Authors
Charlotte Hill

Charlotte Hill

Partner

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Daniel Hirschfield

Daniel Hirschfield

Senior professional support lawyer

Read More
Authors
Charlotte Hill

Charlotte Hill

Partner

Read More
Daniel Hirschfield

Daniel Hirschfield

Senior professional support lawyer

Read More

5 November 2020

Financial services update – 11 of 11 Insights

Financial services update - November 2020

  • IN-DEPTH ANALYSIS

The topics covered in this month's newsletter include:

  • the introduction to Parliament of the Financial Services Bill 
  • the launch of the next phase in the review of the UK's financial services regulatory framework
  • Dear CEO letters on Brexit preparedness
  • £96.6m penalty imposed by FCA and PRA on Goldman Sachs for risk management failures in connection with 1MDB
  • FSB's report on effective practices for cyber incident response and recovery.
  • Please also see our separate articles COVID-19: how the UK financial regulators are responding and COVID-19: how the European financial regulators are responding for the latest regulatory updates in relation to the coronavirus pandemic.

General financial services regulation

FCA Insight article on improving diversity objectively

On 21 October 2020, the FCA published an Insight article on improving diversity objectively (see here to find out more about the Insight project). The article highlights that encouraging diversity and inclusion is a vital task for many organisations and assessing success inevitably starts with statistics. Organisations can draw important lessons from studies measuring diversity. The article also notes that having a diverse workforce does not guarantee that people feel included or have an equal impact on decision-making. Therefore, as well as reporting on the representation of different demographics, organisations should consider ways to quantify inclusion.

Financial Services Bill 2019-21 introduced to Parliament

On 21 October 2020, the Financial Services Bill 2019-21 was introduced to Parliament. The key reforms that the government intends to include in the Bill include:

  • the introduction of a legislative framework for overseas funds marketed in the UK and for market access to the UK for Gibraltar-based financial institutions
  • new powers for HM Treasury to implement specific reforms to the prudential regulation of banks and investment firms that reflect EU regulations and standards set by the Basel Committee on Banking Supervision
  • revisions to the UK legislative regime for benchmarks to address issues arising from the transition from LIBOR.

HM Treasury to consult on Phase II of the Financial Services Future Regulatory Framework Review

On 19 October 2020, HM Treasury published a consultation on Phase II of the Financial Services Future Regulatory Framework Review. The consultation marks the launch of the second phase of the Future Regulatory Framework Review, which considers how the regulatory framework for financial services needs to adapt to be fit for the future, in particular, to reflect the new position outside of the EU. HM Treasury's key aim is to achieve an agile and coherent approach to financial services regulation in the UK, with appropriate policy input to support a stable, innovative and world-leading financial services sector. The consultation will remain open for three months (closing on 19 January 2021).

The intention to conduct the review on the UK's regulatory framework was announced in March. The review has two phases. Phase I of the review examined co-ordination arrangements between the UK authorities that have responsibility for regulation of and policy for the financial services sector. Phase I concluded in March 2020 following HM Treasury's announcement of the establishment of the Financial Services Regulatory Initiatives Grid and the Financial Services Regulatory Initiatives Forum.

FCA Insight publishes a three-part series on future market dynamics

On 12, 14 and 16 October respectively, the FCA published a three-part Insight series on future market dynamics. The first article discussed climate change, the impacts on the financial sector as well as how the FCA is planning to continue helping the industry to respond to the risks associated with climate change. The second article focuses on technology and the opportunities and challenges that technology will pose for the future of regulation. The third article examines the role of data as a public and private good and discusses other dynamics affecting consumers such as the risks and opportunities they face and the issue of trust in the payment services and systems.

Payment Services and Systems

FMLC responds to HM Treasury's Call for Evidence on Payments Landscape Review

On 20 October 2020, the Financial Markets Law Committee responded to HM Treasury's Call for Evidence in relation to its Payments Services Landscape Review. The Call for Evidence sets out HM Government’s aims for payment systems and payments networks in the UK and seeks responses to questions relating to future opportunities and risks for new payments systems and cross-border payments as well as how regulators may adapt to and promote new payment networks. The FMLC urged HM Government to consider:

  • the uncertainties which may arise in relation to distributed ledger technology innovation in the area of payments systems
  • whether the current regulatory regimes should be amended to expand the scope to cover the Broader Payments Networks Activities and bodies which manage or administer such activities within a payments network

HM Treasury publishes Call for Evidence on access to cash

On 15 October 2020, HM Treasury published a Call for Evidence on access to cash. As the UK has witnessed a decline in the use of cash payments and a transition towards digital payments, the government announced at March Budget 2020 that it will bring forward legislation to protect access to cash for those who need it and ensure that the UK’s cash infrastructure is sustainable in the long term.

