Financial institutions general regulatory news, 28 June 2021

Contents

• Download the full regulatory news bulletin
• Financial Services Act 2021 (Commencement No 2) Regulations 2021
• Financial promotion approvals regulatory framework: HM Treasury response to consultation
• UK implementation of IFPR and Basel 3 standards: HM Treasury response to consultation
• FCA regulation of LC&F: Treasury Committee report
• Financial holding companies: PRA CP12/21 on regulatory framework
• PRA occasional consultation paper CP13/21
• ESG: FCA CP21/7 on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers
• ESG: FCA CP21/18 on enhancing climate-related disclosure requirements by standard listed companies and seeking views on ESG topics in capital markets
• UK regulatory reform: FCA speech on building regulatory environment for future
• BMR: FCA CP21/9 on proposed decision to require synthetic LIBOR for six sterling and yen LIBOR settings
• LIBOR transition: IA encourages transition of LIBOR-linked bond transition
• LIBOR transition: European Commission, EBA, ECB and ESMA on forthcoming cessation of all LIBOR settings
• Review of Distance Marketing of Consumer Financial Services Directive: European Commission consultation
• ESG: EBA report on management and supervision of ESG risks for credit institutions and investment firms

Financial Services Act 2021 (Commencement No 2) Regulations 2021

The Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739) have been published. The Regulations set out commencement dates for a number of provisions in the Financial Services Act 2021 (FS Act). Regulation 2 brings into force, on 28 June 2021, paragraphs 10 to 21 of Schedule 12 to the FS Act as they extend to Northern Ireland, dealing with forfeiture powers extended to include accounts held at payment and e-money institutions. Regulation 3 brings into force, on 1 July 2021, the following of provisions of the FS Act:

• sections 8 to 21 and schedule 5 relating to benchmarks;
• section 27 and schedule 10 relating to access to financial services markets;
• section 28 and schedule 11 relating to variation or cancellation of permission to carry on regulated activity at the Financial Conduct Authority's (FCA's) initiative;
• section 29 on FCA rules about the level of care provided to consumers by authorised persons;
• section 34 on the application of money laundering regulations to overseas trustees;
• section 37 relating to regulated activities and the application of the Consumer Credit Act 1974;
• section 38 on amendments to the UK Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation;
• section 39 relating to the retention of personal data under the UK Market Abuse Regulation;
• section 40 on clearing, and procedures for reporting over-the-counter derivatives; and
• section 43 relating to subordinated legislation made under retained direct EU legislation.

Financial promotion approvals regulatory framework: HM Treasury response to consultation

HM Treasury has published a response to its July 2020 consultation on the regulatory framework for approval of financial promotions. In the response, HM Treasury summarises responses received to its consultation paper, and explains the next steps.

Most respondents support the introduction of a regulatory gateway, with a slight preference for option 1 (imposing FCA requirements to restrict financial promotion approvals – summarised in paragraph 1.6 of the response). HM Treasury agrees that a gateway should be introduced for the approval of unauthorised persons' financial promotions by way of option 1.

All new and existing authorised firms will be prohibited from approving unauthorised persons' financial promotions by way of a requirement on their permission – the "Financial Promotion Requirement". Both new and existing authorised firms that wish to approve financial promotions will have to apply to the FCA to have the prohibition removed either entirely (allowing them to approve all types of financial promotions) or partially (allowing them to approve certain types of financial promotions). Firms will do this by submitting a variation of requirement (VREQ) application to the FCA. The FCA will determine, and accept or refuse, an application under powers in Part 4A of the Financial Services and Markets Act 2000 (FSMA). The FCA will be able to refuse an application if this is deemed necessary in order to advance its operational objectives.

The Treasury explains that permissions to approve financial promotions could be limited to a specific type or types of products or services dependent on the firm's expertise. It states that the proposed gateway is not intended to require the FCA to grant permission on a promotion by promotion basis, thereby reducing the additional administrative burden on firms.

There will be three exemptions to the new regime:

• firms approving the financial promotions of an unauthorised person within the same group;
• the approval of authorised firms' own promotions for communication by unauthorised persons; and
• principals approving financial promotions for their appointed representatives in relation to regulated activities, for which the principal has agreed to accept responsibility.

HM Treasury has also developed proposals to implement a transitional period (with three distinct phases set out in Chart 1.C in the response) allowing an orderly transition between the two regimes. Unauthorised persons will remain able to communicate any financial promotion that was approved prior to the implementation of this gateway provided the promotion remains unchanged and continues to comply with FCA rules.

