Financial Services Duty of Care Bill 2019-20 reintroduced to Parliament

The Financial Services Duty of Care Bill 2019-20 has been reintroduced to the House of Lords. The Bill requires the Financial Conduct Authority (FCA) to make rules for authorised persons to owe a duty of care to consumers in their regulated activities.

The Bill was originally introduced in the 2017-19 parliamentary session as a private members' bill and so had to be reintroduced for the 2019-20 session. The Bill received its first reading in the House of Lords on 9 January 2020. A date for the second reading of the Bill is yet to be scheduled.

LIBOR transition: BoE, FCA and RFRWG next steps

The Bank of England (BoE), the FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published the following documents, outlining priorities and milestones for 2020 on LIBOR transition:

Cryptoasset businesses: FCA registration fees

The FCA has published the Fees (Cryptoasset Business) Instrument 2020 (FCA 2020/1) which amends the FCA's Fees manual (FEES) setting the fees payable by applicants to the FCA to register as cryptoasset businesses. The fees are:

  • £2,000 for businesses with UK cryptoassets revenue up to and including £250,000; and
  • £10,000 for businesses with UK cryptoassets revenue over £250,000.

The instrument came into force on 13 January 2020.

FSCS: PRA and FCA joint consultation on management expenses levy limit

The Prudential Regulation Authority (PRA) and the FCA are jointly consulting on the 2020/21 management expenses levy limit (MELL) for the Financial Services Compensation Scheme (FSCS) (PRA CP1/20 and FCA CP20/2). This consultation is supported by the publication of the FSCS's Plan and Budget for 2020/21 (reported below).

Under the Financial Services and Markets Act 2000 (FSMA), the PRA and the FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms. The MELL is the maximum amount that the FSCS may levy in a year for its operating costs without further consultation; it ensures that the FSCS has adequate funding to exercise certain functions conferred on it by Part XV of FSMA and by rules made by the PRA and the FCA.

The proposed MELL is £83.2 million for 2020/21, consisting of a management expenses budget of £78.2 million and an unlevied contingency reserve of £5 million. The proposed MELL would apply from 1 April 2020, the start of the FSCS's financial year, to 31 March 2021.

The consultation closes on 17 February 2020. Once responses have been considered, the PRA will issue a policy statement and the FCA will issue a Handbook Notice so that the final rules can be in place by 1 April 2020.

FSCS: 2020/21 plan and budget

The FSCS has published its plan and budget for 2020/21, setting out its expected management costs and the latest forecast of potential claims volumes.

The FSCS proposes an indicative levy for 2020/21 as £635m, an increase of £87m from the levies raised in 2019/20. The FSCS states that this increase is due to a rise in SIPP operator claims, which is consistent with the trend FSCS has seen in recent years. The FSCS expects the investment provider class to reach its annual limit as a result of these latest levy predictions, which will trigger the retail pool.

In addition, the FSCS needs to raise a supplementary levy of £50m for 2019/20 from the "Life Distribution, Pensions and Investment Intermediation" class of firms. The main cause for this supplementary levy is increased claims volumes and new defaults. The FSCS will also provide a refund of £30m to firms in the "Deposits" class.

The total management expenses budget (that is, the cost of running the FSCS and of paying claims) will be £78.2m, a 1.3% increase on the latest full-year forecast for 2019/20 of £77.2m, and an increase of £3.6m (4.8%) compared to the 2019/20 budget. The key drivers for this increase are the costs of core support and making recoveries.

The FSCS will confirm the final levy in April 2020.

RDR and FAMR evaluation: FCA update

The FCA has updated its webpage on its evaluation of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR) setting out progress and next steps. The FCA indicates that it expects to publish its final RDR/FAMR review report later in the year.

The FCA is analysing data it obtained from a survey of approximately 400 firms in August 2019 under which the FCA asked for information on their advice services, including business models and strategies, target customers, charging structures, future plans, use of technology and any recent innovations.

The FCA has also commissioned qualitative research on how consumers interact with the market. This research will explore consumers' view of their needs for support with financial issues, how they go about getting that support, and their experiences. Together with the quantitative findings from the FCA's "Financial Lives" survey, the FCA states that this will inform its view of the current state of the market and how it is developing from a consumer perspective.

