FIG Bulletin Recent developments 27 September 2019

General 4

Improving suitability of financial advice: FCA speech 4

Bank of England and FSCS update MoU 4

FCA appoints new Executive Director of Risk and Compliance 4

Sustainable finance: BoE speeches 4

Proposed Regulation on sustainability disclosures: trade associations call for delay 5

Banking and Finance 6

How banks are authorised in the UK: BoE guide 6

EBA launches 2019 transparency exercise 6

STS Regulation: EBA consults on STS framework for synthetic securitisations 6

United Nations Principles for Responsible Banking 7

Payment Services 8

CHAPS migration to ISO 20022: BoE update and consultation 8

Guidelines for appearance of mandates for SEPA DD schemes: EPC version 5 8

Creditor Identifier overview: EPC version 7 8

Request to pay: Pay.UK report on industry views 8

Securities and Markets 10

MiFID II research unbundling: FCA review findings 10

Credit derivatives market: FCA/CFTC joint statement on opportunistic strategies updated 10

MiFID II transparency requirements for non-equity instruments: ESMA confirms delay to review 11

Sustainability: WFE and the UN Sustainable Stock Exchanges initiative report 11

Insurance 12

Liquidity risk management for insurers: PRA PS18/19 and SS5/19 12

Unit-linked funds' governance review: FCA findings and next steps 12

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Funds and Asset Management 13

Passive and active investment: FCA Insight article 13

Financial Crime 14

JMLSG Guidance: HM Treasury approval of amendments 14

EU AML legislation: European Parliament calls for better co-ordination and swifter implementation 14

Cybercrime: MoU 14

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General

Improving suitability of financial advice: FCA speech

The Financial Conduct Authority (FCA) has published a speech by Debbie Gupta, Director of Life Insurance and Financial Advice Supervision at the FCA, on improving the suitability of financial advice.

Ms Gupta explains that the four broad areas of work the FCA is focusing on are improving standards, targeting firms that cause the most harm, supporting customers, and helping advisers. The FCA's main concern is on whether a client receives suitable advice.

Ms Gupta talks about:

• the lessons the FCA has learned from its work on advice suitability; • fact-finding and reporting, an area in which the FCA has seen very varied practice; and • evidencing the correlation between advice/recommendations and clients' attitudes

towards risk.

On the last two bullet points, Ms Gupta gives guidance on good and poor practice. She also notes that the area of greatest concern to the FCA is unsuitable advice on defined benefit pension transfers.

Bank of England and FSCS update MoU

The Bank of England (BoE) (exercising its prudential regulation functions) and the Financial Services Compensation Scheme (FSCS) have published an updated memorandum of understanding (MoU). The MoU sets out the high-level framework the PRA and the FSCS use to co-ordinate and co-operate in carrying out their respective responsibilities.

The MoU has been updated to reflect some minor changes to certain legislative functions and other organisational changes. As part of this update, the title of the MoU was also changed to reflect the PRA becoming fully integrated into the BoE in March 2017.

FCA appoints new Executive Director of Risk and Compliance

The FCA has announced the appointment of Sheree Howard as its new Executive Director of Risk and Compliance Oversight (R&CO). Ms Howard replaces Barbara Frohn who left the FCA earlier this year.

Ms Howard is currently Interim Director of R&CO having joined the FCA as a Senior Adviser in December 2017.

Sustainable finance: BoE speeches

The BoE has published two speeches given by Mark Carney, Governor of the BoE, on the need to bring climate risks and resilience into the heart of financial decision making.

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Mr Carney observes that the development of sustainable finance is not moving fast enough for the world to reach net zero:

"To bring climate risks and resilience into the heart of financial decision making, climate disclosure must become comprehensive; climate risk management must be transformed, and sustainable investing must go mainstream."

Mr Carney suggests the following priority areas for action:

• climate-related financial disclosures; • improved understanding and management of climate-related financial risks; and • supporting companies that are working to transition from brown to green, including by

overcoming the existing inconsistent measurement of environmental, social and governance (ESG) improvements. To help this, Mr Carney calls for a common taxonomy, "to help financial markets rigorously identify environmental outperformance and to direct investment accordingly. The EU’s Green Taxonomy and the Green Bond Standard are good starts, but they are binary (dark green or brown). Mainstreaming sustainable investing will require a richer taxonomy – 50 shades of green".

