EIOPA publishes opinion on the solvency position of insurers and reinsurers post Brexit.
On 18 May, EIOPA published an opinion on the solvency position of insurance and reinsurance undertakings in light of the withdrawal of the UK from the EU (EIOPA-BoS-18/201). The opinion is drafted on the assumption that the UK will become a third country on 30 March 2019. In the opinion, EIOPA considers the impact of the UK becoming a third country on the determination of technical provisions, own funds and capital requirements of EU insurance and reinsurance undertakings. It focuses on risks arising under the Solvency II Directive, which differentiates between exposures situated inside and outside the EU. The opinion sets out 14 separate changes arising from the UK's change of status that will affect firms' solvency position, including: (i) EU firms may not have the appropriate authorisations to service insurance contracts concluded in the UK after Brexit. Similarly, UK firms may not be able to provide services in some EU member states unless they take measures to secure market access; (ii) the ability of UK banks and investment firms to provide derivatives to transfer risks will be affected by the loss of passport rights. This may affect firms' ability to use derivatives to mitigate risks for the purposes of the SCR; (iii) the deregistration of UK CRAs will affect external credit ratings issued by these CRAs, as they will no longer qualify as ECAIs, and consequently these ratings may not be permitted for use for regulatory purposes; and (iv) the SCR for exposures to the UK government and BoE may increase, as these will no longer fall within the zero-risk charge for spread risk and market risk for member states' government bonds. EIOPA notes that the impact of some of the changes can be mitigated by measures, including the relocation of UK exposures or UK CRAs to the EU. EIOPA states that firms should prepare for the scenario that the UK will become a third country on 30 March 2019. NSAs should ensure that firms under their supervision identify, measure, monitor, manage and report the risks arising from Brexit and include them in their ORSA. EIOPA will monitor the risks arising from the UK becoming a third country, in conjunction with national supervisory authorities.
BoE Governor publishes speech on SONIA and SMR.
On 24 May, the BoE published a speech by Mark Carney, BoE Governor, in which he discusses the SMR and sterling RFRs. Points of interest in the speech include the following: (i) RFRs - Mr Carney reports that the BoE's April 2018 reforms to the SONIA interest rate benchmark have increased the volume of transactions captured by a factor of three, to £50bn per day. The focus is now on transition. He urges market participants that use the LIBOR to come together to identify and resolve issues, change business practices, and adopt alternative benchmarks. Over time the private sector will develop a wider range of products referencing SONIA, futures contracts have already been created and the BoE expects floating rate notes and loans referencing SONIA will follow. Mr Carney concludes that the end point should be an ecosystem for interest rate markets that has a healthier foundation than at present; and (ii) SMR - Mr Carney believes that there are signs that the SMR is making a difference. It is helping firms by clarifying and improving governance, accountability and decision-making. It is also helping supervisors to identify weaknesses in governance and accountability, and to encourage the necessary changes. In addition, some international firms are voluntarily adopting elements of the SMR's certification requirements, and a number of jurisdictions are applying the principles and features of the SMR. The FSB has also included elements of the regime as examples in its FSB’s recent toolkit on governance frameworks.
New FCA webpage on SYSC 19F provisions on remuneration and performance management of sales staff
On 23 May, the FCA published a new webpage with information on the provisions in chapter 19F of the Senior Management Arrangements, Systems and Controls (SYSC), which relate to the remuneration and performance management of sales staff. SYSC 19F implements the requirements of MiFID II in this area. On the webpage, the FCA highlights the interaction between SYSC 19F and the five FCA remuneration codes set out in SYSC 19A-E, which are dedicated to certain specific types of firms. It explains that: (i) while the codes set out specific remuneration principles applicable to senior management of firms who are material risk takers (known as MRTs or code staff), SYSC 19A, 19C and 19D also contain a general requirement, applicable on a firm-wide basis, for remuneration policies to promote effective risk management; (ii) the provisions in SYSC 19F largely affect staff who would not otherwise be captured as MRTs under the codes; and (iii) a single firm can fall under several codes or remuneration requirements (or both).
