Financial services update – 31 / 37 观点
The topics covered in this month's update include:
Please also see our 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 concerning the coronavirus pandemic.
On 30 June 2020, the Financial Conduct Authority (FCA) published a webpage announcing that HM Treasury has agreed to delay the SMCR certification deadline for solo-regulated firms to 31 March 2021 (from 9 December 2020). To ensure SMCR deadlines remain consistent, the FCA intends to consult on extending the deadline for application of the Conduct Rules and the submission of information about Directory Persons to the Register.
On 25 June 2020, the FCA notified the European Banking Authority (EBA) that it intends to comply with the EBA's final guidelines on ICT and security risk management. All credit institutions, investment firms and PSPs will be expected to make every effort to comply with the Guidelines from 30 June 2020 when they enter into force. The FCA will apply reasonable supervisory flexibility when assessing the implementation given the ongoing COVID-19 pandemic.
In a statement made on 23 June 2020, Rishi Sunak, Chancellor of the Exchequer, discussed the UK’s financial services regulatory framework reforms in light of the UK’s position outside of the EU. In general, consistent with the UK’s position as a major international financial hub, the government intends to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant.
The statement identified the following key areas for the forthcoming reforms: updating prudential requirements, maintaining sound capital markets, and managing future risks (eg the LIBOR transition) (more on this below).
On 22 June 2020, HM Treasury announced that Nikhil Rathi will be the new Chief Executive of the FCA from autumn 2020 for a five-year term. Mr Rathi will succeed Christopher Woolard, who has acted as interim Chief Executive since Andrew Bailey stepped down from the post in March 2020, following Mr Bailey's appointment as Governor of the Bank of England. Mr Rathi is currently the Chief Executive of London Stock Exchange plc and was Director, Financial Services Group at HM Treasury from September 2009 to April 2014.
Charles Randell, Chair of the FCA and the Payment Systems Regulator (PSR), delivered a speech on 16 June 2020 to a virtual roundtable of bank chairs on how the financial services industry can work to support recovery from the COVID-19 pandemic.
In his speech, Mr Randell highlighted how COVID-19 shows the need to reassess the approach to consumer debt, high risk retail investments and financial exclusion. Mr Randell noted the significant increase in consumer and business debt and the need to have a robust framework to deal with debt that turns out to be unaffordable as we emerge from COVID-19.
He also emphasised the impact of digitisation on the behaviour of consumers and the challenges posed for financial services, for example, financial exclusion owing to the accelerated move away from cash. The demands on the FCA will be large, but Mr Randell remains confident that the FCA will work with pace and pragmatism as it plans for the future of regulation and focuses on consumer outcomes.
On 11 June 2020, the House of Lords EU Financial Affairs Sub-Committee published a letter (dated 27 May 2020) from John Glen, Economic Secretary to the Treasury, relating to the committee's review of financial services after Brexit. The letter addresses the government's priority on equivalence, the new approach to financial regulation, and global regulatory cooperation.
On 11 June 2020, the FCA published finalised guidance on the assessment of adequate financial resources for all FCA solo-regulated firms subject to the Threshold Conditions and/or the Principles for Businesses.
The framework document aims to clarify the role of adequate financial resources in minimising harm, the practices firms can adopt when assessing adequate financial resources by improving controls and reducing the risk in their activities, and how the FCA assesses the adequacy of a firm’s financial resources. The FCA expects firms to assess their adequate financial resources commensurate to the risk of harm and complexity of their business.
On 16 June 2020, the PSR published a revised version of its Powers and Procedures Guidance (PPG) for regulated firms. The original guidance, which was published in March 2015, has been updated to reflect the developments in the PSR's processes and practices, as well as its increased remit.
The revised guidance also aims to be more informative by helping regulated parties understand how the regulator chooses which of its powers to exercise and when, outlining the PSR's current role and remit and how it collaborates with concurrent regulators and authorities, and providing more information about the procedures and processes the regulator uses, for example, how the PSR decides whether to make a formal direction, and about how and when it conducts an enforcement investigation.
The PSR has also updated its guidance on its approach to the Interchange Fee Regulation, revising the relevant chapter to bring it in line with the updated PPG.
