Regulation Update

A round-up of regulatory changes by Norton Rose Fulbright

ECB extends leverage ratio relief for banks until March 2022 (18 June 2021)

The European Central Bank (ECB) has announced that the euro area banks it directly supervises may continue to exclude certain central bank exposures from the leverage ratio, as exceptional macro-economic circumstances due to the COVID-19 pandemic continue. The announcement extends until March 2022 the leverage ratio relief granted in September 2020, which was set to expire on 27 June 2021.

Subsequently there was published in the Official Journal of the EU (OJ), Decision (EU) 2021/1074 of the ECB of 18 June 2021 on the temporary exclusion of certain exposures to central banks from the total exposure measure in view of the COVID-19 pandemic and repealing Decision (EU) 2020/1306.

HM Treasury: consultation response to regulatory framework for approval of financial promotions (22 June 2021)

HM Treasury has published the response to its July 2020 consultation on a regulatory framework for approval of financial promotions. In the earlier consultation HM Treasury proposed that the Financial Services and Markets Act 2000 (FSMA) should be amended so that authorised firms are no longer able to approve the financial promotions of unauthorised persons, unless the authorised firm had passed through a new regulatory “gateway” operated by the Financial Conduct Authority (FCA). In terms of the gateway HM Treasury set out two possible options being: (i) restrict approval of the financial promotions of unauthorised firms through the imposition of requirements by the FCA; or (ii) specify the approval of financial promotions communicated by unauthorised persons as a “regulated activity” under FSMA. HM Treasury’s preferred option was the first option on the basis that it would achieve the intended outcome of strengthening the FCA’s ability to ensure that authorised firms comply with FCA rules when approving the financial promotions of unauthorised persons, without fundamentally altering the overall regulatory architecture of the financial promotion regime. In its response HM Treasury is proceeding with its preferred option for the gateway and sets out the proposed structure that includes a transitional period. In terms of next steps: (i) the government intends to bring forward legislation when parliamentary time allows; and (ii) the FCA will consult on its proposals for implementing the gateway in due course.

The Financial Services Act 2021 (Commencement No. 2) Regulations 2021 (22 June 2021)

There was published on the legislation.gov.uk website The Financial Services Act 2021 (Commencement No. 2) Regulations 2021. Regulation 2 of these Regulations brings into force provisions of the Financial Services Act 2021 (FS Act 2021) dealing with forfeiture of money in respect of Northern Ireland. Regulation 3 of these Regulations brings into force provisions of the FS Act 2021 dealing with: (i) Benchmarks (ss 8 to 21 and Sch 5); (ii) Access to financial services markets (s 27 and Sch 10); (iii) Variation or cancellation of permission to carry on regulated activity (s 28 and Sch 11); (iv) Rules about level of care provided by authorised persons (s 29); (v) Insider dealing and money laundering etc (s 34); (vi) Miscellaneous matters (ss 37 to 40 and 43).

FCA speech: LIBOR: 6 months to go (5 July 2021)

The FCA has published a speech by Edwin Schooling Latter (Director of Markets and Wholesale Policy) entitled ‘LIBOR – 6 months to go’. In his speech Mr Latter discusses what firms need to do now with respect to legacy conversion and US dollar market transition. He also discusses what the “official sector” has left to do.

Commission adopts final one-year extension of the transitional regime for capital requirements for non-EU CCPs (24 June 2021)

The European Commission (Commission) has extended by an additional year the current transitional regime regarding the capital requirements that EU banks and investment firms must maintain when exposed to non-EU central counterparties (CCPs). The transitional regime will now continue to apply until 28 June 2022. A Commission Implementing Regulation was subsequently published in the OJ.

Securitisation Regulation: Call for Evidence (24 June 2021)

HM Treasury has issued a call for evidence regarding the onshored Securitisation Regulation. Article 46 of the onshored Securitisation Regulation places a legal obligation on HM Treasury to review the functioning of the Regulation and lay a report in Parliament by 1 January 2022. There are a number of areas in this review obligation that must be assessed by HM Treasury. Each of these areas is covered in the call for evidence. The deadline for comments on the call for evidence was 2 September 2021.

EBA updates on monitoring of AT1 instruments and issues recommendations for ESG-linked capital issuances (24 June 2021)

The European Banking Authority (EBA) has updated its report on the monitoring of Additional Tier 1 (AT1) instruments including an update on the monitoring of the implementation of the EBA’s opinion on legacy instruments and its considerations on ESG capital bonds. The objective of the update is to further strengthen the robustness and quality of EU institutions’ own funds and eligible liabilities instruments.

