Recent regulatory developments of interest to all financial institutions. Includes updates relating to Brexit, COVID-19, HM Treasury's consultation on the implementation of CRD V and more.
- Draft Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020
- Future regulatory framework and UK-EU equivalence assessments: HM Treasury update
- CRD V: HM Treasury consultation on UK implementation
- LIBOR transition: BoE speech
- PRA SMCR forms: CP7/20
- COVID-19: FCA modification by consent of 12-week rule for benchmark administrators and appointed representatives
- COVID-19: FCA CP20/10 on extending the implementation deadlines for the Certification Regime and Conduct Rules
- FCA enhanced Financial Services Register
- Pilot of digital sandbox: FCA and City of London Corporation partnership
- Office of the Complaints Commissioner 2019/20 annual report
- Recapitalising business post COVID-19: TheCityUK final report
- Brexit: European Commission Communication on readiness for end of transition period
- EEA Agreement: EEA Joint Committee Decisions amending Annex IX (Financial Services)
- COVID-19: EU best practices for relief measures to support customers and businesses
- EU sustainable finance strategy: ESAs respond to European Commission consultation
- COVID-19: FSB report on financial stability implications and policy measures taken
Draft Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020
HM Treasury has published draft Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, together with a draft explanatory memorandum. It has also published a summary of the responses to its preceding consultation: Fifth Money Laundering Directive and Trust Registration Service.
The Regulations update the existing UK anti-money laundering (AML) legislation to implement changes in the EU AML framework and make minor corrections and other minor amendments. They also fix the deficiencies that will otherwise arise from these amendments at the end of the Brexit transition period. In particular, the Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017) to implement amendments made by the Fifth Money Laundering Directive (MLD5) to the Fourth Money Laundering Directive (MLD4).
The main changes concern:
- the UK's register of express trusts: in particular, expanding the scope of the register, and requiring that information on the register is made available in certain circumstances to those with a legitimate interest;
- correspondent banking;
- reporting of discrepancies in beneficial ownership information;
- customer due diligence on publicly listed companies;
- the use of confidential information;
- registration deadlines for some firms;
- directions to cryptoasset businesses; and
- fixes to EU exit-related deficiencies.
Parts 1 to 3 of the Regulations come into force 21 days after the day on which they are laid (except as specified). Regulation 7(2)(a) (substitution of regulation 45(3): register of beneficial ownership information) comes into force on 6 April 2021. Regulation 5 (substitution of regulation 30A: reporting discrepancies: trusts) and regulation 7(4) (insertion of new regulation 45ZB: access to information on the register) come into force on 10 March 2022. Part 4 of the Regulations (EU exit amendments) comes into force on IP completion day (the end of the Brexit transition period).
Future regulatory framework and UK-EU equivalence assessments: HM Treasury update
The House of Lords Select Committee on the European Union has published oral evidence given on 2 July 2020 by John Glen, Economic Secretary and City Minister, HM Treasury, and Katharine Braddick, director-general of financial services, HM Treasury, relating to the Committee's inquiry on financial services after Brexit.
In relation to equivalence assessments, Mr Glen notes that the UK has made its assessments of the EU, but that the EU's timescale for its decisions are unknown. Mr Glen states that the UK expects to make its outcome known only as part of the structured dialogue with the EU. He indicates that the UK will not announce its decision unilaterally if the EU has not completed the process. The UK hopes to complete all of the questionnaires sent to it by the Commission in the next couple of weeks.
On the future regulatory framework for financial services, Mr Glen indicated that HM Treasury intends to publish a consultation paper in autumn 2020. This paper will consider how regulators should operate in dealing with technical standards, how policy innovation from HM Treasury and Parliament is scrutinised, and how that interacts with regulators' responsibilities.
HM Treasury also intends to publish the Financial Services Bill 2019-21 in autumn 2020.
