FIG Bulletin Recent developments 15 November 2019

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General 4

Financial Services Duty of Care Bill falls 4

Regulatory fees and levies policy proposals for 2020/21: FCA CP19/30 4

Stablecoins: Council of EU and European Commission draft joint statement 4

EU supervisory reporting requirements: European Commission fitness check 4

FSB November 2019 plenary meeting 5

Brexit 6

UK EMIR: FCA validation rules 6

EIOPA Brexit insurance recommendations: PRA statement on ACPR response 6

Operational risk increases when banks delay action: ECB article 6

UK CCPs: Trade associations call on European Commission to extend Brexit temporary equivalence 7

Hogan Lovells Brexit resources 7

Banking and Finance 8

2020 EBA EU-wide banking sector stress test 8

NPLs: EBA progress report 8

Cooperation between prudential and AML/CTF supervision: BCBS consultation 8

SRB resolution reporting Q&A process launched 8

Securities and Markets 9

MiFID II inducements and research: FCA welcomes SEC decision to extend no-action relief 9

Commission Delegated Regulation amending PRIIPs Delegated Regulation 9

EU ETS Auctioning Regulation: amending Delegated Regulation 9

Third-country CCPs under EMIR 2.2: ESMA final reports on tiering, comparable compliance and fees 10

Securitisation Regulation: RTS specifying information to be provided for STS notifications 10

Securitisation Regulation: RTS on the homogeneity of the underlying exposures 10

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MiFID II: SMSG advice on ESMA CP on draft guidelines on certain aspects of the compliance function 11

Working group on risk-free rates: fallback recommendations for users of €STR 11

Working group on risk-free rates: fallback recommendations in transactions referencing EURIBOR 11

Insurance 12

Insurance age agreement renewed 12

Funds and Asset Management 13

IA operational and enterprise risk principles for asset managers 13

Financial Crime 14

Suspicious activity reports: NCA glossary codes and reporting routes 14

Suspicious activity reports: NCA Annual Report 2019 14

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General

Financial Services Duty of Care Bill falls

Parliament has updated its webpage on the Financial Services Duty of Care Bill 2019-20 to indicate that the Bill will make no further progress as the 2017-19 Parliament has been dissolved.

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

The FCA is consulting (in CP19/30) on the way it will raise FCA fees from 2020/21. Among other things, the FCA consults on:

• a proposed charge of £5,000 per year for proxy advisors; • income as the basis for calculating periodic fees for Multi-lateral Trading Facilities,

Organised Trading Facilities and Recognised Overseas Investment Exchanges; • changes to special project fees; • an administration charge of £50 for fee-payers requiring paper invoices; and • mechanisms for funding free-to-consumer debt advice in the UK, including the debt

advice levies for the Money and Pensions Service and the devolved authorities.

The consultation ends on 13 January 2020.

Stablecoins: Council of EU and European Commission draft joint statement

The Council of the EU has published a note sent to it from the Presidency on the topic of stablecoins. The note has annexed to it a draft joint statement from the Council and the European Commission on stablecoins. The draft Joint Statement will be submitted to the Permanent Representatives Committee with a view to the approval by the Council (ECOFIN) at its 5 December meeting.

In their draft statement, the Council and the Commission recognise the potential of the stablecoin initiative to reach a global scale and acknowledge the opportunities of stablecoins. However, among other things, the Council and Commission state that no global stablecoin arrangement should begin operation in the EU until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.

EU supervisory reporting requirements: European Commission fitness check

The European Commission has published a staff working document on the findings of its fitness check of EU supervisory reporting requirements. It has also published a separate executive summary.

In December 2017, the Commission launched the fitness check to assess whether EU-level supervisory reporting requirements were fit for purpose. Among other things, the fitness check involved a public consultation, a detailed mapping exercise of supervisory reporting requirements and a targeted consultation of national supervisory authorities.

