Financial institutions general regulatory news, 8 February 2021

Contents

• Download the full regulatory news bulletin
• UK and Switzerland to deepen cooperation on financial services
• Green Finance: UK joins International Platform on Sustainable Finance
• Pre-paid funeral plans: Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2021
• UK implementation of IFPR and Basel III standards: HM Treasury consultation
• FOS: Treasury Committee outlines concerns
• Zero or negative BoE Bank Rate: PRA Dear CEO letter regarding firms' operational readiness
• FCA approach document on international firms
• FCA Handbook Notice 84
• EU digital finance strategy: European Commission requests ESA technical advice
• SFDR: Joint Committee of ESAs final report on draft RTS on ESG disclosures
• CRR and Solvency II: Joint Committee of ESAs consults on amending ITS on mapping credit assessments of ECAIs
• PRIIPs Regulation: EIOPA adopts draft final report on RTS amending PRIIPs KID Delegated Regulation

UK and Switzerland to deepen cooperation on financial services

HM Treasury has published a press release announcing plans to move forward to the next stage of talks between the UK and Switzerland on an agreement on financial services. Following initial exploratory talks, the two countries will move forward with negotiations on the ambition of delivering a comprehensive mutual recognition agreement that would reduce costs and barriers for UK firms accessing the Swiss market, and vice versa. Negotiations are expected to cover a wide range of sectors such as insurance, banking, asset management and capital markets, including market infrastructure.

Discussions between the UK and Switzerland are set to continue at official levels over coming months.

Separately, HM Treasury has announced that reciprocal arrangements between the UK and Switzerland concerning the share trading obligation have entered into force, following the removal of restrictions on UK trading venues by the Swiss authorities. The Swiss Financial Market Supervisory Authority (FINMA) has also published confirmation and guidance on its decision.

Green Finance: UK joins International Platform on Sustainable Finance

HM Treasury has announced that the UK has become a member of the International Platform on Sustainable Finance (IPSF). It also published the text of the Joint Statement of the IPSF that was signed by Rishi Sunak, Chancellor of the Exchequer, on 12 January 2021.

The IPSF is a forum for public authorities in charge of developing environmentally sustainable finance policies and initiatives, such as ministries of finance, central banks and supervisory and regulatory authorities. Its aim is to coordinate approaches and initiatives for the capital markets (such as taxonomies, disclosures, standards and labels), which are key to enabling private investors to identify and seize environmentally sustainable investment opportunities worldwide.

Pre-paid funeral plans: Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2021

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2021 (SI 2021/90) has been published, together with an explanatory memorandum.

The Order amends the regulatory framework for providers of pre-paid funeral plan contracts so that providers of funeral plan contracts will generally need to be authorised under the Financial Services and Markets Act 2000 (FSMA) when entering into, or carrying out, such contracts. The Order also makes other amendments relating to the intermediation and financial promotion of funeral plan contracts, and expands the permitted business of appointed representatives, so that such persons can intermediate the sale of funeral plan contracts as either an arranger or an agent.

Finally, the Order makes various transitional modifications to the ombudsman scheme established under FSMA, scheme, by making provision, in certain circumstances, for complaints made on or after the date on which the Order comes fully into force relating to acts or omissions that occurred before that date to be dealt with by the Financial Ombudsman Service (FOS). In particular, the FOS will have jurisdiction to deal with complaints made in relation to acts or omissions that took place at a time when the funeral plan provider was registered with the Funeral Planning Authority (FPA) and subject to the FPA's Code of Conduct and Rules.

Parts of the Order come into force on the day after the day on which it was made (28 January 2021) (initial commencement date). The rest of it comes into force on the first day following the expiry of a period of 18 calendar months beginning on the day after the initial commencement day (that is, 28 July 2022). This period is to allow sufficient time for the UK Financial Conduct Authority (FCA) to design, consult on and implement the architecture for the new regulatory regime, and for funeral plan providers and intermediaries to take the necessary steps (including seeking authorisation) to meet the requirements of the new regulatory framework.

UK implementation of IFPR and Basel III standards: HM Treasury consultation

HM Treasury has published a consultation paper on the implementation of the Investment Firms Prudential Regime (IFPR) and Basel III (referred to by HM Treasury as Basel 3) standards.

HM Treasury explains that, once the Financial Services Bill 2019-21 (FS Bill) receives Royal Assent, it will enable the FCA and the UK Prudential Regulation Authority (PRA) to introduce the IFPR and the outstanding Basel III prudential standards for credit institutions. The latter include those standards which make up the UK equivalent to the outstanding elements of the EU's second Capital Requirements Regulation (CRR II). The Government, the FCA and the PRA have announced their intention to implement these regimes by 1 January 2022. The PRA and the FCA will be consulting on the key elements of the new regimes in the first half of 2021. The FCA already published its first IFPR consultation paper on 14 December 2020.

