BREXIT
Please see our bulletin entitled "The UK regulation of EEA firms post-Brexit - contractual continuity and the financial services contracts regime."
Please see the product sections for updates on the various draft SIs published this week in anticipation of a hard Brexit.
Draft Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 laid before Parliament
On 17 January, a draft version of the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, were laid before Parliament. An explanatory memorandum has also been published. The Regulations provide the government with a temporary power, for up to twelve months after exit day, to make equivalence directions and exemption directions for EU and EEA member states. This power is intended to be used only in cases where it is necessary to make equivalence decisions for EU and EEA member states quickly and efficiently to support UK market activity and the continuity of cross-border business. After this power expires, and for any countries other than EU and EEA member states, equivalence decisions made by HMT must be made by regulations subject to the negative procedure. Among other things, the draft Regulations: (i) in Schedule 1, set out the EU legislation under which HMT may make equivalence decisions for EEA states by direction. This includes the BMR, the CRR, the Credit Ratings Agencies Regulation, EMIR, MiFIR, the Prospectus Directive, the Transparency Directive and the Solvency II Directive; (ii) in Schedule 2, make amendments to some existing equivalence decisions contained in EU tertiary legislation that will become retained EU law at exit; and (iii) revoke the regulations establishing the ESAs and the ESRB. The ESAs' function of providing technical advice to the EC will be transferred to the BoE, the FCA and the PRA. Under the draft Regulations, regulations 7 (Amendments to EU tertiary legislation) and 8 (Revocation of Regulations establishing the ESFS) and Schedule 2 (Commission Tertiary Legislation) will come into force on exit day. The other provisions will come into force on the day after the day on which the Regulations are made.
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Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 laid before Parliament
On 15 January, a draft version of the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 (FSCR Regulations) were laid before Parliament. An explanatory memorandum has also been published. The purpose of the Regulations is to establish a run-off regime for EEA financial institutions that currently operate in the UK on the basis of EU legislation and that do not enter into the various UK temporary regimes available to these firms after Brexit. HMT published a draft version of the Regulations in December 2018. Later in December 2018, it published a draft version of another set of Regulations, the FSCR No 2 Regulations, relating to the run-off regime for e-money and payments firms. The draft of the Regulations that has been laid before Parliament now incorporates (in Part 4) the FSCR No 2 Regulations. The Regulations will come into force on the day after the day on which they are made.
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Draft Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 published by HMT
On 14 January, HMT published a draft version of the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019. HMT has published the draft version of the Regulations ahead of formally laying them before Parliament. The purpose of the Regulations is to ensure that authorised financial services firms in Gibraltar are able to provide services and establish branches in the UK after exit day on current terms. The Regulations will amend: (i) section 409 of FSMA and the Gibraltar Order to provide for the continuation of the existing market access framework between the UK and Gibraltar. These amendments also delete provisions relating to market access rights for EEA financial services firms to and between the UK and Gibraltarian markets from exit day; and (ii) the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 to provide that financial services firms incorporated and headquartered in Gibraltar will not be able to join the TPR or the FSCR. The Regulations will come into force on the day after the day on which they are made, with the exception of the amendments to FSMA and the Gibraltar Order, set out in Parts 2 and 3 of the Regulations, which will come into force on exit day. The amendments to FSMA and the Gibraltar Order will cease to have effect at the end of 31 December 2020, although HMT will be given the power to make regulations keeping them in force for successive periods of 12 months. HMT published an explanatory note relating to the Regulations in December 2018.
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CONSUMER/RETAIL
Please refer to the Other Developments section for the FCA's regulation round-up.
FCA statement on vulnerability and access-focused initiatives in 2019
On 15 January, the House of Commons Treasury Committee published written evidence submitted by the FCA to its inquiry on consumers' access to financial services. In the evidence, the FCA sets out a summary of its past and ongoing work on issues concerning financial access for consumers, focusing on vulnerable people. In the Annex to the evidence, the FCA provides information on work relating to vulnerability and access that it intends to undertake in 2019, including: (i) the outcome of multi-firm work on policies towards vulnerable consumers, to be published in March; (ii) the outcome of the FCA's thematic review of debt management, to be published in March; (iii) a consultation paper regarding guidance on vulnerability, to be published in April. This guidance is intended to clarify the FCA's expectations of firms and ensure good outcomes for vulnerable consumers; and (iv) planned thematic work on the treatment of vulnerable consumers within non-bank lenders, to begin in April.
