Recent regulatory developments of interest to all financial institutions. Includes updates on Brexit, COVID-19, SMCR and more.
Contents
- SMCR extension: SI extending implementation date made
- PRA and FCA Climate Financial Risk Forum: July 2020 meeting
- Innovations in payments: BoE speech
- BoE research agenda
- Brexit: PRA Dear CEO letter on temporary permissions regime
- Brexit: FCA temporary permissions regime
- COVID-19: FCA extends submission deadline for complaints data summary
- SMCR conduct rules breach reporting and fitness and propriety assessments: FCA guidance
- Annual financial crime reporting obligation: FCA CP20/17
- Dormant child trust funds: FCA modification by consent
- COVID-19: FCA update on digital sandbox pilot
- UK international regulatory cooperation strategy: BEIS call for evidence
- FOS ombudsman news issue 153
- JMLSG AML and CTF guidance updates: HM Treasury approval
- AI and data protection: ICO guidanc
- Disclosure Regulation: FMLC responds to ESAs consultation on RTS
- RegTech and FinTech: BIS speech
- Network for Greening the Financial System: new charter
SMCR extension: SI extending implementation date made
The Bank of England and Financial Services Act 2016 (Commencement No. 6 and Transitional Provisions) (Amendment) Regulations 2020 (SI 2020/929) have been made. These Regulations amend the Bank of England and Financial Services Act 2016 (Commencement No. 6 and Transitional Provisions) Regulations 2019 (SI 2019/1136) (the 2019 Regulations) by changing the implementation date from 9 December 2020 to 31 March 2021 for the following provisions relating to the extension of the senior managers and certification regime (SMCR) to solo-regulated firms and claims management companies:
- regulation 2(6) of the 2019 Regulations which brings into force the employee certification provisions (as defined in regulation 2(8) of the 2019 Regulations) in relation to solo-regulated firms other than benchmark firms;
- regulation 3(2) and (3) of the 2019 Regulations which contains a transitional provision in relation to claims management companies. Regulation 3(2) and (3) provides that the commencement of the employee certification provisions on 9 December 2020 under regulation 2(6) of the 2019 Regulations does not apply until the claims management company has had full permission from the Financial Conduct Authority (FCA) to carry on claims management activity for 12 months or has permission to carry on any other regulated activity. The period of 12 months does not apply if the firm receives full permission before 9 December 2019. Regulation 2(3)(a)(ii) of SI 2020/929 amends this period to 15 months and 22 days. This extended period for claims management companies will align with the revised commencement date of the employee certification provisions for solo-regulated firms provided for in regulation 2(2) of these Regulations. The effect is that no claims management company will be required to comply with the certification regime provisions in advance of any other solo-regulated firm; and
- consequential amendments to the date of 9 December 2020 in regulation 3(2) and (3) of the 2019 Regulations.
The FCA has welcomed the publication of the amending regulation which it requested in light of COVID-19. The FCA has consulted (in CP20/10) to change the same date in the FCA Handbook, the deadline for when firms need to have certified their staff. It states that it received predominantly positive feedback to its consultation which includes extending to the same deadline the following requirements:
- the date the Conduct Rules come into force, for staff who are not Senior Managers or Certification Staff; and
- the deadline for submission of information about Directory Persons to the Register.
The FCA states that it is now finalising its proposals and intends to publish final rules and responses to feedback in a Policy Statement in October 2020.
Separately, the FCA has added to its webpage for solo-regulated firms, information on good and bad practice relating to training staff on the conduct rules and carrying out fitness and propriety assessments.
PRA and FCA Climate Financial Risk Forum: July 2020 meeting
The Prudential Regulation Authority (PRA) has published a new webpage on the July 2020 meeting of the Climate Financial Risk Forum (CFRF), which it hosts jointly with the FCA.
