Worldwide: Financial Regulatory Developments (FReD) - June 5, 2015

Headlines

  • Commission urges Member States to adopt BRRD
  • Commission speaks on EMIR review
  • ESMA recommends UCITS changes
  • BoE issues stress test guidance
  • FCA outlines wholesale banking ToR

EU AND INTERNATIONAL

Financial Stability Board (FSB)

FSB publishes SIB supervisory review: FSB published a thematic peer review on supervisory frameworks and approaches for systemically important banks (SIBs). The review found that regulators have taken significant steps to improve supervisory effectiveness. They are using a broader range of tools and have improved dialogue with senior management at SIBs. Feedback from the 13 global systemically important banks (G-SIBs) surveyed as part of the peer review confirmed these findings. The G-SIBs noted that both supervisory intensity (especially in relation to capital and liquidity) and supervisory actions had strengthened. However, the review did find that more work was needed to improve and assess supervisory effectiveness, in particular in relation to cross-border supervisory co-operation. The report goes on to recommend that supervisory authorities:

  • clearly define their supervisory strategy and priorities, establish a formal process for evaluating supervisory effectiveness against this, and make further progress in attracting and retaining skilled supervisory resources;
  • further strengthen their engagement with banks, particularly at board level and with senior management, with the objective of enhanced understanding of G-SIBs' business models forming part of supervisory risk assessments;
  • press banks to improve their information technology and management information systems to provide robust and timely information on the institutions' risk on an enterprise-wide basis; and
  • continue to ensure that data requests are effectively targeted and evaluated for purpose and intent, including via co-ordination between home and host authorities.

The report also recommends that the Basel Committee on Banking Supervision assists supervisors in establishing effective supervisory strategies and risk appetite frameworks. (Source: FSB Publishes Peer Review on Supervisory Frameworks and Approaches for SIBs)

Contact: Rosali Pretorius or Michael Wainwright

Council of the European Union (Council)

Council publishes MLD4: The Council has published the final versions of the MLD4 package comprising:

  • the Regulation on information accompanying transfers of funds; and
  • the fourth Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.

(Source: Regulation on Information Accompanying Transfers of Funds and Directive on the Prevention of the Use of the Financial System for the Purposes of Money Laundering or Terrorist Financing)

Contact: Emma Radmore or Nicholas Ralph

Council confirms PSD2 text: The Council sent a note to the Permanent Representatives Committee confirming the final compromise text of the proposal for a revised Directive on payment services in the internal market (PSD2). The other EU legislative bodies now need to agree the text. (Source: Note from General Secretariat of the Council to Permanent Representatives Committee (Part 2): Proposal for a Directive on Payment Services in the Internal Market)

Contact: Nicholas Ralph or Josie Day

European Commission (Commission)

Commission urges Member States to adopt BRRD: The Commission has requested that Bulgaria, the Czech Republic, France, Italy, Lithuania, Luxembourg, the Netherlands, Malta, Poland, Romania and Sweden fully implement the Bank Recovery and Resolution Directive (BRRD) as the deadline for transposition into national law was 31 December 2014. The request is in the form of a reasoned opinion, the second stage in the EU infringement procedures. Failure to comply within two months could result in the Commission referring the guilty party to the EU Court of Justice. (Source: Commission urges Member States to adopt BRRD)

Contact: Rosali Pretorius or Michael Wainwright

Commission publishes capital buffers standards update: The Commission has published a supplementing regulation with regard to regulatory technical standards for disclosure of information on compliance with the countercyclical capital buffer requirement under the Capital Requirements Regulation (CRR). (Source:Supplementing Regulation with Regard to Regulatory Technical Standards for the Disclosure of Information in Relation to the Compliance of Institutions with the Requirement for a Countercyclical Capital Buffer in Accordance with Article 440)

Contact: Rosali Pretorius or Michael Wainwright

Commission speaks on EMIR review: Jonathan Hill spoke at a public hearing on the European Market Infrastructure Regulation (EMIR) about the forthcoming review of EMIR. He spoke on:

  • why EMIR was originally needed and its development;
  • progress on trade reporting;
  • the current status of EMIR: all 17 EU central counterparties (CCPs) are authorised or in the process of getting authorisation, while 10 non-EU CCPs have been authorised with a further 31 awaiting authorisation;
  • progress on clearing obligations and introducing the first clearing rules, which will cover certain interest rate products. The Commission hopes these might be in place for some market users by April 2016;
  • the need for the-two year extension of transitional relief from central clearing for EU pension funds;
  • planned delivery of requirements on margin for non-cleared trades in the next few months, with a view to staggered implementation, starting late next year; and
  • whether or not the review will result in an "EMIR II".

He concluded by urging any affected stakeholders to respond to the public consultation on the review of EMIR which closes on 13 August. (Source: First Steps in the Review of EMIR, the European Derivatives Regulation)

Contact: Luca Salerno or Tom Harkus

Commission announces CMU public hearing: The Commission will host a public hearing on the next steps to build a Capital Markets Union (CMU) in Brussels on 8 June. The themes will include:

  • diversifying the sources of investment funding: challenges and opportunities;
  • how to make CMU work for retail and institutional investors; and
  • conditions for an efficient cross-border investment environment.

