FIG Bulletin Recent developments 6 March 2020

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General 4

Board diversity: PRA letter 4

Supervising liquidity and funding risks: PRA PS4/20 and SS24/15 4

BoE launches COP26 private finance agenda 4

Covid-19: FCA and BoE statements 4

Evolution of TechSprints: FCA report 5

FCA Handbook Notice 74 5

EU Digital Finance Strategy: European Commission planned consultation 5

PRIIPs KID: European Commission report on consumer testing 6

Cybersecurity in EU financial market infrastructures: ECB speech 6

Digital finance: EBA priorities for 2020 7

Brexit 8

UK preparations for financial services equivalence assessments 8

Brexit and insurers' outstanding EU liabilities: PRA letter 8

Hogan Lovells Brexit resources 8

Banking and Finance 9

Reconciling capital requirements and macroprudential buffers: PRA CP2/20 9

Evolution of money: BoE speech 9

CRR: EBA report on assessment of Pillar 3 disclosures 9

MCD: EBA report on RTS on PII for mortgage credit intermediaries 10

Specialised lending and MREL: EBA analysis on Basel III reforms 10

Benchmark rate reforms: BCBS newsletter 10

BCBS February 2020 meeting 11

Principles for Sustainable Securities Lending published by ISLA Council for Sustainable Finance 11

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Payment Services 13

APP scams voluntary code: UK Finance announces further extension 13

Regulation on payments statistics: ECB consults on amendments 13

Securities and Markets 14

ESMA CCP supervisory committee terms of reference 14

MiFID/MiFIR: ESMA's annual transparency calculations for equity and equity-like instruments for 2020/21 14

EMIR: ESMA report on C6 energy derivative contracts 14

Transition to RFRs in bond market: ICMA guide 14

CSDR: AFME recommendations for partial settlement 15

Insurance 16

Brexit and insurers' outstanding EU liabilities: PRA letter 16

Outsourcing in life insurance sector: FCA webpage on multi-firm review 16

Digital finance: EIOPA speech on managing risks 17

Climate-related financial disclosures: IAIS and SIF joint issues paper on implementing recommendations 17

Funds and Asset Management 18

Cessation of LIBOR: FCA Dear CEO letter 18

Patient capital and authorised funds: FCA feedback statement 18

Patient capital: FCA PS20/4 on changes to permitted links rules 19

MMF Regulation: ESMA guidelines on stress test scenarios 19

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General

Board diversity: PRA letter

The Prudential Regulation Authority (PRA) has written to chairs of regulated firms aiming to reinforce the importance it places on diversity for improving decision-making and providing effective challenge. It also reminds firms of the requirement to comply with PRA rules in this area and refers to:

• PRA supervisory statement SS5/16 on corporate governance; and • the European Banking Authority's (EBA's) February 2020 report on diversity practices.

The PRA advises chairs to satisfy themselves that their firm is meeting its requirements and to take remedial action where they are not. In doing so, chairs (and where appropriate, chairs of the nomination committee) should consider the extent to which the diversity policy is embedded in recruitment and succession planning for the board, to support constructive debate and challenge on the range of issues facing the firm. Chairs should expect to discuss this with their supervisors through the course of their normal supervisory dialogue.

Supervising liquidity and funding risks: PRA PS4/20 and SS24/15

Following its earlier consultation, CP27/19, the PRA has published a policy statement, PS4/20, and an updated supervisory statement, SS24/15, on its approach to supervising liquidity and funding risks. They are relevant to PRA-authorised UK banks, building societies and PRA-designated UK investment firms.

The PRA received three responses to its consultation. Respondents generally welcomed the proposals, but did request some clarifications, which are set out in chapter 2. The PRA states that it will align supervisory practice with the new policies in SS24/15 and the Bank of England's (BoE) Market Operations Guide, but has made no changes to the proposals outlined in CP27/19.

The updated SS24/15 comes into effect immediately.

BoE launches COP26 private finance agenda

The BoE has launched the 2020 UN climate change conference (COP26) private finance agenda to help private finance support the whole economy transition to net zero. The objective is that every professional financial decision will need to take climate change into account.