HM Treasury intends to bring forward the necessary legislation when parliamentary time allows. The FCA will consult on its proposals for implementing the gateway in due course.

UK implementation of IFPR and Basel 3 standards: HM Treasury response to consultation

HM Treasury has published the response to its consultation paper on implementing the Investment Firms Prudential Regime (IFPR) and the final Basel 3 (or Basel III) standards using powers under the FS Act 2021. In the response, HM Treasury summarises the 12 responses received to its February 2021 consultation paper and explains the next steps. In the light of comments received, HM Treasury has changed its approach in a few areas. The changes are outlined in the response.

Among other things, HM Treasury:

• intends to lay the secondary legislation required to revoke the specific provisions in the UK Capital Requirements Regulation (UK CRR) shortly (except in relation to leverage), and to pass a second statutory instrument, before the end of 2021, which makes amendments to legislation that are needed as a consequence of these revocations, and revokes provisions relating to leverage;
• now considers that applying the equivalence provision contained in Article 132 of the UK CRR would be a disproportionate method for addressing the prudential risks arising from UK banks' investments in overseas funds. It has decided to remove the equivalence provision;
• has decided to implement the Fundamental Review of the Trading Book (FRTB) reporting requirements alongside FRTB revisions to Pillar 1 capital requirements (that is, as part of Basel 3.1 and not from 1 January 2022) due to concerns about implementation costs;
• sees no reason to depart from its proposed approach of amending the Financial Services and Markets Act (PRA-Regulated Activities) Order 2013 (SI 2013/556) to remove reference to the EUR730,000 initial capital requirement (ICR), which will become obsolete. The proposed amendment will not, of itself, designate these firms for prudential supervision by the PRA; and
• has decided to remove FCA-regulated EUR730,000 ICR firms from the scope of the UK resolution regime. Additional firms brought into the scope of the £750,000 capital requirement will also not be within scope of the UK resolution regime.

HM Treasury intends to lay the relevant implementing secondary legislation to a timeline that provides firms with adequate time to prepare ahead of the 1 January 2022 implementation date.

FCA regulation of LC&F: Treasury Committee report

The House of Commons Treasury Committee has published a report following its inquiry into the FCA's regulation of London Capital & Finance plc (LC&F). The findings and recommendations set out in the report include that:

• the committee welcomes the FCA's ongoing transformation programme, but the FCA board should set an end date and create and publish milestones to review changes in culture;
• it is not readily justifiable for the FCA to require the firms it regulates to adhere to the principles of the Senior Managers Regime, but seemingly not to apply similar principles internally when there are failings of practice and culture. The committee believes there are doubts as to whether the FCA has, in the LC&F case, met the standards it seeks to impose on others;
• the FCA should require authorised firms to make clear the risks to customers associated with their unregulated activities. It should also set out in its annual perimeter report how its supervisory strategies and policies reflect the activities of authorised firms both within and outside the regulatory perimeter. The FCA should be given the power to recommend perimeter changes formally to HM Treasury;
• in the future, the FCA should be more interventionist and make more frequent use of its powers regarding financial promotion breaches rather than maintaining a culture of risk aversion. HM Treasury should, as a priority, re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes are needed to protect consumers;
• the government should include measures in the Online Safety Bill to address fraud via online advertising. Pending any legislative changes, the FCA should continue to work with online platforms to remove misleading and fraudulent advertisements as quickly as possible; and
• HM Treasury's ongoing consultation on the regulation of mini-bonds is welcome, but the committee notes the delay in its launch. HM Treasury should proceed with its analysis as soon as the consultation closes and publish the outcome by the end of September 2021, setting a way forward that can be implemented rapidly.

Financial holding companies: PRA CP12/21 on regulatory framework

The Prudential Regulation Authority (PRA) has published a consultation paper, CP12/21, on the further implementation of the regulatory framework for financial holding companies (FHCs).

Following the UK's implementation of the fifth Capital Requirements Directive (CRD V), holding companies in UK banking groups are subject to supervisory approval and consolidated supervision under a legislative framework under Part 12B of FSMA. A UK consolidation group's approved parent holding company is responsible for ensuring that consolidated prudential requirements are met. If the relevant holding company cannot be approved, another group entity may be temporarily designated as responsible for ensuring that the requirements are met. The FSAct 2021 gave the PRA the power to make rules relating to approved or designated holding companies.