FCA publishes speech on building societies and the future of retail banking
On 23 May, the FCA published a speech by Jonathan Davidson, FCA Director of Supervision: retail and authorisations, on building societies and the future of retail banking. Points of interest in the speech include: (i) Mr Davidson considers that opportunities exist for the building society sector in the light of wider developments in the market. The FCA wants to work collaboratively with the sector to take advantage of these opportunities; (ii) while the FCA considers that the industry is doing "reasonably well" on affordability, the BoE recently called out some early warning signs of relaxation of lending standards. This is backed up by the FCA's own data, which shows that the proportion of lending at higher loan-to-income ratios is creeping up. The FCA is concerned that any loosening of standards could harm consumers, so it is monitoring this; (iii) the FCA is monitoring mortgage account arrears. It worries about the extent of forbearance being offered in cases where the borrower has no realistic chance of getting back on track. It is currently investigating this issue and will publish its findings later in the year; (iv) the FCA is looking at how firms are dealing with the payment of support for mortgage interest changing from a benefit to a loan and the treatment of borrowers who do not opt for the loan who subsequently fall into arrears; (v) the FCA wants to build on the progress that has been made on advice and suitability, and work with the industry to consider what more can be done to help customers obtain the best deal; (vi) the FCA is considering the fair treatment of customers who do not or cannot switch mortgages. It plans to engage with the industry and consumers to explore possible options for helping these customers; (vii) the FCA plans to explore how the industry can do more to help customers find the best deal; and (viii) the FCA is not yet ready to share its research and analysis following its review of retail banking business models, however Mr Davidson shares some of the hypotheses it has been working on: (a) large retail banks have enjoyed competitive advantages not just from capital requirements but from other factors. While this effect is muted by low interest rates and the costs of running current accounts and branch networks it likely represents a competitive advantage over the many building societies without current accounts and with flat pricing of their back book; and (b) current accounts have been the source of relatively profitable fee income from overdraft charges, foreign exchange and interchange revenues. But these competitive advantages could reduce significantly.
CMA revokes further elements of the Northern Ireland PCA Banking Market Investigation Order 2008
On 23 May, the CMA published a notice of revocation of the Northern Ireland PCA Order 2008 (as varied in 2011 and 2016). The Order imposed remedies to address the adverse effect on competition identified in the 2007 market investigation into personal banking in Northern Ireland. In October 2016, the CMA decided to revoke the Order in phases as the CMA found that market and regulatory developments, as well as the remedies package in the retail banking market investigation, represented a change of circumstances and that provisions of the Order had become obsolete. As the current account switching service has been widely promoted, the CMA now revokes Article 8.7 of the Order, with immediate effect. The remaining provisions in relation to switching information and reporting requirements will continue to be in effect.
MAS outlines plans to implement Wyman debt advice review recommendations
On 22 May, the MAS announced the support of its DASG for the recommendations of Peter Wyman's independent review of the funding of debt advice in England, Wales, Scotland and Northern Ireland. The DASG welcomes the direction of travel set by the review and intends to prioritise five key areas for delivery in 2018/19. These cover increasing the provision of debt advice by 50%, broadening the base of organisations who contribute to funding, introducing measures that ensure high quality advice, increasing investment of the debt advice levy in co-ordination, infrastructure and technology, and increasing collaboration in the sector. The work will be led by the MAS alongside the devolved authorities and the DASG. The press release states that detailed action plans for delivering on the prioritised areas will be produced "in coming months". In the meantime, the MAS has also published a speech by Charles Counsell, MAS CEO, given on 21 May, which provides more detail on the MAS' work to implement the review recommendations. The work includes: (i) the development of a "performance management framework" to ensure an increased focus on the quality of advice, and to ensure that the increased investment is targeted on making a real difference to improving customer outcomes. A redeveloped and redesigned existing peer assessment process will play a key part in the performance management framework, as will training and development (with advisers undergoing 16 hours of CPD or equivalent activity a year); (ii) the creation of new posts within the debt advice delivery organisations to ensure that advice meets the quality standard, supported by two full-time quality assurance managers at MAS. The MAS will also be investing in case recording and will be supporting new training and professional development requirements; and (iii) a new strategic approach to commissioning, to ensure a focus on vulnerable groups.
