Financial services speedread 28 April 2022 edition

1. ESMA Guidelines on certain aspects of the MiFID II Appropriateness and Execution-Only Requirements

On 12 April 2022, ESMA issued guidelines to clarify aspects of MIFID II relating to appropriateness and execution-only requirements (the Guidelines). The aim of the guidelines is to ensure consistent application and supervisory approach to Articles 25 (3) and 25 (4) of MIFID II and Articles 55 to 57 of the MIFID II Delegated Regulation.

The Guidelines state that firms should inform their clients clearly and in good time about the appropriateness assessment and its purpose, and that firms should have policies and procedures in place to enable them to collect the information necessary to conduct the appropriateness assessment. This should include polices to ensure the information is up-to-date, accurate and reliable. The Guidelines reiterate that a client's knowledge and experience, and the relevant characteristics of the product, determine if a product is or service is appropriate for that client. Firms must ensure accurate record keeping and retention and compliance in relation to appropriateness assessments.

Staff involved in appropriateness assessments should have the adequate level of skill, knowledge and expertise to perform their role. Further arrangements should be made to ensure such staff can identify when an appropriateness assessment is required. Firms should operate and maintain a policy for situations in which a client is a legal person, or group or where natural persons are represented by another natural person.

2. ESMA Letter to the European Commission on the MiFID II Suitability Consultation

On 19 April 2022, ESMA published a letter (dated 13 April 2022) regarding the consultation on options to enhance suitability and appropriateness assessments.

The letter emphasises ESMA's acknowledgement of the importance of appropriateness and the suitability assessment for investor protection under the MiFID II framework, welcomes any proposals to strengthen the framework and improve its consistency, and specifically highlights the following:

• the fact that the proposal to apply a unique and standardised retail investor assessment regime may raise questions as to whether a 'one size fits all' approach can effectively serve all retail investors;
• the significant impact of the proposals on the current framework would require sufficient guidance and information on the new framework to be provided to clients in order to aid their understanding;
• to the resistance of clients to sharing their personal information and the impact that this may have on allowing investors to easily switch between multiple brokers and financial intermediaries;
• ESMA's support of the alignment of investment products falling under both MiFID and the Insurance Distribution Directive to the extent that this does not lead to reduction of existing investor protection;
• concerns regarding how the assessment of costs and benefits of switches recommended to clients could be incorporated into the new proposed suitability regime; and
• that the consultation does not mention knowledge and experience amongst information to be collected from clients, and highlighting the importance of this.

3. European Commission adopts RTS on MiFID II position limits

On 20 April 2022, the European Commission adopted a Delegated Regulation and Annex under MiFID II with regard to commodity derivatives position limits and the exemption application procedure.

The new Delegated Regulation will repeal current RTS 21. The changes made have been driven by the EU's capital markets recovery package and a desire to improve the existing methodology. ESMA's related report is here.

The European Parliament and Council will now review the Delegated Regulation, and if neither object, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal.

4. ESMA delivers speech regarding driving forward high-quality supervision and transparency in the single EU capital market
On 20 April 2022, Verena Ross, Chair of ESMA, delivered a speech in relation to driving forward high-quality supervision and transparency in the single EU capital market

Topics which were addressed include:

• ESMA's direct supervision mandate;
• ESMA's supervisory lifecycle, including from the registration phase of firms to the ongoing monitoring of activities;
• ESMA's 'enforcement toolbox', including regular information flow and meetings, investigations, on-site inspections and enforcement;
• ESMA's overarching principles towards supervision, including its risk-based, data-driven and outcome-focused approach;
• the successes and challenges regarding ESMA's supervision, with a challenge for the future being the diversity of the entities which ESMA supervises; and
• ESMA's role in integrated EU level transparency, with recent legislative proposals to combat this including the European Single Access Point (ESAP) and Consolidated Tape.

5. The Post-Trade Task Force publishes its report "Charting the Future of Post-Trade"

On 21 April 2022, the industry-led Post-Trade Task Force published its report titled 'Charting the Future of Post-Trade' (the Report) which sets out some key challenges where change would be particularly impactful in current post-trade processes.

