Content

• Download the full regulatory news bulletin
• Spring 2020 Budget: key financial services announcements
• Financial Services Bill and prudential standards: HM Treasury policy statement
• Future Regulatory Framework Review: HM Treasury response to call for evidence on regulatory coordination
• FPC remit and recommendations for 2020/21
• SONIA Compounded Index: Working Group on Sterling RFRs statement and roadmap
• Post-Brexit UK regulatory framework: BoE speech
• Appointment of Andrew Bailey as BoE Governor: Treasury Committee report
• COVID-19: FPC and PRA statements
• Climate risk and green finance initiatives: FCA and BoE letters
• LIBOR discontinuation: FCA and BoE letter
• Regulation of funeral plan providers and intermediaries: HM Treasury response to CP
• FCA cyber coordination group insights
• FCA quarterly consultation: CP20/4
• FCA policy development update
• Driving purposeful cultures: FCA discussion paper
• Treating vulnerable customers fairly: FCA speech
• FOS maximum award limits for complaints
• Annex IX (Financial Services) to EEA Agreement: amending Decisions published in OJ
• EU green bond standard: EU TEG usability guide
• Taxonomy on sustainable economic activities: EU TEG final report
• Digital identity: FATF guidance

Spring 2020 Budget: key financial services announcements

The Chancellor of the Exchequer, Rishi Sunak, has delivered the Spring 2020 Budget. The Budget includes a number of measures of interest to financial services:

• The government will introduce a Financial Services Bill later in the parliamentary session to ensure that the UK maintains its world-leading regulatory standards and remains open to international markets. The Bill is intended to:
  • provide long-term market access between the UK and Gibraltar for financial services firms following Brexit. The Treasury has launched a consultation which closes on 11 May 2020: HM Treasury: Consultation: Market access arrangements for financial services between the UK and Gibraltar;
  • support the asset management industry by simplifying the process for overseas investment funds seeking to market into the UK: HM Treasury: Consultation: Overseas funds regime; and
  • enable the implementation of the remaining Basel banking standards and a more proportionate prudential regime for investment firms. HM Treasury has published a policy statement on prudential standards in the Financial Services Bill 2019-21: HM Treasury: Policy statement: Prudential standards in the Financial Services Bill (reported further below).
• The government announced a Reforming Regulation Initiative to collect ideas from businesses and the public to help it ensure that regulation is sensible and proportionate. It has published a webpage launching a consultation on this initiative. The government states that it is particularly interested in the needs of small businesses. The consultation closes on 11 June 2020: HM Treasury: Open consultation: Reforming Regulation Initiative.
• Firms subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 will be required to pay a new levy to help fund new government action to tackle money laundering and to ensure it delivers the reforms it is committing to in the Economic Crime Plan. The government will consult on the levy later in spring 2020.
• During 2020, the government will undertake a review of the UK funds regime. This will cover direct and indirect tax, as well as relevant areas of regulation, and will consider whether any policy changes might be needed. As a first step, it has published a consultation on whether there are tax changes that could help make the UK a more attractive location for companies used by funds to hold assets. The consultation closes on 19 May 2020: HM Treasury: Consultation: Tax treatment of asset holding companies in alternative fund structures.
• Ron Kalifa OBE will lead a review of the UK FinTech sector to identify what more the industry and government can do to support growth and competitiveness in this sector. The government will also extend funding for the FinTech delivery panel and will tour the UK to showcase its diverse range of FinTech firms.
• The government intends to consult on bringing certain cryptoassets into scope of financial promotion regulation. It also plans to consult later in 2020 on the broader regulatory approach to cryptoassets, including new challenges from stablecoins.
• HM Treasury will shortly be publishing a call for evidence to ask what can be done by the government, industry and regulators to support a more innovative and resilient payments system.
• The government will legislate to bring funeral plan providers within the remit of the Financial Conduct Authority (FCA): HM Treasury: Consultation response: Regulation of pre-paid funeral plans.
• The government will bring forward legislation to allow credit unions to offer a wider range of products and services to their members.
• The government will convene a summit to consider what further data needs to be made accessible to make it faster and easier for SMEs to shop around for credit.
• The government will create a digital identity market to enable people to prove information about themselves without needing to show paper documents. This will help make certain actions, such as opening a bank account, simpler, safer and quicker.

