PUBLICATIONS

Brexit and the creation of UK sectoral sanctions targets

The UK currently is set to leave the European Union on 29 March. In the context of international sanctions, most commentary has focussed on the potential for policy divergences between the UK and the EU in the medium to long term. However, a no-deal Brexit may have unintended and immediate consequences. Notably, under the EU’s sanctions regime targeting Russia, a no-deal Brexit may mean that a number of UK entities become EU sectoral sanctions targets for the first time. Please click here to view our publication which examines some of the potential issues associated with this development for the entities themselves, for their contractual counterparties and for EU financial institutions.

European Economic Area member states' domestic preparations for a “no deal” Brexit

A&O has been tracking the domestic preparations that a number of European Economic Area (EEA) member states and Switzerland have been undertaking in the event that the UK leaves the EEA without an agreement as to a transitional period or its future trading relationship. We have set out these measures in a tracker which is available on A&O’s Brexit website.

Beyond Brexit podcast: Introduction to UK EMIR

In this episode of our Brexit podcast series, Emma Dwyer, partner, and Emma Lancelott, senior lawyer, in our Derivatives and Structured Finance practice discuss what the UK version of the European Markets Infrastructure Regulation, otherwise known as UK EMIR, will look like and the likely practical effect of the onshoring of EMIR in a hard Brexit scenario. Please be aware that, since the date of recording, the UK FCA has issued a statement on the use of transitional powers post hard Brexit clarifying they will not be used in the context of EMIR reporting – you should bear this in mind when listening to the final section of the podcast. We note that, although the content is correct as at the date of recording, the legal position is evolving in this space and we cannot guarantee that there will not be additional developments in this area. However, the podcast should nonetheless provide a useful overview of the basic position and the key issues arising. Please click here to listen to the podcast.

BREXIT

Financial Guidance and Claims Act 2018 (Naming and Consequential Amendments) Regulations 2019 published

On 4 March, the Financial Guidance and Claims Act 2018 (Naming and Consequential Amendments) Regulations 2019 were published together with an explanatory memorandum. The Regulations were made on 26 February and come into force on 6 April. Regulation 2 names the single financial guidance body (SFGB) as the "Money and Pensions Service". Regulation 3 and the Schedule make consequential amendments to the 2018 Act, to primary legislation amended by the 2018 Act (including the Pensions Schemes Act 1993 and FSMA) and to secondary legislation, to reflect the new body's name and functions. This is the first use of the regulation-making power in section 1(3) of the 2018 Act. The explanatory memorandum states that there will be a one-off cost to pension providers or administrators and to mortgage and debt management firms of £5.65 million. These firms will be required to amend their communications to signpost the new body. The SFGB was established as a legal entity on 1 October 2018 and started delivering its functions on 1 January. The functions include money guidance, pensions guidance and debt advice. These functions were previously carried out by the Money Advice Service, the Pensions Advisory Service and the Department of Work and Pensions under the "Pension Wise" name.

Statutory instrument

Explanatory memorandum

CONSUMER/RETAIL

Please refer to the Other Developments section for a policy statement published by the PRA responding to chapters 3-7 of the October 2018 occasional consultation paper.

Please refer to the Payment Services and Payment Systems in relation to the update on the FCA’s feedback following its review of credit card fees and charges.

FCA Dear CEO letter identifies key risks in firms in its high-cost lenders portfolio

On 6 March, the FCA published a Dear CEO letter, sent to firms providing high-cost lending products, on its "portfolio" strategy. As part of the FCA's new approach to supervision, which was implemented in 2018, it has put supervised firms into different portfolios. Each portfolio is made up of firms with broadly similar business models. The recipients of the letter have been allocated to the high-cost lenders portfolio. The FCA will regularly analyse each portfolio, and will give the firms within it the results of its analysis. In the letter, the FCA outlines its view of the key risks that high-cost lenders pose to consumers or the markets they operate in. The key risks identified (where the FCA will prioritise its supervisory work) include: (i) relending; (ii) affordability assessments; (iii) complaints; (iv) buying and selling existing loan portfolios; (v) changes to business models; (vi) complying with new rules and guidance; and (vii) payments made by guarantors. The FCA recognises that all of the findings in the letter may not apply to all firms in the portfolio. However, it has seen a number of specific causes of harm across the firms in this portfolio. As a result, these firms are encouraged to read and reflect on all of the findings set out in the letter. In particular, they are expected to consider the degree to which they present the key risks identified and their mitigation strategies. If the FCA has contact with any of these firms in the future, it will expect them to be able to explain what they did in response to the letter. The FCA's high-cost lenders supervision strategy covers the period to January 2021. It includes work to identify, diagnose and remedy the harms identified in this market. It also evaluates the impact of the FCA's interventions. The FCA plans to write to these firms again, after January 2021, to give them an updated view of the key risks posed and the FCA's updated supervision plans.

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Treasury Committee continues investigation on treatment of “mortgage prisoners”

On 5 March, the House of Commons Treasury Committee published correspondence with both the Economic Secretary to the Treasury and the FCA on the treatment of “mortgage prisoners”. In a letter from Nicky Morgan, Committee Chair, to John Glen, Economic Secretary to the Treasury, Ms Morgan welcomes the FCA announcement that it will consult on changes to its responsible lending rules to provide for a more proportionate, relative affordability assessment. However, she also notes that, in his evidence to the committee, Andrew Bailey, FCA Chief Executive, said that helping the “mortgage prisoners” who will not benefit from the new affordability criteria will require "a broader public policy response". Commenting that such a broad policy response would require the support of HMT, Mr Glen was asked to provide further information, including an explanation of how HMT plans to help these particular “mortgage prisoners”. Mr Glen responded in a letter dated 30 January. Among other things, he advises that finding a solution for “mortgage prisoners” with inactive lenders is a government priority, and it has been working with the FCA in this area. The inability of some customers with inactive lenders to remortgage would be a result of their specific circumstances putting them outside lenders' risk appetites, rather than inflexibility in the FCA rules. The government does not believe it would be fair or appropriate to provide support for one subset of customers in arrears when it would not do this for all such customers. As a result of this, the FCA's proposed intervention and a lack of evidence of a broader market failure, Mr Glen does not plan to pursue any broader public policy response to this issue. However, he intends to keep the situation under review, and to monitor the impact of the new FCA rules when they are implemented. Mr Bailey has provided the committee with further information by way of a letter. Among other things, he explains that the FCA is engaging with lenders and lender trade bodies to understand the extent to which firms may be interested in taking on certain customers, and how the options will be communicated to affected customers.

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FCA confirms introduction of rent-to-own price cap

On 5 March, the FCA published a policy statement (PS19/6) in which it confirms the introduction of a price cap to protect customers in the rent-to-own (RTO) sector. The FCA consulted on the proposals in CP18/35, which was published in November 2018. Most respondents agreed with the FCA's assessment and the need to intervene in the RTO market. The feedback, together with the FCA's response, is set out in chapter 2 of PS19/6. In PS19/6, the FCA explains that it wants to bring down prices on RTO agreements where the overall costs to consumers are high compared to other retailers' prices. The price cap is designed to do this by: (i) setting a total credit cap of 100%; (ii) introducing a requirement that firms must benchmark product base prices (including delivery and installation, but excluding any add-on products like warranties) against retail prices; and (iii) preventing firms increasing their prices for other goods and services sold with an RTO agreement (for example, theft and accidental damage cover or extended warranties, or arrears charges) to recoup lost revenue from the price cap. The final rules are in the Consumer Credit (Rent-to-Own Cost Cap) Instrument 2019. The instrument inserts a new chapter 5B (Cost cap for rent-to-own agreements) in the Consumer Credit sourcebook. The rules will come into force on 1 April and will apply immediately to any new products RTO firms introduce to the market for the first time. For products that RTO firms are already offering, the rules will apply either at the point the RTO firm raises the price or 1 July (whichever date is sooner). Micro-enterprises will have until 1 October to do this. The FCA will review the price cap and the effect benchmarking has on product prices in April 2020. It will also look at the effectiveness of its rules on other charges.

