Please see the product sections for updates on various draft SIs published this week in anticipation of a hard Brexit.
Final EBA Outsourcing Guidelines: Impact on firms’ Brexit contingency plans
The EBA has published final guidelines on outsourcing (the EBA Guidelines), which will replace the guidelines issued by its predecessor, the Committee of European Banking Supervisors, with effect from 30 September. The EBA Guidelines will apply to all firms within the EBA’s remit, being CRD IV institutions, payment services institutions and e-money institutions. The EBA has focussed on reducing the risks posed by so-called ‘letter-box entities’, outsourcing of banking and/or payment services (particularly to non-EEA locations) and intra-group outsourcings, all of which may have material consequences for firms’ Brexit contingency plans. Please find A&O’s bulletin here.
Online toolkit to enable EEA firms to meet their UK compliance obligations post-Brexit
A&O has published an online toolkit which enables EEA banks and investment firms providing wholesale services in or into the UK to identify and scope how the FCA and (where relevant) PRA rules will change for them on entry into, and on exit from, the temporary permission regime. Please find the toolkit on our Brexit website here.
Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 made
On 28 March, the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to make minor and technical amendments to UK primary and secondary legislation and to retained EU legislation relating to financial services, in preparation for a no-deal Brexit. They also revoke certain statutory instruments and EU legislation, including legislation relating to the single supervisory mechanism and the single resolution mechanism. In addition, they introduce transitional provisions relating to, among other things, insurance business transfers and disclosures concerning credit agreements. The Regulations will enter into force on exit day, with the exception of amendments to statutory instruments made under the European Union (Withdrawal) Act 2018 (EUWA), which will come into force immediately before exit day and a transitional provision relating to EEA overseas investment exchanges, which will come into force on the day before exit day. The Regulations were first laid before Parliament on 21 February but were subsequently superseded by an amended version laid on 26 February.
Exit day definition amended in European Union (Withdrawal) Act 2018
On 28 March, the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) Regulations 2019 were made by the government. These amend with immediate effect the definition of exit day in the European Union (Withdrawal) Act 2018 (EUWA), which had been 11.00 pm on 29 March. The House of Commons approved the regulations on 27 March. Exit day is now defined in section 20 of the EUWA as: (i) 11.00 pm on 22 May, if the House of Commons approves the withdrawal agreement by 29 March; or (ii) 11.00 pm on 12 April, if the House of Commons does not approve the withdrawal agreement by 29 March. This means that exit day, and the moment when some of the central provisions of the EUWA take effect, now mirror the UK and EU's agreement to extend the Article 50 period. The EUWA provides, for example, that the repeal of the European Communities Act 1972 and the moment of the "snapshot" of retained EU law are both scheduled for exit day.
Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019 made
On 26 March, the Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to make amendments to correct deficiencies in legislation to ensure that the UK continues to have a robust legislative framework governing how UK regulators share confidential information with other authorities after Brexit. The Regulations were laid before Parliament in January. No substantive changes appear to have been made. Parts 1 and 3 of the Regulations come into force on 27 March. Part 2 of the Regulations comes into force on exit day.
Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 made
On 26 March, the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to make a number of Gibraltar-related modifications and amendments to UK financial services legislation in the context of Brexit and save the effect of certain financial services legislation in relation to Gibraltar-based firms and activities. The Regulations were laid before Parliament in February. No substantive changes appear to have been made. Regulations 2, 3, 4, 5, 11 and Schedules 1 and 2 to the Regulations come into force on exit day. The other provisions in the Regulations come into force immediately before exit day.
FCA and PRA to extend notification period for temporary permissions regime to 11 April
On 25 March, the FCA updated its webpage on the TPR to announce that it intends to extend the notification window for firms wishing to enter the TPR to the end of 11 April. On 26 March, the PRA updated its webpage on the TPR to make an equivalent announcement. The FCA and the PRA's decision follows the European Council's decision on 21 March to agree to a short extension to the Article 50 period. The original deadline for notifications to the FCA and the PRA concerning the TPR was 28 March. On 28 March, the FCA published guidance on the amended directions to extend the notification window until 11 April.
FCA supplementary directions on temporary permissions regime notifications
On 25 March, the FCA updated its webpage on the TPR to announce the publication of supplementary directions for: (i) EEA firms with passports and Treaty firms; (ii) EEA authorised payment institutions and EEA registered account information service providers; and (iii) EEA authorised electronic money institutions. The supplementary directions state that any firm that withdraws its notification in writing to the FCA before exit day will not enter the TPR. The directions supplement directions made by the FCA in November 2018 and December 2018. These directions, which were made under the EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018 and the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 respectively, required firms to notify the FCA if they intend to obtain a deemed authorisation or registration under the TPR. On 22 March, the PRA similarly published such a direction to clarify the position where an EEA firm that has submitted a notification to enter the TPR wants to withdraw its notification before exit day.
Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 made
On 22 March, the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to amend the Financial Services and Markets Act 2000 (FSMA) and related legislation to ensure that they continue to operate effectively in the UK once the UK has left the EU. The Regulations also contain transitional powers for the FCA, the PRA and the BoE to allow them to delay or phase in regulatory requirements that change or apply for the first time because of Brexit. The Regulations were laid before Parliament in January. No substantive changes appear to have been made. The Regulations come into force on exit day, with the exception of certain provisions specified in regulation 1 (including those relating to transitional powers) that came into force on 23 March (that is, on the day after the day on which they were made).
Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 made
On 27 March, the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 were published. The regulations, which are intended to address deficiencies in the prospectus, transparency and listing regimes that arise from the UK leaving the EU and to ensure that the UK’s listing regime and transparency framework continue to operate as intended following exit day, are in substantially the same form as the draft published in January. They will enter into force on exit day.
Underwriting: AFME equity selling restriction wording for Brexit
On 27 March, AFME published model equity selling restriction wording for use following a no-deal Brexit or Brexit with a deal and transitional period. It includes: (i) for a no-deal Brexit, an EEA public offer equity selling restriction (in substantially the same form as the model wording published by AFME in April 2016, but updated to refer to the new Prospectus Regulation and with minor drafting amendments), a UK public offer equity selling restriction (in a similar format but adapted to refer to relevant UK regulatory requirements) and a selling restriction addressing additional UK securities laws (in the same form as that published in April 2016); and (ii) for Brexit with a deal and transitional period, an EEA and United Kingdom public offer equity selling restriction (in substantially the same form as the April 2016 wording, but including the UK in addition to EEA States, replacing the term Member State with State, updated to refer to the new Prospectus Regulation and with minor drafting amendments) and a selling restriction addressing additional UK securities laws (in the same form as that published in April 2016). If there is a deal, AFME expects that that no further changes will be required to reflect the full implementation of the new Prospectus Regulation. However, if there is no deal, while it notes it is the UK’s policy to implement the new regulation, it states it is unclear whether there will be a timing mismatch between the EU27 and the UK regarding implementation. It plans to review the impact of those issues in July.
