Key Regulatory Topics: Weekly Update - 17 November 2017 – 23 November 2017

Allen & Overy LLP

Allen & Overy LLP


EBA relocation to Paris

On 21 November, the Council of the EU published a press release announcing that the ministers of EU member states other than the UK have selected Paris as the new location of the EBA. The relocation reflects the decision of the UK to leave the EU. In June, the Council published the procedure that it would follow for determining the new location of the EBA. The EC has published a press release stating that it will now prepare a legislative proposal to amend the EBA Regulation (Regulation 1093/2010) to reflect this decision.

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EC speech on future of financial services sector

On 20 November, the EC published a speech on the future of the EU given by Michel Barnier, the EU's chief Brexit negotiator. In his speech, Mr Barnier focuses on Brexit and identifies three key points to the EU building a strong partnership with the UK: (i) the EU needs to agree on the terms for the UK's orderly withdrawal; (ii) the integrity of the single market must be maintained; and (iii) there needs to be a level playing field between the EU and the UK.

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ECB speech on banks' Brexit preparation plans

On 20 November, the ECB published a speech given by Sabine Lautenschläger, ECB Executive Board Member and Supervisory Board Vice-Chair, that considers banks' preparations for Brexit. In the speech, Ms Lautenschläger repeated concerns raised by the ECB in an article published on 15 November, relating to UK banks' relocation plans concerning risk management and "dual-hatting". She also highlighted the following issues relevant to UK and EU banks: (i) settlement finality; (ii) continuity of contracts; and (iii) recovery plans.

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UK Government response to international trade committee report on UK trade options beyond 2019

On 17 November, the HoC International Trade Committee published the response of the government to its March 2017 report on UK trade options beyond 2019. In its response, the government: (i) indicates that it will seek agreement on mutual market access arrangements; (ii) states that a future dispute resolution mechanism will need to reflect the bespoke arrangement with the EU that the government is seeking; and (iii) states that it is mindful of the particular need for a smooth and orderly exit in the area of financial services.

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Please see the Markets section for an update on indirect clearing arrangements.

ESMA updates Q&As on implementation of CRA III

On 20 November, ESMA published an updated version of its Q&As on the implementation of the CRA III Regulation (Regulation 462/2013). In particular: (i) outlining the applicable rotation periods for different types of staff, lead analysts, analysts and persons approving credit ratings; (ii) setting out the circumstances in which exemptions from these rotation periods apply; (iii) explaining how the rotation periods of these types of staff should be calculated; and (iv) explaining what ESMA understands to be a person approving credit ratings.

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EU Council formally adopts Securitisation Regulation and CRR Amendment Regulation

On 20 November, the General Affairs Council formally adopted at first reading: (i) the EC proposal for a Regulation of the EP and of the Council amending Regulation (EU) 575/2013 (CRR Amendment Regulation); and (ii) the EC proposal for a Regulation of the EP and of the Council laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation (Securitisation Regulation).

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ESMA updates Q&As on EMIR implementation

On 20 November, ESMA published an updated version of its Q&As (ESMA70-1861941480-52) on the implementation of EMIR. Part III of the Q&As contains questions and answers relating to trade repositories. It has been amended as follows: (i) a new Q&A 24(b) has been added regarding buy/sell indicators; (ii) the answer to Q&A 40, which concerns updating LEIs as a result of mergers or acquisitions, has been modified to clarify that, to the extent possible, the reporting entity should provide the required information in advance so that the change is not done retrospectively but by the date on which it takes place; and (iii) the answer to Q&A 44, which concerns the validation of reports related to old outstanding trades, has been modified slightly.

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EC report on recommendations on improving corporate bonds market

On 20 November, the EC published a report setting out recommendations to improve European corporate bond markets. The report is drafted by an expert group on corporate bond markets liquidity, which was established by the EC. In total, it delivered 22 recommendations, in pursuit of six objectives, to foster the development of corporate bond markets in Europe. The recommendations will be discussed at a public hearing on 24 November. The EC will follow up on certain recommendations through a public consultation in early 2018. The EC has also published an external study on the drivers of corporate bond market liquidity.



ESMA consultation on guidelines on derivative position calculation under EMIR

On 17 November, ESMA published a consultation paper (ESMA70-151-819) on guidelines for trade repositories on derivative position calculation under EMIR. The aim of the guidelines is to ensure that trade repositories calculate positions in derivatives in a consistent and harmonised way in accordance with Article 80(4) of EMIR. They provide information on the aggregation of certain data fields and how trade repositories should calculate these before they provide the data to relevant authorities. In addition, the guidelines aim to ensure: (i) consistent position calculation across trade repositories in respect of the timing of calculations, the scope of the data used in calculations and the calculation methodologies; and (ii) that trade repositories apply a consistent methodology for calculating collateral relating to positions. The deadline for comments is 15 January 2018. ESMA will consider the feedback it receives and expects to publish final guidelines during the first half of 2018.