The BoE states that, to achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world. The right framework for reporting, risk management and returns will embed these considerations and help finance a whole economy transition. The goals are briefly summarised in an infographic.

Mark Carney, outgoing BoE governor, gave a speech at the launch event. The full strategy will be published once Dr Carney's term as BoE governor ends in March 2020 and he takes up his roles as UN Special Envoy for Climate Action and Finance, and the UK Prime Minister's finance adviser for COP26.

The European Central Bank (ECB) has also published a speech on climate change and the financial sector, given by Christine Lagarde, ECB President, at the launch event.

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Covid-19: FCA and BoE statements

The Financial Conduct Authority (FCA) has published a statement on its expectations of firms in relation to Covid-19. The FCA states that, working alongside the BoE and HM Treasury, it is working closely with the financial services sector to ensure it is responding effectively to the Covid-19 outbreak.

The FCA states that all firms should have contingency plans in place to deal with major events and, alongside the BoE, it is reviewing the contingency plans of a wide range of firms. This includes assessing operational risks, firms' ability to continue to operate effectively and the steps firms are taking to serve and support their customers.

The FCA expects firms to take all reasonable steps to meet their regulatory obligations, including being able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading and give staff access to necessary compliance support. The FCA has no objection to firms undertaking these activities from backup sites or with staff working from home.

Separately, the BoE has published a Governor statement to the Treasury Select Committee relating to Covid-19. Among other things, the Prudential Regulation Committee is reviewing the contingency plans of banks, insurers and financial market infrastructure.

Evolution of TechSprints: FCA report

The FCA has published a report on the evolution of the FCA TechSprint approach and how it aims to foster innovation through collaboration.

In its report, the FCA explains the TechSprint model and how it has evolved over time. It also provides an evaluation of the model, noting some areas where the FCA is working to further develop and improve its approach in the context of the FCA's wider efforts to foster sustainable and desirable innovation in financial markets. Through case studies, the FCA illustrates key points, learnings and provided added information and insights to help others who are thinking of adopting a similar approach.

The FCA welcomes further engagement and feedback on its TechSprint approach and encourages those with suggestions and ideas to get in touch.

FCA Handbook Notice 74

The FCA has published Handbook Notice 74, which sets out changes to the FCA Handbook made by the FCA board on 30 January 2020 and 27 February 2020. The Handbook Notice reflects changes made to the Handbook by the following instruments:

• Pension Schemes (Disclosure of Transaction Costs and Administration Charges) (Amendment) Instrument 2020 (FCA 2020/2), in force on 1 April 2020;

• Insurance: Conduct of Business Sourcebook (Access to Travel Insurance) Instrument 2020 (FCA 2020/3), which comes into force on 1 June 2020 for Annex A and Part 1 of Annex B, and 5 November 2020 for the remainder of the instrument; and

• Fees (Miscellaneous Amendments) (No 15) Instrument 2020 (FCA 2020/8), in force on 1 April 2020, except for Part 2 of Annex B which comes into force on 31 March 2020.

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EU Digital Finance Strategy: European Commission planned consultation

The European Commission has published a banking and finance newsletter, which provides more information on the future EU Digital Finance Strategy that the Commission has previously announced is to come. The aim of the strategy is to ensure that the EU financial services regulatory framework promotes digital finance, while regulating in a proportionate way the risks that digitalisation and new technologies present.

The Commission plans to launch a public consultation from March to May 2020 as part of the preliminary work to develop, and determine the key priorities for, the strategy. The Commission will present the strategy in Q3 2020.

PRIIPs KID: European Commission report on consumer testing

The European Commission has published a final report on consumer testing of the key information document (KID) under the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs Regulation).

The general objective of the consumer testing project was to test the effectiveness of information presented to retail investors within the PRIIPs framework. An online consumer testing with over 7500 participants in five EU countries was conducted using ten different versions of the KID for 11 different products within three different types of PRIIPs (investment funds, structured products and insurance-based investment products). The versions included potential future performance scenarios, past performance information and illustrative scenarios.