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EBA opinion on Brexit deposit protection issues

On 1 March, the EBA published an opinion on deposit protection issues stemming from the withdrawal of the UK from the EU. The PRA's policy, confirmed in its February policy statement on Brexit, is that after Brexit EEA branches of UK credit institutions will not be protected by the Financial Services Compensation Scheme (FSCS) (the UK deposit guarantee scheme (DGS)). Depositors at these branches will lose consequently lose coverage, unless the branches join a local EU DGS. The EBA expects: (i) affected branches to be required to join a local DGS, in accordance with the provision in Article 15(1) of the DGS Directive permitting member states to require branches of third-country banks to join a DGS in their territory. Membership of the local DGS should starts when the UK leaves the EU, or, in exceptional cases, as soon as possible afterwards; (ii) firms to provide information to depositors about changes in DGS affiliation – this information should be provided at least one month before the end of their current DGS affiliation (although a shorter timescale is permissible if arrangements for joining a local DGS are uncertain). This information should include details of actions taken by the firm to prevent any detriment to depositors. Firms should also provide depositors with a depositor information template, in accordance with Annex 1 of the DGSD. Any information provided to depositors should be clear and written in plain language, with details of next steps, advice on action to take where applicable and realistic timelines; and (iii) depositors to be allowed to withdraw or transfer their eligible deposits to another credit institution without incurring any penalty, if they are no longer protected by a DGS. The EBA highlights the issue potential of double coverage for UK branches of EEA credit institutions that are FSCS members, as required by the PRA, and members of an EU DGS. It is concerned that this may cause future problems, including lack of clarity on the DGSs' respective obligations if there is a payout, confusion for depositors and costly IT adjustments to comply with UK requirements.

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FINANCIAL CRIME

Council of the EU objects to EC’s February Delegated Regulation identifying high-risk third countries under MLD4

On 7 March, the Council of the EU published a press release announcing that it has unanimously decided to object to the EC’s latest Delegated Regulation which supplements MLD4 by identifying 23 high-risk third countries with strategic deficiencies. Alongside the press release, the Council has published an "I/A" item note from its General Secretariat to COREPER relating to the Council's decision. A Council statement on the decision is set out in an Annex to the note. The statement explains that the Council is unable to support the Delegated Regulation as it was not established in a "transparent and resilient process that actively incentivises affected countries to take decisive action while also respecting their right to be heard". As the Council has objected to the Delegated Regulation, it will not enter into force. The EC will now have to produce a new Delegated Regulation that addresses the Council's concerns. Article 9(2) of MLD4 gives the EC the power to adopt delegated acts identifying high-risk third countries. The EC published the Delegated Regulation the Council has objected to on 13 February. The list of high-risk third countries set out in the Annex to the February Delegated Regulation was produced by the EC using new methodology that the EC considered reflected the stricter criteria of MLD5. MLD5 amends MLD4 and came into force in July 2018. The aim of the list of high-risk third countries produced under Article 9(2) is to protect the EU financial system by better preventing money laundering and terrorist financing risks. Under Article 18 of MLD4, firms are required to apply enhanced due diligence measures when dealing with financial operations involving customers and financial institutions from the high-risk third countries identified by the EC.

Press release

“IA” item note

Final text of industry code for reimbursement of victims of authorised push payment scams agreed

On 1 March, the Authorised Push Payments (APP) Scams Steering Group published the final text of the contingent reimbursement model code for APP scams, a voluntary, good practice, industry code for the reimbursement of victims of APP scams. The PSR published a consultation paper on a draft version of the code in September 2018. The steering group has also published feedback on responses to the consultation, explaining how the feedback has affected the ongoing work of the group since September 2018. The code, which comes into effect on 28 May, sets out the agreed principles for greater protection of consumers and the circumstances in which they will be reimbursed. Under the code, any customer of a bank or PSP signed up to the code who falls victim to an APP scam will be reimbursed if their bank has failed to meet the standards set out in the code, providing the customer did everything expected of them under the code. Where both the consumer and the PSPs involved in a transaction have met their expected level of care (the "no blame" scenario), the steering group has concluded that the consumer will be reimbursed. The Lending Standards Board (LSB) will take over full ownership of the operation and governance of the code, and will agree a MoU with the steering group. The MoU will set out the framework for how the two entities will work together to agree the detail of the governance framework and review arrangements, and the handover to the LSB. Between implementation and 31 December, a number of PSPs have committed to fund an initial contribution so that customers in the no blame scenario can be reimbursed from the time the code becomes effective until the end of this year. The PSPs, supported by the PSR, will work together to introduce a longer-term funding mechanism from January 2020. The steering group aims for as large a proportion of the PSP market as possible to sign up to the code before implementation. The first group of signatories will be announced on 28 May.

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FINTECH

Please refer to the Markets and Markets Infrastructure section for the BCBS report on the outcome of the February meeting.

FCA cryptoassets consumer research reports

On 7 March, the FCA published two qualitative research reports on consumer attitudes and awareness of cryptoassets to help it better understand the potential harms of cryptoassets. The first report, How and why consumers buy cryptoassets (produced for the FCA by Revealing Reality) explores the attitudes, understanding, motivations and beliefs that underpin people's decisions to purchase and use different cryptoassets. 31 cryptoassets consumers shared their motivations and sources of information, 17 of which were selected for follow-up interviews. The second report, Cryptoassets: Ownership and attitudes in the UK (commissioned from Kantar TNS), surveyed a nationally representative sample of over 2,100 UK consumers who were asked high-level questions about their awareness, understanding and purchasing habits relating to cryptoassets. While the research is exploratory in nature and is not conclusive, the results provide the FCA with evidence of how consumers interact with cryptoassets. The results reveal that, while many consumers do not understand cryptoassets, the vast majority do not buy or use them currently. The research suggests that while there has been some harm to individual cryptoassets users, it does not suggest a large impact on wider society, and the overall scale of harm may not be as high as previously thought. The report follows the publication in October 2018 of a report by the Cryptoassets Taskforce (comprising the FCA, Bank of England and HMT), which identified the lack of credible evidence on consumers' usage in the cryptoasset market. It forms part of a series of work on cryptoassets, which includes the FCA's January consultation paper on cryptoassets perimeter guidance.

First report

Second report

INSURANCE

PRA consults on draft supervisory statement on liquidity risk management for insurers

On 5 March, the PRA published a consultation paper on liquidity risk management for insurers (CP4/19). The PRA seeks views on a draft supervisory statement on liquidity risk management for insurers (the text of which is set out in the Appendix to CP4/19), and the consequential supersession of a legacy supervisory statement on collateral upgrade transactions (SS2/13). The draft supervisory statement sets out the PRA's expectations for liquidity risk management by insurers. These include the key elements of an insurer's liquidity risk management framework, the consideration of material sources of liquidity risk an insurer may be exposed to, expectations of the design and conduct of a stress testing programme, considerations for assessing asset liquidity, quantitative metrics and tools for measuring and monitoring liquidity risk, and effective liquidity contingency planning. The draft supervisory statement draws on recent PRA engagement with stakeholders in the insurance sector, and its regulatory experience including through reviews of own risk and solvency assessment reports and liquidity risk reviews. The PRA has identified some key issues for insurers to consider, which are issues it pays close attention to in the conduct of its supervision. However, the draft supervisory statement is not intended to be an exhaustive guide to liquidity risk management. The PRA recognises that liquidity risks are unique to each firm and group. Insurers are expected to understand the liquidity risks they face and to apply the guidance in the draft supervisory statement proportionately, in the light of the scale, nature and complexity of their activities. SS2/13 sets out the PRA's expectations of insurers and banks engaging in collateral upgrade transactions, and describes a number of considerations in their management of the associated risk. On publication of the final form of the new supervisory statement, the PRA proposes that it would supersede SS2/13, including the expectation set out in SS2/13 to notify the PRA in advance of significant transactions. The PRA explains that insurers are not immune to liquidity risk. It takes the view that this is a serious risk for the sector, and one that may increase further in the future. The deadline for comments on the proposal is 5 June. The PRA proposes that the expectations in the draft supervisory statement would apply from the date of publication of the final version, which is expected in the second half of this year.

