BREXIT

Please see the Insurance section for an update on the HoC Treasury Committee’s response to the PRA's constructive approach to issues identified by Solvency II inquiry.  

Please see the Other Developments section for an update on ECON’s adoption of its draft report on the regulatory and supervisory relationships between EU and third countries.

UK government publishes a white paper on the future UK-EU relationship

On 12 July, the UK government published a white paper on the future UK-EU relationship. The white paper reiterates that the UK government's policy is for the UK to leave the single market and the customs union, and gain flexibility to conclude new international trade agreements, making particular mention of agreements on trade in services. The white paper addresses the following aspects of the future UK-EU relationship: (i) economic partnership, including proposals for a free trade area for goods (with a facilitated customs arrangement), and a new economic and regulatory arrangement with the EU in financial services; (ii) security partnership, including law enforcement and criminal justice co-operation; and (iii) cross-cutting and other co-operation in areas such as data protection. The white paper also sets out the UK government's vision of institutional arrangements, including a proposal that the future UK-EU relationship should be structured around an overarching institutional framework. According to the white paper, precedent suggests that this would take the form of an association agreement. The EP has welcomed this proposal. In respect of financial services, the UK government is proposing a new economic and regulatory arrangement with the EU. This arrangement would be based on the principle of autonomy for each party on decisions relating to access to its market, with a bilateral framework of treaty-based commitments. The existing equivalence framework should be expanded to encompass a broader range of cross-border activities. The UK government acknowledges that this arrangement cannot replicate the EU's passporting regime. There should be reciprocal recognition of equivalence between the UK and the EU under all existing third country regimes that takes effect at the end of the transition period. Future determinations of equivalence should be an autonomous matter for each party. However, the bilateral arrangement framework should contain provisions relating to: (i) common principles for the governance of the relationship; (ii) extensive supervisory co-operation and regulatory dialogue - there should be frameworks for: (a) regulatory dialogue - the UK and the EU should be able to understand and comment on each other's proposals at an early stage through a structured consultative process of dialogue at political and technical levels; and (b) supervisory co-operation - there should be close supervisory co-operation concerning firms that pose a systemic risk or that provide significant cross-border services on the basis of equivalence (or both). There should be codified procedures for routine co-operation and for co-ordination in crisis situations; (iii) predictable, transparent and robust processes - there should be processes to ensure that the relationship is stable, reliable and enduring. These processes may be established through a mixture of treaty-based bilateral agreements and the autonomous measures of the UK and the EU. These processes should relate to: (a) transparency assessment methodology for assessing equivalence; (b) a structured withdrawal process if either party considers withdrawing equivalence; and (c) long term stabilisation - there should be a presumption against unilateral changes that narrow the terms of existing market access regimes, other than in exceptional circumstances. 

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ESMA warns firms on timings for submitting Brexit authorisation applications 

On 12 July, ESMA published a public statement (ESMA42-110-998) on the timely submission of requests for authorisation in the context of the UK withdrawing from the EU. ESMA has issued the statement to raise the awareness of all market participants of the importance of preparing for the possibility of there being no deal on Brexit between the UK and the EU and consequently no transitional period in place from 30 March 2019. ESMA states that NCAs in the EU27 have seen a significant increase in the number of authorisation requests by firms wishing to be authorised in their jurisdictions by 29 March 2019 to be able to continue providing services in the EU after Brexit. ESMA: (i) urges firms wishing to relocate to the EU27 to submit their application for authorisation as soon as possible to allow it to be processed before 29 March 2019. It notes that some NCAs have already told firms that unless an application is received "in the month of June/July", there is no guarantee that authorisation will be achievable before 29 March 2019; (ii) invites firms to contact the relevant NCAs (or ESMA itself in the case of CRAs and TRs), as soon as possible if they have not yet done so; and (iii) reminds firms that the time required to analyse an authorisation request depends primarily on the quality of the application file and encourages firms to be complete and accurate in their filing for authorisation.

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CAPITAL MARKETS

Please see the Financial Crime section for an update on the FCA’s speech on its actions to tackle money laundering in capital markets.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 published 

On 10 July, the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018 (SI 2018/831) was published, together with an explanatory memorandum. The Order was made on 10 July and came into force on 11 July. Article 2 of the Order amends the RAO. It expands on the conditions set out in article 77A(2) of the RAO, allowing for a broader range of AFIBs to qualify as specified investments. This means that arrangements involving securities that are traded on a MTF or an OTF may satisfy the conditions in article 77A, and may be treated as AFIBs. Article 2 is intended to bring the regulatory treatment of AFIBs under the FSMA into line with section 34(2) of the Finance Act 2018, which came into force on 1 April. This ensures that the regulatory and tax regimes for AFIBs are harmonised, and meet the UK government's commitment to provide a level playing field for Islamic Finance instruments in the UK. The Order has been brought into force with immediate effect (rather than after the expiry of 21 days) to reduce the length of time the differing treatment of AFIBs was in effect. Businesses were not considered to need time to prepare for this change. However, MTF or OTF operators wishing to trade AFIBs on their trading venues will need to apply to the FCA to vary their permission. Article 3 amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 so that a person administering a benchmark as specified in the RAO will be regarded as carrying on the activity by way of business. This means that persons carrying on this activity will need to be authorised under FSMA. This amendment was made as a consequence of the coming into force of the Benchmarks Regulation, which was given effect by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018. HMT did not consult on the changes made by the Order.

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CONSUMER/RETAIL

HMT publishes a response to its consultation on secondary regulations relating to CMC regime

On 11 July, HMT published a response to its consultation on secondary regulations relating to regulating CMCs, together with a draft version of the Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018, which includes transitional and consequential provisions. Overall, there was broad agreement from respondents on the proposals set out in the April consultation. Key things to note: (i) chapters 2 to 4 of the response set out some of the key themes in the responses, and confirm HMT’s final approach to defining the scope of claims management activities for the purposes of FCA regulation and the temporary permissions regime. It intends to implement seven different permissions for regulating the scope of claims management activities, and proceed with the temporary permissions regime, as consulted on; (ii) there were some queries about whether "financial services and products" should be defined in the draft Order. However, HMT believes the phrase is broad enough to catch a range of activities and does not want to create a definition that may limit its applicability. To ensure there is no doubt, HMT has made express provision in the draft Order to make clear that claims made under section 75 of the CCA are included within the scope of claims for financial services and products; (iii) there were a number of suggestions that the scope of the draft Order should be extended to Northern Ireland. However, this cannot be done through secondary legislation; and (iv) chapter 5 sets out HMT’s policy intent for transitional provisions. Provisions included in the draft instrument provide more detail on the proposed legislative framework. HMT will continue to work on the draft Order, which will be subject to further amendment, legal checks and, in due course, parliamentary approval. The FCA will take over the regulation of claims management activities on 1 April 2019. Claims management complaints will be transferred to the FOS at the same time. The FCA plans to publish its final rules in the fourth quarter of this year, once it has considered responses to its June consultation paper (CP18/15). The UK government will do further work to assess whether claims for cavity wall insulation, aviation and timeshares should be regulated in the future.

