Recent regulatory developments of interest to all financial institutions. Includes COVID-19 and Brexit-related updates, amendments to the list of high-risk third countries in MLD4, and more.
- Draft Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020
- Brexit: government approach to various financial services legislative reforms
- FPC remit and recommendations: correspondence
- COVID-19: further delays to FCA work
- COVID-19: FCA further extends regulatory reporting deadlines
- Independent Governance Committee value for money assessments: FCA CP20/9 and TR20/1
- RegData: new data collection platform
- Cryptoasset business registration: FCA reminder
- EBA Guidelines on ICT and Security Risk Management: FCA update
- New FCA chief Executive appointed
- JMLSG: COVID-19 update
- LIBOR transition: AFME white paper on client communications
- COVID-19: AFME paper on senior manager responsibilities
- Taxonomy Regulation published in OJ
- MLD4: Delegated Regulation amending list of high-risk third countries
- CRD: Corrigendum
- EU digital finance strategy: European Commission speech
- AI and ML: IOSCO consults on guidance for market intermediaries and asset managers
- Deference: IOSCO good practices report
- Cost Transparency Initiative framework: new resources
Draft Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020
A draft version of the Equivalence Determinations for Financial Services (Amendment etc) (EU Exit) Regulations 2020 has been laid before Parliament, together with an explanatory memorandum. The draft Regulations concern the UK future regime for equivalence and add to the measures made in the draft Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020, which was laid in May 2020. It also contains minor amendments and deficiency fixes to existing financial services EU Exit instruments.
The Regulations will come into force on the day after the day on which they are made.
Brexit: government approach to various financial services legislative reforms
The UK government has published a written ministerial statement made by Rishi Sunak, Chancellor of the Exchequer, indicating the government’s approach to some key regulatory EU and international developments following the end of the transition period. It also reaffirms the government’s commitment to seeking equivalence where possible. The government has also published a number of related documents.
In the statement, the government confirms that its general approach is to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant. However, in some areas, the UK approach will differ to better suit the UK market, while remaining consistent with international standards and achieving the same regulatory outcomes.
The government will:
- implement, through the Financial Services Bill, a new prudential regime for investment firms (IFPR) and update the regulation of credit institutions, in line with the intended outcomes of the EU’s Investment Firms Regulation and Directive and the second Capital Requirements Regulation (CRR II) respectively. The government and the Prudential Regulation Authority (PRA) do not intend to require PRA-designated investment firms to re-authorise as credit institutions, unlike the EU regime. In addition, the government does not intend to require investment firms regulated by the Financial Conduct Authority (FCA) to comply with the requirements of CRD V in the period until the new IFPR applies. A consultation on the transposition of CRD V will take place in July. Further detail is published in the following documents:
- transpose CRD V, and the Bank Recovery and Resolution Directive II (BRRD II) by 28 December 2020, excluding the requirements that do not need to be complied with by firms until after the end of the transition period. HM Treasury is still considering how best to implement aspects of files that do not come into force until after the 31st December 2020. It will not transpose Article 1(17) of BRRD II which revises the framework for Minimum Requirements for Own Funds and Eligible Liabilities (MREL) as the UK already has in place an MREL framework in line with international standards. For further detail on BRRD II, see: HM Treasury: Transposition of the Bank Recovery and Resolution Directive II: consultation (BRRD II) (consultation ends on 11 August 2020);
- review certain features of Solvency II to ensure that it is properly tailored to take account of the structural features of the UK insurance sector, which will consider areas that have been the subject of long-standing discussion while the UK was a member state and some of which may also form part of the EU’s intended review. These will include, but are not limited to, the risk margin, the matching adjustment, the operation of internal models and reporting requirements for insurers. The government expects to publish a call for evidence in autumn 2020;
- consider the future approach to the UK’s settlement discipline framework. The UK will not implement the EU’s new settlement discipline regime in the Central Securities Depositories Regulation, which is due to apply in February 2021. UK firms should instead continue to apply the UK’s existing industry-led framework; and
- not incorporate into UK law the reporting obligation of the EU’s Securities Financing Transactions Regulation for non-financial counterparties (NFCs), which is due to apply in the EU from January 2021. This is because systemically important NFC trading activity will be captured sufficiently through the other reporting obligations that are due to apply to financial counterparties and the government believes it is appropriate for the UK not to impose this further obligation on UK firms.
