Key Regulatory Topics: Weekly Update - 22 December 2017 – 4 January 2018
Allen & Overy LLP
FMLC paper on Brexit and impact of WTO rules on financial services
On 22 December 2017, the FMLC published a paper on the potential impact of Brexit and WTO rules on financial services. The paper focuses on the future of the UK's cross-border trade with the EU and the potential impact of WTO rules. Section 2 summarises the WTO rules that are relevant to financial services and section 3 examines the application of the WTO rules to financial services, including the operation of the prudential carve-out and the ways in which they support the negotiation of a FTA.
CAPITAL MARKETS AND MARKET INFRASTRUCTURE
ECB recommendation on dividend distribution policies: December 2017
On 4 January, the ECB published a recommendation (dated 28 December 2017) on dividend distribution policies (ECB/2017/44). It also published a letter on variable remuneration policy (dated 4 January 2018) sent by DaniÃ¨le Nouy, ECB Supervisory Board Chair to the management of credit institutions. The recommendation and letter relate to the payment of dividends in 2018 for the financial year 2017 by credit institutions in the SSM. The ECB published an equivalent recommendation (ECB/2016/44) and letter in December 2016 relating to the payment of dividends in 2017 for the financial year 2016. Apart from appropriate changes to the dates, the contents of the recommendation and the letter are unaltered from the versions published in December 2016.
FCA updates webpage on authorisation and registration process for benchmarks administrators
On 2 January, the FCA updated its webpage for benchmark administrators applying for authorisation or registration under the BMR. The updated webpage explains that the forms to apply to become an authorised or registered benchmark administrator or to endorse a third country benchmark are still in draft, and will be finalised once the applicable secondary legislation has been made. The relevant fees rules will also be made at that time. Applicants (including those who have already applied using the draft forms) will then need to apply for the new Part 4A permission and pay the relevant application fee. The FCA sets out its current expectations where an applicant has already submitted a draft form. In such circumstances, the applicant must confirm that it wants its existing application under the BMR to be treated as an application for the new Part 4A permission and provide any additional information required by the final versions of the forms. The relevant fee should also be paid; failure to do so will result in the firm breaching FSMA. The updated webpage also sets out the process for third country administrators and firms wishing to apply to endorse a third country benchmark from 1 January 2018.
OTC derivatives - FSB report on governance arrangements for UTI
On 29 December 2017, the FSB published a report setting out its conclusions on governance arrangements for the UTI, together with a recommended implementation plan for those arrangements. The FSB's report: (i) sets out key criteria the FSB has identified and used to assess UTI governance arrangements; (ii) outlines the FSB's conclusions on UTI governance arrangements; and (iii) sets out the FSB's conclusions on implementation of the UTI governance arrangements, including a proposed implementation timeline and a proposed process for the creation of the governance arrangements.
Benchmark Regulation - EC Implementing Regulation adding LIBOR published in OJ
On 28 December 2017, EC Implementing Regulation (EU) 2017/2446, which amends Implementing Regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets pursuant to the Benchmarks Regulation, was published in the OJ. It adds LIBOR to the list of critical benchmarks for the purposes of the BMR. The other two benchmarks on the list are EURIBOR and the EONIA. The Implementing Regulation entered into force on 29 December 2017.
AML measures - Wolfsberg Group updates website on correspondent banking due diligence questionnaire
On 24 December 2017, the Wolfsberg Group updated its website with information regarding its work on correspondent banking and, in particular, the due diligence questionnaire (DDQ) 2017. As a result of internal conversations and feedback from industry organisations, it has now decided that it should only publish the DDQ more widely once it has completed an additional set of materials. This is to limit third parties' ability to interpret what it is that the Group intended with the DDQ and who it was directed to. These additional materials will include: (i) updated publication guidance (who it applies to, reasons for doing it, expectations for implementation); (ii) guidance on completing the DDQ; a set of FAQs; and (iii) a glossary containing consistent terminology so people do not interpret the DDQ incorrectly and so financial institutions have the same baseline of understanding. The Wolfsberg Group has also decided to extract the 37 standard questions (which replaced the 28 questions from the original questionnaire) from the new version and issue this as a stand-alone replacement for the existing DDQ. The Wolfsberg Group intends to publish these documents, along with the DDQ itself, in February.
