Financial institutions general regulatory news, 1 April 2021

Contents

• Download the full regulatory news bulletin
• UK-EU MoU on regulatory cooperation in financial services
• UK-US bilateral agreement on insurance and reinsurance prudential measures: first committee meeting
• Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021
• HM Treasury advisory notice on AML and CTF controls in higher risk jurisdictions
• Draft Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021
• FPC meeting summary and record
• Pension freedoms: House of Commons Work and Pensions Committee first-stage report on pension scams
• Guide for employers and pension trustees on providing support with financial matters without FCA authorisation
• Advising on DB pension transfers: FCA FG21/3
• Operational resilience: FCA, PRA and BoE policy statements
• Outsourcing and third party risk management: PRA PS7/21
• LIBOR transition: Joint PRA and FCA Dear CEO letter on priority areas
• Transition to SONIA: Working Group on Sterling RFRs meeting minutes
• 2021/22 FSCS management expenses levy limit: PRA PS5/21
• Open finance: FCA FS21/7
• FCA Handbook Notice 86
• FCA regulation of LC&F: Andrew Bailey letter on lessons learnt
• Extending annual financial crime reporting obligation: FCA PS21/4
• Schemes of arrangement: FCA evaluation approach
• FOS 2021/22 plans and budget
• EEA Joint Committee Decisions amending Annex IX (Financial Services) to EEA Agreement
• Assessment of the application of ESA Guidelines on complaints-handling
• EU IFR: EBA consults on RTS on disclosure of investment policy

Following a seasonal break, the next update will be published on 19 April 2021.

UK-EU MoU on regulatory cooperation in financial services

HM Treasury has announced that technical discussions on the text of the memorandum of understanding (MoU) on UK-EU regulatory cooperation in financial services have concluded. HM Treasury states that formal steps need to be undertaken on both sides before the MoU can be signed but that it expects that that this can be done expeditiously. The text of the final version of the MoU has not yet been published.

UK-US bilateral agreement on insurance and reinsurance prudential measures: first committee meeting

The UK and the US have held the first meeting of the Joint Committee established under the UK-US bilateral agreement on insurance and reinsurance prudential measures.

During this first Joint Committee meeting under the agreement, participants on both sides discussed progress made toward timely implementation of the agreement, including the removal of collateral and local presence requirements for reinsurers and the provisions on group supervision measures. In addition, the parties affirmed their commitment to the agreement and to close coordination between the two sides as implementation continues. Consistent with the agreement, both sides continue to encourage relevant authorities to refrain from taking any measures that are inconsistent with any provisions of the agreement.

Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021

The Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021 (SI 2021/392) have been published, together with an explanatory memorandum. The Regulations came into force on 26 March 2021.

The Regulations insert a new Schedule 3ZA into the Money Laundering, Terrorist Financing and  Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017), which sets out a list of high-risk third countries. The Regulations also change the definition of a "high-risk third country" in regulation 33(3)(a) of the MLRs 2017 from a country that has been defined as such by a European Commission delegated act to a country specified in the new Schedule 3ZA, and they make a consequential amendment to regulation 39(4).

The Regulation also revoke the retained EU law version of Commission Delegated Regulation (EU) 2016/1675 which set out the list of third countries identified by the European Commission as high risk. This list has been superseded by the new list set out in Schedule 3ZA.

HM Treasury advisory notice on AML and CTF controls in higher risk jurisdictions

HM Treasury has updated its advisory notice on money laundering (AML)and terrorist financing (CTF) controls in higher risk jurisdictions. This notice replaces all previous notices issued by HM Treasury on the subject. The revised notice follows two statements published by the Financial Action Task Force (FATF) on 25 February 2021, identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

Draft Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021

HM Treasury has published a draft version of the Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021, together with a draft explanatory memorandum. These Regulations amend the UK Capital Requirements Regulation (UK CRR) to provide that exemptions for commodities dealers will continue to apply until 1 January 2022. This is the date on which the new UK Investment Firms Prudential Regime will come into effect.

The Regulations are intended to come into force on the 22nd day after the day on which they are laid before Parliament.

