Authors
Charlotte Hill

Charlotte Hill

Partner

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Daniel Hirschfield

Daniel Hirschfield

Senior professional support lawyer

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Authors
Charlotte Hill

Charlotte Hill

Partner

Read More
Daniel Hirschfield

Daniel Hirschfield

Senior professional support lawyer

Read More

2 April 2020

Financial services update – 4 of 10 Insights

Financial services update - April 2020

  • IN-DEPTH ANALYSIS

The topics covered in this month's newsletter include the BoE's discussion paper on a central bank digital currency, financial services updates from the Budget, the FCA's updates on LIBOR, the FCA's new webpages on securities financing transactions, and proposed AML and CTF guidance for cryptoasset exchange providers and custodian wallet providers.

Please also see our separate webpage on 'COVID-19: how the financial regulators are responding' for the latest updates from regulators in response to the coronavirus pandemic.

General financial services regulation

FMLC responds to consultation on cryptoassets framework

On 17 March 2020, the Financial Markets Law Committee (FMLC) published a press release with its response to the European Commission's consultation document on a regulatory framework for markets in cryptoassets. The two-part response, in the form of two complementary reports, comprises of comments from the FMLC on the classification of cryptoassets and comments, including advice from the wider FinTech Scoping Forum, dealing with cryptoassets within the European Union regulatory perimeter.

European Commission discusses equivalence assessments and decisions

The European Commission published a letter on 16 March 2020, addressed to the Chancellor of the Exchequer, in response to Mr Sunak's letter discussing equivalence assessments and delivering a decision before the end of June 2020. The Commission's agreed that the assessments should begin as soon as possible with a view to conclude before the end of June 2020 but suggested that this was not a hard deadline.

Response to the report on IT failures in the financial services sector

On 13 March 2020, the response of the UK Government and UK regulators (the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England (BoE)) was published. The response, addressing the House of Commons Treasury Committee report on IT failures in the financial services sector, summarised various initiatives on operational resilience and outsourcing. In particular, the response addressed:

  • Levies – the regulators opposed the views of the committee to increase the levies to fund additional operational resilience resources.
  • Change management – the FCA and BoE will undertake further focused reviews on select firms of IT change management. The regulators aim to understand if better supervision can be implemented and clarifying expectations on firms.
  • Applying SM&CR to FMIs – it was agreed that there is scope to extend the Senior Managers and Certification Regime (SM&CR) to firms outside the scope of the Financial Services and Markets Act 2000, such as financial market infrastructures.
  • Incident reporting – consistency in incident reporting needs to be improved as well as the PRA's regulatory reporting requirements for operational resilience.

The Bank of England's paper on a central bank digital currency

On 12 March 2020, the BoE published a Discussion Paper titled "Central Bank Digital Currency: Opportunities, challenges and design" and updated its central bank digital currency (CBDC) webpage.

The Discussion Paper sets out the BoE's initial thoughts on whether it should create a CBDC to provide to the public. It highlights the decrease in use of physical money as innovative payment mechanism take hold and new forms of money are introduced. A key feature of any CBDC launched by the BoE, will allow members of the public to use the currency to store value and make payments. The Discussion Paper was intended to lay the groundwork and encourage further research.

The BoE will host a webinar on the paper on 7 April 2020 before the paper closes to responses on 12 June 2020.

Financial Services Regulatory Initiatives Forum launches

The main UK regulators and the Competition and Markets Authority, released a joint statement on 11 March 2020 to welcome the launch of the Financial Services Regulatory Initiatives Forum. The forum aims to assist regulators in better identifying and managing demand in the financial services landscape including a clearer view of key upcoming initiatives.