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PRA and FCA agree no-deal Brexit MoUs with EIOPA, EU and EEA insurance supervisors

On 5 March, the PRA and FCA published a joint press release announcing they have agreed MoUs with EIOPA and EU and EEA national insurance supervisors on supervisory co-operation and information-sharing arrangements regarding UK, EU and EEA insurance companies. EIOPA has also published a press release relating to the MoUs. The press releases explain that the MoUs would apply in the event the UK leaves the EU and EEA without a withdrawal agreement and implementation period (that is, a no-deal Brexit). The MoUs, which have not yet been published, are: (i) a multilateral MoU with EU and EEA NCAs, covering supervisory co-operation, enforcement and information exchange between the UK authorities and EU/EEA NCAs; and (ii) a bilateral MoU with EIOPA, covering information exchange and mutual assistance between the UK authorities and EIOPA in relation to insurance regulation and supervision. In its press release, EIOPA states that the aim of the MoUs is to maintain sound prudential and conduct supervision over (re)insurance undertakings and groups based either in the UK or in an EEA member state, with cross-border business activities in the EEA or the UK respectively, and to maintain the financial stability of the financial markets within the EEA or the UK (or both). The MoUs provide for the reciprocal flow of appropriate and reliable information to ensure risk-based and effective supervision of cross-border (re)insurance establishments incorporated either in the UK or in an EEA member state, cross-border groups, or special purpose vehicles established in the UK or in an EEA member state.

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MARKETS AND MARKETS INFRASTRUCTURE

Please refer to the Publications section for a podcast on the UK EMIR and what it will look like in a hard Brexit scenario.

FCA Dear CEO letter asks loan-based P2P crowdfunding platforms to review wind-down arrangements

On 7 March, the FCA published a Dear CEO letter, sent to loan-based peer-to-peer (P2P) crowdfunding platforms, on their wind-down arrangements. The FCA is asking P2P platforms to review their wind-down arrangements. These are important safeguards should a platform decide for commercial reasons to exit the P2P sector, or if it faces any other threat to its viability. Inadequate arrangements could cause considerable consumer harm if a P2P platform stops providing management and administration services for loans that were invested through the platform. Risks include that investors may not receive some or all of the loan repayments for loans made through the platform, or may have to recover repayments directly from borrowers. It is unlikely to be economically viable for an investor to enforce their rights against a potentially very large number of individual borrowers. P2P platforms are required to take reasonable steps to ensure they have arrangements in place to enable P2P agreements to continue to be managed and administered if, for any reason, a platform ceases to operate. A recent supervisory review of a sample of P2P platforms' wind-down arrangements against the existing FCA requirements strongly suggests that some platforms are falling short of the required standard. The FCA has identified three main areas requiring urgent attention to mitigate the risks identified: (i) systems and controls relating to wind-down; (ii) platform funding and remuneration models; and (iii) third-party permissions required for wind-down. The FCA expects P2P platforms to ensure they review and, where necessary, improve their wind-down plans (WDPs). They should apply a methodical approach to assessing their wind-down systems and controls, and use the FCA's WDP guidance to support their review. The FCA will ask certain platforms to respond to it, providing details of their revised WDPs. It also plans to give specific feedback to those platforms whose WDPs it has assessed as part of its supervisory work. P2P platforms are reminded to notify the FCA "at the earliest opportunity" if the ongoing viability of their business is threatened.

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EC staff working document on movement of capital and freedom of payment

On 7 March, the EC published a staff working document on the movement of capital and the freedom of payment. In the document, the EC reports on capital movements and policy initiatives relating to the free movement of capital in 2017-2018. Sustaining free movement of capital is particularly important against the current backdrop of increased policy and geopolitical uncertainty globally, slowing cross-border investment and the need to sustain the economic recovery. The EC is committed to addressing barriers impeding the free movement of capital within the EU. Implementing the capital markets union (CMU) is key to attaining this objective. The EC has delivered most of the measures announced in its 2015 CMU action plan, and in the 2017 mid-term review of the action plan. Among other things, it has worked with member states to encourage and support them in removing barriers to the CMU on a voluntary and co-operative basis. Beyond this collaborative approach, the strategic use of enforcement and, more specifically, infringements remain an important tool enabling the EC to tackle barriers to the free movement of capital. While encouraging the free movement of capital, the EC has also ensured that appropriate safeguards are in place. In addition, it keeps track of developments affecting the movement of capital, such as macroprudential measures or capital controls in member states. The EC plans to continue its monitoring of the free movement of capital and will follow up on implementation of recent policy initiatives, in particular, on the legislative proposals still being discussed by the Council of the EU and the EP. The information in the document will feed into discussions held annually by the Economic and Financial Committee to examine capital movements and the freedom of payments under Article 134 of the Treaty on the Functioning of the EU.

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ESMA statement on application of MiFID, MiFIR and BMR provisions in event of no-deal Brexit

On 7 March, ESMA published a statement outlining its approach, in the event of a no-deal Brexit, to the application of key provisions in MiFID II and MiFIR (together MiFID II) and the Benchmarks Regulation. The statement covers MiFID II provisions relating to the: (i) trading obligation for derivatives – ESMA does not currently have evidence that market participants will not be able to continue meeting their obligations under the trading obligation for derivatives in the case of a no-deal Brexit and in the absence of an equivalence decision by the EC covering UK trading venues. ESMA will continue to closely monitor how liquidity develops post-Brexit; (ii) MiFID II "C(6) carve-out” – ESMA addresses the impact of derivative contracts based on electricity or natural gas produced, traded or delivered in the UK no longer being eligible for the carve-out as they will not fall within the "wholesale energy product" definition; (iii) ESMA opinions on third-country trading venues for the purpose of post-trade transparency and the position limits regime – ESMA has not yet assessed any UK trading venue against the criteria set out in the opinions, but will do so on the request of EU27 market participants. The need for assessment arises as trading venues established in the UK will, post-Brexit, be considered to be third country trading venues; and (iv) post-trade transparency for OTC transactions between EU investment firms and UK counterparties – ESMA considers the obligations under Article 20 and 21 of MiFIR in the context that investment firms established in the UK post-Brexit will no longer be EU investment firms, but will fall within the category of counterparties established in a third country. The statement also covers the deletion of UK administrators from ESMA's register of administrators and third country benchmarks under the BMR and the application of the BMR transitional period defined in Article 51 of the BMR. ESMA may adjust its approach if the timing and conditions of Brexit change, and will announce any such changes as soon as possible.

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ESMA speech on importance of costs and performance of retail investment products

On 6 March, ESMA published a speech, given by Steven Maijoor, EMSA Chair, on asset management priorities. In his speech, Mr Maijoor talks about how people's investments in financial products progress over time, and the role of costs. In particular, how costs affect the value of an investment over time. Points of interest include the following: (i) following ESMA's recently published annual statistical report on the costs and performance of retail investment products, it is looking further into the performance of active versus passive funds and expects to report on this in more detail in the next edition of the annual report. ESMA will also look into the performance of equity exchange traded funds; (ii) ESMA is confident that the UCITS results in the annual report are robust, but is aware of the challenges associated with the availability, quality and comparability of costs and past performance data, which can inhibit assessment of retail investment products. This is something it will work on in future editions of the annual report. However, for some products (including retail AIFs) there is a lack of available and usable cost and performance data. This is a significant investor protection issue. ESMA is considering the implications of this for further policy work; (iii) it is typically not the task of securities supervisors to regulate the costs or pricing of financial products and services, however, ESMA has a competition mandate. Its mission is to ensure consumers receive a clear picture and, as a result, understand what costs are associated with the investment options they choose. Enhancing transparency on costs and performance is especially important in the current low interest rate environment; and (iv) MiFID II provisions on suitability and product governance confirm and emphasise the importance of analysing product costs, and their impact, when providing investment services to investors. However, MiFID II rules on costs and charges differ from the framework under the PRIIPs Regulation and are usually more high level. ESMA has issued a number of Q&As on this topic, and is preparing further clarifications.

