Recent regulatory developments of interest to all financial institutions. Updates include the latest FCA Market Watch and COVID-19 communications.
Contents
- PRA PS20/20: response to CP3/20 occasional paper
- COVID-19: FCA second survey of firms' financial resilience
- FCA Market Watch 65
- FCA CP20/18: quarterly consultation 29
- FCA annual report and accounts 2019/20
- Complaints Commissioner: new appointment announced
- FinTech: Innovate Finance inclusion charter
- EU AML and CTF framework: EBA response to European Commission call for advice
- COVID-19: FSB extends implementation timelines for minimum haircut standards for non-centrally cleared SFTs
- Environmental risk analysis by financial institutions: NGFS overview
PRA PS20/20: response to CP3/20 occasional paper
Following its March 2020 occasional consultation paper (CP3/20), the UK Prudential Regulation Authority (PRA) has published a policy statement, PS20/20, setting out its final rules and guidance on issues consulted on in the following chapters of CP3/20:
The policy changes relating to chapters 2, 3, 6 and 7 were implemented on 4 September 2020. The changes relating to chapter 4 will be implemented on 30 November 2020 and the changes to chapter 5 will be implemented on 25 October 2020.
COVID-19: FCA second survey of firms' financial resilience
On 10 September 2020, the UK Financial Conduct Authority (FCA) announced that it will be carrying out a further survey of firms to help it understand the change in their financial resilience as a result of COVID-19. The FCA issued the first phase of its COVID-19 impact survey in June 2020 to around 13,000 firms.
The FCA intends to email the survey to the relevant firms during the period of 16 September to 22 September 2020. Completion of the survey is mandatory.
The FCA will use the data it obtains from the survey, alongside existing data, to support its ongoing work. It expects to repeat the survey in the future. Firms with queries can contact the FCA's Contact Centre.
FCA Market Watch 65
The FCA has published issue 65 of Market Watch, its newsletter on market conduct and transaction reporting issues. In brief, in this edition, the FCA:
- reminds firms that its information requests should be kept strictly confidential and not be discussed with staff outside Compliance without its prior agreement;
- states that it has recently seen material relating to firms' clients that could be subject to legal professional privilege (LPP) being submitted as an attachment to a suspicious transaction report (STOR) or market observation. It reminds firms that they should not submit any material that could be subject to LPP alongside a STOR or market observation; and
- highlights some data quality issues in firms' transaction reports. It reminds firms to take note of its observations and review their transaction reports to check their completeness and accuracy, back-reporting if appropriate.
FCA CP20/18: quarterly consultation 29
The FCA has published its latest quarterly consultation paper, CP20/18, on the following proposed changes to the FCA Handbook:
- consequential changes to the Listing Rules (Chapter 8) to align with provisions for 'exempted documents' under the Prospectus Regulation (Chapter 2 of CP20/18);
- amendments to the open banking identification requirements (eIDAS certificate) in Article 34 of the UK regulatory technical standards for strong customer authentication and secure communication (UK-RTS). The amendments, following approval from HM Treasury, will apply immediately after IP completion date; and
- onshoring changes to the FCA Handbook for legislative provisions and/or relevant technical changes needed to the FCA rules as a result of onshoring over the transition period for EU withdrawal. In brief, these changes include:
- SMCR and APR Brexit-related amendments to SYSC, APER, FIT and SUP. In particular, the FCA consolidates all previous changes consulted on in this same instrument;
- amendments to COLL 5.2 and TP1, including a two year transitional period before EU authorised or recognised approved counterparties lose their status;
- technical amendments to PERG 2.7 (regulated credit), FEES, PROD (relating to pathway investments) and COBS 16.9 and 19.10; and
- amendments to Binding Technical Standards (BTS) relating to the Securitisation Regulation and the Capital Requirements Regulation to reflect recent EU changes.
The consultation closes on 5 October 2020 for Chapter 3 and 4 November 2020 for Chapters 2 and 4, except for the Fees (Credit Rating Agencies, Trade Repositories and Securitisation Repositories) Instrument 2020, which closes on 5 October 2020. The FCA expects to present the final Handbook and BTS instruments to its board for approval ahead of the end of the transition period.
FCA annual report and accounts 2019/20
The FCA has published its annual report and accounts 2019/20 (for the year ended 31 March 2020). Among other things, the report summarises the FCA's work over the relevant year.
Complaints Commissioner: new appointment announced
The FCA, the PRA and the Bank of England (BoE) have announced the appointment of Amerdeep Somal as Complaints Commissioner from 1 November 2020. Ms Somal will serve an initial term of three years. She replaces Antony Townsend who has held the role for the past six years.
FinTech: Innovate Finance inclusion charter
Innovate Finance has announced the launch of the Fintech For All Charter, an industry-led initiative to end harassment and promote diversity within the sector. The initiative is being led by InChorus and supported by Innovate Finance, the FinTech Alliance and Level39, with the FCA supporting the steering committee.
Initial signatories to the Charter include some of the leading names in the sector. Each signatory has committed to:
- ensuring at least one member of the senior executive team is accountable for diversity and inclusion;
- creating and promoting an effective harassment and bullying policy;
- developing employee awareness around what constitutes harassment and encouraging inclusive practices;
- providing a range of appropriate reporting channels so employees can speak up safely; and
- ensuring that action is taken as per the harassment and bullying policy.
Signatories will be provided with guidance, resources, networks and workshops to enable them to take the tangible steps towards becoming more inclusive and having a more diverse workplace culture.
