FIG Bulletin

Recent developments

21 February 2020

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General 4

FCA annual Sector Views 4

Penalties, remediation and Principles for Businesses: FCA speech 4

AI: FCA article and ICO consultation on draft auditing framework guidance 4

FCA appoints new Interim Executive Director of Strategy and Competition 5

DB pension schemes: Complaints Commissioner urges FCA to complete review 5

Disclosure of privileged documents to FRC not required: Court of Appeal case 5

Systemic cyber-attacks: ESRB report 5

FSB key areas of focus 6

Brexit 7

UK-EU negotiations: European Parliament resolution on mandate 7

Hogan Lovells Brexit resources 7

Banking and Finance 8

CRR: European Commission adopts amending ITS on supervisory reporting 8

LSB standards for business customers in financial difficulty: thematic review report 8

CRR II and BRRD II: SRB consults on changes to MREL policy 9

Consumer Finance 10

Credit brokers: FCA letter to directors on key risks and supervision strategy 10

Payment Services 11

Confirmation of payee and decision on varying specific direction 10: PSR PS20/1 11

Enhanced data ISO messages: plans for guidance 11

Securities and Markets 12

MiFID II post-implementation review: European Commission consultation 12

CRA III: ESMA updates Q&As 12

CSDR: ESMA updates Q&As 12

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Prospectus Regulation: ESMA updates Q&As 12

Benchmark Regulation: ESMA response to Commission consultation 13

CSDR: EACH Settlement Discipline Framework 13

Sustainable finance: ICMA Compendium of international policy initiatives and best market

practice 13

Insurance 14

Solvency II: Implementing Regulation on technical information for calculation of technical

provisions and basic own funds for Q1 2020 reporting 14

Low interest rate environment: EIOPA Supervisory Statement 14

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General FCA annual Sector Views

The Financial Conduct Authority (FCA) has published its Sector Views. These provide the FCA's

annual analysis of the changing financial environment and the resulting impact on consumers

and market effectiveness. They represent the FCA's views as at mid-2019.

Read more in our bulletin, UK FCA publishes annual Sector Views report.

Penalties, remediation and Principles for Businesses: FCA speech

The FCA has published a speech given by Mark Steward, FCA Executive Director of Enforcement

and Market Oversight, on penalties, remediation and the FCA's Principles for Businesses.

Among other things, Mr Steward emphasises the importance of a firm's remediation when

failures are discovered, noting that there have been several cases in which the FCA has materially

reduced its financial penalties on firms in excess of the automatic 30% discount for cases that are

fully resolved at stage one. The FCA encourages firms to respond to this incentive by going

beyond what it expects and taking immediate, unprompted steps, in consultation with the FCA,

to thoroughly and quickly ameliorate harm caused by their conduct failures.

In addition, Mr Steward comments that most of the enforcement cases that the FCA has

completed recently have involved serious breaches of the FCA's Principles for Businesses which,

it appears, are not being used to test or measure conduct, to measure systems and controls that

were being put in place or to identify or address the inadequacies of the misconduct that

occurred.

Mr Stewards states that the Principles are the foundations of good conduct and should be an

integral part of the operational process of planning or decision-making at all levels and as a way

of overseeing and assessing whether the firm's conduct remains appropriate. "In short, what we

need is less hindsight and more foresight."

AI: FCA article and ICO consultation on draft auditing framework guidance

The FCA has published an Insight article on artificial intelligence (AI) in financial services in

which the author:

explains the motivation behind the FCA and The Alan Turing Institute currently working

on a year-long collaboration on AI transparency;

presents an initial framework for thinking about transparency needs in relation to

machine learning in financial markets, resonating with recent work by the OECD, the

European Commission's High-Level Expert Group on AI and the Information

Commissioner’s Office; and

considers the questions:

o Why is transparency important?

o What types of information are relevant?

o Who should have access to these types of information?

o When does it matter?

Separately, the Information Commissioner's Office has launched a consultation on draft

guidance on how to audit risk, governance and accountability in AI applications. The draft

guidance contains advice on how to understand data protection law in relation to AI and

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recommendations for organisational and technical measures to mitigate the risks AI poses to

individuals. It also provides a solid methodology to audit AI applications and ensure they process

personal data fairly.