(Source: Public Hearing on the Next Steps to Build a Capital Markets Union)

Contact: Rosali Pretorius or Michael Wainwright

European Central Bank (ECB)

ECB publishes TARGET2 report: ECB published the 2014 annual report for the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET2) system. (Source: TARGET2 Turnover Stable, According to Annual Report)

Contact: Michael Wainwright or Josie Day

European Banking Authority (EBA)

EBA updates single rulebook Q&As: EBA has added five new items to its single rulebook Q&As. (Source: Single Rulebook Q&As)

Contact: Rosali Pretorius or Michael Wainwright

EBA issues equivalence questionnaire: EBA has issued a questionnaire to guide its assessment of non-EU countries' equivalence with EU prudential supervision and regulatory requirements set by the CRR and fourth Capital Requirements Directive (CRD4). EBA will send the questionnaire to selected countries in several rounds. It will facilitate data collection and allow EBA to give the technical advice the Commission needs. (Source: EBA Assesses Regulatory Equivalence of Third Countries)

Contact: Rosali Pretorius or Michael Wainwright

EBA updates on interest rate risk: EBA has updated its guidelines on technical aspects of the management of interest rate risk arising from non-trading (banking book) activities (IRRBB) under the supervisory review process. The first section is an updated version of the original text and provides enhanced high-level guidance on the management of IRRBB. The second section gives additional details on managing IRRBB. It also clarifies how institutions should take these aspects into account when assessing IRRBB in their Internal Capital Adequacy Assessment Process (ICAAP). This detailed guidance focuses thematically on five areas of interest risk assessment and control: scenarios and stress testing; measurement assumptions; methods for measuring interest rate risk; governance and identification of interest rate risk; and calculation and allocation of capital to interest rate risk. The guidelines will apply from 1 January 2016. (Source: EBA Updates Guidelines on IRRBB)

Contact: Rosali Pretorius or Michael Wainwright

EBA publishes resolution guidelines: EBA has issued its final guidelines on the circumstances under which an institution shall be considered as "failing or likely to fail". The guidelines list all objective elements for determining whether an institution is failing or likely to fail. Both supervisors and resolution authorities should use the guidelines, which set out different sets of procedural rules for each authorities, and establish the link between the supervisory review and evaluation process (SREP) and the "failing or likely to fail" determination. The guidelines will apply from 1 January 2016. (Source: EBA Publishes Guidelines on Triggers for Resolution)

Contact: Rosali Pretorius or Michael Wainwright

EBA publishes DGS contribution guidelines: EBA has published its final guidelines on contributions to deposit guarantee schemes (DGSs) and on payment commitments under the new deposit guarantee scheme directive (DGSD). The guidelines:

  • set out methods adjusted to the risk profile of each institution for calculating ex-ante contributions to DGSs;
  • lay down calculation methods that include a set of core indicators capturing the main dimensions of the risk profile of credit institutions which will represent 75% of the risk assessment, giving the DGSs and relevant regulators discretion over the remaining 25%;
  • allow DGSs to authorise credit institutions to contribute up to 30% as secured commitments to pay upon request;
  • allow credit institutions to make payment commitments via two types of arrangements - a Payment Commitment Arrangement and a Financial Collateral Arrangement;
  • provide for criteria on the eligibility and management of collateral. Assets will be eligible for collateral only if they are of sufficiently low risk;
  • provide that DGSs should limit their exposure to debt, the value of which has a strong link to events where the DGS would have to use its funds; and
  • introduce principles ensuring that the prudential treatment of payment commitments does not encourage procyclicality by incentivising payment commitments over cash contributions.

Member States have to implement the DGSD by 3 July. DGSs and designated authorities should implement the guidelines by 31 December. (Source: EBA Publishes Guidelines on Contributions and Payment Commitments to Deposit Guarantee Scheme)

Contact: Rosali Pretorius or Michael Wainwright

EBA finalises capital instruments report: EBA has published its final report on monitoring Additional Tier 1 (AT1) capital instruments. (Source: EBA Publishes Final Version of its Updated Report on the Monitoring of Additional Tier 1 Capital Instruments)

Contact: Rosali Pretorius or Michael Wainwright

EBA issues MCD guidelines: EBA has published two sets of guidelines on the Mortgage Credit Directive (MCD):

  • on the creditworthiness assessment: these guidelines set out how to verify consumers' income and assess what they can afford, documenting and keeping information and preventing misrepresentation in information, and how to cater for potential negative scenarios in the future; and
  • on arrears and foreclosure: these guidelines look at how to detect payment difficulties at an early stage and how to deal with them.

These guidelines will replace the current, pre-MCD, guidelines from 21 March 2016. (Source: EBA Issues MCD Guidelines)

Contact: Nicholas Ralph or Josie Day

European Insurance and Occupational Pensions Authority (EIOPA)

EIOPA releases May stability report: EIOPA has published its May financial stability report. The report covers:

  • specific risks and how they affect the various pension and insurance sectors;
  • a qualitative and quantitative assessment of these risks; and
  • thematic articles.

