Financial services speedread 10 Feb 2022

1. FCA: Financial promotions data 2021

On 3 February 2022, the FCA published a new webpage analysing data from action taken against authorised firms breaching financial promotion rules and referrals and investigations into unregulated activity, in 2021, and across all sectors.

Key findings include the following:

• retail investments and retail lending are the sectors with the highest amend/withdraw outcomes, amounting to 77 percent of FCA interventions with authorised firms;
• some of the most common breaches were in the retail lending sector, in particular claims management companies and retail finance promotions;
• retail investment firms’ use of social media influencers on various platforms to market investments is becoming a concern for the FCA. Firms should ensure they have taken appropriate legal advice to understand their responsibilities prior to using influencers; and
• the FCA has seen a significant reduction in non-compliant paid for advertisements by unauthorised entities on Google since the implementation of Google's new financial services ad policy.

2. ESMA: Supervisory Briefing on supervisory expectations in relation to firms using tied agents in the MiFID II framework

On 2 February 2022, ESMA published a briefing setting out supervisory expectations in relation to firms using tied agents under the MiFID II framework. ESMA is concerned that the use of tied agents may allow for circumvention of the MiFID legal framework. The briefing covers supervisory expectations of the following:

• interaction of the activities of tied agents with the investment firm's activities;
• assessments to be carried out when appointing tied agents;
• arrangements for monitoring tied agents, providing oversight of activity that the tied agent carries out on the investment firm's behalf, and governance; and
• respective rights and obligations, including instruction and termination rights, rights of information and rights of inspection and access to books and premises of the tied agent.

3. ESMA: New Q&As on financial regulation

On 28 January 2022, ESMA issued new Q&As in relation to several pieces of EU financial regulation legislation. As this guidance has been issued after the Transition Period, the FCA's general position is that UK firms are under no obligation to follow them, but UK firms interacting with EU counterparties may want to make a note.

• MiFID: ESMA has added a new question in relation to whose responsibility it is to verify suspension under the double volume cap when a trading venue starts operating or admits/trades an equity or equity-like financial instrument for the first time.
• SFTR: ESMA has amended the section on settlement failures to clarify that where the reporting under Article 4 of SFTR is affected by events linked to the settlement of the respective SFT or of either of its legs, "settlement fail" means “the non-occurrence of settlement, or partial settlement of a securities transaction on the intended settlement date, due to a lack of securities or cash and regardless of the underlying cause. ESMA also clarifies whether a settlement fail is reportable where the counterparties have been unable to modify the maturity date of an SFT due to a failed settlement that takes place after the day following the maturity date.
• Benchmark Regulation: ESMA has amended the Q&As to include an update to question 8.6 concerning temporary disruptions under Article 28(2) of the BMR. The question now provides that a temporary disruption to the provision of a benchmark does not constitute by itself a cessation of the benchmark and that supervised entities are not required to initiate written plans established pursuant to Article 28(2) of the BMR when this occurs.
• Crowdfunding Regulation: ESMA has updated the Q&As to add material in relation to: language of the key investment information sheet (KIIS); marketing of crowdfunding projects; and cross-border marketing.

4. ESMA: Consultation Paper: Opinion on the trading venue perimeter

On 28 January 2022, ESMA issued a consultation paper on a proposed opinion to clarify provisions in the MiFID II concerning multilateral systems and the perimeter for trading venue authorisation. The consultation paper follows the final report on the functioning of Organised Trading Facilities under MiFID II and discusses instances where the trading venue perimeter is not easily identified and might be subject to different interpretations from market participants and national competent authorities. The consultation paper gives ESMA the opportunity to discuss the four elements that are set out in MiFID concerning the definition of a multilateral system and also how to treat special cases e.g. order management systems/executions management systems and request for quote systems, as well as pre-arranged transactions (where execution takes place on authorised trading venue).

The closing date for comments is 29 April 2022.

