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Being better informedFS regulatory, accounting and audit bulletin bulletin
PwC FS Risk and Regulation Centre of Excellence
July 2014
In this month’s edition:
What firms should be doing now for MiFID II p4
Solvency II steams ahead p22
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 1
Welcome to this edition of “Beingbetter informed”, our monthly FSregulatory, accounting and auditbulletin, which aims to keep you up tospeed with significant developmentsand their implications across all thefinancial services sectors.
Macroprudential challenges toppedmany regulators’ agendas in June, withthe ESRB, the BoE and the EBA allissuing new reports. The regulators aretentatively confident that EU banks arecontinuing to slowly turn the corner asthe real economy improves. Theircapital levels are up, profits have largelystabilised (albeit from a low base) andthe sovereign debt crisis seems to havefizzled out. But both EU and nationalregulators remain concerned abouthouses prices - in particular Belgium,Sweden, Finland, France and the UKhave been exercising attention. Theybelieve that macroprudential tools canbe used to curb the excesses in realestate or other sectors, and protectbanks from another burst. These toolsare particularly important in theEurozone, where the ECB is firmly fixedon fighting deflationary pressures andnot necessarily national housingbubbles. On the other hand, the IMF ischallenging EU regulators’ views – it isless worried about housing bubbles andmore worried that maintaining ourhistorically low levels of inflation areunsustainable. Some stability hasclearly been achieved – now thequestion is how to manage it. HymanMinsky, the Keynesian economist,suggested that stability can bedestabilising. His basic thesis is that thedynamic forces of a capitalist economyare explosive and must be contained by
institutional ceilings and floors.Agreeing where those lines should bedrawn isn’t easy.
Will fresh leadership in the EU mean achange of direction? Italy took over theItalian Presidency of the Council inJune, setting out its priorities asfinancial crime, anti-money launderingand the banking union. EU leaders arestill recovering from their recentfraught negotiations over theappointment of Jean-Claude Juncker asPresident of the EU Commission, butthey will need to adopt a morecooperative approach to finalise keyfinancial reforms. With the new EPgetting underway at the beginning ofJuly, the new ECON Committee willhave an important role to play. It isexpected to be chaired by Italiansocialist, Roberto Gualtieri (S&D), withGerman MEPs Markus Ferber (EPP)and Peter Simon (S&D) as vice-chairs(expected to be elected on 14 July 2014in Strasbourg). The UK’s representationon ECON has fallen from seven to sixrepresentatives, even though ECON willhave 11 additional members.
MiFID II sprang into life in June whenboth the amended Directive and thenew Regulation were published in theOfficial Journal, confirming theimplementation date of 2 January 2017.It targets data and marketfragmentation problems identified
under the original Directive, while alsotaking on board many lessons from thefinancial crisis. It aims to substantiallyimprove investor protection: makingfinancial markets more transparent,addressing concerns about the adventof recent technology advances andensuring that all trading venues aresubject to some form of supervisoryoversight. Financial marketparticipants face a wave of enhancedsupervision and reporting requirementsto comply with the new regime—withsignificant costs in both time andmoney. Our feature article this monthlooks at what firms should be doingnow as the countdown to the newregime begins.
On the Solvency II front, we are fullsteam ahead. EIOPA has published ahefty set of guidelines on the Directive,covering Pillar 1, internal models,systems of governance, supervisoryreview process and equivalenceassessment of national supervisoryauthorities. In the UK, the PRA wroteto life and general insurance firmshighlighting concerns about theinternal model approval process underSolvency II. Not enough firms aremaking progress on their applicationsfor model approval, so the PRA isencouraging firms to meet with theirsupervisors as soon as practical to agreejoint plans to achieve modeldevelopment.
Executive summary
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 2
The ‘too big to fail’ agenda continues toadvance in the UK. Banks and businessassociations welcomed the UKGovernment’s decision to allow ring-fenced banks to offer simple derivativetransactions to customers. TheGovernment originally proposedprohibiting banks from offering basicrisk-management services to businesscustomers, which would have put themat a significant competitivedisadvantage to their internationalpeers. It has also eased the ability ofring-fenced banks to provide finance tosmaller financial institutions, providedthey obtain special permission from thePRA.
And more than a year after the FSAsplit, we are still learning more aboutour new regulators and theirsupervisory initiatives. In June, thePRA published updated us on itsapproach to banking and insurancesupervision. The PRA continues tomove away from a rules-based, processdriven, style of supervision to a morejudgement-based regime. In thisupdate, it has introduced newFundamental Rules (replacing theprevious Principles for Businesses), andadded a requirement for PRA regulatedfirms to prepare for orderly resolution.In this update, it also begins to grapplewith its new secondary objective topromote competition in financialmarkets.
As you can see, we’ve had a busy Juneon the risk and regulatory agenda,
which is likely to be followed by anequally busy July as regulators try toclear their plates ahead of summerholidays!
Laura Cox
FS Regulatory Centre of Excellence
020 7212 1579
@LauraCoxPwC
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 3
How to read this bulletin?
Review the Table of Contents therelevant Sector sections to identify thenews of interest. We recommend yougo directly to the topic/article ofinterest by clicking in the active linkswithin the table of contents.
ContentsExecutive summary 1
MiFID II: The monster comes to life 4
Cross sector announcements 7
Banking and capital markets 10
Asset management 15
Insurance 17
Monthly calendar 21
Glossary 26
Contacts 31
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 4
Walking alone on a dark, rainy night, you
glance back, alerted by a distant footfall.
Something large, dark and ominous seems
to be following you! It’s a long way behind
so you’re not too worried at first, but when
you look again it’s closing in fast. Here
comes MiFID II.
Don’t panic yet, but if you don’t start
considering your strategy for dealing with it,
you will – very soon – be in trouble. If
you’ve been ignoring MiFID II in favour of
other pressing regulatory issues, reconsider
your priorities. MiFID II is not a
compliance exercise: it will have far-
reaching and long-lasting impacts on the
way the financial markets in the EU operate.
You need to focus all your attention now to
assess how it will impact your business.
Without doubt, it will. If you start now, you
can optimise the 30 month implementation
period. That sounds a long time but if you
look at the extensive landscape MiFID II
covers, it definitely is not.
Entry into force
Policy makers published the Level 1 text in
the Official Journal of the European Union
on 12 June 2014. This step marked the end
of the beginning for MiFID II. We now
move on to the development of the detailed
implementing measures. The MiFID II
Directive and Regulation both came into
force on 2 July 2014. The new regime is now
law, but market participants do not have to
comply immediately.
When MiFID II came into force it triggered
a series of deadlines for developing
associated implementing measures, or
‘secondary legislation’. The full rules,
including the existing primary and the
further secondary legislation to be
developed, will apply to firms from 3
January 2017. To kick off the process,
ESMA issued over 800 pages of proposals in
its consultation paper (CP) and discussion
paper (DP) on 22 May 2014. MiFID II
requires the EC and ESMA to promulgate
over 100 secondary legislation measures -
there is still much for the policy makers to
do!
Implementing MiFID IIForward thinking firms have already begun
to assess the impact that MiFID II will have
on their businesses and to understand the
scale of the implementation challenge.
There are no definitive answers on many
issues as yet, although the feedback from
ESMA’s current consultations may fill in
some of the missing detail. But firms have
enough definite information now to make
an initial assessment.
The EC and ESMA must have detailed
secondary legislation in place by the start of
2016, twelve months before MiFID II comes
into effect. For those parts of the Directive
which must be transcribed into national
legislation, the implementation timeframe
is even tighter. National competent
authorities must write MiFID II into
national law by July 2016, leaving firms
only six months to implement changes.
To meet the 3 January 2017 deadline, firms
will have to begin implementing MiFID II
on the basis of partial information. When
the rules are finalised firms will be able to
fine tune their approach, but they must start
work by making assumptions on the basis of
the information available at the time.
Waiting for the implementing measures to
be finalised will be too late. Fans of legal
certainty will shudder at that thought. But
while draft rules may change, the process
for developing the secondary “Level 2”
legislation is sufficiently transparent that
firms can develop reasonable assumptions
about the final rules. That will enable them
to shape an implementation programme
that can adapt effectively in response to
future developments.
The Level 2 textThe Level 2 text comprises a mixture of
delegated acts and regulatory and
implementing technical standards. The EC
and ESMA respectively will draft these
measures. The process can appear
complicated, but firms need to understand
the steps in that process, the limited
opportunities for lobbying and when it is
MiFID II: The monster comes to life
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
F
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remaining five months of this year it will
finalise its advice, having digested
stakeholders’ comments.
