European Union: Financial Regulatory Developments (FReD) - June 12, 2015

Headlines

  • Commission extends transitional period for CCP exposures
  • Commission extends pension fund central clearing exemption
  • ESAs consult on EMIR
  • MLD4 and Funds Transfer Regulation in OJEU
  • BoE publishes Fair and Effective Markets Review
  • PRA finalises liquidity and funding risk supervision rules and guidance

EUROPEAN UNION AND INTERNATIONAL

European Parliament (EP)

EP publishes MAR letters: EP has published letters its Committee on Economic and Monetary Affairs (ECON) has sent to the Commission and ESMA on managers' transactions under the new Market Abuse Regulation (MAR). EP's negotiating team met to discuss whether transactions in baskets, index instruments and investment funds should attract different reporting treatment to other instruments. ESMA's proposals would mean "persons discharging managerial responsibilities" would not have to report these transactions if shares in their own company constituted less than 20% of these instruments. The meeting discussed:

  • whether there could or should be a threshold at all: to introduce one would require a "quick fix" to the current Level 1 test, but the negotiators think there should be a threshold; and
  • whether 20% is the appropriate threshold. EP is not convinced it is and does not agree with ESMA's reasoning behind suggesting the figure. It would rather look at, for example, whether there is a benchmark for other conflicts of interest that distinguishes between significant and insignificant transactions that might be a better guide.

(Source: EP Publishes MAR Letters)

Contact: Rosali Pretorius or Nicholas Ralph

European Commission (Commission)

Commission speaks on CMU: Jonathan Hill has spoken on the next steps towards capital markets union (CMU). He looked at the themes of the review, including:

  • the role for European Long Term Investment Funds and European Venture Capital Funds in increasing access to finance. He also spoke on the changes in the Markets in Financial Instruments Directive (MiFID 2), European Market Infrastructure Regulation (EMIR) and Alternative Investment Fund Managers Directive initiatives that also help to increase access to non-bank finance;
  • the Commission's plan for a framework for simple, transparent securitisation products;
  • opening up investment possibilities for pension funds; and
  • better transparency for retail investors.

(Source: Commission Speaks on CMU)

Contact: Rosali Pretorius or Michael Wainwright

Commission adopts first Solvency 2 equivalence package: The Commission has adopted decisions on the equivalence, for Solvency 2 purposes, of seven jurisdictions:

  • Switzerland has full equivalence, indefinitely – that is, on solvency calculation, group supervision and reinsurance; and
  • Australia, Bermuda, Brazil, Canada, Mexico and the US have equivalence on solvency calculation for 10 years.

(Source: Commission Adopts First Solvency 2 Equivalence Package)

Contact: Michael Wainwright or Juan Jose Manchado

Commission extends transitional period for CCP exposures: The Commission has extended the transitional period for capital requirements for exposures to central counterparties (CCPs) under the Capital Requirements Regulation (CRR). The transitional period was due to expire on 15 June and the Commission has extended it to 15 December to allow time for CCPs to complete their authorisations. (Source: Commission Extends Transitional Period for CCPs and Transitional Extension in OJEU)

Contact: Rosali Pretorius or Tom Harkus

Commission extends pension fund central clearing exemption: The Commission has extended transitional relief for pension funds from central clearing requirements under EMIR to 16 August 2017. (Source: Commission Extends Pension Fund Central Clearing Exemption)

Contact: Rosali Pretorius or Tom Harkus

Commission publishes CMU, securitisation and prospectus responses: The Commission has published the responses it received to three consultation papers on:

  • building a CMU;
  • the Prospectus Directive; and
  • an EU framework for simple, transparent and standardised securitisation.

All three contain UK responses. (Source: EU Public Consultations)

Contact: Rosali Pretorius or Michael Wainwright

Joint Committee of European Supervisory Authorities (ESAs)

ESAs consult on EMIR: The ESAs have launched a second, limited consultation on Regulatory Technical Standards (RTS) on risk mitigation techniques for OTC derivatives contracts that are not centrally cleared under EMIR. Although most decisions on the content have been made following the first consultation, the ESAs seek views on some outstanding issues. The RTS cover:

  • general counterparties' risk management procedures;
  • margin methods;
  • eligibility and treatment of collateral;
  • operational procedures; and
  • procedures concerning intragroup derivative contracts.

