Recent regulatory developments of interest to all financial institutions. Includes updates on COVID-19, FCA guidance on assessing adequate financial resources, and European Commission draft legislation incorporating sustainability considerations into existing frameworks.

Contents

• Brexit: HM Treasury response to House of Lords EU Financial Affairs Committee recommendations on financial services
• Assessing adequate financial resources: FCA finalised guidance FG20/1
• COVID-19: BoE speech on financial system resilience
• COVID-19: FCA and PRA next steps on LIBOR transition apply to RFRWG's amended target
• COVID-19: FCA statement on government debt advice services' support package
• FCA quarterly consultation 28: CP20/7
• Conduct, culture and COVID-19: FCA Insight article
• FCA policy development update
• Sustainability: draft legislation to amend UCITS Directive, AIFMD, MiFID, Solvency II and IDD
• EU taxonomy and EU green bond standard: European Commission FAQs
• COVID-19: further ESRB measures
• COVID-19: BoE and PRA statement on ESRB recommendation on restriction of distributions
• ESMA peer review methodology updated
• Europol European financial and economic crime centre launched

Brexit: HM Treasury response to House of Lords EU Financial Affairs Committee recommendations on financial services

The House of Lords EU Financial Affairs Sub-Committee has published a letter, dated 27 May 2020, from John Glen, Economic Secretary to the Treasury, to Lord Sharkey, Chair of the House of Lords EU Financial Affairs Sub-Committee, relating to the committee's review of financial services after Brexit.

Mr Glen confirms the government's intention to seek equivalence across all the equivalence regimes currently existing in EU legislation. However, it wants to ensure that there are clear and coherent structures in place in the event that equivalence is withdrawn by either party, in order to stabilise equivalence as the basis of market access.

The government is willing to look at regulatory cooperation arrangements that reflect the level of access between the UK and EU markets, that are "grounded in the economic partnership" as stated in the Political Declaration, and that seek to establish processes for dialogue.

On the Future Regulatory Framework review, the next phase of the review will set out how the government proposes to address the opportunities that Brexit raise. The Treasury is considering the timing of this next phase, in light of COVID-19, and intends to say more in the second half of this year.

Mr Glen agrees that the government should take the opportunities after Brexit to develop closer bilateral relations with jurisdictions with which it shares a common approach to promoting cross border financial services. The government intends to deploy its independent financial services trade and regulatory powers to enhance its links to key global financial centres, combatting market fragmentation, improving collaboration between states and promoting cross border activity.

Assessing adequate financial resources: FCA finalised guidance FG20/1

The UK Financial Conduct Authority (FCA) has published finalised guidance, FG20/1, on a framework to help financial services firms ensure they have adequate financial resources and to take effective steps to minimise harm. This guidance applies to all FCA solo-regulated firms subject to threshold conditions and/or the Principles of Businesses (PRIN).

This framework document aims to provide more clarity to the industry on:

• the role of adequate financial resources in minimising harm;
• the practices firms can adopt when assessing adequate financial resources; and
• how the FCA assesses the adequacy of a firm's financial resources.

The FCA intends to improve the way firms operate so that they can take effective steps to prevent harm from occurring, by improving controls and/or reducing the risk in their activities, and so that they can put things right when they go wrong. The FCA states that its intention is not to increase general levels of financial resources across financial services but to take a proportionate and risk-based approach to the supervision of firms. However, in some cases, it might be necessary to increase a firm's financial resources.

The FCA expects firms to assess their adequate financial resources commensurate to the risk of harm and complexity of their business. This starts with considering whether they have enough assets to cover their debts and liabilities. For firms with limited potential to cause harm, meeting debts as they fall due may be enough to show they have adequate financial resources. For firms with potential to cause significant harm, a more in-depth assessment is likely to be required.

The FCA states that this guidance does not place specific additional requirements on firms because of COVID-19, but the crisis underlines the need for all firms to have adequate resources in place.

COVID-19: BoE speech on financial system resilience

The Bank of England (BoE) has published a speech by Sir Jon Cunliffe, BoE Deputy Governor Financial Stability, on "Financial system resilience: Lessons from a real stress". Acknowledging that the initial shock of the impact of COVID-19 on the financial system has passed, Sir Jon notes that the depth and length of its economic impact remain very uncertain. He looks at how the current system performed and whether there are any issues likely to need further attention by the regulatory and supervisory community.