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FCA reports on pawnbroking sector review

On 11 July, the FCA published the outcome of a review of the pawnbroking sector. The review's aim was to assess any potential risks arising from the pawnbroking sector, which forms part of the high-cost credit market and follows the FCA's July 2017 feedback statement on the high-cost credit sector, in which it concluded that pawnbroking was not a priority area terms of potential risk. The FCA concluded that it still does not consider pawnbroking a priority area in terms of potential risk of harm to consumers. However, it identified potential areas of concern, including: (i) unpaid surplus. Customers are not always receiving the surplus money owed to them when an unredeemed pledge is sold above the redemption value, taken together with the expenses of sale. The FCA notes that, under section 121(3) of the CCA, any surplus from the sale of the pledge must be returned to the customer; (ii) expenses of sale. The expenses of sale relating to the sale of an unredeemed pledge are not always reasonable. The FCA notes that section 121(7) of the CCA refers to reasonable expenses of sale and, if the customer challenges these expenses, the onus is on the firm to prove they were reasonable; (iii) financial crime. The FCA warns that firms may be at risk of being exploited for criminal purposes. Firms should assess these risks and ensure they have systems and controls to address them. There are weaknesses in the knowledge of some MLROs of the requirement to report SARs to the NCA; and (iv) suitability of services. The FCA found that customers may be unaware of the absence of equivalent consumer protections when entering into unregulated agreements (such as sale and buy back agreements) or where agreements are regulated differently (such as peer-to-peer lending agreements). The FCA expects firms to consider the findings of the review and take any action as necessary, particularly in relation to any of the areas of concern identified. It will assess firms' response to the report in any future supervisory work.

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FINANCIAL CRIME

Please see our eAlerts: (i) Anti-Money Laundering Regulation of Cryptocurrency: U.S. and Global Approaches; and (ii) International Comparative Legal Guide to: Anti-Money Laundering 2018 

HMT publishes an advisory notice on money laundering controls in overseas jurisdictions

On 11 July, HMT published an advisory notice on money laundering controls in overseas jurisdictions which sets out the countries that pose the greatest risk to companies when business is transacted with them. The published advice replaces all previous advisory notices issued by HMT on this subject.

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FCA publishes a speech on its action to tackle money laundering in capital markets

On 10 July, the FCA published a speech (dated 3 July) given by Mark Steward, FCA Director of Enforcement and Market Oversight, on MiFID II and the fight against financial crime. Amongst other things, Mr Steward comments on how the FCA is acting on the UK's October 2017 NRA, which identified an emerging risk of money laundering in capital markets. The FCA has several investigations underway on a series of capital market transactions that appear to have no market purpose or function. If the FCA's suspicions are correct, these transactions falsify liquidity, trading volume and supply and demand in the market, and their purpose is unrelated to the sale and purchase of the underlying investments. As these transactions have cross-border elements, the investigations are being conducted in association with overseas regulators and law enforcement agencies. The FCA has started a small number of investigations into firms' systems and controls. It has indicated to these firms that it is looking at whether there has been any misconduct that may justify a criminal prosecution under the MLRs 2017. Mr Steward notes that the FCA starting criminal investigations against firms relating to AML systems and controls may be surprising. However, the prospect of investigations having a dual track, or potentially a multiplicity of outcomes (from no further action to disciplinary, civil or criminal proceedings) is not new. An investigation is primarily a fact-finding mission with any decision about what, if any, action may result being best left until the end. The presumption of innocence applies, which is why these firms should not be identified unless and until any charges are laid. Any criminal proceedings would need to satisfy both the evidential test (beyond reasonable doubt) as well as the public interest test. In practice, this means criminal action is likely to be reserved for the most serious cases. It is hard to be definitive about what a serious case looks like. However, where the FCA sees what appears to be facilitation of suspected serious crime, in circumstances where plainly obvious checks and questions have not been carried out or asked, it is likely the test of seriousness is passed.

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FATF consults on guidance for life insurance and securities sectors on applying risk-based approach to AML and CTF

On 6 July, the FATF published the following draft guidance for consultation: (i) draft guidance for life insurance sector. In the private sector, this guidance is aimed at insurers and intermediaries providing life insurance and other investment-related insurance products. This is an updated version of the FATF's 2009 guidance for the life insurance sector. It brings the 2009 guidance into line with the FATF's 2012 AML and CTF standards; and (ii) draft guidance for securities sector. In the private sector, this guidance is aimed at securities providers and intermediaries. The guidance is designed to help countries, competent authorities and firms design and implement a RBA to AML and CTF. It provides general guidance and includes examples of current practices, focusing on the risks in each sector and associated risk mitigation measures. The guidance also supports development of a common understanding of what an RBA to AML and CTF entails. The deadline for comments on the draft guidance is 17 August. In particular, firms are asked whether the draft guidance for the private sector provides sufficient clarity on the design and implementation of risk-based AML and CTF measures. The FAFT intends to adopt final versions of the guidance at its October plenary meeting. The FATF advises that the guidance should be read in conjunction with other specified FATF papers, as well as its international standards.

FINTECH 

Please see the Financial Crime section above for our eAlert on the anti-money laundering regulation of cryptocurrency.

ECON publishes a study on the competition issues in FinTech

On 10 July, ECON published a commissioned study on competition issues in FinTech. The study notes that FinTech services offer significant potential benefits to European consumers and has revolutionised, and continues to aid, the financial services. The study proposes the following categories of classification of FinTech services: (i) banking (deposits and lending); (ii) payments, transfers and Forex; (iii) digital currencies; (iv) wealth and asset management; (v) personal finance; (vi) insurance; and (vii) enabling technologies and infrastructures. The study states that (i) the main obstacle for the development of a competitive market is not due to existing anti-competitive behaviours in the market, but a lack of clear regulatory standards. Banking platform markets are primarily multi-home and do not have a high intensity of use, so potential anti-competitive factors might not have a real impact on competition at this stage; (ii) payments are the FinTech services that competition authorities are paying the most attention to. Relevant concerns that could lead to diminishing competition in the provision of payment services include access to critical assets such as data and mobile near field communication chips, and the use of an incumbency position gained offline to engage in exclusionary conduct towards competitors; and (iii) the market for digital currencies is characterised by competition between currencies (inter-cryptocurrency market) and competition between exchanges (intra-cryptocurrency market). While each sub-market, namely mining, exchanges, wallets and payments, is subject to diverse dynamics which may result in different competition issues, there are also common factors among them, one of the most relevant being the presence of network effects. The study notes that an established case practice of how to deal with competition concerns in this area has not yet been developed and official decisions by competition authorities have still to emerge. Most potential competition issues in the FinTech sector have not occurred, or have not been detected by competition authorities, so far. The study's discussion of competition problems is, therefore, hypothetical. It considers that the application of competition instruments to analyse potential anti-competitive behaviours in the FinTech sector faces several challenges, the most relevant being the difficulty in applying traditional instruments to the new market phenomena, and concludes that the current state of the markets for FinTech services is generally too fluid to reach firm conclusions on the existence of competition challenges that need the deployment of competition tools on a large-scale basis.