In addition, HM Treasury plans to set out further detail on upcoming legislation in due course. This will include:
- amendments to the Benchmarks Regulation to ensure continued market access to third country benchmarks until end-2025. HM Treasury will publish a policy statement in July 2020;
- amendments to the Market Abuse Regulation to confirm and clarify that both issuers and those acting on their behalf must maintain their own insider lists and to change the timeline issuers have to comply with when disclosing certain transactions undertaken by their senior managers (Persons Discharging Managerial Responsibilities – PMDRs);
- legislation to improve the functioning of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regime in the UK and address potential risks of consumer harm in response to industry and regulator feedback. HM Treasury will publish a policy statement July 2020; and
- legislation to complete the implementation of the European Market Infrastructure Regulation (EMIR) Refit to improve trade repository data and ensure that smaller firms are able to access clearing on fair and reasonable terms.
HM Treasury also published a written ministerial statement relating to LIBOR transition. The statement sets out detail on the government’s approach to legislative steps that could help deal with “tough legacy” contracts that cannot transition from LIBOR before end-2021. In particular the government will use the Financial Services Bill to introduce amendments to the Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018 (the “UK BMR”), to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR. Further information is set out in:
FPC remit and recommendations: correspondence
The Bank of England (BoE) has published a letter from Andrew Bailey, BoE Governor and Chairman of the Financial Policy Committee (FPC), responding to recommendations on the remit and recommendations for the FPC for 2020/21 sent to the FPC on 11 March 2020 by Rishi Sunak, Chancellor of the Exchequer.
In the covering letter to the formal response that is annexed, Mr Bailey summarises, among other things, the FPC’s ongoing work to mitigate the economic impact of COVID-19. In addition, he notes that the FPC agrees it is important to effectively monitor, assess and take action to mitigate risks to the stability from the non-bank financial sector. Mr Bailey indicates that the FPC will carry out a more detailed assessment of the oversight and mitigation of systemic risks from this sector and will publish its preliminary findings in the Financial Stability Report in early August 2020. “Where appropriate, the assessment will identify gaps in resilience in the non-bank financial sector and the potential measures that may be taken to increase resilience.”
The FPC’s response covers other matters including risks from climate change, facilitating finance for productive investment and support for the government’s economic policy towards the financial services industry.
COVID-19: further delays to FCA work
On 25 June 2020, the FCA updated its webpage on delayed activities and regulatory change in light of COVID-19 to announce further delays to some of its planned work for 2020.
The dates have changed for various publications including the following:
- joint PRA and FCA work with the Climate Financial Risk Forum to develop industry led guidance on how to integrate climate-related risks into business decision making across the financial services sector is expected in Q3 2020;
- the new directory of certified persons will be published later on in 2020;
- consultation papers on the FCA’s approach to market integrity and wholesale markets, its new consumer duty of care and effective competition in non-workplace pensions will be published later on in 2020;
- the FCA’s consultation papers on mortgage switching and investment platforms are now due in 2021; and
- the interim report on the FCA’s market study on credit information will be published in 2021.
The FCA has also updated the table on the webpage setting out delays to implementing rules. Among others, new rules relating to motor finance, pension transfer advice and prohibiting the sale of investment products that reference cryptoassets to retail customers, have been delayed until later on in 2020.
COVID-19: FCA further extends regulatory reporting deadlines
On 26 June 2020, the FCA updated its webpage on changes to regulatory reporting due to COVID-19. The FCA explains that, following its announcement on 22 April 2020, it will continue to allow flexibility in relation to submission deadlines for the following regulatory returns:
- Credit union complaints return (CREDS 9 Annex 1R);
- Complaints return (DISP Annex 1R); and
- Claims management companies complaints return (DISP 1 Annex 1AB).
