Financial Services SpeedRead: 27 October 2020

 

 

Brexit

ESMA publishes statement on share trading obligation for shares under MiFIR after implementation period

On 26 October 2020, ESMA published a statement directed to market participants on the operation of the share trading obligation (STO) under MiFIR after the end of the implementation period.

ESMA notes that, in the absence of an equivalence decision in respect of the UK by the European Commission, the conflicting EU and UK STOs may potentially create a risk of disruption, in particular for UK branches of EU investment firms and for EU branches of UK investment firms.

ESMA states that the trading of shares with an EEA ISIN on a UK trading venue in GBP by EU investment firms occurs on a non-systematic, ad-hoc, irregular and infrequent basis. Therefore, it is expected that those trades will not be subject to the EU STO, in accordance with Article 23 of MiFIR.

ESMA has indicated that it aims to minimise disruption as much as possible and avoid occasions in which regulatory obligations will overlap between the EU and UK STO regimes. However, the absence of transparency as to the current UK STO regime has made this difficult to achieve. We expect further statements from the FCA on the operation the UK STO in the coming weeks.

ESMA notes that the statement is only meant to clarify the application of the EU STO to shares with an EEA ISIN, and address the specific circumstances of trading an EEA ISIN on UK trading venues in GBP.

Following ESMA's updated statement on 1 October 2020 on the impact of Brexit on the application of MiFID II/MiFIR, ESMA has on 27 October 2020 announced that it has updated its list of third-country venues. UK venues which received a positive assessment have been added to (i) the annex to the opinion related to post-trade transparency and (ii) the annex to the opinion related to position limits. This means that from 1 January 2021:

• EU investment firms will not be required to report transactions executed on a UK trading venue in ESMA's list via an EU APA; and
• commodity derivative contracts traded on a UK trading venue in ESMA's list will not be considered as economically equivalent over-the-counter contracts for the purpose of the EU position limit regime.

HM Treasury publishes its response to consultation on the transposition of the BRRD II Directive and Draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulation 2020 laid before Parliament

On 15 October 2020, HM Treasury published its response to its consultation on the transposition of the BRRD II Directive, setting out the government's approach. The government is transposing BRRD II via either secondary legislation or regulator rules (in line with the previous approach for the transposition of the BRRD).

The Government will implement all obligations which require transposition before IP Completion Day, but will not transpose BRRD II provisions which apply to firms after the end of the implementation period.

HM Treasury will transpose the new Article 44a of the BRRD II using FCA rules (in order to introduce restrictions on the selling of subordinated eligible liabilities to retail clients) and the new Article 71a, by including the new pre-resolution moratorium power within the definition of ‘crisis management measure’ in the 2009 Banking Act (crucially, this approach means no changes of substance are required to the PRA’s stay rules, and so will not require firms that are already compliant with the PRA’s stay rules to repaper contracts).

Having taken into account industry concerns, HM Treasury confirmed that certain provisions which are not deemed suitable for the UK resolution regime after leaving the EU will subsequently be 'sunsetted'. The effect of the sunset clauses is that certain rules will start to apply on 28 December 2020 (the BRRD II implementation cut-off date) but will then cease to have effect in the UK from 1 January 2021, including:

• Article 1(6) BRRD II, which amends the existing in-resolution moratorium power under Article 69 of BRRD.
• Article 1(12) of BRRD II, which inserts a new Article 33a in BRRD to introduce a pre-resolution moratorium power. The inclusion of the pre-resolution moratorium power within the definition of ‘crisis management measure’ in the 2009 Banking Act will also be sunsetted;
• Article 1(20) of BRRD II, which introduces Article 48(7) of BRRD, making changes to priority of debts in insolvency;
• Article 1(21) of BRRD II, which updates Article 55 of BRRD on the contractual recognition of bail-in (see further below); and
• Article 1(30) of BRRD II, which amends the existing in-resolution moratorium power under Article 69 of BRRD.

Notably, the PRA's existing contractual recognition of bail-in rules will be revoked from 28 December for the remainder of the implementation period and replaced from IP Completion Day. The PRA's consultation on the new rules is expected in the coming weeks. It is possible that we will see a divergence between EU and UK contractual recognition of bail-in rules thereafter.

Finally, the Government also intends to revoke any regulatory technical standards (RTS) and implementing technical standards (ITS) which relate to provisions not implemented or not suitable for the UK that are developed by the EBA and adopted by the EU Commission by the end of the implementation period.