The new consultation includes a draft of the RTS, marked to show proposed changes and giving the reasons for them. The ESAs will hold a public hearing in London on 18 June and ask for comment on the proposals by 10 July. (Source: ESAs Consult on EMIR)

Contact: Rosali Pretorius or Tom Harkus

European Banking Authority (EBA)

EBA updates risk dashboard: EBA has published an update to its risk dashboard showing the main risks and vulnerabilities in the EU banking sector in Q4 2014. The dashboard shows that:

  • EU banks' Common Equity Tier 1 (CET1) ratio was 12.1%, an increase of 50 basic points compared to 2013;
  • the impairment ratio of loans slightly decreased from the previous year to 6.6%;
  • the cost-to-income ratio (63.6% in Q4 2014) showed the highest value since 2009; and
  • as deposits increased more than loans the EU average loan‐to‐deposit ratio decreased further in Q4 2014 to 108.6% which is the lowest ratio since 2009.

(Source: EBA Updates its Risk Dashboard for EU Banking Sector)

Contact: Rosali Pretorius or Michael Wainwright

EBA releases reporting ITS: EBA has published an interactive set of Implementing Technical Standards (ITS) on reporting to complement the standard reporting ITS which have already been published in the OJEU. The document complements the Interactive Single Rulebook which is already available on the EBA website. It is designed as a quick tool to support institutions, supervisors and all stakeholders across the EU in the implementation of this set of harmonised rules. Presented as an interactive PDF, it allows navigation through the legislative text and the corresponding clarifications provided by EBA in its Q&A tool. (Source: EBA Publishes Interactive ITS on Reporting)

Contact: Rosali Pretorius or Michael Wainwright

EBA consults on MCD passports: EBA has published a consultation on draft guidelines for passport notifications for mortgage credit intermediaries under the Mortgage Credit Directive (MCD). These draft guidelines follow on from a December 2014 discussion paper in which respondents broadly supported EBA's proposed guidelines. The guidelines also include template notification forms for exercising the freedom to provide services and freedom of establishment. The consultation closes on 4 July. EBA intends to deliver final guidelines in Q3 2015. They would apply from 21 March 2016, the transposition date of the MCD. (Source: EBA Consults on Passport Notifications for Mortgage Credit Intermediaries)

Contact: Nicholas Ralph or Emma Radmore

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

Contact: Rosali Pretorius or Michael Wainwright

EBA sets AMA criteria: EBA has published final draft RTS specifying the criteria that competent authorities will assess institutions against before allowing them to use advanced measurement approaches (AMA) for calculating their capital requirements for operational risk. The draft RTS:

  • set out the qualitative and quantitative requirements institutions must satisfy before they will be granted permission to use AMA to calculate their capital requirements;
  • explain how through periodic reviews competent authorities will ensure that institutions maintain the expected standards over time;
  • lay down criteria for the supervisory assessment of the key methodological components of the operational risk measurement system;
  • provide common standards for the supervisory assessment of a bank's operational risk governance with respect to the role and responsibilities of the operational risk management function and the reporting system; and
  • establish criteria for the supervisory assessment of banks' data quality and IT systems, the requirements and terms for an institution to use its AMA in the running of its business ("use test") and the terms and the scope of audit and internal validation of the AMA framework.

EBA took feedback received during the public consultation into account when finalising these standards. Specifically, EBA clarified and amended the scope of operational risk, as well as the scope of operational risk loss, the treatment of fraud losses in the credit area and the perimeter of conduct risk events. (Source: EBA Publishes Final Draft Standards on Assessment Methodologies to Use Advanced Measurement Approaches for Operational Risk)

Contact: Rosali Pretorius or Michael Wainwright

EBA updates on validation rules: EBA has issued a revised list of validation rules in its ITS on supervisory reporting, highlighting those which have been deactivated either for incorrectness or for triggering IT problems. (Source: EBA Issues Revised List of ITS Validation Rules)

