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Being better informed

FS regulatory, accounting and audit bulletin

FS Regulatory Insights December 2019

In this month’s edition: LIBOR transition: FCA flags conduct risks

Insurance: PRA sets out supervisory priorities

Asset management: Dear AFM Chair letter on liquidity management

Analysis: General insurers face strategic shake-up

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

1 PwC | FS regulatory, accounting and audit bulletin | December 2019

Executive summary

Welcome to this edition of ‘Being better informed’, our monthly FS regulatory, accounting and audit bulletin, which aims to keep you up to speed with significant developments and their implications across all the financial services sectors.

As we approach the end of the year, our regulators continue to be busy, with particularly significant developments relating to the insurance sector and LIBOR in recent weeks.

Regulators continue to focus on the transition away from LIBOR, with the FCA highlighting conduct risks associated with the transition. The regulator published Q&As, which contain a range of guidance to help firms identify and mitigate conduct risks which may arise as they prepare for the discontinuation of LIBOR. For instance, in line with firms’ duty to treat

customers fairly, they are expected to plan their engagement with clients early, advise them clearly on the implications of the LIBOR transition, and leave them sufficient time to understand the risks. The FCA also reminds firms of their obligations to identify a Senior Manager responsible for overseeing the transition. It is essential that firms involve all business lines and operational areas, as the FCA notes that the LIBOR transition will impact their overall business strategy and front-office client engagement.

In the asset management sector, the FCA published a ‘Dear AFM Chair’ letter related to liquidity management in open-ended funds. The letter sets out a series of actions that Authorised Fund Managers need to take to minimise liquidity risks across their funds. Firms are told to consider their obligations on portfolio composition, asset eligibility and liquidity management. The regulator also discusses best practice around liquidity management, which includes carrying out ongoing assessments of liquidity demands and the liquidity of portfolio positions.

Meanwhile the PRA set out its supervisory priorities for general insurance firms in a Dear CEO letter and a Dear Chief Actuary letter. The letters highlight areas of supervisory focus over the coming year, including reserving, underwriting and exposure management. The PRA raises specific concerns around reserve adequacy in specialty lines, firms’ ability to

generate underwriting profit, and weaknesses in exposure management practices for general insurers. The regulator also shines a spotlight on corporate culture and individual behaviour. It makes clear that it will consider personal integrity and any instances of non-financial misconduct when assessing the fitness and propriety of individuals under the SM&CR.

Also of interest to insurers will be the IAIS’s adoption of long-standing proposals on the international approach to group supervision and macroprudential issues, including the Common Framework, International Capital Standard (ICS) 2.0 and the Holistic Framework. The Common Framework provides shared standards and principles for group supervision and includes ICS 2.0, which will begin in January 2020 with a five-year, confidential monitoring period prior to full implementation. The Holistic Framework provides national supervisory authorities with additional tools and measures to identify and respond to potential sources of systemic risk in the insurance sector.

Meanwhile, general insurers are facing a number of conflicting pressures and market changes. In our feature article this month, we consider how regulatory pressures on competition, pricing and profitability, underlined by technological changes such as the Open Finance initiative, have the potential to disrupt firms’ business models - and how insurers should be preparing for these market shifts.

Finally, the latest episode of our recently-launched podcast series, Risk & Regulation Rundown, is now available. The podcast is led by PwC Partner Sarah Isted, who’s joined by a range of guests to discuss the latest developments affecting the industry, insights from our work with clients, and our perspective on industry talking points. The latest episode covers how firms are developing their approaches to vulnerable customers, and looks ahead to what’s on the regulatory agenda for 2020 and beyond.

We hope you enjoy reading this month’s articles and have a relaxing break over the Christmas period.

Hannah Swain Director, FS Regulatory Insights M: +44 (0) 7803 590553 E: swain.hannah@pwc.com

Hannah SwainDirector, FS Regulatory Insights

swain.hannah@pwc.com

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

2 PwC | FS regulatory, accounting and audit bulletin | December 2019

How to read this bulletin?

Review the Table of Contents and the relevant Sector sections to identify the news of interest. We recommend you go directly to the topic/article of interest by clicking in the active links within the table of contents.

Contents

Executive summary 1

Fighting on multiple fronts – general insurers face strategic shake-up 3

Cross sector announcements 5

Banking and capital markets 10

Asset management 12

Insurance 13

Monthly calendar 17

Glossary 19

Contacts 25

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

3 PwC | FS regulatory, accounting and audit bulletin | December 2019

Fighting on multiple fronts – general insurers face strategic shake-up

Tania LeeSenior Manager

+44 (0) 7976 687457 tania.a.lee@pwc.com

Firms are used to tackling individual regulatory initiatives, but the best firms seek to ‘dig up the road’ only once, addressing overlapping developments in one swoop. What happens, though, if firms face pressure from multiple directions at once - on product charges and price, their route to market and sales approach, challenges to the underlying profitability assumptions of a product, and the threat of added competition from open access to their data? Well, there is a risk that general insurers are about to find out.

General insurers in the UK need to act now if they are to meet increasing regulatory demands and thrive in the new decade. Both UK regulators, the FCA and PRA, have identified serious failings in the market and are expecting insurers to take immediate action; overlay the Open Finance initiative and ever

evolving technology and it’s clear there is much to consider.

The FCA has raised major competition concerns, concluding that six million policyholders in the general insurance market - a third of which are vulnerable customers - are getting a bad deal. It estimates this is costing customers £1.2bn more annually than if they were to pay average premiums. To address this, the FCA is proposing a significant package of remedies that covers pricing, renewal processes, enhanced communication and transparency requirements, and it is also expanding pricing and product governance requirements.

This pressure for a more competitive market comes at a time when general insurers are also facing challenges from the PRA on reserving adequacy and underwriting profitability. The PRA is concerned that reserving deficiencies may be increasing in some lines of business. It’s also worried about individual case reserve adequacy and the treatment of future claims inflation, attritional loss deterioration on older years of business and management approach to reserve setting. Further, the PRA highlights continued concerns regarding poor underwriting controls and exposure management. In particular, it finds some firms do not appear to have adapted

their strategies and business plans to deal with potential underpricing of risk and are still struggling to achieve underwriting profitability.

Facing such a range of financial and consumer pressures, it is important that general insurers develop a robust strategy to remain competitive in a more consumer outcomes focused industry, while meeting the demands of regulators.

FCA seeks truly competitive markets In its October General insurance pricing practices interim report, the FCA focuses on the treatment of consumers, including distribution chains, uncompetitive pricing on insurance renewals and implementation of the IDD. The FCA wants to make sure that insurers act in their customers’ best interests. While the IDD relies on disclosures to allow consumers to make decisions based on all the relevant facts, the FCA is clear that disclosures alone will not generate change on the scale it seeks. The FCA already requires firms to disclose last year’s premium at renewal to encourage comparison with this year’s premium. But given it feels competition in the market is not working well enough in the interests of consumers, the regulator is now working on a range of significant solutions to improve customer outcomes. These include preventing firms from raising prices

unreasonably for customers who don’t switch, requiring firms to switch customers paying high prices into lower priced products with equivalent cover, and imposing restrictions on auto-renewals. The FCA aims to publish the final market study report, alongside a consultation paper on proposed remedies, in Q1 2020.

The FCA is particularly unhappy that many insurers use a strategy known as price walking (complex pricing practices which allow them to raise prices for consumers that renew year-on-year) without making this clear to consumers. Given the FCA found that one in three of the consumers paying high prices showed at least one characteristic of vulnerability, it is clear that firms need to address this immediately. The potential remedy of assigning responsibility for the fair value of products to the target market to a named senior manager will also focus the mind of that individual.

Questions firms should consider asking themselves include: are certain categories of client treated differently and is that fair? How do they identify vulnerable customers? What level of their premiums relates to practices the FCA is proposing to stop? Can this be redressed? Will discounts have to be cut? And could articulating value or offering premium

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

4 PwC | FS regulatory, accounting and audit bulletin | December 2019

services be a way to retain or grow market share despite premium increases?

PRA raises financial concerns While the FCA remedies will have a material impact on pricing and distribution, in its recent Dear CEO letter (published November 2019), the PRA concentrates on the hard numbers around underwriting and reserving and what they mean for risk exposures and financial soundness. It also wrote to Chief Actuaries further highlighting its reserving concerns. For year-end 2019, insurers need to be able to demonstrate that they have addressed a number of priority issues including bias in reserve assessment, weakening of case reserving basis, inadequate claims inflation allowance, attritional loss deterioration, lack of transparency over key judgements and assumptions in management information.

