March 20, 2019

Key Regulatory Topics: Weekly Update 8 March - 14 March 2019

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BREXIT

Please see the product sections for updates on various draft SIs published this week in anticipation of a hard Brexit.

Please refer to the Markets and Markets Infrastructure section for an update regarding the FCA statement on MiFID II obligations and BMR in the event of no-deal Brexit and the two Commission Delegated Regulations under EMIR preparing for no-deal Brexit

New French Brexit-related ordinance

On 7 February, ordinance no. 2019-75 relating to the preparatory measures in connection with the United-Kingdom’s withdrawal from the European Union in respect of financial services (the Ordinance) was published. The Ordinance provides for specific measures that will be applicable from the date of Brexit in the event that no agreement is entered into pursuant to Article 50 of the Treaty of the European Union (i.e. Hard Brexit). This publication sets out the ordinance no. 2019-75 and provides a summary.

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.

Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019 made

On 14 March, the Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The Regulations, which were made on 13 March, will amend the Financial Services (Distance Marketing) Regulations 2004 to ensure that they continue to operate effectively in the UK once the UK has left the EU. The deficiencies addressed arise in relation to distance contracts for financial services made by suppliers established in the EEA and consumers in the UK, and in relation to financial services supplied by these suppliers to consumers in the UK. The Regulations come into force on exit day, apart from Parts 1 and 2, which come into force on 14 March.

Statutory instrument

Explanatory memorandum

2019 Spring Statement: key financial services announcements

On 13 March, the Chancellor, Philip Hammond, delivered the 2019 Spring Statement. In it, the Chancellor makes two financial services announcements that form part of the government's work to ensure the UK remains an open and competitive place to do business: (i) before summer of this year, the government will set out its approach to consulting on how to ensure the UK financial services regulatory framework adapts to its new constitutional position outside the EU. This includes the need to ensure financial stability is delivered through an effective regulatory framework, with the responsiveness necessary for a dynamic and open financial services sector, as well as an appropriate level of democratic accountability; and (ii) following consultation later this year, the government will legislate as necessary to ensure that, in the immediate period after the UK leaves the EU, the UK can maintain world-leading financial services regulatory standards, remain open to international markets, and realise new trading opportunities.

Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 made

On 12 March, the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 were published together with an explanatory memorandum. The purpose of the Regulations is to make provisions for elements of the UK equivalence framework to ensure that they function effectively in the event of a no-deal Brexit. EU legislation under which HMT may make equivalence decisions for EEA states includes the Benchmarks Regulation (BMR), the Capital Requirements Regulation (CRR), EMIR and the Solvency II Directive. Regulations 7 and 8 and Schedule 2 will come into force on exit day. The other provisions will come into force on the day after the day on which the Regulations are made (that is, 13 March). A draft of the Regulations was published in January.

Statutory instrument

Explanatory memorandum

CAPITAL MARKETS

Prospectus Regulation: final draft EC delegated regulation on the format, content, scrutiny and approval of prospectuses

On 14 March, the EC published a further draft text of its delegated regulation supplementing the new Prospectus Regulation regarding the format, content, scrutiny and approval of prospectuses. This is the final draft, subject to the right of the EP or the Council to express objections in accordance with Article 290(2) of the Treaty on the Functioning of the European Union. The content is substantially the same as that of the draft published by the EC in November 2018, although drafting amendments have been made throughout and some of the articles have been re-ordered. The annexes are also largely the same as those published with the earlier draft, although some amendments have been made, including: (i) the inclusion of a new annex 13: Securities note for depository receipts issued over shares; (ii) the deletion of sections 3, 4, 5, 6 and 7 from annex 5; and (iii) the deletion of former item 6.5.8 from section 6 of annex 24 (previously annex 23), relating to a description of any changes to the share capital in the 12 months preceding the approval of the prospectus. The regulation will enter into force on the twentieth day following that of its publication in the OJ, and will apply from 21 July.

Prospectus Regulation: draft Commission delegated regulation on regulatory technical standards

On 14 March, the EC published a draft text of its delegated regulation supplementing the new Prospectus Regulation with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal. The content is substantially the same as that of the draft submitted by ESMA to the Commission in July 2018, although drafting amendments have been made throughout. The regulation will enter into force on the twentieth day following that of its publication in the OJ, and will apply from 21 July.

FCA final rules on new financial services directory

On 8 March, the FCA published a policy statement on a new directory of financial services workers (PS19/7). The FCA consulted on proposals to introduce the directory and amend the existing financial services register (FS register) in a July 2018 consultation paper (CP18/19). The majority of the 500 respondents supported the establishment of a directory, with many suggesting ways in which it could be improved. PS19/7 confirms the FCA's intention to introduce the directory, and outlines the changes it has made to its proposals to take account of the feedback. These changes include extending the reporting deadline for banking firms and insurers, including information on membership of relevant accredited bodies and extending the deadline for updating information. The FCA explains that to make the information more easily accessible and understandable it is including a health warning on the directory to highlight where information may be out of date, and will allow firms who have many directory persons to submit multiple records at once. The directory will include individuals performing roles that will no longer be made public on the FS register following the introduction of the SM&CR. It will also make public information on additional roles, such as those providing mortgage advice, for the first time. The FS register will continue following the extension of the SM&CR, but will contain fewer individuals. This is because only specified senior manager roles at firms will be approved, and so will appear on the financial services register. The final rules establishing the directory are set out in the Reporting of Information About Directory Persons (Dual-Regulated Firms) Instrument 2019 (FCA 2019/11) and will come into force on 9 September. The directory interface will go live shortly after information on directory persons has been uploaded in March 2020 for banking firms and insurers, and December 2020 for all other firms. The data start dates and upload deadline for banking firms (where the SM&CR already applies) is aligned with that of insurers. The deadline for uploading information to the directory for solo-regulated firms is 12 months from the commencement date of the SM&CR for such firms.

FCA finalised guidance on SM&CR statements of responsibilities and responsibilities maps for solo-regulated firms

On 8 March, the FCA published its finalised guidance on statements of responsibilities (SoRs) and responsibilities maps for FCA firms under the SM&CR. The aim of the finalised guidance is to give solo-regulated firms practical assistance and information on preparing their SoRs and responsibilities maps. It explains the purpose of SoRs and responsibilities maps, provides questions for firms to ask themselves, and sets out examples of good and poor practice. The FCA expects firms to apply the guidance in a risk-based and proportionate way. This includes considering the size, nature and complexity of the firm when deciding whether a particular example of good or poor practice is appropriate to a firm's business. The guidance builds on the information the FCA published in July 2018 in its SM&CR guide for solo-regulated firms. It is designed to be read alongside the guide, as well as the applicable rules and guidance in the FCA Handbook. The FCA consulted on a draft of the guidelines in October 2018 and has published a summary of the feedback received. All respondents generally supported the proposals and viewed the guidance as a positive step. As a result, the FCA decided to proceed with the guidance as consulted on, but with some amendments and additions based on the feedback received. These amendments are explained in the summary. Although the guidance has been developed for solo-regulated firms, the FCA notes that it may also be of interest to dual-regulated firms.

FCA consults on investment platforms market study remedies

On 14 March, the FCA published a consultation paper on investment platforms market study remedies (CP19/12). CP19/12 has been published alongside the FCA's final report on its investment platforms market study. In the final report, the FCA sets out a package of measures to help consumers who invest through investment platforms more easily find and switch to the right one for them. Some of the remedies require changes to the FCA Handbook. These changes are being consulted on in CP19/12. The FCA is also considering whether and how it might apply some of the IPMS remedies to non-platform firms offering similar services in relation to retail investment products. The FCA is concerned that consumers (both advised and non-advised) often find it hard to move from one platform to another, for reasons of time, complexity and cost. In CP19/12, it sets out proposals to mitigate one of the causes of this concern. It plans to make it easier for consumers to move their assets to a new platform without the unnecessary liquidation of investments. The FCA also proposes a rule to ensure that consumers who move platforms are given the option of a conversion to a discounted unit class, where this is available to them on the new platform. CP19/12 includes a "discussion" on platform exit fees. The FCA considers that a ban on exit fees is likely to be appropriate as a measure to reduce consumer harm. It needs to consider the scope of any such remedy, given that platforms compete in a wider retail distribution market. As a result, the FCA is seeking views on how an exit fee should be defined, the scope of the intervention and whether the intervention should be a ban or a cap on fees. A draft of the FCA instrument that would make the proposed Handbook changes, the Conduct of Business Sourcebook (Platform Switching) Instrument 2019, is set out in the Appendix to CP19/12. Comments can be made on the proposals until 14 June. For the proposals on making transfers simpler, the FCA plans to issue a policy statement and final rules in late 2019. For the discussion on exit fees, the FCA explains that it may issue a formal consultation in late of this year.