EC proposals for SME growth market reform (corporate aspects)
On 24 May, the EC published a proposed regulation to amend MAR and the new Prospectus Regulation in relation to the use of SME growth markets. The initiative forms part of the EC’s CMU and stems from the objective of broadening SME access to sources of financing other than from banks. The EC’s proposals include: (i) removing the obligation for SME growth market issuers to document the reasons for delaying disclosure of inside information under Article 17, MAR, unless so requested by the competent authority. The competent authority would not be able to require the issuer to keep a record of that explanation. The issuer would however still have to notify the competent authority that it had delayed disclosure; (ii) providing that Article 18, MAR would only require SME growth market issuers to keep a list of permanent insiders, being those persons with regular access to inside information due to their function or position within the issuer. Such a list would still only have to be provided to the competent authority on request; (iii) granting SME growth issuers two days, under Article 19, MAR, to make public details of a manager's transaction after the date it receives notification of such transaction from the relevant PDMR (or PCA); and (iv) extending the simplified prospectus regime (currently only applicable to secondary issues under Article 14 of the new Prospectus Regulation) to those issuers that have had securities admitted to trading on an SME growth market for at least three years and that are now seeking admission to trading of new or existing securities on a regulated market. The proposed regulation now passes to the EP and the Council of EU for discussion.
Sanctions and Anti-Money Laundering Act 2018 receives Royal Assent
On 23 May, the Sanctions and Anti-Money Laundering Bill received Royal Assent. The Bill is now an Act of Parliament. This Act makes provision enabling sanctions to be imposed where appropriate for the purposes of compliance with United Nations obligations or other international obligations or for the purposes of furthering the prevention of terrorism or for the purposes of national security or international peace and security or for the purposes of furthering foreign policy objectives. It also makes provision for the purposes of the detection, investigation and prevention of money laundering and terrorist financing and for the purposes of implementing Standards published by the Financial Action Task Force relating to combating threats to the integrity of the international financial system.
OFSI issues new sanctions compliance reporting form and updates guidance on the monetary penalties for breaches of financial sanctions
On 22 May, the OFSI issued a new compliance reporting form to assist individuals and organisations in meeting their financial sanctions reporting obligations. The form is intended to be of universal application in all reporting scenarios and will allow submitters to disclose: (i) frozen assets; (ii) information about a suspected designated person; and (iii) suspected or known breaches of sanctions. The form should be filled in with reference to Chapter 5 of OFSI's guidance on financial sanctions, which provides an overview of reporting obligations. On 21 May, the OFSI updated its guidance on monetary penalties for breaches of financial sanctions. The updated guidance provides additional detail on voluntary disclosure (Chapter 3) and updates the tribunal appeal process (Chapter 7). Although it is vital for practitioners to refer to the updated guidance, it remains the case that OFSI is yet to issue a monetary penalty for a sanctions breach.
FCA publishes speech on the use of FinTech to detect and disrupt criminal activity
On 22 May, the FCA published a speech by Megan Butler, FCA Executive Director of Supervision - Investment Wholesale and Specialists, looking at how data and technology can help to detect and disrupt criminal activity. Points of interest in the speech include: (i) while the FCA recognises the benefits of firms investing in technology to deal with financial crime, Ms Butler emphasises that efficacy of any new technologies over the level of expenditure on them is key. Firms will not be let off the hook for financial crime compliance failings just because they have introduced new technology. Ms Butler explains that cheap technologies that aren't tested and don't work properly are not acceptable alternatives to old, expensive tech systems that do; (ii) firms should share methods, innovations and technologies aimed at combatting financial crime with the regulators. The FCA's own analysis indicates that transaction monitoring is the area with the most potential, with onboarding, maintenance, client screening and reporting also being frequently cited. The FCA believes that the next big step will be to apply intelligent technologies to spot suspicious transactions in real time from unstructured account and transaction data. However, there are practical obstacles that must be overcome; and (iii) although the FCA expects to publish more details around the FCA's annual financial data return up to 31 December 2017 in due course, Ms Butler makes two points which can be drawn from the data: (a) it is important to recognise how much of the direct threat to customers from financial crime has moved online; and (b) despite the abuse of financial services by criminals, most financial institutions are not complacent about the risk, and banks are undertaking a lot of activity to combat financial crime.
