FIG Bulletin Recent developments 26 July 2019

General 5

Fair pricing in financial services: FCA FS19/4 - summary of responses and next steps 5

Fair treatment of vulnerable customers: FCA GC19/3 5

SMCR extension: commencement order published 5

RDR and FAMR: FCA evaluation review 6

Future Regulatory Framework Review – regulatory coordination: HM Treasury call for evidence 7

FCA annual public meeting 2019: Charles Randell speech 7

Office of the Complaints Commissioner: annual report 2018–19 and FCA response 8

MoU between the FCA and Bank of England updated 8

Whistleblowing regime: cross-party parliamentary group recommends overhaul 8

Performance scorecards: UKRN progress note on development 8

FinTech: EBA report on regulatory perimeter, regulatory status and authorisation approaches 9

Recalibrated EONIA: EMMI confirms publication time 9

Administration of EURIBOR: EMMI benchmark statement 10

Unfair Contract Terms Directive: European Commission guidance 10

Brexit 11

Extension of Article 50: BoE and PRA CP18/19 on changes to financial services legislation 11

Extension of temporary transition powers: FCA announcement 11

Brexit: ISDA updates FAQs 12

Banking and Consumer Credit 13

Alternatives to high-cost credit: FCA report 13

CRR counterparty credit risk: PRA CP17/19 on treatment of model limitations in banks' internal models 13

CRR credit risk mitigation: PRA PS14/19 on eligibility of financial collateral 13

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Financial stability risks in SFTs: FSB adjusts implementation timelines for policy recommendations 14

CRR: EBA report and updated list of monitored CET1 capital instruments 14

Stress tests: EBA staff paper 15

IFRS 9: EBA roadmap and benchmarking exercise 15

Consumer credit: High Court considers whether Tomlin Order constitutes a regulated credit agreement 15

Investment Funds 16

MMF Regulation: ESMA guidelines on stress testing requirements 16

Liquidity risk management recommendations for investment funds: IOSCO statement 16

Insurance 17

Insurance stress testing: EIOPA discussion paper on methodological principles 17

Solvency II: PRA CP16/19 on group availability of subordinated liabilities and preference shares 17

IDD: EIOPA examines national general good rules 17

Authorisation of ISPVs: PRA updates 18

Securities and Markets 19

Wealth management and stockbroking supervision strategy: FCA Dear CEO letter 19

MiFID II: ESMA report on NCA's use of sanctions 19

Credit rating sustainability issues and disclosure requirements: ESMA advice and final guidelines 19

MiFID II: ESMA call for evidence on compliance with inducement and costs disclosure rules 20

Securitisation Regulation: ESMA updated Q&As, XML schema and validation rules for securitisation reporting 20

EU CCPs supervision: ESMA publishes annual peer review report 21

Implementation of margin requirements for non-centrally cleared derivatives: BCBS and IOSCO extension 21

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Financial Crime 23

JMLSG update: revisions to sectoral guidance on credit unions and brokerage services to funds 23

MLD4 high risk third countries assessment: European Ombudsman decision 23

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General

Fair pricing in financial services: FCA FS19/4 - summary of responses and next steps

The Financial Conduct Authority (FCA) has published a feedback statement (FS19/4) in which it gives a summary of its responses to feedback on its October 2018 discussion paper (DP18/9). The discussion paper launched a debate on fair pricing in the broad context of financial services.

In FS19/4, the FCA:

• summarises the main themes in the submissions it received and, where appropriate, provides its responses;

• provides further clarification on how it will apply its framework in practice; and • outlines how the FCA will approach the next stage of work, which will focus on

operationalising its approach to fair pricing in retail markets. The FCA states that the first application of the fair pricing framework will be in the General Insurance Pricing Practices Market Study, on which it will publish findings later this year. The FCA will also begin the work required to formally embed its thinking on fair pricing into its regulatory approach. A part of that will involve contributing to the review of FCA Handbook principles, which will be the first strand of the FCA's review of its Handbook. The FCA intends to publish a discussion paper on the review of its principles in Q4 2019/20. It will report on the next phase of its fair pricing work at that time.

Fair treatment of vulnerable customers: FCA GC19/3

The FCA has launched a consultation (GC19/3) on proposed Guidance for firms on the fair treatment of vulnerable customers. The proposed Guidance sets out the FCA’s view of what the FCA Principles for Business require of firms to ensure that vulnerable consumers are consistently treated fairly across financial services sectors.

The draft Guidance contains three main sections which discuss:

• understanding the needs of vulnerable consumers; • ensuring staff have the skills and capabilities needed; and • converting that understanding into practical steps.

The Guidance will be consulted on in two stages. This first stage of the consultation closes on 4 October 2019. In the light of the feedback received from stage one, the FCA intends to consult on revised draft Guidance in a second stage.

Read our blog for further information, FCA draft vulnerability guidance: embedding 'doing the right thing' in firms' culture.

SMCR extension: commencement order published

On 18 July 2019, the Bank of England and Financial Services Act 2016 (Commencement No 6 and Transitional Provisions) Regulations 2019 (SI 2019/1136) (Regulations) came into force. These Regulations ultimately confirm the commencement date for the extension of the senior managers and certification regime (SMCR).

