Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector.
BREXIT
Please see the product sections for updates on the various draft SIs published this week in anticipation of a hard Brexit.
Please see the Markets and Markets Infrastructure section for Commission Implementing Decisions on temporary equivalence of UK regulatory framework for CCPs and CSDs published in OJ.
Please also see the Markets and Markets Infrastructure section for ESMA's statement on firms' MiFID disclosure obligations to clients in the context of Brexit.
Please also see the Markets and Markets Infrastructure section for the FMLC's report on legal uncertainties relating to draft Brexit SIs on markets in financial instruments.
Please see the Payment Services and Payment Systems section for an update on the FCA's consultation on RTS for strong customer authentication in event of no-deal Brexit.
FCA draft rules on treatment of Gibraltar in FCA Handbook
On 20 December, the FCA published a statement on the treatment of Gibraltar in the FCA Handbook after Brexit. In March, the UK government published a statement guaranteeing Gibraltar financial services firms' access to UK markets until 2020 and announcing that it would develop a replacement framework that will last beyond 2020. The FCA intends to make rules and guidance to ensure that authorised financial services firms in Gibraltar retain access to UK markets after exit day on current terms. It has published a draft instrument, the Exiting the European Union: Gibraltar (General Rules) Instrument, that will insert a new section 2.3 (General saving of the Handbook for Gibraltar) into General Provisions. This specifies that rules and guidance that apply in relation to or in connection with Gibraltar before exit day will continue to apply in the same way after exit day, notwithstanding amendments made to the FCA Handbook as a result of Brexit. The FCA intends to finalise the instrument shortly before the UK leaves the EU. It will consult in due course on Handbook changes that will apply in relation to Gibraltar after 2020.
Joint PRA and BoE consultation paper on further Brexit changes to PRA Rulebook and BTS
On 20 December, the PRA and the BoE published a joint consultation paper on further Brexit-related changes to the PRA Rulebook and BTS (CP32/18). In CP32/18, the PRA and the BoE consult on proposals relating to: (i) the FSCR and, in particular, the application of the PRA Rulebook to firms in SRO; (ii) Gibraltar and incoming Gibraltarian firms; (iii) protections under the FSCS for firms in the FSCR and Gibraltarian firms; and (iv) amendments to BTS relating to securitisation, the CRR and the BRRD. The consultation follows on and supplements consultations published in October by the PRA and the BoE. The deadline for responses to the consultation is 21 January 2019.
EC adopts Communication and package implementing "No Deal" Contingency Action Plan
On 19 December, the EC adopted a Communication on implementing the EC's "no deal" Contingency Action Plan. This is the EC's third Communication on its preparedness measures for a no-deal Brexit. It is accompanied by a Q&A document. Among other things, the Communication discusses the impact of a no-deal scenario for citizen's rights to stay and social security co-ordination. The EC calls on the EU27 member states to take a number of actions to mitigate the impact of a no-deal scenario on these areas. The Communication also sets out a package of 14 legislative proposals and secondary legislation acts, as well as other actions that the EC is taking to prepare for a no deal Brexit scenario. The measures relate to, inter alia: (i) financial services: two temporary equivalence decisions for UK CCPs and UK CSDs and two Commission Delegated Regulations amending RTS on clearing and margins; and (ii) environmental climate policy: a proposal to suspend temporarily the UK's participation in the EU Emissions Trading Scheme and two proposals on the quota system for the placing on the market of hydrofluorocarbons. The Communication also includes proposals to ensure that the current territorial co-operation programmes for the border counties of Ireland and Northern Ireland continue, as well as amending the rules for balance of payments statistics. For the proposals for Regulations falling under the ordinary legislative procedure, the EP and the Council, as co-legislators, both need to adopt the same final text before the Regulations can be published in the OJ and enter into force. Meanwhile, the EC will continue to implement its Contingency Action Plan in the weeks to come and will continue to monitor the need for additional action.
EBA reminds firms of need to communicate impact of Brexit to customers
On 17 December, the EBA published a press release reminding firms of their need to maintain efforts regarding their Brexit-related communication to customers. The reminder follows the EBA's June opinion on preparations for the withdrawal of the UK from the EU. The opinion specified that firms should provide clear information to customers whose contracts or services may be affected as soon as that information was available, and in any event no later than the end of the year. The EBA explains that it has observed continued progress in contingency planning, however, it has seen little evidence of financial institutions communicating effectively to their customers on how they may be affected by Brexit and on any relevant actions undertaken by such institutions as part of their contingency planning that may affect those customers' contractual or statutory rights. The EBA therefore calls on all financial institutions affected by the UK withdrawal from the EU, directly or indirectly, to take the June opinion into careful consideration. Firms should engage with their customers, as soon as possible, and provide adequate information on the risks and mitigating measures being taken, at the very least providing the information specified in the opinion. The EBA also suggests that customers with concerns about whether Brexit will impact on them, and that have not been contacted by their financial service providers by the end of 2018, may wish to contact their financial institutions directly.
CONSUMER/RETAIL
Please see the Markets and Markets Infrastructure section for an update regarding HMT's letters on proposals relating to European crowdfunding service providers.
Please also see the Markets and Markets Infrastructure section for an update on ESMA restrictions on CFDs for further three months.
Draft Mortgage Credit (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 19 December, a draft version of the Mortgage Credit (Amendment) (EU Exit) Regulations 2019 was published. This is the version that has been laid before Parliament following the draft published by HMT on 12 December. The Regulations address deficiencies in the Mortgage Credit Directive Order 2015, (which transposed the Mortgage Credit Directive in the UK), that arise as a result of the UK leaving the EU. They will come into force on exit day.
FCA finalised guidance on fairness of variation terms in financial services consumer contracts
On 19 December, the FCA published finalised guidance (FG18/7) on the fairness of variation terms in financial services consumer contracts under the CRA 2015. The guidance outlines a number of non-exhaustive factors the FCA believes firms should consider under the CRA 2015, when drafting and reviewing unilateral variation terms in their consumer contracts. It sets out the FCA's understanding of the CRA 2015's provisions and recent UK and EU case law developments in respect of unilateral variation terms. The FCA consulted on a draft version of the guidance in May (GC18/2). Alongside FG18/7, it has published a summary of feedback to GC18/2, with FCA responses to the feedback. Respondents generally welcomed the draft guidance and were broadly positive and supportive of its content. Some issues were raised, including requests for more examples and more clarity in certain areas, and various minor clarifications. The FCA notes that some comments suggested a lack of understanding that the purpose of the guidance is to identify factors that are relevant to the assessment of fairness of variation terms, not to set out what terms would or would not be considered unfair. Ultimately, only a court can determine the fairness of a term and the FCA cannot approve terms for these purposes. The FCA has considered all the responses received and revised the guidance where appropriate, as outlined in the summary of feedback. The FCA expects firms to consider the guidance when they review their existing contracts and draft new contracts. Firms must ensure that variation terms in their contracts are transparent and not unfair. In the guidance, the FCA reminds firms that they are responsible for ensuring their terms meet the CRA 2015's requirements.
FCA makes final rules on overdrafts and consults on further changes
On 18 December, the FCA published a consultation paper (CP18/42) on changes to the overdraft market. In light of harm to consumers, CP18/42 sets out proposals to simplify the pricing of all overdrafts. The FCA has decided not to introduce a price cap at this stage. Its proposals include: (i) aligning prices of unarranged overdrafts with arranged overdrafts; (ii) standardising the presentation of arranged overdraft prices; (iii) banning fixed fees for borrowing through an overdraft (other than fees for refusing a payment due to lack of funds); and (iv) telling banks to do more to identify overdraft customers showing signs of financial strain who are in financial difficulty, and to help them to reduce their overdraft use. The proposed text is set out in the draft Personal Current Accounts and Overdrafts Instrument 2019, which is in Appendix 2 of CP18/42. The deadline for comments is 18 March 2019. The FCA intends to publish its response to the feedback received, and any final rules, by early June 2019. It proposes to give firms six months to comply with any rules on pricing and repeat use, meaning they would be in force by early December 2019. CP18/42 also contains a policy statement for the competition remedy rules the FCA has made to address low awareness and engagement in the overdraft market. The FCA consulted on the draft rules in CP18/13, which was published in May. Feedback to CP18/13, together with the FCA's response, is covered in chapters 4 to 7 of CP18/42. Among other things, the final rules require firms to provide tools (online or within their banking apps) that assess eligibility for overdrafts, improve visibility and content of key general information about overdrafts, and introduce a ban on the inclusion of overdrafts in available funds.
FCA final report on strategic review of retail banking business models
On 18 December, the FCA published a final report on its strategic review of retail banking business models, together with annexes. The FCA launched the report in April 2017 and published an updated in June. The review is based on a business model analysis of about 40 firms active in retail banking and on the output of the FCA's September conference on the future of retail banking. The FCA has used its analysis to inform its view of emerging scenarios in retail banking and their impact on business models and consumers. This shows that increased competition has the scope to improve outcomes for many consumers, but progress is uncertain and may take time. The final report also examines the impact of branch closures, provides an update on its distributional analysis of personal current accounts (PCAs), and analyses the profile of customers who switch PCA provider. The FCA's analysis confirms its view that the PCA is an important source of competitive advantage for major banks. The reasons for this include that PCAs bring cheap funding from customer deposits and additional revenues from overdraft fees and other changes. These advantages have led to outcomes for many consumers and small businesses in the form of little or no interest on credit balances, high charges, and pricing models that can work against loyal customers. The FCA intends to initiate three strands of work following the review: (i) ongoing monitoring of retail banking business models; (ii) analysis to understand the value chain in new payment services business models; and (iii) exploratory work to understand certain aspects of SME banking. In addition, to ensure that the retail banking sector continues to work well for consumers, the FCA has identified three potential areas where co-ordinated action may be needed in the future: (a) continued access to banking services; (b) appropriate use of customer data and system resilience; and (c) effective prevention of financial crime and fraud.
FCA makes rules and guidance for high-cost credit sector and consults on buy now pay later offers
On 18 December, the FCA published feedback (CP18/43) with final rules and guidance following its consultation paper (CP18/12) in May, relating to the high-cost credit sector. CP18/43 also summarises feedback received to CP18/12 and sets out the FCA's responses. The final rules relate to home-collected credit, catalogue credit and store cards. Their aim is to reduce costs to consumers, improve sales practices, protect consumers at risk of financial difficulty, ensure repeat borrowing is consumer-led and encourage market innovation to make alternatives more widely available. The final rules are set out in the Consumer Credit (High-Cost Credit) Instrument 2018. The instrument mostly comes into force on 19 March 2019, except for Annex A and Parts 1, 3, 5 and 7 of Annex B, which come into force on 19 December. Alongside CP18/43, the FCA has published final guidance (FG18/6) to assist registered social landlords to understand the scope and application of consumer credit regulation when they help tenants to find alternatives to high-cost credit. In particular, it aims to provide greater clarity about the activities for which they are likely to require authorisation as credit brokers, and gives an overview of the authorisation process. FG18/6 comes into effect on 19 December. In chapter 4 of CP18/43, the FCA is also consulting on "buy now pay later" (BNPL) offers. It proposes to extend two measures that already apply to catalogue credit and store cards to point of sale retail finance providers, and introduce two new measures that would apply to catalogue credit, store cards and point of sale retail finance providers. The proposed text is set out in the draft Buy Now Pay Later Instrument 20[19], which is in Appendix 1 to CP18/43. The deadline for comments is 18 March 2019. The FCA intends to publish its response to the feedback received, and any final rules, by the end of June 2019. Chapter 6 of CP18/43 provides an update on the FCA's work on alternatives to high-cost credit. It focuses on the FCA's work relating to housing associations and providers of essential household goods.