The Report focusses on the following three core areas:

• Non-Economic Trade Data Working Group (NETD): the key themes include counterparty identification and the lack of impact and use of LEIs, and the current challenges surrounding settlement;
• Client Onboarding Working Group (CO): the key themes include: (i) the standardisation of documents for different client types; (ii) clarification in a glossary of which data points are acceptable as proof of regulatory requirements; (iii) the digitisation of access to documents onto one platform; and (iv) the liaison with other jurisdictions to extend the digital platform outside the UK; and
• Uncleared Margin Working Group (UM): the key themes include the need: (i) for increased standardisation; (ii) to improve awareness of existing automated solutions; (iii) to increase the transparency and use of the automated solutions in the market through improved reporting and metrics; and (iv) to work towards a fully automated centralised system.

The FICC Markets Standards Board (FMSB) has agreed to take the Task Force's work forward through FMSB's new Post-Trade Committee.

6. The Bank of England updates its webpage regarding passporting rights for firms operating between the UK and Gibraltar

On 22 April 2022, the Bank of England updated its webpage to reflect the fact that passporting rights will continue for firms operating between the UK and Gibraltar.

Statutory Instrument (SI) 2019/589 established the transitional arrangements for Gibraltar which preserved the passporting rights of Gibraltarian firms after the end of the Transition Period.

These transitional arrangements have been extended until Friday 31 December 2022 and can be further extended beyond this date until such time as the permanent arrangements of the Gibraltar Authorisation Regime are in place.

7. Bank of England Statement on Capital Arbitrage Transactions

On 13 April 2022, the Bank of England provided an update on the PRA's approach to capital arbitrage transactions. The Bank is aware of firms having conducted or considered deficit reduction transactions with their defined benefit pension schemes to limit the regulatory capital impact, and stated that firms should not engage in transactions which have the aim of offsetting regulatory adjustments, because they may be incompatible with the firm's obligations under the PRA's Fundamental Rules and may therefore pose prudential risks.

8. Bank of England Publication on Transforming Data Collection Communication to Firms

On 13 April 2022, the Bank of England provided an update on the joint transformation programme it is conducting with the FCA regarding data collection. The Bank announced the end of Phase One 'discovery and design'. In Phase Two, work will continue on commercial real estate as part of a 'Phase One scaling sprint'. Phase Two will start in September 2022, and will focus on commercial real estate, retail banking business model data, incident, outsourcing and third party reporting, asset reporting for insurers and a strategic review of prudential data collections from solo regulated firms. The scaling sprint will focus on identifying scaling opportunities and identifying critical risks to transform data collection.

The Bank is looking for 20 full time equivalent staff from firms to join the core delivery team for Phase Two.

9. PRA publishes its Business Plan for 2022/23

On 20 April 2022, the PRA published its Business Plan for 2022/23 setting out its strategy, workplan and budget for the upcoming financial year.
Its key strategic objectives include:

• retaining and building on the strength of the banking and insurance sectors delivered by financial crisis reform;
• being at the forefront of identifying new and emerging risks and developing international policy;
• supporting dynamic and competitive markets; and
• running an inclusive, efficient and modern regulator in conjunction with the central banks.

Some of the tangible methods proposed to achieve these goals include:

• avoiding slippage for insurers through capital and provisioning levels;
• prioritising the horizon-scanning programme and focusing on regulatory arbitrage and dangerous practices;
• renewing the focus on reducing barriers to growth post-Brexit;
• consulting on the implementation of Basel 3.1 to make changes to the way banks calculate weighted risk assessments;
• stress testing the financial system using extreme but plausible scenario analysis; and
• implementing more inclusive recruitment practices within the PRA.

10. European Commission: Targeted Consultation On The Functioning Of The Money Market Fund Regulation

On 12 April 2022, the European Commission (EC) launched a public consultation on the adequacy of EU rules on money market funds (MMF) which invest primarily in short-term debt. The consultation is targeted at stakeholders and users of MMFs, in particular to investors and mangers of MMFs to review the impact of the current regime.

