Financial services update – 13 / 15 观点
The topics covered in this month's newsletter include:
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.
End of the Brexit transition period: Regulatory change for firms
On 31 December 2020, the FCA published a statement stating that as of 11 pm on 31 December 2020, the transition period ended and EU law no longer applies in the UK.
Passporting between the UK and EEA states has ended and the temporary permissions regime (TPR) has now come into effect for those firms and funds that notified the FCA that they wanted to enter the TPR. Alongside the TPR, the government has created the financial services contracts regime (FSCR). This allows, for a limited period, EEA passporting firms not in the TPR to continue to service UK contracts entered into prior to the end of the transition period (or prior to when they enter FSCR).
The FCA has also become the UK regulator of UK-registered and certified credit rating agencies (CRAs). This means that any UK legal entity that wishes to issue credit ratings publicly or by subscription will now need to be registered or certified as a CRA with the FCA.
Quarterly Consultation Paper No. 30
On 4 December 2020, the FCA published its 30th quarterly consultation paper. The consultation invites comments on a number of policy proposals and changes to the FCA Handbook.. Chapter 2 of the consultation paper is a joint FCA and PRA consultation on their expectations for firms to notify regulators of when a senior manager takes temporary leave for longer than 12 weeks. Among others, the FCA and PRA propose to require firms notifying them that the individual is on long term leave via Form D (Changes to personal information/application details and conduct breaches/disciplinary action related to conduct). The FCA and PRA propose to clarify their expectations through new rules and guidance in the FCA Handbook, the PRA Rulebook and updated supervisory statements (Strengthening individual accountability in banking (SS28/15) and Strengthening individual accountability in insurance (SS35/15)).
The closing date for comments on Chapter 2 is 4 February 2021.
BoE speech outlines three key actions for firms ahead of LIBOR cessation
On 9 December 2020, the BoE published a speech by Andrew Hauser, the Executive Director for Markets at the BoE, on firms' preparations for LIBOR cessation at the end of 2021. The speech identifies three key actions for market participants:
FCA publishes evaluation of its work on the financial advice market
On 3 December 2020, the FCA published an evaluation of the impact of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). Both reviews aim to improve the distribution of retail financial services products. The key findings of the evaluation include:
APP scam: extension of victim compensation and implementation of warnings provision
On 9 December 2020, UK Finance announced that a group of signatories to the voluntary Authorised Push Payment (APP) Contingent Reimbursement Code has agreed to extend until 30 June 2021 the interim funding to compensate eligible victims of APP scams. The interim funding is provided to ensure customer reimbursement takes place while regulators and the government work to deliver a long-term, sustainable funding arrangement.
On 10 December 2020, the Lending Standards Board published a report on how firms have implemented the effective warnings provision of the contingent reimbursement model code for APP. The report found that firms had taken the provision of effective warnings as a key tool to prevent APP scams from taking place. All participants acknowledged that warnings could be improved and enhanced, but that warnings could not prevent all occurrences of customers falling victim to scams.
Consultation on new special administration regime for payment institutions and electronic money institutions
On 3 December 2020, HM Treasury published a consultation to seek views on the introduction of a new special administration regime for payment institutions and electronic money institutions. The new regime aims to help protect customers when a payment or electronic money institution goes into insolvency. The special regime is intended to have the following key features:
The consultation closes on 14 January 2021.
BoE's future priorities in its supervision of financial market infrastructures
On 3 December 2020, the BoE published the 2020 Annual Report on its supervision of financial market infrastructures (FMIs). The BoE has outlined five future priorities:
FCA letter to mainstream consumer credit lenders
On 2 December 2020, the FCA published a Dear Board of Directors letter it sent to mainstream consumer credit lenders (MCCLs). The key drivers of harm for MCCLs, as set out in the letter, are:
The FCA expect MCCLs to reflect on the issues highlighted in the letter, and to consider the degree to which they present these risks, as well as their mitigation strategies.
FCA evaluation of its rent-to-own price cap
On 2 December 2020, the FCA published an evaluation paper summarising its evaluation of the 2019 price cap intervention in the rent-to-own (RTO) market. The FCA evaluated two key aspects of the RTO price cap:
In the FCA's view, the results estimate that the price cap’s benchmarking requirements have brought RTO prices much closer to the high-street average. The FCA also has not seen evidence to suggest that RTO firms raised the prices of add-ons and connected goods or services to recoup revenue lost because of the price cap.
