Financial Services SpeedRead: 24 November 2020

 Brexit

1. Treasury Committee announces launch of enquiry into the future of financial services in the UK post-Brexit

On 20 November 2020, the House of Commons Treasury Committee announced in a press release the launch of a new inquiry into the future of financial services in the UK after IP completion day. A call for evidence containing 17 questions was also published, with a deadline of 8 January 2021 for responses. The aim of the inquiry for the Treasury Committee is threefold:

• to examine how financial services regulations should be set and scrutinised by Parliament, given that EU directives will no longer govern new rules and regulations;
• to consider the government's financial services priorities when negotiating trade agreements with third countries; and
• to consider how regulators are funded and the extent to which financial services regulation should be consumer focused.

More information can be found on the Treasury Committee's webpage.

The inquiry follows the Chancellor of the Exchequer, Rishi Sunak's, statement to the House of Commons on the future of financial services and the Financial Services Bill on 9 November 2020. You can read more about the Chancellor's statement in the previous edition of our Financial Services SpeedRead here, and in our Brexit Bulletin here.

2. PRA statement on application of temporary transitional power to CRD V and BRRD II-derived legislation and new guidance documents published

On 13 November 2020, the PRA published a statement on the application of its temporary transitional power (TTP) to legislation relating to the implementation of the CRD V and BRRD II.

The PRA and the BoE have not identified any further exceptions to their transitional directions, as a result of onshoring amendments to CRD V and BRRD II-derived legislation. This means that transitional relief will apply to the small number of relevant obligations that are changed by onshoring amendments made to CRD V and BRRD II-derived legislation after IP completion day.

The PRA warns that firms must ensure that they are ready to comply with changes to legislation and PRA rules that are being made to implement CRD V and BRRD II, to the extent that these are relevant to firms. This is because these amendments are not onshoring amendments made under the EUWA and consequently the TTP will not apply.

The PRA's intention remains to grant transitional relief in respect of the rules in its Contractual Recognition of Bail-in (CROB) and Stay in Resolution Parts, except in relation to phase two liabilities as referenced in relation to CROB. This policy will remain the same irrespective of any changes to the PRA rules made due to BRRD II.

The PRA states that it may need to reconsider its approach if it makes changes to the final rules, following responses to its consultations on CRD V and BRRD II, which were published in July 2020 and October 2020.

On the same day, the PRA and BoE updated their TTP webpage to announce the publication of file-specific guidance documents to supplement the general guidance on the transitional directions published in October 2020. These guidance documents include the PRA Rulebook guidance, CRR guidance; Solvency II guidance; Securitisation guidance; BRRD guidance; and guidance on the Bank's use of transitional direction as FMI competent authority.

3. FCA updates its webpage on its expectations for firms' preparation for the end of the Brexit transition period

On 11 November 2020, the FCA updated its webpage on firms' preparations for the end of the transition period to set out considerations for EEA firms conducting business in the UK. 

The FCA acknowledges that how firms will be impacted at the end of transition period will depend on a number of factors, but that all firms should consider how the following issues may impact them, including passporting, changes to legislation in the UK (onshoring), the FCA's Temporary Transitional Power, data sharing and communicating with customers.

Further, the FCA notes that EEA firms that do not plan to enter the TPR or the FSCR need to notify the FCA of their plans, and that such firms should ensure that customers are treated fairly, including when considering what notice to provide and what support customers need to make alternative arrangements. Notifications to the FCA should be made by contacting it directly or through firms' usual supervisory contacts.

4. ESMA publishes updated Brexit statements on SFTR and EMIR reporting and the use of UK data in ESMA databases

On 10 November 2020, ESMA published the following three updated Brexit statements:

• Statement on the impact of reporting under EMIR and SFTR following the end of the UK implementation period, covering issues affecting reporting, record-keeping, reconciliation, data access, portability of data, aggregation of derivatives under Article 9 EMIR and of securities financing transactions reported under Article 4 SFTR;
• Statement on the use of UK data in ESMA databases and the performance of MiFID II calculations following the end of the UK implementation period, covering reference data, Relevant Competent Authority, annual transparency calculations, determination, Double Volume Cap and Ancillary Activities calculations; and
• Statement on ESMA's Data Operational Plan after the end of the UK implementation period. The statement covers actions in relation to Financial Instrument Reference Data System, FITRS Transparency System, Double Volume Cap System, transaction reporting systems and ESMA' registers and data.