The PRA also remains concerned that some firms are assuming greater profitability in their business plans than can be justified, and intends to challenge firms’ underwriting controls and exposure management. Firms need to undertake thorough independent analysis of premium adequacy and not only rely on historical data.

The obvious impact of these regulatory initiatives on costs, price and profitability, inevitably force firms to consider how best to react.

Open Finance - threat or opportunity? As part of its work on pricing, in the longer term, the FCA is keen for the general insurance market to benefit positively from

technological developments. An area of significant interest to the FCA is Open Finance, which it sees as having the potential to improve access to financial services, and to substantively change the nature of competition.

The FCA wants Open Finance to develop in a competitive environment, where the right incentives exist for all players to participate and which delivers good outcomes for consumers. Moreover, the FCA is keen to avoid a world where data aggregation leads to vulnerable consumers being priced out of the market.

Currently the FCA has set up an Advisory Group on Open Finance (AGOF) to consider the issues related to extending data-sharing, similar to Open Banking, to a wider range of financial products. The CMA created Open Banking (in line with the framework outlined in PSD2) to allow third party finance providers secure access to an individual’s financial information. Meanwhile PSD2 allows access to payment account data. So together these initiatives enable customers to consent to third party providers accessing their payment account information or to make payments on their behalf. As well as banking information, Open Finance is likely to include data on savings, investments, mortgages, projected pensions and insurance products.

Presently consumers can use price comparison websites to help them shop around, but to benefit fully from these sites customers need to actively provide their data. Under Open Finance, users would automatically have access to the information, advice and products they require. The FCA

also hopes that the availability of data will lead to greater competition and encourage third party providers to develop innovative new products and services that will better meet consumers’ demands.

The Advisory Group plans to publish a call for input on Open Finance data aggregation schemes at the end of the year. Insurers need to fully participate in this process. They should assess the opportunities, challenges and costs of opening their databases to analysis by third parties, including the risks of sharing potentially commercially sensitive accident and claims data.

Open Banking continues to challenge incumbents in the banking sector; the same could be true in insurance. Issues that insurers should consider include how to educate their customers in the potential benefits of data amalgamation, data protection and how to allay customers’ concerns regarding data security. The FCA also expects insurers to weigh the costs of investing in infrastructure to share data against the benefits, which may be especially challenging to address for firms already facing profitability issues.

What’s next for firms? Taken together, all these proposals are likely to shake up the industry and create winners and losers. If firms are already struggling to achieve underwriting profitability, and may need to increase reserves, a reduction in overall premium income won’t be a viable outcome. So it is likely that premiums for low margin customers will have to increase to compensate

for the reduction in premiums for high margin consumers.

The days of offering heavily discounted premiums as a loss-leader to attract new business are clearly over. Instead, to succeed, firms will need to be seen as genuine, reputable, and willing and able to pay claims. Delivering good customer service will be key to success.

In preparation for this new world, firms must review their business models, product oversight and governance processes and their use of data. They need to fully understand their clients’ requirements so they can offer them appropriate products and services, and put more resources into checking that all customers are getting a fair deal on renewal, not just new customers. New technologies, such as Open Finance, may well help match customers to appropriate products, and insurers need to ensure they keep abreast of these as they develop. There may well be advantages to first-movers from helping to shape the new system, but implementation costs could be high, especially if other firms do not follow suit.

With the regulators looking for fundamental changes to the way the industry does business, there is no doubt that general insurers are facing a period of major disruption. Firms that rise to meet the challenges and deliver what both regulators and customers want will be those that thrive in the new environment.

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

5 PwC | FS regulatory, accounting and audit bulletin | December 2019

Cross sector announcements

In this section:

Regulation 5 Benchmarks 5 Conduct 6 Consumer issues 6 Corporate governance 6 Finance 7 Market infrastructure 7 MiFID II 7 Operational resilience 7 Accounting 8 PwC publications 8 Also this month 8 A brief roundup of other regulatory developments

Regulation

Benchmarks Final results to IBOR fallbacks consultation

ISDA published the Summary of Responses to the ISDA Consultation on Final Parameters for the Spread and Term Adjustments on 15 November 2019.

Based on the majority of responses, ISDA expects to implement a historical median spread adjustment over a five-year lookback period without a transitional period, but including outliers and negative spreads. The spread adjustment will be applied to a compounded in arrears rate.

In practice, payments for derivatives contracts governed by an ISDA agreement will be determined as follows: the overnight RFRs observed for each interest period will be compounded daily and paid at the end of the accrual period, then the adjustment spread will be added to determine the full coupon, which will then be adjusted backwards by two days.

Next, ISDA will use these results to amend its 2006 ISDA Definitions to incorporate fallbacks with these adjustments for new IBOR trades, and to publish a protocol to help market participants include fallbacks in legacy IBOR contracts. ISDA expects to finalise them by the end of this year, and implement them in 2020.

Finally, ISDA expects to publish a consultation on the spread and term adjustments for fallbacks in derivatives linked to euro LIBOR and EURIBOR. If those results are consistent with prior consultations, ISDA is likely to implement those fallbacks in line with fallbacks for the other nine IBORs.

However, this timing is uncertain following the FSB suggestion issued on the same day to delay the publication of fallbacks.

FCA flags conduct risk in LIBOR transition

The FCA published Q&As on Conduct risk during LIBOR transition on 19 November 2019. The document contains a wide range of guidance to help firms identify and mitigate conduct risks which may arise as they prepare for the discontinuation of LIBOR and its replacement by RFRs. The FCA reminds firms they have a duty to treat customers fairly. They are expected to plan their engagement with clients early, advise them clearly on the implications of the LIBOR transition, and leave them sufficient time to understand the risks.

The FCA notes firms need to identify a Senior Manager responsible for overseeing the transition. Firms will need to establish and retain records over decisions taken, and identify and manage conflicts of interest. It’s essential that firms involve all business lines and operational areas, as the FCA explains that the LIBOR transition will impact their

Hannah SwainFS Regulatory Insights

swain.hannah@pwc.com

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

6 PwC | FS regulatory, accounting and audit bulletin | December 2019

overall business strategy and front-office client engagement.

The document also contains advice for asset managers. They are expected to identify the extent of their own exposure and investors’ exposure to LIBOR. They need to consider the impact of LIBOR ending on contract continuity and interest payments, and to engage with issuers of LIBOR referencing securities to amend them to reference RFRs.

The FCA expects firms to take action now to address conduct risks and may send further communications to firms to enquire about their plans. For further information about the Q&As, please refer to our At a Glance publication.

Next steps in LIBOR transition

Edwin Schooling Latter, FCA Director of Markets and Wholesale Policy, gave a speech on next steps in transition from LIBOR on 21 November 2019. The key next steps he highlighted were ending the use of LIBOR in new sterling loans from Q3 2020, and making it standard to quote based on SONIA for interest rate swaps from Q1 2020. He dedicated most of the speech to term rates and the possibility of the FCA declaring LIBOR unrepresentative.

In relation to term rates, Schooling Latter stated that these won’t be necessary for most products, with the exception of LIBOR contracts that cannot be amended to work on overnight rates compounded in arrears. Instead, he expects overnight compounded rates to be the norm in derivatives, securities and wholesale loans. He dismissed the argument that term rates are needed for payments where certainty is a key factor, by

saying that fixed rates, the Bank rates or SONIA rates observed over an earlier period may be better. Moreover, Schooling Latter stated that compounded rates may be less volatile than a term rate polled from market transactions on a single day. He said the RFRWG is expected to soon publish term rate use cases.

Regarding the loss of representativeness of LIBOR, Schooling Latter made the point that it would be unwise for firms to assume that LIBOR will be published if and after it becomes unrepresentative. That’s because an appetite to buy, hold, or issue new LIBOR-linked products would be very unlikely, he explained. Plus, EU-supervised firms may be prohibited from entering into at least new LIBOR transactions. Schooling Latter also reiterated that the FCA doesn’t plan to compel banks to join or rejoin LIBOR panels after end-2021.

Conduct FCA to extend SMR to benchmark administrators

The FCA issued CP19/31: Extending the Senior Managers Regime (SMR) to Benchmark Administrators on 29 November 2019. The FCA proposes to:

classify all administrators as ‘Core’ firms automatically, with the option for subsequent waivers for ‘Limited Scope

require administrators to allocate up to four SMFs, depending on their governance structure, and allocate two Prescribed Responsibilities to the relevant SMFs

require them to apply the FCA’s Conduct Rules to almost all their employees

tailor the Conduct Rules for certain commodity benchmark administrators.