EC acts to protect the interests of EU companies investing in Iran
On 18 May, the EC announced that it is going to launch the formal process to activate the EU blocking statute by updating the list of US sanctions on Iran falling within its scope. The Blocking Statute forbids EU persons from complying with US extraterritorial sanctions, allows companies to recover damages arising from such sanctions from the person causing them, and nullifies the effect in the EU of any foreign court judgements based on them. The US Sanctions authority, OFAC, has announced that re-imposed Iranian sanctions will be subject to 90 and 180 day wind-down periods that will expire on 6 August and 4 November respectively. The EU’s aim is to have the Blocking Statute in force before 6 August, when the first batch of US sanctions take effect.
Please see the Financial Crime section for an update on the FCA’s thoughts on how FinTech can be used to detect and disrupt criminal activity.
FCA and BoE evidence to the Treasury Committee’s digital currencies inquiry
On 22 May, the HoC Treasury Committee updated its webpage on its digital currencies inquiry to link to the written evidence it has received, which includes responses from: (i) the FCA - The FCA's response outlines how different forms of cryptoassets and products that reference or relate to underlying cryptoassets generally sit within its regulatory perimeter. However, the FCA confirms that whether a cryptoasset (including crypto tokens issued as part of an ICO) falls within the perimeter will be fact specific. The FCA explains that about a third of the 60 firms that have participated in its regulatory sandbox have used a cryptoasset or DLT, making it the most popular technology employed in the sandbox. The main use cases relate to international money remittance, issuance and settling of financial instruments, listing of private companies' shares, and charitable donations and e-money. Through its work with firms and monitoring the market developments, the FCA has identified several risks of harm deriving from cryptoassets, including price volatility, market manipulation, and in relation to cryptoasset derivatives and money laundering. The FCA also outlines its work, as part of its RegTech initiative, to develop a prototype for regulatory reporting of mortgage transaction data. The FCA is unclear whether DLT will be adopted broadly across securities markets or remain limited to niche uses; and (ii) the BoE – the BoE outlines why it believes that cryptoassets are very unlikely to replace commonly used payment systems. The BoE also confirms its view that cryptoassets do not currently pose a material threat to financial stability. Nevertheless, the FPC will continue to closely monitor developments for signs that cryptoassets are becoming more widely used in the payments and settlement areas, and whether systemic firms are taking on significant or leveraged exposures to cryptocurrencies. The PRA is also assessing how prudential regulations should apply if cryptoassets were held by banks or financial institutions, including whether additional requirements are necessary to cover associated risks (such as the extreme levels of volatility). While the BoE remains open to the eventual development of a CBDC, it states that it does not plan to issue one in the medium term.
CLLS responds to EC’s legislative proposals on the cross-border distribution of investment funds
On 22 May, the EC published the CLLS’ response (dated 10 May) to the March legislative proposals on cross-border distribution of investment funds. The CLLS does not agree that the regulation of the distribution of AIFs and that of UCITS should be fully aligned. UCITS are regulated open-ended investment funds investing in liquid financial instruments designed for the retail market. AIFs cover a very wide range of different funds, both open and closed-ended, investing in all types of asset. Specific concerns include: (i) pre-marketing – the safe harbour currently proposed is too narrow and needs to be both clarified and extended. It is important to clarify that the new rules establish a minimum standard of permitted pre-marketing, rather than to impose restrictions on the amount of pre-marketing permitted; (ii) the cessation of marketing - the provisions do not seem to be workable or appropriate for closed-ended funds where redemptions and repurchases are not permitted; (iii) the marketing communications - it is not appropriate for identical provisions to be applied to the marketing of AIFs to professional investors as to the marketing of UCITS to the general retail market; and (iv) fees and charges - permitting fees and charges seems to be contrary to the stated purpose of the legislation in that they create a regulatory barrier.
Please see the Brexit section for an update on EIOPA’s opinion on the solvency position of insurers and reinsurers post Brexit.
EIOPA publishes its first comparative study on market and credit risk modelling
On 22 May, EIOPA published a report on the findings of its first comparative study on market and credit risk modelling (EIOPA-BoS/18-180). In 2016/17, EIOPA and several NCAs started a European-wide comparative study of market and credit risk based on year-end 2015 data, with the aim of developing tools and common supervisory practices. The study focused on euro-denominated instruments and involved 14 participants from seven member states. EIOPA found that there were significant variations in asset model outputs, but that more detailed scrutiny of facets of asset types was needed to explore the underlying causes. EIOPA states that the report is the first step in an ongoing process of monitoring and comparing internal market and credit risk models. It intends to perform regular studies on the market and credit risk modelling in internal models starting from year-end 2017. The year-end 2017 version of the study will focus on risk charges for benchmark portfolios under the combined market and credit risk.
