Financial Services SpeedRead 27 January edition

1. FCA publishes guidance consultation on its approach to compromises for regulated firms

On 25 January 2022, the FCA published a guidance consultation on its approach to compromises for regulated firms (GC22/1). Compromises refer to arrangements that allow a firm to settle its liabilities with creditors and/or shareholders (in particular, redress liabilities). The consultation sets out how the factors that the FCA considers when assessing compromises and the FCA's role in relation to proposed compromises.

The consultation makes clear that firms which seek to limit their liabilities through compromise should do so in a way that provides the best possible outcome for customers. Failure to do so may lead to the FCA objecting to the firm's proposal in court.

The guidance is aimed at both solo-regulated firms and dual-regulated firms. The consultation runs until 1 March 2022.

2. FCA provides supervisory flexibility on the short selling indicator in UK MiFIR transaction reports

On 13 January 2022, the FCA outlined temporary measures in relation to the reporting of the short selling indicator in transaction reports under UK MiFIR (RTS 22, field 62).

Article 26(7) of UK MiFIR requires firms to correct errors and omissions in the short selling indicator field and resubmit affected transaction reports. The FCA has confirmed that it does not expect firms to notify it about issues affecting the short selling indicator field through an errors and omissions notification form. The FCA will not take actions against firms who do not meet the requirements for the time being.

These temporary measures are being put in place while the FCA considers more permanent changes to the UK MiFIR transaction reporting regime (including but not limited to the future of the short selling indicator). The FCA will keep the position under review.

3. EBA consultation: draft Guidelines on the higher earner data collection exercises under CRD and IFD

On 21 January 2022 the EBA published a consultation paper on draft guidelines on the higher earner data collection exercises under the Capital Requirements Directive (CRD) and the Investment Firms Prudential Directive (IFD).

The draft guidelines have been published to reflect the amended remuneration framework contained in the CRD V and to reflect changes from the specific remuneration regime set out in IFD and IFR. The establishment of two distinct regulatory frameworks has required a separation of the data collection on high earners in credit institutions and investment firms. The templates and instructions have been updated accordingly and specific templates for investment firms have been provided.

The higher earner data collection exercises under the CRD and IFD require institutions and firms to collect certain information in relation to natural persons remunerated EUR 1 million or more per financial year. The new reporting format included in the revised guidelines is to be used for the annual collection of data regarding high earners, starting for the financial year that ends in 2022. Until then the data collection exercise will be conducted under the existing Guidelines, where applicable.

Further information on the consultation can be accessed on the EBA's website.

4. EBA consultation: remuneration and gender pay gap benchmarking guidelines

On 21 January 2022, the European Banking Authority (EBA) published two consultation papers in relation to updates to its guidelines on remuneration and gender pay gap benchmarking to reflect the additional requirements introduced under the Capital Requirements Directive (CRD V):

• draft guidelines on the benchmarking exercises on the remuneration practices, the gender pay gap and approved higher ratios under Directive 2013/36/EU; and
• draft guidelines on the Benchmarking exercises on remuneration practices and gender pay gap under Directive (EU) 2019/2034.

Benchmarking the gender pay gap will enable competent authorities to monitor measures that have already been implemented regarding "equal pay for equal work" and how these measures develop at different pay grades. The draft guidelines also seek to ensure the benchmarking of the gender pay gap is representative of a selection of institutions.

The EBA has introduced specific templates for the benchmarking, as well as updating the templates for data collection, taking the European Commissions' Implementing Regulation on disclosures into consideration.

The new reporting framework for the collection of data is anticipated to apply in 2023 for the financial year 2022. Data on the gender pay gap will first be collected in 2024 for the financial year 2023.

5. UK Future Regulatory Framework Review: regulation of CCP and CSDs

On 17 January 2022, as part of its Future Regulatory Framework Review, HMT released a consultation paper outlining the government's proposals for revising the UK's approach towards regulating central counterparties (CCPs) and central securities depositaries (CSDs).
Given the Bank of England's (BoE) role as the regulator of CCPs and CSDs, the government is considering granting the BoE 'general' and 'additional' rule-making powers over CCPs and CSDs (modelled on the rule-making powers granted to the FCA and PRA's under FSMA).

