BREXIT
Please refer to the Insurance section for an update on LMA model clauses on Brexit and placing of risks after 1 January 2019.
Please refer to the Other Developments section for an update regarding the FCA Chair speech on cycle of deregulation, crisis and regulation.
ESMA speech on MiFID II implementation and Brexit
On 3 October, ESMA published a speech given by Stephen Maijoor, ESMA Chair, on the state of implementation of MiFID II and preparing for Brexit. Points raised in the speech on Brexit include: (i) Mr Maijoor calls for a harmonised EU regime for third-country trading venues under MiFID II and sets out the key elements that he considers should form part of that regime; (ii) ESMA is working to identify the effects on the markets of a no-deal Brexit arising from the impact of MiFID II calculations performed at the EU level, such as the DVC. It is also working to find the most efficient way to limit the impact for EU financial markets; (iii) Mr Maijoor calls for measures to ensure continued access to UK CCPs for EU clearing members and trading venues. He believes that this continued access would be in line with the proposed Regulation amending the EMIR supervisory regime for EU and third-country CCPs. He supports a swift conclusion to the legislative process for this Regulation, complemented by a transitional period allowing for continued access to UK-based CCPs, subject to conditions ensuring that UK CCPs continue to comply with EMIR requirements and colleges continue to monitor this compliance; and (iv) ESMA is co-ordinating preparations for MOUs between EU NCAs, as well as ESMA, and their UK counterparts necessary if there is a no-deal Brexit. ESMA plans to start negotiations with the FCA to finalise these MoUs before the end of March 2019. On MiFID II, Mr Maijoor states that ESMA intends to publish a call for evidence in the coming months on the potential use of periodic auction systems to circumvent the DVC regime. He also notes that ESMA may propose adjustments to the scope of classes of derivatives subject to the MiFID II trading obligation.
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Consumer Credit (Amendment) (EU Exit) Regulations 2018 made
On 2 October, the Consumer Credit (Amendment) (EU Exit) Regulations 2018 were published on legislation.gov.uk, together with an explanatory memorandum. The purpose of the Regulations is to address deficiencies relating to consumer credit legislation arising from the UK's withdrawal from the EU. They make only minor and technical amendments and will have no substantive impact on the operation of the consumer credit regime. In particular, they amend references in the CCA, the Consumer Credit (Disclosure of Information) Regulations 2010, the Consumer Credit (Green Deal) Regulations 2012 and the Financial Services Act 2012 (Consumer Credit) Order 2013. The Regulations were laid before Parliament on 28 September and come into force on exit day. A draft of the Regulations was published in July.
Consumer Credit (Amendment) (EU Exit) Regulations 2018 (SI 2018/1038)
Explanatory Memorandum
Friendly Societies (Amendment) (EU Exit) Regulations 2018 made
On 2 October, the Friendly Societies (Amendment) (EU Exit) Regulations 2018 were published on legislation.gov.uk, together with an explanatory memorandum. The Regulations amend the Friendly Societies Act 1992 and the Friendly Societies (Accounts and Related Provisions) Regulations 1994 to address failures of retained EU law to operate effectively, and other deficiencies arising from the UK's withdrawal from the EU. The Regulations were laid before Parliament on 28 September and come into force on exit day. A draft of the Regulations was published in July.
Friendly Societies (Amendment) (EU Exit) Regulations 2018 (SI 2018/1039)
Explanatory Memorandum
CAPITAL MARKETS
AFME guidance on FCA rules relating to analysts' participation in pitches
On 3 October, AFME published a guidance note relating to financial analysts' interactions with representatives of private companies and their financial advisers. The guidance relates to the FCA's explanation of the meaning of "participating in pitches for new business" in chapter 12.2 of COBS (COBS 12.2.21AG). COBS 12.2.21EU provides (among other things) that financial analysts should not engage in activities other than the preparation of investment research where engaging in such activities would be inconsistent with the maintenance of that person's objectivity. Activities that would be inconsistent with the maintenance of an analyst's objectivity include participating in "pitches" for new business or "road shows" for new issues of financial instruments; or being otherwise involved in the preparation of issuer marketing. AFME advises that the guidance should be read in conjunction with Q&A on IPO reform (dated 6 August) that it has produced after discussions with the FCA in relation to COBS 12.2.21AG.
Guidance Note
Q&A on IPO reform
CONSUMER/RETAIL
Please see the Markets and Markets Infrastructure section for an update regarding restrictions on CFDs.