Implementing Regulation on the technical information for calculation of technical provisions and basic own funds for Q2 2018 reporting under Solvency II published in OJ
On 18 May, Commission Implementing Regulation (EU) 2018/730 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 31 March until 29 June under the Solvency II Directive was published in the OJ. The technical information is based on market data related to the end of the last month preceding the first reporting reference date to which the relevant Implementing Regulation applies. The Recitals to the Implementing Regulation explain that in accordance with Article 77e(1) of the Solvency II Directive, on 6 April, EIOPA provided the EC with the technical information related to end of March market data. The EC adopted the Implementing Regulation on 4 May. It entered into force on 19 May (the day after its publication in the OJ), and applies from 31 March.
MARKETS AND MARKET INFRASTRUCTURE
Please see the Conduct section for an update on the BoE Governor’s comments on SONIA.
Please see the Financial Crime section for an update on the EC’s proposals for SME growth market reform.
FEMR progress report
On 24 May, the BoE, FCA and HMT (together, the authorities) published a progress report on the FEMR, outlining the progress made in responding to the FEMR recommendations that were published in June 2015. The progress report provides an initial assessment of the impact of the FEMR's recommendations and the additional work carried out in relation to strengthening individual accountability, improving market standards, embedding a forward-looking approach to wholesale FICC markets, and strengthening benchmarks. Points of interest include: (i) firms and the authorities have made significant progress in implementing the FEMR recommendations, which are starting to have a positive impact in making markets fairer and more effective. The rapid technological and structural innovation in FICC markets means an ongoing approach to risk identification and mitigation is crucial; (ii) the industry must take a leading role in monitoring developments and ensuring that market infrastructures and practices keep pace with innovation, which the authorities will support; (iii) the BoE will continue to focus on issues affecting the effectiveness of FICC markets. It will also continue to support the move to risk-free rates and the development of industry codes; (iv) the FCA will take a more forward looking and strategic approach to its supervisory work. This will be enhanced by improved new regulation for FICC markets and benchmarks, and the strengthened and expanded accountability regime, which will apply to insurance firms from 10 December and to all authorised financial services firms in the UK from 2019. The authorities will publish a guide to help firms understand the regime, the requirements and the intended outcomes; (v) HMT will keep under review the open FEMR recommendations relating to new legislation and assess the case for action following the settlement of the UK’s new relationship with the EU; and (vi) the BoE's Markets Forum 2018 is expected to provide an opportunity for open dialogue on changing market structures, emerging risks and challenges, and how industry and the authorities can continue to work together to address vulnerabilities.
EC publishes draft Delegated Regulation amending MiFID II to promote use of SME growth markets
On 24 May, the EC published the text of a draft Delegated Regulation amending Delegated Regulation (EU) 2017/565 (the Commission Delegated Regulation) as regards certain registration conditions to promote the use of SME growth markets. The Commission Delegated Regulation supplements MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms. It includes requirements that an SME issuer must meet to qualify as an SME and for its securities to be traded on an SME growth market. These requirements have been found to be too restrictive and so the draft Delegated Regulation amends Articles 77 and 78 of the Commission Delegated Regulation to address this. The amendments include a requirement that an issuer that has no equity instrument traded on any trading venue shall be deemed to be an SME for the purposes of Article 4(1)(13) of MiFID II, if the total size of its debt issuances does not exceed EUR50 million over a period of 12 months on all trading venues across the EU, starting on 1 January each year. The deadline for comments on the draft Delegated Regulation is 21 June.
ECB publishes summary of responses to its consultation on a new euro unsecured overnight interest rate
On 18 May, the ECB published a summary of the responses it has received to its second consultation paper on a new euro unsecured overnight interest rate. Forty-eight market participants, mainly from the banking sector, submitted responses or comments to the consultation. The main messages included: (i) most respondents agreed that a EUR1 million threshold would adequately reduce the administrative and operational burdens while ensuring an effective representativeness of the new interest rate; (ii) respondents broadly agreed with the proposed methodology of a volume-weighted mean with trimming, although they expressed some reservation on the proposed 25% trimming level. A small majority preferred a lower level of 10%; and (iii) respondents largely approved the proposed criteria-based (as opposed to a principle-based) data sufficiency policy, and agreed with the proposed criteria for moving to a contingency procedure. The ECB says that it will continue to inform market participants on the progress it is making, and intends to provide the financial sector with as much information as possible to prepare for a smooth implementation of the new rate.