Aimed at both technology specialists developing AI systems and risk specialists whose

organisations use AI systems, the ICO says this guidance will help in assessing the risks to rights

and freedoms that AI can cause; and the appropriate measures businesses can implement to

mitigate them.

The consultation closes on Wednesday 1 April 2020. The ICO is running a webinar on 26

February 2020 to discuss the consultation and its next steps.

FCA appoints new Interim Executive Director of Strategy and Competition

The FCA has appointed Sheldon Mills as Interim Executive Director of Strategy and

Competition.

Mr Mills is currently FCA Director of Competition. He will start his new role on 16 March 2020,

replacing Christopher Woolard, who was appointed Interim Chief Executive of the FCA in

January 2020.

DB pension schemes: Complaints Commissioner urges FCA to complete review

The Office of the Complaints Commissioner has published a final report of the Financial

Regulators Complaints Commissioner (FRCC) relating to a complaint against the FCA by a firm

unable to cancel its authorisation as it was part of the FCA's general review of firms involved in

advising on defined benefit (DB) pension scheme transfers.

While the firm's complaint was not upheld, the FRCC commented that it considers that the FCA's

blanket policy of deferring an authorisation cancellation application pending the completion of

the review becomes less defensible the longer deferral lasts. The Commissioner urges the FCA to

complete the review as soon as possible, to enable it to consider the firm's application.

Disclosure of privileged documents to FRC not required: Court of Appeal case

In Sports Direct International plc v Financial Reporting Council [2020] EWCA Civ 177 (18

February 2020), the Court of Appeal (Rose and Lewison LJJ and Sir Terence Etherton MR) has

allowed, in part, the appellant's appeal, holding that the appellant was not required to disclose

privileged documents to the regulator (the Financial Reporting Council (FRC)) investigating its

auditors.

The Court of Appeal held that the judge at first instance had erred in ordering disclosure of

privileged documents to the FRC, finding that the FRC's statutory powers did not override the

privileged status of the documents. However, it agreed with the judge at first instance that the

fact that an email was privileged did not confer privilege on an otherwise non-privileged

attachment to that email, and therefore, such attachments were disclosable.

Systemic cyber-attacks: ESRB report

The European Systemic Risk Board (ESRB) has published a report on systemic cyber-attacks.

The ESRB identifies that cyber risk is a source of systemic risk to the financial system, which may

have the potential for serious negative consequences for the real economy. From a

macroprudential perspective, the ESRB considers the main shocks to be the destruction,

encryption or alteration of data related to value. Such shocks could cause a cyber incident to

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develop into a systemic event, impairing the provision of key economic functions, generating

significant financial losses and undermining confidence in the financial system.

The ESRB states that to further mitigate the risk of a systemic cyber incident materialising, more

work is needed to address system vulnerabilities and reduce the potential for widespread

disruption. It intends to use its broad institutional composition and network to evaluate the costs

and benefits of different policy options aimed at reducing systemic cyber risk.

FSB key areas of focus

The Financial Stability Board (FSB) has published a letter sent by Randal Quarles, FSB Chair, to

the G20 finance ministers and central bank governors ahead of their February 2020 meetings in

Riyadh. Mr Quarles sets out the FSB's key areas of focus, including LIBOR transition, BigTech,

stablecoins, cross-border payments, cyber incidents, evaluating the post-crisis regulatory

framework and monitoring its implementation.

Annexed to the letter is a table setting out the "deliverables" (both actions and timing) during the

Saudi Arabian G20 Presidency.

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Brexit UK-EU negotiations: European Parliament resolution on mandate

The European Parliament has adopted a resolution on the proposed mandate for negotiations for

a new partnership with the UK, setting out its position on the draft negotiating directives

proposed by the European Commission on 3 February 2020.

The European Parliament broadly supports to the position set out in the Commission's draft

negotiating directives. It wants an association agreement with the UK to be as deep as possible,

based on three main pillars: an economic partnership, a foreign affairs partnership and specific

sectoral issues. However, the European Parliament emphasises that a non-EU country cannot

enjoy the same rights as a member state and the integrity of the Single Market and the customs

union must be maintained. Specifically, it believes that future competition with the EU must be

kept open and fair through a "level playing field". This would include guarantees for equal rules

on, among other things, social, environmental, tax, state aid, consumer protection and climate

matters.