FPC meeting summary and record

The Bank of England (BoE) has published the financial policy summary and record (FPSR) of the meeting of its Financial Policy Committee (FPC) on 11 March 2021. Announcements made in the FPSR relate to topics including:

• open-ended funds: the FPC considered the findings of the joint BoE-Financial Conduct Authority (FCA) survey of liquidity management in open-ended funds, also published on 26 March 2021. The FPC will set out in the next Financial Stability Report (FSR) its views on how a liquidity classification could be developed and an approach for how more consistent and complete swing pricing could be developed in order to promote financial stability;
• Long-Term Asset Fund (LTAF): the FPC noted that the BoE, HM Treasury and the FCA had established an industry working group to facilitate investment in productive finance through the launch of an LTAF structure. It states that the FCA plan to publish a consultation on the LTAF in the first half of 2021;
• UK Countercyclical Capital Buffer (CCyB) rate: the FPC agreed to maintain the UK CCyB rate at 0% in 2021 Q1. It expects to maintain a UK CCyB rate of 0% until at least December 2021, which means that any subsequent increase is not expected to take effect until Q4 2022 at the earliest; and
• 2022 cyber stress test: the FPC set out its initial thinking on the 2022 cyber stress test, which will test firms' abilities to withstand cyber incidents and to restore functioning after a cyber incident. It agreed that the test should involve a scenario where data integrity had been compromised. It will be an exploratory test, rather than a formal pass-fail assessment. Participating firms will, however, be expected to share their findings and plans with their supervisors. The FPC intends to provide more information on the 2022 cyber stress test in due course.

The annex to the FPSR lists the FPC policy decisions that remain in force. These relate to the CCyB rate, mortgage loan to income ratios and mortgage affordability.

Pension freedoms: House of Commons Work and Pensions Committee first-stage report on pension scams

The Work and Pensions Committee of the House of Commons published Protecting pension savers - five years on from the pension freedoms: Pension scams. This is the first report under the Committee's three-part inquiry into the impact of the pension freedoms introduced in 2015 on pension savers. The first report concerns pension scams and focuses on Project Bloom, the multi-agency initiative set up in 2012 to combat pension scams. In February 2021, the Committee issued a call for evidence on the second stage of its inquiry. This will look at accessing retirement products.

Guide for employers and pension trustees on providing support with financial matters without FCA authorisation

The FCA and the Pensions Regulator have published an updated version of their guide for employers and trustees on providing support with financial matters without needing to be subject to FCA regulation. The purpose of the guide is to provide a non-exhaustive explanation of the type of assistance that employers and pension trustees may provide to help employees, without needing to be authorised by the Financial Conduct Authority (FCA) under the Financial Services and Markets Act 2000. It also provides details of actions that could trigger a requirement for authorisation, such as helping scheme members towards certain FCA-regulated products or helping them make decisions on their pension in a way that would likely be considered as providing financial advice.

The FCA consulted on a revised version of the guide as part of its guidance consultation (GC20/1) on advising on pension transfers. It has published a feedback statement relating to GC20/1, setting out the feedback received to the proposed revisions to the guide and its policy decisions in response to that feedback.

Advising on DB pension transfers: FCA FG21/3

The FCA has published finalised guidance, FG21/3, on advising on pension transfers. The guidance is aimed at firms providing advice on the conversion or transfer of pension benefits and relevant advice on where any transferred funds may be invested. It is intended to help firms to understand how to apply FCA rules and guidance when giving defined benefit (DB) transfer advice. The guidance came into effect immediately, as it is based on existing rules.

Operational resilience: FCA, PRA and BoE policy statements

Following their December 2019 consultations, the FCA (PS21/3), the Prudential Regulation Authority (PRA) (PS6/21) and the Bank of England (BoE) have published a joint feedback statement, policy statements and supervisory materials setting out their final rules and guidance on operational resilience. The FCA has also updated its webpage on operational resilience.

The authorities are introducing new operational resilience framework for firms and financial market infrastructures (FMIs). Under this framework, firms and FMIs are required to identify the important business services that, if disrupted, would impact the authorities' objectives. Firms and FMIs are required to set an impact tolerance for each of their important business services and take actions to meet specified standards relating to operational resilience.

The new rules introduced by the framework will come into effect on 31 March 2022. The authorities have set out a timetable for the implementation of the framework, which will consist of a one-year implementation period, ending on 31 March 2022, and a three-year transitional period, ending on 31 March 2025. During the implementation period, firms and FMIs should identify their important business services and set impact tolerances. They should also develop and put into effect a strategy or plan setting out how they will comply with the authorities' requirements and expectations.