(Source: EIOPA Stability Report May 2015)

Contact: Michael Wainwright or Juan Jose Manchado

EIOPA publishes second draft of full Solvency 2 reporting taxonomy: EIOPA has published the second draft version of the DPM and XBRL taxonomy package covering the full scope of Solvency 2 information requirements. (Source: Full Solvency 2 Reporting)

Contact: Michael Wainwright or Juan Jose Manchado

European Securities and Markets Authority (ESMA)

ESMA recommends UCITS changes: ESMA has published an opinion addressed to the other EU institutions outlining the impact of EMIR on undertakings for collective investments in transferable securities (UCITS) Directive. ESMA thinks:

  • the UCITS Directive should no longer distinguish between over-the-counter (OTC) financial derivatives transactions and exchange-traded derivatives (ETDs);
  • instead, the distinction should be between cleared and non-cleared OTC financial derivatives transactions;
  • for OTC financial derivative transactions that are not centrally cleared, there is no need to modify the UCITS Directive and the current counterparty risk limits should continue to apply;
  • counterparty risk limits should be calibrated to the different types of segregation arrangements, taking into account elements such as the portability of the position if a clearing member defaults;
  • UCITS should not apply counterparty risk limits to clearing members, but should apply some limited omnibus client segregation; and
  • UCITS' counterparty risk limits to EU CCPs and some non-EU CCPs recognised by ESMA should take into account the relatively low counterparty risk of these entities.

(Source: ESMA Calls for Modification of UCITS Directive)

Contact: Luca Salerno or Tom Harkus

Agency for the Co-operation of Energy Regulators (ACER)

ACER consults on inside information under REMIT: ACER is consulting on enhancing disclosure of inside information under the Regulation on Wholesale Energy Market Integrity and Transparency (REMIT). ACER asks for responses by 26 June. (Source: ACER Consultation Paper on Common Schema for the Disclosure of Inside Information Under REMIT)

Contact: Luca Salerno or Tom Harkus

Official Journal of the European Union (OJEU)

Own Funds amending regulation in OJEU: An amending delegated Regulation on regulatory technical standards (RTS) for Own Funds requirements for institutions has been published in OJEU. (Source: Amending Delegated Regulation with Regard to RTS for Own Funds Requirements for Institutions)

Contact: Rosali Pretorius or Michael Wainwright

UK GOVERNMENT AND PARLIAMENT

Bank of England (BoE)

BoE consults on resolvability: BoE is consulting on its approach to exercising its statutory power (stemming from the BRRD) to direct institutions to address impediments to their resolvability. The power applies to:

  • UK-authorised banks, building societies and systemically important investment firms;
  • parent companies of these institutions that are financial holding companies or mixed financial holding companies; and
  • PRA- or FCA-authorised financial institutions that are subsidiaries of these institutions or such parent companies.

BoE proposes guidance on when it might use the power of direction, and gives examples. It seeks comments on its proposed "Statement of Policy" by 22 August. (Source: The Bank of England's Power to Direct Institutions to Address Impediments to Resolvability)

Contact: Rosali Pretorius or Michael Wainwright

BoE issues stress test guidance: BoE has published the UK 2015 stress test guidance on the traded risk methodology for participating banks and building societies. The guidance:

  • describes the approach banks should adopt for the stress test;
  • describes how the stress and baseline scenarios should be translated into the specific loss numbers and financial metrics that banks report; and
  • defines certain important terms and concepts.

The guidance highlights the differences in this approach from the approach of previous years. There are three important design features to BoE's new approach:

  • BoE has, where possible, linked the traded risk stress scenario to the macroeconomic aspects of the scenario;
  • BoE now expects banks to apply risk factor shocks of a size that corresponds to the likely liquidity of each position under the stress scenario and hence to the likely time for which each position is exposed to the scenario; and
  • BoE's approach to counterparty credit risk requires that banks treat as having defaulted those counterparties/clients that are most vulnerable under the stress scenario.

The guidance then goes on to outline in greater detail all aspects of the methodology. (Source: Stress Testing the UK Banking System: Guidance on Traded Risk Methodology for Participating Banks and Building Societies)

Contact: Rosali Pretorius or Michael Wainwright

HM Treasury (Treasury)

Treasury updates sanctions: Treasury has updated the sanctions lists in respect of Libya and Syria. (Source: Treasury Updates Sanctions)

Contact: Emma Radmore or Nicholas Ralph

Financial Markets Law Committee (FMLC)

FMLC issues securitisation paper: FMLC published a paper on legal uncertainty in securitisation disclosure regimes. The paper considers the existing EU securitisation disclosure regimes and their interaction with each other and with certain third country regimes. To emphasise the issues raised by these existing regimes and by the lack of harmonisation or mutual recognition and substituted compliance with third countries, the paper takes a cross-border perspective, looking at the equivalent regimes in the US and Japan. The paper also contains a case study, demonstrating the issues raised. (Source: FMLC: Issues of Legal Uncertainty Arising in the Context of Securitisation Disclosure Regimes)

Contact: Ed Hickman or Rosali Pretorius

UK FINANCIAL SERVICES AND MARKETS REGULATORS

Financial Conduct Authority (FCA)