The participants generally made good investments decisions. More than two thirds selected the optimal investment product from pairs of products of the same type for all types of products and versions of the KID. However, consumers seemed to struggle to identify a product based on its specific features and to answer the "understandability" questions correctly. With few exceptions across all KID versions and product types, less than half of the respondents were able to identify the product with the most unpredictable returns, the product with the highest expected return or the product that guaranteed a positive return or guaranteed investors their money back. Moreover, with few exceptions, less than half of the participants correctly answered the understandability questions.

The detailed findings and conclusions are set out in section 7 of the report. The results of the exercise will feed into the European Supervisory Authorities' review of the PRIIPs Delegated Regulation, which sets out the content and format of the KID.

Cybersecurity in EU financial market infrastructures: ECB speech

The ECB has published introductory remarks made by Fabio Panetta, ECB Executive Board Member, at a meeting of the Euro Cyber Resilience Board for pan-European Financial Infrastructures (ECRB). Mr Panetta (ECRB Chair) is responsible for market infrastructure and payments at the ECB, which includes cyber resilience of financial market infrastructures (FMIs).

Among other things, Mr Panetta mentions that the ECRB is launching the Cyber Information and Intelligence Sharing Initiative (CIISI-EU). This will allow the most important FMIs to share vital technical information among them using an automated platform. Members will create a trusted community where they will meet to discuss cybersecurity threats and share related intelligence and best practice. ECRB members will receive biannual threat reports informing them of strategic issues pertinent to their businesses. This is the first time that the largest pan-EU FMIs, in close liaison with Europol and the European Union Agency for Cyber Security, have come together to agree to share information and intelligence. The CIISI-EU operating model has

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the potential to serve as an example to other communities and jurisdictions on how to work together, share information and catalyse new initiatives. The ECB has published a related press release about the CIISI-EU.

Digital finance: EBA priorities for 2020

The EBA has published a speech by José Manuel Campa, EBA Chair, in which, among other things, he sets out the EBA's priorities for 2020 relating to digital finance.

Mr Campa explains that FinTech remains a strategic priority for the EBA. As well as continuing its work on cryptoassets, artificial intelligence, Big Data and machine learning, and wider innovation monitoring, the EBA will focus its attention in three areas:

• RegTech and SupTech; • platformisation; and • operational resilience.

The EBA also expects further work as a follow up on the advice provided to the European Commission on ICT-related legislative improvements (for example, the framework for oversight of third-party service providers), coherent cyber resilience testing framework, regulatory impediments to innovation, and cryptoassets, and additional new mandates under the European Commission's upcoming Digital Finance Strategy.

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Brexit

UK preparations for financial services equivalence assessments

HM Treasury has published a letter from Rishi Sunak, Chancellor of the Exchequer, to Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), outlining the UK's preparations for assessments of financial services equivalence.

Mr Sunak says that the UK is committed to concluding equivalence assessments before the end of June 2020, though he notes that the deadline was not included in the EU's mandate agreed on the 25 February 2020.

Mr Sunak has asked his officials to reach out to their counterparts in the EU to initiate discussions on equivalence, establish a programme of meetings to work efficiently through the issues at hand, and provide initial technical information on the UK's equivalence framework and regulatory regime.

Mr Sunak reiterates that the UK is committed to working with the EU to build a friendly future relationship on financial services that is based on cooperation between sovereign equals.

Brexit and insurers' outstanding EU liabilities: PRA letter

This letter is reported in the Insurance section of the Bulletin.

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

Twitter

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Banking and Finance

Reconciling capital requirements and macroprudential buffers: PRA CP2/20

The PRA has published a consultation paper, CP2/20, on reconciling capital requirements and macroprudential buffers.

In December 2019, the Financial Policy Committee (FPC) decided to raise the level of the UK countercyclical capital buffer (CCyB) rate in the standard risk environment from in the region of 1% to in the region of 2%.