Key financial services updates from the Spring Budget 2020

Alongside the Budget, various updates were provided in the financial services regulatory sector including:

  • Regulatory coordination – in a response document published, the Government considers the proposals to improve regulatory coordination through the introduction of the Financial Services Regulatory Initiative Forum (see above) and the Regulatory Initiatives Grid.
  • Regulatory reform – the Government launched the Reforming Regulation Initiative inviting consultation from the public on ways to improve the regulatory system with a focus on the needs of small businesses. The consultation closes on 11 June 2020.
  • Fintech: the Government has initiated a review of the FinTech sector lead by Ron Kalifa OBE (see para. 2.274 of the "Red Book"). The review will focus on how the UK can remain a global leader in this vital sector with wider industry and government initiatives.
  • Cryptoassets: the Government intends to consult on bringing cryptoassets into the scope of the financial promotion regime, and the regulatory approach to cryptoassets including the new challenges from 'stablecoins' (see para. 2.276).
  • Payments: HM Treasury also announced it will shortly be publishing a call for evidence into the payments landscape in the UK in light of rapid developments in technology (see para. 2.277).

Payment services and systems

Update on card-acquiring market review interim report

On 16 March 2020, the Payment Systems Regulator (PSR), provided an update on the estimated timeframe for publishing its interim report on the card-acquiring market review. The review, which began in January 2019 and is exploring the supply of card-acquiring services, was meant to be published in late 2019. The PSR now intends to publish the report in June 2020 (COVID-19 dependent) after considering written responses received and stakeholders' views.

PSR's annual review of Specific Direction 8

On 10 March 2020, The PSR published its annual review of Specific Direction 8 (SD8), which regulates the actions of LINK in relation to free-to-use ATMs. It concluded that SD8 is still required for the time being to ensure the LINK's commitment to maintain widespread access to cash. The PSR will works with other industry bodies to develop long term strategies and liaise directly with LINK as needed. The PSR will reconsider its approach and related policies when it undertakes a second review of SD8 due in October 2020.

PSR publishes new versions of its 'day one' General and Specific Directions

Following the policy statement (CP19/3) published in March 2019, the PSR has, on 5 March 2020, published five new general directions, which will take effect from 5 April 2020, and one new specific direction, which will take effect from 5 May 2020.

  • General Direction 1: Co-operative relationships with the PSR (2020).
  • General Direction 2: Access (FSBRA) (2020).
  • General Direction 3: Access (PSRs 2017) (2020).
  • General Direction 4: Service-user interests (interbank payment systems) (2020).
  • General Direction 5: Conflict of interest (FSBRA) (2020).
  • Specific Direction 1: Access (sponsor banks) (2020).

The PSR paper examines the changes made to the new directions and the feedback it received. It notes that the General Directions will not necessitate significant system charges for compliance hence the shorter one-month transition period.

Banking and insurance

Lloyd's of London Annual Report

Lloyd's published its Annual Report for the year ended 31 December 2019 on 24 March 2020. The Report showed a return to pre-tax profit underpinned by strong performance across investments, alongside sustained rate increases and improving underwriting discipline. Lloyd's focused on three central priorities in 2019 of performance management, modernising the market and creating a market culture.

New policy statement on capital regime for credit unions

On 13 March 2020, the PRA published the policy statement (PS 6/20), which contained the final policy on amendments to the Credit Union Part of the PRA Rulebook (Appendix 1) and the updated supervisory statement (SS 2/16) on the prudential regulation of credit unions (Appendix 2). The changes, which came into effect from 16 March 2020, include a 'graduated rate' approach, removing the 2% capital buffer, reducing the complexity in the capital regime and new expectations in relation to the capital to assets ratio of credit unions.

The policy has been designed with a view of Brexit and the interim transition period. The PRA will review the policy in due course to consider any changes that may be required upon the expiry of the transition period.

Pre-cessation triggers in LIBOR contracts

The FCA has urged market participants to be prepared and aware of how potential announcements by the FCA might activate pre-cessation triggers in preparation for the transition from LIBOR to a relevant Risk Free Rate. In its new webpage on LIBOR contractual triggers, published on 11 March 2020, the FCA explains that any potential relevant announcement will be made via the Regulatory News Services, be clear and unambiguous, and given at the same time to all market participants.

