Financial Services Speed Read 8 September 2022 edition

1. FCA: Portfolio Letter on Trade Repositories

On 5 September 2022, the FCA published a portfolio letter to trade repositories (TRs) registered with the FCA under either UK EMIR or UK SFTR and to securitisation repositories (SRs) registered with the FCA under the UK Securitisation Regulation (the Letter). In the letter, the FCA sets out its view of the key risks of harm in relation to TRs and SRs and measures firms should take to minimise these risks.

The key risks identified for TRs were:

• market concentration which may exacerbate operational resilience risk, limit opportunities to switch provider and lead to lower incentives to provide high quality services; and
• inadequate systems and controls to prevent introducing errors in data.

The key risks identified for SRs were:

• wider market and macro-economic conditions are still developing due to the novelty of SR system;
• inadequate systems and controls to prevent introducing errors in data; and
• poor third party performance of activities undertaken on behalf of SRs compromising the service provided by the SR.

The FCA expects firms should have robust operational resilience processes and monitoring procedures to review data systems and controls. Further, the FCA expect SRs to hold sufficient liquid net assets to cover potential general business losses and sufficient financial resources to cover the operational costs of an orderly wind-down or reorganisation. The FCA makes clear the SRs are responsible for effectively managing and controlling services provided by a third party.

2. ESMA: Questions and Answers on MiFID II and MiFIR Transparency Topics

On 5 September 2022, ESMA updated its Questions & Answers on MiFID II and MiFIR transparency topics, to clarify that transfers of financial instruments between two branches of the same legal entity, or between a branch and its parent, are not subject to post-trade transparency or transaction reporting requirements, as this does not constitute a change in ownership of financial instruments.

3. ICE: Consultation Paper on Potential Cessation of USD LIBOR

On 30 August 2022, ICE Benchmark Administration (IBA) published a consultation paper on the potential cessation of USD LIBOR. IBA does not expect to be able to continue to publish USD LIBOR ICE swap rate settings for which the USD LIBOR settings serve as the underlying rate for the floating leg of the relevant swap transaction after 30 June 2023 because IBA does not expect sufficient (or any) input data to be available. IBA is seeking feedback on its intention to cease the publication of the USD LIBOR ICE swap Rate. Responses are requested by 7 October 2022.

4. Bank of England: Policy Statement: Modifications to derivatives clearing obligation to reflect USD interest rate benchmark reform

On 24 August 2022, the Bank of England (BoE) published a policy statement on the derivatives clearing obligation (DCO) to reflect the move away form USD Libor. The BoE policy is to add overnight index swaps that reference the Secured Overnight Funding Rate (SOFR) to the scope of contracts subject to the DCO to remove contracts referencing USD LIBOR. Contracts referencing USD LIBOR will be removed from the DCO on 24 April 2023.

5. FCA: Consultation Paper: Quarterly Consultation No 37

On 2 September 2022, the FCA issued its 37th quarterly consultation paper. Among proposals consulted on are changes to the definition of "significant SYSC firm". This follows final rules confirming that the FCA would be moving across the IFPRU definition of significant firm to the SYSC sourcebook as a consequential change in implementing the IFPR. Stakeholders have since highlighted that moving across this definition may have resulted in more firms falling within the scope of the Enhanced Scope SMCR regime (see entry 5 in Financial Services Speedread 24 August 2022 edition).

The FCA is proposing to clarify that only firms that would have been both significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the definition of a "significant SYSC firm" for the purpose of the Enhanced Scope SMCR regime. This would be effected by limiting the application of the definition of a "significant SYSC firm" in SMCR provisions contained in the FCA Handbook to reflect the scope of "significant IFPRU firm" as it had previously been understood and applied by the FCA.

The FCA is also consulting on changes to Handbook provisions relating to the following: DEPP, COLL, EG and the Glossary to reflect amendments made to the individually recognised overseas collective investment schemes regime under section 272 of the Financial Services and Markets Act 2000, as well as other minor changes to COLL to reflect the UK's withdrawal from the EU. The deadline for responses is 10 October 2022.