It also clarifies that benchmark administrators won’t be subject to the Certification Regime. The consultation closes on 28 February 2020, and the FCA aims to finalise its approach by Q3 2020. The SMR will apply to firms that only administer benchmarks from 7 December 2020. Firms that carry out benchmark activities alongside other regulated activities need to apply the SM&CR from 9 December 2019.

Consumer issues FCA bans marketing of mini-bonds

The FCA announced on 26 November 2019 that it will be introducing a temporary ban on the marketing of mini-bonds to retail investors. It considers these products to create a high risk of consumer harm, given that they are typically of an illiquid nature and issued by small or start-up companies that are engaged in highly speculative and high-risk activities.

In practice, the FCA’s intervention means that authorised financial services firms are not able to approve financial promotions or provide services (e.g. advice, arranging deals in investments etc.) associated with mini-bonds unless they are being marketed to sophisticated or high net worth investors. The FCA characterises mini-bonds as ‘speculative illiquid securities’, defined as unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property. The temporary

rules will not apply to companies using unlisted securities to buy or construct property used for their own commercial or industrial purpose, or to investment vehicles that only invest in a single UK-based property.

The FCA will apply the rules from 1 January 2020 to 31 December 2020, using its temporary intervention powers under s137D of FSMA. It intends to publish a consultation paper in the first half of 2020, setting out proposals for making the temporary rules, or similar measures, permanent. The regulator is also likely to consider other changes to enhance consumer protection related to high-risk investments more broadly.

Corporate governance FCA finalises proxy advisor rules

The FCA published PS19/28: Proxy Advisors (Shareholders’ Rights) Regulation Implementation on 25 November 2019. This sets out final rules related to the FCA’s new powers on the oversight of proxy advisors under the Shareholder Rights Directive II (SRD II).

The Proxy Advisors (Shareholders’ Rights) Regulations 2019 was introduced by HMT on 14 May 2019 to implement Article 3j of the SRD II, which relates to proxy advisors. The legislation requires these firms to make certain disclosures about how they conduct their business, including the code of conduct they apply, their research capabilities, how they produce advice and voting recommendations, and conflicts of interest that may influence the preparation of their research. HMT has designated the FCA as the competent authority

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

7 PwC | FS regulatory, accounting and audit bulletin | December 2019

over proxy advisors and has, therefore, provided it with new powers to remove a proxy advisor from the public list of proxy advisors and investigate and enforce against contraventions of the legislation.

To implement these new powers, the FCA is introducing new decision-making procedures. The first removes an advisor from the public list of proxy advisors in situations where they stop providing services but have not given the regulator notice to be removed from the list. The second allows the FCA to investigate and discipline proxy advisors caught by the legislation but which are not authorised by the FCA or PRA.

SRD II came into force on 10 June 2019. Proxy advisors that are subject to the directive need to ensure they comply with their obligations.

Finance Legal clarity for cryptoassets

The UK Jurisdiction Taskforce (UKJT) published a legal statement on cryptoassets and smart contracts on 18 November 2019. UKJT has provided the market with legal clarity, confidence and predictability by stating that assets and contracts created on distributed ledgers, with cryptographic protections, are valid under existing English law.

The UKJT focused on the questions of whether cryptoassets should be classed as property and if smart contracts can be classed as contracts, both under English law. The conclusions were:

Cryptoassets are to be treated in principle as property. There is no reason why their unique characteristics (intangibility, decentralisation) would prevent them from being classed as such. This means there are a number of consequences for legal rules relating to bankruptcy, succession or fraud.

Smart contracts should be treated as contracts. In English law, a contract is formed when two or more parties reach an agreement, create a legal relationship, and each has given something of benefit. Smart contracts fulfil this definition even though requirements on parties may be recorded in computer code, contracting parties may be anonymous and signatures may amount to private keys.

Firms need to consider the legal clarifications in the course of their own business activities.

Market infrastructure ESMA advises on EMIR 2.2 CCP regime

ESMA published three pieces of technical advice to the EC on the EMIR 2.2 third-country regime on 11 November 2019. Firstly, its final technical advice on criteria for tiering under Article 25(2a) of EMIR 2.2 specifies the criteria used to determine whether a third-country CCP is systemically important for the EU or a Member State’s financial stability (Tier 2 CCP). ESMA proposes a range of indicators to be considered in determining a third country CCP’s tiering and gives guidance on what it may consider in this assessment.

Secondly, the technical advice on Comparable Compliance under article 25a of EMIR

specifies the minimum elements to be assessed for ‘comparable compliance’. Comparable compliance would allow a Tier 2 CCP to comply with EMIR requirements by complying with the requirements of its home jurisdiction.

And lastly, technical advice on ESMA fees for Third-Country CCPs under EMIR 2.2 gives details on the fees that ESMA will charge third country CCPs, such as fees for recognition and withdrawal of recognition, annual fees, and fees for comparable compliance assessments.

The EC will use ESMA’s advice to develop the relevant EMIR 2.2 delegated acts.

MiFID II Reviewing MiFID II commodity derivatives regime

ESMA published Consultation Paper: MiFID II review report on position limits and position management on 5 November 2019. This comes in the context of the review ESMA is required to undertake under MiFID II.

Following its call for evidence on position limits in commodity derivatives (issued in May 2019), the EU authority considers the impact of position limits on market abuse and orderly pricing and settlement, as well as the possible impact on the liquidity commodity derivative contracts. It proposes a series of amendments to the rules, including reducing the scope of commodity derivatives under the position limits regime (e.g. removing securitised derivatives), and introducing a limited exemption for financial counterparties.

ESMA is also reconsidering the so-called ‘C(6) carve-out exemption’. It notes that the carve-out ‘has proved a significant and successful incentive for market participants to move trading in REMIT contracts to OTFs and is the source of a major competitive disadvantage for regulated markets and MTFs, which ESMA can find no justification for’.

Finally, the consultation paper is seeking views on an amendment to the quantitative thresholds that trigger publication of weekly position reports by trading venues. The aim of the amendment is to enhance transparency for commodity derivative contracts traded in the EU27.

The consultation period closes on 8 January 2020, after which ESMA intends to draft its final report to the EC on the impact of position limits and position management controls on commodity derivatives markets and finalise its technical advice on weekly position reports. ESMA plans to complete this work by the end of March 2020.

Operational resilience EBA final guidelines on ICT and security risk management

The EBA published final guidelines on the mitigation and management of information and communication technology (ICT) and security risk management for credit institutions, investment firms and payment service providers on 28 November 2019. This is the latest move to harmonise a consistent set of expectations for EBA-regulated firms to follow. The guidelines, which come into force on 30 June 2020, cover topics

Executive summary Fighting on multiple

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Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

8 PwC | FS regulatory, accounting and audit bulletin | December 2019

including governance and strategy, change management, business continuity management and information security measures.

Given the growing dependency on third parties to deliver ICT platforms and services, there is a strong link with the EBA's outsourcing guidelines, in force since September 2019. Both sets of guidelines set expectations on firms to monitor the effectiveness of risk mitigation by third parties. The new guidelines also support evolving regulatory thinking on the broader topic of operational resilience, with common themes including testing programmes, albeit through the lens of business functions or systems rather than business services delivered to customers.

Accounting

PwC publications Our IFRS News November 2019 includes

articles on:

Hyper inflation status update for Zimbabwe.

IFRS IC decision on disclosure of changes in liabilities arising from financing activities.

IFRS IC decision on presentation of uncertain tax liabilities (or assets).

IASB consideration of feedback on the proposed amendments to IFRS 17, ‘Insurance Contracts’.

Word on a Wharf.

In our IFRS reporting podcast Episode 62: Regulators areas of focus for this year end we consider what regulators are focusing on this reporting season.

Our video IFRS hot topics – Negative interest rates considers the IFRS accounting implications of negative interest rates.

Our Illustrative IFRS financial statements – Investment funds 2019 is based on the requirements of IFRS standards and interpretations for the financial year beginning on 1 January 2019. The most significant change to the publication this year is updated guidance to address IFRIC 23 ‘Uncertainty over income tax treatments’ applicable for financial years beginning on or after 1 January 2019.

In our IFRS reporting podcast Episode 61: IBOR reform Phase 1 we consider what is happening in phase 1 of IBOR reform and the IASB’s work.

Our Practical guide to Phase 1 amendments IFRS 9, IAS 39 and IFRS 7 for IBOR reform considers the IASB amendments to provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform.

Also this month

Council The Council adopted a number of

legislative reforms as part of progress towards the CMU on 8 November 2019.

Reforms include regulations with respect to sustainable finance, covered bonds, SME growth markets, as well as a new prudential framework for investment firms.

