Among the items covered in this month's newsletter are the FCA's annual Sector Views, further publications from the BoE on LIBOR, EIOPA's final report on outsourcing guidelines to cloud service providers, ESMA's strategy on sustainable finance, and the European Commission's consultation on the review of MiFID II.
General financial services regulation
FCA Sector Views 2020
On 18 February 2020, the FCA published its annual Sector Views document that provides an overall analysis of how each financial sector is performing, the way the financial environment is changing and the impact of these changes on consumers and market effectiveness. The FCA's findings will help it to shape its 2020/21 Business Plan.
The FCA identified four drivers of change that are having the greatest impact on the sectors it regulates:
- economic conditions, such as monetary policy and GDP growth
- societal changes, including intergenerational differences and sustainable finance
- technological developments, such as Open Banking, Artificial Intelligence and Fintech
- Brexit, with a particular focus on what will happen after the end of the transition period.
The remaining chapters cover all the markets the FCA regulates: retail banking and payments; retail lending; general insurance and protection; pensions savings and retirement income; retail investments; investment management; and wholesale financial markets.
Brexit transition period: FCA and BoE publish statements on impact on transitional power directions, and FCA outlines subsequent considerations for firms
The FCA and Bank of England (BoE) have updated their webpages to include information on how the Temporary Transitional Power (TTP) will be used and on transitioning to post-exit rules and standards, during the Brexit transition period:
- the FCA has updated its webpage on TTP and its Brexit policy statement (PS19/5) to state that the UK has now left the EU and has entered a transition period due to operate until 31 December 2020. Since EU laws will continue to apply during this period, the TTP Directions previously made by the FCA were not required and therefore did not come into force at 11pm on 31 January 2020.
- the BoE also updated its webpage on transitioning to post-exit rules and standards to confirm it has not made final versions of the BoE and PRA transitional directions, nor has the BoE published updated transitional guidance materials.
The FCA has also updated its webpage outlining considerations for UK firms after the transition period.
The FCA set out a list of questions firms should consider in order to determine whether they conduct business in the EEA. Firms that do will need to understand on what legal basis their business is undertaken, including whether they rely on any passporting rights. The FCA has also set out considerations relating to:
- servicing EEA customers
- payments to and from the EEA
- engaging with non-UK regulators.
Payment services and systems
PSR policy statement on Confirmation of Payee and decision on varying Specific Direction 10
On 14 February 2020, the Payment Systems Regulator (PSR) published a policy statement on Confirmation of Payee and varying Specific Direction 10 (SD10) following a previous consultation on 20 January 2020 (as discussed in our February newsletter).
The PSR has decided to give SD10 in the varied form proposed in the consultation:
- to introduce an additional basis for a directed Payment Service Provider to ask for an exemption from an obligation under the direction
- to exempt HSBC UK Bank plc from the obligations of the direction in respect of accounts held with it that form part of HSBC Group’s Private Banking brand
Alongside the policy statement, the PSR also published responses to the consultation along with the varied SD10.
Pay.UK consults on next generation standard for UK retail payments
On 4 February 2020, Pay.UK published a consultation paper setting out its proposals for the adoption of ISO 20022 and other key standards for the clearing and settlement capability which will be enabled by the New Payments Architecture (NPA) infrastructure.
The consultation is broken down into three sections:
- Pay.UK's recommended direction it is proposing on the adoption of ISO 20022 for the clearing and settlement capability to be enabled by the NPA infrastructure
- foundational technical details for the ISO 20022 message standard, including Pay.UK's technical design and ISO 20022 readiness approach
- the future direction on concepts that have emerged during Pay.UK's consultative approach, which requires a degree of standardisation across the payments ecosystem
The deadline for stakeholders to submit responses to the consultation is 31 March 2020.
Banking and insurance
BoE publications on LIBOR transition
Andrew Hauser, Executive Director for Markets, gave a speech on 26 February 2020 titled "Turbo-charging sterling LIBOR transition: why 2020 is the year for action – and what the Bank of England is doing to help".
Hauser used his speech to unveil two BoE initiatives, which will help the transition to risk-free rates:
- a proposal to publish a SONIA-linked index from July 2020, which will allow market participants to calculate a wide range of compounded SONIA rates for longer-than-overnight products by using the start and end-date of the product. The BoE is consulting on whether there is market consensus on how to define the relevant time periods for the compounded rates.
- confirmation that from October 2020 the BoE will increase haircuts progressively on LIBOR linked collateral that it lends against with haircuts due to reach 100% at the end of 2021. After October 2020, any LIBOR linked collateral will not be eligible for use at the BoE. Further details are set out in a Market Notice.