6. FMLC: Letter to the European Banking Authority: EU Directive on Credit Servicers and Credit Purchasers

On 30 August 2022, the Financial Markets and Law Committee (FMLC) published a letter in response to the EBA's consultation on draft implementing technical standards templates to be used for the provision of information in connection with the sale of non-performing loans under the EU Directive on Credit Servicers and Credit Purchasers (the Directive). This Directive regulates the sale, purchase and servicing of non-performing loans originated by EU banks. EU Member States are required to adopt and publish implementing legislation by 29 December 2023. In the letter, the FMLC sets out areas of legal uncertainty identified by stakeholders in relation to the consultation paper and Directive, including the following:

• the scope of the Directive (e.g. the treatment of large, syndicated corporate loans and how to address a situation where there are multiple EU banks in a lending syndicate, but they do not all classify the loan as non-performing);
• the wide definition of credit purchaser may result in credit institutions having less flexibility in managing NPLs in their consolidated groups; and
• the servicing framework set out in the Directive largely exempts servicing by regulated financial institutions from needing separate licensing but MiFID investment firms, who regularly manage assets on behalf of clients, are absent from the list.

No updates for this edition of the FSS.

7. FCA Press Release: PRA and FCA Conclude Investigations into Senior Managers in relation to the 2008 Failure of HBOS PLC

On 26 August 2022, the FCA published a press release on investigations into senior managers in relation to the 2008 failure of HBOS plc. The FCA and PRA confirmed that they will not be taking enforcement action against former HBOS senior managers and are closing the investigations. The investigations began in 2016 and were in response to Andrew Green QC’s November 2015 report into the reasonableness of the scope of the then FSA’s enforcement investigations in relation to the failure of HBOS.

The failures of HBOS and RBS banks were seen as partly due to failure of regulatory architecture concerning senior managers. The regulators published a report into the failure of HBOS in 2015 amidst the preparations for introduction of senior managers and certification regime. The report had recommendations for senior managers and their regulators. In November 2015, Andrew Green QC report titled ‘Report into the FSA’s enforcement actions following the failure of HBOS’ was published. This recommended the regulators consider anew whether or not to carry out investigations into any other former HBOS senior managers. In 2016, the PRA and the FCA conducted further analysis and each regulator decided to open joint investigations into certain former HBOS senior managers.

8. FCA Speech by Sarah Pritchard: Fighting financial crime – the force multiplier effect

On 7 September 2022, Sarah Pritchard, Executive Director of Markets, gave a speech to the Financial Crime Summit. In the speech, Ms Pritchard highlighted the role and effectiveness of regulated firms in detecting and preventing financial crime. Ms Pritchard also highlighted the likely impact of the cost of living crisis leading to increased levels of financial crime and emphasised that a coordinated response from government, the FCA and industry would be needed to protect consumers.

9. EBA: Report on the functioning of anti-money laundering and counter-terrorist financing colleges in 2021

On 1 September 2022, the European Banking Authority (EBA) issued its second report on the functioning of anti-money laundering (AML) and counter-terrorist financing (CTF) colleges under MLD4. The EBA published its first report on the functioning of AML/CTF colleges in December 2020.

The 2019 guidelines on cooperation and information exchange between competent authorities supervising credit and financial institutions outline how competent authorities should give effect to the cooperation requirements set out in MLD4 via a framework for AML/CFT colleges.

The report contains findings and observations from EBA staff participation in AML/CFT college meetings and from its monitoring activities, focusing on level of cooperation at college meetings and discussions between members and observers. The EBA notes that ongoing cooperation and proactive information exchanges between supervisors has not been fully achieved yet in all AML/CFT colleges. Among the recommendations the EBA makes in relation to the actions lead supervisors and other college members could take to improve the way individual AML/CTF colleges function in the future is to apply a risk-based approach to college meetings to ensure more frequent meetings take place for financial institutions exposed to higher money laundering and terrorist financing risks.