The Council adopted an amendment to a number of EU directives, aimed at strengthening consumer protection rules, on 8 November 2019. Amendments include harmonising penalties for breaking EU consumer law and enhanced transparency for online transactions, especially where pricing is personalised based on algorithms.

EC Following the EC’s review of ESAs’ powers

in September 2017, it is preparing a directive to transfer responsibility for the authorisation and supervision of data reporting service providers from national authorities to ESMA, and to enhance EIOPA’s role with regard to insurers’ internal models. The Council published an information note on the proposed directive to amend MiFID II and Solvency II on 19 November 2019. It outlines the outcome of the EP’s first reading and Corrigendum procedure and includes the updated wording for Council approval.

The EC adopted two Delegated Regulations containing RTS for securitisation repositories relating to their obligations under the Securitisation Regulation on 29 November 2019. The first relates to operational standards for data, which sets out a framework for securitisation repositories to collect,

process and provide access to relevant disclosures on securitisations that an originator, sponsor or securitisation special purpose entities are required to make available through a securitisation repository. The second RTS specifies the content of a securitisation repository’s application for registration.

ECB The working group on euro RFRs released

a report on the financial accounting implications of the transition from EONIA to the €STR on 5 November 2019. The report seeks to help preparers of financial statements to assess the impact of the transition on a wide range of contracts.

The working group on euro RFRs published a report on €STR fallback arrangements on 12 November 2019. It recommends market participants to consider: the measures that the ECB might take as part of the regular review of €STR methodology, and the policies and procedures to be followed in the event of the possible cessation of €STR; along with the fallback provisions provided in the EONIA to €STR Legal Action Plan. The group believes this combination will provide sufficient contingency as fallback measures for €STR.

ESMA ESMA published updated Q&As on the

Securitisation Regulation on 15 November 2019. The amendments provide further clarity on how a range of fields in the templates contained in the draft technical

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standards on disclosure should be populated, as well as how affected firms should approach requirements on STS notifications and securitisation repositories.

ESMA published new data on bonds subject to the pre- and post-trade transparency requirements under MiFID II on 8 November 2019. The data, which relates to the latest quarterly liquidity assessment for bonds available for trading on EU trading venues, shows that there are currently 611 liquid bonds subject to MiFID II transparency requirements. Bonds deemed liquid under this latest assessment will be subject to the transparency rules from 16 November 2019 to 15 February 2020.

ESMA published new data in relation to the SI regime under MiFID II on 8 November 2019. The data shows the total number of trades and total volume over the period April 2019-September 2019 for 22,015 equity and equity-like instruments and for 334,610 bonds. The results are published only for instruments for which trading venues submitted data for at least 95% of all trading days over the six-month observation period.

ESMA updated its public register with the latest double volume cap (DVC) data under MiFID II on 8 November 2019. This includes DVC data for the period of 1 October 2018 to 30 September 2019, together with updates to historic data which had already been published. The data shows there have been 51 breaches in

equities at the 8% cap, applicable to all trading venues, and 11 breaches in equities at the 4% cap that applies to individual trading venues.

FCA The FCA proposed changes to the way it

intends to raise fees for the next financial year, in CP19/30: Regulatory fees and levies: policy proposals for 2020/21 on 13 November 2019. The consultation closes on 13 January 2020.

The FCA published a statement on 8 November 2019, welcoming the US SEC’s announcement to extend its ‘no action letter’ relating to the research unbundling provisions under MiFID II. The SEC’s letter addresses the potential conflict between US regulation and MiFID II, so that broker-dealers subject to the US regime may receive payments for unbundled research from firms subject to MiFID II or equivalent rules of EU Member States without being considered an investment adviser under US law. This will also apply to UK firms in the event of EU withdrawal before or during the extended period.

The FCA set out changes to its Handbook recently approved by its board, including those relating to mortgage lending, in Handbook Notice No 71 on 22 November 2019.

Nick Cook, Director of Innovation at the FCA, gave a speech on how the FCA can keep up with technological change on 6 November 2019. Cook recognises the need

for the FCA to remain open to new technologies within industry, and to utilise technology itself to stay relevant. Cook also highlights the FCA’s plan to develop a digital, data-rich sandbox that can support innovative RegTech solutions.

The FCA published Primary Market Bulletin No. 25, which provides updates on the treatment of inside information under MAR, on 27 November 2019. The FCA reiterates a number of policy developments and its expectations relating to the identification, management and disclosure of inside information.

FSB The FSB updated its Regulatory framework for haircuts on non-centrally cleared SFTs on 26 November 2019. The document contains new Q&As to clarify the scope of the framework, including for intra-group transactions.

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

10 PwC | FS regulatory, accounting and audit bulletin | December 2019

Banking and capital markets

In this section:

Regulation 10 Capital and liquidity 10 Also this month 11 A brief roundup of other regulatory developments

Regulation

Capital and liquidity CRD V/CRR II - mapping out the detail

The EBA published its risk reduction package roadmaps on 21 November 2019 for delivering more than 100 mandates under CRD V, CRR II and BRRD II. These mandates include RTS, ITS, guidelines and reaports and cover governance and remuneration, large exposures, resolution, pillar 2 (including SREP and IRRBB), pillar 3 disclosures and supervisory reporting. This follows the EBA’s June 2019 CRR II related market risk and counterparty credit risk roadmap.

The EBA indicates that mandates due for delivery within the next six to nine months, as specified in the legislative texts, risk being delayed by three to nine months. For mandates with deadlines beyond that, it also anticipates delays in areas concerning large exposures, IRRBB and MREL as well as consequential related delays of elements of its reporting mandates.

Progressing market risk and MREL reporting

The EBA launched two consultations concerning draft ITS on specific supervisory reporting requirements for market risk on 21 November 2019 and draft ITS on disclosure and reporting of MREL and TLAC on 22 November 2019. These are deliverables under the EBA’s CRD V/CRR II roadmaps.

The market risk draft ITS includes a thresholds template that provides data on the size of banks’ trading books and the volume of their business subject to market risk. As a first step, it also includes a summary template reflecting the own funds requirements under the FRTB Alternative Standardised Approach. The EBA intends to take a gradual approach to expanding reporting requirements in this area. The EBA plans to submit the finalised ITS to the EC in April 2020 and envisages 31 March 2021 as the first reference date for reporting.

For the MREL and TLAC proposals, the EBA aims to provide an integrated set of supervisory reporting and public pillar 3 disclosure templates that minimise the compliance burden and ensure consistency and comparability. It provides a mapping file between the disclosure and the reporting requirements.

The EBA also includes reporting templates covering forecast MREL and TLAC positions and funding structures. It intends these as non-binding recommendations for resolution authorities to use. The EBA plans to submit the finalised ITS to the EC in June 2020 and envisages 30 June 2021 as the first reference date for reporting. It expects TLAC disclosure to apply as soon as the ITS come into force and MREL disclosure from 1 January 2024.

Hortense HuezFS Regulatory Insights

hortense.huez@pwc.com

Hannah SwainFS Regulatory Insights –cross-sector lead

swain.hannah@pwc.com

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

11 PwC | FS regulatory, accounting and audit bulletin | December 2019

The market risk and MREL/TLAC consultations close on 7 January 2020 and 22 February 2020 respectively.

Also this month

Basel Committee The Basel Committee launched a

consultation on voluntary disclosure templates with respect to banks’ sovereign exposures on 14 November 2019. The proposed templates break down banks’ sovereign exposures by jurisdiction, currency and accounting classification. The consultation closes on 14 February 2020.

The Basel Committee released a report on open banking and application programming interfaces (APIs) on 19 November 2019. The report addresses aspects of open banking related to customer-consented data sharing where the customer allows a third-party firm to access their data. The Committee identified challenges for banks around remaining competitive and profitable in a changing digital environment, data and cyber security, the lack of commonly accepted API standards, complexity in assigning liability in cases of financial and/or data loss, and reputational risk.

The Basel Committee launched two consultation papers on banks' market risk disclosure requirements and voluntary disclosure of sovereign exposures on 14 November 2019. The Committee proposes granular Pillar 3 disclosure requirements on banks' trading desks and sovereign

exposures. The consultations close on 14 February 2020.

The Basel Committee published guiding principles for the operationalisation of a sectoral countercyclical capital buffer (SCCyB) on 27 November 2019. The principles include details with respect to the objectives, calibration and the interaction of SCCyB with other prudential regulations. The principles apply to jurisdictions that voluntarily choose to implement a SCCyB.

The Basel Committee published its consultation Identification of guidelines on interaction and cooperation between prudential and AML/CTF supervision on 11 November 2019. It proposes to strengthen existing cooperation between supervisory functions through better information exchange. The consultation closes on 6 February 2020.