FCA CP21/19: Proposed decision under Article 23D onshored Benchmarks Regulation for 6 sterling and yen LIBOR settings (24 June 2021)

The FCA has published Consultation Paper 21/9: Proposed decision under Article 23D onshored Benchmarks Regulation for 6 sterling and yen LIBOR settings (CP21/9). In CP21/9 the FCA is consulting on a proposal to use its Art 23D(2) powers introduced through amendments to the onshored Benchmarks Regulation under the FS Act 2021. The FCA proposes to require the administrator of LIBOR, ICE Benchmark Administration (IBA), to change the way 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings are determined after 2021 (the 6 LIBOR settings) to secure an orderly wind-down. The requirement would be conditional on any designation of the 6 LIBOR settings as Art 23A benchmarks taking effect immediately after end 2021. The deadline for comments on CP21/9 was 27 August 2021.

FCA Dear CEO letter: Action needed in response to common control failings identified in AML frameworks (29 June 2021)

The FCA has published a Dear CEO letter that it had issued detailing common themes coming out of its recent assessments of retail banks’ financial crime systems and controls.

In the Dear CEO letter the FCA reminds firms that the Senior Managers and Certification Regime (SMCR) places a responsibility on all senior management to counter the risk that their firm might be used to further financial crime. Particular responsibility lies with those SMCR roles with responsibility for financial crime, including Senior Management Function (SMF) 17 (Money Laundering Reporting Officer) and Prescribed Responsibility D (Financial Crime). The FCA adds that in its supervisory work it will continue to consider carefully whether the relevant SMF holders have carried out their responsibilities appropriately.

In the Dear CEO letter the FCA sets out certain areas where it has identified common weaknesses in firms’ financial crime systems and control frameworks. These areas include: governance and oversight, risk assessments, transaction monitoring and suspicious activity reporting.

Whilst firms are not required to respond to the Dear CEO letter their senior management should take the necessary steps to gain assurance that the financial crime systems and controls are commensurate with the firm’s risk profile and meet the requirements on the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. Firms are expected to complete a gap analysis against each of the common weaknesses the FCA has outlined by 17 September 2021.

The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 (30 June 2021)

There was published on the legislation.gov.uk website The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021. Together with planned FCA changes to the relevant requirements (see Consultation Paper 21/9: Changes to UK MiFID’s conduct and organisational requirements), the Regulations remove the obligation on trading and execution venues to publish reports relating to the quality of execution of orders obtained on them. The Regulations were made on 28 June 2021 and mostly came into force on 26 July 2021.

PS14/21 : Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251 (30 June 2021)

The Prudential Regulation Authority (PRA) and FCA have jointly published Policy Statement 14/21: Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251 (PS14/21). In PS14/21 the PRA and FCA provide feedback on the responses to Consultation Paper 6/21: Margin requirements for non-centrally cleared derivatives: Amendments to BTS 2016/2251. It also contains the PRA’s and FCA’s final policy, in the form of amendments to Binding Technical Standard 2016/2251. The requirements became effective on publication of PS14/21, which includes the final technical standards instrument by the PRA and FCA.

New proposal for a Directive on consumer credits repealing and replacing the Consumer Credit Directive (1 July 2021)

The Commission has issued a proposal for a Directive on consumer credits repealing and replacing the Consumer Credit Directive. The Commission has also published the Annexes to the draft Directive, an impact assessment report, an executive summary of the report and a factsheet. The European Parliament and the Council of the EU will now consider the draft Directive.

New HM Treasury papers on UK regulatory reform (1 July 2021)

HM Treasury has published the following papers:

• Mansion House speech by the Chancellor, Rishi Sunak MP. In his speech the Chancellor discusses the future of financial services in the UK. Among other things the Chancellor reports that the government is negotiating a “ground-breaking” deal with Switzerland which will be the “most ambitious financial services agreement ever attempted”. He also states that he sees “no reason of substance why the UK cannot or should not continue to provide clearing services for countries in the EU and around the world”.
• A new chapter for financial services. In this document the government sets out its vision for an open, green and technologically advanced UK financial services sector.
• HM Treasury consultation paper on access to cash. The FS Act 2021 allows for the provision of cashback without a purchase from the end of June 2021 as a non-regulated activity. As set out in its October 2019 Call for Evidence ‘Access to Cash: Call for Evidence’, the government considers that cashback without a purchase has the potential to be a valuable facility to cash users in the future and play an important role in the UK’s cash infrastructure, which comes with the additional benefit of supporting local cash recycling. The FS Act 2021 provided the opportunity to make this targeted but potentially high impact legislative change whilst detailed work to develop broader cash legislation has continued. The consultation paper sets out the details of the government’s proposed policy approach for this broader legislation seeking views in three key areas: geographic access requirements for providing access to cash withdrawals and deposits; designation of firms to meet requirements to provide access; and regulatory oversight. The deadline for comments on the consultation paper is 23 September 2021.
• HM Treasury consultation paper on the Wholesale Markets Review. The Wholesale Markets Review was established to determine how the UK’s approach to regulating secondary markets needs to adapt following the UK’s withdrawal from the EU, and to ensure that the framework continues to cater for future challenges and opportunities. The consultation paper outlines the government’s proposals to clarify the regulatory perimeter to ensure the market can operate in confidence, and to remove requirements that limit firms’ ability to access the most liquid pools of capital where they can get the best outcomes for investors. The consultation considers how the transparency regime for fixed income and derivatives markets can be recalibrated to ensure it is proportionate to the characteristics of these markets. It also proposes reforms to the UK commodities regime as well as amendments to the market data regime, to ensure that market activity is not unnecessarily restricted and to enable participants to identify best available prices, respectively. The deadline for comments on the consultation paper is 24 September 2021.
• HM Treasury consultation paper on the UK prospectus regime review. In the consultation paper the government sets out how it proposes reviewing and potentially replacing the prospectus regime the UK has inherited from the EU. The deadline for comments on the consultation paper is 24 September 2021.

EBA revises guidelines (2 July 2021)

The EBA has published:

• Revised guidelines on internal governance. The update takes into account the amendments introduced by the Capital Requirements Directive V (CRD V) and the Investment Firms Directive (IFD) in relation to credit institutions’ sound and effective governance arrangements. The final revised guidelines will apply from 31 December 2021.
• Revised guidelines on sound remuneration policies. The update takes into account the amendments introduced by the CRD V in relation to institutions’ sound remuneration policies and, in particular, the requirement that remuneration policies should be gender neutral. The revised guidelines will apply from 31 December 2021.

The EBA and the European Securities and Markets Authority (ESMA) have published revised final joint guidelines on the assessment of the suitability of members of the management body and key function holders. These revised final guidelines take into account the amendments introduced by the CRD V and the IFD, and their effect on the assessment of the suitability of members of the management body, in particular with regard to money laundering and financing terrorism risks, and gender diversity. The revised final guidelines will apply from 31 December 2021.

PRA PS16/21: Internal Rating Based UK mortgage risk weights: Managing deficiencies in model risk capture (6 July 2021)

The PRA has published Policy Statement 16/21: Internal Rating Based UK mortgage risk weights: Managing deficiencies in model risk capture (PS16/21). In PS16/21 the PRA provides feedback on Consultation Paper 14/20: Internal Ratings Based UK mortgage risk weights: Managing deficiencies in model risk capture (CP14/20) and sets out its final policy in the form of an updated version of Supervisory Statement 11/13: Internal Ratings Based (IRB) approaches (SS11/13). The amendments to SS11/13 will take effect from 1 January 2022.

PRA, FCA, BoE Discussion Paper: Diversity and inclusion in the financial sector – working to drive change (7 July 2021)

The PRA, FCA and the Bank of England in its capacity of supervising financial market infrastructure firms (together the regulators) have issued a joint Discussion Paper on diversity and inclusion in the financial sector. In the Discussion Paper the regulators begin by setting out their role including how improving diversity and inclusion links to their objectives and their public sector equality duty. The regulators also cover the steps they have taken to improve diversity and inclusion within their own organisations. The regulators then summarise current expectations and requirements on diversity for UK-regulated firms. They also outline different policy initiatives that they think could be effective for driving and supporting change. The Discussion Paper is open until 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022.

New FCA webpage: Agreements with overseas regulators (8 July 2021)

The FCA has published a new webpage setting out the multilateral and bilateral memoranda of understanding and other agreements it has signed with overseas regulators.