FCA updates on remuneration: FCA has written to firms' remuneration committee chairs in proportionality level 1 on embedding ex-post performance adjustment (malus) within their remuneration codes. FCA stresses the importance of remuneration committees in applying the Remuneration Code to ensure greater alignment between risk and individual reward, to discourage excessive risk-taking and short-termism, to encourage more effective risk management, and in turn to support a strong conduct culture within firms. FCA also outlined its expectations on the application and consideration of malus in terms of:

  • scope: an appropriate range of individuals including those who failed to act, or those who by virtue of their seniority could be deemed indirectly responsible or accountable;
  • staff understanding: staff in firms should be clear on the fully discretionary nature of their variable remuneration and firms should apply appropriately sized reductions, including taking account of any fines;
  • timing: firms should consider events early on and apply reductions as soon as reasonably possible;
  • procedure: firms should consider events using a clearly defined, robust and well documented process that considers a range of relevant factors;
  • transparency: the process clearly shows the difference between awards before and after application of malus and should be clearly communicated to employees;
  • ex-ante risk adjustments: firms should take into account the risk of conduct failings which have not yet crystallised when setting the size of the bonus pool, making larger adjustments where they believe these risks have increased; and
  • co-operation with FCA: firms should provide information in sufficient detail and at an early enough point to facilitate the process of reaching agreement on bonus plans.

In the 2014/15 remuneration round FCA will focus on the application of malus while continuing to look for compliance with all areas of the Remuneration Code, including the consideration of potential future risks in the setting of awards. FCA will pay particular attention to whether firms have considered the changes arising from the fourth Capital Requirements Directive (CRD4) such as the bonus cap and identification of material risk-takers. FCA urges firms to provide the necessary information or, where unavailable, estimates as soon as possible. (Source: Embedding the Application of Ex Post Performance Adjustment (Malus) - Update for 2014/15 Remuneration Round)

Contact: Michael Wainwright or Ryan Carthew

FCA consults on benchmarks: FCA is consulting on fair, reasonable and non-discriminatory access to regulated benchmarks. Responses to an earlier consultation expressed concern over the unconstrained ability of administrators to set the prices of benchmarks. FCA has decided as a result to introduce a new rule setting out how the administrator must act on a fair, reasonable and non-discriminatory basis. FCA asks for comment by 3 August. (Source: FCA Consultation: Fair, Reasonable and Non-discriminatory Access to Regulated Benchmarks)

Contact: Rosali Pretorius or Tom Harkus

FCA publishes hedge fund review: FCA has published its hedge fund review based on data as at September 2014. The main findings include:

  • only two of the top 10 funds by net asset value (NAV) that participated in the survey also reported the same detail of information under Alternative Investment Fund Managers Directive, making the overlap of these two reporting channels less significant;
  • execution on regulated exchanges makes up 68% of the securities transaction volume, but only 60% of derivatives volume, leaving a still substantial part of execution taking place on a bilateral or OTC basis;
  • clearing is increasingly taking place at CCP level, even if transactions are concluded OTC; and
  • the hedge funds in the survey obtain their leverage primarily in the form of derivative positions (synthetic leverage). Financial leverage is a far less significant source of leverage and around 20% of funds have no financial leverage at all. The predominant approach is towards secured and collateralised borrowing, with less than 10% of funds using unsecured borrowing.

Funds have increasing exposure to structured/securitised products and listed equities, and smaller holdings of unlisted equities on the securities front. On the derivatives front, the funds' gross exposure to IRDs and FX increased. Net exposure in fixed income derivatives also remained outright long. (Source: FCA Hedge Fund Review June 2015)

Contact: Rosali Pretorius or Kam Dhillon

FCA speaks on competition and innovation: Martin Wheatley gave a speech exploring the balance between ensuring consumer protection while encouraging market growth. Addressing the issue of competition he noted:

  • the continued reluctance of UK current account holders to switch provider;
  • regulatory action to encourage competition, such as reducing liquidity requirements for new market entrants and authorisation at an earlier stage; and
  • that these measures have also opened up alternate sources of funding, or shadow banking, for commercial customers.

He then went on to speak about the effect of behavioural economics on competition. In particular he looked at:

  • why consumers tend to make "sub-optimal" decisions when selecting financial products;
  • how regulators are acting to ensure that consumers are better educated and that products are marketed in terms that they can understand so that consumer behaviour promotes better products at the expense of weaker ones; and
  • the actions FCA has already taken in the retail banking and insurance industries, and will soon take in the investment and corporate banking spaces.

Finally he addressed innovation. Specifically he outlined:

  • how the alternative funding market is expanding rapidly;
  • how FCA's Innovation Hub has been giving direct support to innovators, and how it might adapt the regulatory regime to support useful innovation; and
  • how FCA is working with firms to test approaches to customer engagement; including by reforming disclosure.

(Source: Martin Wheatley, CEO of FCA, on Regulation - Supporting Vibrant Markets)

Contact: Emma Radmore or Josie Day

FCA publishes SME insurance review result: FCA has published the results of its thematic review into handling of insurance claims for small and medium-sized enterprises (SMEs). The review highlighted:

  • a clear disparity between SMEs' expectations and the service they actually received: notably poor communication leading to delays in the settling of claims;
  • delays in the initial visits by loss adjusters, in some cases by up to three weeks;
  • that many claimants were left unsure as to what actions they should take to minimise disruption to their businesses;
  • dissatisfaction among SMEs with the lack of clarity over who was responsible for driving claims outcomes; and
  • a lack of clarity over the next steps in the claims process.