5. European Parliament: agreement on changes to improve resolution framework for EU banks

On 2 February 2022, the European Parliament's Economic and Monetary Affairs Committee (ECON) announced that it had adopted its report on the European Commission's legislative proposal for a Regulation making targeted amendments to the Capital Requirements Regulation. The legislative proposal was published in October 2021 as part of the EU's Banking Package and concerns amendments to the CRR relating to the total loss absorbing capacity and the minimum requirement for own funds and eligible liabilities.

Proposed changes introduced by the text include the following:

• the introduction of a cap for the deduction mechanism (Daisy Chain) proposed by the European Commission; and
• including a request for the European Commission to assess the impact of the "Daisy Chain" framework on the different banking group structures to avoid any unintended consequences.

ECON also confirms that it has decided to enter trialogue negotiations with the Commission and the Council of the EU.

6. ESMA publishes final reports on the CCP Recovery Regime

On 31 January 2022, ESMA published its final seven reports on the CCP Recovery Regime (mandated under the CCP Recovery and Resolution Regulation (CCPRRR)).

The reports concern proposals for Regulatory Technical Standards on the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources, on the factors to be taken into account by the competent authority and the supervisory college when assessing the recovery plan and on the recompense mechanism for non-defaulting clearing members.

The reports also provide Guidelines on the consistent application of the triggers for the use of Early Intervention Measures, on the CCP’s recovery plan indicators and scenarios and on the restrictions of dividends in case of a significant non-default event.

• Guidelines on the consistent application of the triggers for the use of Early Intervention Measures
• Guidelines on CCP recovery plan scenarios
• Guidelines on CCP recovery plan indicators
• Draft RTS further specifying the factors that shall be considered by the competent authority and the supervisory college when assessing the CCP recovery plan
• Guidelines further specifying the circumstances for temporary restrictions in the case of a significant non-default event in accordance with Article 45a of EMIR
• Regulatory technical standards specifying the conditions for recompense
• RTS on the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources

7. FCA IFPR Newsletter: update on MIF007 submission date

On 31 January 2022, the FCA published its most recent IFPR Newsletter in which it clarified its approach regarding the first submission date for the ICARA assessment questionnaire (MIF007). Investment firms who had previously informed the FCA that their first submission date would be in 2022 are now permitted to submit their first MIF007 in 2023. However, in accordance with the prescribed notification requirements, firms need to notify the FCA of the new date using the following address: IFPRquery@fca.org.uk.

Other updates included:

• a new MIFIDPRU Remuneration Code webpage containing information on application, proportionality, reporting requirements, disclosure and performance adjustment; and
• all forms for IFPR applications and notifications now being available in Connect.

Firms can sign up to the IFPR newsletter by emailing the FCA.

For more information on the key upcoming IFPR deadlines for both SNI and non-SNI firms, please see our IFPR Key Actions & Timeline summary.

8. PRA Consultation Paper (CP2/22): Definition of capital: updates to PRA Rules and supervisory expectations

On 7 February 2022, the PRA issued a consultation paper setting out proposals to revoke the UK Technical Standards for own funds requirements (UK version of Commission Delegated Regulation (EU) 241/2014) and replicate it in the PRA Rulebook with proposed amendments to align with updates to the CRR. These cover, in particular, rules relating to the prior permission regime to reduce own funds instruments. The PRA is also proposing to update Supervisory Statement (SS) 7/13 "Definition of capital (CRR firms)" to enhance the quality of capital instruments issued by firms, simplify procedures where appropriate, and clarify PRA expectations in relation to permissions to reduce own funds instruments.

The FCA has also published the following:

• appendix 1 to CP2/22 outlining the proposed amendments to the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook;
• appendix 2 containing the proposed technical standards instrument revoking the Own Funds RTS; and
• appendix 3 containing proposed amendments to SS7/13.

The deadline for comments is 2 May 2022.

9. FCA's regulation round-up provides clarification on regulatory references

On 27 January 2022, the FCA published its regulation round-up for January 2022. Of particular interest, in the "Hot Topics" section, the FCA provided clarification regarding the regulatory references under the Senior Managers & Certification Regime (SM&CR) as follows:

• Firms should request and respond to requests for regulatory references promptly. The time frame of six weeks provided in SYSC 22 is a limit not a target.