PRA statement: Update on shareholder distributions by large UK banks (13 July 2021)

The PRA has issued a statement that provides an update on shareholder distributions by large UK banks. The PRA previously issued a statement last December on capital distributions by large UK banks and set out certain guardrails for distributions to ordinary shareholders in relation to full-year 2020 results. The PRA has reviewed its approach to shareholder distributions and in this latest statement concludes that the guardrails within which it asked bank boards to determine the appropriate level of distributions in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect. The statement also adds that in the meantime it is essential that banks continue to support households and businesses through the economic recovery and as the government’s support measures unwind over the coming months, including in the event that economic outcomes are more severe than currently expected. Bank boards should therefore continue to exercise an appropriate degree of caution around the level of any shareholder distributions.

SFDR draft RTS further delayed (9 July 2021)

Earlier this year, the European Supervisory Authorities (ESAs) published a final report containing draft RTS (RTS) on the content, methodologies and presentation of sustainability-related disclosures under the empowerments set out in Arts 2a, 4(6) and (7), 8(3), 9(5) and 10(2) and 11(4) of the Sustainable Finance Disclosure Regulation (SFDR). At the time of issuing the draft RTS the ESAs noted that while financial market participants and financial advisers were required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the draft RTS would be delayed to a later date. At the time the ESAs proposed in the draft RTS that the application date should be 1 January 2022. The ESAs are also preparing draft RTS on taxonomy-related product disclosures under the Taxonomy Regulation which amends the empowerments in Arts 8(4), 9(6) and 11(5) of the SFDR. The deadline for the submission of the standards was 1 June 2021 and certain provisions are due to apply from 1 January 2022. The Commission has issued a letter informing the European Parliament that it plans to bundle all of the above draft RTS into a single delegated act and defer the dates of application of 1 January 2022 by six months to 1 July 2022.

FCA Business Plan (15 July 2021)

The FCA has published its Business Plan 2021/22. In the Business Plan the FCA explains how it sees its future role and priorities, how it intends to deliver them and how it will measure its performance.

In consumer markets FCA priorities include: (i) strengthening rules on financial promotions to protect consumers in relation to investments; (ii) continuing to improve standards of pension advice; (iii) a consumer campaign on scams and high-risk investments; and (iv) progressing proposals for a new Consumer Duty to raise standards in firms’ treatment of consumers. In wholesale markets the focus includes: (i) following the UK’s exit from the EU, continuing to develop plans to make primary and secondary markets work better while maintaining high standards; and (ii) continuing to support the smooth transition away from sterling LIBOR to alternative risk-free rates. The Business Plan also sets out a number of cross-cutting priorities including: (i) using the FCA’s authority and influence to work with partners to help drive down the incidence and impact of fraud; (ii) improving diversity and inclusion, both at the FCA and in regulated firms; and (iii) supporting environmental goals by adapting the regulatory framework to enable a market-based transition to net-zero carbon emissions. The FCA also published a speech by its CEO, Nikhil Rathi, entitled ‘Transforming to a forward-looking, proactive regulator’. In his speech Mr Rathi states, among other things, that the FCA’s role is more critical than ever and that scrutiny of its performance is closer than ever. He also discusses the FCA being more innovative, assertive and adaptive.

UK updates list of AML high risk countries (12 July 2021)

There was published on the legislation.gov.uk website The Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021. These Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRS) by substituting the list of high-risk third countries in Sch 3ZA for a new list. The new list mirrors the updates made by the Financial Action Task Force to its own list of high-risk countries following its June Plenary. The Regulations came into force on 13 July 2021.

Report on CBDCs (9 July 2021)

The Committee on Payments and Market Infrastructures, the Bank for International Settlements Innovation Hub, the International Monetary Fund and the World Bank have co-published a report on central bank digital currencies (CBDCs). The report looks at how CBDCs could facilitate enhanced cross-border payments, and how practical efforts are taking these considerations forward.

PRA PS17/21: Implementation of Basel standards (9 July 2021)

The PRA has published Policy Statement 17/21: Implementation of the Basel Standards (PS17/21). In PS17/21 the PRA provides feedback on comments received on Consultation Paper 5/21: Implementation of Basel Standards (CP5/21) and sets out near final rules. The proposals in CP5/21 sought to implement some of the remaining Basel III standards and restate without material modification those aspects of the onshored Capital Requirements Regulation (CRR) which HM Treasury proposes to revoke and the PRA proposes to restate in the PRA Rulebook. The PRA expects to publish the final rule instruments in a subsequent Policy Statement, after HM Treasury has laid the Statutory Instrument, to delete the relevant parts of the CRR that the near-final rules will replace. The policy is intended to take effect at the same time as HM Treasury’s revocation of the relevant parts of the CRR, which will be on 1 January 2022.