Orrick's Financial Industry Week In Review

by Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

SEC Proposes Rules to Implement FAST Act Mandate to Modernize and Simplify Disclosure

On October 11, 2017, the Securities and Exchange Commission (SEC) proposed amendments "to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies and to implement a mandate under the Fixing America's Surface Transportation (FAST) Act." Such amendments would, among other things, (i) update, streamline or otherwise improve the SEC’s disclosure framework, (ii) update certain rules by eliminating certain requirements for undertakings in registration statements, (iii) simplify disclosure or the disclosure process and (iv) improve access to information by "requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR". If the proposed rules are approved, the SEC will seek public comment on the proposed rules for 60 days. To read the full article, please click here. To read the Proposed rule on periodic statements, click here.

CFPB Finalizes Rule To Stop Payday Debt Traps

On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) "finalized a rule that is aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans." The protections under the rule include, among other things, a full-payment test, a principal-payoff option for certain short-term loans and a debit attempt cut-off that applies to certain loans. In addition, the rule identifies it as an unfair and abusive practice for a lender (i) "to make covered short-term or longer-term balloon-payment loans, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay the loans according to their terms" and, with respect to certain loans, "to make attempts to withdraw payment from consumers’ accounts after two consecutive payment attempts have failed, unless the consumer provides a new and specific authorization to do so". The rule also provides notices for consumers before an attempt is made to withdraw payments from their account. The rule will go into effect twenty-one (21) months after it is published in the Federal Register. To read the full article, please click here. To read the Proposed rule on periodic statements, click here.


Rating Agency Developments

On October 10, 2017, DBRS issued a report entitled: Rating U.S. Structured Finance Transactions. Report.

On October 10, 2017, S&P issued a report entitled: Special-Purpose Vehicle Margin Requirements For Swaps - Methodology And Assumptions. Report.

On October 9, 2017, DBRS issued a report entitled: Derivative Criteria for European Structured Finance Transactions. Report.

On October 9, 2017, Fitch issued a report entitled: CLOs and Corporate CDOs Rating Criteria. Report.

On October 6, 2017, Fitch issued a report entitled: Canada Residential Mortgage Rating Criteria. Report.

On October 6, 2017, Fitch issued a report entitled: U.S. Wireless Tower Transaction Rating Criteria. Report.


European Financial Industry Developments

EBA Adopts Final Guidelines on Compliant Procedures for Infringements of PSD2 

The EBA published a report (EBA/GL/2017/13) on October 13, 2017, which includes its final guidelines for competent authorities on the complaints procedures to be taken into consideration to ensure compliance by payment service providers ("PSPs") with the revised Payment Services Directive ((EU) 2015/2366) ("PSD2").

The guidelines, issued under Article 100(6) of PSD2, govern the process through which payment service users, and other interested parties, can submit complaints to competent authorities with regard to PSPs' alleged infringements of PSD2.

The EBA consulted on the guidelines in February 2017, and it found that the majority of respondents supported the proposed guidelines. Feedback on the consultation is in section 5 of the report. In light of responses, the structure of the guidelines has stayed the same but the EBA has introduced the following changes:

  • A clarification that the guidelines apply to complaints submitted by PSPs that are affected by a situation that gave rise to a complaint.
  • A requirement for competent authorities to establish at least one method of submission of complaints that is accessible online.
  • A requirement for competent authorities to provide information to complainants on how they can access the channels for submission of complaints, and the contact details of any authority or body to which the complaint might have been forwarded.
  • An extension of the scope of the analysis of complaints, which now also includes information on the payment services and the provisions of PSD2 most complained about.
  • The guidelines will be published on the EBA website in all official EU languages. Competent authorities will have two months following the publication of the translated guidelines to report whether or not they comply with the guidelines.

The guidelines will come into force on January 13, 2018, which is the date from which PSD2 applies.


EBA Publishes Opinion on Brexit

On October 12, 2017, the EBA published an opinion on issues relating to the departure of the UK from the European Union (EBA/Op/2017/12).

The EBA explains that it decided to issue the opinion to provide guidance on supervisory expectations and to address regulatory and supervisory risks that arise from increased requests from entities seeking to relocate to the EU within a relatively short period of time. It aims to provide practical recommendations to credit institutions, investment firms and other financial services firms, and to highlight to the Commission areas of the legislative framework that could be updated to respond to challenges posed by Brexit. The opinion focuses on the period before the UK's departure from the EU.