The PRA responds to this in CP2/20 by setting out proposals to update the Pillar 2A capital framework to take account of the additional resilience associated with higher macroprudential buffer requirements in a standard risk environment. In particular, the proposals clarify the considerations relating to macroprudential buffers that the PRA takes into account when it carries out an overall assessment of the level of capital that would be sufficient to ensure the sound management and coverage of firms' risks.

A draft of the proposed amendments to supervisory statement, SS31/15: the internal capital adequacy assessment process (ICAAP) and the supervisory review and evaluation process (SREP), are set out in Appendix 1 to CP2/20.

The consultation ends on 30 April 2020. The proposed implementation date for the updated policy is 6 July 2020. The PRA proposes to apply the Pillar 2A reduction, where applicable, at the same time or before the 2% CCyB rate comes into effect on 16 December 2020.

The PRA advises that any subsequent changes in the CCyB, up or down, brought about by changes in the FPC's view of the prevailing risk environment would not be reflected in changes in Pillar 2A.

Evolution of money: BoE speech

The Bank of England (BoE) has published a speech given by Sir Jon Cunliffe, deputy governor, financial stability, titled, "It’s time to talk about money". Sir Cunliffe looks at the future of money. He examines:

• the use of cash; • the evolution of commercial bank money; • the rise of crypto assets and stablecoins; and • opportunities and challenges posed by central bank digital currencies.

CRR: EBA report on assessment of Pillar 3 disclosures

The European Banking Authority (EBA) has published a report assessing the Pillar 3 disclosures made by 12 systemically important credit institutions based on an end-2018 disclosure reference date. The report aims to identify best practices and potential areas for improvement, which should help institutions enhance their own disclosures and will input to the EBA's policy work on Pillar 3. It is based on standards included in EBA guidelines on disclosure requirements and liquidity coverage ratio (LCR) under Part Eight of the Capital Requirements Regulation (CRR).

The EBA observes that institutions are on the correct path towards achieving consistency and comparability through the implementation of common disclosure formats, accompanied by qualitative explanations that help communicate meaningful prudential information. There is,

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nevertheless, room for improvement. In particular, the following findings may hamper the ability of users to access, understand and compare the information:

• omission of information without any indication of the reasons; • unclear identification and location of Pillar 3 reports that hinders the ability of users to

find them; • lack of consistency in the structure of Pillar 3 reports and of some of the information

reported, particularly qualitative information; • over-simplification of interim reports compared to end-of-year reports; and • lack of reconciliation of quantitative information across disclosure templates or

inconsistent ways to calculate quantitative flows of information.

The EBA also observes that, while environmental, social and governance (ESG) related information is still scarce and diffuse, institutions are starting to embed sustainability considerations in their strategic agenda and to recognise environmental and climate change risks as emerging risks.

Institutions are encouraged to implement the best practices identified in the report. The EBA has also published a timeline showing how and when it is implementing its Pillar 3 strategy.

MCD: EBA report on RTS on PII for mortgage credit intermediaries

The EBA has published a report on the review of October 2014 regulatory technical standards (RTS) (Regulation 1125/2014) that specify the minimum monetary amount of the professional indemnity insurance (PII) or comparable guarantee for mortgage credit intermediaries under the Mortgage Credit Directive (MCD).

The EBA concludes that there is currently no evidence that suggests that the PII minimum monetary amounts need to be amended.

Specialised lending and MREL: EBA analysis on Basel III reforms

The EBA has published a letter to the European Commission about additional analysis for the Commission's call for advice on Basel III reforms. The letter responds to a further request from the Commission for advice on specialised lending and the minimum requirement for own funds and eligible liabilities (MREL).

Annex 1 to the letter contains the EBA's analysis on specialised lending, setting out an overview of the use of regulatory approaches and portfolio composition.

Annex 2 to the letter discusses the impact of Basel III on MREL.