CMA / FCA joint report on lessons learned about consumer facing remedies
On 1 October, the CMA published a paper prepared jointly with the FCA that sets out the lessons that have been learned from the programme of work conducted by the UK Competition Network to examine remedies in consumer markets. The paper provides an overview of the ways in which demand-side problems can lead to poor consumer outcomes in markets and discusses types of remedies that can be, and have been used, to try to address these issues and improve competition in consumer markets. The paper also highlights the importance of testing remedies whilst they are being designed and examines different methods for doing so. Finally, the paper sets out some high-level principles relating to the development of remedies (understanding the problem, being bold, letting consumers stay in control, leveraging the experience and resources of the private sector, testing, recognising that good analysis is not enough, and reviewing effectiveness). It also notes that the focus of future work in this area will be consumer diversity and vulnerability, and the opportunities and challenges presented by the digital economy. The FCA has also published a speech by Christopher Woolard, FCA Executive Director of Strategy and Competition, which discusses the FCA's approach to testing its market interventions. Mr Woolard also highlights the importance of collaboration in the design of competition remedies, as identified by the CMA/FCA joint paper.
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ESAs highlight concerns about KID requirements for PRIIPs
On 1 October, the ESAs published a letter to the EC about KIDs for PRIIPs. The ESAs explain that an approach where retail investors receive both a PRIIPs KID and a key information document under the UCITS KIID is unsatisfactory. Overlapping disclosure documents may deter investors from using them rather than facilitating informed decision making. The ESAs are also unconvinced that UCITS KIID information can be effectively articulated together with PRIIPs KID information. These documents may not provide consistent information due to technical difficulties in the methodologies used in the presentation of risks, performance and costs. For example, the PRIIPs summary risk indicator and the UCITS synthetic risk reward indicator will result in different risk indicators for a material number of PRIIPs. The ESAs suggest other solutions are needed, including legislative changes, to avoid a situation where there are duplicate information requirements from 1 January 2020. The ESAs intend to launch a public consultation in Q4 as part of a review of Commission Delegated Regulation (EU) 2017/653. Among other things, the ESAs expect to examine performance scenarios and aim to submit proposed amendments to the EC in Q1 2019.
ESAs letter to EC
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CMA receives super-complaint from Citizens Advice on excessive prices for disengaged consumers
On 28 September, the CMA announced that it has received a super-complaint from Citizens Advice asking it to investigate excessive prices for disengaged consumers. Citizens Advice has raised concerns about long term, loyal and disengaged customers paying more for goods and services, which it refers to as "the loyalty penalty". It has identified five key markets where it has concerns about the loyalty penalty, covering telecoms and financial services (mobile, broadband, savings accounts, mortgages and household insurance). Citizens Advice wants the CMA to undertake a thorough, cross-sectoral market study to consider the loyalty penalty wherever it occurs and propose recommendations and remedies that can be implemented by the CMA, sector regulators and the Government. The CMA now has 90 days to respond to the super-complaint and to identify what, if any, further action it proposes to take. The CMA has invited interested parties to provide any evidence which may be useful to its assessment by 14 October. The CMA states that it will be engaging with Ofcom and the FCA in considering the super-complaint. The FCA has stated that it has long been concerned by the issues identified by Citizens Advice and that it will work closely with the CMA. The FCA has also announced that it is intending to launch a market study looking at how general insurance firms charge their customers for home and motor insurance. At the same time, the Department for BEIS has announced the launch of a Smart Data Review to accelerate the development and use of new data-driven technologies and services to improve the consumer experience in regulated markets. The Review is intended to make it easier for consumers to get good deals on essential services and put an end to consumers paying unjustifiable loyalty penalties. The Review will report in the first half of 2019.
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FINANCIAL CRIME
Please see our bulletin regarding the SFO's ability to request overseas documents from non-UK companies.
FCA thematic review on money laundering and terrorist financing risks in e-money sector
On 3 October, the FCA published a report on its thematic review on money laundering and terrorist financing risks in the e-money sector. The FCA visited 13 EMIs, a mixture of authorised EMIs and registered small EMIs, to assess their AML and CTF controls. In particular, the FCA was concerned that EMIs' use of agents and distributors to distribute e-money might increase money laundering and terrorist financing risks. The FCA tested firms against the obligations set out in the MLRs 2017. The report sets out details of the FCA's expectations and findings, together with examples of good and poor practice, in areas including governance, culture and management information, CDD and EDD and outsourcing. The FCA did not find any cases at the EMIs where it needed to use formal supervisory tools to remediate issues. It found that the majority of EMIs visited had: (i) effective AML systems and controls, a positive culture and a low financial risk appetite; (ii) revised their policies and procedure to comply with the MLRs 2017; and (iii) carried out effective transaction monitoring, largely based on automated technological solutions. In addition, the FCA found that most EMIs with outsourced distribution of e-money and compliance to PMs had adequate governance and audit measures to manage the risk. The FCA encourages EMIs to review the report, including the examples of good and poor practice, and consider whether their AML and CTF systems and controls could be improved.
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NCA successfully resists challenge to UWO
On 3 October, in the judgment of National Crime Agency v A [2018] EWHC 2534 (Admin), there is an examination of the first successfully obtained UWOs. The court rejected a number of challenges against an UWO, including the recipient's status as a PEP and income requirements. This is a comforting decision for prosecuting authorities.