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The SMCR has applied to banks and certain investment institutions since March 2016 and insurers since December 2018. These Regulations extend the application of the SMCR to FCA solo-regulated firms from 9 December 2019, except for benchmark firms, for which the commencement date is 7 December 2020. The amendments made by the Regulations came into force on 18 July 2019 for the purpose of the making of rules, the giving of directions, the imposition of requirements and the issuing of policy statements by the FCA. This means that the FCA can now publish its final rules on the regime. The Regulations also introduce a number of transitional provisions. Benchmark firms should remain alert to the future FCA consultation that will detail how the regime will apply to them in December 2020. Other firms should look out for the final rules published by the FCA. It is now less than five months until the regime is in force for the majority of FCA solo-regulated firms. Getting to grips with the SMCR should now be a priority. Most firms will already have implementation projects underway. Firms should consider if they have enough resources and time to fully review their documentation, systems and procedures, create and deliver customised training of staff and carry out fit and proper assessments. Firms have had plenty of warning from the FCA and it is unlikely to be forgiving to those that fail to meet its requirements in a timely fashion. Hogan Lovells can help. Our team has experience advising a range of authorised firms on governance matters, including on the extension of the SMCR specifically. We have also advised on the implementation of the Benchmark Regulation and therefore are well-placed to advise benchmark firms on the SMCR when the FCA's proposals applicable to them are published. We are able to flexibly support you to reflect your firm’s business needs: from running your entire implementation project using a mix of our legal and consulting offering, providing legal advice on the key requirements for you to implement the SMCR requirements, or via our SMCR Toolkit to help you implement your own project. Please contact us for more information.

RDR and FAMR: FCA evaluation review

The FCA has updated a webpage summarising the findings from its May 2019 call for input on evaluating the retail distribution review (RDR) and the financial advice market review (FAMR). The main themes arising from responses to the call for input and a number of stakeholder events include:

• access to appropriate services – not all consumers have appropriate access to a wide range of services to help them with their financial planning, particularly those with smaller amounts of money to invest. This issue has got worse in recent years and regulatory costs have contributed to it;

• the regulatory perimeter – the boundary between providing guidance services and regulated advice is not clear to all stakeholders. Some firms feeling unable to provide potentially useful information to consumers if they feel there is a risk that it will be perceived as regulated advice;

• consumer engagement – consumer education in financial planning issues could be improved to encourage engagement with advice and guidance services; and

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• innovation – consumers value face-to-face advice and alternatives (including online services) are less popular. More needs to be done to incorporate technology into the market to help consumers.

As the feedback broadly supports the proposed scope outlined in the call for input, the FCA will now proceed with its review in line with that scope. The FCA's work will be informed by other projects either underway or recently completed, but it does not want to duplicate work in these areas. As a result, it has decided not to include certain issues in its review, for example, requirements relating to defined benefit (DB) pension transfers and changes to the Financial Ombudsman Service (FOS) award limits and funding.

Over the next months, the FCA is planning to carry out additional research. In August 2019, it will survey a sample of firms to collect additional data about the industry. Firms will have until the end of September 2019 to complete the survey. The FCA will also review data it already holds as a result of firm reporting, FCA market studies and supervisory work. The FCA will also gather consumer information.

The FCA will publish further updates as work progresses and expects to publish its final report in 2020.

Future Regulatory Framework Review – regulatory coordination: HM Treasury call for evidence

HM Treasury has published a call for evidence on regulatory coordination. This is the first publication in HM Treasury’s "Future Regulatory Framework Review", announced by the Chancellor in his Mansion House speech. The call for evidence introduces the Review, and invites submissions on the first phase. The first phase will examine the processes for managing the impact of regulatory change on financial services firms and their customers, including coordination between regulatory authorities. The call for evidence will run from July to October 2019.

HM Treasury’s approach in this call for evidence acknowledges that there are significant, complex and long-term challenges that will require a rigorous and comprehensive review of the UK framework, as part of which HM Treasury will draw on the expertise of UK regulators and stakeholders. In particular, the manner in which the Future Regulatory Framework review proceeds will depend on the nature of the UK’s exit from, and future relationship with, the EU.

Once arrangements for the UK’s withdrawal from the EU become clear, HM Treasury will set out further detail on the later phases of the review.

FCA annual public meeting 2019: Charles Randell speech

The FCA has published the text of a speech given by Charles Randell, Chair of the FCA, at its 2019 annual public meeting. Highlights from the speech include:

• the context in which the FCA works is constantly changing. The FCA needs to think about how it can meet its growing responsibilities with finite resources;

• the FCA must recognise that it does not get things right every time. It must strive to constantly improve; and

• as well as taking on the challenges of the present, the FCA is also looking ahead to ensure it is the most responsive and agile regulator it can be.

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Office of the Complaints Commissioner: annual report 2018–19 and FCA response

The Office of the Complaints Commissioner has published its annual report for 2018/19 and the FCA has published its response to the report.