FCA also noted that in a number of cases the sums insured were inadequate to cover the loss incurred. This highlights the need for businesses to accurately assess how much cover they need if faced with major disruption. FCA will provide feedback to firms in the review and, where appropriate, may ask firms to determine whether individual instances of poor claims handling reflects widespread issues within the firm. (Source: FCA Review Highlights Gap Between Insurance Claims Service and SMEs' Expectations)

Contact: Emma Radmore or Josie Day

FCA promotes Innovation Hub: Christopher Woolard, Director of Strategy and Competition at FCA, spoke on innovation and FCA. He described:

  • the role of the Innovation Hub in helping innovators to navigate regulation and in working to change processes and policies where this would promote innovation;
  • how the Innovation Hub has helped around half of the 170 firms that have approached it already with 83% describing their experiences as good or excellent; and
  • two particular case studies: one involving a business that aims to provide consumers with a clearer picture of and greater control over their creditworthiness, and another involving a company aiming to provide more direct access to the bond market.

Looking forward, FCA is exploring ways in which it could make it easier for firms to test their products on a sample of consumers before having to become fully authorised – as in other industries, such as pharmaceuticals. Mr Woolard also announced that in the autumn FCA will be issuing a "Call for Input" seeking examples of regulatory barriers to innovation in digital and mobile from a broad range of participants. (Source: The FCA and Innovation: A Speech By Christopher Woolard, Director of Strategy and Competition at FCA)

Contact: Nicholas Ralph or Josie Day

FCA outlines wholesale banking ToR: FCA has published the terms of reference (ToR) for its investment and corporate banking market study. Building on feedback to the wholesale sector competition review published in February, FCA will focus on the following key issues:

  • transparency, and in particular the transparency of the allocation process in debt and equity issues and the impact of established market practice and regulations on transparency in the IPO process;
  • client choice and behaviour and the impact of syndication;
  • assessing whether and how bundling and cross-subsidisation affects competition; and
  • the potential benefits of reducing regulatory barriers to firms entering or expanding into primary markets.

FCA seeks input from a wide range of firms by 22 June. It aims to publish a report setting out interim findings and any proposed remedies (as required) in advance of the final report in spring 2016. (Source: FCA Publishes Terms of Reference for its Investment and Corporate Banking Market Study)

Contact: Rosali Pretorius or Michael Wainwright

FCA comments on Plevin v. Paragon: FCA is considering whether it needs to make new rules to deal with the Supreme Court's decision in Plevin v. Paragon Personal Finance Ltd that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. (Source: FCA Statement on Plevin v. Paragon Personal Finance Ltd)

Contact: Nicholas Ralph or Josie Day

FCA publishes Keydata decision notices: FCA has published decision notices against Stewart Ford (former chief executive), Mark Owen (former sales director) and Peter Johnson (former compliance officer), all previously of Keydata Investment Services. FCA has decided to fine them £75 million, £4 million and £200,000 respectively and ban them all from performing any role in regulated financial services in future. Keydata sold financial products, underpinned by bonds issued by Luxembourg-based special purpose vehicles called SLS Capital and Lifemark, and marketed as being eligible for ISA status, when they were not, in fact, so eligible. FCA found that all three executives:

  • failed to act with integrity and also misled the then Financial Services Authority (FSA) on a number of occasions in relation to the performance of the investment products;
  • permitted Keydata to continue to sell the Lifemark-backed products to retail investors when the individuals knew it was highly likely that (i) the products did not comply with the ISA regulations, (ii) the financial promotions were unclear, incorrect and misleading, (iii) the due diligence on the products was inadequate and (iv) there were problems with the performance of the portfolio ultimately underlying the products;
  • deliberately misled FCA by making false representations in compelled interviews about the performance of the investment products, having failed to disclose to FCA problems with the SLS portfolio which impacted on the SLS products' performance.

In addition FCA found that:

  • Mr Ford and trusts set up for the benefit of his family received £72.4 million in fees and commissions and Mr Owen received £2.5 million in commissions on sales of the Lifemark products;
  • with regard to the SLS-backed products, Mr Ford deliberately concealed the problems with the portfolio underlying these products from investors, financial advisers and the then FSA. Mr Owen recklessly relied on assurances from Mr Ford that he would resolve the problems with the portfolio's performance and solvency and agreed to Keydata funding the income payments to investors from Keydata's own resources although he was aware this would conceal the portfolio's solvency problems;
  • Mr Johnson failed to ensure FCA was aware of problems with the products and their financial promotions, identified by Keydata's professional advisers; and
  • Mr Ford and Mr Owen failed to disclose to FCA the significant personal benefits and commissions they received from the sale of the Lifemark products, when they were aware of FCA's concerns around their involvement in Lifemark and the commissions they received.

