Financial institutions general regulatory news, December 2020 # 3

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to all financial institutions. See also sector specific updates in the Related Materials links.


  • Sanctions and Anti-Money Laundering Act 2018 (Commencement No 2) Regulations 2020
  • Sanctions Regulations (EU Exit) (Commencement) Regulations 2020
  • UK financial services overseas framework: HM Treasury call for evidence
  • BoE Financial Stability Report and FPC summary and record
  • SMCR implementation: PRA evaluation
  • FCA appoints new Executive Director of Consumers and Competition
  • UK Investment Firms Prudential Regime: FCA CP20/24
  • FCA Handbook Notice 83
  • FCA complaints data for first half of 2020
  • FOS consults on plans and budget for 2021/22
  • FOS Ombudsman News 156
  • Pensions dashboards: Data Standards Guide
  • IFD: EBA consults on draft guidelines on internal governance
  • IFD: EBA consults on draft guidelines on sound remuneration policies
  • IFR and IFD: EBA final report on draft RTS on prudential requirements
  • Cybersecurity: European Commission Cybersecurity Strategy and proposed revised NIS Directive and Directive on resilience of critical entities
  • Functioning of AML and CTF colleges: EBA report
  • Non-bank financial intermediation: FSB 2020 report
  • Network for Greening the Financial System publications

Following a seasonal break, the next update will be published on 11 January 2021.

Sanctions and Anti-Money Laundering Act 2018 (Commencement No 2) Regulations 2020

The Sanctions and Anti-Money Laundering Act 2018 (Commencement No 2) Regulations 2020 (SI 2020/1535) were made on 14 December 2020. The regulations bring into force several provisions of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA 2018).

SAMLA 2018 is enabling legislation to allow the UK to impose economic and other sanctions, and money laundering regulations, after the end of the Brexit transition period.

Sanctions Regulations (EU Exit) (Commencement) Regulations 2020

The Sanctions Regulations (EU Exit) (Commencement) Regulations 2020 (SI 2020/1514) were made on 10 December 2020. They bring into force on specified dates the provisions of certain Regulations which have been made under Part 1 of the SAMLA 2018. In particular, SI 2020/1514 brings into force the sanctions Regulations made under section 1 of the SAMLA 2018 to establish sanctions regimes in relation to certain countries or regime Regulations.

UK financial services overseas framework: HM Treasury call for evidence

HM Treasury has published a call for evidence on the UK framework for financial services firms based overseas. Topics the Treasury seeks feedback on include (but are not limited to):

  • the overseas persons exclusion;
  • investment services equivalence under Title VIII of the Markets in Financial Instruments Regulation;
  • the regime for recognised overseas investment exchanges; and
  • the Financial Promotion Order in general, and specifically in relation to the distribution of certain overseas long-term insurance products in the UK.

HM Treasury notes that there are some overlaps between the activities covered by these regimes, and there may be scope for improving consistency and to make the overall framework more transparent and easier to navigate.

The call for evidence is intended to be an information-gathering exercise about how the regimes work in practice and how market participants navigate them and might use them in future. HM Treasury will use this information to assess how the regimes measure up against its principles for cross-border services (set out at paragraph 1.7 of the call for evidence) and fit within the UK's regulatory framework, following the UK's departure from the EU.

The deadline for responses is 11 March 2021.

BoE Financial Stability Report and FPC summary and record

The Bank of England (BoE) has published the Financial Stability Report for December 2020 and the financial policy summary and record of the meetings of its Financial Policy Committee (FPC) on 8 December 2020.

In the documents the FPC sets out its view of the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the main risks to UK financial stability, and the action it is taking to remove or reduce those risks. In particular, it considers the work undertaken by the UK financial system to support the economy during the COVID-19 pandemic.

SMCR implementation: PRA evaluation

The Prudential Regulation Authority (PRA) has published for comment a report setting out its findings following an evaluation of the implementation of the Senior Managers and Certification Regime (SM&CR or SMCR) to assess how it is delivering against its original objectives. While the report focuses on dual-regulated firms, the evaluation team benefited from discussions with the Financial Conduct Authority (FCA) on several issues. In considering its next steps following feedback on this report, the PRA will continue to work closely with the FCA.

