4 June 2020
Financial services update – 6 of 10 Insights
The topics covered in this month's newsletter include:
Please also see our separate webpages 'COVID-19: how the UK financial regulators are responding' and 'COVID-19: how the European financial regulators are responding' for the latest regulatory updates from regulators in response to the coronavirus pandemic.
In a press release on 21 May 2020, the FSCS announced it had set its levy for 2020/21 at £649 million. This £14m more than it had forecasted in its Plan and Budget for the same year. The increase is mainly owning to the inclusion of £44m to cover estimated compensation costs for London Capital and Finance claims. The FSCS acknowledged the concern in the industry about "the rising trends in compensation costs and increased levy amounts" but assured the industry and regulators that it is addressing these concerns and will keep them updated.
On 7 May 2020, the Financial Services Regulatory Initiatives Forum (the Forum) published the Regulatory Initiatives Grid (the Grid). The Grid was published earlier than originally planned in response to the pressures the financial services industry is under as a result of the COVID-19 crisis. The Grid maps out the regulatory pipeline by quarter over the next 12 months and is intended to assist firms and other stakeholders with their understanding of regulatory changes that may have a significant operational impact on them, and their preparations for implementing such changes. It will run initially as a pilot and is expected to be published at least twice a year.
Please see our separate webpage 'Keeping ahead of regulatory developments: the new regulatory initiatives grid' for more information.
TheCityUK published a report on 'Enhancing the UK's Approach to Innovation in financial services' on 7 May 2020. The report, jointly produced with PA Consulting, addressed the world leading FinTech industry in the UK and emphasised the role of the government and regulators in the success of the industry. While the industry, government and regulators have shown leadership and driven innovation in financial services, the report notes that challenges around resources, delivery of support, integration and overseas expansion could be limiting the pace of change. Accordingly, a number of pragmatic and actionable recommendations are put forward that focus on the following four key areas:
The report acknowledged the current uncertainty as a result of the COVID-19 pandemic but noted that the way people think about and use digital technology is undergoing a radical transformation.
The Cabinet Office published a letter from HM Treasury to the House of Commons European Scrutiny Committee Chair. on 5 May 2020. The letter discussed the UK-EU institutional arrangements and equivalence on financial services, and the requirements pursuant to EMIR 2.2. (Regulation (EU) 2019/2099). According to the letter, the government is seeking regulatory and supervisory arrangements that:
The following change to the Financial Conduct Authority (FCA) Handbook, as proposed in the FCA's Quarterly Consultation Paper No 26, came into force on 22 May 2020.
On 30 April 2020, the LSB published a summary report on its review of firms' approach to reimbursement of customers under provision R2(1) (c) of the contingent reimbursement model code for authorised push payment (APP) scams (the CRM Code). In the LSB's Business Plan & Budget for 2020/21, it stated that the top priority will be to undertake a review of the CRM to ensure that it is delivering fair outcomes for consumers who have fallen victim to a scam. The report sets out the LSB's findings and recommendations of the CRM Code and how firms have interpreted and implemented it. The LSB stated that broadly firms have taken positive steps in implementing the requirements and noted instances where a proper application of the CRM Code resulted in good practice. Nevertheless, it identified four key areas for improvement: (1) reimbursement processes, (2) effective warnings, (3) customer vulnerability and (4) record keeping.
On 29 May 2020, the Tough Legacy Taskforce of the Working Group on Sterling Risk-Free Reference Rate (RFRWG) released a Paper on the identification of Tough Legacy issues. The paper considers: market participants’ expectations for the scope of products across markets which may be at risk of forming part of the ‘tough legacy’ category; specific issues which mean certain contracts are less likely to be able to convert; the likely market outcomes in relation to those contracts in the event of LIBOR cessation; and the range of potential options suggested by market participants for mitigating those outcomes, with consideration of their benefits and risks, and limitations around their effectiveness and feasibility. The paper was in response to Andrew Bailey's call for more public debate on the outcome for legacy contracts (i.e. that do not have robust fallbacks and that are unable to be amended ahead of LIBOR discontinuation).
In a speech published on 22 May 2020, Charlotte Gerken, Executive Director of Insurance Supervision, discussed regulatory views and life beyond Solvency II. Ms Gerken explained that in light of COVID-19, insurers are expected to increase their monitoring of the additional risks and, if necessary, update their risk and capital assessments. She went on to discuss the future regulatory landscape in the UK and identified three points of interest.
The speech also addressed emerging supervisory priorities (e.g. the prudent person principle), maintained that operational resilience remains a strategic priority and highlighted climate change risks to businesses.
In a press release on 20 May 2020, the European Central Bank (ECB) published a guide for consultation that sets out how it expects banks to safely and prudently manage climate-related and environmental risks and disclose such risks transparently under the current prudential framework. While the ECB acknowledges that the current priority for banks is the COVID-19 pandemic, it remains focused on the advancing the management and disclosure of climate-related and environmental risks in the banking sector. As such, the guide aims to serve as a basis for supervisory dialogue encouraging banks to assess their current practices and foster banks' preparedness for managing the risks. The guide was drafted in close cooperation with the national competent authorities with a view to ensuring that high supervisory standards are applied consistently across the euro area.
The consultation period ends at midnight CET on 25 September 2020. The ECB also published a list of FAQs.
