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COVID-19: BoE and PRA measures
The Bank of England (BoE) and Prudential Regulation Authority (PRA) have announced a number of measures aimed at alleviating operational burdens on PRA-regulated firms and BoE-regulated financial market infrastructures (FMIs) in response to COVID-19. These measures will provide flexibility to help firms and FMIs maintain their safety and soundness and deliver the critical functions they provide to the economy.
The steps include:
- cancellation of the BoE's 2020 annual stress test – the annual cyclical scenario (ACS);
- amendments to the biennial exploratory scenario (BES) timetable: the BoE had been due to publish the results of the 2019 BES on liquidity in mid-2020. In order to alleviate burdens on core treasury staff at banks, the BoE has paused this exercise until further notice; and
- the BoE published a discussion paper on the 2021 BES on the financial risks from climate change on 18 December 2019. It will take stock of the responses as well as the evolving COVID-19 situation with a view to announcing the way forward for this exercise in the summer;
- the BoE and the PRA recognise the importance of IFRS 9 as a forward-looking measure of losses, which were previously not considered in IAS 39. The PRA reminds firms that forward-looking information used to incorporate the impact of Covid-19 on borrowers into the expected credit loss (ECL) estimate needs to be both reasonable and supportable for the purposes of IFRS 9. To the extent that forecasts can be made, the PRA expects firms to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities. In particular, any such forecasts should take into account the relief measures – such as repayment holidays – that will be made available to enable borrowers who are affected by the COVID-19 outbreak to resume regular payments. The PRA's expectation is that eligibility for the policy on the extension of mortgage repayment holidays should not automatically, other things being equal, be a sufficient condition to move participating borrowers into Stage 2 ECL;
- the joint BoE and Financial Conduct Authority (FCA) survey into open-ended funds is delayed until further notice, with a subsequent impact on the FCA consultation that would have followed;
- BoE and PRA supervisors will review their work plans so that non-critical data requests, on-site visits and deadlines can be postponed, where appropriate. This includes pausing the skilled persons Section 166 reviews relating to the reliability of banks' regulatory returns that were announced in October 2019. In doing so the PRA will have regard to the flexibility provided under the relevant regulatory regimes, for example in the Capital Requirements Regulation and Solvency II;
- the PRA will review its approach for considering and processing Senior Manager Function (SMF) applications with a view to reducing the burdens involved during current events;
- the BoE and PRA will also review its programme of regulatory change. Where appropriate, they will postpone non-critical work at the current time to allow firms and FMIs to focus on their safety and soundness, the protection of policyholders and delivering their functions. This includes postponing a number of deadlines, including:
- the deadline for responses to the BoE and PRA consultations on "Building Operational Resilience: Impact tolerances for important business services" and the PRA consultation on "Outsourcing and third party risk management" will, in line with the FCA, be extended to 1 October 2020;
- Internal Ratings Based (IRB) models: Banks which use the IRB (credit risk modelling) framework are implementing a programme ("the EBA roadmap") that aims to improve the consistency of credit risk modelling across the sector. Proposals on the final phase were published in CP21/19 "Credit Risk: PD and LGD estimation" on 18 September 2019. Implementation of the proposals related to the Definition of Default, Probability of Default, and Loss Given Default estimation, will be delayed by one year to 1 January 2022. The move to "hybrid" IRB models will also be delayed until the same date, 1 January 2022. Firms using the standardised approach to credit risk will also benefit from a delay to changes they need to make as part of guidelines on definition of default; and
- the PRA acknowledges that the existing timetable to implement Basel 3.1 may prove to be challenging, and is coordinating internationally to ensure that implementation will happen alongside other major jurisdictions. The PRA will advise the government on the legislative approach accordingly; and
- the Financial Services Regulatory Initiatives Forum (RIF) was established to help regulators identify and manage peaks in operational demands on firms and FMIs resulting from regulatory initiatives and to ensure firms and FMIs have an early and clearer understanding of them. The RIF's first meeting will now take place as soon as possible in April 2020 to assist coordination of regulatory initiatives.
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COVID-19: FCA information for firms
The FCA has published a webpage giving information to firms on COVID-19 expectations and regulator responses. The FCA will add to this page periodically.
The FCA states that it is in regular contact with firms to assess their current position, and expects firms to be taking reasonable steps to ensure they are prepared to meet the challenges COVID-19 could pose to customers and staff, particularly through their business continuity plans.
Among other things, the FCA expects firms to provide strong support and service to customers during this period. They should be clear and transparent and provide support as consumers and small businesses face challenges at this time. The FCA also expects firms to manage their financial resilience and actively manage their liquidity. Firms should report to the FCA immediately if they believe they will be in difficulty.
