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FINANCIAL SERVICES REGULATIONEXCHANGE – INTERNATIONAL NEWSLETTER

Issue 36September 2018

02 | Financial Services Regulation

CONTENTS

INTRODUCTION ..............................................................................................................03

EUROPEAN UNION .........................................................................................................04

UNITED KINGDOM ..........................................................................................................15

PORTUGAL ..........................................................................................................................43

USA .........................................................................................................................................44

INTERNATIONAL ..............................................................................................................46

IN FOCUS .............................................................................................................................50

CONTACT US .....................................................................................................................52

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INTRODUCTIONWELCOME

DLA Piper’s Financial Services International Regulatory team welcomes you to the thirty sixth edition of “Exchange – International” – our international newsletter designed to keep you informed of regulatory developments in the financial services sector.

This issue includes updates from the EUROPEAN UNION, as well as contributions from the UK, PORTUGAL and the US.

In this edition, “In Focus” looks at the reports of the European Banking Authority (EBA) on the prudential risks and the opportunities arising for institutions by virtue of FinTech, as well as the potential impact on the institutions’ business models.

We discuss the opinion of the European Banking Authority in relation to the Second Payment Services Directive (PSD2), concerning Strong Customer Authentication issues. We also provide an update on the status of implementation of PSD2 in various EU member states.

With regards to digital currencies, we provide insights to the approach of the UK regulatory and supervisory bodies as well as the latest developments at an international level, focusing on the report of the Financial Stability Board on crypto-assets.

We set out the work of the FCA, including its new rules and guidance on persistent credit card debt and creditworthiness assessment in consumer credit as well as its extension of the Senior Managers Certification Regime to the whole financial services industry. Moreover, we examine the decision of the Upper Tribunal in the Plaxedes case, requiring the FCA to reconsider a validation order relating to unenforceable regulated credit agreements of a total amount of GBP 47 million.

We cover the latest Brexit updates focusing on the framework proposed by the UK Government on the Post-Brexit UK-EU partnership in financial services.

We also consider the consultation paper on the impact of the G20 regulatory reforms on incentives to centrally clear OTC derivatives, prepared jointly by the Financial Stability Board, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions.

Your feedback is important to us. If you have any comments or suggestions for future issues, we welcome your feedback.

– The DLA Piper Financial Services Regulatory Team

September 2018

04 | Financial Services Regulation

EUROPEAN UNION

EBA PUBLISHES OPINION ON STRONG CUSTOMER AUTHENTICATION

On 13 June 2018, the European Banking Authority (EBA) published an important opinion (Opinion) and a consultation paper (Consultation Paper) arising from the far-reaching consequences of the Second Payment Services Directive (PSD2).

The Opinion and Consultation Paper aim to clarify a number of issues identified by market participants in respect of PSD2 implementing Regulation (EU) 2018/389 focusing on Strong Customer Authentication issues (SCA) (SCA-RTS) which will come into force on 14 September 2019.

Consultation Paper

One of the key issues is providing adequate guidance on the four conditions required for an Account Servicing Payment Service Provider (ASPSP) not to have to provide contingency measures (the so called “fall-back” solution) to continue permitting Third Party Payment Service Providers (TPSPs) access to ASPSP systems and data. One of the objectives of PSD2 is to open up ASPSP systems and customer data to third party payment service providers to facilitate innovation and competition in the banking sector. ASPSPs typically include major retail banks.

The SCA-RTS requires competent authorities (CAs) “after consultation with the EBA”, to exempt ASPSPs from the requirement to implement the “fall-back” solution if the ASPSP can show that it and its dedicated interface meets the four conditions under Article 33(6) of the SCA-RTS.

The Consultation Paper contains draft Guidelines on these four conditions which permit use of the exemption where the dedicated interface of the ASPSP meets the following:

■ it complies with all the obligations for dedicated interfaces as set out in Article 32 of the RTS;

■ it has been designed and tested in accordance with Article 30(5) to the satisfaction of the payment service providers referred to therein;

■ it has been widely used for at least 3 months by payment service providers to offer account information services, payment initiation services and to provide confirmation on the availability of funds for card-based payments;

■ any problem related to the dedicated interface has been resolved without undue delay.

As well as the draft Guidelines, the EBA Consultation Paper contains questions the EBA is seeking comments on and the cost-benefit impact assessment. The EBA addresses

every component of each of the four conditions in turn, giving guidance on how they should be interpreted. The EBA emphasised that its approach to implementation of the RTS is “pragmatic in nature”.

The consultation ran until 13 August 2018, and the final Guidelines will be published soon.

EBA Opinion

The EBA Opinion, addressed to the CAs of the member states, is issued in response to the “numerous queries” received by the EBA and CAs.

As a general comment, the EBA noted that in order for Payment Service Providers (PSPs) to comply with the RTS, “industry participants will now need to develop or amend the necessary systems, hardware and software, including, in the case of ASPSPs, building interfaces and infrastructures”. The EBA urged the CAs to “remind the ASPSPs that they are required to change and adapt their systems in response to the RTS, regardless of whether ASPSPs choose to modify the customer interface or to develop a dedicated interface”.

It also stated its view that where account information or payment initiation services are provided to a Payment Service User (PSU) following a contract that has been signed by both parties, ASPSPs do not have to check consent. It suffices that Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) can rely on the authentication procedures provided by ASPSPs to the PSU.

The EBA also made a number of specific comments about the following issues:

■ the scope of data AISPs and PISPs can access and four-times-daily limit;

■ the application of strong customer authentication;

■ exemptions from the strong customer authentication requirement; and

■ method(s) of carrying out strong customer authentication.

The EBA announced that in the future it will provide further clarification on the interpretation of the SCA-RTS through its online Interactive Single Rulebook and Q&A tool and advised the CAs to encourage market participants to use the EBA Q&A tool as soon as it becomes available to submit any query they may have in relation to the SCA-RTS.

Separately, in a speech on 22 February 2018, Yves Mersch, Member of the Executive Board of the European Central Bank (ECB), urged speedy compliance with all relevant PSD2 requirements. In particular, Mr Mersch said: “I would strongly encourage European payment service providers to embrace the

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opportunities the PSD2 provides for competition and innovation, to cooperate in the standardisation of APIs that should preferably result in a single API, and to implement all the security requirements of the new directive and its RTS as soon as possible, even before they become mandatory”.

FCA Statement

In a press release published on 22 June 2018, the FCA supported the views expressed in the EBA Opinion and stated that, if the “final version of the Guidelines is the same as the published draft”, the FCA would expect to comply with them. The FCA is the CA for the UK under PSD2.

The FCA further announced that it plans to consult on the changes to its guidance and rules to reflect the RTS as well as the EBA Opinion and the Guidelines.

In advance of the consultation, the FCA expects ASPSPs and TPSPs to be aware that:

■ the FCA encourages ASPSPs to provide dedicated access to TPSPs using secure Application Programming Interfaces (APIs);

■ where ASPSPs do not opt to implement the dedicated interface, their interface must still meet various requirements under the RTS;

■ all ASPSPs will also need to make available technical specifications, and provide support and a testing facility by 14 March 2019; and

■ the RTS does not allow the FCA to grant a partial exemption. The FCA will provide opportunities for ASPSPs to engage with it before submission of the exemption request, and encourages timely requests for exemption.

ASPSPs and TPSPs should also note that the Guidelines and Opinion set out:

■ that some ASPSPs will only be able to demonstrate that their interface is available to be widely used, rather than show it is widely in use;

■ that the use of redirection by an ASPSP is not automatically an obstacle; nor is there a requirement in PSD2 or the RTS for an ASPSP to provide more than one method of access;

■ that ASPSPs must avoid imposing unnecessary requirements (such as additional consent checks) when designing and implementing their dedicated interfaces; and

■ that the FCA would not be able to exempt ASPSPs whose implementation creates obstacles to the provision of account information and payment initiation services.

SPEECH BY ESMA CHAIR ON MIFID II IMPLEMENTATION

On 21 June 2018, Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA) delivered a keynote address at the Federation of European Securities Exchanges Convention 2018 in Vienna.

Mr Maijoor focused on the following areas.

LEI progress

ESMA and the national competent authorities have been closely monitoring the use of Legal Entity Identifiers (LEIs) and have observed a steady and substantial increase in use of the identifier. The speaker noted that currently 95.5% of the instruments reported in the ESMA reference data system have the correct LEI.

DVC

The dark trading of more than 900 instruments has been suspended as a result of the Double Volume Cap (DVC) system and the overall number and volume of transactions in dark pools has been significantly reduced. However, some trading venues are still dealing with data quality issues and are accordingly advised to step up their efforts and submit all necessary and correct data.

Systematic Internalisers and Periodic Auctions

ESMA is currently carrying out a fact-finding exercise on the different periodic auction trading systems undertaking an in-depth analysis in order to understand their various features. If necessary, further ESMA measures or recommendations may be introduced.

Brexit and third-country equivalence

ESMA welcomes the European Commission’s proposal to amend the MiFIR equivalence conditions for third country investment firms ahead of Brexit with respect to third country trading venues. A consistent and harmonised EU regulatory and supervisory framework governing third-country venues is required to ensure that risks related to third country venues are addressed.

ESMA SPEECH ON PRIIPS IMPLEMENTATION AND COSTS TRANSPARENCY

On 22 June 2018, the European Securities and Markets Authority (ESMA) published a speech (Speech) by Steven Maijoor, Chair of ESMA, delivered at the joint European Supervisory Authorities’ (ESAs) consumer protection day.

06 | Financial Services Regulation

Although discussing transparency of costs at length, the Speech is perhaps most notable for Mr Maijoor’s comments on the implementation of Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and the ESAs’ programme of action in this area.

In the Speech, clarification about the scope of PRIIPs was stated to be considered a “level 1 issue”, particularly in relation to corporate bonds and non-structured securities. ESMA was in discussions with the Commission to make further guidance available quickly for market participants.

Mr Maijoor also stated that some specific aspects of performance scenarios were being considered by ESMA. He stated ESMA’s intention to provide a Q&A on the subject of the presentation and calculation of performance scenarios for PRIIPs with a recommended holding period of less than a year. He also noted that ESMA is working on developing a converged approach on the use of past performance in performance scenarios, to ensure a consistency in approaches taken by manufacturers and distributors to inform their clients on the meaning of such performance scenarios.

Finally, using data received from associations of the fund industry, Mr Maijoor stated that the ESAs were currently assessing whether any aspect of the methodology to transaction costs needs amending or clarification, following concerns about negative transaction costs and high transaction costs under PRIIPs.

EU COMMISSIONER CRITICISES “SLOW AND UNSATISFACTORY” AMLD4 IMPLEMENTATION

The European Commission has published a speech (Speech) by Věra Jourová, the European Commissioner for Justice, Consumers and Gender Equality, delivered on 25 June 2018, in which she gives a damning assessment of the implementation of the fourth Anti-Money Laundering Directive (AMLD4), describing it as “weak and unsatisfactory”.

AMLD4 was required to be transposed by member states in the EU by 26 June 2017, but Ms Jourová revealed that the Commission had opened infringement procedures against 20 member states for non-transposition. This goes further than the 17 countries it was reported were written to last year over alleged partial or complete failure to implement the provisions. Ms Jourová also stated that the Commission was beginning the process of scrutinising the content of notified legislation for compliance with the requirements of AMLD4.

The Speech also touched on the detailed methodology for assessing third countries, and the Commission is working towards prioritising those countries which need to be assessed by the end of the year. The Commission intends to present its first Delegated Regulation updating the list of high-risk third countries by the end of this year. The Speech noted that the Commission estimates to have over 85% of all countries in scope of the EU assessment covered by 2022.

EUROPEAN COMMISSION PUBLISHES EVALUATION ROADMAP ON CONSUMER CREDIT DIRECTIVE

On 29 June 2018, the European Commission published an evaluation roadmap on the Consumer Credit Directive (2008/48/EC) (CCD).

The CCD was published in the Official Journal of the EU in May 2008 and aims to create a single market for consumer credit and achieve a level playing friend for consumer credit across the EU. A first report on the implementation of the CCD, adopted in May 2014, identified issues with credit providers not adhering to its provisions (particularly relating to advertisements, pre-contractual information and informing customers about their rights). A REFIT Platform opinion, published in 2017, recommended that the Commission review certain CCD provisions regarding the standard information to be included in advertising. In this context, the Commission has launched a full evaluation of the CCD. This is aligned with the Commission’s undertaking in its Consumer Financial Services Action Plan to explore ways of facilitating cross-border access to consumer credit while ensuring a high level of consumer protection.

The Commission highlights the speed at which the consumer credit market has developed, particularly in terms of the opportunities and risks for both lenders and consumers which are created by an increasingly digitalised market. The evaluation will assess whether the rules of the CCD are fit for purpose, in particular looking at:

■ effectiveness: whether original objectives have been achieved;

■ efficiency: the functioning of the Directive from a simplification and burden reduction perspective;

■ coherence: how the Directive works together with other legislation in the field of retail financial services;

■ consumer protection and data protection;

■ relevance: whether the tools of the Directive correspond to current needs; and

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■ EU added value of the Directive: whether the EU intervention has delivered additional added value, compared to national actions.

The deadline for feedback on the evaluation roadmap was 27 July 2018, and the Commission intends to launch a public consultation by the end of 2018. The Commission will also conduct a targeted consultation for stakeholders, including national authorities, credit providers, industry associations and consumer organisations. The Commission is looking to produce a synopsis report of the consultation by Spring 2019 and the full evaluation is due to conclude by the end of 2019.

ESMA UPDATES Q&AS ON BENCHMARKS REGULATION

On 17 July 2018, the European Securities and Markets Authority (ESMA) published an updated version of its Q&As on the implementation of the Regulation on indices used in financial instruments and financial contracts or to measure the performance of investment funds (EU 2016/1011) (Benchmarks Regulation).

The update to the Q&As confirms that ESMA does not consider calculation agents to be users of benchmarks under the Benchmarks Regulation if the issuer of securities has set the terms of the financial instrument that references the benchmark. It also clarifies that if an administrator obtains regulated data through a third party provider and has arrangements in place that meet the outsourcing requirements in the Benchmarks Regulation, the benchmark could still qualify as a regulated data benchmark, even despite the principle that “entirely and directly” would ordinarily preclude the involvement of a third party in the data collection process.

The Q&As were originally published by ESMA in July 2017 and are designed to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Benchmarks Regulation.

ESMA UPDATES PRIIPS Q&AS AND PUBLISHES FLOW DIAGRAMS FOR THE RISK AND REWARD CALCULATIONS

On 19 July 2018, the European Securities and Markets Authority (ESMA) updated its Q&As on the PRIIPs key information document (KID) and published flow diagrams for risk and reward calculations in the PRIIPs KID.

The new Q&As address three issues:

■ Whether the KID needs to be published on the public section of the website – In short, the answer is yes.

■ How performance and cost figures should be presented in the KID if the Recommended Holding Period (RHP) is less than one year – It should be assumed that the performance scenarios should reflect the projected return over the RHP, whilst the disclosure obligations in the performance scenarios for over 1 year and half of the RHP would not be applicable and the costs figures presented in the KID should reflect the projected costs over the RHP. Other resulting amends would also be required to the KID, including explaining the implications of the figures being presented over the RHP rather than per year on the comparability with other PRIIPs of different RHP and explaining any risks associated with holding open-ended PRIIPs with extremely short RHPs.

■ How to present the costs if a moderate scenario shows a total loss of capital or negative return – Point 71(c) of Annex VI should be applied, such that performance should be assumed to be 3% annual growth for the purposes of determining the reduction in yield.

The flow diagrams document sets out the calculation steps for the summary risk indicator (including the calculation of the market risk measure and the credit risk measure) and performance scenario calculations. Although the diagrams are non-binding in nature, they should assist when performing the relevant calculations required under Commission Delegated Regulation 2017/653.

Many of these clarifications had been anticipated following a recent speech by Stephen Maijoor, Chair of ESMA. For more details about the speech, please see our article “ESMA speech on PRIIPS implementation and costs transparency”.

ESMA FINES FIVE BANKS FOR ISSUING CREDIT RATINGS WITHOUT AUTHORISATION

On 23 July 2018, the European Securities and Markets Authority (ESMA) published the decisions of the Board of Supervisors (all dated 11 July 2018) to fine five banks for issuing credit ratings without authorisation, in breach of the Credit Rating Agencies Regulation (CRAR). The relevant banks are Danske Bank, Nordea Bank, SEB, Svenska Handelsbanken and Swedbank.

Under the CRAR, in order to issue credit ratings, a firm must be authorised by ESMA. The authorisation ensures that “ratings are independent, objective and of adequate quality and that Credit Rating Agencies are subject to the same rules and oversight across all EU countries”.

08 | Financial Services Regulation

ESMA found that the five banks mentioned above issued credit research, including what the banks described as shadow ratings, to their clients between June 2011 and August 2016, and SEB continued to do so until May 2018. ESMA also found that the research provided to clients met the definition of a credit rating under the CRAR, while none of the banks was authorised under the CRAR or in the process of applying for authorisation. Finding the banks in breach of CRAR, ESMA decided that the appropriate supervisory measures in each case were a public notice and a fine of EUR 495,000 to each bank.

In the press release, ESMA notes that the banks have a right to appeal the decisions against them to the Board of Appeal of the European Supervisory Authorities.

ESMA UPDATED UCITS AND AIFMD Q&AS

On 23 July 2018, the European Securities and Markets Authority (ESMA) published the updated version of its Questions and Answers (Q&As) on the application of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD) (together, Directives).

Objectives

The aim of the updated Q&As is to promote common supervisory approaches and practices regarding the application of the UCITS Directive, the AIFMD and their implementing measures, as well as to clarify the existing obligations of Alternative Investment Fund Managers (AIFMs) and UCITS managers.

Updated Q&As

More specifically, the updated Q&A documents address the following issues:

■ Supervision of branches of UCITS Management Companies or AIFMs providing MiFID investment services: ESMA noted that, under the UCITS Directive and the AIFMD, when branches of UCITS Management Companies or AIFMs are established in a member state other than the home member state, competent authorities of the home and host member state share the supervisory responsibility. The Directives, however, remain silent in relation to the allocation of supervisory responsibilities when authorised UCITS Management Companies or AIFMs provide investment services through branches outside the home member state. In accordance with article 35(8) of MiFID II, ESMA clarified that it is the competent authority of the host member state that needs to ensure that the branch complies with the MiFID II requirements under Articles

24 (General principles and information to clients) and 25 (Assessment of suitability and appropriateness and reporting to clients).

■ UCITS issuer concentration limits: With regards to the calculation of UCITS issuer concentration limits, it is clarified that only netting, and not hedging, arrangements may be taken into account, in accordance with guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS.

■ UCITS investing in other UCITS or collective investment undertakings with different investment strategies or investment restrictions: ESMA stated that, when a UCITS invests in other UCITS or collective investment undertakings and the target fund(s) have different investment strategies or restrictions, this should be clearly disclosed in the UCITS prospectus. In cases where investing in certain types of assets or derivatives is expressly ruled out, without any reservations, under the rules or instruments of incorporation and prospectus of a UCITS fund, then UCITS Management Companies/self-managed investment companies are expected to conduct proportionate due diligence to ensure compliance with the UCITS’ rules.

■ Depositaries as counterparties in a transaction of assets that they hold in custody: Under article 22(7) of the UCITS Directive, a UCITS depositary or a third party to whom the custody function has been delegated is prohibited from reusing the assets held in custody for their own account. Nevertheless, ESMA clarified that depositaries (or delegated third parties) may act as counterparties in a transaction involving assets they hold in custody, provided that the conditions under the UCITS Directive are met, conflicts of interest are properly managed and the transaction is conducted on an arm’s length basis.

Next Steps

ESMA will be reviewing and updating the Q&As periodically and, should it prove necessary, convert some of the material into ESMA guidelines.

EBA PUBLISHES FINAL REPORT AND RTS FOR HOME-HOST CO-OPERATION UNDER PSD2

On 31 July 2018, the European Banking Authority (EBA) published a final report containing its draft Regulatory Technical Standards (RTS) specifying the framework for co-operation and the exchange of information between competent authorities under Article 29(6) of the revised Payment Services Directive (PSD2) (EBA/RTS/2018/03).