HMRC's updated "Information for businesses about HM Revenue and Customs approach to enforcement measures to money laundering"
On 22 December 2017 this information was updated to reflect the Money Laundering Regulations changes effective from December 2017.
JMLSG revises AML and CTF guidance
On 21 December 2017, the JMLSG published revised versions of its AML and CTF guidance. The revised guidance was approved by the JMLSG Board approval on 13 December 2017. The JMLSG confirms that it has made the amendments proposed in November 2017, subject to further amendments to the guidance in paragraph 6.15 in Part I, which explains what is meant by the phrase "reasonable grounds to know or suspect". It has also made a number of minor editorial amendments to paragraph 1.20 in Part I, which provides general guidance on the UK legal and regulatory framework, and to the correspondent relationships guidance in chapter 16 of Part II. The revised guidance has been submitted to HMT for approval. Technically, the guidance is not legally binding. However, when JMLSG guidance has been approved by HMT, compliance with it can provide a safe harbour in the event of prosecution under certain parts of the UK AML and CTF regime. Despite the fact that the revised guidance has not yet been approved by HM Treasury, the JMLSG advises that firms are free to use it immediately if they wish to do so.
Fox v Germany: High Court decision on extradition request for tax evasion - whether or not a prosecutor (rather than a court) is a competent "judicial authority" depends on local criminal law
This decision is important because it clearly states that whether or not a prosecutor is a "competent authority" to make a decision to try will depend on the local law system. The appellant's contention that his extradition should be barred by s12A of the Extradition Act 2003 was rejected.
Fox v Germany  EWHC 3396 (Admin), 21 December 2017
FCA updates transaction reporting webpages to reflect MiFID II implementation
On 3 January, the FCA updated the following webpages relating to transaction reporting to reflect the implementation of MiFID II and MiFIR: (i)
Transaction reporting webpage
Requesting sample transaction reporting data webpage
Determining which instruments are reportable webpage
Instrument reference data webpage
MiFID I transition arrangements webpage
; and (vi)
ESMA transaction reporting exchange mechanism webpage
FCA and BoE agree transitional arrangements for certain trading venues and CCPs under Article 54(2) of MiFIR
On 3 January, the FCA published a statement relating to the applications it has received under Article 54(2) of MiFIR from two trading venues: ICE Futures Europe and the LME. Separately, the BoE updated its webpage on FMI supervision in relation to applications it has received under Article 54(2) of MiFIR from ICE Clear Europe Ltd and LME Clear Ltd, both of which are BoE-recognised CCPs. Under Article 54(2) of MiFIR, an EU CCP or trading venue may apply to its competent authority for a transitional arrangement in relation to exchange-traded derivatives, under which the open access requirements of Articles 35 or 36 (respectively) of MiFIR will not apply until July 2020. The FCA and BoE have considered the relevant applications: (i) having taken into account the risks resulting from the application of the access rights under Article 36 of MiFIR as regards exchange-traded derivatives to the orderly functioning of ICE Futures Europe and LME, as required by MiFIR, the FCA has decided to agree a transitional arrangement for these trading venues. Under this arrangement, ICE Futures Europe and LME will not be required to consider open access requests made under Article 36 of MiFIR, to the extent they relate to exchange-traded derivatives; and (ii) having taken into account the relevant risks resulting from the application of the access rights under Article 35 as regards exchange-traded derivatives to the orderly functioning of ICE Clear Europe and LME Clear, as required by MiFIR, the BoE has decided that Article 35 will not apply to these CCPs in respect of exchange-traded derivatives for a transitional period. In each case, the decision takes effect on 3 January 2018 and the transitional period expires on 3 July 2020.