Proposed Regulation on sustainability disclosures: trade associations call for delay

Insurance Europe has published a letter, sent jointly by it and seven other trade associations to the European Commission, on the timings for the application of the proposed Regulation on disclosures relating to sustainable investments and sustainability risks.

The letter is signed by Insure Europe, the Association for Financial Markets in Europe (AFME), the Alternative Investment Management Association (AIMA), the Association of Mutual Insurers and Insurance Cooperatives in Europe (AMICE), the European Association of Cooperative Banks (EACB), the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA) and PensionsEurope.

While the signatories support the European Commission’s objectives of financing a more sustainable economy, they are concerned that the proposed Regulation is likely to become applicable before the necessary level 2 legislative measures are adopted. This will create significant compliance challenges and liability risks for market players, as well as confusion for investors.

The trade associations urge the Commission to take immediate action to ensure there is "realistic time" for implementation. They suggest that the application date of the Regulation should be changed to 12 months after all the regulatory technical standards (RTS) have been published in the Official Journal of the EU (OJ).

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Banking and Finance

How banks are authorised in the UK: BoE guide

The BoE has published Quarterly Bulletin 2019 Q3, "How banks are authorised in the UK", which gives an overview of the process for authorising banks in the UK. The overview includes a section on mobilisation — or authorisation with restriction — which enables new banks to benefit from the certainty of being authorised to help them to secure further investment, recruit staff, invest in IT systems and commit to third-party suppliers, etc., in exchange for limitations being imposed on their business.

EBA launches 2019 transparency exercise

The European Banking Authority (EBA) has announced that it has launched its regular EU-wide transparency exercise. Transparency exercises are conducted on an annual basis and are part of the EBA's efforts to monitor risks and vulnerabilities and to reinforce market discipline.

The EBA says that it will publish the results of its transparency exercise in November 2019, together with its Risk Assessment Report. It will release up to 2.2 million data points on around 130 EU banks. The data will cover capital positions, financial assets, risk exposure amounts, sovereign exposures and asset quality.

As of 2019, the transparency exercise will disclose data with quarterly rather than semi-annual frequency. This is to provide users with more granular supervisory data for time series analysis. In addition, in 2019, the EBA will provide a more detailed overview of the banks' financial assets and risk weighted assets.

STS Regulation: EBA consults on STS framework for synthetic securitisations

The EBA has launched a consultation on its proposals for a simple, transparent and standardised (STS) framework for synthetic securitisation. The consultation is detailed in a discussion paper, titled "Draft Report on STS Framework for Synthetic Securitisation Under Art. 45 of Regulation (EU) 2017/2402".

The discussion paper:

• contains an extensive analysis of the synthetic securitisation market developments and trends in the EU, including data on the historical default and loss performance of the synthetic transactions, both before and after the financial crisis (up until end 2018);

• examines the rationale of the STS synthetic product and assesses positive and negative implications of its possible introduction, both with and without differentiated regulatory treatment;

• sets out a list of STS criteria for the synthetic securitisation; • analyses the potential different regulatory treatment of STS synthetic securitisations; and • invites comment on the introduction of an STS framework for synthetics, the regulatory

treatment and potential market impact of the proposals laid out in the discussion paper.

The consultation closes on 25 November 2019. The EBA will hold a public hearing on the topic at the EBA premises on 9 October 2019.

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United Nations Principles for Responsible Banking

The United Nations has launched "Principles for Responsible Banking" which have been signed by 130 banks.

The Principles were developed by a core group of 30 founding banks through an innovative global partnership between banks and the UN Environment Programme Finance Initiative (UNEP FI). UNEP FI is the UN-private sector collaboration that includes membership of more than 240 finance institutions around the globe.