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ESMA updates Q&As on CSDR

On 17 November, ESMA published an updated version of its Q&As on the CSDR. In a related press release, ESMA explains that it has updated the Q&As by providing detailed answers regarding certain aspects of the following: (i) relevant authorities; (ii) conduct of business rules; (iii) protection of securities; and (iv) prudential requirements. New questions are marked as such in red.

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ESMA final reports on endorsement regime for third-country credit ratings and CRA III regulatory equivalence

On 17 November, ESMA published: (i) a final report (ESMA33-9-205) updating ESMA's guidelines on the application of the endorsement regime under Article 4(3) of the CRA Regulation. ESMA consulted on the guidelines in April. The final report sets out a number of changes and clarifications to the existing guidelines that focus on the obligations of the endorsing CRA, the conduct of the third-country CRA, and the third-country legal and supervisory framework. It also clarifies ESMA's supervisory powers over endorsed credit ratings and the notion of objective reasons. The guidelines will be translated into the official EU languages and published on the ESMA website. They will take effect on 1 January 2019. Annex III to the report contains a list of requirements in the CRA Regulation that are currently met by one or more third-country CRAs in a way that is different from how an endorsing CRA of the same group meets them. ESMA intends to provide guidance on the requirements listed in Annex III in the first half of 2018 to leave CRAs with sufficient time to take them into account in advance of the 1 January 2019 deadline; and (ii) a final report (ESMA33-9-207) setting out ESMA's technical advice on CRA regulatory equivalence. The CRA III Regulation (Regulation 462/2013) (which amends the CRA Regulation) will enter into force on 1 June 2018 for the purposes of endorsement and equivalence. The advice to the EC re-assesses the legal and supervisory framework of the nine jurisdictions (Argentina, Australia, Brazil, Canada, Hong Kong, Japan, Mexico, Singapore and the United States), which until now have been eligible for equivalence and endorsement, in the light of CRA III.

Report on guidelines

Report on technical advice on equivalence


Joint Committee of ESAs updates Q&As on PRIIPs KID

On 20 November, the Joint Committee of ESAs published an updated version of its Q&As (JC 2017 49) on the KID requirements for PRIIPs, as laid down in Delegated Regulation (EU) 2017/653. The updated Q&A includes new Q&As on: (i) whether a KID is always required when an investment product is listed on a regulated market; (ii) the definitions of the terms "biometric risk premium" and "insurance premium"; (iii) how credit-linked notes should be treated under the Delegated Regulation; (iv) how the number of trading periods to use should be calculated under Point 9 of Annex IV of the Delegated Regulation; (v) how the term "rolling" in Point 10(c) of Annex IV should be applied; (vi) whether it is possible to alter the prescribed wording in the KID template for OTC derivatives; and (vii) how the information on the underlying options of a MOP should be provided; and (viii) how information on costs should be reflected in the generic KID under Article 10(b) of the Delegated Regulation.

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ESMA updates Q&As on MAR

On 21 November ESMA published a further version of its Q&As on MAR. ESMA has added two new questions and answers on: (i) trading during closed periods and prohibition of insider dealing; and (ii) types of transactions by PDMRs prohibited during closed periods.

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JMLSG consultation on further revisions to its AML and CTF guidance

On 17 November, the JMLSG published, for consultation, further proposed revisions to its AML and CTF guidance for the financial services sector. It published: (i) a revised version (dated 15 November) of Part I of the guidance. This Part contains guidance for all financial services firms; (ii) a revised version (dated 15 November) of Part II of the guidance. This Part consists of industry-specific chapters dealing with particular issues faced by a range of sub-sectors of the financial services sector; and (iii) a revised version (dated 15 November) of Part III of the guidance. This Part sets out specialist guidance on a number of topics. The deadline for comments is 4 December.

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IOSCO final report on good practices for termination of investment funds

On 23 November 2017, the IOSCO published its final report (FR23/2017) setting out good practices for the termination of investment funds. In the report, IOSCO highlights the importance for investment funds of adopting termination procedures that take into account investor protection issues. Particularly since the decision to terminate an investment fund can have a significant impact on investors, including their ability to withdraw their funds in a timely manner. The report sets out 14 good practices categorised under: (i) disclosure at time of investment; (ii) decision to terminate; (iii) decision to merge; (iv) during the termination process; and (v) specific types of investment funds.