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MAR: ESMA updated Q&A
On 1 October, ESMA published an updated version of its Q&A on the Market Abuse Regulation. ESMA has added three new questions and answers relating to the delay of disclosure of inside information by a credit or financial institution to preserve financial stability under Article 17(5): (i) where a credit/financial institution, as issuer, intends to resort to the financial stability delay, it should provide evidence to the NCA that the conditions under Article 17(5) are met. Assessment of the conditions should be as complete as possible to the best of its knowledge. Where the NCA consents to the delay further to its own assessment, the issuer must share subsequent relevant information. Disclosure must entail a risk of undermining the financial stability of both the issuer and financial system. For disclosure to entail a risk of undermining the stability of the financial system, it will likely pertain to and be performed by an institution of relevance, in terms of impact and interconnection. When assessing whether the delay is in the public interest, the issuer should identify potentially affected entities and groups whose interests may be understood as public interest. It should consider direct economic and other non-financial interests of the public in the round. The issuer should assess divergent public interests on a case-by-case basis and weigh these against each other. The issuer should also provide information on how confidentiality can be ensured (both at notification and during any delay period). This should include the procedures and measures in place. Insider lists should be drawn up pending the NCA's decision as the information is already delayed; (ii) the credit/financial institution notifying the NCA of its intention to resort to the financial stability delay should provide its assessment on the expected length of the delay and details of expected trigger events. Likewise, if the NCA consents to the delay further to its own assessment, the issuer should update the NCA when it becomes aware of new elements or events that may affect the duration of the delay; (iii) where the conditions under Article 17(5) are not met and the NCA does not consent to the delay, the credit/financial institution must disclose the inside information immediately as provided in Article 17(6). It cannot resort to the delay of disclosure under Article 17(4).
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FUND REGULATION
Please see the Markets and Markets Infrastructure section for an update on stress testing rules for money market funds.
Please see the Consumer/Retail section for an update on UCITS KIID and ESAs concerns about KID requirements for PRIIPs.
Please refer to the Prudential Regulation section for an update regarding the ECON report on revised EU prudential frameworks for investment firms.
ESMA updates Q&As on application of AIFMD
On 4 October, ESMA published a press release announcing that it had updated its Q&As on the application of the AIFMD. ESMA has added a new Q&A clarifying the application of the AIFMD notification requirements to AIFMs managing umbrella AIFs on a cross-border basis. ESMA last updated the AIFMD Q&As in July.
Press Release
Q&As
Council of EU non-objection to Delegated Regulations on depositaries' safe-keeping obligations under AIFMD and UCITS IV
On 2 October, the Council of the EU published the minutes of a meeting held in its configuration as ECOFIN. In the minutes, the Council confirms that it has decided not to object to: (i) the EC Delegated Regulation amending Commission Delegated Regulation (EU) 231/2013 as regards safe-keeping duties of depositaries, which supplements AIFMD; and (ii) the EC Delegated Regulation amending Commission Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries, which supplements UCITS IV. The EC adopted the amending Delegated Regulations in July. The next step is for the EP to consider the amending Delegated Regulations and decide whether to object to them. If the Parliament does not object, the amending Delegated Regulations will be published in the OJ. They will enter into force 20 days after their publication in the OJ and apply 18 months from that date.
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ECON revised draft report on proposed Directive on cross-border distribution of collective investment funds
On 2 October, ECON published a draft report on the proposal for a Directive on the cross-border distribution of collective investment funds. The draft report, which has been produced by rapporteur Wolf Klinz, is a revised version of the draft report on the proposed Directive published in September. ECON has not indicated what amendments have been made to the first version of the report. The EC adopted the proposed Directive, together with the proposed Regulation on facilitating cross-border distribution of collective investment funds in March.
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ESMA consults on stress testing rules for money market funds
On 28 September, ESMA published a consultation paper on draft guidelines on stress test scenarios under the MMF Regulation. Under the MMF Regulation, MMF managers are required to conduct regular stress tests as part of their risk management and regulatory disclosure. MMFs must put in place sound stress testing processes, including identifying stress events, or future changes in economic conditions, and assess the impacts these different scenarios may have on the MMF. The guidelines are developed under Article 28 of the MMF Regulation. The consultation paper proposes common parameters and scenarios that consider hypothetical risk factors. These include the following: (i) liquidity changes of the assets held in the portfolio of the MMF; (ii) credit risk, including credit events and rating events; and (iii) changes in interest and exchange rates. Official translations of ESMA's 2017 guidelines were published in March. The final report on the guidelines published in November 2017. These will be updated following the consultation so that managers of MMFs have the information needed to fill-in the required fields in the reporting template. The guidelines need to be updated at least every year to take into account the latest market developments. Stakeholder's views are especially sought on the methodology, including the methodology itself, risks factors, data and the calculation of the impact. Although the calibration of the stress test scenarios is not part of the consultation, any input from stakeholders on the way to calibrate the scenarios is welcome. Comments can be made on the consultation until 1 December. ESMA intends to finalise the guidelines in Q1 2019.