In CP12/21, the PRA sets out proposals for rules and guidance relating to approved and designated holding companies:

• Appendix 1 to CP12/21 contains the draft text of the PRA Rulebook: PRA (Rules applying to holding companies) Instrument 2021, which contains proposed revisions to a number of Parts of the PRA Rulebook to bring approved and designated holding companies within their scope by applying them to "CRR consolidation entities". A CRR consolidation entity is defined as a UK parent institution, a PRA approved parent holding company, a PRA designated parent holding company or a PRA designated institution;
• Appendix 2 to CP12/21 contains the text of a new PRA statement of policy (SoP): Supervisory measures and penalties in relation to financial holding companies. This reflects the PRA's obligation under section 129Z2 of FSMA to prepare and issue an SoP on the taking of supervisory measures, including directions, under section 192T of FSMA and the imposition and amount of penalties under section 192Y of FSMA; and
• Appendix 3 to CP12/21 (included in the main document for CP12/21) contains proposed amendments to the PRA's SoP on its approach to enforcement, reflecting the PRA's powers concerning holding companies under section 192Y of FSMA.

The deadline for responses is 22 July 2021. The PRA intends to implement its proposals on 15 September 2021.

PRA occasional consultation paper CP13/21

The PRA has published an occasional consultation paper, CP13/21, proposing minor amendments to its Rulebook, supervisory statements (SSs), reporting data items and instructions, the Branch Return, and associated guidance and notes.

The chapters in CP13/21 are relevant to different types of firms, as follows:

• chapters 2 and 3: banks, building societies, and PRA-designated investment firms;
• chapter 4: Capital Requirements Regulation (CRR) firms;
• chapter 5: PRA-supervised third country branches;
• chapter 6:
  • Audit Committee – CRR firms, UK Solvency II insurance and reinsurance firms, and the Society of Lloyd’s and managing agents; and
  • Auditors – major UK banks and building societies.

The deadline for responses is 25 August 2021.

ESG: FCA CP21/7 on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers

The FCA has published a consultation paper, CP21/17, on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers. It proposes to introduce the following climate-related financial disclosure rules and guidance, consistent with the recommendations and recommended disclosures developed by the Task Force on Climate-related Financial Disclosures (TCFD):

• entity-level disclosures: firms would be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers; and
• product or portfolio-level disclosures: firms would be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

The FCA intends to introduce a new Environmental, Social and Governance (ESG) sourcebook to set out its proposed rules and guidance. The proposals in CP21/17 relate solely to climate-related disclosures, but the FCA anticipates that the ESG sourcebook will expand over time to include new rules and guidance on other climate-related and wider ESG topics.

The scope of the proposed rules and guidance would cover 98% of assets under management in both the UK asset management market and held by UK asset owners, representing £12.1 trillion in assets managed in the UK. However, the FCA's proposals would not apply to firms with less than £5 billion in assets relating to relevant activities.

The consultation closes on 10 September 2021. The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021.

In its press release, the FCA states that, given the global reach of regulated firms operating in the UK, the FCA has approached the design of the regime with international consistency in mind and to accommodate firms' different business models.

ESG: FCA CP21/18 on enhancing climate-related disclosure requirements by standard listed companies and seeking views on ESG topics in capital markets

The FCA has published a consultation paper, CP21/18, on proposals to extend the application of its TCFD-aligned Listing Rule (LR) in LR 9.8.6R(8) for premium-listed commercial companies to issuers of standard listed equity shares (excluding standard listed investment entities and shell companies), and seeking views on other topical ESG issues in capital markets, including green and sustainable debt markets and ESG data and rating providers. Comments are requested by 10 September 2021.

The FCA proposes adding a new rule LR 14.3.27R directly mirroring LR 9.8.6R(8), which requires in-scope standard listed companies to include a statement in their annual financial report setting out certain information about their climate-related disclosures, including whether they comply with the TCFD recommendations and recommended disclosures and to explain any non-compliance. The FCA also proposes to include at LR 14.3.28G to LR 14.3.31G the same guidance as is included in LR 9.8.6BG to LR 9.8.6EG for the purposes of LR 9.8.6R(8), and to update the Listing Rules section of Technical Note 801.1 to reflect the new rule and guidance.

While it is proposed that the new rule would apply to issuers of equity shares in LR 14, excluding standard listed investment companies and shell companies, the FCA invites views on whether the rule should be extended to issuers of global depositary receipts in LR 18 and standard listed issuers of shares other than equity shares, and whether and how issuers of standard listed debt and debt-like securities (in LR 17) should be reflected in the scope of the rule.