In a speech published on 3 June 2020, Genevieve Marjoribanks, PSR Head of Policy, talked about innovation and regulation of payment systems. In her speech, Ms Marjoribanks discussed the priority areas for the PSR, as follows:
The PSR wants to work with the industry to meet the future needs of the UK's increasingly digital economy. Changes in business and consumer habits have been accelerated by COVID-19, and it remains to be seen whether these will remain once lockdown is over.
The FCA issued a statement on 23 June 2020 welcoming the government's intention to bring forward legislation to amend the Benchmarks Regulation to give the FCA enhanced powers. The FCA says these could help manage and direct an orderly wind-down of critical benchmarks such as LIBOR and help deal with the problem identified by the Sterling Risk Free Rate Working Group of 'tough legacy' contracts that cannot transition from LIBOR.
The new powers proposed will be available where the FCA has found that a critical benchmark is not representative of the market it seeks to measure and representativeness will not be restored. The FCA and other authorities have been clear that those who can amend their contracts so that they move away from LIBOR should do so.
The FCA will publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally.
On 23 June 2020, HM Treasury published a policy statement on a new prudential regime for banks and investment firms in the Financial Services Bill 2019-21. HM Treasury intends to use the Bill to implement prudential standards for banks and other credit institutions relating to the CRR II Regulation and the new Investment Firms Prudential Regime. It also intends to delegate responsibility for the implementation of requirements for firms to the Prudential Regulation Authority and the FCA.
On 18 June 2020, the Bank of England published its Annual Report and Accounts for the period between March 2019 and February 2020. In the report, the BoE looks at the initiatives to upgrade the real time gross settlement system, its actions to make the largest banks more resolvable, reform of benchmark rates, the need to manage operational risk, the timely collection of data and preparation for Brexit. It also disclosed its own approach to climate risk management across its entire operations as part of its annual reporting and published its Climate-Related Financial Disclosure for 2020.
The Bank of England has confirmed that it will publish a daily Sterling Overnight Index Average (SONIA) compounded index from August 2020. In a summary and response paper published on 11 June 2020, the BoE also stated that given a lack of consensus on both the usefulness of SONIA period averages and the conventions underpinning such rates – in line with the position set out in the February 2020 discussion paper – the BoE will not be producing them at this time.
On 10 June 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a discussion paper on the (re)insurance value chain and new business models arising from digitisation. As technology continues to evolve, insurance undertakings and intermediaries continue to develop and revise their business models bringing both beneficial innovation and a new set of emerging risks that have to be considered.
Accordingly, EIOPA recognises a possible fragmentation of the insurance value chain could occur, including, importantly, a potential for a reduced regulatory and supervisory oversight. The discussion paper aims to get a better picture on possible fragmentation of the EU's insurance value chain and supervisory challenges related to that in order to plan for next steps.
EIOPA welcomes all comments by 7 September 2020. These must be submitted by responding to a survey.
The FCA published a discussion paper on 23 June 2020 on a prudential regime for UK investment firms. The discussion paper sets out initial views as well as technical details on the Investment Firm Directive and the Investment Firm Regulation.
The FCA is seeking views on how to best implement the government's new prudential regime framework. This marks the FCA's first step in introducing a set of prudential rules for investment firms to better reflect their business models and the risk of harm they pose to consumers and markets.
The FCA seeks responses from stakeholders until 25 September 2020.
On 10 June 2020, the European Commission (Commission) published a report assessing the application and scope of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). Key findings in the report are that:
On 5 June 2020, the European Securities and Markets Authority (ESMA) published a final report with guidelines on the Markets in Financial Instruments Directive (MiFID II) compliance function. The guidelines enhance the value of existing standards by providing additional clarifications on certain specific topics, such as new responsibilities in relation to MiFID II’s product governance requirements, by notably detailing further the reporting obligations of the compliance function. The guidelines also foster greater convergence in the implementation, and supervision, of the new MiFID II compliance function requirements.
The FCA published a consultation paper on 18 June 2020 on making its temporary rules on marketing certain high-risk investments (including speculative mini-bonds) permanent and extending them to some similar securities. The FCA wants to prevent harm to consumers from investing in complex, higher-risk products that they do not understand and are not suitable for them.