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Article 29(6) of PSD2 mandates the EBA to develop draft RTS to “specify the framework for co-operation, and for the exchange of information, between the competent authorities of the home Member State and the host Member State” where a payment institution is seeking to provide payment services in a member state other than its home member state. The RTS developed by the EBA also needed to make provision for co-operation in the supervision of payment institutions operating on a cross-border basis, in particular the scope and treatment of information to be exchanged. According to both Article 29(6) and 29(2) PSD2, the EBA is also mandated to specify in the RTS the means and details of any reporting requested by host member states from payment institutions on the payment business activities carried out in their jurisdictions by agents or branches. Under Article 111 of PSD2, the RTS are also applicable to Electronic Money Institutions (EMIs). The EBA consulted on a draft of the RTS in October 2017, and received nine responses.

Significantly, following consultation, the EBA dismissed the option for host Competent Authorities to have a discretion to require reporting from a characteristic subset of payment institutions. The EBA determined that where a host Competent Authority decides to require reporting from payment institutions providing payment services in its territory via agents or branches, the reporting must be required of all payment institutions, not solely a subset thereof.

The EBA updated the RTS to provide additional clarification as to how the periodical reporting obligations in the RTS apply to EMIs that use distributors, but not agents or branches, in the host member states.

The next steps will be for the draft RTS to be submitted to the European Commission for endorsement. Following this, the RTS will be passed to the European Parliament and the Council for scrutiny, before being published in the Official Journal of the European Union. The RTS will enter into force 20 days after publication.

IMPLEMENTATION OF PSD2 BY MEMBER STATES

For reference, we have included a table setting out the implementation position for PSD2 in our key European jurisdictions as at 6 August 2018. If you require any additional information on those countries listed below please refer to your local DLA Piper contact.

COUNTRY STATUS DESCRIPTION

Denmark ImplementedDenmark has, since 1 January 2018, implemented PSD2 through the Payments Act (in Danish: lov om betalinger).

Finland Implemented

Finland has implemented PSD2 into Finnish law in two parts: titles III and IV were implemented by amendments to the Finnish Payment Services Act through Law on Amendments to the Payment Services Act (Fi: Laki maksupalvelulain muuttamisesta, 898/2017) and title II, IV and VI by amendments to the Finnish Payment Institutions Act through Law on Amendments to the Payment Institutions Act (Fi: Laki maksulaitoslain muuttamisesta, 890/2017). Both laws entered into force on 13th January 2018.

France ImplementedPSD2 was implemented on 13 January 2018, via Ordonnance no 2017-1252 of 9 August 2017 and Décret (Decree) no 2017-1314 of 31 August 2017.

Germany Implemented

PSD2 was implemented on 13 January 2018, via the Gesetz zur Umsetzung der Zweiten Zahlungsdiensterichtlinie dated 17 July 2017. Some of the commentary to date has been focused on how payment institutions will meet security requirements, the mechanisms by which Payment Initiation Service Providers (PISPs) can authenticate payers and the protection of information provided to Account Information Service Providers and PISPs.

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Greece ImplementedGreek Law 4537/2018 entitled “Transposition of Directive (EU) 2015/2366 on payment services and other provisions”, which entered into force on 15 May 2018, implemented PSD2 in Greece.

Ireland Implemented

PSD2 was transposed into Irish law by the European Union (Payment Services) Regulations 2018 S.I. No.6 of 2018 (Payment Services Regulations 2018). Nearly all the provisions of the Payment Services Regulations 2018 have been applicable from 13 January 2018.

Italy Implemented

Legislative Decree no. 218 of 15 December 2017, which entered into force on 13 January 2018, has implemented the PSD2 in Italy. The focus of this implementing legislation has been on encouraging electronic device initiated payment transactions and promoting competition.

Luxembourg Implemented

A law of 20 July 2018 on payment services, which entered into force on 29 July 2018, has implemented PSD2 in Luxembourg. It was published in the Luxembourg official journal (Mémorial A) on 25 July 2018. The new law amends the Luxembourg law dated 10 November 2009 on payment services and e-money institutions. Furthermore, the Luxembourg Supervision Commission of the Financial Sector has published the following circulars:

– a Circular CSSF 18/677 concerning the EBA Guidelines on the information to be provided for the authorisation of payment institutions and for the registration of account information service providers under Article 5(5) of Directive (EU) 2015/2366 on payment services in the internal market;

– a Circular CSSF 18/681 concerning the adoption of the EBA Guidelines on the criteria on how to stipulate the minimum monetary amount of the professional indemnity insurance or other comparable guarantee under Article 5(4) of Directive (EU) 2015/2366 on payment services in the internal market.

NetherlandsNot implemented

PSD2 will most likely be implemented via two separate laws that will amend the Dutch Financial Supervision Act (Wet op het financieel toezicht), the Dutch Civil Code (Burgerlijk Wetboek) and ancillary laws. These laws are currently available in their draft form and no final implementation laws are yet available.

The laws implementing PSD2 are the following:

Implementing Act PSD2 (Implementatiewet herziene richtlijn betaaldiensten)

Implementing Decree PSD2 (Implementatiebesluit herziene richtlijn betaaldiensten)

On 25 June 2018 amendments to the draft implementing act were published. The new elements introduced in the draft implementing act mainly have regard to data protection (following the entry into force of the GDPR). These changes were debated in Parliament after recess and were adopted by Parliament (Eerste Kamer). Once adopted by Senate (Tweede Kamer), the implementation act will enter into force as soon as possible. The Implementing Decree PSD2 is also not adopted yet. It is expected to be implemented by the end of October 2018.

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NorwayNot implemented

In Norway, PSD2 will be transposed in two parts. Titles III and IV are implemented by amendments to the Norwegian Financial Contract Act of 1999 and titles II, IV and V by changes to the Norwegian Financial Undertakings Act of 2015 and the Payment System Act of 1999. The draft implementation acts and draft explanatory notes, subject to consultation, were published and the consultation process was completed in 2017. We are still waiting for the draft acts to be published based on the consultation process. However, note that on 22 June 2018, the Norwegian Ministry of Finance proposed to implement certain of the institutional law provisions of the PSD 2 (Prop. 110 L (2017-2018) through temporary legislation. Pursuant to the proposed legislation, the payment initiation providers and account information providers shall be made subject to regulation and supervision. The law proposal has recently been submitted to Parliament. Furthermore, on 5 July 2018, the Ministry of Justice suggested to implement level 2 regulations in respect of private law issues related to PSD 2. The regulation is temporary until the law making process of the Norwegian Contract Act is completed. The consultation deadline for these regulations is 5 October 2018.

PortugalNot implemented

[UPDATE as at 3 September 2018] Law no. 57/2018 was published on 21 August 2018 by the Portuguese Parliament, authorizing the Portuguese Government to publish the Decree-Law that will implement the Directive (EU) 2015/2366 (the Second Payment Services Directive, or “PSD2”) in Portugal.

The deadline established in this Law for the implementation of the PSD2 in Portugal is 180 days.

SpainNot implemented

Spain has not implemented PSD2 yet. The first draft of the implementation law was published on 22 December 2017 and a second draft has been published on 11 July 2018. This second draft has been approved by the Council of Ministers for submission to the State Council for their review. Once reviewed by the State Council, it needs a second approval by the Council of Ministers for submission to the two legislative chambers (the Parliament and the Senate). Once approved by the two legislative chambers, the law needs to be published in the Spanish Official Gazette. In light of all these steps required in the legislative process we expect that the Spanish law implementing PSD 2 will not take effect earlier than the fourth quarter of 2018 or first quarter of 2019.

Sweden Implemented

Sweden has, as of 1 May 2018, implemented PSD2 through the Payment Services Act (Sw. Lag (2010:751) om betaltjänster). The Swedish FSA has amended the existing FSA Regulations and general guidelines governing payment institutions and registered payment service providers (FFFS 2010:3) and issued new regulations regarding activities of payment service providers (FFFS 2018:4). The FSA general guidelines regarding reporting of events of material significance (FFFS 2015:15) has, due to the implementation of new regulations for payment service providers, been replaced with FFFS 2018:5, and as a result it no longer applies to payment service providers in their payment service operations.

UK ImplementedPSD2 was implemented into UK law via the PSRs 2017, most of the provisions of which came into force on 13 January 2018.

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THE COMMITTEE ON ECONOMIC AND MONETARY AFFAIRS OF THE EUROPEAN PARLIAMENT PUBLISHES DRAFT REPORT ON THE PROPOSAL FOR A CROWDFUNDING REGULATION

On 10 August 2018, the Committee on Economic and Monetary Affairs of the European Parliament (ECON) published a draft report on the proposal for a regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business (Crowdfunding Regulation). The European Commission’s proposal for a Crowdfunding Regulation and the complementing proposal for a directive amending MiFID II, of 8 March 2018, form part of its Action Plan on how to harness opportunities presented by technology-enabled innovation in the financial services sector.

Background

Crowdfunding provides an alternative source of finance, especially for Small and Medium Enterprises (SMEs). With the introduction of a European passport, Crowdfunding Service Providers (CSPs) will be able to offer their services throughout Europe and gain access to funding at an early stage of the development of their business. Common rules for the operation of crowdfunding platforms across the EU also reflect the ongoing efforts towards building a Capital Markets Union and are expected to improve crowdfunding activity in Europe, without however impeding domestic markets and rules. On this basis, the European Parliament has called for appropriate consumer protection standards to be in place in order to avoid abusive or unfair commercial practices.

The Draft Report

ECON agrees with the Commission’s proposal and, particularly, the introduction of a proportionate risk management framework applicable to CSPs and the high level of investor protection, which the proposal seeks to ensure. However, in its draft report, ECON notes that there is room for improvement and thus suggests the following amendments:

■ The threshold for crowdfunding offers should be set at EUR 8 million instead of EUR 1 million. This higher threshold is consistent with the maximum threshold up to which member states can exempt offers of securities to the public from the obligation to publish a prospectus in accordance with Regulation 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to

trading (Prospectus Regulation). A lower threshold would undermine the attractiveness and competitiveness of the European framework.

■ The current proposal introduces a central supervisory regime placing the primary supervisory responsibility on the European Securities and Markets Authority (ESMA). According to the draft report, however, the role of National Competent Authorities (NCAs) should be enhanced, due to their experience in granting authorisation and supervising the crowdfunding platforms and due to their proximity to the national markets.

■ The Commission’s proposal distinguishes between investment-based and lending-based crowdfunding ruling out more complex structures. With a view to establishing a more proportionate regulation on the basis of activities and risk, ECON proposes that different disclosure requirements should be applicable to platforms facilitating the matching of investors and project owners, on the one hand, and platforms determining the pricing and packaging of offers, on the other hand.

■ The scope of the proposed regulation could expand in order to cover ECSPs raising capital via Initial Coin Offerings (ICOs). ICOs are currently unregulated with consumers being potentially exposed to market fraud and cyber security risks.

■ Third-country CSPs play an important role in terms of scale in cross-border provision of capital to firms across the EU at an early stage of their development. Therefore, third-country CSPs authorised in their home jurisdiction, should be able to provide their services within the EU as long as they are subject to equivalent standards as CSPs with a European passport.

EUROPEAN CENTRAL BANK PUBLISHES ITS OPINION ON THE COMMISSION’S PROPOSALS ON THE PRUDENTIAL TREATMENT OF INVESTMENT FIRMS

On 22 August 2018, the European Central Bank (ECB) published an opinion (Opinion) on the Commission’s proposal for a Regulation on the prudential requirements of investment firms and proposal for a Directive on the prudential supervision of investment firms (Proposed Acts).

Objectives

The Proposed Acts aim to establish a prudential framework, which will be adapted to the specific risks and business models of different types of investment firms. They also seek to

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subject systemically important investment firms to the same prudential rules as credit institutions. To this end, investment firms above certain thresholds would be classified as credit institutions.

The ECB Opinion

While being overall supportive of the Proposed Acts, the ECB raises the following issues:

■ Classification of investment firms as credit institutions

The Proposed Acts classify investment firms into three categories/classes. Under this proposed categorisation, the very largest firms, referred to as “Class 1 firms”, would be investment firms that deal on own account and/or underwrite financial instruments and/or place financial instruments on a firm commitment basis and whose total assets exceed EUR 30 billion or investment firms that are part of a group that carries out these activities and whose total assets exceed EUR 30 billion. These Class 1 firms would be classified as credit institutions and therefore would be subject to MiFID II and the CRR, and supervised by the ECB in the context of the Single Supervisory Mechanism.

Overall, the ECB supports the criteria used that reflect the increased financial stability risks, risk of contagion due to size and level of interconnectedness and high counterparty and market risk of Class 1 firms. It considers that the Proposed Acts establish prudent and consistent supervisory standards creating a level playing field for institutions similar to credit institutions.

Nevertheless, the ECB points out the following:

– the calculation of assets, including in the context of third country groups and third country subsidiaries of undertakings in the Union arising from their consolidated balance sheet, needs to be further clarified;

– the total asset threshold should be complemented by other criteria relevant for the systemic importance of the institution, such as a revenue criterion, level of cross-border activity or interconnectedness;

– the requirement for consultation between competent authorities when a credit institution and the investment firm are under the same control, should also apply even when investment firms are reclassified as credit institutions;

– in relation to the Commission’s proposal requiring third country credit institutions and investment firms to establish an EU parent undertaking to consolidate all of their assets in the EU, the proposed amendment to the

definition of institutions in the Proposed Acts should not preclude investment firms from being required to set up an intermediate EU parent undertaking.

■ Authorisation of investment firms as credit institutions

Under the proposed directive, the competent authority for authorisation of credit institutions shall also be responsible for the authorisation of Class 1 firms as credit institutions. Competent authorities need to cooperate, in particular in order to assess whether the relevant Class 1 thresholds are met. The ECB identifies the need for further clarifications in respect of:

– what follows the granting of authorisation as credit institution;

– what the implications are for, and the competent authority which would sanction, an investment firm that operates above the threshold without authorisation for a significant time and whose application for authorisation is rejected;

– making clear that investment firms classified as credit institutions cannot perform traditional banking activities (i.e. receiving deposits from the public or granting loans), unless they have the relevant authorisation for these activities.

■ Statistical implications

The ECB points out the need to address inconsistencies that may occur in the context of the common standards, definitions and classifications of relevance for the statistical treatment of financial corporations under EU legislation.

■ Macro-prudential perspective on investment firms

The ECB considers that the Proposed Acts do not take into consideration the recommendations of the European Banking Authority (EBA) on the need for a macro-prudential perspective on investment firms. It also suggests that any review of the criteria for assessing systemic investment firms could also consider whether macro-prudential tools could be developed to address specific risks posed by smaller investment firms to financial stability.

■ Provision of services by third country firms

The ECB suggests that harmonised rules are applied to all branches of third country investment firms, including those who provide services to professional clients and eligible counterparties, to ensure consistency. In order to address possibilities for regulatory arbitrage, the treatment of branches of third country credit institutions and investment firms, should

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be consistent. Additionally, the ECB proposes reconsidering the extent of the equivalence regime under MiFIR and the regulation of non-equivalent third country investment firms by member states.

■ Alignment

The ECB notes that the change in the definition of credit institutions may result in unintended inconsistencies with the Capital Requirements Regulation (CRR), MiFID II and amendments which are expected to enter into force in the coming months, and these should be avoided, including in relation to the scope of consolidation. The ECB also recommends that the Proposed Acts should seek to align the wording of its professional secrecy obligations with other EU measures.

ESMA RENEWS PROHIBITION ON BINARY OPTIONS

On 24 August 2018, the European Securities and Markets Authority (ESMA) published a press release renewing the prohibition of the marketing, distribution and sale of binary options to retail clients, which has been in force since 2 July 2018. The renewal will be applicable from 2 October 2018 and shall remain in place for a further three-month period. Additionally, ESMA decided to exclude a limited number of products from the scope of the intervention measure.

Objectives

ESMA concluded that the renewal of the prohibition was necessary, given that the offer of binary options to retail clients continues to raise important concerns in terms of investor protection. There are, however, certain types of binary options that mitigate risks for investors, due to their specific characteristics or the fact that they do not put the investor’s capital at risk. Therefore, these binary options need to be excluded from the scope of the intervention measure.

Exclusions

The renewal of the prohibition does not cover the following products:

■ a binary option for which the lower of the two predetermined fixed amounts is at least equal to the total payment made by a retail client for the binary option, including any commissions, transaction fees and other related costs; and

■ binary options that satisfy cumulatively the following criteria:

– the term from issuance to maturity is at least 90 calendar days;

– a prospectus drawn up and approved in accordance with the Prospectus Directive is available to the public; and

– the binary option does not expose the provider to market risk throughout the term of the binary option and the provider or any of its group entities do not make a profit or loss from the binary option, other than previously disclosed commissions, transaction fees or other related charges.

Next steps

ESMA will continue to review these binary options in the course of the prohibition period. Following its adoption in the official languages of the EU and the publication of an official notice on ESMA’s website, the renewal measure will be published in the Official Journal of the EU.

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UK GOVERNMENT AGREES TO FORCE BRITISH OVERSEAS TERRITORIES TO INCREASE FINANCIAL TRANSPARENCY

On 1 May 2018, the Minister of State for Europe and the Americas Sir Alan Duncan conceded the UK government accepted a cross party amendment that will force British overseas territories such as the British Virgin Irelands and Gibraltar to establish public registers of companies incorporated within their jurisdictions.

The government’s initial position was not to legislate for the overseas territories on this matter in order not to damage the territories’ autonomy. However, following strong support for the measure being voiced by a number of MPs during debate in the House of Commons, the government has agreed to the amendment.

The Bill passed all its House of Commons stages and will now be returned to the House of Lords in a stage known as ping pong.

Similar transparency initiatives were originally proposed by David Cameron and George Osborne in 2013 and gained more support in the wake of the publication of the Panama Papers. According to Transparency International, more than half of the offshore companies referred to in the Panama Papers registered in the British Virgin Islands.

Amendment

The amendment instructs the Secretary of State, by the end of 2020, to prepare a draft Order in Council requiring the governments of any British Overseas Territory that has not introduced a “publicly accessible register of the beneficial ownership of companies registered in each government’s jurisdiction” to do so. The similar amendment applying to the Crown Dependencies (places such as Jersey, Guernsey and the Isle of Man) was not carried forward.

Hostile reception

Commenting on the developments, the CEO of Jersey Finance, Geoff Cook welcomed the fact that these transparency measures were limited to British Overseas Territories, “underlining the contention that the UK Parliament cannot and should not seek to legislate for the Crown Dependencies”. Mr Cook emphasised the benefits of Jersey’s approach of maintaining a central register of ultimate beneficial ownership which “is available to the people who request that vital information”. Mr Cook noted that under such an approach, the right to personal privacy is better balanced against the interests of transparency than it would be if the register was public.

The governments of the British Overseas Territories and some of the bodies representing their financial industries expressed concern that the new measures will damage the economies of those jurisdictions. For example, the government of the British Virgin Islands “vehemently reject[s] the idea that [its] democratically elected government should be superseded by the UK parliament,” while the chief minister of Gibraltar, Fabian Picardo, described the measures as an “unacceptable act of modern colonialism”.

FCA AND PRA CONTRIBUTE TO HM TREASURY’S INQUIRY ON DIGITAL CURRENCIES

On 22 May 2018, the Financial Conduct Authority (FCA) and the Bank of England (BoE) offered their written submissions to HM Treasury’s inquiry on digital currencies. The inquiry was launched on 22 February 2018 with written evidence having already been submitted by a number of market participants, including Barclays and MasterCard.

Consistent with the approach both the FCA and the BoE have taken so far when commenting on digital currencies, the two submissions do not include any big surprises or radical views. They do, however, offer valuable input in relation to their regulatory approach towards cryptocurrencies and confirm the current state of play, to the extent possible considering the currently evolving environment.

In their submission, the FCA confirms that crypto-assets, primarily designed as a means of payment or exchange, are generally not within the regulatory perimeter. However, given their diverse characteristics, each case will have to be considered separately taking into consideration the unique nature of the instruments and structure in question. The FCA helpfully includes a table (please see below) identifying different forms of crypto-assets and offers an initial indication of their regulatory treatment.

The FCA notes that, even though crypto-asset exchange activities are not currently covered under the money laundering regulations, they are included in the EU Fifth Money Laundering Directive which was published in the Official Journal of the EU on 19 June 2018. The FCA recognises the benefits of crypto-assets, including in relation to international money remittance and the issuance and settling of financial instruments, but also points out the potential risks attached, including price volatility, market manipulation and money laundering. It also notes the potential benefits of Distributed Ledger Technology (DLT).