PRA policy statement on changes to the pre-issuance notification regime

On 10 March 2020, the PRA published policy statement (PS5/20), which set out its amendments to its pre-issuance notification regime to reflect changes to the Capital Requirements Regulation and its experience of assessing capital instruments.  For more detail, please see our update here.

Funds and Asset Management

Speech on liquidity between the assets and liabilities of an open-ended fund

In a speech given on 19 March 2020, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, addressed the issue of liquidity mismatch. Schooling Latter referred to the recent instances of open-ended funds, which had promised daily liquidity to investors, having to suspend dealing in response to the number of redemption requests due to the nature of their relatively illiquid assets. The FCA and BoE have been working together to consider the risks, for instance the risk to the fund's own investors or in amplifying systemic risk, and the possible solutions, including addressing the asset side of the balance sheet or through managing liabilities. To accurately assess the costs and benefits of the various tools at their disposal and to achieve greater consistency of fund redemption terms with the liquidity of funds' assets, Mr Schooling Latter said the FCA welcomed input from investors and industry.

Consultation on overseas funds regime

On 11 March 2020, HM Treasury published a consultation paper on an overseas funds regime (OFR). The paper sets out the government's approach for a streamlined regime for overseas funds. The current UCITS passporting system will expire at the end of the Brexit transition period. The new OFR is intended to establish a more appropriate basis for recognising overseas retail funds. HM Treasury states that the OFR "has the potential to promote the interconnectedness of financial markets and consumer choice, advance trading opportunities around the world, and support bilateral agreements with other countries".

Securities and Markets

Proportionate Listing Rules proposed for OEICs

On 9 March 2020, the FCA published a consultation paper setting out the proposed necessary changes to the Listing Rules to create a proportionate regime for open-ended investment companies (OEICs) (CP20/5). The changes will be relevant to stakeholders in premium-listed OEICs, OEICs that are premium-listed or considering it, fund managers and market participants. The changes proposed by the FCA are as follows:

  • align the listing rules for OEICs more closely with the standard listing segment to ensure they are not disproportionate, and
  • to disapply or amend the requirements that "are not relevant or are inoperable for OEICs because they don’t take account of the specific features of OEICs’ business models or structures".

The consultation paper closes to comments on 9 June 2020.

FCA's new webpages on securities financing transactions (SFTR)

On 11 March 2020, three new FCA webpages were published for SFTR. These are as follows:

  • webpage providing a high-level overview of SFTR, including the impact of COVID-19, Brexit and EU SFTR;
  • webpage on the European Union SFTR reporting obligations; and
  • webpage containing a SFTR library with information and links to EU and UK legislation, and various supporting regulatory and implementing technical standards to help firms understand their requirements.

Investigations, enforcement and dispute resolution

Judicial review of the Financial Services Compensation Scheme (FSCS) decision against London Capital & Finance (LC&F)

In a press release on 20 March 2020, the FSCS comments on the judicial review action brought by LC&F bondholders after its decision to compensate only 135 of the 11,600 bondholders. The claim brought on behalf of the bondholders alleges the FSCS decision was "irrational", but the FSCS stated it complied with the rules following a wide-ranging investigation into the regulated activities LC&F carried out in this "complex and sensitive case".

FCA issues final notice to Awesome3

The FCA published a final notice regarding Awesome3 Limited's (Awesome3) application for registration as a small payment institution (SPI). In the final notice, dated 19 March 2020, it stated that Awesome3 did not meet the conditions for registration set out in Regulation 14 of the Payment Services Regulations 2017. In particular, the FCA noted that the directors did not have "appropriate knowledge and experience to provide payment services".