As part of the government’s proposal to grant the BoE these enhanced rulemaking responsibilities, the government also intends to put in place a revised set of statutory objectives and principles that will guide the Bank’s regulation of CCPs and CSDs. In particular, in addition to an extended primary objective related to financial stability, the government is proposing to introduce a secondary objective for th BoE to "facilitate innovation".

The consultation closes on 28 February 2022.

6. Valuation of UCITS and AIFs: ESMA launches common supervisory action with NCAs

On 20 January 2022, the European Securities and Markets Authority (ESMA) published a press release stating it is launching a common supervisory action (CSA) with national competent authorities (NCAs) on the valuation of UCITS and open-ended alternative investment funds (AIFs) within the EU.

Throughout 2022, the CSA plans to evaluate the compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD regulations. In particular, the CSA will focus on authorised managers who invest in less liquid assets, which include unlisted equites, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities which are not actively traded and bank loans.

The CSA will use a common assessment framework developed by ESMA. The CSA is intended to foster consistent and effective supervision of valuation methodologies, policies and procedures of supervised entities to ensure that less liquid assets are valued fairly both during normal and stressed market conditions, in line with applicable rules.

No updates included for this fortnight's edition of the FSS.

No updates included for this fortnight's edition of the FSS.

No updates included for this fortnight's edition of the FSS.

7. Cartel behaviour in prepaid cards market: PSR fines five companies more than £33 million

On 18 January 2022, the Payment Systems Regulator (PSR) published a statement announcing it had fined five companies more than £33 million for infringing competition law within the prepaid cards market in Great Britain: (1) Mastercard (£31,560,062); (2) allpay (£28,553); (3) Advanced Payment Solutions (APS) (£755,419); (4) Prepaid Financial Services (PFS) (£916,746); and (5) Sulion (£572).

The PSR concluded that the five parties breached competition law by agreeing not to compete or poach each other's customers in the prepaid cards market in Great Britain. The infringing conduct included collusion in allocating new public sector customer contacts between the parties and two parties agreeing not to target each other's public sector customers when a contract was up for renewal or tender. The prepaid cards concerned were used by local authorities to allocate welfare payments to vulnerable persons.

8. European Commission letter on Payment Accounts Directive and negative interest rates

On 17 January 2022, the Danish Financial Supervisory Authority published a letter it had received from the European Commission regarding the interaction between the Payment Accounts Directive (PAD) and negative interest rates following the request (from the Danish Financial Supervisory Authority) for the Commission's views on the compatibility with PAD of charging negative interest rates on payment accounts.

The Commission stated that the possibility of charging negative interest rates was not envisaged at the time that PAD was brought into force. As such, the question for their consideration is whether negative interest rates are to be considered a "fee" in the sense of Article 2(15) PAD. The Commission considered that it may be argued that "fee" should be interpreted broadly to "ensure financial inclusion". If such a view is followed, negative interest rates would be regarded as a fee linked with the service of placing funds. However, it may also be argued that the legislators' intended to distinguish between fees for specific service and interest rates (which are not linked to a specific service). On this reading, negative interest rates would not be a fee as it would be a charge paid in relation to a service.

The Commission conclude that they "lean towards" the answer that interest rates are not considered as "fees" and therefore are not required to comply with the "reasonableness" criteria in Article 18. However the Commission note that the determination of this question ultimately lies with the ECJ.

