Financial institutions general regulatory news, 15 February 2021

News

Financial institutions general regulatory news, 15 February 2021

FIG Bulletin

15 February 2021

Recent regulatory developments of interest to all financial institutions, including the latest UK PRA and FCA COVID-19 updates. See also our sector specific updates in the Related Materials links.

Content

COVID-19: PRA statement on COVID-19 regulatory reporting amendments

On 5 February 2021, the UK Prudential Regulation Authority (PRA) has published a further statement on COVID-19 regulatory reporting amendments. The PRA refers to its June 2020 statement on regulatory reporting and disclosure amendments and explains that it is now providing further guidance on submitting this year's annual submissions and other types of regulatory reporting.

The PRA recognises that recent government guidance on COVID-19 restrictions, and an increase in COVID-19 cases, may impact the time needed by firms and their auditors to complete the work necessary to finalise firms' annual report and accounts. The requirement for this report to be audited may make timely submission challenging for some firms.

Consistent with the measures announced by the Financial Conduct Authority (FCA) and the Financial Reporting Council, the PRA will accept a delay in submission of annual reports and accounts by UK banks and designated investment firms by up to two calendar months, where the remittance deadlines contained in the PRA Rulebook fall on or before 31 July 2021. For building societies, while the PRA is prepared to accept a similar delay, firms considering this may need to consider other statutory requirements that apply to them.

Firms are advised to keep their supervisory contact at the PRA notified of any significant developments in their financial circumstances. Firms that are able to submit before the end of the delayed submission window are encouraged to do so.

The PRA recognises that the pandemic may be creating challenges for some firms' ability to meet other regulatory reporting deadlines. It is prepared to consider being flexible in its expectations of firms' submissions for such reporting where the remittance deadlines fall on or before 31 March 2021, and where the reporting is not time critical for supervisors. Firms expecting to experience difficulty with timely submission should contact their usual PRA supervisor to discuss this.

COVID-19: FCA updates webpage on changes to regulatory reporting

On 5 February 2021, the FCA updated its webpage on changes to regulatory reporting during the pandemic. In its update, the FCA states that due to the challenges faced by firms and their auditors preparing audited financial statements during the pandemic, it will allow flexibility in the submission deadline for FIN-A (annual report and accounts). For this return only, firms may apply a two-month extension to the deadline for submissions due up to and including 31 July 2021.

The FCA advises that this flexibility is intended to cover the situation where the impacts of COVID-19 have made it impractical to finalise audited financial statements. If firms can submit FIN-A on time, then they should do so. In any event, firms should submit FIN-A as soon as they are reasonably able to, and no later than 30 September 2021.

COVID-19: FCA consults on extending guidance on cancellations and refunds

On 12 February 2021, the FCA published a guidance consultation on extending its October 2020 temporary guidance for insurance providers and card providers relating to consumer cancellations and refunds. The existing guidance is effective until 2 April 2021.

The FCA explains that, with the ongoing uncertainty around the impact of COVID-19, and the potential for consumers to continue to be impacted by cancellations in the coming months, it proposes that this guidance should remain in force during the exceptional circumstances arising out of COVID-19 until varied or revoked. The FCA will keep the guidance under review.

The consultation closes on 26 February 2021.

The FCA has also updated its related webpage.

FCA Financial Lives 2020 survey and October 2020 COVID-19 panel survey

The FCA has published a report setting out the key findings from its second Financial Lives Survey (FLS) which ended in February 2020 (before the pandemic and its October 2020 COVID-19 panel survey). It has also updated its dedicated FLS webpage. The surveys look at consumers’ financial situations, the financial products they choose, and their experiences of engaging with financial services firms.

The FCA describes the report as full of invaluable insights on consumers and the serious challenges they face. It is an important reference point and will inform the FCA's thinking on where and how it intervenes. The FCA has already used some of the data in its consumer work and it has been integral to its COVID-19 response. It actively encourages stakeholders (including financial services firms, consumer bodies, the government and academics) to use the survey results in their own work.

