Financial Services SpeedRead: 8 December 2020

 

Brexit

1. Cutover plan for firms migrating to FCA FIRDS and FITRS after the Brexit transition period

On 4 December, the FCA issued a press release and a webpage in relation to the cutover plan for firms migrating to FCA FIRDS and FITRS from ESMA FIRDS and ESMA FITRS.
On 31 December 2020, ESMA will switch off the FCA's access to its MIFID systems and the FCA has built parallel systems in the UK in preparation for this. The FCA confirms that both systems will be unavailable from 16 December 2020 until 2 January 2021 while the FCA rebuilds its data. The FCA's webpage sets out the timeline of each system's availability prior to cutover, throughout the cutover weekend, and the FCA FIRDS and FCA FITRS publication schedule up to the end of the first trading day after cutover (4 January 2021). It also outlines the instrument coverage in FCA FIRDS and FCA FITRS for the first weeks following the cutover.

2. FCA Primary Market Bulleting No.32

On 3 December, the FCA published Primary Market Bulletin No. 32. The Bulletin contains information for firms preparing for Brexit and summarises changes brought about by onshored legislation. Much of the information set out in the Bulletin will not be new as it largely repeats information set out in previous Primary Market Bulletins.
The FCA confirms that is continuing with updates to its website in relation to Brexit and refers to equivalence decisions taken by HM Treasury in respect of European Economic Area (EEA) states.

In the Bulletin, the FCA sets out some of the reporting obligations that will result from the Short Selling (Amendment) Regulations 2018 (UK SSR), as well as the impact of HM Treasury's November 2020 Unilateral Equivalence Decision made in relation to the Short Selling Regulation. The FCA confirms that it will set out its position in relation to reporting its threshold requirements under UK SSR in due course.

In relation to the changes brought about by the Market Abuse (Amendment) (EU Exit) Regulations (UK MAR), the FCA summarises firms' obligations in relation to article 17 (public disclosure of inside information), article 19 (managers (PDMR) transactions), article 5 (exemption for-buy-back programmes) and article 19 (PDMR transactions). These obligations take effect after 11 pm, 31 December 2020 (IPCD).

For more information please see our recent Newsflash.

3. FCA publishes webpage on adding sub-funds to an umbrella scheme in the TMPR

On 3 December, the FCA published a new webpage regarding the process for adding a new sub-fund to an umbrella scheme that will be in the temporary marketing permissions regime (TMPR). The TMPR applies to UCITS funds which were already passporting into the UK before IPCD, and this has been extended to cover new sub-funds. To use the TMPR, the sub-fund will need to satisfy the following:

• the new sub-fund must become authorised by its home state regulator on or after IPCD;
• when the new sub-fund becomes authorised by its home state regulator, at least one other sub-fund of the new sub-fund's umbrella scheme must be a recognised scheme in the TMPR;
• after the new sub-fund becomes authorised by its home state regulator and while at least one other sub-fund of the umbrella scheme continues to be so authorised, the operator of the new sub-fund must have notified the FCA that they wish the new sub-fund to enter the TMPR; and
• the notification must be given before the start of the period specified by the FCA directing the new sub-fund's umbrella scheme to apply for individual recognition.

4. FCA event on EU withdrawal and MiFID II

The FCA has opened registration for an event on 9 December where it will provide further details on the supervision, policy and technical changes to support EU withdrawal in relation to MiFID II. Click here to register for the event.

5. FCA publishes draft transitional direction for the Share Trading Obligation

On 2 December, the FCA published the FCA Transitional Direction for the Share Trading Obligation (UK STO), along with an explanatory note. The effect of the direction is that UK firms will be able to continue to trade shares on EU trading venues and EU systematic internalisers without breaching the UK STO, where the EU trading venue or EU systematic internaliser is relying on the UK temporary permissions regime (TPR), or where the Overseas Persons Exclusion (OPE) applies. UK firms will also be compliant with the UK STO where they trade on a UK Recognised Overseas Investment Exchange (ROIE).