5. HM Treasury announces financial services equivalence decisions for EEA member states

On 9 November 2020, HM Treasury announced its intention to grant equivalence to EEA States in a number of areas, to take effect from IP completion day.

The equivalence package includes:

• equivalence with regard to EEA regulated markets under Article 2A of UK EMIR, such that derivative transactions traded on EEA regulated markets will continue to be "exchanged traded derivatives" and will not be re-categorised as "OTC derivatives" under Article 2(7) of UK EMIR;
• partial equivalence for EEA states under Article 13 of UK EMIR, in relation to intragroup exemptions from the clearing and margining obligations;
• equivalence for EEA benchmark administrators, allowing them to be included on the FCA's BMR register for use by supervised entities in the UK (although note that the transitional regime for third-country benchmarks is likely to be extended to the end of 2025 in any case);
• equivalence for EEA CCPs, meaning that EEA CCPs will be eligible for recognition by the BoE under UK EMIR;
• equivalence for EEA central securities depository under CSDR, paving the way for cooperation arrangements to be made and EEA CSDs to be recognised by the BoE;
• quivalence feor EEA credit referencing agencies under CRAR, allowing non-systemic CRAs that are authorised or registered in the EEA to apply to be certified in the UK;
• equivalence for the purposes of Article 17(2) of the SSR, making EEA market makers eligible to use the Article 17 exemption from reporting (amongst other things);
• equivalence of EEA regulatory requirements under CRR, to prevent UK firms from becoming subject to increased capital requirements as a result of EEA exposures; and
• equivalence for the purposes of certain provisions of Solvency II.

The majority of the equivalence decisions have been made by directions under the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019.

Following the announcement, the FCA published its response to HM Treasury's equivalence decisions.

See our Brexit Bulletin on the equivalence decisions here.

6. HM Treasury publishes guidance document for UK equivalence framework

On 9 November 2020, HM Treasury also published a Guidance Document setting out its model for how the UK's equivalence framework for financial services will operate.

The Guidance Document covers the UK's equivalence model, assessment and decision-making process, and ongoing monitoring and withdrawal.

Among other things, HM Treasury intends for the UK's equivalence framework to be judged on outcomes, be a transparent and evidence-based process, as well as providing a stable and reliable arrangement for cross-border market access.

Financial Markets

7. FCA updates its Q&As on conduct risk during LIBOR transition

On 20 November 2020, the FCA updated its Q&As about conduct risk during LIBOR transition, to include the following two new Q&As:

• how firms that are actively transitioning existing customers from LIBOR to alternative rates can do so fairly, given that the spread between LIBOR and SONIA will vary; and
• whether LIBOR contracts can be converted on LIBOR cessation or loss of representativeness to Bank Rate plus an appropriate spread, rather than SONIA plus an appropriate spread.

8. FCA publishes a portfolio letter on its supervisory strategy for CRAs and CISPs

On 20 November 2020, the FCA published a portfolio letter on its supervisory strategy in relation to credit reference agencies (CRAs) and credit information service providers (CISPs). The FCA set out the key drivers of potential harm in relation to these firms, which include:

• the loss or misuse of personal data;
• poorly designed CRA products;
• ineffective product governance and poor data quality;
• technology resilience;
• disorderly firm failure leading to disruption in access to credit;
• complaints handling; and
• credit broking fee disclosure.

The FCA has stated that it expects firms to have in place contingency plans in place to deal with any major events, including COVID-19. The FCA will write to these firms again in 2021 with an update on the key risks in the sector and its updated supervisory plans.

9. HM Treasury launches UK Listings Review and calls for evidence

On 19 November 2020, HM Treasury published a call for evidence and Terms of Reference in relation to a review of the UK listing regime. The review is to be carried out by Lord Hill, with the objective of reforming the UK regime to encourage listings in UK markets.

Views are sought on whether certain aspects of the current regime could be more flexible, and if so, how they can be whilst also retaining high standards of corporate governance and market integrity. In particular, comments are sought in relation to:

• the 25% free float requirement;
• dual class share structures;
• track record requirements for premium listings; 
• the appropriateness of the prospectus requirements; and
• dual and secondary listings.