In the area of financial services, the European Parliament states that:

in any free trade agreement (FTA) with the UK, commitments on services should be made

with the aim of delivering a level of liberalisation in trade in services well beyond the

parties' World Trade Organization commitments, building on recent EU FTAs;

the FTA should include a prudential carve-out and limitations in the cross-border

provisions of financial services, as these are a customary feature of EU trade agreements;

market access should be based on equivalence decisions, which should be provided if the

EU is satisfied that the UK regulatory and supervisory regime and standards are and

continue to be fully equivalent to those of the EU, reflecting the provisions agreed upon

for a level playing field;

once equivalence has been granted towards the UK, an effective mechanism should be

put in place to guarantee that equivalence is maintained over time (noting that that the

EU can withdraw the status of equivalent unilaterally at any moment); and

any future framework should safeguard financial stability in the EU and respect its

regulatory and supervisory regime and standards and their application, while

maintaining the EU regulatory and decision-making autonomy.

The Council of the EU is expected to adopt the Commission's proposed mandate at a meeting of

the General Affairs Council on 25 February 2020.

Hogan Lovells Brexit resources

Given the moving Brexit target at the moment we recommend that for an up-to-date take on

Brexit impact please try the Hogan Lovells Brexit Hub, an open resource online.

Hogan Lovells Brexit Hub

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Banking and Finance CRR: European Commission adopts amending ITS on supervisory reporting

The European Commission has adopted an Implementing Regulation amending Commission

Implementing Regulation (EU) 680/2014 laying down implementing technical standards with

regard to supervisory reporting of institutions under the Capital Requirements Regulation

(575/2013), together with related Annexes.

The Implementing Regulation amends the supervisory reporting requirements relating to:

Common reporting (COREP) to reflect the new securitisation framework and changes

relating to the reporting of the liquidity coverage requirement (LCR) in response to

Delegated Regulation (EU) 2018/1620, which amends Delegated Regulation (EU)

2015/61; and

financial information reporting (FINREP) on non-performing exposures (NPE) and

forbearance to allow the monitoring of reporting institutions' NPE strategies, the

reporting requirements on profit and loss (P&L) items and the implementation of the

new International Financial Reporting Standard on leases (IFRS 16).

The Implementing Regulation is based on the final draft implementing technical standards (ITS)

on supervisory reporting submitted by the EBA in May 2019 and July 2019.

The Implementing Regulation will enter into force the day after its publication in the Official

Journal of the European Union. The amendments to the reporting framework will apply with

different reference dates due to different application dates of the underlying regulatory

requirements:

the revised reporting requirements on own fund and own funds requirements (in points

(1), (4) and (5) of Article 1) apply from 30 March 2020;

the provisions related to liquidity reporting (points (9) to (12)) apply from 1 April 2020;

and

the revised reporting requirements on NPEs, debt obligations subject to forbearance

measures, the operating and administrative expenses and financial information (points

(2), (3) and (6) to (8)) apply from 1 June 2020.

LSB standards for business customers in financial difficulty: thematic review report

The Lending Standards Board (LSB) has published a report setting out the findings from a

thematic review, carried out in 2019, to understand how registered firms are meeting the LSB's

standards for business customers in financial difficulty.

The LSB states that a significant amount of work has been undertaken by registered firms since

the launch of the standards in 2017. Staff demonstrated a genuine desire to ensure that

customers experiencing financial difficulty were managed with care and empathy. The LSB

identified examples of good practice, including the availability and ease of access to support on

websites, close and continuous interactions to help guide customers through difficult periods

and providing time for turnaround plans to work which would help businesses continue to trade.

However, there were some areas for improvement, such as further development in the

assessment of vulnerable business customers and a need to improve early intervention

strategies.

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The LSB has issued individual action plans to all six firms involved with the review. The LSB will

track remedial action and complete a follow up review with each firm where issues were

identified.

CRR II and BRRD II: SRB consults on changes to MREL policy

The Single Resolution Board (SRB) is consulting on substantive changes to its policy on the

Minimum Requirement for Own Funds and Eligible Liabilities (MREL). The changes are

intended to bring it in line with amendments introduced by the BRRD II Directive and the CRR

II Regulation.

The proposals cover the implementation of provisions related to, among others:

MREL requirements for global systemically important institutions (G-SIIs);

changes to the calibration of MREL, including introducing MREL based on the leverage

ratio;

changes to the quality of MREL;

dedicated rules for certain business models, such as cooperatives, and for resolution

strategies, such as multiple point of entry (MPE); and

how these changes will be phased in.