New Prospectus Regulation: ESMA Questions and Answers
On 27 March, ESMA published questions and answers on the new Prospectus Regulation. Topics covered include: (i) the scope of the grandfathering of prospectuses approved under the national laws of member states implementing Prospectus Directive; (ii) the applicability of level 3 guidance on the Prospectus Directive after entry into application of the Regulation; and (iii) the process of updating information included in registration documents and universal registration documents.
FICC Markets Standards Board statements of good practice on conduct risk in market transactions
On 28 March, the FICC Markets Standards Board (FMSB) published statements of good practice for the use of a conduct risk taxonomy for the identification and assessment of conduct risk in the wholesale fixed income, commodity and currency (FICC) markets. It applies to participants in FICC markets in the execution, management and oversight of market activity. The FMSB has developed a methodology called "behavioural cluster analysis", which identifies and provides a taxonomy of the core group of misconduct techniques that have repeatedly formed the basis of misconduct across multiple jurisdictions. The patterns are jurisdictionally neutral, occur in multiple asset classes and repeat over extended time periods. The good practice statements set out in the document use this methodology for the identification of conduct risks in market transactions. The good practice statements include the following: (i) firms should have a taxonomy for the identification and assessment of common conduct risks that may occur in market transactions and that are relevant to their business. This should be informed by incidents of misconduct that have been identified by regulators and by the firm's own analysis of the market activity it conducts; (ii) supervisors should consider whether their supervisory tools and processes allow sufficient oversight of potential misconduct in market transactions; (iii) firms should embed a consistent understanding of misconduct in market transactions throughout the firm's risk management and policy framework underpinned by their own taxonomy; (iv) staff should receive formal training on the conduct risks of market transactions and the behavioural patterns that can lead to misconduct; and (v) firms should develop management information based on their conduct risk taxonomies that allows senior management to consider and challenge the conduct risks identified in the market transactions of the firm. FMSB statements of good practice do not form part of the FMSB standards and are not binding on FMSB members. However, firms are expected to consider their own practices in the light of the statements and any changes that may be appropriate.
ESMA binary options product intervention decision published in OJ
On 27 March, ESMA Decision (EU) 2019/509, adopted under Article 40 of MiFIR, was published in the OJ. In February, ESMA announced that it would renew the prohibition of the marketing, distribution or sale of binary options to retail clients for a further three-month period from 2 April. The prohibition has been made on the same terms as set out in the previous ESMA Decision on the prohibition, which was published in the OJ in December 2018. ESMA has also published on its website a notice of the decision, which was taken on 22 March. The notice reproduces the text of the decision set out in the OJ. The Decision enters into force on 28 March (the day following publication in the OJ). It applies from 2 April until 1 July.
ESMA renews restriction on CFDs for further three months
On 27 March, ESMA announced that it is renewing the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August 2018, from 1 May for a further three-month period. ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. Its board of supervisors agreed to renew the measure on the same terms as the previous renewal decision that started to apply on 1 February. The renewal includes: (i) leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying; (ii) a margin close out rule on a per account basis; (iii) negative balance protection on a per account basis; (iv) a restriction on the incentives offered to trade CFDs; and (v) a standardised risk warning, including the percentage of losses on a CFD provider's retail investor accounts. ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, after which it will publish an official notice on its website. The measure will then be published in the OJ.
Powers of national courts to modify or replace unfair terms in consumer contracts
On 26 March, the ECJ considered the power of national courts to substitute national law provisions to save a loan, where deleting unfair terms would prejudice the consumer. Under Article 6(1) of the Unfair Contract Terms Directive, member states must ensure that unfair terms in consumer contracts are not binding on consumers, but that the contract will survive if it can do so without the unfair terms. The ECJ confirmed, that: (i) as per its decision in Banco Español de Crédito, C 618/10, EU:C:2012:349, a national court cannot simply revise an unfair term to make it fair. If this were the case suppliers would continue to use unfair terms, safe in the knowledge that the court would merely amend them to make them fair; Article 6(1) would not have its intended dissuasive effect; and (ii) as per Kásler and Káslerné Rábai, C 26/13, EU:C:2014:282, Article 6(1) does not preclude a national court from removing an unfair term and replacing it with a provision of national law if simply removing the unfair term would require the court to annul the contract in its entirety and this would penalise the consumer. In this case the unfair term was one which would make the entire loan repayable if the borrower missed one repayment. Removal of the unfair element of the term was not permitted because it would alter the substance of the term. If the term were removed as a whole then under national law the contracts would be annulled and the borrower could use a standard enforcement procedure to recover the sums due. This procedure was less favourable to the borrowers than the mortgage enforcement procedure, which would apply if the loans continued. The court held that in view of this, the national court could replace the unfair terms with a provision of national law which made the entirety of the loan repayable if three (as opposed to one) repayments were missed. This replacement would allow the loans to continue, ensuring the application of the more favourable mortgage enforcement procedure. Whilst this is not new law it is an interesting reminder of the ECJ's interpretation of Article 6(1).
FCA final report on market study on competition in the mortgage sector
On 26 March, the FCA published its final report on the mortgages market study. This market study, launched in December 2016, has focused on consumers' ability to make an effective mortgage choice. The FCA has found that there are certain aspects of the mortgage market that are working well for consumers (particularly, consumers are generally taking out suitable mortgages, there are high levels of consumer engagement, a range of products are on offer and there appears to be competition on headline rates between lenders). The final report focuses on those areas where the FCA considers that the market could work better. The FCA has found that some consumers face difficulties in choosing the right mortgage and mortgage adviser, and there are limitations to the effectiveness of the tools available to help consumers choose a cheaper mortgage. In addition, there are some longstanding borrowers on a relatively high reversion rate who do not or cannot switch. The FCA sets out the action that is being taken (by the FCA and by the industry) to address these issues. In particular, the FCA is seeking to speed up more widespread participation by lenders in innovative tools to help customers identify the mortgages they qualify for. It will also be consulting, in the spring, on proposals to change mortgage advice rules and guidance to help remove potential barriers to innovation. In addition, the FCA will be conducting more analysis to understand more about customers who do not switch mortgage. It is also consulting on new lending rules to help "mortgage prisoners". Further, the FCA explains that the Single Financial Guidance Body is proposing to extend its existing retirement adviser directory (currently under the Money Advice Service brand) to include mortgage intermediaries.