The Commission concludes that the requirements are broadly effective in providing supervisory authorities with the data that they need to fulfil their statutory tasks and mandates. It found that the requirements have improved supervisors' ability to monitor systemic risk, the interconnectedness of the financial system and developments that may pose a risk to financial stability. The Commission also found inefficiencies in the requirements, arising from a lack of clarity and insufficient use of standards, common formats and identifiers. It also found that a lack of consistency in reporting frameworks has arisen from inconsistent wording used in the

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legislative acts introducing reporting requirements. The Commission flags a number of areas for improvement.

FSB November 2019 plenary meeting

The Financial Stability Board (FSB) has published a press release following a plenary meeting to review vulnerabilities in the global financial system, discuss FinTech developments and ongoing work, and agree its work programme for 2020.

Among other things, the FSB indicates that the plenary discussed developments in cryptoasset markets. Members endorsed an augmented framework for monitoring potential financial stability risks in those markets to take account of the development of "global stablecoin" systems, recognising that these are developing rapidly. In parallel, the FSB is examining regulatory and supervisory issues raised by global stablecoins with a view to advising on additional multilateral responses as needed. The FSB will publish a consultative report on regulatory issues of stablecoins in April 2020.

Members also discussed the FSB's ongoing work on market developments and potential financial stability implications from the entry of BigTech firms into finance and from third-party dependencies in cloud services. The FSB will publish initial reports on these key topics in the coming weeks.

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Brexit

UK EMIR: FCA validation rules

The FCA updated its webpage on the reporting of derivatives under the UK EMIR regime in a no-deal scenario to announce the publication of UK EMIR validation rules.

The FCA states that if the UK leaves the EU on a no-deal basis, UK reporting counterparties and UK trade repositories should use these rules when submitting derivative transactions from 11pm on 31 January 2020 onwards.

EIOPA Brexit insurance recommendations: PRA statement on ACPR response

On 31 October 2019, the European Insurance and Occupational Pensions Authority (EIOPA) published member state responses to its February 2019 "Recommendations for the insurance sector in light of the United Kingdom withdrawing from the European Union".

In its response, the French regulator, Autorité de contrôle prudentiel et de résolution (ACPR), indicated that it does not intend to comply with EIOPA's Recommendation 6, relating to insurance policies originally sold in the UK by UK insurers to policyholders now resident or established in France. On 8 November 2019, ACPR published a further statement on its website regarding affected policyholders.

The PRA has published a statement indicating that, as per the ACPR statement, to make use of the French run-off ordinance, UK insurers must have appropriate passports in place to carry out business in France on exit day.

The PRA and the FCA encourage firms to seek legal advice and consider any risk arising from the ACPR approach to affected policyholders as soon as possible.

Operational risk increases when banks delay action: ECB article

The European Central Bank (ECB) has published an article calling on banks to accelerate their preparations for a no-deal Brexit, warning them about heightened operational risks arising from delays to implementing their plans.

The ECB says that banks need to press ahead and implement their plans in line with the commitments they made to regulators in the past. In particular, the ECB warns that delays to banks' implementation of their Brexit plans give rise to heightened operational risk. It states that banks are delaying transfers of assets and customers as well as necessary changes to their IT systems, operations and organisational set-up. Many of these actions require the involvement of third parties, which – if banks end up implementing last-minute, large‑scale measures – could create significant bottlenecks leading to coordination failures. Therefore, it is imperative that banks speed up the implementation of their Brexit plans to be able to meet the deadlines at the end of 2020.

The ECB also calls on banks to take action in all areas of the ECB's supervisory expectations: internal governance, business origination and access to financial market infrastructures, booking models, intragroup arrangements, and IT infrastructure and reporting.

In addition, the ECB raises concern about the fact that a number of banks are making insufficient progress with the novation of uncleared cross-border derivatives contracts.

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UK CCPs: Trade associations call on European Commission to extend Brexit temporary equivalence

The Association for Financial Markets in Europe (AFME) has published a letter that it has sent jointly with other trade associations to the European Commission on the temporary equivalence and recognition of UK central counterparties (CCPs).