CRD V: HM Treasury consultation on UK implementation
HM Treasury has published a consultation paper on updating the UK's prudential regime before the end of the Brexit transition period. The consultation focusses on the UK implementation of the revised Capital Requirements Directive (CRD V), which the UK is required to transpose by 28 December 2020.
LIBOR transition: BoE speech
The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, on entering the LIBOR "endgame".
Among other things, Mr Bailey notes that, from August 2020, the BoE will publish a freely available Sterling Overnight Index Average (SONIA) compounded index to support the use of SONIA across a wide range of sterling products. In September 2020, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) will begin a further programme of public communications to help those with LIBOR-linked exposures navigate to more robust alternatives.
From October 2020, UK banks should be offering alternatives to LIBOR. The BoE does not expect to see any further sterling LIBOR-linked lending after the end of March 2021. Regulated firms' supervisors will monitor and discuss their progress with these important milestones.
After extensive consultation by ISDA, a robust and trusted fallback for derivative contracts will shortly be introduced. The BoE encourages early sign-up to the protocol, but it is not a substitute for continuing to move business onto near risk-free rates. However, the ISDA protocol, together with the UK government's June 2020 announcement on its intention to legislate to provide the FCA with increased powers to deliver an orderly wind-down of critical benchmarks such as LIBOR, are important steps in the endgame becoming clearer.
HM Treasury intends to use secondary legislation to amend the UK legislation that implemented CRD IV and give the Prudential Regulation Authority (PRA) new or updated powers to implement CRD V, ensuring that it can update its rulebook as necessary. Therefore, this consultation seeks comment only on those areas that require legislation, including:
- the Treasury's intention to exempt investment institutions prudentially regulated by the Financial Conduct Authority (FCA) from the scope of CRD V, given the planned introduction of the UK Investment Firms Prudential Regime (IFPR) by summer 2021;
- various updates to the capital buffers that the PRA can require of institutions, to allow the Financial Policy Committee (FPC) and the PRA to maintain their current level of macro-prudential flexibility;
- extending the PRA's powers for consolidated supervision to holding companies and creating a new approval regime for financial holding companies and mixed financial holding companies;
- granting the PRA an express power to remove members of the management body of institutions and holding companies; and
- amendments to the list of entities exempted from CRD V.
The deadline for responses is 19 August 2020.
LIBOR transition: BoE speech
The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, on entering the LIBOR "endgame".
Among other things, Mr Bailey notes that, from August 2020, the BoE will publish a freely available Sterling Overnight Index Average (SONIA) compounded index to support the use of SONIA across a wide range of sterling products. In September 2020, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) will begin a further programme of public communications to help those with LIBOR-linked exposures navigate to more robust alternatives.
From October 2020, UK banks should be offering alternatives to LIBOR. The BoE does not expect to see any further sterling LIBOR-linked lending after the end of March 2021. Regulated firms' supervisors will monitor and discuss their progress with these important milestones.
After extensive consultation by ISDA, a robust and trusted fallback for derivative contracts will shortly be introduced. The BoE encourages early sign-up to the protocol, but it is not a substitute for continuing to move business onto near risk-free rates. However, the ISDA protocol, together with the UK government's June 2020 announcement on its intention to legislate to provide the FCA with increased powers to deliver an orderly wind-down of critical benchmarks such as LIBOR, are important steps in the endgame becoming clearer.
PRA SMCR forms: CP7/20
The PRA has published a consultation paper, CP7/20, on minor amendments it proposes to make to the following forms relating to the Senior Managers and Certification Regime (SMCR or SM&CR).
- the "Notifications Form" to make consequential amendments, reflect the new FCA address and the new FCA logo, to delete an incorrect reference to the PRA as a limited company, update references to the PRA Rulebook, and update the General Data Protection Regulation (GDPR) notification; and
- "SM&CR Form L" to reinstate question 3.05, which requests firms making a notification to provide details of any disciplinary action taken. This question was erroneously deleted when the Form was updated as part of the extension of the SMCR to insurers in December 2018.