The PRA's findings confirm that the introduction of the SMCR has helped ensure that senior individuals in dual-regulated firms take greater responsibility for their actions. It has also made it easier for both firms and the PRA to hold individuals to account. Around 95% of the firms surveyed said the SMCR was having a positive effect on individual behaviour. The PRA concludes that the evidence to date does not suggest the need for major changes to the SMCR approach taken.

However, the PRA states that, notwithstanding this broadly positive start, it is keen to continue to embed the regime and stakeholders have pointed to some areas which could benefit from amendment - such as the use of conduct notifications and regulatory references, where it is not yet clear whether the regime is working fully as intended. Therefore, the PRA identifies nine follow-up actions and recommendations to help refine the way in which the regime operates in practice:

  • Conduct and regulatory references: The PRA will examine the scope for clarifying expectations related to misconduct reporting in notifications and regulatory references. It will also engage with the industry so that regulatory references are used in an appropriate manner.
  • Remuneration: The PRA will seek feedback on the benefits of further articulating the link between the SMCR and remuneration adjustments. It acknowledges that although this is mentioned in speeches, it could be stated more clearly in policy documents (for example, relevant supervisory statements).
  • Senior manager expectations: Firms need to underline the responsibility of those holding prescribed responsibilities and the certification regime to ensure they are embedded.
  • Diversity: The PRA will reaffirm its appetite for diverse skills and experience among senior management teams through policy and expectations, and/or communications. It will also examine options for improving data collection and analysis of diversity among the senior management population.
  • Collective accountability: The PRA will seek further views on whether board responsibilities and individual accountability are mutually reinforcing.
  • Interim appointments: The PRA encourages responses to its joint consultation with the FCA on senior managers' long-term leave.
  • Allocation of responsibilities: The PRA will seek further views on:
  • the usage of the Head of Key Business Area (SMF6) designation at insurers to see why this is used less than at banks;
  • the way in which the designation of certain individuals as Key Function Holders works alongside the SMCR;
  • the case for further guidance in allocating Prescribed Responsibilities; and
  • an option for smaller firms to submit SMCR documentation less frequently.
  • Time-limited and conditional approvals: The PRA will explore options for making time-limited and conditional approvals more readily used in the appointment of senior managers.
  • New senior manager expectations: The PRA will consider adding an inventory of guidance and expectations in respect of senior manager responsibility for new and emerging risks to the individual accountability section of the BoE website and limit the growth of such guidance.

The PRA welcomes comments on the findings of the evaluation and its recommendations until 26 February 2021. This will inform the PRA's case for reviewing rules, expectations, or communication relating to the SMCR, and for engaging further with other UK authorities on these points.

FCA appoints new Executive Director of Consumers and Competition

The FCA has appointed Sheldon Mills as Executive Director, Consumers and Competition with immediate effect. Mr Mills was previously interim Executive Director, Strategy and Competition, following his appointment to that role in March 2020.

The FCA states that the post of Executive Director, Consumers and Competition was created in November 2020 following the announcement that the FCA's two supervision divisions would be brought together and merged with the policy and competition functions. These will form a new, single division led by two executive directors: one focused on the FCA's consumer protection and competition objectives; the other focused on the objective to protect the financial markets. Jonathan Davidson, previously Executive Director of Supervision – Retail and Authorisations, will support Mr Mills through the transition before he leaves the FCA in early 2021.

UK Investment Firms Prudential Regime: FCA CP20/24

The FCA has published its first of three consultation papers, CP20/24, on the implementation of the UK Investment Firms Prudential Regime (IFPR). It has also published the proposed template for the new reporting to support the IFPR and the guidance for completing this template.

In CP20/24, the FCA sets out its proposals for aspects of the IFPR relating to, among other things:

  • the categorisation of investment firms;
  • prudential consolidation;
  • own funds and own funds requirements; and
  • reporting requirements.

The FCA intends to establish a new prudential sourcebook relating to the IFPR: the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU).

The deadline for responses to CP20/24 and the proposed template/guidance is 5 February 2021.

The FCA intends to publish two further consultations in 2021. The second consultation paper will cover issues including liquidity, risk management and governance and remuneration requirements; and the third consultation paper will cover consequential amendments to the FCA Handbook, and any gaps or issues identified through the consultation process.

The FCA will not publish final rules until the Financial Services Bill 2019-21 (which sets out the proposed legislative framework for the IFPR) has passed through Parliament. Subject to the progress of the FS Bill, the FCA aims for the IFPR to be implemented on 1 January 2022.