The Call for Evidence sets out the government’s aims for protecting access to cash throughout the UK and seeks views on:

  • how the government can ensure the UK maintains an appropriate network of cash withdrawal and deposit-taking facilities over time through legislation, including the potential role of cashback
  • the factors affecting cash acceptance
  • whether the government should give a single regulator overall statutory responsibility for maintaining access to cash.

The Call for Evidence will close at 11:59pm on 25 November 2020.

BoE updates webpage on ISO 20022

On 13 October 2020, the BoE updated its webpage on ISO 20022, the emerging global standard for payments messaging which creates a common language for payments data across the globe. Following an industry-wide consultation and an impact assessment, the Renewed Real-Time Gross Settlement Programme confirms a revised approach to the ISO 20022 migration:

  • Phase 2 (TS2): The Bank will migrate the CHAPS payments messages to ISO 20022 in 2022, however, the implementation date will move from April to June.
  • Phase 2.1 (TS2.1): From February 2023, the BoE will require all CHAPS Direct Participants to receive enhanced ISO 20022 payment messages.
  • Phase 3 (TS3): The BoE will introduce the new RTGS2 core ledger and settlement engine in September 2023.
  • The final CHAPS ISO 20022 schemas Technical Guidance and Change Log are now available on MyStandards. The BoE has incorporated feedback received from stakeholders following an Industry Review of the draft enhanced schemas in July 2020.
  • PSR requests inputs on themes as part of the review of its future strategy

    On 1 October 2020, the Payment Systems Regulator (PSR) published a new webpage requesting inputs on the Regulator's theme of choice and availability of payments as part of the review to define PSR future strategy. The PSR has also previously requested inputs on the ‘innovation and future payment methods’ theme and the ‘competition’ theme and the PSR is still welcoming inputs on these two themes.

Banking and insurance

HM Treasury's policy paper on amendments to the Benchmarks Regulation to support LIBOR transition

On 21 October 2020, HM Treasury published a policy statement on amendments to the Benchmarks Regulation to support LIBOR transition. The policy statement accompanies the Financial Services Bill that was introduced on 20 October 2020 (see above). The policy statement states that firms should continue to prioritise active transition away from LIBOR to alternative benchmarks. In bringing forward this legislation, the government recognises that some contracts face insurmountable barriers in transitioning away from LIBOR to an alternative benchmark. The Financial Services Bill will amend the UK Benchmarks Regulation ((EU) 2016/1011) to provide the FCA with additional powers to manage an orderly wind-down of a critical benchmark, such as LIBOR. The FCA will therefore have the power to direct a change in the methodology of a critical benchmark and extend its publication for a limited time period for the benefit of “tough legacy” contracts.

FCA's and BoE's joint letter to CEOs of insurance firms

On 21 October 2020, the FCA and BoE published a joint letter to CEOs of insurance firms on the importance of being prepared for the end of the transition period in order to minimise disruption and to ensure market stability. The joint letter follows the PRA's and the FCA's joint letter to CEOs of PRA-regulated firms preparing that was published on 9 October 2020 (see below). The FCA expects individual firms to take the final steps to address the risks they may face and to ensure their preparedness for the end of the transition period. The FCA has updated the dedicated Brexit page, which includes further details on how to prepare for Brexit and information relevant to UK firms and their sector.

Prudential regulation of credit institutions in the Financial Services Bill

The Financial Services Bill that was introduced on 20 October 2020 (see above) will allow substantial parts of the UK CRR to be revoked and for the PRA to replace with rules to implement changes relating to the outstanding Basel standards. The Bill will insert a new Part 9D into FSMA on the prudential regulation of credit institutions to set out the enhanced accountability framework that the PRA must have regard to when implementing the Basel standards.

FCA's and PRA's joint letter to CEOs on final preparations for the end of the transition period’

On 9 October 2020, the FCA and PRA published a joint letter to CEOs of PRA-regulated firms preparing for the end of the transition period. Similar to the joint letter by the FCA and BoE on 21 October 2020 (see above), firms are urged to take the final steps to ensure their preparedness for the end of the transition period. In addition to the FCA's Brexit page (see above), firms are also directed to observe the updates on the BoE's Brexit page.

Funds and Asset Management

Overseas Funds Regime (OFR) the Financial Services Bill

The Financial Services Bill (see above) will amend Part 17 of FSMA to establish the new Overseas Funds Regime (OFR) which will allow overseas collective investment schemes to be marketed to all investors, including retail investors, in the UK market on appropriate terms. The Bill will also extend the temporary marketing permissions regime from three years to five years so that there is sufficient time for the OFR to be established.