Contact: Rosali Pretorius or Michael Wainwright

EBA issues resolution fund advice: EBA has issued technical advice to the Commission on contributions to the Single Resolution Fund (SRF). The advice focuses on the criteria and principles EBA will use to determine the uniform level of contributions by banks in participating EU Member States to the SRF. EBA recommends a number of safeguards should be in place to ensure that the target level of the SRF (at least 1% of the amount of covered deposits of all credit institutions authorised in all of the participating EU Member States) is achieved by the end of the initial period. This means by the end of eight years from 1 January 2016 or from the date on which this provision is applicable. Contributions may, to the extent possible, exceptionally take into account pro-cyclical effects, and vary accordingly instead of being spread out evenly over the initial period. EBA's advice recommends a number of indicators for determining the phase of the business cycle and the risk of pro-cyclical effects and specifies constraints for the variations of the contribution level. This advice also specifies the criteria for determining the contribution level after a significant amount of the fund has been used to support resolution measures and the SRF needs to be replenished. In this case, similar considerations as for the initial build-up of the fund apply. (Source: EBA Issues Technical Advice to the Commission on Contributions to the Single Resolution Fund)

Contact: Rosali Pretorius or Michael Wainwright

European Securities and Markets Authority (ESMA)

ESMA updates risk dashboard: ESMA has published its updated risk dashboard, which shows high but stable contagion, liquidity and credit risk with increased market risk and volatility. Credit risk was the highest risk, though fundamentally unchanged since 2014. (Source: ESMA Updates Risk Dashboard)

Contact: Rosali Pretorius or Juan Jose Manchado

ESMA consults on best practice impact: ESMA is seeking views on the Impact of the Best Practice Principles (BPP) for Providers of Shareholder Voting Research and Analysis. As anticipated in ESMA's February 2013 Final Report on the role of the proxy advisory industry, ESMA has embarked on a review of the BPP published by an industry group in March 2014. The consultation will close on 27 July and ESMA will publish final results at the end of 2015. (Source: ESMA is Seeking Information on the Impact of the Best Practice Principles)

Contact: Michael Wainwright or Luca Salerno

ESMA speaks on EMIR and MiFID 2: Verena Ross spoke at the international derivatives exhibition in London. She looked at the progress of EMIR, and of MiFID 2 implementation. She focused on:

  • delivery of technical standards;
  • transparency for derivatives;
  • position limits for commodity derivatives;
  • the EMIR clearing obligation;
  • the MiFID 2 trading obligation;
  • the EMIR reporting review; and
  • international derivatives convergence.

(Source: ESMA Speaks on EMIR and MiFID 2)

Contact: Rosali Pretorius or Luca Salerno

European Insurance and Occupational Pensions Authority (EIOPA)

EIOPA updates risk dashboard: EIOPA issued an update to its risk dashboard for Q1 2015. The dashboard shows unchanged market risks and liquidity and funding risks but EIOPA warns there may be challenges to solvency ratios ahead. (Source: EIOPA Risk Dashboard Q1 2015)

Contact: Michael Wainwright or Juan Jose Manchado

Official Journal of the European Union (OJEU)

MLD4 and Funds Transfer Regulation in OJEU: The fourth Money Laundering Directive (MLD4) and accompanying Funds Transfer Regulation were published in the OJEU. Member States have to implement MLD4 by 26 June 2017 and the Funds Transfer Regulation will apply from that same date. (Source: MLD4 in OJEU and Funds Transfer Regulation in OJEU)

Contact: Emma Radmore or Nicholas Ralph

UK GOVERNMENT AND PARLIAMENT

Bank of England (BoE)

BoE publishes Fair and Effective Markets Review: The Fair and Effective Markets Review has published its final report and recommendations. The Review looked at deficiencies in the markets and their root causes, examined progress to date (such as in regulation of benchmark activities) and at where gaps remain. There are 21 recommendations, all aimed at raising standards in the wholesale fixed income, currency and commodity (FICC) markets. Some are aimed at individuals, some at firms and some at regulators. Key recommendations include:

  • extending criminal sanctions for market abuse to a wider range of instruments and increasing the maximum sentence to 10 years' imprisonment; and creating a new civil and criminal market abuse regime for spot foreign exchange;
  • mandatory qualification requirements and disclosure requirements for references, that will prevent the "recycling" of individuals with poor conduct records;
  • creating an FICC Market Standards Board and encouraging international action from IOSCO to create a set of common standards for trading practices across FICC markets;
  • extending the Senior Managers Regime to a wider range of firms;
  • working towards a single global FX code;
  • looking at a global solution to aligning remuneration with conduct risk; and
  • improving forward-looking supervision of FICC markets.