In the consultation, HM Treasury seeks views on issues that will be addressed in secondary legislation, to be made once the FS Bill receives Royal Assent. These include:

• details of the provisions in the provisions in the UK Capital Requirements Regulation (UK CRR) that are to be revoked by HM Treasury using its powers under the FS Bill. These provisions will be replaced by PRA rules, on which the PRA will consult in due course;
• the Treasury's policy approach to two issues where it will not be taking the same approach as the EU CRR II;
• HM Treasury’s approach to applying the Standardised Approach reporting requirements in relation to the Fundamental Review of the Trading Book (FRTB);
• the suggested exercise of HM Treasury delegated powers in the FS Bill to ensure effective implementation of the IFPR, with a focus on definitions regarding the entities within a group structure to whom the rules may apply on a consolidated basis;
• consequential changes to the statute book, in particular the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 (SI 2013/556), as a result of changes to the level of initial capital requirements for investment firms, which will be set in FCA rules; and
• the application of the UK resolution regime in Part 1 of the Banking Act 2009 to FCA investment firms.

The consultation closes on 1 April 2021.

FOS: Treasury Committee outlines concerns

The House of Commons Treasury Committee has published a series of correspondence with Caroline Wayman, Financial Ombudsman Service (FOS) Chief Ombudsman and Chief Executive, in which the Committee expresses concerns about several issues, including the FOS' proposed budget and funding proposals, a strategy to reduce the backlog of unallocated or unresolved cases, and case handling times.

The exchange of letters between Ms Wayman and Mel Stride MP, Chair of the Treasury Committee, follows on from Ms Wayman's appearance before the committee at a hearing on 9 November 2020.

The Committee intends to invite Ms Wayman and Baroness Manzoor, FOS Chair, to provide further evidence around the time that the FOS publishes its final budget in spring 2021.

Zero or negative BoE Bank Rate: PRA Dear CEO letter regarding firms' operational readiness

The PRA has published a Dear CEO letter from Sam Woods, Bank of England (BoE) Deputy Governor for Prudential Regulation and PRA CEO, giving feedback on the Dear CEO letter and information request it sent to specific firms in October 2020 regarding their operational readiness for a zero or negative BoE Bank Rate.

Mr Woods explains that firms' responses have informed the PRA's understanding of the operational implications for PRA-authorised firms in the context of its objectives. Responses have been shared across the BoE to inform the Monetary Policy Committee (MPC) about the operational timelines for firms to implement a zero or negative Bank Rate.

A summary of firms' responses is included as an annex to the letter. They show that firms are already able to deal with near-zero rates (down to at least two decimal places) and that, generally, a zero Bank Rate would pose a lesser operational challenge than a negative Bank Rate and would take less time to implement. While a small number of firms do not require development work to implement a negative Bank Rate, most firms would need to make some changes to systems and processes to implement either a strategic or tactical solution. The PRA defines strategic solutions as permanent changes, involving material systems upgrades that feed through internal systems for managing the calculation of interest, customer communications, treasury, accounting and risk models. Tactical solutions are typically shorter-term fixes, involving workarounds on the periphery of core systems, along with overrides in downstream systems and customer communications.

The PRA understands that most firms would be able to implement tactical solutions to accommodate a negative Bank Rate within six months, without material risks to safety and soundness. It considers an implementation period of less than six months would attract increased operational risks and could adversely impact some firms' safety and soundness and the PRA's wider statutory objectives.

Having considered the MPC's request, as set out in the minutes of its 3 February 2021 meeting, the PRA will now engage with PRA-authorised firms on their development of tactical solutions, with the aim of firms putting themselves in a position to be able to implement a negative Bank Rate at any point after six months.

Strategic solutions to implement a negative Bank Rate have been reported by many firms as having a significantly longer timeframe than tactical solutions. Since this could involve reprioritising other important projects, the PRA does not expect firms to commence work to implement these strategic solutions unless they are already included in their plans.

FCA approach document on international firms

The FCA has published "Our approach to international firms", in which the FCA sets out its general approach to international firms providing or seeking to provide financial services that require authorisation in the UK. The FCA emphasises that it is not changing existing rules or other provisions in the FCA Handbook. The document supplements the FCA Handbook, existing policy statements and guidance.

The approach document intends to explain how the FCA will assess international firms against minimum standards when they apply for authorisation and during ongoing supervision by the FCA, and its general expectations for these firms. It also sets out the circumstances where these international firms could present higher risks of harm and how those risks can be mitigated.

The FCA has published a feedback statement, FS21/3, on the feedback received to its preceding consultation and its response.

