Allen & Overy LLP


​​EP updates its in depth-analysis on third country equivalence in EU banking and financial regulation

On 27 September, the EP updated its April 2017 in depth-analysis on third country equivalence in EU banking and financial regulation. This briefing provides an insight into the latest regulatory developments on equivalence in EU banking and financial regulation, including: (i) elements of the on-going ESA review; (ii) the Investment Firm Review; and (iii) EMIR 2.2. The briefing also gives an overview on the possible role of equivalence regimes in the context of Brexit both in the context of a ‘no-deal’ scenario and as part of an agreement.

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FCA publishes its Market Watch issue 56

On 24 September, the FCA published issue 56 of Market Watch, its newsletter on market conduct and transaction reporting issues. It includes information on: (i) the calibration of firms' surveillance systems. Firms are reminded that that every business will be unique. Therefore, relying on peer standards will not necessarily satisfy the requirements under MAR. Each firm is responsible for making its own judgements about alert calibration, and firms risk failing to comply with MAR if they assume that because a certain calibration is appropriate for their peers, it must be appropriate for them; (ii) assessing the risk of market abuse. Firms are reminded that the lists of indicators for fictitious devices, false or misleading signals and price securing in MAR are not exhaustive. Firms treating them as such may fail to identify the risk of, and so fail to detect and report, other types of market manipulation that are still within the broader scope of Article 12(1)(a) and (b) of MAR; (iii) fixed income surveillance. Submission of suspicious transaction and order reports (STOR) across asset classes remains inconsistent. The FCA believes that submissions continue to be too low in fixed income products. It goes on to provide further observations from its recent visit programme; (iv) firm rationales for failings. The FCA notes that these have two themes. Firstly, some firms appear to consider that their own failings can be excused by a perception that some of their peers are failing in the same way. Secondly, on STOR visits where the FCA observes potential failings, firms occasionally tell it that the responsible employee has only recently joined and does not feel they are responsible for a predecessor's arrangements, which is of limited relevance; and (v) payment for order flow. Following its Dear CEO letter on Payment for Order Flow, which was published in December 2017, the FCA provides an update on its recent work. It shares its high-level findings and sets out the planned next steps, which includes scrutiny of the specific controls for correctly classifying individual transactions. The FCA will also look at the policies applied by firms, focusing particularly on how they manage potential conflicts, and the extent of their compliance monitoring and oversight activity.

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FCA publishes a report following its thematic review on the impact of credit broking remuneration models at the point of sale

On 27 September, the FCA published a report (TR18/2) following its thematic review of the impact of credit broking remuneration models at the point of sale. The review covered a wide variety of credit brokers offering loans or finance provided by a third party. It did not consider lenders selling their own products directly to consumers, or motor finance firms as this market is subject to a separate FCA review and will publish its findings later in the year. The FCA did not find evidence that inter-firm commissions are generally resulting in significant harm to consumers. However, it did identify a small number of issues in individual firms and are addressing these with each firm. The FCA's findings include the following: (i) the main business of most of the credit broking firms the FCA regulates is not credit broking. Many are retailers that sell their goods on finance; (ii) most finance brokers in the FCA's survey did not receive commission on credit products; (iii) finance brokers did not actively look to negotiate higher commission rates with lenders, or to switch to lenders that provide higher commission, which might have led them to offer poorer value finance products; (iv) the level of commission appears to play little, or no, part to loan brokers; and (v) most consumers surveyed saw their experience of buying products on credit through a finance broker as positive, regardless of whether commission was paid or not. The report also identifies good practice for firms. The FCA will continue to monitor credit broking activity as part of its ongoing supervisory strategy and address harm in individual firms where it sees it.