EIOPA final report on outsourcing guidelines to cloud service providers
On 7 February 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published its final report setting out its finalised guidelines on outsourcing to cloud service providers.
EIOPA identified that the use of cloud outsourcing is a practice common to all financial undertakings, and the risks it presents is similar across sectors. As such, EIOPA issued guidelines under Article 16 of the EIOPA Regulation (1094/2010), which cover:
- updates to the outsourcing written policy
- pre-outsourcing analysis, including the assessment of critical or important operational functions, the identification of relevant risks, due diligence and conflicts of interest
- documentation requirements
- contractual requirements
- access and audit rights and security of data and systems
- monitoring and oversight of cloud outsourcing arrangements
The guidelines apply from 1 January 2021 to all cloud outsourcing arrangements entered into or amended after that date.
EBA publishes benchmarking report on EU diversity practices under CRD IV
On 3 February 2020, the European Banking Authority (EBA) published a benchmarking report on diversity practices in credit institutions and investment firms.
The Capital Requirements Directive (CRD) introduced a requirement that institutions must take into account the diversity of the management body when recruiting new members and implement a diversity policy. 'Significant' institutions are also required to set targets to achieve balanced gender representation and implement measures to achieve this.
From the data obtained, the EBA found that a large proportion of institutions (41.61%) have not adopted a diversity policy. Other key findings from the report include:
- the level of diversity in the composition of management bodies in institutions differs significantly between Member States, particularly with regard to gender diversity.
- within management bodies, female representation in their management function improved slightly to 15.13% (2015, 13.63%), and their representation in their supervisory function improved strongly to 24.02% (2015, 18.90%).
- two thirds (66.95%) of institutions have executive directors of only one gender.
The EBA has said it will continue to monitor diversity in management bodies and issue periodic benchmark studies on diversity and on gender-neutral remuneration.
FCA letter to credit broking firms on key risks and approach to supervision
On 13 February 2020, the FCA published a letter sent to directors of credit broking firms on its supervision strategy and the key risks they could pose to consumers and the market.
The FCA examined a range of information and data to assess how credit brokers could cause harm. The key drivers of harm the FCA found include:
- firms not understanding their regulatory requirements
- firms having poor oversight of staff and/or Appointed Representatives’ (ARs) activities
- misleading or inaccurate financial promotions
- firms not explaining the level of service provided
- firms not considering or managing the risks to their business from technology perspective.
The FCA's supervision strategy for credit brokers runs to March 2022. During that time, the FCA will prioritise its supervisory work in various areas, including:
- accurate regulatory data
- domestic premises suppliers
- understanding the customer journey and staff/AR oversight.
Asset management and investments
FCA Dear CEO letter to asset management firms: preparing for LIBOR transition
On 27 February, the FCA wrote to regulated asset management firms setting out what action it expects them to take in preparation for the end of LIBOR. It expects firms to take all reasonable steps to ensure the end of LIBOR does not lead to market disruption or consumer detriment, and to support industry initiatives.
- asset management firms use swaps on behalf of their clients so should now consider switching from LIBOR swaps to SONIA swaps for new positions where possible.
- asset management firms are significant investors on behalf of clients in cash products and should therefore consider not making any new investments in GBP LIBOR based cash products maturing beyond 2021 by the end of Q3 2020. The FCA also thinks that firms that operate funds and other products with benchmarks or performance fees linked to LIBOR should use the Q3 2020 target for planning to cease launching new products which have benchmarks or performance fees linked to LIBOR.
The FCA also highlights the importance of:
- assessing the impact of the LIBOR transition on product governance rules
- effective LIBOR transition plans and senior management accountability
- managing conflicts of interest.
MiFID II post-implementation review: European Commission consultation
On 17 February 2020, the European Commission launched a public consultation on the review of the MiFID II/MiFIR regulatory framework.
The consultation document is split up into three sections: Section 1 aims to gather views from stakeholders on the experience of two years of application of MiFID II/MiFIR; Section 2 will seek stakeholder views on technical aspects of the current MiFID II/MiFIR framework; and Section 3 invites stakeholders to detail any further regulatory aspects or identified issues.
Part one of Section 2 of the consultation sets out the Commission's priority areas for review, which include:
- the establishment of an EU consolidated tape (Qs 7 – 30.1)
- investor protection (Qs 31 – 57.1)
- research unbundling rules and SME research coverage (Qs 58 – 68.1)
- commodity markets (Qs 69 – 76.1)
The consultation is open until 20 April 2020 and complements ESMA's consultation on elements of the MiFID II/MiFIR framework. The output of both consultation processes will feed into the Commission's reports to the European Parliament and the Council of the EU, which may include legislative proposals.