European Commission consults on European long-term investment funds

On 19 October 2020, the European Commission launched a consultation relating to its review of the Regulation on European long-term investment funds (ELTIFs) ((EU) 2015/760) (ELTIF Regulation). The consultation seeks views on issues grouped under headings including:

  • scope of the ELTIF authorisation and process
  • investment universe, eligible assets and qualifying portfolio undertakings
  • borrowing of cash and leverage
  • rules on portfolio composition and diversification.

FCA to consult on climate-related financial disclosures for asset managers and personal pension schemes

On 2 October 2020, the FCA published a letter to Guy Opperman, the Minister for Pensions and Financial Inclusion, Department for Work & Pensions in relation to the recent consultation proposals from the Department for Work and Pensions on climate-related financial disclosures for Occupational Pension Schemes (OPS) regulated by the Pensions Regulator. The letter confirms that the FCA plans to implement consistent climate-related disclosure requirements for asset managers and contract-based pension schemes. The FCA will consult on implementing disclosures that align with Task Force on Climate-related Financial Disclosures recommendations in the first half of 2021. It is likely that the rules will be finalised by the end of 2021, with new obligations coming into force in 2022.

FCA reopens notification window for temporary permissions regime until end 30 December 2020

On 30 September 2020, the FCA published an updated webpage on the temporary permissions regime explaining that EEA firms and fund managers can now notify the FCA if they wish to use the TPR. They can submit the notifications to the FCA via the Connect system until the end of 30 December 2020.

Securities and Markets

Directive and regulation on European crowdfunding service providers published in Official Journal

On 20 October 2020, the following directive and regulation aiming to provide a single set of rules on crowdfunding services were published in the Official Journal of the EU:

  • Regulation (EU) 2020/1503 on European crowdfunding service providers for business and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (2018/0048(COD))
  • Directive (EU) 2020/1504 amending the MiFID II Directive (2014/65/EU) relating to crowdfunding (2018/0047(COD))

MIFID and CSDR legislative initiatives in the European Commission's 2021 work programme

On 19 October 2020, the European Commission published a communication setting out the Commission's work programme for 2021 and a timeline on when legislative initiatives are intended to be published. 2021 will be a crucial year during which a number of legislative initiatives will be introduced, including:

  • In Q1 2021, the Commission will propose amendments to the MiFID II and MiFIR framework to strengthen the EU investment protection and facilitation framework.
  • In Q4 2021, the framework will be reviewed more extensively, with the Commission reviewing the administrative burden and information requirements for a subset of retail investors and will review investor categorisation more generally.

In Q2 2021, the Commission will conduct a targeted review of the Central Securities Depositories Regulation ((EU 909/2014) (CSDR), focusing on the cross-border provision of services and the basis of passports and authorisation procedures, and conditions under which central securities depositories are authorised to designate banks or themselves to provide banking-type ancillary services.

Parliamentary Committee seeks further clarification from HM Treasury on UK approach to EU crowdfunding service provider proposals

On 14 October 2020, the House of Lords European Union Select Committee Chair published a letter to John Glen, the Economic Secretary to the Treasury, in which the Committee asks for further clarifications on the UK government's approach to the European Commission's proposed Regulation on European Crowdfunding Service Providers (ECSP) for Business (2018/0048(COD)) and the related Commission proposal for a Directive making consequential amendments to the MiFID II Directive (2014/65/EU) relating to crowdfunding (2018/0047(COD)).

Mr Glen previously wrote to the committee on 11 August 2020. The Committee's letter refers to Mr Glen's statement that the government will "consider whether similar changes in UK law would enhance the competitiveness" of the sector and asks:

  • which elements of the law might make the UK's Europe-leading crowdfunding sector more competitive
  • where the government might seek to diverge from the law and what the impact of any such divergence would be

The Committee's letter also refers to Mr Glen's observation regarding the European Commission's "commitment to consider the appropriateness of expanding the scope of the Regulation to third countries" and asks for the government's assessment of the desirability and of the effect of such a move on the UK sector's competitiveness.

FCA's confirmation in relation to ESMA's statement on MiFID trade reporting and position limit obligations

On 1 October 2020, ESMA published a statement on MiFID trade reporting and position limit obligations and on the same date, the FCA published a statement in respect of UK requirements from the end of the EU withdrawal transition period, confirming that the FCA does not require UK investment firms that transact on trading venues outside the UK, in the EU or elsewhere, to publish details of those transactions through a UK APA.