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Financial Guidance and Claims Act 2018 (Commencement No. 3 and Transitory Provisions (Modification)) Regulations published

On 25 September, the Financial Guidance and Claims Act 2018 (Commencement No. 3 and Transitory Provisions (Modification)) Regulations (SI 2018/1029) were published. These are the third commencement regulations made under the Act. The Regulations bring into force, on 1 October, the specified provisions in Part 1 of the Financial Guidance and Claims Act 2018 to establish a single financial guidance body, and make associated and consequential provisions.

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New FCA webpage on the FAMR baseline tracking

On 24 September, the FCA published a new webpage on baseline tracking relating to the FAMR. In line with the FCA's commitment to monitor changes in the market, it has also published a report (dated August) outlining the findings from interim consumer research carried out concerning the FAMR. The results of the research will be used to indicate if there have been any changes in the behaviour of UK adults relating to taking regulated advice and guidance, and their perceptions of the market since 2017. A full review of the FAMR baseline indicators will be carried out in 2019, along with the final post-implementation review of the RDR. The results will be published in early 2020.

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Please see the “Conduct” section for an update on the FCA’s Market Watch.

New senior roles at the SFO

On 27 September, the SFO announced that it is expanding and restructuring its management team, to strengthen the organisation’s intelligence and case development function and to bring a clearer focus to the Chief Investigator and General Counsel roles. The roles include: (i) a new role of Head of Intelligence will be created at Senior Civil Service (SCS) level 1, to accelerate the drive to a more proactive approach to sourcing new cases. The Chief Investigator, who currently oversees the Intelligence Unit, will therefore be able to devote his full attention to his core role, advising on investigative strategy and leading the professional development of investigators; and (ii) a new Head of Corporate Services will also be recruited to manage the finance, human resources, procurement and facilities management functions, also at SCS1. This will allow line management responsibility for operational staff to be moved from General Counsel to the Chief Operating Officer, Mark Thompson, allowing the former to return to a more focussed legal role whilst ensuring the corporate teams are fully supported. Recruitment for these roles will be run concurrently with the search for a General Counsel to succeed Alun Milford, who departs later this year. Separately, the SFO will welcome a senior secondee from the private sector, whose main roles will be to assist with building and consolidating relationships with authorities in other jurisdictions and to act as an adviser in case reviews and on compliance issues. Peter Pope, a partner at Jenner & Block, will be on loan to the SFO for a year beginning in early October.

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Please see the “Prudential Regulation” section for an update on ECON’s draft reports on the revised EU prudential framework for investment firms

ECON publishes two draft reports on the EC’s legislative proposals on the cross-border distribution of collective investment funds

On 21 September, the ECON published the following draft reports, both dated 18 September: (i) draft report (PE627.813v01-00) on the proposal for a Directive on the cross-border distribution of collective investment funds (2018/0041(COD)); and (ii) draft report (PE627.812v01-00) on the proposal for a Regulation on facilitating cross-border distribution of collective investment funds (2018/0045(COD)). Both draft reports have been produced by rapporteur Wolf Klinz. They each contain a EP legislative resolution, the text of which sets out suggested amendments to the proposed legislation, alongside an explanatory statement by the rapporteur. In each case, the rapporteur comments that he essentially supports the EC’s proposals. He has, however, identified some areas for action, which include procedures for meeting marketing requirements by national authorities, transparency on fees set by national authorities, and the possibility of "pre-marketing" across borders AIFs that have not been established.

Draft report on the proposal for a Directive on the cross-border distribution of collective investment funds

Draft report on the proposal for a Regulation on facilitating cross-border distribution of collective investment funds


CMA publishes its provisional decision in its limited review of the Payment Protection Insurance Market Investigation Order 2011 (the PPI Order)

On 27 September, the CMA published its provisional decision in its limited review of the PPI Order. The CMA's provisional view is that EU Insurance Distribution Directive 2016/97 (IDD) represents a change of circumstances, such that the PPI Order should be varied. The PPI Order and the IDD both require PPI providers to provide policy holders with a policy summary, containing similar information. Of the three options previously consulted upon, the CMA proposes to implement Option 1. This will require all new, renewable and existing PPI policies to include an information document in the format of the Insurance Product Information Document specified in the IDD. PPI providers must provide this information document to policy holders annually. The deadline for comments is 29 October. The CMA intends to issue its final decision in November.