Supplementing the above, a draft version of the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020, was also published on 15 October 2020, along with a draft explanatory memorandum. The regulations transpose BRRD II in accordance with HM Treasury's approach in the response to consultation and also make other "onshoring" changes to corrects deficiencies arising in retained EU law, in preparation for IP Completion Day.

Parts 1 to 3 and Chapter 3 of Part 4 come into force on 28 December 2020. Part 4 (apart from Chapter 3) comes into force on IP Completion Day. Part 5 comes into force on 28 December 2020, but ceases to have effect on IP Completion Day. It is Part 5 that effects the sunsetting provisions.

UK Government extends power to depart from retained EU case law

On 15 October 2020, the government laid the European Union (Withdrawal) Act 2018 (Relevant Court) (Retained EU Case Law) Regulations 2020 before Parliament, together with a draft explanatory memorandum.

The Regulations:

• extend the power to depart from retained EU case law after IP Completion Day to specified appeal courts, including the Court of Appeal in England and Wales;
• establish that the relevant courts must, when deciding whether to depart from retained EU case law, apply the same test as the Supreme Court would apply in deciding whether to depart from its own case law, namely where it considers it "right to do so"; and
• affirm the existing rules of precedent between decisions of the domestic courts.

These provisions, and any relevant court's departure from retained EU case law after IP Completion Day, are subject to relevant separation agreement law (including the withdrawal agreement). The Regulations come into force on IP Completion Day (11:00pm on 31 December 2020).

References to "exit day" in financial services onshoring instruments to be updated and further guidance on intragroup exemptions under EMIR

On 15 October 2020, HM Treasury announced plans to bring forward further secondary legislation under the EUWA 2020 to update references to "exit day" within the substantive provisions of Financial Services EU Exit SIs to refer instead to "IP completion day" (31 December 2020). It will also make sure that the temporary transitional power (also known as the standstill power) is available for use from IP Completion Day, rather than from exit day. Time periods will generally remain the same length, so a reference to “one year from exit day” will become “one year from IP completion day”.

The announcement also makes reference to the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, which were published in draft form on 15 October 2020. These regulations make amendments to recently applicable and related EU legislation (which will form part of retained EU law at the end of the Implementation Period / from IP Completion Day) and various other financial services legislation where appropriate. Changes brought in by the instrument include:

•  transitional and savings provisions concerning trade repositories relating to the Regulations on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFTR) in order to ensure a temporary registration regime is in place trade repositories;
•  transitional and saving provisions concerning the securitisation repositories under the Securitisation Regulation ((EU) 2017/2402). The Regulations ensure that the FCA can receive and consider applications from securitisation repositories before the end of the implementation period;
• various amendments to previous EU Exit financial services instruments and primary legislation in order to update outdated cross-references EU regulations, such that they refer to the version of the EU regulation as it will be in force at the end of the implementation period; and
• miscellaneous amendments to 40 Brexit statutory instruments and eight retained direct EU legislations relating to financial services.

Notably, the regulations make amendments to the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/335) to ensure that all UK firms that currently benefit from an intragroup exemption from the clearing obligation on or after 21 December 2020 will also automatically have an exemption in the UK’s temporary regime. With respect to the intragroup exemption from the margin requirements, the EU's derogation expired on 4 January 2020, and have not been formally extended. Under the regulations, UK firms with intragroup transactions with non-EU group entities where no equivalence has been granted will need to notify the FCA in order for exemptions from the previous EU regime to continue under the UK’s temporary regime. The FCA will set out further details on the notification process in due course.

PRA and FCA publish Dear CEO letter to insurance firms on final preparations for end of Brexit transition period

In our previous FSS update we covered the PRA and FCA's joint Dear CEO / Branch Manager Letter of 9 October 2020, reminding firms that they need to be prepared for a range of potential outcomes at the end of the implementation period.