The deadline for responses is 13 October 2020.
COVID-19: FCA modification by consent of 12-week rule for benchmark administrators and appointed representatives
The FCA has published a direction relating to a modification by consent of rule 10A.5.6R of the Supervision manual (SUP) (known as the "12-week rule") available to benchmark administrators and firms using appointed representative (AR) arrangements. Firms can use the modification if they think they may need to make, or extend, temporary arrangements to cover absences, as a result of COVID-19.
The modification by consent extends the period in which an individual can cover for an approved person without being approved from a maximum of twelve weeks in a consecutive twelve-month period to a maximum of 36 weeks in a consecutive twelve-month period.
ARs will not be able to apply for the modification directly. Instead, their principal firm will need to submit the application. Where an AR has multiple principals and wishes to use the modification, each principal firm will need to submit its consent to the modification individually. However, a principal firm will not need to do this if the principal did not (and did not need to) apply for the approval of the absent approved person.
The FCA reminds those taking advantage of the modification of its expectations on internal record keeping.
The direction will continue to have effect in relation to ARs after the changes made to SUP10A.5.6R by the Individual Accountability (FCA-Authorised Benchmark Firms) Instrument 2020 come into effect on 7 December 2020. However, it will cease to have effect in relation to benchmark administrators from this date, as the Senior Managers and Certification Regime will apply to these firms from then, rather than SUP 10A.
The direction ends on 30 April 2021.
COVID-19: FCA CP20/10 on extending the implementation deadlines for the Certification Regime and Conduct Rules
On 17 July 2020, the FCA published a consultation paper, CP20/10, on making changes to its rules following the extension of the deadline by which FCA solo-regulated firms need to have implemented the certification regime. The delay will give firms significantly affected by COVID-19 time to make the changes they need.
To ensure other deadlines remain consistent and to provide extra time for firms that need it, the FCA is consulting on extending the deadline for the following requirements from 9 December 2020 to 31 March 2021:
- the date the Conduct Rules come into force;
- the deadline for submission of information about Directory Persons to the Financial Services Register (FS Register); and
- changing references in the rules to the deadline for assessing Certified Persons as fit and proper (which has been announced by HM Treasury).
However, the FCA states that if firms are able to certify staff and submit information about Directory Persons to the FS Register earlier than March 2021 they should do so. The FCA will still publish details of certified employees of solo firms starting from 9 December 2020 on the FS Register as the FCA expects that this published information will be of immediate benefit to consumers and firms.
The FCA is consulting alongside the parliamentary process to give regulated firms certainty and finalise policy as soon as possible.
As the Certification Regime and reporting of Directory Persons do not apply to benchmark administrators, the FCA does not intend to consult to move the deadline for benchmark administrators. Benchmark administrators have until December 2021 to train non-Senior Manager staff in the Conduct Rules.
The consultation ends on 14 August 2020.
FCA enhanced Financial Services Register
The FCA has announced that it will launch an enhanced Financial Services Register to replace its existing register on 27 July 2020. It will provide more detail on the improvements on launch.
The FCA states that all links to the current register will be redirected to the enhanced register's homepage. Therefore, firms will need to update any links they have to other pages to the current register. The existing register will not be available from 6pm on 24 July 2020.
The FCA also confirms that it intends to launch the directory of certified and assessed persons later in 2020 and that this directory will be added to the enhanced register. Firms can continue to update the information on their past and present certified employees for inclusion in the directory for when it launches. However, the FCA acknowledges that some firms may wish to wait to submit their data once it has confirmed a publication date.
Pilot of digital sandbox: FCA and City of London Corporation partnership
The FCA has announced that the City of London Corporation and the FCA are collaborating on the pilot of a "digital sandbox" to support innovative firms tackling challenges caused by COVID-19. The strategic partnership will see both organisations work together to develop and launch a digital testing environment to provide innovative firms with access to high-quality data sets to allow for the testing and validation of technology solutions.