The fourth meeting was held in July 2020. Among other things, the CFRF:
- discussed how to publicise and promote use of its June 2020 guide by the financial services industry; and
- agreed that, for the second year of the CFRF, the existing working groups (on risk management, scenario analysis, disclosure and innovation) will undertake thematic pieces of work on metrics, data and methodologies. They will also focus on building the guide by progressing and refining the recommendations, in particular, highlighting how firms can effectively implement approaches set out in the guide. Once their workplans are agreed at the next meeting in Q4, the working group memberships will be refreshed to ensure there is an appropriate variety of skills and experiences.
Innovations in payments: BoE speech
The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, on innovations in payments, including so-called digital currencies.
Mr Bailey notes that innovation is a good thing, particularly when supported by clear standards and expectations. The BoE’s Financial Policy Committee (FPC) has set out principles to respond to the significant changes in the payments landscape. Payments regulation should reflect the financial stability risk, rather than the legal or technological form, of payment activities. Firms that are systemically important should be subject to standards of operational and financial resilience that reflect the risks they pose, with sufficient data available to monitor emerging risks. While these may sound like common sense points, innovation is increasingly challenging regulators' ability to ensure they are met.
Mr Bailey comments on the declining use of cash payments, increasingly so during lockdown. He says that the increased use of non-cash payments places even greater importance on payments systems, which underlies the BoE's work to upgrade real-time gross settlement (RTGS).
Mr Bailey looks in turn at crypto-assets, e-money and, in greater detail, so-called stablecoins. He notes that, for stablecoins to be widely used, they must comply with equivalent standards to those that govern other forms of payment. Mr Bailey refers to the FPC August 2020 Financial Stability Report, which advised that stablecoins used in systemic payment chains should meet the standards equivalent to those expected of commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat money, noting that not all stablecoin proposals appear to meet this expectation.
In a UK context, Mr Bailey warns that for a sterling retail stablecoin to operate at scale in the UK, the BoE will strongly consider the need for an entity to be incorporated in the UK. This is similar to the requirement for subsidiarisation of banks if they hold UK retail transactional customer deposits above a de minimis level. However, he adds that since a global stablecoin is a cross-border phenomenon it can be operated in one jurisdiction, denominated in another's currency and used by consumers in a third. The regulatory response must therefore match this by being grounded in internationally agreed standards.
Mr Bailey goes on to consider whether a better outcome would be for central banks themselves to harness much of the technological innovation and directly digitise cash by creating central bank digital currencies.
BoE research agenda
The BoE has launched its new agenda for research, which sets out the key areas for new research over the coming years and a set of priority topics for 2021.
The agenda is set out in five areas, with priority topics for 2021 in each. The areas relate to:
- the monetary toolkit;
- the open economy;
- the prudential framework;
- the future of finance; and
- the transformed world.
The agenda builds on the BoE's original 2015 "one bank research agenda".
Brexit: PRA Dear CEO letter on temporary permissions regime
The PRA has published a Dear CEO letter reminding firms to be operationally ready for the temporary permissions regime (TPR) at the end of the Brexit transition period, which is due to end at 11 pm on 31 December 2020.
Firms that have submitted a valid notification or submitted an application for authorisation under Part 4A of the Financial Services and Markets Act 2000 (and not subsequently withdrawn it) will automatically enter the TPR. During the TPR, a firm will have a deemed Part 4A permission to carry on its existing activities for up to a maximum of three years from the end of the transition period. If a firm is passporting and already has a top-up permission, it will obtain a deemed variation of that permission.
The PRA stresses that it is important that firms are operationally prepared to enter the TPR and able to meet the regulatory requirements that will apply to them once in the TPR. To help firms, the PRA has updated the information on EU withdrawal on its website. The update summarises its approach to the TPR and highlights the key requirements for UK branches of firms. More information (including the full requirements) is also set out on a new PRA webpage on the TPR.
