CAPITAL MARKETS AND MARKET INFRASTRUCTURE
ISDA to Produce Comprehensive Analysis and Global Roadmap on Benchmarks Transition
On 2 November, ISDA announced in a press release that it has begun a comprehensive analysis of the issues and potential solutions related to transitioning financial market contracts and practices to new alternative RFRs. The analysis will include a targeted global survey of buy- and sell-side firms and infrastructure providers to identify the means by which market participants can effectively implement regional benchmark transitions, as well as highlight possible challenges. The new report will consider how IBORs are currently used across financial markets, including in derivatives, loans, bonds and mortgages. It will also explore potential adjustments required to transition from IBORs to RFRs for both new and existing contracts. This may include documentation issues, the potential for value transfer, threats to market liquidity, the requirement for term fixings and differences in credit spreads between existing and new rates, among other topics. In addition, the report will outline a roadmap of any identified solutions, along with a timeline for actions required to implement them.
TARGET 2 – ECB decision amending TARGET2 terms and conditions
On 30 October, the ECB published a Decision (ECB/2017/30) (dated 10 October) amending Decision ECB/2007/7 which concerned the terms and conditions of TARGET2-ECB. The amendments to ECB/2007/7 reflect amendments made to guideline ECB/2012/27 in September. They include the introduction of a new Article 3a on the remuneration of guarantee funds. Decision ECB/2017/30 entered into force on 20 October and applies from 13 November.
FCA handbook – FCA policy statement setting out near final rules on regulatory framework for ILS
On 1 November, the FCA published a policy statement setting out near-final rules on the changes required to the FCA Handbook to reflect the new regulatory framework for insurance linked securities (ILS) (PS17/24). PS17/24 also contains the FCA's response to the feedback received to consultation papers CP16/34 & CP17/3, in which it set out the proposed authorisation and supervisory approach in relation to ISPVs and proposed Handbook changes to reflect the new ILS regime. Responses to the consultation generally supported proposals for the near final rules. The rules will be made final when the Risk Transformation Regulations come into force. They are expected to come into force this year.
Regulatory reporting – FCA launches webpage on model driven machine executable regulatory reporting
On 1 November, the FCA published a new webpage on model driven machine executable regulatory reporting. The aim of the webpage is to explore solutions to the increasing challenges financial institutions face implementing their regulatory reporting obligations. As a result the FCA is working with the BoE to see how they can use technology to link regulation, compliance procedures, firms’ policies and standards together with firms’ transactional applications and databases. If successful, firms would be able to map their regulatory requirements directly to the data that they hold, creating the potential for automated, straight-through-processing of regulatory returns.
FSCS – FCA second consultation on review of FSCS funding
On 30 October, the FCA published its second consultation paper on reviewing the funding of FSCS (CP17/36). In CP17/36, the FCA: (i) seeks views on proposals for discussion concerning the professional indemnity insurance (PII) market; (ii) seeks views on proposals for consultation concerning funding classes and provider contributions and to FSCS compensation limits; and (iii) sets out policy decisions and final rules relating to issues consulted on in CP16/42. The deadline for comments is 30 January 2018.
BSB consults on good banking outcomes for consumers – consumer retail
On 2 November, the BSB published a consultation paper seeking views about what the outcomes of a good banking culture looks like to consumers. The purpose of the consultation is to seek views, in particular from consumer and civil society organisations, on several principles including: (i) access; (ii) choice; (iii) clarity and transparency; (iv) safety and security; (v) redress and being listened to; (vi) value for money; and (vii) fairness. This will inform the BSB’s work to identify good practice by helping develop and refine the framework for this thinking. The deadline for responses is 26 January 2018.
Retail financial services – ECON report on EC’s action plan on retail financial services
On 31 October, ECON published its report (dated 20 October) on the EC’s action plan on retail financial services (PE605.928v02-00). This makes substantial amendments to a draft report it published in June. The EP is scheduled to consider the report during its plenary session to be held from 13 to 16 November.