The trade associations express their appreciation to the European Commission and the European Securities and Markets Association (ESMA) in their steps so far to ensure continuity of access for EU members to UK CCPs in the event that the UK leaves the EU without a deal. However, the associations call on the Commission to extend the temporary equivalence for UK CCPs until the new framework for recognition of non-EU CCPs under EMIR 2.2 is effective and ESMA has completed its review of existing recognition decisions.

The current temporary recognition arrangements expire on 30 March 2020.

Hogan Lovells Brexit resources

Given the moving Brexit target at the moment we recommend that for an up-to-date take on Brexit impact please try the Hogan Lovells Brexit Hub, an open resource online.

Hogan Lovells Brexit Hub

Twitter

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Banking and Finance

2020 EBA EU-wide banking sector stress test

The European Banking Authority (EBA) has published the final methodology, draft templates and template guidance for the 2020 EU-wide stress test. The methodology and templates cover all relevant risk areas and incorporate the feedback received during the EBA's discussion with the industry in the summer of 2019. The draft version of the templates may be subject to minor technical adjustments before final publication.

The stress test exercise will be formally launched in January 2020 and the results published by 31 July 2020.

NPLs: EBA progress report

The EBA has published a report on progress made in the EU banking sector on non-performing loans (NPLs) and challenges ahead, together with a statistical Annex. This is the EBA's second thematic report on NPLs, following one published in July 2016. The review found that:

• total NPLs decreased from over EUR 1.15 trillion in June 2015 (6% as a percentage of total loans) to EUR 636 billion as of June 2019;

• the NPL ratio declined to 3%, the lowest ratio since the EBA introduced a harmonised definition of NPLs across European countries; and

• the average coverage ratio slightly increased from 43.6% to 44.9% over the same period.

Overall, the EBA has found that efforts to improve EU banks' asset quality have been successful, although pockets of risks remain. Impediments to resolving NPLs remain significant in a few countries, in particular, those with higher NPL ratios.

Cooperation between prudential and AML/CTF supervision: BCBS consultation

The Basel Committee on Banking Supervision (BCBS) has published a consultative document on the introduction of guidelines on interaction and cooperation between prudential and anti-money laundering (AML) and counter-terrorist financing (CTF) supervision. The BCBS proposes to amend in this respect its guidelines on the sound management of risks related to money laundering and financing of terrorism, which were published in June 2017.

These proposed guidelines are intended to enhance the effectiveness of supervision of banks' money laundering and financing of terrorism risk management, consistent with, and complementary to, the goals and objectives of the standards issued by the Financial Action Task Force and principles and guidelines published by the BCBS.

The consultation closes on 6 February 2020.

SRB resolution reporting Q&A process launched

The Single Resolution Board (SRB) has set up a Q&A process for raising questions on resolution reporting. The Q&A process aims to provide support to national resolution authorities and institutions subject to the resolution reporting requirements.

Details on how to raise questions and access the Q&A archives are provided on the dedicated webpage.

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Securities and Markets MiFID II inducements and research: FCA welcomes SEC decision to extend no-action relief

The FCA has published a statement on MiFID II inducements and research. The FCA welcomes the US Securities and Exchange Commission's (SEC) announcement of an extension of the SEC staff "no-action letter" relating to the MiFID II Directive inducements and research provisions. The letter addresses the potential conflict between US regulation and the MiFID II Directive provisions, extending the existing relief from expiry on 3 July 2020 to 3 July 2023.

The no-action relief means that broker-dealers subject to the US regime may receive payments for unbundled research from firms subject to the MiFID II Directive or equivalent rules of EU member states without being considered an investment firm under US law. This relief will also apply to UK firms in the event that the UK leaves the EU before or during the extended period.

Commission Delegated Regulation amending PRIIPs Delegated Regulation

Commission Delegated Regulation (EU) 2019/1866 has been published in the OJ. The new Delegated Regulation amends the PRIIPs Delegated Regulation ((EU) 2017/653) to align the transitional arrangements for PRIIP manufacturers offering units of UCITS and non-UCITS funds referred to in Article 32 of the PRIIPs Regulation as underlying investment options with the prolonged exemption period under that Article.