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BoE publishes a speech on the current issues in insurance supervision

On 27 September, the BoE published a speech by David Rule, BoE Executive Director of Insurance Supervision, on current issues in insurance supervision, including: (i) the progress being made towards a global international capital standards (ICS) for internationally-active insurance groups. The BoE supports the ICS' development. It encourages UK insurance groups to respond to the latest consultation published by the IAIS and to participate in the final round of field testing in 2019; (ii) the UK market for ILS. The PRA has now authorised a number of ISPVs. It is taking a proportionate approach to their supervision and is keen to work with industry to ensure it captures any learning while developing its experience of operating the new ILS regime; (iii) the FCA and PRA's new insurer start-up unit, which is not solely targeted at innovative Insurtech firms, but also firms with more traditional business model; (iv) pricing, underwriting and reserving in wholesale insurance and reinsurance markets. Responses to the PRA's May Dear CEO letter on underwriting and reserving have acknowledged almost universally the concerns raised about the wider market. However, the quality of insurer's individual responses has been more variable. Where there are concerns over a firm's Dear CEO letter response, the PRA will follow up, including with the board where appropriate; and (v) management, market risk sensitivities and disclosures. The PRA is interested in the sensitivity of UK life insurers' capital surpluses to various market movements, insurers' disclosure of sensitivities and the drivers of changes in insurers' capital positions over time. The appendix to the speech sets out a generic breakdown of the change in an insurer's capital surplus over the SCR from one reporting date to the next. The PRA uses this to understand how an insurer generates Solvency II capital.

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PRA asks for feedback on the working drafts of its standalone internal model output and market risk sensitivities taxonomy

On 21 September, the PRA updated its webpage on regulatory reporting in the insurance sector. The PRA explains that it has published a public working draft (PWD) of the standalone internal model output (IMO) and market risk sensitivities (MRS) taxonomy, alongside related technical "artefacts", that will make up part of the PRA's insurance XBRL taxonomy. The materials can be accessed from the webpage. The PWD follows publication of PS21/18 in July, and is based on the proposals in CP10/18. The PRA explains that the taxonomy, data point model (DPM) dictionary, annotated templates and validation rules, represent the reporting requirements as set out in supervisory statements: Solvency II: regulatory reporting, internal model outputs (SS25/15); Solvency II: ORSA and the ultimate time horizon – non-life firms (SS26/15); and Solvency II: Data collection of market risk sensitivities (SS7/17). The deadline for comments is 28 September. The PRA advises firms that the PWD should not be used for reporting. The PRA also reminds firms that the PWD for national specific templates and standard formula reporting for firms with an approved internal model was published on 10 August. The final live release will consolidate all frameworks.

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ESMA updates its May Q&As on CSDR

On 27 September, ESMA published an updated version of its May Q&As (ESMA70-708036281-2) on the implementation of the CSDR. The additional Q&As relate to book-entry form requirements, organisational requirements and settlement discipline. It is the first set of Q&As relating to settlement discipline issues following the publication of Commission Delegated Regulation (EU) 2018/1229 on settlement discipline on 13 September.

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ESMA updates its July 2017 Q&As on BMR

On 27 September, ESMA published an updated version (ESMA70-145-11, version 9) of its July 2017 Q&As on the BMR. ESMA has added six new Q&As (all dated 26 September): (i) Q&A 5.8, which clarifies when financial instruments traded on a SI are within the BMR's scope; (ii) Q&A 5.9, which sets out when banks issuing certificates are users of benchmarks; (iii) Q&A 5.10, which explains why the NAV of investment funds should be considered input data and not benchmarks; (iv) Q&A 7.2, which confirms that a single application for endorsement can include a family of benchmarks; (v) Q&A 7.3, which sets out ESMA's view that benchmark statements should be published in a language that is accepted by the NCA of the relevant member state; and (vi) Q&As 8.2 and 8.3, which concern written plans under Article 28(2) of the BMR and, specifically, when the written plan to be produced by benchmark users should be considered robust and how the plan should be reflected in the contractual relationship with clients.