Consumer decision making – EC report on consumers' decision-making in insurance services
On 27 October, the EC published a report (dated May 2017) prepared by London Economics, Ipsos and VVA Europe that contains a study on consumers' decision-making in insurance services. The study sought to explore and understand consumers’ decision-making in the non-life insurance market when purchasing domestically and cross-border, to test remedies aimed at helping consumers make better decisions, and to collect complementary data on the supply side of the market. The UK was one of the countries included in the study. Based on the findings the study made a number of recommendations, including: (i) improving the provision of information; (ii) facilitating consumers’ decision-making in insurance purchases; and (iii) addressing pressure selling.
APMs – ESMA updates Q&As
On 30 October, ESMA updated Q&As on its guidelines on alternative performance measures, adding six new questions and answers. The new questions provide information on: (i) the definition of APMs; (ii) the scope of the APM guidelines; (iii) application of the scope exemption; (iv) definition of the APM ‘organic growth’; (v) how to carry out reconciliation; and (vi) how to apply the fair review principle.
Chancellor of Exchequer letter on package of reforms to improve UK response to economic crime
On 1 November, the HoC Treasury Committee published a letter (dated 26 October) from Philip Hammond, Chancellor of the Exchequer, to Nicky Morgan, Chair of the committee, providing an update on the project that is being carried out by the Cabinet Office to examine the UK's response to economic crime. This project looked at the UK agencies involved in the investigation and prosecution of high value or complex economic crime to determine the effectiveness of the organisational framework and the capabilities, resources and powers available to these agencies. Officials provided advice to ministers on the effectiveness of the UK's response to economic crime along with a series of recommendations to further enhance our capabilities. The recommendations seek to improve the governance and operational response of the UK's economic crime agencies. The cross-Government meeting agreed that the Home Secretary will take forward this work and that a package of reforms should be announced by the end of 2017.
Sections 11 and 36 Criminal Finances Act 2017 come into force on 31 October 2017
On 30 October 2017, the Criminal Finances Act 2017 (Commencement No.3) Regulations 2017 (SI 2017/1028) were published. The Regulations bring sections 11 and 36 of that the Criminal Finances Act 2017 into force from 31 October 2017: Section 11 of the Act introduces a new procedure in POCA for entities within the regulated sector (as defined in Schedule 9 to POCA and Schedule 3A to TACT) to share information relating to suspicion that a person is engaged in money laundering, for the purpose of developing a joint disclosure report to the National Crime Agency. Section 36 of the Act introduces a similar procedure into TACT.
EC adopts Delegated Regulation amending list of high-risk third countries under MLD4
On 27 October 2017, the EC adopted a Delegated Regulation amending the EC’s list of high-risk third countries under MLD4 ((EU) 2015/849) to include Ethiopia (C(2017) 7136 final). The next step will be for the Council of the EU and the EP to consider the amending Delegated Regulation. If neither the Council nor the Parliament object to the amending Delegated Regulation, it will be published in the OJ. It will enter into force 20 days after its publication in the OJ and will apply from that date.
Robo Advice: an FCA perspective
On 2 November, the FCA published a speech (dated 11 October) delivered by Bob Ferguson, Head of Department, Strategy & Competition Division, FCA. Highlights from the speech include: (i) the discovery of automated advice as a valuable vehicle to help tackle the issues faced by those consumers who are unserved or underserved by more traditional advice models, as well as promoting competition in the UK financial advice market; (ii) the FCA’s Advice Unit continues to be active in providing regulatory feedback and external tools to firms developing an automated advice (or guidance) model; (iii) automated advice brings its own risks, but well-designed models have great potential for compliance risk reduction; and (iv) the FCA will supervise with a focus on outcomes – the suitability of recommendations for the consumer, acting where it sees harm – a guiding principle set out in the FCA’s Mission document.
Artificial intelligence – FSB report on artificial intelligence and machine learning in financial services
On 1 November, the FSB published a report that considers the financial stability implications of AI and machine learning in financial services. The FSB’s analysis reveals a number of potential benefits and risks for financial stability that should be monitored as the technology is adopted in the coming years and as more data becomes available. These include: (i) more efficient information processing; (ii) discovery of new and unexpected forms of interconnectedness between financial markets and institutions; and (iii) the potential emergence of new systemically important players that could fall outside the regulatory perimeter due to network effects and scalability of new technologies giving rise to third-party dependencies. The report goes on to stress that adequate testing and ‘training’ of tools with unbiased data and feedback mechanisms is important to ensure applications do what they are intended to do.