• The template in SYSC 22 Annex 1 should be used when providing regulatory references.
• Firms are only required to take "reasonable steps" to obtain regulatory references. If a firm experiences difficulties, they should inform the FCA. If a firm is unable to obtain regulatory references as part of an application, the firm should set out the steps it took to obtain the references.
• Regulatory references should be assessed on a case-by-case basis. Individuals should not be automatically rejected due to a qualification in their references and firms should not have a quota for the number of qualified references that they will accept.

10. House of Commons (Treasury Committee): Economic Crime Report

On 2 February 2022, the House of Commons Treasury Committee issued a report on economic crime. The report looks at the effectiveness of measures taken to address economic crime since the Government’s Economic Crime Plan 2019-2022. The report's recommendations include the following:

• the Government should include measures to address fraud via online advertising in the Online Safety Bill, in the interests of preventing further harm to customers being offered fraudulent financial products;
• the Government should ensure that financial services advertising regulations also apply to online companies, and that the FCA has the necessary powers to effectively enforce the regulations;
• a timeline showing when the SARs reform programme milestones are expected to be met should be produced, as well as an annual progress report on the programme should be prepared;
• the forthcoming Government review of the regulatory and supervisory regime for anti-money laundering and counter-terrorist financing should address concerns raised about OPBAS and consider radical reforms (including a move away from the self-regulatory model and the creation of a new supervisory body);
• the FCA should report annually on numbers of de-risking decisions and on progress to ensure that banks are not unfairly freezing bank accounts and de-risking customers;
• the Government should ensure that there is proper consumer protection regulation across the whole cryptoasset industry;
• the Government should consider whether online platforms and social media companies should be required to do Know Your Customer checks on their advertisers, to make it more difficult for fraudsters to promote themselves; and
• the process for registration of cryptoasset firms for anti-money laundering should be speeded up.

11. EBA launches EU's central database for anti-money laundering and counter-terrorism financing (EuReCA)

On 31 January 2022, the EBA announced that it had launched EuReCA, a central database designed to assist in the coordination of efforts by competent authorities and the EBA in relation to AML/CFT.

Key aspects include the following:

• EuReCA will contain information on material weaknesses in individual financial institutions in the EU that competent authorities have identified (e.g. lack of adequate AML/CFT policies and procedures, including the absence of transaction monitoring at the group level and the absence of policies and procedures for high-risk customers);
• EuReCA includes internal audit findings identified by a prudential authority during an on-site inspection;
•  EUReCA is designed to serve as an early warning tool, with the EBA intending to share information from EuReCA with competent authorities as appropriate; and
• EuReCA will not start to collect personal data until the approval of the draft RTS by the European Commission.

12. PSR remedies consultation for card-acquiring market review

On 26 January 2022, the Payment Systems Regulator (PSR) published its initial remedies consultation paper from its card-acquiring review.

Following on from its market review in November 2021 in which it concluded that supplying card-acquiring services was not a workable solution for merchants with an annual card turnover of up to £50 million, the PSR has outlined proposals to enhance the services and choice for merchants. The PSR is considering four potential remedies:

• Greater transparency – providing summary information boxes outlining the important price and non-price service components of card-acquiring services will help merchants better understand the pricing elements of the services they use.
• Access to comparison tools – digital comparison tools will allow merchants to see if they are getting a good deal.
• Greater engagement – an agreed standard of messaging by providers will enable merchants to understand if their contract is due for renewal.

• The ability to easily change providers – removing barriers to allow merchants to switch providers without inconvenience or unnecessary costs.

The deadline for responses to the consultation is 6 April 2022. The PSR intends to release a provisional decision and a final remedies notice later in 2022.

13. ESAs publish response to ESMA's call for evidence on Digital Finance 

On 7 February 2022, the ESAs published a joint response to the European Commission's call for evidence in February 2021 on Digital Finance.