Pension Schemes Act 2021

The Pension Schemes Act 2021 has completed its progress through the parliamentary procedure and received Royal Assent on 11 February 2021. The Act contains major changes for both defined benefit and defined contribution pension schemes, including new powers for the Pensions Regulator, and the regulatory frameworks for collective defined contribution schemes and pensions dashboards.

Most the Act's provisions will be brought into force following subsequent statutory instruments and consultations that are expected in the coming months, although several sections containing regulation-making powers take effect from the date of Royal Assent.

End of Brexit transition period: House of Commons EU Scrutiny Committee letter on EU file scrutiny

The House of Commons European Scrutiny Committee has published a letter from Sir William Cash, Committee Chair, to Michael Gove, Chancellor of the Duchy of Lancaster, stating that, in light of the end of the Brexit transition period and the substance of the UK-EU Trade and Cooperation Agreement (TCA), it intends to continue to scrutinise only a limited number of files which the Committee consider to be legally and/or politically important.

The Annex to the letter details the files that the Committee will retain an active interest in. These are files that, among other concerns: (i) engage the Protocol on Ireland/Northern Ireland to the UK/EU Withdrawal Agreement; (ii) are relevant to the TCA; and/or (iii) concern the UK's new relationship with the EU more broadly.

The files listed in the Annex include several documents relating to digital and data, cybersecurity, AI, the EU's proposed Regulation on markets in cryptoassets (MiCA), and the Taxonomy Regulation.

Files not listed in the Annex to the letter are deemed to have been cleared from scrutiny and all open correspondence between the committee and the government is closed. The committee will consider all explanatory memoranda and correspondence on documents deposited since 1 January 2021 that are not included in the Annex to the letter, but no further follow-up is expected.

The committee will continue to scrutinise and report to the House of Commons on all new EU documents deposited by the government.

BofE and FCA MoU on the supervision of market infrastructure and payment systems

The FCA has published an update on the Bank of England (BofE) and FCA's memorandum of understanding (MoU) on the supervision of market infrastructure and payment systems (FMIs).

The frameworks for cooperation with these authorities are set out in two MoUs which the signatories are required to review annually, including by seeking feedback from supervised firms. The FCA reports that the BofE and the FCA held a consultation with FMIs seeking particular feedback on how the authorities had cooperated during the COVID-19 market events of Spring 2020. The authorities concluded that the MoU's arrangements for cooperation remain effective, with appropriate coordination and no material duplication. Industry respondents acknowledged the efforts made on cooperation and the authorities remain committed to effective cooperation.

The authorities recognise that policy cooperation will be even more important from 2021 as a result of the UK leaving the EU. The authorities re-affirmed their commitment to cooperate domestically and internationally to ensure sound rulemaking that reflects awareness of their respective objectives.

UK Productive Finance Working Group

The BofE has published the minutes of the first meeting of the steering committee of the Productive Finance Working Group held on 26 January 2021, and the Working Group's terms of reference. The Working Group's overall objective is to propose concrete solutions to barriers to long-term investment.

At the meeting, the committee discussed:

the Working Group's purpose and ultimate objectives;
the barriers to productive investment that should be the Working Group's areas of focus; and
deliverables from the technical expert group (TEG) before the next steering committee meeting on 4 May 2021.

BofE Governor Mansion House speech

The BofE has published the Mansion House a speech given by Andrew Bailey, BofE Governor. In his speech, Mr Bailey looks at the benefits of a global financial system and talks about the UK's current and future role in it. He argues that the benefits are global, not regional in nature, therefore global cooperation is needed to ensure a safe and strong financial system.

Among other things, considering the UK's applications for EU equivalence, Mr Bailey discusses when the UK may want to change its rules. Mr Bailey gives three examples:

the UK wants to see if it can apply a strong but simple framework of rules for small banks that are not internationally active and outside of the global standards in the Basel regime (as opposed to the EU regime);
the UK plans to consult on amending the onshored EU rule to exclude software assets from counting towards bank capital, again, in line with global standards. The UK has no evidence to support the notion that software assets have any value in stress; and
the UK is reviewing the Solvency II regime, as some elements have not worked as well for the market as hoped.