Please see the Conduct section for updates on the regulatory framework for ILS.
Please also see the Consumer/Retail section for an update on the EC’s report on consumers' decision-making in insurance services.
IAIS agrees approach to implementation of ICS version 2.0
On 2 November, the IAIS published a press release announcing a unified path to convergence of group capital standards in furtherance of its ultimate goal of a single ICS that achieves comparable outcomes across jurisdictions. This pivotal agreement responds to a call from Members and stakeholders for more clarity on what the implementation of ICS Version 2.0 will mean in practice. The IAIS has agreed that implementation of ICS Version 2.0 will be conducted in two phases – a five-year monitoring phase followed by an implementation phase. Implementation of ICS Version 2.0 will also have two equally important components. The first is mandatory confidential reporting by all IAIGs of a reference ICS. The second is additional reporting, at the option of the group-wide supervisor. Following the announcement by Members from the United States of development of an aggregation-based group capital calculation, the IAIS has further agreed to collect data to allow it to assess by the end of the monitoring period whether or not the aggregation method provides comparable outcomes to the ICS.
ISPVs – PRA policy statement on authorisation and supervision of ISPVs
On 1 November, the PRA published a policy statement (PS26/17) which provides feedback to responses to CP42/16 ‘Authorisation and supervision of insurance special purpose vehicles’ and sets out the PRA’s final approach and expectations in relation to the authorisation and supervision of ISPVs, subject to the Risk Transformation Regulations 2017 being passed through Parliament. This PS is relevant to all parties who wish to apply to the PRA for, or have obtained authorisation as, an ISPV. It is also relevant to insurers and reinsurers seeking to use UK ISPVs as risk mitigation in accordance with Solvency II.
Solvency II – EIOPA final report on first set of technical advice on Delegated Regulation
On 31 October, EIOPA published a document (dated 30 October) containing the first set of advice to the EC on specific items in the Solvency II. The advice covers: (i) simplified calculations of capital requirements in the SCR standard formula; (ii) reducing reliance on external credit ratings in the calculation of the SCR; (iii) exposures guaranteed and exposures to regional governments and local authorities (RGLA); (iv) risk-mitigation techniques; (v) undertaking specific parameters; (vi) look-through for investment related undertakings; and (vii) factual information on loss-absorbing capacity of deferred taxes (LAC DT). This issue will be addressed further in EIOPA's second set of advice to the EC (expected by end February 2018). This will look to address issues such as: (i) policy proposals on LAC DT to increase supervisory convergence, (ii) risk margin; (iii) catastrophe risks; (iv) non-life and life underwriting risks; (v) non-proportional reinsurance covers; (vi) unrated debt and unlisted equity; and (vii) own funds. EIOPA is expected to consult on these issues before the end of 2017.
IDD – EP non objection to IDD Delegated Regulations
On 27 October, the EP published the texts adopted in plenary on 25 October: (i) Decision to raise no objections to Delegated Regulation supplementing the IDD with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (P8_TA-PROV(2017)0404); and (ii) Decision to raise no objections to Delegated Regulation supplementing the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (IBIPs) (P8_TA-PROV(2017)0405). The decisions call on the EC to adopt a legislative proposal extending the application date for measures implementing the IDD to 1 October 2018, while retaining the existing transposition deadline for the IDD of 23 February 2018.
MAR: CLLS and Law Society update Q&A
On 1 November the City of London Law Society and Law Society Company Law Committees' Joint Working Parties on Market Abuse, Share Plans and Takeovers Code published an updated version of their Q&A on MAR. In particular, Q&A 7 of Part A, which broadly asks whether company B, which has a PDMR who is non-controlling shareholder of company B and a director of company A, must notify company A under Article 19(1) of MAR of transactions on its own account in company A's shares on the basis that it is a person closely associated to the director. The Q&A has been amended to reflect ESMA's view of the definition of person closely associated in sub-paragraph (d) of Article 3(1)(26) of MAR as set out in question 7.7 of ESMA's Q&A on MAR.