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EU and international financial services trade associations urge EC to recognise UK derivatives trading venues under EMIR and MiFIR in event of no-deal Brexit

On 5 March, a number of key EU and international financial services trade associations published a letter, sent to the EC, relating to the equivalence of UK derivatives trading venues post-Brexit under EMIR and MiFIR. The trade associations welcome the EC's December 2018 communication on preparing for a no-deal Brexit. However, they remain concerned about the disruptive impact on EU27 market participants and EU derivatives markets if the EC does not take urgent action with respect to the recognition of UK derivatives trading venues under EMIR and MiFIR in a no-deal scenario. In particular: (i) in the absence of an EC equivalence decision under Article 2a of EMIR with respect to UK regulated markets, UK exchange-traded derivatives will be considered OTC derivatives under EMIR in the event of a no-deal Brexit. This would result in a significant adverse impact on non-financial counterparties (NFCs) currently under the EMIR clearing threshold and financial counterparties (FCs) with smaller positions in OTC derivatives; (ii) in the absence of an EC equivalence decision under Article 28(4) of MiFIR with respect to UK multilateral trading facilities and organised trading facilities, EU27 FCs and NFCs would cease to be able to execute transactions in OTC derivatives in the event of a no-deal Brexit, subject to the trading obligation under MiFIR on those venues. Among other things, this would result in EU27 firms not being able to access these UK venues to service their clients or risk manage their own positions, and transactions between EU27 and UK counterparties may be subject to conflicting requirements; and (iii) there should be no obstacle to the EC making an equivalence determination with respect to UK trading venues under EMIR and MiFIR. Under the European Union (Withdrawal) Act 2018, the regulatory requirements currently applicable to UK trading venues will continue to apply in the event of a no-deal Brexit, with necessary modifications to reflect the UK's status outside the EU. The EC is urged to prepare the necessary implementing acts with a view to them taking effect at or very shortly after the UK leaves the EU.

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BCBS and IOSCO guidance on implementation of margin requirements for non-centrally cleared derivatives

On 5 March, the BCBS published a joint press release with IOSCO on the final implementation phases of the framework for margin requirements for non-centrally cleared derivatives. The BCBS and IOSCO advise that significant progress has been made to implement the framework. Based on monitoring implementation of the framework across products, jurisdictions and market participants, they have provided the following guidance to support timely and smooth implementation of the framework, and to clarify its requirements: (i) it is recognised that market participants may need to amend derivatives contracts in response to interest rate benchmark reforms. Amendments to legacy derivative contracts pursued solely to address interest rate benchmark reforms do not require the application of the margin requirements for the purposes of the framework. However, the position may be different under relevant implementing laws; and (ii) in the remaining phases of the framework's implementation in 2019 and 2020, initial margin requirements will apply to a large number of entities for the first time, potentially involving documentation, custodial and operational arrangements. It is noted that the framework does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework's EUR50 million initial margin threshold. However, covered entities are expected to act diligently when their exposures approach the threshold, to ensure that the relevant arrangements needed are in place if the threshold is exceeded. The BCBS and IOSCO will continue to monitor the effect of meeting the final stage of phase-in that is scheduled for 2020.

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FCA statements of policy on operation of UK MiFIR transparency regime following no-deal Brexit

On 4 March, the FCA published a document containing statements of policy on how it intends to operate the transparency regime under the retained EU law version of the Markets in Financial Instruments Regulation (UK MiFIR) if the UK leaves the EU without an implementation period. On a related webpage, the FCA states that the statements of policy outline how it will use its decision-making powers relating to the transparency regime in these circumstances. It notes that it will have a degree of flexibility during a four-year transitional period to allow it to build the systems necessary to operate the system as ESMA currently operates it, and to change the regime if necessary to reflect a move from an EU-wide trading data set to a UK-only data set. The statements of policy cover the FCA's approach to: (i) suspending the use of pre-trade transparency waivers for a trading venue for the purposes of the double volume cap (DVC); (ii) withdrawing a pre-trade transparency waiver granted for a trading venue in respect of non-equity financial instruments; (iii) suspending the pre-trade transparency obligations for trading venues in respect of non-equity financial instruments referred to in Article 8 and suspending the post-trade transparency obligations for trading venues in respect of non-equities referred to in Article 10; (iv) determining the standard market size of equity instruments for the purposes of the pre-trade transparency regime for systematic internalisers; (v) suspending the post-trade transparency obligations for non-equity transactions taking place outside a trading venue referred to in Article 21(1); and (vi) directing that an equity instrument is to be treated as not having a liquid market under Articles 5(1) and 5(1A) of Commission Delegated Regulation (EU) 2017/567. ESMA published a statement on the use of UK data relating to the MiFIR transparency regime if there is a no-deal Brexit in February.

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ESMA's annual transparency calculations for equity and equity-like instruments published for 2019/20

On 1 March, ESMA published a press release announcing that it has made available the results of the annual transparency calculations for equity and equity-like instruments. Currently, there are 1,344 liquid shares, and 389 liquid equity-like instruments other than shares, subject to calculations relating to the transparency requirements in MiFID II and MiFIR (together MiFID II). ESMA's annual transparency calculations are based on the data provided to the ESMA financial instruments transparency system (FITRS) by trading venues and arranged publication arrangements relating to the 2018 calendar year. The full list of assessed equity and equity-like instruments is available through FITRS in the XML files with publication date from 1 March and through the register web interface. The transparency requirements based on the results of the annual transparency calculations published from 1 March will apply from 1 April until 31 March 2020. From 1 April 2020, the next annual transparency calculations for equity and equity-like instruments, to be published by 1 March 2020, will become applicable. Due to late data submissions by some reporting entities and adaptations necessary in case of a no-deal Brexit, ESMA will likely have to update the results after 29 March 2019. It intends to make the public aware of any updates in advance.

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BCBS reports on outcome of February meeting

On 1 March, the BCBS published a press release on the outcome of its meeting on 27 to 28 February 2018. Among other things, the BCBS committed to taking the following action: (i) margin requirements for non-centrally cleared derivatives – the BCBS will publish, in March, a joint statement with IOSCO clarifying certain implementation aspects of the margin requirements framework; (ii) interest rate benchmarks – the BCBS reiterated its support for reforms of interest rate benchmarks and approved a work plan to look at the interactions with supervisory requirements; (iii) cryptoassets – the BCBS agreed to publish, in March, high-level supervisory expectations on cryptoassets given the high degree of risks associated with such exposures; and (iv) global minimum prudential standards – the BCBS agreed to publish, in March, a summary of the different practices used by jurisdictions to proportionately apply the global minimum prudential standards. The indicative date for the next meeting of the BCBS is 19 to 29 June.

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ESMA postpones results of annual calculations of LIS and SSTI thresholds for bonds for 2019/20

On 1 March, ESMA published a press release relating to the annual calculation of the large in scale (LIS) and size specific to the instruments (SSTI) thresholds for bonds. ESMA has decided to delay publication of the results of these annual calculations because its IT systems have required more time than expected to complete them. Publication was originally planned for 1 March, in advance of the 30 April deadline set out in Article 13(17) of Commission Delegated Regulation (EU) 2017/583. ESMA now aims to ensure that publication will take place later in March. The transparency requirements based on the results of the annual calculations to be published by 30 April will apply from 1 June until 31 May 2020. From 1 June 2020 the results of the next annual calculations of the LIS and SSTI thresholds for bonds, to be published by 30 April 2020, will become applicable.