(Source: BoE Publishes Fair and Effective Markets Review)

Contact: Rosali Pretorius or Luca Salerno

BoE highlights quarterly bulletin items: BoE highlighted items of interest in its forthcoming quarterly bulletins. It will look at:

  • the history of Solvency 2 and prudential regulation of insurers under it; and
  • banking interconnectedness.

(Source: BoE Highlights Quarterly Bulletin Items)

Contact: Rosali Pretorius or Michael Wainwright

Department for Business Innovation and Skills (DBIS)

DBIS updates on Iran: DBIS has reiterated that the UK Government does not encourage any trade with or investment in Iran, and has withdrawn all commercial support for trade. It notes that phased sanctions relief may follow the end of negotiations on Iran's nuclear programme at the end of June, but until then all current embargoes and sanctions remain. (Source: DBIS Updates on Iran)

Contact: Emma Radmore or Nicholas Ralph

DBIS issues consumer law guidance: DBIS has issued guidance for Trading Standards officers tasked with enforcing consumer law on the new enhanced consumer measures (ECM) and the circumstances in which they might be used. However, the guidance notes it may be useful to other enforcers also, although they will have their own specific powers and guidance. Specifically the guidance outlines:

  • the enforcement order and undertakings powers contained in the Enterprise Act 2002 and how these have been amended and expanded by the Consumer Rights Act 2015 (CRA);
  • the scope of the new ECMs: when they can be used, how they should be used and details of the extended consultation period on the subject of ECMs;
  • details of the measures the CRA has introduced: an outline of the redress measures, how to make an offer of redress, measures in the collective interest of consumers, terminating contracts, compliance measures and consumer information measures; and
  • the roles and responsibilities of the enforcer and the business in relation to the redress measures.

Throughout, the document contains case studies illustrating how the various measures might be applied in practice. (Source: DBIS: Enhanced Consumer Measures: Guidance for Enforcers)

Contact: Nicholas Ralph or Emma Radmore

HM Treasury (Treasury)

George Osborne and Mark Carney give Mansion House speeches: In this year's Mansion House speeches:

  • George Osborne said he believes financial services regulation has improved significantly, not least with the BoE's role in supervision, the decision to ring-fence retail banking and improvements in capitalisation of firms. He looked forward to more competition and innovation, and the "fintech revolution" that he said Britain leads. He said he wants Britain to be the best place for banks to be headquartered. He heralded the Fair and Effective Markets Review, saying it is crucial to focus on accountability of individuals. He then moved to discuss Government stakes in banks, its plans to return Lloyds to the private sector and the plan to begin to do the same with RBS. He said it is important to do this, but it will take time. Finally, he turned to the EU debate and the Government's desire to see the EU benefit its members, and not merely impose costly and damaging regulation; and
  • Mark Carney focused on markets, and the necessary move from informal codes to formal regulation. He heralded the FICC review and the key problems it identified, which he summarised as:

    • market structures which presented specific opportunities for abuse and were vulnerable to conflicts of interest, collusion and thin markets;
    • standards of acceptable market practice that were usually poorly understood, often ignored and always lacked teeth;
    • systems of internal governance and control within firms that could not put the interests of anyone above those of "close-knit trading staff";
    • skewed incentives; and
    • personal accountability that was lacking.

He noted the changes already in place, and highlighted the importance of meeting the review's recommendations. (Source: George Osborne Mansion House Speech and Mark Carney Mansion House Speech)

Contact: Rosali Pretorius or Michael Wainwright

Treasury updates sanctions: Treasury has updated the financial sanctions lists in respect of the Ukraine and Yemen. (Source: Treasury Updates Sanctions)

Contact: Emma Radmore or Nicholas Ralph

UK FINANCIAL SERVICES AND MARKETS REGULATORS

Financial Conduct Authority (FCA)

FCA fines Lloyds £117 million for PPI complaints handling failures: FCA has fined three members of Lloyds Banking Group a record retail fine of £117 million for failing to treat customers fairly in their handling of complaints about payment protection insurance (PPI). The failings started in March 2012 and lasted one year. Over that period, the companies rejected 37% of the 2.3 million claims they received. FCA found:

  • Lloyds had told complaints handlers to assume its PPI sales processes were compliant and robust unless told otherwise;
  • Lloyds did not tell complaints handlers when it found problems in the sales process; and
  • some complaints handlers believed what Lloyds had told them to assume over what customers told them, and sometimes did not contact customers to allow them to explain.