For these returns, firms may apply two-month extensions to the deadlines for returns falling due up to and including 30 September 2020. The FCA will also continue not to apply the late fee for submissions from small and medium-size businesses in the period up to and including 30 September 2020.
The FCA reminds firms that the flexibility is intended to cover the situation where the impacts of COVID-19 have made it impractical to submit the named returns on time. They should continue to submit all returns as soon as they are reasonably able to. If a firm misses a deadline (in the period up to 30 September) the FCA will send a reminder letter. The FCA reminds firms of their reporting obligations under Principle 11 of the Principles for Businesses and other parts of the Handbook.
For returns listed in the April 2020 announcement but not listed above, forms falling due after 30 June 2020 should continue to be submitted by their usual deadlines. Subject to any significant change in the COVID-19 situation, the FCA has no intention of continuing to offer reporting deadline flexibility after 30 September 2020.
Independent Governance Committee value for money assessments: FCA CP20/9 and TR20/1
The FCA has published a consultation paper, CP20/9, with proposals that aim to make it easier for independent governance committees (IGCs) and governance advisory arrangements (GAAs) to compare the value for money (VfM) of pension products and services.
Among other things, CP20/9 includes:
- feedback to CP19/15 “Independent Governance Committees: extension of remit”;
- proposals to specify a simple framework for the annual IGC VfM assessment process, including a definition of VfM and three key elements of value;
- a requirement for the IGC to consider whether its pension provider offers VfM on charges and transaction costs when compared with other options on the market; and
- a discussion section on whether the FCA should impose a specific obligation on pension providers to provide value for money.
The consultation closes on 24 September 2020.
At the same time, the FCA published a report on a thematic review, TR20/1, examining how IGCs and GAAs ensure members of workplace personal pension schemes receive VfM. The review found that a number of IGCs are working well to provide VfM for their members. However, a lack of consistency in the way IGCs and GAAs operate means that members of some workplace pension schemes may not be receiving VfM.
The review also found that:
- some IGCs lack the necessary independence and were ineffective at challenging firms to ensure VfM for workplace pension scheme members;
- IGCs that maintained independence from the firms whose pension schemes they had responsibility for, delivered better outcomes for pension scheme members;
- GAAs operated by third-party firms on behalf of pension providers were less effective at delivering meaningful improvements in VfM; and
- over the period of the review (2017-2019), the FCA found there had been a small reduction in charges across all pension savings, although this cannot be directly linked to the work of IGCs and GAAs.
As a result of the review, the FCA has sent feedback letters to firms to ensure they make improvements to the way they work with their IGC or GAA.
The FCA expects firms and IGCs to review the examples of good and poor practice contained in TR20/1 and consider what actions they need to take to ensure they can assess and deliver VfM for all relevant members. It states that comparison against the charges of other similar workplace personal pension schemes may help IGCs to benchmark the schemes they assess and whether these provide VfM for policyholders.
RegData: new data collection platform
The FCA will move firms and their users to RegData in groups to minimise the impact this has on them. Firms’ moving dates will be determined by the nature of their reporting obligations and reporting schedules.
Firms will not be able to access RegData until they and their users’ data have been moved from Gabriel. The FCA will email firms’ principal user and associated users three weeks before their moving date, with reminders five and one days before. Compliance consultants will receive reminders for every firm their user account is currently associated with in Gabriel.
In advance of their moving date, the FCA asks firms to check they have:
- up-to-date contact details in Gabriel;
- nominated the correct principal user and assigned administrator rights correctly in Gabriel; and
- accurate information in Gabriel about all other active users – with any non-active users disabled.
Cryptoasset business registration: FCA reminder
The FCA has reminded businesses that carry on cryptoasset activity in the UK to register with it by 30 June 2020 to ensure that their applications are processed on time before the January 2021 deadline. Read more in our briefing: UK FCA reminds crypto firms to register before the end of June.
