Financial institutions general regulatory news, November 2020

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to all financial institutions, including updates relating to Brexit, COVID-19 and sustainable finance. See also sector specific updates in the Related Materials links.


  • Brexit: UK equivalence decisions for EEA states
  • Future of financial services: UK Chancellor's statement
  • Mandatory climate-related disclosures: UK government's TCFD taskforce interim report and roadmap
  • Brexit: FCA update for EEA firms
  • Climate stress test exercise and regulatory expectations: BoE speech
  • Rising to the climate challenge: FCA speech
  • COVID-19: FCA and PRA update information on senior manager accountability and workplace arrangements
  • COVID-19: FCA statement on changes to certain work
  • FCA policy development update
  • Brexit: EBA reminds firms to prepare for end of transition period
  • DMD evaluation: European Commission staff working document
  • CMU: European Court of Auditors report
  • Outsourcing and third-party relationships: FSB discussion paper

Brexit: UK equivalence decisions for EEA states

HM Treasury has announced its intention to make equivalence decisions in respect of the EEA across a number of financial services areas. The following directions will come into effect at the end of the transition period:

The government confirmed it is not ruling out further equivalence decisions for the EEA States in the future as it continues to believe that comprehensive mutual findings of equivalence between the UK and the EEA States are in the best interests of both parties, however, the UK awaits clarity from the EU about their intentions.

The government has also published a Guidance Document for the UK’s Equivalence Framework for Financial Services, and a related webpage which includes a link to an Excel document tracking UK equivalence decisions.

The FCA has published a response to the Treasury's announcement, summarising some of the decisions and what they mean for firms.

Future of financial services: UK Chancellor's statement

Rishi Sunak, Chancellor of the Exchequer, has made a statement in the House of Commons on financial services, announcing UK government initiatives and decisions relating to equivalence (see above), access to UK markets, payments and FinTech and sustainable finance. The Chancellor announced that:

  • HM Treasury will launch a call for evidence on the UK's overseas regime, establish a taskforce on the UK's listings regime and consult shortly on the UK's regime for investment funds. The UK will also treat financial services exports to the EU the same as for other countries, which means that UK firms will be able to reclaim input VAT on financial services exports to the EU;
  • HM Treasury will shortly publish plans to support the payments sector, following the conclusion of the first stage of the Payments Landscape Review, as well as a consultation on stablecoins; and
  • the UK intends to mandate climate disclosures by large companies and financial institutions by 2025 (see next item below), implement a new "green taxonomy" and issue its first ever Sovereign Green Bond in 2021, subject to market conditions. We report on these "green finance" measures in our separate update: UK Government announces post-Brexit priorities to strengthen the UK's global leadership in green finance.

Mandatory climate-related disclosures: UK government's TCFD taskforce interim report and roadmap

The UK government's TCFD taskforce has published an interim report and a roadmap on mandatory climate-related disclosures in line with the recommendations of the Task force on Climate-related Financial Disclosures (TCFD).

In the 2019 Green Finance Strategy, the government established a Taskforce, chaired by HMT and made up of regulators and government departments, to explore the most effective approach for implementing the recommendations of the TCFD.

The UK has now announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. The accompanying roadmap sets out an indicative pathway to achieving that ambition, illustrating how coverage of disclosures could increase each year as potential new regulatory or legislative measures come into force, subject to the outcomes of relevant regulators' and Government departments' consultation processes and other statutory requirements such as cost-benefit analyses.

The roadmap sets out a strategy for seven categories of organisation:

  • listed commercial companies;
  • UK-registered companies;
  • banks and building societies;
  • insurance companies;
  • asset managers;
  • life insurers and Financial Conduct Authority (FCA)-regulated pension schemes; and
  • occupational pension schemes.

The implementation approach by each category is usefully summarised in the Annex to the interim report.

Brexit: FCA update for EEA firms

The FCA has updated its webpage on firms' preparations for the end of the transition period to set out considerations for EEA firms conducting business in the UK. The FCA states that it expects EEA firms that are not intending to take advantage of the temporary permissions regime or the financial services contracts regime to notify the FCA of their plans by contacting it directly or through their usual supervisory contacts. It also emphasises that it expects firms to treat customers fairly, including when considering what notice to provide and what support customers need to make alternative arrangements.