All three applied unsuccessfully to the Upper Tribunal for an order preventing FCA from publishing the Decision Notices. (Source: FCA Publishes Decision Notices in Respect of Three Former Members of Keydata's Senior Management)

Contact: Emma Radmore or Josie Day

FCA welcomes Commission's CMU paper: FCA has issued a report in response to the Commission's Green Paper on the CMU. Overall, FCA welcomes the Commission's work and is ready to help. FCA noted that:

  • greater supply of investor finance will require appropriate investor protection;
  • there should be a focus on implementing legislation that already exists or is planned;
  • more consistent supervision within the current framework could bring significant benefits;
  • authorities should aim to legislate only where necessary and embed the Better Regulation agenda;
  • the opportunities of new technology and the potential gains from effective competition need to be embraced; and
  • European markets need to be embedded in a globally competitive landscape.

FCA highlighted the following priorities for action:

  • ensuring investor protection;
  • harnessing the benefits of digitalisation;
  • competitive, fair and effective intermediation;
  • reviewing the Prospectus Directive;
  • examining impediments to bond market liquidity; and
  • improving available credit information.

FCA also provided some individual responses to specific questions posed in the Green Paper. (Source: FCA's Response to Commission's Green Paper: Building a Capital Markets Union)

Contact: Rosali Pretorius or Michael Wainwright

FCA consults on PIF capital requirements: FCA is seeking views on capital resources requirements for personal investment firms (PIFs). FCA proposes that:

  • the majority of PIFs will have capital resources requirements that are the higher of a new minimum capital resources requirement of £20,000 or 5% of their relevant annual income for the previous year; and
  • it will consider the case for a time limit on complaints to the Financial Ombudsman Service. FCA will consult on this later in the year in light of the new capital requirements proposed in the current paper.

Consultation closes on 7 September. FCA will then publish its final rules in a policy statement later in 2015. (Source: FCA Consultation: Capital Resources Requirements for Personal Investment Firms)

Contact: Rosali Pretorius or Michael Wainwright

FCA creates RLR webpage: FCA has created a webpage detailing the background to its responsible lending review (RLR), which started in April following the Mortgage Market Review. The RLR consists of a review of mortgage lenders and market research. It will run throughout 2015 and FCA will report on it in the first half of 2016. From autumn 2015 FCA will also begin a wider assessment of barriers to competition with a view to launching a market study in early 2016 on those aspects of the mortgage market that are not working to the benefit of consumers. (Source: FCA Responsible Lending Review Webpage)

Contact: Nicholas Ralph or Josie Day

FCA publishes general insurance outsourcing review: FCA has published the results of its thematic review on outsourcing in the general insurance market. It surveyed 12 insurers, and 19 firms that held underwriting or claims handling authorities on their behalf. It found that insurers often do not treat delegated authority as outsourcing. FCA wants firms to:

  • improve their due diligence on delegates and their management of delegation arrangements;
  • focus more on how the outsourcing might impact customers;
  • ensure that intermediaries who design products understand the scope of their responsibilities; and
  • ensure that they carry out appropriate supervision of product and intermediary performance.

Other areas of concern included that some firms had not properly considered potential conflicts or how to manage them, and there was a tendency to over-rely on internal audit rather than having in place proper controls.

FCA now plans to follow up concerns with individual firms, and focus generally on them in its ongoing supervisory work. It will also look at how firms will respond to the governance changes that Solvency 2 will require. (Source: FCA Publishes General Insurance Outsourcing Review)

Contact: Michael Wainwright or Emma Radmore

Martin Wheatley speaks on trust and confidence: Martin Wheatley has spoken on improving trust and confidence in banking. He focused on accountability and how FCA will apply the presumption of responsibility. He said he hopes a better accountability regime will lead to less prospect of employees breaching regulatory requirements. He stressed that changes to regulation at top levels in institutions did not mean that middle management would not take equal responsibility for ensuring necessary changes happen. He then spoke about the aims of the certification regime and conduct rules. (Source: Martin Wheatley Speaks on Trust and Confidence)

Contact: Richard Caird or Katharine Harle

FCA updates on binary options: FCA has updated its website to explain how it is proposing to take over regulation of binary options, so that the products are financial products rather than gambling products. It notes consumers may think FCA already regulates activities in binary options, as many other EU regulators do. It notes its consultation on the proposed changes, which closes on 18 June. (Source: FCA Updates on Binary Options)

Contact: Rosali Pretorius or Luca Salerno

FCA holds prudential supervisory forum: FCA has held its first prudential supervisory forum. The forum included speeches on:

  • FCA's prudential approach and its link to conduct supervision;
  • liquidity adequacy and cash management;
  • resolution and recovery; and
  • crisis management.