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ESMA final report on technical advice on MMF Regulation

On 17 November, ESMA published a final report (dated 13 November) (ESMA34-49-103) on its technical advice, ITS and guidelines under the MMF Regulation. The final versions of the technical advice, ITS and guidelines are set out in Annex III to the report. Section 2 of the report summarises the feedback received and explains how ESMA has taken it into account. The technical advice and ITS have been submitted to the EC (in the case of the ITS, for endorsement).

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Solvency II – EIOPA paper on basis for common supervisory culture

On 22 November, EIOPA published a paper describing the basis of a common European supervisory culture. One of EIOPA's key priorities is to further enhance supervisory convergence with a view to moving towards a common European supervisory culture. The paper discusses the main objectives of supervision and key characteristics of high-quality and effective supervision, governance of the supervisory review process, and the basic tools that should be available to any NCA.

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Solvency II – EIOPA speech on regulatory and supervisory priorities for 2018

On 22 November, Gabriel Bernardino, EIOPA Chair, gave a speech at EIOPA's seventh annual conference. In the speech, Mr Bernardino considers EIOPA's work on a number of ongoing regulatory and supervisory issues. In particular he focussed on: (i) the Solvency II review; (ii) PEPP; (iii) supervisory convergence; (iv) insurTech; and (v) insurance guarantee schemes.

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FSB statement on list of G-SIIs for 2017

On 21 November, the FSB published a statement announcing that it was not updating its list of G-SIIs for 2017. The list was last updated in November 2016. The FSB states that the G-SIIs identified in November 2016 will remain subject to the internationally agreed standards set out in the November 2016 list, although the implementation of HLA requirements will be subject to the revised timetable of the IAIS. The FSB notes that the activities-based approach to addressing systemic risk being developed by the IAIS may have implications for the identification of G-SIIs and for G-SII policy measures. It will review the situation in November 2018 based on the progress made by the IAIS in developing the activities-based approach at that time.

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MiFID II and EMIR – EC Delegated Regulations on indirect clearing arrangements published in OJ

On 21 November, the following were published in the OJ: (i) EC Delegated Regulation ((EU) 2017/2154), which supplements MiFIR with regard to RTS on indirect clearing arrangements; and (ii) EC Delegated Regulation ((EU) 2017/2155), which amends Delegated Regulation (EU) 149/2013 with regard to RTS on indirect clearing arrangements. The RTS in this Delegated Regulation reflects a mandate under Article 4(4) of EMIR. The Delegated Regulations will enter into force on 11 December (that is, the twentieth day after their publication in the OJ). They apply from 3 January 2018, which is the date that the MiFID II, along with MiFIR, will repeal and recast MiFID (2004/39/EC).

Delegated Regulation 2017/2154

Delegated Regulation 2017/2155

MiFIR – EC adopts Delegated Regulation relating to trading obligation for derivatives

On 17 November, the EC adopted a Delegated Regulation (C(2017) 7684 final) supplementing the MiFIR with regard to RTS on the trading obligation for certain derivatives. The next step is for the Council of the EU and the EP to consider the Delegated Regulation. If neither of them objects, it will enter into force on the day following its publication in the OJ.

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EC report on SEPA Migration Regulation

On 23 November, the EC published a report (COM(2017) 683 final) to the EP and the Council of the EU on the application of the SEPA Migration Regulation. The Commission concludes that, overall, the SEPA Migration Regulation is correctly applied across the EU, and there is currently no need for a follow-up legislative proposal. The very few issues (such as IBAN discrimination and competent authorities competences) that persist have been addressed by member states and their resolution should be closely monitored. The main issue to be closely observed is IBAN discrimination by payees.

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FCA speech on regulatory priorities for retail banking

On 23 November, the FCA published a speech by Karina McTeague, Director of Retail Banking Supervision, on the FCA's regulatory priorities for retail banking. Points of interest include: (i) the FCA recognises that although PSD2 comes into effect in January 2018, it seems unlikely that the RTS that prescribe the safety and security requirements for PSD2 will be in place before mid-2019. In the meantime, the FCA expects all firms to have in place policies and procedures to monitor, identify and prevent fraud to keep their customers' data safe and secure. The FCA will be reviewing the fraud reports submitted by firms to determine the effectiveness of their fraud detection and prevention capabilities; (ii) the FCA is bolstering its payments capacity and capability in response to the major changes in retail banking regulation; and (iii) it is extending its programme of proactive engagement with existing payment services institutions, as well as preparing to supervise the newly regulated AISPs and PISPs. As part of this proactive supervision, the FCA will be looking to see that firms have implemented: (a) a culture that prioritises treating customers fairly; (b) systems and controls for effectively managing financial risks; and (c) systems and controls to combat the risk of financial crime and money laundering.