The EC must submit the draft delegated acts
to the Council and the EP for approval no
later than 3 July 2015. They have three
months to approve or reject the delegated
acts, although they may extend that period
may be extended if either the Council or the
EP needs more time. Given the number and
complexity of the delegated acts, an
extension is likely. Policy makers must
publish the approved text in the Official
Journal no later than 3 January 2016 (18
months after MiFID II entered into force),
leaving Member States six months to
The regulatory technical standards must be
published in the Official Journal by 3
January 2016 with the delegated acts.
ESMA has to submit the implementing
technical standards to the EC by January
2016 for endorsement. Implementing
technical standards do not need approval
from the Council or EP.
The current ESMAconsultationsESMA’s CP and DP seek industry input on
draft rules for MiFID and outline ESMA’s
current thinking on many related issues.
The CP contains draft technical advice from
ESMA to the EC with regards to the
What is MiFID II?
The MiFID II Directive amends and repeals the original Markets in FinancialInstruments Directive (MiFID). As a Directive it will need to be ‘transposed’ intonational law in each Member State. It is accompanied by MiFIR which isautomatically binding on Member States.
The original MiFID aimed to create a single, pan-EU regime for firms providinginvestment services and undertaking investment activities. It standardised theauthorisation and operating regime for investment firms, set minimum levels ofinvestor protection and encouraged competition through a passporting regime thatenabled firms to offer services cross-border in the EU. It also opened up competition infinancial markets, removing the monopoly of incumbent national exchanges, byintroducing an authorisation and operating regime for Multilateral Trading Facilities(MTFs) to operate in parallel.
In MiFID II, legislators have tried to learn lessons from the financial crisis and fromdeficiencies identified in the original regime. It expands on the original MiFID topromote further competition in the EU, address data fragmentation, update marketstructures, increase transparency, enhance investor protection, improve governance
S regulatory, accounting and audit bulletin bulletin – July 2014 PwC 5
easonable for them to act on the draft
aterials.
elegated actselegated acts are the secondary legislation
ith political/policy implications beyond
imple technical issues.
he EC is empowered to draft delegated
cts. Essentially the two EU policy makers –
he Council and the EP - have delegated
pecific and clearly delineated competences
o the EC to formulate secondary legislation.
elegated acts have a political dimension,
ut generally the EC first mandates ESMA
o provide supporting technical advice as
nput into the process. The EC then
onsiders this advice when drafting the
delegated acts. The EC submits the draft
delegated acts to the Council and EP for
approval. Neither the Council nor the EP
can amend the EC proposed text, but they
can reject a delegated act in its entirety and
oblige the EC to redraft it. But doing so
would be an extreme measure to take, given
the amount of work that goes into a draft
delegated act, and the delays that would
entail.
The EC has mandated ESMA to provide
technical advice on MiFID II by 3 January
2015 (6 months after it entered into force).
In its consultation paper on 22 May 2014,
ESMA set out substantially advanced
proposals on which it is seeking feedback
from the industry by 1 August 2014. In the
incorporate the Directive’s requirements
into national law.
Technical standardsTechnical standards are just that –
secondary legislation that deals purely with
technical issues and does not involve any
interpretation of the Level 1 text.
ESMA drafts the technical standards
directly and submits them to the EC for
endorsement. There are two types technical
standard: regulatory and implementing
technical standards. ESMA must submit the
regulatory technical standards on MiFID II
to the EC for endorsement by 3 July 2015.
After the EC endorses them, the Council and
EP then subject them to scrutiny, in a
process similar to that for delegated acts. If
the Council and EP do not object, the
technical standards become law.
delegated acts. In this advice, ESMA
suggests a number of possible approaches,
provides a clear indication of its
preferences, and invites industry
stakeholders to comment. The EC is likely to
follow ESMA’s advice closely in the final
secondary legislation. But the EC is under
no obligation to adopt ESMA’s
recommendations if those
recommendations do not meet the wider
political objectives for MiFID II.
This ESMA consultation is the last
opportunity for firms to have formal input
into the delegated acts.
At over 530 pages, the DP is the larger of the
two papers and covers a raft of topics. Even
at that length, it does not cover every
required technical standard. ESMA is using
the DP to set out its preliminary thinking
in firms and enforce a more harmonised regulatory and supervisory regime.
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 6
and invites the industry to comment on the
direction of travel. Even so, ESMA’s
thinking is well advanced in many, if not
most of these areas. But in some key areas it
has stressed the need for market data to
support the final choices. The onus is on the
industry to provide evidence based
arguments where it disagrees with ESMA’s
suggested approach.
We expect ESMA to issue a further
consultation on the technical standards in
very late 2014 or early 2015. It has indicated
that it prefers to allow firms a full three
months to respond, but this cannot be
guaranteed.
ESMA may also consult further on the
implementing technical standards, perhaps
in Q2 2015.
What should firms be doingnow?The first step is to understand what MiFID
II means for your business. The potential
scale of impacts ranges from fundamentally
altering your business model to negligible.
No current MiFID firm will escape
unscathed, and even some firms which are
currently outside the scope of MiFID, such
as algorithmic traders or commodity market
participants, will find that MiFID II impacts
them. Gap analysis is a necessary first step.
After you understand the scale of change
required in your firm, you can begin to
anticipate the effort required and plan your
implementation.
From July 2015, both the delegated acts and
the regulatory technical standards will be in
their near final form – subject to rejection
by the Council or EP. Close observers of the
process will have a good idea what those
final draft rules are likely to require even
earlier. Given the shortage of time between
publication in the Official Journal and the
compliance date for MiFID II, firms will
need to be familiar with the draft rules to
support their implementation projects.
Finally, firms should resist the temptation
to assume that the 3 January 2017
compliance date is flexible. There is little or
no chance of that date slipping. The original
MiIFD was entirely a Directive, so it was
dependant on individual Member State
implementation. But MiFID II is in part a
Regulation, and much of the Level 2 text
will likewise be Regulation with direct effect
from the stated date.
By understanding the scale of the challenge
now and starting work early, you can ensure
that you stay one step ahead of the MiFID II
monster.
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 7
In this section:
Regulation 7
Capital, liquidity and funding 7
CRAs 7
Disclosure 7
Financial stability 8
Market infrastructure 8
Securities and Derivatives 8
SSM 8
Accounting 9
FRC 9
IAS 9
IFRIC 9
IFRS 9
Regulation
Capital, liquidity andfundingSetting a countercyclical buffer
The ESRB published guidance for setting
countercyclical buffer rates on 30 June
2014. It includes recommendations to help
designated authorities use the new
macroprudential instrument. Seven
principles provide guidance to designated
authorities for setting buffer rates and for
measuring and calculating the credit-to-
GDP gap.
National authorities have until 30 June
2016 to report to the ESRB, the Council and
the EC explaining the measures that they
have taken to comply with the
recommendations.
CRAsESMA hands down first CRA sanction
ESMA publically censured Standard &
Poor’s (S&P) for breaches of the CRA
Regulation on 3 June 2014. The censure
followed an investigation into an email
stating that S&P had downgraded France’s
sovereign debt, sent erroneously to
subscribers of S&P’s Global Credit Portal.
ESMA found that S&P failed to meet certain
organisational requirements set out in the
CRA Regulation, including internal control
mechanisms, effective control and
safeguard arrangements for information
processing systems and decision-making
procedures and organisational structures.
Finalising CRA disclosure andreporting
ESMA published final draft RTS under the
CRA3 Regulation on 24 June 2014, which
includes feedback from its February 2014
consultation. It clarifies the:
disclosure requirements on structured
finance instruments (SFI), focusing on
the information that the issuer,
originator and sponsor of a SFI must
publish
new European Rating Platform defining
the content and presentation of rating
information, including structure,
format, method and timing of reporting
that CRAs should submit to ESMA
content and format of periodic reporting
of the fees CRAs charge.
ESMA has submitted the draft RTS to the
EC for endorsement.
DisclosureSharing supervisory information
The EC published an implementing
regulation laying down ITS with regard to
information exchange between competent
authorities of home and host Member
Cross sector announcements
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 8
States in the Official Journal on 12 June
2014.
The EC establishes standard forms,
templates and procedures for the
information sharing requirements under
CRD IV. The common framework for
information sharing is designed to facilitate
the monitoring of banks that operate
through a branch or cross border, in one or
more Member States.
The regulation came into force 2 July
2014.
Financial stabilityESRB implements macroprudentialrecommendations
The ESRB published recommendations on
the macroprudential mandate of national
authorities on 25 June 2014, assessing
Member States’ implementation of the
ESRB’s macroprudential recommendations.
The ESRB is aiming to create consistent
national frameworks that complement the
EU level institutional framework for
macroprudential supervision.
The ESRB has been successful in
encouraging the establishment of
institutional competence at national level
and helping to ensure the effectiveness of
the macroprudential function. Most
Member States have implemented the
macroprudential recommendations through
legislation or other measures, with no
Member State justifying reasons for
inaction.