PRA policy statement on Capital Requirements Directive V
On 28 December 2020, the PRA published a policy statement (PS29/20) setting out its final policy on the implementation of the Capital Requirements Directive V (CRD V) and its final policy on the designation of firms within certain consolidation groups. PS29/20 confirms that the policy published as near-final in PS26/20 on the implementation of the CRD V has now been finalised. The PRA's final policy is set out in the appendices to PS29/20. The policy is relevant to UK banks, building societies, and PRA-designated investment firms, as well as UK financial holding companies, and UK mixed financial holding companies.
PRA policy statement on transposing BRRD II Directive
On 21 December 2020, the PRA published a policy statement (PS28/20) on transposing the Bank Recovery and Resolution Directive II (BRRD II)). PS28/20 provides feedback to responses that the PRA received on its Consultation Paper. PS28/20 also contains the amended Contractual Recognition of Bail-in (CROB) Part of the PRA Rulebook (Appendix 1) and the amended Stay in Resolution (Stays) Part of the PRA Rulebook (Appendix 2). The policy is relevant to Bank Recovery and Resolution Directive (BRRD) undertakings to which the CROB and Stays Parts apply.
Future priorities of the International Association of Insurance Supervisors
On 8 December 2020, the International Association of Insurance Supervisors (IAIS) published a press release, setting out the IAIS's four overarching priorities for the coming years:
These priorities will be codified in the IAIS Roadmap 2021-2022, which will be published in early-2021.
PRA speech on the use of stress tests in preparing the insurance sector
On 3 December 2020, the PRA published a speech by Charlotte Gerken, the Executive Director of Insurance Supervision at the PRA. The speech focus on the importance of the insurance sector being prepared for a world of high risk and the benefits of stress testing. Ms Gerken stated that set piece tests enhance the PRA's understanding of the structure and sensitivities of firms’ balance sheets, while generic stress tests provide a guide to resilience under a diverse set of systemic shocks regardless of the circumstances of a particular event.
Additionally, Ms Gerken also mentioned two future stress tests:
IOSCO survey on exchange traded funds
On 22 December 2020, the International Organization of Securities Commissions (IOSCO) issued a voluntary questionnaire for industry participants on exchange-traded funds (ETFs), including asset managers, liquidity providers and market-makers. The purpose of the survey is to support the IOSCO's ongoing ETF project by enhancing its understanding of certain aspects of ETFs, including during the market volatility in March/April 2020 due to the COVID-19 pandemic and, in particular, issues related to fixed-income ETFs.
The deadline for responses is 1 March 2021.
ESMA final guidelines on outsourcing to cloud service providers
On 18 December 2020, the European Securities and Markets Authority (ESMA) published its final report on guidelines on outsourcing to cloud service providers.The guidelines complete the guidance from the European Supervisory Authorities on the use of cloud services, following earlier guidelines from the European Banking Authority and European Insurance and Occupational Pension Authority. However, despite some similarities, the guidelines may not represent the level of cross-sector harmonisation that some might have hoped for (see our article for a more detailed analysis).
The guidelines enter into force on 1 January 2021 and will apply to all cloud outsourcing arrangements firms enter into, renew or amend on or after 30 June 2021. For existing cloud arrangements, ESMA expects firms to review and amend those arrangements by 31 December 2022.
ESMA final guidelines on assessing leverage risk under the AIFMD
On 17 December 2020, ESMA published its final report on guidelines under Article 25 of the Alternative Investment Fund Managers Directive, which requires competent authorities to identify the extent to which the use of leverage contributes to the build-up of systemic risk in the financial system, risks of disorderly markets or risks to the long-term growth of the economy. The guidelines, which are in Annex III to the report, provide national competent authorities with a set of indicators to consider when performing their risk assessment and a set of principles that they should take into account when calibrating and imposing leverage limits.
The guidelines will now be translated into the official EU languages and published on ESMA's website and will apply two months after the publication of the translations.
ESMA Q&As on MiFID II Directive and MiFIR
On 22 December 2020, ESMA published an updated version of its Q&As on investor protection and intermediaries under MiFID II and the Markets in Financial Instruments Regulation (MiFIR). The Q&As provide responses to a range of questions including questions regarding recording of telephone conversations and electronic communications, record keeping, information on costs and charges, underwriting and placing as well as client categorisation.
Change of notification thresholds under UK Short Selling Regulation
On 15 December 2020, HM Treasury announced that it intends to lay a statutory instrument under the retained EU law version of the Short Selling Regulation amending the initial notification threshold under Article 5(2) for the reporting of net short positions to the FCA, in relation to the issued share capital of a company that has shares admitted to trading on a trading venue, from 0.2% to 0.1%. The change will come into force on 1 February 2021.