UNITED KINGDOM

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Similarly to the FCA’s messaging, the BoE draws a distinction between crypto-assets and DLT and, taking a technology neutral approach, notes that DLT may have significant potential for the efficiency and resilience of the financial system, but is not without challenges, including in relation to scalability and reliability, privacy and security. The BoE states that crypto-assets are very unlikely to replace commonly used payment systems as they are failing to satisfy the three key functions of money, i.e. act as a store of value, a means of payment and a unit of account, with cyber risk being an additional concern. These points have already been made in a recent speech by Mark Carney, the Governor of the BoE. In BoE’s view, crypto-assets do not pose a material threat to financial stability in the UK as the relevant exposures of the financial institutions are minimal and the total crypto-asset stock is relatively small.

According to the BoE’s submission, the Financial Policy Committee will continue to monitor closely crypto-asset-related developments in order to identify any potential systemic risks. The Prudential Regulation Authority is also assessing how prudential regulations should apply if crypto-assets were held by banks or financial institutions and considering whether additional requirements should be imposed in order to cover associated risks, including extreme levels of volatility. Lastly, the BoE touches on the development of a Central Bank Digital Currency (CBDC) flagging both potential benefits and risks. The BoE does not oppose the idea of a CBDC, but concludes that it will not be issuing one in the medium term.

Table included in the FCA submission to HM Treasury inquiry on digital currencies

Product area Within perimeter? Typical use case

Crypto-assets as a medium of exchange

NO Peer-to-peer payments, and investment assets, e.g. Bitcoin and Ethereum

Regulated payments service which use crypto-asset

YES Intermediary in cross-border transactions, e.g. GBP – Bitcoin – USD transactions

Derivative instruments referencing crypto-assets

YES Financial instrument to bet on price developments (CfDs) or to hedge a position (futures), e.g. CfD providers IG, Crypto Facilities and Plus500

Investment assets in crypto-assets YES Direct investments in crpto-asset, e.g. Swedish registered exchange traded notes

Tokens representing transferable security

YES (‘security token’) Distribution infrastructure for regulated products such as shares and bonds, e.g. issue of traditional shares on public blockchain. Also in the context of ICOs, when tokens amount to a transferable security, more akin to regulated equity-based crowdfunding.

Tokens representing a claim on prospective services or products

NO (‘utility token’) Tokens that do not amount to transferable securities or other regulated products and only allow access to a network or product. Can also be used as a fundraising mechanism akin to unregulsted donation and rewards-based crowdfunding, also in the context of ICOs.

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LATEST CHAPTER OF THE FCA’S HIGH-COST CREDIT MARKET REVIEW

On 31 May 2018, the FCA, following its 18-month review of the high-cost credit market, published two consultation papers pointing to the key areas of concern and focus with regards to arranged and unarranged overdrafts, the rent-to-own market, home-collected credit, catalogue credit and store card products.

The FCA, who had been criticised as too slow in protecting consumers from the high costs of consumer credit, proposed a significant package of reforms to ensure consumers are better protected including the possibility of a cap on rent-to-own lending and a potential backstop price cap for overdraft charges.

The main points raised in the FCA consultation papers are set out below.

Rent-To-Own, Home-Collected Credit, Catalogue Credit and Store Cards

The first consultation paper focuses on rent-to-own, home-collected credit, catalogue credit and store cards, and alternatives to high-cost credit. More specifically:

Rent-to-own: The FCA considers that “the case is made, in principle” for introducing a price cap in the context of rent-to-own products. The FCA proceeds with the relevant proposal in its consultation paper, but notes that it remains open-minded to alternative solutions. It further proposes new rules to ban the sale of extended warranties alongside rent-to-own agreements at the point of sale, taking the view that similar cover is already provided by standard manufacturers’ warranties.

Home-collected credit: The FCA is proposing new rules in order to ensure customers are treated fairly when they re-borrow. It is also introducing new guidance on the interpretation of the ban on “canvassing” cash loans off trade premises, clarifying that firms cannot visit a customer to offer new loans or refinancing unless this is in response to a specific request by the customer. Moreover, a new rule is being contemplated whereby firms would be compelled to provide customers with the comparative costs of refinancing.

Catalogue credit and store cards: The FCA is concerned about the consumers’ understanding of complex products and applicable fees, the lack of control over credit limit increases and the lack of protection for consumers at risk of financial difficulties or persistent debt.

The FCA proposes new rules whereby:

■ catalogue credit and store card firms offering “buy now pay later” and similar offers would have to give consumers clearer explanations of the relevant implications and costs of not paying back within the offer period;

■ firms would have to remind the customers when the offer period is about to come to an end;

■ catalogue credit consumers would enjoy more choice in relation to their credit limit increases;

■ catalogue credit firms would not be allowed to give credit limit increases or increase the interest rate on the account of customers in financial difficulties;

■ firms, including store card firms, would have to identify customers at risk of financial difficulty based on available information and take appropriate steps;

■ firms would have to offer customers in persistent debt help to repay their debt more quickly.

Alternative forms of credit: The FCA also considered wider issues in the high-cost credit sector and in particular, the degree to which demand in the rent-to-own market may be driven by the social housing system and the lack of availability or awareness of alternatives to high-cost credit. The FCA took the view that for such issues to be addressed, public authorities need to work together in a number of areas.

Arranged and Unarranged Overdrafts

In its consultation paper, the FCA sets out immediate measures to improve consumer engagement and awareness of overdrafts, but also notes that it is considering more radical options to ban fixed fees and end the distinctions around unarranged overdraft prices. Such options will, if appropriate, be consulted on later in 2018.

The FCA proposes rules requiring firms to provide online or in-app tools that assess eligibility for overdrafts; improving the visibility and content of key information about overdrafts by means of including an online calculator to show the costs of overdrafts for different patterns of use and help consumers understand how overdrafts work; and expecting firms to send consumers overdraft alerts (including text messages or push notifications) to address unexpected overdraft use.

The FCA also introduces for discussion a potential package of remedies and measures which may form part of the next stage of its work on overdrafts. Such measures include simplifying overdraft pricing structures; a potential backstop price cap for overdraft charges; guidance around which costs firms should consider when ensuring refused payment fees reasonably

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reflect the actual costs; an explicit obligation on firms to have adequate systems and policies around their provision of overdrafts; and interventions by firms at prescribed intervals.

Next steps

The FCA welcomes comments on its consultation papers by 31 August 2018.

The rules in relation to the rent-to-own market, home-collected credit, catalogue credit and store card products are expected to be finalised in autumn 2018 and come into force early in 2019. With regard to the rules on overdrafts, the FCA will consider the feedback received before finalising its rules near the end of 2018, or alternatively, as part of the next stage of its review of pricing interventions and repeat overdraft use.

AML FAILINGS BY BANK RESULT IN FCA FINE AND RESTRICTION ON NEW BUSINESS

On 6 June 2018, the FCA published its final notice issued to Canara Bank, levying a fine of GBP 896,000 and imposing a restriction on accepting deposits for new customers for 147 days, for failings relating to Anti-Money Laundering (AML) systems and controls between 2012 and 2016. Canara is the UK branch of the Indian state owned bank of the same name.

The FCA visited Canara in 2012, and notified it of a number of serious weaknesses in its systems and controls. Following a re-visit in 2015, the remedial actions were considered insufficient, and Canara had failed to test the implementation and effectiveness of the steps taken. A skilled persons report was subsequently commissioned, and found that:

■ the organisational and corporate governance structure and arrangements at the bank were not adequately designed or effective;

■ its compliance and AML systems and controls were not appropriately designed, and the AML risk management and governance framework was not fit for purpose; and

■ there was a lack of understanding of AML risk profile, a lack of monitoring of AML risks and controls, an inability to identify or flag unusual transactions and an inability to recognise politically exposed persons.

These failings were found to be endemic throughout Canara’s UK operations, and had an effect on almost every part of its business.

A key finding from the FCA was a lack of adequate management experience, stemming from senior management transfers from its Indian head office and the resultant lack of understanding of UK legal and regulatory AML requirements.

The FCA stated that in imposing the restriction, in addition to the financial penalty, it hoped that this would be a more effective and persuasive deterrent, and that it would “demonstrate to firms that fail to address deficiencies in their AML systems and controls that the Authority will take disciplinary action to suspend and/or restrict the firm’s regulated activities”.

FCA PUBLISHES DEAR CEO LETTER ON CRYPTOASSETS AND FINANCIAL CRIME

On 11 June 2018, the FCA published a dear CEO letter (Letter) to banks regarding the FCA’s expectations in relation to financial crime for firms who provide services to clients who conduct business in or related to cryptoassets, or whose source of wealth derives from such assets or activities relating to such assets.

The anonymity of cryptoassets has long troubled regulators because of their potential use in financial crime. The Letter recognises that although there are legitimate uses for cryptoassets, firms need to take “reasonable and proportionate” measures to reduce the risk of facilitating financial crime. The Letter outlines what the FCA considers such steps might entail.

The Letter, broadly, targets firms providing banking services to clients who conduct significant business activities or derive significant revenues from crypto-related activities. The three examples identified in the Letter are:

■ firms offering services to cryptoasset exchanges;

■ firms offering trading activities where the client’s or counterparty’s source of wealth is derived from cryptoassets; and

■ where the firm wishes to arrange, advise or take part in an Initial Coin Offering (ICOs).

The types of “appropriate steps or actions” that may be considered include staff training; updating the firm’s existing financial crime frameworks; engaging with clients to understand their businesses better; carrying out due diligence on key individuals; assessing the adequacy of a cryptoasset exchange’s Customer Due Diligence (CDD); and considering the ICO issuance’s investor base, organisers, the functionality of the tokens and the jurisdiction. The Letter notes that this should be applied on a risk-based approach.

The Letter also states that firms should assess the risks posed by a customer whose wealth or funds derive from the sale of cryptoassets or cryptoasset-related activities using the same criteria as for other sources of wealth or funds. Whilst the FCA acknowledges that the evidential trail behind cryptoasset

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transactions may be weaker, this does not, in their view, justify the application of a weaker or different evidential test – and the Letter advises that firms should exercise particular care in these cases. The FCA explicitly identifies use of state-sponsored cryptoassets which are designed to evade international sanctions as a high risk indicator.

The Letter concludes by considering investment fraud, and specifically endorses the good and bad practice guidance contained in the FSA’s 2012 paper on investment fraud as being relevant to ICOs.

It is, perhaps, noteworthy that the FCA’s working definition of ‘cryptoassets’ builds on its definition of ‘digital’ or ‘cryptocurrencies’ adopted in its discussion paper on distributed ledger technology published in 2017. The FCA defines ‘cryptoassets’ in the Letter as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value”. This therefore includes both permissioned and permissionless distributed ledgers, which is broader than the definition for ‘digital currencies’ or ‘cryptocurrencies’ used in the feedback statement, which only included permissionless distributed ledgers.

The Dear CEO Letter comes in the context of the FCA and Bank of England submissions to HM Treasury’s inquiry on digital currencies. We have considered this further in our article “FCA and PRA contribute to HM Treasury’s inquiry on digital currencies”, in this publication.

MONEY MARKET FUNDS REGULATIONS 2018 PUBLISHED

On 11 June 2018, HM Treasury published the Money Market Funds Regulations 2018 (UK Regulations), which came into force on 21 July 2018. The UK Regulations are published in the context of the EU Regulation 2017/1131 on money market funds (EU MMF Regulation) which became applicable in the UK on the same date.

While the EU MMF Regulation is directly applicable in the UK, the UK Regulations amend the Financial Services and Markets Act 2000 and relevant secondary legislation in order to designate the FCA as the authority responsible for authorising and regulating money market funds (MMFs) in the UK. The FCA will have the power to investigate and bring enforcement actions against funds directly for breach of the EU MMF Regulation.

Overview of the EU MMF Regulation

The EU MMF Regulation introduces a framework of requirements towards enhancing the liquidity and stability of MMFs. In particular, the EU MMF Regulation aims to address concerns relating to MMFs spreading or amplifying risks throughout the financial system.

MMFs are investment funds that invest in highly liquid, short-term debt instruments such as government bonds or corporate debt. They are primarily used to provide short-term finance to financial institutions, corporations and local governments, allowing those entities to spread their credit risk and exposure and avoid relying solely on bank deposits. MMFs are operated by asset management companies which may either run the MMF independently or be sponsored by a bank to do so. MMFs can be denominated in any currency, however those based in Europe are generally denominated in euro, pound sterling or US dollar.

Article 1 of the EU MMF Regulation sets out that the Regulation applies to a collective investment undertaking that meets the following conditions:

■ it requires authorisation as an Undertaking for Collective Investment in Transferable Securities (UCITS) or is authorised as a UCITS under the UCITS Directive 2009/65/EC (UCITS Directive), or it is authorised as an Alternative Investment Fund (AIF) under the Alternative Investment Fund Managers Directive (AIFMD);

■ it invests in short-term assets, i.e. financial assets with a residual maturity not exceeding two years; and

■ it has distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment.

The EU MMF Regulation provides for three types of MMF: variable new asset value MMFs, public debt constant net asset value MMFs, and low viability net asset value MMFs. New transparency requirements under the EU MMF Regulation mean that investors should be clearly informed of the type of MMF and whether the MMF is of a short-term or a standard nature. The manager of an MMF is further required to make certain information available to investors on a weekly basis, including the maturity breakdown of its portfolio, its credit profile, the total value of its assets, its net yield, and details of the ten largest holdings in the MMF.

The EU MMF Regulation prescribes the assets that MMFs are permitted to invest in. Broadly, these are money market instruments, eligible securitisations and Asset-Backed Commercial Papers (ABCPs), deposits with credit institutions, financial derivative instruments, repurchase agreements, reverse repurchase agreements, and units or shares of other MMFs. Diversification requirements in the EU MMF Regulation mean that an MMF is not permitted to invest more than 5% of its assets in money market instruments, securitisations and ABCPs issued by the same body, or 10% of its assets in deposits made with the same credit institution. The aggregate of all MMF’s exposures to securitisations and ABCPs may not exceed 20% of the assets of the MMF.

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Also introduced by the EU MMF Regulation is the requirement for an MMF to have a prudent internal credit quality assessment procedure for determining the credit quality of the money market instruments, securitisations and ABCPs in which it intends to invest.

Next steps for MMF managers and sponsor banks

Where a fund is already categorised as a UCITS or an AIF, the manager will need to submit prescribed documentation to its competent authority in order for the UCITS or AIF to be authorised as an MMF. The UK Regulations provide that the competent authority in the UK will be the FCA. The EU MMF Regulation contains a transitional provision for existing UCITS and AIFs, allowing an 18 month window from the date the EU MMF Regulation comes into force for the manager to submit an authorisation application. Therefore the deadline for the submission of applications for authorisation is 21 January 2019.

For new funds, a UCITS manager can apply for the fund’s authorisation as an MMF as part of the UCITS authorisation process. An AIF can only be authorised as an MMF if its manager is already authorised under AIFMD.

Authorisation will be valid across all EU member states. Before applying for authorisation, managers and sponsors of existing MMFs will need to consider which of the new model MMFs it is most suitable for the fund to operate as, as well as how the fund will need to be adapted in order to comply with the new requirements.

BANK OF ENGLAND PUBLISHES SPEECH ON RESILIENCE AND CONTINUITY IN AN INTERCONNECTED AND CHANGING WORLD

On 13 June 2018, the Bank of England (BoE) published a speech on resilience and continuity in an interconnected and changing world. The speech, delivered by Lyndon Nelson, Deputy CEO of the Prudential Regulation Authority and Executive Director of the BoE, tracked developments in the financial services sector over the last 30 years, focussing on the increasing dependency of the financial system on technology and data and the resultant importance of operational resilience.

Mr Nelson set out that he envisages that operational resilience will soon be on a par with financial resilience and a key part of a firm’s risk profile. In recent years, polls of regulated entities have shown cyber security risk to now be considered the number one risk to firms, with increasing numbers of operational incidents occurring, stemming from both internal failures and external attack. Mr Nelson suggested that the cyber threat is bringing operational resilience into greater focus and that it is the job of regulators to set clear expectations of firms and their operational resilience.

The speech highlighted examples of both recent and ongoing work of regulators in the operational resilience space, including the work of the Financial Policy Committee (FPC) around setting expectations for the minimum levels of service provision that firms must provide in relation to key economic functions in the event of disruption, and the development of supervisory tools that will allow for the assessment of firms’ resilience against the FPC’s expectations. The speech also touched on the importance of ensuring that financial regulators operate under a common framework, providing a joined up approach to regulation.

While Mr Nelson explained that this ongoing work will be the subject of a future Discussion Paper, published jointly with the FCA, he outlined his expectation that firms will be on a ‘WAR’ footing: able to ‘withstand’, ‘absorb’, and ‘recover’ from operational disruptions. To withstand such risks, he proposed that firms will need to set their own tolerances for key business services, identifying when a disruption would pose a threat to the firm, consumers, or financial stability; and that firms will be responsible for testing those tolerances and demonstrating that they have the capability to deliver a resilient service. While the intention is that the focus on building the capability to ‘withstand’ will reduce the likelihood of operational incidents occurring, firms will nevertheless need to have incident management strategies in place in order to allow them to properly ‘absorb’ any operational shocks that do occur. Finally, firms will need to be able to ‘recover’ from operational incidents, with viable and tested contingency plans in place to enable them to resume critical functions.

While acknowledging that technology is opening up opportunities for financial sector firms and for customers, Mr Nelson concluded his speech by emphasising the need to build a more resilient financial system, “able to withstand growing threats, able to absorb shocks when they do occur and able to recover quickly from any operational incident so that the critical functions in which customers, the sector and the economy rely are unaffected”.

TREASURY PUBLISHES RESPONSES TO CALL FOR EVIDENCE ON IMPLEMENTATION OF PROBLEM DEBT BREATHING SPACE SCHEME

On 19 June 2018, the Treasury published its call for evidence response (Response) in respect of the government’s proposed 2017 manifesto pledge to introduce a “breathing space scheme” for serious problem debt (Scheme). The call for evidence for the Scheme was published in October 2017 (Call for Evidence), and the Response summarises the feedback received from over 80 unique respondents. A consultation paper is expected later in the summer with proposals for the Scheme.

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The Scheme, broadly, consists of two aspects:

■ The first part is designed to give those in “serious problem debt” the legal right to a six week protection period, to receive debt advice and enter into a sustainable debt solution (i.e. to provide the individual with a six-week ‘breathing space’ period).

■ The second part is a proposed Statutory Debt Repayment Plan (SDRP), which would enable individuals with unmanageable debts to enter into a debt repayment agreement with creditors to repay within a realistic timeframe. During the SDRP period, the individual would receive legal protections from creditor taking enforcement action.

It is noteworthy that “problem debt” was broadly defined in the Call for Evidence as instances where debt and arrears absorb an “excessive proportion” of income. One of the requested inputs was a more precise definition of this, and any such definition will presumably be incorporated as part of any subsequent consultation.

Some of the key issues raised in Response were:

■ Most respondents felt that an individual should have to seek debt advice before entering into a breathing space period, although there may be circumstances where this is not appropriate.

■ Some respondents argued that there should be some specified criteria (in addition to speaking to a debt advisor) which would determine eligibility for a breathing space period. Others, however, felt that this was inappropriate given the complexity and wide variety of individuals struggling with problem debt. Many respondents felt there needed to be an element of discretion in determining eligibility for a breathing space period.

■ Respondents broadly thought that all of an individual’s debts should be caught within the breathing space, aside from certain, specific, often sensitive debts (such as child maintenance payments).

■ There was a divergence of views regarding freezing of interest, fees and charges during the breathing space period.

■ Most respondents felt that the breathing space should be entered on a person’s credit file.

■ A wide variety of structures were considered for the administration of the breathing space.

■ Although a number of respondents considered that a single creditor should not have a veto on an individual entering an SDRP, there was less consensus about the course of action to be pursued where multiple creditors objected to a SDRP.

■ Most respondents felt the SDRP staying in place should be contingent on an individual keeping up with agreed repayments and, if an SDRP were to fail, a number of respondents suggested that creditors would be able to revert to their usual collection practices.

■ Most respondents felt that collection activity should be stopped and interest fees and charges frozen, during an SDPR period and that all of an individual’s debts should be included (aside from certain, specific debts similar to those for the breathing space period). There was less agreement on whether interest, fees and charges could be applied retrospectively covering the period of the SDRP, should the SDRP fail.

■ There was less consensus on how the Scheme could be appropriately administered for creditors.

The Treasury has stated it will consult on proposals to design the Scheme later this summer, with regulations establishing the scheme expected to be made during 2019.

The issue of problem debt has echoes of what the UK Financial Conduct Authority (FCA) is doing in areas of the consumer credit market since it took over the regulation of this area from the Office of Fair Trading in 2014.

