Recent regulatory developments of interest to all financial institutions. Includes updates on COVID-19, LIBOR transition, JMLSG guidance and IFR/IFD consultations.
Contents
- COVID-19: FCA speech on expectations of wealth management and advice industry
- COVID-19: FCA survey of firms' financial resilience
- COVID-19: PRA statement on use of electronic signatures on forms and other documents
- Pension transfers: FCA PS20/6, GC20/1 and update
- LIBOR transition: RFRWG paper on tough legacy issues
- JMLSG AML and CTF guidance updated
- FOS Ombudsman News issue 152
- FOS strategy for 2020-25
- Investment Consultants Market Investigation: CMA update on compliance statements
- Brexit: Supervisory Coordination Network winding down
- IFR and IFD: EBA roadmap
- IFR and IFD: EBA consults on RTS on prudential requirements
- IFD: EBA consults on RTS on remuneration requirements
- IFR: EBA consults on reporting RTS and disclosures ITS
- IFR and IFD: EBA data collection exercise
- Digital finance: ECON draft report
COVID-19: FCA speech on expectations of wealth management and advice industry
On 4 June 2020, the UK Financial Conduct Authority (FCA) published a speech by Megan Butler, FCA Executive Director of Supervision, Investment, Wholesale and Specialists, on the FCA's response to COVID-19 and its expectations for 2020 for the wealth management and advice industry. Highlights include:
- in operational terms, advisors and wealth managers responded well to the onset of COVID-19;
- while acting with speed has been the absolute priority, as the industry adapts to the long-term impact of COVID-19, there is a need to transition from the immediate "incident response" towards focusing on longer-term impacts. In her speech. Ms Butler explores the FCA's priorities and longer-term expectations for the wealth management and advice industry;
- key areas of focus for the FCA include operational resilience in light of COVID-19, financial resilience (and within that the preservation of client assets and money), and acting with integrity. On operational resilience, alongside the Bank of England (BoE), the FCA is actively reviewing the contingency plans of a wide range of firms. This includes firms' assessments of operational risks, their ability to continue to operate effectively and the steps they are taking to serve and support their customers. Ms Butler notes that the FCA's proposals in its consultation paper on operational resilience are now more relevant than ever. Firms will need to keep their focus on operational resilience as circumstances change, government guidance is updated and, as things return to some form of "new normal", how those changes will affect their resilience and their services; and
- the FCA has identified some firms which have tried to avoid their liabilities to customers by closing down companies and setting up new ones. These practices are unacceptable, and the FCA will continue to take action against firms conducting such activities.
COVID-19: FCA survey of firms' financial resilience
On 3 June 2020, the FCA announced that it will be carrying out a survey, being sent out between 4 and 8 June 2020, of firms' financial resilience. The FCA plans to survey around 13,000 firms to obtain a more accurate view of their financial resilience as a result of COVID-19. The FCA will use the data it obtains from the survey, alongside existing data it holds, to support its ongoing work.
COVID-19: PRA statement on use of electronic signatures on forms and other documents
On 2 June 2020, the Prudential Regulation Authority (PRA) published a statement on the use of electronic signatures to evidence forms and other regulatory documents submitted to the PRA. In the context of COVID-19 and increased remote working, the PRA is responding to queries from firms about the acceptability of electronic rather than "wet" signatures (that is, signing a document by hand using a pen) in relation to the submission of forms and other regulatory documents to it.
The PRA confirms that, in the absence of any specific legal provisions to the contrary, firms may use electronic signatures for such purposes, although the PRA may, in specific instances, request a "wet signature" where it is appropriate to do so. The PRA notes, however, that it is unable to comment on the use of electronic signatures more generally, and firms should obtain their own legal advice on the validity of such signatures in specific circumstances. PRA-regulated firms are reminded of Fundamental Rules 1-3 and 5-7 and other parts of the PRA Rulebook concerning the adequacy of systems and controls.
The PRA will keep its approach under review in the light of evolving working practices, while recognising that many forms are already processed on an automated basis.
Pension transfers: FCA PS20/6, GC20/1 and update
The FCA has published a package of measures designed to address weaknesses in the defined benefit (DB) pension transfer market. It includes a policy statement, PS20/6, setting out its final rules and guidance on pension transfer advice, a guidance consultation paper, GC20/1, on advising on pension transfers (GC20/1), and an update on the FCA's DB transfers work including next steps.
PS20/6 provides feedback on the FCA's proposals in CP19/5. Among other things, the FCA confirms its intention to proceed with a ban on contingent charging, except in certain limited circumstances. The final rules and guidance are set out in the FCA Conduct of Business sourcebook (Pension Transfers) (No 3) Instrument 2020 (FCA2020/21), which is contained in Appendix 1 to PS20/6. They mostly come into force on 1 October 2020, except for guidance on triage services and estimated transfer values, which come into force on 15 June 2020.
