Operational resilience: developments in the financial services sector in the UK
In recent years, operational resilience has come under the spotlight of financial regulators globally, leading to a proliferation of new regulation. The sheer number of publications on this topic can be confusing for businesses navigating the regulatory landscape.
Hogan Lovells has published Part 1 of our series of articles on operational resilience. The series aims to summarise international and national regulatory developments and how these impact outsourcing and the use of information and communications technology. Part 1 gives an overview of the most recent operational resilience regulatory developments in the UK.
Supporting the wind-down of critical benchmarks: HM Treasury consultation
HM Treasury has published a consultation paper on supporting the wind-down of critical benchmarks.
The Financial Services Bill 2019-21 (FS Bill) includes amendments to the UK Benchmarks Regulation (UK BMR), which provide the UK Financial Conduct Authority (FCA) with new and enhanced powers to oversee the orderly wind-down of critical benchmarks, such as LIBOR. Specifically, the FS Bill amends the BMR to enable the FCA to manage a situation in which a critical benchmark has become, or is at risk of becoming, unrepresentative and it may be impractical or undesirable to restore its representativeness.
Since the introduction of the FS Bill to Parliament, a number of stakeholders have approached HM Treasury to suggest incorporating a supplementary legal "safe harbour" for relevant legacy contracts. Therefore, HM Treasury is seeking views on whether a legal safe harbour could be a helpful supplement to the provisions inserted into the BMR by the FS Bill.
The consultation closes on 15 March 2021 and the Treasury encourages responses from a wide range of sectors and firms that hold contracts referencing LIBOR.
Independent NEDs: PRA letter on issues and risks for boards
The UK Prudential Regulation Authority (PRA) has published a letter it has sent to independent non-executive directors (iNEDs) following its pilot programme of virtual meetings between PRA senior advisors and iNEDs, from around 40 PRA-regulated banks and insurers, which took place in October and November 2020. The objective of these meetings was to provide an informal opportunity to discuss issues and risks that were on board agendas. The letter sets out some of the themes which emerged from the discussions.
The PRA asks iNEDs to share the summary with their board colleagues to help inform them of the current and horizon risk issues shared by industry peers.
UK Centre for Greening Finance and Investment
The government has announced that its new UK Centre for Greening Finance and Investment (CGFI) will begin work in April 2021 and will have physical research hubs in Leeds and London. The CGFI will be led by a partnership of several UK institutions, including the University of Oxford, the University of Leeds, and Imperial College London.
The announcement states that the research hubs in both cities will provide world-class data and analytics to financial institutions and services such as banks, lenders, investors and insurers around the world to better support their investment and business decisions by considering the impact on the environment and climate change.
FCA Regulation round-up
The FCA has published its Regulation round-up for February 2021. Among other things, it includes the following items of interest:
- the FCA reports that half of the firm reporting population have successfully moved to its new data collection platform, RegData, and have begun using the new system for their regulatory reporting. It reminds those firms who are still Gabriel users that they need to register for RegData in advance of their planned moving date and encourages them to do this as soon as possible;
- the FCA's recent work indicates that some SIPP operators are not calculating liquid capital correctly in line with IPRU-INV 5.8. In particular, some firms have not deducted all amounts that should have been treated as illiquid assets. These include intercompany balances that are not readily realisable and debtor balances overdue by more than a month by reference to the contractual payment date; and
- the FCA has made available the recordings of the presentations given by firms that are taking part in the Digital Sandbox pilot. The firms presented the prototype solutions they have developed at a series of demo days that the FCA hosted earlier in February 2021. The Digital Sandbox pilot focuses on solving the following issues relating to COVID-19:
Digital identity: FCA Insight article
The FCA has published an Insight article on "Unleashing the potential of digital identity: a sandbox observation". The article looks at sandbox support for digital ID propositions, what is a digital ID system, and considers:
- opportunities and challenges from the perspective of both consumers and financial institutions;
- risks in the digital ID ecosystem;
- financial inclusion versus exclusion; and
- ways ahead for digital ID.
GDPR: UK ICO letter on exporting data to SEC
The Information Commissioner's Office (ICO) recently published a letter it wrote in September 2020 to the US Securities and Exchange Commission (SEC), setting out its views on how the restrictions on international transfers of data under Chapter V of the EU General Data Protection Regulation (GDPR) apply to UK based financial services organisations that are subject to regulation by the SEC. Although sent on 11 September 2020, the letter has only recently become publicly available.