By way of example, the FCA recently announced a package of remedies following its Credit Card Market Study, including looking at issues of persistent credit card debt and early intervention mechanisms for credit card firms. For more details please see our article on “new rules and guidance on persistent credit card debt”, discussed below.

Although broader in scope than merely for financial services firms, any Scheme would likely have the effect of increasing the pressure on consumer credit firms operating in this space to calculate a customer’s affordability at the outset and during the ongoing relationship with a customer – to avoid ending up subject to breathing space or SDRP moratoriums. It will also be important to ensure that firms’ collections teams are alert to the issues that such a Scheme could raise.

The consultation, when it comes out this summer, should be on the radar for such firms, who should be prepared to respond if they have particular concerns.

22 | Financial Services Regulation

FCA STATEMENT ON STRONG CUSTOMER AUTHENTICATION AND COMMON AND SECURE OPEN STANDARDS OF COMMUNICATION UNDER PSD2

On 22 June 2018, the FCA published a statement (Statement) on its website, providing its response to the recent publication by the European Banking Authority (EBA) of an opinion (Opinion) and a consultation on draft guidelines (Draft Guidelines) on the implementation of the Strong Customer Authentication (SCA) and Common and Secure open standards of Communication (CSC) Regulatory Technical Standards (RTS) under the Second Payment Services Directive (PSD2).

The RTS were published in the Official Journal in March, giving firms until 14 September 2019 to comply with their requirements. The Statement, the Opinion and the Draft Guidelines aim to provide more certainty and clarity to competent authorities and market participants in advance of implementation. For more details on the EBA Opinion and Draft Guidelines, please see our article “EBA publishes opinion on strong customer authentication”, in the EU section of this publication.

What are SCA and CSC?

In high level terms, the SCA requirements are designed to increase the level of security associated with electronic payments, requiring verification of a customer’s identity in particular prescribed circumstances, and setting out that this has to be done by reference to at least two of the following criteria: something only the customer knows, something only the customer possesses or something inherent to the user (e.g. fingerprint, voice recognition, iris).

The CSC requirements are designed to regulate the interaction between different payment service providers to facilitate the introduction of two new types of payment services (payment initiation services and account information services). These new service providers can, with the consent of a payment services user, share access to the customer’s payment account, which is provided and maintained by the customer’s Account Servicing Payment Service Provider (ASPSP).

One feature of the CSC requirements is the obligation for ASPSPs to provide for a secure communication channel to Third Party Payment service providers (TPPs) to access the customer’s payment account using secure Application Programming Interfaces (APIs). These communication channels can either be through standardised APIs or firms can adopt a more bespoke version. This bespoke version has still to meet the requirements in the RTS, including providing a contingency access mechanism (known as a “fall

back mechanism”) where the interface is down. This fall back mechanism, however, does not have to be provided if the relevant competent authority is satisfied that four prescribed tests are met, as set out in Article 33(6) of the RTS. In the UK, this competent authority is the FCA.

What do the Opinion and Draft Guidelines say?

The Opinion, which is addressed to competent authorities, seeks to clarify a number of issues identified by market participants and competent authorities on the implementation of the RTS, including in relation to exemptions to SCA, consent, data sharing and the requirements for APIs and dedicated interfaces.

The Draft Guidelines provide more information about how the four tests should be applied under Article 33(6) of the RTS, with the aim of bringing regulatory and supervisory convergence in this area. The focus of the Draft Guidelines includes providing clarity in respect of service levels, availability and performance of the interfaces to the satisfaction of the payment services providers, the wide usage of the interface, the resolution of issues and consultation by competent authorities with the EBA.

How has the FCA responded?

In the Statement, the FCA indicated its support for the Draft Guidelines, noting that if the final version of the guidelines was unchanged from the Draft Guidelines, then the FCA expected to comply with them, subject to their own consultation obligations.

The FCA stated that it will consult on the proposed process and level of information required from firms to make an exemption assessment under Article 33(6) of the RTS. In respect of timing, the FCA stated that it expects such assessments to be carried out from early 2019, and will aim to respond to exemption requests promptly.

The FCA also provided some information to ASPSPs in advance of the FCA’s consultation:

■ The FCA reiterated its preference that market participants adopt standardised APIs, such as those developed by the Open Banking Implementation Entity.

■ In addition to the ASPSP’s obligations under the RTS to make available technical specifications and provide a testing and support facility by 14 March 2019, the FCA encouraged those seeking to rely on an exemption to make such specifications available beforehand.

■ The FCA encouraged timeliness in respect of requests for exemptions to allow for a full assessment to be made. The FCA noted it was not empowered to grant partial exemptions.

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The FCA also gave guidance for ASPSPs when designing their interfaces:

■ Some ASPSPs will only be able to demonstrate that their interface is “available to be widely used”, as opposed to demonstrating it is “widely in use”.

■ The use of redirection by an ASPSP is not automatically an obstacle.

■ There is no requirement to provide more than one method of access.

■ ASPSPs must avoid imposing unnecessary requirements (such as additional consent checks).

■ The FCA cannot exempt ASPSPs whose implementation created obstacles to the provision of third party access, for example where the interface created delays and friction in the customer journey.

Next Steps

The consultation on the Draft Guidelines ran until 13 August 2018, with the final version to be published subsequently. The FCA has stated that it plans to consult on relevant changes to its rules and guidance to reflect the RTS, the Opinion and the Draft Guidelines during summer 2019.

With the implementation date for SCA and CSC applicable from 14 September 2019, and with technical specifications needing to be available six months before this, the industry will no doubt be looking forward to reviewing the contents of the FCA’s proposals as soon as they become available.

FCA CONSULT ON COMPLAINTS HANDLING AND EXTENDING THE JURISDICTION OF THE FOS FOR AUTHORISED PUSH PAYMENT FRAUD

On 26 June 2018, the FCA and Financial Ombudsman Service (FOS) have published a joint consultation paper (Consultation) on firm complaints handling and extending the jurisdiction of the FOS to include handling complaints regarding Authorised Push Payment (APP) scams in cases where the PSP who received the APP fraud funds did not do enough to prevent the fraud, or where it failed to respond to it sufficiently.

APP fraud is where a fraudster tricks a payer to instruct their Payment Service Provider (PSP) to send money from their account to another account held in the name of the fraudster. The difficulty for PSPs is that these transactions can be very difficult for PSPs to detect in a firm’s analytics, since they will be likely to look very similar to genuine payment instructions.

APP scams are deemed by regulators to be a growing problem, and a move towards further regulation had been expected by the industry following the Which? Super-complaint to the Payment Systems Regulator (PSR) and FCA in September 2016, alleging insufficient protections for victims of APP fraud compared with other types of fraud, and the FCA’s and PSR’s responses in November 2017 calling for the industry to do more.

Under the Consultation, firms who receive funds that are the result of APP fraud will be required to handle complaints about alleged APP fraud in line with the Dispute Resolution: Complaints (DISP) sourcebook in the FCA Handbook. Eligible complainants would also be able to refer their complaints against such PSPs to the FOS if they are unhappy with the outcome reached by the PSP, or if the PSP has failed to respond to the complaint. This will be effected through changes to the FOS’ compulsory jurisdiction and voluntary jurisdiction. The Consultation proposes the date after which acts or omissions might be caught under the new broader scope of the FOS would be 1 January 2019.

The Consultation also proposes to amend the FOS’ jurisdiction to capture complaints about cooperation between PSPs when the account details provided about the payee are incorrect and where there is a complaint between a payment service user and a PSP about a PSP’s obligations under Titles III and IV of the Second Payment Services Directive (PSD2). Since these changes are being implemented to transpose provisions of PSD2, the Consultation proposes that acts or omissions after 13 January 2018 would be eligible for such a referral, to mirror PSD2’s implementation date.

The PSR, for its part, consulted on introducing a voluntary contingent reimbursement model code for the industry in November 2017, which set out a number of scenarios under which APP scam victims would be entitled to reimbursement. The code is to be developed between industry and consumer representatives, with a public consultation expected in September 2018.

The Consultation is open until 26 September 2018, with resulting rules to be published in due course.

24 | Financial Services Regulation

HM TREASURY, FCA, BOE AND PSR APPROACHES TO FINANCIAL SERVICES LEGISLATION IN LIGHT OF BREXIT

The European Union (Withdrawal) Act (EUWA), which repeals the 1972 European Communities Act and makes provision with regard to the UK’s withdrawal from the EU, received Royal Assent and officially became law on 26 June 2018. On 27 June 2018, HM Treasury, the Financial Conduct Authority (FCA), the Bank of England (BoE) and the Payment Systems Regulator (PSR) published statements on their respective approaches to the UK financial services legislation in light of Brexit.

HM Treasury Approach

Implementation Period

Assuming no hard Brexit at the end of March 2019, an implementation period has been provisionally agreed between the UK and EU, which will run from 29 March 2019 until 31 December 2020. During that time, the UK will have to comply with existing EU rules, continue to implement new ones, but will also continue to be treated as part of the EU single market.

HM Treasury seeks a “deep and special future partnership with the EU”, stability with regard to recognition of equivalence and an open and collaborative relationship between supervisors. It also confirms the government’s intention to introduce a new bill, the Withdrawal Agreement and Implementation Bill, which will transpose the Withdrawal Agreement with the EU into national law.

Contingency Preparation

HM Treasury advises firms to “continue to plan on the assumption that an implementation period will be in place from 29 March 2019 – and, therefore, that they will be able to trade on the same terms that they do now until December 2020”. While confident that a deal will be concluded with the EU, the government must still prepare for all eventualities, including a “no-deal” scenario. To that end, HM Treasury plans to use its powers under the EUWA.

The EUWA converts the existing directly applicable EU rules into UK domestic law and preserves UK law that previously implemented EU Directives. As a contingency measure, the EUWA also gives ministers powers to “prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law, through Statutory Instruments” (SIs). Such powers are time-limited (for two years after the exit date) and SIs are only intended to smooth the Brexit transition and not to make policy changes. HM

Treasury also plans to delegate powers to the UK’s financial services regulators in order for them to address deficiencies in their respective rulebooks and to introduce transitional contingency measures (onshoring).

HM Treasury’s approach is for the same laws and rules, as currently applicable in the UK, to continue to apply at the point of exit. However, some changes are required in order to reflect the UK’s new position outside the EU.

The deficiencies identified by HM Treasury include the following:

■ functions that are currently carried out by EU authorities that would no longer apply to the UK;

■ certain provisions in retained EU law that would become redundant;

■ certain provisions that would be inconsistent with ensuring a functioning regulatory framework;

■ certain provisions that would lead to significant disruption for firms or customers of firms; and

■ certain provisions requiring participation in EU institutions, bodies, offices and agencies.

Fixing Deficiencies

Should the UK leave the EU without a deal, the UK’s position in relation to the EU, as confirmed by the European Commission, would be determined by the default member state and EU rules applicable to third countries. Similarly, the UK would default to, in principle, treating EU member states under its third country frameworks, including the Financial Services and Markets Act 2000, the Banking Act 2009 and the Bank of England Act 1998.

For cases where such third country frameworks prove insufficient, HM Treasury identified an alternative approach in order to manage the transition. This approach is based on the following principles:

■ having a functioning legislative and regulatory regime in place;

■ enabling regulators and firms to be ready by minimising disruption and avoiding material unintended consequences for the continuity of service provision to UK customers, investors and the market;

■ protecting the existing rights of UK consumers; and

■ ensuring financial stability.

HM Treasury noted that the introduction of a Temporary Permissions Regime (TPR), as initially announced in December 2017, is advisable in order to allow firms of the European

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Economic Area (EEA) to continue operating in the UK for a time-limited period after Brexit. It also mentioned that the government intends to introduce further specific transitional regimes for entities operating cross-border and outside of the passporting framework.

Next Steps

The first financial services Statutory Instruments (SIs), including the SIs delivering the Temporary Permissions Regime, the Temporary Recognition Regime for central counterparties and the SI sub-delegating the power to fix deficiencies in EU Binding Technical Standards (BTS) and regulator rulebooks to the financial services regulators, will be laid soon. Further SIs will be laid over the Autumn into early 2019.

FCA, BoE and PSR Approach

HM Treasury’s statement was followed by similar statements issued by the FCA, the BoE and the PSR. All three statements repeat the key points already raised by HM Treasury and focus particularly on their recently delegated tasks to amend and maintain the BTS and to update their respective rulebooks. The three regulatory bodies announced that consultations will be launched in order to determine how such amends will be introduced.

It is worth noting that the FCA announced that some of their initiatives, such as their work on illiquid assets or the remit of Independent Governance Committees, will be pushed back. However, the FCA will continue working on initiatives, such as their High-Cost Credit Review, the implementation of the Senior Managers and Certification Regime and next steps from their Asset Management Market Study.

It is noted that on 20 August 2018 the UK Government published a framework on the proposed future partnership between the United Kingdom and the European Union for financial services following the exit of the UK from the EU. For further information, please see our relevant article in this publication.

PRA “DEAR CEO” LETTER ON EXISTING OR PLANNED EXPOSURE TO CRYPTO-ASSETS

On 28 June 2018, the Prudential Regulation Authority (PRA) published a ‘Dear CEO’ letter by Sam Woods, Deputy Governor and CEO of the PRA, with regards to existing or planned exposure to crypto-assets. The purpose of the letter was to remind PRA regulated entities of their obligations and communicate the PRA’s corresponding expectations.

Mr Woods mentioned that, even though exposure to crypto-assets may have been, to date, limited, it is worth noting that crypto-assets have exhibited high price volatility and relative liquidity and they raise concerns regarding misconduct and market integrity, as well as money laundering and terrorist financing. In light of these characteristics, firms should be reminded of their responsibilities as follows:

■ PRA’s Fundamental Rule 3: act in a prudent manner;

■ PRA’s Fundamental Rule 5: have effective risk strategies and risk management systems; and

■ PRA’s Fundamental Rule 7: deal with regulators in an open and co-operative way.

The following risk strategies and risk managements systems are considered by the PRA as the most appropriate in the context of crypto-assets:

■ Firms should recognise that crypto-assets are a new and evolving assets class whose risks must be fully considered by the board and high ranking executive officers. Consequently, an individual approved by the PRA to perform an appropriate Senior Management Function (SMF) should be involved actively in reviewing and signing off on the risk assessment framework for any planned direct exposure to crypto-assets and/or entities heavily exposed to crypto-assets.

■ Firms’ remuneration policies and practices should ensure that the incentives provided for engaging with crypto-assets do not encourage excessive risk-taking.

■ Firms, relying on appropriate and relevant expertise, must ensure that their risk management approach is commensurate to the risks of crypto-assets. They should, therefore, undertake extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks, including financial but also operational and reputational risks.

Mr Woods confirms that crypto-assets should not be considered as currency for prudential purposes and notes that their classification for prudential purposes should reflect firms’ comprehensive assessment of the risks involved. If relevant, firms should set out their consideration of risks relating to crypto-exposures in their Internal Capital Adequacy Assessment Process or Own Risk and Solvency Assessment. They should also inform their usual supervisory contact accordingly.

26 | Financial Services Regulation

FCA CREATES NEW PREMIUM LISTING CATEGORY FOR SOVEREIGN CONTROLLED COMPANIES

From 1 July 2018, sovereign controlled companies seeking to list securities in the UK are able to benefit from a new premium listing category introduced specifically for commercial companies controlled by a shareholder that is a sovereign country. This distinct listing category has been created in recognition of the different relationship that sovereign controlling shareholders have with the issuer, as compared to other types of controlling shareholder.

The proposal for a new premium listing category open to sovereign controlled companies was the subject of a Consultation Paper (CP17/21) published by the FCA in July 2017. Following feedback from stakeholders, the FCA published a Policy Statement (PS18/11) in June 2018 in which it confirmed that it would be proceeding with the creation of the new category, in spite of opposition from a number of buy-side institutions which responded to the consultation. The FCA iterated in the Policy Statement that the new category is designed to recalibrate the existing premium listing requirements, revising those parts which it perceived as too onerous for some sovereign controlled companies. The FCA highlighted that “companies with a sovereign controlling shareholder can have interactions with the sovereign that differ in scope, frequency and nature from interaction with other types of controlling shareholder”, and that more information is usually available on sovereign states than on private controllers, meaning that investors have the ability to assess sovereign risk.

The FCA published the Listing Rules (Sovereign Controlled Commercial Companies) Instrument 2018 in an appendix to the Policy Statement. The instrument is now in force and amends the Listing Rules to create the new premium listing category, “premium listing (sovereign controlled commercial company)”. For the purposes of the new category, the definition of “sovereign controlled commercial company” sets the threshold for control of the company by a State at 30% of the company’s voting rights.

The new listing category continues to subject sovereign controlled companies to the existing premium listing requirements, but with two modifications:

■ there is no requirement to put in place a controlling shareholder agreement with the State; and

■ it will not be necessary to obtain prior shareholder approval or a sponsor’s fair and reasonable opinion for transactions between the company and the State.

The modifications are designed to encourage sovereign controlled companies to seek a premium listing, rather than investing elsewhere or seeking a standard listing. While the option of seeking a standard listing does remain open to sovereign controlled companies, this would provide investors with fewer protections.

In a press release published alongside the finalised rules, Andrew Bailey, Chief Executive of the FCA, stated that: “These rules mean when a sovereign controlled company lists here, investors can benefit from the protections offered by a premium listing. This raises standards. This package recognises that the previous regime did not always work for these companies or their investors. These rules encourage more companies to adopt the UK’s high governance standards”.

The new premium listing category is now effective and issuers are able to seek an admission or transfer of securities to listing under this category. Issuers wishing to do so should contact the FCA’s Listing Transactions department.

FCA PUBLISHES RULES ON THE EXTENSION OF THE SMCR TO WHOLE FINANCIAL SERVICES INDUSTRY AND PROPOSES NEW DIRECTORY OF FINANCIAL SERVICES WORKERS

On 4 July 2018, the FCA published a number of documents relating to the implementation of the Senior Managers and Certification Regime (SMCR), including a consultation paper (CP18/19) outlining its proposals to introduce a new public register, the Directory, containing the details of key individuals working in the financial services industry.

The proposed Directory will include the information on all individuals who hold Senior Manager positions requiring FCA approval as well as staff falling under the Certification Regime. The FCA had received industry feedback that the transition from the Approved Persons Regime to the Certification Regime would result in significant numbers of staff no longer appearing on the publicly searchable financial services register. The proposed Directory rectifies these concerns but ensures that information on Certified Persons will be publicly available. In a press release, the FCA said that the Directory “has been designed to provide user friendly, practical and easy to understand information” and will include “more information about individuals working in financial services than is currently available”.

The FCA also published its Policy Statements containing near final rules on extending the SMCR to FCA firms (PS18/14) and to insurers (PS18/15) conducted earlier this year. The HM Treasury has decided that the regime will commence on 9 December 2019 for FCA regulated firms and on 10 December 2018 for insurers.

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In addition, FCA published the Final Guidance (PS18/16) on the Duty of Responsibility under SMCR for insurers and FCA solo-regulated firms. The FCA noted that the guidance it published should help firms “understand what steps they need to take to prepare for the SMCR’s implementation”.

Commenting on the publication, Jonathan Davidson, Executive Director of Supervision (Retail and Authorisations) at the FCA, said:

“The Senior Managers and Certification Regime sets clear standards for the conduct that consumers and regulators expect from all financial services staff. These standards of behaviour are central to the FCA’s priority of promoting healthy cultures in firms.”

FCA PUBLISHES INVESTMENT PLATFORMS MARKET STUDY

On 16 July 2018, the FCA published its investment platforms market study interim report (MS17/1.2) (Interim Report), outlining the FCA’s view on how competition in the investment platform market works and how it would like the market to develop. The market study follows an earlier report on the asset management market study (MS15/2.3), published last year, which highlighted some potential competition issues in this sector.

The Interim Report identifies investment platforms as a growing and significant distribution channel, with the platform service provider market doubling since 2013 from GBP 250bn to GBP 500bn assets under administration.

The Interim Report found that the market appears to be “working well in many respects” and that the level of customer satisfaction is high. On average, the FCA found that customers who pay more receive better functionality and the FCA found little evidence of consumers paying more for “no good reason”. Lack of excess profitability in the sector has led the FCA to conclude that there are no widespread competition concerns in the investment platforms sector.