FCA publishes final report on investment platforms market study

On 14 March, the FCA published its final report on its market study to examine the investment platforms market. The FCA has found that while competition is generally working well, some consumers and financial advisers can find it difficult to shop around and switch to a platform that better meets their needs. Switching can be difficult due to the time, complexity and cost involved. This is driven in part by the exit charges that consumers incur and difficulties switching between unit classes. To address these issues, the FCA is consulting separately on rules to allow consumers to switch platforms and remain in the same fund without having to sell their investments, and is proposing to ban or cap exit fees. The FCA will also review the progress being made by industry to improve the switching process. The FCA also examined the ability of consumers to shop around and compare platforms. It found that action is being taken by the industry to improve the provision of information about costs and charges. The FCA is, therefore, not proposing any intervention in this regard at present, but will review industry progress in 2020/21. The FCA has also examined competition between adviser platforms, whether consumers are able to make informed investment choices, and any barriers to entry and expansion. It has concluded that no intervention or action is needed at this time to address any harm in these areas.

CMA publishes term of reference for Loyalty Penalty Working Group

On 12 March, the CMA published the terms of reference for the Loyalty Penalty Working Group (LPWG). The LPWG will oversee the implementation of recommendations made by the CMA in its response to the super-complaint from Citizens Advice on the loyalty penalty. The super-complaint asked the CMA to investigate excessive prices for disengaged consumers, particularly in the mobile, broadband, savings accounts, mortgages and household insurance markets. The CMA considered that a step-change in approach is needed to effectively tackle the issues raised by loyalty penalties and it sets out various recommendations for actions by itself, the FCA, Ofcom and government. The CMA stated that it would look at whether sufficient progress has been made in taking forward its recommendations over the next 12 months, and reconsider what next steps are necessary, including the possibility of conducting a market study. The LPWG will be chaired by the CMA and its members include representatives from the FCA, Ofcom, Ofgem, the Department for Business, Energy and Industrial Strategy, the Department for Digital, Culture, Media and Sport, HMT and the UK Regulators Network. It will focus on the following cross-cutting recommendations made by the CMA: (i) bolder enforcement and tackling harmful business practices; (ii) publishing key metrics on the loyalty penalty; (iii) greater role of consumer-facing advisory organisations; (iv) rolling out smart data across markets; (v) nudge remedies best practice sharing; (vi) consideration of targeted pricing interventions; and (vii) data matching feasibility assessment. Discussions from the LPWG will inform a progress update on the loyalty penalty to be provided to the Consumer Forum in May/June, and an update to be published by the CMA in summer.

EA Joint Committee Decision incorporating MCD into EEA Agreement published in OJ

On 11 March, Council Decision 2019/380 of the EEA Joint Committee concerning the incorporation of the Mortgage Credit Directive (MCD) into Annex IX and Annex XIX to the EEA Agreement was published in the OJ. The decision states that Annex IX to the EEA Agreement should be amended to incorporate the MCD. The decision specifies adaptations to the reading of certain provisions in the MCD for the purposes of the EEA Agreement. The decision was made and entered into force on 4 March.

FCA and FOS policy statement on increasing FOS award limit

On 8 March, the FCA published a policy statement, jointly with the FOS, on increasing the FOS's award limit from 1 April (PS19/8). The FCA has decided to introduce the changes as consulted on. From 1 April the FOS's £150,000 award limit will change to: (i) £350,000 for complaints about acts or omissions by firms on or after 1 April 2019; and (ii) £160,000 for complaints about acts or omissions by firms before 1 April and which are referred to the FOS after that date. From 1 April 2020 onwards, both award limits will be automatically adjusted annually on 1 April to ensure they keep pace with inflation, as measured by the CPI. The reward limit will remain at £150,000 for complaints referred to the FOS before 1 April. The final rules are set out in the Financial Ombudsman Service (Award Limit) Instrument 2019. Shortly after the rules come into force, the FOS will publish information about additional governance arrangements that will apply to high value complaints, and examples to help firms better understand how the FOS would determine whether it would be more appropriate for a complaint to be handled by the courts. Firms are advised to ensure, before 1 April, that consumer facing material is updated, they are using the most recent version of the FOS's standard explanatory leaflet, and that complaint handling staff are aware of the increased limits.

FINANCIAL CRIME

Please refer to the Pensions section for an update regarding the FCA Chief Executive’s update on the Work and Pensions Committee’s approach to tackling pension scams.

Pressure mounting for new failure to prevent economic crime corporate criminal offence

A&O’s blog, Investigations Insights, which focuses on the latest trends, risks and developments in business crime and financial services investigations, has published a blog by partner Eve Giles on the UK government’s commitment to reform corporate liability for economic crime. Please find the publication here.

EP adopted provisional version of texts regarding AML

On 14 March, the EP published a provisional version of text regarding urgency for an EU blacklist of third countries in line with the AML Directive in which, amongst other points raised, it (i) welcomes the fact that on 13 February the EC adopted a new list of 23 third countries with strategic deficiencies in their AML and counterterrorist financing (CTF) frameworks; (ii) stresses the importance for the Union of having an autonomous list of high-risk third countries presenting AML/CTF deficiencies; (iii) notes that lobbying and diplomatic pressure by the listed countries have been and will be part of the process of identifying high-risk countries; and (iv) underlines that such pressure should not undermine the EU institutions’ ability to tackle money laundering and to CTF linked to the EU in an effective and autonomous manner.

Bribery Act 2010: post-legislative scrutiny

On 14 March, the House of Lords Select Committee on the Bribery Act 2010 (BA 2010) published the Bribery Act 2010: post-legislative scrutiny to establish whether the BA 2010 is achieving its intended purposes. The report concludes that the BA 2010 is an excellent piece of legislation which creates offences which are clear and all-embracing. The offence of corporate failure to prevent bribery is regarded as particularly effective, enabling those in positions of influence in a company to ensure that it operates ethically. The Ministry of Justice guidance is less successful in providing small and medium enterprises with the information and advice they need to enable them to decide on a formal anti-bribery policy. For companies considering exporting, the guidance should give more assistance on the point at which hospitality exceeds what a reasonable member of the public might think was acceptable and begins to influence the recipient's course of action. There was criticism of a lack of co-operation between the various stakeholders and the slow pace of investigations, including the failure to update businesses and individuals on the progress of cases. It is recommended that the director of the Serious Fraud Office and the director of public prosecutions publish plans outlining how they will speed up bribery investigations and improve the level of communication with those placed under investigation for bribery. The committee also considered deferred prosecution agreements (DPAs). They are broadly supportive, believing that the discounts being applied to financial penalties are appropriate to encourage companies to self-report but not so large as to deprive the penalty of its effectiveness. It stated a DPA is not, and cannot be, a substitute for the prosecution of any individuals involved in corrupt conduct. The committee heard from several distinguished witnesses and produced a full report.

Treasury Committee report on Economic Crime: Anti-money laundering supervision and sanctions implementation

On 8 March, the Treasury Select Committee published a report entitled Economic Crime – Anti-money laundering supervision and sanctions implementation. The report covers several issues concerning economic crime in the UK, and draws the following conclusions: (i) a more precise estimate of the scale of economic crime in the UK is needed; (ii) the government should review the UK's anti-money laundering supervision more frequently; (iii) the UK should not compromise the fight against economic crime to secure trade deals post-Brexit; (iv) HMRC should ensure all estate agents are registered with them for AML purposes; (v) Companies House needs powers to combat economic crime; (vi) the government must reform the corporate criminal liability framework for economic crime, including looking at a failure to prevent offence and strict liability; (vii) the Office for Financial Sanctions Implementation should be reviewed after two years; and (viii) the government should create a centralised database of PEPs for the use of those registered by AML supervisors. Perhaps the most significant finding from the report is that the anti-money laundering framework is currently not fit for purpose, and despite the establishment of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) the process is still too fragmented with many separate organisations supervising the checks, many of them trade bodies. The report calls on the government to consider proposals for new legislation, including a proposal that a company would be guilty of the substantive criminal offence if a person associated with it commits a certain offence, a form of strict liability, and the introduction of a new offence of failing to prevent economic crime.

