The topics covered in this month’s update include:
- updates on financial services after Brexit
- the PSR’s updated Powers and Procedures Guidance
- BoE’s annual report and accounts for 2020
- the FCA’s consultation on a new prudential regime for UK investment firms
- ESMA’s guidelines on the MiFID II compliance function.
Please also see our articles COVID-19: how the UK financial regulators are responding and COVID-19: how the European financial regulators are responding for the latest regulatory updates concerning the coronavirus pandemic.
General financial services regulation
Financial services regulatory reforms before the end of Brexit
In a statement made on 23 June 2020, Rishi Sunak, Chancellor of the Exchequer, discussed the UK’s financial services regulatory framework reforms in light of the UK’s position outside of the EU. In general, consistent with the UK’s position as a major international financial hub, the government intends to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant.
The statement identified the following key areas for the forthcoming reforms: updating prudential requirements, maintaining sound capital markets, and managing future risks (eg the LIBOR transition) (more on this below).
Nikhil Rathi appointed as new Chief Executive of the FCA
On 22 June 2020, HM Treasury announced that Nikhil Rathi will be the new Chief Executive of the Financial Conduct Authority (FCA) from autumn 2020 for a five-year term. Mr Rathi will succeed Christopher Woolard, who has acted as interim Chief Executive since Andrew Bailey stepped down from the post in March 2020, following Mr Bailey’s appointment as Governor of the Bank of England. Mr Rathi is currently the Chief Executive of London Stock Exchange plc and was Director, Financial Services Group at HM Treasury from September 2009 to April 2014.
A financial system to support the recovery – speech by Charles Randell
Charles Randell, Chair of the FCA and the Payment Systems Regulator (PSR), delivered a speech on 16 June 2020 to a virtual roundtable of bank chairs on how the financial services industry can work to support recovery from the COVID-19 pandemic.
In his speech, Mr Randell highlighted how COVID-19 shows the need to reassess the approach to consumer debt, high risk retail investments and financial exclusion. Mr Randell noted the significant increase in consumer and business debt and the need to have a robust framework to deal with debt that turns out to be unaffordable as we emerge from COVID-19.
He also emphasised the impact of digitisation on the behaviour of consumers and the challenges posed for financial services, for example, financial exclusion owing to the accelerated move away from cash. The demands on the FCA will be large, but Mr Randell remains confident that the FCA will work with pace and pragmatism as it plans for the future of regulation and focuses on consumer outcomes.
Letter from HM Treasury on recommendations on financial services after Brexit
On 11 June 2020, the House of Lords EU Financial Affairs Sub-Committee published a letter (dated 27 May 2020) from John Glen, Economic Secretary to the Treasury, relating to the committee’s review of financial services after Brexit. The letter addresses the following three topics:
- Equivalence: the government’s priority regarding to the Political Declaration commitments on equivalence is to seek equivalence across all the equivalence regimes which currently exist in EU legislation (which number around 40). The government also wants to ensure that there are clear and coherent structures in place in the event that equivalence is withdrawn, in order to stabilise equivalence as the basis of market access.
- New approach to financial regulation: the next phase of the Future Regulatory Framework review will set out how the government proposes to address questions relating to possible delegation of more powers to the financial regulators, to make the UK regime more flexible and responsive to change. The government intends to seek views from Parliament, industry and other interested parties, and the treasury intends to address this in the second half of this year.
- Global regulatory cooperation: the UK recognises the value in continued engagement at multilateral forums and is committed to the development of global standards in areas of common interest. The government should take the opportunities after Brexit to develop closer bilateral relations with jurisdictions with which it shares a common approach to promoting cross border financial services.
FCA guidance for assessing adequate financial resources
On 11 June 2020, the FCA published finalised guidance on the assessment of adequate financial resources for all FCA solo-regulated firms subject to the Threshold Conditions and/or the Principles for Businesses.