The Basel Committee launched a consultation on the Credit Valuation Adjustment (CVA) risk framework on 28 November 2019. The Committee proposes to make a number of targeted final adjustments to align relevant parts of the revised CVA risk framework with the FRTB. The consultation closes on 25 February 2020.

Council The Council published a progress report with respect to work on strengthening the EU Banking Union on 25 November 2019. The report focuses on the implementation of the banking package, calculation of risk-based

contributions under EDIS and the action plan on NPEs.

EBA The EBA announced in a press release the

publication of the final methodology and draft templates for the 2020 EU-wide stress test on 7 November 2019. Similar to 2018, the 2020 test is a bottom-up exercise with constraints, including a static balance sheet assumption. It intends to formally launch the exercise in January 2020 and publish the results by 31 July 2020.

The EBA hosted a Research workshop on stress testing in the banking sector on 27 and 28 November 2019. This contributes to the ongoing debate on possible future changes to the EBA stress test. The EBA makes available details of the participant’s presentations on its website.

IAIS The IAIS published the final version of its Application Paper on Recovery Planning on 18 November 2019. It gives guidance on the application of ComFrame, ICP 16 ‘Enterprise Risk Management for Solvency Purposes’, ICP 23 ‘The Group-wide Supervisor’ and ICP 25 ‘Supervisory Cooperation and Coordination’. In particular, the paper considers the relationship between recovery plans and enterprise risk management tools (including the ORSA and contingency plans), the circumstances in which it is appropriate for the supervisor to require a recovery plan, and the implementation of the proportionality principle with respect to a recovery plan.

Pay.UK Pay.UK, the UK’s independent payment scheme operator, reached a conclusion on ‘no-blame’ fraud reimbursement on 15 November 2019. It found no industry consensus on how to finance a central fund to repay innocent victims of Authorised Push Payment fraud, although payment providers agreed that customers should be reimbursed in a ‘no-blame’ scenario. Hence, Pay.UK is inviting the industry and regulators to work together to explore alternatives.

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

12 PwC | FS regulatory, accounting and audit bulletin | December 2019

Asset management

In this section:

Regulation 12 Fund liquidity 12 Also this month 12 A brief roundup of other regulatory developments

Andrew StrangeFS Regulatory Insights

andrew.p.strange@pwc.com

Regulation

Fund liquidity FCA writes to AFM chairs on fund liquidity

The FCA published a ‘Dear AFM Chair’ letter related to liquidity management in open-ended funds on 4 November 2019. The letter sets out a series of actions that Authorised Fund Managers need to take to minimise liquidity risks across their funds. It comes in response to the recent suspension of a high-profile fund in the UK.

Firms are told to consider their obligations on portfolio composition, asset eligibility and liquidity management. In particular, the regulator calls on firms to:

consider criteria which transferable securities must meet to be eligible for a UCITS fund and NURS

review whether funds have a prudent spread of risk, including by ensuring that securities of a given issuer are limited to 10% of fund

assess whether liquidity of a security compromises the ability to satisfy redemption requests (e.g. consider whether security is sufficiently liquid even if admitted to an eligible market)

review whether systems, controls and governance are appropriate in overseeing and managing liquidity risks across funds.

The FCA discusses best practice around liquidity management. This includes, for example, having in place processes to ensure that the fund dealing arrangements are appropriate for the investment strategy of the fund, carrying out ongoing assessments of liquidity demands and the liquidity of portfolio positions, using ‘liquidity buckets’ for liquidity risk management, and performing liquidity stress testing.

Also this month

ESMA ESMA’s Securities and Markets Stakeholder Group (SMSG) published advice to ESMA on 14 November 2019, related to ESMA’s consultation on Guidelines for performance fees in UCITS from July 2019. The SMSG welcomes ESMA’s efforts to set common guidelines and criteria. It does, however, recommend that ESMA: gathers more data on the use and effects of performance fees; clarifies that the performance fee model applies at the level of the share class and not necessarily at the level of the fund; and includes retail AIFs in the scope of the Guidelines to ensure consistency of treatment on performance fees between UCITS and retail AIFs.

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

13 PwC | FS regulatory, accounting and audit bulletin | December 2019

Insurance

In this section:

Regulation 13 Capital and liquidity 13 Pensions 13 Retail products 14 Solvency II 15 Supervision 15 Accounting 16 IFRS 17 16 Also this month 16 A brief roundup of other regulatory developments

Melinda StrudwickFSRR Insurance lead

melinda.strudwick@pwc.com

Regulation

Capital and liquidity IAIS consults on liquidity risk management

The IAIS published a Draft Application Paper on Liquidity Risk Management for Public Consultation on 19 November 2019. In developing its Holistic Framework, the IAIS revised ICP 16 ‘Enterprise Risk Management for Solvency Purposes’ and ComFrame to more explicitly address liquidity risk.

To help supervisors apply the liquidity risk management standards, the IAIS is now proposing additional guidance on:

applying liquidity risk management measures in a proportionate way and the ways supervisors may tailor requirements

detailed components of the four elements for ‘more detailed risk management processes’ contained in ICP 16 (comprising liquidity stress testing, maintenance of a portfolio of unencumbered highly liquid assets, a contingency funding plan and the submission of a liquidity risk management report to the supervisor)

integration of liquidity risk into insurers’ enterprise risk management frameworks, including recommendations for governance.

The IAIS expects supervisors to apply these requirements to internationally active

insurance groups, and other insurers as necessary. The comment period ends on 20 January 2020.

The IAIS published a Draft Application Paper on Liquidity Risk Management for Public Consultation on 19 November 2019. It aims to help supervisors apply the liquidity risk management standards following revisions to ICP 16 ‘Enterprise Risk Management for Solvency Purposes’ and ComFrame during development of the Holistic Framework. It includes guidance on:

applying liquidity risk management measures in a proportionate way and how supervisors may tailor requirements

detailed components for ‘more detailed risk management processes’ (i.e. liquidity stress testing, maintenance of a portfolio of unencumbered highly liquid assets, a contingency funding plan and the submission of a liquidity risk management report to the supervisor)

integration of liquidity risk into insurers’ Enterprise Risk Management frameworks, including governance recommendations.

The IAIS expects supervisors to apply these requirements to internationally active insurance groups and other insurers as necessary. The comment period ends on 20 January 2020.

Pensions EIOPA consults on PEPP regulation

Hannah SwainFS Regulatory Insights –cross-sector leadswain.hannah@pwc.com

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14 PwC | FS regulatory, accounting and audit bulletin | December 2019

EIOPA published a CP concerning technical advice, implementing and regulatory technical standards for the Pan-European Personal Pension Product (PEPP) on 29 November 2019. It is consulting on key aspects of the PEPP related to its objective and policy approach to draft technical advice and technical standards. In the PEPP, EIOPA aims to establish a simple, safe and cost-efficient savings product. The consultation covers:

proposals for PEPP information documents

the cost cap of the basic PEPP

mandatory use of risk-mitigation techniques

supervisory reporting and supervisory cooperation

product intervention powers.

Alongside the consultation, EIOPA published PEPP KID illustrative example A, PEPP KID illustrative example B and a PEPP Benefit Statement illustrative example. It sets out standardised documents for pre-contractual and annual information on the PEPP and its investment options.

The comment period ends on 2 March 2020.

Retail products Insurers told to focus on value

The FCA published FG 19/5 The GI distribution chain: Guidance for insurance product manufacturers and distributors on 19 November 2019, together with a summary of feedback received to the guidance consultation. The regulator wants firms to focus on the value of products to the end consumer,

including non-price benefits as well as overall price and quality issues.

The guidance covers the responsibilities of insurance product manufacturers through the product cycle including product design, distribution and review. Guidance on the responsibilities of insurance distributors focuses particularly on remuneration. For example, the FCA states that insurance distributors must not be remunerated, or remunerate their employees, in a way that conflicts with the duty to comply with the customer’s best interests rule. The FCA emphasises that firms cannot rely on disclosure as a means of managing this conflict of interest.

The FCA acknowledges that manufacturers may have difficulty in obtaining information about cost and remuneration from all distributors in complex chains. Firms should consider what information is necessary and reasonable for them to obtain, and factor this in when considering how their distribution strategy affects overall value and how it will be monitored.

The guidance is largely a restatement of the draft guidance as consulted on, and there is no implementation period. It does not change the existing rules or introduce any new ones. Firms should also note that The Responsibilities of Providers and Distributors for the Fair Treatment of Customers continues to apply in addition to this guidance.