Antony Townsend, the Complaints Commissioner, made a number of observations and recommendations, largely identifying a number of concerns with the FCA's procedures:

• the FCA must, as a priority, complete its programme to strengthen its Complaints Team and eliminate the backlog of complaints;

• the regulator should complete the long-delayed work on improvements to the Complaints Scheme, including proposals to clarify the position on compensation for complainants, and consult on them;

• there are problems with the FCA’s communications – centred upon the Financial Services Register, its system for interacting with regulated firms, and its handling of information – which generate complaints and sometimes financial losses;

• due to significant delays, more thought needs to be given to progressing complaints in parallel with other processes, where possible; and

• the FCA should publish more material on the quality assurance of supervision.

In its response, the FCA details the steps it has taken or is taking to mitigate the issues raised by the Commissioner.

MoU between the FCA and Bank of England updated

The FCA has published an updated Memorandum of Understanding (MoU) setting out the high-level framework the FCA and the Bank of England (BoE) (exercising its prudential regulation functions) will use to co-ordinate and co-operate in carrying out their respective responsibilities. The MoU is updated to reflect the expansion of the regulators’ remit and organisational changes since the MoU was first signed.

Whistleblowing regime: cross-party parliamentary group recommends overhaul

An all party parliamentary group (APPG) has recommended an overhaul of the UK’s whistleblowing regime. APPGs are informal groups established by backbench MPs to help other MPs from all parties become better informed about a particular policy area. They have no statutory or formal role but are able to exert some influence on the government.

The APPG for whistleblowing was launched in July 2018 with a goal of achieving legislation that properly protects whistleblowers, and to look at the case for an Independent Office for the Whistleblower.

The APPG makes ten recommendations intended to ensure "gold-standard" protection for whistleblowers.

Performance scorecards: UKRN progress note on development

The UK Regulators Network (UKRN) has published a note on progress made in developing a set of performance scorecards to measure customer experience across key sectors. This initiative was requested by the Department for Business, Energy and Industrial Strategy which wants the

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UKRN to develop performance metrics for companies and digital comparison tools operating in their sectors, where relevant.

The UKRN has established a Performance Scorecards Working Group to explore the technical and practical details of scorecards. The UKRN notes that it has been working closely with the FCA, Ofcom and Ofgem on how best to incorporate price differential metrics.

The UKRN plans to publish the first iteration of scorecards by the end of 2019. It sets out the initial metric themes to be covered, as proposed by the regulators and provides examples of the range of existing metrics in this area, on which the UKRN's work draws. Each regulator will also publish their own metrics on their website, providing links to enable the easy discoverability of metrics in other sectors.

Following publication of the metrics, in spring 2020, regulators will engage with key stakeholders, including consumer groups and price comparison websites, to test the effectiveness of the initial metrics and how they could be used by stakeholders. Regulators will also consider how best to evaluate the impact of performance scorecards and how to measure their effectiveness and impact on consumer outcomes.

FinTech: EBA report on regulatory perimeter, regulatory status and authorisation approaches

The European Banking Authority (EBA) has published the findings of its analysis on the regulatory framework applicable to FinTech firms when accessing the market. The report illustrates the developments on the regulatory perimeter across the EU, the regulatory status of FinTech firms, and the approaches followed by national competent authorities (NCAs) when granting authorisation for banking and payment services.

In regard to the regulatory perimeter, the EBA's findings show few national legislative developments that could potentially create an EU unlevelled playing field.

In relation to authorisation approaches, the EBA found that proportionality and flexibility principles are applied in the same way by NCAs irrespective of whether the applicant presents a traditional or innovative business model and/or delivery mechanism.

Recalibrated EONIA: EMMI confirms publication time

The European Money Markets Institute (EMMI) has confirmed that EONIA will be published at or shortly after 9:15 a.m. CET, starting on 2 October 2019. The announcement came after the ECB’s decision to publish the euro short-term rate (€STR) at 8:00 a.m. CET on each TARGET business day, as of the start date 2nd October 2019.

EMMI’s decision reconfirms its previous announcement on 31 May 2019, following the adoption of the new EONIA methodology. EONIA will be calculated as the €STR plus a spread on every TARGET2 day in which the €STR is published. The reliance on the €STR for EONIA’s determination makes it necessary for EONIA to be calculated and published after the €STR publication.

In relation to €STR, the ECB also decided that, if errors are detected that affect €STR by more than 2 basis points, the ECB will revise and re-publish €STR on the same day at 9:00 a.m. CET, and that no changes will be made to €STR after that time. EMMI has therefore judged that the most suitable option is to maintain the current decision of publishing EONIA at or shortly after

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9:15 a.m. CET, in order to prevent market participants from being exposed to an additional EONIA re-fixing, if there were an €STR re-fixing.

Administration of EURIBOR: EMMI benchmark statement

The European Money Markets Institute (EMMI) has published a benchmark statement for the administration of EURIBOR under the Benchmarks Regulation (BMR). EMMI has published the benchmark statement to comply with Article 27 of the BMR, which requires benchmark administrators to publish a benchmark statement for each benchmark or family of benchmarks provided.

The statement gives general information about EURIBOR as well as information under the following headings:

• market or economic reality measured by the benchmark; • input data and methodology; • exercise of judgement or discretion by the EMMI or contributors; • cessation and change of the methodology; • potential limitations of the benchmark; and • specific disclosures for interest rate and critical benchmarks.