The framework document aims to clarify the role of adequate financial resources in minimising harm, the practices firms can adopt when assessing adequate financial resources by improving controls and reducing the risk in their activities, and how the FCA assesses the adequacy of a firm’s financial resources. The FCA expects firms to assess their adequate financial resources commensurate to the risk of harm and complexity of their business.
Payment services and systems
PSR’s revised Powers and Procedures Guidance for regulated firms
On 16 June 2020, the PSR published a revised version of its Powers and Procedures Guidance (PPG) for regulated firms. The original guidance, which was published in March 2015, has been updated to reflect the developments in the PSR’s processes and practices, as well as its increased remit.
The revised guidance also aims to be more informative by helping regulated parties understand how the regulator chooses which of its powers to exercise and when, outlining the PSR’s current role and remit and how it collaborates with concurrent regulators and authorities, and providing more information about the procedures and processes the regulator uses, for example, how the PSR decides whether to make a formal direction, and about how and when it conducts an enforcement investigation.
The PSR has also updated its guidance on its approach to the Interchange Fee Regulation, revising the relevant chapter to bring it in line with the updated PPG.
PSR’s Head of Policy gives speech on innovation and regulation of payment systems
In a speech published on 3 June 2020, Genevieve Marjoribanks, PSR Head of Policy, talked about innovation and regulation of payment systems. In her speech, Ms Marjoribanks discussed the priority areas for the PSR, as follows:
- New Payments Architecture (NPA): this provides an ambitious plan for developing an innovative, competitive interbank payments environment underpinned by a resilient, sustainable infrastructure. Ms Marjoribanks noted that creating the NPA is a significant change that needs to be planned and managed carefully, and the right balance between the speed of realising benefits with managing the costs and risks of transition needs to be established.
- Access to cash: the PSR wants to ensure that innovation in payment systems does not have a detrimental impact on those who want or need to use cash. It is continuing to work with HM Treasury, the Bank of England (BoE) and the FCA via the Joint Authorities Cash Strategy Group to ensure that cash remains widely accessible.
- Confirmation of Payee (CoP): this is a key development aimed at preventing accidentally misdirected payments and APP fraud. CoP should have been implemented by the end of March 2020 but, in light of COVID-19, the PSR has decided not to take formal action over delays in implementation in the period to 30 June 2020.
The PSR wants to work with the industry to meet the future needs of the UK’s increasingly digital economy. Changes in business and consumer habits have been accelerated by COVID-19, and it remains to be seen whether these will remain once lockdown is over.
Banking and insurance
Planned amendments to the Benchmarks Regulation
The FCA issued a statement on 23 June 2020 welcoming the government’s intention to bring forward legislation to amend the Benchmarks Regulation to give the FCA enhanced powers. The FCA says these could help manage and direct an orderly wind-down of critical benchmarks such as LIBOR and help deal with the problem identified by the Sterling Risk Free Rate Working Group of ‘tough legacy’ contracts that cannot transition from LIBOR.
The new powers proposed will be available where the FCA has found that a critical benchmark is not representative of the market it seeks to measure and representativeness will not be restored. The FCA and other authorities have been clear that those who can amend their contracts so that they move away from LIBOR should do so.
The FCA will publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally.
Policy statement on prudential standards in the Financial Services Bill
On 23 June 2020, HM Treasury published a policy statement on a new prudential regime for banks and investment firms in the Financial Services Bill 2019-21. HM Treasury intends to use the Bill to implement prudential standards for banks and other credit institutions relating to the CRR II Regulation and the new Investment Firms Prudential Regime. It also intends to delegate responsibility for the implementation of requirements for firms to the Prudential Regulation Authority and the FCA.
Bank of England annual report and accounts 2020
On 18 June 2020, the Bank of England published its Annual Report and Accounts for the period between March 2019 and February 2020. In the report, the BoE looks at the initiatives to upgrade the real time gross settlement system, its actions to make the largest banks more resolvable, reform of benchmark rates, the need to manage operational risk, the timely collection of data and preparation for Brexit. It also disclosed its own approach to climate risk management across its entire operations as part of its annual reporting and published its Climate-Related Financial Disclosure for 2020.