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EC speech on timetable for payment reforms

On 21 November, the EC published a speech given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and CMU. In the speech, Mr Dombrovskis provides an overview of the timings of pending EC initiatives relating to: (i) cross-border payment fees. The EC intends to propose new rules early in 2018 relating to cross-border payment fees covering, in particular, non-euro countries; (ii) PSD2 RTS. The EC will shortly present standards on the implementation of the revised PSD2. These standards will, among other things, make two-factor authentication the norm for payments above a certain threshold. This presumably refers to the adoption of RTS on strong customer authentication (SCA) and common and secure communication.

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EPC announces launch of SEPA instant credit transfer scheme

On 21 November, the EPC published a press release announcing that its SEPA instant credit transfer (SCT Inst) scheme is operational. The transactions covered by the scheme must be denominated in euros. The scheme currently involves nearly 600 PSPs (that is, approximately 15% of European PSPs) from eight European countries. More PSPs are expected to join the scheme in 2018 and 2019. The EPC has also published accompanying Q&A, together with a document providing further information on the scheme. The EPC intends to consult in 2018 on the proposed evolution of the scheme. In particular, in November 2018, it will review the maximum transaction amount.

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Updated EPC SEPA guidelines and clarifying papers for rulebooks

On 20 November, the EPC published the following documents relating to the SEPA: (i) a clarification paper (EPC131-17) on SEPA credit transfer (SCT) and SEPA Inst rulebooks; (ii) a clarification paper (EPC132-17) on SEPA direct debit core and SEPA DD B2B rulebooks; (iii) updated guidance (EPC173-14) (version 4.0) on reason codes for SEPA DD rulebook transactions; (iv) updated guidance (EPC 262-08) (version 5.0) on CIs. The objective of the document is to provide basic information to allow creditor banks to check on the validity of CIs by providing information on CI characteristics per SEPA country; (v) updated SEPA scheme management internal rules (EPC207-14) (version 4.1); and (vi) updated guidelines (EPC 392-08) (version 3.0) on the appearance of mandates for the SEPA DD core and DD B2B schemes.

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Please see the Capital Markets and Market Infrastructure section for an update on CRR Amendment Regulation.

EC legislative proposals – HoC first report on CRR II, CRD V and BRRD II

On 21 November, the HoC European Scrutiny Committee published its first report of the 2017-19 parliamentary session. In the report, the committee considers the legislative proposals adopted in November 2016 by the EC. These relate to: amendments to the CRR: the CRD IV; and revisions to the BRRD and the implementation in the EU of the FSB TLAC standard. The report sets out information provided to the committee by the Economic Secretary to HMT on the progress of the proposals, including the current status of individual measures within the reform package. In particular, it notes that there is no consensus yet in the Council of the EU on the proposal to require some large third-country banks with independently-authorised subsidiaries in the EU to establish an additional, fully-capitalised intermediate holding company in the EU. It states that the Presidency of the Council is aiming for the adoption of a Council general approach by the end of 2017, with trialogues with the EP likely to commence in 2018. However, the formal adoption of the legislative proposals is unlikely until early 2019. The committee will also seek clarification on the impact of Brexit on these proposals.

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EBA third report on convergence of supervisory practices

On 21 November, the EBA published a report of its findings on the convergence of supervisory practices and its activities in promoting convergence in supervision (EBA-Op-2017-14). It tracks progress made by competent authorities since the 2016 assessment, considering ongoing policy development work and reflecting previous observations and recommendations made by EBA staff to competent authorities. In the report, the EBA highlights that progress has been made in achieving convergence (for example good progress has been made on the SREP guidelines) but states that challenges remain, primarily in the areas of methodologies for the capital adequacy assessments and determining institution-specific additional own funds requirements. In chapter 6 of the report, the EBA summarises its recent policy work on supervisory convergence as well as its ongoing activities for the rest of 2017 and for 2018. These include: (i) revisions to existing guidelines relating to SREP and Pillar 2; and (ii) supervisory assessment of internal models.

