Financial institutions general regulatory news, July 2020

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to all financial institutions. Includes COVID-19 and Brexit-related updates, and more.


  • Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020
  • UK temporary permissions regime: FCA to re-open notification window
  • EU assessment of UK equivalence decisions: Michel Barnier speech
  • UK and Switzerland future mutual recognition agreement
  • COVID-19: FCA expectations for approved persons regime
  • COVID-19: FCA extends SMCR implementation periods for solo-regulated firms
  • EU Taxonomy Regulation: House of Commons European Scrutiny Committee letter on UK alignment
  • FCA Handbook Notice 78
  • Managing climate-related financial risk: PRA Dear CEO letter on thematic feedback
  • FCA regulated fees and levies for 2020/21: PS20/7
  • Climate-related financial risk management: Climate Financial Risk Forum guide
  • Digital advertising in financial services: FSCP discussion paper
  • Cyber incident management: UK Finance whitepaper
  • MLD4: European Commission infringement proceedings
  • EU macro-prudential policy framework: ESRB Recommendation amending 2015 Recommendation
  • COVID-19: FSB statement on impact on global benchmark reform

Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020

The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020 (SI 2020/628) have been published, together with an explanatory memorandum.

The purpose of the Regulations, which were made on 29 June 2020, is to amend secondary legislation and amend and revoke parts of retained EU law to address deficiencies arising from the withdrawal of the UK from the EU. They also make minor amendments to financial services statutory instruments made under the European Union (Withdrawal) Act 2018 (EUWA) to correct and clarify previous financial services exit instruments.

Among other things in the Regulations, Regulation 7 reinstates Article 37 of the Markets in Financial Instruments Regulation (MiFIR) (Non-discriminatory access to and obligation to licence benchmarks) into the onshored MiFIR.

Regulations 2, 3, 5, 6, 11 and 16 came into force on 30 June 2020. Regulations 7 to 10, 12 to 14 and 17 come into force immediately before IP completion day (the end of the Brexit transition period). Regulations 4, 15 and Part 3 (Regulations 18 - 24) come into force on IP completion day.

UK temporary permissions regime: FCA to re-open notification window

The Financial Conduct Authority (FCA) has announced that it will re-open the notification window for its temporary permissions regime (TPR) on 30 September 2020 for inbound passporting EEA firms and funds.

This will allow firms and fund managers that have not yet made a notification to do so before the end of the Brexit transition period.

The FCA states that there will also be an opportunity for fund managers to update their previously submitted notifications under the temporary marketing permissions regime (TMPR), if necessary. The FCA intends to communicate further on this issue in September 2020. The windows for EEA firms and fund managers to make notifications under the TPR and the TMPR last closed at the end of 30 January 2020.

Nausicaa Delfas, FCA Executive Director of International, has also given a speech in which she states that over 1,000 firms and over 600 fund managers have already made notifications under the TPR. She states that the FCA plans to consult later in 2020 on the approach it will take when assessing applications from overseas firms.

EU assessment of UK equivalence decisions: Michel Barnier speech

The European Commission has published a speech given by Michel Barnier, the EU's chief negotiator on its future relationship with the UK. In his speech, Mr Barnier provides an update on the Brexit negotiations as they impact on the financial services sector and the EU's ongoing process for the assessment of equivalence determinations relating to the UK.

UK and Switzerland future mutual recognition agreement

HM Treasury has published a joint statement with the Swiss Federal Department of Finance, on deepening cooperation in financial services. They have agreed a shared ambition to conclude an international agreement that will enhance the cross-border market for financial services between the UK and Switzerland.

The UK and Switzerland will work towards mutual recognition of each other's regulatory and supervisory regimes in the fields of insurance, banking, asset management and capital markets (including market infrastructure).

The parties intend for the agreement to:

  • establish outcomes-based mutual recognition, providing rights for the provision of relevant financial services from one jurisdiction into the other, and reducing regulatory frictions for cross-border activity;
  • establish structures and appropriate safeguards to underpin these rights, including provisions for regulatory and supervisory cooperation; and
  • create a clear, transparent and managed process in the event that recognition is withdrawn in the future or re-established after a withdrawal.

In particular, the parties intend to improve access for the cross-border provision of financial services for wholesale and sophisticated clients on the basis of recognition, reciprocity and enhanced regulatory and supervisory cooperation. Both parties note their willingness to defer to each other's national regimes and supervisory practices where they achieve comparable overall outcomes with regard to market integrity, financial stability and the protection of consumers and investors.