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INSURANCE
Please see the Consumer/Retail section for an update on ESAs concerns about KID requirements for PRIIPs.
LMA model clauses on Brexit and placing of risks after 1 January 2019
On 2 October, LMA published a bulletin with links to model clauses relating to Brexit and the placing of EEA and non-EEA risks after 1 January 2019. The model clauses relate to the following issues: (i) the consequences for contracts of the decision to establish a new Lloyd's insurance company based in Brussels to underwrite non-life insurance and facultative reinsurance risks located in EEA countries with effect from 1 January 2019; (ii) the clarification for policies affected by Brexit that any automatic coverages provided by the terms and conditions of the policy for entities acquired or established by the insured should not apply, to the extent that, after Brexit, the insurer is not permitted by applicable law or regulation to provide this coverage; and (iii) the clarification of the treatment of the reinsurance of Lloyd's Brussels business (that is, underwritten on behalf of Lloyd's Brussels, on or after 1 January 2019, and simultaneously reinsured back to a syndicate) that is ceded by the syndicate. The LMA states that these clauses are purely illustrative and established and distributed for the guidance of Lloyd's members, who are free to agree to different conditions.
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New EIOPA webpage to help identify registered insurance intermediaries
On 28 September, EIOPA published a new webpage to help establish whether an insurance intermediary is registered. Under the IDD, insurance intermediaries must be registered. Article 3(4) of the IDD requires EIOPA to establish, and keep up-to-date, a single electronic register containing records of insurance, reinsurance and ancillary insurance intermediaries that have notified their intention to carry on cross-border business. The webpage provides a provisional database of hyperlinks to national registers, or single information points, and is published in accordance with Article 3(4) of the IDD. EIOPA is currently assessing the most adequate long-term approach towards an online register. The implementation deadline for the IDD was 1 October.
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FCA launches market study into how firms charge customers for home and motor insurance
On 28 September, the FCA published a statement on the super-complaint from Citizens Advice to the CMA on excessive prices for disengaged consumers. The FCA welcomes the super-complaint as it has been concerned about the issue of long-standing customers being charged more for some financial products than new customers for some time. In addition, the FCA has announced the launch of a market study into how general insurance firms charge their customers for home and motor insurance. The terms of reference for the market study will be published in a few weeks' time. The FCA previously referred to looking at the pricing practices of general insurance firms in its 2018/2019 business plan.
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MARKETS AND MARKETS INFRASTRUCTURE
Please refer to the Other Developments section for an update on ESMA's work programme for 2019.
Please refer to the Prudential Regulation section for an update regarding the ECON report on revised EU prudential frameworks for investment firms, which propose to amend equivalence provisions of MiFIR.
Please refer to the Brexit section for ESMA's speech on MiFID II implementation and Brexit.
ESMA updates MiFID II Q&As on transparency and market structures
On 4 October, ESMA published: (i) an updated version of its Q&As on transparency topics under MiFID II and MiFIR. Two new questions have been added to section 4 (non-equity transparency); and (ii) an updated version of its Q&As on market structures topics under the MiFID II and MiFIR. Three new Q&As have been added to section 3 (DEA and algorithmic trading), and three Q&As have been added to section 5 (Multilateral and bilateral systems). ESMA last updated the Q&As on market structures in May and last updated its Q&As on transparency topics in July.
Q&As on transparency topics
Q&As on market structures topics
ESMA updates MiFID II Q&As on investor protection and intermediaries topics
On 3 October, ESMA published an updated version of its Q&As on investor protection and intermediaries topics under MiFID II and MiFIR. ESMA has added new Q&As or updated existing Q&As relating to the following topics: (i) best execution; and (ii) investment advice on an independent basis. ESMA previously updated the Q&As in July.
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ESMA withdraws MiFID guidelines on systems and controls for highly automated trading
On 3 October, ESMA published a decision of its board of supervisors (dated 26 September) announcing the withdrawal of its guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities. The guidelines, which were finalised in December 2011, were intended to provide clarity for trading platforms and investment firms about the expectations of competent authorities concerning organisational requirements in a highly-automated trading environment under MiFID. ESMA has decided to withdraw the guidelines on the grounds that the clarifications set out in the guidelines have been incorporated in MiFID II and MAR.