On 4 December, the FCA also updated its webpage, publishing the list of EEA market operators which have applied to the FCA for ROIE or expressed a formal intention to do so and have consented to be published on the FCA's list.

6. FCA publishes webpage on UK Benchmarks Register

On 1 December, the FCA published a new webpage on the UK Benchmarks Register. The webpage details that the UK Benchmarks Register will consist of two sections:

• the Benchmark Administrator Register – a public record of all benchmark administrators that are authorised, registered or recognised by the FCA, or benefit from an equivalence decision that has been adopted in the UK; and
• the Third Country Benchmarks Register – a public record of benchmarks provided by third country benchmark administrators that are recognised by the FCA, endorsed by a UK-authorised or registered benchmark administrator (or other supervised entity) for use in the UK, or that are provided by benchmark administrators that have notified us that they benefit from an equivalence decision that has been adopted by the UK.

The webpage also provides information regarding the process for third country benchmark administrators to apply for approval via equivalence, recognition or endorsement in the UK.

7. FCA updates its EMIR webpage regarding clearing thresholds and intragroup exemptions

On 30 November, the FCA updated its EMIR News webpage with information regarding:

• notifications to the FCA of clearing thresholds for UK financial counterparties and non-financial counterparties under UK EMIR. The deadline for firms to complete their first clearing threshold notification under UK EMIR is 17 June 2021; and
• HM Treasury's equivalence direction under UK EMIR, that will grant partial equivalence to EEA member states in relation to intragroup exemptions from the clearing obligation and margin requirements for uncleared derivatives transactions. This direction will take effect immediately following IPCD.

8. EU Commission publishes equivalence decision regarding UK CSDs

On 26 November, the EU Commission published Commission Implementing Decision (EU) 2020/1766 determining that the UK's regulatory framework applicable to UK central securities depositories (CSDs) is equivalent to the EU regulatory framework applicable to EU CSDs under Regulation (EU) 909/2014. Therefore, EU issuers may use UK CSDs to perform notary and central maintenance services concerning transferable securities following IPCD. The decision is time-limited and will expire six months from IPCD on 30 June 2021 (but may be subject to further review). The EU Commission has taken this approach in anticipation of the UK diverging from EU law on the basis that the UK has announced that certain requirements for CSDs that will come into force under EU law in future, will not be incorporated into domestic law following IPCD.

9. ESMA public statement on the DTO post-IPCD

On 25 November 2020, ESMA released a public statement clarifying the application of the EU trading obligation for derivatives (DTO) following IPCD. The statement confirms the approach set out in ESMA's previous statement in March 2019, and clarifies that the DTO will continue applying without changes after IPCD. In ESMA's view, most UK trading venues that offer trading in derivatives subject to the DTO have established new trading venues in the EU. Further, ESMA acknowledges that although its approach may create challenges for certain EU counterparties, particularly UK branches of EU investment firms, it takes the view that this situation is primarily a consequence of how the UK has chosen to implement the DTO.

On 27 November 2020, ESMA also published an updated version of its public register for the trading obligation for derivatives under MiFIR.

10. FCA statement on reporting of derivatives under UK EMIR post-IPCD

On 24 November, the FCA released a statement regarding what Trade Repositories, and the UK counterparties that use them, should do to make sure they are compliant with reporting obligations under UK EMIR after IPCD. The statement advises that, following IPCD, all UK counterparties that enter into a derivative contract (OTC and exchange-traded) are in scope of UK EMIR and are expected to report those transactions to an FCA-registered, or recognised, Trade Repository in accordance with UK EMIR.

11. FCA statement on reporting of securities financing transactions under UK SFTR post-IPCD

On 24 November, the FCA released a statement regarding what Trade Repositories, and the UK counterparties that use them, should do to make sure they are compliant with reporting obligations under UK SFTR after IPCD. The statement advises that, following IPCD, all UK SFTR counterparties that enter into securities financing transactions that are in scope of UK SFTR are required to report details of those transactions to an FCA-registered, or recognised, Trade Repository.