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EC consults on CCD evaluation
On 14 January, the EC launched a consultation to evaluate the CCD. Since the CCD was implemented in 2008, the consumer credit market has significantly evolved and several other pieces of EU legislation have been adopted in different fields, which impact on the provision of consumer credit. This includes the MCD and PSD2. The EC is therefore launching a second evaluation to assess whether the CCD is still fit for purpose given all the market developments that have occurred since 2008. The consultation closes on 8 April 2019. The EC published an evaluation roadmap on the CCD in July 2018.
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FINANCIAL CRIME
ESAs announce multilateral agreement on exchange of information between ECB and AML/CFT competent authorities
On 15 January, the ESAs published a multilateral agreement on the practical modalities for the exchange of information between the ECB and all competent authorities responsible for supervising compliance of credit and financial institutions with AML and CFT obligations under MLD4. The agreement aims to create a clear framework for exchanging information between the ECB and competent authorities, and potentially enhance the effectiveness of their supervisory practices. An accompanying press release explains that MLD4 was amended by MLD5 in July 2018. The amendments included a new Article 57a(2), which requires the ESAs to support the conclusion of such an agreement. The agreement contains provisions relating to matters including: (i) the type of information and underlying process for exchanging it; (ii) confidentiality and data protection; (iii) situations where the request for information can be refused; and (iv) the settlement of disputes procedures. The agreement was approved by the ESAs on 10 January. It has now been sent to the ECB and competent authorities for signing.
Multilateral agreement
Press Release
FMSB statement on suspicious transaction and order reporting
On 14 January, the FMSB published a statement of good practice (SGP) on the identification of reportable transactions and orders, and the associated processing of STORs. The SGP is relevant to all front office and control or support function personnel who are active participants in the FICC markets, and to those who are engaged in the monitoring and surveillance of such activities. It includes ten statements relating to matters including organisational structure, surveillance capabilities, training and record-keeping. Annex 1 to the SGP provides an example of a relevant record-keeping log for suspicions and notifications. The FMSB expects each firm to consider their own practices in the light of the SGP and consider the extent to which any changes might be appropriate. In considering the SGP, firms should interpret it in accordance with their own circumstances and develop arrangements, systems and procedures that are appropriate and proportionate in relation to the scale, size and nature of their business activity.
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NCA publishes Suspicious Activity Reports Annual Report 2018
On 14 January, the NCA published its SARs Annual Report for 2018. Key statistics from the report include: (i) 463,938 SARs were received between April 2017 and March 2018 (9.6% increase on 2016-17 (423,304)); (ii) 22,619 defence against money laundering (DAML) requests were made (20% increase on the previous year's 18,849); (iii) £51,907,067 was denied to criminals as a result of DAML requests (refused and granted); and (iv) $500 million was denied to criminals as a result of a DAML refusal relating to funds transferred to fraudsters from overseas. Of particular interest is the summary of SARs reporting by sector. While there had been a large increase in reports by financial institutions and casinos and a rise in other sectors particularly at risk of money laundering, there was a significant decrease in the number of reports from lawyers. These had fallen by 11% despite law firms being seen as an essential tool for those seeking to launder dirty money in the UK. Trust company or company service providers saw a 26% drop in reports which is a concern as these companies can be used to form and maintain UK companies used by criminals to launder money. Although the financial sector continues to file the most SARs, there is a concern of overreporting by such institutions by filing "defensive SARs" to seek to limit their own liability in the event that transactions they process consist of illegal activity.
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UK government launches Economic Crime Strategic Board
On 14 January, HMT and the Home Office announced the launch and first meeting of the Economic Crime Strategic Board. The board is a new government taskforce that will work with senior figures from the UK financial sector to tackle economic crime. The board includes chief executives from Barclays, Lloyds and Santander as well as senior representatives from UK Finance, the NCA, the SRA, the AAG and the NAEA. The board, which will meet twice a year, will set priorities, direct resources and scrutinise performance against the economic crime threat, as set out in the Serious and Organised Crime (SOC) Strategy, which was last published in November 2018. In the press release, the Home Office commits £3.5 million in 2019/20 to support work to reform the SARs regime in line with commitments made in the SOC Strategy. Working jointly with the private sector, law enforcement and regulators, the Home Office is designing a new system for SARs that is intended to be more efficient and effective. The government announced its intention to establish the board in December 2017 in its UK Anti-Corruption Strategy 2017-22.