FCA consults on changes to mortgage responsible lending rules and guidance
On 26 March, the FCA published a consultation paper on proposed changes to its responsible lending rules and guidance, which will enable mortgage lenders to make more proportionate affordability assessments. The FCA is concerned that some consumers cannot switch to a more affordable mortgage despite being up-to-date with their mortgage payments (referred to as "mortgage prisoners"). It considers that consumers who are currently in this position, or who could be in the future, are paying higher than necessary mortgage payments. The proposals aim to remove potential barriers in the FCA's rules to make it easier for customers of inactive lenders and unregulated entities to switch to an active, authorised lender. The FCA proposes to amend its responsible lending rules and guidance so that: (i) mortgage lenders can choose to carry out a modified affordability assessment where the consumer has a current mortgage, is up-to-date with their mortgage payments, does not want to borrow more (other than to finance any relevant product fee or arrangement fee for that mortgage), or is looking to switch to a new mortgage deal on their current property; (ii) inactive lenders, and administrators acting for unregulated entities, are required to review their customer books and contact relevant customers. They must write to them highlighting the rule change and directing them to relevant sources of information; (iii) mortgage lenders that use the modified assessment are required to tell consumers the basis on which their affordability has been assessed and provide some additional disclosures about potential risks; and (iv) mortgage lenders are required to flag sales that have involved the modified assessment when they submit product sales data reports to the FCA. Comments can be made on the consultation paper until 26 June.
Mortgage Credit (Amendment) (EU Exit) Regulations 2019 made
On 25 March, the Mortgage Credit (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to address deficiencies in the Mortgage Credit Directive Order 2015, which transposed the Mortgage Credit Directive in the UK, that arise as a result of the UK leaving the EU. The Regulations were laid before Parliament in December 2018. No substantive changes appear to have been made. The Regulations come into force on exit day.
FCA final report on review of retained CCA provisions
On 25 March, the FCA published its final report following its review of the retained provisions of the Consumer Credit Act 1974 (CCA). The FCA took over responsibility for regulating consumer credit in April 2014. As part of the transfer, Parliament repealed some CCA provisions and some were replaced by FCA rules. The FCA was required to undertake a review of the remaining provisions. It published an interim report in August 2018, setting out its initial views and inviting comments. The FCA's views in the final report are broadly similar to those in the interim report. The FCA carried out its review by identifying three themes: (i) rights and protections; (ii) information requirements; and (iii) sanctions.
Please see the Markets and Markets Infrastructure section for an update regarding the Delegated Regulations exempting BoE from MAR, MiFIR, EMIR and SFTR obligations after Brexit which were published in the OJ.
BAFT, Wolfsberg Group and ICC publish 2019 version of Trade Finance Principles
On 27 March, BAFT, the Wolfsberg Group, and the ICC jointly announced the publication of two new appendices to their Trade Finance Principles, now incorporated in the 2019 version of the Principles. The Principles provide guidance on the nature and extent of controls that should be followed by financial institutions in trade finance transactions to address financial crime risks, including money laundering and terrorist financing. They were last updated in 2017. The two new appendices provide guidance on the specific application of controls by banks in the context of open account trade transactions and specifically elaborate on receivables purchase techniques as defined by the Global Supply Chain Finance Forum. They also provide guidance on the application of controls by banks in the context of Financial Institutions Trade Loans, also called Bank-to-Bank Trade Loans.
EP Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance recommends overhaul of system to fight financial and tax crime
On 26 March, the EP adopted the report of the Special Committee on Financial Crime, Tax Evasion and Tax Avoidance (TAX3). TAX3 was established by the EP on 1 March 2018, with a mandate to report and make recommendations on how to fight financial and tax crimes at an EU and global level. Significant findings from the report include: (i) highlighting a lack of political will in member states to tackle tax evasion/avoidance and financial crime; (ii) seven EU countries (Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands) displayed traits of a tax haven and facilitate aggressive tax planning; (iii) criticising Denmark, Finland, Ireland and Sweden for maintaining their opposition to the digital services tax; and (iv) the Netherlands, by facilitating aggressive tax planning, deprives other EU member states of EUR11.2 billion of tax income. Among other matters the report recommends various measures be adopted. These include the introduction of a European financial police force and an EU financial intelligence unit and the setting up of an EU anti-money laundering watchdog. A global tax body within the UN should also be set up and golden visas and passports should be phased out, with those offered by Malta and Cyprus singled out for their weak due diligence. Whistleblowers and investigative journalists must be much better protected and an EU fund to help investigative journalists should be established.
Public consultation on review of 2009 OECD anti-bribery recommendation
On 22 March, the OECD launched a public consultation on a review of its 2009 anti-bribery recommendation (ABR). The ABR is one of the suite of instruments adopted by the OECD to combat foreign bribery. The ABR contains provisions for combating small facilitation payments, protecting whistleblowers, improving communication between public officials and law enforcement authorities, and includes the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance. While the ABR does not have legal force it is regarded as a high-level policy statement of principles and practices that both members and non-members ought to fully implement. The review comprises a series of questions aimed at understanding the effectiveness of the ABR and how it might be strengthened to meet the evolving challenge of foreign bribery. The OECD Working Group on Bribery is expected to conclude the review by early 2020. The consultation closes on 30 April.
ESMA consults on draft ELTIF costs disclosure RTS
On 28 March, ESMA published a consultation paper on draft RTS under Article 25(3) of the Regulation on European Long-Term Investment Funds (ELTIF Regulation). ESMA is consulting on the draft RTS in the light of the new regulatory framework put in place in the context of the PRIIPs Regulation. In particular, because of the differences between the new framework of cost disclosure introduced by the PRIIPs Regulation as compared to the existing cost disclosure requirements of key investor information under the UCITS Directive.
The draft RTS are to determine the: (i) criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purposes; (ii) circumstances in which the life of an ELTIF is considered sufficient in length; (iii) criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets; (iv) costs disclosure; and (v) facilities available to retail investors. The full text of the draft RTS is in annex V to the consultation paper. Comments can be made until 29 June. Responses will help ESMA to finalise the draft RTS and they will then be submitted to the EC for endorsement.