The ESRB also released a decision on the
extension of the deadline on the
macroprudential mandate of national
authorities on 30 June 2014. This decision
formalises the extension of the reporting
deadline that it gave to national authorities
on 28 February 2014.
EU economy slowly recovers
The ESRB published its June Risk
Dashboard on 25 July 2014. It believes
economic growth is slowly improving
despite large cross-country divergences.
Most countries’ current account deficits are
shrinking as production starts to pick up
and unemployment levels have fallen from
their nadir, but the ESRB still feels
countries’ levels of indebtedness are likely
to weigh on the recovery for some time to
come.
The ESRB noted that the share of central
bank funding has fallen across Europe
except for Cyprus, Hungary and Bulgaria. It
highlighted the wide regional divergences in
EU housing markets, suggesting house
prices are most overvalued in Belgium,
Sweden, Finland and France
Market infrastructureSay Hi to Global LEI
The FSB announced completion of the
approvals and filings required to establish
the Global Legal Entity Identifier
Foundation (GLEIF) on 30 June 2014. It
endorsed the appointment of its inaugural
Board of Directors and the appointment of
Gerard Hartsink as Chairman.
The FSB has committed to establishing a
three tier structure for the Global LEI
System in the 2012 G-20 agreements.
Creating the Regulatory Oversight
Committee was the first tier, established in
January 2013 with responsibility for the
governance and oversight of the system. The
GLEIF forms the second tier and will act as
the operational arm of the system. The
federated Local Operational Units, which
supply registration and other services, form
the third tier.
Securities and DerivativesTough task of identifying risk
IOSCO published Risk Identification and
Assessment Methodologies for Securities
Regulators on 26 June 2014, reviewing the
methods that securities regulators have
developed and implemented to identify and
deal with new risks. It acknowledged that
there is not a ‘one-size-fits-all’ approach to
securities regulation, suggesting that
regulators benefit from combining a series
of methods.
Securities regulators use the following
methods to identify risk:
risk committee
risk register
regulatory collaboration
risk-focused meetings
risk surveys
risk dashboard
research and publications
data analytics and econometrics.
IOSCO noted that identifying, analysing and
monitoring systemic risk is a new discipline
for securities regulators. Consequently it
expects the identification methods to evolve.
SSMIdentifying significant banks underSSM
The ECB published a list of supervised
entities notified of its intention to consider
them significant on 27 June 2014. It has
labelled 120 institutions as significant. It
removed twelve banks from the list and
added four more. The ECB removed banks
that had either reduced their balance sheets
or had niche characteristics and business
models more in line with non-banks. The
new joiners are part of international groups
- , three have ultimate parents outside the
Eurozone.
The ECB also published the rules of
procedure of the Supervisory Board of the
ECB in the Official Journal on 21 June 2014.
The rules of procedures entered into force
on 1 April 2014. The Supervisory Board is
responsible for planning and executing the
ECB’s supervisory tasks under SSM.
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 9
Accounting
FRCSharing your strategy
The FRC published guidance on producing
a strategic report on 3 June 2014. A firm
can give investors insights into how its
business is run and its strategic direction
through the strategic report. The FRC gave
an overview of the various components of
an annual report and considered where
firms should place information. The FRC
also encouraged companies to focus on
ensuring disclosures are material, as a key
step towards concise reporting. Our In brief
looks as the details.
Presenting true and fair statements
On 4 June 2014 the FRC published a
statement reconfirming that the
presentation of a true and fair view remains
a fundamental requirement of financial
reporting. The FRC used this update to
reflect developments in UK GAAP, the now
finalised EU audit legislation, the legal
advice that FRC published in October 2013,
and feedback from stakeholders seeking
clarity as to the primary requirement to
present a true and fair view. For further
details see our In brief.
IASIASB updates on Disclosure Initiative
The IASB issued an Update on the
Disclosure Initiative on 13 June 2014,
which is designed to improve the quality of
information provided in financial reports.
The IASB covers targeted improvements to
disclosure requirements (including
amendments to IAS 1, 'Presentation of
financial statements', reconciliation of
liabilities arising from financing activities
and accounting policies), and materiality.
IASB proposes consolidation exception
The IASB proposed amendments to IFRS 10
‘Consolidated Financial Statements’ and
IAS 28 ‘Investments in Associates and Joint
Ventures’ on 11 June 2014. It clarifies the
requirement for investment entities to
measure subsidiaries at fair value instead of
consolidating them. The IASB:
confirmed that the exemption from
presenting consolidated financial
statements continues to apply to
subsidiaries of an investment entity that
are themselves parent entities
clarified when an investment entity
parent should consolidate a subsidiary
that provides investment-related
services instead of measuring that
subsidiary at fair value
simplified the application of the equity
method for an entity that is not itself an
investment entity but that has an
interest in an associate that is an
investment entity.
The comment period ends on 15
September 2014. For further details see
our Straight away publication.
New transition resource groups begin
On 23 June 2014, the IASB created a
transition resource group to focus on the
new requirements for impairment of
financial instruments. The group will
support stakeholders by providing a
discussion forum on implementation issues
that may arise as a result of the new
impairment requirements under IFRS 9
'Financial Instruments' (2014), which is
expected to be issued later this year.
The IASB and the FASB also formed a joint
transition resource group to focus on
implementation issues associated with their
new revenue recognition standard on 3
June 2014.
IASB reviews conceptual framework
On 5 June 2014, the IASB published a staff
paper discussing how the tentative
decisions it made would affect the proposals
in the discussion paper 'A review of the
conceptual framework for financial
reporting'. The staff paper reflects the
IASB’s tentative decisions made through
April 2014.
IFRICEC endorses IFRIC 21 'Levies'
The EC endorsed IFRIC 21, 'Levies', an
interpretation of IAS 37, 'Provisions,
contingent liabilities and contingent assets'
on 13 June 2014. IAS 37 outlines criteria for
the recognition of a liability, including the
requirement for the entity to have a present
obligation as a result of a past event (an
obligating event). The EC clarified that the
obligating event which requires firms to pay
a levy is the activity described in the
relevant legislation that triggers the
payment of the levy. UK firms will use
IFRIC 21 to determine the basis of
provisioning under IFRS for financial
service levies including the FSCS levy, the
bank levy and other schemes such as the
Motor Insurance Bureau levy. Firms must
apply this interpretation for annual periods
starting on or after 1 January 2014. For
further details see our Straight away guide.
IFRSESMA assesses business combinationsdisclosures
ESMA published 'Review on the application
of accounting requirements for business
combinations in IFRS financial statements'
on 16 June 2014. It found that some
European companies provide good business
combination disclosures in their annual
financial statements, but certain areas need
improvements. ESMA based its report on a
sample of IFRS 3 disclosures in EU
companies’ 2012 annual IFRS financial
statements. It expects NCAs to take
appropriate enforcement actions where they
identify material breaches of the IFRS
requirements as part of the review, and it
will monitor NCA’s progress.
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 10
In this section:
Regulation 10
Annual reports 10
Capital, liquidity & funding 10
CRD IV 11
Financial stability 12
Other regulatory 12
Recovery and Resolution 12
Securities and Derivatives 13
Supervision 14
Regulation
Annual reportsESMA publishes its annual report
ESMA published its Annual Report 2013 on
13 June 2014. ESMA compared its work in
2013 against its role and objectives, which
for last year were: financial stability,
financial consumer protection, supervision,
single rulebook and convergence. It
identified improvements in all areas,
including the consumer protection elements
of MiFID II, its authorisation and
monitoring of CRAs, CCPs and TRs, and the
publication of RTS and ITS to achieve single
rulebooks under UCITS and AIFMD. ESMA
also restated its 2014 workplan.
Capital, liquidity & fundingGetting supervisors’ disclosures right
The EC published its final ITS with regard
to the format, structure, contents list and
annual publication date of the information
to be disclosed by competent authorities in
the Official Journal on 25 June 2014.
The EC details how supervisors should:
disclose information on the texts of laws,
regulations, administrative rules and
general guidance that they have adopted
for prudential regulation
provide information on how they
exercise options and discretions
available in EU law
publish information on the general
criteria and methodologies used for
supervisory review and evaluation
process
disclose aggregate statistical data on key
aspects of the implementation of the
prudential framework.
The EC stipulates that national supervisors
should complete the templates by 31
December each year and publish them by 31
July. The Implementing Regulation will
enter into force on 15 July 2014.
EBA tightens operational riskstandards
On 12 June 2014 the EBA proposed draft
RTS on the use of internal operational risk
models which apply to regulators rather
than directly to firms. It is seeking to
harmonise the approval process for
operational risk models by specifying the
aspects that regulators must examine before
allowing a firm to use a model. Under
proposed approach, national regulators
assess the quality of firms’ internal data, IT
systems and the terms of the internal self-
assessment of their operational risk models
before approval.