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FUND REGULATION

EC adopts Delegated Regulation clarifying depositaries' safe-keeping obligations under UCITS 

On 12 July, the EC published a Delegated Regulation it has adopted amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries (C(2018) 4379 final). In particular, the Delegated Regulation further specifies depositaries' duties with regard to safe-keeping UCITS clients' assets. Article 22a(3)(c) of the UCITS Directive requires that where a depositary delegates safe-keeping functions to third parties (custodians), the assets also need to be segregated at the level of the delegate. Article 16 of Delegated Regulation (EU) 2016/438 details how this obligation is to be fulfilled. Experience gained since 13 October 2016 (the application date of Delegated Regulation (EU) 2016/438) has shown that further clarification is needed on the requirements laid down in Article 22a(3)(c). The EC acknowledges that securities and insolvency laws are not harmonised at the EU level. This should lead to the clear identification of assets belonging to a particular UCITS, and to the protection of these assets in the case of insolvency of the depositary or the custodian. The provisions of the UCITS Directive and Delegated Regulation (EU) 2016/438 pursue these objectives. However, the EC considers that diverging applications by NCAs and market participants of depositaries' obligations as regards safe-keeping of UCITS clients' assets risks undermining the objectives. As a result, the new Delegated Regulation amends Delegated Regulation (EU) 2016/438 (Articles 13(1)(c), 13(2), 15, 16, 17(2), 17(3) and 22(3)) to clarify the requirements in this area. In response to industry requests, the EC has decided to defer the application date of the new Delegated Regulation for 18 months. The EC has also made some amendments that it considers improve the overall clarity of the legal text. The new Delegated Regulation states that it will enter into force twenty days after publication in the OJ, and will apply from the date 18 months after publication. The next step is for the Delegated Regulation to be considered by the EP and the Council of the EU.

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EC adopts Delegated Regulation clarifying depositaries' safe-keeping obligations under AIFMD 

On 12 July, the EC published a Delegated Regulation it has adopted amending Delegated Regulation (EU) 231/2013 as regards safe-keeping duties of depositaries (C(2018) 4377 final). Section 3 of the Delegated Regulation further specifies depositaries' duties with regard to the safe-keeping of AIF clients' assets. Article 21(11)(d)(iii) of the AIFMD requires that where a depositary delegates safe-keeping functions to third parties (custodians), the assets also need to be segregated at the level of the delegate. Article 99 of Delegated Regulation (EU) 231/2013 details how this obligation is to be fulfilled. The experience gained since 22 July 2013 (the AIFMD implementation date) has shown that further clarification is needed on the requirements laid down in Article 21(11)(d)(iii). The EC considers it important to have common rules to ensure the protection of assets safe-kept by depositaries or custodians for their clients. This should lead to the clear identification of assets belonging to a particular AIF, and to the protection of these assets in the case of insolvency of the depositary or the custodian. The provisions of the AIFMD and Delegated Regulation (EU) 231/2013 pursue these objectives. However, the EC considers that diverging applications by NCAs and market participants of depositaries' obligations as regards safe-keeping of AIF clients' assets risks undermining the objectives. As a result, the new Delegated Regulation amends Delegated Regulation (EU) 231/2013 (Articles 89(1)(c), 89(2), 98 and 99) to clarify the requirements in this area. In response to industry requests, the EC has decided to defer the application date of the new Delegated Regulation for 18 months. The EC has also made some amendments that it considers improve the overall clarity of the legal text. The new Delegated Regulation states that it will enter into force twenty days after publication in the OJ, and will apply from the date 18 months after publication. The next step is for the Delegated Regulation to be considered by the EP and the Council of the EU.

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FCA publishes its policy statement and final rules on MMF Regulation

On 11 July, the FCA published a policy statement and final rules on the MMF Regulation (PS18/17). In PS18/17, the FCA: (i) summarises the feedback received to its January consultation paper (CP18/4) in which it proposed FCA Handbook amendments and new fees schedules to reflect the application of the MMF Regulation; and (ii) publishes its response to the feedback. Respondents generally agreed with the FCA's proposals. It has therefore decided to proceed with the main proposals outlined in CP18/4. However, it has modified its approach on, and clarified, several points, in the light of the feedback received. The key changes made respond to suggestions that the FCA's proposals would go beyond what was necessary and create unnecessary burdens or restrictions. The FCA will charge fees to recover the costs of authorising and supervising MMFs. It recognises that the draft fee schedule contained in CP18/4 was not clear about the level of charges faced by MMFs. It has therefore provided the figures in a clearer format in the MMF Regulation Instrument 2018 (FCA 2018/37) (Appendix 1 to PS18/17), which was made on 28 June and comes into force on 20 July. This final instrument contains the rule changes to the FCA Handbook (principally, the Collective Investment Schemes sourcebook (COLL)), which are largely technical and remove inconsistencies between the FCA Handbook text and the MMF Regulation. The MMF Regulation will take effect on 21 July. The FCA's final rules will apply from that date to new MMFs (including funds not currently marketed as MMFs, but with substantially similar objectives) after they have been authorised as an MMF under the MMF Regulation. The rules will apply to funds already operating as either MMFs, or short-term MMFs (as currently defined in the FCA Handbook), only once they have been authorised. These existing funds will have until 21 January 2019 to apply for authorisation as an MMF under the MMF Regulation. There are transitional provisions that apply in respect of these existing funds.