Signatories to the Principles commit to:

• align their business strategy with the UN's Sustainable Development Goals and the Paris Climate Agreement;

• continuously increase their positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from their activities, products and services. They will set and publish targets where they can have the most significant impacts;

• work responsibly with their clients and customers to encourage sustainable practices; • consult, engage and partner with relevant stakeholders to achieve society's goals; • implement their commitment to the Principles through effective governance and a

culture of responsible banking; and • periodically review their individual and collective implementation of the Principles and

be transparent about, and accountable for, their positive and negative impacts.

The Principles are accompanied by a guidance note and other resources available on the UNEP FI webpage.

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Payment Services

CHAPS migration to ISO 20022: BoE update and consultation

The BoE has published an update on the CHAPS migration to ISO 20022, a common global messaging standard, for UK payments.

The BoE's approach to implementation of ISO 20022 in CHAPS consists of three phases: the Preparatory Phase (Phase 1), the Introductory Phase (Phase 2) and the Enhanced Phase (Phase 3).

In response to recent market developments and feedback, the BoE explains that it is re-visiting its approach to the Introductory Phase of the CHAPS ISO 20022 migration – specifically around the early adoption of "enhanced" data. It outlines two options for the implementation of this phase and invites input from interested parties.

The feedback period will close on 16 October 2019. The BoE will communicate its final decision on the approach when it publishes the final like-for-like schemas and guidance at the end of 2019.

Guidelines for appearance of mandates for SEPA DD schemes: EPC version 5

The European Payments Council (EPC) has published an update to its guidelines on the appearance of mandates for the Single Euro Payments Area (SEPA) Direct Debit (DD) (SDD) Core Scheme and the SDD Business-to-Business (B2B) Scheme.

The guidelines supplement section 4.7.2 of the SDD Core and SDD B2B Scheme Rulebooks, which define the rules for the content of SDD Core and SDD B2B mandates respectively.

Creditor Identifier overview: EPC version 7

The EPC has published a new version of the Creditor Identifier (CI) overview. The objective of this document is to inform creditors about the need for a CI on SDD mandates and forthcoming collections, and about the institution(s) in each SEPA country that can issue such CI. It also informs SDD scheme participants how they can check the proper issuance and/or validity of CIs by providing information on the CI characteristics per SEPA country.

The updates relate to the national CI descriptions of Belgium, Denmark, Germany and the Netherlands.

Request to pay: Pay.UK report on industry views

Pay.UK has published a report on industry views on the new payment system "request to pay".

Request to pay is currently in a closed pilot testing phase. Future vendors of the service including FinTechs, major billers and household name financial services providers are testing the rules, standards and functionality of the service in a closed environment. Testing is expected to end later this year ahead of a planned market launch of the rules and standards in early 2020.

Prior to that introduction, Pay.UK sought to test the market's reaction to this service and explore potential opportunities for, and barriers to, implementation and market uptake. Therefore, at the end of 2018, Pay.UK commissioned Ipsos MORI to conduct research with stakeholders. The findings of that research are covered in this report, "Request to pay – exploring industry views".

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It presents the independent conclusions and recommendations, and highlights the themes that emerged from speaking to payments decision-makers across a variety of businesses.

Pay.UK describes "request to pay" as a new, flexible way for bills to be settled between people, organisations and businesses. It is a messaging service that has been created to complement existing payments infrastructure and gives billers the ability to request payment for a bill rather than simply sending an invoice or a bill. For each "request", customers will be able to pay in full, pay in part, ask for more time, communicate with the biller, or decline to pay. A customer's response does not change their legal obligations.

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Securities and Markets MiFID II research unbundling: FCA review findings

The FCA has published the findings from its review of how firms have implemented the MiFID II Directive (MiFID II) rules on the unbundling of third-party research.

The FCA's rules to implement MiFID II require asset managers to explicitly pay for third-party research, and brokers to price and provide each service separately. The FCA undertook a review between July 2018 and March 2019 as to how these rules were being implemented. The review included a survey of 40 buy-side firms and ten firm visits across the buy-side and sell-side.

The FCA's headline message is that the change has achieved what the regulators were aiming for (albeit at an expense to firms paying themselves for research). However, there remain some concerns from the industry and the FCA in the detail of its report on its website.