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ESMA publishes final report amending RTS on the clearing obligation under EMIR

On 27 September, ESMA published its final report (ESMA70-151-1768) on the extension of the deferred date of application of the clearing obligation under EMIR for certain intragroup transactions where one of the counterparties is in a third country. The report includes a new set of draft RTS on the clearing obligation. ESMA consulted on the draft RTS in July. The final report provides explanations on the finalised draft RTS, including the main feedback received from the consultation. Currently there are three EC delegated regulations (CDRs) on the clearing obligation, which mandate a range of interest rate and credit derivative classes for clearing. The CDRs contain a deferred date of application of the clearing obligation for intragroup transactions that satisfy certain conditions, and where one of the counterparties is in a third country, in the absence of the relevant equivalence decision. As the deferred dates are approaching and, in the absence of implementing acts on equivalence on the legal, supervisory and enforcement framework of a third country under Article 13(2) of EMIR in respect of the clearing obligation, ESMA proposes to prolong these exemptions for a limited period of time. It also proposes to align the date of extension for the three relevant CDRs to 21 December 2020 in case no equivalence decision has been adopted. ESMA has submitted the draft RTS (in Annex III to the report) to the EC for endorsement.

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ESMA updates its July Q&As on the implementation of EMIR

On 26 September, ESMA published an updated version of its Q&As (ESMA70-1861941480-52) on the implementation of EMIR. ESMA has added: (i) a new Q&A (number 23) in the CCPs questions section, which clarifies access models at European CCPs, specifically models that typically aim at facilitating buy-side or small participant access to CCPs and allowing better capital treatment for clearing members; and (ii) a new Q&A (number 49) in the TRs section, which explains how a reporting counterparty should report a FX swap derivative under Article 9 of EMIR. This Q&A applies from 26 September 2019.

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ESMA announces details of two new data completeness indicators for trading venues

On 27 September, ESMA announced two new data completeness indicators for trading venues detailing the double volume cap (DVC) and bond liquidity data. ESMA considers that the provision of timely, complete and accurate data is essential for the proper implementation of MiFIR and compliance with its requirements. The two new indicators are: (i) the completeness ratio, which provides information on the completeness of a particular venue taken in isolation, irrespective of the performance of other venues. It is calculated as the number of records received from a venue divided by the total number of records expected from that venue over the relevant period. One record corresponds to a bi-weekly report on completeness for the DVC and to a one-day report on completeness for bond liquidity; and (ii) the completeness shortfall, which gives an indication of a venue's performance in terms of completeness compared to other trading venues. It reflects the percentage of missing data for which a particular venue is responsible. ESMA will publish one file containing trading venue identification information and quantitative information. The two indicators will assist trading venues in delivering complete and accurate data on a timely basis, by providing performance information on the timeliness and completeness of their data provision. ESMA will publish them for the first time on 8 October for DVC data, and by 1 November 20 for bond liquidity data.

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ESMA updates its MiFIR data reporting Q&As

On 26 September, ESMA published an updated version of its Q&As (ESMA70-1861941480-56) on data reporting under the MiFIR. The document includes new Q&As relating to FX swaps reporting and interest rate swaps reporting. It also clarifies how trading venues or systematic internalisers should populate certain fields, and makes an amendment to an existing Q&A relating to the total issued nominal amount.