The current temporary product intervention for speculative illiquid securities came into effect on 1 January 2020 and lasts for 12 months. It restricts speculative mini-bonds and preference shares from being mass-marketed to retail investors. It also improves disclosure of key risks and costs to those certified high net worth and sophisticated retail investors who are still eligible to receive promotions for these types of securities.
The FCA invites comments until 1 October 2020 and aims to publish final rules in a policy statement before the end of 2020.
On 17 June 2020, UK Finance published a technical briefing, What the MiFIR third-country regime means for UK-EU cross-border services. In the briefing, UK Finance noted that the EU Markets in Financial Instruments Regulation (MiFIR) allows third-country (non-EU) firms registered with the ESMA to provide cross-border services to eligible counterparties and certain professional clients (qualifying clients) in the EU if the commission makes an equivalence decision in respect of the third country concerned.
The briefing discusses how this regime operates and the implications for UK firms if the Commission makes an equivalence decision concerning the UK under MiFIR, including the impact of the amendments to the regime that will apply from 21 June 2021 under the EU Investment Firms Regulation. It also discusses the implications for EU firms if the UK makes a corresponding equivalence decision in respect of the EU under MiFIR (as adopted under UK domestic law at the end of the transition period).
On 12 June 2020, the Commission published a consultation, together with an impact assessment, on its initiative for an EU green bond standard. Green bonds play an increasingly important role in financing assets needed for the low-carbon transition. However, there is no uniform green bond standard within the EU. The consultation builds upon the European Green Deal, which significantly increases the EU’s climate action and environmental policy ambitions.
The FCA issued a public censure to Redcentric Plc on 26 June 2020 for committing market abuse between 9 November 2015 and 7 November 2016. Redcentric's unaudited interim results and audited final year results materially misstated its net debt position and overstated its true asset position, leading to investors paying more when purchasing shares than they would have done had they known the true position.
Redcentric has agreed to initiate a compensation scheme and, taking this into account, the FCA decided to impose a public censure rather than a financial penalty. In a separate action, the FCA has instituted criminal proceedings against three former employees of Redcentric, each facing two counts of making a false or misleading statement.
On 17 June 2020, the FCA fined Commerzbank AG (London Branch) £37,805,400 for failing to put adequate anti-money laundering (AML) systems and controls in place between October 2012 and September 2017. The FCA stated that Commerzbank was aware of these weaknesses and failed to take reasonable and effective steps to fix them creating "a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system."
Commerzbank has now undertaken a significant remediation exercise to bring its AML controls into compliance, conducted an extensive look-back exercise to identify suspicious transactions, and voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers. Commerzbank agreed to resolve the matter at an early stage of the investigation and therefore qualified for a 30% discount (without the discount the financial penalty was £54,007,800).
The FOS published issue 152 of their newsletter on 5 June 2020. It provides guidance to consumers and business dealing with complaints or enquiries caused or affected by COVID-19, and information on the assistance the FOS provides on avoiding fraud and scams. It sets out the FOS's annual complaints data and commentary on trends in complaints, with a specific focus on claims management companies' complaints data. The FOS also details its future strategy, which will run until 2025.
The EFECC, launched by Europol on 5 June 2020, aims to enhance the operational support provided to the EU Member States and EU bodies in the fields of financial and economic crime and promote the systematic use of financial investigations. The exponential increase of financial and economic crime and the involvement of organised crime on a large scale – together with the number of requests for operational support from EU Member States – called for an adequate and coordinated European response.
On 1 June 2020, the Joint Money Laundering Steering Group (JMLSG) published the final amended versions of Part I, Part II and Part III of its anti-money laundering and counter-terrorist financing guidance. The guidance takes account of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), which came into force on 10 January 2020, and also comments received on the consultation text that was published in February 2020. The new chapter 22 for Part II, containing sectoral guidance relating to cryptoasset exchanges and custodian wallet providers, has not yet been finalised.
What term is used to describe the practice of firms and individuals deliberately seeking to avoid their liabilities or poor conduct history by closing down firms only to re-emerge in a different legal entity?
The answer to last month's question is the Banking Standards Committee.
Join us for our next financial services regulatory round-up webinar.
In this webinar we will update you on the ongoing actions taken by the UK and EU financial services regulators in response to the COVID-19 crisis and highlight other developments from the regulators.