SONIA compounded index
The Bank of England has confirmed that it will publish a daily Sterling Overnight Index Average (SONIA) compounded index from August 2020. In a summary and response paper published on 11 June 2020, the BoE also stated that given a lack of consensus on both the usefulness of SONIA period averages and the conventions underpinning such rates – in line with the position set out in the February 2020 discussion paper – the BoE will not be producing them at this time.
EIOPA discussion paper on insurance value chain and new business models arising from digitalisation
On 10 June 2020, the European Insurance and Occupational Pensions Authority (EIOPA) published a discussion paper on the (re)insurance value chain and new business models arising from digitisation. As technology continues to evolve, insurance undertakings and intermediaries continue to develop and revise their business models bringing both beneficial innovation and a new set of emerging risks that have to be considered.
Accordingly, EIOPA recognises a possible fragmentation of the insurance value chain could occur, including, importantly, a potential for a reduced regulatory and supervisory oversight. The discussion paper aims to get a better picture on possible fragmentation of the EU’s insurance value chain and supervisory challenges related to that in order to plan for next steps.
EIOPA welcomes all comments by 7 September 2020. These must be submitted by responding to a survey.
Funds and asset management
Discussions on a new prudential regime for UK investment firms
The FCA published a discussion paper on 23 June 2020 on a prudential regime for UK investment firms. The discussion paper sets out initial views as well as technical details on the Investment Firm Directive and the Investment Firm Regulation.
The FCA is seeking views on how to best implement the government’s new prudential regime framework. This marks the FCA’s first step in introducing a set of prudential rules for investment firms to better reflect their business models and the risk of harm they pose to consumers and markets.
The FCA seeks responses from stakeholders until 25 September 2020.
European Commission report on application and scope of AIFMD
On 10 June 2020, the European Commission (Commission) published a report assessing the application and scope of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). Key findings in the report are that:
- the AIFMD has improved the monitoring of risks to the financial system and the cross-border raising of capital for investments in alternative assets
- the AIFMD has played a role in creating an internal market for alternative investment funds and reinforcing the regulatory and supervisory framework for alternative investment fund managers (AIFMs) in the EU, and
- AIFMs are operating with more transparency for investors and supervisors.
ESMA publishes guidelines on aspects of the compliance functions under MiFID II
On 5 June 2020, the European Securities and Markets Authority (ESMA) published a final report with guidelines on the Markets in Financial Instruments Directive (MiFID II) compliance function. The guidelines enhance the value of existing standards by providing additional clarifications on certain specific topics, such as new responsibilities in relation to MiFID II’s product governance requirements, by notably detailing further the reporting obligations of the compliance function. The guidelines also foster greater convergence in the implementation, and supervision, of the new MiFID II compliance function requirements.
Securities and markets
FCA consultation paper on a permanent ban on mass-marketing of speculative illiquid securities
The FCA published a consultation paper on 18 June 2020 on making its temporary rules on marketing certain high-risk investments (including speculative mini-bonds) permanent and extending them to some similar securities. The FCA wants to prevent harm to consumers from investing in complex, higher-risk products that they do not understand and are not suitable for them.
The current temporary product intervention for speculative illiquid securities came into effect on 1 January 2020 and lasts for 12 months. It restricts speculative mini-bonds and preference shares from being mass-marketed to retail investors. It also improves disclosure of key risks and costs to those certified high net worth and sophisticated retail investors who are still eligible to receive promotions for these types of securities.
The FCA invites comments until 1 October 2020 and aims to publish final rules in a policy statement before the end of 2020.
Impact of MiFIR third-country regime on UK cross-border financial services
On 17 June 2020, UK Finance published a technical briefing, What the MiFIR third-country regime means for UK-EU cross-border services. In the briefing, UK Finance noted that the EU Markets in Financial Instruments Regulation (MiFIR) allows third-country (non-EU) firms registered with the ESMA to provide cross-border services to eligible counterparties and certain professional clients (qualifying clients) in the EU if the commission makes an equivalence decision in respect of the third country concerned.