For example, "research pricing is still evolving, with wide price ranges being offered by brokers and independent providers". The FCA will monitor for potential competition concerns in this market and will act if necessary.

The FCA also notes that asset managers' research valuation models have different levels of sophistication, particularly in evaluating the quality of research. It expects firms to refine models to ensure they are acting in the best interests of their clients.

Further guidance, which firms are expected to take note of, is given on the webpage. The FCA also gives some guidance on what constitutes "non-monetary benefits" and flags concerns about oversight of delegation or outsourcing arrangements.

The FCA intends to carry out further work in this area in 12 to 24 months' time to assess firms' ongoing compliance with its rules.

Credit derivatives market: FCA/CFTC joint statement on opportunistic strategies updated

The FCA has published an update on its website to its June 2019 statement that it published jointly with the US Commodity Futures Trading Commission (CFTC) on their efforts to address opportunistic strategies in the credit derivatives markets. The joint statement outlined mutual concerns about the pursuit of these strategies and the adverse impact they may have on the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally.

In its update, the FCA refers to a proposed protocol released by The International Swaps and Derivatives Association (ISDA) which is designed to address certain issues related to narrowly tailored credit events. It says that this protocol contains two amendments to the 2014 ISDA Credit Derivatives Definitions. One relates to the Failure to Pay definition, and the other to the Outstanding Principal Balance definition. The FCA welcomes these changes.

The FCA states that it expect firms to consider how opportunistic strategies may impact their businesses and to take appropriate action to mitigate market, reputation and other risks arising from these types of strategies. With regard to the proposed ISDA protocol, the FCA says that firms should consider how adherence to the proposed ISDA protocol may help them mitigate these risks. Firms should also consider the risks to which they may be exposing themselves by trading with counterparties that do not adhere to the proposed ISDA protocol.

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However, by itself, the FCA says that the proposed ISDA protocol will not address many of the concerns identified in the joint statement, such as opportunistic strategies that do not involve narrowly tailored credit events.

The FCA looks forward to further industry efforts to improve the functioning of the credit derivative markets and welcomes continuing engagement with market participants.

MiFID II transparency requirements for non-equity instruments: ESMA confirms delay to review

The European Securities and Markets Authority (ESMA) has published a letter, from Steven Maijoor, ESMA Chair, to Olivier Guersent, European Commission Director General for Financial Stability, Financial Services and Capital Markets Union, on the annual review of transparency requirements for non-equity instruments, required by Article 17 of Commission Delegated Regulation (EU) 2017/583 (RTS 2).

ESMA and the Commission agree it is not advisable to perform the annual review of RTS 2 in 2019 due to the remaining uncertainties around a potential no-deal Brexit. ESMA reiterates its intention to perform the annual review of RTS 2 by 30 July 2020, which will incorporate an analysis of the empirical data available to ESMA and look specifically into what effects Brexit may have on bond market liquidity.

Sustainability: WFE and the UN Sustainable Stock Exchanges initiative report

The World Federation of Exchanges (WFE), the global industry group for exchanges and central counterparties (CCPs), has partnered with the United Nations (UN) Sustainable Stock Exchanges (SSE) initiative to publish a report looking at how exchanges can embed sustainability within their operations, and to establish effective internal governance and operational processes and policies to support this.

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Insurance Liquidity risk management for insurers: PRA PS18/19 and SS5/19

The PRA has published a policy statement, PS18/19, and a supervisory statement (SS) on liquidity risk management for insurers, SS5/19. PS18/19 sets out feedback received to the PRA's March 2019 consultation paper, CP4/19, which sought views on a draft version of the SS.

PS18/19 is relevant to all UK Solvency II firms, including in respect of the Solvency II groups provisions, the Society of Lloyd's and its managing agents, and non-directive insurers.

Respondents to the consultation generally welcomed the PRA's proposals, and made a number of observations and requests for clarification. Therefore, after considering the responses, the PRA has made some changes to the draft policy. The most significant amendments involve clarifying the PRA's expectations on the definition of risk limits within an insurer's liquidity risk appetite framework and the role of the board in managing liquidity risk. In addition, the function and characteristics of the liquidity buffer have been clarified. The PRA has also made a number of editorial amendments to improve the clarity of the SS; these are not explicitly addressed in PS18/19.