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ECON draft report on Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks
On 2 October, ECON published its draft report (dated 27 September) on the proposed Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks. The draft report, which was prepared by Rapporteur Neena Gill, contains the proposed text of a EP legislative resolution which sets out suggested amendments to the Regulation. The explanatory memorandum to the report highlights the key proposed amendments, including: (i) the EC is mandated to adopt a delegated act setting out the methodology for measuring the social and governance impact of financial benchmarks; (ii) the EC is mandated to adopt a delegated act on a standardised methodology intended to ensure that by 2022 all the benchmarks provided and published by benchmarks providers are aligned with the Paris Agreement commitments; (iii) benchmark providers must be required to describe precisely in a standardised way in all benchmark statements what the climate impact is of the benchmarks used and how these are to be aligned with the Paris Agreement commitments; and (iv) the EC is mandated to adopt a delegated act, which should be based on an ESMA report, outlining criteria to ensure fees charged by benchmark providers to their clients for the provision of benchmarks are totally transparent, impartial and based on actual costs. The EC published its legislative proposal for the Regulation in May.
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ESMA updates MiFID II and MiFIR commodity derivatives Q&As
On 2 October, ESMA published an updated version of its Q&As on commodity derivatives topics under MiFID II and MiFIR. The update includes new answers relating to position limits (section 2) and position reporting (section 4), as well as modified and deleted answers relating to ancillary activity (section 3). ESMA last updated these Q&As in March.
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ESMA opinion on calculating market size of ancillary activity under MiFID II
On 2 October, ESMA published an opinion on ancillary activity calculations. Article 2(1)(j) of MiFID II provides an exemption from persons dealing on own account or providing investment services in specific areas, provided that their activity is an ancillary activity to their main business. Commission Delegated Regulation (EU) 2017/592 specifies the criteria for establishing when an activity is to be considered as ancillary for this purpose. In particular, it lays down rules for calculating the overall market trading activity, which ultimately determines whether an activity is ancillary. NCAs and market participants have asked ESMA to provide guidance for the determination of the market size figures to ensure the correct application of the Delegated Regulation. In the opinion, ESMA provides the estimation of the market size of various commodity derivatives, including metals, oil and coal, as well as emission allowances. It has prepared those estimations based on data collected from trading venues and data reported to trade repositories under EMIR. The opinion is an updated version of the opinion on ancillary activity calculations that ESMA first published in June 2017 and subsequently updated in December 2017. ESMA has expanded the opinion to include estimates for 2017 and the whole of 2016.
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ESMA binary options product intervention decision published in OJ
On 1 October, ESMA Decision (EU) 2018/1466 of 21 September was published in the OJ. The Decision renews and amends ESMA Decision (EU) 2018/795, which was published in June. It relates to the renewal of the prohibition of the marketing, distribution or sale of binary options to retail clients. ESMA announced in August 2018 that it would be renewing its previous Decision for a further three-month period. The Decision has been adopted under Article 40 of MiFIR. It applies from 2 October until 1 January 2019.
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ESMA letter to EC on MiFID II and MiFIR third-country regimes
On 1 October, ESMA published a letter (dated 26 September), from Steven Maijoor, ESMA Chair, to Valdis Dombrovskis, EC Vice President, on issues relating to third-country firms concerning some of the requirements under MiFID II and MiFIR on investor protection and intermediaries. The letter highlights four issues. These relate to: (i) concerns regarding the MiFIR regime for third-country firms providing investment services and activities to eligible counterparties and per se professional clients; (ii) concerns regarding the MiFID II regime for third-country firms providing investment services and activities to retail and professional clients on request; (iii) third-country firms providing investment services and activities at the exclusive initiative of EU clients (reverse solicitation); and (iv) investment firms outsourcing critical or important functions other than those related to portfolio management to third-country providers. Although the above issues were initially identified in the context of the discussion on the risks arising from Brexit, Mr Maijoor explains that the issues seem more general and apply beyond Brexit, and so it is important to address them. The letter is a follow-up to an ESMA letter (dated 20 November 2017) to the EC relating to concerns regarding the MiFID II and MiFIR third-country regime, third-country trading venues and the placing of trading screens in the EU, and the lack of a temporary suspension regime for the trading obligation for derivatives.
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ESMA updates MiFID II Q&As on temporary product intervention measures
On 28 September, ESMA published an updated version of its Q&As on temporary product intervention measures on the marketing, distribution or sale of CFDs and binary options to retail clients under Article 40 of MiFIR. The updated Q&As provide clarification on the application of the temporary product intervention measures in relation to rolling spot forex. The previous version was published in July.
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ESMA renews restriction on CFDs for further three months
On 28 September, ESMA announced that it is renewing the restriction on the marketing, distribution or sale of CFDs to retail clients, in effect since 1 August, from 1 November for a further three-month period. ESMA published a decision notice on the prohibition in June, which has been in effect since 1 August. ESMA has agreed to renew the restriction as it considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist. The renewal includes: (i) certain leverage limits on the opening of a position by a retail client; (ii) a margin close out rule on a per account basis; (iii) negative balance protection on a per account basis; (iv) a restriction on the incentives offered to trade CFDs; and (v) a standardised risk warning, including the percentage of losses on a CFD provider's retail investor accounts. During its review of the intervention measure, ESMA obtained information that, in certain cases, CFD providers experienced technical difficulties in using the risk warnings due to the character limitations imposed by third party marketing providers. Therefore, it has agreed to introduce in the renewal an additional reduced character risk warning. ESMA will adopt the renewal measure in the official languages of the EU in the coming weeks, following which it will publish an official notice on its website. The measure will then be published in the OJ.