Following on from this, on 21 October 2020, the PRA and FCA published a joint Dear CEO letter sent to insurance firms in relation to final preparations for the end of the Brexit implementation period. Although the letter is addressed to insurance firms, the points on EEA bank account closures (see below) are interesting for financial services firms generally. Firms are encouraged to continue to build on their preparatory work to ensure they (and their clients) are ready for a range of scenarios at the end of the transitions period. The letter sets out key areas requiring final preparation, including: 

• Contingency planning and continuity of cross-border business in respect of EU liabilities: firms intending to run-off or transfer their EU liabilities should ensure that they finalise preparations and implement suitable and realistic contingency plans;
• Part VII saving provision: parties can obtain a court order sanctioning the transfer of insurance business for up to two years from the end of the IP Completion Day;
• Data: in the absence of a decision by the European Commission on UK data protection adequacy, firms can comply with cross-border personal data transfer laws by using standard contractual clauses;
• EEA bank account closures: where firms have customers in the EU who are reliant on UK bank accounts that may need to be closed, they will need to review their capability to make and receive payments to and from overseas accounts; and
• EEA passporting firms: on entry into the temporary permission regime on IP Complete Date, EEA passporting firms will obtain temporary Part 4A permission to operate in the UK pending permanent authorisation as third country branches. Firms must ensure that they can comply with the same obligations and supervisory framework which applied to them prior to IP Completion Day.

Financial Markets

Financial Services Bill 2019-21 published and introduced to Parliament

On 21 October 2020, the Financial Services Bill 2019-21 (the Bill) was introduced to Parliament. The text of the Bill was published, along with explanatory notes in relation to the Bill. The Bill represents a significant milestone and is intended to, "enhance the UK’s world-leading prudential standards and promote financial stability by enabling the implementation of the full set of Basel III standards, a new prudential regime for investment firms, and giving the Financial Conduct Authority (FCA) the powers it needs to oversee an orderly transition away from the LIBOR benchmark". The Bill introduce significant amendments and will be of interest to all regulated UK firms and those seeking access to the UK market after IP Completion Day. 

The Bill will introduce several provisions, including:

provisions enabling the introduction by the FCA of a tailored Investment Firms Prudential Regime and ending the application of the UK Capital Requirements Regulation to investment firms other than PRA-designated firms;

• amending the UK Benchmarks Regulation to provide the FCA with additional powers to manage a wind-down of a critical benchmark and to extend the transitional period for third country benchmarks to 31 December 2025;

• establishing an Overseas Funds regime, which will allow overseas collective investment schemes to be marketed to all investors, including retail investors, in the UK market on appropriate terms. HM Treasury will have the power to grant ‘equivalence’ to a specified category of schemes from an overseas country or territory;
• amending UK MiFIR in relation to the equivalence regime for third country investment firms;
• amending UK MAR to clarify who is required to maintain an insider list, adjust the timeframe within which issuers are required to disclose transactions by senior managers and extending the maximum criminal sentence for market abuse offenses from 7 to 10 years;
• amendments to simplify and reduce uncertainty surrounding the scope and application of the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, including by enabling the FCA to clarify the scope of the PRIIPs Regulation through its rules and by removing the obligation for PRIIPs manufacturers to produce "performance scenarios"; 
• amending UK EMIR to require firms offering clearing services to do so in accordance with fair, reasonable, non-discriminatory and transparent terms; and
• establishing the Gibraltar Authorisation Regime, a new permanent market access regime.

The Bill has had its first reading in the House of Commons and is due to have its second on 9 November 2020. In a statement on 21 October 2020, the FCA welcomed the Bill and noted it would continue to work with HM Treasury on these issues including the Bill's passage through Parliament.

FCA updates its money laundering regulation webpage – bank account portal provisions

On 21 October 2020, the FCA updated its money laundering regulations webpage to include information on the bank account portal provisions under the Money Laundering Regulations 2017 (MLRs). Part 5A of the MLRs imposes duties on credit institutions and providers of safe custody services to respond to requests for information related to accounts and safe-deposit boxes from law enforcement authorities through a central automated mechanism. The mechanism is still under development and firms are therefore not expected to comply with these requirements.

FCA updates its webpage on reporting simple, transparent and standardised securitisations

On 23 October 2020, the FCA updated its webpage on reporting simple, transparent and standardised (STS) securitisations. The onshored Securitisation Regulation transfers the responsibility for maintaining a list of STS securitisations from ESMA to the FCA. During the implementation period, UK firms should continue to notify ESMA where a securitisation meets the STS requirements. From IP Completion Day on 31 December 2020, firms should inform the FCA using the onshored UK STS notification templates for

• securitisations which meet the UK STS criteria under the onshored regulation; and
• for UK securitisations previously notified to ESMA as EU STS that meet the UK STS criteria.