The ESAs' response includes the following proposals:

• encouraging a holistic approach to be taken to the regulation and supervision of the financial services value chain;
• convergence in the classification of cross-border services and in addressing money laundering risks;
• improving regulation and supervision of "mixed-activity groups";
• strengthened support on cross-border services;
• monitoring the use of social media in financial services; and
• improving consumer protection through enhanced disclosures and complaints handling.

Alongside the report a public call for evidence and a survey to National Competent Authorities have been published.

The press release can be accessed here.

14. ESMA: Call for evidence: On Market Characteristics for ESG Rating Providers in the EU

On 3 February 2022, ESMA issued a call for evidence on the a market characteristics for ESG rating providers. This follows a letter ESMA sent to the European Commission in January 2021 outlining concerns about the main challenges relating to ESG ratings and assessment. The call for evidence seeks to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU.

The call for evidence is mainly addressed to three target groups: ESG rating providers; users of ESG ratings; and entities subject to rating assessment of ESG rating providers.

Questions for ESG ratings providers include the following:

• mechanisms in place to deal with the identification and management of possible conflicts of interest in relation to product offerings;
• views on the level of relevance of ESG ratings to EU financial markets and financial market participants, and whether this level will increase in the coming years; and
• views on the level of risk ESG ratings currently pose to orderly markets, financial stability and investor protection in the EU and whether this level will increase in the coming years.

Questions for ESG ratings users include the following:

• terms of use of ESG rating providers;
• general views on ESG ratings in EU financial markets; and
• satisfaction with methodological transparency of products contracted for (including transparency around data sourcing).

Questions for entities covered by ESG rating providers include the following:

• mode of interaction with ESG rating providers providing an ESG rating (e-mail, conference call, IT platform, etc. and frequency of these interactions); and
• opportunities to correct any error relating to the ESG rating provided and if so, how this is performed and at what stage of the rating process.

The closing date for comments is 11 March 2022. ESMA plans to provide the European Commission with an overview of the market for ESG rating providers before the end Q2 2022.

15. European Commission present the Taxonomy Complementary Climate Delegated Act

On 2 February 2022, the European Commission presented a Taxonomy Complementary Climate Delegated Act. The Act sets out that certain gas and nuclear activities will be included in the list of economic activities covered by the EU Taxonomy Regulation. The Act also introduces specific disclosure requirements for businesses relating to their gas and nuclear activities.

This follows the publication of a press release on 1 January which confirmed that such activities would be included which we covered previously in our FSS here.

The College of Commissioners have now reached agreement as to the text of the Act and it will be formally adopted once it has been translated into all EU languages. It will then be sent to the European Parliament and Council to scrutinise. Providing they do not object to it, the Act is expected to apply from 1 January 2023.

The press release can be accessed here and the webpage can be accessed here.

16. ESMA publish consultation paper: Guidelines on certain aspects of MiFID II suitability requirements

On 27 January 2022, ESMA published a consultation paper setting out draft guidelines on certain aspects of the MiFID II suitability requirements in order to update the guidelines in line with amendments to MiFID II relating to sustainability.

The main amendments introduced to the MiFID II Delegated Regulation and reflected in the guidelines on sustainability are:

• collection of information from clients on sustainability preferences;
• assessment of sustainability preferences; and
• organisational requirements.

The consultation closes on 27 April 2022 and ESMA expect to publish its final report in Q3.

The press release can be accessed here and the webpage can be accessed here.

17. New timeline for EU Platform on Sustainable Finance

On 25 January 2022, the European Commission published a press release confirming a new timetable for the publication of reports for the EU Platform on Sustainable Finance. The Platform is a permanent expert group which advises and helps the Commission to establish sustainable finance policies such as the EU taxonomy. Reports on the environmental transition taxonomy, social taxonomy, and recommendations on technical screening criteria for the outstanding environmental objectives are now scheduled for Q1 2022.

18. New inquiry into the future of UK-EU financial services

On 4 February 2022, the European Affairs Committee launched an inquiry into the future of the UK-EU relationship in the financial services sector.