The briefing discusses how this regime operates and the implications for UK firms if the commission makes an equivalence decision in respect of the UK under MiFIR, including the impact of the amendments to the regime that will apply from 21 June 2021 under the EU Investment Firms Regulation. It also discusses the implications for EU firms if the UK makes a corresponding equivalence decision in respect of the EU under MiFIR (as adopted under UK domestic law at the end of the transition period).
European Commission consultation paper on an EU Green Bond Standard
On 12 June 2020, the Commission published a consultation, together with an impact assessment, on its initiative for an EU green bond standard. Green bonds play an increasingly important role in financing assets needed for the low-carbon transition. However, there is no uniform green bond standard within the EU. The consultation builds upon the European Green Deal, which significantly increases the EU’s climate action and environmental policy ambitions.
Investigations, enforcement and dispute resolution
FCA fines Commerzbank over anti-money laundering failures
On 17 June 2020, the FCA fined Commerzbank AG (London Branch) £37,805,400 for failing to put adequate anti-money laundering (AML) systems and controls in place between October 2012 and September 2017. The FCA stated that Commerzbank was aware of these weaknesses and failed to take reasonable and effective steps to fix them creating “a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system.”
Commerzbank has now undertaken a significant remediation exercise to bring its AML controls into compliance, conducted an extensive look-back exercise to identify suspicious transactions, and voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers. Commerzbank agreed to resolve the matter at an early stage of the investigation and therefore qualified for a 30% discount (without the discount the financial penalty was £54,007,800).
FCA final notice issued to Lloyds Bank plc, Bank of Scotland plc and The Mortgage Business plc for failures in mortgage arrears handling
The FCA published a final notice on 11 June 2020, issued to Lloyds Bank plc, Bank of Scotland plc, and The Mortgage Business plc for failures in mortgage arrears handling. The FCA found the banks’ systems and procedures for gathering information from mortgage customers in payment difficulties or arrears resulted in call handlers not consistently obtaining adequate information to assess customers’ circumstances and affordability, creating a risk that customers (including vulnerable customers) were treated unfairly.
As a result, the banks breached Principles 3 and 6 of the FCA’s Principles for Business and were fined £64,046,800. The breach was committed inadvertently, and the banks have acknowledged many of the failings and commissioned an independent third-party to prepare an investigation report. In addition, the banks have taken considerable steps to improve their systems and controls, consistent with the recommendations in the report. As the banks agreed to resolve all issues of fact and liability, they qualified for a 30% discount (without the discount the financial penalty was £91,495,400).
Financial Ombudsman Service (FOS) News issue 152
The FOS published issue 152 of their newsletter on 5 June 2020. It provides guidance to consumers and business dealing with complaints or enquiries caused or affected by COVID-19, and information on the assistance the FOS provides on avoiding fraud and scams. It sets out the FOS’s annual complaints data and commentary on trends in complaints, with a specific focus on claims management companies’ complaints data. The FOS also details its future strategy, which will run until 2025.
European Financial and Economic Crime Centre (EFECC)
The EFECC, launched by Europol on 5 June 2020, aims to enhance the operational support provided to the EU Member States and EU bodies in the fields of financial and economic crime and promote the systematic use of financial investigations. The exponential increase of financial and economic crime and the involvement of organised crime on a large scale – together with the number of requests for operational support from EU Member States – called for an adequate and coordinated European response.
JMLSG Guidance on anti-money laundering and counter-terrorist financing
On 1 June 2020, the Joint Money Laundering Steering Group (JMLSG) published the final amended versions of Part I, Part II and Part III of its anti-money laundering and counter-terrorist financing guidance. The guidance takes account of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), which came into force on 10 January 2020, and also comments received on the consultation text that was published in February 2020. The new chapter 22 for Part II, containing sectoral guidance relating to cryptoasset exchanges and custodian wallet providers, has not yet been finalised.