Financial services regulation round-up - December 2019

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Open Banking update on banks’ implementation of the Customer Experience Guidelines

Open Banking has published an overview of how the six largest banks in Great Britain and the three largest banks in Northern Ireland (known collectively as the CMA9) have implemented the Customer Experience Guidelines (CEG) and the measures the Open Banking Implementation Entity and the CMA9 are taking to remedy any outstanding issues.


FCA and FOS Handbook instrument amending voluntary jurisdiction rules in DISP

The FCA has published an instrument amending certain provisions in the FCA Handbook’s Dispute Resolution: Complaints Sourcebook (DISP) relating to the Financial Ombudsman Service’s (FOS) voluntary jurisdiction rules.

The instrument amends chapter 2 of DISP by replacing references to “1 April 2019” with references to “exit day” to reflect the changes the FOS made to its voluntary jurisdiction to incorporate Brexit.

FMLC updates its Brexit analysis on third country regimes in EU legislation

The Financial Markets Law Committee (FMLC) has published  an addendum to its July 2017 paper which focused on issues of legal uncertainty arising out of the UK’s withdrawal from the European Union (EU) without retaining access to the Single Market under any other legal provision.

The addendum sets out key updates on developments that have transpired since the 2017 report, including no-deal contingency plans and providing updates on general points across different financial services sectors.

The FMLC concludes that the uncertainties highlighted in the 2017 report continue to paint a daunting picture for UK market participants and the risk of a ‘cliff edge’ Brexit continues to present a substantial danger of market disruption and of litigation in relation to legacy business.


European Council and Commission call for action on stablecoin risks

The Council of the EU has published a draft joint statement by the Council and the Commission on stablecoins.

Stablecoins are cryptocurrencies that attempt to link their market value to some external reference, and may be pegged to a currency or to a commodity's price.

The draft statement notes that technological innovation can produce great economic benefits for the financial sector, and sets out the potential benefits of stablecoins, including cheap and fast payments, especially cross-border payments. However, these arrangements pose multifaceted challenges, and the paper sets out the risks in terms of consumer protection, privacy, taxation, cyber security and operational resilience, money laundering, terrorism financing, market integrity, governance and legal certainty.

The statement concludes by stating that no initiatives should start in the EU until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.

EU Regulation

EBA publishes final guidelines on ICT and security risk management

The European Banking Authority (EBA) has published its final Guidelines on ICT and security risk management (the Guidelines). The Guidelines establish requirements for credit institutions, investment firms and payment service providers (PSPs) on the mitigation and management of their information and communication technology (ICT) and security risks, and sets out the expectations on how financial institutions should manage internal and external ICT and security risks that they are exposed to.

The Guidelines also provide financial institutions with a better understanding of supervisory expectations for the management of their ICT and security risks, covering sound internal governance, information security requirements, ICT operations, project and change management and business continuity management.

In addition, the guidelines cover the management of PSPs’ relationship with payment service users to ensure that users are made aware of the security risks linked to the payment services.

The Guidelines will enter into force on 30 June 2020.


FCA publishes finalised guidance on the general insurance distribution chain

The FCA has published finalised guidance 19/05: General insurance distribution chain—Finalised guidance for insurance product manufacturers and distributors (FG19/05).

FG19/05 intends to provide clarity to firms about the FCA’s expectations, in particular on the design and distribution of insurance products and the requirement to act in accordance with the customer’s best interests.

PRA sends ‘Dear CEO’ letter to general insurance firms setting out current areas of focus

The PRA has sent a letter to the Chief Executives of general insurance firms setting out the PRA’s current areas of focus for general insurance firms.

The PRA's priority areas of focus for general insurance firms over the coming year are as follows:

  • Reserve adequacy, 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. With recent natural catastrophe experiences in mind, firms should ensure that they have assessed the adequacy of their exposure management controls as well as their risk mitigation strategies.
  • 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 employees feel able to speak up and raise concerns, with effective mechanisms in place to support them in doing so.


Dear AFM Board letter: Effective liquidity management

The FCA has sent a letter to the boards of authorised fund management firms setting out the FCA’s expectations on liquidity management.

The letter begins by stressing that ensuring effective liquidity management in funds is the responsibility of the authorised fund manager (AFM), even if investment management has been delegated to another person. The letter notes that open-ended funds are not always able to liquidate assets sufficiently quickly in response to increased redemption requests from investors. AFMs can, however, prevent the likelihood of this causing consumer detriment through suitable portfolio composition, effective fund governance (including by independent directors), understanding their investor base and investors’ redemption rights, and using liquidity tools appropriately, especially in times of market volatility and stress.

