Financial institutions general regulatory news, July 2020 #2

Hogan Lovells

Hogan Lovells

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


  • LIBOR transition and PRA resolution-related rules: PRA statement
  • PRA 2020/21 regulatory fees and levies: PS12/20
  • Brexit: FCA statement on outsourcing
  • FCA controlled function applicants: Complaints Commissioner report
  • FCA policy development update
  • CRD V corrigendum
  • EEA Agreement: EEA Joint Committee Decisions amending Annex IX (Financial Services)
  • Brexit: European Commission updates notices for readiness
  • CMU action plan: European Commission consults on roadmap for Communication
  • AML and CTF: European Commission extends deadline for Action Plan consultation
  • COVID-19: IFSB statements on impact on Islamic banking and Islamic capital markets
  • So-called stablecoins: FATF report
  • AML and CTF standards on virtual assets and virtual asset service providers: FATF review
  • Benchmark transition: FSB and BCBS report

LIBOR transition and PRA resolution-related rules: PRA statement

The UK Prudential Regulation Authority (PRA) has published a statement outlining the PRA's view on the implications of LIBOR transition for contracts in scope of the Contractual Recognition of Bail-In (CROB) and Stay in Resolution (Stays) Parts of the PRA Rulebook.

The PRA has been considering the issues raised by the Working Group on Sterling Risk-Free Reference Rates, including possible implications of benchmark rate reform for rules related to resolution, which it set out in its December 2019 letter.

The PRA considers that, where the sole purpose of an amendment to a liability (as defined in CROB) or a financial arrangement (as defined in Stays) is to transition away from LIBOR, the amendment should not be considered a material amendment as the term applies to either the CROB Part or the Stays Part of the PRA Rulebook.

Nonetheless, firms should consider adding CROB and Stays terms into the documentation for a third-country law governed liability or financial arrangement that is amended for the sole purpose of transitioning away from LIBOR, as it enhances a firm's resolvability. CROB and Stays are part of the UK resolution regime, ensuring that firms can fail in an orderly way. The PRA states that both sets of rules are needed for the effectiveness of UK resolution actions in third-country jurisdictions.

The PRA also states that firms should consider whether having non-Common Equity Tier 1 (CET1) own funds instruments governed by third-country law, but without statutory or contractual recognition of UK bail-in rules, would create difficulties for resolution. This would be consistent with paragraph 5.10 of the Bank of England's (BoE's) statement of policy on its approach to setting minimum requirements for own funds and eligible liabilities. The PRA suggests that the BoE could determine it needs to use its powers under section 3A of the Banking Act 2009 to direct relevant persons to address impediments to resolution, in particular through a direction, to endeavour to renegotiate instruments under section 3A(4–5).

PRA 2020/21 regulatory fees and levies: PS12/20

Following its earlier consultation, the PRA has published a policy statement, PS16/20, giving feedback to its consultation and setting out the final fee rates and rules to recover the PRA's annual funding requirement for the financial period 1 March 2020 to 28 February 2021. The final rules to implement changes to the Fees Part of the PRA Rulebook are set out in the PRA Rulebook: PRA Fees Amendment Instrument 2020 (2020/5).

The PRA also updates its supervisory statement, SS2/16, on the PRA's approach to the Fees Part and its application.

The changes to the rules and the updated supervisory statement come into force with immediate effect.

Brexit: FCA statement on outsourcing

The Financial Conduct Authority (FCA) has updated its webpage for UK firms considering how the end of the Brexit transition period may impact on their business and customers. Among other things, the FCA has added to the section on outsourcing. It advises firms to consider how their outsourcing and third-party relationships will be affected at the end of the transition period. Firms should consider the associated operational risk to their business and the potential harm to consumers that may result from any change or disruption to the outsourced services provided.

