Financial institutions general regulatory news, 24 January 2020

FIG Bulltin

Recent regulatory developments of interest to financial institutions generally.

Contents

General

Financial advice firms: FCA Dear CEO letter 

The Financial Conduct Authority (FCA) has published a Dear CEO letter to financial advisers, setting out the FCA's approach to tackling key areas of concern in financial advice firms and the actions those firms are expected to take. The FCA has identified four key ways in which consumers of financial advice may be harmed:

  • receiving unsuitable advice for their needs and objectives;
  • falling victim to pension and investment scams;
  • not receiving redress as a result of the non-payment of Financial Ombudsman Service (FOS) awards and/or failing firms being unable to compensate consumers; and
  • paying excessive fees or charges for products and services.

The FCA states that it will have an increased focus on these areas over the next two years.

The range of actions flagged in the letter that firms need to undertake is wide and includes focusing on suitability assessments (see also the FCA's Assessing Suitability Review 2, reported below), defined benefit transfer advice, having adequate financial resources, informing the FCA about the approval of financial promotions, implementing the senior managers and certification regime, and preparing for Brexit.

Firms are expected to discuss the Dear CEO letter at board level and agree what actions to take. Principal firms are also expected to share the contents of the letter with their appointed representatives.

Financial advice firms: FCA Assessing Suitability Review 2 

The FCA has published a statement about its second review of the market for pensions and investment advice, which it calls Assessing Suitability Review 2. The review will focus on the advice that consumers receive around retirement income.

The FCA aims to publish a report setting out the results of the review in 2020.

Use of cloud services by banks and insurers: BoE article 

The Bank of England (BoE) has published a Bank Overground article, "How reliant are banks and insurers on cloud outsourcing?", presenting data from a survey of the use of cloud services by banks and insurers.

The BoE surveyed the 30 largest banks and 27 largest insurers that it supervises to understand how they use the cloud. The survey shows that banks and insurers mainly use cloud outsourcing to run software and access additional processing capacity (Software-as-a-Service or SaaS) or to support IT infrastructure (Infrastructure-as-a-Service or IaaS). The survey indicates that banks use cloud outsourcing more widely than insurers. For both banks and insurers, the use of SaaS outweighs the use of IaaS.

The results of the survey will be used to inform and adjust the BoE's supervisory approach to cloud oversight.

Taxonomy Regulation: House of Lords EU Committee seeks clarification from Treasury 

The House of Lords European Union Committee has published a letter from Lord Kinnoull, Committee Chair, to John Glen, Economic Secretary to the Treasury, on the proposed Regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation).

Political agreement was reached by the European Parliament and the Council of the EU on the Taxonomy Regulation in December 2019. If the file is approved in the coming months and the UK-EU withdrawal agreement is passed, the primary legislation will become binding in the UK during the transition period. However, Lord Kinnoull notes that the associated secondary legislation will only start to apply from the end of 2021, which raises the possibility of future regulatory divergence. Among other things, Lord Kinnoull asks if the government will seek to align with the relevant secondary legislation after the end of the transition period.

Bitcoin Commercial Court case: AA v Persons Unknown [2019] 

In AA v Persons Unknown [2019] EWHC 3556 (Comm) (17 January 2020), the Commercial Court allowed a private hearing of an insurer's application for injunctive relief in proceedings following computer hacking and payment of a ransom in Bitcoin. The defendants had demanded or held or controlled the Bitcoin.

The various claims against the defendants were for possession of property belonging to the insurer or for wrongfully extorting it. Importantly, among other things, the judge considered that a cryptoasset such as Bitcoin was a form of property capable of being the subject of a proprietary injunction, accepting the analysis in the UK Jurisdictional Taskforce (UKJT) Legal statement on cryptoassets and smart contracts (November 2019).

CRD IV: EBA peer review report on NCAs' application of RTS on identifying material risk takers 

The EBA has published a peer review report on the application by national competent authorities (NCAs) of the regulatory technical standards (RTS) on the criteria to identify categories of staff whose professional activities have a material impact on an institution's risk profile (Commission Delegated Regulation (EU) 604/2014).

The peer review aimed to assess the supervisory practices followed by NCAs, and measures taken regarding the RTS. The review panel did not identify any deficiencies or major issues during the period 1 January 2015 to 31 December 2017. However, it identified a number of best practices and weaknesses on the part of NCAs.

To improve the consistent application of the RTS and harmonise NCAs' practices, the review panel suggests carrying out a targeted review of the RTS' application following their amendment under the CRD V Directive. However, it considers there should be a period of time before this review takes place, to allow supervisors and institutions to implement the CRD V Directive and the amended RTS.