FCA Handbook Notice 83

The FCA has published Handbook Notice 83, which sets out changes to the FCA Handbook made by the FCA board on 7 and 10 December 2020. The Handbook Notice reflects changes made to the Handbook by the following instruments:

  • Conduct of Business (Speculative Illiquid Securities) Instrument 2020 (FCA 2020/74);
  • Technical Standards (European Long-Term Investment Fund Regulation) (EU Exit) Instrument 2020 (FCA 2020/86);
  • Technical Standards (Miscellaneous Amendments) (EU Exit) Instrument 2020 (FCA 2020/87);
  • Exiting the European Union: Handbook (Amendments) (No 3) Instrument 2020 (FCA 2020/78);
  • Exiting the European Union: SMCR and APR (Amendments) (No 2) Instrument 2020 (FCA 2020/79);
  • Technical Standards (Specifying the Information and Details of a Securitisation to be Made Available by the Originator, Sponsor and SSPE) (EU Exit) Instrument 2020 (FCA 2020/80);
  • Technical Standards (Specifying the Information to be Provided to Comply with the STS Notification Requirements) (EU Exit) Instrument 2020 (FCA 2020/81);
  • Technical Standards (Format of Applications for Registration of Securitisation Repositories) Instrument 2020 (FCA 2020/82);
  • Technical Standards (Information to be Provided in the Application for Registration of a Securitisation Repository) Instrument 2020 (FCA 2020/83);
  • Technical Standards (Securitisation Repository Operational Standards for Data Collection, Aggregation, Comparison, Access and Verification of Completeness and Consistency) Instrument 2020 (FCA 2020/84); and
  • Technical Standards (Supplementing EMIR with regard to the Clearing Obligation) (EU Exit) Instrument 2020 (FCA 2020/85).

FCA complaints data for first half of 2020

The FCA has published a webpage summarising its latest complaints data relating to the first half of 2020 and linking to its more detailed firm specific data for individual firms and aggregate figures for the industry.

FOS consults on plans and budget for 2021/22

The Financial Ombudsman Service (FOS) has published a consultation paper on its proposed plans and budget for 2021/22. In the consultation, the FOS seeks views on, among other things:

  • its projections for the volumes of complaints it will receive and resolve, and its perspective on identified trends;
  • its proposed budget and funding arrangements; and
  • how it intends to take forward the first year of its new strategic priorities.

The deadline for responses is 31 January 2021. The FOS will adopt its final budget and publish its plans for 2021/22 by 31 March 2021.

FOS Ombudsman News 156

The FOS has published issue 156 of its Ombudsman News. Items of interest in this edition include:

  • the consultation on the FOS' proposed plan and budget for 2021/22, which was published on 16 December 2020 (see above);
  • information on how to contact the FOS with enquiries or complaints over the Christmas and New Year period;
  • the FOS' annual report and accounts 2019/20; and
  • links to previous FOS consultations and feedback statements, together with responses by the FOS to other organisations' consultations.

Pensions dashboards: Data Standards Guide

The Pensions Dashboard Programme (PDP) has published a Data Standards Guide, containing the key data standards which will underpin the initial technology for pensions dashboards. It includes definitions of the overall process, the high level data elements and a technical breakdown of each data element, plus examples of how the data elements should work, using example data.

The PDP, set up by the Money and Pensions Service, has responsibility for designing and implementing the digital ecosystem which ensures that the pensions dashboards will work as effectively as possible.

IFD: EBA consults on draft guidelines on internal governance

The European Banking Authority (EBA) has published a consultation paper on internal governance under Article 26(4) of the Investment Firms Directive (IFD), specifying the governance provisions that class 2 investment firms should comply with.

The guidelines consider the principle of proportionality and specify:

  • the tasks, responsibilities and organisation of the management body;
  • the organisation of investment firms, including the need to create transparent structures that allow for supervision of all their activities; and
  • requirements aimed at ensuring the sound management of risks across all three lines of defence, in particular, setting out detailed requirements for the second line of defence (the independent risk management and compliance function) and the third line of defence (the internal audit function).

The EBA states that the guidelines are consistent with the guidelines on internal governance for credit institutions and with international standards. To ensure that investment firms groups take a holistic approach to their risk management, the draft guidelines apply at both individual and consolidated level.

The consultation closes on 17 March 2021. The EBA will hold a public hearing on the draft guidelines on 17 February 2021. The EBA expects that the guidelines will apply from 26 June 2021.