The PRA will continue communicating with firms as appropriate to understand the progress of their preparations. Firms should engage with the PRA on a pro-active basis in the event of problems. Firms should contact the PRA (PRA.FirmEnquiries@bankofengland.co.uk or call 020 3461 7000) if they do not have a named PRA supervisor.
Brexit: FCA temporary permissions regime
The FCA has updated its website on the TPR to make its material easier to navigate. The FCA also reminds firms that the window for firms and fund managers to notify it that they want to use the TPR is currently closed, but it will re-open the notification window on 30 September 2020. This will allow firms and fund managers that have not yet notified it to do so before the end of the transition period. There will also be an opportunity for fund managers to update their previously submitted notifications, if necessary. The FCA will communicate further on this in September 2020.
COVID-19: FCA extends submission deadline for complaints data summary
On 28 August 2020, the FCA updated its webpage on changes to regulatory reporting during the COVID-19 pandemic. The FCA states that, due to the extensions it has allowed to complaints data returns, it will allow flexibility in relation to the 31 August 2020 deadline for the publication of the complaints data summary required under the FCA Handbook (DISP 1.10A.1R).
Firms may apply a two-month extension to this deadline, meaning summary data for complaints reports submitted to the FCA, covering reporting periods ending between 1 January and 30 June 2020, must be published by firms no later than 31 October 2020.
SMCR conduct rules breach reporting and fitness and propriety assessments: FCA guidance
The FCA has published a new webpage on reporting breaches of the conduct rules for solo-regulated firms under the SMCR. It has also provided information to firms on good and bad practice relating to training staff on the conduct rules and carrying out fitness and propriety assessments.
Under the SMCR, FCA solo-regulated firms must annually report to the FCA whether disciplinary action has been taken against individuals who are not senior managers for breaches of the conduct rules. The report is called REP008 and it should be completed and submitted using Gabriel. The FCA explains when to submit REP008 and what and who to include in the report. It also sets out information for sole traders and information relating to appeals against disciplinary action and the personal data provided in REP008.
The FCA has also updated its webpage for solo-regulated firms to provide information on good and bad practice (referred to as positive and negative indicators) relating to training staff on the conduct rules and carrying out fitness and propriety assessments.
Annual financial crime reporting obligation: FCA CP20/17
The FCA has published a consultation paper, CP20/17, on extending its annual financial crime reporting obligation (REP-CRIM) in the FCA Handbook (SUP 16.23) to include firms carrying on regulated activities that potentially pose a higher money laundering risk.
The FCA is also consulting on removing two activities from REP-CRIM, which it considers are outside of the scope of the MLRs. These activities are home finance mediation and making arrangements with a view to transactions in investments.
The consultation closes on 23 November 2020. The FCA intends to issue the final rules and publish a policy statement in Q1 2021.
The FCA reminds all firms, irrespective of whether they are required to provide REP-CRIM information, to continue to assess their systems and controls, including through assessments against relevant financial crime publications, to identify and manage money laundering risks. Firms should also be able to evidence the steps they have taken to manage that risk.
Dormant child trust funds: FCA modification by consent
The FCA has published a direction relating to a modification by consent of rule 8.1.1R in the Conduct of Business sourcebook (COBS). The modification will enable Child Trust Fund (CTF) providers to move matured CTFs to a protected account ISA or by bulk transfer to a new provider, when reasonable steps have been carried out to contact the client, but the client is deemed "gone away" or uncontactable.
HMRC legislation requires CTF providers to move any dormant CTFs to protected account ISAs, but the FCA's requirements under COBS 8.1.1R, COBS 8.1.2R and COBS 8.1.3R may make this difficult unmodified.
The modification is valid for five years from the start date of the direction unless subsequently withdrawn.
Firms wishing to take advantage of the modification by consent should email centralwaiversteam@fca.org.uk. The FCA will then write to confirm that the modification has been granted and publish each modification direction it grants on its website.