10. FSCS Consumer Research: Understanding of FSCS protection

On 7 September 2022, the FSCS published research on identifying the gaps in FSCS protection. The FSCS research explores consumers' understanding of FSCS protection of financial products. The FSCS found that while protection in the event of the collapse of a bank or building society was well known, many consumers are not aware that certain FSCS protections are available in respect of pensions, bad financial advice and other financial products. The FSCS is of the view that in the context of the cost of living crisis, increased consumer awareness would improve confidence and empower consumers when making financial decisions.

No updates for this edition of the FSS.

11. HM Treasury: Designation of Sterling Fnality as a Regulated Payment Systems

On 31 August 2022, HM Treasury published an Order designating Fnality (also known as the Sterling Fnality Payment System) as a regulated payment system. HM Treasury further published a Recognition Order in respect of Sterling Fnality.

12. FCA Occasional Paper: Robo-Advice for Borrower Repayment Decisions

On 30 August 2022, the FCA published an occasional paper on robo-advice for borrower repayment decisions. The paper reviewed the availability and use of robo-advice (automated advice) for borrower repayment of loans in vulnerable households. The paper found that the availability of free robo-advice significantly improves loan repayment choices. Although, it concluded that consumers do not learn to make better repayment decisions after using robo-advice services and as a result would need repeated access to robo-advising tools in order to maintain ongoing improvements.

The paper further found that consumers would be willing to pay a higher price for robo-advising tools than they could save by using them, suggesting that consumers feel a significant mental cost in making repayment decisions. The FCA uses occasional papers to provide research and inform its views however the results do not necessarily represent the views of the FCA.

13. IOSCO: Final Report: Retail Investor Education in the Context of Sustainable Finance Markets and Products

On 31 August 2022, the International Organization of Securities Commissions (IOSCO) published its final report on retail investor education in sustainable finance markets and products. IOSCO found that investors of all sizes are increasingly interested in sustainable investments although they are of the view that investors lack a consistent framework to use in comparing and understanding sustainable finance products. IOSCO emphasised that retail investors particularly need to understand and compare the risks and characteristics of sustainable finance products.

IOSCO are of the view that the lack of consistency and low levels of financial literacy could expose retail investors to risks of misconduct and could undermine confidence in the market.

14. FCA Webpage: Cancelling temporary permission

On 1 September 2022, the FCA reiterated on its website that firms who wish to cancel their temporary permission but still have active business with UK clients to run-off will still be able to use the supervised run-off regime (SRO), provided they continue to be authorised in their home state. The FCA stated that it is the responsibility of the firm to ensure that it qualifies for the SRO regime. Further, while the firm will no longer be able to carry on regulated activities in relation to new UK business, it will still need to comply with the Principles for Business and other relevant rules set out in the FCA Handbook during the run-off period.

15. ESMA: Report: Trends, Risks and Vulnerabilities Report

On 1 September 2022, ESMA issued its second Trends, Risks and Vulnerabilities Report of 2022. ESMA notes the impact of the Ukraine crisis and other factors on the risk environment of EU financial markets, adding that the overall risk to ESMA's remit remains at its highest level. The report also looks at risks to key sectors. The key points were as follows.

• Securities markets: The report states that market volatility, bond yields and spreads jumped as inflation drove expectations of higher rates and that equity price falls stalled the recovery that had started in 2020.
• Asset management: The report argues that the direct impact of the Ukraine crisis on this sector has been limited, but that investors turned away from fixed income funds while commodity funds outperformed the sector in the first half of 2022.
• Financial innovation: The report states that cryptoasset markets fell over 60 per cent in value in the first half of 2022 from an all-time-high and that investor mistrust has increased owing to the collapse of Terra stablecoin and the suspension of consumer withdrawals by crypto lenders.

16. FCA Diversity, Equity and Inclusion Innovation Spotlight

On 24 August 2022, the FCA launched a new Diversity, Equity and Inclusion (DEI) Spotlight. The DEI Spotlight seeks to encourage firms to work with the FCA's Innovation services to develop products which focus on treatment of consumers, vulnerability, and the new Consumer Duty. The FCA highlight that industry data indicates there is a lack of diversity in FinTech firms and are actively encouraging applications from firms with business models which address the need to improve financial inclusion and target underserved, or unrepresented consumers.