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ESMA publishes an opinion on amendments to MiFIR RTS on the systematic internalisers' quote obligations

On 21 September, ESMA published an opinion (dated 20 September) on amendments to RTS 1 (ESMA70-156-769). Among other things, RTS 1 specifies, in the context of the quoting obligation for SIs "the determination of whether prices reflect prevailing market conditions". In its opinion, ESMA agrees to limit the application of tick sizes to quotes of SIs to shares and depositary receipts. Although it continues to believe that applying the obligation to all equity and equity-like instruments better achieves the legislative goals expressed in Article 14(7) of MiFIR, it considers that the EC’s amendment will ensure the application of tick sizes to SIs' quotes for most equity instruments in a timely fashion. ESMA also agrees to the other technical amendments proposed by the EC. A revised draft Delegated Regulation amending RTS 1 is set out in the Appendix to the opinion.

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PSR publishes consultation on the draft specific direction regarding protected ATMs (LINK)

On 27 September, the PSR published for consultation a draft version (PSR CP18/2) of a specific direction it is proposing to issue to LINK Scheme Holdings Ltd (LINK), the operator of the LINK ATM system. The draft specific direction is entitled: "Draft specific direction 8 requiring the adoption of appropriate policies and measures and reporting obligations regarding protected ATMs (LINK)". The draft specific direction states that, to ensure LINK can maintain the broad geographic coverage of the free-to-use ATM network in the UK and meet service user needs, and has the resources to do so, the PSR considers it is necessary for it to have clarity regarding: (i) the scope of LINK's commitment; (ii) the terms of LINK's procedures, processes, policies and measures; (iii) LINK's compliance with certain minimum requirements; and (iv) LINK securing the expertise, resources, equipment and software that may be required from time to time to enable it to fulfil its commitment. On a related webpage, the PSR explains that the deadline for comments on the draft specific direction by 9 October. Once the consultation has closed, the PSR will review the comments received and, if appropriate, issue a specific direction to LINK.

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Please see the “Insurance” section for an update on the BoE’s speech on the current issues in insurance supervision.

ECON votes to adopt its draft reports on the revised EU prudential framework for investment firms

On 24 September, the EP announced that its ECON has voted to adopt its draft reports on the EC’s proposals for a Regulation on the prudential supervision of investment firms (IFR), and a Directive on the prudential supervision of investment firms, which amends CRD IV and MiFID II (IFD). Among other things, in its draft reports ECON suggests amendments relating to: (i) enabling competent authorities to subject an investment firm below a certain threshold to the bank rules when its activities are carried out at such a scale that the failure may pose a systemic risk; (ii) extending the period during which thresholds must be exceeded before moving to the higher, more burdensome category; (iii) increasing the number of investments that are subject to the lowest requirements; and (iv) tightening the equivalence rules for third country investment companies.

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ESRB Recommendation amending 2015 Recommendation on EU macroprudential policy framework published in OJ

On 21 September, Recommendation of the ESRB ESRB/2018/5 (dated 16 July) amending Recommendation ESRB/2015/2 on the assessment of cross-border effects of, and voluntary reciprocity for, macroprudential policy measures was published in the OJ. The 2018 Recommendation amends Recommendation ESRB/2015/2, which was last amended in October 2017, by recommending that relevant authorities reciprocate certain specified macroprudential policy measures that have been adopted by the relevant authorities in Belgium, Estonia and Finland.

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ECB finalises its guide to on-site inspections and internal model investigations

On 21 September, the ECB finalised its July 2017 guide to on-site inspections (OSIs) and internal model investigations (IMIs) under the SSM. The aim of the guide is to provide a reference document for supervised entities and other legal entities for which the ECB has decided to launch an on-site inspection. It provides a general overview of the legal and supervisory framework for OSIs and IMIs, describes the inspection process and sets out applicable principles for inspections, covering the powers of inspection teams and the rights of inspected legal entities. The guide applies to inspections conducted in significant institutions, less significant institutions (LSIs) and other legal entities referred to in Article 10(1) of the SSM Regulation, including third parties to whom credit institutions have outsourced functions. The ECB has published a feedback statement summarising responses received to the consultation and policy decisions taken by the ECB in response.