FCA report setting out industry insights on cyber security

On 8 March, the FCA published a report setting out industry insights on cyber security. In the report, the FCA explains that, since 2017, it has brought together over 175 firms across different parts of the financial services sector to share information and ideas from their cyber experiences. It runs these "cyber co-ordination groups" (CCGs) with industry to help improve cyber security practices among members of the CCGs and their sub-sectors. Over the last year, the CCGs have been discussing and sharing practices in the following areas: (i) governance; (ii) identification; (iii) protection; (iv) detection; (v) situational awareness; (vi) response and recovery; and (vii) testing. As the FCA believes that sharing information is vital to successful cyber defence and resilience, it has collated the examples shared by one of more of the firms in the CCGs, and set out in the report those it considers are of interest to a wider audience under the themes listed above. The FCA hopes the practices and experiences of the CCGs help firms not already involved when considering where to prioritise their efforts in increasing their cyber resilience. All firms are encouraged to consider whether the insights may be useful. The FCA believes the report may be particularly helpful for small and medium-sized firms. The FCA advises that the report should not be considered FCA guidance. It does not set out the FCA's expectations in terms of what systems and controls firms should have in place to comply with its regulatory requirements. The FCA notes that many of the insights in the report support existing guidance from the national Cyber Security Centre (NCSC). In 2019, the FCA plans to create two new CCGs to increase the representation of trading venues, benchmark administrators, brokers and principal trading firms. Also, over the next twelve months, it will continue to communicate insights and innovative practices shared within the CCGs with the wider financial community.

Findings of phase I of FCA's digital regulatory reporting pilot

On 13 March, the FCA updated its webpage on digital regulatory reporting (DRR). The FCA has added the following to the webpage: (i) a video explaining the concept of DRR and outlining the work carried out by the DRR pilot group. A transcript of the video has also been published; (ii) a report setting out an overview of the work and findings of phase I of its DRR pilot, which ran from June to December 2018. The pilot explored how firms and regulators could use technology to make the current process of regulatory reporting more accurate, efficient and consistent. This included exploring the broader implications of those technological changes and developing a vision for what regulatory reporting might look like in the future. During the pilot, participants built a prototype using distributed ledger technology to implement this vision for two cases: UK domestic mortgage reporting and calculation of the common equity tier 1 ratio; and (iii) information on phase II of the DRR pilot, which was launched in February. This phase of work will focus on addressing some of the gaps identified in phase I, in particular, understanding the economic viability of DRR and exploring how it could apply to different product groups. The FCA welcomes and encourages input on DRR from across the industry. Firms and individuals interested in discussing the technical aspects of the report in more detail are invited to contact the FCA.

BCBS statement on cryptoassets

On 13 March, the BCBS published a statement on cryptoassets. The statement sets out the BCBS' prudential expectations related to banks' exposures to cryptoassets and related services, for those jurisdictions that do not prohibit such exposures and services. The BCBS expects that, if a bank is authorised and decides to acquire cryptoasset exposures or provide related services, it should adopt the following as a minimum: (i) due diligence. Before acquiring exposures to cryptoassets or providing related services, the bank should conduct comprehensive analyses of the risks and ensure it has the relevant and requisite technical expertise to adequately assess the risks stemming from cryptoassets; (ii) governance and risk management. The bank should have a clear and robust risk management framework that is appropriate for the risks of its cryptoasset exposures (direct and indirect) and related services and fully integrated into its overall risk management processes, including those related to AML and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Relevant senior management functions should be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank's cryptoasset risk profile. An assessment of these risks should be incorporated into the bank's internal capital and liquidity adequacy assessment processes; (iii) disclosure. The bank should publicly disclose any material cryptoasset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations; and (iv) supervisory dialogue. The bank should inform its supervisory authority of actual and planned cryptoasset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks. The BCBS will continue to monitor developments in cryptoassets, including banks' direct and indirect exposures to such assets. In due course, it will clarify the prudential treatment of these exposures to appropriately reflect the high degree of risk of cryptoassets. The BCBS is co-ordinating its work in this area with other global standard setting bodies and the FSB.

BIS committees report on central bank digital currencies

On 12 March, the Committee on Payments and Market Infrastructures and the Markets Committee published a joint report on central bank digital currencies (CBDCs). In the report, the committees provide an initial analysis of CBDCs, focusing on two types: a wholesale currency limited to select financial institutions, and a general-purpose currency accessible to the public. The report provides a high-level overview of the implications of CBDCs for three core central banking areas: payment systems, monetary policy implementation and transmission, and the structure and stability of the financial system. Among other things, in the report the committees explain that: (i) wholesale CBDCs, combined with the use of distributed ledger technology, may enhance settlement efficiency for transactions involving securities and derivatives. Currently proposed implementations for wholesale payments look broadly similar to, and not clearly superior to, existing infrastructures. More experimentation and experience would be required before central banks can usefully and safely implement new technologies supporting a wholesale CBDC variant; (ii) in part because cash is rapidly disappearing, some central banks are analysing a CBDC that could be made widely available to the general public, and serve as an alternative safe, robust and convenient payment instrument. The provision of CBDC could bring substantial benefits. However, consideration should be given to whether these goals could be achieved by other means. Not least because CBDCs raise important questions and challenges that would need to be addressed. The benefits of a widely accessible CBDC may be limited if fast (even instant) and efficient private retail payment products are already in place or in development; and (iii) although a general purpose CBDC might be an alternative to cash in some situations, a central bank introducing such a CBDC would have to ensure compliance with AML and counter-terrorist financing requirements, as well as satisfying the public policy requirements of other supervisory and tax regimes. Generally, the committees consider that any step towards the possible launch of a CBDC should be subject to careful thought and consideration. Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is warranted. The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further investigation. The committees consider that the report is a starting point for further discussion and research in this "rapidly evolving area".

Treasury progress update on proposed Regulation and Directive on cross-border distribution of collective investment funds

On 14 March, the UK government published a letter from John Glen, Economic Secretary to HMT, to William Cash, House of Commons EU Scrutiny Committee Chair, setting out a further progress update on the proposed Regulation and proposed Directive on the cross-border distribution of collective investment funds. In his letter, Mr Glen notes the committee's July 2018 report in which the committee decided to keep the file under scrutiny. Points of interest in Mr Glen's letter include: (i) COREPER has agreed the proposed Regulation and Directive. Although the government expects the proposed Regulation and Directive to progress to the EP in April, it is currently unclear when they will proceed to the Council for final adoption; and (ii) the draft text agreed at trialogues represents the Council's general position on key issues such as pre-marketing and denotification, as well as providing what the government considers to be a "welcome amendment" to the PRIIPs Regulation. In view of this, Mr Glen seeks clearance from the committee for the UK to be able to vote in favour in the Council should a vote take place before the UK leaves the EU. Mr Glen also responds in his letter to concerns raised by the committee in its report, relating to mutual recognition, equivalence and portfolio delegation in the context of Brexit.

Joint Committee of ESAs propose draft RTS to clarify application of KID to investment funds

On 8 March, the Joint Committee of the ESAs published a letter it has sent to the EC proposing draft RTS amending Commission Delegated Regulation (EU) 2017/653 (the PRIIPs Delegated Regulation) to clarify the application of the KID to multi-option products (MOPs). The text of the draft RTS are appended to the letter. MOPs are UCITS and certain non-UCITS funds offered as underlying investment options to a packaged retail and insurance-based investment product (PRIIP). As the ESAs identified in February, the draft RTS are necessary following a decision during the trialogue on the cross-border distribution of investment funds that will extend the time period for which MOPs are exempted from preparing a PRIIPs KID until 31 December 2021. The draft RTS seek to align the date of the exemption in Article 18 of the PRIIPS Delegated Regulation with the revised date in the PRIIPS Regulation. The ESAs ask that the issue be addressed as soon as possible, and within the current legislative term of the EP, to ensure that clarity and legal certainty is provided to market participants before the expiry of the current provisions in the PRIIPS Delegated Regulation at the end of this year. They urge the EC to consider a shortened endorsement procedure for the draft RTS, given the consequential nature of the amendment. In February, industry trade bodies called on the EC to urgently align the expiry date of Article 14(2) of the PRIIPs Delegated Regulation with the expiry date of the temporary exemption of UCITS from the PRIIPs Regulation.

PRA policy statement on group own fund availability under Solvency II

On 14 March, the PRA published a policy statement on group own fund availability under the Solvency II Directive regime (PS9/19). In PS9/19, the PRA provides feedback on responses to its July 2018 consultation paper (CP15/18). The PRA explains that it has made only minor drafting amendments in response to the feedback received. Alongside PS9/19, the PRA has published an updated version of its supervisory statement on Solvency II group supervision (SS9/15). The updated version of SS9/15 sets out the PRA's updated expectations for group supervision. SS9/15 now clarifies that, in assessing group own funds availability, the solo solvency capital requirement should no longer be presumed to be a barrier to availability. It also clarifies that the PRA expects such available analysis to be provided only where a group insurer is based in a jurisdiction that is not subject to a regime that is similar to the UK solvency regime. In addition, some amendments have been made to SS9/15 to simplify formatting and aid readability. The policy in the updated SS9/15 takes immediate effect. In CP15/18, the PRA explained that the proposals would result in better alignment of its policy and supervisory expectations with EIOPA's views on group own funds availability, which were set out in Q&As published in late 2017.