FCA policy statement on regulation of claims management companies
On 17 December, the FCA published a policy statement setting out its final rules and guidance on the regulation of CMCs (PS18/23). The FCA consulted on its proposals to regulate CMCs in June. It subsequently consulted on the regulatory fees for CMCs in August. In PS18/23, the FCA reports that the vast majority of responses to both consultations supported its proposals, as respondents recognised the need to strengthen the regulation of the industry. The FCA also received some suggestions for changes to the proposed rules. Generally, it intends to implement the proposals as consulted on, but it has made some changes based on feedback. In particular, it has: (i) clarified the requirements for lead generators when using the term "no win, no fee"; (ii) reduced the amount of information CMCs need to set out in the services they will provide in the one-page summary document; (iii) made some changes to its pre-contractual and ongoing disclosure requirements; (iv) made some changes to its reporting requirements; and (v) introduced a lower minimum periodic fee of £500 for smaller firms with turnover up to £50,000 instead of the single minimum fee it had proposed of £1,000 for firms with turnover up to £100,000. The final rules are set out in the Claims Management Instrument 2018. Most of the rules apply from 1 April 2019, when the FCA's regime begins. The prudential resources requirements come into force on 1 August 2019. The FCA advises that firms affected by the changes should review their policies and procedures in light of the new rules and guidance, and make changes where needed. The FCA has also published the Fees (Claims Management Companies) Instrument 2018, which contains the final fees rules for CMCs. They apply from 1 January 2019. The FCA will publish its final rules on how the SMCR will apply to CMCs in early 2019.
FINANCIAL CRIME
Please refer to the Payment Services and Payment Systems section for the FCA's policy statement on changing complaint handling rules for victims of APP fraud.
Council agrees position on revised AML proposal for Omnibus Regulation
On 19 December, the Council published a press release reporting that it has agreed its negotiating position in relation to the revised legislative proposal for the Omnibus Regulation on reforms to the European System of Financial Supervision. The press release indicates that the EBA will be given responsibility for: (i) collecting information from NCAs relating to weaknesses identified in the context of their action to prevent or fight money laundering and terrorist financing; (ii) enhancing the quality of supervision by developing common standards and co-ordinating between national supervisory authorities; (iii) performing risk assessments on NCAs to evaluate their strategies and resources to address the most important emerging AML risks; (iv) facilitating co-operation with non-EU countries; and (v) addressing decisions directly to individual banks (as a last resort where NCAs have not acted). The EC published its communication on the EU framework for prudential and AML supervision for financial institutions, together with a revised legislative proposal in September.
MAR: FCA review of implementation
On 17 December, the FCA published issue 58 of its Market Watch newsletter. In this issue the FCA details its findings on a review of the implementation of MAR. The FCA has met with firms, carried out surveys, and analysed its own data. It attempts to clarify some of the issues raised. Among the topics discussed are: (i) the impact of the new market soundings regime on issuers, firms and investors - the FCA comments on different approaches to contacting investors, record-keeping, and post-sounding cleansing; (ii) insider lists - the FCA notes different approaches to the production of insider lists (and varying quality in the lists it has received) and comments on the use of other types of list, including "above-the-wall" lists; and (iii) obligations for issuers under MAR - the FCA comments on possible systems and controls for the identification and disclosure of inside information, including the use of disclosure committees and seeking the views of advisers. The FCA states that it will continue to work closely with market participants to ensure a consistent and effective implementation of MAR.
ECB guidance on white team's roles and responsibilities in TIBER-EU test
On 17 December, the ECB published guidance on the roles and responsibilities of the white team in a Threat Intelligence-Based Ethical Red-Teaming (TIBER-EU) test. The white team is the team within the financial infrastructure or institution being tested that is responsible for the overall planning and management of the test, in accordance with the TIBER-EU framework. The members of the white team are the only people within the entity being tested that know that a TIBER-EU test is taking place. They must ensure that the TIBER-EU test is conducted in a controlled manner, with appropriate risk management controls in place, while maximising the learning experience for the entity. They must co-operate closely with the TIBER cyber team from the relevant authority. The guidance is divided into four parts: (i) the roles and responsibilities of the white team during the preparation, testing and closure phases of a TIBER-EU test; (ii) the composition of the white team; (iii) the requisite skills and experience needed for the white team to manage the test; and (iv) the organisation of the white team during the test. The guidance is aimed at authorities responsible for adopting, implementing and managing the TIBER-EU framework at national and European levels, entities looking to undertake TIBER-EU tests and their supervisors, third-party providers that may be included in the scope of the test, and organisations interested in providing cyber threat intelligence services and red team testing services under TIBER-EU. TIBER-EU is the first EU-wide framework for controlled and bespoke tests against cyber attacks in the financial sector. The framework allows European and national authorities and firms to establish a programme to test and improve firms' resilience against sophisticated cyber attacks. It was published in May.
The Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018 laid before Parliament
The Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018 was laid before Parliament on 13 December. They make amendments to MLR 2017, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 (oversight regulations) and the Solicitors (Scotland) Act 1980. Regulation 3 implements an amendment to Directive 2015/849/EU of the EP and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing by adding restrictions on the use of anonymous safe-deposit boxes. Regulation 4 specifies the decisions of the FCA and of HMRC which are subject to appeal under the MLR 2017. Regulation 5 amends the oversight regulations which give the FCA powers to oversee certain anti-money laundering supervisors. Regulation 12 originally prevented the FCA from disclosing information to anyone other than relevant authorities (such as other supervisors) and law enforcement authorities. The amendment now allows the FCA to disclose information to other persons, provided that the disclosure is for purposes connected with enforcement proceedings or with the FCA’s functions. Regulation 7 requires HMT to carry out a review of the regulations by 26 June 2022. The regulations come into force on 10 January 2019.
FINTECH
UK Government and FCA respond to House of Commons Treasury Committee report on cryptoassets
On 20 December, the House of Commons Treasury Committee published its session 2017-19. The report sets out the UK Government's and the FCA's response to the Committee's twenty second report of the session on cryptoassets. In their responses, both the government and the FCA refer to the joint HMT, FCA and BoE Cryptoassets Taskforce October final report that clarifies many of the issues on which the Committee sought clarity. Referring to the final report, the government points out that it shares the Committee’s concerns about the substantial risks to consumers and market integrity associated with cryptoassets, as well as their potential use for illicit activity. As such, the government and regulators' immediate priorities are to mitigate these risks, while also continuing to encourage innovation and responsible development of legitimate DLT and cryptoasset related activity. These priorities include a series of FCA and government consultations, announced by the Taskforce, on the most appropriate response to cryptoassets (including on the regulatory perimeter relating to cryptoassets, a ban on the sale of derivatives referencing cryptoassets and action to tackle the use of cryptoassets for illicit activities). Of particular interest in its response, the FCA addresses the steps it would take regarding market manipulation if the entire cryptoasset market was brought within its remit. It explains that it would not authorise or approve the listing of a transferable security or a fund that references exchange tokens unless it is confident in the integrity of the underlying market and other regulatory criteria for funds authorisation are met. It would have to be satisfied that any listing of a security with cryptoassets as the underlying asset would not be detrimental to investors' interests. It confirms that it has not approved such a listing to date. In a press release published alongside the report, the Committee states that it is clear that the Government and the FCA share its concerns on crypto-assets, including the lack of regulation, minimal consumer protection, and anonymity aiding money laundering, and welcomes the series of consultations on how to mitigate these risks.
FUND REGULATION
Please refer to the Markets and Markets Infrastructure section for an update on the FCA's policy statement on Handbook changes to reflect application of Securitisation Regulation and CRR Amendment Regulation.
ESMA consults on integrating sustainability risks into UCITS and AIFMD
On 19 December, ESMA published a consultation paper on integrating sustainability risks and factors into UCITS and AIFMD. ESMA is aiming to clarify that all authorised fund managers subject to UCITS and AIFMD will need to incorporate sustainability risks into certain internal processes. Proposed changes to the UCITS and AIFMD framework include: (i) incorporation of sustainability risks into organisational procedures, consideration of the types of conflicts of interest that can arise, and systems and controls to ensure that they are properly taken into account in the investment and risk management processes; (ii) consideration of required resources and expertise for the integration of sustainability risks, including clarification that this is a senior manager responsibility; and (iii) consideration of sustainability risks when selecting and monitoring investments, designing written policies and procedures, and implementing effective arrangements. The draft technical advice shows that the proposed changes will be made by amending the Organisation Directive and Commission Delegated Regulation 231/2013 supplementing AIFMD with regard to the AIFMD Level 2 Regulation. The consultation closes on 19 February 2019. ESMA is aiming to submit the final technical advice to the EC by the end of April 2019.
Draft Collective Investment Scheme (Amendment etc) (EU Exit) Regulations 2019 laid before Parliament
On 17 December, a draft version of the Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2019 was published, together with an explanatory memorandum. It contains amendments to the retained provisions of delegated acts made under UCITS IV (Commission Regulation 2010/583 and Commission Delegated Regulation (EU) 2016/438), as well as UK legislation including FSMA and related secondary legislation. The Regulations will come into force on exit day, except for certain provisions specified in regulation 1(3). These include regulations 59 to 70 (Temporary recognition for the purposes of Part 17 of FSMA), which come into force on the day after the day on which the Regulations are made. HMT published updated versions of the draft Regulations and related explanatory information document on 7 December.
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 17 December, a draft version of the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 was published, together with an explanatory memorandum. The Regulations amend the Technical Standards Regulations to assign responsibility to the FCA for RTS supplementing the ELTIF Regulation set out in Commission Delegated Regulation (EU) 2018/480. The Regulations will come into force on exit day, with the exception of amendments relating to the Technical Standards Regulations, which will come into force on the day after the day on which the Regulations are made. HMT published a draft version of the Regulations and an updated explanatory information document on 19 November.
INSURANCE
Final progress report on implementation of Insurance Fraud Taskforce's recommendations
On 20 December, HMT published a report relating to the IFT's recommendations to reduce the level of insurance fraud. The report sets out the progress made during 2017 on the original 26 recommendations. Among other things, the report sets out work carried out in 2017 concerning how the insurance industry is improving consumer understanding of insurance products, the development of industry best practice guidance on how the most effective firms are tackling fraud, and how the industry is tackling issues with CMCs. The report notes that the transfer of regulation of CMCs to the FCA should help with the issues.
EIOPA Financial Stability Report
On 20 December, EIOPA published its December Financial Stability Report. The report concludes, among other things: (i) while overall Solvency ratios of European insurers have slightly improved further and remain high around 200%, the profitability of insurers is under increased pressure; (ii) climate and cyber related risks are still considered key emerging risks for insurers and pension funds. Extreme weather related events are expected to become more frequent and severe, with potentially significant impact on the liabilities of non-life insurers, while the transformation towards a low carbon economy carries significant transition risks in the investment portfolios of insurers and pension funds; and (iii) in relation to investments, insurers in certain countries continue to show a high de¬gree of home bias in fixed-income and equity investments and remain highly intercon¬nected with banks, while exposures to real estate markets can also be substantial in certain jurisdictions. Going forward, EIOPA will continue to deliver on its mandate in the financial stability area, assessing vulnerabilities at both the macro level and micro level.