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JMLSG revisions to AML and CTF guidance relating to anonymous safe-deposit boxes
On 10 January, the Joint Money Laundering Steering Group published amendments to its AML and CTF guidance that relate to the use of anonymous safe-deposit boxes. The revisions relate to the entry into force on 10 January of amendments to regulation 29 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 concerning restrictions on the use of anonymous safe-deposit boxes. These amendments were made by the Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018.
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INSURANCE
EIOPA call for evidence on integration of sustainability risks in Solvency II
On 17 January, EIOPA published a call for evidence on the integration of sustainability risks and factors in the prudential assessment of assets and liabilities for insurers and (re)insurers under the Solvency II Directive. The call of evidence relates to the EC's call for advice from EIOPA and ESMA in July 2018, following which EIOPA launched a survey to help it build up a suitable evidence base on the sustainable finance legislative proposals. Through the call of evidence, EIOPA expects to collect market data to analyse how sustainability risks affect (re)insurers investments, with particular focus on climate change, as well as data on market practices on insurance underwriting. The EC has asked EIOPA to assess whether Solvency II presents any inherent incentives or disincentives to sustainable investment, including but not limited to investments in unrated bonds and loans, unlisted equity and real estate. National competent authorities will collect information from individual undertakings within their jurisdiction to support EIOPA's analysis. The deadline for comments is 8 March. EIOPA plans to prepare a draft opinion for consultation during the second half of 2019 for submission to the EC in the third quarter of 2019.
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The Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 15 January, the Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2019 (the Regulations) were laid before Parliament. An explanatory memorandum has also been published. The majority of the Regulations come into force on exit day. The Regulations amend: (i) the Credit Institutions (Reorganisation and Winding up) Regulations 2004; (ii) the Insurers (Reorganisation and Winding Up) Regulations 2004; and (iii) the Insurers (Reorganisation and Winding Up) (Lloyd’s) Regulations 2005. The Regulations address the fact that, unless otherwise agreed as part of UK withdrawal from the EU, the remaining EEA member states will no longer automatically recognise the primacy of UK insolvency proceedings for credit institutions, insurance undertakings, investment firms and group companies whose home state is in the UK (UK institutions). Accordingly, the Regulations remove the prohibition on the UK courts making a winding-up or administration order against insolvent institutions whose home state is elsewhere in the EEA (EEA institutions). In the same vein, the Regulations: (i) remove provisions for the UK automatically to recognise EEA insolvency proceedings for EEA institutions; (ii) remove various provisions that apply a relevant EEA member state's law in UK insolvency proceedings; (iii) remove office holder requirements to notify EEA regulators of UK insolvency proceedings, publish arrangements and orders in the OJ and accept claims not submitted in English; and (iv) remove a requirement to recognise EEA proceedings opened before exit day if those proceedings have an adverse effect on UK financial stability, materially prejudice UK creditors or are unlawful under section 6 of the Human Rights Act 1998.
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MARKETS AND MARKETS INFRASTRUCTURE
The Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019 laid before Parliament
On 17 January, the Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019 were laid before Parliament. An explanatory memorandum has also been published. The purpose of the Regulations is to ensure that the regulatory regime for RIEs, clearing houses, CSDs and market operators continues to be operational in UK domestic law after exit day in a no-deal scenario. The Regulations amend: (i) FSMA; and (ii) Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositaries) Regulations 2001. The majority of the Regulations come into force on exit day.
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Draft Uncertificated Securities (Amendment and EU Exit) Regulations 2019 laid before Parliament
On 17 January, the Uncertificated Securities (Amendment and EU Exit) Regulations 2019 were laid before Parliament. An explanatory memorandum has also been published. The purpose of the Regulations is to make amendments to the Uncertificated Securities Regulations 2001 and certain other legislation necessary: (i) to reflect the implementation of the CSDR, including the fact that certain provisions of the Uncertificated Securities Regulations overlap with requirements that are now the subject of the CSDR regime; and (ii) to ensure that the UK retains an operative regulatory framework for uncertificated securities following the withdrawal of the UK from the EU. Those regulations which relate to the CSDR regime come into force on the day after the day the Regulations are made. Those regulations which relate to Brexit come into force on exit day.