In particular, the FCA:

  • is keen to hear from firms about their plans to use technology in making efficiencies, in offering innovative services, and what challenges and barriers they are facing in doing so;
  • wants to explore further the potential for new services to emerge in the market, both alternative advice services and unregulated information services. It wants to understand more about the barriers to providing alternative services, for example, is there a lack of demand for new services or are there economic or regulatory barriers that prevent them from emerging; and
  • wants to hear from firms about the effect open finance could have on the market and what role the FCA may be able to play in helping this. In the beginning of 2020, the FCA plans to host roundtable events with a number of trade bodies and firms to discuss open finance and how it may affect the market to benefit consumers. Read more in our update, FCA consults on how open finance could transform financial services.

Loyalty penalty: FCA update on Citizens Advice super-complaint to CMA

In response to the Citizens Advice super-complaint on the loyalty penalty, the Competition and Markets Authority (CMA), in December 2018, made several recommendations relating to the cash savings, home insurance and mortgage markets. The FCA has published an update on its website where it consolidates summaries of the work it has been undertaking that address the CMA recommendations.

Among other things, the FCA states that it plans to publish updates on its work relating to fair pricing in financial services and its consultation on guidance for firms on the fair treatment of vulnerable customers (GC19/3) in the first quarter of 2020.

FCA policy development update

The FCA has updated its policy development update webpage for January 2020, setting out information on recent and future FCA publications.

EU equivalence regime: AFME recommendations

The Association for Financial Markets in Europe (AFME) has published a paper assessing the EU equivalence framework for financial services and providing recommendations to further enhance its functioning. The paper considers last year's European Commission Communication and recent developments in the EU equivalence framework. The paper addresses the EU's relationship with third countries generally as opposed to the specific future relationship with the UK post-Brexit.

AFME proposes four key principles which should be considered in the context of equivalence determinations:

  • decisions should be proportionate and risk-sensitive, based on sound regulatory and supervisory arrangements;
  • the equivalence assessment should be focused on alignment of regulatory and supervisory outcomes in the area under consideration;
  • there should be transparency in the decision-making process; and
  • decisions should be made in a timely manner and provide certainty and stability for market participants.


Data protection and financial services: European Commission slides on future EU-UK relationship

The European Commission has published slides outlining internal preparatory discussions on the future EU-UK relationship relating to personal data protection (adequacy decisions) and cooperation and equivalence in financial services. The slides relate to the Commission's work in preparing negotiating directives for the EU for the negotiations on the future EU-UK relationship.

In the area of data protection, the Commission states that personal data protection for the future partnership will be based on Commission adequacy decision(s) if conditions are met and there are provisions in the EU-UK agreement on cooperation between regulators. The Commission will endeavour to finalise the adequacy assessment by the end of 2020 and will prioritise assessment in the context of law enforcement. The Commission sets out the necessary steps for an adequacy decision and timeline.

In the area of financial services, the slides set out the Commission's proposed approach to cooperation and equivalence. On equivalence, the Commission notes that, under the political declaration, the EU and the UK are to endeavour to conclude equivalence assessments before the end of June 2020. It suggests that the EU should make equivalence decisions in protection of its own interests and that its autonomy on equivalence should not be restricted by any free trade agreement.

The Commission states that the assessment of UK legislation and supervision should be based on a risk-based and proportional approach and, as for other third countries, the higher the possible impact on EU markets and interests, the more granular the assessment.

CRAs: FCA updates webpage to reflect Brexit developments

The FCA has updated its webpage for credit rating agencies (CRAs), for which the FCA will become the UK regulator post-Brexit. In its update, the FCA says it is making changes to its systems implementation activities.

Written on the assumption that the UK leaves the EU with a withdrawal agreement in place, the FCA explains that firms will not be required to submit outstanding credit ratings to it on 1 February 2020. During the implementation period, the European Securities and Markets Authority (ESMA) will continue to operate as the direct supervisor of UK CRAs. UK firms using credit ratings for regulatory purposes can continue to use EU ratings over the course of the implementation period in accordance with the existing rules.

If a firm has submitted either a notification for conversion or advance application to register with the FCA, it does not need to take any additional action at this stage. The FCA will continue to assess advance applications that are in progress.

Hogan Lovells Brexit resources

Given the moving Brexit target at the moment we recommend that for an up-to-date take on Brexit impact please try the Hogan Lovells Brexit Hub, an open resource online.

