Financial institutions general regulatory news, 13 December 2019

Recent regulatory developments of interest to financial institutions generally.


SMCR: extension to FCA solo-regulated firms

The extension of the senior managers and certification regime to 47,000 FCA solo-regulated firms took effect on 9 December 2019. The Financial Conduct Authority (FCA) reminds firms that, by 9 December 2020, solo-regulated firms still need to ensure:

  • all relevant staff are trained on the Conduct Rules and how they apply to their roles;
  • all staff in certified roles are fit and proper to perform that role and are issued with a certificate; and
  • they submit data to the FCA for the directory of key people working in financial services.

This will take time so firms should start preparing now.

The FCA has also published various forms and other materials related to the extended regime.

Outsourcing and third party risk management: PRA CP30/19

The Prudential Regulation Authority (PRA) has published a consultation paper, CP30/19, which sets out its proposals for modernising the regulatory framework on outsourcing and third-party risk management.

The proposals in CP30/19 pursue the following objectives:

The consultation closes on 3 April 2020. The PRA proposes to publish its final policy on the proposals in the second half of 2020 with implementation of most the proposals shortly after. However, certain proposals, which derive from the EBA Outsourcing Guidelines or (if adopted in the current form) the draft EIOPA Cloud Guidelines would be subject to longer implementation periods. In particular, those relating to:

  • the register of outsourcing arrangements; and
  • the revision by:
    • banks of outsourcing arrangements entered into before 30 September 2019; and
    • insurers of cloud outsourcing arrangements entered into before 1 July 2020;

to bring them into compliance with the EBA Outsourcing Guidelines and EIOPA Cloud Guidelines respectively.

Operational resilience: PRA CP29/19 and FCA CP19/32

The Bank of England (BoE), the PRA and the FCA have published a shared policy summary and coordinated consultation papers, PRA CP29/19 and FCA CP19/32, on new requirements to strengthen operational resilience in the financial services sector. The papers follow a previous shared discussion paper.

Building the operational resilience of firms and financial market infrastructures (FMIs) is a shared priority for the three supervisory authorities. The coordinated consultations build on the concepts set out in the discussion paper, taking into consideration the responses the regulators received.

The PRA consultation paper, CP29/19, sets out proposals designed to improve the operational resilience of firms and protect the wider financial sector and UK economy from the impact of operational disruptions.

Under the proposals, firms and FMIs would be expected to:

  • identify their important business services that if disrupted could cause harm to consumers or market integrity, threaten the viability of firms or cause instability in the financial system;
  • set impact tolerances for each important business service, which quantify their maximum tolerable level of disruption;
  • identify and document the people, processes, technology, facilities and information that support their important business services; and
  • take actions to be able to remain within their impact tolerances through a range of severe but plausible disruption scenarios.

The PRA proposes that boards and senior management are actively involved in the oversight of the firm's operational resilience work, for example, by approving the important business services identified for their firm and the impact tolerances set for each of their firm's important business services.

In the FCA consultation, the FCA states that its proposals are not intended to conflict with or supersede existing requirements to manage operational risk or business continuity planning, but rather aim to set new requirements that enhance operational resilience. The FCA is not proposing changes to the rules and guidance on outsourcing or third-party service provision.

The consultation period ends on 3 April 2020 with the intention that the proposals are implemented in the second half of 2021.

During 2020, the PRA plans to consider the regulatory reporting requirements for operational resilience, including whether new quantitative information should be submitted by firms and what information should be submitted when operational incidents occur.

Quarterly consultation: FCA CP19/33

The FCA has published its latest quarterly consultation paper, CP19/33, on proposed miscellaneous amendments to the FCA Handbook. In CP19/33, the FCA proposes:

  • clarification of the rules relating to Financial Services Compensation Scheme claims against appointed representatives and principals (chapter 2);
  • changes to the Listing Rules' requirements, which cross-refer to the Prospectus Regulation, for information to be put on display (chapter 3);
  • amendments to the Listing Rules to include a requirement mandating the disclosure of rights attached to the securities (chapter 4);
  • minor amendments to the Handbook to reflect changes made by the Financial Guidance and Claims Act (chapter 5);
  • changes to the Perimeter Guidance Manual (PERG) 15.3 on payment accounts (chapter 6);
  • changes to regulatory reporting requirements (chapter 7); and
  • further Brexit-related changes to the Handbook & binding technical standards following the extension of Article 50, which will only come into effect if the UK leaves the EU without an implementation period (chapter 8).

The consultation period ends on 6 January 2020 for chapters 3, 7 and 8, and 6 February 2020 for chapters 2, 4, 5 and 6.

FCA Policy Development Update

The FCA has updated its policy development update webpage, which gives information on the FCA's recent and upcoming publications.

Corporate governance: guidance for board risk committees in financial services sector

Following an earlier consultation, the Risk Coalition has published its final principles-based guidance for board risk committees and risk functions in the UK financial services sector.

The Risk Coalition is an association of not-for-profit professional bodies and membership organisations committed to raising the standards of risk management in the UK. The Risk Coalition launched the Risk Guidance Initiative in 2018 to meet the need for coherent, principles-based good practice guidance for board risk committees and risk functions within the UK financial services sector. Its guidance is the outcome of this work.