IFD: EBA consults on draft guidelines on sound remuneration policies

The EBA has published a consultation paper on draft guidelines on sound remuneration policies under the IFD. The draft guidelines specify the remuneration provisions that class 2 investment firms should comply with, considering the proportionality principle. They apply at both individual and consolidated level.

The consultation runs until 17 March 2021. There will be a public hearing on the draft guidelines on 17 February 2021. The EBA expects to publish a final version of the guidelines before the end of June 2021.

IFR and IFD: EBA final report on draft RTS on prudential requirements

Following its June 2020 consultation, the EBA has published a final report setting out the following seven draft regulatory technical standards (RTS) relating to the prudential treatment of investment firms:

  • draft RTS (under Article 8a(6), point (a) of the Capital Requirements Directive on the information to be provided for the authorisation of credit institutions as defined in point (1)(b) of Article 4(1) of the Capital Requirements Regulation;
  • draft RTS to specify the calculation of the fixed overheads requirement and define the notion of a material change (Article 13(4) of the IFR);
  • draft RTS to specify the methods for measuring the K-factors (Article 15(5)(a) of the IFR);
  • draft RTS to specify the notion of segregated accounts (Article 15(5)(b) of the IFR);
  • draft RTS to specify adjustments to the K-DTF coefficients (Article 15(5)(c) of the IFR);
  • draft RTS to specify the amount of total margin for the calculation of K-CMG (Article 23(3) of the IFR); and
  • draft RTS on the criteria for subjecting certain investment firms to the CRR (threshold of EUR5 billion) (Article 5(6) of the IFD).

These final draft RTS are part of the phase 1 mandates of the EBA's June 2020 roadmap for investment firms and aim to ensure a proportionate implementation of the new prudential framework for investment firms considering the different activities, sizes and complexity of investments firms.

Each of the RTS will come into force on the twentieth day after its publication in the Official Journal of the EU and will apply from 26 June 2021.

Cybersecurity: European Commission Cybersecurity Strategy and proposed revised NIS Directive and Directive on resilience of critical entities

The European Commission has adopted a new EU Cybersecurity Strategy which aims to bolster the EU's collective resilience against cyber threats and help to ensure that all citizens and businesses can fully benefit from trustworthy and reliable services and digital tools. It has also published accompanying Q&As. In addition, the Commission has adopted:

The proposal for a Directive on the resilience of critical entities expands the scope of the existing Directive 2008/114/EC on critical infrastructure to cover ten sectors: energy, transport, banking, financial market infrastructures, health, drinking water, waste water, digital infrastructure, public administration, and space. Existing EU rules only applied to the energy and transport sectors.

The Commission and the High Representative of the Union for Foreign Affairs and Security Policy are committed to implementing the new Cybersecurity Strategy in the coming months. The European Parliament and the Council now need to examine and adopt the legislative proposals on a NIS 2 Directive and a Critical Entities Resilience Directive. Once the proposals are agreed and consequently adopted, member states would have to transpose them within 18 months of their entry into force.

Functioning of AML and CTF colleges: EBA repor

The EBA has published its first report on the functioning of anti-money laundering (AML) and counter-terrorist financing (CTF) colleges. In the report, the EBA outlines the progress made by national competent authorities (NCAs) on setting up colleges to enhance supervisory cooperation for AML and CTF purposes. The EBA also recognises that NCAs have until 10 January 2022 to set up colleges.

The EBA identifies areas that may require more focus from NCAs when setting up future colleges and provides examples of good and poor practices identified from the first ten colleges. NCAs are encouraged to make use of the report when establishing or participating in AML and CTF colleges, adjusting their approach where necessary. The EBA will continue to monitor and support NCAs in this area.

Non-bank financial intermediation: FSB 2020 report

The Financial Stability Board (FSB) has published its global monitoring report on non-bank financial intermediation for 2020, which sets out the results of its annual monitoring exercise that assesses global trends and risks from non-bank financial intermediation.

Network for Greening the Financial System publications

The Network for Greening the Financial System (NGFS) has announced the publication of a report on the implementation of sustainable and responsible investment practices in central banks' portfolio management and a report following its survey on monetary policy operations and climate change. It has also announced that the US Federal Reserve System has joined as a new member.

The NGFS is a group of central banks and supervisors that share best practices and contribute to the development of environment and climate risk management in the financial sector.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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