Financial Ombudsman Service (FOS) News issue 150

The FOS published issue 150 of their newsletter on 13 March 2020. It considers the statistics on the complaints received by the FOS between July 2019 and December 2019, and information for consumers relating to COVID-19. In it, the FOS notes that while it has only received a few complaints relating to the novel COVID-19 disease, it expects the complaints to rise, in particular with regard to insurance policies (travel and medical) and credit cards payments and related cancellation and refund requests.

FCA invites comments from Cryptoasset Businesses

The FCA's 27th quarterly consultation paper (CP20/4), published on 6 March 2020, invited comments from cryptoasset businesses on the proposed changes to its Decision Procedure and Penalties Manual (DEPP) and Enforcement Guide (EG) to reflect the amendments made to the Money Laundering Directive in December 2019. The DEPP and EG contain the FCA's enforcement powers, which require minor amendments to reflect the extension of their investigation and sanctioning power to cryptoasset businesses.

The deadline for comment  was 3 April 2020, but this has been extended as a result of the coronavirus crisis to 1 October 2020.

Financial crime

OPBAS publishes its AML progress and themes from 2019

On 19 March 2020, the  Office for Professional Body Anti-Money Laundering Supervision (OPBAS) published its report on progress made in tackling anti-money laundering (AML) over the past year. The Report noted the progress made by professional body supervisors in driving supervisory activity by AML risk and identified a number of areas for improvement. These include: more enforcement action, better information and intelligence sharing, quality assurance in the decision-making process and improved staff training.

JMLSG launches consultation on new chapter of AML and CTF guidance

On 17 March 2020, the Joint Money Laundering Steering Group (JMLSG) published its proposed new chapter to be added to Part II of the AML and counter-terrorist financing (CTF) guidance. The proposals, containing new guidance for cryptoasset exchanges and custodian wallet providers, cover the following areas:

  • definitions
  • scope of regulation
  • risks the sector faces
  • risk management
  • customer due diligence
  • record keeping
  • dealing with suspicious transactions, and
  • sanctions screening.

The deadline to provide comments on the proposed new chapter is 18 May 2020.

Government, PSR and FCA's response on economic crime

On 13 March 2020, the Government and UK regulators' response to the House of Commons Treasury Committee report, 'Economic crime: consumer view', was published. The response document raised the following key considerations:

  • Government response – updated risk-assessment will be published, a review of the data sharing provisions to prevent economic crime, potential third-party responsibility for data breaches and associated fraud, and it's views on a contingent reimbursement model code.
  • PSR response – confirmation of payee implementation and further views on a contingent reimbursement model code.
  • FCA response – consistency on the approach to freezing accounts, benefits of a delay on first-time payments, the FCA's views on a contingent reimbursement model code and a review of the guidance on gross negligence by a consumer.

Comparison webpage of UK banking providers' fraud controls

On 9 March 2020, the FCA released an interactive webpage containing information about UK banking providers' fraud controls. The webpage has information from 21 current account providers and is intended to disseminate information allowing consumers to make more informed decisions. The data includes: firm's approaches to fraud prevention and the controls they have in place, steps they take to educate customers and how and when they contact their customers, and broader industry initiatives/collaborations.

Proposed changes to the Financial Crime Guide

The FCA's 27th quarterly consultation paper (see above), also considered the consequential changes required to the Financial Crime Guide to align it with the amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The changes are not intended to be an exhaustive list of amendments or set out substantive guidance but are aimed are helping firms apply a risk-based approach with the biggest impact.                                                                      

FSR trivia

What is the maximum amount of compensation the Financial Ombudsman Service can direct a firm to pay a successful complainant for complaints referred to it on or after 1 April 2020 about a firm's acts or omissions on or after 1 April 2019:

  • £150,000
  • £160,000
  • £355,000
  • £350,000

The answer to last month's question is Global Financial Innovation Network.

In this series

Financial services regulatory

Financial services update - January 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update – February 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - March 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - April 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - May 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - June 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - July 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - August 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - September 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - October 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

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