The FCA did, however, raise a number of areas where it felt there was room for market improvement, including:

■ consumers who would benefit from switching between platforms can find it difficult to do so;

■ price sensitive consumers having difficulties shopping around and choose a lower-cost platform;

■ the risks and expected returns of model portfolios with similar risk labels were unclear;

■ consumers with large cash balances on investment platforms not knowing they are missing out on investment returns, the interest they lose or the charges they pay by holding cash in this way; and

■ “orphan clients”, namely those clients who were previously advised but no longer have any relationship with a financial adviser, being unaware that they face higher charges and lower service.

In the Interim Report, the FCA proposed measures to remedy some of these concerns. Whilst it recognised that full implementation of the rules introduced under MiFID II could address some of the problems identified, the FCA noted that additional rules may be required to supplement the current framework. The measures proposed included:

■ Providing help for consumers to shop around in order to choose on the basis of price. Although not proposing additional costs and disclosure rules at this stage, the FCA stated they wanted to see more innovation in the way costs and charges were presented. The FCA stated that other options being considered included giving intermediaries more data on platform charges and performance.

■ Using platform providers to drive competition between asset managers. The FCA noted that it was seeking views on the impact of arrangements between asset managers and platform providers which stipulate a “best price” or “no lower price elsewhere” condition. The FCA also stated that their behavioural research suggested attention on asset manager charges can be heightened by presenting charges in a clear, understandable and prominent way.

■ Assisting consumers with large cash balances on understanding the cost and implications of expected returns.

■ Facilitating platform switching by investors and advisors, including reinforcing industry initiatives in the area.

The FCA invited comments on the findings and proposed remedies published in the Interim Report. Comments on questions set out in the Interim Report can be provided until 21 September 2018, and the final report is expected to be published in Q1 of 2019.

28 | Financial Services Regulation

APPROACH TO CONSUMERS AND DISCUSSION PAPER ON A DUTY OF CARE PUBLISHED BY THE FCA

On 17 July 2018, the FCA published two documents: its approach to consumers document (Approach) and a discussion paper on a new duty of care (Discussion Paper). The publications follow an earlier consultation paper (Consultation) by the FCA and build the “Our Mission” document (Mission) published in 2017. These two publications, taken together are intended to provide further clarity about the actions the FCA will take to protect consumers and ensure there are no gaps in the consumer protection regime in the financial sector.

Of significance in the Approach document is that the FCA have dropped their updated definition of “vulnerable consumers” proposed in the Consultation, in response to feedback that many firms had already adopted the existing definition and the updated drafting had the potential to narrow the scope of affected persons.

The Discussion Paper is intended to explore whether the lack of an existing duty of care could be perceived as a gap in the current legal and regulatory system, and whether the ability to ensure adequate protection for consumers could be improved by its introduction. It follows responses by stakeholders to the Consultation and to similar questions posed in earlier publications.

Approach to Consumers

The Approach sets out the FCA’s vision for well-functioning markets for consumers and its expectations on how consumers should be treated by financial firms. It gives an insight into the wide range of powers the FCA has to ensure consumers are protected, particularly some of the most vulnerable people in society.

The Legal and Regulatory Framework

The Approach sets out the framework in which the FCA operates and outlines its main powers and rules for protecting consumers. It lists the FCA’s statutory objectives and explains the conditions for consumers it expects to see when competition is working well and market integrity is observed. It also highlights how the consumer protection legislation and the Equality Act 2010 impact on its objectives. The FCA stated the importance of a strong consumer complaints and redress framework to ensuring that “consumers can have confidence that when things go wrong they will be put right”.

The FCA also recognised that it “may not always be best placed to resolve the harms” and outlined a number of areas where it works in partnership with other organisations and services to protect consumers, as well as the areas where it is more appropriate for the UK Government to act.

Vulnerable Consumers

In response to feedback on the Consultation, the FCA dropped its plan to update the definition of “vulnerable consumer”. The FCA now intend to retain the definition originally published in Occasional Paper No. 8, namely as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”.

This followed feedback that the existing definition had already been put into practice by many firms, and that the revised wording risked narrowing the definition and shifting responsibility on consumers to self-identify vulnerability. The FCA concluded that the existing definition provided a sound basis for stakeholders to develop and adapt the concept to their business.

To provide further clarity in the area, the FCA noted that it intends to consult on guidance for firms on identifying and treating vulnerable consumers in early 2019, focussing on the FCA’s expectations in this area.

Protecting Consumers

The FCA provided details on the decision-making framework it uses to achieve the greatest impact of its interventions in the market. Much of this information is provided in more detail in other FCA approach documents produced following the Mission publication.

Of most note in this section, however, are the sources of information that the FCA use, which range from the expected (for example routine supervisory contact with firms and calls to the contact centre) to the more novel (including social media scanning software and commercial third party data and information).

The FCA’s Key Principles

The FCA explains how it uses four key, and interconnected, principles to make “complex and finely balanced judgements about what is reasonable to expect of different types of consumers and firms in any given situation”:

■ Firm Responsibility: Firms are responsible for making sure all their customers are treated fairly, even if they have no direct contact with retail customers. This includes taking into account real world consumer behaviours and not exploiting biases.

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■ Consumer Responsibility: The general principle is that consumers should take reasonable responsibility for their choices and decisions. However, some consumers’ low levels of financial capability, financial resilience or level of confidence in managing their money and finances, coupled with behavioural biases, make it difficult for this to be a universal expectation. The FCA will therefore “take these factors into consideration when determining the precise level of responsibility a consumer should be expected to take for their decisions”.

■ Vulnerability: Consumers have different needs, and some may be more vulnerable than others. Consumers who are vulnerable may be significantly less able to represent their own interests than the average consumer, and more likely to suffer harm. The FCA expects firms to identify vulnerable consumers and treat them appropriately.

■ Access and Exclusion: Some consumers can find that they are inadvertently excluded from participating in financial services due to their particular characteristics or circumstances, or that firms actively do not wish to service them due to the perceived risk that they represent, which may damage their longer-term wellbeing. Although the FCA does not have a specific responsibility to ensure access for all consumers, it will seek to develop practical strategies to tackle access problems in partnership with firms and stakeholders.

Discussion Paper on a New Duty of Care

The FCA explained that some stakeholders had raised concerns that its current regulatory framework does not provide adequate protection for consumers and called for the introduction of a “duty of care” for firms when dealing with consumers. Introduction of such a duty might bring financial services firms on a par with solicitors and doctors, who have similar such duties.

The FCA therefore produced this Discussion Paper to:

■ better understand whether there is a gap in its regulatory and legal framework, or the way it applies it in practice, that could be addressed by introducing a new duty;

■ assess whether change is desirable and, if so, what form it could take, how it would work in practice alongside its current framework, and what consequences it would have for consumers, firms and the FCA;

■ better understand and consider possible alternative approaches that might address stakeholders’ concerns; and

■ understand what a new duty for firms might do to enhance good conduct and culture in financial services, and how this could influence consumer outcomes, alongside the Senior Managers and Certification Regime (SMCR).

The FCA distinguish a “duty of care” from a “fiduciary duty”, stating the latter is a stricter standard. A duty of care would impose a positive obligation on firms to ensure their conduct meets a standard, whereas a fiduciary relationship would prohibit particular actions which may be disloyal or inappropriate. The FCA has stated that the duty of care is a legal obligation to take care which, when breached, will make the person at fault liable to compensate the victim for the loss they have suffered. The FCA has said the position is complicated by the fact that, in many cases, a person who has fiduciary duties is also subject to a duty of care. In the Discussion Paper, the FCA explains that the term “new duty” is used to “cover all possible formulations of any new duty of care or fiduciary duty on firms and any other changes that could address stakeholders’ concerns”.

The FCA invites stakeholders to comment on whether the current regime has any gaps and on whether and how the new duty of care could be used to address these. The FCA sought views on several options, including:

■ FCA rules introducing a new duty;

■ a new statutory duty imposed by government;

■ extending the client’s best interest rule; and

■ additional rules or guidance on the Principles.

A question on whether a duty of care would help ensure financial markets functioned well, contained in the Consultation, attracted a wide range of responses. Some respondents felt that the current rules did not remove conflicts of interest and did little to deter misselling, and once poor performance was found, there was a lengthy process to obtain redress. Others, however, argued that the current regime, supplemented by the SMCR extension, all but added up to a duty of care, and that an introduction of a new duty would bring needless complexity and uncertainty for limited benefit and may expose the industry to huge litigation and redress costs whilst the definition was clarified and tested. It would not be surprising if similar views were expressed in response to the Discussion Paper.

There is also the question of whether the new duty might extend to wholesale markets as well as retail markets, and if so, to what extent it might differ. The FCA appear open to the possibility and have included questions to seek feedback on the point.

Stakeholders can submit their comments on the Discussion Paper by 2 November 2018.

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CMA PUBLISHES PROVISIONAL DECISION IN INVESTMENT CONSULTANCY MARKET INVESTIGATION

On 18 July 2018, the Competition and Markets Authority (CMA) published its provisional decision report regarding its market investigation into investment consultancy and fiduciary management services (Report). The investigation was instigated by a referral from the FCA after the FCA’s asset management market study identified competition concerns in the investment consultancy and fiduciary management sector.

The investigation relates to two types of service, investment consultancy and fiduciary management, and focuses in particular on their influential role in the GBP 1.6 trillion pension scheme investment industry. Pension scheme trustees are legally bound to take and consider “proper advice” before taking investment decisions, and investment consultants will often perform this advisory role.

Provisional decision on competition

The CMA has identified features of both investment consultancy services and fiduciary management services which it has provisionally found to prevent, restrict or distort competition in connection with the supply and acquisition of these services in the UK to and by pension schemes. Accordingly, the CMA considers that there is an Adverse Effect on Competition (AEC) in respect of both investment consultancy and fiduciary management services.

In relation to investment consultancy services, the features identified are as follows:

■ low levels of engagement by some customers;

■ lack of clear information for customers to assess the quality of their existing investment consultant; and

■ lack of clear and comparable information for customers to assess the value for money of alternative investment consultants.

In relation to fiduciary management services, the features identified are as follows:

■ firms offering both investment consultancy and fiduciary management steering their advisory customers towards their own fiduciary management service;

■ low levels of customer engagement at the point of first moving into fiduciary management;

■ lack of clear and comparable information for customers to assess the value for money of alternative fiduciary managers;

■ lack of clear information for customers to assess the value for money of their existing fiduciary manager; and

■ barriers to switching a fiduciary manager.

The CMA considers that the potential AEC may result in material customer detriment in both the investment consultancy and fiduciary management markets, manifesting in terms of customers paying higher prices and receiving worse service quality.

Provisional decision on remedies

The Report proposes a package of remedies to address the AEC in both markets and its potential detrimental effect on customers. All of the proposed remedies relate to pension schemes.

The remedies are grouped under three themes: promoting greater trustee engagement when buying fiduciary management services; fees and performance reporting; and supporting remedies. The suggested remedies include mandatory competitive tendering on first adoption of fiduciary management, minimum requirements for fee disclosures for prospective clients, basic standards for reporting performance of recommended asset management products and funds and extension of the FCA regulatory perimeter to include the relevant services provided by investment consultancy and fiduciary management.

Next steps

The CMA has invited interested parties to submit feedback on the Report. The deadline for submission of this feedback is 24 August 2018. In a press release published shortly after the Report was circulated, the FCA confirmed its agreement with the CMA regarding the importance of ensuring that the remedies address the potential harm in this sector effectively. The FCA encouraged stakeholders to engage with the CMA’s consultation.

Having considered the stakeholder responses, the CMA is required to publish its final decision by 13 March 2019.

INTERESTING TRENDS IN THE FCA’S ANNUAL ENFORCEMENT PERFORMANCE REPORT 2017/18

The Financial Conduct Authority (FCA) has published its enforcement annual performance report for 2017/18. Although shorter than in previous years, it focusses on what the FCA considers to be the “essential enforcement developments and achievements” in relation to its enforcement actions.

We have picked out below some of the highlights:

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■ The FCA issued 269 final notices last year, including 16 financial penalties totalling GBP 69.9 million. This is down from a total of GBP 181 million in 2016/17, and GBP 884.6 million in 2015/16, perhaps reflecting a relative “normalisation” of enforcement fines following the financial crisis, benchmark rigging and misselling scandals in recent years.

■ 302 new cases were opened by the FCA in the past year. The bulk of these have been in relation to retail conduct, financial crime, culture and governance, insider dealing and unauthorised business. The number of open cases has increased from 410 last year to 504.

■ Particularly interesting is the dramatic increase in the number of “culture and governance” cases, likely reflecting a heavier focus on the area as a result of the introduction of the senior managers regime in 2016 to banks and the largest investment firms and the FCA’s own focus on “tone from the top”. From 15 open culture and governance cases as at 1 April 2017, there were 61 open cases by 31 March 2018, with 48 new cases being opened during the course of the year. We would expect that this trend of increased investigations into culture and governance is likely to continue in the future, with the extension of the senior managers regime in 2019.

■ Of the 10 cases referred to the Tribunal last year, six were withdrawn and three were dismissed without substantive hearing. Only one resulted in a tribunal decision.

■ The FCA is increasingly using its powers of variation, cancellation or refusal of authorisation/approval/permissions. This has gone up from less than half of all published outcomes in 2015/16 to over three quarters in 2017/18.

■ The average length of FCA cases in 2017/18 (including those where no further action was taken) was almost 20 months. Cases that settled took, on average, over 30 months. Last year, the average length of a case referred to the RDC took almost 60 months (i.e. five years), which was interestingly slightly longer than the average length for those referred to the Tribunal (52.4 months). The average length for criminal cases was 58.2 months last year.

■ The FCA states that it has seen a “significant increase” in reports of potential unauthorised activity in the UK over the past year, including pension scams, investment and insurance fraud, boiler room schemes and unauthorised collective investment or deposit taking business.

■ Last year saw the FCA’s first successful prosecution for illegal money lending since the FCA took over responsibility for consumer credit in 2014.

LAW COMMISSION PUBLISHES SARS REFORM CONSULTATION PAPER

On 20 July 2018, the Law Commission has published a consultation paper (Consultation) on the Suspicious Activities Reports (SARs) regime under the Proceeds of Crime Act 2002 (POCA).

The current UK SARs regime requires certain businesses and banks to make “required disclosures” to the UK Financial Intelligence Unit (UKFIU) (overseen by the National Crime Agency (NCA)), where a person knows, suspects or has reasonable grounds to know or suspect that a person is engaged in money laundering. If a required disclosure is not made, the person who ought to have reported is liable for prosecution for a criminal offence. There are also what are known as “authorised disclosures”, whereby a disclosure regarding money laundering is made to obtain consent to proceed with a transaction, to fit within a statutory exemption (this is also known as the “consent regime”). SARs are the mechanism for making these disclosures under POCA.

The industry and regulators have had reservations for some time about the effectiveness of the current SARs regime, particularly in regard to the high volume of SARs being made, inadequate resourcing in the UKFIU to appropriately review, consider and distil the intelligence being provided and the resultant costs and delays involved in the current process for market participants.

The Law Commission were tasked with looking at this area by the Home Office in 2017, with the aim of improving the prevention, detection and prosecution of money laundering and terrorist financing in the UK. The Consultation has been produced following various fact-finding meetings with stakeholders, and sets out proposed changes to the regime.

In high level terms, the Law Commission does not advocate a wholesale removal of the current consent regime (although consultees are invited to submit their views on the current system), but it does suggest a number of changes or enhancements to make the regime work more effectively.

Following fact-finding meetings with stakeholders, the following practical difficulties are identified in the Consultation:

■ the large volume of disclosures to the UKFIU. On average, the UKFIU, overseen by the NCA, receives 2,000 SARs per working day, with 100 seeking consent to proceed with a financial transaction, whereas there are a mere 25 dedicated staff;

■ the low intelligence value and poor quality of many of the disclosures that are made in accordance with the present legal obligations;

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■ the misunderstanding of the authorised disclosure exemption by some reporters;

■ abuse of the authorised disclosure exemption by a small number of dishonest businesses and individuals;

■ defensive reporting of suspicious transactions leading to high volume reporting and poor quality disclosures;

■ the overall burden of compliance on entities under duties to report suspicious activity; and

■ the impact of the suspension of transactions on reporting entities and those that are the subject of a SAR.

A number of legal issues are also identified in the Consultation:

■ the “all-crimes” approach whereby any criminal conduct which generates a benefit to the offender will be caught by the regime as “criminal property” and the consequent impact of this on the scope of reporting;

■ the terminology used in Part 7 of POCA and the meaning of appropriate consent;

■ the meaning of suspicion and its application by those with obligations to report suspicious activity;

■ fungibility, criminal property and issues arising from mixing criminal and noncriminal funds;

■ the extent to which information should be shared between private sector entities;

■ the wide definition of criminal property which applies to the proceeds of any crime and has no minimum threshold value; and

■ what should constitute a reasonable excuse within Part 7 of POCA.

Chapters 5 to 13 of the Consultation identify what the Law Commission considers to be the critical issues with the current legal structure, and identify some proposed solutions. These include:

■ Consulting on alternatives to the “all crimes” approach, including three variants of a “serious crimes” approach. The Law Commission’s provisional view is that a change to the serious crimes approach could prove problematic and undesirable.

■ Considering the meaning of “suspicion” and how to ensure the threshold is understood and applied consistently, including consulting on whether the term should be defined in statute or whether guidance on indicative factors of suspicion should be published. The Law Commission’s provisional view is that formal government guidance would be the better approach.

■ Considering whether the thresholds for reporting and fault should be made more objective through a “reasonable grounds to suspect” test. The Law Commission’s initial view is that the fault threshold should not be changed, but a defence should be added for when a person has no reasonable grounds to suspect. The Law Commission’s provisional view is that no change should be made to the terrorist financing regime.

■ Considering the issues arising from the mixture of legitimate and criminal funds. The Law Commission’s view is that there should be a statutory defence for banks who ring-fence suspected criminal funds.

■ The Law Commission’s provisional view is that the Government should issue statutory guidance on the types of issues that would constitute a “reasonable excuse” for failing to make a disclosure, to reduce the volume of low intelligence SARs and enhance the intelligence value of the remaining SARs.

■ The Law Commission propose that there should be government guidance on the term “appropriate consent” under POCA, and invites the views of consultees in this area.

■ Consulting on whether pre-suspicion sharing between private sector institutions is necessary desirable or appropriate and, if so, how it can be squared with the General Data Protection Regulation. The Law Commission’s view is that there are strong arguments against allowing the sharing of data at a lower threshold than law enforcement agencies without external scrutiny.

The Consultation is open until 5 October 2018.

NEW RULES AND GUIDANCE ON PERSISTENT CREDIT CARD DEBT

From 1 September 2018, all firms offering credit cards to consumers will be required to comply with the new rules and guidance on persistent credit card debt and earlier intervention. The new rules have been published in the Consumer Credit sourcebook (CONC) and came into force on 1 March 2018.

Background

Having taken over regulation of consumer credit in April 2014, the Financial Conduct Authority (FCA) launched a market study into credit cards. The FCA published its final findings report in July 2016 (Credit Card Market Study), highlighting concerns about the scale, extent and nature of problem credit card debt and firms’ limited incentives to reduce this.

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As part of the package of remedies, the FCA proposed new rules and guidance on the treatment of customers whose credit card debt persists over 18 to 36 months, along with proposed rules and guidance on earlier intervention for customers at risk of potential financial difficulties. The FCA consulted on the proposals in April 2017 (CP17/10) and December 2017 (CP17/43).

On 27 February 2018, the FCA published Policy Statement PS18/4, setting out the feedback to its consultation and the resultant changes to the proposals. PS18/4 also contains the finalised rules and guidance on persistent credit card debt and earlier intervention.

The FCA announced a package of remedies to address the issues identified in its Credit Card Market Study, designed to put consumers in greater control of their borrowing while maintaining the flexibility of credit cards. This package is now largely in place, and is depicted in the below infographic, produced by the FCA.

PACKAGE OF REMEDIES

Shopping around and switching Introductory offer Greater control

over credit limits Everyday useEarlier

Intervention Persistent debt

Easier access to credit card usage data to allow more accurate comparisons.

Clearer standards for price comparison websites.

Promote/facilitate the use of quotation searches.

Customers notified when their promotional offer is coming to an end.

New customers given choice of whether to make firms obtain express consent for each credit limit increase.

Existing customers will be given a more straightforward means of declining an increase, or choosing how increases will be offered in future.

Help customers keep track of how much they are borrowing and avoid penalty charges, with alerts on credit limit utilisation at set points.

Encourage customers to repay more quickly where they can afford to by changing repayment options.

Firms identify customers at risk of financial difficulty earlier and take appropriate steps.