Banking and capital markets
Mark JamesPartner, Jersey office+44 (0) 1534 [email protected]
Nick VermeulenPartner, Guernsey office+44 (0) 14 81 [email protected]
James de VeulleDirector, Jersey office+44 (0) 1534 [email protected]
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The EBA welcomes comments until 12
September 2014. Once finalised, the RTS
will form part of the Single Rulebook on
Prudential Regulation in the EU.
EBA harmonises countercyclicaldisclosures
The EBA launched a consultation on draft
RTS on disclosure of information in
relation to the countercyclical capital
buffer on 26 June 2014. Institutions must
disclose the geographical distribution of
exposure value and own fund requirements
for relevant exposures. The EBA requires
institutions to disclose annually the amount
of their countercyclical capital buffer. In the
draft RTS the EBA propose two disclosure
templates for firms to complete.
The consultation closes on 27 September
2014. EBA must submit the draft RTS to
the Commission by 31 December 2014.
Firms are required to transition to
countercyclical buffer requirements over a
three year period starting 1 January 2016.
Proportionality in modelling creditrisk
The EBA launched a consultation on draft
RTS on the sequential implementation of
the IRB Approach and permanent partial
use under the Standardised Approach (SA)
on 26 June 2014. The EBA details a number
of CRR provisions which allow firms to use
both the IRB and the SA when modelling
credit risk RWAs.
The EBA proposes criteria that firms using
the IRB approach must meet if they want to
apply the SA to calculate capital
requirements. Firms can use the SA to
model their exposures:
to central governments and central
banks, where the number of material
counterparties is limited and it would be
unduly burdensome to implement a
rating system for these counterparties
to other firms, where the number of
material counterparties is limited and it
would be unduly burdensome to
implement a rating system for these
counterparties
in non-significant business units, as well
as exposures classes or types of
exposures that are immaterial in terms
of size and perceived risk profile.
The consultation closes on 26 September
2014. The EBA must submit the draft RTS
to the EC by 31 December 2014.
IT problems for EBA
The EBA revised its list of validation rules
in the supervisory reporting ITS again on 24
July 2014. It found that several validation
rules were incorrect or caused IT problems.
The EBA has deactivated some of these
rules and updated the remaining validation
rule files on its website under ‘Related
documents’ in the Supervisory Reporting
section.
The EBA informed national supervisors that
they should not validate data submitted
against the set of deactivated rules.
Achieving RWA consistency
The EBA published its second report on
consistency of RWAs for residential
mortgages on 11 June 2014, It investigating
why banks apply different risk weights to
similar pools of mortgage exposures. It
found that banks are putting varying levels
of dependence on different economic
variables when estimating borrowers’
default rates and creditworthiness.
The EBA noted that national regulators are
currently examining the consistency of
banks’ internal models. It plans to wait for
the outcome of these reviews before
determining what regulatory action it needs
to take.
CRD IVEnriching Pillar 3
The BCBS consulted on enhanced Pillar 3
disclosure in its Review of the Pillar 3
disclosure requirements published 26 June
2014. The Committee feels the existing
requirements have been inadequate,
particularly those related to RWAs. Banks
aren’t disclosing information consistently –
both in form and level of granularity..
The BCBS’ proposed new standards
promote greater consistency in banks’ risk
disclosure, and in their risk measurement
and management. It wants market
participants to be able to compare banks'
disclosed RWAs and so assess more
effectively a bank's overall capital adequacy.
In particular, the BCBS disclosure
requirements respond to concerns about the
opacity of internal model-based approaches
to determining RWAs. In most cases, banks
aren’t required to disclose additional
information but instead present
requirements in a more detailed and
prescriptive way to make them easier to
compare.
The Committee welcomes comments on this
consultative document by 26 September
2014.
Disclosing encumbered assets
The EBA is pushing for more disclosure of
encumbered and unencumbered assets in
final CRR guidelines, published 27 June
2014. These guidelines are the EBA’s first
step towards implementing a harmonised
disclosure framework of asset encumbrance
in the EU.
The EBA provided three templates for
completion on encumbrance. It believes that
disclosing asset encumbrance increases
market discipline by helping market
participants better understand the liquidity
and solvency profiles of institutions.
National supervisors should incorporate the
guidelines into their supervisory procedures
within six months of publication. The EBA
plans to review the guidelines after one year
with a view to developing binding technical
standards on more extensive disclosure by
2016.
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EBA consults on disclosurerequirements
The EBA proposed new regulatory
disclosures for EU banks in a Consultation
Paper on the materiality, proprietary and
confidentiality and on disclosure frequency
on 13 June 2014. The EBA permits
institutions to waive the disclosure of
requirements that are immaterial,
proprietary or confidential. But its
monitoring of disclosures since 2009 has
shown significant variations in disclosure
standards, reflecting different
interpretations of the three concepts and
raising concerns about possible incorrect
use of the waivers. The EBA therefore aims
to bring consistency and certainty to the
regime through new common waiver
frameworks. The common frameworks
cover the:
process and criteria that institutions
should follow when considering a
disclosure waiver and their need to
disclose more frequently than annually
information that institutions should
provide when using waivers or choosing
to disclose more frequently.
Where a bank decides not to disclose due to
materiality, proprietary or confidentiality,
the EBA expects senior management to
make the decision. The bank should also
assess the need to provide this information
more frequently when meeting specific
criteria.
The EBA provides no common materiality
threshold but insists that readers should be
able to understand the indicators used in a
bank’s waiver assessment. Similarly, it
allows firms to decide on frequency of
disclosure but specify a list of information
that ought to be disclosed more than
annually.
The consultation closes 13 September
2014 and the guidelines are expected to be
finalised before 31 December 2014.
Assessing pension fund volatility
The EBA published a report on the impact
on the volatility of own funds of the revised
IAS 19 and the deduction of defined pension
assets from own funds on 24 June 2014. It
considers how the CRR requirement to
deduct defined benefit (DB) pension fund
assets from capital will impact firms’ capital
resources. It also analyses whether frequent
changes in the value of pension fund assets
could lead to volatility in capital levels.
The EBA concludes that the IAS19 and CRR
changes only create limited volatility of own
funds. Own funds volatility is driven by the
existence of DB plans, their characteristics
and size compared to the capital position of
the institution. The EBA also highlights that
during economic downturns own funds may
be adversely impacted by the increase of
actuarial losses, leading to an increase in DB
pension fund deficits.
The EBA’s assessment was informed by a
discussion paper which it published on 17
February 2014.
Financial stabilityClouds still hang over EU banks
The EBA published a Risk Assessment of the
European Banking System on 25 June
2014. Echoing market sentiment it reports
strengthening confidence in the European
banking system but concedes the recovery
remains weak and fragile. European banks
have benefited from favourable market
conditions by boosting their capital levels
ahead of the forthcoming stress test and the
AQR exercise. At December 2013, the
weighted average tier 1 ratio for the largest
European banks stood at 11.6%.
Other regulatoryIOSCO finds macroprudential risks
IOSCO published its market survey on
market trends on 17 June 2014. The survey
highlights the growing leverage in securities
markets, the impact of cross-border capital
flows on emerging markets, financial risk
disclosure, collateral management, and
potential counterparty risk in central
clearing houses.
IOSCO surveyed its Expert Network and
regulatory members on risks to, and within,
the global securities markets. It was
particularly concerned with
Macroprudential issues, especially banking
vulnerabilities and capital flows. IOSCO
noted differing responses by organisational
type: regulators see risk emanating from
illegal conduct, corporate governance,
financial risk disclosure and benchmarking
issues, while market participants are more
concerned with risk attached to the hunt for
yield, resolution and resolvability plans,
CCPs and market fragmentation.
Participants saw securities markets as likely
to transmit and/or amplify shocks rather
than as a source of risk. Compared to the
2012 survey, they no longer cited sovereign
debt and the global economic slowdown as
prominent risks. But they have consistently
mentioned three risks in the past three
years: regulatory uncertainty, banking
vulnerabilities and capital flows.
Recovery and ResolutionBasel deals with weak banks
The BCBS issued draft Supervisory
guidelines for identifying and dealing with
weak banks on 18 June 2014. In 2002 BCBS
provided a toolkit for supervisory
authorities to deal with weak banks in a
timely and effective manner. This 2014
revision addresses the significant
developments in global financial markets
and regulatory landscape since the financial
crisis.
Key changes include:
emphasising the need for early
intervention and the use of recovery and
resolution tools, and updating
supervisory communication policies for
distressed banks
providing further guidance for
improving supervisory processes, such
as incorporating macroprudential
assessments, stress testing and business
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model analysis, and reinforcing the
importance of sound corporate
governance at banks
highlighting the issues of liquidity
shortfalls, excessive concentrations,
misaligned compensation and
inadequate risk management
expanding guidelines for information-
sharing and cooperation among relevant
authorities.