The statement should be read in conjunction with the EURIBOR governance framework and related policies and procedures, which are listed with weblinks in Annex 2 of the statement.

Unfair Contract Terms Directive: European Commission guidance

The European Commission has published guidance on the Unfair Contract Terms Directive (UCTD). In the UK, the UCTD is implemented by the Consumer Rights Act 2015.

The guidance note is based on the case law of the European Court of Justice (ECJ), referring to existing rulings on unfair terms. The guidance seeks to clarify the ECJ's interpretation of key concepts and provisions of the UCTD. However, as the UCTD is a minimum harmonisation directive, practitioners must also take into account any local rules in the relevant member state when applying the UCTD. Accordingly, the guidance only provides a minimum standard but not a comprehensive picture of the application of the UCTD in individual member states, including the decisions of national courts.

As a complement to the guidance note, European businesses organisations have drawn up recommendations on how mandatory consumer information as well as terms and conditions can be presented to consumers in a more user-friendly and transparent way.

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Brexit

Extension of Article 50: BoE and PRA CP18/19 on changes to financial services legislation

The Prudential Regulation Authority (PRA) and the Bank of England (BoE) have published a joint consultation paper on further amendments to financial services legislation following the extension of the Brexit deadline under Article 50(3) of the Treaty on European Union to 31 October 2019.

On 18 April 2019 the BoE and PRA published amendments to financial services legislation under the European Union (Withdrawal) Act 2018 (EUWA). This included final EU Exit Instruments covering changes to PRA rules, financial market infrastructure (FMI) rules (for which the BoE has responsibility) and binding technical standards (BTS). These EU Exit Instruments have, with limited exceptions, an effective date of "exit day" as defined in the EUWA. CP18/19 sets out minor amendments to the BoE's and PRA's EU Exit Instruments that are needed due to the extension of the Article 50 period and the consequent change of "exit day" in the EUWA to 31 October 2019. Also, additional provisions in EU law that apply before 31 October 2019 will need amending as they will now meet the definition of retained EU law.

CP18/19 is divided in to two sections:

• section A provides an update on how the BoE and PRA intend to use their temporary transitional powers; and

• section B contains proposals to fix deficiencies arising from the UK's withdrawal from the EU and for consequential changes due to the extension of the Article 50 period. Section B is split into two parts: Part 1 sets out the PRA's proposals relating to the PRA Rulebook and BTS within the PRA's remit that will be retained, or "onshored", in UK law. Part 2 sets out the BoE's proposals relating to BTS under the Central Securities Depositories Regulation.

The consultation closes on 18 September 2019.

Extension of temporary transition powers: FCA announcement

The FCA has confirmed that it intends to extend the proposed duration of the directions issued under the temporary transitional power (which apply in the event of a no-deal Brexit) to 31 December 2020. This is to reflect the extension of the Brexit deadline under Article 50(3) of the Treaty on European Union that was announced in April 2019. Other than the additional time, the FCA’s approach remains unchanged.

The temporary transitional power is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. Under the power, firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

Nausicaa Delfas, Executive Director of International at the FCA, said:

"The temporary transitional power is a key part of our contingency planning if the UK leaves the EU without an agreement. This extension should give firms and other regulated persons the time they need to phase in any regulatory changes they may need to make as a result of

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'onshored' EU legislation. The power will provide certainty, ensure continuity and reduce the risk of disruption."

"As we said in February, there are some areas where it would not be appropriate to phase in the changes. For example, reporting rules under MiFID II as receiving these reports is crucial to our ability to ensure market oversight and the integrity of financial markets. In these few areas only, we still expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by exit day."

There are specific areas where the FCA will not be granting transitional relief. In these areas, the FCA continues to expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by exit day.

As a reminder, the following firms or persons should continue their preparations to comply with the changes:

• firms subject to the MiFID II transaction reporting regime, and connected persons (for example, approved reporting mechanisms);

• firms subject to reporting obligations under the European Market Infrastructure Regulation;

• EEA Issuers that have securities traded or admitted to trading on UK markets; • investment firms subject to the Bank Recovery and Resolution Directive and that have

liabilities governed by the law of an EEA State; • EEA firms intending to use the market-making exemption under the Short Selling

Regulation; • firms intending to use credit ratings issued or endorsed by FCA-registered credit ratings

agencies after exit day; and • UK originators, sponsors, or securitisation special purpose entities of securitisations they

wish to be considered simple, transparent, and standardised under the Securitisation Regulation.

The FCA expects firms to use the additional time between now and the end of October to prepare to meet these obligations. If firms are not ready to meet these obligations in full, it will expect to see evidence of why this was not possible.

The FCA will publish further information before exit day on how firms should comply with post-exit rules. The extension is aligned with the end date intended by the BoE and the PRA.

Brexit: ISDA updates FAQs

The International Swaps and Derivatives Association (ISDA) has updated its Brexit frequently asked questions (FAQs) which address possible outcomes for the derivatives market post-Brexit. The FAQs have been updated to reflect developments to 30 June 2019.