EIOPA report on outsourcing to cloud service providers
On 27 March, EIOPA published a report on outsourcing to cloud service providers. In the European financial regulatory landscape, the purchase of cloud computing services falls within the broader scope of outsourcing. The EBA, EIOPA and ESMA were required to explore the need for guidelines on outsourcing to cloud service providers under the EC’s FinTech action plan, which was published in March 2018. The report provides an overview of cloud computing and market practices relating to cloud computing, before answering the EC’s question. As cloud computing is a fast-developing service, for its regulation to be efficient, EIOPA believes that it should be principle-based. To support market participants (that is, regulated undertakings and service providers), and to avoid potential regulatory arbitrage, under the steering of its InsurTech taskforce, EIOPA will develop guidelines on cloud outsourcing. It intends to draft the guidelines during the first half of this year, issue for consultation and then finalise by the end of the year. The guidelines will be aligned with the EBA recommendations relating to outsourcing, with minor amendments to reflect the (re)insurance specificities highlighted by analysis EIOPA has carried out. During the process of drafting the guidelines, EIOPA will organise a public roundtable on the use of cloud computing by (re)insurance undertakings. In addition, to guarantee cross-industry harmonisation within the European financial sector, EIOPA has agreed with the EBA and ESMA, in the second half of this year, to carry out a joint market monitoring activity aimed at developing policy views on how cloud outsourcing in the finance sector should be treated in the future. This will consider the increasing use of the cloud and the potential for large cloud service providers to be a single point of failure.
EIOPA report on licencing approaches to InsurTech
On 27 March, EIOPA published a report on best practices on licencing requirements, P2P insurance and the principle of proportionality in an InsurTech context. In the light of the EC’s Fintech action plan and the mandate of EIOPA's InsurTech taskforce, EIOPA mapped current authorisation and licencing requirements and assessed how the principle of proportionality is being applied in practice in the area of financial innovation. This includes the approach to InsurTech start-ups such as P2P insurers. The aim of the report is to provide an overview of the mapping and assessment, and to highlight emerging best practices for NCAs. Overall, EIOPA found that the EU InsurTech market is at an early stage but evolving. It sees no present need for further regulatory steps on licencing as the types of licences in the insurance sector are much more limited than in, for example, the banking sector. Currently, apart from P2P business, there is no obvious InsurTech-related development seen as challenging the current licencing framework. However, NCAs should, where appropriate, adapt their internal processes and knowhow to the general process of digital transformation. EIOPA notes that as InsurTech is constantly evolving, developments have to be monitored closely. NCAs should engage further with each other and exchange experiences with each other and with EIOPA, considering the rise of new technology-driven business models, the use of new technologies (for example, artificial intelligence and distributed ledger technology), and the licencing and ongoing supervision of highly digitised insurers to avoid supervisory arbitrage (for example, through different sensitivities to the use of crypto-assets to pay claims or premiums). EIOPA aims to facilitate this process, working with NCAs and InsurTech firms in the promotion of sound financial innovation in the European insurance and pensions market. This could include: (i) exploring options to develop a European insurance innovation hub for the benefit of NCAs and InsurTech firms; (ii) the assessment of InsurTech-related data that should be collected systematically to support NCAs and EIOPA work on InsurTech; and (iii) understanding how risks shift given new technologies and business models to enable further work on understanding different business models, including InsurTech's impact on traditional business models. EIOPA refers to other topics that are worth further attention and regular monitoring as outsourcing, developments in licencing InsurTech companies and the potential growth of the P2P insurance market.
FCA highlights complaints-handling failures by general insurance firms
On 26 March, the FCA published its regulation round-up for March. Among other things, the FCA reminds general insurance firms that they must handle complaints in line with its rules and principles, in particular, the requirements set out in Dispute Resolution: Complaints (DISP). It states that its supervisory work has revealed that some general insurance firms are failing to consistently deliver fair outcomes for their customers when handling complaints. The FCA identifies areas for improvement, including: (i) some firms are dealing with complaints in breach of DISP, without issuing a summary resolution or a final response letter. The FCA notes that this may prevent customers from accessing the formal complaint process (that is, the complaints time-limit rules, fair and prompt assessment of the complaint, and referral rights to the FOS); (ii) firms should capture and address all elements of each complaint; (iii) some firms need to improve the quality of final response letters issued to customers; (iv) firms should ensure that the root causes of complaints are always captured. The action required to correct the root cause, action owners and dates for completion must be clear; and (v) firms should take steps to ensure that their complaints processes are embedded by their outsourcers. Firms should have effective oversight of the quality of their outsourcers' complaints-handling and have management information to support this. The FCA will continue to monitor firms' compliance and take action concerning individual firms where necessary.
Insurance Distribution (Amendment) (EU Exit) Regulations 2019 made
On 25 March, the Insurance Distribution (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to correct deficiencies in retained EU law relating to the Insurance Distribution Directive (IDD) that arise from the UK leaving the EU. The Regulations also fix deficiencies in the directly applicable EU delegated regulations that have been made under the IDD (that is, Commission Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359). The Regulations were laid before Parliament in December 2018. No substantive changes appear to have been made. The Regulations come into force on exit day.
EIOPA report on year-end 2017 comparative study on market and credit risk modelling under Solvency II
On 25 March, EIOPA published a report setting out the findings from its YE2017 comparative study on market and credit risk modelling. EIOPA undertakes annual European-wide comparative studies on the modelling of market and credit risks under the Solvency II Directive. Market and credit risk contribute significantly to the solvency capital requirement of insurers, and is also important for the majority of internal model undertakings. The report summarises the key findings from the study undertaken in 2018 based on year-end 2017 data. The study focused on euro-denominated instruments and involved 19 participants from eight member states. The report also sets out (in section 5.3) details of action taken by relevant NCAs in response to the study's findings. In particular, NCAs are considering what action to take in respect of certain outliers identified for interest rate risk figures, variations in undertakings' credit risk charge for credit spread risk and variation of risk charges for property and strategic participations. EIOPA notes that some undertakings have already planned to incorporate some of the study's observations into their regular model activities. EIOPA states that the next study, based on year-end 2018 data, will follow the scope and extent of the current data request, although it also intends to include an analysis of derivatives and extend the analysis of foreign currencies.
MARKETS AND MARKETS INFRASTRUCTURE
Please refer to the Consumer/Retail section for an update regarding ESMA renewing the restriction on CFDs for a further three months and publishing its binary options product intervention decision in the OJ.