GC20/1 sets out the FCA's expectations of how firms should apply the existing Handbook rules and guidance when giving DB transfer advice, as well as the new rules made in PS20/6, through best practice and case study examples of suitable and unsuitable advice. The deadline for responses to GC20/1 is 4 September 2020.
The FCA's update on its work on pension transfers outlines the FCA's findings in its recent assessment of firms. It sets out its key findings which relate to material information gaps in firms' fact-finding processes, and the outcome of the latest suitability review following a data request of all firms with the permission to advise on DB transfers. The FCA has observed that although standards of advice are improving, they are still well below the ideal level, and sets out its next steps. This includes a further data request to all firms with the pension transfer permission, which will help to inform where the FCA targets its assessments.
LIBOR transition: RFRWG paper on tough legacy issues
The BoE has announced that the Working Group on Sterling Risk-Free Reference Rates (RFRWG) has, through its "Tough Legacy Taskforce", released a Paper on identification of Tough Legacy issues.
Tough legacy contracts are considered those that do not have robust fallbacks and prove unable to be amended ahead of LIBOR discontinuation. The Taskforce has considered "tough legacy" issues across asset classes in the UK, and has concluded that there is a case for action to address these exposures. The case for action differs by asset class, depending on the contracts involved and the ability to amend the terms. While many contracts will be able to successfully transition, this may be more difficult where, for example:
- contracts form part of complex transactions or arrangements;
- distribution is broad and there may be additional complications with obtaining the necessary consent; or
- retail counterparties are involved.
To the extent it is feasible, the Taskforce proposes that the UK Government considers legislation to address "tough legacy" exposures. However, the Taskforce recognises that there is no guarantee that such a solution will materialise, that it will materialise across all relevant legal jurisdictions, or that it would be available for all products and circumstances. The Taskforce also recognises that any potential solution may not be economically neutral or suitable for particular contracts.
The RFRWG calls on market participants to continue to focus on active transition, as this is the only way for parties to have certainty over the timing and substance of transition. It emphasises that the approaches explored in this paper are relevant only for those contracts that cannot be dealt with in any other way.
JMLSG AML and CTF guidance updated
The Joint Money Laundering Steering Group (JMLSG) has published final amended versions of Part I, Part II and Part III of its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance. The Board approved revisions (which reflect the Money Laundering and Terrorist Financing (Amendment) Regulations 2019) take account of comments received on the consultation text that was published in February 2020. However, the new chapter 22 for Part II, containing sectoral guidance relating to cryptoasset exchanges and custodian wallet providers, has not yet been finalised.
The amended versions of the guidance have been submitted to HM Treasury for approval.
FOS Ombudsman News issue 152
The Financial Ombudsman Service (FOS) has published issue 152 of its Ombudsman News. Items of interest include:
- guidance on specific types of complaint relating to COVID-19 for financial businesses. This covers section 75 complaints and complaints about financial difficulties, investments and pensions, mortgages, those relating to credit arrangements (including car finance), and various types of insurance product (including business protection interruption insurance);
- the FOS' annual complaints data and commentary on trends in complaints, based on the 2019/20 complaints data analysis, together with an article analysing the data;
- details on the FOS' future strategy that will run until 2025 (see report below); and
- resources on frauds and scams.
FOS strategy for 2020-25
As part of its Ombudsman News (reported above), the FOS has outlined its future strategy, which will run to 2025. The document, entitled "Contributing to a fairer financial world", outlines the FOS' three strategic priorities for the next five years:
- Enhancing the service: the FOS will set the standard for modern, efficient, accessible alternative dispute resolution (ADR), recognising and responding to the needs and expectations of the people and organisations that rely on it.
- Preventing complaints and unfairness arising: working collaboratively with others, the FOS will find new and better ways of harnessing and using its insight to achieve fairer outcomes and help underpin trust and confidence.
- Building an organisation with the capabilities needed for the future: the FOS will use its strength as a diverse, values-based organisation to develop and retain the capabilities needed in the future.
COVID-19 has resulted in significant and unprecedented changes to the external environment. The FOS will continue to proactively monitor the impact of this, as well as other changes, on its service. It will adapt its plans as necessary throughout the duration of the strategy.
Investment Consultants Market Investigation: CMA update on compliance statements
The Competition and Markets Authority (CMA) has updated its webpage on the Investment Consultants Market Investigation on the process and timing for submitting compliance statements.
Compliance statements under the Investment Consultancy and Fiduciary Management Market Investigation Order 2019 must be submitted to the CMA within 12 months and 4 weeks beginning with the date on which each of the relevant applicable Articles comes into force. Parts 3, 4, 5, 7 and 8 of the Order came into force on 10 December 2019, and Part 6 came into force on 10 June 2019. Therefore:
- for Part 6 (Fiduciary Management Services—performance information provision requirements), fiduciary management providers must submit a compliance statement by 8 July 2020; and
- for Parts 3, 4, 5, 7 and 8, pension scheme trustees, IC-FM firms (firms that offers both investment consultancy and fiduciary management services), investment consultancy providers and fiduciary management providers must submit a compliance statement by 7 January 2021.