The FCA will soon open its portal where firms can access the notification templates and submit an STS notification before 11pm on 31 December 2020, when the UK STS framework comes into effect. The FCA will communicate further updates ahead of the portal opening. To access the portal, firms must be enrolled on the FCA's online system Connect. For firms not already registered on Connect, the FCA will be publishing instructions and a link to the enrolment form. After enrolling, users will be able to access instructions for submitting UK STS notifications to the FCA.

Note, under the FCA's transitional directions, securitisations notified to ESMA as meeting EU STS criteria before and up to 2 years after the end of the transition period, and which remain on ESMA’s list, will also qualify as UK STS for the life of the transaction.

Payments

BoE revises its approach to ISO 20022 migration

On 13 October 2020, the BoE updated its webpage on ISO 20022, the emerging global standard for payments messaging which is intended to create a common language for payments data across the world. Following RTGS Renewal Programme consultation with CHAPS direct participants, other central banks and members of the payments industry, the revised approach to ISO 20022 migration is as follows:

• Phase 2: The BoE will migrate the CHAPS payments messages to ISO 20022 in 2022, but the implementation date will move from April to June 2022. CHAPS direct participants will then be required to send and receive like-for-like ISO 20022 payment messages using the like-for-like schemas;
• Phase 2.1: From February 2023 (on the basis that the SWIFT correspondent banking network will migrate to ISO 20022 in November 2022), the BoE will require all CHAPS direct participants to receive enhanced ISO 20022 payment messages; and
• Phase 3: In September 2023, the BoE will introduce the new RTGS2 core ledger and settlement engine.
  Technical guidelines on preparing for the messaging standard are available here.

EBA publishes Consultation Paper on major incident reporting under PSD2

On 14 October 2020, the European Banking Authority (EBA) published a Consultation Paper setting out its proposals to revise its Guidelines on major incident reporting under the revised Payment Services Directive ((EU) 2015/2366) (PSD2). EBA's proposals include: 

•  increasing the absolute amount thresholds of the incident classification criterion 'transactions affected';
• changing the calculation of the criteria 'transactions affected' and 'payment service users affected' in the lower impact level; and
• introducing a new incident classification criterion, 'breach of security measures', to capture incidents where the breach of the security measure of the payment service provider has an impact on the availability, integrity, confidentiality and/or authenticity of the payment services related data, processes or systems. 

EPC sets out criteria for participation of non-EEA countries in SEPA Schemes

On 23 October 2020, the European Payments Counsel (EPC) published its criteria for participation of non-EEA communities of banks and financial institutions in the Single Euro Payments (SEPA) Schemes. The document sets out common conditions that an applicant must meet before institutions from non-EEA communities can be considered eligible for participation in the EPC schemes. The criteria does not apply to PSPs licensed in EEA countries.

FinTech

FSB finalises high-level recommendations on global stablecoin arrangements

On 13 October 2020, the Financial Stability Board (FSB) published a final report setting out its 10 high-level recommendations to address the regulatory, supervisory and oversight challenges raised by global stablecoin (GSC) arrangements at a domestic and international level. The report follows a public consultation and outreach on GSCs, which are defined as a subcategory of crypto-assets.

The high-level recommendations are addressed to local authorities, but also set out expectations for providers of services and activities within GSC arrangements. Whilst focusing on privately-issued GSCs used for retail purposes, the report states that its recommendations may be relevant for other types of stablecoin and cryptoassets that pose similar risks.

Funds

European Commission launches publish consultation in relation to new rules under AIFMD

On 22 October 2020, the European Commission launched a public consultation in relation to a review of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). The EU Commission is seeking the views of stakeholders on how to make the EU's Alternative Investment Fund (AIF) market more efficient, effective and competitive, while maintaining the overall stability of the EU's financial system.

This consultation follows the EU Commission having submitted, on 10 June 2020, its report to the European Parliament and the Council on the scope and the application of the AIFMD. That report concluded that the AIFMD was delivering on objectives, had contributed to the creation of the EU AIF market, provided a high-level protection to investors and facilitated monitoring of risks to financial stability. However, the report also identified a number of areas where the legal framework could be improved.

The objective of the consultation process is to test the market appetite for the potential changes to the AIFMD and to gather views from the regulators, investors and investor protection associations as well as from the broader public on potential risks that the contemplated legislative changes may generate.