ESMA guidance on clearing obligation under EMIR Refit Regulation
On 28 March, ESMA published guidance for financial counterparties (FCs) and non-financial counterparties (NFCs) on the clearing obligation under the proposed Regulation amending EMIR (the EMIR Refit Regulation). ESMA states that the final text of the EMIR Refit Regulation could be adopted and published in the OJ in May. It could, therefore, enter into force around the end of May. It explains that the EMIR Refit Regulation includes a new regime to determine when FCs and NFCs are subject to the clearing obligation, depending on whether their positions exceed the clearing thresholds. FCs and NFCs can choose whether to conduct the calculation. When they choose not to, or where the calculation result exceeds the clearing thresholds, they are required to immediately notify ESMA and the relevant competent authority, and they will become subject to the clearing obligation for the OTC derivative contracts entered into four months following that notification. However, the regime differs in terms of the clearing obligation's scope of application and the calculation of the positions: (i) Scope: when NFCs conduct the calculation, they are only subject to the clearing obligation for the OTC derivative contracts pertaining to those asset classes in respect of which the calculation result exceeds the clearing thresholds; and (ii) Calculation: NFCs need only include the OTC derivative contracts that are not objectively measurable as reducing risks, whereas FCs must include all OTC derivative contracts they enter into. As the new regime applies on the EMIR Refit Regulation's entry into force, FCs and NFCs taking positions in OTC derivative contracts and choosing to calculate their aggregate month-end average position for the previous 12 months would need to determine the calculation results on the day it enters into force. ESMA expects those FCs and NFCs to collect all the necessary data so they are ready for the calculation. All FCs and NFCs taking positions in OTC derivative contracts and that do not calculate their aggregate month-end average position for the previous 12 months, or where the calculation result exceeds any of the clearing thresholds, must immediately notify ESMA and their relevant competent authority on the day the EMIR Refit Regulation enters into force.
ESMA updates MiFID II Q&As on investor protection and intermediaries topics
On 28 March, ESMA published an updated version of its Q&As on investor protection and intermediaries topics under MiFID II and MiFIR. ESMA has added new Q&As on: (i) best execution and the scope of the RTS 27 reporting requirements for market makers and other liquidity providers; (ii) the use of generic statements in suitability reports; (iii) information on costs and charges; (iv) provision of investment services and activities by third-country firms – reverse solicitation; (v) the meaning of durable medium; and (vi) product governance – the target market of CoCo-bond funds. It has also updated two existing Q&As relating to the availability of suitability reports on firms' websites and the use of products' costs presented in the PRIIPs KID.
EC adopts Delegated Regulations under EMIR to prepare for no-deal Brexit
On 28 March, the EC adopted the following Delegated Regulations under EMIR: (i) a Delegated Regulation amending Commission Delegated Regulation (EU) 2016/2251, which supplemented EMIR with RTS on risk mitigation techniques for uncleared OTC derivative contracts; and (ii) a Delegated Regulation amending RTS on the clearing obligation under EMIR to extend the dates of deferred application of the clearing obligation for certain OTC derivatives contracts. The EC previously adopted two similar Delegated Regulations ((EU) 2019/396 and (EU) 2019/397) relating to EMIR in December 2018, which were subsequently published in the OJ. In the light of the extension of the Article 50 period, these Delegated Regulations no longer apply. However, as the reasons underlying the original Delegated Regulations remain, in particular the possibility that certain risks remain unhedged should the exemptions not be extended in case of a withdrawal without an agreement, the EC proposes new amended Delegated Regulations. The EP and Council of the EU will now consider the new Delegated Regulations. The Delegated Regulations will apply from the date that the Treaties cease to apply to and in the UK. They will not apply if the withdrawal agreement has entered into force by that date or the Article 50 process has been extended.
EP adopts first reading position on proposed Regulation on recovery and resolution of CCPs
On 27 March, the EP adopted its position at first reading on the proposed Regulation on the recovery and resolution of CCPs. The EP has published the provisional edition of the text of the legislative resolution adopted. The EP’s first reading position sets out its amendments to the EC’s legislative proposal. ECON voted to adopt its report on the proposed Regulation in January. The next step is for the Council of the EU to adopt its first reading position.
EP adopts first reading position on proposed Regulation and Directive on European crowdfunding service providers
On 27 March, the EP published a press release announcing that it has adopted its position at first reading on the proposed Regulation on European crowdfunding service providers and the proposed Directive making consequential amendments to MiFID II. The EP has also published: (i) the provisional edition of the text of the legislative resolution adopted on the proposed Regulation; (ii) the provisional edition of the text of the legislative resolution adopted on the proposed Directive. The EP’s first reading position sets out its amendments to the EC’s legislative proposals. The press release states that its position confirms the position of ECON, which adopted its draft report in November 2018. The press release also states that the vote closes the EP’s first reading with a view to an agreement being reached with the Council of the EU in the next parliamentary term. The Council has not yet adopted its position.
ESMA updates MiFID II and MiFIR commodity derivatives Q&As
On 27 March, ESMA published an updated version of its Q&As on commodity derivatives topics under MiFID II and MiFIR. In the updated version, ESMA clarifies the scope of the ancillary activity test and updates a previous Q&A on the deadline for the notification to make use of the ancillary activity exemption.
COREPER agrees Council of EU's negotiating mandate on proposed Directive on credit servicers, credit purchasers and the recovery of collateral
On 27 March, the Council of the EU announced that COREPER has agreed the Council's negotiating mandate on the proposed Directive on credit servicers, credit purchasers and the recovery of collateral. The Council has also published the text of the negotiating mandate, as well as an "I" item note from the General Secretariat of the Council to COREPER inviting it to approve the mandate. The mandate does not include the Council's position on the part of the proposed Directive relating to the recovery of collateral and omits the reference to the recovery of collateral in the title of the Directive. The Council has not yet reached agreement on this part. The "I" item note explains that the Presidency of the Council decided to move forward with the part of the Directive relating to credit services and credit purchasers, as it considered that this was separable from the accelerated extrajudicial collateral enforcement (AECE) part. The Council will continue working on the AECE part in the Working Party on Financial Services. The Council can now start negotiations on these secondary market’s parts with the EP as soon as the EP has agreed on its own negotiating position.
EP adopts Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks at first reading
On 26 March, the EP adopted its position at first reading on the proposed Regulation amending the BMR on low carbon benchmarks and positive carbon impact benchmarks. The EP has published the provisional edition of the text of the legislative resolution adopted, as well as the relevant section of the minutes of the plenary and details of the votes. The resolution amends the formal title of the proposed Regulation to "Regulation (EU) 2019/… of the [EP] and of the Council amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks". The EP’s first reading position reflects the political agreement reached by it and the Council of the EU in February. The next step is for the Council to adopt the proposed Regulation. Once adopted, it will enter into force the day after its publication in the OJ.