Mr Bailey stresses that none of the UK plans for reform mean that it should or will create a low-regulation, high-risk, financial centre and system. He states that there is an overwhelming body of evidence that such an approach is not in the UK's interests, let alone anyone else's. Mr Bailey believes that the UK has a very bright future competing in global financial markets, underpinned by strong and effective common global regulatory standards.

Mr Bailey concludes by stressing that:

"an open world economy supported by an open financial system that respects the public interest objective of financial stability will bring the greatest benefits all round. It needs to be supported by effective institutions and strong international standards. But this must be a global, not a regional, regime to be effective. And that is why we [the UK] spend so much time and effort on the work of the global standard setting and oversight bodies. What follows from that is much more a matter of implementation and how we each put these standards into practice consistently. We have an opportunity to move forward and rebuild our economies, post Covid, supported by our financial systems. Now is not the time to have a regional argument."

FCA policy development update

The FCA has updated its policy development update (PDU) webpage, which sets out information on recent and future FCA publications. This update summarises the FCA's proposed future publications.

Implementing technology change review: FCA report

The FCA has published the findings from its cross-financial services change management review which looked at how firms manage technology change, the impact of change failures, and the practices used within the industry to help reduce the impact of incidents resulting from change management. The FCA carried out the review because its analysis of the incident data firms report to it showed that change related incidents are consistently one of the top causes of failure and operational disruption. It notes that nearly 1,000 material incidents were reported to the FCA in 2019, 17% of which were attributed to change activity. By reviewing how financial firms implement technology change, and the effect that outages have on consumers and the financial system, the FCA aims to understand how firms currently approach managing technology change and the causes of the problems they encounter.

The FCA analysed over 1 million production changes implemented in 2019 by a sample of firms leveraging different business models at varying scale. This data was supplemented with a qualitative questionnaire, a confidential board questionnaire and industry workshops to understand firms' release and deployment methodologies, the effectiveness of the governance arrangements in place, and the role that infrastructure plays in deploying change effectively.

In its report, the FCA sets out its analysis and key findings across the following areas:

contributing practices to change success and change failure;
the impact of incidents caused by technology change;
how firms govern and manage technology change;
how firms build and deploy technology change; and
how infrastructure impacts technology change.

Firms are advised to consider the findings when assessing their future technology changes. The findings will also contribute to the discussion on how firms can implement technology change in ways that reduce the potential for operational disruption.

EU renewed sustainable finance strategy: European Commission summary report of consultation feedback

The European Commission has published a summary report of its consultation on a renewed sustainable finance strategy. The consultation ran from April to July 2020. In the report, the Commission summarises the feedback received, but does not set out its response to the feedback.

Overall, the feedback received on the objectives and direction of travel of the strategy was generally supportive. Key opportunities highlighted by stakeholders for mainstreaming sustainability into the financial sector included: utilising the COVID-19 recovery phase for redirection of capital, intensifying international dialogue and cooperation, and using innovations and new technologies, including financial system digitalisation.

The key challenges raised regarding the mainstreaming of sustainability in the financial sector included non-sustainable short-term profit-seeking practices and greenwashing, prevention of the social and economic risks related to the transition and the management of stranded assets, the availability, comparability, and quality, of data on environment, social and governance (ESG), the risk of complexity of the overall new regulatory framework and the visibility of the pipeline projects to investors.

In the report, the Commission summarises the key messages identified across responses and under the following three thematic areas:

strengthening the foundations for sustainable finance;
increasing opportunities for citizens, financial institutions, and corporates to enhance sustainability; and
reducing and managing climate and environmental risks.

The Commission intends to adopt the renewed sustainable finance strategy in Q1 2021.

Proposed EU Regulation on digital operational resilience: ESAs letter

The European Supervisory Authorities (ESAs) have sent a letter to the EU co-legislators on modifications to the legislative proposal for a Regulation on digital operational resilience for the financial sector (DORA). In their letter, the ESAs emphasise their strong support for the establishment of an oversight framework covering the ICT services provided by critical third-party providers (CTPPs) to the financial sector. However, the ESA's note:

it is important to clearly communicate that the proposed oversight role for the ESAs is limited to the ICT risks which CTPPs may pose to financial entities, and that the oversight currently envisaged will not amount to full supervision of CTPPs across their full range of activities; and
another structural challenge for the role of the ESAs in the oversight framework is that individual CTPPs may serve entities across the entire financial sector, just as they may serve businesses across the wider economy. Unlike the established remits of the ESAs, where specialisation by sub-sector offers natural advantages, an ESAs-led oversight model for CTPPs will need to be carefully crafted to address coordination and consistency challenges.