EU AML and CTF framework: EBA response to European Commission call for advice
The European Banking Authority (EBA) has published its response to the European Commission's March 2020 call for advice on the future EU anti-money laundering (AML) and counter-terrorist financing (CTF) framework. The EBA's response comprises an opinion and a report, which is annexed to the opinion.
The report contains the EBA's detailed advice on how the EU legal framework should be strengthened to tackle vulnerabilities linked to divergent national approaches and gaps in the EU money laundering (ML) and terrorist financing (TF) defences.
Specifically, the EBA recommends that the Commission establish a single rulebook to:
- harmonise the EU legal framework in a directly applicable Regulation where evidence suggests that divergence of national rules and practices has had a significant, adverse impact on the prevention of the use of the EU’s financial system for ML and TF purposes. In this regard, the EBA identifies customer due diligence (CDD) and wider AML and CTF systems and controls requirements, in addition to rules governing key supervisory processes (including ML and TF risk assessments, cooperation and enforcement);
- strengthen aspects of the Fourth Money Laundering Directive (MLD4), where existing provisions are insufficiently robust or specific, for example, in relation to competent authorities' supervision powers in this area;
- review the list of obliged entities currently within the scope of the EU's AML and CTF regime; and
- clarify provisions in sectoral financial services legislation to ensure they are compatible with the EU’s AML and CTF objectives, for example, by ensuring that ML and TF risk is addressed consistently across all sectors.
The opinion and advice complement the EBA's response to the Commission's consultation on its AML/CFT action plan published in August 2020.
COVID-19: FSB extends implementation timelines for minimum haircut standards for non-centrally cleared SFTs
On 7 September 2020, the Financial Stability Board (FSB) published a press release announcing that it has extended the implementation timelines for minimum haircut standards for non-centrally cleared securities financing transactions (SFTs). By doing this, it aims to ease operational burdens on market participants and authorities so that they can focus on addressing the priorities resulting from the impact of COVID-19.
The implementation of recommendation 16 is extended until January 2022 (instead of January 2021), recommendations 14 and 18 are extended until January 2023 (instead of January 2022), recommendation 17 is extended until January 2024 (instead of January 2023) and recommendation 15 is extended until January 2025 (instead of January 2024).
The FSB has reflected the extended timelines in annexes 1, 3 and 4 of its report on transforming shadow banking into resilient market-based finance.
The extension of these timelines by one year follows the decision taken by the Basel Committee on Banking Supervision (BCBS), in March 2020, to defer the implementation of the Basel III framework by one year to January 2023. It reflects the fact that the FSB framework for numerical haircut floors for bank-to-non-bank transactions is expected to be implemented through the Basel III framework in many jurisdictions.
Environmental risk analysis by financial institutions: NGFS overview
The Network for Greening the Financial System (NGFS) has published an overview of environmental risk analysis (ERA) by financial institutions (FIs). In the overview, the NGFS provides an extensive list of examples of how environmental risks are transmitted to financial risks. It also reviews the tools and methodologies for ERA that are used by FIs (including banks, asset managers and insurance companies), third-party service providers, research institutions and non-governmental organisations (NGOs). These tools and methodologies cover wide-ranging environmental and climate scenario analyses and stress tests, as well as environmental, social and governance (ESG) analysis and natural capital risk assessment that can be used to analyse the potential impact on FIs from transition and physical risks associated with climate and other environmental factors.
The NGFS identifies several major barriers to wider adoptions of ERA by the financial services industry. These barriers include a lack of awareness of environmental risks and appreciation of their relevance, inadequate environmental and loss data, limited capacity to develop ERA methodologies, limited application to environment-related risks and emerging market economies and gaps in methodologies and data quality. To effectively address climate-related and environmental risks, the NGFS considers that collective efforts from regulators, international organisations, FIs, third party vendors and academic institutions are urgently needed to promote the wider adoption of ERA.
The overview concludes with six options for mainstreaming ERA within the financial sector:
- enhancing ERA awareness: central banks and financial supervisors should strive to enhance ERA awareness among financial institutions by conducting ERA themselves and clarifying expectations or standards for FIs to implement ERA;
- capacity building: industry associations, central banks and supervisors, international organisations, NGOs and academic institutions could organise seminars and training activities on ERA methodologies, with some results delivered as public goods to the financial industry;
- supporting demonstration projects: the NGFS, international organisations, central banks and supervisors should consider supporting demonstration ERA projects in key sectors such as banking, insurance and asset management, and for key regions exposed to substantial environmental and climate-related risks;
- disclosing risk exposures and ERA results: a robust and internationally consistent climate and environmental disclosure framework is needed. For those countries with more developed ERA tools and capacity, central banks and supervisors might encourage FIs to disclose their exposures to environmental and climate risks as well as their ERA results in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);
- developing Key Risk Indicators (KRI) and statistics: the NGFS and relevant international organisations could conduct research themselves while encouraging other market bodies and academic institutions to develop KRI that facilitates the identification, measurement and data comparability of environment- and climate-related risks; and
- developing a taxonomy of economic activities: NGFS calls on policymakers to bring together the relevant stakeholders and experts to develop and adopt green and brown taxonomies that enhance the transparency around the ESG characteristics of the economic activities.
Alongside the overview, the NGFS has published an occasional paper containing detailed case studies of ERA methodologies conducted by over 30 organisations. The paper aims to inform the financial community of ERA methodologies and encourage interested FIs to further develop or enhance them.
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