Technical work on the future financial services relationship is currently underway and will be intensified ahead of the next UK-Swiss dialogue on 8 September 2020.

HM Treasury has also published a speech given by Rishi Sunak, the Chancellor of the Exchequer, on the future agreement. In the speech, Mr Sunak states that the UK has completed its equivalence assessment of Swiss stock markets and found them to be equivalent. On its webpage on the agreement, HM Treasury states that it will lay a statutory instrument on the equivalence of the Swiss stock markets in Parliament at the earliest opportunity once its equivalence powers come into force at the end of the Brexit transition period.

COVID-19: FCA expectations for approved persons regime

On 30 June 2020, the FCA published a statement setting out its expectations to help benchmark administrators and firms using appointed representative arrangements apply the approved persons regime during the coronavirus pandemic.

The FCA recognises that some benchmark administrators and appointed representatives have had to make temporary arrangements to cover absences in direct response to COVID-19 and that this uncertainty continues. The FCA intends to issue a modification by consent to the 12-week rule, which will allow temporary arrangements for up to 36 weeks rather than 12 if a firm notifies the FCA that it consents to the modification. If the modification by consent is being used in relation to an appointed representative, the principal, rather than the appointed representative, should notify the FCA. The FCA notes that roles requiring approval under the customer function (CF30) cannot be covered using the 12-week rule. The FCA states on its webpage that the "Modification by consent does varies this exclusion"[sic].

The FCA also notes that there may be cases where benchmark administrators or appointed representatives decide to furlough approved persons. Unless an individual is permanently leaving their post, they can retain their approval during their absence and will not need to be re-approved by the FCA when they return. However, the benchmark administrator, or, in the case of an appointed representative, the principal, is still responsible for ensuring the approved person is fit and proper.

The FCA does not expect firms to notify it under Form D of the temporary arrangements set out in its statement. However, it does expect the arrangements to be clearly documented internally, so that everyone understands who is responsible for what. This should be available if requested by the FCA now or in the future. Firms' internal records should aim to keep a "running commentary" of their personnel performing significant influence functions and their responsibilities during this period. Firms should make sure that their appointed representatives do the same.

The FCA reminds regulated firms that use appointed representatives to carry on regulated activities that they remain responsible for their appointed representatives meeting the FCA's rules.

COVID-19: FCA extends SMCR implementation periods for solo-regulated firms

On 30 June 2020, the FCA extended the deadline for solo-regulated firms to undertake their first assessment of the fitness and propriety of their certified persons under the senior managers and certification regime (SMCR) from 9 December 2020 until 31 March 2021. The FCA's intention is to provide relief to firms significantly affected by COVID-19 and give them time to make the changes they need.

Read more in our briefing: SMCR: UK FCA extends implementation periods for solo-regulated firms.

EU Taxonomy Regulation: House of Commons European Scrutiny Committee letter on UK alignment

The House of Commons European Scrutiny Committee has published a letter from its chair, Sir William Cash, to John Glen, Economic Secretary to the Treasury, on the Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation). The Committee seeks clarification on, and to be kept informed of, the government's intentions as regards implementing (or not) this initiative at the end of the Brexit transition period.

FCA Handbook Notice 78

The FCA has published Handbook Notice 78, which sets out changes to the FCA Handbook made by the FCA board on 21 May and 25 June 2020 by the following instruments:

Managing climate-related financial risk: PRA Dear CEO letter on thematic feedback

The Prudential Regulation Authority (PRA) has published a Dear CEO letter in which it builds on its expectations set out in its supervisory statement, SS3/19, on enhancing banks' and insurers' approaches to managing the financial risks from climate change, provides observations on good practice, and sets out next steps for implementation.

The PRA instructs firms to have fully embedded their approaches to managing climate-related risks by the end of 2021. By this time, firms should be able to demonstrate that the expectations set out in SS3/19 have been implemented and embedded throughout their organisation as fully as possible. In doing this, firms should take a proportionate approach, reflecting the particular institution's exposure to such risks and the complexity of its operations.

The letter includes further detail on the PRA's expectations in this respect, together with feedback from its review of firms' SS3/19 implementation plans.

FCA regulated fees and levies for 2020/21: PS20/7

The FCA has published a policy statement, PS20/7, setting out the final 2020/21 fees and levies for the FCA, the Financial Ombudsman Service, the Money and Pensions Service, the devolved authorities debt advice levy and HM Treasury's illegal money lending levy expenses. The FCA also sets out feedback on the responses received to its April 2020 fees and levies consultation paper (CP20/6).