FCA to delay Brexit MiFID IT switchover
On 26 March, the FCA published its regulation round-up for March. Among other things, the FCA announces that it will not switch over its IT systems to replace ESMA's MiFID systems on the weekend of 30/31 March. If there is a no-deal Brexit, the FCA plans for the switchover to take place on the weekend of 13/14 April with a go-live date of 15 April. This includes the planned switchover to FCA Financial Instruments Reference Database and FCA Financial Instruments Transparency System. The FCA expects firms to continue to report to it as they currently do until 11pm on 12 April. The FCA's decision follows the European Council's decision on 21 March to agree to a short extension to the Article 50 period.
Uncertificated Securities (Amendment and EU Exit) Regulations 2019
On 26 March, the Uncertificated Securities (Amendment and EU Exit) Regulations 2019 were made and published. The regulations, which make amendments to the Uncertificated Securities Regulations 2001 and certain other legislation intended to reflect the implementation of the Central Securities Depositories Regulation and ensure that the UK retains an operative regulatory framework for uncertificated securities following the withdrawal of the UK from the EU, are in substantially the same form as the draft published in January. The regulations which relate to the CSDR regime, will come into force on the day after the day on which they were made. Those which relate to Brexit, will come into force on exit day.
Securitisation (Amendment) (EU Exit) Regulations 2019 made
On 25 March, the Securitisation (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to correct deficiencies in the retained version of the EU Securitisation Regulation and other UK and retained EU legislation relating to securitisations that arise from the UK leaving the EU. They aim to ensure that the European framework governing securitisations under the EU Securitisation Regulation, will continue in the UK, post Brexit. The Regulations were laid before Parliament in January. The Regulations will come into force on exit day.
Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019 made
On 25 March, the Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The Regulations correct deficiencies in parts of the Financial Services and Markets Act 2000 that cover the regulatory regime for recognised investment exchanges, EEA market operators, clearing houses (including CCPs) and central securities depositories operating in, or offering services to, the UK. The Regulations were laid before Parliament in January. No substantive changes appear to have been made. Regulation 1 (citation, commencement and interpretation) and Part 2 of the Regulations came into force on 26 March. The remaining provisions come into force on exit day.
Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 made
On 25 March, the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to make amendments to retained EU law relating to the BMR to ensure that the regime for financial benchmarks continues to operate effectively in the UK once the UK has left the EU. The Regulations will also make minor changes to delegated acts under the BMR to ensure they function after exit day. This includes amending the list of critical benchmarks to remove benchmarks administered in the EU. The Regulations were laid before Parliament in December 2018. No substantive changes appear to have been made. The Regulations come into force on exit day.
Delegated and Implementing Regulations under SFTR published in OJ
On 22 March, the following Delegated Regulations and Implementing Regulations supplementing the Regulation on reporting and transparency of SFTR were published in the OJ: (i) Delegated Regulation (EU) 2019/356 supplementing the SFTR with regard to RTS specifying the details of SFTs to be reported to trade repositories; (ii) Delegated Regulation (EU) 2019/358 supplementing the SFTR with regard to RTS on the collection, verification, aggregation, comparison and publication of data on SFTs by trade repositories; (iii) Delegated Regulation (EU) 2019/360 supplementing the SFTR with regard to fees charged by ESMA to trade repositories; (iv) Delegated Regulation (EU) 2019/357 supplementing the SFTR with regard to RTS on access to details of SFTs held in trade repositories; (v) Delegated Regulation (EU) 2019/359 supplementing the SFTR with regard to RTS specifying the details of the application for registration and extension of registration as a trade repository; (vi) Implementing Regulation (EU) 2019/363 laying down ITS with regard to the format and frequency of reports on the details of SFTs to trade repositories in accordance with the SFTR and amending Implementing Regulation (EU) 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts; (vii) Implementing Regulation (EU) 2019/365 laying down ITS with regard to the procedures and forms for exchange of information on sanctions, measures and investigations in accordance with the SFTR; (viii) Implementing Regulation (EU) 2019/364 laying down ITS with regard to the format of applications for registration and extension of registration of trade repositories in accordance with the SFTR; (ix) Commission Delegated Regulation (EU) 2019/361 amending Delegated Regulation (EU) 151/2013 with regard to access to the data held in trade repositories; and (x) Commission Delegated Regulation (EU) 2019/362 amending Delegated Regulation (EU) 151/2013 as regards RTS specifying the details of the application for registration as a trade repository. These Regulations will enter into force on 11 April (that is, the 20th day following their publication in the OJ).
Delegated Regulations exempting BoE from MAR, MiFIR, EMIR and SFTR obligations after Brexit published in OJ
On 22 March, four Delegated Regulations that exempt the BoE and public bodies charged with or intervening in the management of the public debt in the UK from requirements under four EU Regulations after Brexit were published in the OJ: (i) Delegated Regulation (EU) 2019/460 amending EMIR with regard to the list of exempted entities; (ii) Delegated Regulation 2019/461 (including Annex) amending Delegated Regulation (EU) 2016/522 as regards the exemption of the BoE and the UK Debt Management Office from the scope of MAR; (iii) Delegated Regulation 2019/462 (including Annex) amending Commission Delegated Regulation (EU) 2017/1799 as regards the exemption of the BoE from the pre- and post-trade transparency requirements in MiFIR; and (iv) Delegated Regulation (EU) 2019/463 amending the SFTR with regard to the list of exempted entities. The EC adopted the delegated regulations on 30 January. The Delegated Regulations enter into force on the day after their publication in the OJ. They will apply on the day that EMIR, MAR, MiFIR and the SFTR cease to apply to and in the UK.