COVID-19: FCA and PRA next steps on LIBOR transition apply to RFRWG's amended target

The Prudential Regulation Authority (PRA) has confirmed that the expectations it and the FCA published in January 2020 regarding the next steps in LIBOR transition continue to apply to the Working Group on Sterling Risk-Free Reference Rates' (RFRWG) amended target on new sterling LIBOR lending maturing after end-2021. The PRA and FCA letter should therefore be read in conjunction with that amended target.

COVID-19: FCA statement on government debt advice services' support package

On 9 June 2020, the FCA published a statement on the government's support package for debt advice services. The statement relates to an announcement by HM Treasury on 9 June 2020 that an additional £37.8 million support package will be made available to debt advice providers during 2020/21 so they can continue to provide essential services to help people who are struggling with their finances due to the coronavirus.

The distribution of the funding across England will be overseen by The Money and Pensions Service (MaPS) and will come from a combination of sources: £20.6 million from the government; £14.2 million will be raised through a one-off increase to the debt advice levy; and a further £3 million contribution from MaPS. For the Devolved Authorities, £2m (out of an additional £5.9m) will come from the Devolved Authorities' debt advice levy.

The FCA is responsible for collecting funding amounts requested by the government for free-to-consumer debt advice provided by MaPS in England and by other financial bodies in Scotland, Wales and Northern Ireland. The FCA collects this through the debt advice levy, which funds MaPS, and the Devolved Authorities' debt advice levy.

Therefore, as collection agent for these levies, the FCA indicates that it will consult on further details in due course.

FCA quarterly consultation 28: CP20/7

The FCA has published its latest quarterly consultation paper, CP20/7, in which it invites comments on proposed changes to the FCA Handbook relating to:

• a rule clarification to the FCA's Compensation sourcebook (COMP) to confirm the ability of the FSCS to declare in default firms and successors subject to the proposed new moratorium under the Insolvency Act 1986. The FCA asks for feedback on the proposed changes to COMP by 5 July 2020;
• amendments to Chapter 7 (Arrears, default and recovery (including repossessions)) of the Consumer Credit sourcebook (CONC) as a consequence of the Bounce Back Loan Scheme (BBLS). The deadline for comments on these proposals is 5 July 2020; and
• changes to the Sourcebook for Professional Body Anti-Money Laundering Supervisors. The deadline for comments on these proposals is 5 August 2020.

Conduct, culture and COVID-19: FCA Insight article

The FCA has published an Insight article on COVID-19, conduct and culture. The article explores some of the ways in which individual behaviour and workplace culture might be affected by the changes in working life resulting from the COVID-19 pandemic and what this could mean for financial services firms in terms of challenges and opportunities.

FCA policy development update

The FCA has updated its policy development update for June 2020, setting out information on recent and future FCA publications.

Sustainability: draft legislation to amend UCITS Directive, AIFMD, MiFID, Solvency II and IDD

The European Commission has published for consultation the following draft texts of legislation (downloadable from their respective webpages) to incorporate sustainability issues and considerations into existing legislative frameworks as part of the EU's action plan on sustainable finance:

• Commission Delegated Directive amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for UCITS – inserts a new Article 5a into the UCITS Organisation Directive, requiring investment companies to integrate sustainability risks in the management of UCITS. It also amends Articles 9(2), 17, 23 and 38(1) of the UCITS Organisation Directive to incorporate sustainability risks into risk management and conflict procedures;
• Commission Delegated Regulation amending Delegated Regulation (EU) No 231/2013 as regards sustainability risks and sustainability factors to be taken into account by alternative investment fund managers – amends the AIFMD Level 2 Regulation to include the consideration of sustainability risks in due diligence requirements, to require AIFMs to retain the necessary resources and expertise for the effective integration of sustainability risks, and to state that the identification of conflicts of interest must also include those conflicts of interest that may arise as a result of the integration of sustainability risks. The amendments also require senior management of AIFMS to be responsible for the integration of sustainability risks and will require risk management policies to consider exposures to sustainability risks;
• Commission Delegated Directive amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors and preferences into the product governance obligations – Delegated Directive (EU) 2017/593 supplements the Markets in Financial Instruments Directive (MiFID) and contains product governance obligations. The amendments mean that investment firms manufacturing and distributing financial instruments should consider sustainability factors in the product approval process of each financial instrument and in the other product governance and oversight arrangements for each financial instrument that is intended to be distributed to clients seeking financial instruments with a sustainability-related profile. A general statement that a financial instrument has a sustainability-related profile will not be sufficient;
• Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms – the amendments to the MiFID Org Regulation mean that investment firms providing financial advice and portfolio management will need to carry out a mandatory assessment of sustainability preferences of clients. Investment firms should take these sustainability preferences into account in the selection process of financial products. Investment firms will also be required to prepare client reports that explain how the recommendation meets a client's investment objectives, risk profile, capacity for loss bearing and sustainability preferences. The amendments also require investment firms to take into account sustainability risks when complying with the organisational requirements and to integrate sustainability risk into risk management policies; and
• Commission Delegated Regulation amending Delegated Regulation (EU) 2015/35 as regards the integration of sustainability risks in the governance of insurance and reinsurance undertakings under the Solvency II Directive – amends the Solvency II Delegated Regulation by requiring insurers to reflect sustainability risks in their risk management processes, by requiring remuneration policies to be consistent with the integration of sustainability risks, and by requiring that sustainability risks are taken into account in the implementation of the prudent person principle; and
• Commission Delegated Regulation amending Delegated Regulation (EU) 2017/2358 and Delegated Regulation (EU) 2017/2359 as regards the integration of sustainability factors and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products under the Insurance Distribution Directive (IDD). They are amended by integrating sustainability factors in suitability assessments and by integrating sustainability risks into the product oversight and governance requirements and into the rules on conflicts of interest.

The consultation period ends on 6 July 2020. The Delegated Regulations and Directives will apply 12 months after they enter into force.

EU taxonomy and EU green bond standard: European Commission FAQs

The European Commission has published FAQs focussing on the final reports of the Technical Expert Group on Sustainable Finance (TEG) on the EU Taxonomy and the EU Green Bond Standard (EU GBS), as well as on how the Commission intends to take the content of those reports forward.

COVID-19: further ESRB measures

On 8 June 2020, the European Systemic Risk Board (ESRB) announced a second set of actions taken in response to COVID-19 at its extraordinary meeting on 27 May 2020. The ESRB has issued recommendations relating to:

• monitoring debt moratoria, guarantee schemes and other fiscal measures put in place by member states;
• introducing restrictions on dividend payments, share buybacks and other pay-outs until 1 January 2021 where they have the effect of reducing the quantity or quality of own funds at the EU group level, for banks, certain investment firms, insurers, reinsurers and central counterparties (CCPs). It also published a background report on its reasons for issuing this recommendation; and
• measures addressing liquidity risks arising from margin calls issued by CCPs, together with a background report. This recommendation aims to:
  • limit cliff effects in relation to the demand for collateral, also including client clearing services and non-centrally cleared markets;
  • enhance CCP stress test scenarios for the assessment of future liquidity needs;
  • limit liquidity constraints related to margin collection; and
  • promote international standards related to the mitigation of procyclicality in the provision of client clearing services and in securities financing transactions.

COVID-19: BoE and PRA statement on ESRB recommendation on restriction of distributions

On 8 June 2020, the Bank of England (BoE) and the PRA published a joint statement on the recommendation from the ESRB on the restriction of distributions during the COVID-19 pandemic (reported above). The BoE and the PRA note that the recommendation applies to UK authorities during the Brexit transition period.

However, the BoE and the PRA do not consider it necessary to extend guidance that they have previously issued to firms that cover this topic.

ESMA peer review methodology updated

The European Securities and Markets Authority (ESMA) has published a new peer review methodology integrating the improvements to the peer review process that were introduced by the revised ESMA Regulation.

The new peer review methodology provides for the set-up of ad hoc peer review committees chaired by ESMA staff, an enhanced role for the management board and the introduction of fast-track peer reviews to be launched in case of an urgent convergence issue.

The new methodology will be used for ESMA peer reviews launched after the date of adoption.

Europol European financial and economic crime centre launched

Europol has launched its European Financial and Economic Crime Centre (EFECC) to enhance the operational support provided to EU member states and EU bodies in the fields of financial and economic crime and to promote the systematic use of financial investigations. The new EFECC has been set up within the current organisational structure of Europol that already plays an important part in the European response to financial and economic crime and will be staffed with 65 international experts and analysts.

Europol has also published a report giving an overview of the most threatening phenomena in the area of economic and financial crime including various types of fraud, the production and distribution of counterfeit goods, money laundering and others.

[View source.]