Benchmark rate reforms: BCBS newsletter

The Basel Committee on Banking Supervision (BCBS) has published a newsletter on benchmark rate reforms. It emphasises that it is critically important that banks consider the effects of benchmark rate reform on their businesses and make the necessary preparations for transitioning to alternative rates. They should maintain close dialogue with their supervisors on their plans and transition progress.

The BCBS gives some practical comment on steps banks should be taking. It also states that banks should expect greater supervisory scrutiny of their preparations and contingency planning. The BCBS will continue to consider what additional steps may be necessary to ensure a smooth and timely transition to the alternative reference rates, including issuing any further clarifications that may be necessary.

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BCBS February 2020 meeting

The BCBS has published a press release following a meeting held on 26 and 27 February 2020.

At the meeting, the BCBS discussed the financial stability implications of the coronavirus outbreak (Covid-19) for the banking system and exchanged information on business continuity measures that banks and authorities have put in place. Banks and supervisors are encouraged to remain vigilant in light of the evolving situation. The BCBS notes the importance of effective cross-border information sharing and cooperation when dealing with such events.

The BCBS reviewed vulnerabilities associated with leveraged loans and collateralised loan obligations. Among financial participants, banks have the largest direct exposures to these markets. Banks are also exposed through a number of indirect channels. The BCBS is continuing work in this area on members' supervisory approaches to measuring and mitigating risks, the regulatory treatment of these exposures, and the need to further quantify banks' direct and indirect exposures.

The BCBS discussed progress made by banks to prepare for the transition from LIBOR to alternative reference rates. In December 2019, the BCBS and the Financial Stability Board launched a survey on exposures for LIBOR and associated supervisory measures. The survey results and a report on remaining challenges to benchmark transition will be provided to the G20 in July 2020. In the interim, the BCBS stresses the need for banks to dedicate the necessary resources to understand the impact of benchmark rate reforms on their business and make necessary preparations for a smooth transition.

On climate-related financial risks, the BCBS has established a high-level Task Force on Climate-related Financial Risks. The Task Force's workplan includes producing a set of analytical reports on climate-related financial risks, reporting on the transmission channels of these risks to the banking system and on measurement methodologies, and developing effective supervisory practises to mitigate these risks. The BCBS also reviewed a stocktake of members' current initiatives in this area, a summary of which will be published in March 2020.

The BCBS also reviewed the implementation status of Basel III across its member jurisdictions. It agreed to publish a consultation paper on strengthening banks' operational resilience in March 2020, as well as a report on members' experiences in using the countercyclical capital buffer in due course.

Principles for Sustainable Securities Lending published by ISLA Council for Sustainable Finance

The International Securities Lending Association (ISLA) Council for Sustainable Finance (ICSF) has published Principles for Sustainable Securities Lending (PSSL). Publication of the PSSL follows the formation of the ICSF by ISLA in December 2019.

The PSSL is a new, voluntary, sustainable finance mechanism for securities lending that has been developed by a high-level working group, in association with ISLA. The PSSL remit is to have a strong and clear impact on the social, governance and long-term thinking elements of sustainable securities lending.

The ICSF has also invited stakeholders to participate in an online survey, the results of which will be used to inform discussions at a roundtable event in Brussels which will be held as part of the ICSF's official launch.

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Payment Services

APP scams voluntary code: UK Finance announces further extension

UK Finance has announced that the interim funding arrangement to pay compensation to victims of authorised push payment (APP) scams in situations where both the customer and their bank have met the standards expected of them under the APP scams voluntary code is being extended to 31 December 2020.

The payment service providers that have provided the interim funding since the code launched on 28 May 2019 have agreed to continue doing so until the end of this year to allow more time for regulators, government and industry to deliver a long-term, sustainable funding arrangement.

Regulation on payments statistics: ECB consults on amendments

The European Central Bank (ECB) is consulting on a draft Regulation amending the ECB Regulation on payment statistics.

The ECB has reviewed the Regulation with the aim of keeping the ECB's statistics fit for purpose. The review also takes into account an assessment of the relative merits of new requirements against the potential costs to reporting agents.