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House of Commons Treasury Committee Oral evidence: The work of the FCA
On 15 January, the House of Commons Treasury Committee published oral evidence from its meeting on the work of the FCA. Present at the meeting was Nicky Morgan, Chair of the House of Commons Treasury Committee, Andrew Bailey, Chief Executive of the FCA, and Charles Randell, Chairman of the FCA. Among other things, topics discussed include how well firms have adapted to the MiFID II requirements. The FCA flags that following their work on costs and charges, they will be carrying out work on product governance and research unbundling under MiFID II. They also confirm that there are currently no MiFID II enforcement actions in train, as their focus has been on supervisory action. If they find things which don’t meet the necessary tests, they may take enforcement action.
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EC call for advice from EBA on benchmarking of national loan enforcement frameworks
On 15 January, the EBA published a letter (dated 7 January) from Olivier Guersent, EC Director General of FISMA, to Adam Farkas, EBA Executive Director, together with a call for advice for the purposes of gathering data for a benchmarking of national loan enforcement frameworks from a bank creditor perspective. The EC has requested the EBA to collect data on the recovery rate and speed which member states experience when trying to enforce NPLs in EU member states. The EC will use this data in its ongoing work on the benchmarking of national loan enforcement frameworks (including insolvency frameworks) with the aim of understanding the efficiency of enforcement procedures in terms of recovery rates and times to recovery. The EC asks the EBA to provide country-by-country estimates, differentiated by type of loan and by type of enforcement, based on loan-by-loan data covering banks' NPLs where enforcement has been completed in a specified period. The call for advice specifies the type of data that the EC expects the EBA to collect relating to asset class breakdown and types of loans, types of enforcement mechanisms, time to recovery and the recovery rate. The EC asks the EBA to deliver to it a preliminary analysis of the data gathered for a representative sample by 30 June and its final analysis by 31 December. The EC announced in its October 2017 communication on completing the banking union that it would undertake a benchmarking exercise of loan enforcement regimes.
Letter
Call for advice
Government and FCA respond to Treasury Committee's SME finance market report
On 11 January, the House of Commons Treasury Select Committee published the responses of the government and FCA to its report on the state of the SME finance market. The responses address points including whether SME lending should be regulated, the extension of the jurisdiction of the FOS and the potential impact of the SMCR on the industry. The Committee published its report in October 2018.
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ECON report on Regulation amending BMR on low carbon benchmarks and positive carbon impact benchmarks
On 11 January, ECON published its report (dated 20 December 2018) on the EC's proposed Regulation amending the BMR on low carbon benchmarks and positive carbon impact benchmarks. ECON voted to adopt the report on 13 December 2018. The next step will be for the EP to consider the report in plenary. The EC published its legislative proposal for the Regulation in May 2018.
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PRUDENTIAL REGULATION
EBA final guidelines on exposures associated with high risk under CRR
On 17 January, the EBA published its final report on guidelines on the specification of types of exposures to be associated with high risk under the CRR. The aim of the guidelines is to: (i) clarify the notion of investments in venture capital firms and private equity as referred to in Article 128(2) CRR. The EBA points out that the clarification is an own initiative contribution of the EBA and is not within the mandate for the guidelines that the CRR provides; and (ii) specify which other types of exposures should be considered as high risk and under which circumstances by way of application of Article 128(3) CRR. This part of the guidelines, which contains the actual policy related to the mandate as laid down in Article 128(3), has been drafted with the intention that institutions should specify those individual exposures as items of particularly high risk that carry a high risk of loss due to being structurally different from common exposures of the same original asset class. The EBA notes that the revised standardised approach for credit risk agreed by the BCBS as part of its Basel III finalisation in December 2017 no longer includes provisions on "higher risk exposures" as the Basel II standard currently does. The revised standards are due to apply from 2022 onwards. The EBA considers that, in the meantime, it is beneficial to issue these guidelines to ensure detection of high risk within banks before the transposition of the revised standards into the EU legislative framework. The guidelines will also help to ensure a harmonised and consistent application of Article 128(2) and (3) of the CRR until any revision of the provisions has to be applied by institutions under Basel III. The guidelines will apply from 1 July.