On 11 May 2020, the Financial Markets Law Committee (FMLC) published a letter in response to the HM Treasury consultation on a proposal for an OFR. The FMLC notes that whilst the consultation sets out, in broad strokes, its future approach to non-UK funds, much of the specificity around the criteria, timing and process of the equivalence assessments remains unknown. The FMLC requested clarification and noted the following key issues:
On 4 May 2020, the House of Commons EU Scrutiny Committee (the Committee) published a letter from HM Treasury on the proposed regulation on the establishment of a framework to facilitate sustainable investment (2018/0178(COD)) (the Regulation). In the letter, Sir William, Chair of the Committee, noted that in the absence of binding ‘green’ label criteria for investment products, it appears that firms offering bonds can in practice appear to meet the new ‘sustainability’ criteria with little effort. The Committee notes that the Regulation is note applicable in the UK but asks the government to clarify, by the end of May 2020, whether it is considering establishing a similar legally binding domestic sustainability taxonomy for investment products.
On 21 May 2020, the International Capital Market Association (ICMA) published a response it received from the European Securities and Markets Authority (ESMA) on the reporting of central bank repurchase transactions (repos) under the Market in Financial Instruments Regulation (600/2014) (MiFIR). ESMA confirmed the main aspects of the ICMA proposals and structured their response on three key areas: repos with one collateral security, repos with multiple collateral securities and other issues around timing of reporting and pledge-based repos.
On 11 May 2020, the Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) published a spotlight review examining the crucial role of data and data management in the stability and resilience of wholesale FICC markets and financial systems. The FMSB notes the importance of data in today's financial systems, where data runs through all the infrastructure of participants in global wholesale FICC markets, including the pricing, order and trade management, risk management, regulatory reporting, financial and corporate systems. The increasing use of data and increasing complexity and inconsistency risks market misconduct and instability. The FMSB identifies seven principal areas of data risk: business continuity and operational risk, security and confidentiality risk, commercial trading risk, aggregate exposure risk, regulatory enforcement risk, ownership and rights risk and security and conduct risk.
In a press release dated 4 May 2020, the ECB provided an update on the TARGET2 (T2) - TARGET2-Securities (T2S) consolidation project. The ECB stated that SWIFT's plans to delay the migration to ISO 20022 from November 2021 to the end of 2022, will not affect the launch of the Eurosystem Single Market Infrastructure Gateway and T2. However, it will impact plans to adopt ISO 20022 for correspondent banking business. In this regard, European banks will have to maintain their capability of send SWIFT Message Type payment and reporting messages in addition to the new infrastructure for ISO 20022. The ECB and SWIFT have jointly developed a plan to ensure data compatibility between cross-border payments sent with ISO 20022 and the MT message type.
The Banking Business Resolution Service (BBRS), on 15 May 2020, published interim findings from its live pilot to inform and fine tune the set-up of the BBRS so that it launches as smoothly as possible later this year. The live pilot involved an examination of over 40 complaints by SME customers against their banks from the 2008 financial crisis. Key findings from the report include:
The Competition and Markets Authority (CMA) updated its webpage on 21 May 2020 with regard to the case timetable for its investigation on anti-competitive arrangements in the financial services sector which may infringe Chapter I of the Competition Act 1998 and/or Article 101 of the Treaty on the Functioning of the European Union (TFEU). The investigation, launched in November 2019, will not continue till December 2020 (previously extended to April 2020).
The FCA and Her Majesty's Revenue & Customs (HMRC) entered into a collaboration agreement on 1 May 2020, to provide single point of contact services under Section 79(3) of the Investigatory Powers Act 2016 and Section 8.58 of the Statutory Code of Practice. Pursuant to the agreement, the FCA will be the subscribing authority and HMRC will be the supplying authority. This is a significant enhancement of the FCA's powers of investigation using the resources and experience of HMRC.
On 14 May 2020, the Joint Money Laundering Steering Group (JMLSG) published the proposed text for a new annex to its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance relating to pooled client accounts. The proposed text includes: guidance on firms considerations as part of the documented customer risk assessment, the written agreement with the customer and due diligence measures.
The JMLSG invites all comments by 10 June 2020.
On 7 May 2020, the EC published a communication on an Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing. The Action plan sets out concrete measure that the EC will take over the next 12 months to better enforce, supervise and coordinate the EU's rules on combating money laundering and terrorist financing. The EC's strategy is built on six pillars aimed at creating a more harmonised and effective EU strategy. The six pillars are: (1) Effective application of EU rules, (2) A single EU rulebook, (3) EU-level supervision, (4) A coordination and support mechanism for Member State Financial Intelligence Units, (5) Enforcing EU-level criminal law provisions and information exchange and (6) The EU's global role.
On 5 May 2020, the Financial Action Task Force (FATF) published a COVID-19-related report on money laundering and terrorist financing risks and policy responses. The FATF has identified an increase in COVID-19 related crimes, including fraud and cybercrime, and measures to contain COVID-19 are impacting criminal behaviour. The new threats and vulnerabilities represent emerging money laundering and terrorist financing risks that could result in criminals bypassing due diligence measures, exploiting economic stimulus measures, misuse of online financial services and more. AML/CFT policy responses can help support the swift and effective implementation of measures to respond to COVID-19, while managing new risks and vulnerabilities. These policy responses range from domestic coordination to assess the impact of COVID-19 and strengthening communication with the private sector to encouraging the full use of due diligence and supporting digital payment options.
Which of the following is not a committee of the Bank of England?
The answer to last month's question is Rt Hon Mel Stride MP.
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