4 August 2017

Key Regulatory Topics: Weekly Update - 28 July 2017 – 3 August 2017

BREXIT

HM Government to introduce an International Sanctions Bill

On 2 August, the government published plans for a bill that would give it the legal power to impose sanctions after it leaves the EU. The Queen's Speech confirmed that an 'International Sanctions Bill' will be tabled during the current 2017-19 parliamentary session. The stated aim being to ensure that as a permanent member of the UN Security Council, the UK continues to play a central role in negotiating global sanctions to counter threats of terrorism, conflict and the proliferation of nuclear weapons, as well as bringing about changes in behaviour. The new powers would see the introduction of an annual review of sanctions regimes to ensure they remained appropriate. It would also allow individuals and organisations to challenge sanctions imposed on them. The domestic legislative framework would also allow the government to: (i) impose sanctions to ensure compliance with obligations under international law after the UK's exit from the EU. These include asset freezes, travel bans and trade and market restrictions; (ii) exempt or license certain types of activity, such as payments for food and medicine, which would otherwise be restricted by sanctions; and (iii) amend regulations for AML and CTFC and to pass new ones after the UK's exit from the EU.

TARGET2 – ECB recast guideline and amending decision published in OJ

On 31 July, the following were published in the OJ: (i) Guideline (EU) 2017/1404 of the ECB of 23 June amending Guideline ECB/2012/13 on TARGET2. The Guideline reflects the establishment of a Market Infrastructure Board, a Market Infrastructure and Payments Committee and an Advisory Group on Market Infrastructures for Securities and Collateral. It takes effect on the day of its notification to the national central banks of member states whose currency is the Euro; and (ii) Decision (EU) 2017/1403 of the ECB of 23 June amending Decision ECB/2012/6 concerning the terms and conditions of TARGET2-ECB (ECB/2017/20). The amended Decision reflects the establishment of a Market Infrastructure Board. It entered into force on 23 June.

Amending Guideline

Decision

CLIENT ASSET PROTECTION

CASS – FCA consultation on client money and unbreakable deposits

On 1 August, the FCA published a consultation paper (CP17/29) on client money and unbreakable deposits, which sets out proposals relating to minor amendments to the CASS. The FCA has found that some investment firms are experiencing difficulty depositing client money at banks in accordance with CASS requirements. Feedback from industry strongly suggests that this is partly due to the unintended combined effects of a rule in CASS 7 and the prudential liquidity rules applicable to banks. CASS 7 prevents firms from placing client money in bank accounts with unbreakable terms of longer than 30 days. Banks have cited the cost of liquidity requirements associated with such 30-day money as their main reason for their reduced appetite for client money. As result, the FCA requests views on the proposed changes to CASS: (i) permit a firm to deposit an appropriate proportion of client money in an unbreakable deposit (UD) of a maximum of 90 days; (ii) where a firm deposits client money in a UD of 31-90 days, it must comply with certain conditions; and (iii) require CASS medium and large firms to report client money in a UD of 31-90 days in their client money and asset return (CMAR). The proposals will not apply to general insurance intermediaries that only hold client money under CASS 5 or debt management firms that only hold client money under CASS 11. They will also not apply to client money received by a firm in its capacity as a trustee firm. The proposed rules are set out in the draft Client Assets (Term Deposits) Instrument 2017, which is in Appendix 1 to CP17/29. The deadline for comments is 1 November. The FCA will publish a policy statement, together with the final rules. It expects the rules to come into force alongside changes to the Handbook as required by the UK transposition of the MiFID II (2014/65/EU) (which applies from 3 January 2018).