Financial Services Bill and prudential standards: HM Treasury policy statement

HM Treasury has published a policy statement on prudential standards in the Financial Services Bill 2019-21 which it intends to introduce to Parliament in the current parliamentary session. The Bill will ensure that HM Treasury has powers to implement in the UK:

• those provisions in the CRR II Regulation that apply in the EU from June 2021 (that is, those provisions that, as things stand, will not automatically apply in the UK following the expiry of the Brexit transition period on 31 December 2020);
• the final Basel III standards agreed by the Basel Committee on Banking Supervision (BCBS) in December 2017 (referred to by HM Treasury as "Basel 3.1"); and
• the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD). The revised prudential regime for investment firms introduced by the IFR and the IFD will not automatically apply in the UK because the IFR will apply in the EU from 26 June 2021 (after the Brexit transition period) and member states are expected to apply legislation and regulation implementing the IFD on that date.

HM Treasury intends to consult publicly on the implementation of the CRR II Regulation, the final Basel III standards and the revised prudential regime for investment firms "in due course". The financial services regulators will also consult on amendments to their rules in due course.

HM Treasury confirms that, together with the Prudential Regulation Authority (PRA), it intends to transpose the CRD V Directive into UK legislation and regulation by 28 December 2020, reflecting its obligation to implement EU legislation with an application date before the end of the transition period.

Future Regulatory Framework Review: HM Treasury response to call for evidence on regulatory coordination

HM Treasury has published its response to its call for evidence on regulatory coordination, which marks the first phase in its Future Regulatory Framework Review. In its call for evidence, HM Treasury requested views on the coordination of financial services regulators on regulatory interventions and on improvements to the regulators' coordination on authorisation, supervision and enforcement.

In the response, HM Treasury summarises responses received to the call for evidence and sets out how the financial services regulators, working with the government, propose to improve regulatory coordination through the introduction of the Financial Services Regulatory Initiatives Forum and the Regulatory Initiatives Grid. It also provides further information on the next phase of the Financial Services Future Regulatory Framework Review.

The call for evidence was the first phase of HM Treasury's Future Regulatory Framework Review. HM Treasury will use the second phase of the review to develop a more coherent approach to UK financial services regulation. It intends to explore how financial services policy and regulation are made in the UK, including how stakeholders are involved in the process. This phase will form part of the government's white paper on financial services, which will be published in spring 2020.

FPC remit and recommendations for 2020/21

HM Treasury has published a letter from Rishi Sunak, Chancellor of the Exchequer, to Mark Carney, Bank of England (BoE) Governor, setting out the remit and recommendations for the Financial Policy Committee (FPC) for 2020/21.

The Chancellor confirms that HM Treasury will publish a financial services white paper in spring 2020 setting out an "ambitious vision" for the future of the UK's financial services sector.

SONIA Compounded Index: Working Group on Sterling RFRs statement and roadmap

The Working Group on Sterling Risk-Free Reference Rates has published a statement outlining how bond markets can use the BoE's proposed compounded Sterling Overnight Index Average (SONIA Compounded Index), which is expected to be published from July 2020.

The Working Group also published an indicative roadmap outlining a path for the discontinuation of new sterling LIBOR-based cash lending by the end of Q3 2020. The roadmap focuses on the development of products referencing the new SONIA Compounded Index as the primary risk-free rate in sterling markets and is intended to act as a guide for lenders, borrowers and infrastructure providers to enable them to plan how they will meet the Q3 target.

Post-Brexit UK regulatory framework: BoE speech

The BoE has published a speech by Victoria Saporta, BoE Executive Director of Prudential Policy, on the ideal post-EU regulatory framework.