Climate stress test exercise and regulatory expectations: BoE speech

The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, about tackling climate change. Mr Bailey explains that the BoE's goal is to build a UK financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy.

Mr Bailey announces in his speech that the climate stress test postponed because of COVID-19 will be launched in June 2021. Read more in our separate update: Bank of England announces June 2021 launch date for climate stress test exercise.

Rising to the climate challenge: FCA speech

The FCA has published a speech by Nikhil Rathi, FCA Chief Executive, about rising to the climate challenge. In his speech, Mr Rathi explains the FCA wants green and sustainable finance to be at the heart of growing London as a global financial centre and that good financial regulation will be key to facilitating the transition to a less carbon-intensive economy. The FCA is ready to support the UK government to fulfil its commitment to at least match the ambition of the EU sustainable finance action plan in the UK.

The FCA confirms it will be introducing a new rule that will require companies to include statements about TCFD recommendations from 1 January 2021. Work will be done in 2021 to extend the scope of the rule to more listed issuers and to move towards mandatory disclosure. The FCA is also aiming to bring in TCFD-related rules for asset managers, life insurers and FCA-regulated pension providers by 2022.

The FCA wants to ensure consumers can trust sustainable products. The FCA has been considering measures to combat potential greenwashing in the investment funds space. It has also developed a set of principles to help firms interpret existing rules requiring that disclosures are fair, clear and not misleading, including when they submit new products to the FCA for authorisation. The FCA plans to discuss these principles with industry with a view to finalising them in early 2021. The FCA also plans to run consumer experiments to better understand what information influences consumers choices in sustainable products.

Over the next year, the Climate Financial Risk Forum will look to refine and develop the recommendations contained in its June 2020 guide. Thematic work on metrics, data and methodologies is planned.

COVID-19: FCA and PRA update information on senior manager accountability and workplace arrangements

On 9 November 2020, the FCA and the Prudential Regulation Authority (PRA) published updated information about COVID-19 and workplace arrangements. Both statements recommend that the Chief Executive Officer Senior Management Function (SMF1) is accountable for ensuring an adequate process for following and adhering to government guidance. For firms that do not have an SMF1, this will be the most relevant member of the senior management team.

The FCA's statement confirms that firms should continue to comply with relevant guidance from the government on coronavirus restrictions. In particular, firms should refer to the guidance on who should work from home if possible, and ensure workplaces are safe for those who cannot work from home.

The PRA's statement reiterates that firms should follow relevant government guidance, including:

  • who should work from home, and ensuring that workplaces are safe;
  • use of face coverings in close contact services (including branch staff); and
  • coronavirus testing regimes.

COVID-19: FCA statement on changes to certain work

The FCA has published a statement providing an update on work that it intends to either stop or postpone in light of the ongoing impact of COVID-19 and economic conditions.

The FCA is making the changes to allow it to focus its resources on the most urgent work where it can make the most immediate difference to consumers and markets. Key changes to the FCA's work relate to the following:

  • potential duty of care for firms - the FCA now aims to consult on potential options in Q1 2021;
  • given the continuing impact of COVID-19 and the low-interest rate environment, the FCA has decided to stop its work relating to introducing a single easy access rate (SEAR) for cash savings. As interest rates for new products fall, so does the gap between rates paid to new and longstanding customers, and the size of the harm falls. Therefore, the FCA does not consider that introducing the SEAR would be proportionate to the current level of harm in this market. However, it will continue to monitor the market and may revisit its priorities if it sees significant harm to consumers in the future; and
  • in its policy statement on making investment platform transfers simpler (PS19/29), the FCA announced that it would consult on restricting platform exit fees in Q1 2020. This was delayed due to COVID-19, with an intention to consult in spring 2021. However, the FCA has now decided to stop work on the consultation in the light of the ongoing impact of COVID-19 and economic conditions. It will be closely monitoring the situation, with the potential to consult on new rules if market changes lead to harm re-emerging in this area.