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Council of EU invites COREPER to approve final compromise text of EMIR Refit Regulation

On 1 March, the Council of the EU published an "I" item note (6913/19) with accompanying addendum setting out the final compromise text of the proposed Regulation to amend EMIR. In the "I" item note, the General Secretariat Council invites its COREPER to approve the final compromise text. It also asks COREPER to confirm that it can indicate to the EP that, should the EP adopt its position on the proposal, as set out in the addendum, the Council would approve the EP’s position and adopt the act in the wording that corresponds to the EP’s position. The Council and the EP reached political agreement on the proposals in February.

“I” item note

Addendum

EP to consider proposed Regulation on the recovery and resolution of CCPs at 25 to 28 March plenary session

On 1 March, the EP updated its procedure file on the proposed Regulation on the recovery and resolution of CCPs. The procedure file indicates that the EP will consider the proposed Regulation during its plenary session to be held from 25 to 28 March. ECON voted to adopt a draft report on proposed Regulation in January 2018.

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ESMA announces recognition of UK CSD in event of no-deal Brexit

On 1 March, ESMA published a press release announcing that in the event of a no-deal Brexit, it will recognise Euroclear UK and Ireland Ltd, the UK central securities depository (UK CSD), as a third country CSD under the CSDR. The UK CSD will be recognised to provide its services into the EU, having been assessed as meeting the recognition conditions under Article 25 of the CSDR. ESMA explains that it has adopted this recognition decision to allow the UK CSD to serve Irish securities and to avoid any negative impact on the Irish securities market. ESMA has previously communicated that its board of supervisors supports continued access to the UK CSD.

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PAYMENT SERVICES AND PAYMENT SYSTEMS

Please refer to the Markets and Markets Infrastructure section for a staff working document on the movement of capital and the freedom of payment published by the EC.

PSR varies competitive procurement of central infrastructure specific direction

On 7 March, the Payments Systems Regulator (PSR) published the text of specific direction 4a varying specific direction 4 on competitive procurement of central infrastructure (LINK). Specific direction 4a extends the deadline for LINK's central infrastructure services (CIS) to be provided by the winner of a competitive tender process by six months (from 2 April 2021 to 2 October 2021). This was necessary as the current operator of LINK is unable to award a new CIS contract under its competitive tender process in the expected timeframe. The PSR published a consultation paper proposing to extend the deadline in February. In a related webpage the PSR explains that the eight respondents supported the proposal for a six-month extension and agreed with the rationale for it. The PSR has therefore decided to give the direction as consulted on as the best way to ensure that LINK's procurement process is effective and competitive. The PSR states that the extension should secure certainty of supply and maintain the two-year transition (between the award of the contract and the beginning of the supply of services under that contract) originally envisaged.

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European Payments Council's decision paper on Brexit and UK PSPs’ participation in SEPA schemes

On 7 March, the EPC Board took the decision to approve the application from UK Finance for the continued participation of UK PSPs in the SEPA schemes after 29 March in the event of a no-deal Brexit.

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FCA feedback on review of credit card fees and charges

On 6 March, the FCA published a letter that it has sent to credit card firms setting out feedback following its review of credit card fees and charges. In 2017 and 2018, the FCA looked at fees and charges across several consumer credit sectors and the impact on outcomes for consumers. The review also considered whether firms were appropriately identifying indicators of potential financial difficulty. In the letter, the FCA reminds firms that under chapter 6 of the Consumer Credit sourcebook (CONC), they must monitor a credit card customer's repayment record and any other information held by the firm and take appropriate action where there are signs of actual or possible financial difficulties (CONC 6.7.3AR). Appropriate action includes considering suspending, reducing, waiving or cancelling any further interest, fees or charges. In its review, the FCA looked at missed payments causing a late fee, consecutive over-limit fees, payments that were returned which caused a returned payment, late and over-limit fee, and authorised transactions triggering over-limit fees. The FCA found that some customers were charged fees on multiple occasions and sometimes multiple fees in a single billing cycle. Incurring multiple fees could indicate that a customer is in financial difficulty and that action should be taken by the firm. In the light of the FCA's review, the firms involved reviewed their fee-charging strategies and impact they were having on their customers. As a result, numerous changes were made to how customers are charged fees, including removing fees, capping fees, and renewing communication strategies to prevent fees being triggered. The FCA states that firms should consider whether their policies and procedures in relation to fees and charges result in fair consumer outcomes and are compliant with the rules and guidance provided in CONC 7. It gives the following examples of questions to consider: (i) what does your firm regard as signs of actual or possible financial difficulties? Are (multiple) fees and charges considered as one of those signs; (ii) does your firm flag on its systems those customers who are repeatedly incurring fees on their account; and (iii) what are the range of actions your firm takes when identifying a sign of actual or potential financial difficulty and are you satisfied they meet the requirements of CONC 7.3.4R?

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Access to Cash Review final report

On 6 March, the Access to Cash Review (ACR) published its final report. The ACR, chaired by Natalie Ceeney CBE, was launched in July 2018 to look at the future of access to cash across the UK. In December 2018, the ACR published an interim report which considered the question of whether Britain is ready to go cashless. In the final report, the ACR explores the end-to-end cash cycle. It concludes that digital payments do not yet work for everyone and that around eight million adults (17% of the population) would struggle to cope in a cashless society. The ACR makes the following five recommendations for action to be taken now by government, regulators and the industry: (i) guarantee access to cash to ensure consumers can get cash wherever they live or work; (ii) take steps to keep cash accepted, locally and nationally.; (iii) make radical change to the wholesale cash infrastructure, moving from a commercial model to more of a "utility" approach, to keep cash sustainable for longer; (iv) make digital inclusion in payments a priority; and (v) have clear government policy on cash, supported by a joined-up regulatory approach that treats cash as a system. A related ACR press release includes a response from Nicky Morgan, House of Commons Treasury Select Committee Chair, who notes that "leaving the future of cash to be determined by market forces will not work". Ms Morgan supports the ACR's call for government, regulators and industry to respond with a plan of action and considers it would be "highly negligent for those parties not to provide a considered response". The BoE has published a press release welcoming the final report and announcing it will convene relevant stakeholders to develop a new system for wholesale cash distribution that will support the UK in an environment of declining cash volumes. The BoE also indicates it is committed to working together with HMT, the Payments Systems Regulator (PSR) and the FCA to further understand and address, as far as possible, the concerns identified by the ACR. The FCA has also published a statement welcoming the final report. In its press release, the PSR notes the final report contains some useful information that it will use to supplement its own work.

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PSR policy statement and final EU exit instrument onshoring RTS under IFR

On 5 March, the Payment Systems Regulator (PSR) published a policy statement (PS19/1) on onshoring EU regulatory technical standards (RTS) under the Interchange Fee Regulation (IFR), to ensure they can still operate effectively if the UK leaves the EU without a withdrawal agreement or implementation period in place. The IFR will continue to apply in the UK after Brexit as it will be converted into UK law by the European Union (Withdrawal) Act 2018 (EUWA). The statutory instrument onshoring the IFR was made on 13 February. HMT has delegated powers to the PSR under the EUWA to onshore and maintain in the future Commission Delegated Regulation (EU) 2018/72, which contains RTS adopted under Article 7 of the IFR. The RTS supplement the IFR on requirements for payment card schemes and processing entities intended to ensure the application of independence requirements in terms of accounting, organisation and decision-making process. Annex 1 to PS19/1 contains the Technical Standards (Interchange Fee Regulation) (EU Exit) Instrument 2019. This instrument, which was made by the PSR board on 30 January (with approval from HMT), is the final EU exit instrument onshoring the RTS Regulation. It is unchanged from the draft version on which the PSR consulted in November 2018, as respondents raised no objections and did not suggest additional amendments. If the UK leaves the EU in a no-deal scenario, the RTS will be converted into UK law on exit day and the instrument onshoring the RTS Regulation will take effect. However, if the UK and the EU ratify a withdrawal agreement, and there is an implementation period, the instrument will not come into effect on exit day. In these circumstances, any amendments made to the RTS Regulation will take effect after the implementation period ends. The PSR will consider in due course whether it needs to amend the instrument to accommodate the outcome of negotiations on the future relationship between the UK and the EU.