Cheque image clearing system launched
On 30 October 2017, the Cheque & Credit Clearing Company published a press release announcing the launch of the Image Clearing System (ICS). It has also published a webpage, FAQs and a factsheet on the ICS. The ICS is designed to speed up cheque processing significantly for customers across the UK. Cheques processed via the new system will mean that if a customer pays in a cheque on a weekday they will be able to withdraw the funds by 23.59 on the next weekday (excluding bank holidays) at the latest, with many banks and building societies likely to allow access to the funds earlier than this.
PSD2 – EBA consultation on draft RTS for home-host co-operation
On 27 October, the EBA published a consultation paper (EBA/CP/2017/16) on draft RTS specifying the framework for co-operation and the exchange of information between competent authorities under Article 29(6) of the PSD2. The RTS also set out the periodical reporting requirements, divided into two sets of information that host competent authorities can request from payment institutions operating in their territories via agents or branches. The reporting requirements define the data breakdown, reporting periods, frequency and reporting deadlines. Periodical reporting will provide the host competent authority with a better understanding of the payments market in the host member state and will help the host competent authority monitor compliance with the provisions of national law transposing the PSD2. The deadline for comments is 5 January 2018.
Financial Guidance and Claims Bill: amendment requiring trustees to check if member has received guidance introduced at report stage
The report stage of the Financial Guidance and Claims Bill continued in the House of Lords on 31 October 2017. Despite government opposition, a cross-party amendment introducing a requirement for trustees to check whether a member has received information and pension guidance before accessing or transferring their pension was passed on a division of the House. The amendment requires the FCA to check the recipient of pensions had received financial information and guidance to which they were entitled. If the recipient had not, the change would then allow the FCA to require a manager to provide access to the guidance before proceeding. A revised version of the Bill was published on 1 November 2017. Third reading in the House of Lords will take place on 21 November 2017.
CRD IV and BRRD – EBA final guidelines on supervision of significant branches
On 1 November, the EBA published a final report containing guidelines on the supervision of significant branches (EBA/GL/2017/14). The purpose of the guidelines is to specify how the "consolidating supervisor", the home and host competent authorities should, within the framework of supervisory colleges, cooperate to prudentially supervise and coordinate monitoring of ‘significant-plus’ branches. To assess whether a branch determined to be significant in accordance with Article 51 of CRD IV should be classified as ‘significant-plus’, an ‘intensification test’ is put in place: the consolidating supervisor and the home and host competent authorities should perform a common assessment and arrive at a common conclusion on the basis of certain parameters. The authorities must assess whether a branch performs critical functions within the meaning of the BRRD and its importance for the group or firm and for the financial stability of the host Member State where the branch operates. These guidelines apply to the prudential supervision of significant-plus branches of Union institutions established in another Member State. The guidelines do not apply in relation to branches of institutions having their head offices in a third country, with their supervision being covered by Articles 47 and 48 of CRD IV. The guidelines will apply from 1 January 2018.
CRD IV – EBA consultation on revised guidelines on IRRBB risk arising from non-trading activities
On 31 October, the EBA published a consultation paper on revised guidelines on the management of interest rate risk arising from non-trading book activities (that is, interest rate risk in the banking book (IRRBB)). The aim of these guidelines is to set out supervisory expectations regarding the management of IRRBB risk. These guidelines build upon the EBA Guidelines published on 22 May 2015 and take account of existing supervisory expectations and practices including the BCBS Standards on Interest rate risk in the banking book published in April 2016. The updated guidelines are structured into six main sections and stress that institutions should develop and use their own internal arrangements to identify, measure, monitor and control IRRBB, while respecting supervisory expectations set out in these guidelines. The guidelines will be finalised following the completion of the public consultation. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. Institutions and competent authorities are expected to apply these guidelines from 31 December 2018, taking into account longer transitional arrangements for the provisions on CSRBB and for the application of the new threshold of 15% of Tier 1 as an "early warning signal" for the supervisory outlier test calculated based on the six shock scenarios set out in Annex III.