Financial Markets

12. FCA publishes evaluation of its work on the financial advice market

On 3 December, the FCA published an evaluation of the impact of its Retail Distribution Review and Financial Advice Market Review (FAMR) (which it carried out in collaboration with HM Treasury). The evaluation found evidence of some improvements in the financial advice market since FAMR was published, but concluded that further innovation could help consumers by improving their investment decisions and driving greater competition between firms.

13. ESMA publishes EMIR RTS on clearing obligation regarding intragroup transactions and novations from UK to EU counterparties

On 23 November, ESMA published a final report containing draft regulatory technical standards (RTS) on the clearing obligation under the European Market Infrastructure Regulation (EMIR). The RTS relate to the treatment of certain intragroup transactions concluded with a third-country group entity, and the treatment of OTC derivative contracts novated from a counterparty established in the UK to a counterparty established in the EU as a result of Brexit.

14. ESAs publish final report on EMIR implementation timelines for intragroup transactions, equity options and novations to EU counterparties

On 23 November, the European Supervisory Authorities (ESAs) published a final report containing draft RTS proposing to amend Commission Delegated Regulation (EU) 2016/2251 on bilateral margin requirements under EMIR. The draft RTS propose to extend the temporary exemption for intragroup transactions for 18 months, and the temporary exemption for single-stock equity options or index options for three years. In addition, the draft RTS allow UK counterparties to be replaced with EU counterparties without triggering bilateral margin and clearing obligation requirements under certain conditions – this being intended to support preparations for the end of the Brexit transition period.

Banking and Prudential

15. BoE and PRA focussing on operational resilience for banks and financial market infrastructures

On 3 December, the BoE and PRA published a statement regarding operational resiliency where it described the "progress" made by banks in enhancing operational resilience in recent years, including through the challenges posed by the coronavirus pandemic. The statement notes that, while more work is still to be done, the PRA is encouraged by the recognition of the shared interest between supervisors and the industry in strengthening operational resilience, and the actions firms have taken to date.

On the same day, the BoE published its Annual Report on the supervision of financial market infrastructures (FMIs), which sets out how the BoE has exercised its responsibilities in respect of supervising FMIs since the last report. The report highlight's the BoE's focus on operational resilience, particularly in the face of challenges presented by the coronavirus pandemic, and describes how it intervened to set clear expectations in respect of FMIs' resilience. It concludes that, to date, FMIs have performed effectively under the stressed conditions resulting from the pandemic.

16. ECB publishes final guide on climate-related and environmental risks for banks

On 27 November, the European Central Bank (ECB) published its final guide on climate-related and environmental risks, which takes into account comments received from public consultation. The ECB also published a separate report which found that banks are lagging behind on their climate-related and environmental risk disclosures – which notes that while there has been some improvement since last year, "significant efforts" are required to better support disclosure statements.
The ECB intends now to follow up with banks in two steps. First, in early 2021, it will ask banks to conduct a self-assessment in light of the expectations published in the guide and prepare action plans on that basis. It will then benchmark the banks' self-assessments and plans and engage in supervisory dialogue. Second, in 2022, it will conduct a full supervisory review of banks' practices and take follow-up measures where required.

Fund Management

17. FCA and PRA propose to amend COBS rules requiring fund managers to explain benchmark choices in communications

On 4 December, the FCA and PRA published a joint Quarterly Consultation (CP20/23), which at Chapter 4 sets out proposals to amend COBS 4.5 concerning the obligation for authorised fund managers to include an explanation of the choice of benchmark used in any communication about an authorised fund. Market participants have in response highlighted various types of administrative customer communications for which they think that the rules are unduly burdensome, such as contract notes.

As a result, the FCA / PRA is proposing to narrow the scope of the obligations by amending COBS 4.5.12R to 4.5.15R, and by introducing a new COBS 4.5.11AR which will limit the requirement to communications that could influence a retail client's investment decisions. It is also proposed to introduce new guidance in COBS 4.5.11BG to clarify that the rules would not normally be expected to apply to communications that are purely administrative in nature and do not refer in any way to the aims, benefits or risks of investing.