The letter goes on to refer to the FCA's policy statement on illiquid assets and open-ended funds (PS19/24), which sets out measures to strengthen the regulatory framework in this area. Although PS19/24 focused on non-UCITS retail schemes, firms should recognise that “effective liquidity management is an irreducible, core function for all open-ended funds”.  Whilst the new rules in PS 19/24 are not due to come into force until September 2020, AFMs (and depositaries) may wish to consider whether it would be in investors’ interests to adopt some of the measures earlier.

Temporary intervention on the marketing of speculative mini-bonds to retail investors

The FCA has announced the introduction of temporary product intervention measures for 12 months from 1 January 2020 to address risks of consumer harm from the promotion of speculative mini-bonds to retail investors.

The term mini-bond refers to a range of investments; however the FCA’s temporary measure is applicable to a specific sub-sector within the mini-bond market: securities which are defined as ‘speculative illiquid securities’. These are complex and opaque arrangements where the funds raised by the sale of mini-bonds are used to lend to a third party, invest in other companies or purchase or develop properties. There are various exemptions to the intervention, including for listed mini-bonds, companies which raise funds for their own activities (other than the ones above) or to fund a single UK property investment.

The temporary intervention means that:

  • unlisted speculative mini-bonds can only be promoted to individual retail investors who have been pre-categorised as either sophisticated or high net worth, and where the product has been initially assessed as likely to be suitable for them; and
  • marketing material produced or approved by an authorised firm will be required to include a specific risk warning, as well as disclosure of any costs or payments to third parties that are deducted from the money raised by an issuer.

The new restrictions will be set out in Conduct of Business Sourcebook (COBS) of the FCA Handbook at COBS 4.14.


FCA Q&As outline expectations to minimise conduct risk arising from LIBOR transition

The FCA has published a statement together with key questions and answers for firms on conduct risk arising from the London Inter-bank Offered Rate (LIBOR) transition.

LIBOR is used as the interest rate benchmark to price or value a wide range of financial products. It is expected to cease after end-2021, when the voluntary agreement of panel banks to continue to submit to LIBOR ends. Firms therefore need to find suitable alternatives to LIBOR.

The Q&As outline in detail the FCA’s core expectations for firms during the transition away from LIBOR. They set out what firms should do in relation to issues including:

  • governance and accountability;
  • fair replacement rates for LIBOR-linked products or services when amending existing contracts;
  • treating customers fairly when replacing LIBOR and communicating with customers about LIBOR and alternative rates/products;
  • offering new products that reference risk-free rates (RFRs) and other alternative rates;
  • the Sterling Overnight Index Average (SONIA) and other alternative reference rate products; and
  • acting in the best interests of clients when making investment decisions in relation to LIBOR and RFR-linked products.

UK Finance publishes members’ guide on LIBOR transition

UK Finance has published a guide for its members’ business customers on the discontinuation of LIBOR.

The guide is intended for firms' business customers who hold LIBOR-linked financial products, including loans, to help them understand more about the discontinuation and what they should expect to hear from their bank or lender in the coming months. The guide includes messages for business customers covering topics such as why LIBOR is unsustainable, what the options are for its replacement, and how the transition away from LIBOR is being managed by the industry.


BSB publishes full suite of SMCR good practice guidance

The Banking Standards Board (BSB) has published four good practice guidance documents aimed at supporting firms in their implementation of the Senior Managers and Certification Regime (SMCR).

The suite of documents are intended to help firms reference their own policies and procedures against a statement of what ‘good’ looks like in relation to SMCR, and includes:

Extending SMCR to Benchmark Administrators

The FCA has published a consultation paper (CP19/31) setting out how the Senior Managers Regime (SMR) will apply to benchmark administrators. The SMR will come into force for benchmark administrators that do not undertake any other regulated activities on 7 December 2020.

CP 19/31 explains how the FCA proposes to:

  • not apply the Certification Regime to benchmark administrators , as the EU Benchmarks Regulation (BMR) contains requirements on administrators to ensure employees are fit and proper;
  • categorise benchmark administrators under the SMR as ‘Core’ firms initially, with the option of subsequent waivers, so that firms that are subject to  (and in compliance with) the Annex II regime under the BMR can become Limited Scope firms;
  • require administrators to allocate up to 4 Senior Manager Functions, depending on their governance structure;
  • require Core firms to allocate three Prescribed Responsibilities;
  • require Limited Scope firms to allocate the Limited Scope Function to the most appropriate person at the firm; and
  • require administrators to apply the Conduct Rules to almost all their employees.

Additionally, after 9 December 2019, the existing Approved Persons Regime will no longer apply to firms authorised under the Financial Services and Markets Act 2000 (FSMA), and will only apply to Appointed Representatives. The consultation proposes some consequential changes to the FCA’s rules to make this clear.  

The deadline for comments on CP19/31 is 28 February 2020.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.

Date published

06 December 2019


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