CRD IV – EBA consultation on revised guidelines on common supervisory procedures and methodologies for SREP and supervisory stress testing
On 31 October, the EBA published a consultation paper on revised guidelines on common supervisory procedures and methodologies for the SREP and supervisory stress testing under Article 107(3) of the CRD IV. The consultation sets out proposals for revisions to the EBA's current guidelines on common supervisory procedures and methodologies for SREP (EBA/GL/2014/13), which were published in December 2014. The EBA's revisions are intended to reflect developments affecting the SREP framework since the original guidelines were finalised and relate to: Pillar 2 capital guidance; supervisory stress testing and the supervisory assessment of institution’s stress testing; the alignment of supervisory assessment of IRRBB with the revision of the EBA's guidelines on IRRBB; the articulation of total SREP capital requirements and overall capital requirements and communication of supervisory capital expectations to institutions; and internal governance. The deadline for comments is 31 January 2018. The EBA intends to apply revised guidelines from 1 January 2019.
CRD IV – EBA consultation on draft guidelines on stress testing
On 31 October the EBA published a consultation paper on draft guidelines on institutions' stress testing (EBA/CP/2017/17). The aim of the guidelines is to achieve convergence on practices followed by institutions for stress testing across the EU. They provide detailed guidance to be complied with by institutions when designing and conducting a stress testing programme/framework. These guidelines reflect the conclusions of the peer review of the implementation of the CEBS Guidelines on Stress Testing (GL32), which will be repealed and replaced by these guidelines. The deadline for comments is 31 January 2018. They will be then finalised, translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The EBA aims to finalise the proposed guidelines during the first quarter of 2018, taking into account the comments received during the consultation. It is expected that the guidelines will begin to apply in the second quarter of 2018.
Stress testing – EBA finalises 2018 EU-wide stress test timeline
On 30 October, the EBA published a press release on the 2018 EU-wide stress test timeline. The EBA intends to adhere to the following timetable: November 2017 the EBA to publish the final methodology: by end of 2017 the EBA to circulate final templates and guidance to participating banks; January 2018 launch of the 2018 EU-wide stress test. The EBA will publish the macroeconomic scenario at the time of the launch; early June 2018 first submission of results to the EBA; Mid-July 2018 second submission of results to the EBA; late October 2018 final submission of results to the EBA; and 2 November 2018 the EBA to publish results of the stress test.
RECOVERY AND RESOLUTION
BRRD – EBA final report on coverage of entities in a group recovery plan
On 1 November, the EBA published a final report on its recommendation on the coverage of entities in a banking group recovery plan (EBA/Rec/2017/02). Under Article 7 of the BRRD, group recovery plans should consist of a recovery plan for the group headed by the EU parent undertaking as a whole, which should identify measures that may be required to be implemented at the level of both the EU parent undertaking and each individual subsidiary. The recommendation is intended to set out a common framework for achieving the necessary level of information on all group entities in the group recovery plan and specific guidance is given on how the EU parent should identify all relevant group entities in its group recovery plan. The guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply from 1 January 2018.
Crowd funding – EC inception impact assessment on legislative proposal for EU framework
On 30 October, the EC published an inception impact assessment for a legislative proposal for an EU framework on crowd and peer-to-peer finance. In the impact assessment, the EC sets out information on a potential initiative relating to crowdfunding. The aim of the initiative is to create a framework that will encourage cross-border activity relating to crowdfunding platforms and to provide platforms with a proportionate and effective risk management framework. The EC is concerned that, to date, crowdfunding activities have been confined to national markets with very little cross-border activity. It is also concerned about the perceived lack of reliability of crowdfunding and peer-to-peer platforms, with the biggest perceived risks being loan defaults, business failures, fraudulent activities and the collapse of platforms because of malpractice. The EC sets out three potential options for an EU framework on crowdfunding. The deadline for comments is 27 November.