Senior Managers and Governance

18. FCA and PRA clarify expectations on senior manager temporary long term absences

In Chapter 2 of the same joint Quarterly Consultation (CP20/23) described at item ‎17 above, the FCA and PRA set out proposals regarding their expectations around firms notifying the FCA / PRA when a senior manager takes temporary leave for longer than 12 weeks. The Quarterly Consultation notes that the rules are not currently sufficiently clear on whether individuals can retain regulatory approval during long-term leave, or whether firms can hold open approved roles for an individual on leave, resulting in firms taking inconsistent approaches.

The regulators proposed to clarify their expectations through new rules and guidance in the FCA and PRA Handbooks and updated supervisory statements. We summarise the proposals below.

• Where an individual who performs a Senior Management Function (SMF) is temporarily absent from their role, and the firm intends to keep the role open for that individual to return to in the future, the firm will need to notify the FCA (and where applicable, the PRA) that the individual is on long-term leave using Form D (Changes to personal information/application details and conduct breaches/disciplinary action related to conduct). The FCA / PRA are also proposing appropriate amendments to Form D to allow for this.
• The individual will continue to be listed as the SMF on the firm's FS Register.
• Firms will not be required to seek re-approval once the individual returns to their role.
• However, firms should still ensure that another individual is appointed to perform that required function during the interim period.
• If the firm is aware that the individual will not be returning to their role, the firm should notify the FCA (and where applicable, the PRA) by using Form C (Notice of ceasing to perform controlled functions including senior management functions) or Form E (Internal transfer of an approved person) as appropriate.

19. FCA speech on the business of social purpose

On 26 November, the FCA's Executive Director of Supervisions (Retail and Authorisations), Jonathan Davidson, delivered a speech to the 6th Annual Culture and Conduct Forum on the topic of culture and social purpose. He highlighted that culture and non-financial misconduct remain key areas of focus for the FCA, and described "healthy cultures" as being, among other things, "purposeful, diverse and inclusive". He described how firms have been part of the solution rather than the problem in supporting consumers through the coronavirus pandemic, but pointed to other challenges – such as the need to break barriers around diversity and inclusion, and climate change and sustainability – which he said can only be effectively tackled by firms with healthy cultures.

Retail Investments

20. ECJ issues ruling on national courts' powers to intervene in unfair contracts

On 25 November, the Court of Justice of the European Union (ECJ) issued a ruling in relation to questions raised by the Romanian Court of Appeal in Banca B. SA v A.A.A (Case C 269/19) on national courts' powers to intervene in contracts with unfair terms. The ECJ held that as a general rule, national courts are required to take all necessary steps to protect consumers, although these powers are limited to doing what is strictly necessary to restore balance between the parties. In this case, the ECJ approved the Romanians court's proposed solution of inviting the parties to negotiate a replacement for the unfair contract, provided the court established an appropriate framework for those negotiations.

Payments

21. FCA confirms proposal to revoke and replace the EU Strong Customer Authentication Technical Standards

On 27 November, the FCA published Handbook notice (No. 82) in which it confirmed – among other things – that the EU Strong Customer Authentication RTS (SCA-RTS) would be immediately revoked on IPCD and replaced with equivalent UK technical standards.

22. EPC publishes 2021 EPC SEPA payment scheme rulebooks and SRTP scheme rulebook

On 26 November, the European Payments Council (EPC) published the 2021 Single Euro Payments Area (SEPA) payment scheme rulebooks and related implementation guidelines and clarification papers. The 2021 rulebooks enter into force and will replace the existing rulebooks on 21 November 2021. The EPC has also updated its webpage on the SEPA Direct Debit Core rulebook and implementation guidelines.

Rulebooks

• SEPA Credit Transfer Scheme Rulebook;
• SEPA Instant Credit Transfer Scheme Rulebook;
• Maximum Amount for Instructions under the SCT Inst Scheme Rulebook;
• SEPA Direct Debit Core Scheme Rulebook; and
• SEPA Direct Debit Business-To-Business Scheme Rulebook.