EC responds to ECON concerns about Solvency II Delegated Regulation

On 13 March, ECON published a letter received from the EC relating to the review of the Solvency II Delegated Regulation (EU) 2015/35. The EC responds to an ECON letter of 6 December 2018, which identified three areas of concern for the review: (i) criteria for long-term equity investments. ECON considered that the criteria may prevent this measure from working in practice, in particular the ring-fencing criterion and the minimum holding period of twelve years. Following ECON's comments, the EC has significantly reduced the minimum holding period requirement to five years, and has removed references to ring-fencing; (ii) perceived shortcomings in activation of the country component of the volatility adjustment (VA). ECON reiterated a call for a short-term solution to this. The EC has thoroughly analysed ECON's proposed solution. It has also received internal legal advice to the effect that, as the Solvency II Directive is currently drafted, the assessment of the conditions of the activation of the country component can only be based on the most recent market data on the valuation date. The VA, including the activation of the national component, is part of the formal request the EC sent to EIOPA in February for technical advice on the 2020 review of the Directive. At the same time, the EC will continue to explore whether other short-term solutions are possible; and (iii) lowering of the risk margin. The review focused on the cost-of-capital rate to calculate the risk margin. The evidence gathered by EIOPA does not suggest that this rate can be lowered from its current level of 6%, while still fulfilling its purpose in line with the Directive. To the contrary, EIOPA's assessment suggested that the rate should be increased. This is why the EC decided not to change the rate in the Delegated Regulation. However, it has asked EIOPA to analyse the broader risk margin design, beyond this rate, for the 2020 review. Following the review, the EC adopted a Delegated Regulation amending the Solvency II Delegated Regulation on 8 March.

FCA FIRDS open for firms to test publication

On 14 March, FCA FIRDS opened for firms to test publication. The FCA built FCA FIRDS (Financial Instruments Reference Data System) to replace ESMA FIRDS in the UK. Firms will be able to test FCA FIRDS’s publishing solution, which enables firms to download full and delta reference files. Firms will need to test using the FCA FIRDS production publishing system (not the FCA FIRDS industry testing publishing system which is currently being restricted as the FCA complete some format and data verification).

€STR start date and recommendations on transition from EONIA announced

On 14 March, the ECB announced that it will start publishing the euro short-term rate (€STR) as of 2 October. The ECB's working group on euro risk-free rates also published recommendations on the transition to €STR from EONIA. The recommendations include that: (i) market participants gradually replace EONIA with €STR for all products and contracts, making €STR their standard reference rate; and (ii) EONIA's administrator modify the current EONIA methodology to become €STR (plus a spread) for a limited period of time, to give market participants sufficient time to transition to €STR. The working group originally recommended that €STR replace EONIA as the new euro risk-free rate in September 2018.

EC adopts Delegated Regulation extending MiFIR trade transparency exemption to People's Bank of China

On 14 March, the EC published the Delegated Regulation it has adopted that amends Commission Delegated Regulation (EU) 2017/1799 as regards the exemption of the People's Bank of China from the pre- and post-trade transparency requirements in MiFIR. The EC has also published an Annex to the adopted Delegated Regulation, the text of which replaces the original Annex to Commission Delegated Regulation (EU) 2017/1799. The adopted Delegated Regulation adds the People's Bank of China to the list of exempted institutions in Delegated Regulation (EU) 2017/1799. The EC has also published a report from itself to the EP and Council that sets out its rationale for granting the exemption. The next step is for the Delegated Regulation to be considered by the EP and Council of the EU. It states that it will enter into force 20 days after its publication in the OJ. A related press release indicates that the Delegated Regulation has a targeted entry into application on 18 October. The EC published the draft text of the Delegated Regulation in January.

ESMA includes MiFID II and MiFIR in interactive single rulebook

On 14 March, ESMA updated its interactive single rulebook to include all level 2 and level 3 measures related to MiFID II and MiFIR.

CPMI and IOSCO update on status (as of January) of level 1 assessments for implementation of principles for financial market infrastructures

On 14 March, IOSCO and CPMI published a press release reporting that they have jointly released updated information on the status of level 1 assessments for implementation of principles for financial market infrastructures (PFMIs), as of January. The updated information has been released through the level 1 assessments online tracker, which is accessible on the CPMI and IOSCO websites. The online tracker does not require the publication of a Level 1 assessment report, thereby permitting jurisdictions to update their information more quickly. Further progress has been made among some participating jurisdictions that had not completely adopted their implementation measures at the time of the fifth update to level 1 assessment report, published in July 2018. Notably, Korea and South Africa have completed the process of adopting measures that will enable them to implement the PFMI for all FMI types. Argentina, Chile and Indonesia have also reported progress in adopting measures that will facilitate their implementation of the PFMI, although additional progress is needed to achieve the highest rating for all FMI types. In total, 23 of the 28 jurisdictions that participate in the implementation monitoring programme have adopted measures for all FMI types. The CPMI and IOSCO encourage jurisdictions to continue to adopt measures that will enable them to implement the PFMI. To support future progress, the two bodies will continue to update the information on the level 1 assessments through the online tracker, based on progress reported by participating jurisdictions.

FCA supervisory statement on operation of UK MiFIR transparency regime following no-deal Brexit

On 14 March, the FCA published a supervisory statement on the operation of the transparency regime under the retained EU law version of the Markets in Financial Instruments Regulation (UK MiFIR). If the UK leaves the EU on 29 March without an implementation period. the FCA will become responsible for many of the tasks currently undertaken by ESMA under MiFIR. It states that by 29 March it will not have fully developed and implemented the technology to make the relevant calculations and assessments that ESMA currently undertakes and to publish the results. The statement sets the FCA's approach to the operation of the regime during the period (lasting for up to four years) in which it can use temporary powers to run the UK transparency regime. The statement considers issues including: (i) the double volume cap; (ii) equity and non-equity transparency; (iii) systematic internalisers; (iv) trade reporting issues, including territorial scope, the temporary permission regime and the temporary transitional power; and (v) tick sizes. The statement is intended to build on the FCA's statements of policy on the operation of the MiFIR transparency regime, which were published on 4 March. The FCA states that it also takes account of ESMA's February statement on the use of UK data in ESMA databases, as well as statements on post-trade transparency published by it and ESMA on 13 March and 7 March respectively.

Council of EU and EP reach provisional agreement on proposed Regulation amending EMIR supervisory regime for EU and third country CCPs

On 13 March, the Council of the EU published a press release announcing that the Council Presidency and the EP have reached a provisional agreement on the proposed Regulation amending the EMIR supervisory regime for EU and third-country CCPs. According to the press release, the agreed text: (i) establishes a CCP supervisory committee within ESMA; (ii) strengthens the existing system for recognising and supervising third country clearing houses. In particular, it introduces a "two tier" system differentiating between non-systemically important CCPs and systemically important CCPs (known as Tier 2 CCPs). Tier 2 CCPs would be subject to stricter rules for them to be recognised and authorised to operate in the EU; and (iii) on the basis of a fully reasoned assessment, ESMA would also be able to recommend that a CCP or some of its clearing services are of such substantial systemic importance that the CCP should not be recognised. The EC could decide, as a measure of last resort, that the CCP will need to establish itself in the EU. The third country CCP would then need to establish itself in the EU to be able to operate. Pending technical finalisation of the text, the provisional agreement will be submitted for endorsement to COREPER, following which it will be subject to legal linguistic revision. The EP and the Council will be called on to adopt the proposed Regulation at first reading. Separately, the EC and the US Commodity Futures Trading Commission (CFTC) have published a joint statement relating to the provisional agreement reached on the proposed Regulation, referred to in the joint statement as "EMIR 2.2". The statement notes that, as required under the proposed Regulation, the EC will shortly adopt a number of delegated acts to define the scope and content of certain provisions, drawing on public consultations and relevant assessments. Before their adoption, these delegated acts will be subject to a public consultation to which all stakeholders will be invited to respond. The CFTC has indicated it will participate in the consultation process. The statement adds that the EC and CFTC expect the implementation of the proposed Regulation and the CFTC's ongoing review of both its swaps regulatory framework and its cross-border approach will "result in more deference between the CFTC and the EU supervisors than is currently the case".

