FIG Bulletin

21 June 2019

FINANCIAL CONDUCT AUTHORITY 5

FCA PS19/17: final rules on buy now pay later products 5

Defined benefit pension transfers: FCA announces further action 5

RBS GRG: final report into treatment of SMEs 6

FCA CP19/20: Assessing Adequate Financial Resources 6

Regulatory co-operation between the UK and US: now and in the future 6

FCA and MAS announce collaboration on cyber security 7

BANK OF ENGLAND AND PRUDENTIAL REGULATION AUTHORITY 8

PRA PS13/19 Pillar 2 liquidity: updates to framework 8

Fast growing firms: PRA Dear CEO letter 8

PRA PS12/19: Regulated fees and levies: Rates proposals 2019/20 8

Financial resilience and economic earthquakes: BoE speech 8

Simulating stress in the UK corporate bond market: investor behaviour and asset fire-sales 9

Diversity and inclusion: BoE speeches 9

BREXIT 10

PRA Rulebook (EU Exit) (Amendment) Instrument 2019 10

Hogan Lovells Brexit resources 10

EUROPEAN UNION 11

Sustainable finance: Commission guidelines and three new expert reports 11

EMIR: ESMA updates Q&A 11

EMIR: ESMA letter on the hedging exemption for calculation of clearing thresholds for non-financial groups 11

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MiFiD II product intervention: ESMA issues opinions on NCA proposals 12

CSDR: ESMA updates Q&As 12

ESMA Annual Report 2018 13

EIOPA 2018 Annual Report 13

Deposit Guarantee Schemes: EBA updates data 13

Benchmarks Regulation: ESMA publishes translations for Guidelines on non-significant benchmarks 13

GENERAL 14

EMIR Refit: Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) (Amendment) Regulation 14

Loyalty penalty super-complaint: CMA and FCA updates 14

Select Committee condemns the state of UK sanction policy 14

SECURITIES AND MARKETS 15

FCA and CSRC announce their support for the Shanghai-London Stock Connect scheme 15

INSURANCE 16

EIOPA, ECB, NCBs and NCAs agree on common minimum standards for supervisory and statistical reporting by (re)insurance undertakings 16

Insurance stress test 2019 16

Chief actuaries of life insurers: PRA letter 16

IAIS strategic plan for 2020 to 2024 16

IAIS consults on revisions to core principles, glossary and ComFrame 16

Holistic framework for systemic risk: IAIS consults on revisions 17

Solvency II: amending Delegated Regulation published in OJ 17

INVESTMENT FUNDS 18

LF Woodford Equity Income Fund: FCA letter to Treasury Committee 18

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INTERNATIONAL 19

IOSCO cyber taskforce final report 19

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Financial Conduct Authority FCA PS19/17: final rules on buy now pay later products

On 12 June 2019, the Financial Conduct Authority (FCA) published a policy statement on buy now pay later (BNPL) offers (PS19/17). The paper is relevant to firms involved in offering BNPL deals, including retailers and lenders.

BNPL offers are credit offers with a product feature that gives the consumer a promotional period during which they are not generally required to make repayments. If the consumer does not repay the entire amount within the promotional period, interest will usually be charged on the original credit amount or the unpaid part of that amount from the date of purchase.

In December 2018, the FCA consulted in CP18/43 on a package of remedies relating to BNPL offers, including:

• three proposed disclosure remedies, designed to improve the information consumers receive about these offers; and

• a proposal to prevent firms charging backdated interest on money that the consumer has repaid during the BNPL offer period.

The FCA is going ahead with its proposals, subject to some small technical changes to the definition of BNPL credit. It is also extending the implementation period for the backdating interest remedy, so that firms have enough time to implement this significant change properly.

Affected firms need to comply with:

• the disclosure rules and guidance by 12 September 2019; and • the rule preventing backdated interest from being charged on repaid amounts by 12

November 2019.