The deadline for the submission of responses is 5 January 2021. The review will then report to HM Treasury in early 2021.

10. FCA statements and consultations on approach to UK BMR powers and LIBOR transition

On 18 November 2020, the FCA published a number of statements in relation to the benchmarks regime. The FCA published a statement on amendments to be made to the UK BMR by the Financial Services Bill 2019-21. This provides background to the proposal to the give the FCA enhanced powers, in particular in relation to managing the orderly wind-down of critical benchmarks. These powers have been introduced at the present time in order to allow us to properly address the issues relating to LIBOR transition.

The FCA also published two consultations with respect to the FCA's proposed approach to:

• designating an unrepresentative benchmark using new powers under the proposed Article 23A of the UK BMR; and
• requiring changes to a critical benchmark, including its methodology, using new powers under proposed Article 23D of UK BMR.

These consultations will be of interest to administrators, contributors and users of critical benchmarks. The deadline for responses is 18 January 2021. At conclusion of these consultations, the FCA will set out its approach in Statements of Policy, to be published on its website.

Finally, the FCA published a statement on its proposed approach to use its benchmark powers to ensure an orderly wind down of LIBOR. This follows the IBA's press release on the same day, announcing it would consult on its intention that the euro, sterling, Swiss franc and yen LIBOR panels would, subject to confirmation following the consultation, cease at the end of 2021.

11. FCA warns firms to be responsible when handling client data

On 18 November 2020, the FCA published a press release to warn firms of the need to be responsible when handling client data, particularly if they leave the market or merge with another firm as a result to the current economic climate. Firms are reminded to ensure that they lawfully process and transfer client data in these situations, in line with data protection legislation such as the DPA 2018 and the GDPR 2016/679, and to consider the Principles for Business (in particular, Principle 3 (management and control), 6 (customer's interests) and 7 (communications with clients)).

The FCA states it will act where it identifies breaches of relevant parts of the FCA Handbook. Firms that intend to transfer or receive personal client data must be able to demonstrate how they have considered the fair treatment of consumers and how their actions comply with data protection and privacy laws.

12. FCA publishes statement on postponing or ceasing certain workstreams

On 13 November 2020, the FCA published a statement providing an update on work that it intends to either stop or postpone as a result of the impact of COVID-19 and the current economic conditions. Key changes to the regulator's work relate to:

• Duty of care: the FCA's work in relation to a potential duty of care for firms (as announced in its July 2019 feedback statement) has been delayed and the FCA now aims to consult on potential options in Q1 2021 (see DP 18/5);
• Introducing a single easy access rate (SEAR) for cash savings: the FCA has decided to stop its work in this area (see CP 20/1), because as interest rates for new products fall, so does the gap between rates paid to new and longstanding customers and the size of the harm falls. As such, the FCA does not consider that introducing the SEAR would be proportionate to the current level of harm in the market. The FCA will, however, continue to monitor the market and may revisit the area if it sees significant harm to consumers in the future; and
• Investment platforms exit fees consultation: the FCA has decided to stop its work on the consultation in relation to restricting platform exit fees. The FCA states it will, however, closely monitor the situation and may consult on new rules if market changes lead to harm re-emerging in the area.

13. Law Commission publishes a scoping paper on potential reforms to intermediated securities

On 11 November 2020, the Law Commission published a scoping paper, focused on investments in UK-incorporated public companies, that reviews the current law underlying intermediated securities and identifies key concerns of market participants. A range of possible solutions to these concerns are set out (note that these are not formal recommendations), with the aim of providing a basis for future focused policy development and reform. The paper is based on the Law Commission's own research and detailed responses to a call for evidence, as published in 2019.

In the paper, the Law Commission states that it considers an intermediated holding system for investment securities would provide significant benefits, including increased efficiency and economies of scale, reduced costs for intermediaries and convenience in enabling investors to hold a diverse portfolio of investments through a single intermediary. However, the downside to these advantages is that the system could impact negatively on ultimate investors, particularly in relation to corporate governance and transparency.

The Law Commission also published a summary of the scoping paper, which can be accessed here.

14. FCA publishes Primary Market Bulletin 31

On 11 November, the FCA published Primary Market Bulletin 31, which included two reports. The first on delayed disclosure of inside information notifications (see entry below) and the second on corporate governance disclosures by listed issuers (see entry below).

