Risk & Regulation Round-up December 2016 to September 2017

In this blog we go back to our regular round-up of key announcements and developments in UK financial risk and regulation.

We haven’t done this for a while, so this edition covers a longer period than usual – 1st December 2016 to 30th September 2017.

We expect to resume more frequent updates going forward, and sincerely thank our readers for their patience during the gap so far this year. Given the long time period in view, the coverage is deliberately even more summarised and simplified than usual. In particular we pay only scant attention to Brexit.

Brexit contingency planning is well under way at all firms, under the watchful eye of the regulators. But, for the purposes of this blog, Brexit remains, just about, an environmental factor rather than a driver of actual rule changes. So – as before – we focus more on concrete developments that have occurred than on future Brexit-related changes whose detail and timing is not yet certain.

Links to underlying source stories or documents are contained in individual articles in this blog.

*** Note: The articles in this blog do not constitute advice, but please contact Prism-Clarity for further information, including where to get the best advice. ***


1. Brexit

Andrew Bailey speech: July 2017

FCA chief executive Andrew Bailey made a speech setting out an overview of the work that the FCA is doing on Brexit and his perception of the impact of Brexit on financial services. He noted that open markets in financial services, freedom of location and free trade are important to the functioning of the global economy. He added that firms should be able to take their own decisions on where they locate, subject to appropriate regulatory arrangements being in place which preserve the public interest, but confirmed the regulator’s view that restricting trade is not an inevitable or necessary response to Brexit.

ESMA Principles on Brexit-related relocations: July 2017

Elsewhere, European regulators made some important announcements relating to the relocation of entities, activities and functions from the UK post-Brexit. This one from ESMA set out some specific principles covering investment firms, investment management and secondary markets, aiming to foster consistency in authorisation, supervision and enforcement. Earlier, in May, ESMA had set out nine more general principles relating to this topic. The opinions were addressed primarily to national regulators – also known as national competent authorities (NCAs) – of the 27 member states that will remain in the EU. But they are relevant to firms considering relocating entities, activities or functions from the UK.

[Similar announcements, not linked here, were also made by the German financial regulator BaFIN and the European insurance regulator EIOPA.]

2. Basel and Financial Stability Board (FSB) announcements

Basel Committee on Banking Supervision publications: 2017

The Basel Committee has had a busy year of routine monitoring and issuing new consultations, with perhaps the most significant new papers being those related to FinTech (August), new standardised rules for market risk under the FRTB (June) and finalising Pillar 3 requirements (March). Aside from those there have been numerous updates under the BIS Regulatory Consistency Assessment Programme (RCAP) concerning progress with the Liquidity Coverage Ratio (LCR) implementation in the US, Japan, China and the EU among others.

Key FSB announcements: 2017

The FSB has also been busy. In July it reported in a letter to G20 leaders on high-level progress towards financial regulatory reform. The FSB indicated that it thought the G20 reforms were building a safer, simpler, fairer financial system, and that banks were now stronger, more liquid and more focused. Nevertheless it said Basel III must be completed urgently and then implemented faithfully along with other outstanding tasks including cross-border resolution regimes, improving individual accountability and better aligning incentives and reward. It also said FinTech would continue to be monitored as an emerging financial stability risk.

Also in July the FSB published a substantive update on its resolution planning reforms for G-SIBs including TLAC. The TLAC standard defines a minimum requirement for the instruments and liabilities that should be held by global systemically important banks (G-SIBs) and readily available for bail-in if the bank has to be resolved. The guiding principles support the implementation of an internal TLAC requirement. They give guidance on various aspects of TLAC including size and composition, details on cooperation and coordination between home and host authorities, and the mechanism for triggering TLAC requirements.


3. EU and EBA announcements


Among hundreds of technical regulatory notices published by the Commission in 2017 a few key themes stand out: Brexit, MiFID and EMIR. Space is limited here but thanks are due to Deloitte for highlighting the detailed developments in their excellent monthly financial services risk and regulation round-up. June was particularly active, with the publication of significant EU proposals on the treatment of central counterparties (CCPs) as part of the review of EMIR, and Commission proposals on the idea of the Pan-European Personal Pension Product, or PEPP. Also in June the European Single Resolution Board conducted its first resolution in the Eurozone, with the resolution of Banco Popular in Spain.

In September, meanwhile, the EU made a major announcement of new rules intended to create a stronger and more integrated system of European financial supervision, in the context of the proposed Capital Markets Union; best summarised in this factsheet and Q&A document.