The guidance is aimed at distribution chains, but product manufacturers should also look at the value of their products to the end

consumer, including in direct sales. In addition, firms should be aware that the FCA will be consulting on competition remedies as part of its general insurance pricing practices market study in 2020.

PRA highlights priorities for general insurers

The PRA published a Dear CEO letter setting out its current areas of focus for general insurance firms on 5 November 2019. It outlines its priorities for general insurers which include:

reserve adequacy and associated reserving governance and controls, particularly in the light of emerging risk developments including in the US

the extent to which firms are demonstrating discipline in underwriting strategies remediation activity and controls, notwithstanding recent rate rises in some specialty lines

emerging risk trends and experience in firms’ exposure management practices, including both natural catastrophe and man‐made accumulations

understanding UK retail general insurers’ responses to the FCA’s pricing practices review, once this review is finalised

ensuring firms develop and maintain a culture where staff feel able to speak up and raise concerns, with effective mechanisms in place to support them in doing so (including mechanisms to ensure access for control functions to non‐executive board members).

Alongside this, the PRA published a Dear Chief Actuary letter on Feedback from recent PRA reserving reviews which considers reserving issues in greater depth.

The PRA expects all general insurers to assess its concerns carefully to identify which issues are relevant to them, have appropriate discussions at board level and take action to address them. Firms also need to be prepared to discuss these issues and proposed action plans with their supervisors over the coming months. See our At a glance - PRA sets out supervisory priorities for general insurance firms for further information.

PRA eyes continued reserving deficiencies

The PRA published Feedback from recent PRA reserving reviews on 5 November 2019. It highlights a number of key reserving and claims handling issues that it expects insurers to address in their 2019 year-end reserving exercises and associated actuarial reports. These priority issues include bias in reserve assessment, weakening of the case reserving basis, inadequate claims inflation allowance, attritional loss deterioration, transparency over key judgements and assumptions in management information, and several specified areas of uncertainty.

The PRA also includes additional feedback on areas that it expects firms to consider over a longer timeframe. These include inadequate and inconsistently applied case reserving policies, allowance for reserve uncertainty in reserve margin held versus capital, deficiencies in claims management

Executive summary Fighting on multiple

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15 PwC | FS regulatory, accounting and audit bulletin | December 2019

information, limited top-down validation, feedback loops and motor reserving findings.

Solvency II PRA highlights solvency implications of tax treatment

The PRA published a Statement on the delegated regulation changes published by the EC on 20 November 2019. It reminds insurers that the deferred part of the EC’s delegated regulation changes, published in June 2019, comes into effect from 1 January 2020 and this may impact the calculation of the SCR.

In relation to the loss-absorbing capacity of deferred tax (LACDT), the PRA highlights the new treatment of increases in deferred tax assets (DTA). It will only allow insurers to include these after a stress event in the calculation of the tax adjustment to the standard formula SCR if they can demonstrate to the PRA’s satisfaction that it is probable that future taxable profits will be available to utilise the increase. The PRA advises firms wanting to include increases in DTA in their LACDT calculation to speak to their usual supervisory contact about how to demonstrate that this is appropriate.

In addition, the PRA notes that this is also relevant for firms expecting to have net deferred tax liabilities (DTL) post-stress, but the DTA component of the net DTL has increased.

TMTP – PRA clarifies expectations for simplified recalculations

The PRA published PS25/19 Solvency II: Maintenance of the TMTP on 14 November

2019. The regulator addresses feedback to its May 2019 consultation (CP11/19) and includes the final updated supervisory statement (SS6/16).

In the supervisory statement, the PRA outlines its expectations for firms intending to develop their own simplification methods for the TMTP recalculations. In addition to its original proposals, the PRA acknowledges that the distinction between a methodology and assumption change may rely on judgement, and further clarifies its expectations for firms using a simplified methodology for TMTP recalculation.

Insurers planning to use a simplified approach need to discuss it with their supervisors before the expected recalculation at 31 December 2019. They also need to be able to demonstrate that their methodology results in a TMTP that is in line with the Solvency II requirements.

Supervision EIOPA to prioritise climate change risks

EIOPA Chair Gabriel Bernadino has called on European insurers and pension funds to play a powerful role in mitigating the impact of climate change. In his keynote speech to the annual EIOPA conference on 19 November 2019, Bernadino highlighted the impact of underwriting practices on the environment and the widening protection gap between natural catastrophes and insurance coverage. Firms should play a stewardship role in contributing to climate change adaptation and mitigation, he argued.

In a wide-ranging speech, Bernardino referred to the problems arising from the persistent low interest rate environment and the increasing shift of risk to consumers. EIOPA sees the pan-European personal pension (PEPP) as an important step in closing the retirement savings gap and may look to develop a blueprint for defined contribution frameworks and auto-enrolment solutions. Bernadino also sees consumer risks in digital technology, which is why EIOPA has established a consultative expert group on digital ethics in insurance and will be designing a cyber resilience framework and a standardised cyber incident reporting system to aggregate data from across Europe.

Firms should be alert to the opportunities arising from EIOPA’s increasing focus on digital technology, the potential for digital data sharing and the ambitions for the PEPP.

IAIS adopts global framework for IAIGs

On 14 November 2019, the IAIS announced that its members formally adopted a number of reforms to enable effective cross-border supervision of insurance groups and to contribute to global financial stability, including the:

Common Framework (ComFrame);

Insurance Capital Standard Version 2.0 (ICS);

Holistic Framework.

ComFrame is a set of international supervisory requirements focusing on the effective group-wide supervision of internationally active insurance groups (IAIGs). It is built and expands on the high-level requirements and

guidance set out in the IAIS Insurance Core Principles.

The insurance capital standard (ICS) for IAIGs is a risk-based global standard covering valuation principles, a definition of qualifying capital resources and a risk-based capital requirement. It has some similarities to Solvency II, but differs in several important ways (such as methods for discounting and calculation of the risk margin). It will be used in confidential reporting to group-wide supervisors and discussion in supervisory colleges for a five-year monitoring period from 1 January 2020. Only after this, does the IAIS propose that the ICS should be used as a group wide Prescribed Capital Requirement.

The Holistic Framework replaces the IAIS’ previous proposal to have additional capital requirements for global systemically important insurers (G-SIIs). G-SIIs are a sub-set of IAIGs 'of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries'.

As the holistic framework has been adopted by the IAIS, the FSB (in consultation with the IAIS and national authorities) announced its decision to suspend G-SII identification from the beginning of 2020. However, it intends to review this again in November 2022 following the holistic framework's implementation.

See our At a glance - IAIS finally adopts Comframe and the Holistic Framework for further details.

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Cross sector announcements

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16 PwC | FS regulatory, accounting and audit bulletin | December 2019

Accounting

IFRS 17 IASB aims to finalise IFRS 17 amendments mid-2020

The IASB met on 20 November 2019 to consider feedback to the Exposure Draft ED/2019/4 – Amendments to IFRS 17 (published June 2019). To reduce uncertainty about the additional amendments to IFRS 17 and limit disruption to the implementation process, it identified the topics under review it plans to:

confirm at a future meeting, with limited additional consideration

consider further

not consider further.

It intends to complete its re-deliberations and finalise amendments by mid-2020, consistent with the timetable in the ED. See our In transition – The latest on IFRS 17 implementation for further details.

Also this month

EIOPA In November 2019, EIOPA published further answers to questions on: (EU) No 2015-2452 procedures formats and templates of the SFCR, (EU) No 2015-2450 templates for the submission of information to the supervisory authorities, (EU) No 2009-138 Solvency II Directive (Insurance and Reinsurance) and (EU) No 2016-97 – IDD.

FCA The FCA published the IDD general good requirements on 27 November 2019. As required by Article 11 of the IDD, it sets out the FCA Handbook rules, applicable to an incoming firm exercising a passport right under the IDD, protecting the general good. It includes notes on areas where the UK has chosen to apply stricter provisions than the IDD.

IAIS The IAIS published an Application Paper on Recovery Planning on 18 November 2019. It adds guidance to the regulatory framework on the relationship between recovery plans and enterprise risk management tools (including the ORSA and contingency plans). The IAIS also outlines the circumstances in which it is appropriate for the supervisor to require a recovery plan, and considers the implementation of the proportionality principle with respect to a recovery plan.

PRA The PRA published Solvency II: Supervisory disclosures, the PRA’s supervisory approach and insurance regulations applicable in the UK on 14 November 2019. As required by Solvency II, the regulator discloses aggregate statistical data on key aspects of the application of the prudential framework; a table covering the manner of exercise of the options provided for in the Solvency II Directive; links to the texts of insurance regulations applicable in the UK; and links to the PRA’s supervisory approach.