Defined benefit pension transfers: FCA announces further action

The FCA has published the results of the data it has received from firms carrying out defined benefit (DB) pension transfers and set out the next steps in its supervisory work related to such transfers. The FCA is concerned that firms are recommending that large numbers of consumers transfer out of their defined benefit pension schemes. The FCA stresses that it has repeatedly warned firms in the past that such transfers are likely to be unsuitable for most clients. Despite this, the FCA states that too much advice it has seen to date is still not of an acceptable standard. In its review the FCA surveyed 3,015 firms and found that between April 2015 and September 2018:

• 2,426 firms provided advice on transferring their DB pension; • 234,951 scheme members received advice on transferring; and • of those, 162,047 members had been recommended to transfer out and 72,904 had

been recommended not to transfer.

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The FCA has already started visiting some firms, starting with those most active in the market. These visits will allow the FCA to complete a full assessment of the firms’ approach to DB advice, focusing on key aspects of firms’ business models and processes which could give rise to harm. The FCA will also write to all firms where the potential for harm has been identified in the data the firm has supplied. This will set out the FCA’s expectations and the actions firms should take.

RBS GRG: final report into treatment of SMEs

The FCA has published the final report on its investigation in to Royal Bank of Scotland’s (RBS) treatment of small and medium-sized enterprise (SME) customers transferred to its Global Restructuring Group (GRG). This follows the FCA’s update provided in July 2018 on the investigation. In that update, the FCA said that given the serious concerns that were identified in the independent review it should launch a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. Also, that it was important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.

The FCA concluded that its powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success. The FCA also found no evidence that RBS artificially distressed and transferred otherwise viable SME businesses to GRG to profit from their restructuring or insolvency. In its newly published final report, the FCA sets out in detail why it came to the decision it did. This report concludes the FCA’s work on GRG. However, the FCA states that it will continue to closely monitor the sector and the complaints process overseen by Sir William Blackburne to ensure that things are put right.

FCA CP19/20: Assessing Adequate Financial Resources

The FCA has published a consultation, CP19/20, which explains the purpose of, and its approach to, the assessment of adequate financial resources for all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Businesses (PRIN). It also provides further guidance on the meaning of ‘adequate financial resources’ under these parts of the Handbook. The FCA aims to provide more clarity to the industry on:

• the role of adequate financial resources in minimising harm; • the practices firms can adopt when assessing adequate financial resources; and • how the FCA assesses the adequacy of a firm’s financial resources.

The deadline for comments on the proposals is 13 September 2019.

Regulatory co-operation between the UK and US: now and in the future

Nausicaa Delfas, FCA Executive Director of International, spoke in a panel appearance at the British American Business Transatlantic Finance Forum in New York. Her focus was on regulatory co-operation between the UK and the US. The FCA has published her speech. Ms Delfas concludes by emphasising that, whatever the outcome of Brexit, ‟you can expect the

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FCA to continue to champion high standards, international coherence and open markets, and that we will continue to build on our strong relationships with both US and EU regulatorsˮ.

FCA and MAS announce collaboration on cyber security

The Monetary Authority of Singapore (MAS), the BoA and the FCA have announced that they will be working together to strengthen cyber security in their financial sectors. The MAS and the UK financial authorities will commence work towards a Memorandum of Understanding to signify this enhanced collaboration.

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Bank of England and Prudential Regulation Authority PRA PS13/19 Pillar 2 liquidity: updates to framework

The PRA has published a policy statement, PS13/19, giving feedback to responses to its consultation paper, CP6/19 ‘Pillar 2 liquidity: Updates to the frameworkʼ, and setting out the PRA’s final policy, as follows:

• updates to the Regulatory Reporting part of the PRA Rulebook; • updates to Statement of Policy ʽPillar 2 liquidityʼ; • updates to Supervisory Statement(SS) 24/15 ʽThe PRA’s approach to supervising

liquidity and funding risksʼ; • updates to SS34/15 ʽGuidelines for completing regulatory reportsʼ; and • updates to PRA110 template and reporting instructions.