EP non-objection to Delegated Regulations exempting BoE from MAR, MiFIR, EMIR and SFTR obligations after Brexit

On 13 March, the EP decided not to object to Delegated Regulations that exempt the BoE from certain requirements under four EU Regulations after Brexit. The Delegated Regulations were adopted by the EC on 30 January.

EP non-objection to Delegated Regulation amending MiFID II tick size regime

On 13 March, the EP published a provisional version of its decision to raise no objections to a Delegated Regulation amending Delegated Regulation (EU) 2017/588 (RTS 11) as regards the possibility to adjust the average daily number of transactions for a share where the trading venue with the highest turnover of that share is located outside the EU. Article 49 of MiFID II requires trading venues to adopt tick size rules for a number of financial instruments, including shares. Tick sizes should be determined for each individual financial instrument and calibrated to reflect the instrument's liquidity in the markets where it is traded. EC adopted the Delegated Regulation on 13 February. In the decision, the Parliament notes that: (i) the Delegated Regulation contains important amendments to preserve the competitiveness of EU trading venues offering trading in shares that are admitted to trading or are traded in the EU and a third country concurrently, and where the trading venue with the highest turnover in those shares is located outside the EU; (ii) it recognises the importance of a swift adoption of the Delegated Regulation to ensure the preparedness of the EU in the event of a withdrawal of the UK from the EU without a withdrawal agreement (a no-deal Brexit); and (iii) it considers RTS 11 as adopted is not "the same" as the draft RTS submitted by ESMA due to the EC’s changes that were introduced, and therefore that it has three months to object to RTS 11 (that is, the scrutiny period). It urges the EC to indicate the one-month scrutiny period only in cases where the EC has adopted the drafts of the European Supervisory Authorities without changes (that is, where the draft and the adopted RTS are the same). The EP declares that it has no objections to the Delegated Regulation and instructs its President to forward its decision to the Council of the EU and the EC. The next step is for the Council to consider the Delegated Regulation. If it does not object, it will enter into force and apply 20 days after it is published in the OJ.

Two Commission Delegated Regulations under EMIR preparing for no-deal Brexit published in OJ

On 13 March, the following Commission Delegated Regulations under EMIR were published in the OJ: (i) Delegated Regulation (EU) 2019/396 amending Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 supplementing EMIR as regards the date at which the clearing obligation takes effect for certain types of contracts; and (ii) Delegated Regulation (EU) 2019/397 amending Delegated Regulation (EU) 2016/2251 supplementing EMIR as regards the date until which counterparties may continue to apply their risk-management procedures for certain OTC derivative contracts not cleared by a CCP. Both Delegated Regulations were adopted by the EC on 19 December 2018 and will enter into force on 14 March. They will apply from the date following that on which the EU Treaties cease to apply to and in the UK, pursuant to Article 50(3) of the Treaty on the EU. However, they will not apply if either the withdrawal agreement has entered into force by that date or the Article 50 process has been extended.

Delegated Regulation (EU) 2019/396

Delegated Regulation (EU) 2019/397

FCA statement on MiFID II obligations and BMR in event of no-deal Brexit

On 13 March, the FCA published a statement setting out its position on certain obligations under MiFID II and the BMR in the event the UK leaves the EU without an implementation period (a no-deal Brexit). The statement covers MiFID II provisions relating to: (i) post-trade transparency and position limits. If there is no implementation period, the FCA will not require UK investment firms to make public, through a UK-approved publication arrangement (APA), transactions conducted on EU trading venues in instruments that are also traded on a UK trading venue. In addition, commodity derivative contracts traded on EU trading venues should not be considered as economically equivalent OTC contracts and so will not count towards the UK position limit regime; (ii) post-trade transparency for OTC transactions between UK investment firms and EU counterparties. Under the FCA's temporary transitional power, UK investment firms that did not have a reporting obligation for a transaction conducted with an EU27 investment firm before Brexit will not be required to report these transactions to a UK APA for a period of 15 months after Brexit. EU27 investment firms with a branch in the UK that has entered the UK temporary permissions regime may fulfil their UK trade reporting obligations by continuing to make transactions public through an EU APA, where obliged to do so; and (iii) trading obligation for derivatives. As set out in the onshored MiFID II and related BTS, investment firms must conclude transactions in certain derivatives only on regulated markets, multilateral trading facilities or organised trading facilities established in the UK or on third-country venues in jurisdictions for which the UK has adopted an equivalence decision. In relation to the BMR, the FCA will be setting up a UK public register of benchmarks and administrators authorised in the UK. It will provide further information shortly on the operation of this register.

EEA Joint Committee Decision incorporating MiFIR and MiFID II Directive into EEA Agreement published in OJ

On 12 March, Council Decision 2019/389 of the EEA Joint Committee concerning the incorporation of the MiFID II Directive and the MiFIR into Annex IX to the EEA Agreement was published in the OJ. The decision states that Annex IX to the EEA Agreement should be amended to incorporate MiFID II and MiFIR. The decision specifies adaptations to the reading of certain provisions in the legislation for the purposes of the EEA Agreement. The decision was made and entered into force on 4 March.

Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019 made

On 12 March, the Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019 were published together with an explanatory memorandum and impact assessment. The purpose of the Regulations is to correct deficiencies in the retained version of the Regulation on reporting and transparency of securities financing transactions (SFTR) and to establish supervisory requirements for trade repositories. The Regulations will come into force on exit day.

Statutory instrument

Explanatory memorandum

Impact assessment

ECON draft report on proposed Directive on credit servicers, credit purchasers and recovery of collateral

On 11 March, ECON published its draft report on the proposed Directive on credit servicers, credit purchasers and the recovery of collateral. The draft report, which was prepared by Rapporteurs Esther de Lange and Roberto Gualtieri, contains a EP legislative resolution, the text of which sets out suggested amendments to the proposed Directive. The report does not contain an explanatory statement on the Rapporteurs' reasons for the amendments. A second version of the draft report was published on 12 March.

FCA statement on derivatives reporting under UK EMIR regime in no-deal Brexit

On 11 March, the FCA published a statement explaining what trade repositories, and UK CCPs that use them, should do to ensure that they comply with their EMIR reporting obligations after the UK leaves the EU. The statement is only relevant in a no-deal scenario. From exit day, UK CCPs must report details of their derivative trades to an FCA registered, or recognised, trade repository. Also from exit day, UK trade repositories must provide UK authorities access to data reported to them by UK counterparties. Among other things, the statement provides information on: (i) what is changing for trade repositories and what is changing for UK CCPs. This includes the FCA becoming the UK authority responsible for the registration and ongoing supervision of trade repositories operating in the UK; (ii) the reporting of new and outstanding trades under the UK EMIR reporting regime by CCPs in scope; (iii) inter-trade repository reconciliation in enhancing data quality; and (iv) the suspension of reporting requirements. If UK counterparties, or other relevant stakeholders, have questions not covered by the statement, they should contact the FCA. The FCA may amend the statement over time if it finds that there are common questions it does not address.

FCA consults on Handbook changes to reflect application of Securitisation (Amendment) (EU Exit) Regulations 2019 and Securitisation Regulations 2018

On 11 March, the FCA published a consultation paper (CP19/11) on Handbook changes to reflect the application of the Securitisation (Amendment) (EU Exit) Regulations 2019 (Securitisation Brexit Regulations) and the Securitisation Regulations 2018 (2018 Regulations). Securitisation repositories in the EU are currently regulated by ESMA. HMT will transfer responsibility for regulating securitisation repositories to the FCA when the UK leaves the EU. The FCA needs to amend its Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) due to changes the Securitisation Brexit Regulations will introduce. For enforcement powers over securitisation repositories, the FCA proposes to apply its existing policy and procedures in the exercise of its disciplinary and investigatory powers. It also proposes a decision-making procedure for registering or withdrawing the registration of securitisation repositories. The FCA is also consulting on minor amendments to DEPP and EG resulting from new enforcement powers granted to it under the 2018 Regulations. It proposes decision-making procedures for imposing a suspension, condition or limitation on an individual for a breach of a requirement imposed by or under the 2018 Regulations, and imposing a suspension, limitation or other restrictions on an authorised person for a breach of a requirement imposed by or under the 2018 Regulations. The proposed Handbook changes are set out in the draft Repositories (Guidance) Instrument 2019 and the draft Enforcement (EU Securitisation Regulation) (No [2]) Instrument 2019, which are in the appendices to CP19/11. Comments can be made on CP19/11 until 8 April. The FCA intends to publish responses and its final rules by mid-June.