These led to several consequences, including Lloyds telling customers they had fully investigated complaints when this was not the case, as well as many customers not having the opportunity to provide evidence, and Lloyds failing to consider customer evidence in a balanced way. The then Financial Services Authority had intervened when it noticed a sharp decline in the amount of complaints upheld, following which Lloyds removed the assumption of compliance from its policies. FCA noted the steps Lloyds has taken to put in place a remediation programme which has included a review or upholding of 1.2 million complaints and setting aside significant funds to pay redress. Lloyds has also frozen shares under deferred bonus schemes for senior staff as a result of the investigation. Lloyds settled at an early stage and benefited from a 30% discount on the proposed fine. (Source: FCA Fines Lloyds £117 Million for Complaints Handling Failures)

Contact: Felicity Ewing or Katharine Harle

FCA appoints new directors: FCA has appointed Mark Steward as the new director of enforcement and market oversight and Barbara Frohn as the director of risk and compliance oversight. (Source: FCA Appoints New Directors)

Contact: Emma Radmore or Josie Day

FCA issues final CBTL rules: FCA has issued a policy statement on reflecting the Mortgage Credit Directive (MCD) Order 2015 within its rules. The statement contains feedback from an earlier FCA consultation paper on FCA's proposals for a legislative framework for consumer buy-to-let (CBTL) mortgages and final rules. The consultation focused on four main areas:

  • registration: respondents welcomed FCA's intention to replicate the registration processes set out in the legislation. Following requests from firms, FCA has also issued a specimen application form for authorised firms;
  • aggregated data reporting: respondents considered the proposals to be a proportionate way of monitoring CBTL lending volumes and informing FCA's supervisory approach. However, FCA will be clarifying aspects of its guidance following feedback and adjusting the timing of reporting;
  • complaints handling rules: the proposal to apply most of FCA's complaints handling rules (set out in the Dispute Resolution section in the FCA Handbook – DISP) to firms' CBTL activity was broadly supported. Some firms suggested that all of the DISP rules should apply to CBTL activity, including complaints publication rules. FCA rules would not prevent firms from publishing their own CBTL complaints data, but FCA decided it would not be proportionate to change its proposals to mandate this; and
  • modifications to other FCA Handbook modules to incorporate CBTL: FCA received limited feedback to proposed changes effecting the implementation and oversight of the CBTL regime. FCA has made some minor technical amendments in these areas.

The earlier consultation set out an indicative fee structure and registration fees for CBTL firms. Respondents raised concerns which FCA will take account of in a consultation on periodic fees planned for March 2016. FCA reminds firms that if they wish to lend, administer, intermediate, arrange or provide advisory services in relation to CBTL from 21 March 2016 they will have to be registered. FCA intends to start accepting applications in the summer. (Source: Buy-to-let Mortgages – Implementing the Mortgage Credit Directive Order 2015: Feedback on CP15/3 and Final Rules)

Contact: Nicholas Ralph or Josie Day

FCA issues pension transfer rules: FCA published a policy statement containing proposed changes to its pension transfer rules and feedback from its consultation on those changes. The new rules were necessary following changes to the Regulated Activities Order which made the conversion or transfer of safeguarded pension benefits into flexible benefits a regulated activity. FCA has also made changes to ensure that the Conduct of Business Sourcebook (COBS) pension transfer requirements will apply to all pension transfers, regardless of when the transferred benefits are being crystallised. The new rules described in this policy statement will come into force on 8 June. (Source: Proposed Changes to Pension Transfer Rules and Consultation Feedback)

Contact: Michael Wainwright or Emma Radmore

FCA issues "insistent client" advice: FCA has published a factsheet for advisers on the handling of "insistent clients" who wish to take a course of action contrary to that suggested by their adviser. FCA encourages advisers to adopt the following three-step approach:

  • ensure that advice is suitable for the individual client and is clear to the client;
  • make clear to the client that the client's actions are against the advice provided; and
  • make clear to the client the risks of the alternative course of action.