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Council of EU adopts Regulation amending Regulation on cross-border payments

On 4 March, the Council of the EU published a press release announcing that it has adopted the proposed Regulation amending the Regulation on cross-border payments as regards certain charges on cross-border payments in the EU and currency conversion charges. The Council has also published the adopted text of the new Regulation. The new Regulation will enter into force on the 20th day following publication in the OJ, and the majority of its provisions will apply from 15 December.

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PRUDENTIAL REGULATION

Please refer to the Markets and Markets Infrastructure section for the BCBS report on the outcome of the February meeting.

PRA policy statement and final rules on credit risk and CRR definition of default

On 6 March, the PRA published a policy statement on credit risk and the definition of default (PS7/19). In PS7/19, the PRA provides feedback to responses to the proposals set out in its consultation paper (CP17/18). Respondents generally supported the proposals. Some respondents outlined specific concerns and requests for clarification. The specific areas where the PRA has amended or clarified the proposals as a result of responses are detailed in chapter 2 of PS7/19. The appendices to PS7/19 contain the PRA’s final policy, as follows: (i) Appendix 1: PRA Rulebook: CRR Firms: Credit Risk (Amendment) Instrument 2019 (PRA 2019/8). This instrument amends the Credit Risk Part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material for the purpose of the definition of default in the CRR. The instrument was made on 8 February and comes into force on 31 December 2020; and (ii) Appendix 2: updated version of the PRA's supervisory statement on internal ratings based (IRB) approaches (SS11/13). The annex to SS11/13 explains that the PRA has updated its expectations in chapter 11 of SS11/13 on the definition of default. The updates apply from 31 December 2020. Firms may request supervisory approval to extend the application date of the Credit Risk Part rules and updated version of SS11/13. The PRA explains this in paragraphs 2.10 to 2.15 of PS7/19. This final policy is part of the PRA's approach to implementing the EBA's work on the definition of default in the CRR. The EBA has developed a roadmap of regulatory products aimed at reducing unwarranted variability in the risk weighted assets calculated using banks' IRB models. The PRA intends to publish a further consultation on its proposed implementation of the remaining aspects of the EBA roadmap. This consultation will be published once the EBA has finalised the relevant regulatory products.

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EBA final report and guidelines on estimation of LGD under economic downturn

On 6 March, the EBA published a final report containing final guidelines specifying how institutions should quantify the estimation of loss given default (LGD) appropriate for an economic downturn (downturn LGD estimation). Starting from the relevant downturn period(s) identified in accordance with the related final draft regulatory technical standards, the final guidelines set out requirements for the appropriate quantification of the calibration target used for downturn LGD estimates. They include three types of approaches: (i) Type-1 approaches can be applied when banks have sufficient loss data for the identified downturn period. In this case, institutions are allowed some modelling flexibility, but subject to a harmonised and prescriptive impact assessment; (ii) Type-2 approaches can be applied when banks do not have sufficient loss data for the identified downturn period. In this case, institutions are given the choice between two approaches, the so-called haircut or extrapolation approaches. This will harmonise the approaches used by banks; and (iii) Type-3 approaches can be applied in rare cases, where neither type-1 nor type-2 approaches can be used. In this case, banks have to apply a minimum margin of conservatism requirement of 15 percentage points on LGD estimates. Finally, a reference value is put in place that acts as a non-binding challenger to the final downturn LGD estimation. The final guidelines will apply from 1 January 2021, at the latest. However, the EBA encourages earlier implementation. Institutions should engage with their competent authorities at an early stage to determine an adequate implementation plan, including the timeline for the supervisory assessment and approval of material model changes, where necessary. The final guidelines are an addendum to the EBA's November 2017 guidelines on the application of the internal ratings-based (IRB) approach under the CRR. These guidelines specify the requirements for the estimation of probability of default and LGD and are part of the EBA's roadmap to reduce unwarranted variability risk parameters and own funds requirements. Accordingly, publication of the final guidelines completes the plan outlined in the EBA's February 2016 report on the review of the IRB approach.

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ECB launches annual validation reporting on internal models for credit risk

On 5 March, the ECB published a letter, sent to "significant institutions", on validation reporting on internal models for credit risk. In the letter, the ECB informs institutions about the launch of the annual validation reporting on internal models used for calculating own funds requirements for credit risk. As part of its ongoing review of the regulatory compliance of the internal ratings based (IRB) approach, the ECB requires significant institutions that have permission to use the IRB approach to calculate their own funds requirements for credit risk, to provide information on their probability of default, loss given default (LGD), credit conversion factor models and the slotting approach they apply to specialised lending exposures. The ECB needs this information to enable it to assess: (i) whether the models under the IRB approach effectively capture the credit risks to which the institutions are exposed, so they can adequately calculate their own funds requirements for credit risk; and (ii) whether the institutions have robust systems in place to validate the accuracy and consistency of rating systems, processes and the estimation of all relevant risk parameters, in line with Article 185 of the CRR. To satisfy these information requirements, the ECB is launching annual validation reporting. Information from the validation exercise will play an important role in the ECB's future supervision of institutions' internal models. Among other things, it will enable the ECB to enhance prioritisation of on-site and off-site model reviews. Institutions that are already using internal models will receive individual ECB supervisory decisions requesting the information, and setting out the date when the reporting will become mandatory. Institutions that receive permission to use internal models in the future will receive their ECB decision letters in due course. Reporting instructions and templates are available on the ECB's internal models webpage. The ECB plans to launch an FAQs process to clarify any technical questions institutions may have.

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EBA consults on updating guidelines on harmonised definitions and templates for funding plans of credit institutions

On 5 March, the EBA published a consultation paper on updating its guidelines on harmonised definitions and templates for the reporting of funding plans by credit institutions. The EBA proposes updating the guidelines as a result of experience it has gained through its assessment of credit institution's funding plans in 2017 and 2018, as well as questions raised via the single rulebook tool. The draft guidelines seek to establish consistent, effective and efficient supervisory practices by harmonising templates and definitions. A draft of the updated guidelines is set out in section 4 of the consultation paper. Most of the proposed changes aim to align the definitions and breakdowns used in the guidelines with those used in Commission Implementing Regulation (EU) 680/2014 to facilitate implementation and reduce reporting burdens. The alignment will also increase comparability, and facilitate better and more automatic validations, of the data provided. Other proposed changes are designed to improve the assessment of banks' funding plans and the relevance of the data provided for these assessments. This is the case for the additional breakdown of total long-term unsecured debt securities and the new template on forecast of the statement of profit or loss. The EBA believes that the data production process for credit institutions will be made easier, and will ultimately deliver better quality data. The EBA plans to hold a public hearing to discuss the proposals in London on 26 March. Comments can be made on the proposals until 5 June (although the consultation paper itself erroneously refers to 5 March as the closing date). The EBA expects to publish the final version of the updated guidelines in the second half of this year. The original version of the guidelines will be repealed from the date the updated version takes effect. The first reporting reference date for reporting under the updated framework set out in the updated guidelines will be 31 December 2020.