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GFXC Survey on FX Global Code
On 28 September, the GFXC launched a survey that will aim to measure awareness and adoption of the FX global code among market participants. The data collected from the survey will aid the GFXC in promoting, maintaining and updating the Code. The GFXC is also providing an update on the working groups it created to focus on four priority areas: (i) "cover and deal" trading activity; (ii) disclosures; (iii) buy-side outreach; and (iv) integration of the Code in the FX market. The GFXC will consider the results of the survey at its next meeting which is due to take place on 29-30 November.
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PAYMENT SERVICES AND PAYMENT SYSTEMS
Please refer to the Financial Crime section regarding the FCA's thematic review on money laundering and terrorist financing risks in e-money sector.
ECJ ruling on interpretation of payment account under PSD
On 4 October, the ECJ handed down its judgment in Bundeskammer für Arbeiter und Angestellte v ING-DiBa Direktbank Austria Niederlassung der ING-DiBa AG. The judgment is in response to a request from the Austrian Supreme Court for a preliminary ruling concerning the interpretation of "payment account" under the PSD. An opinion on the request was handed down in June. The ECJ held that Article 4(14) of the PSD must be interpreted as meaning that a savings account, which allows for sums deposited without notice and from which payment and withdrawal transactions may be made solely by means of a current account, does not come within the concept of payment account. Points of interest in the judgment include the following: (i) the wording of relevant provisions in the PSD does not make it possible to determine if the notion of payment account includes accounts for which an intermediate step, involving the transfer of funds between the savings account and the user's current account, is necessary to carry out a payment transaction. Therefore, it is necessary to analyse the legislative context of the PSD. In particular, it is important to consider the PAD, which applies to all payment service providers; (ii) while savings accounts do not, in principle, fall within the definition of the concept of payment account, such an exclusion is not absolute; (iii) naming an account a savings account is insufficient to exclude the categorisation of payment account. The determining criterion for the purposes of categorisation lies in the ability to perform daily payment transactions from an account; (iv) the possibility of making payment transactions to a third party from an account, or of benefiting from such transactions carried out by a third party, is a defining feature of the concept of a payment account; and (v) an account from which such payment transactions cannot be made directly, but for which use of an intermediary account is necessary, cannot be regarded as being a payment account within the meaning of the PAD and, consequently, within the meaning of the PSD.
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Consultation on industry code for reimbursement of victims of authorised push payment scams
On 28 September, the APP Scams Steering Group published a consultation paper on a voluntary industry code for the reimbursement of victims of APP scams, together with the draft code. The code has been developed by representatives from the banking industry, other PSPs and consumer groups. Under the draft code, each bank and PSP would take measures to tackle APP scams, such as: (i) detecting APP scams through measures including analytics and employee training; (ii) preventing APP scams from taking place by taking steps to provide customers with effective warnings that they are at risk; and (iii) responding to APP scams. For example, by delaying a payment while an investigation is conducted and, if necessary, carrying out timely reimbursement. In addition, the steering group has agreed proposals for a set of reimbursement principles depending on whether the relevant parties have met their expected levels of care. It proposes that where a consumer has met their requisite level of care, they should be reimbursed. Comments can be made on the draft code until 15 November. The aim is for the code to be implemented in early 2019. The PSR has published a statement welcoming the draft code. In the statement, it also confirms its plans to consult, by December, on using its regulatory powers to give a general direction to banks and PSPs to implement confirmation of payee. The proposed direction would require banks and PSPs that are participants in the faster payments system to be capable of receiving and responding to confirmation of payee requests from other PSPs by 1 April 2019. They must also send confirmation of payee requests and present responses to their customers by 1 July 2019. The PSR set out the initiatives that it is working on to increase consumer protection from APP scams in June.