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Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

17 PwC | FS regulatory, accounting and audit bulletin | December 2019

Monthly calendar

Open consultations

Closing date for responses

Paper Institution

18/12/19 CP21/19 Credit risk: Probability of Default and Loss Given Default estimation PRA

18/12/19 CP22/19 Solvency II: Prudent Person Principle PRA

27/12/19 CP23/19: Solvency II: Income producing real estate loans and internal credit assessments for illiquid, unrated assets PRA

08/01/20 MiFID II review report on position limits and position management Draft Technical Advice on weekly position reports ESMA

13/01/20 CP26/19: Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on conversion PRA

13/01/20 CP19/30: Regulatory fees and levies: policy proposals for 2020/21 FCA

13/01/20 Amendments to the PRIIPs KID EBA and ESMA

15/01/20 CP19/28: Motor finance discretionary commission models and consumer credit commission disclosure FCA

15/01/20 Opinion on the 2020 review of Solvency II EIOPA

16/01/20 ITS on Supervisory Reporting EBA

17/01/20 CP24/19: Asset encumbrance PRA

17/01/20 Draft Guidelines on the treatment of structural FX under 352(2) of the CRR EBA

20/01/20 Application Paper on Liquidity Risk Management IAIS

24/01/20 CP28/19: Credit unions: Review of the capital regime PRA

14/02/20 Revisions to market risk disclosure requirements Basel Committee

14/02/20 Voluntary disclosure of sovereign exposures Basel Committee

22/02/20 Draft Implementing Technical Standards on disclosure and reporting of MREL and TLAC EBA

25/02/20 Credit Valuation Adjustment risk: targeted final revisions Basel Committee

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18 PwC | FS regulatory, accounting and audit bulletin | December 2019

Closing date for responses

Paper Institution

28/02/20 CP 19/31: Extending the Senior Managers Regime to Benchmark Administrators FCA

02/03/20 Technical advice, implementing and regulatory technical standards for the Pan-European Personal Pension Product EIOPA

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19 PwC | FS regulatory, accounting and audit bulletin | December 2019

Glossary

ABI Association of British Insurers

ABS Asset Backed Security

AI Artificial intelligence

AIF Alternative Investment Fund

AIFM Alternative Investment Fund Manager

AIFMD Alternative Investment Fund Managers Directive 2011/61/EU

AML Anti-Money Laundering

AMLD3 3rd Money Laundering Directive 2005/60/EC

AMLD4 4th Money Laundering Directive 2015/849/EU

AMLD5 5th Money Laundering Directive

AQR Asset Quality Review

ASB UK Accounting Standards Board

Banking Reform Act (2013)

Financial Services (Banking Reform) Act 2013

Basel II Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework

Basel III Basel III: International Regulatory Framework for Banks

Basel Committee Basel Committee of Banking Supervision (of the BIS)

BCR Basic capital requirement (for insurers)

BIS Bank for International Settlements

BoE Bank of England

BMR EU Benchmarks Regulation

BRRD Bank Recovery and Resolution Directive 2014/59/EU

BRRD II Bank Recovery and Resolution Directive (EU) 2019/879 amending BRRD

CASS Client Assets sourcebook

CCA Consumer Credit Act 1974 (as amended)

CCB Countercyclical capital buffer

CCD Consumer Credit Directive 2008/48/EC

CCPs Central Counterparties

CDS Credit Default Swaps

CET1 Common Equity Tier 1

CFTC Commodities Futures Trading Commission (US)

CGFS Committee on the Global Financial System (of the BIS)

CIS Collective Investment Schemes

CMA Competition and Markets Authority

CMU Capital markets union

COBS FCA conduct of business sourcebook

COCON FCA code of conduct sourcebook

CoCos Contingent convertible securities

ComFrame The Common Framework

CONC FCA consumer credit sourcebook

COREP Standardised European common reporting

Council Generic term representing all ten configurations of the Council of the European Union

CPMI Committee on Payments and Market Infrastructures

CRA1 Regulation on Credit Rating Agencies (EC) No 1060/2009

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CRA2 Regulation amending the Credit Rating Agencies Regulation (EU) No 513/2011

CRA3 Proposal to amend the Credit Rating Agencies Regulation and directives related to credit rating agencies COM(2011) 746 final

CRAs Credit Rating Agencies

CRD ‘Capital Requirements Directive’: collectively refers to Directive 2006/48/EC and Directive 2006/49/EC

CRD II Amending Directive 2009/111/EC

CRD III Amending Directive 2010/76/EU

CRD IV Capital Requirements Directive 2013/36/EU

CRD V Capital Requirements Directive (EU) 2019/878 amending CRD IV

CRR Capital Requirement Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms

CRR II Capital Requirements Regulation (EU) 2019/876 amending CRR

CSD Central Securities Depository

CSDR Central Securities Depositories Regulation (EU) 909/2014

CSMAD Criminal Sanctions Market Abuse Directive 2014/57/EU

CTF Counter Terrorist Financing

DEPP The FCA’s Decision Procedure and Penalties Manual

DG FISMA Directorate-General for Financial Stability, Financial Services and Capital Markets Union

DG MARKT Internal Market and Services Directorate General of the European Commission

DGS Deposit Guarantee Scheme

DGSD Deposit Guarantee Schemes Directive 2014/49/EU

DLT Distributed ledger technology

D-SIBs Domestic Systemically Important Banks

EBA European Banking Authority

EC European Commission

ECB European Central Bank

ECJ European Court of Justice

ECL Expected credit loss

ECOFIN Economic and Financial Affairs Council (configuration of the Council of the European Union dealing with financial and fiscal and competition issues)

ECON Economic and Monetary Affairs Committee of the European Parliament

ECP Eligible counterparty

EDIS European Deposit Insurance Scheme

EEA European Economic Area

EEC European Economic Community

EFTA European Free Trade Association

EIOPA European Insurance and Occupations Pension Authority

ELTIF European long-term investment fund

EMIR Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (EU) No 648/2012

EP European Parliament

EPC European Payments Council

ESA European Supervisory Authority (i.e. generic term for EBA, EIOPA and ESMA)

ESCB European System of Central Banks

ESG Environmental, social and governance

ESEF European Single Electronic Format

ESMA European Securities and Markets Authority

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ESRB European Systemic Risk Board

€STR Euro short-term rate

ETC Exchange-traded commodity

ETN Exchange-traded note

EU European Union

EU Securitisation Regulation

Regulation (EU) 2017/2402 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012

EURIBOR Euro Interbank Offered Rate

Eurosystem System of central banks in the euro area, including the ECB

EuSEF The European social Entrepreneurship Funds Regulation

EuVECA European Venture Capital Funds Regulation (EU) 345/2013

FAMR Financial Advice Market Review

FATF Financial Action Task Force

FC Financial counterparty under EMIR

FCA Financial Conduct Authority

Fiat currency Currency whose value is underpinned by the strength of the issuing government, e.g. USD, GBP, euro and other major world currencies

FICC Fixed income, currencies and commodities

FiCOD1 Amending Directive 2011/89/EU of 16 November 2011

FiCOD Financial Conglomerates Directive 2002/87/EC

FMI Financial Market Infrastructure

FMLC Financial Markets Law Committee

FMSB FICC Markets Standard Board

FOS Financial Ombudsman Service

FPC Financial Policy Committee

FRC Financial Reporting Council

FRTB Basel Committee fundamental review of the trading book market risk capital requirements

FSA Financial Services Authority

FSB Financial Stability Board

FSBRA Financial Services (Banking Reform) Act 2013

FS Act 2012 Financial Services Act 2012

FSCP Financial Services Consumer Panel

FSCS Financial Services Compensation Scheme

FSI Financial Stability Institute (of the BIS)

FSMA Financial Services and Markets Act 2000

FTT Financial Transaction Tax

G30 Group of 30

GAAP Generally Accepted Accounting Principles

GDPR General Data Protection Regulation

G-SIBs Global Systemically Important Banks

G-SIFIs Global Systemically Important Financial Institutions

HCSTC High Cost Short Term Credit

HMRC Her Majesty’s Revenue and Customs

HMT Her Majesty’s Treasury

IA Investment Association

IAIS International Association of Insurance Supervisors

IASB International Accounting Standards Board

IBA ICE Benchmark Administration

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

22 PwC | FS regulatory, accounting and audit bulletin | December 2019

ICAAP Internal Capital Adequacy Assessment Process

ICAS Individual Capital Adequacy Standards

ICO Initial coin offering

ICOBS Insurance: Conduct of Business Sourcebook

ICPs Insurance Core Principles

ICT Information and Communication Technology

IDD The Insurance Distribution Directive (EU) 2016/97

IFR Investment Firms Review, used to refer to the new EU prudential regime for investment firms consisting of the Regulation (EU) 2019/2033 and Directive (EU) 2019/2034