Firms offer customers in persistent debt help to repay the debt more quickly. This includes showing forbearance such as an interest reduction where customers cannot afford increased repayments.

Allow customers to request a ‘later than’ payment date to give greater control and help customers avoid penalty charges.

Further restrictions on the offer of credit limit increases for customers in persistent debt for 12 months.

CUSTOMER JOURNEY

POTENTIAL PROBLEM DEBT

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Scope of the new rules

The new persistent debt rules apply to personal credit card customers only. The rules are not applicable to business credit cards and, for this purpose, the FCA defines a business credit card as one which is promoted solely for the purposes of the customer’s business.

Where a customer uses their personal credit card for business purposes, this account will still be caught by the persistent debt rules if the agreement is a regulated credit agreement.

Closed and pay down customers, meaning customers whose agreement has been terminated but who may choose to continue to pay the minimum payment, who meet the definition of persistent debt, should still receive the persistent debt communications encouraging them to repay faster.

The requirement for earlier intervention

Under the new rules, firms are required to monitor customers’ repayment records, as well as other relevant information held by the firm, taking appropriate action where there are signs of actual or possible financial difficulties.

Examples of appropriate action set out in the guidance include: considering suspending, reducing, waiving or cancelling any further interest, fees or charges; notifying the customer of the risk of escalating debt; and providing contact details for not-for-profit debt advice bodies and encouraging the customer to contact them.

It is a requirement that firms establish, implement and maintain an adequate policy for identifying and dealing with customers showing signs of actual or potential financial difficulties, even though they may not have missed a payment. A customer paying the minimum amount under the agreement is not in itself a sign of possible or actual difficulties.

Customers in persistent debt

A credit card customer is defined as being in persistent debt where the amount they have repaid towards the credit card balance over the immediately preceding 18 month period comprises a lower amount in principal than in interest, fees and charges (Persistent Debt).

Firms are required to assess whether a credit card customer meets this definition on at least a monthly basis.

Where a customer is in Persistent Debt, the new rules require firms to take a series of escalating steps to help customers. The initial intervention by the firm takes place at the 18 month mark, this being the time at which the customer first meets the Persistent Debt definition. Subsequent interventions by the firm are required after

27 and 36 months. The intervention at 36 months marks the time at which the customer has met the definition of Persistent Debt for a second consecutive 18 month period.

Intervention at 18 months

Where a customer is in Persistent Debt, the firm must, in an appropriate medium and in plain language:

■ notify the customer that, in the preceding 18 months, the amount the customer paid comprised a lower amount in principal than in interest, fees and charges;

■ notify the customer that increasing this level of payment would reduce the cost of borrowing and the amount of time it would take to repay the balance;

■ notify the customer to contact the firm to discuss the customer’s financial circumstances and whether the customer can increase the amount of payments without an adverse effect on the customer’s financial situation;

■ warn the customer of the potential implications if the customer remains in persistent debt in two consecutive 18 month periods; and

■ provide contact details for not-for-profit debt advice bodies and encourage the customer to contact one of them.

There is no specified form of words to be used for this communication and firms have discretion to tailor the language and tone of the communication to the circumstances of the individual customer.

Intervention at 27 months

At the 27 month mark (no earlier than 9 months and no later than 10 months after the 18 month communication), the firm must consider the pattern of payments made by the customer since the 18 month communication and assess whether the customer will remain in Persistent Debt at the 36 month mark, assuming that these repayments will be representative of the customer’s repayments over the entirety of the second 18 month period (starting on the date of the customer meeting the definition of Persistent Debt).

If this analysis indicates that it is likely the customer will be in Persistent Debt after the end of the second consecutive 18 month period, the firm must repeat the 18 month communication.

Intervention at 36 months

Where, over the 18 month period immediately following the date on which the customer first met the definition of Persistent Debt, the amount that the customer has paid to the firm towards the credit card balance comprises a lower

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amount in principal than in interest fees and charges, the firm is required to take reasonable steps to assist the customer to repay the balance more quickly and in a way that does not adversely affect the customer’s financial situation.

In these circumstances, the firm must contact the customer to:

■ explain that increasing this level of payment would reduce the cost of borrowing and the amount of time it would take to repay the balance;

■ provide contact details for not-for-profit debt advice bodies and encourage the customer to contact one of them;

■ set out options for the customer to increase payments and request that the customer, within a specified reasonable period, respond to either:

– confirm that the customer will increase payments in accordance with one of the options; or

– where applicable, confirm that the options proposed are not sustainable for the customer; and

■ inform the customer that if the firm does not receive a response in the time specified, the firm will suspend or cancel use of the card.

Examples of repayment options set out in the guidance include transferring the balance on the credit card to a fixed-sum unsecured personal loan or an increase in the amount of monthly payments on the credit card under a repayment plan. The aim of the options is for a customer to repay the balance in a reasonable period. The FCA expects a “reasonable period” to usually be between three and four years, other than in exceptional circumstances.

Where the customer does not respond to the firm’s communication, or where the customer confirms that one or more of the repayment options proposed is sustainable but states that they will not make the increased payments, the firm must suspend or cancel the customer’s use of the credit card.

Where a customer confirms that the repayment options are unsustainable, or where the patterns of payments actually made under the repayment plan show that the customer is unlikely to repay the balance in a reasonable period, the firm must treat the customer with forbearance and due consideration. The steps taken to treat a customer with forbearance should have the aim of assisting the customer to make sustainable repayments to repay the outstanding balance in a reasonable period and may include reducing, waiving or cancelling any interest, fees or charges.

Next steps for the FCA

In PS18/4, the FCA set out that the next steps for the implementation of its Credit Card Market Study remedies are to:

■ assess the effectiveness of the industry voluntary remedies (the option for customers to opt out of automatic credit limit increases/preventing credit limit increases from being given to customers that have been in Persistent Debt for 12 months or more) and consider further action if any of these measures prove to be ineffective;

■ monitor the persistent debt and earlier intervention remedies by looking at, for example, the number of customers contacted at the 18 month intervention stage, the proportion of those that reach the 36 month stage and the actions firms take at 36 months; and

■ review how effective the remedies are after they have been fully implemented by firms and in operation for long enough to assess customer outcomes. The FCA expects this to be in 2022 or 2023.

The FCA has now completed its behavioural trials work with credit card firms, testing different ways of presenting repayment options to encourage customers making low repayments to pay more where they can afford it. The FCA outlined in PS18/4 that it is currently considering the results and expects to complete its analysis and announce further details in 2018.

FOUR FORMER DIRECTORS OF ONLINE CONSUMER CREDIT BROKER BANNED FOR LIFE

On 25 July 2018, the FCA published final notices banning David James Carter Mullins, Edward John Booth, Christopher Paul Brotherton and Mark Robert Kennedy, the former directors and shareholders of online consumer credit broker Secure My Money (SMM) for misleading customers.

By way of background, individuals searching for loans online who landed on the SMM websites were informed that they had been “approved” and were shown details of a sample loan. They were then asked to enter their payment card details in order to “verify their account”. However, no pre-approval or account verification, in fact, took place, instead their cards were charged between GBP 39 and GBP 69.

As a result, the FCA found that between November 2013 and July 2014 the four individuals lacked honesty and integrity as they had deliberately misled vulnerable customers in relation to fees and services provided through web-based brands i-loansdirect, LoanZoo and the1loan.

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In May 2014, the FCA asked SMM to take down its websites. SMM disabled the homepages, informing the FCA that it had taken them down for new customers. However, all four individuals knew that most of their customers arrived on the sites via other pages, that those pages were still live and that SMM was still taking fees from new customers. In total, firm took fees of over GBP 7.2 million from approximately 124,000 online customers. Approximately GBP 1.4 million was repaid by SMM as a result of customers either requesting chargebacks from card providers or making refund requests direct to the firm. SMM went into liquidation on 31 July 2014, and a further GBP 33,564.17 was paid out.

All four individuals were disqualified as directors for periods of between 5-8 years by the Insolvency Service, and the FCA banned them from performing any function relating to any regulated activity “for life or for as long as necessary for consumer protection”. The FCA has also explained that the bans are the strongest sanction it could impose because the relevant conduct took place before the FCA was given the power to fine individuals at consumer credit firms.

Commenting on the development, Mark Steward, Executive Director of Enforcement and Market Oversight, said: “These four individuals consistently misled vulnerable customers into paying money for worthless services and into believing SMM had found them a loan, in addition to selling on their data. They showed complete disregard for the consequences of their actions. We have taken the strongest action possible to prevent them from working in financial services again”.

PRA CONSULTS ON CREDIT RISK AND CRR DEFINITION OF DEFAULT

On 27 July 2018, the Prudential Regulation Authority (PRA) published a consultation paper on credit risk and the definition of default (CP17/18) (Consultation Paper), setting out its proposed approach to implementing the European Banking Authority (EBA)’s regulatory publications relating to the definition of default in the Capital Requirements Regulation (CRR).

With the objective of reducing variance in the risk weighted assets calculated under the Internal Ratings Based (IRB) approach, the EBA has recently published two items which relate to the definition of default: the regulatory technical standards for the materiality threshold for credit obligations past due (RTS) and the Guidelines on the application of the definition of default (Guidelines). The EBA has also published an opinion on the use of the 180 past due criterion in the days past due component of the CRR definition of default (Opinion).

In the Consultation Paper, the PRA proposes to implement the RTS, Guidelines and Opinion through: (i) updating its expectations in its supervisory statement on IRB approaches (SS11/13) and (ii) amending the Credit Risk part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material for the purpose of the CRR’s definition of default.

The specific proposals include:

■ setting a 0% relative materiality threshold and zero absolute materiality threshold for retail exposures;

■ setting a 1% relative materiality threshold and a sterling equivalent of EUR 500 absolute materiality threshold for non-retail exposures;

■ removing the PRA’s exercise of the discretion to use 180 days instead of 90 days in the “days past due” component of the definition of default for exposures secured by residential or SME commercial real estate in the retail exposure class and/or exposures to public sector entities; and

■ introducing an expectation that firms comply with the Guidelines when applying the CRR definition of default.

The consultation is open for comments until 29 October 2018 and the proposed implementation date for the proposals is 31 December 2020.

NEW PROPOSED RULES FOR CROWDFUNDING PLATFORMS

On 27 July 2018, the Financial Conduct Authority (FCA) published a consultation paper proposing new rules for loan-based crowdfunding platforms. The proposed changes are published less than two years since the last FCA review of the sector during which time the FCA observed the various loan-based crowdfunding business models.

The FCA said that all crowdfunding platforms are subject to the FCA Principles for Businesses, and specific Conduct of Business rules. However, during its review, the FCA observed some poor business practices in relation to, among others, disclosure of information to clients, charging structures, wind-down arrangements and record keeping. The FCA identified a number of potential and actual harms to investors, including poor customer treatment, unsuitable products, unreliable performance or disorderly failure and high prices for low quality products.

The FCA announced that it is largely content with the regulatory framework in place for investment-based crowdfunding platforms. Contrary to business models for investment-based crowdfunding platforms which tend to be relatively simpler, the P2P sector is more diverse with business

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models often providing for the platform to take decisions on behalf of the investor. Consequently, the FCA focused mainly on P2P platforms and proposed new rules where the existing ones were deemed insufficient.

The FCA put forward the following proposals with regards to P2P platforms:

■ setting out the minimum information that P2P platforms need to provide to investors;

■ introduction of more explicit requirements to clarify what systems and controls platforms need to have in place to support the outcomes they advertise they can deliver, focusing particularly on credit risk assessment, risk management and fair valuation practices;

■ introduction of stronger rules on plans for the wind down of P2P platforms;

■ extension of marketing restrictions already applying to investment-based crowdfunding to P2P platforms;

■ application of the rules under the Mortages Conduct of Business sourcebook (MCOB) and other Handbook requirements to P2P platforms that offer home finance products, where at least one of the investors is not an authorised home finance provider; and

■ proposals to limit the percentage of assets which a retail investor could invest in P2P lending to 10% of the investor’s assets.

Christopher Woolard, executive director of strategy and competition at the FCA said: “When we introduced new rules for crowdfunding, we said we’d review the market as it developed. We believe that loan-based crowdfunding can play a valuable role in providing finance to small businesses and individuals but it’s essential that regulation stays up to date as markets develop. The changes we’re proposing are about ensuring sustainable development of the market and appropriate consumer protections”.

The FCA is seeking responses by 27 October 2018 and will publish the new rules in a Policy Statement later this year. Please note that on 10 August 2018, the Committee on Economic and Monetary Affairs of the European Parliament published a draft report on the proposal for a Crowdfunding Regulation. For further information please see our relevant article elsewhere in this publication.

FCA ADOPTS FINAL RULES AND GUIDANCE ON CREDITWORTHINESS ASSESSMENT IN CONSUMER CREDIT

On 30 July 2018, the Financial Conduct Authority (FCA) published Policy Statement 18/19 (Policy Statement) in response to the feedback received to Consultation Paper 17/27

(Consultation Paper), published in July 2017, on the assessment of creditworthiness in consumer credit. The FCA also published the final rules and guidance clarifying the existing rules of the Consumer Credit sourcebook (CONC) on responsible lending and post contractual requirements.

The key elements of the amended rules are set out below.

Credit risk and affordability

The FCA clarifies the distinction between credit risk and affordability risk. While the former is related to the risk of default, the latter is concerned with the ability of the borrower to meet their repayment obligations without significantly jeopardising their financial position. Moreover, credit risk is concerned with risk to the lender while affordability risk with risk to the borrower. Firms shall assess creditworthiness against both risks, which may not necessarily overlap.

Reasonable creditworthiness assessment

Prior to entering into a regulated credit agreement or significantly increasing the amount of credit or credit limit, firms shall carry out a “reasonable” creditworthiness assessment. An increase of the amount of credit may be significant either on a sole or aggregate basis. For this purpose, firms shall estimate the customer’s income, which may include non-discretionary expenditures, savings and any household income that can be reasonably assumed to be available for the repayment of credit. There is no obligation to estimate the customer’s income and non-discretionary expenditure, if the firm can show that it is obvious that the customer can repay or the consumer has indicated their intention to repay the credit. Special provision is made for open-ended agreements and agreements for running-account credit. The potential impact on the guarantor’s financial position should also be assessed. Similar rules apply when peer-to-peer (P2P) platforms assess creditworthiness, both under regulated and unregulated credit agreements.

The extent and scope of the creditworthiness assessment

The FCA follows a principles-based approach affording firms the flexibility to determine the extent and scope of the creditworthiness assessment, the content and amount of information that they deem sufficient and how to verify its accuracy. The assessment should be proportionate to the circumstances of each case. The rules specify some factors that may be considered, which include the nature, the amount, the duration and the cost of credit.

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Policies and procedures

The FCA does not seek to determine specific processes to assess creditworthiness, which may involve the use of automated systems or credit reference agencies (CRAs). Firms are however expected to adopt, maintain and review appropriate policies and procedures in writing in order to carry out the creditworthiness assessments.

Next steps

The new rules may particularly affect consumer credit lenders, P2P platforms and trade bodies that represent these firms. Affected parties should implement the necessary amendments, in terms of policies and procedures, to ensure compliance with the new rules that come into force on 1 November 2018.

FCA WELCOMES COMMITMENT BY MORTGAGE LENDERS TO HELP LONGSTANDING BORROWERS

On 31 July 2018, UK Finance announced a cross-industry voluntary commitment, established by UK Finance, the Building Societies Association (BSA) and the Intermediary Mortgage Lenders Association (IMLA), to help existing mortgage borrowers on reversion rates to switch products. On the same date, the Financial Conduct Authority (FCA) published a statement welcoming the new common standards, which have been agreed by 59 authorised lenders, covering 93% of the UK’s residential mortgage market.

The introduction of the voluntary commitment follows the FCA’s Mortgages Market Study interim report, in which the FCA identified a number of borrowers who are on a reversion rate and are up-to-date with repayments, who took out their mortgage pre-financial crisis and would benefit from switching to a new deal but are currently ineligible to do so. Where their current lender is able to offer alternative products to existing borrowers, the common standards will aim to assist such customers to move to an alternative product provided by their lender.

Standard principle-based criteria will determine whether a customer is eligible. These criteria are that a customer must:

■ be a first charge owner-occupier;

■ be an existing borrower of an active lender;

■ be on a reversion rate;

■ be looking for a like-for-like mortgage;

■ be up-to-date with payments;

■ have a minimum remaining term of two years;

■ have a minimum outstanding loan amount of GBP 10,000; and

■ be able to benefit from switching.

The commitment is subject to certain exclusions, including any change to the terms of the mortgage which are likely to be material to affordability (for example, additional borrowing, change of term, adding or removing a party to the mortgage), mortgages on overseas properties, any discontinued products and securitisation and closed books.

The participating lenders have undertaken to contact all qualifying borrowers by the end of 2018, and customers are therefore not required to take any action in order to benefit from the common standards. Importantly, switching to a new product will be optional for customers: there is no obligation to do so.

While the initiative is currently focussed on customers with active lenders, Jackie Bennett, Director of Mortgages at UK Finance, states in the press release that UK Finance, BSA and IMLA “will be working closely with the FCA and active lenders to see what might be possible for customers of inactive and unregulated lenders”.

In its response to the commitment, the FCA stated its intention to “work closely with industry to discuss the detail of this arrangement and monitor the impact it will have’, as well as to ‘continue to work with industry to identify solutions for borrowers who have mortgages with inactive firms and any active lenders not signed up to this agreement”. The deadline for responses to the FCA’s interim Mortgages Market Study passed on 31 July 2018, and the FCA intends to publish its final findings by the end of 2018, along with a summary of feedback received and next steps.

FCA PROPOSALS ON GENERAL STANDARDS AND COMMUNICATION RULES FOR THE PAYMENT SERVICES AND E-MONEY SECTORS

On 1 August 2018, the Financial Conduct Authority (FCA) published Consultation Paper 18/21 (CP) proposing the application of existing rules and guidance on general standards for business conduct and communication to the Payment Services and Electronic Money (E-Money) sectors and suggesting new rules for communications concerning currency conversion.

The objectives

The purpose of the proposals is to address two sets of issues:

■ Firstly, the FCA has identified inconsistencies in terms of the provision of Payment Services and issuance of E-Money. In particular, while both are FCA regulated activities under the Payment Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011 (EMRs), different

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regulatory requirements are currently applicable to different Payment Service Providers (PSPs) and E-Money issuers. This is due to the fact that within the same sector, some entities fall under the regulatory ambit of the FSMA, while others do not. Consequently, there might be a mismatch of standards of behaviour and treatment of customers among different firms in the market.

■ Secondly, the FCA is concerned that communication, advertising and marketing of Payment Services and E-Money services to customers by certain firms might be misleading, to the detriment of consumers.

In light of the above, the proposals in the CP seek to clarify the FCA’s expectations regarding the standards of behaviour for firms, treatment of clients and communication practices. The suggested rules and guidance aim to serve the broader objectives of promoting fair competition and strengthening consumer protection in the market.

The proposals

More specifically, the FCA proposes the following:

■ to extend the application of the Principles for Businesses (Principles) to the activities of the provision of Payment Services, the issuance of E-Money and also to Payment Institutions (PIs), Electronic Money Institutions (EMIs) and Registered Account Information Service Providers (RAISPs). The Principles set out the standards the FCA expects to be met in conducting business, which indicatively touch upon integrity, skill, care and diligence, management and control, financial prudence, market conduct, communication with clients and conflicts of interest management;

■ to extend the communication rules and guidance set out in the FCA Banking Conduct of Business Sourcebook (BCOBS) on communication with retail banking customers to communication with payment services and e-money customers and PIs, EMIs and RAISPs. Thus, any communication should be fair, clear and not misleading; and

■ to introduce rules and guidance on the communication and marketing of currency exchange transfer services for Payment Services and E-Money involving a currency conversion. In particular, any comparison with other providers should be meaningful, presented in a fair and balanced way and be capable of substantiation.

The FCA proposals are open for consultation with stakeholders until 1 November 2018.

FCA PROPOSES HANDBOOK CHANGES TO REFLECT THE EU SECURITISATION REGULATION AND THE AMENDMENT TO THE CAPITAL REQUIREMENTS REGULATION

On 1 August 2018 the Financial Conduct Authority (FCA) published Consultation Paper 18/22 (CP) proposing amendments to the FCA Handbook (Handbook) to ensure its consistency with the EU Securitisation Regulation and the related amendment to the Capital Requirements Regulation (CRR Amendment). Both EU legal instruments are directly applicable and most of their provisions will become effective as of 1 January 2019.