Stefan Ingves, Chairman of the BCBS, said
that weak banks are a “worldwide
phenomenon” and “early identification and
intervention by supervisors is critical in
preventing an escalation of problems”.
The consultation closes on 19 September
2014.
EC fills the resolution pot
The EC launched a Public consultation on
the contributions of credit institutions to
resolution financing arrangements under
the BRRD and the SRM on 20 June 2014.
The EC is assessing the annual amount that
individual credit institutions will have to
pay to their respective resolution funds.
While broadly defined by criteria set out in
the BRRD (based on metrics such as size
and risk profile of the firm), the criteria
have to be specified in greater detail in a
delegated act.
The EC is seeking answers to the following
questions:
what should be the level at which the
contributions of groups are calculated:
individual or consolidated level?
should small credit institutions receive a
discount to what they would pay on the
basis of an industry wide formula?
should the flat or the risk-adjusted
element of contribution be the most
prominent?
what should be the respective weight of
each risk pillar, as set out in the BRRD,
and of each risk indicator within each
risk pillar?
The consultation closes on 14 July 2014.
The EC intends to finalise the necessary
delegated acts by September 2014, ahead of
the implementation of SSM.
BRRD enters into force
The text of BRRD was published in the
Official Journal on 12 June 2014, triggering
the introduction of a pan-European
framework for bank recovery and resolution
from 2 July 2014.
Member States must adopt and publish the
measures transposing the BRRD into
national law by 31 December 2014 and must
apply those measures by 1 January 2015.
Provisions relating to the bail-in tool will
apply from 1 January 2016.
Securities and DerivativesMiFID II and MAR in the books
The Council and EP published the final text
of four key pieces of legislation in the
Official Journal on 12 June 2014, which
became law on 2 July:
Market Abuse Regulation (MAR)
Criminal Sanctions for Market Abuse
Directive (CSMAD)
Recast Markets in Financial
instruments Directive (MiFID II)
Markets in Financial Instruments
Regulation (MiFIR).
Although each piece of legislation is now in
force, firms do not have to comply with the
new rules immediately. They have to comply
with most of MAR from 3 July 2016, but
have until 3 January 2017 before having to
comply with MiFID II, MiFIR and those
sections of MAR which depend on MiFID II.
The EC and ESMA have until early January
2016 to develop much of the supporting
secondary legislation providing detailed
requirements. Whilst firms should engage
with the ongoing consultation process for
the secondary rules, they should not wait for
final rules before beginning implementation
work.
Our feature article this month provides
further detail on the secondary legislation
process and implementation timetable for
the new MiFID regime.
Guidance on EMIR valuationreporting
ESMA updated its EMIR Q&A website on
23 June 2014, which provides new guidance
on reporting contract and collateral
valuations. Entities subject to EMIR
clearing and non-centrally cleared margin
obligations need to report valuations from
11 August 2014.
ESMA clarified that counterparties should:
report the collateral that a counterparty
posts, not receives
use the end of day settlement price of
the underlying market or CCP for mark-
to-market valuation, if available - if that
is not available then they should use the
closing mid-price
rely on a reporting party's valuation for
delegated reporting
value non-cash collateral at the time of
posting, not the time of receipt
report trades which construct complex
products as separate trades, wherever
possible.
ESMA also outlined scenarios and
terminology applicable to the
collateralisation description field in the
update. Finally, it confirmed that firms do
not need to report life cycle events for
period 16 August 2012 to 12 February 2014.
ESMA stated that it does not plan to issue
further guidance on EMIR reporting.
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SupervisionBasel Committee encouragessupervisory consistency
The BCBS published Principles for effective
supervisory colleges on 26 June 2014, to
encourage a consistent approach for
supervisory colleges. It sees international
supervisory colleges as increasingly
important in the supervision of banking
groups that operate across national borders.
The Principles replace the Good practice
principles on supervisory colleges
published in October 2010.
The BCBS aims to promote and strengthen
the operation of colleges and revised the
Principles to reflect observations on best
practice. It underscores the importance of
continuous collaboration and information-
sharing outside the formal college meetings.
The BCBS incorporates recent supervisory
developments such as the formation of
crisis management groups and the greater
focus on macroprudential considerations.
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Chris StuartDirector, Jersey office+44 (0) 1534 [email protected]
Mary BruenAssistant Director, Jersey+44 (0) 1534 [email protected]
In this section:
Regulation 15
AIFMD 15
Consumer protection 15
Credit ratings 16
Regulation
AIFMDEC determines open and closed funds
The EC published a Delegated Regulation
with regard to RTS determining types of
AIFMs in the Official Journal on 24 June
2014. The standards were delayed after the
EC asked ESMA to review the contents to
ensure alignment with the AIFMD regime.
The EC determined that an open-ended
fund is one in which the shares can be
purchased or redeemed prior to the AIF’s
liquidation or wind-down, in line with its
prospectus or offering documents. An AIF is
considered close-ended when shares cannot
be redeemed or purchased in this way. An
AIFM can manage both open-ended and
closed-ended funds at the same time.
AIFMD applies differently to open-ended
and closed-funds, and managers must use
the definition in the RTS to assess which
category their funds fall into.
The RTS enter into force on 14 July 2014.
Update on MoUs
ESMA published an update on which
Member States comply or intend to comply
with the AIFMD MoUs that ESMA
negotiated with other regulators on 20 June
2014. ESMA agreed MoUs with a number of
non-EU countries, including the Cayman
Islands, US and Japan. But individual EU
national regulators still needed to sign-up to
the MoUs to make them official.
ESMA revealed that only Slovenia has
stated it will not comply with the MoUs.
Slovenia has not yet implemented AIFMD
or decided which national regulator will be
responsible for implementing AIFMD. All
other Member States confirmed that they
will comply.
Consumer protectionLaw makers strengthen depositorprotection
The EP and Council published the recast
Deposit Guarantee Schemes Directive
(DGSD) in the Official Journal on 12 June
2014. They revised the DGSD to introduce
pre-funding of the schemes and a
requirement for funds to cover 0.8% of the
value of eligible deposits. A Member State
can apply to the EC to reduce this coverage
to 0.5% if its domestic banking market is
significantly concentrated.
The EP and Council amended the definition
of eligible deposits. They have extended the
guarantee to include temporary ‘high
Asset management
John LuffPartner, Guernsey office+44 (0) 1481 [email protected]
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balances’ in excess of the existing €100,000
cap when linked to specific life-events (e.g.
death or marriage), or the proceeds of
property disposals. The EP and Council
require Member States to distribute
compensation within 7 days of bank failure
but allow them until 2024 to reach this
standard.
Credit ratingsIOSCO issues credit ratingrecommendations
IOSCO published Consultation report:
good practices on reducing reliance on
CRAs in asset management on 4 June 2014.
IOSCO is consulting on its implementation
of the FSB Principles for reducing reliance
on CRA ratings for asset managers and
investment funds.
Asset managers use ratings produced by
CRAs to assess the credit worthiness of a
financial instrument. Credit ratings given to
some investment funds (e.g. MMFs) also
impact investor decision-making. Investors
may use credit ratings to define acceptable
levels of risk when investing in a fund or
through a discretionary mandate. IOSCO
would like asset managers to assess credit
risks themselves and use CRA ratings to
form part of this assessment rather than
relying solely on CRAs for due diligence.
IOSCO also identifies additional good
practice which regulators and asset
managers are encouraged to follow,
including:
publishing information on how the asset
manager internally assesses credit
quality of an investment and how they
use external ratings
understanding a CRA’s methodology
and limitations when using external
ratings
using a wide range of quality parameters
when assessing the eligibility of
collateral
implementing internal processes to deal
with any external credit rating
downgrades that might not involve an
immediate fire sale.
In the EU, AIFMs and UCITS management
companies will be subject to similar
requirements from 21 December 2014.
From then,, they must not solely or
mechanistically rely on a CRA’s rating in
their decision-making process.
The consultation closes to comments on 6
September 2014.
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In this section:
Regulation 17
Consumer protection 17
Financial stability 17
Fraud 18
Other 18
Solvency II 18
Supervision 19
Accounting 19
IFRS 19
PwC Publications 20
Regulation
Consumer protectionPPI progress recognised
EIOPA summarised Member State’s
responses to its opinion on PPI in a report
published 25 June 2014. It concluded that
the opinion had triggered significant
developments in some countries although
many developments are still in the early
stages. EIOPA’s opinion aimed to draw
attention to consumer protection issues
regarding PPI products. It analysed detailed
information on existing national practises
and summarised experience from eight
Member States. EIOPA does not intend to
take any immediate follow-up action but
will keep this option open.