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BCBS announces principles for sound liquidity risk management and supervision remain fit for purpose
On 17 January, the BCBS published a press release announcing that its 2008 Principles for Sound Liquidity Risk Management and Supervision remain fit for purpose. This follows a review by the BCBS of the Principles, which it initiated in 2017. The review, which also covered liquidity risk-related developments in financial markets since 2008, concluded that: (i) all BCBS member jurisdictions have implemented the Principles through regulation, published guidance or supervisory practice; (ii) the global liquidity standards introduced under Basel III (the LCR and NSFR) are important complements to the Principles. As such, banks and supervisors should continue to heed the broader liquidity risk management considerations set out in the Principles; and (iii) significant developments in financial markets since the Principles were published in 2008 are likely to have an important bearing on a bank's liquidity risk management considerations. These developments include the increasing digitisation of finance and payment systems and the broader growth of financial technology, a greater use of central clearing of derivatives and margining, and the increasing risk and magnitude of cyberattacks. The BCBS states that it expects market participants to remain vigilant in their liquidity risk management. It explains that, consistent with the Principles, banks' risk management and supervisors' practices should be consistently and rigorously applied through the economic cycle, regardless of market liquidity conditions.
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PRA Dear CFO letter on disclosures about IFRS 9 expected credit losses
On 16 January, the PRA published a Dear CFO letter (dated 15 January) on market disclosure about IFRS 9 ECL. The PRA refers to a report on recommendations on a comprehensive set of IFRS 9 ECL disclosures prepared by the Taskforce on Disclosures about Expected Credit. The PRA also notes the commitment that the banking groups to whom its letter is addressed have given in the BBA Code for Financial Reporting Disclosure to assess, and reflect to the extent relevant to their business, good practice recommendations such as those in the report. The PRA expects each firm to be looking to adopt the report's recommendations in full. It encourages firms to make as much progress as possible in adopting the recommendations in their next annual report, and will from time to time be asking for an update on their adoption plans, and for a progress report against those plans. The PRA comments specifically on the following two matters mentioned in the report as areas on which the Taskforce might develop more detailed recommendations: (i) measurement uncertainty and sensitivity - the PRA refers to a Dear CFO letter sent to firms in January 2018 explaining the importance it attaches to good disclosures about measurement uncertainty and sensitivity. It expects all the firms to be providing useful quantitative measurement uncertainty and sensitivity information from their 2018 (or 2018/2019) annual reports and accounts; and (ii) the use of Monte Carlo approaches - if firms have decided to use Monte Carlo approaches, the PRA presumes that they will have concluded that they would be able to provide, from their 2018 (or 2018/2019) annual reports, disclosures explaining that use and its implications in a comprehensive and appropriately focused way and at an appropriate level of granularity.
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EP to consider proposed Regulation amending CRR on statutory prudential backstop for NPLs at 11 to 14 March plenary
On 16 January, the EP updated its procedure file on the proposed Regulation on the minimum loss coverage for NPLs. The procedure file indicates that the EP will consider the proposed Regulation during its plenary session to be held from 11 to 14 March. Political agreement on the proposed Regulation was reached in December 2018.
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House of Commons European Scrutiny Committee considers progress of banking package, revised EU prudential framework for investment firms and proposed Regulation on sustainable finance disclosures
On 15 January, the House of Commons European Scrutiny Committee published its fiftieth report of the 2017-19 parliamentary session. The report covers matters including; (i) the banking package - this consists of the proposed CRR II, the proposed CRD V, the proposed BRRD II and the proposed SRM II Regulation; (ii) the proposed IFR and IFD; and (iii) the Proposed Disclosures Regulation. The Committee notes that, despite Brexit, the above proposals are likely to have a direct impact on firms in the UK. This could be by virtue of the continued applicability of EU law during a transition period, the conditions attached to any future equivalence agreement, or the potential domestic implementation of certain EU legislation once the UK has left the EU under the Financial Services (Implementation of Legislation) Bill (the Bill). In light of this, the Committee retains the banking package and IFR and IFD proposals under scrutiny. In addition, with regard to the banking package, issues remain around the leverage ratio and the thresholds determining the application of pay restrictions in banks that need to be resolved in the Council's discussions with the EP. As the legislative process for the Disclosures Regulation is likely to be finalised in the coming months, the Committee clears this from scrutiny. Among other things, in the report, the Committee notes that the Bill does not include this proposal and suggests that this means the government's support for the proposal is lukewarm. It also states that the proposed Regulation amending the BMR on low carbon benchmarks and positive carbon impact benchmarks remains under scrutiny, and the Committee will publish a report on this in due course.