HMT progress update on proposed Regulation amending EMIR supervisory regime for EU and third country CCPs

On 11 March, the UK government published a letter from John Glen, Economic Secretary to HMT, to Sir William Cash, House of Commons EU Scrutiny Committee Chair, setting out a further progress update on the proposed Regulation amending the EMIR supervisory regime for EU and third-country CCPs. Among other things, Mr Glen explains: (i) the matter was discussed at a meeting of COREPER in December 2018. Although the UK abstained on the proposal, the majority of member states supported it and a general approach was agreed. The government did not feel able to support the approach due to the Council's approach to third country CCPs. The UK drew particular attention to the powers granted to EU authorities over third countries, which is inconsistent with the way that global CCPs and their supervisors operate. It raised concerns with the imbalance between the significant powers given to ESMA and the ECB over non-EU CCPs when they are not given similar powers over EU CCPs; (ii) the UK's concerns with the text of the proposed Regulation were highlighted at a meeting of ECOFIN; and (iii) it is not clear when a trialogue will conclude, but it could be during March (see update above on provisional agreement reached). There was some discussion during a trialogue about how to ensure that the powers given to central banks of issue are aligned with the financial stability objectives of the proposed Regulation more broadly. Discussions focused on matters including ESMA's role over EU CCPs and the EP’s proposal that requirements should be consistent with the rules for CCPs set out in EMIR. In addition, the UK government has published a letter from Mr Glen to Lord Boswell of Aynho, House of Lords EU Committee Chair, the content of which is similar. It also provides information on the Council's approach to the Statute of the ESCB and of the ECB in relation to EMIR, and an update on the CCP supervisory committee.

PAYMENT SERVICES AND PAYMENT SYSTEMS

Please refer to the FinTech section on a report from the BIS committees on central bank digital currencies.

PSR policy statement: decision on review into "day one" directions and consultation on proposed directions

On 14 March, the PSR published a policy statement and consultation: PSR directions: decision on the review into "day one" directions and consultation on proposed directions (CP19/3). The PSR's day one directions are the six general directions and one specific direction issued under the Financial Services (Banking Reform) Act 2013 (Banking Reform Act) when it launched in 2015. The majority of these directions were intended to improve access to, and the governance of, payment systems in the UK. In the policy statement, the PSR reports on the main issues arising from its March 2018 consultation on the review of the day one directions. The PSR has published a separate document setting out the responses to CP18/1. Chapter 3 sets out the PSR's decisions on each of the day one directions and its feedback to comments made by respondents. Overall, the PSR considers it has seen real benefits flow from the day one directions and does not believe it needs to radically rethink its approach. However, it intends to make some changes to ensure that the directions remain relevant and proportionate, and to tailor its requirements to market realities, legislative changes and expected future developments. This also reflects the regulatory principles in the Banking Reform Act. These changes are summarised in Table 1 of the policy statement. Annex 1 to the policy statement contains the proposed wording of the new directions on which the PSR is consulting. This consultation closes on 26 April. After assessing consultation responses, the PSR expects to make final decisions on the wording of the directions. It is aiming to publish the finalised directions around mid-year. The PSR's intention is that, when the directions are finalised, it will revoke the day one directions and give the new directions simultaneously. There will be at least a one-month notification period before the new directions come into force.

EC adopts Delegated Regulation on PSD2 central contact point

On 14 March, the EC adopted a Delegated Regulation containing RTS relating to central contact points (CCP) under the revised Directive on payment services in the internal market (PSD2). The Delegated Regulation sets out the criteria for the appointment of CCPs by payment institutions. It creates legal certainty about the criteria that member states will apply to determine whether it is appropriate to appoint a CCP. It also clearly sets out the functions a CCP must have to fulfil its duties. The EBA published a final report containing the draft RTS in December 2017. The next step is for the Council of the EU and the EC to consider the Delegated Regulation. If neither of them objects, it will enter into force 20 days after it is published in the OJ.

PSR responds to Treasury Committee on caps on interchange fees in no-deal scenario

On 12 March, the House of Commons Treasury Committee published a letter from Hannah Nixon, Managing Director of the Payment Systems Regulator (PSR), to the Committee, which contains information the PSR committed to providing during an evidence session on 12 February. The letter was sent in response to a letter from the Committee dated 19 February. Among the range of issues addressed in the letter, Ms Nixon clarifies the extent to which caps contained in the Regulation on interchange fees for card-based payment transactions (IFR) would apply to the fees for using and accepting EU-issued cards in the UK in a no-deal scenario. The question arose in the context of the Interchange Fee (Amendment) (EU Exit) Regulations 2019, the made version of which was published on 18 February. Ms Nixon explains that the scope of the on-shored IFR will be narrowed so that the caps would only apply where the point of sale (that is merchant location) and both the issuer and acquirer are located in the UK. This means that where a card is issued in the UK, but the acquirer and merchant are located in the EEA, the interchange fee caps will no longer apply. The same would be true where a UK issued card is used at a UK merchant, but the acquirer is located in the EEA. If the caps no longer apply to such transactions, there is a significant risk that interchange fees may increase for these transactions, making it more expensive for EEA merchants to accept UK issued cards, and for UK merchants to accept EEA issued cards. Ms Nixon points out that the precise impact will depend on how card schemes set the level of the interchange fees for UK-EEA cross-border transactions in the event of a no-deal. The PSR will continue to be responsible for enforcing the caps, and will continue to liaise with Mastercard and Visa on the issue.

EBA clarifies first set of issues raised by working group on APIs under PSD2

On 11 March, the EBA published a document setting out clarifications to the first set of issues raised by its working group on APIs under the revised Payment Services Directive (PSD2). The issues relate to the practical aspects regarding the reliability of testing platforms, the alignment of functionalities between API schemes, and the identification for testing purposes of entities that have not yet been authorised. An accompanying press release explains that the working group was established in January and met for the first time on 21 February. It consists of 30 individuals representing account servicing payment service providers, third party providers, API schemes, and other market participants. The aim of the group is to facilitate industry preparedness for the RTS on strong customer authentication and common and secure communication, and to support the development of high-performing and customer-focused APIs under PSD2. The group will also propose solutions on how the identified issues could be addressed, which the EBA and national authorities will then consider. In due course, the EBA will add clarifications to a number of additional issues raised by the working group.

ECB consults on draft Decision on oversight of systemically important payment systems

On 8 March, the ECB published for consultation a draft Decision on the procedure and conditions for exercise by a competent authority of certain powers relating to the oversight of systemically important payment systems (SIPS). The draft Decision relates to Article 21(1) of the ECB's SIPS Regulation which gives competent authorities the power to: (i) obtain information and documents from a SIPS operator; (ii) require a SIPS operator to appoint an independent expert to perform an investigation or independent review on the operation of the SIPS; and (iii) conduct on-site inspections or delegate the carrying-out of such inspections. Article 21(2) of the SIPS Regulation requires the ECB to adopt a Decision on the procedure and conditions competent authorities are to comply with when exercising their Article 21(1) powers. On a related webpage, the ECB explains that comments can be made on the draft Decision until 12 April. The final version of the Decision, together with details of the feedback provided, will be published in due course. The draft Decision states that it will enter into force twenty days after its publication in the OJ.

FCA Chief Executive updates Work and Pensions Committee on approach to tackling pension scams

On 13 March, the House of Commons Work and Pensions Select Committee published a letter from Andrew Bailey, FCA Chief Executive, to Frank Field, Committee Chair, in which he outlines the FCA's approach to tackling pension scams. Mr Bailey has written the letter following the FCA's appearance at an evidence session on 6 February that formed part of the committee's pension costs and transparency inquiry. In his letter, among other things, Mr Bailey: (i) describes the composition and work of the FCA's pension scam intelligence team; (ii) explains how the FCA handles a "typical" pension scam case. Once supervisory work has been carried out, the most serious cases will be referred to the FCA's Enforcement Division for formal investigation; and (iii) states that the Regulatory and Retail Investigations Division (a department in the FCA's Enforcement Division) is currently undertaking a significant number of investigations into suspected pensions misconduct. Around 20 of these investigations, each of which have several investigation subjects, appear to involve scam-type features. These investigations make up a significant proportion of the work being carried out by FCA staff in this division.