The new rule would apply on a comply or explain basis and take effect for accounting periods beginning on or after 1 January 2022. While the FCA confirms its support for a pathway to mandatory climate-related disclosures, it has concluded that it is not the right time to consult on transitioning the TCFD-aligned Listing Rules to a mandatory compliance basis.

The FCA also seeks views (but without proposed rule changes) on other topical ESG issues in capital markets, particularly in relation to green, social and sustainability bonds. The paper discusses sustainability frameworks and how they are reflected in bond prospectuses and transaction documents. It also outlines issues related to third party reviews, as well as ESG data and rating providers.

UK regulatory reform: FCA speech on building regulatory environment for future

The FCA has published a speech by Nikhil Rathi, FCA Chief Executive, on building a regulatory environment for the future. In his speech, Mr Rathi explains the FCA has to be agile and confident to build and operate an effective regulatory regime for the firms and consumers of the future. He highlights three ways the FCA is doing this, namely: (1) meeting the needs of UK markets; (2) setting the bar high at the gateway for entry to regulation and intervening assertively to deal with misconduct; and (3) playing its part in international regulatory discussions.

Mr Rathi states that the FCA has contributed to an HM Treasury consultation on reform of the broader Markets in Financial Instruments Directive regime to be published in summer 2021. The proposals are the product of the FCA's experience of the EU regime, listening to the views of market participants and reflecting the future of UK markets. Areas most in need of reform include market structure, the operation of the transparency regime, the regulation of commodity derivatives markets, and improving access to market data.

In addition, Mr Rathi notes that the FCA will consult in July 2021 on removing other barriers to companies listing.

He states that cooperation with the EU is generally working well, but highlights some areas where challenges remain due to lack of equivalence, including relating to the derivatives trading obligation and money market funds.

Mr Rathi comments that there are 1,450 EEA firms currently accessing UK markets via the temporary permissions regime. The move to a more permanent arrangement requires a rigorous review of all firms seeking to enter the UK authorisation gateway. Since the end of the transition period, the FCA has taken action against 13 firms, restricting their business, and the FCA is taking steps to remove a further 120 firms from its regulatory perimeter. The FCA's robust approach continues in its supervision of firms. It will act quickly to remove firms' permissions where they are not using their authorisation or are misusing it. The FCA also anticipates that, where there are significant risks, it will need to supervise overseas firms accessing the UK market more directly to ensure they meet the required standards.

Mr Rathi also discusses some of the steps the FCA has taken in relation to international cooperation, partnerships and steps taken regarding ESG and LIBOR transition.

BMR: FCA CP21/9 on proposed decision to require synthetic LIBOR for six sterling and yen LIBOR settings

The FCA has published a consultation paper, CP21/19, on its proposed decision to use its powers under Article 23D(2) of the UK Benchmarks Regulation (UK BMR) to require the administrator of LIBOR, ICE Benchmark Administration (IBA), to change the way 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings (together, the six LIBOR settings) are determined beyond the end of 2021.  It has also published a related statement.

In March 2021, the FCA confirmed the dates the LIBOR panels will end, including the cessation of all sterling and Japanese yen LIBOR panels immediately after end-2021. In CP21/19, the FCA sets out its proposal to use its new UK BMR powers to require IBA to publish the six LIBOR settings on a changed methodology (that is, "synthetic") basis, effective immediately after end-2021.

The proposed changed methodology would reflect the FCA's intended technical specification in Chapter 2 of CP21/19. It would take effect immediately after end-2021. However, the FCA's Article 23D(2) decision is contingent on its other, future decisions under the UK BMR. It would apply if it decides, as it currently expects, to compel the continued publication of the six LIBOR settings by IBA under Article 21(3) of the UK BMR and to designate them as Article 23A benchmarks. The FCA is not consulting on these future decisions.

The FCA can only mandate publication for a maximum period of 12 months at a time. However, for Japanese yen LIBOR settings, the FCA is advising market participants now that it intends to compel only for one 12-month period until end-2022, after which point publication will cease. It is not consulting on this.

CP21/19 closes to responses on 27 August 2021. The FCA intends to communicate its final decision as soon as practicable in Q4 2021.

Where a synthetic LIBOR is implemented, the FCA must determine its permitted use. It is currently considering responses to its consultation on its proposed policy in this area before publishing its final policy framework. The FCA aims to consult further in Q3 2021 on a proposed decision on precisely what legacy use to allow for any synthetic sterling and yen LIBOR.