The consultation closes on 6 March 2020. The SRB aims to publish a policy statement by the end

of April 2020. MREL decisions implementing the new framework will be taken, based on this

policy, in the 2020 resolution planning cycle by the first quarter of 2021.

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Consumer Finance Credit brokers: FCA letter to directors on key risks and supervision strategy

The FCA has sent a letter to directors of firms within its credit brokers portfolio, outlining key

risks that credit brokers could pose to their consumers and markets, and the action it expects

firms to take. The FCA's supervision strategy for credit brokers runs to March 2022 and will

involve identifying, diagnosing and resolving harm from credit broking and assessing the

effectiveness of this work.

The FCA has identified the following key drivers of harm within the credit broking portfolio:

failure to understand regulatory requirements;

poor oversight of staff and appointed representatives;

misleading or inaccurate financial promotions;

inadequate product information;

lack of explanation of service levels; and

failure to manage the risk to business from technology.

The FCA expects firms to take notice of the FCA's areas of concern and consider whether they

need to make changes to reduce potential harm to consumers.

Over the next two years, the FCA will prioritise supervisory work in a number of areas, including:

accurate regulatory data;

understanding the customer journey and oversight of staff and appointed

representatives; and

domestic premises suppliers.

The FCA will write again to credit broker portfolio firms after March 2022 updating them on the

key risks they pose and its future plans for supervising them.

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Payment Services Confirmation of payee and decision on varying specific direction 10: PSR PS20/1

Following its earlier consultation in CP20/1, the Payment Systems Regulator (PSR) has

published a policy statement, PS20/1, on confirmation of payee and its decision on varying

specific direction 10 (SD10). It has also published the varied SD10 and the responses to its

consultation.

The PSR has decided to proceed with SD10 in a varied form so that it:

includes the additional basis for exemption as consulted on, but includes a provision that

means the PSR will always impose a revised deadline as a condition of approval; and

excludes the private bank accounts held at HSBC UK Bank plc.

SD10 aims to reduce losses caused by authorised push payment (APP) scams and accidentally

misdirected payments.

Enhanced data ISO messages: plans for guidance

The Bank of England (BoE) has published the minutes of the Standards Advisory Panel's (SAP's)

meeting held on 2 December 2019. Among other things, at the meeting, the BoE and Pay.UK set

out their approach to producing thematic market guidance on the use of enhanced data ISO

messages by the end of 2020.

The guidance will explain how to populate enhanced data ISO messages, dependent on the

payment purpose. The SAP supports this approach, noting the need for UK-centric guidance in

addition to the international guidance.

The BoE and Pay.UK envisage the guidance being created and owned by the industry, with the

BoE and Pay.UK playing a convening and coordinating role, ensuring consistency between

different pieces of guidance. The minutes give further details.

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Securities and Markets MiFID II post-implementation review: European Commission consultation

The European Commission is consulting on its post-implementation review of the MiFID II

Directive and the Markets in Financial Instruments Regulation (MiFIR) (together referred to as

MiFID II).

Among other things, the Commission consults on:

potential changes to investor protection rules;

potential actions to foster research coverage for SMEs; and

the possible introduction of a new transparency tool that allows investment managers,

investment advisors and their clients to have access to "live" asset prices across the EU in

a consolidated format (the consolidated tape).

The Commission explains that this consultation, and the European Securities and Markets

Authority's (ESMA) consultation on the functioning of certain aspects of MiFID II, are

complementary and should not be considered mutually exclusive. Both the ESMA report and the

findings from this consultation will inform the Commission's review reports for the European

Parliament and the Council of the EU, including legislative proposals where considered

necessary.

The review consultation ends on 20 April 2020.

CRA III: ESMA updates Q&As

ESMA has updated its Q&As on the implementation of the CRA III Regulation to provide

clarification on what steps a credit rating agency (CRA) should take to ensure a sufficient level of

quality and transparency in the periodic review of credit ratings conducted in accordance with

Article 8(5) of CRA III.