UK-US bilateral agreement on insurance and reinsurance prudential measures signed
On 20 December, HMT published a joint statement from HMT, US Treasury and the Office of the US Trade Representative following the signing of the UK-US bilateral agreement on insurance and reinsurance prudential measures on 18 December. The agreement is to provide continuity when, post-Brexit, the UK is no longer subject to the EU-US covered agreement. The final text of the UK-US agreement was published on 12 December. The UK–US agreement addresses the same three areas of prudential insurance supervision as the US–EU covered agreement (group supervision, reinsurance and exchange of information between supervisory authorities).
EIOPA annual report on use of capital add-ons by NCAs under Solvency II
On 20 December, EIOPA published its annual report on the use, during 2017, by NCAs of CAOs under the Solvency II Directive. A CAO is a supervisory measure available to NCAs, to be used under exceptional circumstances, and only in the cases set out in the Solvency II Directive. The aim of report is to contribute to a higher degree of supervisory convergence in the use of CAOs by NCAs and to highlight any concerns about the CAO framework. The analysis is based on 2017 year-end Solvency II data, as reported by undertakings and insurance groups by means of the Solvency II QRTs and an additional survey sent to NCAs in the 28 EU member states and three EEA members. EIOPA has identified a slight increase in the use of CAOs, but the overall usage remains extremely limited. During 2017, six NCAs have set CAOs to 23 solo insurance and reinsurance undertakings. This limited usage may be due to what EIOPA describes as the "negative image" attributed to CAOs, which, in turn, inhibits supervisors from using it, or to the level of judgement that is associated with the decision and calculation of the CAOs. Based on the analysis, the use of CAOs appears to be linked to the level of capitalisation of the market. Even though CAOs are not used frequently, when they are used, they have a material impact on the SCR of some of the entities. The weight of the CAOs ranges from a low 1% to a high 83% respectively, with an average of 30% of the total SCR. EIOPA believes that the CAO appears to be a good and positive measure to adjust the SCR to the risks of the undertaking, when the application of other measures is not adequate (for example, the development of an internal model) since, in 18 cases, the CAO was already set in 2016. Over the coming years, EIOPA will continue to analyse the development of the use of CAOs to monitor whether more experience will encourage NCAs to make more efficient use of this tool. This is EIOPA's second annual report on the use by NCAs of CAOs, the first having been published in December 2017.
EIOPA annual report on limitations and exemptions from reporting under Solvency II
On 20 December, EIOPA published its annual report on limitations and exemptions from reporting during 2017 and the first quarter of 2018 under the Solvency II Directive. The report addresses the proportionality principle on the reporting requirements, in respect of which the limitations and exemptions on reporting are one of a number of proportionality tools.
EIOPA call for input on Solvency II reporting and disclosure review 2020
On 19 December, EIOPA published a call for input on the reporting and disclosure requirements under the Solvency II Directive as part of its 2020 review of Solvency II. EIOPA aims to assess if the requirements remain fit-for-purpose and, in particular, if they allow a risk-based and proportionate approach. EIOPA expects to consult on the conclusions of this assessment during 2019 but wants to give all stakeholders the opportunity to provide input at an early stage of the discussions, on areas that could be further improved. EIOPA invites stakeholders to submit any input on the following areas, bearing in mind that evidence-based inputs and concrete proposals will facilitate the reviewing process: (i) supervisory reporting - it asks questions relating to the consistency of the SII reporting framework with other EU supervisory reporting frameworks, the proportionality principle, internal models, reporting processes, narrative reporting and specific templates; and (ii) public disclosure – it asks questions about the aim and structure of the Solvecny and Financial Condition Report (SFCR), the external audit requirements of the SFCR, the language and means of disclosure, and it invites suggestions for other specific improvements. The deadline for comments is 21 February 2019.
EIOPA report on group supervision, capital management and passporting provisions under Solvency II
On 19 December, EIOPA published a report to the EC (dated 14 December) on group supervision and capital management with a group of insurance or reinsurance undertakings and freedom to provide services and freedom of establishment under the Solvency II Directive. In the report, EIOPA concludes that the tools it has developed to strengthen group supervision and the supervision of cross-border issues have contributed to substantial progress in the convergence of practices of NCAs.The report highlights those areas where EIOPA considers that significant challenges remain, including: (i) gaps in the regulatory framework that have led to divergent practices. These include issues relating to the definition of intra-group transaction, the treatment of insurance holding companies and mixed financial holding companies and the inclusion of non-insurer holding companies in the scope of group supervision; and (ii) areas where the supervision of insurance groups would benefit from a harmonised approach, including early intervention, recovery and resolution and the assessment of group own funds.
EIOPA states that the report should be read in conjunction with the report on the application of group supervision under the Solvency II Directive published in January. Publication of the report follows a request from the EC made in June. The report is intended to assist the EC in its work to assess the benefits of enhancing group supervision and capital management requirements within a group of insurers or reinsurers, as required under Article 242(2) of the Solvency II Directive.
Draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 19 December, a draft version of the Insurance Distribution (Amendment) (EU Exit) Regulations 2019 was published, together with a draft explanatory memorandum. The Regulations intend to fix deficiencies in the directly applicable EU delegated regulations that have been made under the IDD (that is, Commission Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359). The Regulations will enter into force on exit day. HMT published a draft version of the Regulations and related explanatory information document on 21 November.
EIOPA reports on results of 2018 insurance sector stress test
On 14 December, EIOPA published a report setting out the results of its 2018 European-wide insurance sector stress test, together with a fact sheet and updated FAQs. The main objective of the 2018 insurance sector stress test is to assess the resilience of the European insurance sector to specific adverse scenarios with potential negative implications for the stability of the European financial markets and the real economy. 42 (re)insurance groups, representing a market coverage of around 75% based on total consolidated assets, participated. As the exercise is based on group level information, the report does not provide country results. The stress test comprised the following three scenarios: (i) a YCU scenario encompassing market shocks combined with lapse and provisions deficiency stresses; (ii) a YCD scenario encompassing market shocks combined with longevity stress; and (iii) an NC scenario encompassing a series of four windstorms, two floods and two earthquakes distributed throughout Europe. In the report, EIOPA concludes that the stress test exercise highlights the vulnerabilities of the European insurance industry to market shocks combined with insurance specific shocks. It reveals that not only does a decrease of interest rates accompanied with prolonged life expectancy impact the sector but also that a sharp and sudden increase in yields triggering higher lapses and costs of claims has a substantial negative impact on the insurers' capital positions. EIOPA considers that the exercise represents an important step forward in the reassessment of capital requirements under adverse scenarios. It also provides a valuable basis for a follow-up dialogue between the group supervisors and the participating groups on the identified vulnerabilities. EIOPA will further analyse the results to gain a deeper understanding of the sector's risks and vulnerabilities. Based on that analysis, EIOPA (in co-operation with the group supervisors) will issue recommendations on the relevant aspects, if appropriate. The stress test exercise also included a questionnaire on cyber risk to gather information on cyber risk management and exposures to cyber risk, which is considered a relevant emerging risk for insurers and financial stability. EIOPA will analyse the results from the questionnaire separately to identify potential risks and vulnerabilities stemming from cyber risk at both a micro- and macro-prudential level. EIOPA launched the 2018 stress test in May.
IAIS reports on 2018 G-SII identification process
On 14 December, the IAIS published a report on the 2018 identification process of G-SIIs. The IAIS participates in a global initiative with other standard setters, central banks and financial sector supervisors to identify G-SIFIs. It focuses on identifying G-SIIs, a class of G-SIFIs, whose distress or disorderly failure would potentially cause significant disruption to the global financial system and economic activity. The IAIS used the 2016 G-SII assessment methodology to complete the 2018 G-SII identification process. It considers that this methodology adds an extra level of transparency to the annual G-SII identification process for both participating insurers and the public. In November, the FSB announced it would not engage in an identification of G-SIIs in 2018. This is on account of an IAIS consultation on a holistic framework for systemic risk in the insurance sector, in which the IAIS stated that implementation of the framework, which is expected to take effect in 2020, should remove the need for an annual G-SII identification by the FSB and national authorities.
MARKETS AND MARKETS INFRASTRUCTURE
Please see the Sustainable Finance section for the Council of the EU's general position on proposed Regulation on disclosures relating to sustainable investments and sustainability risks and proposed Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks.
Commission Implementing Decision on the equivalence of the legal and supervisory framework applicable to stock exchanges in Switzerland published in OJ
On 20 December, Commission Implementing Decision (EU) 2018/2047 was published in the OJ. This decision is to be complemented by cooperation arrangements to ensure the effective exchange of information and coordination of supervisory activities between the NCAs and FINMA. Commission Implementing Decision (EU) 2017/2441 on the equivalence of the legal and supervisory framework applicable to stock exchanges in Switzerland in accordance with Directive 2014/65/EU expires on 31 December. The Decision applies from 1 January 2019.
BoE Paper: New and legacy loan transactions referencing Sterling LIBOR
On 20 December, the BoE published a paper on new and legacy loan transactions referencing Sterling LIBOR. The paper outlines some steps that market participants could take in relation to new and legacy loan agreements which reference LIBOR and are due to terminate after 2021. The paper highlights, among other things, the following considerations: (i) an amendment exercise may be required if LIBOR is discontinued; and (ii) hedging arrangements may be impacted. Market participants are encouraged to take the actions that they can in order to promote awareness of the transition and contribute to consultations and other discussions.
Working group on euro risk-free rates consults on transition from EONIA to ESTER
On 20 December, the ECB's working group on euro risk-free rates published: (i) a report on possible approaches to transitioning from the EONIA to the ESTER; and (ii) a public consultation on determining ESTER-based term structure methodologies as a fallback for contracts linked to EURIBOR. The working group recommended that ESTER replace EONIA as the new euro risk-free rate in September. Feedback is requested on both the report and consultation by 1 February 2019.
Securitisation Regulation: FCA and PRA statement on reporting private securitisations
On 20 December, the FCA and PRA published a joint statement setting out how parties must report information, required by the Securitisation Regulation, to the UK authorities. The requirements relate to private securitisations, which are securitisations where a prospectus has not been prepared under the Prospectus Directive. Under the requirements, a summary of the relevant information must be sent to the PRA or FCA: (i) when securities are issued (for non-ABCP securitisations or on the first issuance of securities); (ii) on the creation of each new securitisation position (for non-ABCP where no securities are issued); and (iii) when any information is made available, under the Securitisation Regulation, to holders of a securitisation position. A template for notification is attached as an annex to the statement.