EBA Guidelines on ICT and Security Risk Management: FCA update
The FCA has published a statement confirming that it has notified the European Banking Authority (EBA) that it intends to comply with the EBA’s final Guidelines on ICT and security risk management for credit institutions, investment firms and payment service providers (PSPs), published by the EBA in November 2019.
Therefore, all credit institutions, investment firms and PSPs will be expected to make every effort to comply with the Guidelines from 30 June 2020 when they enter into force. Firms should also refer to the EBA’s further guidance on the use of flexibility in relation to COVID-19 and the implementation of the Guidelines. Consistent with the EBA guidance, the FCA states that it will apply “reasonable supervisory flexibility” when assessing the implementation of the Guidelines given the ongoing COVID-19 crisis. However, in line with the FCA’s previous COVID-19 information for firms, it encourages firms to focus in particular on the provisions within the Guidelines relating to information security, ICT operations and business continuity, to maximise their ability to provide services on an ongoing basis and to limit losses in the event of severe business disruption.
The FCA reminds firms of its open consultation on operational resilience. The FCA encourages feedback from firms on their experiences in embedding the requirements of the new Guidelines and says that, in the FCA’s final rules, it intends to cover the link between its new policy and the EBA Guidelines. The FCA expects to publish its final rules on operational resilience in Q1 2021.
New FCA Chief Executive appointed
HM Treasury has appointed Nikhil Rathi as the new permanent Chief Executive of the FCA.
The FCA has published a press release announcing that HM Treasury has appointed Nikhil Rathi as the new permanent Chief Executive of the FCA. He is expected to take up the role in autumn 2020. Mr Rathi is being appointed for a five-year term.
JMLSG: COVID-19 update
On 22 June 2020, the Joint Money Laundering Steering Group (JMLSG) issued an update noting that the impact of COVID-19 has given rise to unusual circumstances and new anti-money laundering/counter terrorist financing (AML/CTF) challenges for firms.
The JMLSG reminds firms that they must ensure that they are satisfied that their policies, procedures and processes continue to reflect their risk-based approach, including any temporary adjustments required for COVID-19. Firms are referred to the FCA’s statement on financial crime systems and controls during the pandemic.
The JMLSG notes that the COVID-19 lockdown is likely to disrupt the administration of documents used for identification and verification. Firms should consider whether policies and procedures need to be adapted to take this into account, having been risk assessed and documented accordingly. For example, the JMLSG notes that there is a government extension relating to the validity of photocard drivers’ licences.
LIBOR transition: AFME white paper on client communications
The Association for Financial Markets in Europe (AFME) has published a white paper on managing conduct and compliance risks relating to client communications during LIBOR transition. The paper provides guidance for firms engaged in the transition away from LIBOR to risk-free reference rates to consider when planning and developing their client engagement for the transition, from establishing an effective strategy through to monitoring and record-keeping.
COVID-19: AFME paper on senior manager responsibilities
AFME has also published a paper setting out some common considerations for senior managers under the senior managers and certification regime (SMCR) in light of COVID-19.
Taxonomy Regulation published in OJ
Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation) has been published in the Official Journal of the EU (OJ). The Taxonomy Regulation introduces an EU-wide taxonomy of environmentally sustainable activities, as well as new disclosure requirements for certain financial services firms and large public interest entities.
The Taxonomy Regulation enters into force on 12 July 2020. Articles 4, 5, 6, 7, 8(1), 8(2) and 8(3) apply from 1 January 2022 when they relate to climate change mitigation and climate change adaptation environmental objectives. The same Articles apply from 1 January 2023 when they relate to the other environmental objectives contained in the Taxonomy Regulation.
MLD4: Delegated Regulation amending list of high-risk third countries
Commission Delegated Regulation (EU) 2020/855, which amends the list of high-risk third countries with strategic AML and CTF deficiencies produced under Article 9(2) of the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4), has been published in the OJ. The new Delegated Regulation amends the Annex to Delegated Regulation (EU) 2016/1675 and comes into force on 9 July 2020. However, Article 2 (the Article adding third countries to the list) applies from 1 October 2020. The European Commission believes that the later date should give firms sufficient time to make the changes required to implement this provision.