A single compliance statement can cover more than one Part of the Order (that is, the CMA does not require a separate compliance statement for each Part of the Order, except in relation to Part 6 which has a different timetable to other Parts as listed above).
Compliance statements should confirm the extent to which the relevant applicable Articles of the relevant Part or Parts of the Order that were in force during the reporting period have been complied with during that period.
Further details are set out in Articles 15 and 16 of the Order and paragraphs 102 to 110 of the explanatory note to the Order.
When the provisions of the Order are transposed into equivalent provisions in regulations put in place by a relevant sector regulator, the CMA plans to update its webpage with further information. This will include information on the effect this will have on the need to submit compliance statements.
Brexit: Supervisory Coordination Network winding down
The European Securities and Markets Authority (ESMA) has announced the finalisation of the work of the Supervisory Coordination Network (SCN). The SCN was established in May 2017 as a response to emerging supervisory convergence risks with respect to the treatment of authorisation requests by EU27 national competent authorities (NCAs) in the context of the UK's withdrawal from the EU. As the Withdrawal Agreement entered into force on 31 January 2020, the work of the SCN is coming to an end.
The SCN will hold a final follow-up meeting before the end of the year to take stock of the relocation situation and close its work. ESMA will continue to work with NCAs in preparation for the end of the transition period.
IFR and IFD: EBA roadmap
The European Banking Authority (EBA) has published a "Roadmap on Investment Firms", which sets out the EBA's planned work and expected timelines in relation to its mandates under the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR). The IFD and IFR begin to apply on 26 June 2021.
The EBA's mandates include 18 regulatory technical standards (RTS), three implementing technical standards (ITS), six sets of guidelines, two reports, the requirement for the EBA to maintain a list of capital instruments and a database of administrative sanctions, and a number of notifications in various areas. Overall, the mandates are divided into four phases, mostly in accordance with the legal deadlines.
IFR and IFD: EBA consults on RTS on prudential requirements
The EBA has published a consultation paper on regulatory technical standards (RTS) relating to prudential requirements for investment firms under the IFR and the IFD. The EBA seeks views on nine draft sets of RTS relating to the following issues:
- reclassification of investment firms to credit institutions. These RTS relate to mandates under Article 8a of the CRD IV Directive, which was introduced by the IFD;
- capital requirements for investment firms at a solo level; and
- capital requirements for investment firms on a consolidated basis.
The deadline for responses to the consultation is 4 September 2020. In its roadmap on investment firms reported above, the EBA states that it intends to finalise these RTS by December 2020.
The EBA intends for the RTS to apply from June 2021.
IFD: EBA consults on RTS on remuneration requirements
The EBA has published consultation papers on draft RTS under the IFD relating to the following:
The deadline for responses to the consultations is 4 September 2020. The EBA intends to finalise the RTS on pay-outs in instruments for variable remuneration by November 2020.
IFR: EBA consults on reporting RTS and disclosures ITS
The EBA has published a consultation paper on:
- draft implementing technical standards (ITS) for investment firms under Article 54(3) and on disclosures requirements under Article 49(2) of the IFR; and
- draft regulatory technical standards (RTS) on the monitoring of information related to the thresholds for credit institutions reporting requirements for investment firms under Article 55(5) of the IFR.
Annexes contain a set of reporting templates and instructions.
The consultation closes on 4 September 2020. The EBA will then deliver the final draft ITS and RTS to the European Commission in December 2020. The EBA will also develop the data-point model (DPM), XBRL taxonomy and validation rules based on the final draft ITS and RTS.
IFR and IFD: EBA data collection exercise
The EBA has published a template and instructions for a data collection exercise for investment firms to assess the impact of the draft RTS it is consulting on relating to prudential and remuneration requirements under the IFR and the IFD (reported above).
Participation in the exercise is voluntary. It applies to EEA investment firms and to EEA investment firm groups that would be subject to prudential consolidation under Article 7 of the IFR.
Firms should submit the completed templates to their national competent authority by 19 August 2020. The EBA will then undertake data quality assurance and, if any issues are identified, the deadline for firms to submit revised templates is 16 September 2020.
Digital finance: ECON draft report
The European Parliament's Economic and Monetary Affairs Committee (ECON) has published a draft report with recommendations to the European Commission on Digital Finance: emerging risks in cryptoassets - regulatory and supervisory challenges in the area of financial services, institutions and markets. The draft report, prepared by Rapporteur Ondřej Kovařík, contains a motion for a European Parliament legislative resolution, annexed to which are specific recommendations on the content of the legislative proposals requested and an explanatory statement.
The report includes three issues for consideration for legislative action:
- defining a framework for cryptoassets;
- a common approach to cyber resilience of the financial sector; and
treatment of data.
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