ESMA update on assessment of third-country trading venues for purpose of post-trade transparency and position limits
On 20 December, ESMA published an update on its assessment of TCTVs for the purpose of post-trade transparency and position limits under MiFID II and MiFIR. ESMA received requests to assess more than 200 TCTVs against the criteria set out in its two revised opinions of December 2017. At the time the opinions were published, ESMA said that it would publish the results of its assessments in the course of 2018. However, to date ESMA has not reviewed enough TCTVs to publish a comprehensive list. To ensure that all TCTVs receive the same treatment and to maintain a level playing field, ESMA intends to delay publishing the list until a more significant number have been assessed. ESMA confirms that pending publication of the lists, investment firms do not have to make public their transactions concluded on TCTVs via an approved publication arrangement. ESMA states that commodity derivatives contracts traded on TCTVs are not considered as economically equivalent over-the-counter contracts for the purpose of the position limit regime.
ESMA final report and guidelines on non-significant benchmarks under BMR
On 20 December, ESMA published a final report containing guidelines on NSBs under the BMR. ESMA has also separately published the guidelines on its website. The guidelines apply to competent authorities designated under Article 40 of the BMR, benchmark administrators and supervised contributors. They apply in relation to the provision of, and contribution to, NSBs. The purpose of the guidelines is to ensure common, uniform and consistent application, for NSBs, of: (i) the oversight function requirements in Article 5 of the BMR; (ii) the input data provision in Article 11 of the BMR; (iii) the transparency of the methodology provision in Article 13 of the BMR; and (iv) the governance and control requirements for supervised contributors provision in Article 16 of the BMR. ESMA consulted on a draft version of the guidelines between September and November 2017. In the final report, ESMA summarises the key points made in responses to the consultation and sets out its feedback. The guidelines will apply two months after they have been translated in the official EU languages and published on ESMA’s website. Publication of the translations in all official languages of the EU will therefore trigger a two-month period during which NCAs must notify ESMA whether they comply or intend to comply with the guidelines. NCAs that do not intend to comply must notify ESMA of their reasons for not complying with the guidelines. Competent authorities to whom the guidelines apply must comply by incorporating them into their supervisory practices, including where particular guidelines within the document are directed primarily at financial market participants. Administrators of NSBs and supervised contributors to NSBs are not required to report whether they comply with the guidelines.
ESMA consults on settlement fails reporting and standardised procedures and messaging protocols guidelines under CSDR
On 20 December, ESMA published the following consultation papers seeking comments on guidelines made under the CSDR: (i) Consultation Paper, Guidelines on standardised procedures and messaging protocols used between investment firms and their professional clients under Article 6(2) of CSDR. These guidelines cover the standardised procedures and messaging protocols to be used by firms to comply with Article 6 of the CSDR, which requires investment firms to take steps to limit the number of settlement fails. It is intended that they will contribute to the early settlement of transactions on the intended settlement date and to the reduction of the number of instructions that fail to settle on the intended settlement date. The draft guidelines are set out in section III of the paper; and (ii) Consultation Paper, Guidelines on Settlement Fails Reporting under Article 7(1) of CSDR. These guidelines cover the scope, reporting architecture and exchange of information between ESMA and competent authorities regarding settlement fails, based on the reports submitted by CSDs. The draft guidelines are set out in section III of the paper. The deadline for comments on both consultation papers is 20 February 2019. ESMA intends to finalise the guidelines by July 2019.
Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 made
On 20 December, the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, which were made on 19 December, were published, with an explanatory memorandum and impact assessment. A draft of the Regulations was laid before Parliament on 18 October. Regulations 1, 2, 3, 15(5) (for the purpose only of inserting regulation 47B into the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017), and regulation 20, come into force on 20 December (that is, the day after the day on which the Regulations were made).
FMLC report on legal uncertainties relating to draft Brexit SIs on markets in financial instruments
On 20 December, the FMLC published a report on legal uncertainties arising from the changes proposed by the draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018. The draft Regulations were laid before Parliament on 18 October. Their purpose is to ensure that the regime established by MiFID II and MiFIR functions effectively after Brexit. The legal uncertainties include those relating to: (i) references to other legislation (including the FCA Handbook). The FMLC recommends that HMT or the FCA (or both), clarify how subsequent updates to guidelines and rules will be reflected in the legislation; (ii) the new requirement to determine whether EU regulatory requirements have "equivalent effect". The FMLC states that it is unclear how the relevant provision would apply in cases where provisions have a different impact under MiFIR in the EU and onshored MiFIR in the UK. The FMLC recommends that HMT issue guidance to firms on the circumstances in which equivalent effect will apply; (iii) information and thresholds published in the EU after exit day. The draft Regulation introduces a new provision setting out the issues the FCA must take into account in deciding whether to suspend the use of a waiver of the obligation to publish certain pre-trade information, and whether to renew a suspension of the use of waivers during the temporary permissions period. The new provision gives rise to questions about the extent to which thresholds and information published in the EU will continue to have an impact on the FCA’s determination; and (iv) the new powers and functions given to the FCA. The FMLC believes that guidance both to and from the FCA in respect of its new functions under the draft Regulations would provide market certainty.
Commission Implementing Decisions on temporary equivalence of UK regulatory framework for CCPs and CSDs published in OJ
On 20 December, the following Commission Implementing Decisions were published in the OJ: (i) Commission Implementing Decision (EU) 2018/2031 on the temporary equivalence of the UK's regulatory framework for CCPs; and (ii) Commission Implementing Decision (EU) 2018/2030 on the temporary equivalence of the UK's regulatory framework for CSDs. The aim of the Decisions is to ensure that UK CCPs and CSDs may continue to provide clearing and other services in the EU after 29 March 2019, if the UK leaves the EU without transitional arrangements in place. The EC adopted both Decisions on 19 December. They will enter into force on 21 December (that is, the day after their publication in the OJ). They will apply from the date following that on which the Treaties cease to apply to, and in, the UK, under Article 50(3) of the Treaty on European Union. However, they will not apply if the withdrawal agreement has entered into force by that date or a decision has been taken to extend the Article 50 process. The Decision on CCPs will expire on 30 March 2020 and the Decision on CSDs will expire on 30 March 2021.
Draft Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019 published by HMT
On 19 December, HMT published a draft version of the Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019. The purpose of the Regulations is to correct deficiencies in the retained version of the SFTR and to establish supervisory requirements for TRs. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. The Regulations will come into force on exit day.
ESMA renews restriction on CFDs for further three months
On 19 December, ESMA published a press release announcing it is renewing the restriction on the marketing, distribution or sale of CFDs to retail clients, in effect since 1 August, from 1 February 2019 for a further three-month period. ESMA intends to adopt the renewal measure in the official languages of the EU in the coming weeks, after which it will publish an official notice on its website. The measure will then be published in the OJ.
FCA policy statement on Handbook changes to reflect application of Securitisation Regulation and CRR Amendment Regulation
On 19 December, the FCA published a policy statement on Handbook changes to reflect the application of the Securitisation Regulation and the CRR Amendment Regulation (PS18/25). PS18/25 sets out the FCA's final and near-final rules that implement the Securitisation Regulation and the CRR Amendment.
The FCA consulted on its proposals, in CP18/22, in August and, in CP18/30, in October. As it did not receive any formal responses to the two consultation papers, its final and near-final rules are nearly the same as those it consulted on. It is making the following changes: (i) changes to the Handbook - it is making changes to the Investment Funds sourcebook and the Collective Investment Schemes sourcebook that cover the obligations of AIFMs and UCITS managers investing in securitisations, and parts of the Prudential sourcebook for Investment Firms to reflect the changes from the Securitisation Regulation and CRR Amendment; (ii) fees for TPVs - it is making near-final rules on new application and periodic fees for authorising TPVs under the Securitisation Regulation; and (iii) changes to DEPP and EG - it is amending certain regulatory guides and regulatory processes in the Handbook. These include changes to the Decision Procedure and Penalties manual and Enforcement Guide to bring them in line with the changes that the Securitisation Regulation will introduce. The FCA's final rules, which come into force on 1 January 2019, are set out in the Securitisation Regulation Implementation Instrument 2018. Its near-final rules are set out in the draft Securitisation Regulation Implementation (Fees for Third Party Verifiers) Instrument 2019, which is in Appendix two to PS18/25. It intends to finalise these rules in January 2019 once the Securitisation Regulations 2018 come into force on 1 January 2019. The FCA advises firms that are considering applying for authorisation as a TPV to proceed with their formal applications from the coming into effect of the Securitisation Regulation and the Securitisation Regulations 2018.
ESMA clarifies arrangements for recognising UK CCPs and CSDs in event of no-deal Brexit
On 19 December, ESMA published a public statement clarifying its arrangements to recognise UK CCPs and UK CSDs in the event of a no-deal Brexit. ESMA states that it supports continued access to UK CCPs (which will become third-country CCPs following Brexit) to limit the risk of disruption in central clearing and avoid any negative impact on EU financial stability. Therefore, ESMA aims to recognise UK CCPs in a timely manner, where the following four recognition conditions under EMIR are met: (i) EC's adoption of an equivalence decision. ESMA welcomes the EC's equivalence decision; (ii) CCPs are authorised in the UK and subject to effective supervision and enforcement ensuring full compliance with applicable prudential requirements. ESMA expects the BoE to confirm this to it by letter; (iii) establishment of co-operation arrangements between ESMA and the BoE. ESMA explains that it and the BoE are creating a MoU establishing the necessary co-operation arrangements for the recognition of UK CCPs. It expects this to be agreed by the end of January 2019 and take effect from the date following Brexit date; and (iv) the UK is not on the list of third-country jurisdictions with strategic deficiencies in their AML and countering the financing of terrorism regimes. ESMA does not expect the UK to be added to this list on Brexit date. Against this background, ESMA states that it is ready to review applications for recognition under EMIR from UK CCPs and has already engaged with them to solicit their applications. To ensure continued access to UK CCPs for EU clearing members and trading venues, ESMA aims to adopt the recognition decisions well ahead of Brexit date. They will take effect on the date following Brexit date in a no-deal scenario. ESMA also supports continued access to UK CSDs to allow them to serve Irish securities and avoid any negative impact on the Irish securities market. Therefore, ESMA welcomes the EC's equivalence decision. It will follow a similar process to that for CCPs to recognise the UK CSDs as third-country CSDs under the CSDR.
Draft Securitisation (Amendment) (EU Exit) Regulations 2019 published by HMT
On 19 December, HMT published a draft version of the Securitisation (Amendment) (EU Exit) Regulations 2019. The purpose of the Regulations is to correct deficiencies in the retained version of the EU Securitisation Regulation and other EU and UK legislation relating to securitisations. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. The Regulations will come into force on exit day.
BoE statement on equivalence of future UK legal and supervisory framework for CCPs and CSDs
On 19 December, the BoE published a statement on the equivalence of the future UK legal and supervisory framework for CCPs and CSDs. The BoE welcomes the EC's adoption of temporary equivalence decisions for UK CCPs and CSDs. It explains that these decisions are needed to allow UK CCPs and CSDs to be recognised by ESMA. They would come into effect from 30 March 2019 in a no-deal Brexit scenario. Recognition would allow UK CCPs to continue to provide clearing services to their EU members, and EU banks to meet their obligations to UK CCPs. It would also allow UK CSDs to be recognised so that they can continue providing notary and settlement services for securities issued under EU law. It explains that the practical arrangements to implement the EC equivalence decisions now need to be put in place. ESMA has also issued a public statement clarifying its plans to recognise UK CCPs and CSDs. The BoE notes that, in the UK, it and HMT have already put in place a temporary recognition regime for non-UK CCPs and a transitional regime for non-UK CSDs. These will enable EU CCPs and CSDs to continue to provide services in the UK in a no-deal Brexit scenario.