In the speech, Ms Saporta argues that there are three ideal features of regulation:

• dynamism – allowing adjustments to be made to regulation over time to incorporate updated international standards and unintended consequences of regulation;
• time consistency – aiming to avoid the potential instability caused by acting on short-term incentives to the detriment of long-term considerations; and
• legitimacy – democratic control over the shape of the regulatory regime and the ability to hold the regulator to account.

Ms Saporta argues that an independent regulatory body with a clear mandate set out in primary legislation and a clear set of accountability mechanisms to Parliament is preferable to the alternative models for the institutional structure for prudential regulation (that is, primary legislation; regulations set by government ministers; or an entirely independent regulatory body).

Appointment of Andrew Bailey as BoE Governor: Treasury Committee report

The House of Commons Treasury Committee has published a report on the appointment of Andrew Bailey as the Governor of the BoE. The committee concludes that Mr Bailey has the professional competence and personal independence to be appointed as Governor of the BoE.

COVID-19: FPC and PRA statements

The PRA has published a statement on its expectations of firms in response to Covid-19 (the coronavirus). The PRA statement follows the BoE's FPC decision to reduce the UK countercyclical capital buffer (CCyB) rate to 0% of banks' exposures to UK borrowers with immediate effect. The FPC expects to maintain the 0% rate for at least 12 months.

The PRA considers the following issues:

• Distributions: the PRA expects firms not to increase dividends and other distributions in response to the FPC's action and will monitor firms' distributions against this expectation. The PRA expects firms' boards to consider this when deciding distributions. Any proposals or discussions relating to potential dividends or share buybacks should be undertaken in a manner consistent with firms' safety and soundness and subject to a transparent governance process. The PRA sets out its specific expectations of senior managers and, in particular, the individual performing the chair of the remuneration committee senior management function (SMF12). The PRA may engage with relevant senior managers and check written records to assess whether any relevant decisions were subject to an appropriate level of discussion, documentation and oversight.
• Capital buffers: the PRA reminds firms that capital buffers can be used as intended to continue to support the real economy during periods of stress. Among other things, firms should note that use of the PRA buffer or CRD IV combined buffer is not a breach of capital requirements or threshold conditions and that the PRA buffer is confidential and the automatic distribution restrictions associated with the CRD IV combined buffer do not apply to it.
• Transitional measures on technical provisions (TMTP) relief for insurers: the PRA considers that movements in risk free rates (RFR) since 31 December 2019 meet the threshold for a material change in risk profile set out in its supervisory statement on the maintenance of the TMTPs under the Solvency II Directive. It believes that the risks posed by COVID-19 are sufficient to meet a broad definition of a change in risk profile that for some firms may be material.

Climate risk and green finance initiatives: FCA and BoE letters

The House of Commons Treasury Committee has published letters to and from Andrew Bailey, FCA Chief Executive, and Mark Carney, Governor of the BoE, on initiatives being undertaken or contemplated by the FCA and the BoE on climate risk and green finance.

LIBOR discontinuation: FCA and BoE letter

The FCA and the BoE have published a letter they have sent to trade associations on how the discontinuation of LIBOR may affect their members and stakeholders. In light of the transition underway to switch from LIBOR to alternative risk-free rates, the regulators are asking trade associations to help raise awareness among their networks. The letter provides practical advice on how to do so. The regulators emphasise that during the transition from LIBOR, it is important that firms treat customers fairly and provide more information on this in the appendix to the letter.

Regulation of funeral plan providers and intermediaries: HM Treasury response to CP

HM Treasury has published the response to its June 2019 consultation paper on its legislative approach to bringing pre-paid funeral plan providers and intermediaries within the FCA's regulatory remit.

Most respondents agreed that the draft statutory instrument that was annexed to the consultation paper, the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (Funeral Plans) Order 2019, accurately captures the activities that should be subject to FCA regulation.

HM Treasury retains the existing definition of a funeral plan contract in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. This definition does not include contracts where, at the time of entering into them, the policyholder and the funeral plan provider intend or expect the funeral to occur within one month.