The inquiry is looking to address the following:

• how the UK's departure from the EU Single Market has impacted the UK financial services sector so far;
• how UK-EU regulatory cooperation has been affected by "the absence of a functioning framework";
• how non-equivalence will impact the future of cross-border financial services trade between the UK and EU; and
• how regulatory divergence and agreements with third countries have affected financial services trade between the UK and EU.

Since the UK and EU signed the Trade and Cooperation Agreement in December 2020, the EU has granted two time-limited equivalence decisions for financial services (one of which has already expired), whereas the UK has granted equivalence decisions to EEA member states in 28 areas.

The Committee anticipates to report on the inquiry by May 2022.

19. New Brexit Freedoms' Bill and inquiry into the future of retained EU law

On 31 January 2022, the European Scrutiny Committee launched an inquiry into the UK's future use of retained EU law. The inquiry focuses on how retained EU law is functioning in practice rather than which specific parts of retained law should be retained or replaced. Questions include (i) whether retained EU law is a sustainable concept, (ii) whether it should be interpreted in the same way as other domestic law and (iii) whether there are any uncertainties or anomalies in its use. The Committee is accepting evidence until 14 March 2022.

In a press release on the same day, the Prime Minister announced that the government will bring forward a 'Brexit Freedoms' Bill which will bring the "special status" of EU law to an end and make amending and removing outdated retained EU law an easier process. It is hoped that reforms under the Bill will remove £1 billion of red tape for UK businesses.

The government also published a paper on "The Benefits of Brexit: How the UK is taking advantage of leaving the EU". The paper includes a high-level summary on the future of financial services post-Brexit. The government's aim is to establish "an open, green and technologically advanced financial services sector that is globally competitive" through the following initiatives:

• An open and global financial hub – building relationships with other jurisdictions, bringing in investment and cultivating opportunities for cross-border trade.
• A competitive marketplace promoting effective use of capital – (i) rationalising and streamlining retained EU law and financial services regulation through the Future Regulatory Framework Review; (ii) reforming capital markets through the Wholesale Markets Review and Prospectus Regime Review; (ii) establishing a Financial Markets Infrastructure Sandbox to examine the use of new technologies; (iii) working on a Long-Term Asset Fund to encourage investment in long-term assets, and (iv) reviewing Solvency II and Securitisation regulation.
• Being at the forefront of technology and innovation – speeding up the growth of the fintech sector through: (i) creating a new Centre for Finance, Innovation and Technology to leverage expertise from across the UK; (ii) establishing a new regime for stable coins and (ii) the FCA launching a 'scale box' for fintech firms.
• A world leader in green finance – building on the success of the green financing programme in 2021 to become the "world's first net zero-aligned financial centre", as demonstrated by the decision to make net zero transition plans mandatory.

20. FCA: New webpage: Transforming data collection

On 26 January 2022, the FCA issued a webpage update in relation to the Transforming Data Collection Programme, a joint programme the FCA is undertaking with the Bank of England concerning how data is collected from the UK financial sector. 

The webpage states that the regulators will be concentrating on the following: integrating reporting to increase consistency in designing and delivering collections for value, reuse, and efficiency; modernising reporting instructions to improve how data is interpreted and implemented by firms; and defining and adopting common data standards that identify and describe data in a consistent way.

Furthermore, regulators will be widening their engagement in 2022 with solo-regulated firms to support them in engaging with the programme. The regulators note that many firms face challenges in relation to data collection and the FCA is keen to understand and address these issues.

21. Treasury Committee publish letter from FCA in relation to December 2021 oral evidence session

On 25 January 2022, the House of Commons (Treasury Committee) published a letter that they received from the FCA, dated 19 January 2022, which concerned the oral evidence session with the Treasury Committee that took place on 8 December 2021.

The letter notes that the FCA would be:

• publishing an updated Data Strategy in the coming months and ensuring that it has the appropriate infrastructure to run projects concerned with the collection, management and storing of data; and
• recruiting 100 additional permanent colleagues to help with authorisation application backlogs. They are also considering automating the process.