Retail Banking Market Investigation Order 2017 – remedies

On 2 August, the CMA published a blog post discussing the entry into force of two of the remedies imposed following the retail banking market investigation and under the Retail Banking Market Investigation Order 2017. The blog explains that, from 2 August, all banks must have set, and publicised, a ceiling (or cap) on their unarranged overdraft charges, in the form of a monthly maximum charge (MMC). This is the maximum that the bank can charge a customer during any given month, taking together all types of unarranged overdraft charges. The CMA notes that it is pleased to see that some banks have already responded by introducing a cap earlier than required to, or doing away with these charges altogether. In addition, from 2 August all providers of unsecured loans and overdrafts to SMEs, for values up to £25,000, will have to publish and clearly display the rates they will charge for doing so. They must do this by using similar measurements (such annual percentage rates (APRs)) to those used on personal loans and credit cards.

FCA consultation on FAMR recommendations relating to FCA advice unit and insistent clients

On 1 August, the FCA published a consultation paper (CP17/28) on rules and guidance relating to some of the recommendations made by the FAMR in its final report. In its final report, FAMR set out a series of recommendations intended to tackle the barriers to consumers accessing advice and guidance. CP17/28 aims to address three of these recommendations. In particular, the FCA proposes to: (i) make changes to the FCA Handbook in the light of recent amendments to the definition of "advising on retail investments" under article 53(1) of the FSMA 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO). The amendments to the RAO were published in March and come into force on 3 January 2018. The proposals are in Chapter 3; (ii) amend its PERG to give firms more clarity on what amounts to a personal recommendation. The proposed changes also reflect the recent amendments to the RAO and consolidate earlier non-Handbook Guidance in this area. The proposals are in Chapter 4; (iii) provide guidance arising from the experience of the FCA's advice unit. In providing feedback to several firms, the FCA has identified common areas of uncertainty where giving guidance could benefit firms more generally. These proposals are in Chapter 5; and (iv) provide Handbook guidance on the treatment of insistent clients. This is set out in Chapter 6. The deadline for comments is 2 October. The FCA intends to publish a policy statement, together with final rules, in the fourth quarter of 2017, with the rules due to come into force on 3 January 2018. Also in the fourth quarter of 2017, the FCA intends to publish consolidated non-Handbook guidance bringing together guidance that the FCA will publish in September 2017, and the new guidance stemming from CP17/28.

FCA consultation - Creditworthiness in consumer credit

On 31 July, the FCA published a consultation paper (CP17/27) on assessing creditworthiness in consumer credit, together with a summary of its research findings, which mainly involved a firm survey and earlier FCA qualitative research. The FCA is concerned about the risk of potential harm to consumers from poor culture and practice by consumer credit firms, which could lead to consumers being granted credit that they cannot afford to repay, causing financial distress. It could also lead firms to develop processes that are unduly costly or restrictive. In the light of this, the FCA wants to clarify: (i) the distinction between affordability and credit risk; (ii) the factors that should be used when deciding the proportionality of assessments; (iii) the role of income and expenditure information; and (iv) its expectations around firms' policies and procedures. The FCA originally announced its intention to carry out research relating to how consumer credit firms assess creditworthiness in its 2015/16 business plan. The proposed rules are set out in the draft Consumer Credit (Creditworthiness) Instrument 2017. The deadline for comments is 31 October. The FCA intends to publish a policy statement with final rules and guidance (and the final determination) in the first half of 2018.

Credit cards – FCA letter to UK Finance on voluntary agreement on credit limit increases

On 31 July, the FCA published a letter it has sent to UK Finance (as the representative of the UK credit card industry, previously the UK Cards Association) (dated 19 July) from Mary Starks, FCA Director of Competition, relating to the voluntary industry agreement on credit limit increases. In response to concerns raised during the FCA's credit card market study, the UK Cards Association agreed to develop a voluntary industry agreement to give credit card customers greater control over credit limit increases. The agreement consists of two components: an agreement to give greater control to customers; and an agreement to further restrict when customers would be offered credit limit increases. UK Finance has suggested aligning the proposed restrictions on when customers are offered credit limit increases with the FCA's proposals on persistent debt. This relates to the second component of the agreement only. The industry has, via UK Finance, made a proposal to exclude customers who meet the FCA's proposed definition of persistent debt for 12 months from offers of credit limit increases. This would be instead of the previously published restriction in relation to making minimum repayments. The FCA agrees that this would be a more sensible approach as it would be easier to implement, easier to explain to consumers and would increase the number of accounts that were subject to restrictions on offers of credit limit increases.