FCA Handbook Notice 84

The FCA has published Handbook Notice 84, which sets out changes to the FCA Handbook made by the FCA board on 22 December 2020 and 28 January 2021 by the following instruments:

• Financial Conduct Authority Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) (No 2) Instrument 2020 (FCA 2020/88). Except for the revocation of a previous EU exit instrument, which took effect on 23 December 2020, the instrument entered into force on IP completion day;
• Technical Standards (Miscellaneous Amendments) (No 2) (EU Exit) Instrument 2020 Instrument 2020 (FCA 2020/89). Except for amendments to EU exit instruments and onshored technical standards, which took effect on 23 December 2020, the instrument entered into force on IP completion day;
• Fees (Trade Repositories and Securitisation Repositories) Instrument 2021 (FCA 2021/1), which came into force on 29 January 2021;
• Markets in Financial Instruments (Tick Sizes) Instrument 2021 (FCA 2021/2), which came into force on 29 January 2021; and
• Listing Rules (Open-ended Investment Companies) Instrument 2021 (FCA 2021/3), in force from 4 January 2022;

EU digital finance strategy: European Commission requests ESA technical advice

The European Commission has requested technical advice relating to its digital finance strategy from the European Supervisory Authorities (ESAs). The Commission asks the ESAs for advice on how to address several issues, in the following areas:

• regulation and supervision of more fragmented or non-integrated value chains;
• platforms and bundling of various financial services;
• risks of groups combining different activities;
• non-bank lending (requested from EBA); and
• protection of client funds and the articulation to the Deposit Guarantee Scheme Directive (DGSD) (requested from EBA).

The Commission advises that as part of its DFS over the next four years it may propose new legislation, amend existing EU legislation or take other actions. The ESAs' technical advice will be a key input to this work.

SFDR: Joint Committee of ESAs final report on draft RTS on ESG disclosures

Taking into account feedback to its April 2020 consultation, on 4 February 2021, the Joint Committee of the European Supervisory Authorities (ESAs) published the final report, including draft regulatory technical standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).

The proposed RTS aim to strengthen protection for end-investors by improving environmental, social and governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.

The main proposals cover entity-level principal adverse impact disclosures, and proposals relating to pre-contractual information, information on the entity's website, information in periodic reporting, and information relating to the "do not significantly harm" principle.

The European Commission is expected to endorse the RTS within three months of their publication. The ESAs propose in the draft RTS that the application date of the RTS should be 1 January 2022. In October 2020, the Commission confirmed that the application of the RTS would be delayed until after the SFDR comes into force on 10 March 2021.

CRR and Solvency II: Joint Committee of ESAs consults on amending ITS on mapping credit assessments of ECAIs

The Joint Committee of the European Supervisory Authorities (ESAs) has published the following consultation papers containing draft implementing technical standards (ITS) amending Implementing Regulation (EU) 2016/1799 and Implementing Regulation (EU) 2016/1799 on the mapping of external credit assessment institutions' (ECAIs) credit assessments under the Capital Requirements Regulation (CRR) and the Solvency II Directive:

• consultation paper on draft ITS amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs' credit assessments under Article 136(1) and (3) of the CRR. The ITS reflect a mandate in Article 136(1) of the CRR; and
• consultation paper on draft ITS amending Implementing Regulation (EU) 2016/1800 on the allocation of credit assessments of ECAIs to an objective scale of credit quality steps under the Solvency II Directive. The ITS reflect a mandate in Article 109a(1) of the Solvency II Directive.

Implementing Regulation (EU) 2016/1799 establishes the mapping methodology for the use of external credit assessments of ECAIs in the calculation of the capital requirements for credit institutions and financial institutions. Implementing Regulation (EU) 2016/1800 specifies the allocation of relevant credit assessments of ECAIs to an objective scale of credit quality steps for the purposes of the calculation of the solvency capital requirement (SCR) by insurance and reinsurance undertakings. Article 111(1)(n) of the Solvency II Directive specifies that the Solvency II approach to mapping ECAI credit assessments should be consistent with the CRR approach.

The ESAs propose to amend both Implementing Regulations to reflect the registration of additional credit rating agencies (CRAs) by the European Securities and Markets Authority (ESMA) under the CRA Regulation and the deregistration of other ECAIs for which the Implementing Regulations provide a mapping.

The deadline for responses to both consultations is 5 March 2021.

PRIIPs Regulation: EIOPA adopts draft final report on RTS amending PRIIPs KID Delegated Regulation

The ESAs have submitted to the European Commission draft final report which EIOPA has adopted (following its previous refusal), on RTS amending Commission Delegated Regulation 2017/653 on key information documents (KID) for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs KID Delegated Regulation).

The draft report follows a request from the European Commission in December 2020 for the ESAs to submit the draft. In a further letter dated January 2021, the Commission confirmed its approach to a broader review of the PRIIPs Regulation. The review will take place as soon as the results (due at the end of 2021) are known from the cross-sectoral study on disclosure, inducements and suitability rules for retail investors announced in September 2020 as part of the Commission's second CMU action plan.

EIOPA's Board of Supervisors had previously refused to adopt the draft RTS. However, in a letter dated 3 February 2021, the ESAs confirmed that a qualified majority of EIOPA's board have adopted the draft final report based on the further details provided by the Commission. Accordingly, the ESAs have now submitted the draft final report to the Commission.

The next step will be for the Commission to adopt the draft report, following which it will be scrutinised by the Council of the EU and the European Parliament.

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Authored by Yvonne Clapham