Parts of the PRA Rulebook instrument come into force on 1 July 2019, at the same time as the updated versions of the Statement of Policy, SS24/15 and SS34/15. The remainder of the instrument, the updated PRA110 template and reporting instructions come into force on 1 January 2020.

Fast growing firms: PRA Dear CEO letter

The PRA has published a letter to CEOs from Melanie Beaman, Director, UK Deposit-takers Supervision, to communicate the PRAs overall findings from its review into fast growing firms. In its letter, the PRA highlights, in bold text, a number of aspects of risk management and control that it considers all firms should be adopting. The PRA states that firms should expect the PRAʼs supervisory team to discuss the points raised in the letter with them as part of their ongoing supervisory engagement.

PRA PS12/19: Regulated fees and levies: Rates proposals 2019/20

The PRA has published a policy statement, PS12/19, which provides feedback to responses to CP9/19 ‘Regulated fees and levies: Rates proposals 2019/20’, and sets out the PRA’s final policy, as regards fee and levy updates for 2019/20. This paper is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2019/20 fee year.

The implementation date for the changes and the updated SS3/16 ‘Fees: PRA approach and application’ is 1 July 2019.

Financial resilience and economic earthquakes: BoE speech

The Bank of England (BoE) has published a speech given on 13 June 2019 by Alex Brazier, Executive Director for Financial Stability Strategy and Risk, BoE Member of the Financial Policy Committee, at the University of Warwick. Mr Brazier discusses the ongoing value of macroprudential policy.

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Simulating stress in the UK corporate bond market: investor behaviour and asset fire-sales

On 14 June 2019, the BoE published Staff Working Paper No. 803 on ʽSimulating stress in the UK corporate bond market: investor behaviour and asset fire-salesʼ. Staff working papers set out research in progress by BoE staff, with the aim of encouraging comments and debate.

Diversity and inclusion: BoE speeches

The BoE has published two recent speeches which focus on diversity and inclusion:

• a speech on ‟Finance by all, for allˮ, by Mark Carney, Governor of the Bank of England, at the Women in Banking and Finance 22nd Annual Awards in London; and

• a speech on ‟Making impactful changeˮ by Anna Sweeney, Director, PRA Insurance Supervision at the Insurance Insider Progress Network event in London.

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Brexit PRA Rulebook (EU Exit) (Amendment) Instrument 2019

On 13 June 2019, the PRA and the BoE published a further version of their joint policy statement on amendments to financial services legislation under the European Union (Withdrawal) Act 2018 (EUWA) (PS5/19). The policy statement has been updated to add Appendix B.2A reflecting that Annex BF to The PRA Rulebook: (EU Exit) Instrument 2019 does not come into force on 1 July 2019 but instead comes into force on ‘exit day’. This version of PS5/19 supersedes the April 2019 version, and supplements the February 2019 version. The appendices in the policy statement only apply in the event of the UK’s withdrawal from the EU.

Hogan Lovells Brexit resources

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European Union Sustainable finance: Commission guidelines and three new expert reports

On 8 June 2019, the European Commission published new guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan. These guidelines provide companies with practical recommendations on how to better report the impact that their activities are having on the climate as well as the impact of climate change on their business. The Commission also welcomed the publication of three new expert reports published by the technical expert group on sustainable finance:

• a classification system – or taxonomy – for environmentally-sustainable economic activities. This aims to provide practical guidance for policy makers, industry and investors on how best to support and invest in economic activities that contribute to achieving a climate neutral economy;

• an EU Green Bond Standard which recommends clear and comparable criteria for issuing green bonds; and

• EU climate benchmarks and benchmarks' environmental, social and governance (ESG) disclosures, setting out the methodology and minimum technical requirements for indices that will enable investors to adopt a climate-conscious investment strategy more easily, and address the risk of greenwashing. The report also sets out disclosure requirements for benchmark providers in relation to ESG factors and their alignment with the Paris agreement. This expert report relates to the Commission's proposal on low-carbon benchmarks, which has recently been agreed by the co-legislators.