The Securitisation Regulation and the CRR Amendment seek to ensure the securitisation market in the EU works more effectively, including through disclosure requirements, alignment of interests and creating a framework for simple, transparent and standardised (STS) securitisations. The CP intends to reflect the general policy objectives of the EU securitisation framework, which overlap with the FCA’s objectives of market integrity and consumer protection.

The FCA’s consultation follows on from the Prudential Regulation Authority’s (PRA) consultation on securitisation in May 2018.

More specifically, the proposed Handbook changes are the following:

Application and periodical fees for the authorisation of TPVs

To assess compliance with the STS criteria, a sponsor, originator or Securitisation Special Purpose Entity (SSPE) may use a Third Party Verification Agent (TPV). With a view to ensuring their independence and integrity, a TPV shall not be an insurance firm, credit institution, investment firm or credit rating agency and TPVs shall not provide advisory, audit or equivalent services to the originator, sponsor or SSPE in the context of the particular securitisation they assess.

HM Treasury has confirmed its intention to make the FCA the National Competent Authority for the authorisation and supervision of TPVs. On the basis of the draft European Regulatory Technical Standards to the Securitisation Regulation and existing FCA rules on setting fees for regulated entities, the FCA proposes the following fees for TPVs:

■ The FCA expects the application to be straightforward and thus application fees are proposed to be set at GBP 1,500. No Variation of Permission (VoP) discounts shall be applicable if authorised firms apply to become TPVs. Interested parties will be able to submit a draft application

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form as of September 2018, however, fees will be charged and applications will be formalised when the Treasury empowers the FCA to do so.

■ Due to the low estimated regulatory risk, the FCA proposes a flat periodic fee of GBP 250 per annum, although this will be kept under review.

Other changes to the Handbook

To ensure consistency with the EU framework, the FCA proposes to amend:

■ the Investment Funds sourcebook (FUND) and the Collective Investment Schemes sourcebook (COLL) to reflect amendments under the Securitisation Regulation of the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive respectively. In particular, proposed changes implement the obligation of AIFMs or UCITS fund managers to undertake corrective action in the event that the securitisation they are exposed to does not meet the requirements of the Securitisation Regulation;

■ the Prudential sourcebook for Investment Firms (IFPRU). These are minor changes to reflect the CRR Amendment.

The proposals are open for consultation until 1 October 2018 and the FCA plans to publish its final rules in a Policy Statement in December.

UPPER TRIBUNAL REDIRECTS THE FCA TO RECONSIDER VALIDATION ORDER RELATING TO UNENFORCEABLE REGULATED CREDIT AGREEMENTS

On 1 August 2018, the Upper Tribunal (Tax and Chancery Chamber) (Tribunal) published its decision in Plaxedes Chickombe and others v FCA and others [2018] UKUT 0258 (TCC), which required the Financial Conduct Authority (FCA) to reconsider a validation order (Order) relating to unenforceable credit agreements.

The validation order

The Order was made on the application of Clydesdale Financial Services Ltd, trading as Barclays Partner Finance (BPF) to the FCA, and concerned 1,444 regulated credit agreements (Agreements) entered into by BPF as lender, under which the total amount payable was £47 million. These credit agreements were concluded with BPF in order to finance the acquisition of timeshare accommodation, but were brokered by Azure Services Limited (Broker), an unauthorised broker, in breach of the general prohibition. Accordingly, the Agreements were unenforceable against the borrowers, who were entitled to recover money or property transferred to BPF under them.

Following an application by BPF, the FCA granted the Order to BPF following a finding that it would be just and equitable to allow for the enforcement of the regulated credit agreements and for money paid under them to be retained, considering that the breach was not intentional, no consumer suffered detriment and BPF made, in the meantime, the necessary amendments in its internal processes to avoid similar incidents in the future. Under the Order, BPF could enforce the Agreements and retain money paid under them.

Reference to the Upper Tribunal

Several borrowers (Borrowers) referred the matter to the Upper Tribunal alleging detriment from entering into the Agreements, as a result of the Broker’s conduct. In particular, the Borrowers argued, among other things, that they were not properly informed and/or were misled before entering into the agreements in dispute, they were pressurised into entering the Agreements, the terms of the Agreements were not explained and there were concerns about commission arrangements. It is noted that these allegations were not previously communicated to the FCA and therefore they were not taken into consideration when producing the Order.

The parties agreed that the matter should be remitted to the FCA for reconsideration and requested the Tribunal to provide directions in this respect. In particular, two issues were in dispute:

■ Firstly, whether there were any limitations with regards to the FCA’s assessment on the issue of consumer detriment; and

■ Secondly, what would be the impact of the redirection on the status of the existing Order and more specifically, whether the latter would cease to have effect, thus making the regulated credit agreements again unenforceable.

Decision of the Tribunal

The references were determined in favour of the borrowers and the Tribunal decided that the matter should be remitted to the FCA for reconsideration. More specifically Herrington J found that:

■ the FCA should take consumer detriment and all other relevant factors into account, without imposing any limitations as to the scope of the considerations;

■ no further directions were necessary, given that the FCA has the appropriate procedures in place to deal with the matter in a fair and efficient way;

■ no definitive ruling on the impact of the redirection on the existing Order was necessary, provided that BPF would confirm in writing its intention not to take enforcement

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action in relation to the Agreements, as it indicated it would do, pending the FCA reconsideration, and to take due account of its obligations to treat customers fairly in relation to matters concerning the Agreements which did not relate to enforcement. Nevertheless, “considerable doubts” were expressed as to whether the FSMA conferred the Tribunal with the power to set aside a decision remitted to the FCA for reconsideration.

Next steps

The FCA will reconsider the Order on the basis of the above. Herrington J also stated that in relation to future matters of this kind, the FCA would need to assess whether the current application form for a validation order is fit for purpose.

BANK OF ENGLAND FINALISES PROCEDURES FOR ENFORCEMENT DECISION MAKING COMMITTEE

On 3 August 2018, the Bank of England (BoE) published Policy Statement PS/EDMC2018 (Policy Statement) providing feedback to its preceding Consultation Paper CP/EDMC2017 (Consultation Paper) which was originally published in November 2017 and which dealt primarily with the establishment of the Enforcement Decision Making Committee (EDMC). The Policy also introduced some amends to the Prudential Regulation Authority (PRA) and Financial Market Infrastructures (FMI) Decision-Making Framework to take into account the EDMC. The BoE also issued a document setting out the procedures to be followed by the EDMC.

EDMC’s Role and Scope of Powers

The EDMC was created by the Court of the Bank of England (Court), with a view to separating the investigative and decision-making functions of the BoE and thus strengthening enforcement processes in certain areas. More specifically, the EDMC will be the decision making body of the BoE (and therefore, also of the PRA as part of the BoE) with respect to prudential regulation, financial market infrastructures and resolution enforcement cases, and in due course, the Scottish and Northern Ireland banknote issuance regime. Its members will be wholly independent of the BoE’s current executive management structure and will not be BoE’s employees.

The EDMC will hear “contested” enforcement cases, i.e. cases not settled with the BoE following a preliminary investigative stage. In order to ensure legal certainty, the scope of enforcement cases to be referred before the EDMC will be exclusively defined in the schedule of statutory provisions

included in the Consultation Paper and the Policy Statement. Such statutory provisions provide the BoE with sanctioning powers.

EDMC Members & Support

The EDMC shall have up to nine members of whom three would typically be legally qualified. These will perform the roles of Chair and Deputy Chair of the EDMC and Panel Lead of individual EDMC panels. The first six members of the new EDMC have already been appointed, following an external recruitment process and consultation. Members shall only be accountable to the Court, which is the competent body for their appointment and removal.

Adequate legal and administrative support should be provided to the EDMC and its panels. In particular, a sufficiently senior and independent lawyer from the BoE’s Legal Directorate may support the EDMC panels and external legal advice may be requested when necessary.

EDMC Operation and Procedure

An EDMC panel shall not hear a prudential and a resolution case concurrently, to ensure compliance with the Bank Recovery and Resolution Directive (BRRD) which requires operational independence of the BOE’s resolution and other functions.

Matters brought before the EDMC shall be dealt with in a fair, efficient and expeditious manner. EDMC panels shall decide by way of majority voting. Detailed procedures are established in relation to warning notices, representations, decision notices, notices of discontinuance of BoE action and Upper Tribunal proceedings.

UK GOVERNMENT PUBLISHES PROPOSED FRAMEWORK ON POST-BREXIT UK-EU PARTNERSHIP IN FINANCIAL SERVICES

On 20 August 2018, the UK Government published a framework on the proposed future partnership between the United Kingdom and the European Union for financial services following the exit of the UK from the EU (Framework). The Framework, dated 25 July 2018, is set out in the form of a presentation, which forms part of a series produced by the UK negotiating team for discussion with the EU and builds on a White Paper published by the UK Government on 12 July 2018 on the future UK-EU relationship.

Objectives

The Framework seeks to respect the autonomy of both the UK and the EU (Parties), to provide certainty for market participants and safeguard financial stability. The Framework states that the UK will ensure that after exiting the EU, strong and appropriate regulation will be maintained, however it rejects the idea of rule-

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taking i.e. adopting external rules invariably, without influencing their formation. The aim is to achieve a mutually acceptable solution while respecting both Parties’ autonomy.

Proposed model and key features

The UK position involves the following key features:

■ Principle of autonomy: Parties shall remain autonomous in terms of rulemaking and granting access to their markets.

■ Equivalence at the outset: Immediately following Brexit, both Parties will start with the same rulebook and entwined supervision. Additionally, it is proposed that there would be reciprocal recognition for all third country regimes at the outset.

■ Expanded scope of activities permitted cross-border: Owing to the interconnectedness between the UK and EU markets, the aim would be to expand the cross-border activities that are permitted within each other’s territories, prioritising the most mutually beneficial activities for the economy and seeking to ensure that unintended consequences or arbitrage are avoided.

■ Common principles: It is proposed that certain common objectives would be established to address shared interests, and that equivalence would be determined on the basis of an outcomes-based approach.

■ Formalised regulatory and supervisory cooperation: The UK intends to commit to an overall framework that supports extensive collaboration and dialogue, in order to encourage regulatory coherence, effective market surveillance and effective cooperation.

■ Structured withdrawal: It is suggested that any withdrawal of access to markets, including through a declaration of non-equivalence, should require prior consultation as well as clear and reciprocal timelines and notice-periods. Special provision for acquired rights is also contemplated, to safeguard existing obligations to customers if equivalence is withdrawn.

According to the Framework, the relationship of the Parties is proposed to be two-fold:

■ Autonomy: Parties would remain autonomous with regards to rulemaking and granting access to their market. In particular, the legislative process, the determination of equivalence of foreign regimes (in terms of rules and supervision) and the decision to grant or withdraw equivalence, shall remain within the domain of each of the Parties. There would be no recourse to the EU/UK Dispute Resolution Mechanism for matters deemed within the Parties’ autonomous judgment.

■ Bilateral: The UK Government considers a bilateral treaty, establishing clear commitments and processes, to be critical. Bilateral arrangements would not be intended to undermine Party autonomy, but rather ensure that change can be managed effectively. In particular, a treaty-based system would be intended to ensure the desired level of certainty and regulatory consistency, building confidence and predictability in the markets, and should seek to address stability or arbitrage risks and promote transparency and supervisory cooperation in financial services. At the same time the proposed treaty would seek to address deficiencies both in terms of institutional processes and scope under the existing EU equivalence regimes. The UK proposes that the arrangement would be organised on the basis of three pillars: common principles, extensive supervisory cooperation and regulatory dialogue and predictable, transparent and robust processes.

The UK Government considers that this Framework, which combines autonomous decision-making with a bilateral component and which seeks to foster robust cross-border cooperation, is capable of avoiding unnecessary fragmentation and divergence of the UK and EU markets and their regulation and supervision.

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PORTUGAL

SIMPLIFIED PROCESS FOR AUTHORISATION AND REGISTRATION OF FUND MANAGERS

The Portuguese Securities Commission (Comissão do Mercado de Valores Mobiliários or CMVM) and the Bank of Portugal (Banco de Portugal or BdP) have published a guide to assist interest parties through the process for authorisation and registration of investment fund managers in Portugal. The guide has been published following a review of the authorisation and registration procedures that has simplified the entire process.

According to the guide, investment fund managers interested in being established or relocated in Portugal will have a single point of contact for the whole process and also for requests of information, with all guidance and support in English through the entire process and also after the authorisation and registration.

All documentation may be submitted in English without the need for translation and any interim clarification requests and decisions taken by the BdP and the CMVM will be notified in English.

The submission of required documentation for the authorisation and registration may be made through electronic means exclusively.

All equivalent documents approved by other European Union regulators will be considered, namely on suitability and conduct of business rules, without prejudice to the BdP and CMVM own assessments and decisions.

Although the authorisation and registration process involves the two authorities, the new framework establishes an articulation between both entities throughout the entire process to shorten the timeframe for the final decision.

With respect to the possibility of delegating functions or activities, the proportionality principle shall apply, provided that the fund manager does not become a letter box entity and the delegation arrangements comply with the relevant regulations and guidelines.

Although authorisations and registration deadlines established by law are up to 7 months for a complete authorisation and registration, it is expected that the new procedure will help reduce these timings to much quicker outcomes.

NEW EUR 100 MILLION FUND FOR INTERNATIONALISATION FUNDS

In August 2018, the Portuguese Government has created an EUR 100 million “Fund for Internationalisation Funds”, with the purpose of participating under co-investment in the capital of other funds which promote the internationalisation of the Portuguese economy, including through:

■ the increase of Portuguese investment abroad;

■ the increase of foreign direct investment;

■ the increase of exports of domestic companies, notably through international tenders or financing to the importer;

■ the diversification of export destination markets; and

■ the increase in the added value of exports.

The co-invested funds may be implemented through the following types of financing instruments:

■ medium or long-term financing of investments in Portugal and abroad;

■ participation in the capital of companies, in particular through convertible equity and debt instruments;

■ provision of guarantees of proper execution, payment, counter-guarantees or reinsurance operations;

■ medium or long-term financing of credit to the importer or exporter.

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OCC AND FDIC SHORTEN TRADE SETTLEMENT CYCLE FOR SECURITIES TO TWO DAYS

On 1 June 2018, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued a final rule to shorten the standard settlement cycle for securities purchased or sold by institutions supervised by those two agencies. Under the rule, which aligns the settlement cycle requirements of the OCC, FDIC and Federal Reserve, banks will be required to settle most securities transactions within the number of business days in the standard settlement cycle followed by the nation’s registered broker dealers, unless otherwise agreed to by the parties at the time of the transaction.

In 2017, the US securities industry transitioned from a standard securities settlement cycle of three business days after the date of the contract, commonly known as T+3, to a two-business-day standard, or T+2 – a standard that banks are already complying with.

FED FINALIZES RULE TO LIMIT RISK CONCENTRATION AT BANKS AND THEIR COUNTERPARTIES

On 14 June 2018, the Federal Reserve Board approved a final rule to prevent concentrations of risk between large banks and their counterparties from undermining financial stability by limiting the amount of credit exposure a big bank can have to a single counterparty. The rule, which implements part of Dodd-Frank, applies stricter credit limits based on the systemic importance of the firm.

A bank holding company with USD 250 billion or more in total consolidated assets would be restricted to a credit exposure of no more than 25 percent of its tier 1 capital to a counterparty. Foreign banks operating in the US with at least USD 250 billion in total global consolidated assets, and their intermediate holding companies with USD 50 billion or more in US assets, would be subject to similar limits. Federal Reserve officials said the final rule reduces regulatory burden by using common accounting definitions to simplify application of the exposure limits. GSIBs will be required to comply by 1 January 2020, and all other firms are required to comply by 1 July 2020.

FED PUBLISHES SUPERVISORY STRESS TEST RESULTS

On 21 June 2018, the Federal Reserve (Fed) released the results of its annual Dodd-Frank-mandated stress tests. Results from the related Comprehensive Capital Analysis and Review were subsequently released on 28 June 2018. Both exercises are intended to determine whether banks have sufficient capital to cope with an economic downturn.

The Fed’s annual review of how 35 of the nation’s largest banks or US affiliates of foreign institutions, representing a combined 80% of total assets, found that they hold sufficient capital to survive the most stringent “severely adverse” scenario yet, involving a sharp economic downturn, a steepening Treasury yield curve, a decline in housing prices and 10% unemployment.

Background

The Dodd-Frank Act stress tests (DFAST) and the Comprehensive Capital Analysis and Review (CCAR) are designed to test whether banks maintain sufficient capital to absorb losses and support operations during adverse economic conditions.

DFAST is mandated by Dodd-Frank and is a quantitative test that assumes each bank will maintain its current dividend and make no share repurchases. Whether a bank passes or fails DFAST is determined strictly by the amount of capital it holds.

CCAR is not mandated by Dodd-Frank and was created by the Fed as a way to evaluate both the adequacy of a bank’s capital under stress and the quality of a bank’s capital planning process (ie, the quality of its loss predictions models, data, capital planning governance). CCAR utilises a bank’s actual planned capital distributions (including share repurchases) when calculating whether a bank maintains sufficient capital to absorb losses and support operations during adverse economic conditions.

It is possible for a bank to be determined under both DFAST and CCAR to hold an adequate amount of capital, but still fail the qualitative portion of CCAR and have restrictions placed on its capital distributions.

Regulatory developments

In conjunction with the release of the stress test results on 21 June 2018, the Fed announced that bank holding companies with less than USD 100 billion in total consolidated assets are no longer subject to supervisory stress testing, including both DFAST and CCAR, as provided for in the recently passed Economic Growth, Regulatory Reform, and Consumer Protection Act. The new banking and financial services regulatory statute was enacted on 24 May 2018 and raised the asset thresholds for application of enhanced supervision under Section 165 of the Dodd-Frank Act. Pursuant to the new law, the Fed will not disclose the current supervisory stress test results for bank holding companies with greater than or equal to USD 50 billion, but less than USD 100 billion, in total consolidated assets. The Fed indicated that it would provide further information on the implementation of the new law at an unspecified future date.

USA

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As part of an overall shift in its regulatory approach, there are indications that the Fed will transition away from the current passing or failing grades it assigns on its annual stress tests and toward a capital ratio that the lender must meet during the following year. In April, the Fed proposed a new rule simplifying capital rules and other supervisory procedures for major financial firms, reducing the possibility that banks would fail their stress tests and significantly relieving their compliance costs. In an article published by the Wall Street Journal on 26 June 2018, Michael Alix, former senior vice president of the New York Fed, stated that the proposed change represents a move away from the “public shaming” of the current regime, and a return to a less public way of addressing risk management issues that is more sensitive to the effects that a negative report card could have on a bank’s reputation, as well as more substantial ripple effects on the broader economy.

Under the proposal, if it determines that a bank’s capital is too low, the Fed would impose a higher capital requirement in the next year that could have similar consequences to the current regime, such as limiting shareholder pay-outs, but without the public stigma of failing the test. The stress testing mandated by Dodd-Frank was initially seen as a way to increase public confidence in banks.

The proposed changes are not reflected in this year’s DFAST and CCAR results but could be implemented in time for next year’s round of testing. Public comments on the April proposal are still being reviewed.

REGULATORS ANNOUNCE ENFORCEMENT CHANGES UNDER NEW BANKING LAW

In an inter-agency statement published on 6 July 2018, the Fed, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) (together, the Agencies) announced that they will no longer enforce enhanced prudential standards on banks with less than USD 100 billion in assets, pursuant to the banking regulatory reform bill signed into law by President Trump on 24 May 2018.

The Agencies still have 18 months to determine which firms with more than USD 100 billion but less than USD 250 billion in total consolidated assets will continue to be subject to the requirement under the new law.

On the same date, the Federal Reserve (Fed) also issued a separate announcement for the banks it supervises describing how, consistent with the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act, it will no longer subject primarily smaller, less complex banking organisations to certain regulations, including those relating to stress testing and liquidity. The Fed/FDIC/OCC announcement also addresses changes in the law relating to company-run stress testing, resolution plans, the Volcker rule, high volatility commercial real estate exposures, examination cycles, municipal obligations as high-quality liquid assets and other provisions. Additional regulatory changes will be issued in the coming months to comply with the new law.

BANK TRADE GROUPS JOIN FORCES

The Clearing House and the Financial Services Roundtable, trade organisations together representing 48 of the nation’s largest banks, have joined forces to advocate for regulatory reform in the financial services sector.