In its pilot stage, the digital sandbox will support large financial institutions and start-ups looking to play a key role in the recovery from COVID-19 through supplying relevant data sets and expertise in the areas of detecting and preventing fraud and scams, supporting vulnerable customers, and improving access to finance for small and medium-sized enterprises (SMEs) financially affected by the pandemic.
Further information is available on the FCA's webpage: Digital sandbox – coronavirus pilot.
Office of the Complaints Commissioner 2019/20 annual report
The Office of the Complaints Commissioner has published its annual report for 2019/20 and the FCA has published its response to the report.
In the report, the Commissioner notes that, during the relevant period, the complaints scheme has not been operating well. He identifies three reasons for this:
- the FCA's complaints function is not coping with the volume and complexity of its work;
- there are clear examples of significant regulatory issues not being identified, despite complaints investigations; and
- the regulators' failure to address suggestions for improvement to the scheme, and, in particular, to clarify the policy on compensation under the scheme, suggests a reluctance to give the needs of complainants sufficient priority.
The Commissioner states that, despite repeated warnings over a sustained period, the FCA has not yet established a complaints function with the resilience required to deal with the kinds of problems that an organisation of its size and responsibilities requires. He makes a number of recommendations in the report, to which, in his view, serious consideration should be given. Without these measures, the Commissioner considers there is a danger that the complaints scheme will continue to not meet its objectives, and that wider lessons about regulatory effectiveness will not be adequately addressed.
In a response to the report, the FCA notes that the past year has been particularly busy for its complaints team and that it concluded more complaints than in any previous year. It responds to the themes identified in the report, and confirms that it is fully committed to making further changes through its ongoing improvement and transformation plans and will continue to share progress with the Commissioner.
Recapitalising business post COVID-19: TheCityUK final report
TheCityUK Recapitalisation Group has published its final report: "Supporting economic recovery: recapitalising businesses post Covid-19". The report highlights that up to three million jobs and 780,000 SMEs are at risk if urgent action is not taken to tackle the projected £35bn of unsustainable debt that could result from COVID-19 loans. It also sets out a series of options for converting, restructuring and repaying this debt to help the UK's economic recovery and future growth.
Brexit: European Commission Communication on readiness for end of transition period
The European Commission has adopted a Communication: Getting ready for changes: Communication on readiness at the end of the transition period between the EU and the UK to help national authorities, businesses and citizens prepare for the changes that will arise after the Brexit transition period ends on 31 December 2020.
The Communication sets out a sector-by-sector overview of the main areas where there will be changes. On financial services, the Commission restates the approach on equivalence assessments outlined by Michel Barnier, the EU's chief negotiator on its future relationship with the UK, in a speech given on 30 June 2020. The Commission states that it will continue its equivalence assessments based on the information being provided by the UK government currently and notes that the assessments may lead to the EU reaching decisions on equivalence or on no equivalence.
In footnotes, the Commission lists those equivalence provisions in financial services legislation for which it has not initiated an assessment because equivalence decisions have already been granted or because the EU legal framework is not yet fully in force. For those areas where the framework is not fully in force, the Commission does not intend to adopt an equivalence decision "in the short or medium term".
Following analysis, the Commission states that the only area identified that may present financial stability risks to the EU is the central clearing counterparties (CCPs) of derivatives. Therefore, the Commission is considering adopting a time-limited equivalence decision relating to the UK concerning CCPs. This would allow EU-based CCPs to develop further their capacity to clear relevant trades in the short and medium term and EU clearing members to take and implement necessary steps, including by reducing their systemic exposure to UK market infrastructure.