In the letter, the ICO confirmed that SEC-regulated UK organisations can rely on the Article 49(1)(d) public interest derogation under the GDPR to transfer personal data to the SEC provided the transfer is truly necessary and proportionate for complying with a SEC regulation, and that the derogation is applied on a case by case basis.
As a long-term solution and to provide greater stability and certainty as a safeguard for data exports, the ICO expressed the view that the UK organisations and the SEC should collaborate on adopting an Article 46 transfer safeguarding mechanism, which could include the use of standard contractual clauses.
EU DORA: IRSG response to European Commission's legislative proposal
The International Regulatory Strategy Group (IRSG) has published its response to the European Commission's legislative proposal for a Regulation on digital operational resilience for the financial sector (DORA). In its response, the IRSG summarises its key concerns with the legislation as proposed. These can broadly be split into three themes:
- ensuring sufficient flexibility for requirements to be applied appropriately by each of the broad range of entities to which they apply;
- avoiding overlap, duplication and contradictions caused by the application of the DORA requirements in conjunction with existing legislation / guidance; and
- identifying practical issues arising from specific requirements in the draft proposal.
EU SFD: European Commission consults on review
The European Commission has published a consultation paper on a targeted review of the Settlement Finality Directive (SFD).
During the legislative process for the second Bank Recovery and Resolution Directive (BRRD), the European Parliament sought to extend the SFD protections to any non-EU system (third-country system) where at least one (direct) participant had its head office in the EU. These proposals were not adopted. However, Article 12a was added to the SFD requiring the Commission to report, by 28 June 2021, on how member states apply the SFD to their domestic institutions that participate directly in systems governed by the law of a third-country, and to collateral security provided in connection with their participation.
The Commission is taking the opportunity to consider a wider range of areas where targeted action may be necessary for the SFD to continue its functioning. In particular, it will consider the impact of new developments in a changing business, technological and regulatory environment.
Among other things, the Commission seeks views on:
- participation in systems governed by the law of a third country;
- participants in systems governed by the law of a member state;
- the SFD and technological innovation;
- protections granted under the SFD vis-à-vis collateral security;
- settlement finality under the SFD;
- the interaction of the SFD with other regulations and directives; and
- inconsistencies in the transposition of the SFD.
The consultation closes on 7 May 2021. The Commission's findings from the review will feed into a report to the Parliament and the Council of the EU.
EU FCD: European Commission consults on review
The European Commission has published a consultation paper on a targeted review of the Financial Collateral Directive (FCD). Article 12a of the SFD requires the Commission to report on the SFD by 28 June 2021 (see above). Since the FCD is closely related to the SFD, the Commission has decided to review the FCD in parallel.
The consultation seeks views under the following broad headings:
- the FCD's scope;
- the provision of cash and financial instruments as financial collateral under the FCD;
- awareness of (pre-)insolvency proceedings;
- the recognition of close-out netting provisions in the FCD and its impact on SFD systems;
- the scope of financial collateral;
- the interaction of the FCD with other relevant EU legislation;
- inconsistencies in transposition of the FCD; and
- enhancing cross-border flows of financial collateral across the EU.
The consultation closes on 7 May 2021.
COVID-19: ESRB report on financial stability implications of support measures to protect real economy
On 16 February 2021, the European Systemic Risk Board (ESRB) published a report on the financial stability implications of support measures to protect the real economy from the effects of the COVID-19 pandemic.
The report has been produced by the ESRB Working Group on monitoring financial stability implications of fiscal measures to protect the real economy in the context of COVID-19, which was established in June 2020. The report summarises the Working Group's work and was approved by the ESRB General Board on 15 December 2020. It provides a framework for monitoring financial stability implications of the measures and illustrates some initial results and policy findings.
Climate risk management tools for financial institutions: UNEP FI reports
The United Nations Environment Programme Finance Initiative (UNEP FI) has announced the publication of the following three reports on climate risk management tools for financial institutions:
The guidance is the result of a project that convened 39 banks to pilot the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD), building on previous UNEP FI work. The UNEP FI states that the package of reports also includes guidance on understanding how climate change and the low-energy transition may impact society and the economy, an overview of the various tools and analytics available, and the potential technological and regulatory developments that may shape climate risk tools in the future.
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Authored by Yvonne Clapham