Joint DWP, Pensions Regulator and HMT response to CMA investment consultancy market investigation

On 12 March, the DWP, Pensions Regulator and HMT responded to the final report published by the CMA in December 2018 on its market investigation into the supply and acquisition of investment consultancy services and fiduciary management (FM) services to and by institutional investors and employers in the UK. The CMA is implementing its proposed remedies in a draft Order published for consultation on 11 February. The relevant measures include a new duty on pension scheme trustees to carry out a competitive tender before awarding an FM mandate of 20% or more of their scheme assets for the first time. Among other things, if trustees have already delegated this level of scheme assets to an FM provider without conducting a competitive tender, then they must do so within five years. The CMA recommended that the DWP pass legislation implementing the new competitive tender requirements on trustees into pensions law, and providing for oversight by the Regulator. The Regulator should also provide guidance to trustees on running competitive tenders for FM and investment consultancy services. In addition, the CMA recommended that HMT bring investment services provided by investment consultants within the FCA’s regulatory perimeter. In their joint response: (i) the DWP accepts the recommendations regarding implementing the competitive tender requirements into pensions law, and for oversight by the Regulator. The DWP intends to consult on draft regulations later in this year and, subject to the outcome of the consultation and the parliamentary timetable, bring the regulations into force (replacing the CMA Order) in 2020; (ii) the Regulator accepts the recommendation on publishing guidance to help trustees in running a competitive tender process for fiduciary managers. The Regulator plans to consult on draft guidance in summer this year; and (iii) HMT notes the recommendation about bringing investment consultants within the scope of FCA regulation. It promises to "consider this recommendation and consult in due course" in the context of "competing priorities for government and the financial services sector".

PRUDENTIAL REGULATION

Please refer to the FinTech section for an update regarding the BCBS’s statement on cryptoassets.

EP adopted provisional version of texts regarding minimum loss coverage for non performing exposures

On 14 March, the EP published a provisional version of text regarding its adoption at first reading of the Regulation amending the CRR as regards minimum loss coverage for non-performing exposures.

PRA consults on updating Pillar 2 capital framework

On 13 March, the PRA published a consultation paper on updating the Pillar 2 capital framework (CP5/19). In CP5/19, the PRA sets out proposals to update the Pillar 2 capital framework to reflect continued refinements and developments in setting the PRA buffer (also referred to as Pillar 2B). Since the PRA published its approach to setting the PRA buffer in 2015, the BoE’s approach to stress testing has evolved. There have been changes to the stress testing hurdle rate and the way microprudential and macroprudential buffers interact. This, in turn, has implications for the way that the PRA buffer is calculated. The PRA also proposes to clarify its approach to assessing weaknesses in RMG, and explain the process for updating the benchmarks used to calculate the Pillar 2A requirement for credit risk. In addition, it is correcting some minor drafting errors that have been identified in previous publications. The PRA explains that it is not proposing to alter the purpose of the PRA buffer through the proposed changes, but to bring greater clarity, consistency and transparency to its capital-setting approach. To implement the proposed changes, the PRA plans to update the following: (i) statement of policy (SoP): the PRA's methodologies for setting Pillar 2 capital. The draft amendments to the SoP are set out in Appendix 1 to CP5/19; (ii) supervisory statement 31/15: the internal capital adequacy assessment process and the supervisory review and evaluation process. The draft amendments to SS31/15 are set out in Appendix 2; and (iii) supervisory statement 6/14: implementing CRD IV: capital buffers. The draft amendments to SS6/14 are set out in Appendix 3. Comments can be made on the proposals until 13 June. The PRA is particularly interested in comments on areas where further clarity is needed. It proposes to implement the proposals by 1 October.

PRA policy statement and final rules on credit risk mitigation

On 13 March, the PRA published a policy statement on credit risk mitigation (CRM): eligibility of guarantees as unfunded credit protection (PS8/19). In PS8/19, the PRA provides feedback to responses to the proposals set out in its February 2018 consultation paper (CP6/18). Respondents generally welcomed the PRA's clarification of its expectations regarding the eligibility of guarantees as CRM. However, several respondents raised concerns regarding the impact of the proposals on certain types of guarantees. Several respondents also requested further clarification on certain aspects of the proposals. As a result, the PRA has made three significant changes to its proposals: (i) removing the proposal relating to the meaning of pay out in a timely manner; (ii) adding a new expectation around risks arising from eligible guarantee arrangements; and (iii) adding a new expectation around recognising any residual risks. Further details on these changes are set out in chapter 2 of PS8/19. Appendix 1 to PS8/19 contains an updated version of the PRA's supervisory statement on CRM (SS17/13). The annex to SS17/13 explains that, together with minor changes to improve readability, the PRA has updated chapter 7 of SS17/13 to clarify expectations regarding the eligibility of guarantees as unfunded credit protection under Part Three, Title II, Chapter 4 of the Capital Requirements Regulation (CRR). Appendix 2 to PS8/19 contains an updated version of the PRA's supervisory statement on the internal capital adequacy assessment process and the supervisory review and evaluation process (SS31/15). The annex to SS31/15 explains that, together with minor changes to improve readability, the PRA has introduced, in new paragraphs 2.6A and 2.6B, an expectation around residual risks arising from guarantees qualifying as unfunded credit protection under Part Three, Title II, Chapter 4 of the CRR. The amendments to SS17/13 and SS31/15 will be effective from 13 September.

EC adopts Delegated Regulation amending Solvency II Delegated Regulation

On 8 March, the EC published the Delegated Regulation (C(2019) 1900 final) it has adopted amending the Solvency II Delegated Regulation ((EU) 2015/35). Annexes 1 to 12 and 13 to 16 to the new Delegated Regulation have been published separately. The new Delegated Regulation amends the Solvency II Delegation in a number of ways, including: (i) to remove unjustified constraints to the financing of the economy, it introduces prudential criteria that allow a reduction in the capital charges in the standard formula for insurers' unrated debt and unlisted equity investments; (ii) to enhance proportionality, it makes further simplifications to unjustifiably burdensome or costly elements of the capital requirements standard formula; (iii) to remove unjustified inconsistencies between different pieces of EU financial services legislation, it further aligns the rules applicable to the capital requirement standard formula with the rules applicable in the banking sector, to the extent that the alignment is commensurate with the different business models in the sectors; (iv) against the background of widely divergent member state practices on recognising the capacity of deferred taxes to absorb present losses, which cannot be justified by different tax regimes, it introduces further principles to ensure a level playing field in the EU; (v) it updates a number of parameters, including risk calibrations for certain risks, making use of additional data gathered on premiums earned and estimates of ultimate losses since the last calibration was performed; and (vi) it further refines the group solvency calculation and the volume measure for non-life premium risk, in recognition of risk mitigation techniques. The next step is for the new Delegated Regulation to be considered by the EP and Council of the EU. It states that it will enter into force twenty days after its publication in the OJ, and also that a number of its provisions will apply from 1 January 2020. In developing the new Delegated Regulation, the EC has taken into account advice from EIOPA and from interested stakeholders, including in relation to its November 2018 consultation on a draft version of the Delegated Regulation. In the explanatory memorandum to the new Delegated Regulation, the EC explains the key issues respondents raised, and the amendments it has made to the version of the Delegated Regulation it consulted on.

ECON and ENVI draft report on proposed sustainable investment framework

On 14 March, the EP published the text of a draft report by ECON and Committee on the Environment, Public Health and Food Safety (ENVI) on the proposal for a Regulation on the establishment of a framework to facilitate sustainable investment. ECON and ENVI adopted the draft report on 12 March. A related press release published at the time stated that the draft report, which contains a legislative resolution, now needs to be confirmed by a plenary vote, which is due to take place during the EP’s 25 to 28 March session. The proposed Regulation establishes an EU-wide classification system, or taxonomy, intended to provide businesses and investors with a common language to identify what degree economic activities can be considered environmentally-sustainable. It is one of three EC proposals relating to sustainable finance. The proposals were published in May 2018 and form part of the capital markets union package of initiatives.

Draft report

Press release

First meeting of FCA and PRA Climate Financial Risk Forum

On 12 March, the FCA published a press release following the first meeting of its Climate Financial Risk Forum (CFRF) on 8 March. The CFRF is a joint initiative with the PRA and its objective is to build capacity and share best practice across financial regulators and industry to advance financial sector responses to the financial risks from climate change. The forum brings together senior representatives from across the financial sector, including banks, insurers, and asset managers. It is chaired by Sarah Breeden, PRA Executive Director of International Banks Supervision, and Christopher Woolard, FCA Executive Director of Strategy and Competition, and will meet three times a year. At its first meeting, the forum decided to set up four working groups to focus on risk management, scenario analysis, disclosure and innovation. The working groups will meet more frequently than the CFRF, reporting back at each CFRF meeting. The aim is to produce practical guidance on each of the four focus areas. The final outputs will be shared with industry more widely. Membership of the working groups will be wider than the forum to allow them to draw on expertise as necessary, such as from academia and industry. The PRA published a consultation paper on enhancing banks' and insurers' approaches to managing the financial risks from climate change, and the FCA published a discussion paper on climate change and green finance, in October 2018.