FCA announces details of new UK benchmarks register
On 22 March, the FCA published a press release setting out details of a new benchmarks register it has developed as part of its planning for the UK leaving the EU on 29 March without an implementation period. The UK Benchmarks Register will replace ESMA's existing register for UK supervised users, and UK and third-country based benchmark administrators that want their benchmarks to be used in the UK. The register will include: (i) Benchmarks Administrators. The Benchmarks Administrators Register is a public record of all benchmark administrators that are authorised, registered or recognised by the FCA or are outside the UK and have notified the FCA that they benefit from an equivalence decision that has been adopted by the UK; (ii) Third-country Benchmarks. The Third-country Benchmarks Register is a public record of all benchmarks that are provided by third-country benchmarks administrators recognised by the FCA, or are endorsed by a UK authorised or registered benchmarks administrator (or other supervised entity) for use in the UK, or are provided by benchmarks administrators from outside the UK that have notified the FCA that they benefit from an equivalence decision that has been adopted by the UK. The details of benchmark administrators and third-country benchmarks included in the new UK register have been copied from ESMA's register as set out in the draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019. This information will stay on the UK register for two years unless it is subsequently removed pursuant to and in accordance with UK Regulation.
PAYMENT SERVICES AND PAYMENT SYSTEMS
PSR annual plan and budget for 2019/20
On 27 March, the PSR published its annual plan and budget for 2019/2020. It also published a related fact sheet and a press release. The document sets out a summary of the PSR's key aims and activities for 2019/20 and its expected operating costs. The PSR's key initiatives for 2019/20 include: (i) Payment scams. The PSR will monitor the implementation of the reimbursement code for authorised push payment scams. It also intends to see Confirmation of Payee (CoP) introduced as soon as possible. It will publish a response in due course to its November 2018 consultation on CoP; (ii) Access to cash. The PSR is carrying out a detailed analysis of how people get cash and their attitudes towards it. Its work will take into account issues raised in the Access to Cash final report, published in March; (iii) New payments architecture (NPA). The PSR will continue to monitor the progress of Pay.UK in its oversight of the design and implementation of the NPA; (iv) Card acquiring market review. The PSR intends to publish an interim report on its card acquiring market review at the end of this year. It published the terms of reference for the review in January; and (v) Brexit. The PSR will continue monitoring developments and working with the payments sector to ensure that risks arising from Brexit are well managed.
Payment Accounts (Amendment) (EU Exit) Regulations 2019 made
On 25 March, the Payment Accounts (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to ensure that UK legislation implementing the Payment Accounts Directive operates effectively after Brexit. The Regulations were laid before Parliament in November 2018. No substantive changes appear to have been made. Chapter 2 of Part 2 of the Regulations, relating to the amendment of the Financial Regulators' Powers (Technical Standards etc) (Amendment etc) (EU Exit) Regulations 2018, came into force on 26 March. The remaining provisions come into force on exit day.
FCA Dear CEO letter on managing risks of DB to DC transfers
On 22 March, the FCA published a Dear CEO letter on managing the risks of defined benefits (DB) to defined contribution (DC) pension scheme transfers. The FCA has completed its review of pension product providers to evaluate and reduce the risks of harm to consumers arising from the transfer of funds from DB schemes to DC products. The review identified key drivers of harm. The letter sets out the FCA's expectations of firms when they design, market and provide pension products. Key areas for firms to take note include: (i) firm's processes for regularly reviewing DC products should show how firms have taken into account the needs of customers transferring from DB schemes, especially if the products were developed before pension freedoms were introduced in April 2015. Management Information (MI) should identify target audiences appropriately and weaknesses in support services. Such reviews should provide the appropriate senior manager function holder with the information they need to be confident they are dealing with incoming DB business appropriately; (ii) processes for review, governance and quality assurance for the messages provided to adviser firms should be accurate and unbiased, and messaging should be balanced, clear and accurate. Messages to adviser firms should not encourage distributors to make inappropriate recommendations to consumers; (iii) MI should be complete and accurately reflect the firms overall risk profile. Metrics should allow meaningful oversight, specifically on customer and adviser behaviour. They should also measure negative trends, which should be investigated and assessed and, if necessary, reported to the FCA; (iv) pay and bonuses should be linked to meaningful measures of quality, rather than solely relying on quantitative factors; and (v) second and third line reviews of DB activity since April 2015 should be carried out and acted on, to assess the systems and controls in place to mitigate operational, regulatory and conduct risks posed by pension transfers. The FCA expects providers to satisfy themselves that they have appropriately implemented and fully comply with the recommendations of PROD, the RPPD and all relevant rules and regulations.
BCBS summary of follow-up actions for Basel III RCAP assessments
On 25 March, the BCBS published a press release announcing the publication of reports on follow-up actions taken by certain BCBS members following regulatory consistency assessment programme (RCAP) assessments. The relevant BCBS members are Argentina, Australia, Brazil, Canada, China, the EU, Hong Kong, India, Indonesia, Japan, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa, Switzerland, Turkey and the US. The BCBS has updated its webpage on the RCAP assessments to include links to reports on post-RCAP assessment follow-up actions taken by each of these jurisdictions as at 31 December 2018. The BCBS has also published a summary of post-RCAP assessment follow-up actions taken or planned by its members. The BCBS states that in 2020 it will publish reports for assessments completed and published as of end-2018. It will extend the scope of these reports to include assessments of the implementation of its standards for the net stable funding ratio and for measuring and controlling large exposures.
EP adopts first reading position on proposed Regulation on sustainable investment framework
On 28 March, the EP published a press release announcing that it has adopted its position at first reading on the proposed Regulation on the establishment of a framework to facilitate sustainable investment. The press release states that the vote closes the EP’s first reading with a view to an agreement being reached with the Council of the EU in the next parliamentary term. The Council has not adopted its position yet (see update on COREPER below).
HMT updates UK Parliament committees on progress of proposed Regulation on disclosures relating to sustainable investments and sustainability risks
On 27 March, HMT published a letter from John Glen, Economic Secretary to the Treasury, sent to Lord Boswell of Aynho, Chair of the House of Lords European Union Committee concerning the proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The Council of the EU and the EP reached political agreement on the Regulation on 7 March. Mr Glen states that HMT expects that the EP will adopt the Regulation at first reading in April, but that it is unclear when the Council will adopt the Regulation (as to which see below). Mr Glen highlights changes made to the Council's general approach that were agreed between the Council and the EP. He notes that a requirement has been introduced to require firms to publish a statement on their policies on how they consider the adverse impacts of their investments on sustainability factors, although a comply or explain approach will operate for smaller firms. There will also be a comply or explain requirement for all firms to disclose at product level how the adverse impact of investments on sustainability factors are considered. Mr Glen also notes that the position remains that no provisions in the Regulation will apply specifically to publicly listed companies. In this letter, and in a letter sent to Sir Bill Cash, Chair, House of Commons European Scrutiny Committee, Mr Glen states that the government has decided to include the Regulation in the Schedule to the Financial Services (Implementation of Legislation) Bill, which lists "in-flight" EU legislation that the government intends to implement if there is a no-deal Brexit. The letters set out the government's reasons for its change of policy on the post-Brexit status of the Regulation.