EMIR: ESMA updates Q&A

The European Securities and Markets Authority (ESMA) has updated its questions and answers (Q&As) regarding the European Markets Infrastructure Regulation (EMIR). The Q&As provide further clarity regarding the implementation of the EMIR Refit Regulation in:

• Q&A OTC Derivatives 3, on the calculation framework towards the clearing thresholds; and

• Q&A Trade Repositories 51, regarding the notifications to be made by market participants to their competent authorities to apply an intragroup exemption from reporting.

EMIR: ESMA letter on the hedging exemption for calculation of clearing thresholds for non-financial groups

ESMA has published a letter it has sent to the European Commission on the interpretation of the hedging exemption for calculation of clearing thresholds for non-financial groups under EMIR, following amendments made by the EMIR Refit Regulation.

In its letter, ESMA states: “In particular, for the purpose of performing the calculation of the positions against the clearing thresholds, an FC [financial counterparty] will need to take into

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account all OTC contracts entered into by that FC or entered into by other entities within the group to which that FC belongs (irrespective whether those other entities are FCs or NFCs). In contrast, for the purpose of performing the calculation of the positions against the clearing thresholds, a non-financial counterparty (NFC) will only need to take into account all OTC derivative contracts entered into by that NFC or by other NFCs within the group to which that NFC belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity (i.e. hedging) of the NFC or of that group (without taking into account positions entered into by any FC within the same group).

One of the objectives of EMIR Refit is to recalibrate the requirements and make them proportionate to the systemic risk of counterparties. In particular, with regards to NFCs or NFC groups more broadly, EMIR takes into account that NFCs use OTC derivative contracts in order to cover themselves against commercial risks directly linked to their commercial or treasury financing activities (hedge transactions). With this in mind, we understand that the hedging exemption is meant to avoid impediments for NFCs to appropriately mitigate their commercial risks. Therefore, from a policy point of view it would make sense that if an NFC can apply the hedging exemption for its positions, then the FCs in their group could also apply the same hedging exemption when taking into account the position of the NFCs at group level.ˮ

While ESMA understands that this would be in line with the policy intentions of EMIR Refit, ESMA is unable to find a ‟solid legal groundˮ to interpret the EMIR Refit text in this way. ESMA is also concerned that requiring FCs to include all the positions of the NFCs in their group, whether concluded for hedging purposes or not, could have some unintended consequences on the behaviour of NFC groups.

ESMA suggests that it would be useful for the European Commission to clarify what is the correct interpretation of these provisions for FCs with NFCs in their group.

MiFiD II product intervention: ESMA issues opinions on NCA proposals

On 13 June 2019, ESMA issued eight positive opinions on product intervention measures taken by the NCAs of Italy, Portugal, Ireland and Luxembourg. ESMA finds that the proposed measures are justified and proportionate. These, and previous ESMA publications relating to product intervention measures, are available on its website.

CSDR: ESMA updates Q&As

ESMA has updated its Q&As on the implementation of the Central Securities Depository Regulation (CSDR). The updates:

• clarify the interaction between the main authorisation procedure (CSDR Art 17) and the passporting procedure (CSDR Art 23(2)), and the benefit of the grandfathering rule for notary and central maintenance services provided on a cross-border basis prior to the authorisation of the Central Securities Depositary (CSD);

• detail what should be considered as a change in the range of services provided on a cross-border basis (the provision of a new core service or the provision of the same service in respect of a new type of financial instrument);

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• clarify how “where relevant” used in Article 23(3)(e) of CSDR should be understood: whenever there are requirements under the national law of the host member state that the CSD has determined as being relevant for the users of each cross-border service it provides or intends to provide; and

• address the process to be followed in case a host member state authority disapproves the assessment of the measures proposed by the CSD to comply with the law of that host member state.