The new Delegated Regulation amends Article 18 of the PRIIPs Delegated Regulation, to extend the transitional arrangements by two years, to 31 December 2021. It does not alter the substance of the PRIIPs Delegated Regulation or create new obligations for manufacturers of PRIIPs, or persons advising on or selling PRIIPs, and is consistent with the extended transitional arrangements in the PRIIPs Regulation.

The new Delegated Regulation enters into force on 28 November 2019.

EU ETS Auctioning Regulation: amending Delegated Regulation

Commission Delegated Regulation (EU) 2019/1868 amending Regulation (EU) No 1031/2010 to align the auctioning of allowances with the EU ETS rules for the period 2021 to 2030 and with the classification of allowances as financial instruments pursuant to Directive 2014/65/EU has been published in the OJ.

The Delegated Regulation is the first general revision of the EU Emissions Trading System (EU ETS) Auctioning Regulation. It makes changes to:

• take account of new rules for Phase IV (2021-30) introduced by the EU ETS Phase IV Directive ((EU) 2018/410). In particular, these concern the use of the common auction platform (set up under the Auctioning Regulation 2010) to monetise allowances dedicated to the Innovation and Modernisation Fund;

• take account of the fact that emissions allowances have been classified as financial instruments by the MiFID II Directive since the beginning of 2018;

• improve and simplify the auction processes based on experiences during Phase III; and • clarify provisions on submission of auction calendars and reporting obligations of auction

platforms on auction transactions, following comments made by stakeholders during the feedback period.

The Delegated Regulation comes into force on 28 November 2019.

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Third-country CCPs under EMIR 2.2: ESMA final reports on tiering, comparable compliance and fees

Following its May 2019 consultations, ESMA has published the following three sets of technical advice relating to third-country central counterparties (TC-CCP) under the proposed EMIR 2.2:

• a final report on criteria for tiering under Article 25(2a) of EMIR 2.2. ESMA's advice proposes a range of indicators to consider in determining a TC-CCP's tiering and provides guidance on what it may consider in this assessment;

• a final report on comparable compliance under Article 25a of EMIR 2.2. To benefit from comparable compliance, tier 2 TC-CCPs will have to evidence how compliance with the requirements applicable in their home country also satisfies the requirements under EMIR 2.2; and

• a final report on ESMA fees for TC-CCPs under EMIR 2.2. ESMA's advice details the fees ESMA will charge for each category of TC-CCPs, as well as the payments and reimbursement conditions. This includes fees for recognition and withdrawal of TC-CCP recognition, annual fees and fees for comparable compliance assessments.

ESMA has sent the advice to the European Commission so it can assist with the development of corresponding delegated legislation under EMIR 2.2, which the Commission will consult on in due course.

Securitisation Regulation: RTS specifying information to be provided for STS notifications

The European Commission has published a Delegated Regulation supplementing the Securitisation Regulation with regard to regulatory technical standards (RTS) specifying the information to be provided in accordance with the simple, transparent and standardised (STS) securitisation notification requirements, together with annexes.

The Delegated Regulation sets out the information that must be notified to ESMA for securitisations seeking STS status.

The Delegated Regulation will enter into force on the twentieth day following its publication in the OJ.

Securitisation Regulation: RTS on the homogeneity of the underlying exposures

Delegated Regulation (EU) 2019/1851 supplementing the Securitisation Regulation with regard to RTS on the homogeneity of the underlying exposures in securitisation has been published in the OJ. Homogeneity of the underlying exposures is one of the requirements for STS securitisations.

The Regulation establishes a set of conditions that the underlying exposures of a securitisation must satisfy in order to be deemed homogenous. The Regulation applies to both asset-backed commercial paper (ABCP) and non-ABCP securitisations.

The Delegated Regulation enters into force on 26 November 2019.