Financial stabilityIAIS updates GSIIs capitalrequirement
The IAIS published its June issue of the
IAIS Newsletter on 17 June 2014. The IAIS
includes a progress update on the next Basic
Capital Requirements (BCR) for G-SIIs
consultation paper, expected to be issued in
early July.
The IAIS is developing three global
standards: the BCR, the global insurance
capital standard (ICS) and higher loss
absorbency (HLA). The BCR will apply to all
group activities, including non-insurance
subsidiaries as the foundation of the HLA
requirements. The IAIS is still developing
the final determination of capital required
for the BCR but it envisions that six factors
will be applied to six exposures, reflecting
the main categories of activity:
traditional life insurance
traditional non-life insurance
assets
asset-liability matching
non-traditional insurance
non-insurance.
The IAIS plans to develop the HLA
requirements once the BCR is finalised and
address additional capital requirements to
apply to G-SIIs, reflecting their systemic
importance in the international financial
system. It expects to complete this work by
the end of 2015.
The IAIS wants to develop a risk-based
group-wide global ICS by end 2016.
Internationally active insurance groups will
have to comply with this standard from
2019 after refinement and final calibration
Insurance
Evelyn BradyPartner, Guernsey office+44 (0) 1481 [email protected]
Adrian PeacegoodDirector, Guernsey office+44 (0) 1481 [email protected]
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in 2017 and 2018. The IAIS intends to use
the work on the BCR to help develop the
ICS.
Insurance risks remain subdued
EIOPA published its June 2014 Risk
Dashboard on 17 June 2014 following its
quarterly assessment of the main systemic
risks and vulnerabilities faced by the
European insurance industry. It found that
the risk environment for the insurance
sector had not changed much since its
March 2014 review. Evidence suggests that
the ongoing moderate recovery continued in
Q1 2014.
FraudInsurance Fraud Bureau consults onstrategy
The Insurance Fraud Bureau (IFB)
launched a consultation on new strategy on
11 June 2014. The IFB calls on the insurance
industry to help shape its future by
considering its expansion into new product
lines and its role in developing an industry-
wide intelligence management framework.
The IFB invites industry stakeholders and
the counter-fraud community to complete a
survey on its website to help direct this new
strategy.
OtherInsurers adopt LEIs
EIOPA proposed guidelines for the use of
LEIs on 27 June 2014. The LEI is designed
to enable risk managers and regulators to
identify parties to financial transactions
instantly and precisely. The international
insurance community has recognised that
the lack of a commonly used identifier has a
negative impact on the quality of data
collection, storage and dissemination,
making these processes costly and less
efficient for national and international
supervisors. EIOPA wants to facilitate the
use of LEIs for (re)insurance undertakings
and for institutions for occupational
retirement provision. The consultation
period ends on 29 August 2014.
EBA sets PII minima
The EBA set an insurance claim minimum
in its final draft RTS on professional
indemnity insurance guarantees for
mortgage credit intermediaries on 24 June
2014. The EBA specified two monetary
floors for professional indemnity insurance:
for each individual claim at €460,000 and
an aggregate amount per calendar year for
all claims at €750,000.
The EBA has submitted these RTS to the EC
for endorsement, fulfilling its
implementation requirement from the
Residential Mortgage Credit Directive. It
plans to review the minima before 21 March
2018.
Solvency IIEIOPA publishes Solvency IIGuidelines
EIOPA published a Consultation on Set 1 of
the Solvency II Guidelines on 2 June 2014.
EIOPA drafts guidelines as non-binding
instruments and addresses them to National
Competent Authorities (NCAs) or financial
institutions, with the aim of ensuring the
common, uniform and consistent
application of EU law and consistent,
efficient and effective supervisory practices.
The consultation comprises five CPs on Set 1
of the Solvency II guidelines:
1. Pillar 1, including guidelines ontechnical provisions, own funds, theStandard Formula (SCR) andGroup Solvency
2. Internal Models
3. System of governance and ownrisks and solvency assessment(ORSA)
4. Supervisory Review Process
5. Methodology for EquivalenceAssessment of National SupervisoryAuthorities.
EIOPA considered the impact of all five CPs
in a separate Impact Assessment published
at the same time. It allows stakeholders to
assess the costs, links between some issues
and to understand the common basis of the
impact assessment, in particular the choice
of the baseline.
EIOPA also published an Annex to EIOPA
consultation on the Guidelines for Solvency
II. This annex gives non-official details of
the draft Delegated Act articles
implementing the Solvency II Directive,
relating to the CPs. The EC has not yet
formally adopted these Delegated Acts. This
is not part of the consultation but is merely
for information purposes.
The comment period ends on 29 August
2014. EIOPA is due to issue the final drafts
in November 2014, with the Guidelines
taking effect from 1 April 2015.
Benefiting firms and consumers
Gabriel Bernardino, Chairman of EIOPA,
considered ‘The future of life insurance,
Solvency II and investment strategies’, in
his foreword for the 3 June 2014
Handelsblatt Newsletter. He believes that
life insurers will benefit from implementing
the new risk-based framework under
Solvency II. But until then, he encourages
insurers to deal seriously with the issues
caused by the low interest rate environment
and to actively implement measures to
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mitigate possible worst case scenarios. He
also reminded insurers that ‘the consumer
should be at the heart of the provider’s
business, not the other way round.’
He also spoke on how ‘Smarter regulation
will benefit consumers’ at the AMICE
Congress Nice on 5 June 2014, emphasising
that mutuals will benefit from the principle
of proportionality by achieving the same
outcomes with a less burdensome solution.
Bernardino believes Solvency II will benefit
consumers, particularly through insurers
offering more sustainable promises and
products, more accurate and fair pricing,
and more transparent disclosure.
EIOPA wants to achieve these results for
consumers by implementing a system of
smarter regulation rather than making
additional unnecessary rules. Bernardino
asserted that smarter regulation takes
consumer behaviour into account,
recognises the limitations and biases in
consumer decision making and reflects
anticipated problems, rather than only
addressing past problems.
SupervisionIAIS encourages supervisoryconsistency
The IAIS published an Application paper on
supervisory colleges on 25 June 2014, to
encourage a consistent approach across
supervisory colleges. These colleges are
becoming increasingly important in the
supervision of insurance groups that
operate cross-border. The IAIS found that
insurance supervisors have different views
on the role of supervisory colleges and their
part in them. The IAIS aims to help
insurance supervisors learn from each
other’s experiences and it provides
examples of good practice to encourage a
common approach. The comment period
ends 25 July 2014.
EIOPA publishes Annual Report
EIOPA published its Annual Report 2013
on 13 June 2014, outlining its main
achievements in meeting its strategic
objectives. EIOPA’s 2013 objectives centred
on enhanced consumer protection,
development of sound regulation, improved
supervision and timely identification and
management of risks to financial stability.
Accounting
IFRSIASB discusses exposure draftcontracts
At its 17-19 June 2014 meeting the IASB
continued its discussions on the 2013
Exposure Draft Insurance Contracts. At the
meeting the IASB:
confirmed the principle that the
discount rates which are used to adjust
the cash flows in an insurance contract
for the time value of money should be
consistent with observable current
market prices for instruments with
similar cash flows
tentatively decided that an entity should
recognise in its profit or loss any
changes in cash flow estimates for a
reinsurance contract where the profit or
loss arises as a result of changes in
estimated cash flows for an underlying
direct insurance contract that are
recognised immediately in profit or loss
clarified that the proposed insurance
contracts standard is intended to
provide principles for the measurement
of an individual insurance contract, but
that an entity could aggregate insurance
contracts when applying the standard
provided that it meets that objective
agreed to change the definition of a
portfolio of insurance contracts to:
“insurance contracts that provide
coverage for similar risks and are
managed together as a single pool”
clarified that, in accordance with IAS 8,
an entity should select and apply its
accounting policies consistently for
similar contracts, considering the
portfolio in which the contract is
included and the related assets that the
entity holds.
continued discussions on participating
contracts, but didn’t decide whether or
not the contractual service margin
(CSM) should be unlocked for the
insurer’s share or the acceptance of the
‘book yield’ approach (this month’s
meeting was only to provide the staff
with direction for the mechanics of a
potential model - this model will then be
used to support future conceptual
discussions and possibly future Board
decisions) .
tentatively decided that if it were to
require an entity to adjust the CSM for
the insurer’s share of the underlying
items on the grounds that the insurer’s
share represents an implicit
management fee, then an implicit asset
management fee should be considered to
exist only when (i) the returns to be
passed to the policyholder arise from the
underlying items the entity holds, (ii)
the entity must retain a minimum
amount (either fixed or determinable)
and (iii) the policyholder will receive a
substantial share of the total return on
underlying items
tentatively decided that if it were to
require an entity to apply a book yield
approach for determining interest
expense presented in profit or loss, this
approach is only appropriate when the
returns passed to the policyholder arise
Executive summary MiFID II: Themonster comes tolife
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from the underlying items the entity
holds and the policyholder will receive a
substantial share of the total return on
underlying items.