Consultation Paper
Draft Code
PSR Statement
PENSIONS
FCA policy statement on improving quality of pension transfer advice
On 4 October, the FCA published a policy statement (PS18/20) on improving the quality of pension transfer advice. In PS18/20, the FCA sets out feedback to its March consultation paper. Since respondents largely agreed with the FCA's proposals, it is proceeding on the basis on which it consulted, except for its proposal to amend the pension transfer definition. The FCA has decided not to proceed with these proposed changes at this time since the issues raised during the consultation showed that it had not achieved the simplification and clarity it had intended. The FCA will also carry out further work on the different charging structures used in pension transfer advice, and in particular contingent charging, as a result of the responses it has received to its consultation and because of the significance of the issues. If it concludes that changes are needed, it will consult further on any new proposals in the first half of 2019. In the meantime, the FCA encourages firms to check that they meet its current requirements on disclosing charges and managing conflicts of interest. The final rules are set out in Conduct of Business Sourcebook (Pension Transfers) (No 2) Instrument 2018, the text of which is included in Appendix 1 to PS18/20. This instrument was made by the board on 27 September. The guidance on two advisers working together and assessing attitude to transfer risk, and the requirement to prepare a suitability report in all circumstances come into force on 4 October. The perimeter guidance on the advice boundary when providing triage services to prospective clients comes into force on 1 January 2019. Changes to the pension increase assumptions come into force on 6 April 2019. The remaining changes will come into force on 1 October 2020.
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PRUDENTIAL REGULATION
EBA reports on Basel III monitoring exercise as of 31 December 2017
On 4 October, the EBA published a report and an accompanying press release, which summarise the results of the latest EU Basel III monitoring exercise, using data as of 31 December 2017. The exercise monitors the impact of the EU legislation that implemented the Basel III reforms: CRD IV and CRR. The report contains analysis relating to matters including: (i) capital ratios and capital shortfalls; (ii) credit risk and operational risk; (iii) output floor; (iv) revised leverage ratio; and (v) NSFR.
EBA Report on Basel III monitoring exercise
EBA report on liquidity measures under Article 509(1) of the CRR
Press Release
BCBS report on Basel III monitoring exercise as of 31 December 2017
On 4 October, BCBS published a report and an accompanying press release, which summarise the aggregate results of the latest Basel III monitoring exercise, using data as of 31 December 2017. The report covers analysis relating to matters including the following: (i) capital ratios, capital shortfalls and composition of capital; (ii) leverage ratio; (iii) TLAC requirements for G-SIBs; (iv) LCR; and (v) NSFR.
206 banks took part in the study, comprising 111 Group 1 banks and 95 Group 2 banks.
Report
Press Release
ECON reports on revised EU prudential framework for investment firms
On 28 September, ECON published the following reports (both dated 27 September) that it has adopted: (i) a report on the EC's proposal for a Regulation on the prudential supervision of investment firms (Investment Firms Regulation (IFR)); and (ii) a report on the EC's proposal for a Directive on the prudential supervision of investment firms, which amends CRD IV and MiFID II (Investment Firms Directive (IFD)). The reports, which were prepared by Rapporteur Markus Ferber, contain legislative resolutions, the text of which set out suggested amendments to the proposed IFR and IFD. ECON voted to adopt the reports on 24 September. ECON agreed in its plenary on 3 October to enter into interinstitutional negotiations.
Report on the proposal for IFR
Report on the proposal for IFD
PRA Q&As on Pillar 2 regulatory reporting
On 28 September, the PRA updated its banking sector regulatory reporting webpage with details about interim reporting of PRA110 and Pillar 2 liquidity. Following publication of the PRA's February policy statement on Pillar 2 liquidity, the PRA has received questions from firms regarding the template and reporting instructions. In response, the PRA has published Q&As on the PRA110 reporting template and instructions. They cover responses on questions related to monetisation rows.
Firms are encouraged to contact the PRA with questions. New Q&As and updates will be published periodically. The PRA has also confirmed that firms should only submit on an all-currency basis and for USD, where this USD is a material currency. The Pillar 2 reporting schedule has also been updated.
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OTHER DEVELOPMENTS
ESMA work programme for 2019
On 2 October, ESMA published its work programme for 2019 (dated 26 September) (ESMA20-95-933). The work programme describes ESMA's objectives for 2019 and its expected results and main outputs, grouped under ESMA's four strategic priorities: promoting supervisory convergence; assessing risks to investors, markets and financial stability; completing a single rulebook for EU financial markets; and directly supervising specific financial entities. Key priorities for ESMA in 2019 include the following: (i) ensuring effective supervisory convergence relating to regulation including MiFID II, MiFIR, and the SFTR; (ii) analysing and managing data requirements under MiFID II and MiFIR; (iii) supporting a smooth and resilient withdrawal of the UK from the EU. ESMA will continue its preparedness planning based on all scenarios, including a no-deal scenario, and will seek to ensure appropriate regulatory and supervisory coverage of third-country entities; (iv) fulfilling its responsibilities stemming from the initiatives of the CMU; and (v) ongoing supervision of credit ratings agencies and trade repositories under the Securitisation Regulation and the SFTR. The work programme also refers to the EC's legislative proposals relating to amending EMIR, and its review of the ESAs. If the relevant legislation is approved in 2018, this will significantly affect ESMA's planning environment for 2019.