IFRS International Financial Reporting Standards

ILAA Internal Liquidity Adequacy Assessment

ILAAP Internal Liquidity Adequacy Assessment Process

ILS Insurance-Linked Securities

IMAP Internal Model Approval Process

IMCO The European Parliament’s Committee on Internal Market and Consumer Protection

IMD Insurance Mediation Directive 2002/92/EC

IMF International Monetary Fund

IORP Institutions for Occupational Retirement Provision

IOSCO International Organisation of Securities Commissions

IRB Internal Ratings Based

IRRBB Interest rate risk in the banking book

ISDA International Swaps and Derivatives Association

ITS Implementing Technical Standards

JCESA Joint Committee of the European Supervisory Authorities

JMLSG Joint Money Laundering Steering Committee

KID Key Information Document

KIID Key Investor Information Document

KYC Know your customer

LCR Liquidity coverage ratio

LEI Legal Entity Identifier

LIBOR London Interbank Offered Rate

MA Matching Adjustment

MAD Market Abuse Directive 2003/6/EC

MAR Market Abuse Regulation (EU) 596/2014

Material Risk Takers Regulation

Commission Delegated Regulation (EU) No 604/2014 of 4 March 2014 supplementing Directive 2013/36/EU of the EP and of the Council with regard to regulatory technical standards with respect to qualitative and appropriate quantitative criteria to identify categories of staff whose professional activities have a material impact on an institution’s risk profile

MCD Mortgage Credit Directive 2014/17/EU

MCOB Mortgages and Home Finance: Conduct of Business sourcebook

MCR Minimum Capital Requirement

Member States Countries which are members of the European Union

MiFID Markets in Financial Instruments Directive 2004/39/EC

MiFID II Markets in Financial Instruments Directive (recast) 2014/65/EU – also used to refer to the regime under both this directive and MiFIR

MiFIR Markets in Financial Instruments Regulation (EU) No 600/2014

MLRO Money Laundering Reporting Officer

MMF Money Market Fund

MoJ Ministry of Justice

MoU Memorandum of Understanding

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

23 PwC | FS regulatory, accounting and audit bulletin | December 2019

MPC Monetary Policy Committee

MREL Minimum requirements for own funds and eligible liabilities

MTF Multilateral Trading Facility

NBNI G-SIFI Non-bank non-insurer global systemically important financial institution

NCA National competent authority

NDF Non-Directive Firms – firms that do not fall within Solvency II

NFC Non-financial counterparty under EMIR

NIS Directive Proposal for a directive of the EP and Council concerning measures to ensure a high common level of network and information security across the EU

NPE Non-performing exposure

NSFR Net Stable Funding Ratio

NST National specific template

NURS Non-UCITS Retail Scheme

OECD Organisation for Economic Cooperation and Development

Official Journal Official Journal of the European Union

OFT Office of Fair Trading

Omnibus II Second Directive amending existing legislation to reflect Lisbon Treaty and new supervisory infrastructure (2014/51/EU). Amends the Prospectus Directive (Directive 2003/71/EC) and Solvency II (Directive 2009/138/EC)

ORSA Own Risk Solvency Assessment

O-SIIs Other systemically important institutions

OTC Over-The-Counter

OTF Organised trading facility

PAD Payment Accounts Directive 2014/92/EU

PERG Perimeter Guidance Manual

PIFs Personal investment firms

PPI Payment Protection Insurance

PRA Prudential Regulation Authority

Presidency Member State which takes the leadership for negotiations in the Council: rotates on 6 monthly basis

PRIIPs Packaged retail and insurance-based investment products

PSD2 The revised Payment Services Directive (EU) 2015/2366

PSP Payment service provider

PSR Payment Systems Regulator

P2P Peer to Peer

QIS Quantitative Impact Study

QRT Quantitative Reporting Template

RAO Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544)

RDR Retail Distribution Review

REMIT Regulation on wholesale energy markets integrity and transparency (EU) 1227/2011

RFB Ring-fenced bank

RFQ Request for quote

RFRs Risk-free rates

RFRWG The Risk-free Rate Working Group of the BoE

RONIA Repurchase Overnight Index Average

RRPs Recovery and Resolution Plans

RTS Regulatory Technical Standards

RWA Risk-weighted assets

SARON Swiss Average Rate Overnight

SCA Strong Customer Authentication (rules under PSD2)

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

24 PwC | FS regulatory, accounting and audit bulletin | December 2019

SCR Solvency Capital Requirement (under Solvency II)

SCV Single customer view

SEC Securities and Exchange Commission (US)

SEPA Single Euro Payments Area

SFP Structured finance product

SFT Securities financing transaction

SFTR Securities Financing Transactions Regulation (EU) 2015/2365

SFO Serious Fraud Office

SI Systematic internaliser

SIMF Senior Insurer Manager Function

SIMR Senior Insurer Managers Regime

SM&CR Senior Managers and Certification Regime

SME Small and Medium sized Enterprises

SMF Senior Manager Function

SOCA Serious Organised Crime Agency

SOFR Secured Overnight Financing Rate

Solvency II Directive 2009/138/EC

SONIA Sterling Overnight Index Average

SPV Special purpose vehicle

SREP Supervisory Review and Evaluation Process

SRF Single Resolution Fund

SRM Single Resolution Mechanism

SRMR Single Resolution Mechanism Regulation (EU) No 806/2014

SRMR II Single Resolution Mechanism Regulation (EU) 2019/877 amending SRMR

SSM Single Supervisory Mechanism

SSR Short Selling Regulation (EU) 236/2012

STS Simple Transparent and Standardised (concerning securitisations)

SUP FCA supervision manual

SYSC The part of the FCA handbook titled senior management arrangements, systems and controls

T2S TARGET2-Securities

TC Treasury Committee

TLAC Total Loss Absorbing Capacity

TMTP Transitional Measure on Technical Provisions

TONA Tokyo Overnight Average Rate

TPR The Pensions Regulator

TR Trade Repository

UCITS Undertakings for Collective Investments in Transferable Securities

UCITS V UCITS V Directive 2014/91/EU

UKLA UK Listing Authority

UK Finance Trade body representing the banking and finance industry, formed by a merger of a number of associations including the British Bankers’ Association

UTI Unique Trade Identifier

XBRL extensible Business Reporting Language

Executive summary Fighting on multiple

fronts – general insurers face strategic shake-up

Cross sector announcements

Banking and capital markets

Asset management Insurance Monthly calendar Glossary

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191126-110833-TN-OS

Contacts

Hannah Swain +44 (0) 7803 590553 swain.hannah@pwc.com Operational resilience and financial crime

Adam Stage +44 (0) 7483 422845 adam.stage@pwc.com Operational resilience

Andrew Strange +44 (0) 7730 146626 andrew.p.strange@pwc.com Retail distribution, SM&CR, upcoming regulatory change

Lucas Penfold +44 (0) 7483 407581 lucas.penfold@pwc.com Wholesale markets and asset management conduct regulation

Tom Boydell +44 (0) 7483 399332 tom.boydell@pwc.com Retail banking, consumer credit and non-bank lending

David Brewin +44 (0) 7809 755848 david.r.brewin@pwc.com Client assets and prudential regulation

Tania Lee +44 (0) 7976 687457 tania.a.lee@pwc.com Insurance, Solvency II

Mete Feridun +44 (0) 7483 362070 mete.feridun@pwc.com Prudential regulation, banks and asset managers

Tessa Norman +44 (0) 7826 927070 tessa.norman@pwc.com Publications and retail distribution

Conor MacManus +44 (0) 7718 979428 conor.macmanus@pwc.com Cross-sector regulatory affairs, Brexit and banking prudential

Daniela Bunea +44 (0) 7561 789058 daniela.bunea@pwc.com Central clearing, FMIs, benchmarks, IBOR reform

Anirvan Choudhury +44 (0) 7843 423721 anirvan.choudhury@pwc.com Insurance prudential

Matthew Field +44 (0) 7483 423613 matthew.c.field@pwc.com Insurance conduct

Daniel de Burca +44 (0) 7483 423613 daniel.de.burca@pwc.com Cross-sector regulatory affairs, Brexit and insurance

Arthur Marquis +44 (0) 7483 391393 arthur.marquis@pwc.com Banking conduct, IBOR reform

Leo Donnachie +44 (0) 7483 329595 emilio.donnachie@pwc.com Cross-sector conduct, asset management