In a July 16 announcement to launch the Bank Policy Institute, the new organisation’s CEO, Greg Baer, said, “We will demonstrate that America’s leading banks are extraordinarily resilient and that the right balance of policies and regulations must be maintained to help ensure they continue to play their important role in helping drive economic growth.” Brian Moynihan, Bank of America CEO, will serve as BPI’s chairman.

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INTERNATIONAL

FSB REPORT ON CRYPTO-ASSETS

On 16 July 2018, the Financial Stability Board (FSB) published a report on the work undertaken by the FSB as well as other standard-setting bodies on crypto-assets. The G20 Ministers of Finance and Central Bank Governors (G20) called on the FSB to produce this report following the G20 meeting in Buenos Aires in March 2018.

Work by the FSB

The FSB agrees that crypto-assets do not currently pose a material risk to global financial stability, but vigilant monitoring was advised. Working with the Committee on Payments and Market Infrastructures (CPMI), the FSB developed a framework to monitor the financial stability implications of crypto-assets markets and particularly to identify potential metrics. The framework looks at the key risks within crypto-assets and potential transmission channels to financial stability risks. The FSB cautions about the variable levels of quality of the underlying data used and warns that metrics on prices, trading volumes and volatility could be manipulated by a number of generally prohibited techniques. Nevertheless, the FSB believes that its proposed metrics provide “a useful picture of crypto-asset markets and the financial stability risks they may present”.

Update from CPMI on its work

In pursuit of its mandate to promote “the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy”, the CPMI has paid particular attention to innovations in payments. The CPMI notes that innovations may improve efficiency at the cost of safety and that represents an important challenge for central banks. According to the CPMI, the “first generation” of decentralised private digital tokens “make for unsafe money”.

Going forward, the CPMI will reach out to central banks urging them to proceed with caution on Central Bank Digital Currency (CBDCs); monitor CBDCs and private digital tokens used for payments, including the development of the “second generation cryptocurrencies”; and analyse the efficiency and safety considerations for wholesale digital currencies.

Update from IOSCO on its work

In November 2017, the International Organisation of Securities Commissions (IOSCO) issued a statement to its members on the risks of initial coin offerings (ICOs), and in January 2018 it issued a communication to the general public highlighting its concerns in this area. IOSCO notes the growth of crypto-asset platforms, but states that they may be failing to comply with the laws applicable to exchanges. IOSCO does not consider

crypto-asset platforms to currently pose global financial stability risks, but the report suggests that they raise other significant concerns in relation to consumer and investor protection, market integrity, and money laundering and terrorist financing. IOSCO’s Committee on Secondary Markets has begun to examine internet-based platforms, including crypto-asset platforms: focusing on transparency, custody and settlement, trading, cyber security and systems integrity.

Update from BCBS on its work

The Basel Committee on Banking Supervision (BCBS) is pursuing a number of policy and supervisory initiatives on crypto-assets relating to its mandate to strengthen the regulation, supervision and practices of banks worldwide, with the purpose of enhancing financial stability. To that end, BCBS is conducting a stocktake on the materiality of banks’ direct and indirect exposures to crypto-assets which may be followed by a structured data collection exercise on crypto-assets as part of its half-yearly monitoring exercise. The BCBS is also conducting a stocktake of how its members currently treat exposures to crypto-assets domestically and will consider whether to formally clarify the prudential treatment of crypto-assets. The BCBS is continuing to monitor FinTech developments.

In its press release, the FSB said that the Financial Action Task Force will report separately to the G20 on its work concerning the money laundering and terrorist financing risks relating to crypto-assets.

G20 PUBLISHES COMMUNIQUE FROM JULY 2018 MEETING

Following a meeting of finance ministers and central bank governors in Argentina on 21 and 22 July 2018, the G20 Ministers of Finance and Central Bank Governors (G20) published a communique setting out its on-going priorities and work streams.

Key messages relating to the financial services sector included the G20’s continued commitment to the “full, timely and consistent implementation and finalisation of the post-crisis reforms, and the evaluation of their effects”. To this end, the G20 welcomed progress on the evaluation by the Financial Stability Board (FSB) and standard-setting bodies of the effects of the reforms on infrastructure financing and incentives to centrally clear over-the-counter derivatives. The communique also confirmed that the G20 continues to monitor and address emerging risks and vulnerabilities in the financial system and encouraged the FSB’s continued progress on achieving resilient market-based finance.

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Also of note were the G20’s comments in relation to crypto-assets. While acknowledging that technological innovations can benefit the financial system and the broader economy, the G20 identified that crypto-assets lack the key attributes of sovereign currencies and raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing. The communique reiterated the G20’s March 2018 commitment to the implementation of the Financial Action Task Force (FATF) standards and asked that the FATF clarifies how its standards apply to crypto-assets by October 2018.

In an annex to the communique, the G20 set out a number of issues for future action. Notably, it set out a request to the Global Partnership for Financial Inclusion (GPFI) to produce a roadmap outlining how it will: (i) consider where its work could be rationalised and prioritised; and (ii) consider its current structure with a view to more closely aligning it with other working arrangements in the G20 finance track. The G20 is also anticipating the FSB’s report on policy development under its action plan to address the decline in correspondent banking relationships. The G20 expects to receive both the FSB’s report and the GPFI’s roadmap in advance of the Leader’s Summit in December 2018.

GFXC PUBLISHES UPDATED FX GLOBAL CODE

On 6 August 2018, the Global Foreign Exchange Committee (GFXC) published a paper, “The FX Global Code at One Year: A Look Back and a Look Ahead” (Paper) reviewing the evolution of the FX Global Code (Code) since its launch in May 2017 and outlining the GFXC’s priorities for the coming 12 months. On the same date, the GFXC released an updated version of its Code, along with minutes from its meeting in Johannesburg, South Africa, on 27 June 2018.

Background

The GFXC was established in May 2017 and brings together central banks and private sector participants with the aim of promoting a robust, fair, liquid, open and transparent Foreign Exchange (FX) market. The FX Global Code was developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale FX market. It is intended as a supplement to legislation, identifying global good practices and processes.

Updated Code

The August 2018 update to the Code amends Annex 1, which provides examples to illustrate the principles set out in the code and situations in which the principles could apply. The update adds an illustrative example highlighting negative behaviour in relation to Principle 11, which concerns pre-

hedging. A press release published by GFXC announcing the launch of the updated Code explains that the example is considered a useful addition since Principle 11 already had two positive examples associated with it.

GFXC Achievements and Priorities

In its Paper, the GFXC highlights achievements since the launch of the Code in May 2017, including:

■ the adoption of the Code by market participants, including 12 public registers and a Global Index having been launched;

■ the Code being embedded and integrated into the FX market, with market participants developing training and reviewing practices to align with the Code; and

■ the Code being consistently used as a point of reference and remaining at the forefront of public discourse around FX.

In terms of the GFXC’s on-going work, the paper highlights four key priorities:

■ continue the GFXC working group on cover and deal;

■ continue the GFXC working group on disclosures to strengthen the landscape of FX disclosures;

■ establish a GFXC buy-side outreach working group; and

■ establish a GFXC working group to focus on the embedding and integration of the Code into the fabric of the FX market.

These priorities, identified following discussions at the GFXC meeting in June 2018 and feedback from a survey of local FXCs, are intended to assist the GFXC to continue to work towards the objectives laid out in its Terms of Reference.

IOSCO PUBLISHES FINAL REPORT ON MECHANISMS FOR TRADING VENUES TO MANAGE EXTREME VOLATILITY

On 1 August 2018, the Board of the International Organisation of Securities Commissions (IOSCO) published its final report on mechanisms used by trading venues to manage extreme volatility and preserve orderly trading (Report).

The Report examines measures currently utilised by trading venues in member jurisdictions to address the risks to orderly markets resulting from extreme volatility events. It sets out eight recommendations, designed to assist trading venues and regulatory authorities when making decisions about the implementation, operation and monitoring of volatility control mechanisms. Volatility control mechanisms seek to minimise market disruption triggered by events (such as clearly erroneous orders, large aggressive orders and positive feedback loops) by halting or temporarily constraining trading.

48 | Financial Services Regulation

Specifically, the Report recommends that:

■ trading venues should establish and maintain appropriate volatility control mechanisms during trading hours;

■ trading venues should ensure that volatility control mechanisms are appropriately calibrated, and may consider a non-exhaustive list of elements provided in the Report;

■ trading venues should regularly monitor volatility control mechanisms to make sure they are working as designed and to identify circumstances that would require the mechanisms to be re-calibrated;

■ regulatory authorities should consider what information is necessary for them to monitor the volatility control mechanism framework in their jurisdiction and ensure sufficient relevant records are kept by trading venues;

■ trading venues should make information regarding triggering of volatility control mechanisms available to their regulatory authorities;

■ trading venues should communicate sufficient information about volatility control mechanisms to market participants and, if appropriate, the public;

■ trading venues should communicate to market participants and, if appropriate, the public when a mechanism is triggered; and

■ where the same or related instruments are traded on multiple trading venues, trading venues should communicate as appropriate when a control mechanism is triggered.

The Report was prepared by IOSCO in line with its objective of ensuring that markets are fair, efficient and transparent. The Report as being part of IOSCO’s on-going work on how technology is changing the way markets operate and how regulators and markets are responding to these changes. The Report builds on the recommendations in a report published by IOSCO in 2011 which addressed the broad technological changes impacting markets, including high frequency trading and measures used to address volatility.

FCA TAKES NEXT STEPS TOWARDS A GLOBAL FINANCIAL INNOVATION NETWORK

On 7 August 2018, the Financial Conduct Authority (FCA), collaborating with 11 overseas financial regulators, announced the creation of the Global Financial Innovation Network (GFIN) and together they published a consultation document about this. The overseas regulators (Regulators) include regulatory bodies from Abu Dhabi, France, Australia, Bahrain, the USA, Dubai, Guernsey, Hong Kong, Singapore and Canada.

Background

The announcement follows the initial FCA consultation on the idea of a “global sandbox” in February 2018. The feedback received on the original consultation was generally positive with the main emerging themes being as follows:

■ Regulatory co-operation and engagement: Respondents were supportive of regulators collaborating on common challenges or policy questions firms face in different jurisdictions. They also welcomed the idea for a space where industry can engage with a broader group of regulatory stakeholders on a single topic or policy question.

■ Speed to market: Respondents found that the global sandbox could make it faster for ideas to reach international markets, while the cross-border potential of emerging technologies or business models was also highlighted as important.

■ Governance: Respondents highlighted that the sandbox process should be transparent and fair and also offered a range of potential models for testing, including transitioning from a domestic sandbox into a “global sandbox”, or TechSprints similar to those organised previously by the FCA.

■ Emerging technologies/business models: A wide range of topics and subject matters were highlighted in the feedback, including artificial intelligence, distributed ledger technology, data protection, regulation of securities and Initial Coin Offerings, know your customer and anti-money laundering.

FCA Consultation Paper

The consultation paper, published by the FCA and the Regulators, provides an update on the next steps of the “global sandbox” project, which is now renamed the GFIN.

The GFIN aims to provide an efficient way for innovative firms to interact and preserve an open dialogue with the regulators while trying out new ideas. At the same time, the GFIN will provide a framework for regulators to work together sharing experiences and approaches. According to the Regulators: “The GFIN is a collaborative policy and knowledge sharing initiative aimed at advancing areas including financial integrity, consumer wellbeing and protection, financial inclusion, competition and financial stability through innovation in financial services, by sharing experiences, working jointly on emerging policy issues and facilitating responsible cross-border experimentation of new ideas”.

In additional to the general mission statements the Regulators set out the GFIN’s key functions. More specifically, the GFIN should:

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■ act as a network of regulators to collaborate and share experience of innovation in respective markets, including emerging technologies and business models;

■ provide a forum for joint policy work and discussions; and

■ provide firms with an environment in which to trial cross-border solutions.

The Regulators also inquired about the GFIN’s preferred priorities and the kind of outcomes, policy work and regulatory trials that interested parties would expect.

Next Steps

The consultation will remain open until 14 October 2018. The FCA and the Regulators committed to engage in the next two months with interested parties across the different jurisdictions involved in the project. Further feedback and an update on the next steps is expected in the Autumn.

CONSULTATION PUBLISHED ON IMPACT OF G20 REGULATORY REFORMS ON INCENTIVES TO CENTRALLY CLEAR OTC DERIVATIVES

On 7 August 2018, the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) (together, the Committees) published a consultation paper on the impact of the G20 regulatory reforms on incentives to centrally clear over-the-counter (OTC) derivatives (Consultation Paper).

Background

In response to the financial crisis, in 2009 the G20 leaders set out several reform objectives in the Pittsburgh declaration, one of which was a commitment to ensure that standardised OTC derivative contracts are cleared through central Clearing Counterparties (CCPs). While a number of post-crisis reforms are directly or indirectly relevant to incentives to clear centrally, concerns have been raised that the interaction of some post-crisis reforms may contribute to inadequate incentives to centrally clear or may otherwise affect costs associated with providing client clearing services or with accessing central clearing for some market participants. Consequently, the Committees have undertaken to examine whether adequate incentives to centrally clear OTC derivatives are in place. This follows an earlier review published in 2014.

Consultation Paper Findings

The Consultation Paper sets out the findings of a study carried out by the Derivatives Assessment Team (DAT), with the DAT having been reconvened by the Committees “to re-examine

whether adequate incentives to clear centrally OTC derivatives are in place”. The data collected and the analysis conducted by the DAT suggest six key findings:

■ The changes observed in OTC derivatives markets are consistent with the G20 Leaders’ objective of promoting central clearing as part of mitigating systemic risk and making derivatives markets safer.

■ The relevant post-crisis reforms, in particular the capital, margin and clearing reforms, taken together, appear to create an overall incentive, at least for dealers and larger and more active clients, to centrally clear OTC derivatives.

■ Non-regulatory factors are also important and can interact with regulatory factors to affect incentives to centrally clear.

■ Some categories of clients have less strong incentives to use central clearing, and may have a lower degree of access to central clearing.

■ The provision of client clearing services is concentrated in a relatively small number of bank-affiliated clearing firms.

■ Some aspects of regulatory reform may not incentivise provision of client clearing services.

Next Steps

The Consultation Paper invites comments on the report compiled by the DAT and sets out a number of specific questions. Responses to the Consultation Paper had to be submitted to the FSB by 7 September 2018 and the Committees intend for the final report to be completed in late 2018 to coincide with the G20 summit at the end of November 2018.

50 | Financial Services Regulation

EBA REPORTS ON PRUDENTIAL CONSIDERATIONS FOR FINTECH COMPANIES

On 3 July 2018, following the European Banking Authority’s (EBA) FinTech roadmap of March 2018, the EBA published reports on the prudential risks and opportunities arising for institutions from FinTech and on the impact of FinTech on incumbent credit institutions’ business models (together, the Reports). Moreover, the EBA published its new webpages on Financial Innovation and FinTech and the FinTech Knowledge Hub.

The Reports seek to raise awareness and promote knowledge-sharing among regulators, supervisors and stakeholders on the specific matters they address.

The Prudential Risks and Opportunities Arising for Institutions from FinTech

The EBA discusses the application of FinTech to existing financial processes, procedures and services in the context of seven use cases and aims to provide a balanced analysis of micro-prudential risks, as well as opportunities that may arise. Despite FinTech having a potentially significant impact on the risk profiles of institutions, the EBA emphasises that its report does not favour or discourage the use of any technology nor does it examine every possible prudential risk and opportunity in an exhaustive manner.

The EBA examines the following cases:

■ biometric authentication using fingerprint recognition;

■ automated investment advice with the use of robo-advisors;

■ use of big data and machine learning for credit scoring;

■ use of Digital Ledger Technology (DLT) and smart contracts for trade finance;

■ use of DLT to steamline Customer Due Diligence (CDD) processes;

■ mobile wallets with the use of Near Field Communication (NFC);

■ outsourcing core banking/payment system to the public cloud.

The EBA notes that, currently there are a few financial technologies of a widespread usage across the financial services sector. This is due to factors such as the lack of trust in these technologies, security concerns, regulatory and supervisory uncertainties around new technologies and institutions filtering the marketing and hype around FinTech. However,

institutions have already implemented the use of biometrics for identification and authentication purposes and the launch of mobile wallets with the use of NFC technology.

With regards to the actual impact of FinTech on the risk profile of institutions, the EBA states that it may be affected by factors such as the type of underlying technology and its application, as well as the relevant processes and business models in place. The context of the particular institution and the different level of FinTech activity across the EU are also important.

The EBA identified the following risks in using applying financial technology:

■ Overreliance on third parties: With regards to FinTech applications, such as customer identification and authentication using biometrics and mobile wallets applying NFC technology, institutions run the risk of overreliance on third-party providers, including device manufacturers and operating system developers.

■ Operational risk: The EBA identified a shift towards operational risk. This risk is particularly prominent when the application of a new technology is at the developing stage and the institution’s staff is inexperienced. It is further exacerbated by factors, such as lack of technical skills, shortage of expert staff and the inadequacy of technology infrastructures.

■ Information and Communications Technology (ICT) risks: The implementation of technology-based solutions, also increases ICT risks, which include cyber-security and digital fraud and amplify ICT outsourcing risks.

■ Legal, compliance and reputational risks: Such risks could arise from mismanagement of personal data or lack of data privacy.

■ Other risks: EBA notes that risks relating to customer protection and macro-prudential risks may also arise.

In terms of key opportunities, the main anticipated benefits from FinTech solutions are efficiency gains and improved customer experience. These create incentives for market participants to explore their potential applications, further driven by factors such as the increasingly competitive environment of the financial sector along with changing customer behaviour.

The EBA concludes that new opportunities created by FinTech may outweigh the risks as long as the appropriate governance structures, implementation and risk management are in place.

IN FOCUS

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The Impact of FinTech on Incumbent Credit Institutions’ Business Models

The EBA maps out the present FinTech landscape and analyses how it induces changes in the behaviour and business models of incumbent credit institutions.

More specifically, the EBA focuses on the following issues.

Current landscape

■ Key drivers of financial innovation: The EBA identifies four main drivers shaping incumbents’ business models, namely consumer expectations and behaviour, profitability concerns, increased competition and changes in the regulatory framework.

■ Impact of FinTech on incumbents’ business lines: According to the EBA’s risk assessment exercise, increased competition driven by new entrants in the market predominately affects payment and settlement business lines by reducing incumbents’ revenues, followed by retail banking.

■ Key players: Besides incumbent institutions, the new digital-based institutions, other FinTech firms as well as technology providers or ICT companies (including BigTech firms) form part of the current FinTech landscape.

■ Key trends and approaches to reacting to FinTech: Digital transformation and digital disruption are the two main trends regarding digitalisation projects pursued by incumbents. The former involves a transformation of internal processes with a view to digitalising and optimising operations. The latter concerns changes to the traditional banking market due to the emergence of a new market as a result of innovative technologies, providing new ways of consumer interaction and enhanced customer experience.

■ Governance, culture and budget: In order to adapt to the new developments several institutions have created core innovation teams of sufficient expertise, resources and management support.

■ Operating model and implementation: When it comes to the implementation of digitalisation and innovation projects, several institutions are not following the traditional waterfall or pipeline approach and are instead adopting an agile approach in order to achieve rapid delivery of projects along with an iterative and team-based approach.

■ Status of adoption of financial technologies by incumbents: Several institutions have adopted financial technologies such as mobile banking and the use of biometrics. Other initiatives involve the implementation of cloud computing and early use of big data, machine learning solutions as well as exploring blockchain technology.

Current relationship of incumbents with FinTech

The EBA notes that, at present, partnership and collaboration is the main form of relationship between incumbents and FinTech firms. As a result, capital/funding and banking expertise, brand visibility and broad consumer base are combined with innovative ideas, a more consumer-centred approach and familiarity with emerging technologies. The way that such partnerships will be integrated within institutions and their financial implications are not yet known. The development of BigTech companies might alter the existing landscape of financial intermediation. The EBA also notes that while incumbents and FinTech firms are not in direct competition, technological developments increase the competition between incumbents themselves.

Risk factors impacting the sustainability of business models

In terms of sustainability, the EBA states that there are five main factors that might have a significant impact on incumbents’ business models, namely digitalisation and innovation strategies put in place in order to remain competitive, challenges as a result of legacy ICT systems, operational capacity to implement the necessary changes, concerns over retaining and attracting staff and increasing risk of competition from peers and other entities. Digitalisation and innovation strategies are considered to be the most significant. It also adds that both incumbents who remain passive observers and those who react aggressively by altering their business models without a clear strategic objective, appropriate governance and operational and technical support, may face risks.

52 | Financial Services Regulation

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