Funeral plan providers will need to be FCA-authorised for "entering into" new, and "carrying out" new and existing, funeral plan contracts. These activities apply to the sale and administration of funeral plan contracts respectively. Funeral plan providers will have the option to seek FCA authorisation solely for administering funeral plan contracts where they are not seeking to sell new plans. Further details of exemptions, etc are detailed in the response.

HM Treasury plans to shortly lay before Parliament the necessary secondary legislation. The new FCA regulatory framework will come fully into force 18 months after the legislation is made.

FCA cyber coordination group insights

The FCA has published a summary of insights from its cyber co-ordination groups on current cyber risks and firms' practices for responding to them.

FCA quarterly consultation: CP20/4

The FCA has published its latest quarterly consultation paper, CP20/4, in which the FCA consults on proposed changes to a number of FCA provisions with varying consultation periods of 3 April or 1 May 2020:

• minor amendments to the Decision Procedure and Penalties manual (DEPP) and the Enforcement Guide to implement the Money Laundering and Terrorist Financing (Amendment) Regulations 2019;
• consequential changes to the Financial Crime Guide to reflect provisions in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019;
• a proposal to add the Institute of Financial Accountants (IFA) to the list of bodies whose members can provide a statement of high net worth to individuals in order for certain credit and consumer hire agreements with them to be exempt from regulation;
• minor amendments to DEPP to reflect the OPBAS Regulations;
• amendments to the notification form to amend firm details;
• clarify notification procedures, include guidance, and make changes to the Directory persons report;
• amendments to MiFID II relating to the tick size regime; and
• changes to the Glossary terms for multilateral development bank and designated multilateral development bank.

FCA policy development update

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

Driving purposeful cultures: FCA discussion paper

The FCA has published a discussion paper, DP20/1, on driving purposeful cultures. DP20/1 contains firm-specific, sector-specific and thematic essays that present a range of views from industry leaders, professional bodies and culture experts exploring the role of purpose in driving a healthy sustainable culture in firms.

While the essays do not represent its views, the FCA aims to share a range of insights, highlight the importance of the topic and encourage broader discussion so firms understand the importance of focusing on their own purpose. It will continue to explore the theme of purpose, using these perspectives as a starting point for future work.

Treating vulnerable customers fairly: FCA speech

The FCA has published a speech by Nisha Arora, FCA Director of Consumer and Retail Policy, on the FCA's approach to ensuring that firms treat vulnerable customers fairly. In her speech, Ms Arora considers why protecting vulnerable customers is important, focusing on the FCA's July 2019 consultation, GC19/3, on guidance on the fair treatment of vulnerable customers.

Ms Arora states that the FCA will consult on its revised guidance in spring 2020 with a view to finalising it later in the year.

FOS maximum award limits for complaints

The FCA has published its latest list of non-legal corrections and clarifications in the FCA Handbook in which it specifies an increase in the maximum award limit for the Financial Ombudsman Service (FOS) for complaints referred on or after 1 April 2020.

The document sets out an amendment to the Dispute Resolution: Complaints sourcebook (DISP) made on 6 March 2020. DISP 3.7.4R has been amended to state that for complaints referred on or after 1 April 2020, the FOS award limit will be:

• £355,000 (increased from £350,000) for complaints about acts or omissions by firms on or after 1 April 2019; and
• £160,000 (as before) for complaints about acts or omissions by firms before 1 April 2019.

Annex IX (Financial Services) to EEA Agreement: amending Decisions published in OJ

Seven Decisions of the EEA Joint Committee that amend Annex IX (Financial Services) to the EEA Agreement to incorporate various pieces of EU financial services legislation into the EEA Agreement have been published in the Official Journal of the EU (OJ):