The FCA has updated its webpage to reflect the change.
First FCA consultation on implementation of Investment Firms Prudential Regime
On 14 December 2020, the FCA published the first out of three consultation papers on the implementation of the Investment Firms Prudential Regime (IFPR) (CP20/24) in relation to a new UK prudential regime for investment firms authorised under MiFID II. In the FCA's view, the IFPR will streamline and simplify the prudential requirements for solo-regulated investment firms in the UK.
The key proposals that are covered in the consultation paper include:
The closing date for the comments on the first consultation paper is 5 February 2021. The second and third consultation papers will respectively be published at the start of Q2 and Q3 2021.
Independent investigation into the FCA's regulation of London Capital & Finance plc
On 17 December 2020, HM Treasury published a report of the Dame Elizabeth Gloster's independent investigation into the FCA's regulation of London Capital & Finance plc (LC&F). The report concluded that the FCA did not discharge its functions in respect of LC&F in a manner which enabled it to effectively fulfil its statutory objectives. The bondholders were entitled to more protection from the regulatory regime in relation to an FCA-authorised firm than that delivered by the FCA. The report made nine recommendations on how the FCA may address the significant gaps and weaknesses in its policies and practices in relation to analysing regulated firms' business activities. Among others, the FCA should:
In its response, the FCA states that it will fully incorporate the recommendations into its ongoing transformation programme.
Additionally, Nikhil Rathi, the Chief Executive at the FCA, also outlined a series of key actions that the FCA will take in the next 6 months in light of the report's findings. Among others, the FCA will:
£26 million fine over treatment of customers in financial difficulty
On 15 December 2020, the FCA published the final notice it has issued to Barclays Bank UK plc, Barclays Bank plc and Clydesdale Financial Services Ltd for failures in relation to their treatment of consumer credit customers who fell into arrears or experienced financial difficulties. The FCA found that they failed to treat customers fairly or to act with due skill, care and diligence. Specifically, they:
The FCA stated that it will continue to focus on the fair and appropriate treatment of customers experiencing financial difficulty and that firms should ensure there is appropriate investment in their staff who work in collections and recoveries, including in training and effective management of information, to allow firms to monitor customer outcomes and take appropriate action where needed.
FCA fines and prohibits hedge fund Chief Investment Officer for market abuse
On 15 December 2020, the FCA published the final notice that it issued to a former portfolio manager, partner and Chief Investment Officer at a hedge fund. The FCA found that the former Officer engaged in market abuse by creating a false and misleading impression as to the supply and demand for equities. The FCA therefore levied a £100,000 fine and prohibited the former Officer from performing any functions in relation to regulated activity.
The FCA also stated that market manipulation is corrosive of market integrity, undermining clean, efficient and fair markets and that the FCA has increased its capability to detect and to take robust action against the harm to shareholder value.
National risk assessment 2020: money laundering and terrorist financing
On 17 December 2020, HM Treasury and the Home Office published the 2020 national risk assessment (NRA) of money laundering and terrorist financing. The NRA sets out the key money laundering and terrorist financing risks for the UK, how these have changed since the UK’s second NRA was published in 2017, and the action taken since 2017 to address the risks.
The key findings include:
Temporary FCA registration regime for cryptoasset businesses
On 16 December 2020, the FCA announced that it has established a Temporary Registration Regime for cryptoasset businesses. The Regime is for existing cryptoasset businesses which have applied for registration before 16 December 2020, and whose applications are still being assessed. The Regime enables those existing businesses to continue to trade on 10 January 2021 until 9 July 2021, pending the FCA’s determination of their application.
The FCA stated that firms that did not apply by 15 December 2020 will not be eligible for the Regime. They will need to return cryptoassets to customers and stop trading by 10 January 2021. Firms that do not stop trading by that date are at risk of being subject to the FCA’s criminal and civil enforcement actions. The FCA also advised customers of cryptoasset firms which should have applied to the FCA, but have not done so, to withdraw their cryptoassets or money before 10 January 2021.
Additionally, the FCA stated that it does not have consumer protection powers for the cryptoasset activities of firms. Even if a firm is registered with the FCA, the FCA is not responsible for ensuring cryptoasset businesses protect client assets.
According to a recent PRA report evaluating the SMCR, in the approximately 4.5 years leading up to October 2020, how many conduct notifications did the PRA receive in respect of senior managers:
The answer to last month's question is: Temporary Transition Power.