Payment statistics have been compiled since 2000. They are used to identify trends in payments and they serve two main purposes:

• to provide the general public and relevant stakeholders with an overview of the world of payments in Europe in terms of volumes, values, services, providers and systems; and

• to support the policy decisions of the European System of Central Banks in this area, by providing relevant statistical information.

The draft Regulation introduces reporting requirements for information on innovative payment services and channels, payment schemes, and fraudulent payment transactions. Collecting this information will enable the ECB to perform its catalyst and oversight roles in the areas of retail payments and payment systems more effectively. In addition, more detailed and frequent statistical information on card payments will help to enhance the ECB's understanding of cross-border trade and economic developments.

The consultation closes on 9 April 2020. The ECB will hold a public hearing on 23 March 2020.

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Securities and Markets ESMA CCP supervisory committee terms of reference

The European Securities and Markets Authority (ESMA) has published the terms of reference for the central counterparty (CCP) supervisory committee (CCPSC), required under Article 24a of the European Market Infrastructure Regulation (EMIR) following its amendment by EMIR 2.2.

The terms of reference address areas such as the responsibilities and tasks of the CCPSC, its composition and its decision-making processes.

MiFID/MiFIR: ESMA's annual transparency calculations for equity and equity-like instruments for 2020/21

ESMA has published the results of its annual transparency calculations for equity and equity-like instruments.

Currently, there are 1,493 liquid shares, and 788 liquid equity-like instruments other than shares, subject to calculations relating to the transparency requirements in the MiFID II Directive and the Markets in Financial Instruments Regulation (MiFIR). ESMA's annual transparency calculations are based on the data provided to the ESMA financial instruments transparency system (FITRS) by trading venues and arranged publication arrangements (APAs) relating to the 2019 calendar year.

The full list of assessed equity and equity-like instruments is available through FITRS in the XML files with publication date from 1 March 2019 and through the register web interface.

The calculations apply from 1 April 2020 to 31 March 2021. ESMA will release the annual transparency calculations for additional instruments "in the next weeks", as they are subject to specific data quality review.

EMIR: ESMA report on C6 energy derivative contracts

ESMA has published a report on C6 energy derivative contracts (concerning coal and oil) and related obligations under EMIR.

The report assesses the impact of subjecting C6 energy derivative contracts to the clearing and margin requirements of EMIR. These contracts currently benefit from a special exemption regime until 3 January 2021. ESMA also analyses the potential impact of including these contracts in the calculation to determine which counterparties are subject to clearing.

ESMA prepared this report to provide input to the European Commission's assessment of the current special regime for C6 energy derivative contracts and whether this regime should be maintained.

Overall, ESMA concludes that changing the regime now for C6 energy derivatives is not expected to have an immediate major impact. Also, the report highlights that in the current context of uncertainty with the withdrawal of the UK from the EU, where an important share of the C6 energy derivatives contracts are either traded or cleared, it would be prudent to wait before considering a change to the current regime.

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Transition to RFRs in bond market: ICMA guide

The International Capital Market Association (ICMA) has published a "quick guide" to the transition from interbank offered rates (IBORs) to risk-free rates (RFR) in the international bond market. The guide is intended to highlight progress on the key issues on which ICMA is focused in this area and provide links to relevant resources on the topic.

CSDR: AFME recommendations for partial settlement

The Association for Financial Markets in Europe (AFME) has published a market practice document setting out recommendations for partial settlement in view of the impending Central Securities Depository Regulation (CSDR). The recommendations aim to encourage greater and more harmonised use of partial settlement across the industry as a way of improving settlement rates.

AFME’s recommendations are against the backdrop of CSDR, which is due to come into force in September 2020 and will introduce cash penalties for late matching and failed settlements, and a mandatory buy-in procedure. AFME aims to set out measures to improve settlement rates in order to lessen these negative impacts on firms.

The market practice document is aimed at all market participants including buy-side clients, brokers and service providers such as intermediaries, CCPs, custodians, banks and local agents.

The set of recommendations fall under the following three areas:

• partial hold and release; • auto-partial settlement; and • manual partials.