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UK Government responds to HoC European Scrutiny Committee report on cross-border distribution of collective investment funds proposals

On 6 July, the UK government published a letter from John Glen, Economic Secretary to HM Treasury, to Sir William Cash, HoC European Scrutiny Committee Chair, concerning the legislative proposals for a Regulation and a Directive on cross-border distribution of collective investment funds (2018/0045 (COD)). The letter responds to the Committee's report on the proposals of 8 May in which the Committee sought further information. The letter also provides an update on the progress of the proposals since that date. Points of interest include: (i) the UK government supports measures that remove barriers for fund managers marketing funds across borders and provide greater consumer choice of fund products. In negotiations on the proposals, the UK government has sought to secure changes that facilitate market access, accommodate the diverse range of fund structures and distributions models within the EU and not inadvertently limit the distribution of funds. These changes are reflected in the negotiating mandate announced by the EC on 19 June; (ii) the letter sets out how the final compromise text improves on the original proposals. This includes the removal of provisions relating to pre-marketing. The UK government also secured concessions to exclude closed end funds from the requirements on fund managers wishing to withdraw from marketing in a member state; and (iii) the UK government continues to be actively involved in the review of the ESAs. Its position remains that the portfolio delegation model should not be undermined; and (iv) it is expected that the general approach of the Council of the EU on the legislative proposals will be agreed on 13 July. In expectation of this, Mr Glen requests that the Committee clears the proposals from scrutiny or grants a scrutiny waiver to enable the UK government to support an agreement that meets UK objectives.

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INSURANCE

ECON publishes a Draft Report on the proposal for a directive amending Solvency II 

On 12 July, ECON published a Draft Report on the proposal for a directive amending Solvency II (PE625.359v01-00) (dated 10 July). ECON proposes to amend Article 93 – paragraph 1 – subparagraph 2 to “Member States shall apply those measures from [x].”

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PRA publishes a policy statement, updated supervisory statement and further consultation paper on group supervision under Solvency II

On 12 July, the PRA published a policy statement on group supervision under the Solvency II Directive (2009/138/EC) (PS17/18). In PS17/18, the PRA provides feedback on its November 2016 consultation paper (CP38/16). It has also published the final revised version of Supervisory statement: Solvency II: group supervision (SS9/15), which sets out the PRA's expectations for group supervision for Solvency II firms. Among other things, SS9/15 incorporates the PRA's July 2014 update on Solvency II implementation. In light of the responses received, the PRA has made some changes to the draft version of SS9/15 it consulted on. These are outlined in paragraph 1.8 and chapter 2 of PS17/18. The changes made include some clarifications, deletion of a section on centralised risk management and the inclusion of a section on the availability of group own funds. Although not covered in CP38/16, the PRA has also updated the final version of SS9/15 to include guidance to auditors of the group SFCR. This guidance describes the process auditors are expected to follow when assessing whether a regulatory determination has been made in respect of the availability of group own funds. The PRA advises that the policy in the updated version of SS9/15 takes immediate effect. Alongside PS17/18, the PRA has published a consultation paper on group own funds availability under Solvency II (CP15/18). CP15/18 sets out proposals to amend section 5A of SS9/15 further, to cover the PRA's expectations for assessments of the availability of own funds to cover the group SCR. A marked-up version of section 5A of SS9/15, showing the proposed amendments, is set out in an Appendix to CP15/18. The proposed amendments provide details on certain aspects of how own funds should be assessed as available, and address responses to CP18/16 on this aspect of the PRA's proposed policy. The PRA explains that the proposals would result in better alignment of its policy and supervisory expectations with EIOPA's views on group own funds availability, which were set out in Q&As published in late 2017. The deadline for comments on the proposals is 12 November.

PS17/18

SS9/15

EIOPA publishes Q&As on POG and IBIPs requirements under the IDD 

On 11 July, EIOPA published its first set of Q&As on the IDD: (i) Q&A on requirements for the POG arrangements; and (ii) Q&A on additional regulatory requirements for IBIPs. The Q&As provide practical guidance on the application of the IDD and its level 2 regulations. EIOPA explains that the answers in the Q&As are not legally binding and so do not prevent NCAs from maintaining or introducing stricter standards at the national level. EIOPA will continue to address, and subsequently publish, answers to further questions. The IDD has to be applied to relevant firms by 1 October at the latest.

Q&A on requirements for the POG arrangements

Q&A on additional regulatory requirements for IBIPs

HoC Treasury Committee welcomes PRA's constructive approach to issues identified by Solvency II inquiry

On 10 July, the HoC Treasury Committee published a letter (dated 3 July) from Nicky Morgan, Committee Chair, to Sam Woods, PRA Chief Executive, relating to the committee's inquiry into the regime under the Solvency II Directive. The letter responds to correspondence from the PRA. Ms Morgan welcomes the PRA's constructive approach to the issues raised by the inquiry. Among other things, the committee: (i) agrees that the Solvency II regime is over specified, and welcomes the fact that the PRA understands the scope for improvement; (ii) understands that the PRA is constrained in how it adapts the Solvency II regime for UK purposes without breaching the Directive. However, the committee considers that there are a number of areas where there are no restrictions. The areas identified in the letter are competition and competitiveness, the MA, the DVA, internal models and reporting requirements; (iii) understands the difficulties in negotiating a recalculation of the risk margin due to the current uncertainty about the UK's future relationship with the EU in relation to financial services. However, given the significance of this issue and its impact on the annuities market, the committee asks the PRA to keep it informed of developments in this area; (iv) notes that enhanced engagement with the industry will be particularly important post-Brexit to ensure firms can be innovative in responding to changing customer needs, and are able to compete in the long-term savings market; and (v) understands that while the UK remains a member of the EU, many of the identified issues will continue to be governed by the Solvency II Directive. After the UK has left the EU, the committee believes it may be sensible to remain as closely aligned as possible with other EU countries. At the same time, the committee considers that it is important to identify where there is a lack of fit with the needs of UK consumers and the industry, and the options for achieving better outcomes. It asks the PRA to be proactive in this regard, and to work with the industry in developing future policy. The committee looks forward to receiving further updates from the PRA on the issues outlined in the letter, as the PRA continues to make progress.

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EIOPA launches Big Data thematic review on motor and health insurance markets

On 6 July, EIOPA announced the launch of an EU wide thematic review on the use of Big Data, which focuses on the motor and health insurance markets. The review is a follow-up to the cross-sectoral review of the use of Big Data by financial institutions published by the Joint Committee of the ESAs in March. The purpose of the review is to gather empirical evidence on the use of Big Data by insurance undertakings and intermediaries along the whole insurance value chain. The review will analyse the potential benefits and risks for both industry and consumers to determine what, if any, supervisory and regulatory actions are needed. It will assess new business models and data quality issues arising from Big Data, including implications for consumers. It will also enhance the understanding of new types and sources of data and data analytics tools used by insurance undertakings and intermediaries. EIOPA explains that it will conduct the review in close co-operation with NCAs with a view to covering at least 60% of the motor and health insurance markets in each member state. It intends to collect the data during July and August, and has sent the following quantitative and qualitative questionnaires to NCAs, consumer associations and a representative sample of insurance undertakings: (i) Consumer Associations survey; (ii) National Competent Authority survey; and (iii) Insurance industry survey. EIOPA plans to publish the review's key findings in the first quarter of 2019.

