which provides an update on its work on market abuse and market manipulation, following recent press reports about the FCA’s approach. Observing that “the aggregate picture is one of increasing intensity, scrutiny and sophisticated action”, the FCA sets out how it tackles market abuse and manipulation, including through:

  • daily monitoring to ensure the timeliness and accuracy of the disclosure of inside information, which is complemented by Suspicious Transaction and Order Reports (STORs);
  • criminal prosecution and civil enforcement powers; and
  • working with international partners to bring the FCA’s data and intelligence to bear in cases of suspected serial market abusers whose activities cross national boundaries.

The FCA notes that it is determined to tackle market abuse and insider dealing wherever there is evidence of it, whether through the courts or its own powers.

FCA’s work on market abuse and manipulation - update 17 June 2022

National Crime Agency

Suspicious activity report - NCA publishes updated guidance - 17 June 2022

The UK Financial Intelligence Unit (UKFIU) of the National Crime Agency (NCA) has published updated guidance on suspicious activity report (SAR) glossary codes and reporting routes, which aims to improve the quality of SARs. In the guidance, it is observed that the use of glossary codes in SARs is considered good practice and enables the UKFIU, the NCA and other law enforcement bodies to conduct analysis to identify money laundering trends, high risk cases for development and take immediate action where necessary.

The revised guidance includes a new glossary code for SARs where the activity value of the suspected money laundering falls below £3,000 and where the person making the report is unaware of any law enforcement interest at the time of reporting.

Suspicious Activity Report (SAR) Glossary Codes and Reporting Routes

ENFORCEMENT

Issue 1165 / 23 June 2022

HEADLINES

  1. Financial Conduct Authority
    1. Financial crime control failings - FCA publishes Final Notice-22 June 2022
    2. Insider dealing - FCA seeks re-trialof Stuart Bayes and Jonathan Swann-22 June 2022
    3. AML controls failings - FCA publishes decision notice-23 June 2022

Financial Conduct Authority

Financial crime control failings - FCA publishes Final Notice - 22 June 2022

The FCA has published a final notice (dated 16 June 2022) with respect to insurance broker JLT Specialty Limited (JLTSL) and has issued a fine of £7,881,700 in relation to financial control failings between 21 November 2013 and 6 June 2017.

JLTSL placed business in the London reinsurance market for JLT Re Colombia, another company in the JLT Group. The business had been introduced by a third-party based in Panama. JLTSL paid US$12.3 million in commission to JLT Colombia Wholesale Limited, the parent company of JLT Re Colombia, which in turn paid US$10.8 million to the third-party introducer. This introducer then paid a bribe of over US$3 million to government officials at a state-owned insurer to help retain and secure their business for JLTSL and JLT Re Colombia. The FCA found that JLTSL failed to manage its business and risks responsibly and effectively.

JLTSL qualified for a 30% discount to the fine under the FCA’s executive settlement procedures.

FCA Final Notice: JLT Specialty Limited

Press release

  1.  

Insider dealing - FCA seeks re-trial of Stuart Bayes and Jonathan Swann - 22 June 2022

The FCA has announced that it will pursue a re-trial of Stuart Bayes and Jonathan Swann for insider dealing offences. This follows the court’s decision on 25 May 2022 to discharge the jury after they were unable to reach a verdict following an eight-week trial at Southwark Crown Court. The court has set the date of 11 September 2023 for retrial.

The alleged offending took place between 2 May 2016 and 10 June 2016, and involved trading in shares in British Polythene Industries plc (BPI), ahead of an announcement that RPC Group plc was to acquire BPI. During this period, Mr Bayes was employed by RPC Group plc and Mr Swann worked as a tenancy support officer. The total profit from alleged insider dealing was approximately £138,700.

Press release

  1.  

AML controls failings - FCA publishes decision notice - 23 June 2022

The FCA has published a decision notice issued to Ghana International Bank Plc (the Bank) indicating that the FCA has fined the Bank £5,829,900 for failings in its anti-money laundering (AML) controls.

The Bank provided correspondent banking services to overseas banks. The FCA found that between 1 January 2012 and 31 December 2016, the Bank did not adequately perform the additional checks required when it established relationships with the overseas banks, and failed to demonstrate it had assessed those banks’ AML controls. The Bank also failed to undertake annual reviews of the information it held on its relationship banks, failed to give staff adequate training on how to scrutinise transactions properly, and did not establish appropriate policies and procedures for staff. The FCA notes that although no evidence of actual money laundering was detected during its December 2016 visit to the Bank, it identified a significant risk of money laundering as a result of deficient AML and counter-terrorist financing controls.

Following the visit, the Bank voluntarily agreed not to take on new customers. This restriction remains in place. The Bank qualified for a 30% discount to the fine under the FCA’s executive settlement procedures.

FCA Decision Notice: Ghana International Bank Plc (204471)

Press release