ESMA Annual Report 2018

ESMA has published its Annual Report 2018, which reviews its achievements against its 2018 priorities and objectives. In 2018 ESMA’s key achievements and highlights include its work on:

• promoting supervisory convergence; • assessing risks to investors, markets and financial stability; • completing the Single Rulebook for EU financial markets; and • directly supervising specific financial entities.

EIOPA 2018 Annual Report

On 14 June 2019, the European Insurance and Occupational Pensions Authority (EIOPA) published its 2018 Annual Report, setting out its activities and achievements of the past year.

Deposit Guarantee Schemes: EBA updates data

The EBA has published 2018 data relating to two key concepts in the Deposit Guarantee Schemes Directive: available financial means, and covered deposits. The EBA publishes this data on a yearly basis to enhance the transparency and public accountability of deposit guarantee schemes (DGSs) across the EU to the benefit of depositors, markets, policymakers, DGSs and members states.

Benchmarks Regulation: ESMA publishes translations for Guidelines on non-significant benchmarks

On 19 June 2019, ESMA issued the official translations of its Guidelines on non-significant benchmarks under the Benchmarks Regulation. NCAs to which these Guidelines apply must notify ESMA whether they comply or intend to comply with the Guidelines, within two months of the date of publication by ESMA of the Guidelines in all EU official languages.

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General

EMIR Refit: Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) (Amendment) Regulation

On 18 June 2019, the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) (Amendment) Regulations 2019 (SI 2019/1031) were published, together with an explanatory memorandum.

Loyalty penalty super-complaint: CMA and FCA updates

The Competition and Markets Authority (CMA) published its response to the Citizens Advice super-complaint on the loyalty penalty in December 2018, making several cross-cutting and market-specific recommendations in the mortgages, cash savings and home insurance markets. On 19 June 2019, the CMA published an update on progress against its recommendations. The FCA has published a webpage which summarises its progress so far on work connected with the recommendations. Many initiatives are underway and it will make further progress and relevant announcements this year.

Loyalty penalties are when companies charge longstanding customers more than new customers or those who renegotiate their deal for the same goods or services.

Select Committee condemns the state of UK sanction policy

The Foreign Affairs Select Committee has condemned the UK government’s sanctions policy as lacking a clear strategy and being fragmented in oversight and implementation. The report is entitled “Fragmented and incoherent: the UK’s sanctions policy” and can be read here.

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Securities and Markets

FCA and CSRC announce their support for the Shanghai-London Stock Connect scheme

The FCA and the China Securities Regulatory Commission (CSRC) have today made a joint announcement of their approval of the Shanghai and London Stock Exchanges’ proposed new Shanghai-London Stock Connect. They have also published a memorandum of understanding (MoU) aimed at providing the basis for the regulatory co-operation that will support the success of the scheme. The Stock Connect scheme is a reciprocal arrangement between the Shanghai Stock Exchange (SSE) and London Stock Exchange. It will encourage cross-border investment between the countries and provide investors and companies in the UK and China with mutual access to each other’s capital markets. The regulators’ joint announcement sets out high-level details of the scheme.

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Insurance EIOPA, ECB, NCBs and NCAs agree on common minimum standards for supervisory and statistical reporting by (re)insurance undertakings

The European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank (ECB) have published Common Minimum Standards for Data Revisions agreed between the ECB, EIOPA, the National Central Banks (NCBs) and National Competent Authorities (NCAs) for insurers and reinsurers. Given the integrated reporting approach followed for supervisory and statistical reporting to EIOPA and the ECB, a common understanding of the minimum level of data quality is required, as well as an understanding of when a revision of data is considered necessary. However, these common minimum standards should not prevent stricter practices from being applied at national level. The NCAs and NCBs have the responsibility and the power to request financial institutions to revise data when necessary.