The Risk Coalition's objectives for this guidance are to:

  • establish a common understanding of the purpose, role and activities of the board risk committee and risk function;
  • provide a benchmark against which board risk committees and risk functions can be assessed objectively;
  • raise the general standard of risk governance and oversight practice within UK financial services; and
  • fill the gap in principles-based good practice risk guidance while recognising the presence of detailed regulation.
Investment firms prudential regime: IFR and IFD published in OJ

The Investment Firms Regulation (Regulation (EU) 2019/2033) (IFR) and the Investment Firms Directive (Directive (EU) 2019/2034) (IFD), which will implement a new prudential regime for investment firms, have been published in the Official Journal of the EU (OJ).

The IFR and IFD will enter into force on 25 December 2019. The IFR will apply from 26 June 2021, except for Articles 63(2) and (3) which will apply from 26 March 2020, and Article 62(30) which will apply from 25 December 2019. Member states are expected to apply domestic legislation and regulation implementing the IFD from 26 June 2021.

Sustainable finance: Disclosure Regulation and Low Carbon Benchmarks Regulation published in OJ

The following EU Regulations relating to sustainable finance have been published in the OJ:

  • Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (Disclosure Regulation). It enters into force on 29 December 2019. Most of the provisions will apply from 10 March 2021. However, certain provisions listed in Article 20(3) will apply from 29 December 2019, and others will apply from 1 January 2022; and
  • Regulation (EU) 2019/2089 amending the Benchmarks Regulation (BMR) as regards EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks (Low Carbon Benchmarks Regulation). It entered into force on 10 December 2019.
Sustainable finance: EBA action plan

The European Banking Authority (EBA) has published an action plan on sustainable finance outlining its approach and timeline for delivering mandates related to environmental, social and governance (ESG) factors. The EBA's remit and mandates on ESG factors and risks are set out in the:

  • amended EBA Regulation;
  • revised Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD);
  • IFR and IFD; and
  • Commission's action plan: Financing Sustainable Growth, and related legislative initiatives.

In its action plan, the EBA will follow the sequence reflected in the mandates, which can be summarised as:

  • strategy and risk management;
  • key metrics and disclosure;
  • stress testing and scenario analysis ; and
  • prudential treatment.
Stablecoins: Council of EU and European Commission adopt joint statement

We reported in this bulletin on 15 November 2019 that the Council of the EU and the European Commission planned to consider their draft joint statement on stablecoins on 5 December 2019. They have now adopted the joint statement in the form of the draft. The statement calls for a coordinated global response to tackle the challenges of "global stablecoins". The Council and the Commission state that no global stablecoin arrangement should begin operation in the EU until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.

Read more in our briefing: EU says global stablecoins should not come into operation until concerns have been addressed.

Cryptoassets and digital operational resilience: European Commission next steps

The European Commission has published a speech by Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union. During his speech, Mr Dombrovskis discusses the Commission's future planned work on cryptoassets.

He notes that a number of member states like France, Germany or Malta have introduced national cryptoasset laws, "but most people agree with the advice of the European Supervisory Authorities [ESAs] that these markets go beyond borders and so we need a common European framework".

Mr Dombrovskis states that the Commission will now move to implement this advice by launching a public consultation before the end of the year. It will also launch a consultation on the digital operational resilience of the financial sector, for example against cyberattacks.

CRR: ESMA final report specifying main indices and recognised exchanges

ESMA has published a final report on draft amendments to Implementing Regulation (EU 2016/1646), specifying the main indices and recognised exchanges under the CRR, relevant to credit institutions and investment firms subject to prudential requirements and trading venues. ESMA is introducing these amendments to ensure the most relevant criteria are applied to specify the main indices, and that the list of recognised exchanges is updated to reflect legislative changes and changes in market structures.

The amended ITS provides for a new methodology to ensure that the main indices captured comprise instruments that are sufficiently liquid, and therefore can serve as adequate eligible collateral. In addition, ESMA's amendment will provide credit institutions and investment firms with the option to use, as eligible collateral, instruments traded on new European exchanges, as well as instruments traded on third-country exchanges, from those jurisdictions for which the European Commission has adopted equivalence decisions under Article 25(4) of MiFID II as now required under CRR II.

Due to the uncertainty about the date when the UK will leave the EU, ESMA includes two versions of the amended ITS in the Final Report. The first version includes UK exchanges and is to be used in case there is a Brexit deal. The second version of the ITS excludes UK exchanges and should be used in case of a no-deal outcome and in the absence of a Commission equivalence decision in respect of the UK.

ESMA has submitted the final report, including the draft ITS to the Commission, which now has three months to decide whether to endorse the proposed amendments.

Financial stability implications of BigTech in finance and third party dependencies in cloud services: FSB reports

The Financial Stability Board (FSB) has published two reports that consider the financial stability implications from an increasing offering of financial services by BigTech firms, and the adoption of cloud computing and data services across a range of functions at financial institutions:

  • BigTech in finance: Market developments and potential financial stability implications - examines recent developments in the provision of financial services by BigTech firms, and the resulting benefits and risks to financial stability; and
  • Third-party dependencies in cloud services: Considerations on financial stability implications - the FSB concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.

Download the full regulatory news bulletin


Authored by Yvonne Clapham


© 2020 Hogan Lovells. All rights reserved. "Hogan Lovells" or the “firm” refers to the international legal practice that comprises Hogan Lovells International LLP,Hogan Lovells US LLP and their affiliated businesses, each of which is a separate legal entity. Attorney advertising. Prior results do not guarantee a similar outcome.