The EBA addresses the following areas and sets out some key principles, followed by specific detailed technical guidance addressed to firms and competent authorities:


Key principles include:

  • Existing authorization standards should not be lowered.
  • All applications for authorization, registration, admission or variation of permission, and notifications relating to branches should be subject to existing procedures and standards.
  • Competent authorities should carefully assess the adequacy of the relocating firms' structure and governance.

Internal governance, outsourcing, risk transfers and "empty shell" companies

Key principles include:

  • Competent authorities should not allow institutions to outsource activities to such an extent that they operate as "empty shell" companies. All institutions should have the substance to identify and manage the risks they generate.
  • Since it is likely that the UK will be a third country after Brexit, competent authorities should assess whether UK institutions to which activities have been outsourced prior to Brexit are able to adapt to the situation.

Internal models

Key principles include:

  • The existing EU legal framework for approvals of internal models should be applied in full and, where approvals or changes are sought, the Capital Requirements Regulation (Regulation 575/2013) (CRR) assessment process should be followed.
  • Existing permissions to use internal models will continue to apply in EU member states after Brexit. However, assessments will need to be made of whether or not a group's new circumstances have affected its use of a model and, therefore, whether or not there is a material change.

Resolution and deposit guarantee schemes

Key principles include:

  • Institutions and authorities need to assess their stock and issuance plans for instruments used to meet the minimum requirement for own funds and eligible liabilities (MREL) in the light of Brexit and in particular their reliance on instruments issued under English law.
  • Deposit Guarantee Schemes (DGSs) should assess the equivalence of the UK's deposit protection regime at the date of Brexit and consider putting in place cooperation arrangements with the UK DGS post-Brexit.
  • The EBA says that it will look at the extent to which the recommendations in its opinion have been followed and will complete a progress report before the end of 2018.

The EBA attaches a report to the opinion setting out the detailed analysis underlying its guidance.


European Commission Establishes Plan on Completing the Banking Union

On October 11, 2017, the European Commission published a communication setting out its plans to complete the outstanding parts of the banking union (COM(2017)592). The Commission also published a fact sheet and a set of questions and answers.

The Commission calls for all aspects of the banking union to be completed by 2018 and sets out a plan to ensure agreement on all the outstanding elements, based on existing commitments by the Council of the EU. The Commission believes that a complete banking union will promote a stable and integrated financial system in the EU.

The main features of the communication are:

  • The Commission is working on comprehensive measures to reduce the level of existing non-performing loans and prevent the build-up of non-performing loans in the future. The package of measures is due to be adopted in spring 2018.
  • The Commission calls on the European Parliament and member states to adopt the banking union as quickly as possible to reduce risks and strengthen the resilience of EU banks.
  • The Commission suggests that the European deposit insurance scheme should be adopted more gradually compared with the Commission's earlier proposal of 2015. There would be only two phases rather than three, relating to reinsurance and coinsurance, respectively.
  • The Commission highlights the need for the backstop to be deployed quickly in last-resort situations.
  • The Commission will consider the outcome of the European Systemic Risk Board's (ESRB) work on sovereign bond-backed securities ("SBBS") with a view to putting forward a proposal to enable the development of SBBS in 2018.
  • In December 2017, the Commission will propose that large investment firms carrying out bank-like activities should be considered as credit institutions and be subject to bank supervision in the framework of the single supervisory mechanism ("SSM"), including by the ECB.


European Commission Publishes Report on Single Supervisory Mechanism

On October 11, 2017, the European Commission published a report on the single supervisory mechanism ("SSM") that assesses the setting up and functioning of the SSM (COM(2017)591), together with a staff working document (SWD(2017)336).

The report aims to determine the effectiveness of the SSM as the first pillar of the banking union and is part of a broader assessment of progress achieved in relation to the banking union. The report represents the first review by the Commission of the application of the Regulation establishing the SSM (Regulation 1024/2013) ("SSM Regulation").

The Commission concludes that the SSM has been implemented successfully, with clear benefits in terms of financial stability and market integration. The ECB has established a reputation as an effective and rigorous supervisory authority.

The review focuses on the most important aspects of the functioning of the SSM and covers five themes:

  • the governance of the SSM;
  • the interaction with relevant EU and international bodies;
  • the key tools developed by the ECB to perform its supervisory tasks;
  • the performance of supervisory tasks by the ECB; and
  • the cost-effectiveness of the SSM.

Overall, the application of the SSM Regulation appears to work well in practice. The shortcomings noted in the report may be corrected mainly through actions to be taken by the ECB or through amendments to relevant EU law.

This conclusion supports the Commission's aim of completing the banking union before the end of 2019, as set out in its communication also published on October 11, 2017.

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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