Bank of England
FCA MiFID II guidance on authorisation process, forms and prudential categories
On 3 January, the FCA published a document containing MiFID II general guidance on the authorisation process, forms and prudential categories. Section 1 of the document provides guidance on applications for: (i) authorisation as a MiFID investment firm made by a first-time applicant; (ii) variations of permission (VoPs) by a non-MiFID firm seeking to become a MiFID investment firm; and (iii) VoPs by a firm that is already authorised as a MiFID investment firm. The document contains tables listing the various forms required for each of these applications, the locations of those forms and an explanation of the purpose of the forms. Section 2 of the document contains flowcharts intended to assist UK firms to determine the prudential categorisations that will apply to them, depending on the regulated activities that they perform and the nature of their businesses.
New FCA MiFID II change in control forms
On 2 January, the FCA updated its webpage on change in control notifications to announce the publication of new forms to be used by persons wishing to become a controller of a firm authorised under MiFID II: (i) corporate controllers form, for use where the prospective controller is a limited company or an LLP; (ii) partnership controllers form, for use where the prospective controller is a partnership, other than an LLP; (iii) individual controllers form, for use where the prospective controller is an individual other than a trustee, settler or beneficiary of a trust; (iv) trust controllers form, for use where the prospective controller is a trustee, settlor or beneficiary of a trust; and (v) intragroup transactions form, for use in intragroup transactions when there is no change to the ultimate controllers of the target firm. The forms contain reduced information requirements that apply where the prospective controllers and the target firms satisfy certain conditions. The reduced information requirements reflect the MiFID II RTS on the information to be included by prospective acquirers of qualifying holdings, which were set out in Commission Delegated Regulation (EU) 2017/1946.
New FCA MiFID II change of legal status forms
On 2 January, the FCA updated its webpage on change of legal status applications to announce the publication of new forms to be used by firms authorised under MiFID II seeking change their legal status: (i) MiFID authorisation form; (ii) list of members of the management body; (iii) change of legal status for MiFID Firms: Application and Cancellation Annex; and (iv) MiFID (IT) assessment questionnaire. The FCA also expects firms to complete existing forms relating to changes to contact or standing data, disclosure of significant events and appointed representatives. The new forms reflect the requirements of the MiFID II RTS and ITS on the authorisation of investment firms set out in Commission Delegated Regulation (EU) 2017/1943 and Commission Implementing Regulation (EU) 2017/1945 respectively. The FCA states that from 1 April, firms must apply using the new application forms. Until 31 March, it will accept any applications that were already being completed in draft using the previous forms.
MiFID II - Implementing Decision on equivalence of Swiss stock exchanges published in OJ
On 23 December 2017, EC Implementing Decision (EU) 2017/2441 on the equivalence of the legal and supervisory framework applicable to stock exchanges in Switzerland in accordance with MiFID II was published in the OJ. Under the Implementing Decision, the EC recognises the legal and regulatory framework applicable to SIX Swiss Exchange AG and BX Swiss AG as equivalent to the requirements resulting from MiFID II, MiFIR, MAR and the Transparency Directive. The EC also considers that the two stock exchanges are subject to effective supervision and enforcement in Switzerland. The Implementing Decision came into force on 24 December 2017 (that is, the day following its publication in the OJ). It will expire on 31 December 2018, unless the EC extends it before that date.
MiFID II - ESMA updates transitional transparency calculations for equities and bonds
On 22 December 2017, ESMA updated its FAQs (ESMA50-164-677) on TTC for equity and bond instruments required under the MiFID II and the MiFIR. The TTC will apply from 3 January. The equity instruments TTC will apply until 31 March 2019 and for bond instruments (with respect to liquidity assessment) it will apply until 15 May 2018.
MiFID II - FCA webpage on security status obligations
On 22 December 2017, the FCA published a new webpage relating to security status obligations under the MiFID II. The webpage provides information on: (i) submitting information to FCA; (ii) notifications from the FCA; and (iii) publication.
MiFIR - Delegated Regulation relating to trading obligation for derivatives published in OJ
On 22 December 2017, EC Delegated Regulation (EU) 2017/2417 supplementing MiFIR with regard to RTS on the trading obligation for certain derivatives was published in the OJ. The Delegated Regulation came into force on 23 December 2017.