Payday lending – FCA feedback statement on high-cost credit market

On 31 July, the FCA published a feedback statement (FS17/2) on the high-cost credit market, together with a technical annex, a report setting out the FCA's survey findings of consumers' experiences of high-cost short-term credit (HCSTC) products and a technical report summarising the methodological approach used for the price cap research. FS17/2 covers: (i) HCSTC price cap; (ii) high-cost credit product findings; and (iii) future priorities. The next stage of the review will focus on: (i) overdrafts; (ii) the FCA will look in more depth at why consumers use RTO to obtain goods and whether more affordable alternatives are available; (iii) home collected credit; and (iv) catalogue credit. The FCA has identified a number of issues that could cause consumer harm. It will investigate these further with the aim of issuing a consultation paper on proposed solutions in spring 2018.

FCA update on work on motor finance

On 31 July, the FCA published a press release providing an update on its work on the motor finance market. The FCA explains that the majority of new car finance is in the form of personal contract purchase (PCPs), which is a form of hire-purchase, although it has identified an extensive range of products across the market. Some of these are based on ultimate vehicle ownership and others on "usership", with no requirement to purchase. The FCA's concerns include the potentially confusing terminology used in the market. It is also concerned that, for used car sales where there is no finance subsidy or deposit contribution, there may be a greater risk that the finance aspect of the car purchase is used to generate a greater margin on the sale. The FCA's review of the market will focus on the following questions: (i) are firms taking the right steps to ensure that they lend responsibly, in particular by appropriately assessing whether potential customers can afford the product in question? (ii) is the information provided to potential customers by firms sufficiently clear and transparent, so that they can understand the risks involved and make informed decisions? and (iii) are firms managing the risk that asset valuations could fall and ensuring that they are adequately pricing risk?. The FCA will publish an update on its work in the first quarter of 2018.

PRIIPS – Joint Committee of ESAs technical advice on PRIIPs with environmental or social objectives

On 28 July, the Joint Committee of ESAs published their technical advice on the procedures used to establish whether a PRIIP targets specific environmental or social objectives (JC 2017 43). The technical advice has been produced under Article 8(4) of the PRIIPs Regulation. The manufacturer of a PRIIP with environmental or social objectives (EOS PRIIP) is required to have specific governance measures to ensure that the environmental and social objectives of the product are met on an ongoing basis. The product also has to demonstrate to retail investors throughout the investment process the relevance of these objectives. The advice focuses on PRIIP manufacturers: clearly specifying these objectives, together with an appropriate and proportionate strategy on how to achieve them; disclosing to retail investors the objectives and how these will be achieved; installing and documenting governance and monitoring measures, where the latter need to be proportionate to the objectives and strategy for how to achieve the objectives; and conducting regular reviews on the progress made in achieving the specified and disclosed objectives. The ESAs concluded that at this time the establishment of specific and detailed standalone obligations for PRIIPs targeting specific environmental or social objectives would not be proportionate. Existing sectoral measures offer already, or are in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of PRIIPs targeting environmental and social objectives. The technical advice was endorsed by the Joint Committee on 6 July and approved by each of the ESA Boards of Supervisors on 27 July.