By the end of the transitional period, firms and FMIs should have in place sound, effective, and comprehensive strategies, processes, and systems enabling them to address risks to their ability to remain within their impact tolerance for each important business service.

Outsourcing and third party risk management: PRA PS7/21

Following its December 2019 consultation in CP30/19, the PRA has published feedback and a policy statement, PS7/21, on outsourcing and third party risk management. The PRA has made some revisions to its final policy, including:

• definitions, scope and proportionality: firms should assess the materiality and risks of all third party arrangements, irrespective of whether they fall within the definition of outsourcing. Where non-outsourcing, third party arrangements are deemed to be material or high risk, the PRA expects firms to implement effective, risk-based controls. The PRA has included additional examples of how proportionality can apply to intragroup arrangements and third-country branches;
• governance and record keeping: the PRA is planning an additional consultation setting out proposals for an online portal on which all firms will need to submit information on their outsourcing and third party arrangements. The PRA also plans to undertake further analysis on whether additional policy measures to manage the risks that critical third parties could pose to their objectives might be appropriate;
• agreements: if a third party service provider in a material outsourcing (or other third party) arrangement is unable or unwilling to include certain terms within the contract that reflect the firm's obligations, that firm should make the PRA aware of this issue; and
• data and access: the PRA expects firms to adopt a risk-based approach to the location of data that allows them to leverage the operational resilience advantages of outsourced data being stored in multiple locations while managing relevant risks. Additional guidance has been added about the conduct of on-site audits.

Appendix 1 contains the supervisory statement on outsourcing and third party risk management (SS2/21), which firms are expected to comply with by 31 March 2022. Outsourcing arrangements entered on or after 31 March 2021 should meet the expectations in SS2/21 by 31 March 2022. Firms should review and update legacy outsourcing agreements entered into before 31 March 2021 at the first appropriate contractual renewal or revision point to meet the expectations in SS2/21 as soon as possible on, or after, 31 March 2022.

For the avoidance of doubt, the PRA states that it considers that it is no longer proportionate for firms to make every effort to comply with the indicative timeline and process for reviewing their material (i.e. critical or important) legacy outsourcing arrangements, as set out in paragraphs 15 and 16 of the European Banking Authority (EBA) Outsourcing Guidelines. Likewise, firms are not expected to inform the PRA if they have not met the timeline set out in the EBA Outsourcing Guidelines. The PRA has made this decision due to the disruption and reprioritisation caused by the COVID-19 pandemic and changes to the UK, EU, and global regulatory landscape in this area, and in consideration of responses to CP30/19.

The PRA is planning a follow-up consultation setting out detailed proposals for an online portal which all firms would need to populate with certain information on their outsourcing and third party arrangements.

LIBOR transition: Joint PRA and FCA Dear CEO letter on priority areas

The PRA and the FCA have sent a joint Dear CEO letter on the transition from LIBOR to risk-free rates (RFRs). In the letter, the PRA and the FCA set out a list of priority areas where further action by firms is necessary to prepare for the cessation of LIBOR. This follows the FCA's statement on 5 March 2021 announcing the dates that panel bank submissions for all LIBOR settings will cease.

The PRA and the FCA will monitor firms' progress and may take supervisory action where they see insufficient progress, or incidents of poor risk management or governance of transition, including in respect of the expectations set out in the letter. The regulators state that responsible senior managers functions (SMFs) should satisfy themselves that all appropriate actions are being taken to ensure an orderly transition and that this transition should form part of the performance criteria for determining responsible SMFs' variable remuneration.

Transition to SONIA: Working Group on Sterling RFRs meeting minutes

The BoE has published the minutes of the February 2021 meeting of the Working Group on Sterling RFRs. Among other things, the working group discussed comments by the PRA at a recent meeting of the senior advisory group (SAG). The PRA's comments include:

• it would intensify supervisory oversight in the coming weeks and months with an active meeting programme and monitoring to ensure firms make progress in line with industry milestones;
• the lending market was a more challenging area than other segments. Data from Q4 2020 suggested less than 20% of new commercial lending was taking place on a "day 1" SONIA basis, which was not a volume that gave the PRA comfort that all firms had made the necessary preparations to meet the Q1 2021 GBP lending milestone;
• the PRA is aware that some firms in syndicates are holding back progress by advising clients to remain on LIBOR. The PRA sends a strong message that they would not allow these firms to act as a brake on transition; and
• the PRA expects that wherever possible all legacy LIBOR contracts would be amended to include at least a contractually robust fallback, or preferably an agreed conversion to an alternative rate no later than the end of 2021.