Investigations and Enforcement

FCA and PRA fine Goldman Sachs International £96.6m for risk management failures in connection with 1MDB

In the FCA's press release published on 22 October 2020, it was stated that the FCA and the PRA have fined Goldman Sachs International (GSI) a total of £96.6 million (US$126 million) for risk management failures connected to 1Malaysia Development Berhad (1MDB) and its role in three fundraising transactions for 1MDB. 1MDB is a Malaysian state-owned development company that has been at the centre of billion-dollar embezzlement allegations. GSI underwrote, purchased and arranged three bond transactions for 1MDB in 2012 and 2013 that raised a total of US$6.5 billion for 1MDB. The 1MDB transactions were approved by global GSG committees that GSI participated in, and were booked to GSI. The investigation found that GSI breached a number of FCA and PRA principles and rules. Specifically, GSI failed to:

  • assess with due skill, care and diligence the risk factors that arose in each of the 1MDB bond transactions on a sufficiently holistic basis
  • assess and manage the risk of the involvement in the 1MDB bond transactions of a third party that GSI had serious concerns about
  • exercise due skill, care and diligence when managing allegations of bribery and misconduct in connection with 1MDB and the third 1MDB bond transaction
  • record in sufficient detail the assessment and management of risk associated with the 1MDB bond transactions

The fines are part of a US$2.9 billion globally coordinated resolution reached with GSI and its subsidiaries.

FCA updates whistleblowing webpages

On 21 October 2020, the FCA published the following new and updated webpages on whistleblowing:

  • Speaking to the FCA - the new webpage affirms that the FCA will protect the whistleblowers' identities and sets out how the FCA protect the whistleblowers' identities. The webpage also provides information on when an individual should speak to the FCA and what the FCA will do with whistleblowers' information.
  • Legal advice and whistleblowing - the FCA updated the webpage setting out the legal protections available to whistleblowers and suggests sources where the whistleblowers can get further advice.
  • Whistleblowing: how to make a report - the new webpage explains how to report concerns to the FCA's Whistleblowing team and what happens to the information that has been provided once a report has been made.
  • Whistleblowing in practice: case studies - the new webpage states that whistleblowing information gives the FCA an insight into what is happening in the markets the FCA regulates. The webpage also sets out some typical case studies based on real incidents handled by the FCA Whistleblowing team, including in relation to misselling, anti-money laundering checks and reporting the conduct of a senior manager.

FCA imposed fines for short selling disclosure rule breaches

On 14 October 2020, the FCA published the final notice it has issued to Asia Research and Capital Management Ltd (ARCM), an asset management firm based in Hong Kong that manages investment vehicles focused primarily on investing in debt and equity securities across Asia while trades in the EU market infrequently. The final notice states that ARCM has failed to comply with the requirements to notify the FCA and disclose to the public details of net short positions held, as set out in the Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps. Therefore, the FCA is fining ARCM £873,118.

FCA's podcast on the approach to Enforcement and what it means for firms

On 29 September 2020, the FCA published a podcast interview with Kate Tuckley, the Head of the FCA's newly formed Retail 4 function. In the podcast, Katies described the work of the multidisciplinary department, which acts as the first port of call for supervisors who want to take formal action against a firm or individual.

Financial crime

FSB publishes report on effective practices for cyber incident response and recovery

On 19 October 2020, the Financial Stability Board published its final report on effective practices for cyber incident response and recovery (CIRR). The FSB has developed a toolkit of effective practices that aims to assist financial institutions in their CIRR activities before, during and after a cyber incident to limit any related financial stability risks. The toolkit provides a set of effective practices that serve as building blocks for enhancing CIRR activities. The FSB stated that firms can adopt and adapt from the range of practices in the toolkit to cater to the complexity of their IT environments and changing business models. The FSB further urged firms and authorities to collectively strengthen their capabilities through frequent engagements in information sharing, exchange of best practices and cyber-related exercises.

European Commission's work programme for 2021 includes a legislative proposal for AML

In the European Commission work programme for 2021 (see above), it is stated that as part of the measures to strengthen the Economic and Monetary Union, the Commission will step up the fight against money laundering. Accordingly, a legislative proposal for an anti-money laundering package can be expected in Q1 2021.

Serious Fraud Office's views on potential reforms in economic crime

On 8 October 2020, Lisa Osofsky, the Director of the Serious Fraud Office, gave a speech on future challenges in economic crime. The potential reforms that the Serious Fraud Office would like to see include:

  • the introduction of a “failure to prevent” offence, partly as a result of the Barclays Qatar judgment, which confirmed a narrow application of the "controlling mind" test
  • Legislation that allows the Serious Fraud Office to use Section 2 powers before opening a formal investigation in fraud and domestic bribery cases
  • the introduction of a “tipping off” offence in relation to Section 2 notices, similar to that available in money laundering legislation
  • a welcome to the new Economic Crime Court planned for the City of London, which will bring criminal and civil economic crime cases under one roof
FSR trivia

How many environmental objectives are specified in the EU Taxonomy Regulation?

  • 5
  • 7
  • 4
  • 6

The answer to last month's question is the financial services contracts regime.

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

Financial services regulatory

Financial services update - November 2020

IN-DEPTH ANALYSIS

by Charlotte Hill, Daniel Hirschfield

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