The IASB’s June Insurance Contracts
podcast provides a summary of the meeting.
See our Insurance Alert - IASB meeting on
17 June 2014 for a summary of the tentative
decisions from the meeting and preliminary
discussion on contracts with participating
features.
The IASB published an updated summary
of the effect of redeliberations on the ED
indicating where and how the proposals in
the 2013 ED would change as a result of the
tentative decisions to date and an updated
insurance contracts project overview in
June. The IASB will continue its re-
deliberations on the Insurance Contracts
project at the July 2014 meeting.
PwC PublicationsIFRS News
In its June 2014 edition of IFRS News, the
IFRS looks at:
IFRS 15, Revenue from Contracts with
Customers - a change in mindset?
IFRS 11, Joint Arrangements - how did
we get here?
Cannon Street Press
IAS 16 and IAS 38 amendments
Leasing re-deliberations
Conceptual Frameworkdiscussions
IASB equity accounting researchproject
IC discusses uncertain taxpositions
questions and answers
‘Q’ is for qualitative disclosures about
risk.
FRS 101 illustrative financialstatements
We have published FRS 101 illustrative
financial statements with examples of
disclosures under FRS 101. We have
included some additional disclosures to
assist users. But these illustrative financial
statements do not include all possible
disclosures and where necessary preparers
will need to refer to the standard itself. We
have not included an FRS 101 transition
statement but have provided an appendix
summarising key differences that entities
adopting FRS 101 from IFRS must apply to
comply with the Companies Act
requirements.
Revenue from contracts withcustomers
We published our In depth guide ‘Revenue
from contracts with customers’ on 13 June
2014. We consider the implications of the
converged standard on the recognition of
revenue from contracts with customers
issued by the IASB and FASB on 28 May
2014. The IASB and FASB standard will
improve firms’ reporting of revenue and
improve readers’ ability to compare the top
line in financial statements globally. Almost
all entities will be affected to some extent by
the significant increase in required
disclosures. But the changes extend beyond
disclosures, so firms’ responses will vary
depending on industry and current
accounting practices. Entities will need to
consider changes that might be necessary to
IT systems, processes, and internal controls
to capture new data and address changes in
financial reporting.
Firms using IFRS will be required to apply
the revenue standard for reporting periods
beginning on or after 1 January 2017,
subject to EU endorsement. Public
companies using US GAAP will be required
to apply it for annual reporting periods
from15 December 2016 (including interim
reporting periods therein).
The Digital Life Insurer
Our paper ‘The Digital Life Insurer – The
growth potential of digital in a changing
landscape’ considers the impact that digital
is having on the UK life and pensions sector
and what insurers need to do to meet the
challenges ahead.
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Open consultations
Closing datefor responses
Paper Institution
25/07/14 Consultation a draft application paper on supervisory colleges IAIS
25/07/14 BCBS-IOSCO Task Force conducts a survey on securitisation markets IOSCO
08/08/14 Basic Capital Requirements for Global Systemically Important Insurers IAIS
09/08/14 EBA consults on tests, reviews and exercises that may lead to public support measures EBA
14/08/14 Consultation Paper: The Financial Policy Committee’s review of the leverage ratio BoE
18/08/14 Consultation paper Clearing Obligation no1 IRS ESMA
22/08/14 Recovering the costs of administering the regulatory gateway through application fees FCA
26/08/14 EBA consults on technical standards on the permanent and temporary uses of the IRB approach EBA
27/08/14 EBA consults on RTS on counter cyclical buffer disclosure EBA
29/08/14 EIOPA consults on the proposal for Guidelines on the use of the Legal Entity Identifier EIOPA
31/08/14 Implementing the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending PRA
01/09/14 British credit unions at 50: call for evidence HMT
Monthly calendar
Executive summary MiFID II: Themonster comes tolife
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Closing datefor responses
Paper Institution
02/09/14 Review of the Money Advice Service: call for evidence HMT
05/09/14 Project Innovate: call for input FCA
12/09/14 Thematic Peer Review on Supervisory Frameworks and Approaches to SIFIs - Questionnaire for national authorities FSB
12/09/14 FSB Peer Review on Supervisory Frameworks and Approaches to SIFIs - Questionnaire for G-SIBs FSB
12/09/14 Consultation on the potential economic consequences of country-by-country reporting under Directive 2013/36/EU (CapitalRequirements Directive or CRD)
EC
18/09/14 Consultation paper Clearing Obligation no2 CDS ESMA
19/09/14 Tax-advantaged venture capital schemes: ensuring continued support for small and growing businesses HMT
26/09/14 Review of the Pillar 3 disclosure requirements BCBS
30/09/14 FCA discussion paper on fairness of changes to mortgage contracts FCA
03/10/14 Consultation paper on the implementing technical standards on joint decisions on prudential requirements EBA
07/10/14 EBA consults on draft guidelines for common supervisory procedures and methodologies EBA
09/10/14 Wholesale sector competition review FCA
09/10/14 Consultation Paper: Draft Regulatory Technical Standards on the content of resolution plans and the assessment of resolvability EBA
09/10/14 Consultation Paper: Draft Guidelines on the specification of measures to reduce or remove impediments to resolvability and thecircumstances in which each measure may be applied
EBA
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Banking and capitalmarkets
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FS regulatory, accounting and audit bulletin bulletin – July 2014 PwC 23
Closing datefor responses
Paper Institution
10/10/14 DP14/3 - The use of dealing commission regime: Feedback on our thematic supervisory review and policy debate on the marketfor research
FCA
10/10/14 GC14/3 Retail Investment Advice: Clarifying the boundaries and exploring the barriers to market development FCA
Forthcoming publications in 2014
Date Topic Type Institution
Capital and Liquidity
TBD 2014 A new capital regime for self-invested personal pension (SIPP) operators Policy statement FCA
Client Money
TBD 2014 Review of the client money rules for insurance intermediaries Policy statement FCA
TBD 2014 Regulated client money regime for consumer credit companies Consultation paper FCA
Consumer protection
TBD 2014 National Depositor Preference and UK depositors Policy statement PRA
TBD 2014 Mortgage Market Review: Arrears and Approved Persons – final rules Policy statement FCA
Financial crime, security and market abuse
Q4 2014 Market Abuse Review Technical advice ESMA
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Banking and capitalmarkets
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Date Topic Type Institution
Insurance
TBD 2014 Institutions for Occupational Retirement Provision Legislative proposals EC
TBD 2014 Advice or technical standards for IMD2 Technical advice or technical standards EIOPA
Securities and markets
Q4 2014 Harmonised transaction reporting Guidelines ESMA
Q4 2014 Exchange-traded derivatives reporting Guidelines ESMA
Q4 2014 Technical standards following the revision of MiFID (MiFID II andMiFIR)
Technical standards ESMA
Q4 2014 Transparency Directive and Prospectus regime Technical standards ESMA
Q4 2014 Credit Rating Agencies Regulation Guidelines ESMA
TBD 2014 Securities Law Directive Legislative proposals EC
TBD 2014 Revision of the Transparency Directive Discussion papers ESMA
TBD 2014 Close-out netting Legislative proposals EC
Products and investments
Q4 2014 European Social Entrepreneurship Funds Technical advice ESMA
Q4 2014 European Venture Capital Funds Technical advice ESMA
Q4 2014 Packaged Retail Investment Products Technical standards ESMA/EIOPA
Executive summary MiFID II: Themonster comes tolife
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Date Topic Type Institution
Q4 2014 Undertakings For The Collective Investment of Transferable Securities V Technical advice ESMA
Q4 2014 Money market funds Technical standards ESMA
TBD 2014 Development of high level principles for the product approval process Principles ESAs
TBD 2014 A framework for the activities and supervision of personal pensionschemes
Advice EIOPA
Recovery and resolution
TBD 2014 EU framework for recovery and resolution plans Technical advice EBA
Solvency II
TBD 2014 Solvency II – draft Level 2 delegated acts Level 2 text EC
TBD 2014 Solvency II Level 3 measures Level 3 text EIOPA
Supervision, governance and reporting
Q4 2014 Alternative performance measures Guidelines ESMA
Q4 2014 Electronic reporting format and access to regulated information Regulatory technical standards ESMA