Please see our Recovery and Resolution section for an update on the CRR IFRS 9 Regulation.
Amendments to CRR and Securitisation Regulations published in OJ
On 28 December 2017, the following documents were published in the OJ: (i) Regulation (EU) 2017/2402 of the EP and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC and 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012 (the Securitisation Regulation); and (ii) Regulation (EU) 2017/2401 of the EP and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (the CRR Amendment Regulation). Both regulations will enter into force on 17 January 2018 (that is, the twentieth day following publication in the OJ) and will apply from 1 January 2019.
CRR - EBA opinion to EC on application of 180 day past due exemption for material exposures
On 22 December 2017, the EBA published an opinion (EBA/Op/2017/17) to the EC on the appropriateness of continuing to apply the 180 day past due (DPD) exemption for material exposures under the CRR.
The EBA found that only a limited number of institutions in the EU currently make use of the 180 DPD criterion. It analysed the impact of removing the 180 DPD criterion for these institutions on risk weighted exposure amounts and capital ratios. In the light of the widespread use of the 90 DPD criterion in the EU, the limited use of the 180 DPD criterion, the variability in risk weights caused by the 180 DPD criterion and future changes in the accounting framework, the EBA recommends that the EC disallows the application of the 180 DPD criterion. However, to allow the institutions currently using the 180 DPD to adjust to the 90 DPD regime, the EBA recommends that there is an appropriate transitional period.
RECOVERY AND RESOLUTION
BRRD Insolvency Hierarchy Directive and CRR IFRS 9 Regulation published in OJ
On 27 December 2017, the following were published in the OJ: (i) Directive (EU) 2017/2399 of the EP and of the Council of 12 December 2017 amending the BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy; and (ii) Regulation (EU) 2017/2395 of the EP and of the Council of 12 December 2017 amending the CRR as regards transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds and for the large exposures treatment of certain public sector exposures denominated in the domestic currency of any member state. Both the Directive and Regulation entered into force on 28 December 2017 (that is, the day after their publication in the OJ), with the Regulation applying from 1 January. Under Article 2, member states must bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 29 December 2018 and they must immediately inform the EC of this. Member states must apply those measures from the date of their entry into force in national law.
FCA consults on aligning FSCS levy time period
On 4 January, the FCA published a consultation paper on aligning the FSCS levy time period (CP18/1). In CP18/1, the FCA consults on proposals for transitional provisions to allow the FSCS to run the current compensation levy year to its original timeframe, ending on 30 June 2018, and to pro-rate the compensation calculations and applicable levy limits in respect of all FCA classes, except for the debt management claims class, for the period from 1 July 2018 to 31 March 2019. The FCA is also consulting on proposals to delay the introduction of arrangements for firms who pay fees on account by one year until 1 April 2019 and on minor clarifications to the new rule about levy-paying arrangements for firms who pay fees on account. The text of the draft FCA instrument making the proposed Handbook amendments, the Financial Services Compensation Scheme (Transitional Levy Provisions) Instrument 2018, is set out in Appendix 1 to CP18/1. The FCA is intending for the instrument to come into force on 1 April 2018, with the exception of the transitional provisions which are intended to come into force on 23 February 2018. The deadline for responses is 5 February 2018. The FCA will publish its final rules in the February 2018 Handbook Notice.
Memorandum of understanding between FCA and FRC: December 2017
On 3 January, the FRC published a MoU (dated 20 December 2017) that it has entered into with the FCA. The MoU sets out the framework agreed between the FCA and the FRC to assist each other to carry out their respective statutory duties and responsibilities. It considers: (i) the roles and responsibilities of the FRC and the FCA; (ii) information-sharing, information requests and confidentiality. Annex 1 to the MoU sets out the statutory restrictions on disclosures that apply to the FCA and the FRC and the information-sharing gateways available to them; and (iii) co-operation on standard-setting, on monitoring and enforcement, on the FRC's oversight responsibilities and on international issues. It is thought that this MoU replaces the MoU entered into by the FCA and the FRC in April 2013.