The factsheet goes on to outline issues firms have experienced with advice given to "insistent clients" and what firms should include in the standard suitability report. (Source: Pension Reforms and Insistent Clients)

Contact: Michael Wainwright or Nicholas Ralph

FCA consults on rule changes: FCA's latest current consultation proposes changes to:

  • transpose the UK Corporate Governance Code and related miscellaneous changes to the Listing Rules, Disclosure and Transparency Rules, Senior Management Systems and Controls Sourcebook, and Statements of Principle for Approved Persons. The changes will affect listed issuers, those who advise them, investors, primary information providers and also affects firms subject to the code in their high level compliance;
  • rules for operators of self-invested personal pensions (SIPPs). FCA received feedback on the practicalities of implementing some of the rules it finalised in 2014 which are due to take effect on 1 September 2016. As a result, it has made minor changes relating to frequency of valuation, the standard asset list and to allow a six-month period for firms to apply any new constant that results from an increase of assets under administration;
  • the Mortgage and Home Finance Conduct of Business Sourcebook (MCOB) and the Training and Competence Sourcebook (TC). These minor changes correct errors in rules implementing the MCD on calculation methods, clarify how firms should consider when MCOB may apply to contracts entered into before MCD implementation and restrict certain transitional provisions in TC that delayed application of certain rules;
  • reflect the CRA. FCA will need to make changes to several parts of the Handbook, but most significantly will make a regulatory process manual and amend the Enforcement Guide and the Unfair Contract Terms Regulatory Guide (UNFCOG). FCA clarifies that the Unfair Terms in Consumer Contracts Regulations (UTCCR) will continue to apply to contracts entered into before 1 October 2015, but FCA needs to make changes to its rules and guidance from 1 October in respect of the CRA's provisions on unfair terms and notices, enforcement of the law on these terms and notices and investigatory powers. The changes will introduce a new definition of consumer and clarify the application of the UTCCR and the CRA. They will necessitate changes to all the conduct of business modules of the Handbook, the Consumer Credit Sourcebook, Supervision Manual and Credit Unions Sourcebook. FCA will rename UNFCOG and will in principle replace all references to the UTCCR with references to the CRA, and explain and clarify its powers under the CRA. FCA will wait for the Competition and Markets Authority's guidance on unfair terms before it decides whether to issue its own; and
  • be consistent with Treasury's measures on small and medium-sized enterprise (SME) finance. FCA thinks it needs to make only limited changes to its rules to reflect the proposed Treasury Regulations that will, among other things, require certain banks to share SME credit information with credit reference agencies and provide information about rejected loan applications to finance platforms. In each case, the information can then reach finance providers.

Consultation closes on 5 August for the first two parts of the consultation and 5 July for the rest. (Source: FCA Consults on Rule Changes)

Contact: Emma Radmore or Juan Jose Manchado

FCA makes GAP competition rules: FCA has published its policy statement and final rules to address some of its concerns over competition in the guaranteed asset protection (GAP) insurance market. From 1 September, firms distributing add-on GAP insurance in the motor markets:

  • must give customers prescribed information to help them shop around and be more engaged when deciding on their purchase; and
  • will not be able to introduce and sell GAP insurance on the same day.

FCA hopes these measures will both level the field between different distribution channels and see greater levels of customer engagement. It is still consulting on further potential remedies (an opt-out ban and improved information requirements for add-on selling). It also says it is considering value measure options to apply to the wider general insurance market, on which it plans a discussion paper. (Source: FCA Makes GAP Competition Rules)

Contact: Michael Wainwright or Emma Radmore

Prudential Regulation Authority (PRA)

PRA finalises liquidity and funding risk supervision rules and guidance: PRA has published a supervisory statement on its approach to supervising liquidity and funding risks to go alongside its Policy Statement and final rules on liquidity, which create two new modules for the PRA Rulebook – CRR Firms: Individual Liquidity Assessment, and CRR Firms: Liquidity Coverage Requirement – UK-Designated Investment Firms, and make some consequential changes to parts of the PRA Handbook. The relevant rules take effect on 1 October 2015 and, in principle, delete those parts of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) relating to liquidity requirements, including BIPRU 12 and BIPRU Schedule 6. The supervisory statement covers PRA's expectations on:

  • the Internal Liquidity Adequacy Assessment Process (ILAAP). PRA explains how it believes firms can use existing documents to transition to the ILAAP requirements, and looks at how it expects firms to apply stress testing and manage the high quality liquid assets buffer. The statement includes a suggested structure and content of the ILAAP document;
  • the Liquidity Supervisory Review and Evaluation Process (L-SREP): PRA will carry out an L-SREP in a manner proportionate to the firm, and, following the L-SREP, will give individual liquidity guidance (ILG) to firms. It notes firms must in any event comply with PRA's overall liquidity adequacy rule (OLAR). PRA plans to follow the L-SREP process from October 2015 at the latest but will review firms on the basis of their existing ILAA if appropriate, asking for more information if this does not contain everything that the ILAAP will need to cover;
  • drawing down Liquid Asset Buffers: PRA explains how it expects firms to notify it if the firm falls or expects to fall below its quantitative ILG, and that such firms should be prepared to discuss their plan for restoring compliance;
  • collateral placed at BoE: PRA expects firms to have robust levels of assets pre-positioned at BoE; and
  • daily reporting under stress. PRA notes the returns it expects certain firms to submit daily in times of stress.

(Source: PRA Finalises Liquidity Rules and PRA Finalises Liquidity Guidance)

Contact: Rosali Pretorius or Tom Harkus

PRA issues volatility adjustment caution: PRA has issued a statement in response to news that some firms are seeking to include methodology in their internal models (for Solvency 2 purposes) which would anticipate future changes in the volatility adjustment (VA) in the modelling of market and credit risk stresses. PRA states that firms should not assume any change to the level of VA when calculating the solvency capital requirement (SCR). PRA explains this is consistent with the purpose of the VA, which is to provide countercyclical relief to firms' balance sheets. PRA believes anticipating this relief via a reduction in capital requirements would frustrate this purpose but says it would be very difficult for firms reliably to model changes to the requisite standard as the modelling of changes in the VA would need to make allowance for a number of complex factors. (Source: Volatility Adjustment in the Modelling of Market and Credit Risk Stresses)

Contact: Michael Wainwright or Juan Jose Manchado

OTHER REGULATORS/AUTHORITIES/INDUSTRY ASSOCIATIONS

Alternative Investment Management Association (AIMA)

AIMA responds on remuneration: AIMA's response to EBA's consultation paper on guidelines on sound remuneration practices under the fourth Capital Requirements Directive (CRD4) notes several significant concerns. AIMA is worried about:

  • EBA's interpretation of the proportionality principle. It says EBA's interpretation could have serious negative implications for AIMA members and that it should (as CRD4 requires) allow firms to neutralise certain provisions of the remuneration principles where proportionate to do so;
  • EBA's proposal to apply the guidelines to staff of delegate entities of a CRD4 group company. It says CRD4 does not mention any requirements applying to staff outside the group; and
  • possible tax consequences of the proposed guidelines on limited liability partnerships or limited partnerships if dividends paid to a CRD4 group company's shareholders or profit allocations to partners or members of partnerships are considered remuneration where those individuals are otherwise "identified staff" as well. AIMA does not think these payments are remuneration but sees disproportionate tax consequences if they are treated as such.

(Source: AIMA Responds on Remuneration)

Contact: Michael Wainwright or Juan Jose Manchado

Bank for International Settlements (BIS)/Basel Committee on Banking Supervision (BCBS)

BCBS consults on interest rate risk in the banking book: BCBS is consulting on interest rate risk in the banking book (IRRBB). It proposes changes, in line with Pillar 2 of the Basel capital framework, to regulatory capital treatment and supervision of IRRBB. It offers two options:

  • a standardised Pillar 1 approach involving minimum capital requirements; or
  • an enhanced Pillar 2 approach, which would also include elements of market discipline under Pillar 3.

The paper looks at key policy issues and the two options. It includes an overview of high level principles for IRRBB for both banks and supervisors, and how the proportionality principle will apply. (Source: BCBS Consults on IRRBB)

Contact: Rosali Pretorius or Michael Wainwright

British Bankers Association (BBA)

BBA responds on remuneration: BBA's response to EBA's consultation on the remuneration guidelines says EBA has not properly thought through the effects of its proposals on longer-term incentive plans. It says the proposals would make the use of performance incentivising plans unattractive and lead to increases in fixed pay as an alternative. It also criticises the proposal to remove the proportionality principle. It says many EU countries have excluded smaller banks from the legislative requirements and should continue to be allowed to do so. (Source: BBA Responds on Remuneration)

Contact: Michael Wainwright or Juan Jose Manchado

Committee of Advertising Practice Ltd (CAP)

CAP issues payday loans guidance: Following a review of payday loan product advertisements, CAP has published new guidance to prevent advertisements that trivialise the serious nature of taking out short-term high-cost loans. Specifically, the guidance clarifies the spirit in which the rules should be interpreted, especially those rules that require advertisements to be responsible to their audience and society. Advertisements are likely to breach the rules if they:

  • suggest loans are a suitable means of addressing ongoing financial concerns;
  • condone non-essential or frivolous spending; or
  • unacceptably distort the serious nature of payday loan products.