ESMA statement on firms' Brexit disclosure obligations
On 19 December, ESMA published a statement providing a reminder to firms on their MiFID disclosure obligations to clients in the context of Brexit. The statement is addressed to UK firms providing services to EU27 member states as well as to EU27 firms that interact with UK clients. Its aim is to remind firms of their legal obligation to provide clients with information on the implications of Brexit on existing and new contracts and the impact of Brexit-related measures that a firm has taken or planned. ESMA also aims to remind firms to finalise and implement suitable plans to mitigate any risks stemming from Brexit in a suitable timeframe and to provide appropriate information to their clients. ESMA states that firms affected by Brexit should ensure that they provide clear information to clients whose contracts and services may be affected. The information should be provided as soon as possible, once available, and should cover at least the following areas: (i) the impact of Brexit - firms should inform clients of the implications of Brexit on the specific services provided to them and the implications for the relationship between the client and the firm; (ii) the actions taken by the firm - firms should inform clients of actions taken to prevent detriment to them, including organisational arrangements to deal with client inquiries, details of any changed competent authorities and changes in protections provided by national investor compensation schemes; (iii) the implications of any corporate restructuring - firms should inform clients of any relevant changes to contractual terms arising from corporate restructuring; and (iv) contractual rights - firms should inform clients on their contractual and statutory rights, including the right to cancel the contract and any right of recourse. The information should specify changes to clients' contractual relationship with the firm and any impact on specific contracts that may occur as a result of the firm's actions. ESMA lists relevant disclosure requirements in MiFID II and in Commission Delegated Regulation (EU) 2017/565. ESMA states that communications should be clear and in plain language and should attempt not to cause undue concerns. They should also include information on whom clients can contact for further information.
EC adopts Delegated Regulation amending RTS on clearing obligation under EMIR to prepare for no-deal Brexit
On 19 December, the EC adopted a Delegated Regulation amending RTS on the clearing obligation under EMIR to extend the dates of deferred application of the clearing obligation for certain OTC derivatives contracts. If the UK leaves the EU without transitional arrangements in place, UK counterparties to OTC derivatives will no longer be able to use passporting rights to perform certain lifecycle events in the EU relating to those contracts. This may lead to EU27 counterparties to those contracts seeking to novate the contracts to entities established and authorised in the EU27. However, the new contracts resulting from these novations might be subject to a clearing obligation that was not applicable at the time that the original contracts were entered into. As centrally-cleared contracts are subject to a different collateral regime than non-centrally-cleared contracts, some counterparties may not be able to agree to the novation and risks may be left unhedged. Commission Delegated Regulations (EU) 2015/2205, (EU) 2016/1178 and (EU) 2016/592 contain RTS with temporary exemptions from the clearing obligation for certain intragroup transactions where one of the counterparties is in a third country. The amending Delegated Regulation will amend Delegated Regulations (EU) 2015/2205, (EU) 2016/1178 and (EU) 2016/592 to extend the temporary exemptions in all three Commission Delegated Regulations for a fixed period of 12 months in relation to contracts that are novated for the sole purpose of replacing a UK counterparty with an EU27 counterparty. The EP and Council will now consider the amending Delegated Regulation. The amending Delegated Regulation will apply from the date that the Treaties cease to apply to and in the UK (that is, on the date that the UK formally leaves the EU). It will not apply if the withdrawal agreement has entered into force by that date or the Article 50 process has been extended. Given the urgency of the situation, ESMA did not consult publicly on the proposed amendments.
ESMA consults on guidelines on disclosure requirements applicable to credit ratings
On 19 December, ESMA published a consultation paper on guidelines on disclosure requirements applicable to credit ratings and CRAs under the CRA Regulation. The CRA Regulation imposes disclosure requirements on CRAs relating to the issuance of credit ratings or credit rating outlooks. The information required is typically provided through the issuing of a publicly disclosed press release. ESMA is concerned that there are inconsistencies in the level of information provided by CRAs in these press releases. The aim of the proposed guidelines, which are set out in Annex II of the consultation, is to improve the quality and consistency of the information that is disclosed as part of a credit rating's press release. The guidelines set out ESMA's expectations of the minimum level of information that should be included in press releases on credit ratings. This information includes: (i) a statement as to whether or not the credit rating has been endorsed for use for regulatory purposes in the EU in accordance with the CRA Regulation; (ii) a clear statement as to whether the credit rating is an unsolicited credit rating; (iii) the names, job titles and contact details for the persons responsible for the credit rating; and (iv) the name of the principal methodology and associated models or criteria used in determining the credit rating. The guidelines also specify that CRAs should provide disclosures on whether and how ESG factors were considered as key underlying elements of a credit rating issuance. CRAs should provide a direct weblink in each press release to a webpage with guidance on how ESG factors are considered as part of that CRA's credit ratings. CRAs should also specify in the press release whether the key underlying elements of the credit rating issuance correspond to that CRA's categorisation of ESG factors. The deadline for responses is 19 March 2019. ESMA expects to publish a report containing the final version of the guidelines by 30 July 2019.
EC adopts Delegated Regulation amending RTS on clearing obligation for certain intragroup transactions under EMIR to extend deferred application until 21 December 2020
On 19 December, the EC adopted a Delegated Regulation amending RTS on the clearing obligation under EMIR to extend the dates of deferred application of the clearing obligation for certain OTC derivatives contracts. Commission Delegated Regulations (EU) 2015/2205, (EU) 2016/1178 and (EU) 2016/592 contain RTS with temporary exemptions from the clearing obligation for certain intragroup transactions where one of the counterparties is in a third country. The provisions provide for a deferred date of application of the clearing obligation of up to three years for these transactions, in the absence of a relevant equivalence decision in respect of the third country. The deferred dates specified in the RTS are approaching, with the nearest deferred date set at 21 December. The amending Delegated Regulation, which reflects a mandate under Article 5(2) of EMIR, will amend Delegated Regulations (EU) 2015/2205, (EU) 2016/1178 and (EU) 2016/592 to extend the temporary exemptions in all three Commission Delegated Regulations until 21 December 2020. The amending Delegated Regulation will enter into force on the day following that of its publication in the OJ.
ESMA updates Q&As on BMR
On 18 December, ESMA published an updated version of its Q&As on the BMR. The updated Q&As provide new clarifications regarding methodology and input data, in particular, the parameters to be considered as input data (see Q&A 5.12 and 5.13). ESMA previously updated the Q&A in November.
ESMA updates Q&As on implementation of the CRA III Regulation
On 18 December, ESMA published an updated version of its Q&As on the implementation of the CRA III Regulation. The CRA III Regulation requires a CRA to immediately notify errors in its rating methodologies or in their application to ESMA and all affected rated entities. The latest version of the Q&As clarifies ESMA's view as to what constitutes an error within the meaning of Article 8(7) of CRA III Regulation (see Q&A 8). ESMA previously updated the Q&As in November 2017.
HMT letters on proposals relating to European crowdfunding service providers
On 18 December, HMT published a letter from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Scrutiny Committee Chair and a letter to Lord Boswell of Aynho, House of Lords EU Committee Chair (both dated 13 December), providing an update on the EC's proposed Regulation on European crowdfunding service providers. The letters also cover the related EC proposal for a Directive making consequential amendments to MiFID II relating to crowdfunding. The letters make the following points: (i) the main update from the third Council Working Group on the proposals is that the direction of travel among most member states is towards changing the proposal into a minimum-harmonising Directive, rather than an opt-in Regulation; (ii) the UK continues to argue that the proposals would be more effective if they clearly differentiated between investment-based crowdfunding platforms and those for peer-to-peer lending, as well as including further differentiation of the regulatory requirements applying to platforms depending on the specific activities that they undertake. It has submitted further comments to the EC to this effect. Several other member states also support such distinctions being made; and (iii) the proposal is moving towards the UK's position on the question of whether ESMA or national regulators should regulate crowdfunding.
Draft RTS amending EMIR in context of STS securitisations
On 18 December, the ESAs published a final report and draft RTS (both dated 12 December) on amending Commission Delegated Regulation (EU) 2016/2251 on RTS on risk mitigation techniques for OTC derivative contracts not cleared by a CCP under Article 11(15) of EMIR in the context of STS securitisations under the Securitisation Regulation. The Securitisation Regulation amends EMIR to ensure consistent treatment of derivatives associated with covered bonds and derivatives associated with securitisations, in relation to the clearing obligation and the margin requirements on non-centrally cleared OTC derivatives. In particular, Article 42 of the Securitisation Regulation amends Article 4 of EMIR by excluding both STS securitisations and covered bonds from the clearing obligation, subject to specific requirements. It also amends the mandate in Article 11(15) of EMIR by requiring the ESAs to determine the level and type of collateral required for OTC derivative contracts concluded by covered bond entities in connection with a covered bond, or by a SSPE, in connection with an STS securitisation.
The final report includes draft RTS that specify the criteria for establishing which arrangements under covered bonds or securitisations adequately mitigate counterparty risk in respect of the clearing obligation and that amend three Commission Delegated Regulations on the clearing obligation in relation to the covered bond provisions. The draft RTS on risk mitigation techniques amend the existing RTS by extending the special treatment for covered bonds to STS securitisations. The treatment, which allows no exchange of initial margin and only collection of variation margin, is applicable only where an STS securitisation structure meets a specific set of conditions equivalent to the ones required for covered bonds issuers to be able to benefit from that same treatment. The draft RTS will be submitted to the EC for endorsement. From the date of submission, the EC should decide within three months whether to endorse the RTS. The ESAs consulted on the draft RTS in May.
FCA statement on Brexit financial services contracts regime
On 17 December, the FCA published a statement following HMT publishing the draft Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 (the FSCR). The temporary permissions regime will enable relevant firms and funds that passport into the UK to continue operating in the UK if the UK leaves the EU without a withdrawal agreement, and the passporting regime falls away abruptly when the UK leaves the EU. Alongside the temporary permissions regime, the government is introducing the Financial Services Contracts Regime (FSCR) to ensure existing contractual obligations not covered by the temporary permissions regime can continue to be met. The FSCR will be relevant where EEA firms that passport into the UK to carry on a regulated activity in the UK fail to notify the FCA that they wish to enter the temporary permissions regime, or are unsuccessful in securing authorisation at the end of it, but still have regulated business in the UK to run off. It is created solely to allow EEA firms to run off existing UK contracts and conduct an orderly exit from the UK market. EEA firms within this regime will not be able to write new UK business. The FSCR will automatically apply to EEA passporting firms that do not notify the FCA that they wish to enter the temporary permissions regime, but have pre-existing contracts in the UK that would need a permission to service. The FSCR will be time limited depending on the type of regulated activity being performed. It will apply for a maximum of 15 years for insurance contracts and five years for all other contracts. Firms in the FSCR will have to keep authorisation in their home state and must notify the FCA if their authorisation is cancelled or varied. The FSCR will provide two mechanisms: (i) supervised run-off, which is for EEA firms with UK branches or top-up permissions in the UK, and firms who entered the temporary permissions regime but did not secure a UK authorisation at the end, and (ii) contractual run-off, which is for remaining incoming services firms. The FCA will consult on these in early 2019.