Hogan Lovells Brexit Hub


Banking and Finance

CRR: EBA consults on RTS on treatment of non-trading book positions subject to FX or commodity risk

The European Banking Authority (EBA) is consulting on draft Regulatory Technical Standards (RTS), made under Article 325(9) of the Capital Requirements Regulation (CRR), on how institutions should calculate the own funds requirements for market risk for their non-trading book positions that are subject to foreign-exchange (FX) risk or commodity risk under the FRTB (Fundamental Review of the Trading Book) standardised and internal model approaches.

The draft standards:

  • specify the value of non-trading book positions that institutions should use when computing the own funds requirements for market risk for those positions;
  • lay down a prudential treatment for the calculation of the own funds requirements for market risk of non-monetary items held at historical cost that may be impaired due to changes in the FX rate; and
  • specify an ad-hoc treatment with respect to the calculation of the actual and hypothetical changes associated to non-trading book positions for the purpose of the backtesting and the profit and loss attribution requirements.

The consultation ends on 10 April 2020.

Big data and advanced analytics in banking sector: EBA report

The EBA has published a report on big data and advanced analytics (BD&AA) in the banking sector and on the key considerations in the development, implementation and adoption of BD&AA. In its report, the EBA identifies recent trends and suggests key safeguards in an effort to support ongoing technological neutrality across regulatory and supervisory approaches. It recognises that a data-driven approach is emerging across the banking sector, affecting banks' business strategies, risks, technology and operations.

Data management, technological infrastructure, analytics methodology, organisation and governance are the key pillars identified by the EBA to support the rollout of BD&AA, along with the following "elements of trust" that need to be properly and sufficiently addressed:

  • ethics;
  • explainability and interpretability;
  • fairness and avoidance of bias;
  • traceability and auditability;
  • data protection;
  • data quality;
  • security; and
  • consumer protection.

The EBA is of the view that additional efforts are needed to ensure that BD&AA solutions respect and integrate these "elements of trust". Towards meeting this objective, a risk-based approach could apply on certain "elements of trust" depending on the impact of each BD&AA application. For example, stricter requirements may apply on the "explainability" element when there is a potential impact on business continuity or potential harm to the customer.

The EBA will continue monitoring developments and, where appropriate, will perform additional work to enhance supervisory consistency and facilitate supervisory coordination.

Sustainable finance: EBA BSG policy paper

The EBA's Banking Stakeholder Group (BSG) has published a policy paper on sustainable finance.

Among other things, the BSG says that banks, as intermediaries between savings and investment and major finance providers in the EU, have a key role to play in the mobilisation of the necessary resources to tackle climate change and mitigate its effects.

The BSG argues that in order to better identify financial risks and opportunities linked to climate change for the banking system, progress must be achieved in the collection of data, usable taxonomy and methodologies, including scenarios. Any regulatory or supervisory development should acknowledge this and contribute to this progress.

The BSG states that ensuring legal certainty and consistency across the legal framework is paramount. In particular, as there are several legislative proposals on the sustainable finance affecting banks, it calls on regulators and legislators to monitor the interaction between the scopes of the different parts of regulatory framework to avoid unintended inconsistencies and to avoid unnecessary burdens.

Securities and Markets

ESMA strategic orientation for 2020-2022

ESMA has published its "strategic orientation" for 2020-22 which sets out ESMA's future focus and objectives and reflects its expanded responsibilities and powers following the European Supervisory Authorities (ESAs) review and implementation of EMIR 2.2. It has also published an updated organigram to reflect the changes in its structure.

Q&A process: ESMA publishes questions and is developing web-based tool

ESMA has announced a change to its Q&A process following recent amendments to the ESMA Regulation which requires ESMA to set up a web-based tool to facilitate the submission of questions and the publication of questions received, as well as answers to admissible questions.

ESMA welcomes the new requirements. It says that the roll-out of the IT infrastructure will be done on a phased basis during the course of the year. Pending the full implementation of the web-based tool, stakeholders can continue submitting questions to ESMA through the Q&A webpage.

In the meantime, ESMA has started publishing the following questions:

  • questions for which a Q&A will be put on the agenda of ESMA's relevant standing committee;
  • rejected questions (questions that were tabled for discussions in an ESMA standing committee and to which ESMA does not intend to provide an answer); and
  • questions forwarded to the Commission.