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FCA Chair speech on cycle of deregulation, crisis and regulation
On 2 October, the FCA published a speech by Charles Randell, FCA Chair, on the cycle of deregulation, crisis and regulation. The speech provides an overview of FCA initiatives intended to avoid the damages caused by this cycle. Points of interest include: (i) the FCA will take forward its review of its Handbook "when the time is right", once the post-Brexit landscape is clear and the FCA and firms have absorbed any changes resulting from leaving the EU; (ii) the FCA has committed to publishing an annual statement on perimeter issues, intended to highlight gaps in protection that may require legislation. This follows oral evidence given by Mr Randell and Andrew Bailey, FCA Chief Executive, to the Treasury Committee in June, in which Mr Bailey highlighted the impact of the regulatory perimeter on the FCA's power to intervene in areas such as commercial lending, funeral plans and cryptoassets; (iii) Mr Randell was sceptical about the merits of the FCA being given a statutory competitiveness objective intended to ensure that the UK financial services industry can be internationally competitive. He suggested that this could imply that UK regulation would be set to a lesser extent than today by the public interest and to a greater extent by the interests of the financial services industry or decisions taken by policymakers in other jurisdictions. It may also lead to difficult trade-offs with the FCA's other statutory objectives such as the need to ensure consumer protection and market integrity; and (iv) Mr Randell emphasised that the FCA does not see Brexit as an opportunity to join a race to the bottom in regulatory standards. He stated that the FCA would seek to continue to influence global standards of financial regulation. His view is that strong global standards dampen the cycle of deregulation, crisis and regulation as they reduce the opportunity for individual jurisdictions to race to the bottom and for firms to engage in regulatory arbitrage.
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SFO decline to appeal in litigation privilege case
On 2 October, the SFO confirmed that it will not appeal the landmark judgement in SFO v ENRC [2018] EWCA Civ 2006. In the case, ENRC successfully argued that documents prepared during the internal investigation, both by its lawyers and a firm of forensic accountants, are protected by litigation privilege. At the time of the judgment, the SFO stated that the facts of the case were complex and that it was exploring whether to seek a further appeal at the Supreme Court. However, Lisa Osofsky, SFO director, has decided to drop the case. The agency stated that it would continue to assess the merits of all privilege claims and "remains prepared to challenge those it considers to be ill-founded".
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PRA consults on changes to notification and application forms
On 1 October, the PRA published a consultation paper on regulatory transactions and changes to notification and application forms (CP21/18). CP21/18 is relevant to all PRA-authorised firms, as well as firms that have a qualifying holding, or which intend to acquire a qualifying holding in a PRA-authorised firm. The PRA proposes to: (i) update the branch notification form and the cross-border notification form to collect passporting data required by EIOPA, to update references to the IDD, and to correct an administrative error in the PRA's February consultation on the IDD commencement date; (ii) update the forms in the Change in Control Part of the PRA Rulebook to improve their usability and to collect information that is otherwise requested separately. This does not represent a change in PRA policy; (iii) update the passporting forms, passporting declaration, controllers forms, MISPV assumption of new risk notification form, group of cells notification form, and the standing data form to provide a link to a privacy notice; and (iv) amend the Change in Control Part of the PRA Rulebook to remove the controllers forms from the PRA Rulebook. This means that when the PRA needs to make administrative or non-material changes to its forms, it will not have to follow the consultation process for rule changes. The forms will be available on the BoE website with other regulatory transaction forms. The consultation closes on 1 November. The proposals are expected to have effect immediately after the publication of final policy.
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FCA Handbook Notice 58
On 28 September, the FCA published Handbook Notice 58, which sets out changes made to the FCA Handbook under instruments made by the FCA board on 26 July and 27 September. The Handbook Notice reflects changes made to the Handbook by the following instruments: (i) Consumer Credit (Creditworthiness) Instrument 2018 (FCA 2018/44); (ii) Individual Accountability (Dual-Regulated Firms) Instrument 2018 (FCA 2018/45); (iii) Fees (Miscellaneous Amendments) (No 12) Instrument 2018 (FCA 2018/46); and (iv) Supervision Manual (Reporting No 9) Instrument 2018 (FCA 2018/48).
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BoE first annual whistleblowing disclosures report
On 28 September, the BoE published its first annual report under the Prescribed Persons (Reports on Disclosures of Information) Regulations 2017. The report covers the period 1 April 2017 to 31 March and summarises the whistleblowing disclosures received by the BoE and the PRA. Both the BoE and the PRA are prescribed persons under the Public Interest Disclosure (Prescribed Persons) Order 2014. The BoE and PRA have received 141 disclosures, of which 116 were qualifying disclosures. These disclosures have been the subject of supervisory consideration. Seven cases have been referred to the BoE's enforcement litigation division, 28 cases have been referred to the FCA, and one case has been referred to the NCA. The report suggests that 15 disclosures were of "significant value" and contributed to the discharge of regulatory activity.
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