The FCA confirmed to the working group its alignment with the approach the PRA presented at the SAG meeting. It warned that firms should consider the increasing conduct risks associated with continued offering of LIBOR products especially where liquidity in these products was likely to deteriorate. It would challenge firms where it believed they should be doing more to shift business away from LIBOR. It and the PRA would act on intelligence where syndicates were not moving away from GBP LIBOR and the FCA had already discussed this with some participants of a syndicate deal that closes in Q2 2021.

2021/22 FSCS management expenses levy limit: PRA PS5/21

The PRA has published a policy statement, PS5/21, on the 2021/22 management expenses levy limit (MELL) for the Financial Services Compensation Scheme (FSCS). In PS5/21, the PRA sets out feedback to the responses it received to its consultation paper on the MELL, published jointly with the FCA in January 2021 (PRA CP4/21 / FCA CP21/2). The responses did not raise issues that require the proposals to be altered and so the PRA is proceeding on the basis of the proposals it consulted on. The FSCS MELL will apply for the financial year ending 31 March 2022.

The FCA published its response to feedback in Handbook Notice 86.

Open finance: FCA FS21/7

Following its December 2019 call for input, the FCA has published a feedback statement , FS21/7, on open finance. The FCA sees open finance as an opportunity to build on the concept of open banking and allow consumers and SMEs to access and share their data with third party providers (TPPs). It involves extending open banking-like data sharing and third-party access to a wider range of financial sectors and products. The feedback statement summarises the responses received by the FCA to its call for input, setting out comments received on the issues of maximising the potential of open banking and open finance, as well as the FCA's draft principles for open finance.

Our separate briefing on the FCA's feedback statement will shortly be available on Hogan Lovells Engage.

FCA Handbook Notice 86

The FCA has published Handbook Notice 86, which sets out changes to the FCA Handbook made by the FCA board on 25 March 2021. It also sets out changes made by the Financial Ombudsman Service (FOS) board on 25 March 2021. The Handbook Notice reflects changes made to the Handbook by the following instruments:

• Exiting the European Union: Gibraltar (Fees) Instrument 2021 (FCA 2021/8 / FOS 2021/2), in force from 1 April 2020;
• Fees (Crypto-asset Business) (Periodic Fees) Instrument 2021 (FCA 2021/9), in force from 1 April 2020;
• Fees (Multilateral Trading Facilities and Organised Trading Facilities Fees Amendments) Instrument 2021 (FCA 2021/10), in force on 1 April 2020;
• Financial Services Compensation Scheme (Management Expenses Levy Limit 2021/22) Instrument 2021 (FCA 2021/11), in force from 1 April 2020; and
• Financial Services Compensation Scheme (Appointed Representatives) Instrument 2021 (FCA 2021/12), in force from 26 Mach 2021.

FCA regulation of LC&F: Andrew Bailey letter on lessons learnt

The House of Commons Treasury Committee has published a letter sent to the Committee by Andrew Bailey, BoE Governor. The letter was written in response to the Committee's request for Mr Bailey to clarify certain statements made during an oral evidence session in February 2021 relating to the Committee's inquiry into the FCA's regulation of London Capital & Finance plc (LC&F). In the letter, Mr Bailey sets out, among other things, the lessons that he learnt from the FCA's failings in regulating LC&F. The letter also addresses certain statements made in the evidence session that appeared to contradict the account of events given by Dame Elizabeth Gloster. The Committee has also published a letter from Dame Elizabeth setting out her views on these statements.

Extending annual financial crime reporting obligation: FCA PS21/4

Following its consultation in CP20/17, the FCA has published a policy statement, PS21/4, on extending its annual financial crime reporting obligation (REM-CRIM) to include firms carrying on regulated activities that potentially pose a higher money laundering risk. The FCA confirms that it will bring the following entities within the scope of the REP-CRIM obligation:

• certain authorised firms falling within the scope of the MLRs 2017 that either hold client money or assets or carry on an activity that the FCA consider poses higher money laundering risk (such as dealing in investments as agents and managing investments);
• payments institutions, subject to certain exceptions, and all electronic money institutions;
• all multilateral trading facilities and organised trading facilities; and
• all cryptoasset exchange providers and custodian wallet providers.