Implementation guidelines

• SEPA Credit Transfer Scheme Inter-PSP Implementation Guidelines;
• SEPA Credit Transfer Scheme Customer-to-PSP Implementation Guidelines;
• SEPA Instant Credit Transfer Scheme Customer-to-PSP Implementation Guidelines;
• SEPA Instant Credit Transfer Scheme Inter-PSP Implementation Guidelines;
• SEPA Direct Debit Core Scheme Customer-to-PSP Implementation Guidelines;
• SEPA Direct Debit Core Scheme Inter-PSP Implementation Guidelines;
• SEPA Direct Debit Core Scheme E-mandate Service Implementation Guidelines;
• SEPA Direct Debit Business-to-Business Scheme Customer-to-PSP Implementation Guidelines;
• SEPA Direct Debit Business-to-Business Scheme E-Mandate Service Implementation Guidelines; and
• SEPA Direct Debit Business-to-Business Scheme Inter-PSP Implementation Guidelines.

Clarification papers

• Clarification paper on SEPA Credit Transfer and SEPA Instant Credit Transfer Scheme Rulebooks; and
• Clarification paper on SEPA Direct Debit Core and SEPA Direct Debit Business-to-Business Rulebooks.

On 30 November, the EPC also published the first version of the SEPA Request-To-Pay (SRTP) scheme rulebook. The SRTP scheme covers the set of operating rules and technical elements that allow a payee to request the initiation of a payment from a payer in a wide range of use cases.

Other

23. Centre for Data Ethics and Innovation: Report: Review into bias in algorithmic decision-making

On 27 November, the Centre for Data Ethics and Innovation (CDEI) published the final report of its review into bias in algorithmic decision-making, in four sectors, including financial services and recruitment. We summarise the key findings below.

• The use of algorithmic decision-making is more established in financial service when compared to other sectors. Acceptance by the public of the use of algorithms is also higher in financial services.
• Research indicates that the main uses of machine learning algorithms in financial services are in relation to risk management and compliance. However, there is increased use of machine learning algorithms in front-office areas, such as credit scoring.
• The use of algorithmic decision-making in the financial services sector should be weighed against social inequality among groups and its impact on access to financial services (although this phenomenon is not the fault of lenders), otherwise reliance on algorithmics could further entrench historic biases.
• For financial services, the "explainability" of how an algorithm works and how the algorithm balances risks and opportunities is important for regulators, banks and customers.Explainability of an algorithm should be a key requirement for banks when developing their own algorithms so as to have better oversight systems assist and reducing discriminatory outcomes.

24. ESMA publishes shortlist of candidates for position of Chair

On 26 November, ESMA published a shortlist of qualified candidates for the position of Chair, as the 10-year term of the current Chair (Steven Maijoor) approaches its end on 1 April 2021. The three candidates are Maria-Luis Albuquerque (former Minister of Finance, Portugal), Carmine Di Noia (Commissioner of CONSOB, Italy) and Verena Ross (Executive Director of ESMA).

25. FCA announces new data collection platform RegData

On 24 November, the FCA announced that RegData will replace Gabriel as the FCA's data collection platform. The first firms moved from Gabriel to RegData during the weekend of 17 and 18 October, and firms will be notified by email when they are scheduled to move.

26. FCA fines TFS-ICAP £3.44m for market misconduct

On 23 November, the FCA issued a press release concerning a £3.44 million fine handed down to TFS-ICAP Ltd, an FX options broker, for communicating misleading information to clients. The FCA's investigation revealed that between 2008 and 2015, TFS-ICAP carried out the practice of 'printing trades', whereby brokers communicated to clients that a trade had occurred at a particular price and/or quantity when no such trade had occurred. This behaviour was found to have occurred "openly" and "over a prolonged period", with the firm failing to react to warning signs that the behaviour was occurring. The firm was also found to have had shortcomings in its oversight and compliance arrangements to detect and counter the risk of brokers providing price or quantity information on the basis that it was based on actual trades when these had not taken place.