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Banking and Consumer Credit

Alternatives to high-cost credit: FCA report

The FCA has published a report that examines the market for alternatives to high-cost credit by looking at consumer demand and the availability of credit and non-credit alternatives. It provides an update on the key issues the FCA identified in its related November 2018 consultation, CP18/35.

In this report, the FCA:

• examines the market for alternatives to high-cost credit by looking at consumer demand and the availability of credit and non-credit alternatives;

• sets out the actions the FCA has taken following the commitments it made in the FCA's high-cost credit publications of November and December 2018; and

• explains the roles of the FCA and other organisations in supporting alternatives to high-cost credit.

A full list of the FCA's proposed actions and its recommendations is set out in Annex 1 to the report.

CRR counterparty credit risk: PRA CP17/19 on treatment of model limitations in banks' internal models

The PRA has published a consultation (CP17/19) that sets out the PRA's proposed changes to SS12/13 "Counterparty Credit Risk". The consultation clarifies expectations regarding the treatment of model limitations and assumptions under Part Three, Title II, Chapter 6 (Counterparty credit risk) of the Capital Requirements Regulation (CRR). The consultation is relevant to all firms to which the Capital Requirements Directive (CRD IV) applies.

The draft amendments to SS12/13 are set out in the Appendix.

The consultation closes on 25 October 2019. The PRA proposes that the draft changes to SS12/13 take effect from the publication of the final policy.

CRR credit risk mitigation: PRA PS14/19 on eligibility of financial collateral

The PRA has published a policy statement (PS14/19) that provides feedback to the responses it received to its consultation, CP1/19 "Credit risk mitigation: Eligibility of financial collateral" and includes an updated Supervisory Statement (SS17/13) "Credit risk mitigation".

The policy statement is relevant to UK banks, building societies and PRA-designated UK investment firms that are subject to the Capital Requirements Regulation (CRR). It is not relevant to UK branches of firms in other European Economic Area (EEA) countries and non-EEA countries, or to insurance firms.

In CP1/19 the PRA consulted on clarifications to its expectations regarding the eligibility of financial collateral as funded credit protection under Part Three, Title II, Chapter 4 (Credit risk mitigation) of the CRR. Following consideration of responses to the consultation, the PRA has made a number of minor changes to the draft policy set out in CP1/19. These changes clarify:

• that where the obligor and the collateral issuer share the same country this does not automatically imply there is a material positive correlation;

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• the assets that the PRA would consider relevant when it refers to "all of the assets to which the lender has legal recourse"; and

• how the PRA's expectations apply when firms have recourse to a financial collateral asset that is an index instrument.

The PRA considers that the changes will not have a significant impact on firms.

The changes to SS17/13 are effective immediately. If firms have concerns about their ability to comply with these expectations, they should contact their usual PRA supervisory contacts.

The PRA believes that the proposals will not be affected in the event that the UK leaves the EU with no implementation period in place.

Financial stability risks in SFTs: FSB adjusts implementation timelines for policy recommendations

The Financial Stability Board (FSB) has announced adjustments to the implementation timelines for its recommendations on securities financing transactions (SFTs), specifically those related to minimum haircut standards for non-centrally cleared SFTs.

As part of its work to enhance the resilience of non-bank financial intermediation, the FSB developed 18 policy recommendations to address financial stability risks that arise from SFTs, such as repos and securities lending. These recommendations are published in the August 2013 report "Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos" and were updated in the November 2015 report "Regulatory framework for haircuts on non-centrally cleared securities financing transactions".

Although FSB member jurisdictions are making progress in implementing these policy recommendations, there have been significant delays in implementation in some jurisdictions. This has especially been the case for recommendations related to minimum haircuts standards for non-centrally cleared SFTs used by banks to provide financing to non-banks. These delays stem mainly from the new date for implementing the minimum haircut standards on bank-to-non-bank SFTs into banking regulation as part of the Basel III framework, which is now January 2022.

Therefore, the FSB is adjusting the implementation timelines for its recommendations related to minimum haircuts standards for non-centrally cleared SFTs, including those related to quantitative standards, that is, the framework of numerical haircut floors.

For example, the implementation timelines for the policy recommendations related to the framework of numerical haircut floors will be extended to January 2022 (instead of end-2018) for bank-to-non-bank transactions and to January 2024 (instead of end-2019) for non-bank-to-non-bank transactions. The implementation timelines for other recommendations remain unchanged.

CRR: EBA report and updated list of monitored CET1 capital instruments

The EBA has published an updated list of common equity tier 1 (CET1) instruments of EU institutions. This list is accompanied by an updated CET1 report, which includes information on the underlying objectives of the monitoring of capital instruments, as well as on the consequences of including or excluding instruments in or from the CET1 list.

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The EBA's monitoring of capital instruments contributes to the enhancement of the quality of institutions' capital across the EU. The EBA will continue to update the report on a regular basis to reflect new developments in CET1 issuances and practices.

Stress tests: EBA staff paper

The EBA has published a paper by Mario Quagliariello in its staff paper series by, "Are stress tests beauty contests? (And what we can do about it)". EBA staff papers describe research in progress and are published to elicit comments and to further debate. Any views expressed are solely those of the authors and do not necessarily represent those of the EBA or to state EBA policy. This paper discusses whether some improvements to the design of the EU-wide stress test could better align the incentives of the different stakeholders involved.