LIBOR transition: IA encourages transition of LIBOR-linked bond transition

The Investment Association (IA) has published a document calling for intensified collective efforts as the final stage of LIBOR-linked bond transition approaches.

The FCA and the PRA expect all legacy sterling LIBOR contracts, wherever possible, to have been amended by the end of Q3 2021 to include at least a contractually robust fall-back that takes effect on an appropriate event, or, preferably, an agreed conversion to a robust alternative reference rate. A large number of outstanding LIBOR-linked bonds have still not yet transitioned to a new rate, despite the deadline of 31 December 2021. The IA describes this as a matter of serious concern for the industry and for the buy-side in particular. The IA and its members believe broader market participants must therefore increase their efforts to ensure effective collaboration and successful transition. In particular, the document highlights the role of issuers, regulators, benchmark providers, third-party operational providers and banks and advisers in this regard.

Issuers and sell-side representatives consider it would be helpful to have a guide setting out the key features the buy-side expects a LIBOR transition consent solicitation to have. The aim is to ensure such proposals are acceptable to investment managers and to maximise the chance of them being successful. In particular, the IA encourages issuers and their sell-side advisers to incorporate certain common features. These are outlined on page 5 of the document in a LIBOR consent solicitation high-level framework for success. However, the IA notes that consent solicitations may not be suitable in all cases and other transition tools are available, including tender offers, bond repurchases or exchanges or the exercise of call options.

LIBOR transition: European Commission, EBA, ECB and ESMA on forthcoming cessation of all LIBOR settings

The European Commission has issued a joint statement with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) in its banking supervisory capacity (together, the authorities), strongly encouraging all market participants to cease their use of all LIBOR settings.

In the statement, the authorities note that LIBOR will shortly cease to be published. To ensure a smooth transition away from LIBOR, market participants are encouraged to actively reduce their exposure to LIBOR and not wait for the exercise by the Commission of its new powers to designate a replacement for LIBOR under Article 23b of the Benchmarks Regulation. The authorities therefore strongly encourage market participants to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposure to these interest rates by:

• stopping the use of the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021;
• limiting the use of any LIBOR setting published under a changed methodology (also known as synthetic LIBOR) only to contracts that are particularly difficult to amend before LIBOR's cessation (tough legacy contracts); and
• including robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.

The authorities will continue to closely monitor the situation and LIBOR exposures.
 

Review of Distance Marketing of Consumer Financial Services Directive: European Commission consultation

The European Commission is consulting on a review of the Distance Marketing of Consumer Financial Services Directive (DMD). The Commission explains that, since the DMD came into force in 2002, the retail financial sector has gone increasingly digital, with new products and actors in the market and new sales channels being used. Also, many of the DMD's substantial elements have been taken over by sectoral legislation that has been adopted since 2002.

The Commission has launched the consultation to gather views on the DMD from all relevant stakeholders. It particularly wants to hear from consumers, retail financial services providers and authorities responsible for supervising and enforcing the DMD. The Commission advises that it wants to make the DMD future proof.

Comments can be made on the DMD, by submitting a completed questionnaire, until 28 September 2021. Following the consultation, the Commission intends to publish its proposals in the first quarter of 2022.

ESG: EBA report on management and supervision of ESG risks for credit institutions and investment firms

On 23 June 2021, the EBA published a report and factsheet on the management and supervision of ESG risks for credit institutions and investment firms. The report is mandated under Article 98(8) of the Capital Requirements Directive (CRD) and Article 35 of the Investment Firms Directive (IFD). It provides a comprehensive proposal on how ESG factors and ESG risks should be included in the regulatory and supervisory framework for credit institutions and investment firms. The report focuses on the resilience of institutions to the potential financial impact of ESG risks across different time horizons. The EBA states that this requires careful assessments by institutions and supervisors who should take a comprehensive and forward-looking view, as well as early, proactive actions.

The EBA has submitted the report to the EU Parliament, the Council of the EU and the European Commission, which are invited to take it into consideration in the context of the renewed sustainable finance strategy and the review of the CRD and the Capital Requirements Regulation. The EBA will use the report and recommendations to develop guidelines on the management of ESG risks by institutions and an update of the supervisory review and evaluation process (SREP) guidelines to include ESG risks in the supervision of credit institutions.

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Authored by Yvonne Clapham