FCA policy development update

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

Brexit: EBA reminds firms to prepare for end of transition period

The European Banking Authority (EBA) has reminded financial institutions of the need for readiness in view of the Brexit transition period ending on 31 December 2020. It instructs financial institutions to finalise the full execution of their contingency plans and reminds them to ensure adequate communication regarding their preparations and possible changes to any affected EU customers. Among other things, the EBA highlights the following issues:

  • UK-based financial institutions need to finalise their authorisations and fully establish EU-based operations. Associated management capacity, including appropriate risk management capabilities, should be in place in the EU, and must be commensurate to the magnitude, scope and complexity of activities and the risks generated in EU operations. Booking arrangements need to be clearly articulated. The EBA's outsourcing guidelines must be met and activities cannot be outsourced to such an extent that they operate as empty shell companies;
  • any eIDAS certificate issued to UK-based third-party providers under the revised Payment Services Directive will no longer meet the legal requirements of Article 34 of Commission Delegated Regulation (EU) 2018/389. Qualified trust service providers that have issued eIDAS certificates to the UK-based account information service providers (AISPs) and payment initiation service providers (PISPs) should revoke the certificates;
  • transfers of funds to or from the UK will be subject to requirements in Regulation (EU) 2015/847 on information accompanying transfers of funds (WTR) on payments from outside the EU. In particular, payment service providers will need to provide more detailed information on the payer and payee; and
  • customers should be informed in a timely way about preparations for the end of the transition period. Information on the cessation of services to EU-based customers should explain the impact of the cessation on the provision of services and the way to exercise customer rights, in order to avoid any detrimental effects for customers.

DMD evaluation: European Commission staff working document

The European Commission has published a cover note attaching the European Commission's staff working document on its evaluation of the Distance Marketing Directive (DMD). The staff working document presents the results of the REFIT evaluation of the DMD, which was carried out in 2019 and finalised in 2020. (The aim of the Commission's REFIT programme is to simplify existing legislation.)

The evaluation assessed whether the original objectives of the DMD have been achieved, and how it works together with other legislation in the fields of retail financial services, consumer protection and data protection. It also considered what its costs and benefits per stakeholder type (consumers, businesses and authorities) are, and whether it has potential for burden reduction and simplification.

The findings of the evaluation will feed into the review of the DMD.

CMU: European Court of Auditors report

The European Court of Auditors (ECA) has published a report on the Capital Markets Union (CMU). The ECA's overall conclusion is that results of the actions taken to establish the CMU are still to come. Among other things, the ECA comments that the objectives for the CMU set by the European Commission were in many cases vague and the Commission's communications raised expectations that were higher than what it could achieve with its own actions. The ECA also found that the Commission's monitoring was limited to progress with legislative measures and that it has not regularly and consistently monitored if it is progressing in accomplishing the main CMU objectives.

The ECA sets out specific recommendations for the Commission relating to:

  • facilitating SME access to capital markets;
  • fostering deeper and better integrated local capital markets;
  • addressing key cross-border barriers to investment; and
  • developing specific objectives, critical measures and the monitoring of the CMU.

The report includes the Commission's response to the ECA's findings, with details of those recommendations that it has accepted. In particular, it sets out details of those initiatives it has undertaken that address the ECA's recommendations, primarily in its September 2020 action plan on the CMU.

Outsourcing and third-party relationships: FSB discussion paper

The Financial Stability Board (FSB) has published a discussion paper on regulatory and supervisory issues relating to outsourcing and third-party relationships. The paper is based on findings from a survey conducted among FSB members (an overview of responses is in the annex to the paper). To facilitate the discussion further, the FSB is asking the following questions:

  • What are the key challenges in identifying, managing and mitigating the risks relating to outsourcing and third-party relationships, including risks in sub-contractors and the broader supply chain?
  • What are possible ways to address these challenges and mitigate related risks? Are there any concerns with potential approaches that might increase risks, complexity or costs?
  • What are possible ways in which financial institutions, third-party service providers and supervisory authorities could collaborate to address these challenges on a cross-border basis?
  • What lessons have been learned from the COVID-19 pandemic regarding managing and mitigating risks relating to outsourcing and third-party relationships, including risks arising in sub-contractors and the broader supply chain?

Comments can be made on the paper until 8 January 2021.

[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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