IFRS 9: EBA roadmap and benchmarking exercise

The EBA has published its IFRS 9 roadmap, providing a comprehensive overview of planned monitoring activities on IFRS 9 implementation. At the same time, the EBA launched an IFRS 9 benchmarking exercise on a sample of institutions. The benchmarking exercise aims to analyse the different modelling practices followed by institutions and how IFRS 9 implementation impacts the amount of expected credit losses in terms of own funds and regulatory ratios.

The EBA will continue to engage closely with all concerned stakeholders on IFRS9 implementation.

Consumer credit: High Court considers whether Tomlin Order constitutes a regulated credit agreement

In CFL Finance Ltd v Bass and others [2019] EWHC 1839 (Ch), the High Court considered a creditor's bankruptcy petition where creditors were in dispute as to how to proceed with regard to the debtor, and also whether a Tomlin Order constituted a regulated credit agreement.

In relation to the Tomlin Order, the court held that a structured settlement clause making provision for the payment of a debt over time (in the form of a Tomlin Order) does not extend "credit" or "financial accommodation" within the meaning of section 9(1) of the Consumer Credit Act 1974, so these arrangements do not fall within the scope of consumer credit regulation.

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Investment Funds

MMF Regulation: ESMA guidelines on stress testing requirements

ESMA has issued two sets of guidelines regarding the stress testing of money market funds and reporting on money market funds to NCAs. The guidelines are aimed at ensuring a coherent application of the Money Market Fund (MMF) Regulation.

The guidelines on stress testing establish common reference parameters of the stress test scenarios MMFs or managers of MMFs should include in their stress scenarios. The guidelines on reporting provide guidance on how to fill in the reporting template on money market funds that managers of MMFs will transmit to NCAs as of Q1 2020.

The guidelines will be updated at least every year and will take into account the latest market developments. The current guidelines include the calibration of the stress test scenarios for 2019.

Liquidity risk management recommendations for investment funds: IOSCO statement

Following questions about the suitability of its February 2018 Liquidity Risk Management Recommendations (2018 LRM Recommendations), particularly following the recent gating of the Woodford Equity Income Fund, the International Organization of Securities Commissions (IOSCO) has published a statement on its 2018 LRM Recommendations.

IOSCO state that their recommendations provide a comprehensive framework for regulators to deal with liquidity risks in investment funds. Some domestic regulators have adopted, or are consulting on, liquidity management regimes consistent with the recommendations. IOSCO intends to conduct a robust assessment exercise beginning in 2020 which will review how the 2018 LRM Recommendations have been implemented in practice.

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Insurance

Insurance stress testing: EIOPA discussion paper on methodological principles

EIOPA has published a discussion paper on "Methodological Principles of Insurance Stress Testing". In this discussion paper, EIOPA sets out methodological principles and guidelines required for the conduct and assessment of an EU-wide stress test exercise with the aim to enhance EIOPA's methodology for bottom-up supervisory stress testing. These principles and guidelines will be the toolbox to facilitate both the design and execution phase of future EIOPA stress test exercises.

EIOPA considers the following key elements:

• stress test process and objectives; • scope of stress tests; • scenario design of a stress test; • shocks and their application in a stress test; and • data collection and validation.

Feedback on the paper from stakeholders can be submitted until 18 October 2019.

The discussion paper is part of a broader process to enhance EIOPA's stress testing framework. In this context, EIOPA will work on other stress testing related issues such as the assessment of liquidity positions under adverse scenarios, assessment of the vulnerabilities towards climate-related risks and potential approaches to multi-period stress tests.

Solvency II: PRA CP16/19 on group availability of subordinated liabilities and preference shares

The PRA has published a consultation paper (CP16/19) on group availability of subordinated liabilities and preference shares under the Solvency II Directive. This consultation is relevant to all insurance firms within the scope of group supervision under the Solvency II Directive and to the Society of Lloyd’s.

The PRA sets out its proposed approach to the determination of the availability of subordinated liabilities and preference shares in group own funds, and its expectations of firms in presenting relevant analysis to the PRA. The Appendix sets out proposed amendments to Supervisory Statement (SS9/15) ‘Solvency II: Group supervision’ to reflect the proposed approach.

The consultation closes on 21 October 2019. The PRA considers that the proposals will not be affected in the event that the UK leaves the EU with no implementation period in place. The PRA intends the proposals to take effect on publication of the final policy. However, it advises that the proposals would not apply to determinations of availability that the PRA has previously made.

IDD: EIOPA examines national general good rules

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report analysing national "general good rules" in the context of the proper functioning of the Insurance Distribution Directive (IDD) and the internal market.

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The report gives a factual description of the types of rules which are published on the websites of NCAs and are applicable to insurance distribution activities. It also looks at the main areas of divergence and impact of the general good provisions on the proper functioning of the IDD and the internal market more broadly.

EIOPA states that, collectively, the quantity and level of diversity of information requirements contained in general good rules present significant challenges for entities seeking to carry out cross-border business due to additional entry costs.