• Decision 304/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/322] incorporates three Delegated Regulations and one Implementing Regulation relating to the Insurance Distribution Directive (IDD). The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement, or the date of entry into force of Decision 214/2018 of 26 October 2018, whichever is the later (this has not yet been published in the OJ);
• Decision 305/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/323] incorporates the Insolvency Hierarchy Directive, which amends the Bank Recovery and Resolution Directive. The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement, or the date of entry into force of Decision 21/2018 of 9 February 2018, whichever is the later;
• Decision 306/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/324] incorporates eight Delegated Regulations, seven Implementing Regulations and one Implementing Directive relating to the Market Abuse Regulation. The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement, or the date of entry into force of Decision 259/2019 of 25 October 2019, whichever is the later (this has not yet been published in the OJ);
• Decision 307/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/325] incorporates Commission Delegated Regulation (EU) 2018/1619 of 12 July 2018 amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries under the UCITS Directive. The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement, or the date of entry into force of Decision 63/2018 of 23 March 2018, whichever is the later;
• Decision 308/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/326] incorporates Commission Delegated Regulation (EU) 2018/1618 of 12 July 2018 amending Delegated Regulation (EU) 231/2013 as regards safe-keeping duties of depositaries under the Alternative Investment Fund Managers Directive (AIFMD). The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement;
• Decision 309/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/327] incorporates Commission Delegated Regulation (EU) 2018/1229 of 25 May 2018 supplementing the Central Securities Depositories Regulation (CSDR) with regard to regulatory technical standards (RTS) on settlement discipline. The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement, or the date of entry into force of Decision 18/2019 of 8 February 2019, whichever is the later; and
• Decision 310/2019 of 13 December 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/328] incorporates a number of Commission Implementing Decisions relating to EU equivalence determinations under the Credit Rating Agencies Regulation (CRA Regulation) and repeals certain earlier Commission Implementing Decisions. The Decision's date of entry into force is specified as 14 December 2019 subject to requisite notifications under Article 103(1) of the EEA Agreement.

EU green bond standard: EU TEG usability guide

Following a European Commission mandate, the EU technical expert group on sustainable finance (TEG) has published a usability guide for the EU green bond standard (EU GBS). The user guide contains recommendations from the TEG on the practical application of the EU GBS intended to assist potential issuers, verifiers and investors of EU green bonds. It includes recommendations on the establishment of a market-based, voluntary interim registration process for verifiers of EU green bonds that might apply until any supervisory role for the European Securities and Markets Authority (ESMA) concerning verifiers is fully operational.

The Commission intends to launch a consultation on sustainable finance in mid-March, which will form the basis for the renewed sustainable finance strategy to be published in the third quarter of 2020. The Commission will, among other things, seek views on a possible legislative initiative on an EU GBS, as developed by the TEG.

Taxonomy on sustainable economic activities: EU TEG final report

Following a European Commission mandate, the EU TEG has published its final report on the taxonomy for sustainable economic activities. The Taxonomy Regulation will establish an EU-wide classification system or taxonomy intended to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable.

In the report, the TEG sets out:

• recommendations on the overarching design of the taxonomy;
• guidance on the obligations for financial market participants and large companies under the taxonomy, including how they can make disclosures using the taxonomy; and
• recommendations for the Platform on Sustainable Finance to be established under the Taxonomy Regulation.

The TEG has also published a technical annex, which contains an updated list of technical screening criteria for economic activities that can substantially contribute to climate change mitigation or adaptation, including an assessment of significant harm to other environmental objectives.

The TEG intends to continue to operate in an advisory capacity until the Platform is operational.

Digital identity: FATF guidance

The Financial Action Task Force (FATF) has published guidance to help governments, financial institutions, virtual asset service providers and other regulated entities determine whether a digital identity (ID) is appropriate for use for customer due diligence. The guidance is technology neutral and was consulted on.

The FATF recommends that financial institutions, authorities and other stakeholders should:

• understand the assurance levels of a digital ID system's main components, including its technology, architecture and governance, to determine whether it is a reliable, independent source of information; and
• make a broader, risk-based determination of whether, given its assurance levels, a particular digital ID system provides an appropriate level of reliability in light of the potential money laundering, terrorist financing, fraud, and other illicit financing risks at stake.

The FATF states that non-face-to-face customer-identification and transactions that rely on reliable, independent digital ID systems with appropriate risk mitigation measures in place may present a standard level of risk, and may even be lower-risk.

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