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MiFID II: SMSG advice on ESMA CP on draft guidelines on certain aspects of the compliance function

ESMA's Securities and Markets Stakeholder Group (SMSG) has published advice to ESMA on ESMA's consultation paper on draft guidelines on certain aspects of the MiFID II compliance function. The SMSG welcomes the draft guidelines in general but sets out a number of recommendations for improvement.

Working group on risk-free rates: fallback recommendations for users of €STR

The working group on euro risk-free rates has published a report on fallback arrangements for the euro short-term rate (€STR).

The working group recommends that market participants consider as fallback measures for the €STR:

• the measures that might be taken by the ECB as part of the regular review of the €STR methodology;

• the policies and procedures to be followed in the event of the possible cessation of the €STR; and

• the fallback provisions provided by the working group in the EONIA to €STR Legal Action Plan.

Working group on risk-free rates: fallback recommendations in transactions referencing EURIBOR

The ECB's working group on euro risk-free rates has published a report on its recommendations for fallback provisions in contracts for cash products and derivatives transactions referencing the Euro Interbank Offered Rate (EURIBOR).

Among other things, the working group recommends that:

• market participants incorporate fallback provisions in all new financial instruments and contracts referencing EURIBOR, regardless of whether they fall within the scope of the EU Benchmarks Regulation (BMR);

• legacy financial instruments and contracts referencing EURIBOR that were entered into after 1 January 2018 and that fall within the scope of the BMR should be covered by "robust written plans" prepared by supervised entities in accordance with Article 28(2) of the BMR;

• for legacy contracts which do not contain appropriately worded fallback provisions, to the extent practicable, market participants should introduce EURIBOR fallback provisions, or enhance existing provisions, when such financial instruments and contracts are next amended or updated; and

• where no specific fallback provisions are recommended and pending further guidance from the working group or regulatory authorities, market participants may wish to consider including generic language in their fallback provisions. To this end, the working group recommends a standard text for a generic EURIBOR fallback provision.

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Insurance Insurance age agreement renewed

The British Insurance Brokers' Association has announced that it, the Association of British Insurers and the UK government have renewed their "signposting" agreement on age and insurance. The agreement, originally in force in 2012, helps older people find the essential cover they need.

Under the agreement, if an insurer or insurance broker is unable to offer cover to an older motorist or traveller because their age is above any upper age limits they have, then they automatically refer the customer to an alternative provider who can meet their needs or to a dedicated signposting service.

The agreement applies to motor and travel insurance contracts entered into on or after 5 November 2019 that are private, voluntary and separate from an employment relationship.

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Funds and Asset Management

IA operational and enterprise risk principles for asset managers

The Investment Association (IA) has published a good practice guide for its members on "Operational & Enterprise Risk Principles for Asset Managers". The guide has been developed to help firms implement a robust enterprise risk management framework, including a well-resourced operational risk function. Its aims are to help to ensure firms' continued financial strength and durability, to prioritise resources in firms, and to organise functions, teams and processes.

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Financial Crime Suspicious activity reports: NCA glossary codes and reporting routes

The UK Financial Intelligence Unit of the National Crime Agency (NCA) has published revised guidance on suspicious activity report (SAR) glossary codes and reporting routes. It replaces all previous publications. The use of glossary codes is considered good practice.

The revised guidance includes new codes for SARs where the value is less than £3,000 and the reporter is unaware of any existing law enforcement interest at the time of reporting.

Suspicious activity reports: NCA Annual Report 2019

The NCA has published its SARs annual report 2019. Key statistics from the report include:

• a record number of 478,437 SARs were received and processed by the NCA during 2018-2019;

• there were 34,543 requests for a defence against money laundering (DAML) which was a 52.72% increase on the previous year; and

• £131,667,477 was denied to criminals as a result of DAML requests (refused and granted) where law enforcement obtained restraint or used new civil powers under the Criminal Finances Act 2017 to freeze an account. This was up from the previous year when £51.9 million was denied.

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