Draft Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 published by HMT
On 17 December, HMT published a draft version of the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, together with an explanatory note. The purpose of the Regulations is to establish run-off regimes for EEA financial institutions that currently operate in the UK that do not enter into the various UK temporary regimes available to these firms after Brexit. The Regulations will: (i) establish the Financial Services Contracts Regime, a run-off regime for EEA firms currently passporting into the UK that will fall outside the scope of the TPR, and an equivalent regime for EEA payments firms and e-money firms operating in the UK; and (ii) establish run-off regimes for non-UK CCPs and EU-registered TRs. The run-off regimes will allow these firms to run off pre-existing contractual obligations in the UK after Brexit but not to undertake new business. HMT has published a draft version of the Regulations ahead of formally laying them before Parliament. It intends to lay the Regulations before Parliament before exit day. The Regulations will come into force on the day after the day on which they are made.
Council Presidency compromise proposal on Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks
On 17 December, the Council published a Presidency compromise proposal (dated 14 December) on the proposed BMR on low carbon benchmarks and positive carbon impact benchmarks. The Council has also published an "I" item note from COREPER, also dated 14 December. In the note, the secretariat states that all member states' delegations to the financial services working party have agreed at a working party level on the proposal, with the exception of the Danish delegation. The secretariat suggests that COREPER should agree the negotiating mandate on the proposed Regulation, as set out in the compromise proposal, and invites the Presidency to start negotiations with the EP on the basis of that mandate. The EC published its legislative proposal for the Regulation in May.
EC proposes to extend equivalence for Swiss share trading venues under MiFID II
On 17 December, the EC published a press release announcing that it proposes to extend, for six months, its decision to recognise trading venues in Switzerland as eligible for compliance with the trading obligation for shares under MiFID II. The EC previously adopted an equivalence decision for Swiss trading venues in December 2017. This is due to expire on 31 December. The EC is currently consulting EU member states on the draft decision so that it can be adopted and take effect before the current equivalence expires. The decision would apply as of 1 January 2019 and expire on 30 June 2019. Once adopted, the EC will closely monitor the impact of the equivalence measure, taking into account the broader political context and the progress towards conclusion of the institutional framework agreement between the EU and Switzerland.
ESMA final report on tick size regime under MiFID II
On 14 December, ESMA published a final report (dated 12 December) on changes to the tick size regime under MiFID II. Commission Delegated Regulation (EU) 2017/588 (RTS 11) calibrates the minimum tick size applicable to shares and depositary receipts to the ADNT on the most liquid market in the EU. ESMA recognises that this metric may not be well suited to instruments where the main pool of liquidity is located outside the EU (third-country instruments) as in these cases the mandatory tick size may be calculated based only on a subset of the overall trading activity. This means that EU trading venues might be subject to minimum tick sizes that are larger than those applicable on non-EU venues, which would put them at a competitive disadvantage. This might result in less liquidity being available on EU trading venues, which can be detrimental for investors trading on those venues as well as for orderly trading on EU markets. ESMA has therefore drafted amendments to RTS 11 to ensure that the tick sizes that apply to third-country instruments are adequate and appropriately calibrated. ESMA consulted on the draft RTS in July. The final report provides explanations on the finalised draft RTS, including the main feedback received from the consultation. ESMA has submitted the draft RTS to the EC for endorsement. The EC has three months to decide whether or not to endorse the proposed amendments.
ECB reports on crisis communication exercise
On 14 December, the ECB published a report on its crisis communication exercise. The Eurosystem's market infrastructure and payments committee carried out a market-wide crisis communication exercise in June. The exercise was conducted in the form of a discussion about a hypothetical scenario based on a cyber attack on major FMIs, market infrastructures and service providers that resulted in a loss of data integrity. Chapter 5 of the report sets out the following conclusions from participants in the exercise: (i) each type of financial infrastructure faced different types of challenges; (ii) recovery requires all stakeholders to come together to ensure that a co-ordinated reconciliation can take place; and (iii) information sharing (incident data and threat intelligence) and crisis management arrangements could be improved. As a result, the ECB will explore how to enhance crisis management arrangements and how best to conduct a co-ordinated recovery and reconciliation process. It will also look to establish or update existing oversight MoUs with other authorities and explore best practices around training and awareness. The ECB published a document setting out its cyber resilience oversight expectations for FMIs earlier in December.
PAYMENT SERVICES AND PAYMENT SYSTEMS
EBA updates guidelines on reporting requirements for fraud data under PSD2
On 20 December, the EBA published updated guidelines on fraud reporting, made under PSD2. A footnote to the guidelines indicates that they have been updated to reflect editorial changes applied to pages 4, 27, 29 and 30. The final guidelines were first published in July. They require PSPs to collect and report data on payment transactions and fraudulent payment transactions using a consistent methodology, definitions and data breakdowns. The guidelines apply from 1 January 2019.
FCA consults on RTS for strong customer authentication in event of no-deal Brexit
On 19 December, the FCA published a consultation paper (CP18/44) on regulatory technical standards for strong customer authentication and common and secure open standards of communication (UK-RTS) in the event of a no-deal exit by the UK from the EU. In CP18/44, the FCA consults on making technical standards substantially the same as the EBA-RTS on strong customer authentication (Commission Delegated Regulation (EU) 2018/389) under PSD2. Several provisions of the EBA-RTS are effective from 14 March 2019, including the requirement to make testing facilities available if providing access to account information or payment initiation service providers. The remainder of the EBA-RTS will take effect on 14 September 2019. If the UK leaves the EU without a withdrawal agreement on 29 March 2019, the EBA-RTS will be left partially converted into UK law. To avoid leaving a gap in the UK's regulatory framework, causing potential disruption and considerable regulatory uncertainty, the FCA is consulting on making its own RTS. The UK-RTS are made under regulation 106A of the PSRs 2017, as amended by the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. The proposed text is set out in the following draft instruments: (i) Technical Standards on Strong Customer Authentication and Common and Secure Methods of Communication (Amendment of Testing Provisions) Instrument 201[9] (Appendix 1). If needed, it will come into force on 29 March 2019; (ii) Technical Standards on Strong Customer Authentication and Common and Secure Methods of Communication Instrument 201[9] (Appendix 2). If needed, it will come into force on 14 September 2019; and (iii) Payment Services (Amendment No 2) Instrument 201[9] (Appendix 3). If needed, it will come into force on 29 March 2019, except for part 2 of Annex B which will come into force on 14 September 2019. The deadline for comments is 19 February 2019. The FCA will publish its feedback, together with final rules in a policy statement in April 2019.
FCA directs EEA electronic money institutions and payment services providers to make temporary permissions notifications
On 19 December, the FCA published the following directions it has given under paragraphs 3(1)(a) and 15(1)(a) of schedule 3 of the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018: (i) direction to EEA authorised electronic money institutions; and (ii) direction to EEA authorised payment institutions and registered account information service providers. The FCA directs these firms, which are currently entitled to offer a range of services in the UK under passporting arrangements, to notify it if they intend to obtain a deemed authorisation or registration under the TPR. Notifications must be made by submitting the Temporary Permission Notification Form using the Connect system. They must contain the information required by that form and be made during the period beginning at 9am on 7 January 2019 and ending on 28 March 2019. The FCA warns that, once the notification window has closed, firms that have not submitted a notification will not be able to use the TPR. The TPR will come into force when the UK leaves the EU, if there is no transition period.
FCA policy statement on final RTS on secure customer authentication and EBA fraud reporting guidelines under PSD2
On 19 December, the FCA published a policy statement (PS18/24) on its approach to final RTS for strong customer authentication and common and secure open standards of communication, and related EBA guidelines, under PSD2. The FCA consulted on its approach in September in CP18/25. In PS18/24, the FCA confirms the changes to its payment services and e-money approach document and the final rules following feedback and publication of the final version of the EBA exemption guidelines. PS18/24 sets out: (i) the FCA's approach to assessing whether banks and other online account providers are properly set up to enable open banking. Banks and other online account providers must implement the RTS to ensure secure and effective communication between third-party providers and account providers with the customer's consent. The RTS contain a requirement for account providers to build a back-up system to a dedicated interface (contingency mechanism). However, they can request that the FCA exempts them from this requirement. The FCA will start to accept and assess exemption requests from January 2019. It encourages firms to discuss applications with it in advance and to submit requests before 14 June 2019; (ii) the FCA's approach to parts of the RTS that are designed to enhance the security of electronic payments. For example, banks will need to ask for more information to verify customers making some payments online to prevent fraud. Unless one of the permitted exemptions apply, the rules will apply from 14 September 2019; (iii) amended fraud reporting requirements, which take effect from 1 January 2019; and (iv) new rules on reporting complaints about authorised push payment fraud, which take effect from 1 July 2019. The final rules are set out in the Payment Services (Amendment) Instrument 2018.
Political agreement reached on amendments to Regulation on cross-border payments
On 19 December, the Council of the EU announced that it and the EP have reached political agreement on the proposed Regulation amending the Regulation on cross-border payments as regards certain charges on cross-border payments in the EU and currency conversion charges. The press release highlights: (i) how charges for cross-border payments in euros for services such as credit transfers, card payments or cash withdrawals will align with the charges for corresponding national payments of the same value in the national currency of the member state where the payment service provider of the payment service user is located; and (ii) increased transparency requirements relating to the charges for currency conversion services. The Council has also published an "I" item note (dated 17 December) from COREPER containing the final compromise text. The EC adopted its legislative proposal for the Regulation in March.
ECSG consults on SEPA SCS Volume version 8.5
On 18 December, the ECSG published a consultation on version 8.5 of the SCS volume. The consultation is part of a regular planned cycle to ensure that the Volume is kept up to date with developments in card technology and regulation. The ECSG has also published on its webpage a consultation draft of its paper on tokenisation considerations for SEPA card payments. This document details the requirements and recommendations for the adopting and implementing tokenisation in the SEPA region. The deadline for comments is 29 March 2019.
EPC implementation guidelines for 2019 SEPA scheme rulebooks
On 17 December, the EPC published the following versions of its implementation guidelines relating to the SDD core rulebook and the SDD B2B rulebook: (i) SDD core scheme customer-to-bank implementation guidelines; (ii) SDD core scheme e-mandate service implementation guidelines; (iii) SDD core scheme interbank implementation guidelines; (iv) SDD B2B scheme customer-to-bank implementation guidelines; (v) SDD B2B scheme e-mandate service implementation guidelines; and (vi) SDD B2B scheme interbank implementation guidelines. The EPC has also published SEPA XML schema definitions relating to the guidelines, which are available on the webpage for each set of guidelines. These implementation guidelines set out the SEPA rules for implementing the interbank ISO 20022 XML message standards based on the 2019 SDD core rulebook and the 2019 SDD B2B rulebook. The EPC published these rulebooks, which take effect on 17 November 2019.