The Commission advises firms to finalise and implement their preparatory measures by 31 December 2020 at the latest to be ready for the changes that will happen under all scenarios, including scenarios where the EU or the UK do not make a relevant equivalence decision. EU clearing members of UK CCPs and their clients should take active steps to prepare for all scenarios, including reducing their systemic exposure to UK market infrastructures.
In relation to data protection, the Commission confirms that the EU will use its best endeavours to conclude the assessment of the UK regime by the end of 2020 with a view to possibly adopting an adequacy decision if the UK meets the applicable conditions. The Commission is currently conducting this assessment and has held a number of technical meetings with the UK to gather information in order to inform the process. For transfers from the UK to the EU, the UK's Data Protection Act 2018 will confer adequacy on EU Member States until the end of 2024, with the need to be re-examined by that date.
However, organisations should be considering alternatives to ensure the compliance of any personal data transfers to the UK in the event no adequacy decision is reached by the end of 2020. This could include binding corporate rules or through specific derogations.
EEA Agreement: EEA Joint Committee Decisions amending Annex IX (Financial Services)
The following three 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 17/2019 of 8 February 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/936], which incorporates Implementing Regulations relating to the Solvency II Directive. The Decision's date of entry into force is specified as 9 February 2019, subject to all requisite notifications under Article 103(1) of the EEA Agreement;
- Decision 19/2019 of 8 February 2019 amending Annex IX (Financial Services) to the EEA Agreement [2020/937], which incorporates a Delegated Regulation and an Implementing Regulation relating to the Bank Recovery and Resolution Directive (BRRD). The Decision's date of entry into force is specified as 9 February 2019, subject to all 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; and
- Decision 20/2019 of 8 February 2019 amending Annex IX (Financial services) to the EEA Agreement [2020/938], which incorporates Delegated Regulations and Implementing Regulations relating to the Central Securities Depositories Regulation (CSDR). The Decision's date of entry into force is specified as 9 February 2019, subject to all 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.
COVID-19: EU best practices for relief measures to support customers and businesses
On 14 July 2020, the European Commission published a document listing a set of best practices to facilitate the convergence and implementation of COVID-19 relief measures by financial institutions for the benefit of consumers and businesses. The document reflects the outcome of two roundtable meetings on best practices facilitated by the Commission with a range of stakeholders representing the financial services sector.
The best practices cover credit payment moratoria, cash availability and payments, new loans and credit guarantees provided in the context of COVID-19, as well as best practices for insurers.
Financial institutions are encouraged to follow the best practices on a best efforts basis, while complying with applicable EU legislation, and without prejudice to regulatory obligations and supervisory expectations within their respective member states. The best practices are temporary and should be applied as long as they are still relevant depending on the situation in member states.
The Commission says it will facilitate a further roundtable in September 2020 to take stock of progress.
EU sustainable finance strategy: ESAs respond to European Commission consultation
The European Supervisory Authorities (ESAs) have published their responses to the European Commission's consultation on a renewed sustainable finance strategy:
The ESAs have also published a joint letter from the ESA Chairs to Valdis Dombrovskis, Commission Executive Vice-President, in which they welcome the consultation and draw attention to certain topics that the ESAs consider to be particularly important.
COVID-19: FSB report on financial stability implications and policy measures taken
On 15 July 2020, the Financial Stability Board (FSB) published a report it delivered to the G20 on the financial stability implications of, and policy measures taken, in response to COVID-19. It also published a letter from Randal Quarles, FSB Chair, to G20 Finance Ministers and Central Bank Governors.
The report sets out COVID-19-related financial stability developments, policy measures taken and work to assess their effectiveness. It draws on the significant work undertaken by the FSB to assess vulnerabilities, consider policy responses under different recovery scenarios and note where additional work may be required. The report also consolidates the policy measures taken across the FSB's national membership and international standard-setting bodies to address the financial fallout of COVID-19. The FSB previously delivered a report on these matters to the G20 in April 2020.
The letter highlights a number of areas of focus for the FSB in relation to COVID-19.
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