AML – FCA updates webpage on new technologies and AML compliance

On 2 August, the FCA published a webpage in the light of research it commissioned relating to new technologies and firms' AML compliance. The FCA commissioned consultants to carry out a survey on emerging technologies with the potential for enhancing financial firms' work to detect and prevent money laundering, and for helping make the UK a hostile environment for criminals' money. It has subsequently published the consultant's report (dated 31 March), which sets out the findings of three months of research that included over 40 interviews with regulated firms, technology providers, and other bodies. The FCA has published the report as it believes it will be of interest to financial firms who are considering the use of new technologies in relation to their AML compliance efforts. Amongst other things, the report sets out respondents' views on topics including the following: (i) what are the key functions of new and emerging technologies related to AML compliance, and how can they aid compliance activities? (ii) what challenges do firms face in introducing new technologies? and (iii) what good practice examples and lessons are available for firms considering new compliance technologies?. Appendix 4 to the report sets out a table of the technologies used by firms in relation to AML compliance. These include biometrics such as voice recognition, blockchain, video know-your-customer checks and geolocation. The report concludes that new and emerging technologies have genuine potential to transform AML compliance, both in helping to prevent money laundering and in reducing the cost of compliance. However, it also notes that substantial barriers to widespread adoption exist, which may continue to limit the progress of ongoing innovation in AML compliance.

ICP – IAIS consultation on revised draft of ICP 24 on macroprudential surveillance and insurance supervision

On 1 August, the IAIS published for consultation a revised draft (dated July 2017) of insurance core principle (ICP) 24 on macroprudential surveillance and insurance supervision. On a related webpage, the IAIS explains that the consultation follows the thematic approach it adopted in September 2015, which is aimed at ensuring a more efficient process for developing supervisory materials. The approach involves the management and development of supervisory materials by theme across the three tiers of standard setting (that is, ICPs, ComFrame and G-SII policy measures), each building on the previous tier. The deadline for comments is 1 October. The IAIS will hold a public "background" call via teleconference on 14 September to discuss the revised draft ICP.

PSD2 – EBA consultation on fraud reporting requirements

On 2 August, the EBA published a consultation paper (EBA/CP/2017/13) on its draft guidelines on reporting requirements on statistical data on fraud under Article 96(6) of the PSD2. The EBA has developed the proposed guidelines in close co-operation with the ECB. Their aim is to ensure that the high-level fraud reporting requirements under PSD2 are implemented consistently among member states and that the aggregated data provided by competent authorities to the EBA and the ECB is comparable and reliable. The first part of the guidelines sets out requirements applicable to all PSPs, with the exception of account information service providers, while the second part introduces requirements that are applicable to all competent authorities in the EU. Amongst other things, the guidelines define the meaning of "fraudulent payment transactions" for the purpose of the data reporting under these particular guidelines. The guidelines also include periodic reporting requirements on payment transactions and fraudulent payment transactions and set out the methodology for collating and reporting data, including data breakdown, reporting periods, frequency and reporting deadlines. The guidelines leave it to the discretion of the competent authority to decide on the technological aspects of the reporting format and the means of communication. The deadline for comments is 31 October. The guidelines will apply from 13 January 2018, which is the date by which PSD2 must be transposed in member states.

UK payments – PSF consultation on blueprint for future of UK payments

On 28 July, the Payments Strategy Forum (PSF) published a consultation document on a blueprint for the future of UK payments. The consultation builds on the PSF's November 2016 strategy to change UK payments systems. In particular, it focuses on: the new payments architecture (NPA); and improving trusts in payments. The deadline for comments is 22 September. The PSF expects to complete its consultation assessment in late November 2017. Responsibility for the NPA is due to transition to the new payment system operator (NPSO) by the end of 2017.

PRUDENTIAL REGULATION

Please see the 'other' section for an update on the ESRB's annual report 2016 and the EBA's report on credit institution funding plans.