On operational resilience, the FCA expects firms to take all reasonable steps to meet the regulatory obligations that are in place to protect their consumers and maintain market integrity. For example, if a firm has to close a call centre – requiring staff to work from other locations (including their homes) – the firm should establish appropriate systems and controls to ensure it maintains appropriate records, including call recordings if required. The FCA refers to its recent consultation paper on operational resilience for further matters that firms should consider in this context.
The FCA also announces that it is extending the closing dates for its open consultations and calls for input to 1 October 2020 as part of its response to COVID-19.
The delayed consultation papers are:
- CP20/4: Quarterly consultation 27; CP19/32: Building operational resilience: impact tolerances for important business services;
- CP20/1: Introducing a single easy access rate (SEAR) for cash savings;
- CP20/3: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations; and
- CP20/5: Consultation paper on open-ended investment companies – proposals for a more proportionate listing regime.
The delayed calls for input are on open finance and wholesale data.
The FCA has also delayed other publications that were due before the end of June 2020. It plans to provide updates at an appropriate point.
The FCA confirms that it still aims to publish its final market study report on general insurance pricing in the summer, but will keep this under review.
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LIBOR contractual triggers: how the FCA will make announcements
The FCA notes that an increasing number of contracts referencing LIBOR include a "pre-cessation trigger" that converts the contract to reference a relevant Risk Free Rate (RFR) plus an appropriate spread if the FCA finds that any LIBOR settings are no longer going to be representative of the underlying market the rates seek to measure. Therefore, the FCA recognises the importance of market participants being aware of its announcements on this issue. The FCA has published a webpage on which it explains how it would announce LIBOR contractual triggers.
The FCA notes that, due to the agreement it has with LIBOR panel banks to remain on the LIBOR panels until end-2021, the FCA does not expect LIBOR to cease or become non-representative before end-2021.
Markets need to be prepared, however, for potential announcements that some or all LIBOR settings will cease after end-2021, or if the FCA find that they are no longer going to be representative, after end-2021. These announcements may be necessary because the FCA is given notice of the departure of panel banks.
Announcements could be made before end-2021, even if the cessation or loss of representative status would not occur until the panel banks had left at the end-2021 or another applicable date of panel bank departure thereafter.
For both scenarios, the FCA states that the announcement will:
- be made via the Regulatory News Service, at the same time as, or very shortly followed by, a posting of a fuller statement on its website;
- be clear that it is being made in the awareness that it will engage certain contractual triggers that are activated by pre-cessation or cessation announcements made by the FCA;
- be clear about the LIBOR currencies and tenors it relates to; and
- include the date of cessation, or, if applicable, date from which the relevant LIBOR settings are not going to be representative.
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FOS Ombudsman News issue 150
The Financial Ombudsman Service (FOS) has published its latest edition of Ombudsman News. Among other things, this edition, in a new online format, includes:
- information for consumers relating to COVID-19;
- statistics about the complaints the FOS received between July and September 2019 and October and December 2019; and
- an insight in-depth report on complaints involving underinsurance, misrepresentation and non-disclosure (reported in our Insurance section).
JMLSG AML and CTF guidance: consultation on cryptoasset exchanges and custodian wallet providers
The Joint Money Laundering Steering Group (JMLSG) is consulting on a new sector chapter in Part II of its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance, for cryptoasset exchanges and custodian wallet providers – Sector 22.
The proposed text takes into account The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 which brings cryptoasset exchange providers and custodian wallet providers into scope of the Money Laundering Regulations (SI 2019/1511).
The consultation period closes on 18 May 2020.
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Regulatory framework for cryptoassets: FMLC response to European Commission consultation
The Financial Markets Law Committee (FMLC) has published a press release indicating that it has responded to the European Commission's consultation on the suitability of the existing regulatory framework for cryptoassets. It attached to the Commission's response form the following two reports:
Scope of national court's duty to assess fairness of consumer terms of its own motion: ECJ preliminary ruling
In Lintner v UniCredit Bank Hungary Zrt (Case C-511/17), the European Court of Justice (ECJ) considered whether a national court must assess the inherent fairness of all the terms of a consumer contract before it, even where such terms are not connected to the disputed term. Interpreting the Unfair Contract Terms Directive (UCTD) (implemented in the UK by the Consumer Rights Act 2015), the ECJ held that:
- although the UCTD obliges national courts to review the fairness of consumer terms of their own motion, this obligation only extends to the disputed terms and other terms connected to them; and
- although assessing the fairness of a disputed term involves taking into account all the other terms of the contract (for their cumulative effect), this does not mean that the court must assess whether such terms are fair in and of themselves.