The FCA expects firms to have a clear understanding of their dependencies on outsourcing or third-party service providers so they can assess whether they will be able to continue providing their services after the transition period. The FCA gives an indicative list of questions that may help firms to decide how the end of the transition period might affect their outsourcing arrangements:

  • Has the firm identified its key third-party service providers?
  • Has the firm considered if these service providers will be materially affected by the end of the transition period?
  • Has the firm and its third-party service providers discussed their respective plans for the end of the transition period, to ensure that the third-party service providers can continue to service the firm?
  • Has the firm considered the potential demand for change management resources at critical service providers (arising from more than one client making increased demands on the service provider)?

FCA controlled function applicants: Complaints Commissioner report

The Office of the Complaints Commissioner has published a final report of the Financial Regulators Complaints Commissioner relating to a complaint made about the FCA. The main thrust of the complaint related to the fairness of the FCA application process to undertake controlled functions, how the FCA reached their decision and the quality of the feedback on that process.

Although the Commissioner did not find the decision to be unfair, it made a number of suggestions and recommendations to the FCA. Of particular interest, the Commissioner suggested that the FCA might consider whether interviewees should have further information about what to expect at interviews. The FCA has accepted this suggestion and "intends to produce a short guide for candidates invited to attend an interview to explain what the candidate can expect from the interview. The guide will explain the format of the interview, explain the role of the Panel members and seek to make clear that candidates should not expect contemporaneous feedback on responses provided during the interview".

FCA policy development update

The FCA has updated its policy development update, which sets out information on recent and future FCA publications.

CRD V corrigendum

A corrigendum to the Capital Requirements Directive (EU) 2019/878 (CRD V) has been published in the Official Journal of the EU (OJ). The corrigendum makes minor technical revisions to the text of CRD IV, as amended by CRD V.

EEA Agreement: EEA Joint Committee Decisions amending Annex IX (Financial Services)

The following Decisions of the European Economic Area (EEA) Joint Committee that amend, among other things, Annex IX (Financial Services) to the EEA Agreement have been published in the OJ:

Brexit: European Commission updates notices for readiness

The European Commission has been updating its "notices for readiness" that it published during the Article 50 negotiations with the UK, for the end of the Brexit transition period. The notices cover various sectors, including financial services, and once updated, are listed on a Commission webpage. The updates include:

CMU action plan: European Commission consults on roadmap for Communication

The European Commission is consulting on a roadmap for a Communication on the capital markets union (CMU) action plan. Specific objectives of the action plan listed in the roadmap include:

  • improving the ecosystem for capital raising for EU businesses, using new technologies, with a focus on small and medium sized enterprises (SMEs);
  • supporting the creation of a more efficient pan-European capital markets architecture;
  • promoting more retail investor participation; and
  • promoting cross-border investment and ensuring better integration.

The consultation on the roadmap ends on 4 August 2020. The Commission plans on adopting its Communication on the CMU action plan in Q3 2020.

AML and CTF: European Commission extends deadline for Action Plan consultation

The European Commission has extended the deadline for feedback on its AML and counter-terrorist financing (CTF) Action Plan from 29 July 2020 to 26 August 2020.

COVID-19: IFSB statements on impact on Islamic banking and Islamic capital markets

On 8 July 2020, the Islamic Finance Services Board (IFSB) published the following statements addressing the implications of COVID-19 on aspects of Islamic banking and Islamic capital markets:

  • statement on regulatory measures to mitigate the impact of COVID-19 for institutions offering Islamic financial services (IIFS). This statement aims to clarify the treatment of payment moratoria, the expected credit loss approach and profit-sharing investment accounts in line with Shar'iah rules, principles and guidance issued by the IFSB, as well as other international standard-setters; and
  • statement on regulatory measures to mitigate the impact of COVID-19, setting out recommendations for the Islamic capital markets. This statement is focused on investor protection. It highlights areas for greater regulatory vigilance and appropriate regulatory responses across IFSB member countries to mitigate the negative economic effects of COVID-19, and to ensure continued strong investor protection in the Islamic capital markets.