Of interest to issuers, this edition of the Primary Market Bulletin also covered:

• ESMA guidelines on disclosure requirements under the Prospectus Regulation and how they should be treated in the UK following the end of the transition period; and
• how the FCA expects issuers (and advisers) to deal with enquiries from the FCA relating to disclosure obligations under MAR, the Listing Rules, Disclosure Guidance and Transparency Rules.

15. FCA review of delayed disclosure of inside information by issuers

On 11 November, the FCA published findings of its review of the delayed disclosure of inside information (DDII) notifications that it receives under Article 17(4) of MAR. 

As a result of the review, the FCA has identified a number of areas where it will be increasing its oversight – these activities will be aimed primarily at raising awareness of the DDII notification requirements, as well as MAR in general. While awareness raising will be the FCA's main focus in the coming months, the FCA has warned that serious or repeated failures to comply may result in action by the FCA.

The FCA states that issuers may want to consider whether:

• they should seek and get adequate advice regarding the disclosure of inside information;
• they have given sufficient training and guidance to staff involved in process and the decision making;
• appropriate information provision and governance arrangements are in place; and
• where the disclosure of inside information is being delayed, they are able to consider whether the conditions to delay continue to be met on an ongoing basis and ensure its confidentiality until that point.

The FCA made a number findings, including in relation to (i) periodic financial information; (ii) unscheduled financial information; (iii) director / board changes; and (iv) overall volumes of DDII notifications.

16. FCA review of corporate governance disclosures by listed issuers

On 11 November, the FCA published the findings of its review of the compliance of listed companies with certain corporate governance disclosure rules.

The regulator analysed a sample of annual reports across several years for issuers across different listing segments and categories. The FCA identified several areas where corporate governance disclosures could be improved, and provides comments relevant to (i) all premium listed issuers; (ii) premium listed close-ended investment funds; (iii) standard listed issuers; and (iv) reporting with respect to diversity concerning the board.

Banking and Prudential

17. ECB announcement on Brexit and COVID-19

On 18 November 2020, the ECB published its November 2020 newsletter, in which it discussed in an article its expectations of banks in light of Brexit and COVID-19. The key points of this article were as follows:

• COVID-19 is not an excuse to avoid physically moving staff – "no additional flexibility is foreseen in principle" and there should only be "minimal delays" in carrying out any moves;
• even where EU27 national regimes may allow UK banks to do cross-border business, they nevertheless should not "carry out large volumes of activities in the EU in a business-as-usual environment". In line with this, the ECB expects "activities and services involving EU clients to be carried out predominantly within the EU";
• banks should not rely excessively on back-to-back arrangements to the UK - "EU products and transactions with EU clients involving non-EU products should be booked in the EU. Similarly, risk management capabilities related to EU products should be located in the EU";
• going further, EU subsidiaries of the UK should be "structurally profitable and operationally self-standing"; and
• in relation to outsourcing arrangements, EU subsidiary banks should be "operationally self-standing and not overly reliant on group entities outside of the EU". 

18. ECB to issue a revised handbook to bolster "fit and proper supervision"

In the same November 2020 newsletter referred to above, the ECB announced in an article its plans to issue a revised handbook in 2021 with enhanced fit and proper assessments for appointments to bank boards, replacing the current guide to fit and proper assessments. This forms part of its objective to harmonise high standards of appointment rules across the EU.

The rules are intended to:

• increase the ECB's influence early on in suitability assessments, particularly where those assessments take place after the appointee has taken up a position;
• enhance the scope of assessments for appointments and reappointments of board members; and
• provide further guidance on reassessing suitability where new material facts emerge.

19. Joint HM Treasury, FCA and PRA statement delaying implementation of IFPR and other prudential reforms

On 16 November 2020, HM Treasury, the FCA and the PRA published a joint statement introducing the UK's Investment Firms Prudential Regime (IFPR) and the implementation of Basel 3 reforms which make up the UK equivalent to the outstanding elements of the EU’s 2nd Capital Requirements Regulation, the legislative framework for which will be introduced through the Financial Services Bill 2019-21.

Importantly, target implementation date for the reforms has been pushed to 1 January 2022 (previously, summer 2021), following feedback from industry, which means that UK firms will have different capital requirements, compared to EEA firms, for six months (or more). HM Treasury has stated that it will ensure the relevant secondary legislation is in place in good time, while the regulators will jointly endeavour to provide industry with as much sight of the final rules as possible ahead of 1 January 2022.