(Source: FCA Holds Prudential Supervisory Forum)

Contact: Michael Wainwright or Nicholas Ralph

FCA announces CIS convictions: Following FCA's successful prosecution of eight individuals who, between July 2008 and November 2011, were involved in the operation of an unauthorised collective investment scheme based on land through three companies, FCA has announced the sentences handed down to the individuals. Five individuals received sentences leading to 26 years' immediate imprisonment. Two further individuals received suspended sentences and the last is still to be sentenced. The defendants were guilty of a range of offences, including carrying on unauthorised regulated activities and in one case deliberately misleading the regulator. A solicitor was convicted and imprisoned as part of the action. (Source: FCA Announces CIS Convictions)

Contact: Rosali Pretorius or Emma Radmore

Prudential Regulation Authority (PRA)

PRA updates on Solvency 2: Andrew Bulley, Director of Life Insurance at PRA, has written to firms updating them on the status of Solvency 2 preparations. The letter:

  • states PRA intends to publish information on issues arising from the stage one balance sheet process by the end of May;
  • reminds firms that the submission period for the first annual returns for the preparatory phase of the regulatory reporting process begins on 1 June, with submissions due by 30 June;
  • reiterates PRA's approach to the standard formula and how it will be applied to firms;
  • reiterates PRA's approach and guidance on the use of internal models;
  • notes that EIOPA is currently consulting on currency reporting requirements under Solvency 2;
  • draws firms' attention to the new BoE webpage dedicated to Solvency 2 approvals and waivers; and
  • reminds firms that PRA has issued a draft questionnaire for firms' comments regarding the upcoming general insurance stress test.

(Source: PRA Director's Solvency 2 Update)

Contact: Michael Wainwright or Juan Jose Manchado

PRA consults on contractual stays: PRA is consulting on a proposal for a new rule for the PRA Rulebook requiring the contractual adoption of UK resolution stays in certain financial contracts governed by the law of a jurisdiction outside the European Economic Area (EEA). The proposed rule would apply to UK banks, building societies and designated investment firms as well as their qualifying parent undertakings in respect of financial contracts governed by the law of a non-EEA jurisdiction. It would:

  • prohibit firms from creating new obligations or materially amending an existing obligation under such a financial contract without the required counterparty agreement. The prohibition applies unless the counterparty has agreed in writing to be subject to similar restrictions on termination, acceleration, close-out, set-off and netting as would apply as a result of the firm's entry into resolution, or the write-down or conversion of the firm's regulatory capital at the point of non-viability, if the contract were governed by the laws of the UK; and
  • oblige firms to ensure that, where their subsidiary credit institutions, investment firms and financial institutions trade in these products under third-country law, the subsidiaries, regardless of location, also obtain agreement to the stay from their counterparties.

Consultation closes on 26 August. (Source: Contractual Stays in Financial Contracts Governed by Third-Country Law)

Contact: Michael Wainwright or Rosali Pretorius

PRA feeds back on ring-fencing responses: PRA published a policy statement providing feedback on the responses received to its consultation on the implementation of ring-fencing. Overall, PRA decided that the responses did not necessitate major changes to the overall approach to implementing ring-fencing. The policy statement comments in detail on consultation responses relating to:

  • the legal structure of ring-fenced bodies (RFBs): specifically, entities that an RFB may own and entities that can own an RFB;
  • governance: in particular, PRA and the Financial Reporting Council commentary on corporate governance and financial reporting; the application of governance rules where an RFB sub-group is formed; board membership and senior managers for risk management and internal audit; PRA policy on consideration of waivers and modifications of ring-fencing rules; personnel dependency; independence criteria; remuneration; vacancies for independent non-executive directors on RFB boards; disclosure requirements for RFBs; rules on RFB board audit committees; and compliance with the ring-fencing obligations; and
  • continuity of services and facilities: particularly, group services arrangements, and group and third party service arrangements.

The government intends to implement ring-fencing by January 2019. (Source: PRA: Structural Reform - Responses to Ring-fencing Consultation)

Contact: Rosali Pretorius or Michael Wainwright

PRA speaks on Solvency 2: Andrew Bulley spoke on Solvency 2. He highlighted that:

  • there are many similarities between the current Individual Capital Adequacy Standards (ICAS) regime for insurers and Solvency 2 meaning that the latter should be seen as an evolutionary rather than revolutionary development;
  • chief amongst these similarities is the shared objective of improving the risk management culture within firms to protect policyholders;
  • Solvency 2 will harmonise EU insurance regulation, replacing disparate and disjointed national regulatory regimes with a single, consistent and coherent rulebook transposed directly into national law;
  • importantly, Solvency 2 empowers supervisory authorities to approve the models from which capital numbers are derived, not the numbers themselves;
  • Solvency 2 requires firms to demonstrate that senior management understand and know how to use their firms' internal models;
  • Solvency 2 offers the possibility also for regulatory approval of matching adjustment and volatility adjustment models;
  • the introduction of the Own Risk and Solvency Assessment (ORSA) ensures risk and capital are considered together;
  • unlike ICAS, Solvency 2 introduces consistent group supervision across Member States; and
  • increased reporting requirements and increased publicity of this information will also help to ensure consistency and drive high standards.

He concluded by saying that PRA will continue to work closely with firms as they prepare to comply with Solvency 2's implementation in six months' time. (Source: Andrew Bulley, PRA: Reflecting on Solvency 2: Continuity and Change)

Contact: Michael Wainwright or Juan Jose Manchado

PRA sets expectations on VA applications: PRA has published a supervisory statement that sets out its expectations on insurers applying for permission to use a volatility adjustment (VA). The statement clarifies what items should be included in the application, how PRA will assess the applications, and how this approval process interacts with other parts of Solvency 2 implementation. (Source: Supervisory Approval for VA)

Contact: Michael Wainwright or Juan Jose Manchado

PRA consults on Solvency 2 reporting codes: PRA is consulting, until 10 July, on two draft supervisory statements covering, respectively:

  • the reporting codes that insurers using internal models must assign to each component of their internal models; and
  • codes for reporting information on life business or annuities that result from non-life business.