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PRA publishes a policy statement on insurance reporting requirements

On 6 July, the PRA published a policy statement on changes in insurance reporting requirements (PS16/18). In PS16/18, the PRA provides feedback on responses to its January consultation paper (CP2/18). In the light of the responses received, the PRA has made minor amendments to the draft rules and LOG files to provide further clarity on completion of the relevant national specific templates. It believes that these changes enhance the clarity of the final rules and, as a result, will reduce the burden on firms relative to the original proposals consulted on. Detail on the changes made is set out in chapter 2 of PS16/18. Alongside PS16/18, the PRA has also published: (i) the PRA Rulebook: Solvency II Firms: Reporting Amendments (No 1) Instrument 2018 (PRA 2018/17). This instrument was made by the PRA on 3 July. It amends the Reporting Part of the PRA Rulebook and comes into force on 31 December; (ii) the PRA Rulebook: Change In Control Amendments (No 1) Instrument 2018 (PRA 2018/18). This instrument was made by the PRA on 3 July. It amends the Change in Control Part of the PRA Rulebook and comes into force on 1 September; (iii) supervisory statement: Solvency II: national specific templates LOG files (SS6/18). This sets out the PRA's expectations of firms when completing their submission of NSTs. It comes into effect on 31 December and will take effect for all financial year-ends on, or after, 31 December.

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PRA publishes a direction relation to a modification by consent of the Solvency II reporting obligation

On 6 July, the PRA published a direction relating to a modification by consent of the Solvency II reporting obligation set out in rule 2.2(1) of the Reporting Part of the PRA Rulebook, together with a document (dated 6 July) explaining the purpose of the modification. The modification will exempt category 4 and 5 insurance firms from submitting quarterly reports to the PRA, subject to the table outlined in supervisory statement: Solvency II: regulatory reporting and limitations (SS11/15). The PRA explains that it has previously stated that category 4 and 5 firms may meet the eligibility criteria for the limitation of regular supervisor reporting with a predefined period of less than one year. It invited these firms to make a formal application for a quarterly reporting waiver after discussing eligibility with their usual supervisory contacts. The PRA has now revised the expectations in SS11/15 regarding the application process for category 4 and 5 firms (both solo and part of a group), to replace the application with a modification by consent (unless specifically instructed by a firm's supervisory contact). This is intended to reduce the reporting burden on smaller firms. The Annex to SS11/15 outlines the amendments made. The modification takes effect from 30 September, and ends on the date rule 2.2(1) is revoked or no longer applies to a firm (in whole or in part). In the direction, the PRA states that it has identified the firms it believes meet the criteria outlined in the modification, and has contacted them directly to offer the modification. Other firms who have not been contacted but who believe they meet the criteria should read the direction and contact the PRA with a request for the modification. The PRA will confirm in writing whether requests have been granted. Approved modification directions are published on the financial services register.

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MARKETS AND MARKETS INFRASTRUCTURE 

ISDA consults on aspects of fullbacks for derivatives referencing certain IBORS 

On 12 July, ISDA published a consultation on the technical issues relating to the new benchmark fallbacks for derivatives contracts that reference GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW. The consultation sets out: (i) options for adjustments that would apply to the fallback rate in the event an IBOR is permanently discontinued; (ii) possible options for adjustments to the RFRs to ensure legacy derivatives contracts referenced to an IBOR continue to function as close as possible to what was intended after a fallback takes effect. These adjustments reflect the fact that the IBORs are currently available in multiple tenors – for example, one, three, six and 12 months – but the RFRs are overnight rates. The IBORs also incorporate a bank credit risk premium and a variety of other factors (such as liquidity and fluctuations in supply and demand), while RFRs do not; and (iii) four options to account for the move from a term rate to an overnight rate: (a) a spot overnight rate; (b) a convexity adjusted overnight rate; a compounded setting in arrears rate; and (c) a compound setting in advance rate. Three options are also proposed to calculate a spread adjustment: (1) a forward approach; (2) a historical mean/median approach; and (3) a spot-spread approach. In each case, the spread adjustment will be fixed at the point the fallback is triggered. The deadline for comments is 12 October. The responses to the consultation will determine the selected approach, and ISDA will then work with an independent third-party vendor selected via an RFP process to build a system that will provide public dissemination of the adjustments. ISDA will publish the final approach for review and comment before any changes are made to its standard documentation.

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FCA Chief Executive publishes a speech on transitioning from LIBOR to alternative interest rate benchmarks 

On 12 July, the FCA published a speech by Andrew Bailey, FCA Chief Executive, on transitioning from LIBOR to alternative interest rate benchmarks. Amongst other things, Mr Bailey comments on: (i) why firms need to end their reliance on LIBOR by the end of 2021; (ii) why overnight RFRs are the right foundation for interest rate markets; and (iii) progress made on transition to overnight RFRs and the work that remains to be done. In Mr Bailey's view, although there is some good news to report on the important steps taken towards transition, the pace of that transition is not yet fast enough and there is much further to go. He again warns firms that are "not yet aware, not yet engaged, and without plans to address their LIBOR-related dependencies" of the risks. Mr Bailey also announces in his speech that the RFRWG will publish, in the week commencing 16 July, a consultation on forward-looking term rates based on the SONIA interest rate benchmark.

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FSB publishes a statement on reforms to IBORs 

On 12 July, the FSB published a statement on reforms to IBORs and the development of overnight RFRs and term rates. The FSB's comments include the following: (i) benchmarks that are used extensively must be especially robust to ensure financial stability. The FSB welcomes the progress that has been made by public authorities and the private sector in identifying and developing overnight RFRs that are sufficiently robust; (ii) overnight RFRs are robust because they are anchored in active, liquid underlying markets. However, the lack of underlying transactions in the term interbank and wholesale unsecured funding markets could make IBORs susceptible to manipulation. The FSB therefore encourages the development and adoption of overnight RFRs where appropriate, for example in businesses where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable; (iii) in the markets where IBORs are disappearing, for example, those currently reliant on the London Interbank Offered Rate (LIBOR), there needs to be a transition to new reference rates. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs; and (iv) overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.