CSDR: ESMA updates Q&As

ESMA has updated its Q&As on the implementation of the Central Securities Depositories

Regulation (CSDR). The update clarifies the implementation of the settlement discipline regime,

as follows (see questions five to seven in the settlement discipline section of the Q&As):

explain that the costs of the penalty mechanism that are charged to participants by a

central securities depository (CSD) should not be allocated based on the number or value

of penalties applied to participants;

provide further information relating to the settlement instructions sent by central

counterparties (CCPs); and

explain that, in respect of the buy-in process, the length of the extension period should be

determined based on the liquidity classification of the relevant financial instrument as of

the intended settlement date of the transaction.

Prospectus Regulation: ESMA updates Q&As

ESMA has updated its Q&As on the Prospectus Regulation. The update includes two new Q&As

relating to the length of the prospectus summary.

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Benchmark Regulation: ESMA response to Commission consultation

ESMA has published its response to the European Commission's consultation on the review of

the Benchmarks Regulation. ESMA's response focuses on the cessation of critical benchmarks,

parity between EU and third-country benchmarks regulation, and transparency.

CSDR: EACH Settlement Discipline Framework

The European Association of CCP Clearing Houses (EACH) has published its CSDR Settlement

Discipline Framework, setting out details of how central counterparties (CCPs) subject to the

CSDR should implement the CSDR's provisions on settlement discipline. The settlement

discipline regime is codified in CSDR and the related Commission Delegated Regulation (EU)

2018/1229 (SDR).

The objective of the CSDR Settlement Discipline Framework is to provide ESMA, relevant

authorities and market participants with details of EACH's implementation of the CSDR

settlement discipline provisions that affect CCPs and their clearing members.

EACH states that, if a CCP does not comply with the framework in a specific aspect, it must

inform EACH and their participants. It also states that the framework is subject to change

depending on changes to working assumptions and discussions with ESMA, the European

Central Securities Depositories Association (ECSDA) and the market community.

The SDR is due to enter into force and apply from 13 September 2020.

Sustainable finance: ICMA Compendium of international policy initiatives and best market practice

The International Capital Markets Association (ICMA) has published a Compendium intended to

provide stakeholders with an easy reference point to the numerous national and international

developments relating to sustainable finance in the capital markets field.

The Compendium is the first publication of ICMA's Sustainable Finance Committee set up in

September 2019. The publication will be regularly updated.

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Insurance Solvency II: Implementing Regulation on technical information for calculation of technical provisions and basic own funds for Q1 2020 reporting

Commission Implementing Regulation (EU) 2020/193, made under Article 77e(3) of the

Solvency II Directive, has been published in the Official Journal of the EU. The Implementing

Regulation sets out the technical information to be used by reinsurers and insurers when

calculating technical provisions and basic own funds for reporting with reference dates in Q1

2020.

The Implementing Regulation entered into force on 14 February 2020 and applies from 31

December 2019.

Low interest rate environment: EIOPA Supervisory Statement

The European Insurance and Occupational Pensions Authority (EIOPA) has published a

Supervisory Statement on the impact of the ultra-low/negative interest rate environment on the

insurance sector in the EU. EIOPA says that this environment is significantly impacting the

sector, in terms of asset allocation, reinvestment risk, profitability and solvency. It constitutes

one of the most important sources of systemic risk for insurers for the coming years.

In publishing the Supervisory Statement, EIOPA aims to raise awareness of the risk and inform

consumers and policyholders about supervisory measures and actions taken to protect their

interest.

EIOPA encourages national supervisory authorities (NSAs) and undertakings in the EU to

continue taking actions to mitigate the impact of the ultra-low/negative interest rate

environment on the EU insurance sector.

In the short term, EIOPA recommends that:

NSAs should intensify the monitoring and supervision of insurers identified as facing

greater exposure to the low interest rate environment;

NSAs should engage with undertakings to explore actions they could take to improve

their financial resilience;

within the context of improving financial resilience and in particular sound capital

planning, undertakings should exercise caution in distributing dividends and NSAs

should consider whether it is necessary to restrict the distribution of dividends;

NSAs and undertakings should pay special attention on pre-emptive recovery and

resolution planning to reduce the likelihood and impact of insurance failures; and

NSAs should broaden the analysis of the low interest rate environment and also consider

the potential build-up of systemic risk.

In the medium to long term, NSAs should identify whether there are any tools or powers missing

in their current toolkit. Where a gap is identified, NSAs should request the missing powers.

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