EBA Latest news and press releases: 2017 to date

The EBA has also been extremely active in 2017, with a number of significant announcements in September alone, relating to the prudential framework for investment firms, the assessment of suitability of management body members and function holders in line with MiFID and the CRR, and a major new consultation on securitisation risk transfer which will run until December 2017.

Earlier we saw publications from the EBA on PSD2 registration and authorisation requirements (August), a major CVA risk monitoring exercise (June), and a discussion paper on the proposed 2018 EU-wide stress test (June).

More broadly the European Supervisory Authorities jointly published their assessment of the main risks for the EU financial system (May) which highlighted cyber-risk, low profitability and high interconnectedness, among other risks. The EBA 2016 Annual Report meanwhile provided a detailed account of the Authority’s work to date and anticipated key areas of focus in coming years. The Authority noted that it had continued to improve its role in monitoring and assessing key risks, to ensure stability, transparency and orderly functioning of the EU banking market. The EBA also referred to its work on supervisory reviews and evaluations, fairness and protection for consumers, monitoring financial innovation and contributing to secure and efficient retail payments in the EU.

Given the high number of publications from the EBA, readers seeking more comprehensive coverage are urged to visit the news and press release link at the start of this sub-section.

4. PRA announcements

Big topics for the PRA so far in 2017 have been liquidity, the extension of the Senior Managers & Certification Regime (SMCR), stress testing, continued progress towards ring-fencing, and preparations for implementation of the new IFRS9 accounting standard in 2018. The PRA’s website page What’s New: as at September 2017 gives a good indication of the rules that have been subject to consultation this year so far.

Pillar 2 liquidity

In July the PRA published its CP13/17 on Pillar 2 liquidity. This CP set out the PRA’s proposals on a cashflow mismatch risk (CFMR) framework and other PRA methodologies for assessing firms’ liquidity risk under the Pillar 2 liquidity framework. The CP also proposed updates to SS24/15, the PRA’s approach to supervising liquidity and funding risks, and SS34/15 which included guidelines for completing regulatory reports, draft reporting rule changes, and a draft reporting template and instructions relating to CFMR.

Senior Managers & Certification Regime (SMCR)

This year the PRA has published a raft of consultation papers and policy statements regarding the ongoing changes to the accountability regime (including remuneration) for PRA regulated firms, alongside other information, links and news. See the PRA website page PRA initiative on Strengthening Accountability, including SMCR for details. Prominent in these announcements have been extensions of the Senior Managers Regime to the insurance sector, and to notified Non executive directors, which both took effect in July. March, meanwhile, marked the one year anniversary of the initial application of the new rules to banking, an anniversary which triggered some automatic extensions and further amendments.

The PRA made clear that it was working in close tandem with the FCA on the implementation of the full Certification Regime and the rolling out of the conduct rules to a wider range of employees. The FCA version of the SMCR rules, which are consistent with the PRA rules but apply to people in (or working with) FCA-regulated or dual-regulated firms, were notified separately by the FCA. These are covered separately in this blog.

Stress testing

As in previous years, or even more so, stress testing has been a major preoccupation for the PRA in 2017. The 2017 stress tests for seven major UK banks and building societies were specified in detail in March, and the results are set to be published on 28 November 2017. Scenarios were agreed by the Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC), and included both an annual cyclical scenario (ACS) and, for the first time, an additional biennial exploratory scenario (BES).

The ACS incorporated a severe and synchronised UK and global macroeconomic and financial market stress, as well as an independent stress of misconduct costs. The BES considers how the UK banking system evolves in an environment of weak global growth, persistently low interest rates, stagnant world trade and cross-border banking activity, increased competitive pressure on large banks from smaller banks and non-banks, and a continuation of costs related to misconduct. The test has a seven-year horizon to capture these long-term trends.

Ring fencing

In a June 2017 speech to the BBA on ring-fencing BoE Executive Director James Proudman gave more details on this major infrastructure programme, part of a broader strategy of co-ordinated improvements to the financial sector, which aims to deliver wide-reaching benefits to the public. The BoE noted that responsibility for putting up the ring-fence on time lies squarely with the banks themselves; and that separating ring-fenced banks into separate legal entities is not sufficient to ensure ring-fenced banks conduct business in a way that protects core banking services. Strong arrangements are necessary at board level to ensure that the ring-fenced banks can take decisions independently to maintain the integrity of the ring-fence. This is not to mention the IT reconfigurations required to support the ring-fence.

The Bank is requiring full and prompt implementation of the ring-fencing legislation and requirements by 2019, and all banks are planning to meet this deadline, with the bulk of restructuring activities planned before mid-2018.