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Insurance Brexit and insurers' outstanding EU liabilities: PRA letter

The PRA has written to PRA-regulated insurance firms about firms' contingency plans to ensure ongoing service continuity in respect of EU liabilities following the UK's withdrawal from the EU.

The PRA warns firms that, unless EU authorities revisit this issue, no-deal transitional measures may not automatically apply at the end of the transition period. In addition, there are a number of countries that did not commit to put in place transitional regimes.

Firms intending to rely on EU run-off regimes should undertake a thorough analysis of their expected run-off profile, and proactively discuss their proposed approach with the relevant EU authorities.

For firms seeking to transfer their EU liabilities to an EU-authorised insurer, the PRA stresses that it cannot guarantee that any Part VII transfer under the Financial Services and Markets Act 2000 will be sanctioned by the court or that it will be sanctioned within firms' intended timeframes. Therefore, such firms should proactively contact the relevant EU authorities to ensure that their contingency plans, and any associated risks, remain satisfactory to them.

All firms should ensure that they have considered relevant legal advice when finalising contingency plans and that these plans have been discussed and approved at an appropriate level within the firm.

Firms are to confirm to their PRA supervisory contact that they have engaged with all relevant EU authorities by 30 April 2020.

Outsourcing in life insurance sector: FCA webpage on multi-firm review

The FCA has published a new webpage setting out the findings from its multi-firm review on outsourcing and third-party service providers in the life insurance sector. The findings are of interest to life insurers that outsource key business functions and outsourced service providers. The FCA identified governance over outsourcing as a priority area for supervision in the life insurers' portfolio strategy.

In its review, the FCA looked at a sample of life insurers' systems and controls for managing and governing outsourced activities. It carried out a desk-based review of practices in three areas with a risk of material customer harm:

• exit planning; • business continuity planning; and • governance, systems and controls.

Generally, the FCA found that life insurers have extensive governance, systems and controls over outsourced activities. However, some firms were not identifying and managing operational risks throughout the life span of outsourced arrangements from inception, through to business as usual operation and to exit from the arrangements.

The FCA sets out examples of good and poor practices it observed.

Where it had concerns around potential non-compliance, the FCA has raised those issues with the firm(s) concerned and asked them to take action. It asks that all firms consider whether the findings and examples set out in this paper are relevant to them, and to review their systems and controls where appropriate and take prompt remedial action.

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The FCA has confirmed that it is not proposing any new rules or guidance in this area at this time.

The FCA reminds firms that control over outsourcing is a key part of operational resilience.

Digital finance: EIOPA speech on managing risks

EIOPA has published a speech given by Fausto Parente, EIOPA Executive Director, on managing the risks of digital finance.

Mr Parente explains that the digitalisation of finance is dependent on many things, but the core drivers are technology and data. Data held by financial institutions is valuable, and technology is vulnerable. This leaves companies and people open to cybercrime risks.

Mr Parente continues to consider two topics in the context of the insurance sector:

• the importance of respecting data; and • the importance of protecting the people through cyber insurance.

Climate-related financial disclosures: IAIS and SIF joint issues paper on implementing recommendations

The International Association of Insurance Supervisors (IAIS) and the Sustainable Insurance Forum (SIF) have jointly published an issues paper on implementation of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The paper draws on the results of a survey on implementation of the TCFD recommendations and supplemental guidance, which was carried out by the Sustainable Insurance Forum (SIF) in the first half of 2019. It also benefits from stakeholder input from a September 2019 SIF and IAIS workshop, as well as from responses to consultations.

The paper gives an overview of the relevance of the TCFD framework to insurance supervision. It then summarises the results of different efforts to assess levels of TCFD awareness and implementation within the insurance sector, based on the SIF survey, as well as other sources of publicly available information. The paper sets out a range of options for supervisory approaches, based on case studies describing supervisory practices in 12 jurisdictions, and concludes with a discussion on lessons learned through the SIF survey and suggestions for next steps.