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BCBS work programme for 2019-20
On 14 January, the BCBS published its work programme for 2019-20.The work programme is structured around four themes: (i) policy development - the BCBS intends to finalise initiatives relating to expected credit loss accounting changes, the leverage ratio treatment of client cleared derivatives and measures to curtail window-dressing behaviour, measures on operational resilience and measures relating to cryptoassets. It is considering whether to initiate work on transitional and steady state prudential and supervisory risks arising from reforms to benchmark rates. It will also consider the ongoing work of the Networking for Greening the Financial System, which is expected to publish a progress report in April, and consider whether additional work is needed on the role of proportionality in the Basel framework; (ii) evaluation and monitoring - the BCBS intends to devote more time to evaluating and monitoring the impact of its reforms and assessing emerging risks. It will continue its evaluation work programme, which is intended to assess the effectiveness of individual standards, the interactions and coherence among standards and the broader macro-economic impact of the BCBS post-crisis reforms. The BCBS will also be involved in evaluations co-ordinated by the FSB. In addition, it will continue to monitor and assess emerging risks, including banks' behavioural responses; (iii) supervision - the BCBS intends to review its existing documents on operational resilience, with a view to publishing an updated set of guidance or standards. It also intends to develop guidelines to enhance co-operation among prudential regulatory, anti-money laundering and investigative authorities. It will continue to monitor the implementation of its standard on IRRBB, and its principles for effective risk data aggregation and risk reporting. It will undertake a survey on the adoption of the principles for effective supervisory colleges; and (iv) implementation - the BCBS will continue to monitor the implementation of its post-crisis reforms. It will continue its regulatory consistency assessment programme in 2019, with a focus on the implementation of the NSFR and large exposure standards. It expects to complete the assessments for most member jurisdictions by the end of 2020.
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BCBS finalises revised minimum capital requirements for market risk
On 14 January, the BCBS published its final standard on the minimum capital requirements for market risk (BCBS457). The BCBS has also published an explanatory note on the standard and an alternative version of BCBS457, incorporating previously published FAQs. These standards will come into effect on 1 January 2022. They will replace the current minimum capital requirements for market risk set out in Basel II and in the Basel 2.5 reforms agreed in July 2009. In the explanatory note, the BCBS highlights revisions made in BCBS457 relating to: (i) scope of application - clarifications relating to the regulatory book that instruments should be assigned to, the treatment of investments in funds and the treatment of structural foreign currency positions; (ii) internal models approach - targeted amendments relating to the revised profits and losses attribution test metric and to the non-modellable risk factor conditions and capitalisation approach; (iii) standardised approach - changes to the sensitivities-based method (SbM), which is the core component of the revised standardised approach, relating to several of the regulatory risk classes used in the calculation of capital requirements under the SbM; and (iv) simplified alternative to the standardised approach - retention of the current Basel 2.5 standardised approach as a simplified alternative to the revised standardised approach for banks that have relatively small or non-complex trading portfolios. The standard is set out in a new modular format that reflects the style of a consolidated framework currently under preparation by the BCBS that is intended to improve the accessibility of the Basel standards. The BCBS published a revised standard on minimum capital requirements for market risk (BCBS352) in January 2016.
Final Standard
Explanatory Note
RECOVERY AND RESOLUTION
Please see the Prudential Regulation section for an update on the House of Commons European Scrutiny Committee's progress report on banking package.
SRB issues 2018 MREL policy for second wave of resolution plans
On 16 January, the SRB published a document setting out its policy on MREL for 2018 for banks in the second wave of resolution planning. The 2018 SRB policy follows a number of the elements defined in the 2017 policy, however some new elements have been added. These include a refined approach for eligible instruments for consolidated MREL targets, increased binding subordination requirements and the introduction of binding MREL targets at individual level. The SRB comments that although the policy is based on the current legislative framework, it is raising the bar in relation to banks' resolvability and MREL targets to prepare the ground for future regulatory changes in the context of the "banking package". The SRB will therefore review its policy for MREL and introduce further updates in 2019 on the basis that the banking package will be published in the OJ.
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SUSTAINABLE FINANCE
Please see the Insurance section for EIOPA's call for evidence on integration of sustainability risks in Solvency II.
Please see the Prudential Regulation section for the House of Commons European Scrutiny Committee’s proposed Regulation on sustainable finance disclosures.
OTHER DEVELOPMENTS
Please see the Insurance section for The Credit Institutions and Insurance Undertakings Reorganisation and Winding Up (Amendment) (EU Exit) Regulations 2019 laid before Parliament.