Also in July the PRA issued Policy Statement PS18/17 which included feedback on an earlier consultation regarding proposed changes to regulatory reporting requirements arising from the introduction of International Financial Reporting Standard 9 (IFRS 9) from 1st January 2018. In particular the proposals affect firms’ credit quality reporting, including arrears and impairments.

Photo by Samuel Zeller at Unsplash

5. FCA announcements

Big topics for the FCA so far in 2017 have been MiFID II, the extension of the Senior Managers & Certification Regime (SMCR), and finalisation/publication of their new mission statement.


MifID II has been one of the FCA’s main areas of focus during 2017, with numerous publications, consultation papers and policy statements being issued in preparation for implementation on 3rd January 2018. The Markets in Financial Instruments Directive is the EU legislation that regulates firms who provide services to clients linked to financial instruments (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded. MiFID was first applied in the UK in November 2007, but is now being revised via MiFID II and a new Markets in Financial Instruments Regulation (MiFIR) to improve the functioning of financial markets in light of the global financial crisis and to strengthen investor protection.

There are great volumes of information on MiFID II on the FCA website (page linked above) but among the most useful are PS17/5: Markets in Financial Instruments Directive II implementation – Policy Statement I and the MiFID II — application and notification user guide, which is designed to help firms decide which applications and notifications they should make ahead of the implementation of MiFID II.

The FCA warns that MiFID II is a wide-ranging piece of legislation and, depending on firms’ business models, could affect a wide range of functions, from trading, transaction reporting and client services to IT and HR systems. Accordingly for most affected firms implementation planning is now in its final stages, with the 3rd January 2018 start date only months away.

Senior Managers & Certification Regime (SMCR) – FCA version

As foreshadowed in the PRA section, the FCA has also this year published an array of documents relating to its implementation of the full Senior Managers & Certification Regime (SMCR) for FCA-regulated or dual-regulated firms; and the rolling out of the conduct rules to a wider range of employees. These rules are fully aligned to the PRA version but covered by separate documents, consultation processes and the like.

The FCA state that aim of the SMCR is to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. As part of this, the SMCR aims to encourage a culture of staff at all levels taking personal responsibility for their actions; and to make sure firms and staff clearly understand and can demonstrate where responsibility lies. Like the PRA version, the FCA SMCR regime is already in place in the banking sector but is in the process of being extended to cover insurers and FCA solo-regulated firms. Amendments to the current banking regime are also under consultation.

Mission statement and business plan

New FCA business plan and mission statement for 2017-18

In April the FCA published its long awaited revised Mission 2017, the result of an in-depth consultation which started in 2016, and its business plan for 2017-18. The FCA noted that its aim is to regulate in a way that adds the most benefit to those who use financial services, and the new mission seeks to explains what the regulator is prioritising and why. It describes the framework the FCA uses to make decisions, the reasoning behind its work and how the FCA chooses the best tools for the job.

The FCA highlighted six areas as its main cross-sector priorities for 2017: firms’ culture and governance; financial crime and anti-money laundering (AML); promoting competition and innovation; technological change and resilience; the treatment of existing customers; and consumer vulnerability and access to financial services.

6. Other Resources

As in earlier bulletins, the above items represent only a selection of key developments in financial risk and regulation over the period.

More comprehensive information is available online, including the following resources which Prism-Clarity uses every day:
A comprehensive portal of regulatory news and analysis covering the UK and Ireland (and thereby the EU)
Contact: Suzanne Charles ([email protected], tel +442076656639)

An independent information source and online community for OTC derivatives professionals globally, providing industry trend analysis, peer commentary and educational resources via articles, podcasts, videos and interactive webinars and webcasts: 15,000 members globally
Contact: Julia Schieffer ([email protected])

Deloitte FS Risk & Regulation Monthly
A comprehensive monthly round-up of key developments in Financial Services Risk and Regulation, from the widely-respected Deloitte EMEA Centre for Regulatory Strategy
Contact: David Strachan ([email protected], tel +442073034791)

Bank of England Prudential Regulation Authority (PRA)
The primary UK prudential regulator: this link contains a valuable source of recent prudential publications and notices

Financial Conduct Authority Regulation round-ups: Aug-17, Jul-17 and Jun-17
The FCA is the primary UK conduct regulator: the above links are to their three latest monthly Regulation round-ups, which summarise key regulatory stories and developments in different financial market sectors

Contact Prism-Clarity for further information, including where to get the best advice.