FCA policy statement on changing complaint handling rules for victims of APP fraud
On 14 December, the FCA published a policy statement on extending the jurisdiction of the FOS relating to APP fraud (PS18/22). In PS18/22, the FCA summarises and responds to feedback to its June consultation paper. The FCA is introducing new rules designed to provide victims of alleged APP fraud (where they are "eligible complainants") with prompt and fair complaints resolution. Respondents were broadly supportive of the proposals, although some asked for clarifications and some challenged them. The FCA decided to proceed with the proposals as consulted on, subject to clarifications in the final rules. With APP fraud, the PSP is often a bank, which holds the accounts of either the victim or the fraudster. Currently, the sending PSP, but not the receiving PSP, must handle complaints about APP fraud in line with the complaints handling rules in the FCA's Dispute Resolution: Complaints sourcebook. These rules are now being extended to the receiving PSP. Eligible complainants will also be able to refer these complaints to the FOS. These new rules come into force on 31 January 2019. Also, to meet the requirements of PSD2 (and regulation 90(3) of the PSRs 2017), victims will be able to refer their complaints to the FOS if they are unhappy about the receiving PSP's co-operation with the sending PSP to recover funds from a payment transaction where incorrect details have been provided. These rules on "misdirected payments" take effect on 14 December, and apply to complaints about acts or omissions from 13 January 2018.
PRUDENTIAL REGULATION
Please see the insurance section for the UK-US bilateral agreement on insurance and reinsurance prudential measures.
PRA policy statement on changes to branch return reporting form in Incoming Firms and Third Country Firms Part
On 20 December, the PRA has published a policy statement (PS33/18) providing feedback to its proposals set out in chapter 2 of its occasional consultation paper (CP24/18) on changes to its Rulebook, supervisory statements, statements of policy and forms relating to, among other things, external auditor reports and reporting templates. Chapter 2 of CP24/18 set out proposals to amend the branch return reporting form in the Incoming Firms and Third Country Firms Part of the PRA Rulebook (Rule 3.1). The changes add a pre-populated drop-down menu in a new field on the form to denote the accounting standards used by submitting firms. The purpose of the proposed field is to facilitate interpretation of the data provided by firms. The PRA explains, in PS33/18, that it received one response to the proposals and intends to make the change as consulted on. The text of the final rules is set out in the PRA Rulebook: CRR firms; Non CRR firms: Branch Rules Instrument 2018. The revised rules and branch return form will take effect on 1 January 2019. PS33/18 is stated as being relevant to all PRA-supervised firms operating through branches in the UK that are not UK-headquartered firms. These firms are required by the Incoming Firms and Third Country Firms Part of the PRA Rulebook to submit the branch return form on a semi-annual basis.
Capital Requirements (Amendment) (EU Exit) Regulations 2018 made
On 20 December, the Capital Requirements (Amendment) (EU Exit) Regulations 2018 were published, together with an explanatory memorandum. The Regulations, which were made on 19 December, aim to correct deficiencies in the retained CRR, EU level 2 legislation made under the CRR and UK legislation implementing the CRR and CRD IV. A draft of the Regulations was published on 15 November. The Regulations will come into force on exit day, with the exception of certain provisions specified in regulation 1(2), which come into force on the day after the day on which the Regulations were made (that is, 20 December).
Political agreement reached on Regulation amending CRR on statutory prudential backstop for NPLs
On 18 December, the EP announced that it and the Council of the EU have reached political agreement on the proposed Regulation on the minimum loss coverage for NPLs. In the press release, the EP highlights the following elements that were agreed in the final deal: (i) the introduction of a uniform calendar that will apply irrespective of the trigger of the non-performance. A calendar of three years will apply for unsecured NPLs. A progressive calendar of seven or nine years will apply for secured NPLs, depending on the collateral type. The press release sets out a table with details of the calendar; and (ii) the introduction of "a prudentially sound approach" for purchased NPLs. The EC published its legislative proposal for the Regulation, which contains amendments to the CRR, in March. The proposal provides for the introduction of a statutory prudential backstop against any excessive future build-up of NPLs without sufficient loss coverage on banks' balance sheets. In its press release on the political agreement, the Council states that the deal will now be submitted for endorsement to EU ambassadors. The EP and the Council will then seek to adopt the Regulation at first reading.
HMT updates EU Scrutiny Committee on progress of CRR II, CRD V, BRRD II and SRM II
On 18 December, the UK government published a letter (dated 17 December) from John Glen, Economic Secretary to the Treasury, to Sir William Cash, House of Commons European Scrutiny Committee Chair, on the banking reforms adopted by the EC in November 2016. These reforms consist of the legislative proposals for CRR II, CRD V, BRRD II and SRM II. In the letter, Mr Glen sets out details of the general endorsement by ECOFIN of the provisional political agreements agreed between the Council and the EP on 4 December. He highlights the UK government's views on issues relating to: (i) MREL, particularly in respect of subordination, the flexibility for member states to impose full MREL requirements before 2024 and internal MREL; (ii) the moratorium tool; (iii) IHCs; and (iv) proportionality.
The UK government is concerned that remuneration and the application of the leverage ratio were not discussed as part of the general endorsement and has urged that these measures should be agreed in line with the Council's general approach. Mr Glen expects that trialogues on the outstanding technical issued and legal drafting will continue into January 2019 and that the Presidency will submit the reforms for final agreement at the January 2019 ECOFIN meeting.
EBA consults on amending ITS on benchmarking of internal models under CRD IV
On 18 December, the EBA published a consultation paper on draft ITS amending Commission Implementing Regulation (EU) 2016/2070 with regard to benchmarking of internal models. Based on feedback from recent interactions with firms, the EBA is proposing to adjust the benchmarking portfolios and reporting requirements in light of the benchmarking exercise it will carry out in 2020. For the 2020 exercise, changes to the market and credit risk portfolios, as well as changes to the reporting templates and instructions, are necessary to keep the portfolios up-to-date and the reported data relevant for the annual assessments. The EBA explains that the proposed changes are designed to simplify the portfolio's structure for the credit risk part of the exercise, and get more insights into the model used for pricing for the market risk part of the exercise. The EBA is also proposing minor consistency updates, as well as a data collection of the sensitivities aiming at further improving the data quality. Given the type of changes introduced by the proposed draft ITS, Annexes I to VII to Implementing Regulation (EU) 2016/2070 are replaced in whole with those set out in the draft ITS to create a consolidated version of the updated draft ITS package. The Annexes to the draft ITS have been published separately. The deadline for comments is 31 January 2019. The revised benchmarking portfolios and reporting requirements are expected to be applicable for the submission of initial market valuation data in the third quarter of 2019, and of other market and credit risk data in the first half of 2020 (that is, with reference date 31 December 2019 for credit risk). The draft Implementing Regulation states that it will come into force 20 days after publication in the OJ. Article 78 of CRD IV requires competent authorities to carry out an annual assessment of the quality of internal approaches used for calculating own funds requirements. To help competent authorities with this assessment, the EBA calculates and distributes benchmark values against which individual firms' risk parameters can be compared. These benchmark values are based on data submitted by firms, as laid out in Implementing Regulation (EU) 2016/2070.
EBA announces timing of next EU-wide stress test
On 17 December, the EBA published a press release announcing that it will run its next EU-wide stress test in 2020. The EBA has also published a letter it has sent to the EP advising it of the decision, which has been copied to the Council of the EU and the EC. The timing is in line with the EBA's June 2015 decision to aim for a biennial exercise. The decision is an acknowledgement of the ongoing progress that EU banks are making in strengthening their capital positions. The EBA also points out that the post-mortem analysis of the results of the 2018 stress test will require an extensive discussion on the way that the exercise may be improved, including potential adjustments in the timeline, methodology and process. In the meantime, competent authorities and market participants will use the significant quantitative and qualitative information generated by the 2018 EU-wide stress test. The EBA explains that the requirement in Article 100 of the CRD to undertake annual supervisory stress tests will be met by supervisors requiring banks to undertake stress tests based on supervisory guidance in accordance with the EBA's guidelines on the revised common procedures and methodologies for the SREP. Competent authorities and the EBA will monitor risks and vulnerabilities in the EU-banking sector as part of the regular assessment of banks. The EBA states that it will start immediately to prepare the methodology for the 2020 stress test exercise. It will perform its regular annual transparency exercise in 2019.
EBA final guidelines on disclosure of non-performing and forborne exposures
On 17 December, the EBA published its final report on guidelines on the disclosure by credit institutions of information on NPEs and FBEs. The guidelines apply to credit institutions that are subject to all or some of the disclosure requirements in the CRR. They specify the common content and uniform disclosure format for the information on NPEs, FBEs and foreclosed assets that credit institutions should disclose. They also include disclosure templates. Proportionality is embedded in the guidelines based on the significance of the credit institution and the level of NPEs. For example, there is a set of templates that needs to be disclosed only by significant credit institutions with a gross NPL ratio of 5% or above.
The guidelines aim to ensure that meaningful information is provided to market participants on credit institutions' asset quality and to gain greater insight into the distribution and level of collateralisation of NPEs among institutions with a gross NPL ratio of 5% or above. In the long term, the guidelines are intended to reduce information asymmetry and increase the comparability of credit institutions' risk profiles, therefore promoting market discipline. The guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply from 31 December 2019. The EBA consulted on the draft guidelines in April. The final report sets out details of the feedback received on the consultation and changes made to the draft guidelines reflecting that feedback. The guidelines reflect the Council's July 2017 action plan on NPLs, which called for policy actions to address the problems of NPEs relating to four policy areas, including disclosure.
RECOVERY AND RESOLUTION
Please refer to the Prudential Regulation section for an update on HMT's update to EU Scrutiny Committee on progress of CRR II, CRD V, BRRD II and SRM II.
Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 made
On 20 December, the Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 were published. The Regulations, which were made on 20 December, aim to ensure that the regime established by the BRRD, and in particular the SRR established under the Banking Act 2009, functions effectively after Brexit. A draft of the Regulations was published on 23 October. The Regulations will come into force on exit day, with the exception of certain provisions specified in regulation 1(3), which will come into force the day after the day on which the Regulations were made (that is, on 21 December).
BoE and PRA consult on resolvability assessment framework
On 18 December, the BoE and the PRA published proposals relating to the resolvability assessment framework package. The package consists of: (i) a BoE consultation paper, 'The Bank of England's approach to assessing resolvability', which proposes how the BoE intends to assess individual banks' resolvability and the three outcomes deemed necessary to support a successful resolution. The three outcomes are having adequate financial resources, being able to continue to do business through resolution and restructuring, and being able to co-ordinate and communicate within the BoE, with authorities and markets so that resolution and restructuring are orderly. The appendix to the consultation paper sets out a draft statement of policy on removing further barriers to resolvability; and (ii) a PRA consultation paper, Resolution assessment and public disclosure by firms, (CP31/18), which contains proposed requirements for banks to assess their preparations for resolution, identifying any risks to implementation and their plans to address these. Banks will be required to submit assessments of their preparation for resolution to the PRA by September 2020, and to publicly disclose a summary of that assessment from the end of May 2021. This would apply to the largest UK banks with at least £50 billion in retail deposits on an individual or consolidated basis. Reports and summaries would need to be published every two years. CP318/18 also includes proposals for arrangements for a firm undergoing significant corporate restructuring, and board-level engagement and accountability for preparing and approving a firm's report. A draft Resolution Assessment Part for the PRA Rulebook, a draft Resolution Assessment Part in the event of a no-deal Brexit, and a draft supervisory statement, "Resolution Assessment and Public Disclosure by Firms" are set out in the appendices to the consultation paper. Comments can be made on the consultations until 5 April 2019. In addition, as part of the resolvability assessment framework package, the BoE will publish a statement regarding its assessment of resolvability of each firm, highlighting any shortcomings where it believes there is more work to do.