Main sources: ESMA 2014 work programme; EIOPA 2014 work programme; EBA 2014 work programme; EC 2014 work programme; FCA policy development updates
Executive summary MiFID II: Themonster comes tolife
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Banking and capitalmarkets
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2EMD The Second E-money Directive 2009/110/EC
ABC Anti-Bribery and Corruption
ABI Association of British Insurers
ABS Asset Backed Security
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager
AIFMD Alternative Investment Fund Managers Directive 2011/61/EU
AIMA Alternative Investment Management Association
AML Anti-Money Laundering
AML3 3rd Anti-Money Laundering Directive 2005/60/EC
ASB UK Accounting Standards Board
Basel Committee Basel Committee of Banking Supervision (of the BIS)
Basel II Basel II: International Convergence of Capital Measurement andCapital Standards: a Revised Framework
Basel III Basel III: International Regulatory Framework for Banks
BBA British Bankers’ Association
BIBA British Insurance Brokers Association
BIS Bank for International Settlements
BoE Bank of England
BRRD Bank Recovery and Resolution Directive
CASS Client Assets sourcebook
CCD Consumer Credit Directive 2008/48/EC
CCPs Central Counterparties
CDS Credit Default Swaps
CEBS Committee of European Banking Supervisors (predecessor of EBA)
CEIOPS Committee of European Insurance and Occupational PensionsSupervisors (predecessor of EIOPA)
CET1 Core Equity Tier 1
CESR Committee of European Securities Regulators (predecessor ofESMA)
Co-legislators Ordinary procedure for adopting EU law requires agreementbetween the Council and the European Parliament (who are the ‘co-legislators’)
CFT Counter Financing of Terrorism
CFTC Commodities Futures Trading Commission (US)
CGFS Committee on the Global Financial System (of the BIS)
CIS Collective Investment Schemes
CMA Competition and Markets Authority
Glossary
Executive summary MiFID II: Themonster comes tolife
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Council Generic term representing all ten configurations of the Council of theEuropean Union
CRA1 Regulation on Credit Rating Agencies (EC) No 1060/2009
CRA2 Regulation amending the Credit Rating Agencies Regulation (EU)No 513/2011
CRA3 proposal to amend the Credit Rating Agencies Regulation anddirectives related to credit rating agencies COM(2011) 746 final
CRAs Credit Rating Agencies
CRD ‘Capital Requirements Directive’: collectively refers to Directive2006/48/EC and Directive 2006/49/EC
CRD II Amending Directive 2009/111/EC
CRD III Amending Directive 2010/76/EU
CRD IV Capital Requirements Directive 2013/36/EU
CRR Regulation (EU) No 575/2013 on prudential requirements for creditinstitutions and investment firms
CTF Counter Terrorist Financing
DFBIS Department for Business, Innovation and Skills
DG MARKT Internal Market and Services Directorate General of the EuropeanCommission
Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act (US)
D-SIBs Domestic Systemically Important Banks
EBA European Banking Authority
EC European Commission
ECB European Central Bank
ECJ European Court of Justice
ECOFIN Economic and Financial Affairs Council (configuration of theCouncil of the European Union dealing with financial and fiscal andcompetition issues)
ECON Economic and Monetary Affairs Committee of the EuropeanParliament
EEA European Economic Area
EEC European Economic Community
EIOPA European Insurance and Occupations Pension Authority
EMIR Regulation on OTC Derivatives, Central Counterparties and TradeRepositories (EC) No 648/2012
EP European Parliament
ESA European Supervisory Authority (i.e. generic term for EBA, EIOPAand ESMA)
ESCB European System of Central Banks
ESMA European Securities and Markets Authority
ESRB European Systemic Risk Board
EU European Union
EURIBOR Euro Interbank Offered Rate
Eurosystem System of central banks in the euro area, including the ECB
FASB Financial Accounting Standards Board (US)
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FATCA Foreign Account Tax Compliance Act (US)
FATF Financial Action Task Force
FC Financial counterparty under EMIR
FCA Financial Conduct Authority
FDIC Federal Deposit Insurance Corporation (US)
FiCOD Financial Conglomerates Directive 2002/87/EC
FiCOD1 Amending Directive 2011/89/EU of 16 November 2011
FiCOD2 Proposal to overhaul the financial conglomerates regime (expected2013)
FMI Financial Market Infrastructure
FOS Financial Ombudsman Service
FPC Financial Policy Committee
FRC Financial Reporting Council
FSA Financial Services Authority
FSB Financial Stability Board
FS Act 2012 Financial Services Act 2012
FS Reform Bill2012
Financial Services (Bank Reform) Bill 2012
FSCS Financial Services Compensation Scheme
FSI Financial Stability Institute (of the BIS)
FSMA Financial Services and Markets Act 2000
FSOC Financial Stability Oversight Council
FTT Financial Transaction Tax
G30 Group of 30
GAAP Generally Accepted Accounting Principles
G-SIBs Global Systemically Important Banks
G-SIFIs Global Systemically Important Financial Institutions
G-SIIs Global Systemically Important Institutions
HMRC Her Majesty’s Revenue & Customs
HMT Her Majesty’s Treasury
IAIS International Association of Insurance Supervisors
IASB International Accounting Standards Board
ICAS Individual Capital Adequacy Standards
ICB Independent Commission on Banking
ICOBS Insurance: Conduct of Business Sourcebook
IFRS International Financial Reporting Standards
IMA Investment Management Association
IMAP Internal Model Approval Process
IMD Insurance Mediation Directive 2002/92/EC
IMD2 Proposal for a Directive on insurance mediation (recast) COM(2012)360/2
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IMF International Monetary Fund
IORP Institutions for Occupational Retirement Provision Directive2003/43/EC
IOSCO International Organisations of Securities Commissions
ISDA International Swaps and Derivatives Association
ITS Implementing Technical Standards
JCESA Joint Committee of the European Supervisory Authorities
JMLSG Joint Money Laundering Steering Committee
JURI Legal Affairs Committee of the European Parliament
LCR Liquidity coverage ratio
LEI Legal Entity Identifier
LIBOR London Interbank Offered Rate
LTGA Long-Term Guarantee Assessment
MAD Market Abuse Directive 2003/6/EC
MAD II Proposed Directive on Criminal Sanctions for Insider Dealing andMarket Manipulation (COM(2011)654 final)
MAR Proposed Regulation on Market Abuse (EC) (recast) (COM(2011) 651final)
Member States countries which are members of the European Union
MiFID Markets in Financial Instruments Directive 2004/39/EC
MiFID II Proposed Markets in Financial Instruments Directive (recast)(COM(2011) 656 final)
MiFIR Proposed Markets in Financial Instruments Regulation (EC)(COM(2011) 652 final)
MMF Money Market Fund
MMR Mortgage Market Review
MTF Multilateral Trading Facility
MoJ Ministry of Justice
NAV Net Asset Value
NBNI G-SIFI Non-bank non-insurer global systemically important financialinstitution
NFC Non-financial counterparty under EMIR
NFC+ Non-financial counterparty over the EMIR clearing threshold
NFC- Non-financial counterparty below the EMIR clearing threshold
NSFR Net stable funding ratio
OECD Organisation for Economic Cooperation and Development
Official Journal Official Journal of the European Union
OFT Office of Fair Trading
Omnibus II Second Directive amending existing legislation to reflect LisbonTreaty and new supervisory infrastructure (COM(2011) 0008 final)– amends the Prospectus Directive (Directive 2003/71/EC) andSolvency II (Directive 2009/138/EC)
ORSA Own Risk Solvency Assessment
OTC Over-The-Counter
Executive summary MiFID II: Themonster comes tolife
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Banking and capitalmarkets
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PERG Perimeter Guidance Manual
PRA Prudential Regulation Authority
Presidency Member State which takes the leadership for negotiations in theCouncil: rotates on 6 monthly basis
PRIPs Regulation Proposal for a Regulation on key information documents forinvestment products COM(2012) 352/3
RAO Financial Services and Markets Act 2000 (Regulated ActivitiesOrder) 2001
RDR Retail Distribution Review
RRPs Recovery and Resolution Plans
RTS Regulatory Technical Standards
RWA Risk-weighted assets
SCR Solvency Capital Requirement (under Solvency II)
SEC Securities and Exchange Commission (US)
SFT Securities financing transactions
SFD Settlement Finality Directive 98/26/EC
SFO Serious Fraud Office
SIPP Self-invested personal pension scheme
SOCA Serious Organised Crime Agency
Solvency II Directive 2009/138/EC
SSM Single Supervisory Mechanism
SSR Short Selling Regulation EU 236/2012
T2S TARGET2-Securities
TR Trade Repository
TSC Treasury Select Committee
UCITS Undertakings for Collective Investments in Transferable Securities
XBRL eXtensible Business Reporting Language
Executive summary MiFID II: Themonster comes tolife
Cross sectorannouncements
Banking and capitalmarkets
Asset management Insurance Monthly calendar Glossary
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