The Appendices to PS20/7 contain the FCA Handbook instruments making relevant amendments to the Fees manual (FEES):

These instruments came into force on 2 July 2020.

The FCA states that firms can use its online fees calculator to calculate their individual fees based on the final rates in PS20/7. The FCA will invoice fee-payers from July 2020 onwards for their 2020/21 periodic fees and levies.

Climate-related financial risk management: Climate Financial Risk Forum guide

The Climate Financial Risk Forum (CFRF) has published a guide to help financial services firms approach and address climate-related financial risks. The guide provides practical recommendations to firms of all sizes on: disclosure of climate-related financial risks; effective risk management; scenario analysis; and opportunities for innovation in the interest of consumers.

The CFRF was established by the PRA and FCA in 2019, with the aim of sharing best practice across financial regulators and industry to advance the sector's responses to the financial risks from climate change. Membership is drawn from a wide range of industry participants.

The PRA and FCA have convened and facilitated CFRF discussions but the views expressed in the guide do not necessarily represent the view of the regulators and does not constitute regulatory guidance.

The guide is designed to be complementary to existing frameworks and initiatives, such as the UN-supported Principles for Responsible Investment and the Taskforce on Climate-related Financial Disclosures.

Digital advertising in financial services: FSCP discussion paper

The Financial Services Consumer Panel (FSCP) has published a discussion paper on digital advertising in financial services. The FSCP is "deeply concerned" about potential consumer harm linked to digital advertising of financial services and the use of advertising technology ("adtech") to create detailed profiles of individual consumers. It notes that, while these techniques enable personalised, targeted marketing, they also potentially create an environment for discrimination, manipulation and exploitation. The FSCP's concerns are seriously heightened by the impact of COVID-19 on the financial situation of UK households.

Two of the FSCP's priority areas for 2020/21 are the high-cost credit market and the pensions-to-cash market. The purpose of the discussion paper is to set out the FSCP's concerns about digital marketing in these markets with reference to evidence from two exploratory research studies it commissioned. The FSCP comments that similar issues seem likely to exist in other financial services markets.

The FSCP sets out what action it would like the FCA to take.

Cyber incident management: UK Finance whitepaper

UK Finance has published a whitepaper on cyber incident management. By publishing the paper, UK Finance intends to help firms assess their incident response plans by providing insight on some of the regulatory and operational considerations, including a number of issues that are specific to the financial sector, such as:

  • how to contact customers during a cyber crisis when systems might be compromised;
  • how regulatory reporting is to be managed; and
  • what access to cash provisions need to be made.

MLD4: European Commission infringement proceedings

The European Commission has announced details of infringement decisions it has taken in respect of nine member states concerning the transposition and implementation of the Fourth Money Laundering Directive (MLD4), including the referral of Austria, Belgium and the Netherlands to the Court of Justice of the European Union (ECJ) with a request for financial sanctions.

EU macro-prudential policy framework: ESRB Recommendation amending 2015 Recommendation

European Systemic Risk Board (ESRB) Recommendation ESRB/2020/9 amending Recommendation ESRB/2015/2 on the assessment of cross-border effects of, and voluntary reciprocity for, macro-prudential policy measures has been published in the Official Journal of the EU.

ESRB/2015/2 is addressed to authorities entrusted with the adoption or activation of macro-prudential policy measures (or both) (relevant authorities). It is intended to address the cross-border effects of macro-prudential measures (that is, measures that have been adopted by member states to prevent and mitigate systemic risk).

Recommendation ESRB/2020/9 amends Recommendation ESRB/2015/2 by excluding the systemic risk buffer rate imposed by the relevant authorities in Estonia from the list of macro-prudential policy measures that the ESRB recommends should be reciprocated by relevant authorities. The revised list now specifies macro-prudential policy measures adopted by relevant authorities in Belgium, Finland, France and Sweden.

COVID-19: FSB statement on impact on global benchmark reform

The Financial Stability Board (FSB) has published a statement on the impact of COVID-19 on global benchmark reform. The FSB maintains its view that financial and non-financial sector firms across all jurisdictions should continue their efforts in making wider use of risk-free rates in order to reduce reliance on interbank offered rates where appropriate and in particular to remove remaining dependencies on LIBOR by the end of 2021.

The FSB confirms that it intends to publish a report on the remaining challenges to benchmark transition later in July 2020, as requested by G20 finance ministers and central bank governors in their February 2020 communiqué.

FSB members, in collaboration with other standard-setting bodies and international institutions, will continue to monitor developments.

[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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