The IAIS and the SIF recognise the value of developing further materials to support supervisors in their work to assess climate risks, including in relation to the IAIS' insurance core principles (ICPs). As a next step, they intend to develop an application paper on climate risk in the insurance sector, which is expected to include a section on disclosures.

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Funds and Asset Management

Cessation of LIBOR: FCA Dear CEO letter

The FCA has published a Dear CEO letter it has sent to UK regulated asset management firms, setting out its expectations for these firms as they prepare for the cessation of LIBOR at end-2021.

The FCA expects firms to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition. It emphasises that the FCA expects firms to take proactive steps now where appropriate and not to wait for instructions from clients. Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.

The areas and related actions highlighted by the FCA in the letter are:

• priorities and milestones; • products and services; • governance and planning; • replacing LIBOR with alternative risk-free rates (RFRs) in existing and new products; • investing on clients' behalf; • managing conflicts of interest; and • next steps.

Asset management firms with LIBOR exposures or dependencies should have their transition activities underway. If they have not done so, the FCA expects such firms to take immediate action to develop and begin to execute an appropriate plan. If a firm's board decides no LIBOR transition plan is needed, the FCA may seek to understand, and challenge (where appropriate), the reasons for this decision. If, following careful review, a firm's board considers a barrier to transition is insurmountable, or the firm's transition preparations will not be completed in time, the FCA should be immediately informed and kept up-to-date on developments.

Patient capital and authorised funds: FCA feedback statement

The FCA has published a feedback statement, FS20/2, on patient capital and authorised funds. FS20/2 summarises the feedback the FCA received to its December 2018 discussion paper, DP18/10, on patient capital and authorised funds, and gives the FCA's response to that feedback.

The FCA received 21 responses from a range of stakeholders, including investment management firms and their representative bodies, law firms and individual investors.

The FCA found no inappropriate barriers to investing in long-term assets within its authorised funds regime. Broadly, respondents found the current authorised funds regime fit for purpose for long-term investments by professional and sophisticated retail investors. For broad retail distribution funds, barriers do exist which limit the range of available investment options. However, the FCA states that it is not clear that these barriers are inappropriate or how they might be relaxed without introducing a degree of risk that is not appropriate for retail investors. The FCA also notes that other investment products, such as investment trusts, already provide alternative ways for retail investors to access long-term investments.

The FCA is currently examining open-ended funds and the risks posed by liquidity mismatch following concerns raised by the Financial Policy Committee. The FCA will consider any rule

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changes that may be recommended when it has completed its review of fund liquidity issues later in 2020.

Patient capital: FCA PS20/4 on changes to permitted links rules

Following its consultation in CP18/40, the FCA has published a policy statement, PS20/4, on changes to the permitted links rules in its Conduct of Business sourcebook (COBS). The changes seek to address any unjustified barriers COBS 21.3 may present to retail investors' investment in a broader range of long-term assets in unit-linked funds, while continuing to offer an appropriate degree of investor protection.

The FCA received broad support for its proposals and in most areas is implementing them as proposed. However, it has revised its proposals relating to rules on investment in permitted land and property, and the level of the overall threshold limit on illiquid assets held as permitted links.

Appendix 1 to PS20/4 sets out the FCA Handbook Instrument making these changes: the Conduct of Business Sourcebook (Conditional Permitted Links) Instrument 2020 (FCA 2020/9). The instrument comes into force on 4 March 2020.

MMF Regulation: ESMA guidelines on stress test scenarios

On 4 March 2020, ESMA published the official translations of its guidelines on stress test scenarios produced under Article 28 of the Regulation on money market funds (MMF Regulation). The guidelines apply two months after the date of their publication on ESMA's website in all EU official languages. National competent authorities (NCAs) must notify ESMA whether they comply or intend to comply with the guidelines within this two-month period.

The guidelines establish common reference parameters of the stress test scenarios that MMFs or MMF managers should include in their stress scenarios. MMFs and MMF managers are expected to measure the impact of the common reference stress test scenarios specified in the guidelines, and send results using the reporting template to the relevant NCAs with their first quarterly reports.

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