The guidance suggests that animation, catchy upbeat jingles and humorous themes are used with care, and proposes phrases to help payday loan advertisers communicate reasonable benefits of the product. The guidance comes into immediate effect. CAP also intends to launch a further consultation into scheduling of TV advertisements for payday loans by the end of July. (Source: New Guidance for Payday Loan Advertisements)

Contact: Emma Radmore or Nicholas Ralph

European Fund and Asset Management Association (EFAMA)

EFAMA responds on remuneration: EFAMA's response to EBA's consultation on the remuneration guidelines highlights that bank-owned asset managers may need to comply with four sets of overlapping legislation setting remuneration requirements at EU level – as well as guidance on most of them. It says this will place a disproportionate regulatory burden on the industry. The response then, again, focuses on why EFAMA believes EBA has taken the wrong stance on proportionality. (Source: EFAMA Responds on Remuneration)

Contact: Michael Wainwright or Juan Jose Manchado

International Organisation of Securities Commissions (IOSCO)

IOSCO publishes CRAs good management report: IOSCO published a report titled "Good practices on reducing reliance on Credit Rating Agencies (CRAs) in Asset Management". IOSCO identified eight sound practices:

  • asset managers make their own determinations as to the credit quality of a financial instrument before investing and throughout the holding period;
  • asset managers have the appropriate expertise and processes in place to perform credit risk assessment appropriate to the nature, scale and complexity of any investment strategy they implement and the type and proportion of debt instruments they invest in, and not to invest in products/issuers when they do not have enough information to perform an appropriate credit risk assessment;
  • external credit ratings may form one element of the internal assessment process but are not the sole factor supporting the credit analysis;
  • the manager's internal assessment process is regularly updated and applied consistently;
  • where asset managers use external credit ratings, they understand the methodologies, parameters and the basis on which the opinion of a CRA was produced, and have adequate means and expertise to identify the limitations of the methodology and assumptions used to form that opinion;
  • asset managers review their disclosures describing alternative sources of credit information in addition to external credit ratings and make available to investors, as appropriate, a brief summary description of their internal credit assessment process, including how external credit ratings may be used to complement or as part of the manager's own internal credit assessment methods;
  • when assessing the credit quality of their counterparties or collateral, asset managers do not rely solely on external credit ratings and consider alternative quality parameters; and
  • where external credit ratings are used, a downgrade does not automatically trigger the immediate sale of the asset. Should the manager/board decide to divest, the transaction is conducted within a timeframe that is in the best interests of the investors.

(Source: IOSCO Publishes Good Practices on Reducing Reliance on CRAs in Asset Management)

Contact: Rosali Pretorius or Luca Salerno

Joint Energy Associations Group (JEAG)

JEAG and LEBA publish REMIT agreements: JEAG and the London Energy Brokers Association (LEBA) have published tripartite and bilateral forms of their REMIT reporting agreements. For ease of use, JEAG and LEBA plan to accompany the agreements with a Guidance Note, and provide for a German translation of the agreements and guidance on how the agreements would operate if expressed to be governed by German law. To promote the use of the agreement and explain its mechanics, the associations involved in the drafting process will organise a series of workshops. The member associations of the JEAG are expressing their expectation that the REMIT agreements shall facilitate contractual standardisation and contribute to an efficient REMIT implementation ahead of the launch of reporting in October. (Source: JEAG and LEBA Publish REMIT Reporting Agreements)

Contact: Luca Salerno and Tom Harkus

Transparency International (TI)

TI looks at UK recovery powers: TI has published a paper discussing how it feels the UK Government's current powers are not fit for purpose to help it properly recover the proceeds of corruption. (Source: TI Looks at UK Recovery Powers)

Contact: Emma Radmore or Nicholas Ralph

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