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ESMA updates its MiFID II Q&As 

On 12 July, ESMA published: (i) an updated version of its May Q&As (ESMA35-43-349) on investor protection and intermediaries topics under MiFID II and MiFIR. ESMA has added new Q&As or updated existing Q&As relating to the following topics: (a) inducements (research); and (b) provision of investment services and activities by third country firms; (ii) updated version of its June Q&As on temporary product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients under Article 40 of MiFIR (ESMA35-36-1262). The updated Q&As include a new question relating to clients established outside the EU and non-EU nationals; and (iii) updated version of its May Q&As on transparency topics (ESMA70-872942901-35) under MiFID II and MiFIR. The new version of the Q&As includes details of ESMA's action plan for systematic internaliser (SI) regime calculations before their publication on 1 August. Under ESMA's updated implementation schedule, it will publish the necessary EU-wide data, for the first time by: (a) 1 August: covering a period from 3 January to 30 June for equity, equity-like and bond instruments. Investment firms will then have to perform their first assessment and, where appropriate, comply with the SI obligations by 1 September; and (b) 1 February 2019: covering a period from 1 July to 31 December for ETCs, ETNs, securitised derivatives, emission allowances and derivatives. SIs will have to comply eventually with the obligations from 1 March 2019. ESMA will publish the results provided trading venues have submitted data for at least 95% of all trading days. It will not publish if the quality of the data received for an instrument is not considered sufficient. The data publications will also include OTC trading to the extent it has been reported to ESMA. After this, ESMA publications will be updated on a quarterly basis in respect of a rolling six months assessment period and investment firms are expected to self-assess and comply after a reduced two week period. ESMA's updated Q&As also provide clarification on: (a) reporting of a new ISIN in the FIRDS and the FITRS following a corporate action; and (b) application of the double volume cap to instruments that have been subject to a corporate action.

ESMA updates its Q&A on EMIR data reporting

On 12 July, ESMA updated its Q&As on EMIR data reporting. ESMA has updated: (i) General Q&A 1 on identification of counterparties to a derivative confirms that a portfolio manager could be a counterparty to a derivative when entering into a derivative on its own account and own behalf; and (ii) TR Q&A 40 on LEI amendments simplify the description of the existing process. The amendments also explain other processes TRs should follow in different scenarios where the reports must be updated in relation to the LEI. A new case for reporting derivatives has also been added to the Part IV of the Q&A which explains the procedure for reporting to TRs in a transaction scenario involving portfolio management companies.

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ESMA consults on extending the temporary exemption from EMIR clearing obligation for intragroup transactions with third-country counterparties 

On 12 July, ESMA published a consultation paper (ESMA70-151-1530) (dated 11 July) on extension of the deferred date of application of the clearing obligation under EMIR for certain intragroup transactions where one of the counterparties is in a third country. ESMA explains that three Commission Delegated Regulations on the clearing obligation include a temporary exemption from the clearing obligation in these circumstances: (i) Commission Delegated Regulation (EU) 2015/2205. The temporary exemptions expire on 21 December; (ii) Commission Delegated Regulation (EU) 2016/1178 regarding interest rate derivative classes. The temporary exemptions expire on 9 July 2019; and (iii) Commission Delegated Regulation (EU) 2016/592 regarding credit derivative classes. The temporary exemptions expire on 9 July 2019. To date, no equivalence decision has been adopted on the legal, supervisory and enforcement framework of a third country under article 13(2) of EMIR in respect of the clearing obligation, which is required for the exemption to clear derivatives subject to the clearing obligation for intragroup transactions with third-country group entities. ESMA therefore proposes to extend the temporary exemptions in all three Commission Delegated Regulations until 21 December 2020. The deadline for comments is 30 August. 

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FICC Markets Standards Board consults on an algorithmic trading standard

On 11 July, the FICC Markets Standards Board published for consultation a transparency draft of a SGP on algorithmic trading in the wholesale FICC markets. The FMSB notes that use of computer algorithms that automatically determine individual parameters of orders to facilitate trading in FICC markets has significantly increased in recent years. However, this activity has the potential to adversely impact market and firm stability and to harm clients. The draft SGP therefore sets out a number of good practice statements relating to the use of algorithms by FMSB member firms. The FSMB acknowledges that some regulation, such as MiFID II already covers similar issues to those addressed in the SGP. However, some areas of FICC-related activity are ordinarily not subject to MiFID II (such as trading of spot FX and physical commodities outside a MiFID-regulated trading venue). This document is therefore intended to apply high level good practice statements to the use of algorithms in all FICC businesses, wherever they are carried on. The SGP consists of nine good practice statements and commentary relating to algorithmic trading. Areas covered include the following: (i) appropriate governance framework to provide for clear responsibility for, and oversight of, the business' algorithmic trading; (ii) minimum standards relating to a range of issues such as risk and execution controls, kill switches, testing practices and business continuity; (iii) pre- and post-trade risk and execution controls; (iv) appropriate software development and change management processes; and (v) appropriate policies and procedures to ensure compliance with the requirements of the SGP. The deadline for comments on the consultation is 7 September.

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ESMA publishes a statement for ECON scrutiny session on Level 2 measures under BMR

On 11 July, ESMA published an introductory statement (ESMA70-145-941) by Jakub Michalick, ESMA Senior Officer, Corporate Affairs Department, for the ECON scrutiny session on Level 2 measures under the BMR. Points of interest include: (i) the draft RTS and ITS submitted by ESMA to the EC in March and June 2017 are aimed at ensuring the accuracy, robustness and integrity of benchmarks and the benchmark determination process. Where appropriate, ESMA has introduced proportionality, in particular for administrators of significant and non-significant benchmarks, to reflect the co-legislators' intentions of a less detailed regime applicable to such administrators; (ii) the delayed endorsement by the EC of the RTS creates significant uncertainties for all parties involved and risks the proper implementation of the BMR. ESMA therefore asks the EC to give, as soon as possible, clarity on the endorsement of the RTS; (iii) in relation to Level 3 measures, ESMA has consulted on draft guidelines applicable only to administrators of non-significant benchmarks. Their content is interlinked with the content of the technical standards covering the same topics. For this reason, ESMA is waiting for the publication of the relevant technical standards in the OJ before publishing the final version of the guidelines; and (iv) on 1 January, ESMA began publishing the register of administrators and third country benchmarks. This is important because, following the transitional period, supervised entities in the EU will be able to use a benchmark only if its administrator or the benchmark itself is included on the register. The register currently includes fourteen administrators either authorised or registered under the BMR, and based in France, Germany and the UK. ESMA expects this number to at least double before the end of this year.