9. EPC consults on the proposed [Instant] Euro One-Leg Out Credit Transfer Arrangement Rulebook

On 17 January 2022, the European Payments Council launched a consultation on its proposed [Instant] Euro One-Leg Out Credit Transfer (Inst Euro OCT) Arrangement Rulebook and a proposed Maximum Amount for Instant Euro OCT Instructions under the Inst Euro OCT Arrangement Rulebook. The proposed Arrangement sets out business requirements and the Inter-PSP rules for the operation of the SEPA-Leg of a Euro OCT Arrangement. Under the proposed Arrangement, a Euro OCT is defined as an electronic payment instrument for making international euro credit transfer payments between a payment account held at a payment service provider established in and/or licensed to operate in a country or territory included in the SEPA geographical scope, and an account held at a financial institution established in and/or only licensed to operate in a non-SEPA country or territory. The proposed Rulebook supports both incoming and outgoing Inst Euro OCTs.

The proposed Maximum Amount for Instant Euro OCT Instructions under the Inst Euro OCT Arrangement Rulebook is 100,000 EUR per transfer. This amount is applicable for both incoming and outgoing Inst Euro OCT.

The EPC states it is keen to gauge the level of interest among SEPA participants for this arrangement and that it will allow sufficient lead time to implement any adaptation to the maximum amount instructions. The deadline for comments on the proposed Arrangement Rulebook is 17 April 2022.

10. BoE announces revised implementation plan for ISO 20022 migration

On 17 January 2022, the Bank of England (BoE) updated its webpage on changes to the Bank’s ISO 20022 migration.

The BoE have announced a revised implementation programme following consultation with CHAPS Direct Participants. This announcement was made via their updated webpage. As a result the migration of CHAPS to ISO 20022 will now take place as a single event in April 2023 rather than two phases in June 2022 and February 2023. The full timeline of the implementation can be found here. To summarise, the transition process will take the following form:

• Transition State 2: The BoE will deliver a pilot platform for CHAPS Direct Participants in summer 2022 to test ISO 20022 messages.
• Transition State 2.1: The migration of live CHAPS service to ISO 20022 will take place in April 2023.
• Transition State 3: The BoE will introduce RTGS2 core ledger and settlement engine in spring 2024.
• Transition State 4: the BoE will launch a consultation on the scope and timing of Transition State 4 in spring 2022.

The move to ISO 20022 marks a shift in the UK payments industry to bring it in line with the standard used across the world.

Technical resources for the migration to ISO 20022 can be found here.

11. Payment Services Directive: EBA's preliminary observations on selected payment fraud data

On 17 January 2022, the European Banking Authority (EBA) released a discussion paper on its preliminary observations on selected payment fraud data under the Payment Services Directive (PSD2) for 2019-2020.

All payment service providers in the EU must report payment fraud to national competent authorities (NCAs) under the PSD2. NCAs must then make statistical data on fraud relating to alternative payment methods available to the EBA and the European Central Bank (ECB).

The paper provides an indication of the "preliminary patterns" across the following payment instruments: credit transfers, card-based payments and cash withdrawals. The paper also sets out some inconclusive patters which would benefit from further analyses and comments from market stakeholders.

Preliminary patterns indicate that the regulatory requirements concerning payment security are proving effective. In almost all cases, transactions which are authenticated with strong customer authentication (SCA) are resulting in a substantially lower share of fraudulent payments in relation to total payment volume and value than those not using SCA. The patters also reveal that there is a considerably higher amount of fraud in cross-border transactions involving non-EEA counterparts than those located in the EEA.

The paper notes that despite improvements in the quality and completeness of data over the two years, there were a number of data limitations which needed to be considered when aggregating and assessing the data, which are set out in the paper.

The deadline for comments on the consultation is 19 April 2022.

12. FCA publishes consultation paper on cryptoassets

On 19 January 2022, the FCA published its consultation paper "Strengthening our financial promotion rules for high risk investments, including cryptoassets" (CP22/2).

The FCA are consulting on their proposals to change:

• their classification of high-risk investments;
• the consumer journey to high-risk investments;
• strengthening the role of firms approving and communicating financial promotions; and
• applying their financial promotion rules to qualifying cryptoassets.

Feedback must be submitted by 23 March 2022. The webpage can be accessed here and the press release can be accessed here.

For more information, please see our detailed briefing.