Fund Management

20. ESMA speech on future challenges for fund managers

On 19 November 2020, ESMA published a speech given by Verena Ross, ESMA Executive Director, on the future challenges to be faced by fund managers. The speech focused, in particular, on (i) delegation in the light of IP completion day approaching and (ii) sustainable finance. The key points of the speech are as follows:

• while the European Commission reviews AIFMD, there is a need to recognise the increased operational complexities and supervisory risks that come with large-scale delegation arrangements. Linked to this, there is a further need for stronger alignment between the AIFMD rules and those under the UCITS framework to enhance investor protection and reduce operations and legal complexity;
• ESMA will be revising the draft technical standards on disclosures under Regulation (EU) 2019/2088 on sustainability-related disclosures, to reflect responses received by its consultation; and
• the ESAs are going to launch a consultation paper in January 2021 on further taxonomy-related product disclosures stemming from empowerment given to the ESAs by the Taxonomy Regulation ((EU) 2020/852).

21. ESMA publishes report in response to the ESRB's recommendation on liquidity risks in investment funds

On 12 November 2020, ESMA published a report in response to the European Systemic Risk Board's (ESRB) recommendation on liquidity risks in investment funds. The ESRB's recommendation, published on 6 May 2020, stated that ESMA should coordinate with NCAs to undertake a focused piece of supervisory work with investment funds that have significant exposures to corporate debt and real estate assets to assess the preparedness of the two segments to potential future adverse shocks.
ESMA's report identified 5 priority areas for action that would enhance the preparedness of certain investment funds in the event of deterioration in financial market liquidity:

• ongoing supervision of the alignment of the funds' investment strategy, liquidity profile and redemption policy;
• ongoing supervision of liquidity risk assessment;
• the establishment and reporting of fund liquidity profiles;
•  an increase of the availability and use of liquidity management tools; and
• the supervision of valuation processes in a context of valuation uncertainty.

ESMA has stated that it will next follow up with NCAs on the first, second and fifth of the above policy areas to foster supervisory convergence amongst NCAs in how they supervise firms' compliance with their obligations in the area.

22. ESMA publishes consultation paper on guidelines for funds' marketing communications

On 9 November 2020, ESMA published a consultation paper on draft guidelines for funds' marketing communications under Article 4 of Regulation (EU) 2019/1156, on the cross-border distribution of collective investment undertakings. The purpose of the draft guidelines is to specify to fund managers the requirements for marketing communications sent to investors to promote UCITS and AIFs. These requirements are that the material must:

• be identifiable as marketing material;
• describe the risks and rewards of purchasing units or shares of an AIF or units of a UCITS, in a prominent manner; and
• contain information that is fair, clear and not misleading.

Comments on the draft guidelines can be made until 8 February 2021. ESMA will issue final guidelines by 2 August 2021.

See our briefing here.

AML / CTF

23. National Crime Agency publishes its SAR Annual Report 2020

On 19 November 2020, the National Crime Agency (NCA) published its Suspicious Activity Reports (SAR) for Annual Report 2020. Key statistics from 2020 are as follows:

• a record number of 573,085 SARs were received and processed by the UK Financial intelligence Unit of the NCA in 2020 – representing a 20% increase from the previous year, with an 81% increase in requests for a defence against money laundering or terrorist financing (DAML); and
• of 61,978 DAML SARs, 2,055 (3.31%) were initially refused (with 690 subsequently being granted in the initial moratorium period, leaving 1,365 cases refused).

FinTech

24. FCA publishes Dear CEO letter on its supervisory strategy for price comparison websites

On 16 November 2020, the FCA published a Dear CEO letter to firms on its supervisory strategy for price comparison websites (PCWs). The letter sets out the following key harms and drivers of harm, together with expectations of the actions firms should take to remedy / mitigate them:

• consumers being sold products that do not meet their demands and needs;
• consumers being unable to access financial services;
• ineffective governance arrangements and poor culture;
• poor operational controls; and
• poorly managed innovation.

The FCA will write to PCW firms again in 2022 to provide an update of the above risks, the extent to which they are being mitigated and the FCA's updated supervisory plans.

Authors: Emma Tran and Vidhi Mahajan