The UCTD allows member states to impose a more wide-ranging assessment duty on their national courts. Section 71 of the CRA provides that where there are proceedings before a court which relate to a term of a consumer contract, the UK courts must consider whether that term is fair, even if none of the parties to the proceedings have raised that issue or indicated that they intend to raise it. It is not clear whether this wording requires UK courts to consider the fairness of undisputed terms and so goes further than the requirements of the UCTD, as determined in this case.
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DMD withdrawal rights when member state implementing law inconsistent with EU law: ECJ preliminary ruling
In Romano and another v DSL Bank (Case C-143/18), the ECJ considered a bank's obligations concerning information on withdrawal rights under the Distance Marketing Directive (DMD) when the relevant member state's implementing legislation and case law was inconsistent with the DMD itself.
Article 6 of the DMD requires consumers to be given the right to withdraw from certain distance contracts once they have been concluded. Article 6(2)(c) states that the right of withdrawal does not apply to contracts whose performance have been fully completed by both parties at the consumer's express request before the consumer exercises their right of withdrawal. Article 5 of the DMD requires suppliers to provide information about withdrawal rights, among other things, before the consumer is bound by a distance contract.
The German legislation concerning DMD withdrawal rights for consumer loan agreements did not provide that the right of withdrawal was extinguished where performance of the contract had been fully completed by both parties at the consumer's express request before the consumer exercised their right of withdrawal. The customer sought to withdraw from a mortgage loan agreement where the notice they were sent complied with the DMD but not the German legislation. The German court made a referral to the ECJ on issues arising from the inconsistency between the DMD and German legislation and practice.
In its judgment, the ECJ highlighted that recital 13 of the DMD states that member states should not be able to adopt provisions other than those laid down in the DMD in the fields it harmonises. On that basis, it held that the obligations of a supplier of a financial service under the DMD concerning withdrawal rights, and in particular information on the effect of Article 6(2)(c), would be fulfilled if that supplier complied with the provisions of the DMD even if that information was not consistent with a member state's legislation and case law.
COVID-19: Brexit talks put on hold
The second round of negotiations between the UK and the EU, which were due to begin on 18 March in London, have been put on hold due to COVID-19 concerns.
Both sides are considering options for progressing the talks through the summer months, including the usage of video conferencing.
The UK is expected to publish a draft Free Trade Agreement shortly to set out its vision for its future relationship with the EU.
Future UK-EU relationship: European Commission draft agreement
The European Commission, on 18 March 2020, published the draft legal text of the UK-EU future relationship agreement, based on the EU's negotiating position. The draft legal agreement represents the EU's negotiating position, as set out in the negotiating directives, which the Council of the EU adopted on 25 February 2020.
The Commission has published the foreign policy, security and defence part of the draft agreement separately, even though the UK has said that it will not negotiate this yet.
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Equivalence assessments: European Commission approach to UK
The European Commission has published a letter, dated 13 March 2020, from Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), to Rishi Sunak, Chancellor of the Exchequer, on the Commission's approach on equivalence assessments and decisions.
In the letter, Mr Dombrovskis states that the Commission's approach is in line with the Political Declaration agreed in October 2019. This means that the EU and the UK should start assessing equivalence as soon as possible, endeavouring to conclude their assessments before the end of June 2020.
However, Mr Dombrovskis continues that, "[a]s agreed in the Political Declaration, this means proceeding with the assessments, not taking equivalence decisions by that date".
Mr Dombrovskis states that his teams will reach out to their UK equivalents soon to collect evidence on the UK frameworks that will apply after the transition period. He comments that equivalence assessments will have to be forward-looking and take into account overall developments, including any divergences of UK rules from EU rules.
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FOS Brexit-related guidance: instrument defers commencement to IP completion day
The FCA has published the Exiting the European Union: Deferral of Commencement Instrument 2020 (FOS 2020/1). The instrument was made by the board of the Financial Ombudsman Service (FOS) on 30 January 2020. It applies to any information, guidance or advice made by the FOS that was drafted as coming into force by reference to exit day, as defined by the European Union (Withdrawal) Act 2018 (EUWA).
The instrument states that any such information, guidance or advice will come into force by reference to IP completion day, as defined in the European Union (Withdrawal Agreement) Act 2020 (WAA). This means that these materials will come into force at the end of the Brexit transition period (currently, 31 December 2020) and did not come into force on exit day (31 January 2020).
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 look at the Hogan Lovells Brexit Hub, an open resource online.
Hogan Lovells Brexit Hub
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Authored by Yvonne Clapham