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RECOVERY AND RESOLUTION

Delegated Regulation on RTS specifying criteria for assessing impact of institution's failure under BRRD published in OJ

On 4 March, Commission Delegated Regulation (EU) 2019/348 supplementing the BRRD with RTS specifying the criteria for assessing the impact of an institution's failure on financial markets, on other institutions and on funding conditions was published in the OJ. Article 4(1) of the BRRD specifies that authorities should have regard to certain criteria when assessing the potential impact of a firm's failure as part of the determination of whether simplified obligations are appropriate to that firm. Article 4(6) of the BRRD gave the EC the power to adopt a Delegated Regulation containing RTS further specifying the Article 4(1) criteria. The RTS specify that the impact of an institution's failure should be assessed, first on the basis of quantitative criteria and subsequently on the basis of qualitative criteria. The assessment based on qualitative criteria should usually only be conducted where the assessment on the basis of quantitative criteria does not lead to the conclusion that, in the light of the impact that the institution's failure could have, full obligations (rather than simplified obligations) are required. The EC adopted the Delegated Regulation in October 2018. The Delegated Regulation will enter into force on 24 March (that is, 20 days after its publication in the OJ).

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STRUCTURAL REFORM

ECB speech on steps needed to deliver true EU banking union

On 7 March, the ECB published a speech, given by Andrea Enria, ECB Supervisory Board Chair, on supervising banks under the single supervisory mechanism. Points of interest include the following: (i) the EU banking union can only be successful if it delivers an integrated, truly domestic banking market for the euro area. As yet, a highly integrated market remains a long-term goal. The EU banking sector is still fragmented as the restructuring process has taken place mainly along national lines. Also, not enough banks have exited the market. Too little consolidation has taken place and, where it has, it has been almost exclusively domestic. Excess capacity has not been reabsorbed, which contributes to the low profitability of EU banks. The ECB cannot consider the post-crisis repairs to be complete if market valuations and price-to-book ratios remain at the current depressed levels; (ii) many of the decisions needed to advance integration of EU banking markets lie outside supervisors' remit. There are important areas in which progress is falling short of what is needed. For a truly European banking sector, banking groups should be allowed to freely allocate their regulatory capital and liquidity within the euro area. However, there is a reluctance to remove existing barriers; (iii) some national policymakers fear that banks are still "national in death", and that they might have to carry the burden when a bank gets into trouble. This is why some policymakers require banks' local entities to maintain relatively high amounts of capital and liquidity. In their view, there needs to be a genuinely European safety net. Although some progress has been made with the agreement on the backstop for the single resolution fund, the debate on the other element of the common safety net, the European deposit insurance scheme, remains stuck; and (iv) the ECB has a duty to seek pragmatic solutions that promote greater integration within the existing framework. At the same time, banks may wish to consider branch structures, rather than subsidiaries, as a way to fully exploit the opportunities offered by the banking union. Mr Enria also comments on some of the ECB's priorities (including NPLs), market and funding risks and Brexit) and responds to criticism that the ECB has ventured beyond its supervisory mandate into rule-making.

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TEG asks for feedback on preliminary work on proposed EU green bond standard

On 6 March, the EC’s Technical Expert Group on Sustainable Finance (TEG) published its interim report on the proposal for an EU green bond standard. In the report, the TEG outlines the work it has carried out so far on developing an EU green bond standard. The proposed content of a draft standard is set out in Annex 1 to the report. The TEG is proposing a voluntary standard building on existing market practices, and designed to be compatible with them. The standard would rely on a strong verification and accreditation structure, and would be closely linked to the new EU-wide classification system for environmentally sustainable economic activities. Among other things, the TEG explains how the standard should be developed and implemented in the EU. It provides preliminary guidance to the EC on the proposed way forward, as well as possible legislative initiatives and amendments. The ultimate aim is to channel substantial financial investments into green activities by developing an EU label that would address barriers to development of the green bond market. Interested parties are asked to provide feedback by 3 April. In particular, they are asked to comment on key barriers to development of the green bond market, eligible use of proceeds raised, reporting and verification, and on possible incentives to help the market grow. The feedback provided will be used by the TEG in developing its final recommendations to the EC, which are due to be presented in June. The TEG's final recommendations are expected to be fed into the EC’s parallel work on a potential EU Ecolabel for green financial products. The TEG was set up by the EC in July 2018 to help with implementation of its March 2018 action plan on financing sustainable growth, which forms part of the EC’s capital markets union work. In action 2 of the action plan, the EC has committed to create standards and labels for green financial products.

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BoE confirms key elements of 2019 annual cyclical scenario for stress testing UK banking system

On 5 March, the BoE published the key elements of the 2019 annual cyclical scenario (ACS) for stress testing the UK banking system. The 2019 ACS will test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, a financial market stress and an independent stress of misconduct costs. Reflecting the assessment of the BoE's Financial Policy Committee (FPC) that the underlying vulnerabilities are broadly unchanged, the stress-test scenario is very close to that in the 2018 ACS. As such, it remains tougher than the financial crisis. The 2019 stress test will cover seven major UK banks and building societies (banks): Barclays, HSBC, Lloyds Banking Group, Nationwide, The Royal Bank of Scotland Group, Santander UK Group Holdings plc and Standard Chartered. This is the same group that participated in the 2018 stress test. The BoE has published guidance for participating banks, to help them conduct their own analysis for the 2019 stress test. In addition to banks' own analysis, BoE staff will perform analysis to independently assess the impact of the baseline and stress scenarios on banks' profitability and capital and leverage ratios. Accordingly, the final 2019 stress test results may differ from banks' own submissions. The templates used for collecting data, together with a document setting out definitions of data items, have been provided to participating banks. In addition, the BoE has published: (i) Stress testing the UK banking system: variable paths for the 2019 stress test; and (ii) Stress testing the UK banking system: traded risk scenario for the 2019 stress test. The results of the 2019 stress test will be published in the fourth quarter of 2019, together with the BoE's Financial Stability Report. Ultimately, the results will inform both system-wide policy interventions by the FPC and bank-specific supervisory actions by the PRA. The FPC and the Prudential Regulation Committee (PRC) have agreed that, from 2020, the ACS will assess the ring-fenced subgroups of existing ACS participant banks on a standalone basis.

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SUSTAINABLE FINANCE

Council of the EU and European Parliament reach political agreement on proposed Regulation on disclosures relating to sustainable investments and sustainability risks

On 7 March, the Council of the EU published a press release announcing that the Council Presidency and the EP have reached political agreement on the proposed Regulation on disclosures relating to sustainable investments and sustainability risks. The press release states that the agreed text (which has not yet been published) sets out a harmonised EU approach to the integration of sustainability risks and opportunities into institutional investors' procedures. It requires them to disclose: (i) the procedures they have in place to integrate environmental and social risks into their investment and advisory processes; (ii) the extent to which those risks might have an impact on the profitability of the investment; and (iii) where institutional investors claim to be pursuing a "green" investment strategy, information on how this strategy is implemented and the sustainability or climate impact of their products and portfolios. The Council advises that the proposed Regulation should, in practice, limit possible "greenwashing" (that is, the risk that products and services that are marketed as sustainable or climate friendly do not, in reality, meet the sustainability or climate objectives claimed to be pursued). The Council explains that the political agreement will now be submitted to EU ambassadors for endorsement, and will then undergo legal linguistic revision. The Council and the EP will be called on to adopt the proposed Regulation at first reading. According to the text of the proposed Regulation adopted by the EC, it will apply 12 months after its publication in the OJ. However, certain powers granted to the EC under the relevant financial services legislation apply from the date this Regulation enters into force.