PRIIPs Regulation: EU trade associations concerns about ESAs KID reform consultation 

Insurance Europe has published a letter written jointly with the Association of Mutual Insurers and Insurance Co-operatives in Europe (amice), the European Banking Federation (EBF) and the European Fund and Asset Management Association (EFAMA), to the European Commission. The associations raise serious concerns with the review by the European Supervisory Authorities (ESAs) of the RTS under the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs Regulation). In the associations' view the ESAs' current approach to amending the PRIIPs key information document (KID) is fundamentally flawed and will not meet the PRIIPs Regulation's aim of providing information that is fair, clear and not misleading.

The associations set out their concerns in the letter.

Separately, the ESAs have published the non-confidential responses to their consultation (which closed on 13 January 2020) on proposed amendments to the KID.

Non-bank financial intermediation: FSB 2019 report 

The Financial Stability Board (FSB) has published its global monitoring report on non-bank financial intermediation 2019. The report sets out the results of the FSB's annual monitoring exercise to assess global trends and risks from non-bank financial intermediation (NBFI).

The annual monitoring exercise is an important part of the FSB’s policy framework to enhance the resilience of NBFI. It covers data up to the end of 2018 from 29 jurisdictions, which together represent over 80% of global GDP. The FSB focuses particularly on those parts of NBFI that may pose bank-like financial stability risks and/or regulatory arbitrage.

The FSB will continue to monitor and assess developments to ensure that non-bank financing is resilient.

GFIN launches new website and reports on cross-border testing pilot 

Launched in January 2019, the Global Financial Innovation Network (GFIN) is an international network of financial regulators and related organisations committed to supporting financial innovation in the best interests of consumers. It seeks to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. This includes the ability to apply to join a pilot for firms wishing to test innovative products, services or business models across more than one jurisdiction. The GFIN also aims to create a new framework for cooperation between financial services regulators on innovation-related topics, sharing different experiences and approaches.

The GFIN has published a report reflecting on the pilot phase, the GFIN's achievements and the challenges it has faced. The report includes next steps and solutions to improve cross-border testing for the next phase.

GFIN has also launched a new website.

Further announcements on the timing of the new cohort will be made in due course.

Brexit

FCA Update 

In its latest regulation round-up for January 2020, the FCA sets out some reminders for firms relating to Brexit. Latest updates will appear on the relevant FCA website pages.

  • The Temporary Permissions Regime (TPR) notification window will close on 30 January, as will the notification window for fund managers under the Temporary Marketing Permission Regime (TMPR). As the government has not yet announced its plans for the period after 31 December 2020, the FCA will provide further details on its approach to the end of the implementation period in due course.
  • All MiFID systems will remain connected to the European Securities and Markets Authority (ESMA) during the implementation period. The FCA's new Financial Instruments Reference Data System (FCA FIRDS) will continue to publish in parallel to ESMA's systems, but should only be used by firms for testing purposes. The FCA's version of ESMA’s Financial Instruments Transparency Reference System (FCA FITRS) will be suspended until further notice. The FCA will resume FCA FITRS, as appropriate, closer to the end of the implementation period.
  • For credit rating agencies, during the implementation period, EU law will continue to apply in the UK and ESMA will continue to operate as the direct supervisor of UK CRAs. Additionally, any new EU legislation that takes effect before the end of the implementation period will also apply to the UK. UK firms using credit ratings for regulatory purposes can continue to use EU ratings during the implementation period in line with the existing rules.
  • During the implementation period, ESMA will continue to operate as the direct supervisor of UK trade repositories (TRs). Additionally, any new EU legislation that takes effect before the end of the implementation period will also apply to the UK. The FCA's Trade Repository Derivatives Data Store (TRDDS) is now in operation and the FCA will continue to engage with TRs on submission of EMIR data to TRDDS (under FCA's current article 81 data mandate).
Withdrawal Agreement: European Commission updates explanatory slides 

The European Commission has published updated slides explaining the revised EU-UK Withdrawal Agreement.

Law enforcement and judicial cooperation in criminal matters: European Commission slides 

The European Commission has published slides from its internal presentation to the Council Working Party on 16 January 2020. The presentation covers the future of law enforcement and judicial cooperation in criminal matters between the UK and the EU post-Brexit and cover four areas for negotiation:

  • the exchange of security data;
  • operational cooperation;
  • anti-money laundering and counter terrorism cooperation; and
  • combatting illegal migration.
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

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Authored by Yvonne Clapham

 

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