11. Bank of England publishes staff working paper on reducing liquidity mismatch in open ended funds

On 22 April 2022, the Bank of England published the Staff Working Paper 'Reducing liquidity mismatch in open ended funds: a cost-benefit analysis'. This Staff Working Paper reached the conclusion that macroprudential authorities have relatively little experience with non-bank financial institutions and they will need to take more action to address the risks from such non-banks.

12. The Confederation of Business Industry publishes survey findings, identifying operational resilience as a key theme

On 13 April 2022, the Confederation of Business Industry (CBI) and PwC published the findings of their Financial Services Survey (the Survey), with operational resilience emerging as a key theme throughout.

92% of firms surveyed cited building operational resilience as a key priority for future business strategy and transformation plans. Firms separately identified 'responding to cyber threats' (81%) and 'improving detection of cyber breaches' (71%) as the main priorities to improve cyber resilience and reduce technology risk.

The Survey reinforces that operational resilience is a key focus for regulated firms and firms should ensure appropriate governance in relation to operational resilience.

13. Bank of England Consultation Papers on FMI outsourcing and third party risk management

On 14 April 2022, the Bank of England published three consultation papers on its proposals around outsourcing and third party risk management in Financial Market infrastructures (FMIs).

The proposals are set out in three draft supervisory statements for central counterparties, central securities depositaries and recognised payment system operators and specified service providers.

The supervisory statements set out non-binding supervisory expectations to provide FMIs with.

The statements aim to facilitate greater resilience and adoption of the cloud and other new technologies, set out the Bank's guidance on how it intends to assess compliance with the regulatory framework on outsourcing and third party risk management in FMIs, and complement the Bank's Supervisory Statements on FMI operational resilience.

The consultation closes on 14 July 2022.

14. FATF Report on the State of Effectiveness and Compliance with the FATF Standards

On 19 April 2022, the Financial Action Task Force (FATF) published a review of the state of global efforts to tackle money laundering and terrorist and proliferation financing The FATF found significant progress had been made to establish and enact wide ranging legislation and regulation to counteract money laundering, terrorist and proliferation financing, with 76% of countries having implemented FATF's 40 recommendations.

The FATF observed that where governments have not implemented policies and co-ordinated with public and non-public bodies, responses to AML/CTF risks are less effective. The FATF observed that financial instructions tend to have a good understanding of risks but non-financial institutions such as real estate agents, lawyers and accountants tend to struggle to mitigate money laundering and terrorist financing risks.

Further, the FATF commented that while there are adequate criminal justice frameworks to tackle money laundering and terrorist financing in most jurisdictions, investigations and prosecutions remain rare.

15. The FCA publishes its review in relation to the financial crime controls at challenger banks

On 22 April 2022, the FCA published a Review which found weaknesses in the financial crime controls of some challenger banks.

Key observations included:

• the FCA's financial crime reviews found some evidence of good practice, such as the use of technology to identify and verify customers at speed. However, more work needs to be done by the challenger banks sector as a whole and challenger banks are requested to review the FCA's findings and make improvements where necessary;
• challenger banks should apply a risk-based approach to anti-money laundering (AML) controls and also continuously make sure their financial crime controls remain fit for purpose as their business develops and grows;
• the FCA found weaknesses in Customer Due Diligence (CDD). Most challenger banks did not obtain details about customer income and occupation, which results in an incomplete assessment of the purpose and intended nature of a customer's relationship with the bank;
• some challenger banks were not consistently applying Enhanced Due Diligence (EDD) and were not documenting it as a formal procedure, such as when managing politically exposed persons;
• some challenger banks had customer risk assessment frameworks which lacked sufficient detail and others did not even have such an assessment in place;
• the FCA found ineffective management of transaction monitoring alerts, such as inconsistent or inadequate rationale used for discounting alerts;
• the UK Financial Intelligence Unit within the NCA noted a substantial increase in the volume of Suspicious Activity Reports (SARs) reported by challenger banks. The FCA also raised concerns about the quality of SARs reported to the NCA by challenger banks; and
• the FCA found weaknesses in the effective management of financial crime change programmes.