Please see the FinTech section for an update on the BOE’s evidence to the Treasury Committee’s digital currencies inquiry in which it discusses prudential regulation and cryptoassets.
Please see the Insurance section for an update on EIOPA’s first comparative study on market and credit risk modelling.
Please see the Brexit section for an update on EIOPA’s opinion on the solvency position of insurers and reinsurers post Brexit.
Council of EU Presidency compromise proposals on CRR II and CRD V
On 24 May, the Council of the EU published Presidency compromise proposals relating to the EC’s proposed revisions to the CRR and CRD IV: (i) Presidency compromise proposal (9055/18) (dated 22 May) on the EC’s proposal to amend the CRR (proposed CRR II), and a corrigendum relating to reference to the institutional file; and (ii) Presidency compromise proposal (9056/18) (dated 23 May) on the EC’s proposal to amend CRD IV (proposed CRD V). The proposals will be presented to the Council of the EU at the ECOFIN meeting on the 25 May.
PRA consults on the new EU securitisation framework and significant risk transfer
On 22 May, the PRA published a consultation paper, Securitisation: the new EU framework and significant risk transfer (SRT) (CP12/18). In the consultation paper, the PRA sets out: (i) proposals to reflect the new EU securitisation framework, which consists of the Securitisation Regulation and Regulation (EU) 2017/2401, which amends the CRR. The new framework will apply from 1 January 2019; (ii) proposals to introduce a new supervisory statement: "Securitisation: general requirements and capital framework”; (iii) expectations concerning general requirements in the Securitisation Regulation, which will apply to all firms within the scope of the CRR or the Solvency II Directive; (iv) expectations for credit institutions seeking to become sponsors of STS ABCP programmes and on the securitisation capital framework for firms that are subject to CRD IV; (v) proposals to change the name of its existing supervisory statement on credit risk and securitisation (SS9/13) to "Securitisation: Significant Risk Transfer". It also intends to amend this supervisory statement to clarify the role of firms' senior management, prudential treatment of excess spread and certain aspects of the PRA’s assessment of commensurate risk transfer with respect to SRT securitisation. The revisions to SS9/13 will apply immediately after the publication of the policy statement relating to those revisions; and (vi) proposals to amend its existing supervisory statement on the ICAAP (SS31/15) to clarify how firms should assess the appropriateness of different methods in measuring securitisation risk, and to specify minimum information that should be included in a firm’s ICAAP document. The deadline for comments on the consultation is 22 August. The new supervisory statement and the revisions to SS31/15 will take effect from 1 January 2019, to reflect the application date for the EU securitisation framework.
HoC European Scrutiny Committee considers CRR II, CRD V and BRRD II legislative proposals
On 22 May, the HoC European Scrutiny Committee published its twenty-eighth report of the 2017-19 parliamentary session. In the report, the committee considers: (i) the legislative proposals adopted by the EC in November 2016 for the CRR II, CRD V, BRRD II and the SRMR II; and (ii) a letter sent by John Glen, Economic Secretary to the Treasury, on the progress of these proposals (dated 2 May). The committee suggests that the likely transposition date for CRD V will be late 2020, assuming the Directive is formally adopted in early 2019. It notes that the Brexit transitional period is due to last until 31 December 2020. The committee states that the default presumption must be that UK banks will be treated as third country institutions once the UK leaves the single market. It remains concerned at the implications for banks within the scope of the IPU requirement in CRD V, which applies to large non-EU banking groups. The committee is also concerned that any delays in the legislative process could push the formal adoption of the legislative proposals until after the UK loses its vote in the Council in March 2019. It highlights the importance of the UK government maximising its input in the negotiations on the reforms while it still retains representation. The committee grants the minister a scrutiny waiver ahead of the ECOFIN meeting on the 25 May to allow the government to endorse the general approach if it considers it appropriate. The committee's scrutiny reserve will continue to apply after the meeting.