FCA Dear CEO letter on supervision strategy for platforms
On 6 February 2020, the FCA issued a Dear CEO letter setting out its approach to supervision for platform firms, including its key concerns, expectations and areas of focus. The letter focuses on:
- technology and operational resilience. Individuals accountable under the Senior Managers and Certification Regime are expected to be responsible for operational resilience, and there must be clear responsibility to meet reporting obligations for operational incidents
- third-party outsourcing. Firms should undertake reviews of outsourcing arrangements to ensure the service provider is performing the services to the required standard and that risks are properly managed
- conflicts of interest. Firms should identify all potential conflicts of interest and have processes in place to effectively manage them
- investment platforms market study. Firms should consider if there are any areas where they need to work on to implement the study's findings and recommendations
- EU withdrawal. Firms will need to consider how the end of the implementation period will affect their businesses and their customers.
Platform firms are expected to take account of the expectations set out in the letter, and should take all necessary action to ensure they are met.
ESMA publishes strategy on sustainable finance
On 6 February 2020, the European Securities and Markets Authority (ESMA) published its strategy on sustainable finance, setting out how it will place sustainability at the forefront of its activities by embedding Environmental, Social, and Governance (ESG) factors in its work.
The key priorities for ESMA include:
- completing the regulatory framework on transparency obligations via the Disclosures Regulation
- reporting on trends, risks and vulnerabilities of sustainable finance, including risk analysis on green bonds
- ESG investing
- convergence of national supervisory practices on ESG factors
- participating in the EU Platform on Sustainable Finance that will develop and maintain the EU taxonomy
- supervision of entities required to abide by ESG guidelines.
ESMA set up a Coordination Network on Sustainability in 2019 to help deliver its strategy, which will be supported by a consultative working group of stakeholders.
Enforcement and investigations
FCA fines Moneybarn £2.77m for treating customers in arrears unfairly
On 17 February 2020, the FCA issued a final notice imposing a fine on car finance provider Moneybarn Ltd (Moneybarn) £2.77 million for failing to treat customers fairly when they fell behind on loan repayments in relation to short-term repayment plans.
Moneybarn had breached Principle 6 (Customers' interests) of the FCA's Principles for Businesses for various reasons, including:
- failing to allow customers the ability to clear their arrears over a realistic and sustainable period
- failing to use the full range of forbearance options at its disposal and according to customers' individual circumstances
- failing to ensure that short-term forbearance repayment plans were affordable for customers and that they had sufficient disposable income left to account for other bills and contingencies
- terminating customers' loan agreements when the customer ultimately defaulted.
Principle 7 (Communication with clients) was also breached as Moneybarn failed to communicate the likely financial consequences of failing to keep up with payments to customers in a way which was clear, fair and not misleading.
Moneybarn agreed to resolve the matter and qualified for a 30% discount.
FCA speech on penalties, remediation and Principles for Businesses
On 12 February 2020, the FCA published a speech by Mark Steward, FCA Executive Director of Enforcement and Market Oversight, on financial penalties, remediation and the FCA's Principles for Businesses (the Principles).
Steward highlighted the following issues:
- Remediation: the broad use of remedial orders can help to achieve just outcomes and the prevention of serious misconduct by ensuring appropriate action is taken to repair harm that has occurred. The FCA may reduce sanctions to give credit for "rapidly-commenced, pro-active, cooperative and through remediation", especially consumer redress. Tougher sanctions may be imposed where the FCA sees firms failing to correct relevant deficiencies and make good consequential losses to consumers.
- Principles for Businesses: most enforcement cases completed over the last year have involved serious breaches of the Principles. Neither firms nor senior management engaged directly or explicitly with the Principles in deciding, carrying out or managing the conduct that led to the breach. The FCA also found no evidence that the Principles had been used to test or measure conduct before it was embarked on.
JMLSG consults on proposed amendments to guidance to reflect Money Laundering and Terrorist Financing (Amendment) Regulations 2019
On 4 February 2020, the Joint Money Laundering Steering Group (JMLSG) published a press release announcing that it has published proposed amendments to its guidance on the prevention of money laundering and terrorist financing.
The proposed amendments have been marked-up within the current guidance under parts I, II and III:
- Part I includes revisions to chapters 4 (Risk-based approach), 5 (Customer due diligence), 7 (Staff awareness), 8 (Record keeping) and the Glossary
- Part II includes revisions to Sector 3 (Electronic money)
- Part III includes revisions to Chapter 3 (Equivalent markets)
Stakeholders have until 3 April 2020 to submit comments on the revisions.
What is the name of the international organisation of regulators that is focused on financial innovation and was formally launched in January 2019?
- Global Sandbox
- Project Innovate
- Innovation Hub International
- Global Financial Innovation Network
The answer to last month's question is attestation.