EIOPA's follow-up actions include:

• issuing recommendations on an individual basis to NCAs on how information on general good rules should be published to enable passporting insurance distributors to easily access and understand such information;

• consulting external stakeholders to collect feedback on the findings of this report; • further analysing the general good rules imposed on incoming insurance distributors in

areas for which the home member state has competence, such as registration and organisational requirements and, where appropriate, making use of the tools at EIOPA's disposal under its Founding Regulation.

EIOPA welcomes comments on its report by 22 September 2019.

Authorisation of ISPVs: PRA updates

The PRA has published an updated version of its webpage on insurance special purpose vehicles (ISPVs) to include links to updated application forms, accompanying notes and a new set of FAQs.

These materials are relevant to anyone wishing to apply for authorisation for an ISPV under Part 4A of the Financial Services and Markets Act 2000 to carry on the regulated activity of insurance risk transformation.

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Securities and Markets

Wealth management and stockbroking supervision strategy: FCA Dear CEO letter

The FCA has published a letter addressed to CEOs of wealth management and stockbroking firms on 13 June 2019, setting out the FCA's view of the key risks of harm that those firms pose to their customers or the markets in which they operate. Key risk areas identified by the FCA are:

• fraud, investment scams and market abuse; • best execution; • costs and charges disclosure; • the senior managers and certification regime; and • the UK's withdrawal from the EU.

Firms should consider whether their firm presents these risks and consider their strategies for mitigating them.

MiFID II: ESMA report on NCA's use of sanctions

The European Securities and Markets Authority (ESMA) has published its first report concerning sanctions and measures imposed under MiFID II by NCAs.

The Annex to the report collates information submitted by NCAs on all sanctions and measures and all criminal sanctions imposed. Among other things, it states that, in the UK, the FCA imposed one MiFID II-related sanction with a fine of EUR53,672 (£60,000).

ESMA states that, as the MiFID II transposition was delayed in some member states, it is unable to observe clear trends or tendencies in the imposition of sanctions and measures or to produce detailed statistics based on it.

Credit rating sustainability issues and disclosure requirements: ESMA advice and final guidelines

ESMA has published its technical advice to the European Commission on sustainability considerations in the credit rating market. It has also published its final guidelines on disclosure requirements applicable to credit ratings.

In its advice, ESMA has assessed the level of consideration of environmental, social and governance (ESG) factors in both specific credit rating actions, and the credit rating market in general. It found that, while credit rating agencies (CRAs) are considering ESG factors in their ratings, the extent of their consideration can vary significantly across asset classes, according to each CRA’s methodology.

However, given the specific role that credit ratings have in the EU regulatory framework for the purposes of assessing credit risk, ESMA advises that it would be inadvisable to amend the CRA Regulation to explicitly mandate the consideration of sustainability characteristics in all rating assessments. Instead, ESMA proposes that the Commission assesses whether there are sufficient regulatory safeguards in place for other products that will meet the demand for pure sustainability assessments.

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The guidelines on disclosure requirements for credit ratings are intended to improve the overall quality and consistency of CRAs' press releases related to their rating activity. The guidelines:

• provide detailed guidance as to what CRAs should disclose when they issue a credit rating; and

• require greater transparency around whether ESG factors were a key driver of the credit rating action.

MiFID II: ESMA call for evidence on compliance with inducement and costs disclosure rules

ESMA has published a call for evidence on certain investor protection topics included in the European Commission's mandate to ESMA to submit reports to it under Article 90 of MiFID II.

ESMA has been asked by the Commission to assess whether firms comply with inducement and costs disclosure rules in practice (as required under Articles 24(9) and 24(4) of MiFID II respectively), whether the application varies across member states and, if so, how it varies. ESMA is to analyse and provide an assessment of the effects of these rules for both professional and retail clients. ESMA is guided by the broader consideration of the extent to which investors have benefited from the new rules to date.

The deadline for comments is 6 September 2019. The Commission will use ESMA's advice in producing a report on the impact of the inducement disclosure rules by 3 March 2020, as required under Article 90(1) of MiFID II.

Securitisation Regulation: ESMA updated Q&As, XML schema and validation rules for securitisation reporting

ESMA has published several additional resources to assist market participants in the implementation of ESMA’s draft technical standards on disclosure requirements for the Securitisation Regulation (SR). These are:

• updated SR Q&As clarifying different aspects of the draft disclosure technical standards, including how some specific fields in the templates should be completed; and

• a set of reporting instructions and XML schema for the templates set out in ESMA’s draft technical standards on disclosure requirements. Article 4 of ESMA’s draft disclosure implementing technical standard requires reporting of data for all securitisations be done using XML.

ESMA is providing these updated Q&As, XML schema and validation rules in advance of several disclosure-related delegated acts that are due to be adopted by the European Commission.

ESMA notes that these resources are subject to change should the actual delegated acts adopted by the European Commission contain changes that need to be reflected in the present documents. Furthermore, ESMA reserves the right to further adjust or update the Q&As, XML schema and validation rules at any time. The content of each of these published items does not signal that the final delegated acts adopted by the Commission, based on ESMA’s submitted draft technical standards, will necessarily be identical to the provisions in ESMA’s submitted draft technical standards.