The consultation is being carried out in questionnaire format. The full version of the questionnaire contains 102 questions. The short version is limited to 3 general questions and 14 investor protection questions, and only covers the general aspects of the AIFMD regime and investor protection matters under the AIFMD, while the full version covers more technical features of the AIFMD regime. The full questionnaire covers issues related to authorisation/scope, investor protection, international issues, financial stability, investment in private companies, sustainability, coherence with the UCITS regime, and a number of questions in relation to delegation rules under the AIFMD.

The deadline for responses to the consultation is 29 January 2021. The supporting documentation suggests that the consultation will be followed by a conference or conference-like event, currently scheduled for November 2020. Further, the consultation webpage indicates that, in Q3 2021, the Commission intends to put forward a legislative proposal amending the AIFMD in the form of a Directive.

PRA & Banks

PRA Dear CEO letter on banks' operational readiness for zero or negative BoE Bank Rate

On 12 October 2020, the PRA published a Dear CEO letter that had been sent to certain banks, requesting information about their operational readiness for a zero or negative BoE Bank Rate, or a tiered system of reserves remuneration. This follows the September 2020 meeting of the BoE Monetary Policy Committee, during which it was discussed that the BoE and PRA were commencing "structured engagement" on the operational considerations of a negative policy rate. Through voluntary responses from banks to a questionnaire annexed to the letter, the PRA seeks to determine:

• the challenges banks would face with the potential implementation of a zero or negative Bank Rate or a tiered system of reserves remuneration;
• the steps that banks would need to take to prepare for implementation of the potential measure; and
• the appropriateness of implementing such measures.

FSB publishes LIBOR global transition roadmap

On 16 October 2020, the FSB published a global transition roadmap providing a timetable of actions to be taken by financial and non-financial sector firms with exposure to LIBOR benchmarks to ensure a smooth transition away from LIBOR by the end of 2021.

Key dates highlighted include:

• by 25 January 2021 (the ISDA Protocol effective date) - firms should have adhered;
•  by the end of 2020 - firms should be able to offer non-LIBOR linked loans to their customers;
• by mid-2021 - firms should have established formalised plans to amend legacy contracts before the end of 2021; and
• by the end of 2021 - firms should be prepared for LIBOR to cease.

FSB publishes final report on effective practices for cyber incident response and recovery

On 19 October 2020, the FSB published its final report on effective practices for financial institutions' cyber incident response and recover. The report aims to assist financial institutions before, during and after the occurrence of cyber incidents to limit any financial stability risks. The toolkit proposed is made up of 49 effective practices which institutions can adopt across its operations.

Senior Managers & Certification Regime ('SM&CR')

FCA updates its webpage on the directory of certified and assessed persons and a reminder on annual conduct rule reporting

Under the SM&CR regime, the FCA will publish and maintain a directory of certified and assessed persons on the Financial Services Register. On 12 October 2020, the FCA updated its webpage on the directory to clarify the data submissions process for solo-regulated firms as follows:

• Solo-regulated firms must submit their Director Persons data on the FCA's Connect system by 31 March 2021;
• From mid-December 2020, the FCA will begin to incrementally display data submitted by solo-regulated firms; and
• Firms with more than 10 directory persons can submit using a multiple add / amend submission form. The FCA will assign timeslots for firms to do this by 12 October. If, by 14 October, the FCA has not contacted a firm in regards to this but the firm has more than 10 directory persons and would like to use the multiple add / amend submission form, they should submit using the single submission form (a) between 26 November and 4 December or (b) between 11 January and 18 March 2021.

The FCA has published user guides (i) for adding or amending individual directory persons data and (ii) for data attestations for directory persons.

Additionally, a reminder to solo-regulated core firms that the first annual conduct rules breach report (REP008) must be submitted to the FCA via Gabriel by 2 November 2020. The current reporting period for all solo-regulated firms’ first REP008 ran from the commencement of the SM&CR on 9 December 2019 to 31 August 2020. Importantly, a report must be submitted even if there have not been any Conduct Rule breaches resulting in disciplinary action during the reporting period.

COVID-19

FCA updates its webpage on firm handling of complaints during coronavirus

On 20 October 2020, the FCA updated its webpage on firm handling of complaints during coronavirus. Although it is recognised that firms' operations continue to be affected by the pandemic, the FCA considers that firms have now had enough time to embed new ways of working. As such, a failure to comply with any of the FCA complaint handling requirements should only arise in exceptional circumstances in relation to the impact of coronavirus. Firms facing difficulties to comply should inform their supervisory contact at the FCA or email firm.queries@fca.org.uk.

Authors: Emma Tran & Vidhi Mahajan