Council of EU invites COREPER to approve final compromise text of proposed Regulation amending BMR on carbon benchmarks

On 11 March, the Council of the EU published an "I" item note from the Council's General Secretariat to COREPER on the approval of the final compromise text of the proposed Regulation amending BMR on low-carbon benchmarks and positive carbon impact benchmarks. COREPER is invited to approve the text set out in the addendum to the note with a view to reaching an agreement at first reading with the EP. The final compromise text has been published following the announcement, on 25 February, from the EP that political agreement on the proposed Regulation has been reached. The proposed Regulation is one of three EC proposals relating to sustainable finance.

"I" item note

Addendum

OTHER DEVELOPMENTS

EBA publishes report on the convergence of supervisory practices

On 14 March, the EBA published a report regarding the convergence of supervisory practices. It provides a summary of the EBA’s observations regarding the current convergence of supervisory practices and the EBA’s activities carried out in 2018 to promote this convergence in accordance with its mandates as set out in its Founding Regulation and in Article 107 of the CRD. Based on these mandates, the EBA used the different tools at its disposal to promote supervisory convergence and implement its convergence strategy.

EP to consider proposed Regulation on EU crowdfunding service providers at 25 to 28 March plenary session

On 13 March, the EP updated its procedure file on the EC’s proposed Regulation on European crowdfunding service providers. The procedure file indicates that the EP will consider the proposed Regulation during its plenary session to be held from 25 to 28 March.

EBA 2017 report on high earners in EU banks

On 11 March, the EBA published its 2017 report on high earners in EU banks. The EBA has analysed the data that was provided by NCAs as at the end of 2017, and compared it to the 2016 data. Key results of the analysis are as follows: (i) the number of high earners who have been awarded EUR1 million or more in annual remuneration slightly increased for 2017, from 4,597 in 2016 to 4,859 in 2017 (+5.69%). The exchange rate between EUR and GBP continues to have an effect on the number of high earners, leading to a slight increase in the staff income paid in GBP when expressed in EUR; (ii) around 87% of high earners were staff whose professional activities have a material impact on the institution's risk profile "identified staff" in 2017 compared with 89% in 2016. Although a small decrease, this confirms that the percentage increased significantly after the RTS on identified staff entered into force in 2014. Not all high earners are considered identified staff; and (iii) the largest population of high earners in the EU of 3,567 is located in the UK (73.27% of the total number of high earners) and most of them are remunerated in GBP. The EBA will continue to benchmark remuneration trends (for the performance year 2018) in the first quarter of 2020 and will continue to publish data on high earners annually to closely monitor and evaluate developments in this area. In addition, it intends to review the application of the RTS on identified staff and publish a report in the second half of this year. Under Article 75 of the CRD IV Directive, the EBA is required to benchmark remuneration trends at the EU level and to publish aggregated data on high earners earning EUR1 million or more per financial year. NCAs are responsible for collecting the relevant information from credit institutions and investment firms and for submitting it to the EBA.

FSB note on key "takeaways" from banking workshop on compensation

On 8 March, the FSB published a note setting out the key "takeaways" from a compensation workshop with banks held in London in October 2018. The FSB held the workshop as part of its work to assess the extent to which its principles for sound compensation practices, and their implementation standards, have been effectively implemented. Executives responsible for managing compensation processes at 17 large internationally-active banks participated in the workshop, together with representatives of the FSB's Compensation Monitoring Contact Group. The aim of the workshop was to gather information on key compensation issues and challenges. The workshop focused on: (i) The big picture. How compensation structures have changed since the financial crisis and how they may change in the coming years; (ii) Implementation of the principles and standards. The practical steps banks have taken to implement these reforms, including details on which individuals are designated as material risk takers; and (iii) Effectiveness. The steps banks are taking to assess the effectiveness of current compensation policies and practices in terms of better aligning risk and reward. In the note, the FSB summarises the main points raised during the workshop. Feedback on the note is welcomed and can be sent until 7 May.

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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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Key Regulatory Topics: Weekly Update 8 March - 14 March 2019

BREXIT

New French Brexit-related ordinance

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

Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019 made

2019 Spring Statement: key financial services announcements

Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 made

CAPITAL MARKETS

Prospectus Regulation: final draft EC delegated regulation on the format, content, scrutiny and approval of prospectuses

Prospectus Regulation: draft Commission delegated regulation on regulatory technical standards

CONDUCT

FCA final rules on new financial services directory

FCA finalised guidance on SM&CR statements of responsibilities and responsibilities maps for solo-regulated firms

CONSUMER/RETAIL

FCA consults on investment platforms market study remedies

FCA publishes final report on investment platforms market study

CMA publishes term of reference for Loyalty Penalty Working Group

EA Joint Committee Decision incorporating MCD into EEA Agreement published in OJ

FCA and FOS policy statement on increasing FOS award limit

FINANCIAL CRIME

Pressure mounting for new failure to prevent economic crime corporate criminal offence

EP adopted provisional version of texts regarding AML

Bribery Act 2010: post-legislative scrutiny

Treasury Committee report on Economic Crime: Anti-money laundering supervision and sanctions implementation

FCA report setting out industry insights on cyber security

FINTECH

Findings of phase I of FCA's digital regulatory reporting pilot

BCBS statement on cryptoassets

BIS committees report on central bank digital currencies

FUND REGULATION

Treasury progress update on proposed Regulation and Directive on cross-border distribution of collective investment funds

Joint Committee of ESAs propose draft RTS to clarify application of KID to investment funds

INSURANCE

PRA policy statement on group own fund availability under Solvency II

EC responds to ECON concerns about Solvency II Delegated Regulation

MARKETS AND MARKETS INFRASTRUCTURE

FCA FIRDS open for firms to test publication

€STR start date and recommendations on transition from EONIA announced

EC adopts Delegated Regulation extending MiFIR trade transparency exemption to People's Bank of China

ESMA includes MiFID II and MiFIR in interactive single rulebook

CPMI and IOSCO update on status (as of January) of level 1 assessments for implementation of principles for financial market infrastructures

FCA supervisory statement on operation of UK MiFIR transparency regime following no-deal Brexit

Council of EU and EP reach provisional agreement on proposed Regulation amending EMIR supervisory regime for EU and third country CCPs

EP non-objection to Delegated Regulations exempting BoE from MAR, MiFIR, EMIR and SFTR obligations after Brexit

EP non-objection to Delegated Regulation amending MiFID II tick size regime

Two Commission Delegated Regulations under EMIR preparing for no-deal Brexit published in OJ

FCA statement on MiFID II obligations and BMR in event of no-deal Brexit

EEA Joint Committee Decision incorporating MiFIR and MiFID II Directive into EEA Agreement published in OJ

Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019 made

ECON draft report on proposed Directive on credit servicers, credit purchasers and recovery of collateral

FCA statement on derivatives reporting under UK EMIR regime in no-deal Brexit

FCA consults on Handbook changes to reflect application of Securitisation (Amendment) (EU Exit) Regulations 2019 and Securitisation Regulations 2018

HMT progress update on proposed Regulation amending EMIR supervisory regime for EU and third country CCPs

PAYMENT SERVICES AND PAYMENT SYSTEMS

PSR policy statement: decision on review into "day one" directions and consultation on proposed directions

EC adopts Delegated Regulation on PSD2 central contact point

PSR responds to Treasury Committee on caps on interchange fees in no-deal scenario

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EBA clarifies first set of issues raised by working group on APIs under PSD2

ECB consults on draft Decision on oversight of systemically important payment systems

PENSIONS

FCA Chief Executive updates Work and Pensions Committee on approach to tackling pension scams

Joint DWP, Pensions Regulator and HMT response to CMA investment consultancy market investigation

PRUDENTIAL REGULATION

EP adopted provisional version of texts regarding minimum loss coverage for non performing exposures

PRA consults on updating Pillar 2 capital framework

PRA policy statement and final rules on credit risk mitigation

EC adopts Delegated Regulation amending Solvency II Delegated Regulation

SUSTAINABLE FINANCE

ECON and ENVI draft report on proposed sustainable investment framework

First meeting of FCA and PRA Climate Financial Risk Forum

OTHER DEVELOPMENTS

EBA publishes report on the convergence of supervisory practices

EP to consider proposed Regulation on EU crowdfunding service providers at 25 to 28 March plenary session

EBA 2017 report on high earners in EU banks

FSB note on key "takeaways" from banking workshop on compensation

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