COREPER approves final compromise text of proposed Regulation on disclosures relating to sustainable investments and sustainability risks
On 27 March, COREPER approved the final compromise text on the proposed Regulation on disclosures relating to sustainable investments and sustainability risks, an EU official has confirmed. The Council of the EU published an "I" item note on the proposed Regulation inviting COREPER to approve the texts on 22 March. The final compromise text agreed by the EP and the Council is set out in an addendum to the "I" item note. COREPER can now inform the EP that, should the EP adopt its position on the proposed Regulation at first reading, as set out in the final compromise text, the Council will adopt the Regulation at first reading. The Regulation will then be published in the OJ and enter into force. The Regulation will apply 15 months after its publication in the OJ, with the exception of certain provisions specified in Article 12 of the final compromise text.
BoE Governor comments on need for conduct scenario analysis of firms' strategic resilience to climate-related issues
On 22 March, the BoE published a speech given by Mark Carney, BoE Governor, on 21 March on a global approach to sustainable finance. Among other things, Dr Carney focuses on the need for firms to conduct scenario analysis when considering their strategic resilience to climate-related issues. He explains that Task Force on Climate-related Financial Disclosures' September 2018 implementation report on the adoption of its disclosure framework found that while the financial sector was moving towards strategic analysis, few systematically conducted scenario analysis, leading to gaps in firms' own risk management. Dr Carney explains that firms should consider scenario analysis as part of their assessments of the impact of climate risks on their balance sheet and broader business strategy. The form of these scenarios is not mandated and firms will need to develop their own transition scenarios or build on commonly available models. The scenarios should be comprehensive, rigorous and challenging, with the assumptions and methodologies in the models being sufficiently transparent to allow for comparisons and external challenge. Scenarios should also be implemented consistently across the business, linking identification of risks and opportunities to both strategy and disclosure. The PRA's Climate Financial Risk Forum will work with industry to review tools and metrics, with the view to publishing reference scenarios and standard assumptions. Referring to the corresponding supervisory action needed, Dr Carney points out that firms' strategic resilience will require climate-related stress testing. In April, UK insurers, as part of a market-wide insurance stress test, will be asked by the PRA to consider how their businesses would be affected in different physical and transition risks scenarios. Outlining the objectives of a system-wide stress test (testing banks and other participants in the financial system) would help supervisors judge whether further actions are needed. While the BoE considers the timing and design of such a stress test, it is working with the Network for Greening the Financial System to develop a small number of high-level scenarios. Dr Carney confirms that the PRA will publish its final supervisory statement on enhancing banks' and insurers' approaches to managing the financial risks from climate change soon following its October 2018 consultation.
Final EBA outsourcing guidelines: A review
The EBA has published final guidelines on outsourcing (the EBA Guidelines), which will replace the guidelines issued by its predecessor, the Committee of European Banking Supervisors, with effect from 30 September. The EBA Guidelines also incorporate and replace its prior recommendations on the use of cloud service providers. The EBA Guidelines contain a significantly increased level of detail with which firms must now comply, substantially increasing firms’ compliance burden, as well as expanding the scope from credit institutions to cover all firms within the EBA’s remit, being CRD IV institutions, payment services institutions and e-money institutions. Firms should focus on their outsourcing policies, procedures and agreements, as complete, compliant, documentation should be in place upon the establishment, or following the first renewal date, of each outsourcing after 30 September and, in any event, no later than 31 December 2021. Please find A&O’s review here.
FOS letter to Treasury Committee comments on requirement to make reasonable adjustments for customers under Equality Act 2010
On 26 March, the House of Commons Treasury Committee published a letter from Caroline Wayman, Financial Ombudsman Service (FOS) Chief Ombudsman and Chief Executive, to Nicky Morgan, Committee Chair relating to the requirement to make reasonable adjustments for customers under the Equality Act 2010 (Equality Act). Ms Wayman's letter responds to a letter from Ms Morgan. Points of interest include: (i) where it is relevant to the circumstances of a complaint, the FOS will consider the Equality Act when deciding what its fair and reasonable. However, this is not the same as making a formal judgment on whether or not a business has breached the Equality Act in the way a court would; (ii) if a customer feels that they have not been treated fairly and part of that was about a reasonable adjustment not being provided, the FOS would look into the complaint. It could then require a financial services provider to put things right, including directing them to make reasonable adjustments; and (iii) if the FOS had concerns about an individual case, it would be likely to contact the FCA or the ECHR. Certain bodies, such as the ECHR, have different powers that are more specifically related to the Equality Act. The FOS is in contact with the ECHR as well as charities and advice bodies to ensure that they are able to discuss matters relating to this area.
IOSCO annual work programme for 2019
On 25 March, IOSCO published its first annual work programme. The aim of the programme is to enhance the effectiveness of IOSCO and the impact of its policy work on global securities markets. IOSCO's priorities for 2019 relate to: (i) Crypto-assets. IOSCO will focus on how platforms where crypto-assets are traded are regulated and will also examine regulation of investment funds with exposures to crypto-assets; (ii) Artificial intelligence and machine learning (AIML). IOSCO will examine the supervision of market intermediaries, including asset managers that use AIML and examine ethical challenges that may arise from the use of AIML in securities markets; (iii) Market fragmentation. IOSCO will analyse potentially harmful market fragmentation, including that attributable to cross-border regulation. It will also take stock of members' progress in assessing and deferring to foreign regulatory regimes since the publication of its 2015 report on cross-border regulation and any further policy implications; (iv) Passive investing and index providers. IOSCO will initiate a review of the impact of passive investing on markets; and (v) Retail distribution and digitalisation. IOSCO will conduct work on the use of social media and the digitalisation of investment product distribution by regulated entities and new types of financial intermediaries. This will include considering whether it needs to expand on its OTC leveraged products report, which was published in September 2018, to take account of developments. In addition, with regard to asset management, IOSCO will continue to work on consistent measures of leverage in investment funds, and will undertake further work on exchange traded funds, following previous work that considered potential investor protection and market integrity issues. IOSCO will also consider, among other things, the role of outsourcing and third-party providers in securities markets, how sustainability issues may relate to securities markets, potential inefficiencies in the market due to OTC derivatives reforms and finalise its consistency review on suitability requirements for complex financial products. Each of the priorities falls into one or more of five broad focus areas that were approved by the IOSCO board in late 2016.