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EBA final guidelines and report on application of IRB approach

On 20 November, the EBA published its final guidelines (EBA/GL/2017/16) on the application of the IRB approach under the CRR. The guidelines specify the requirements for the estimation of probability of default (PD) and loss given default (LGD), including LGD for defaulted exposures (LGD in-default) and best estimate of expected loss (ELBE). They focus on the definitions and modelling techniques used in the estimation of risk parameters for both non-defaulted and defaulted exposures. The EBA considers that the clarification in the guidelines is needed to achieve comparability of risk parameters estimated on the basis of internal models and to restore trust in these models by market participants. The EBA states that the guidelines will apply from 1 January 2021 at the latest, but it encourages earlier implementation. It advises institutions to 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 guidelines are complemented by a report on the results of the EBA qualitative survey carried out across the EU banks using the IRB approach.

Final guidelines


FSB updates list of G-SIBs for 2017

On 21 November, the FSB published a 2017 update of its list of banks identified by it and the BCBS as G-SIBs. Royal Bank of Canada has been added to the list and Groupe BPCE has been removed. Two banks have moved to a higher bucket (Bank of China and China Construction Bank) and three banks have moved to a lower bucket (Citigroup, BNP Paribas and Credit Suisse). The assignment of G-SIBs to the buckets in the list determines the higher capital buffer requirements that will apply to each G-SIB from 1 January 2019. The FSB will next update the list of G-SIBs in November 2018.

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EBA confirms methodology and templates for 2018 stress test

On 17 November, the EBA published the final methodology for its 2018 EU-wide stress test. The aim of the methodology is to provide banks with adequate guidance and support for performing the EU-wide stress test. It does not cover the quality assurance process or possible supervisory measures that should be put in place following the outcome of the stress test. The methodology covers all relevant risk areas and, for the first time, incorporates IFRS 9 accounting standards. The stress test exercise will be formally launched in January 2018 and the results will be published by 2 November 2018.

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Please see the Prudential Regulation section for an update on the HoC's first report on BRRD II.


PRA new webpage on serving written statements on adverse impact of RFTS

On 17 November, the PRA published a new webpage setting out information on how to serve it with copies of written statements relating to a bank's ring-fencing transfer scheme (RFTS). Persons alleging that they would be adversely affected by the carrying out of an RFTS are entitled to be heard by the court if, before the final hearing, they file (or lodge in Scotland) their written statement with the court and serve copies on the PRA and the firm whose business is to be transferred. This is set out in section 110(5) of the FSMA. Written statements can be served on the PRA by email, by post or by hand.

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FCA reports on review of compliance function in wholesale banks

On 23 November, the FCA published a report on the compliance function in wholesale banks. The FCA sent a questionnaire to 22 wholesale banks in January to gather information about their compliance function. The questionnaire contained 27 questions about the compliance function covering: (i) role and structure; (ii) strategy and planning; (iii) compliance monitoring; (iv) technology; (v) support and challenge; and (vi) personnel. The report sets out key themes and issues arising from the firms' responses, together with some of the FCA's own observations. The FCA is not asking individual firms to take any specific action as a result of its review, but suggests that firms and heads of compliance may find the report helpful in developing their departments.

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Autumn 2017 Budget – key financial services measures

On 22 November, Philip Hammond, Chancellor of the Exchequer, delivered the November Budget. The government re-iterated its commitment to supporting competition in banking. It sets out initiatives designed to enable innovation in banking services, strengthen challenger banks, and improve access to affordable credit for consumers. These include: (i) credit unions; (ii) open banking; and (iii) challenger banks.

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FCA guide to completing applications to cancel firm's authorisation under FSMA

On 17 November, the FCA published a guide to completing the application process to cancel a firm's authorisation under Part 4A of FSMA. The guide is designed to assist firms to complete an application to cancel all permissions and cease regulatory activity. The FCA states that the guide is not a checklist of what firms have to do and advises firms to check the sections of the Handbook that are relevant to their business model before completing the cancellation form. When cancelling authorisation, matters firms must consider include: (i) whether the firm's fees are paid up-to-date; (ii) whether there are any unresolved or outstanding complaints against the firm; (iii) the reason(s) for cancellation; and (iv) ensuring that client money is dealt with.

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FCA speech on cyber resilience and supplier risk

On 17 November, the FCA published a speech (given on 15 November) by Nausicaa Delfas, FCA Chief Operating Officer, on cyber resilience and supplier risk. Among other things, Ms Delfas refers to the issue of firms needing to manage the risks of harm posed from suppliers and partners. She goes on to outline some innovations that the FCA is seeing in the marketplace that can help firms develop their strategies for tackling the problem. These include: (i) firms creating initiatives that prioritise and audit their key suppliers; (ii) intermediaries performing assessments to a commonly accepted standard within the financial sector; and (iii) the growth of tools that automatically evaluate and measure the cyber security indicators of firms on the internet.

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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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