The FCA will continue to monitor challenger banks' compliance with their AML obligations and asks challenger banks to consider the key observations and broader findings highlighted in the Review to enhance their financial crime frameworks,

No updates for this edition of the FSS.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

16. FCA Thematic Review: Observations On Wind-Down Planning: Liquidity, Triggers & Intragroup Dependencies

On 11 April 2022, the FCA published its thematic review on wind-down planning. The focus was on liquidity needs during wind-down, and examined firms' intra-group dependencies and wind-down triggers. Firms have an obligation under Threshold Condition COND 2.4 to hold adequate resources, however, the FCA found wide-spread weakness in planning and wind-down documentation.

Key observations included:

• further work is required to ensure wind-down plans are operable. Particular attention should be paid to liquidity and cashflow modelling, intra-group dependency and wind-down trigger calibration;
• firms need to consider wind-down liquidity needs in their risk appetite and point of non-viability;
• liquidity issues arising in wind-down come from cashflow timing mismatches, net cash impact of the wind-down and starting the wind-down from a stressed cash position; and
• testing wind-down planning is the best way of proving to the firm's governing body or board, and the FCA that the plan is operable.

17. Corrigendum published to Commission Delegated Regulation (EU) 2021/2268 amending the RTS laid down in the PRIIPS KID Delegated Regulation (2017/653)

On 13 April 2022, a corrigendum to Commission Delegated Regulation (EU) 2021/2268, amending the RTS laid down in the PRIIPs KID Delegated Regulation (2017/653) was published in the Official Journal of the European Union.

Experience gained during the first years of application of Commission Delegated Regulation (EU) 2017/653 revealed that certain elements of the KID needs to be revised in order to ensure that retail investors are provided with appropriate information. Therefore, in order to provide understandable and not misleading information, performance scenarios shown in the KID should now not provide an overly positive outlook for potential return. It is also necessary to impose more prominent warnings about these scenarios

To enable retail investors to better understand the types of cost structures of different PRIIPs, information in the KID on costs should now include a description of the main cost elements.

For PRIIPs offering a range of investment options, an adjusted presentation of information on costs should be laid down to improve the understanding of the cost implications of those different investment options by retail investors.

KIDs for linear PRIIPs and linear underlying investment options should contain in the section titled ‘Other relevant information’ cross-references to separate documents or websites with past performance information.

18. Opinion of the European Central Bank of 11 April 2022 on a proposal for a directive of the European Parliament and of the Council on measures for a high common level of cybersecurity across the Union

On 13 April 2022, the European Central Bank (ECB) published an opinion (dated 11 April 2022) on a proposal for a directive of the European Parliament and of the Council on measures for a high common level of cybersecurity across the Union (known as the 'revised NIS Directive' or the 'NIS 2 Directive'). The ECB noted its strong support for the objectives of the proposed directive to increase the level of cyber resilience across all relevant sectors, reduce inconsistencies across the internal market, and improve the level of situational awareness and the collective capability to prepare and respond by ensuring efficient cooperation in the EU. It also specifically commented on the following areas:

• scope of the proposed directive and the interaction with the proposed regulation on digital operational resilience for the financial sector (DORA);
• oversight competences over the European System of Central Banks and Eurosystem; and
• ICT third-party risk, management of large-scale incidents and crises, information-sharing between competent authorities and national cybersecurity strategies.

The ECB will publish specific drafting proposals in a separate technical working document where it recommends that the proposed Directive is amended.

19. ESAS Publish Joint Committee Annual Report 2021

On 19 April 2022, the Joint Committee of the European Supervisory Authorities (ESAs) published its Annual Report. The main areas of focus of the Annual Report are the joint risk assessment, enhancement of consumer protection, the development of regulatory and supervisory frameworks for sustainable finance and securitisation.