The expectations set out in SS5/19 and the withdrawal of SS2/13, "Collateral upgrade transactions and asset encumbrance: expectations in relation to firms' risk management practices" have immediate effect.

Unit-linked funds' governance review: FCA findings and next steps

The FCA has published a webpage on which it details its findings following a review of firms' governance practices on assessing the value of unit-linked funds to their investors. Unit-linked funds are funds the performance of which determines the benefits due to holders of unit-linked insurance contracts.

A key finding of the FCA's asset management market study (AMMS) was weak price competition in the sector. This was partly because retail investors do not usually negotiate with asset managers and because fund governance bodies acting on their behalf do not typically focus on value. In response, new FCA rules coming into effect later this year will strengthen and clarify the duty of authorised fund managers to act in the best interests of their investors. However, these new rules will not apply to unit-linked funds. Therefore, in its policy statement on steps following up on the AMMS, PS18/8, the FCA indicated that it wanted to find out whether there are similarities between unit-linked funds' governance practices and those for authorised funds. This webpage follows up on that review.

The FCA found that insurance firms' fund governance for unit-linked funds often does not include considerations that it believes are likely to be important in assessing whether unit-linked funds provide good value for their investors. Specifically, the FCA found limited consideration of unit holders' interests in decision-making around levels of fees and charges. The FCA summarises its findings on its webpage.

The FCA will assess the findings from the review alongside those from its continuing work on non-workplace pensions, the governance of unit-linked mirror funds, and the effectiveness and scope of independent governance committees. It will then decide whether further remedies are needed.

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Funds and Asset Management

Passive and active investment: FCA Insight article

The FCA has published an article on its Insight webpages, "Paying the piper: In a world of passive investing, who would call the market’s tune". The article is written by Kevin R James and Daniel Mittendorf (economist and researcher in the FCA’s Economic Data Science team) and talks about the increase in passive investment.

See also MiFID II research unbundling: FCA review findings.

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Financial Crime JMLSG Guidance: HM Treasury approval of amendments

The Joint Money Laundering Steering Group (JMLSG) has confirmed that it has received HM Treasury Ministerial approval of its revisions to the JMLSG's anti-money laundering (AML) and counter-terrorist financing (CTF) sectoral guidance relating to:

• Sector 4 Credit Unions • Sector 12 Asset Finance • Sector 20 Brokerage Services to Funds

EU AML legislation: European Parliament calls for better co-ordination and swifter implementation

The European Parliament has adopted a resolution stating that AML rules need co-ordinated and speedy implementation. In a related press release, the European Parliament gives an overview of the resolution.

The European Parliament stresses that the date of transposition of the fourth anti-money laundering directive (MLD4) was June 2017 and for the fifth AMD Directive (MLD5) is January 2020; it urges member states to implement them into national law.

It sees the lack of cooperation and poor information-sharing between national authorities and financial intelligence units as the main obstacles to preventing money-laundering, criminal financing and terrorist financing in all member states.

The European Parliament suggests that "minimum standards" legislation on AML and CTF may be the root cause of the poor implementation and calls on the Commission to assess, for any future revision of the AML legislation, whether a regulation would be more appropriate than a directive.

Member states are urged to accelerate work in implementing the beneficial ownership registers for corporate and other legal entities, which should be ready by 10 January 2020 (and for trusts by 10 March 2020).

The European Parliament also indicates its support for the establishment of a new methodology to identify high-risk third-countries that have strategic deficiencies in AML, and it calls on the Commission to apply a transparent process, with clear and concrete benchmarks for these countries and to ensure public scrutiny.

Cybercrime: MoU

The Financial Services Information Sharing and Analysis Center (FS-ISAC) and Europol's European Cybercrime Centre have announced that they have signed an MoU to share intelligence to tackle cybercrime in Europe.

The purpose of the MoU is to facilitate and enhance the law enforcement response to financially motivated cybercriminals targeting banks and other financial institutions through a symbiotic intelligence-sharing network.

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