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EU CCPs supervision: ESMA publishes annual peer review report

ESMA has published its annual peer review report on the overall supervision of EU Central Counterparties (CCPs) by NCAs. ESMA is required to carry out a peer review analysis of NCAs' supervisory practices relating to the authorisation and supervision of CCPs, at least annually.

ESMA's review focused on the effectiveness of NCAs' supervisory practices in assessing CCPs' compliance with the collateral and funding arrangement requirements under the European Markets Infrastructure Regulation. Overall, ESMA found that NCAs' supervisory activities are satisfactory. However, their use of quantitative metrics to assess the liquidity and low market risk of collateral was quite limited. On funding arrangements, the degree of convergence on the basic conditions that identify committed credit and repo lines is generally high. However, different supervisory practices apply for pre-arranged funding arrangements involving repos and liquidity generation from outright sales of securities. Diverging practices emerged on the type of financial instruments considered as highly marketable instruments that can be used to generate liquidity. In the report, ESMA identifies a number of best practices and considerations to further enhance supervisory convergence in this area. To avoid any uncertainty and ensure supervisory convergence, ESMA suggests that the European Commission should issue a corrigendum to the relevant regulatory technical standards to correct any mistaken cross-reference.

In relation to the functioning of CCP colleges, ESMA's findings are overall positive. It acknowledges the efforts of chairing NCAs to meet the expectations and best practices highlighted in past peer reviews and in ESMA opinions. However, NCAs are reminded of the importance of sharing meeting documents (including the agenda, presentations, risk assessment reports and other background documents) with the college well in advance of the college meeting date (at least seven days before) to promote more interactive and effective meeting discussions. ESMA urges the one NCA that has not yet held the in-person annual college meeting to schedule it as soon as possible. It also urges the other NCA that has not yet implemented the common template for the regular reporting of information to CCP colleges to start using it as soon as possible.

ESMA intends to follow up on its findings to identify, where relevant, the most appropriate tools to further enhance supervisory convergence.

Implementation of margin requirements for non-centrally cleared derivatives: BCBS and IOSCO extension

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) have jointly announced that they have agreed to extend the implementation deadline of margin requirements for non-centrally cleared derivatives by one year. They have also published an updated version of the margin requirements for non-centrally cleared derivatives to reflect this change.

With this extension, the final implementation phase will take place on 1 September 2021. At this point, covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion will be subject to the requirements. To facilitate the extension, the BCBS and IOSCO will introduce an additional implementation phase whereby, from 1 September 2020, covered entities with an AANA of non-centrally cleared derivatives greater than €50 billion will be subject to the requirements.

The BCBS and IOSCO have agreed to the extended timeline to support smooth and orderly implementation of the margin requirements. They expect covered entities to act diligently to

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comply with the requirements by the revised timetable, and strongly encourage market participants to make all relevant arrangements on a timely basis. The BCBS and IOSCO will continue to monitor the progress of implementation in order to ensure it is consistent across products, jurisdictions and market participants.

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Financial Crime

JMLSG update: revisions to sectoral guidance on credit unions and brokerage services to funds

The Joint Money Laundering Steering Group (JMLSG) has published a brief update following its March 2019 consultation paper. The consultation paper proposed revisions to its anti-money laundering (AML) and counter-terrorist financing sectoral guidance relating to credit unions and brokerage services to funds. Final board approved texts on those updates have been submitted to HM Treasury for approval. Notification of approval will be published on the JMLSG website when received.

The JMLSG states that it is continuing work on preparing new guidance that will reflect changes in the UK Money Laundering Regulations, which are due to be brought in based on the EU Fifth Money Laundering Directive. The finalisation and publication of this new guidance is expected to be in line with the timing of the implementation of the legislative updates, 10 January 2020.

MLD4 high risk third countries assessment: European Ombudsman decision

The European Ombudsman has published a decision concerning the European Commission's refusal to give public access to documents relating to its assessment of high-risk third countries under the Fourth Money Laundering Directive (MLD4).

The case concerned a dispute about a request for public access to documents drawn up by the Commission while assessing the risk of money laundering and terrorist financing in 54 countries. The complainant was a member of the European Parliament (MEP). He had sight of the documents at issue after signing a declaration that he would not disclose their contents. In February 2019, the MEP asked the Commission to grant him public access. The Commission refused, arguing that disclosure would undermine international relations, public security and the EU's financial, monetary or economic policy. In March 2019, the MEP asked the Commission to review its decision. However, the Commission did not reply within the deadline for responding. The MEP referred the dispute to the Ombudsman in May 2019. Before the Ombudsman, the Commission argued, among other things, that the documents contained sensitive information that had not been shared with the third countries concerned. Publication may have a negative diplomatic impact. Some of the information originated from third countries and international organisations, so disclosure would undermine the relationship of trust and lead to an unwillingness to share further information. The Commission also considered that disclosure would undermine its decision-making processes. One of the MEP's arguments for disclosure was that it is in the public interest that entities such as financial institutions have as much information as possible to help them to comply with their obligations to identify, manage and mitigate money laundering and terrorist financing risks. Disclosure would enable firms to apply the required risk-based approach and terminate business relationships if warranted.

The Ombudsman inspected the documents and found that the Commission was justified in refusing to grant access to them. She closed the inquiry, finding no maladministration.

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