Please see our publication entitled, ‘A reflection on the current state of play regarding how EEA firms can provide financial services into the UK post-Brexit’.
Please see the FinTech section for an update on the FCA’s consultation paper on prohibiting sale to retail clients of investment products that reference cryptoassets.
FOS consultation on future funding
On 2 July, the Financial Ombudsman Service (FOS) published a consultation paper on the future of its funding. The FOS proposes to: (i) rebalance the proportion of the income received from its levy compared to that received from case fees. It is aiming to achieve an equal split between the two in order to give greater certainty and stability in its funding; (ii) change the number of “free” cases to 10 per firm, and to 50 for each group within its group account fee arrangement; and (iii) maintain reserves of a minimum of six months’ operating income. The deadline for comments is 13 August.
CMA launches review of Part 6 of the Retail Banking Market Investigation Order 2017 On 1 July, the Competition and Markets Authority (CMA) announced that it has decided to conduct a review of Part 6 of the Retail Banking Market Investigation Order 2017 (the Order). Part 6 of the Order, which came into force on 2 February 2018, requires banks to automatically enrol all their customers into an unarranged overdraft alert; and to offer, and alert customers to the opportunity to benefit from, grace periods during which they can take action to avoid or reduce charges associated with unarranged overdraft use. On 18 December 2018, the FCA published rules on overdraft alerts, which enter into force on 18 December. Furthermore, on 7 June, the FCA also announced reforms to the way banks charge for overdrafts. As such, the CMA is considering whether, when the FCA’s alert rules become active in December, there will be a change in circumstances in relation to Part 6 of the Order as the FCA’s rules will be effectively duplicated by other regulatory provisions. The CMA has therefore launched the review to assess whether Part 6 of the Order would have been superseded and should be revoked. The deadline for comments is 22 July. Read more FCA policy statement on restricting CFD products sold to retail clients On 1 July, the FCA published a policy statement (PS19/18) on restricting contract for difference (CFD) products sold to retail clients. The FCA published its consultation paper CP18/38 on the rules in December 2018. In PS19/18, the FCA requires firms offering CFDs and CFD-like options to retail consumers to: (i) limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset; (ii) close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account; (iii) provide protections that guarantee a customer cannot lose more than the total funds in their trading account; (iv) stop offering cash or other inducements to encourage trade; and (v) provide a standardised risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses. Firms must comply with the rules from 1 August for CFDs and 1 September for CFD-like options. Read more ESMA opinion on the product intervention measures relating to CFDs proposed by FCA ESMA published an opinion (dated 24 June) on the product intervention measure relating to CFDs and proposed by the FCA. On 25 January, the FCA notified ESMA of its intention to take a product intervention measure under Article 42 of MiFIR, which consists of a permanent restriction on the marketing, distribution or sale to retail clients in or from the UK of CFDs and CFD-like options. The FCA's proposed measures varied from ESMA’s in four ways: (i) they capture products referred to by the FCA as ‘CFD like-options’, which are not included in ESMA’s measures; (ii) they set a leverage limit of 30:1 for CFDs and CFD-like options referencing certain government bonds, instead of the 5:1 leverage limit provided for in ESMA’s measures; (iii) they include minor amendments to the initial margin protection requirement in ESMA’s measures; and (iv) they include minor amendments to the risk warnings in ESMA’s measures. Read more FINANCIAL CRIME Updated FATF recommendations On 3 July, the FATF published an updated version (dated June) of its AML and CTF standards. The updated version includes an interpretive note to recommendation 15 (new technologies), where the FATF explains how its standards are applicable to virtual asset service providers (VASPs). The revisions address new and emerging threats, clarify and strengthen many of the existing obligations, while maintaining the necessary stability and rigour in the Recommendations. Among other things, the FATF explains in the interpretive note to recommendation 15, that: (i) VASPs should be required to be licensed or registered. At a minimum, VASPs should be required to be licensed or registered in the jurisdiction(s) where they are created; (ii) countries should identify, assess, and understand the money laundering and terrorist financing risks emerging from virtual asset activities and the activities or operations of VASPs; (iii) countries should ensure that VASPs are subject to adequate regulation and supervision or monitoring for AML/CFT and are effectively implementing the relevant FATF Recommendations to mitigate money laundering and terrorist financing risks emerging from virtual assets. Read more FINTECH FCA consultation paper on prohibiting sale to retail clients of investment products that reference cryptoassets On 3 July, the FCA published a consultation paper (CP19/22) on prohibiting the sale of investment products that reference cryptoassets. The FCA considers that retail customers cannot reliably assess the value and risks of derivatives and exchange traded products that reference certain cryptoassets. This is because of: (i) the nature of the underlying assets, which have no inherent value and so differ from other assets that have physical uses, promise future cash flows