These statements are part of the IFSB's ongoing programme to provide appropriate policy guidance and to serve as a reference tool kit for its members and the Islamic financial services industry to navigate the current economic and regulatory challenges. It will continue to assess the implications of COVID-19 on Islamic banking, Islamic capital markets and takaful, and will issue further public statements where necessary.

So-called stablecoins: FATF report

The Financial Action Task Force (FATF) has published a report on "So-called Stablecoins" for the G20 finance ministers and central bank governors.

In the report, the FATF sets out its analysis of the AML and CTF issues relating to so-called stablecoins. This follows a request by the G20 in October 2019 that the FATF look into these issues.

This report sets out the FATF's views on so-called stablecoins and addresses the following:

  • what the characteristics of so-called stablecoins are (Section 1);
  • what are the AML and CTF risks of so-called stablecoins (Sections 2 and 4)
  • how the FATF standards apply to so-called stablecoins and the different businesses involved in the so-called stablecoin (Section 3); and
  • how the FATF plans to enhance the global AML and CTF framework for virtual assets and so-called stablecoins (Section 5).

This report was completed simultaneously with a 12-month review of the implementation of revisions to the FATF standards (see further below). The FATF’s 12-month review of these revisions complement the findings of this report.

In particular, the FATF calls on all jurisdictions to implement the revised FATF standards as a matter of priority. It states that the first step to ensuring an effective global response to so-called stablecoins, and virtual assets more broadly, is ensuring that the FATF's pre-existing standards are transposed into domestic law and operationalised.

AML and CTF standards on virtual assets and virtual asset service providers: FATF review

In June 2019, the FATF strengthened its standards to clarify the application of AML and CTF requirements on virtual assets (also known as cryptoassets) and virtual asset service providers (VASPs). It has now published a report on the findings from a twelve-month review of these revised standards.

The report reviews the implementation of the revised standards and sets out:

  • how money laundering and terrorism financing risks and the virtual asset market have changed since June 2019 (Section 1);
  • jurisdictions' progress in implementing the revised standards (Section 2);
  • the private sector’s progress in implementing the revised standards, including the development of technical solutions for the implementation of the travel rule (Section 3);
  • issues identified with the revised FATF standards and guidance (Section 4); and
  • the FATF's next steps regarding virtual assets (Section 5).

The report finds that, overall, both the public and private sectors have made progress in implementing the revised FATF standards.

The FATF has agreed to continue its focus on virtual assets and undertake the following actions:

  • continue its enhanced monitoring of virtual assets and VASPs and undertake a second 12-month review of the implementation of the revised FATF standards on virtual assets and VASPs by June 2021 and consider whether further updates are necessary;
  • release updated guidance on virtual assets and VASPs, addressing issues including so-called stablecoins, anonymous peer-to-peer transactions and travel rule implementation;
  • continue to promote the understanding of money laundering and terrorist financing risks involved in transactions using virtual assets and the potential misuse of virtual assets for money laundering and terrorist financing purposes by publishing red flag indicators and relevant case studies by October 2020;
  • continue and enhance its engagement with the private sector, including VASPs, technology providers, technical experts and academics, through its Virtual Assets Contact Group; and
  • continue its program of work to enhance international cooperation amongst VASP supervisors.

Benchmark transition: FSB and BCBS report

The Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) have published a joint report on supervisory issues associated with benchmark transition. The report contains insights on remaining challenges to transition based on surveys undertaken by the FSB, the BCBS and the International Association of Insurance Supervisors (IAIS). The IAIS has published a separate report on issues of concern for insurers.

The report's conclusion is that the continued reliance of global financial markets on LIBOR poses clear risks to global financial stability. Transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial institutions across many jurisdictions. The report therefore includes three sets of recommendations for authorities to support financial institutions' and their clients' progress in transitioning away from LIBOR:

  • identification of transition risks and challenges;
  • facilitation of LIBOR transition; and
  • coordination.

The FSB and BCBS consider these recommendations to be generally applicable to all jurisdictions with LIBOR exposures.

[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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