(Source: Internal Model Reporting Codes and Components and Life Product Codes)

Contact: Michael Wainwright or Juan Jose Manchado

PRA writes to insurers on MA: PRA has provided insurers that will apply Matching Adjustment (MA) in complying with Solvency 2 with further clarity on:

  • management of collateral arrangements;
  • collateral received against stock-lending activity; and
  • the treatment of reinsurance.

(Source: Solvency 2: MA)

Contact: Michael Wainwright or Juan Jose Manchado

PRA publishes XBRL filing manual: PRA has published the first version of its Solvency 2 XBRL filing manual. (Source: XBRL Filing Manual)

Contact: Michael Wainwright or Juan Jose Manchado

Financial Ombudsman Service (FOS)

FOS consults on pensions and ADR amendments: FOS is consulting on proposed amendments to its rules on alternative dispute resolution (ADR) and pension transfers. It asks for comments by 2 June. (Source: FOS Consultation: Amendments to ADR and Pension Transfer Rules)

Contact: Michael Wainwright or Nicholas Ralph

Payment Systems Regulator (PSR)

PSR publishes indirect access ToR: PSR has published the final ToR for its market review into the supply of indirect access to payment systems. The review will cover indirect access to:

  • BACS;
  • CHAPS;
  • Cheque and Credit;
  • Faster Payments Scheme; and
  • LINK.

The review will consider the following questions:

  • What prices, service and choice do indirect Payment Service Providers (PSPs) want and receive?
  • What factors may limit the number of Independent Access Providers (IAPs) in the market?
  • What is the state of competition in the provision of indirect access?
  • What options are there to improve indirect access to interbank payment systems?

The outcome of the review could result in PSR making either PSP-specific or industry-wide recommendations or even a Competition and Markets (CMA) market investigation. (Source: Market Review into the Supply of Indirect Access to Payment Systems: Terms of Reference)

Contact: Michael Wainwright or Nicholas Ralph

Upper Tribunal (Tribunal)

Tribunal holds on Angela Burns: The Tribunal has judged the appropriate penalty the FCA should levy on Angela Burns, following her long-running dispute with it and its predecessor. The then FSA proposed to fine her £154,800 and ban her for misuse of non-executive director positions to seek to advance her own commercial interests and failing to disclose conflicts of interest. In a previous hearing before the Tribunal, the Tribunal overturned six of the 10 allegations on which FSA had reached its decision and only partly upheld a further three. FCA maintained the level of penalty was justified. The Tribunal held the appropriate penalty was to ban Ms Burns from holding the position of non-executive director in any authorised or exempt firm and to fine her £20,000. (Source: Tribunal Holds on Angela Burns)

Contact: Felicity Ewing or Katharine Harle

Competition and Markets Authority (CMA)

CMA updates SME issues statement: As part of its investigation into the supply of personal current accounts and retail banking services to SMEs, CMA updated its issues statement. This document summarises the independent investigation group's initial findings based on the evidence received and analysis carried out so far. It updates on the three "theories of harm" outlined in the initial issues statement published last November. The "theories of harm" relate to:

  • the extent to which bank customers shop around and switch between providers;
  • the level of concentration in the market; and
  • barriers to entry and expansion.

The statement highlights the areas within the three theories that the investigation team plan to focus on up until the publication of the initial findings in September. Some working papers accompany the update, and CMA asks for comments on the updated statement and working papers by 11 June. (Source: CMA Publishes Updated Issues Statement in Banking Market Investigation)

Contact: Michael Wainwright or Josie Day

OTHER REGULATORS/AUTHORITIES/INDUSTRY ASSOCIATIONS

International Association of Insurance Supervisors (IAIS)

Gibraltar and Belgium join insurance agreement: The insurance supervisor of Gibraltar and the insurance market conduct supervisor of Belgium have joined an international supervisory co-operation and information exchange agreement. (Source: Gibraltar and Belgium Join International Information Exchange Agreement)

Contact: Michael Wainwright or Juan Jose Manchado

The Joint Forum (Joint Forum)

Joint Forum releases credit risk report: The Joint Forum of the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and International Association of Insurance Supervisors has released a report on credit risk management (CRM) across sectors that follows a survey it carried out. It makes the following recommendations:

  • it warns against over-reliance on internal models for CRM and regulatory capital;
  • supervisors should be alert to the growth of risk-taking behaviours and the resulting need for firms to have appropriate risk management processes;
  • supervisors should be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors; and
  • supervisors should consider whether firms are accurately capturing CCP exposures as part of their CRM.

(Source: Joint Forum Releases Report on Credit Risk Management Across Sectors)

Contact: Michael Wainwright or Juan Jose Manchado

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28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

4 Oct 2017, Workshop, London, UK

We are hosting an interactive workshop where we will run a mock High Court trial of an employee competition case – where the members of the audience are the judges. The session, aimed at in-house counsel and HR professionals, will offer an insight as to how disputes involving employees moving to a competitor play out in practice.

 
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