or are legally accepted as money; (ii) the presence of market abuse and financial crime in the secondary market for cryptoassets; (iii) extreme volatility in cryptoasset prices; and (iv) inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them. The FCA believes that these issues have and will cause harm to retail consumers from sudden and unexpected losses if they purchase such products. The deadline for comments is 3 October. The FCA intends to publish its final rules in a policy statement in early 2020. Read more FCA speech on regulating financial innovation On 2 July, the FCA published a speech, given by Christopher Woolard, FCA Executive Director of Strategy and Competition, on regulating financial innovation. Mr Woolard talks about Facebook's plan for Libra, a stablecoin that it intends to launch in collaboration with a number of payment and tech firms. The FCA has been discussing these plans with Facebook, alongside other regulators and banks. If the plans come to fruition, Libra could be very significant indeed and pose questions for both the FCA and the BoE working with
international partners. The FCA has attempted to manage tensions surrounding cryptoassets through initiatives such as the regulatory sandbox. However, the FCA is now facing issues that could have a fundamental impact on the financial services system, and therefore needs to ensure that innovation works in the interests of consumers by thoroughly understanding the business models firms are suggesting and how they benefit customers. Mr Woolard goes on to talk about what are and are not stablecoins, and states that such labels are not very helpful. Market participants use ‘stablecoin’ broadly, which encompasses a variety of different types of cryptoassets. However, the FCA considers that stablecoins could fall under any of the three categories of cryptoasset that it has identified, including exchange tokens, security tokens or utility tokens. The FCA accepts that this is not an easy landscape to navigate, however, it invites firms to consider applying to the FCA’s Innovation firm support services, such as direct support or the regulatory sandbox, which provides firms with the opportunity to set up compliant and controlled tests. Read more BIS to set up Innovation Hub for central banks On 30 June, the BIS announced that it is establishing an innovation hub to foster international collaboration on innovative financial technology within the central banking community. The role of the hub will be to identify and develop in-depth insights into critical trends in technology affecting central banking, develop public goods in the technology space geared towards improving the functioning of the global financial system and will serve as a focal point for a network of central bank experts on innovation. Hub centres will be set up in Basel and Hong Kong, and a third hub will be established in Singapore, subject to the completion of the necessary institutional arrangements. The set-up and ongoing work of the hub centres will be supported by the host central banks: the Swiss National Bank, Hong Kong Monetary Authority and the Monetary Authority of Singapore. There will be a second phase of implementation which will see hub centres set up across Europe and the Americas. Read more INSURANCE EIOPA consultation paper on the proposal for guidelines on outsourcing to cloud service providers On 1 July, EIOPA published a consultation paper on guidelines on outsourcing to cloud service providers. The guidelines aim to provide clarification and transparency to market participants to avoid potential regulatory arbitrages, and foster supervisory convergence regarding the expectations and processes applicable to cloud outsourcing. EIOPA's guidelines cover areas including the following: (i) pre-outsourcing analysis – including undertaking due diligence on the prospective cloud service provider; (ii) documentation requirements and the written notification requirement to the supervisory authorities; (iii) risk assessments of cloud outsourcing; (iv) access and audit rights; (v) security of data and systems; and (vi) sub-outsourcing. The deadline for comments is 30 September. Read more IAIS roadmap for 2019 On 28 June, the IAIS published its 2019 roadmap. The IAIS’ key activities for 2019 have been categorised into four sections: (i) standard setting – the projects in this area reflect the IAIS’ work on supervisory material to finalise the revision of Insurance Core Principles and development of the Common Framework for the Supervision of Internationally Active Insurance Groups, including the Insurance Capital Standard; (ii) financial stability – projects reflect the IAIS’ work on developing a holistic framework to mitigate systemic risk in the global insurance sector, recognising that systemic risk may arise from both the collective activities/exposures of insurers at a sector-wide level as well as from the distress or disorderly failure of individual insurers; (iii) implementation and assessment – projects support the IAIS’ objective of globally effective implementation of the IAIS’ supervisory material through assessing implementation and supporting Members to implement this material through the development of targeted guidance; and (iv) assessing and responding to emerging(ed) risks and opportunities – related projects facilitate sharing of experiences and practices amongst Members to help them better understand emerging supervisory issues and tackle supervisory challenges and opportunities such as FinTech, cyber risk and climate risk and sustainability. Read more MARKETS AND MARKETS INFRASTRUCTURE ECB Dear CEO letter regarding banks’ preparations for interest rate benchmark reforms On 4 July, the ECB published a Dear CEO letter (dated 3 July) regarding banks’ preparations for interest rate benchmark reforms and the use of risk-free rates. The purpose of the letter is to seek assurance that