Euro Summit endorses terms of reference on common backstop to single resolution fund
On 14 December, the Council of the EU published a statement made by the Euro Summit. In the statement, the Euro Summit endorses the terms of reference of the common backstop to the SRF that were set out in a Eurogroup report (dated 4 December) on deepening the EMU. Further details on the backstop are also set out in a term sheet on the European Stability Mechanism (ESM) prepared by the Eurogroup. The SRF provides medium-term funding support for the resolution of banks within the scope of the SRM. The aim of the backstop is to address situations where the SRF proves not to be sufficiently funded by the banking sector. The SRF is being built up over a transition period of eight years, which will end on 1 January 2024. The terms of reference envisage that the ESM will provide the common backstop in the form of a revolving credit line to the SRF. This backstop should be established at the latest by the end of the transition period. It may be introduced earlier, depending on whether an assessment, to be made in 2020, finds that sufficient progress has been made in risk reduction. The common backstop will replace the ESM direct recapitalisation instrument. The "Five Presidents" report on completing Europe's economic and monetary union, published in June 2015, suggested that the backstop could be achieved through a credit line from the ESM to the SRF.
SUSTAINABLE FINANCE
ESMA consults on integrating sustainability risks and factors into MiFID II
On 19 December, ESMA published a consultation paper on integrating sustainability risks and factors in MiFID II. The paper has been published in response to the EC's July request for technical advice on its legislative proposals on sustainable finance. The draft advice on which ESMA is seeking comments covers proposals relating to organisational requirements, risk management and product governance, and suggests amendments to the ESMA guidelines on MiFID II product governance requirements and the ESMA guidelines on certain aspects of the MiFID II suitability requirements. The deadline for comments is 19 February 2019. ESMA expects to publish a final report setting out its technical advice to the EC no later than 30 April 2019.
Council of the EU agrees general position on proposed Regulation on disclosures relating to sustainable investments and sustainability risks and proposed Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks
On 19 December, the Council of the EU published a press release reporting that it has agreed its general approach on the following legislative proposals, which form part of the EC's sustainable finance package of reforms: (i) the proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The Presidency compromise proposal that was agreed by the Council was published on 17 December; and (ii) the proposed Regulation amending the BMR on low carbon benchmarks and positive carbon impact benchmarks. The Presidency compromise proposal that was agreed by the Council was also published on 17 December.
Council Presidency compromise proposal on disclosures relating to sustainable investments and sustainability risks
On 17 December, the Council of the EU published a Presidency compromise proposal on the proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The Council has also published an "I" item note from COREPER. In the note, the secretariat states that all member states' delegations to the financial services working party have agreed at a working party level on the proposal, except for the Danish and Dutch delegations. The secretariat suggests that COREPER should agree the negotiating mandate on the proposed Regulation, as set out in the compromise proposal, and invite the Presidency to start negotiations with the EP on the basis of that mandate, with a view to agreeing at first reading. The EC published its legislative proposal for the Regulation in May.
OTHER DEVELOPMENTS
FCA final ex post impact evaluation framework
On 20 December, the FCA has published a paper setting out its final ex post impact evaluation (EPIE) framework. The paper outlines the FCA's framework for measuring the impact of its past interventions on consumers, firms and markets. It explains why the FCA does EPIE, how it chooses specific interventions to study and how it ensures that its evaluations are robust, impartial, and therefore credible. Assessing the effectiveness and impact of its past interventions allows the FCA to develop a strong evidence base to guide its decisions. The FCA consulted on the impact of its interventions in an April discussion paper. In a feedback statement published alongside the final framework the FCA explains that respondents generally welcomed and supported the FCA's proposals for EPIE of its interventions. Respondents noted that evaluation is central to any effective decision-making framework, and recognised the importance of assessing the impact of regulatory interventions to improve outcomes for customers, now and in the future. The FCA provides feedback on the responses and explains how it has amended the framework to take account of them in a number of areas including the: (i) extent to which the FCA takes note of and follows other existing guidance; (ii) FCA's approach to evaluating unintended consequences of its interventions; (iii) FCA's commitment to publishing its evaluations in most cases; (iv) difference between PIR and EPIE; (v) timing of an evaluation and the commitment to undertake at least one EPIE per year; (vi) criteria used to select which interventions to evaluate ex post; and (vii) FCA's steps to ensure the independence of EPIEs.
FCA evaluates reducing barriers to entry into UK banking sector
On 20 December, the FCA published an evaluation paper (EP18/3) on reducing barriers to entry into the UK banking sector. In April 2013, the BoE and the FSA introduced reforms to the authorisations process and a shift in approach to the prudential regulation of banking start-ups. The FCA and PRA subsequently published a report on the changes in July 2014. In EP18/3, the FCA evaluates the impact the 2013 review has had on reducing the barriers to entry for firms entering the UK banking sector, and the benefits it has generated for consumers. It welcomes views on its findings. Key findings from the evaluation include the following: (i) there is a more efficient authorisations process. The time taken to assess firms' applications has reduced by three months; (ii) the rate of entry into the UK banking sector is higher than before the 2013 review. While not all entry can be solely attributed to the changes in the authorisations process, firm interviews have indicated that the interventions have encouraged entry into the UK banking sector; (iii) the increase in entry has in turn led to a greater range of product offerings in the retail market and benefits for consumers; and (iv) there has not yet been a substantial change to concentration in the retail banking sector and the FCA does not have evidence of significant competitive responses by incumbent banks. The FCA has identified some lessons that it can apply to current and future work. For example, it has found that ease of entry is a necessary but not sufficient condition for healthy competition. Also, it takes time for lowering barriers to entry to affect market shares in the banking sector in a significant way because there may be other barriers to firms expanding to a more significant scale.
EFDI report on technical considerations for design of EDIS
On 18 December, the EFDI published a report on technical considerations for the design of the EDIS. In the report the EFDI considers the elements of potential frameworks for EDIS and discusses technical issues on the basis of criteria intended to determine the effectiveness of the system. It makes 15 recommendations relating to issues including: (i) the scope of EDIS, covering issues such as the exclusion from EDIS of credit institutions covered by a participating DGS and the use of common definitions relating to covered deposits; (ii) the interaction between DGSs and EDIS during a crisis event, including the introduction of a "golden rule" that EDIS should at no stage lead to a decrease in expected available financial means to cover individual DGS events compared to the situation before EDIS; (iii) the interaction between DGSs and EDIS after a DGS event. In particular, the EFDI recommends that more detail should be provided on the role of the SRB and the level of liability of participating DGSs in insolvency procedures; and (iv) the use of disclosures about EDIS in standardised depositor information templates. The EC adopted its legislative proposal for a Regulation amending the SRM Regulation to establish EDIS in November 2015.
FCA final rules giving SMEs access to FOS
On 17 December, the FCA published the Small Business (Eligible Complainant) Instrument 2018. The instrument contains the final rules extending access to the FOS to more SMEs, larger charities and trusts, and a new category of personal guarantors. The final rules, which are set out in the FCA's Dispute resolution: complaints sourcebook, come into force on 1 April 2019. This immediately follows the entry into force of the changes made by the Claims Management Instrument 2018.
Transparency Directive: final draft Commission delegated regulation on the specification of a single electronic reporting format
On 17 December, the EC published the final draft text of its delegated regulation with regard to regulatory technical standards on the specification of a single electronic reporting format. The regulation is in substantially the same form as the draft submitted by ESMA to the EC in December 2017. Detailed requirements are set out in annexes. Briefly, the Transparency Directive is being amended so as to require all annual financial reports to be prepared in a single electronic reporting format from 1 January 2020. The format specified is XHTML. The regulation will enter into force on the twentieth day following that of its publication in the OJ.
FOS consults on plans and budget for 2019/20
On 17 December, the FOS published a consultation paper on its proposed plans and budget for 2019/20. In the consultation, the FOS seeks views on, among other things: (i) its proposed operating models for complaints made by SMEs and for complaints about CMCs - the FOS intends to develop a distinct identity for both its SME work and its CMC work, with a separate microsite and online resources for each; (ii) its financial plans for 2019/20 - the FOS intends to keep its funding model unchanged, which will entail freezing case fees at their current levels and keeping its allowance for 25 "free" chargeable cases. The FOS proposes to increase its compulsory jurisdiction levy to £45 million to fund planned improvements to its service. Annex A to the consultation sets out a draft version of the Fees Manual (Financial Ombudsman Service Case Fees 2019/20) Instrument 2019, which contains the relevant proposed amendments to the Fees manual; (iii) its views on how FOS might develop when it ceases to handle PPI claims in mass volumes, which is expected to occur in April 2021, ahead of its next planning horizon of April 2025 - the FOS will use feedback received on this consultation to inform a strategic proposal that it expects to publish in late 2019; and (iv) principles that might apply to any future funding model for the FOS - the FOS sets out examples of options for possible future models. The FOS comments that the earliest that it could make any changes is 2020/21. The deadline for responses is 31 January 2019. The FOS will adopt its final budget and publish its plans for 2019/20 by 31 March 2019.
FCA Handbook Notice 61
On 14 December, the FCA published Handbook Notice 61, which sets out changes made to the FCA Handbook under instruments made by the FCA board on 15 November and 13 December, and changes made by the FOS board on 7 December. The Handbook Notice reflects changes made to the Handbook by the following instruments: (i) High Cost Credit (Rent to Own Warranties) Instrument 2018; (ii) Claims Management Instrument 2018; (iii) Fees (Claims Management Companies) Instrument 2018; (iv) Dispute Resolution: Complaints (Authorised Push Payment Fraud) Instrument 2018; (v) Periodic Fees (2018/19) and Other Fees (No 2) Instrument 2018; and (vi) Securitisation Regulation Implementation Instrument 2018.
Aggregated results of PRA's 2017/18 firm feedback survey
On 14 December, the PRA published the aggregated results of its 2017/18 firm feedback survey. The PRA explains that it proactively seeks input from firms on the effectiveness and quality of its supervisory framework and approach. One of the ways it does this is through the annual firm feedback survey. The survey gives firms the opportunity to comment on a number of topics, including: (i) the PRA's understanding of firms; (ii) firms' understanding of the PRA's regulatory objectives and expectations; (iii) the PRA's level of challenge to firms; (iv) the effectiveness of firms' relationships with the PRA; and (v) the PRA's co-ordination with other regulators and data requests. The PRA advises that firms are given the opportunity to make additional comments, and they are asked for three improvements that the PRA could make. A few new topics were raised during the 2017/18 survey. Among other things, the PRA is looking to make improvements to its website as it has been given specific examples of navigation difficulties. It is also investigating feedback on the reliability and functionality of its secure email portal. In addition, in future, the PRA will ensure it explains the purpose of public working drafts clearly, and give advanced warning (where possible) so that firms and vendors have at least two weeks to respond with comments. The largest firms supervised by the PRA receive the survey every year. Some of them are also invited to follow-up meetings to discuss their views in more detail. Each year, a sample of small and medium-sized firms are also invited to complete the survey, and some of them are invited to participate in a follow-up roundtable meeting. The firms included in the sample for 2019 can expect to be notified on 8 May 2019.