The questions are published within a spreadsheet available on the Q&A webpage of the ESMA website. ESMA will update the spreadsheet every Friday afternoon (when updates are necessary).

IBOR fallback rate adjustments: ISDA FAQs

The International Swaps and Derivatives Association (ISDA) has published a set of FAQs on IBOR fallback rate adjustments.

Blockchain platforms: ISDA whitepaper on use of smart derivatives contracts

ISDA has published a whitepaper titled, "Private International Law Aspects of Smart Derivatives Contracts Utilizing Distributed Ledger Technology". The paper considers the private international law, or conflict-of-law, aspects of derivatives contracts governed by the laws of Singapore and England and Wales involving distributed ledger technology (DLT), commonly known as blockchain technology.


Solvency II: PRA PS1/20 on longevity risk transfers

The PRA has published a policy statement, PS1/20, on simplification of pre-notification expectations relating to longevity risk transfers. PS1/20 gives feedback to responses the PRA received to its earlier consultation on the issue, CP3/19, and the Appendix contains the PRA's final policy in an updated version of supervisory statement, SS18/16, "Solvency II: longevity risk transfers".

After considering the single response it received to CP3/19, the PRA has made two clarifications to its proposed policy in CP3/19:

  • to amend the headings used in the reporting template, providing more clarity on how firms should complete them, including explanatory footnotes; and
  • to change the phrasing on how firms should include basis risk in their risk assessments of longevity risk transfers.

The policy came into effect on 9 January 2020. From this date, firms are expected to notify the PRA of new longevity risk transfers in accordance with the revised SS18/16.

Insurance market data: PRA call for feedback on proposal to publish quarterly

The PRA has published a call for feedback on its proposal to publish quarterly, aggregated data relating to the UK insurance market. At present, it does not release a regular publication of UK insurance data externally. However, the PRA recognises the value of UK insurance data produced in a timely and structured publication, based on the regular submission of data by firms within the scope of the Solvency II Directive across the various sectors of the market.

The content of the initial publication will be based on Solvency II quantitative reporting templates (QRTs) and, where relevant, supplemented with PRA data collections. The schedule for publication will be at a timely point following the submission and quality checking of quarterly and annual data, with the intention of publishing the information when it is of most relevance.

The PRA has published the call for feedback to inform potential users of this data and the proposed content and presentation. It invites feedback that may help to shape the publication. Comments can be made until 16 March 2020.

The PRA intends to publish the first insurance data release in the new format during the first half of 2020.

Solvency II 2020 review: FMLC response to EIOPA consultation

The Financial Markets Law Committee (FMLC) has published its response to EIOPA's October 2019 consultation paper on its draft opinion setting out technical advice on the 2020 review of the Solvency II Directive. The FMLC comments on some uncertainties in EIOPA's proposals under the headings of:

  • freedom to provide services and freedom of establishment;
  • expected profits in future premiums; and
  • long-term guarantee measures.

EIOPA intends to publish its final opinion on technical advice for the European Commission in June 2020.

Funds and Asset Management

Asset managers' use of portfolio management tools: FCA review report

The FCA has published a webpage setting out a report on the FCA's review findings of how firms in the asset management sector select and use risk modelling and other portfolio management tools. While the FCA saw some good practice at most firms, it says that its review identified problems in firms' processes and controls, particularly in risk model oversight and contingency planning.

The FCA review involved it visiting 10 firms in the asset management sector to see how they selected and used risk modelling and other portfolio management tools. The firms varied in terms of size, scale, operating models and asset classes and the FCA met with senior executives from the first and second lines of defence.

The firms sampled had different approaches in their use of portfolio tools. Some relied largely on a single provider offering an integrated package. Others used a suite of tools from different providers. The remainder built their technology in-house.

The FCA sets out its detailed findings under the following headings:

  • the advantages and disadvantages of different approaches;
  • vendor management;
  • model governance;
  • managing change;
  • resilience and recovery;
  • software testing; and
  • customer expectations.

The FCA asks all asset management firms to consider its findings and how they apply to their own organisations. It states that it expects firms to ensure that their implementation, oversight and contingency arrangements in respect of portfolio tools enable them to comply with its expectations as set out in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) and elsewhere. These include an expectation that a firm's arrangements will ensure that it can continue to function and meet its regulatory obligations in the event of unforeseen interruption.

The FCA will continue to look at the operational resilience arrangements in place at firms, including those that were not included in its review.

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