COVID-19: FCA update on digital sandbox pilot
On 2 September 2020, the FCA published an update on its pilot of a digital sandbox to support innovative firms to test and develop proofs of concept in a digital testing environment around three use cases relating to COVID-19:
- detecting and preventing fraud and scams;
- supporting the financial resilience of vulnerable consumers; and
- improving access to finance for small and medium-sized enterprises.
The FCA reports that its DataSprint event held in July and August 2020 brought together 120 participants from across regulated firms, start-ups, academia, professional services, data scientists and subject matter experts. They collaborated on developing synthetic financial datasets to be used in the FCA's forthcoming digital sandbox pilot.
The FCA states that over 50 participants have continued working since the DataSprint, refining and expanding the data assets produced. In the coming weeks, once this work is completed, it will open applications for the digital sandbox.
UK international regulatory cooperation strategy: BEIS call for evidence
The Department for Business, Energy & Industrial Strategy (BEIS) has launched a call for evidence on the UK's international regulatory cooperation strategy.
BEIS seeks input to help identify priorities for regulatory cooperation and how the government can best support the international engagement activities of UK bodies.
The call for evidence closes on 25 November 2020.
FOS ombudsman news issue 153
The Financial Ombudsman Service (FOS) has published issue 153 of Ombudsman News, which gives its quarterly complaints data, an insight summary on complaints resulting from COVID-19 and its impact on consumers and SMEs, and information for financial businesses about the FOS's approach to complaints caused or affected by COVID-19.
JMLSG AML and CTF guidance updates: HM Treasury approval
The Joint Money Laundering Steering Group (JMLSG) has confirmed that it has received HM Treasury ministerial approval for the updates to its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance that it published in June and July 2020.
AI and data protection: ICO guidance
The UK Information Commissioner's Office (ICO) has published guidance on artificial intelligence (AI) and data protection. The guidance is intended to provide organisations that are either using or developing AI technologies, with practical recommendations on the steps they should take to comply with data protection law.
Read more in our briefing: UK ICO issues new guidance on AI and data protection.
Disclosure Regulation: FMLC responds to ESAs consultation on RTS
The Financial Markets Law Committee (FMLC) has published a response to the European Supervisory Authorities' (ESAs) April 2020 joint consultation paper on proposed regulatory technical standards (RTS) under the Sustainable Finance Disclosure Regulation (Disclosure Regulation).
The FMLC draws attention to the divergence in relation to international standards on sustainability-related disclosure requirements, which creates uncertainty in relation to reporting obligations vis-à-vis cross-border investment activities. It notes that there is also some divergence across EU law in relation to disclosure obligations set out under the Disclosure Regulation, the Non-Financial Reporting Directive and the Taxonomy Regulation.
The FMLC has therefore urged the ESAs to ensure that the RTS are aligned closely to the objectives set out in the Disclosure Regulation. In the future, when the EU legislation in this area is reviewed, the FMLC suggests it would be beneficial for the objectives and requirements imposed on financial markets participants by each piece of legislation to be aligned with the others.
RegTech and FinTech: BIS speech
The Bank for International Settlements (BIS) has published a speech by Benoît Cœuré, Head of the BIS Innovation Hub, emphasising that RegTech and FinTech are high on the BIS' agenda and discussing the potential benefits and challenges they pose for regulatory authorities and financial institutions.
Network for Greening the Financial System: new charter
The Network for Greening the Financial System (NGFS) has published its new charter and announced the creation of two new workstreams. The NGFS is a group of central banks and supervisors, which on a voluntary basis are willing to share best practices and contribute to the development of environment and climate risk management in the financial sector, and to mobilise mainstream finance to support the transition toward a sustainable economy.
The NGFS has identified lack of data as a crucial element for effective climate-related and environmental risk analysis. The NGFS has therefore set up a new workstream to identify what data is missing and determine whether it can be obtained, and a second workstream to identify NGFS research topics and to ensure smooth co-ordination of research efforts.
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