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HMT publishes a response to its consultation on rules for FMI special administration regime

On 10 July, HMT published a response to its November 2016 consultation on rules for the FMI special administration regime. The UK government received six responses to the consultation, which are summarised in the response document. HMT highlights: (i) respondents unanimously agreed with the proposal for the BoE to play an important role in the conduct of an FMI administration, and for it to perform many of the functions that would be carried out by creditors, or a creditors’ committee, in a normal corporate insolvency; and (ii) concerns were raised about a designated service provider going into administration. The UK government agrees that system operators should be made aware when their service provider is being put into administration. Changes have been made to the final rules so that where the infrastructure company is a designated service provider, the operator of the recognised payment system or securities settlement system will be notified of the application for administration. Additionally, the FMI administrator will serve a notice of their appointment to the system operator where the infrastructure company is a designated service provider. The UK government has consulted with the Insolvency Rules Committee on the FMI administration rules, as required under the Insolvency Act 1986. In terms of next steps, the negative statutory instrument for the FMI administration rules will shortly be laid before UK Parliament and will come into force 21 days after laying.

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UK will not opt in to proposed EU regulation on third-party effects of assignments of claims

On 9 July, John Glen, Economic Secretary to the Treasury, publishes a letter notifying Sir William Cash, HoC European Scrutiny Committee Chair, of the UK government's decision not to opt in to the proposed EU regulation on the law applicable to the third-party effects of assignments of claims, which was published in March. Mr Glen explains that the UK government has concluded it is in the UK's interest not to opt in to the regulation, as it would create legal and practical uncertainty in the UK financial services markets. The UK government has published a substantially identical letter from Mr Glen, addressed to Lord Boswell of Aynho, HoL European Union Committee Chair.

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ECSDA consults on its CSDR settlement fail penalties framework

On 9 July, the ECSDA published a draft version of its settlement fail penalties framework for consultation. The framework aims to create a harmonised set of rules for the creation and operation of settlement discipline cash penalties mechanisms. It will apply to all central securities depositaries subject to CSDR. The deadline for comments is 17 August.

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PAYMENT SERVICES AND PAYMENT SYSTEMS 

Please see the Markets and Markets Infrastructure section for an update on HMT’s response to its consultation on rules for FMI special administration regime.

HoC European Scrutiny Committee requests further information on the UK government's approach to proposed Regulation amending the Regulation on cross-border payments 

On 11 July, the HoC European Scrutiny Committee published its thirty-fourth report of the 2017-19 parliamentary session, in which, among other things, it considers the proposed Regulation amending the Regulation on cross-border payments (Regulation 924/2009) as regards certain charges on cross-border payments and currency conversion charges. The committee first considered the proposed Regulation in June and John Glen, Economic Secretary to HMT, subsequently responded to its request for further information regarding the UK government's approach to the proposed Regulation. Points of interest in the report include the committee noting that: (i) a revised text of the proposed Regulation is due to be adopted by COREPER during July. This will serve as the Austrian Presidency's mandate for negotiations with the EP. The UK government is expected to support the amended proposal; (ii) Mr Glen has provided little new information on the UK government's actual planning for the UK's post-Brexit relationship to the SEPA. The committee "has not seen a realistic proposition from the UK government that would retain UK membership of SEPA without meeting the existing requirements that apply to third countries". In the event of a "no deal" scenario, the default assumption must be that UK banks will lose access to SEPA's payment settlement and clearing infrastructure when the UK leaves the single market (either on 29 March 2019 or at the end of the transitional period) until an agreement to the contrary is reached. The precise impact of this on receiving or sending euro-denominated payments in the UK is unclear, but it is likely to result in transactions becoming costlier for PSPs and their customers; (iii) the proposed Regulation appears to require UK banks to offer euro transactions at the same price as sterling transactions. This effectively implies they would be offering those payments at a loss without continued access to the SEPA infrastructure; and (iv) the UK government's forthcoming White Paper on Brexit will hopefully provide further information on its proposals in the financial services area, including SEPA. If it does not, the committee will press HMT further on this in the coming months. As the EP is yet to establish its position on the proposed Regulation, the committee is retaining the draft Regulation under scrutiny and drawing the latest developments to the attention of the Treasury Committee.

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FCA publishes a revised version of its Approach Document on payment services and electronic money 

On 6 July, the FCA published version 2 of its Approach Document on payment services and electronic money to reflect the requirements on operational and security risk under the PSD2. The updated document (dated 5 July) includes new guidance in chapters 13 (Reporting and notifications) and 18 (operational and security risks). The FCA has also made a number of other minor changes to chapters 3, 4, 5, 10 and 15 of the document. All of the amendments are shown in tracked changes. In summary, the FCA is requiring all PSPs to comply with the EBA's guidelines on operational and security risk under PSD2, and to report to the FCA at least annually on their operational and security risk management frameworks. The FCA has also published a final revised version of operational and security risk reporting form (REP018). The FCA has updated its webpage on the reporting requirements for PSPs and EMIs to reflect these changes. The FCA consulted on the changes to the Approach Document and form, as well as related changes to its rules in chapter 16 of the Supervision manual (SUP 16.13: reporting under the PSRs), in chapter 5 of its 20th quarterly consultation paper (CP18/6), feedback to which was set out in chapter 3 of Handbook Notice 56. The changes to the Approach Document will be relevant to all PSPs.

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European Data Protection Board responds to questions from the EP on the protection of personal data in the context of PSD2

On 5 July, the EDPB published a letter sent to the EP relating to the revised PSD2. The letter responds to request by the EP for further clarification regarding a number of issues relating to the protection of personal data in the context of PSD2. In the letter, the EDPB comments on: (i) whether the processing of personal data of "silent parties" is legitimate when explicit consent for the processing have (only) been given by another data subject. This would be the case when data subject A (a payment service user) has given explicit consent to a PISP to process personal data for the performance of this service, based on Article 94(2) of PSD2. When A uses a PISP's services to transfer money to data subject B without there being a contractual relationship between B and the PISP, the issue is whether the PISP can also process the data of B (being a silent party) to make the transfer possible; (ii) whether the legal framework is sufficiently clear regarding the processes of issuing and withdrawing consent under PSD2. Amongst other things, the EDPB considers whether the concept of "explicit consent" included in both PSD2 and the GDPR should be interpreted in the same way; (iii) Commission Delegated Regulation (EU) 2018/389, which sets out RTS on SCA and CSC under PSD2; and (iv) whether banks are sufficiently co-operative in establishing secure interfaces and avoiding alternative, less secure, methods of accessing account data. The EDPB considers that there may be grounds for "fruitful" interaction between EU data protection and financial supervision authorities. As a result, it would like a dialogue between these authorities to start, with a view to establishing a co-ordinated approach aimed at ensuring strengthened and consistent consumer protection. The EDPB will continue to monitor developments in this area. 