13. HMT consultation response confirms regulation of cryptoasset promotions under UK financial promotion regime

On 18 January 2022, HMT published their response to their consultation paper, launched in July 2020, on a proposal to bring certain cryptoassets into the scope of the Financial Promotion Order (FPO).

The response has confirmed that the promotion of cryptoassets will be brought within the scope of the FPO. This means that all cryptoasset promotions will have to be issued or approved by an authorised firm. It should be noted that this also applies to those firms that are registered as cryptoasset service providers under MLD5. The new rules aim to increase consumer protection to ensure that cryptoasset advertisements are fair, clear and not misleading.

The government intends to introduce a transitional period of approximately six months to allow for the finalisation of the amendments to the FPO and the complementary FCA rules.

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

For more information, read our briefing on this topic.

14. House of Lords Economic Affairs Committee publishes 'Central Bank Digital Currencies' report

On 13 January 2022, the House of Lords Economic Affairs Committee published its 'Central bank digital currencies: a solution in search of a problem?' report.

The Committee concluded that there is no "convincing case" for the UK to have a central bank digital currency (CBDC) at present. Although a CBDC may bring about advantages such as quicker settlement and cheaper and faster cross-border payments, financial stability and the protection of privacy present major challenges. The Committee noted that a significant amount of work is needed to find feasible solutions which won't involve "difficult design trade-offs" which could make a CBDC unappealing.

In the report, the Committee asked the Joint Taskforce, (created by the Bank of England and HM Treasury to investigate the potential of a CBDC for the retail market), to answer key questions such as what the most important long-term problem(s) are to which it thinks a CBDC could help address, as well as how a CBDC could be the better option compared to alternative set-ups.

The Committee acknowledged that consumers' payment preferences, technological advancements and the decisions of other countries may improve the case for a UK CBDC in the future. Given the long lead times to scope and develop a CBDC, the Committee advised the Joint Taskforce to continue to (i) examine the rationale and technology of a CBDC; (ii) collaborate with international partners on the standards and principles of a CBDC; and (iii) learn lessons from other countries on their experiences of the usage and technical design of a CBDC.

15. EBA publishes final report on ITS on prudential disclosures on ESG risks in accordance with Article 449a CRR

On 24 January 2022, the EBA published its final report on the draft implementing technical standards (ITS) on prudential disclosures on ESG risks in line with Article 449a CRR. A factsheet and flowchart were published alongside the final report.

The proposals set out in the ITS require institutions to disclose information relating to the climate risks that they face, what mitigating actions they are taking to address such risks, and Green Asset ratio and Banking Book Taxonomy Alignment ratio.

The report sets out the final draft ITS on Pillar 3 disclosures on ESG risks which put forward tables, templates and instructions in order to meet the requirements of Article 449a CRR. The ITS includes:

• tables for qualitative disclosures on environmental, social and governance risks;
• templates with quantitative disclosures on climate change transition risk;
• a template with quantitative disclosures on climate change physical risk; and
• templates with quantitative information and key performance indicators on climate change mitigating measures.

These tables and templates can be found at Annex 1 to the final report. Annex II includes instructions to institutions on how to complete the ESG prudential disclosure templates.

The press release can be accessed here.

16. ECB's opinion on European green bonds

On 19 January 2022, the European Central Bank (ECB) published in the Official Journal its opinion (dated 5 November 2021) on a proposal for a regulation on European green bonds.

The opinion proposes a number of matters, in particular:

• Alignment with the Taxonomy Regulation - The ECB supports the proposal that the use of proceeds of EuGBs will relate to the economic activities that meet the taxonomy requirements or that will meet the taxonomy requirements within a defined period of time. This proposal aims to provide clarity for issuers.
• Later amendment of the delegated acts - The regulation proposes that issuers are to allocate bond proceeds by applying the delegated acts adopted by the Commission pursuant to the Taxonomy Regulation provisions which were applicable at the time that the bond was issued, when allocating bond proceeds to debt, or at the point in time when the debt was created. However, if the delegated acts are subsequently amended following issuance of the bond, where bond proceeds are allocated to debt, after the creation of debt, the issuer should allocate proceeds with respect to the amended delegated acts within five years after their entry into force. The ECB have however proposed that issuers should be allowed to allocate proceeds by applying the respective delegated acts applicable at the point in time when the bond was issued for the entire duration of the bond's lifetime. The ECB is of the opinion that this will bolster financial stability in order to facilitate the function of the EuGB market.
• Transition from voluntary to mandatory applicability - In order to mitigate greenwashing concerns, the ECB proposes to make the EuGB standard mandatory for newly issued green bonds within a reasonable time period.

17. Updates to non-financial reporting: climate-related financial disclosures

On 18 January 2022, the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 were published. Certain large UK LLPs (UK LLPs which have more than 500 employees and a turnover of more than £500 million) will need to report climate-related financial information in their Strategic Reports or Energy and Carbon Reports.

On 19 January 2022, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 were also published. Certain companies (UK companies who are currently required to prepare a non-financial statement; UK companies with securities admitted to AIM with more than 500 employees; or other UK companies which have more than 500 employees and a turnover of greater than £500 million), will need to report climate-related financial information in the Non-Financial and Sustainability Information statement in their Strategic Report.

Reflecting the Taskforce on Climate-related Financial Disclosures (TCFD)'s recommendations, under both sets of regulations relevant LLPs and companies will need to describe the following in its disclosures:

1. the main climate-related risks and opportunities which are material for its business;
2. its governance and risk management approaches to these risks and opportunities;
3. the impact of these risks and opportunities on its business model and strategy; and
4. the targets and key performance indicators it applies to assessing and managing these risks.

The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 will enter into force on 5 April 2022 and the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 will enter into force on 6 April 2022.

18. TPR firms: FCA confirms expectations and actions

On 18 January 2022, the FCA published a press release and webpage confirming that European firms who wish to stay in the TPR must meet the FCA's standards to continue operating in the UK.

The FCA reiterated that only those firms wishing to operate in the UK on a long-term basis and meeting the standards to do so should use the TPR. The FCA indicated that they may ask firms to stop undertaking new business or remove them from the TPR altogether for not meeting its expectations, which include:

1. missing their 'landing slot';
2. failing to reply to mandatory information requests;
3. having no plan to apply for full authorisation; and
4. the FCA refusing their application.

For the same reasons, the FCA may also direct a FSMA firm to apply for a landing slot sooner than scheduled and, for payments and e-money firms, ask for or specify (if they fail to do so) a date when they will stop engaging in new business.

19. EBA publish a letter from European Commission Director General of FISMA in relation to the Mortgage Credit Directive

On 14 January 2022, the European Banking Authority (EBA) published a letter from John Berrigan the European Commission Director General of FISMA to José Manuel Campa, EBA Chair along with a call for evidence in relation to the Mortgage Credit Directive (MCD) (following the consultation and call for evidence launched on the MCD by the Commission in November 2021).

In the letter the Commission have requested advice from the EBA on a number of topics related to the MCD (which are set out in the call for evidence).

Specifically, the EBA have been invited to provide technical advice on:

• MCD evaluation focussing on exclusions from the scope of the MCD, tying / bundling and foreign currency loan;
• the impact of digitalisation, focussing on peer-to-peer lending platforms, information disclosure rules (at pre-contractual and advertising stages), creditworthiness assessment and robo-advice;
• ways to facilitate the cross-border provision for mortgages;
• ways to contribute to financial stability including lessons learnt during Covid-19;
• sustainability including green mortgages and properties at risk due to climate change; and
• other ad hoc issues.

The deadline for the advice is 30 June 2022.

20. India and UK launch Free Trade Agreement negotiations

On 13 January 2022, India and the UK released a joint statement formally initiating negotiations for a Free Trade Agreement (FTA) between the two countries. The first round of negotiations will start on 17 January and later rounds will occur approximately every five weeks.

The UK also released a document outlining its strategic approach towards the FTA negotiations.