EBA consults on RTS and guidelines on the estimation and identification of economic downturns
On 22 May, the EBA announced the publication of: (i) a consultation paper on draft RTS on the specification of the nature, severity and duration of an economic downturn (EBA/CP/2018/07). The proposed RTS specify the approach that firms should take to identify the nature, the severity and the duration of an economic downturn for the purposes of Articles 181 and 182 of the CRR. They require firms to consider relevant macroeconomic and credit factors when specifying the nature of an economic downturn. The EBA proposes that the Delegated Regulation containing the RTS should come into force on 31 December 2019; and (ii) a consultation paper on guidelines for the estimation of LGD appropriate for an economic downturn (EBA/CP/2018/08). The proposed guidelines specify how LGD estimates appropriate for an economic downturn, identified in accordance with the RTS, should be quantified. The guidelines will be integrated with the EBA's guidelines on the application of the IRB approach under the CRR (EBA/GL/2017/16). The EBA proposes that the implementation deadline for the guidelines should be the end of 2020, in line with the deadline for implementing the guidelines on the application of the IRB approach. The deadline for comments on the consultation papers is 22 June.
Commission Delegated Regulation on RTS on the exclusion of transactions with third country NFCs from CVA risk charge under CRR published in OJ
On 18 May, Commission Delegated Regulation (EU) 2018/728 supplementing the CRR with regard to RTS on the procedures for excluding transactions with NFCs established in a third country from the own funds requirement for CVA risk was published in the OJ. The RTS, which reflect a mandate given to the EBA under Article 382(5) of the CRR, specify the procedures under which an institution may exclude from its own funds requirement for CVA risk transactions with an NFC established in a third country. The EC adopted the Delegated Regulation on 24 January. The Delegated Regulation will enter into force on 7 June (that is, 20 days after its publication in the OJ).
Commission Implementing Regulation on the changes to benchmarking portfolios, reporting templates and reporting instructions under CRD IV published in OJ
On 18 May, Commission Implementing Regulation (EU) 2018/688 amending Implementing Regulation (EU) 2016/2070 as regards benchmarking portfolios, reporting templates and reporting instructions under CRD IV was published in the OJ (the Amending Regulation). Commission Implementing Regulation (EU) 2016/2070 contains ITS specifying the information that firms must report to the EBA and competent authorities to enable the assessments of internal approaches for calculating own funds requirements in accordance with Article 78 of CRD IV. The Amending Regulation, which was adopted by the EC on 23 March, reflects the amendments proposed by the EBA in December 2017. The EC has also specified that the deadline for firms to submit certain information required by Commission Implementing Regulation (EU) 2016/2070 this year will be 30 June, rather than 11 April. The Amending Regulation will enter into force on 7 June (that is, 20 days after its publication in the OJ).
RECOVERY AND RESOLUTION
Please see the Prudential Regulation for an update on the HoC European Scrutiny’s comments on the BRRD II legislative proposal.
Council of EU Presidency compromise proposals on BRRD II and SRMR II
On 24 May, the Council of the EU published Presidency compromise proposals relating to the EC’s proposed revisions to BRRD and the implementation in the EU of the FSB’s TLAC standard (known collectively as BRRD II): (i) Presidency compromise proposal (9057/18) (dated 22 May) on the EC’s proposal for a Directive to amend BRRD (proposed BRRD II); (ii) Presidency compromise proposal (9058/18) (dated 23 May) on the EC’s proposal for a Regulation to amend the Regulation for the SRMR (proposed SRMR II). The proposals will be presented to the Council of the EU at the ECOFIN meeting on the 25 May.
Please see our eBulletin: Sustainable lending: a new shade of green
EC publishes legislative proposals on sustainable finance
On 24 May, the EC published legislative proposals on a package of reforms relating to sustainable finance. The aim of the reforms is to integrate ESG considerations into the investment and advisory process in a consistent manner across sectors. The EC has adopted legislative proposals for: (i) a Regulation on the establishment of a framework to facilitate sustainable investment, which introduces an EU-wide taxonomy of environmentally sustainable activities; (ii) a Regulation on disclosures by financial institutions relating to sustainable investments and sustainability risks; and (iii) a Regulation amending the BMR introducing a new category of benchmarks comprising low carbon benchmarks and positive carbon impact benchmarks. The EP and the Council of the EU will now consider these legislative proposals. The EC has also published for consultation: (a) a draft Delegated Regulation, which amends Delegated Regulations made under MiFID II; and (b) a draft Delegated Regulation, which amends Delegated Regulations made the IDD. The proposed amendments will require investment firms and insurance distributors to ask their clients about their preferences concerning ESG and then to take them into account when advising their clients. The EC has also published the following documents relating to the proposals: (i) impact assessment and summary; (ii) press release; (iii) frequently asked questions; (iv) factsheet; and (v) statement of high-level expert group on sustainable finance.