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PRUDENTIAL REGULATION

PRA publishes a statement on SRBs and Pillar 2A in stress test hurdle rates

On 12 July, the PRA published a statement on SRBs and Pillar 2A in banks' stress test hurdle rates. The PRA refers to changes to the way the hurdle rates will be calculated in this year’s stress test that the BoE announced in March. The hurdle rate is the level to which a bank's capital ratio falls in the stress test, relative to the level of capital that banks are expected to maintain in the scenario. The BoE stated in its March announcement that the way the hurdle rates are calculated would be changed in four areas. The PRA provides further details on two of these changes, that: (i) hurdle rates will incorporate buffers to capture domestic systemic importance as well as global systemic importance; and (ii) the calculation of minimum capital requirements incorporated in the hurdle rates will more accurately reflect how they would evolve in a real stress. The changes are only relevant to CRR firms. 

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EBA publishes its peer review report on the RTS on passport notifications under CRD IV 

On 10 July, the EBA published a report of its peer review on the RTS on passport notifications under CRD IV. The peer review looked at all the notifications included in Articles 35 to 39 of CRD IV and provided by credit institutions from 1 July 2016 to 30 June 2017. It assesses home competent authorities' practices on how they manage the passporting process and the co-operation arrangements in place. It specifically evaluates how authorities deal with mandatory information from credit institutions, and the timeliness of handling information. The peer review shows that authorities have developed consistent and robust procedures to comply with the requirements contained in the Delegated Regulation supplementing CRD IV with regard to RTS on the information to be notified when exercising the right of establishment and the freedom to provide services (Regulation 1151/2014). However, the report identifies that: (i) the level of sophistication of these processes varies; (ii) there are inconsistencies in the level of co-operation between authorities when dealing with branch and services passport notifications; and (iii) the exchange of information, its timing and the granularity of transmitted information are inconsistent. The EBA highlights a number of best practices throughout the report. It notes that in the context of Brexit, it may be worth establishing better co-operation channels and developing more meaningful interactions between authorities. The report also suggests some best practices to introduce proportionality into the operational arrangements for the analysis of notifications.

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Delegated Regulation on the RTS on the assessment methodology relating to the use of advanced measurement approaches for operation risk under CRR published in OJ

On 6 July, Commission Delegated Regulation (EU) 2018/959 supplementing CRR with regard to RTS for specification of the assessment methodology under which competent authorities permit institutions to use the AMA for operational risk was published in the OJ. The Delegated Regulation has been developed in accordance with Article 312(4) of the CRR. It is addressed to competent authorities and relates to the assessment of institutions that want to use, or are already using, AMA. The Delegated Regulation was made by the EC on 14 March and comes into force on 26 July (that is, twenty days following OJ publication). There are transitional provisions in Article 45 for institutions already using an AMA, or who have already applied for permission to use an AMA, at the date the Delegated Regulation comes into force. 

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OTHER DEVELOPMENTS 

The Financial Services (Banking Reform) Act 2013 (Commencement No. 1) (England and Wales) Order 2018 

On 12 July, the Financial Services (Banking Reform) Act 2013 (Commencement No. 1) (England and Wales) Order 2018 was published. The following provisions of the Act come into force on 13 July: (i) section 112 of the Act for all purposes; (ii) section 121(1) and (3) of the Act, so far is that section is not already in force; and (iii) all other provisions of Part 6 of the Act (special administration for operators of certain infrastructure systems) for all purposes.

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ECON votes to adopt its draft report on the regulatory and supervisory relationships between EU and third countries 

On 11 July, ECON announced that it had voted to adopt its draft report on the relationships between the EU and third countries concerning financial services regulation and supervision (2017/2253(INI)), which it published in April. In a related press release, ECON: (i) calls for transparent procedures to govern the adoption, withdrawal or suspension of decisions as to whether third-country rules are equivalent to the EU's. These decisions are currently taken unilaterally by the EC, but as they also have a political dimension, ECON believes that they should be subject to appropriate scrutiny by the EP and the Council of the EU; (ii)  advocates a "structured horizontal framework" for recognising and supervising equivalent third country regimes and empowering ESAs to advise the EC and review developments in third countries; (iii) calls on the EC to report annually to the EP on all decisions; and (iv) stresses that the UK's withdrawal from the EU could potentially have a significant impact on the regulation and supervision of financial services, given the currently close relations between EU member states in this area. The procedure file for the report indicates that the EP will consider the report in its plenary session to be held between 10 and 13 September.

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FCA and PSR Chair publishes a speech on Big Data

On 11 July, the FCA published a speech by Charles Randell, FCA and PSR Chair, on Big Data.

Mr Randell was speaking in a personal capacity at a Reuters Newsmaker event. Points of interest include: (i) the liberal approach to markets rests on the assumption that consumers make good choices if given fair disclosure. The FCA and PSR are required to have regard for the general principle that consumers should take responsibility for their decisions. However, this assumption is increasingly being called into question, particularly where vulnerable consumers are involved; (ii) the power of Big Data corporations and their central role in service provision raises significant questions about the adequacy of global frameworks for competition and regulation. Consumers may in practice have no choice about whether to deal with these corporations on terms that are non-negotiable and too general to be well-understood. In addition, new businesses may find it hard to compete; (iii) regulation is central because it will help define whether AI and Big Data liberate customers or disenfranchise them. Society in general and policy-makers in particular must consider how to mitigate the risk that, in the future, an algocracy (that is, a society where algorithms decide) exacerbates social exclusion and worsens access to financial services through identifying the most profitable or the most risky customers; (iv) the foundations of good innovation must have three elements: purpose, people and trust; (v) in relation to trust, good communication is essential. Short and readable statements making clear what firms will and will not do with their customers' data need to be developed with consumers, not imposed on them. A number of firms do this, but many do not. Should all businesses have a data charter? Should these be developed through voluntary codes of practice? Will the industry take the lead or should it be a regulatory requirement? and (vi) the FCA and the PSR are fully supportive of the UK government's proposals to establish a Centre for Data Ethics and Innovation, ensuring the UK sets the highest standards for ethical conduct in harnessing the power of Big Data.

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PRA releases its updated branch return form

On 10 July, the PRA updated its regulatory reporting webpage with a proposed change to its branch return form. This change asks firms to indicate the accounting standard applied by them in cell H30 in the cover tab (an amended form has also been published). The PRA does plan to consult on this change, but asks that firms use the amended form immediately.

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FCA publishes its policy development update

On 6 July, the FCA updated its policy development update (PDU) webpage, which sets out information on recent and future FCA publications. Future publications include, amongst others: (i) Regulatory fees and levies: policy proposals for 2019/20; (ii) feedback on its EU MMF Regulation CP – PS to CP18/4. Feedback expected in Q2; and (iii) feedback to CP 18/14 Quarterly Consultation No. 21.

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