The FCA has also removed two activities from the REP-CRIM reporting obligation, which it considers are outside of the scope of the MLRs: home finance mediation and making arrangements with a view to transactions in investments.

The FCA has also made directions under regulation 74A of the MLRs 2017 directing cryptoasset exchange providers and custodian wallet providers to comply with the REP-CRIM obligation. The instrument and the directions both came into force on 30 March 2022.

Firms being brought into scope are required to submit their first REP-CRIM within 60 business days after their first accounting reference date falling after 30 March 2022.

Schemes of arrangement: FCA evaluation approach

The FCA has issued a statement and published a letter of concerns in relation to an application by a firm to implement a scheme of arrangement under Part 26 of the Companies Act 2006. While the letter relates to a specific scheme application, Annex 2 to the letter sets out the FCA's general approach to its evaluation of arrangements proposed by FCA-regulated firms. This approach includes consideration as to whether a proposed scheme is compatible with FCA rules, including the Principles for Businesses. In particular, the FCA assesses the compatibility of schemes of arrangement with Principle 6 (treating customers fairly), Principle 7 (customers' information needs) and Principle 8 (managing conflicts of interest).

FOS 2021/22 plans and budget

Following consultation, the FOS has published its 2021/22 plans and budget. Alongside the 2021/22 plans and budget, the FOS has published the final version of the Fees Manual (Financial Ombudsman Service Case Fees 2021/2022) Instrument 2021 (FOS 2021/1). This instrument was made by order of the FOS board on 22 March 2021 and by order of the FCA board on 25 March 2021. It came into force on 1 April 2021.

EEA Joint Committee Decisions amending Annex IX (Financial Services) to EEA Agreement

The following two Decisions of the EEA Joint Committee that amend Annex IX (Financial Services) to the EEA Agreement to incorporate various pieces of EU financial services legislation into the EEA Agreement have been published in the Official Journal of the European Union:

• Decision 213/2018 of 26 October 2018 amending Annex IX (Financial Services) to the EEA Agreement [2021/496], which incorporates Commission Implementing Regulation (EU) 2018/730 of 4 May 2018 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 31 March 2018 until 29 June 2018 under the Solvency II Directive. The Decision's date of entry into force is specified as 27 October 2018, subject to all requisite notifications under Article 103(1) of the EEA Agreement; and
• Decision 214/2018 of 26 October 2018 amending Annex IX (Financial Services) to the EEA Agreement [2021/497], which incorporates the Insurance Distribution Directive (IDD), together with Directive (EU) 2018/411 amending the IDD as regards the date of application of member states' transposition measures. The Decision also repeals the Insurance Mediation Directive (IMD) under the EEA Agreement, since this Directive was repealed by the IMD. The Decision's date of entry into force is specified as 27 October 2018, subject to all requisite notifications under Article 103(1) of the EEA Agreement.

Assessment of the application of ESA Guidelines on complaints-handling

The European Supervisory Authorities (ESAs) have published a Joint Committee Report on the assessment of the application of the ESAs' guidelines on complaints-handling. In the report, the ESAs consider the application of the guidelines published by the European Insurance and Occupational Pensions Authority (EIOPA) in June 2012 and December 2013 on complaints-handling by insurance undertakings and insurance intermediaries respectively, as well as the joint guidelines for the securities and banking sectors published by ESMA and the EBA in June 2014. The report refers to these guidelines collectively as the guidelines on complaints-handling.

The ESAs conclude that the guidelines have contributed to achieving the purposes for which they were developed and have resulted in better outcomes for consumers. They conclude that there is no need to revise the guidelines at this stage or to continue the assessment of the guidelines by approaching firms directly for their views.

EU IFR: EBA consults on RTS on disclosure of investment policy

The EBA has published a consultation paper on draft regulatory technical standards (RTS) on the disclosure of the investment policy by investment firms under the Investment Firms Regulation (IFR). Article 52 of the IFR requires investment firms other than small and non-interconnected firms to publicly disclose information on their investment policy. Article 52(3) mandates the EBA to develop draft RTS specifying templates for these disclosures.

Annex I to the draft RTS contains templates and tables for the purpose of the disclosure of information on firms' investment policies. Annex II contains detailed instructions, which provide legal references and guidance concerning specific positions for these templates and tables.

The deadline for responses to the consultation is 1 July 2021.

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Authored by Yvonne Clapham