Insurance stress test 2019

On 18 June 2019, the PRA published a Dear CEO letter to the largest regulated life and general insurers on the 2019 insurance stress test. The PRA is asking all participating firms to undertake an exploratory exercise in relation to climate change. General insurers are asked also to complete exercises relating to cyber underwriting and commercial liability exposures.

Chief actuaries of life insurers: PRA letter

The PRA has published a letter from Sid Malik, PRA Head of Life Insurance and Pensions Risk Division, Insurance Supervision. The letter, addressed to Chief Actuaries of life insurers, gives observations from recent regulatory reviews. The PRA welcomes feedback from firms on the letter.

IAIS strategic plan for 2020 to 2024

The International Association of Insurance Supervisors (IAIS) has published its strategic plan which sets out its high-level goals and strategies. The IAIS is a voluntary membership organisation of insurance supervisors and regulators from more than 200 jurisdictions. It is the international standard setting body responsible for developing principles, standards and other supporting material for the supervision of the insurance sector and assisting in their implementation.

IAIS consults on revisions to core principles, glossary and ComFrame

The IAIS is consulting on supervisory material including revisions to its insurance core principles, the IAIS Glossary and the assessment methodology for the common framework for the supervision of internationally-active insurance groups (ComFrame). It has also published the outcome of its July 2018 consultation on the ComFrame.

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Comments are due by 15 August 2019.

Holistic framework for systemic risk: IAIS consults on revisions

Following its November 2018 consultation, the IAIS has launched a further consultation on revisions to the holistic framework for systemic risk in the insurance sector.

The consultation for this also ends on 15 August 2019.

Solvency II: amending Delegated Regulation published in OJ

On 18 June 2019, Commission Delegated Regulation (EU) 2019/981 amending the Solvency II Delegated Regulation ((EU) 2015/35) was published in the Official Journal of the EU (OJ). The Delegated Regulation amends the Solvency II Delegated Regulation in a number of ways. Among other things, it amends provisions on calculating the solvency capital requirement (SCR) in the light of experience gained by firms during the first year of application of the Solvency II Directive (2009/138/EC).

The new Delegated Regulation enters into force on 8 July 2019.

To avoid disruptions in the non-life and health insurance market (particularly for insurers and reinsurers operating only in one line of business), the changes made by the provisions in Articles 1(50), (59-61), (66) and (74) of the new Delegated Regulation apply from 1 January 2020. This is designed to give these firms sufficient time to prepare for changes in the calculation of the non-life and health premium and reserve risk.

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Investment Funds LF Woodford Equity Income Fund: FCA letter to Treasury Committee

Andrew Bailey, Chief Executive of the FCA has written to Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee. This was in response to Nicky Morgan’s letter on the 10 June 2019 which asked for information from the FCA regarding issues relating to the suspension of Woodford Fund. Mr Bailey's response to her questions is here: LF Woodford Income Fund Letter.

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International IOSCO cyber taskforce final report

The International Organization of Securities Commissions (IOSCO) has published the final report of its cyber taskforce. The taskforce seeks to promote sound cyber practices across all IOSCO members. In its report, the taskforce provides an overview of three internationally-recognised cyber standards and frameworks used by IOSCO members (referred to in the report as "core standards"). They consist of the following:

• Committee on Payments and Market Infrastructures (CPMI) and IOSCO guidance on cyber resilience for financial market infrastructures (FMIs);

• National Institute of Standards and Technology framework for improving critical infrastructure cybersecurity; and

• International Organization for Standardization 27000 series standards.

While IOSCO members have made good progress in establishing appropriate cyber regimes, there is still work to be done in key areas. The taskforce identifies potential gaps in the application of the core standards.

The taskforce hopes more members will review their own cyber standards against the core standards and, where relevant, use the core standards as a model to further improve their cyber regimes.

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