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PRA publishes a report on the impact of climate change on the UK banking sector

On 26 September, the PRA published a report on the impact of climate change on the UK banking sector. The purpose of the report is to: (i) examine the financial risks from climate change that impact PRA regulated banks, building societies and designated investment firms (collectively banks); (ii) assess how banks are responding to and managing the financial risks from climate change; and (iii) help banks understand the PRA's supervisory approach to the financial risks from climate change. The report finds that: (a) physical and transition risks from climate change have financial risk implications, some of which are already materialising (as illustrated by case studies in the report); (b) physical risks can arise from climate and weather-related events. They can potentially result in large financial losses, impairing asset values and the creditworthiness of borrowers;(c) transition risks can arise from the process of adjustment towards a low-carbon economy; and (d) changes in policy, technology and sentiment could prompt a reassessment of the value of a large range of assets and create credit exposures for banks and other lenders as costs and opportunities become apparent. For banks, the climate-related risk factors manifest as increasing credit, market and operational risks. In the light of its report, the PRA considers that financial risks arising from climate change are sufficiently material to be considered at board level. It found that the current approach to risk management varies widely between banks. The PRA expects firms to consider the risks identified in the report and reflect on their current approach. It will shortly be consulting on its supervisory expectations in this area. Given its findings and the finite timescale for ensuring an orderly market transition to a low-carbon economy and so as to minimise financial risks, the PRA intends to enhance its own response. As part of this, the PRA and the FCA will be establishing a climate financial risk forum, involving private sector participants, technical experts and other relevant stakeholders. In addition, the report will help inform the BoE’s wider approach. This includes the considerations of the FPC in its role of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.

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FSB and IMF 2018 publishes their third joint progress report on phase 2 of G20 data gaps initiative

On 25 September, the FSB published its third progress report on the implementation of the second phase of the G20 data gaps initiative (DGI-2). The report is produced jointly with the IMF. The report provides an update on the work undertaken since September 2017, to advance implementation of the twenty recommendations aimed at addressing the data gaps identified after the global financial crisis and promoting the regular flow of timely and reliable statistics for policy use. The key findings in the report include the following: (i) considerable progress was made by the participating economies during the second year of the DGI-2; (ii) key challenges, including adequate resource allocation, remain. High-level political support is crucial to overcome them; (iii) for the first time, the monitoring framework includes an evaluation of year-to-year progress; and (iv) possible synergies with other relevant global initiatives, such as big data and promotion of the global legal entity identifier, are monitored. The FSB and IMF will continue to monitor progress and report back to the G20 finance ministers and central bank governors on an annual basis. The aim is to complete the DGI-2 by 2021.

EBA launches its 2018 transparency exercise

On 24 September, the EBA announced the launch of its 2018 transparency exercise. In December, together with its Risk Assessment Report (RAR) for this year, the EBA will release over 900,000 data points on about 130 EU banks. The data will cover capital positions, risk exposure amounts, sovereign exposures and asset quality. The data disclosure is an important component of the EBA's responsibility to monitor risks and vulnerabilities and foster market discipline. The transparency exercise covers a wide sample of banks and countries, and provides consistent time series of semi-annual bank-by-bank financial information since 2011. The sample of banks will be aligned with the one used for the 2018 EBA RAR and the exercise will be based exclusively on supervisory reporting data. The data for December 2017 and June will cover: (i) financial information on capital; (ii) leverage ratio; (iii) risk exposure amounts; (iv) profit and losses; (v) market risk; (vi) securitisation; (vii) credit risk; (viii) exposures to sovereign; (ix) non-performing exposures; and (x) forborne exposures. The information reported will be mostly in line with the previous exercises.

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