A Corrigendum to the Capital Requirements Directive (CRD) has been published in the OJ.
The Corrigendum makes minor technical amendments to the text of:
- Article 141(8)(d)(iv), which relates to the payment of variable remuneration or discretionary pension benefits; and
- Article 142(3), which relates to the national competent authority assessing and approving a bank’s capital conservation plan.
EU digital finance strategy: European Commission speech
The European Commission has published a speech by Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), on digital finance. In his speech, Mr Dombrovskis confirms that the Commission intends to adopt legislative proposals for cryptoassets and digital operational resilience later in 2020. He sets out details of the Commission’s current thinking on these proposals:
- cryptoassets: the Commission intends to adjust existing rules for those cryptoassets that are currently covered by EU legislation to ensure that the relevant rules remain fit for purpose. It will propose a pilot scheme to allow some regulatory flexibility for experimentation in the area of distributed ledger technology (DLT). It will create a bespoke regime and a passport for markets in cryptoassets for those assets that are not covered by EU legislation. Its aim will to be proportionate, with lighter rules for less risky projects. However, it will impose stronger rules on those cryptoassets that potentially have a systemic role, such as global stablecoins; and
- digital operational resilience: the Commission intends to adopt a legislative proposal on digital operational resilience in early autumn 2020. This will require all financial institutions to comply with operational resilience standards. Among other things, it will set out channels for reporting cyber incidents and identify tools for testing the cyber-resilience of financial institutions. The Commission also intends to create a financial oversight mechanism for third-party ICT providers, such as cloud services. It will also consider rules to deal with concentration risks arising from reliance on a small number of external providers.
AI and ML: IOSCO consults on guidance for market intermediaries and asset managers
The International Organization of Securities Commissions (IOSCO) has published a consultation document on the use of artificial intelligence (AI) and machine learning (ML) by market intermediaries and asset managers, which it has identified as a key priority.
IOSCO recognises that the use of AI and ML may benefit firms and investors, such as by increasing execution speed and reducing the cost of investment services. However, it may also create or amplify risks, potentially undermining financial markets efficiency and causing harm to consumers and other market participants.
Therefore, IOSCO proposes guidance to assist IOSCO members in providing appropriate regulatory frameworks to supervise market intermediaries and asset managers that utilise AI and ML. The proposed guidance seeks to ensure that market intermediaries and asset managers:
- have appropriate governance, controls and oversight frameworks over the development, use and performance monitoring of AI and ML;
- ensure staff have adequate knowledge, skills and experience to implement, oversee and challenge the outcomes of AI and ML;
- have robust, consistent and clearly defined development and testing processes to enable firms to identify potential issues before they fully deploy AI and ML; and
- give appropriate transparency and disclosures to investors, regulators and other relevant stakeholders.
The consultation closes on 26 October 2020.
Deference: IOSCO good practices report
IOSCO has published a report that includes eleven good practice principles on processes for deference to assist regulatory authorities in establishing and operating efficient deference processes to mitigate the risk of unintended, regulatory-driven market fragmentation and to strengthen international cooperation.
IOSCO states that the principles are underpinned by the philosophy that deference processes should be outcomes-based, risk-sensitive, transparent, sufficiently flexible and supported by strong cooperation.
Cost Transparency Initiative framework: new resources
The Cost Transparency Initiative (CTI) has published additional resources to encourage pension schemes and asset managers to adopt its CTI framework of tools and guidance on cost transparency.
The CTI is a partnership initiative between the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local Government Pension Scheme Advisory Board (LGPS SAB). The CTI framework on cost transparency, launched in May 2019, is an industry standard designed to allow investment managers and asset owners to collect and compare costs and charges in a standardised and transparent form.
The CTI has now published several new resources, including a fiduciary management template, additional reporting fields on the liability driven investments template, real estate investment guidance on completing the templates and CTI mapping guidance for private equity investments.