Significant time was given to the regulatory and supervisory framework for sustainability‐related disclosures, with the Joint Committee having drafted 13 Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (SFDR). In relation to consumer protection, the Joint Committee have worked on the Call for Evidence from the EC in the context of the review of PRIIPs Regulation. Additionally, they reported on the implementation and functioning of the Securitisation Regulation and its jurisdictional scope.

20. FCA Policy Statement on Diversity and Inclusion on Listed Company Boards and Executive Committees

On 20 April 2022, the FCA issued finalised rules requiring listed companies to report certain information and make disclosures regarding the representation of women and ethnic minorities on their boards and executive management teams. This enables investors easy access to diversity- related information, and the FCA state in its press release that the rules reflect the FCA's focus on speeding up the pace of change regarding diversity and inclusion in financial services.

The rules can be found in the Listing Rules and Disclosure Guidance and Transparency Rules (Diversity and Inclusion) Instrument 2022, and require listed companies to include a statement in their annual financial report setting out whether they have met the following board diversity targets:

• at least 40% of the board should be women;
• at least one senior board position should be held by a woman; and
• at least one member of the board should be from a minority ethnic background (excluding white ethnic groups).

These disclosures must be made for the company's financial year starting on or after 1 April 2022.

The obligations also require an expanded range of diversity reporting obligations which firms must apply on a 'comply or explain' basis with respect to the representation of women and ethnic minorities.

21. BEIS Publishes the Government Response to its Consultation: Reforming competition and consumer policy

On 20 April 2022, the Department for Business, Energy & Industrial Strategy (BEIS) published the government response to its Consultation on reforming competition and consumer policy which was published in July 2021.

The Consultation proposed a reform programme to the UK's competition and consumer policies. The government response includes a number of tangible proposals to implement the findings of the consultation including:

• giving the Competition and Markets Authority (CMA) enhanced powers to tackle bad business practices, enabling the CMA to directly enforce consumer law, and fine firms up to 10% of their global turnover for mistreating customers;
• making it clearly illegal to pay someone to write or host a false review;
• clearer rules to make it easier for consumers to opt-out of subscriptions which they do not want;
• consulting on a new law regarding fake reviews;
• strengthening competition law to ensure that the CMA's evidence gathering powers are enhanced and ensuring competition law protects UK consumers against anti-competitive conduct; and
• creating more opportunities for firms to offer binding commitments to resolve concerns raised by the CMA, and affording the ability for the CMA to apply more flexible market investigation remedies.

The BEIS clarified in its press release that new measures requiring legal changes will come into effect following parliamentary approval.

22. The Bank of England publishes Staff Working Paper on heterogeneous effects and spillovers of macroprudential policy in an agent based model of the UK housing market

On 22 April 2022, the Bank of England (BoE) published the Staff Working Paper 'Heterogeneous effects and spillovers of macroprudential policy in an agent-based model of the UK housing market':

This Staff Working Paper covered a description of the agent-based model, validation and experiments and concluded that the housing experiments tend to mitigate the house price cycle, a given policy can impact several different risk metrics and the policy experiments affect different types of households differently.

These obligations apply to UK and overseas issuers with equity shares or certificates representing equity shares admitted to the premium or standard segment of the official list, excluding open-ended investment companies and shell companies but including close ended investment funds and sovereign controlled companies.

23. The FCA announces the expansion of its Early and High Growth Oversight

On 26 April 2022, the FCA published a Webpage confirming the expansion of the Early and High Growth Oversight following a successful pilot.

The FCA initiated Early and Growth Oversight in response to its acknowledgement that firms can face challenges in meeting their regulatory obligations in the first few years after authorisation. This approach provides enhanced supervision for firms as they get used to their regulated status, and supports them to understand their obligations.

The Webpage announced that throughout 2022 and 2023, Early and High Growth Oversight will be undertaken for up to 300 newly authorised firms. Firms do not need to apply to be part of Early and High Growth Oversight: the FCA will contact Firms directly if they are included.