Cash Ratio Deposits (Value Bands and Ratios) Order 2018 published
On 24 May, the Cash Ratio Deposits (Value Bands and Ratios) Order 2018 (SI 2018/633) was published on legislation.gov.uk, together with an explanatory memorandum and final impact assessment. The Order amends the ratio used for calculating the percentage of eligible liabilities that eligible financial institutions are required to deposit in a non-interest bearing account at the BoE under the cash ratio deposit scheme. The Order amends the scheme to provide that the ratio for institutions whose eligible liabilities are more than £600 million will be calculated every six months by applying the formula contained in the Order. The Order will come into force on 1 June.
Data Protection Bill 2017-19 receives Royal Assent
On 23 May, the Data Protection Bill 2017-19 received Royal Assent to become the DPA 2018. The Bill was introduced and had its first reading in the HoL on 13 September 2017. The DPA 2018: (i) ensures that the standards set out in the GDPR have effect in the UK. The GDPR will be directly applicable in all EU member states, including the UK until it leaves the EU, with effect from 25 May; (ii) repeals and replaces the Data Protection Act 1998 as the primary piece of data protection legislation in the UK and aims to provide "a comprehensive and modern framework for data protection in the UK, with stronger sanctions for malpractice"; and (iii) ensures that the UK and EU data protection regimes are aligned post-Brexit and the UK will continue to be able to freely exchange personal data with the EU. The DPA 2018 also implements the Data Protection Law Enforcement Directive and provides a specific data protection regime for the intelligence services based on the standards in the modernised Convention 108 (the Council of Europe Convention for the Protection of Individuals with regard to the Automatic Processing of Personal Data).
FCA publishes findings from its review of automated investment services
On 21 May, the FCA published a webpage setting out the findings of its review of firms offering automated investment services. The FCA reviewed the activities of seven firms offering automated ODIM and three firms providing retail investment advice exclusively through automated channels. The FCA's findings include: (i) the service and fee-related disclosures at most ODIM firms were unclear. Firms did not make clear whether their service was advised, non-advised, discretionary or non-discretionary. The FCA also found that some firms compared their fee levels against peer services in potentially misleading ways; (ii) many ODIM firms did not properly evaluate clients' knowledge and experience, investment objectives and capacity for loss in their suitability assessments. Some auto-advice services relied on assumptions about clients and lacked adequate fact finding and know your client focus. The FCA was not satisfied with the level of information-gathering about clients' personal circumstances; and (iii) most ODIM firms were unable to show that they had adequate and up to date information about clients when providing an ongoing service. The FCA highlights specific rules in its COBS relevant to its findings, particularly its rules on communications with clients (COBS 4), and suitability (COBS 9 and 9A). The FCA emphasises that its rules on suitability of advice apply regardless of the medium through which the service is offered and that its rules apply equally to emerging automated offerings. Firms should consider its expectations set out in its finalised guidance on streamlined advice and related consolidated guidance (FG17/8). The FCA expects existing firms and new entrants into the market to consider the issues raised on the webpage and to take action where needed. The FCA intends to review more firms in the auto-advice market later in the 2018/19 financial year. Future reviews will include assessments of compliance with MiFID II requirements and the cumulative impact of MiFID II and the Regulation on key information documents for PRIIPs.
FCA publishes a MoU between the FCA and Insolvency Service
On 21 May, the FCA published a MoU (dated 25 January) that it has entered into with the IS. The MoU sets out the agreement between the FCA and the IS that governs the exchange of information between both organisations. It states that, to fulfill their duties and obligations, the FCA and the IS need to be able to share information, particularly relating to misconduct, investigations and enforcement within their respective remits.