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OTHER DEVELOPMENTS

Access to Cash Review final report

On 6 March, the Access to Cash Review (ACR) published its final report. The ACR, chaired by Natalie Ceeney CBE, was launched in July 2018 to look at the future of access to cash across the UK. In December 2018, the ACR published an interim report which considered the question of whether Britain is ready to go cashless. In the final report, the ACR explores the end-to-end cash cycle. It concludes that digital payments do not yet work for everyone and that around eight million adults (17% of the population) would struggle to cope in a cashless society. The ACR makes the following five recommendations for action to be taken now by government, regulators and the industry: (i) guarantee access to cash to ensure consumers can get cash wherever they live or work; (ii) take steps to keep cash accepted, locally and nationally.; (iii) make radical change to the wholesale cash infrastructure, moving from a commercial model to more of a "utility" approach, to keep cash sustainable for longer; (iv) make digital inclusion in payments a priority; and (v) have clear government policy on cash, supported by a joined-up regulatory approach that treats cash as a system. A related ACR press release includes a response from Nicky Morgan, House of Commons Treasury Select Committee Chair, who notes that "leaving the future of cash to be determined by market forces will not work". Ms Morgan supports the ACR's call for government, regulators and industry to respond with a plan of action and considers it would be "highly negligent for those parties not to provide a considered response". The BoE has published a press release welcoming the final report and announcing it will convene relevant stakeholders to develop a new system for wholesale cash distribution that will support the UK in an environment of declining cash volumes. The BoE also indicates it is committed to working together with HMT, the Payments Systems Regulator (PSR) and the FCA to further understand and address, as far as possible, the concerns identified by the ACR. The FCA has also published a statement welcoming the final report. In its press release, the PSR notes the final report contains some useful information that it will use to supplement its own work.

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PRA policy statement and final policy: responses to chapters 3-7 of October 2018 occasional consultation paper

On 5 March, the PRA published a policy statement (PS6/19) on responses to chapter 3-7 of its October 2018 occasional consultation paper (CP24/18). In PS6/19, the PRA sets out its feedback to the responses received and outlines its final policy decisions, as follows: (i) Chapter 3 of CP24/18: there were no responses to this chapter and, other than excluding certain proposed additional wording, the PRA is making the amendments to its statement of policy (SoP) on the PRA's approach to enforcement: statutory statements of policy and procedure, as consulted. Appendix 1 to PS6/19 contains an updated version of the SoP, which is effective from 7 March; (ii) Chapter 4 of CP24/18: responses to this chapter supported the proposed amendments to Chapter 8 of the Auditors Part of the PRA Rulebook (Auditors 8) and the PRA's supervisory statement on written reports by external auditors to the PRA (SS1/16). Appendix 2 to PS6/19 contains the Written Reports By Auditors To The PRA Instrument 2019 (PRA 2019/6), which was made on 1 March and comes into force on 7 March. Appendix 3 to PS6/19 contains an updated version of SS1/16, which is effective from 7 March. The final policy must be applied to audits related to periods ending on 31 December 2018 or later (that is, the reports due from April); (iii) Chapter 5 of CP24/18: there were no responses to the proposal to update the references to money laundering regulations in the Depositor Protection Part of the PRA Rulebook. Other than two minor amendments, the PRA is making the amendments as consulted. Appendix 4 to PS6/19 contains the PRA Rulebook: CRR Firms, Non CRR Firms, Non Authorised Persons: Depositor Protection (Miscellaneous Amendments) Instrument 2019 (PRA 2019/7) which was made on 1 March and comes into force on 7 March; (iv) Chapter 6 of PS24/18: there were no responses to the proposals to make minor corrections to the Policyholder Protection Part of the PRA Rulebook. Other than one minor amendment, the PRA is making the amendments as consulted. Appendix 5 to PS24/18 contains the PRA Rulebook: Solvency II Firms, Non-Solvency II Firms, Non-Authorised Persons: Policyholder Protection (Miscellaneous Amendments) Instrument 2019 which was made on 1 March and comes into force on 7 March; and (v) Chapter 7 of PS24/18: there were no responses to the proposals to amend the SoP on calculating the risk-based levies for the Financial Services Compensation Scheme (FSCS) deposit class, to reflect changes to, or discontinuation of, certain EBA reporting templates. It has therefore made the amendments as consulted. Appendix 7 to PS6/19 contains an updated version of the SoP (dated March), which is effective from 7 March.

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BoE financial policy summary and record of FPC meeting on 26 February

On 5 March, the BoE published the financial policy summary and record of the meeting of its Financial Policy Committee (FPC) on 26 February. At its meeting, the FPC decided that: (i) the core of the UK financial system is resilient to, and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit; (ii) most risks to UK financial stability that could arise from disruption to cross-border financial services in a no-deal Brexit have been mitigated; (iii) the core banking system is strong enough to withstand the economic shocks that would accompany a worst-case disorderly Brexit; (iv) significant market volatility is to be expected in a disorderly Brexit. However, markets have proved able to function effectively through volatile periods; (v) major UK banks can withstand severe market disruption and, as a further prudent precaution, the BoE has operations in place to lend in all major currencies; (vi) the underlying vulnerabilities in the domestic and global economies have not, on balance, changed since the FPC's November 2018 Financial Stability Report. Accordingly, the FPC is maintaining the UK countercyclical capital buffer rate at 1% in the first quarter of 2019; and (vii) these vulnerabilities are reflected in the design of the 2019 annual cyclical scenario stress test for UK banks, the details of which are set out in documents published alongside the FPSR. In addition, the FPC discussed the scenario to be used and the impact tolerance to be specified in the exploratory pilot of its approach to cyber resilience stress testing. The pilot exercise will be launched in summer 2019. Beforehand, the BoE will engage with firms to arrange appropriate and proportionate coverage of the pilot exercise. Given the sensitivities, the FPC will not disclose precise details of the test or the results from the pilot exercise. However, it expects to publish thematic insights that will determine the finalisation of its impact tolerances and the appropriate choice of scenarios in future cyber resilience stress tests. The FPC's next policy meeting will be on 5 July and the record of that meeting will be published on 11 July.

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FCA Handbook Notice 63

On 1 March, the FCA published Handbook Notice 63, which sets out changes made to the FCA Handbook under instruments made by the FCA board on 24 January and 28 February. The Handbook Notice reflects changes made to the Handbook by the following instruments: (i) Conduct of Business Sourcebook (Retirement Outcomes Review) Instrument 2019 – this instrument amends the Conduct of Business sourcebook to provide consumers with additional information before and after accessing their pension savings. The instrument comes into force on 1 November, apart from Part 2 of Annex B, which comes into force on 6 April 2020.The FCA consulted on the proposals in June 2018 in CP18/17 and provided feedback on the consultation in a policy statement (PS19/1) published in January; (ii) Fees (Devolved Authorities Debt Advice Levies) Instrument 2019 – this instrument introduces a Devolved Authorities' debt advice levy, to provide a mechanism for the FCA to collect funding for the devolved authorities. This levy, together with the Single Financial Guidance Body (SFGB) debt advice levy, will replace the Money Advice Service (MAS) debt advice levy. The instrument came into force on 1 March. The FCA consulted on this proposal in its November 2018 consultation paper on regulatory fees and levies (CP18/34). Feedback is set out in chapter 3 of Handbook Notice 63. The FCA is proceeding with the proposals consulted on. It confirms that firms will contribute to the SFGB debt advice levy and the Devolved Authorities' debt advice levy in the same way that they previously contributed to the MAS levy; and (iii) Fees (Miscellaneous Amendments) (No 13) Instrument 2019 – this instrument exempts unauthorised mutual societies from the payment of fees and removes the current charges for inspecting the mutual register. The instrument comes into force on 1 April. The FCA consulted on this proposal in CP18/34. Feedback is set out in chapter 3 of Handbook Notice 63. The FCA is proceeding with the proposals consulted on. It summarises feedback received on the costs of the mutual register, exempting community finance organisations and credit unions from consumer credit fees, and insurers' tariff data weightings.

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FCA policy development update: March 2019

On 1 March, the FCA updated its policy development update webpage, which sets out information on recent and future FCA publications. This update summarises the FCA's proposed future publications. The webpage was last updated on 1 February 2019.

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