CRR – ECON report on CRR amending Regulation on IFRS9

On 31 July, ECON published its report (dated 14 July) (PE605.934v02-00) on the proposed Regulation amending the CRR relating to the IFRS 9. ECON voted to adopt the report on 11 July. The proposed Regulation contains amendments to the CRR concerning the transitional period for mitigating the impact on own funds of the introduction of IFRS 9 and the large exposures treatment of certain public sector exposures denominated in non-domestic currencies of member states. It forms part of the package of reforms to the CRR referred to as CRR II. The draft report contains a EP legislative resolution on the Regulation, the text of which sets out suggested amendments to the proposed CRR II that reflect the splitting out of the transitional provisions into a separate Regulation. The amendments delete provisions in the CRR II that do not relate to the transitional provisions.

CRR – ECB letter on guidance on CRR securitisation notifications

On 28 July, the ECB published a letter from Ms Daniele Nouy, Chair of the Supervisory Board of the ECB, to the management of significant institutions under the SSM containing guidance on notifications relating to securitisations made under Article 248(1) of the CRR. In the guidance, the ECB sets out how it expects to be notified of transactions that go beyond the contractual obligations of a sponsor institution or an originator institution. Credit institutions should notify each transaction separately in writing no later than 15 working days following the execution of the transaction. The Annex to the guidance specifies the information that the ECB expects to receive from credit institutions acting as an originator or as a sponsor.

Competition - FCA publishes speech on competition

On 3 August, the FCA published a speech by Mary Starks, Director of Competition and Economics, on competition at the FCA. The Director explained the importance of the FCA promoting competition, notably through its market studies, competition law enforcement and pro-competition regulation. The FCA was given concurrent competition powers with the CMA in 2015.

GDPR – LMA guidance for underwriters

On 31 July, the LMA published guidance for underwriters on the GDPR. The guidance provides a high-level overview of the GDPR. It covers: (i) key definitions in the GDPR; (ii) potentially relevant legal grounds that can be relied on under the GDPR to process personal data and special categories of data; (iii) the consent and structure of the Lloyd's/London market; (iv) information that fair processing notices should include; (v) information relating to profiling individuals; (vi) information that individuals are entitled to be told under "subject access rights" in the GDPR; (vii) notifications relating to data security breaches; (viii) the right to be forgotten; and (ix) fines.

Credit institutions – EBA report on funding plans and encumbrance

On 31 July, the EBA published: (i) a report on funding plans. The objective of the report is to assess the feasibility of EU banks' funding plans submitted to the EBA. The EBA has drafted the report in response to the ESRB's recommendations on the funding of credit institutions. The analysis is based on funding plans reported in accordance with the EBA guidelines on harmonised definitions and templates for funding plans of credit institutions, which were published in July 2014. The EBA collected data from a sample of 155 banks (including Barclays plc, HSBC and Lloyds), which covered the largest institutions in each member state. The analysis used 31 December 2016 as a reference date and covered actual figures for 2016 and forecasts for three subsequent years (2017 to 2019). The cut-off date for all data was 10 July; and (ii) a report on asset encumbrance. The EBA monitors asset encumbrance to assess whether changes have broader implications for access to unsecured instruments. The quarterly data for the year 2016, which underlies the report, shows a slight increase in the level of asset encumbrance across the EU compared with the figures for 2015, and also relative to 2014. Among other things, the report also highlights a wide dispersion of asset encumbrance across institutions and countries, which is consistent with what was observed in the previous report. This is the EBA's third report analysing asset encumbrance in EU banks. The previous report was published in June 2016.

Report on Funding Plans

Report on Asset Encumbrances

ESRB annual report 2016

On 28 July, the ESRB published its annual report for 2016. The report describes the work that the ESRB has carried out during its sixth year of operation. It is split into three sections: (i) section 1: Systemic risks in the financial system of the EU, which considers the four main risks to financial stability in the EU that the ESRB has identified; (ii) section 2: Policy measures addressing systemic risks, which reviews the ESRB's work in the area of macro-prudential policy; and (iii) section 3: Ensuring implementation and accountability, which discusses the follow-up to ESRB recommendations, the ESRB's obligation to report to the EP and the institutional framework.

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