With these constraints in mind, the remainder of the ESAs letter sets out their views on how to most efficiently take forward important aspects of the governance and operational processes of the oversight framework for CTPPs and the application of the proportionality principle in DORA.

EU IFD: EBA consults on draft ITS on supervisory disclosure

The European Banking Authority (EBA) has published a consultation paper on draft implementing technical standards (ITS) with regard to the format, structure, contents list and annual publication date of the information to be disclosed by competent authorities in accordance with Article 57(4) of the Investment Firms Directive (IFD). This consultation is part of Phase 2 of the mandates established under the EU's investment firms prudential package.

The EBA developed the draft ITS to determine the format, structure, contents list and annual publication date of the aggregated information competent authorities are required to disclose on:

the texts of laws, regulations, administrative rules and general guidance adopted in their member state in the field of prudential regulation (Annex I to the draft ITS);
the manner of exercise of the options and discretions available under the IFD and IFR (Annex II to the draft ITS);
the general criteria and methodologies that competent authorities use in the supervisory review and evaluation process (SREP) (Annex III to the draft ITS); and
aggregate statistical data on key aspects of the implementation of the IFD and IFR in each member state, including the number and nature of supervisory measures taken in accordance with Article 39(2)(a), and administrative sanctions imposed in accordance with Article 18, of the IFD (Annex IV to the draft ITS).

The Annexes to the draft ITS contain detailed templates to harmonise the publication of the specified information. Instructions for completing the templates are included in each Annex.

The EBA considers that the proposed regulatory requirements in the draft ITS will ensure comparability of the published data and provide the market with transparent and comprehensive information.

The consultation closes to responses on 11 May 2021. The EBA will analyse and take account of consultation responses in finalising the draft ITS and will provide feedback in a final report. It will submit the final version of the ITS to the European Commission for endorsement before its publication in the OJ.

EU MAR: ECJ case on right to remain silent

The Court of Justice of the EU (ECJ) has given a preliminary ruling in Case-481/19 (DB v Commissione Nazionale per le Società e la Borsa (Consob)) involving the interpretation and validity of Article 14(3) of the repealed Market Abuse Directive (MAD) and Article 30(1)(b) of the Market Abuse Regulation (MAR), which require member states to penalise breaches of the obligation to cooperate with the authority responsible for market supervision.

The ECJ ruled that these provisions, read in the light of Articles 47 and 48 of the Charter of Fundamental Rights of the EU, must be interpreted as allowing member states not to penalise natural persons who, in an investigation carried out into them by the competent authority under MAD or MAR, refuse to provide answers that are capable of establishing their liability for an offence punishable by administrative sanctions of a criminal nature, or their criminal liability.

The ECJ notes it is for the referring court to assess, taking into account the relevant criteria, whether the administrative sanctions at issue in the main proceedings are criminal in nature.

Verifiable LEI: GLEIF outlines issuance and infrastructure models

The Global LEI Foundation (GLEIF) has published a press release in which it sets out the issuance and technical infrastructure models for its verifiable Legal Entity Identifier (vLEI) system. A vLEI is a secure digital attestation of a conventional LEI. When fully developed, the vLEI will enable instant and automated identity verification between counterparties operating across all industry sectors globally.

Alongside the press release, GLEIF has published:

a presentation on its digital strategy for the LEI; and
Q&As on the vLEI.

The GLEIF has also updated its webpage on its digital strategy for the LEI and its webpage on introducing the vLEI.

The GLEIF is inviting software developers to engage with existing stakeholders from the pharmaceutical, healthcare, telecom, automotive and financial services sectors, with a view to exploring opportunities to leverage vLEI identity verification in future applications, services and business models.