PRA policy statement on changes to notification and application forms
On 17 January, the PRA published a policy statement on regulatory transactions and changes to its notification and application forms (PS2/19). The PRA received no responses to its October 2018 consultation paper (CP21/18) and has made the following changes to its rules and forms as consulted on, subject to making some minor drafting and typographical errors: (i) changes to the Insurance Special Purpose Vehicles Part, the Passporting Part, the Change in Control Part and the Notifications Part of the PRA Rulebook; (ii) updates to a range of forms, including passporting forms, branch and cross border notification forms and controllers forms, which are linked to from Appendix 2 of PS2/19; and (iii) changes to the Change in Control Part of the PRA Rulebook to remove the Controllers forms from the PRA Rulebook. The final rules and accompanying forms come into effect on 19 January. They are relevant to all PRA-authorised firms as well as firms that have a qualifying holding, or that intend to acquire a qualifying holding in a PRA-authorised firm.
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Audit committees: IOSCO report on good practices in supporting audit quality
On 17 January, IOSCO published a report on good practices for audit committees in supporting audit quality. It published its proposals for consultation on 24 April 2018. The report concerns the role of audit committees of listed companies in supporting and promoting external audit quality. The features and role of audit committees in relation to financial reporting are addressed only to the extent they are relevant to audit quality. The good practices set out in the report are broadly unchanged from the proposals. Significant changes include: (i) features of audit committees that support audit quality - the chair should have demonstrated leadership qualities, strong communication skills and be knowledgeable about their duties and responsibilities. Skills and diversity of board and committee members should be considered. Rotation may be considered. The committee should report to the full board on its activities to support audit quality. Peer assessments of its members and assessments of its own effectiveness should be conducted; (ii) recommending the appointment of an auditor - there should be a tender process with firms given access to management to understand the business and key risk areas so as to determine the nature, timing and extent of audit work and the required resources and expertise; (iii) assessing potential and continuing auditors - senior audit team members should demonstrate a good knowledge of the company's business, industry, environment, risk areas and key issues. The committee should assess whether the auditor has considered its approach to reviewing or testing significant systems and controls supporting information in the financial report in a particular year. The committee may consider whether the coverage of component auditors to perform work at particular operations or locations is appropriate; (iv) facilitating the audit process - the committee should take reasonable steps to ensure that management has a tone and the company has a culture focused on financial reporting quality; and (v) assessing auditor independence - where the auditor disagrees with management on an accounting treatment, estimate or disclosure and the matter is unresolved, the committee should gain an understanding of both positions providing oversight of management's responsibility for the financial statements or forming its own view in meeting the director's responsibility for the financial statements.
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FCA regulation round-up
On 17 January, the FCA published its regulation round-up for January. In its "hot topics" section, the FCA flags issues it has identified with financial promotions for life policies for the over-50s that include product features or benefits. These promotions must comply with the requirement to be fair, clear and not misleading in accordance with rule 4.2.1R in the Conduct of Business sourcebook and Principle 7 of the FCA's Principles for businesses, and should take account of the target audience. The FCA's financial promotions team has seen evidence of such promotions potentially misleading consumers into believing that they are buying a policy that will cover their funeral costs in full. The FCA explains that the proceeds of these policies can be used for payment of, or towards, the cost of a funeral. However, where a promotion refers to funerals and associated costs, it is important that consumers are not misled into believing they are buying a funeral plan that will cover their funeral costs in full. When designing their promotions, the FCA suggests that firms may wish to refer to the Association of British Insurers' November 2012 guidance which sets out initial guidance on over-50s plans. The FCA also explains that it has confirmed to ESMA that it is compliant with ESMA's guidelines on certain aspects of the suitability requirements under MiFID II, which were published in May 2018.
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ECON reports on proposed Omnibus Regulation and proposed Regulation amending ESRB Regulation
On 14 January, ECON published its report on the proposed Omnibus Regulation, which forms part of the EC's legislative proposals to reform the ESFS. ECON voted to adopt the report on 10 January. ECON has also published the following reports: (i) report on the amended text of the proposed Omnibus Directive; (ii) report on the proposed Omnibus Regulation and (iii) report on the amended text of the ESRB Regulation. ECON voted to adopt these reports on 10 January 2018. The procedure files for the Omnibus Directive, Omnibus Regulation and the Regulation amending the ESRB Regulation state that the reports have been tabled for plenary ahead of a vote in plenary.
Report on the amended text of the proposed Omnibus Directive
Report on the amended text of the ESRB Regulation
Report on Omnibus Regulation
