Risk & Regulation Round-up May to July 2018

This is the latest edition of my quarterly round-up of key announcements and developments in UK financial risk and regulation. Although it’s longer than usual the reporting in this edition is still quite summarised, and includes curated links to underlying source stories or documents for the reader who wants more detail.

The rubber is now hitting the road with regard to Brexit and its impact on financial services. Opinion is starting to coalesce around the possible (or even likely) outcome. Accordingly, this edition of the round-up includes an attempt to broadly summarise the position; though it remains complex and fast moving, with many variables.

This edition also includes some links to and coverage of technical communications relating to Brexit – notably from the Bank of England/PRA – which are starting to appear in preparation for the expected withdrawal in March next year.

Elsewhere the dizzying pace of policy and technical announcements from the likes of Basel, the FSB and the EBA continued. As did business as usual regulation from the EU, the PRA and the FCA.

To help readers see the wider picture, or pick up anything I don’t cover in detail, I include in this blog some comprehensive indices of publications and announcements from individual regulators’ websites.

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

1. Brexit

It has become clear that the EU does not accept the latest proposals of the British government regarding UK financial services firms’ access to the European single market after Brexit. The government’s position was carefully negotiated, as part of the Chequers compromise in early July, and subsequently found its way into a White Paper submitted to Brussels on 12th July. But the position may have to evolve further if financial services is not going to be part of or contribute to a no-deal outcome.

Currently the EU grants rights to market access after assessing whether the regulatory regime in an applicant firm’s home country (call it the USA or Singapore) – in areas such as capital and other prudential controls – are ‘equivalent’ to the EU’s own rules. Crucially this ‘equivalence’ determination is made by the EU itself – alone – and is monitored on a virtually real time basis so can be withdrawn at short notice.

Equivalence plus

The position put forward in the government’s White Paper amounted to a kind of ‘equivalence plus’, where the EU wouldn’t necessarily have the sole final word on equivalence, and wouldn’t be able to withdraw the equivalence determination unilaterally. Instead the UK envisaged a system of joint governance and a ‘safeguard for acquired rights’ which would prevent UK firms’ access to the EU financial services market from being withdrawn at short notice.

[By the way, it’s worth noting that ‘equivalence plus’ falls short of the current automatic right of ‘passporting’ – providing cross-border services in another EU state – which is a key feature and benefit of EU single market membership. Passporting was never realistically going to be possible in a Brexit scenario. But as time has passed it has become clear that other possible workarounds are also not viable. These include:

  1. ‘mutual recognition'(where the EU and UK would grant each other substantial market access rights in exchange for commitments to seek the same regulatory outcomes over time);
  2. ‘reverse solicitation’ (claiming that banks in London were approached by clients in the EU rather than vice versa);
  3. dual hatting (booking trades in the EU and executing them in London).

All have been suggested as theoretical solutions over the two years of Brexit negotiations and ultimately foundered for one reason or another.]

Thanks but no thanks

So the current third country equivalence arrangement, or something that looks very like it – where the EU continues to hold final decision-making autonomy over equivalence decisions – is where we are. In short the EU is not comfortable with losing either the right of sole arbitration or the right to withdraw arrangements at short notice. Enhanced equivalence, which the British government nailed to its negotiating mast last month, crosses a bright line for them.

2. Basel and FSB announcements

By contrast with the ongoing shenanigans in London and Brussels, announcements from the BIS and the Financial Stability Board during the April-July period were primarily technical.

BCBS review of methodology for assessing and regulating G-SIBs

BIS publications included a paper from the Basel Committee on Banking Supervision on the assessment methodology and loss absorbency requirements for global systemically important banks (G-SIBs). The revised methodology is expected to be implemented in member jurisdictions by 2021. The BCBS reconfirmed the overall structure of the G-SIB framework, and recognised that the framework appeared, in general, to be meeting its objectives of ensuring sufficient capital buffers in G-SIBs, and reducing systemic linkage between them. The proposed enhancements, therefore, were mainly tweaks: to definitions of various indicators, scope, disclosure requirements and transitional processes.

BCBS update on risk data

The BCBS issued a report on banks’ efforts in implementing the 2013 BIS principles for effective risk data aggregation and reporting. In truth the Committee is not too impressed with the industry’s progress, although it recognises there are complex interdependencies between IT improvement projects. Still, the BCBS makes recommendations to try to hold both supervisors’ and banks’ feet to the fire on the risk data aggregation and reporting project, with a further progress review planned for 2019.

FSB cyber lexicon

The FSB produced a valuable further contribution to the global regulatory debate on cyber risk: a draft cyber lexicon, comprising a set of 50 core terms relating to cyber security and cyber resilience in the financial sector. The aim of the cyber lexicon is to promote cross-sector common understanding of cyber security and cyber resilience themes and risks. Also it aims to promote better information sharing across the industry, and to ensure that supervisors and standard-setting bodies issue better guidance to their constituencies on this important topic. The FSB aims to finalise the cyber lexicon before the G20 Summit in Buenos Aires later this year.

Other publications

Also worth noting in the period were two FSB papers, on a proposed G20 framework for monitoring crypto-assets and on the current state of interest rate benchmark reform.

Please see these linked BCBS and FSB publications pages for guidance on other announcements by the two agencies during the period.


3. European supervisory announcements

EBA annual report

The European Banking Authority published its latest annual report which included a summary of the authority’s current work and priorities, and views on the challenges and opportunities presented by Brexit. [The EBA had already earlier announced its decision to relocate to Paris in response to the forthcoming UK departure from the EU.] Technical topics highlighted by the authority included ongoing work on the single rulebook for banking, and the promotion of supervisory convergence generally, but especially in the area of resolution of failing institutions. Other key areas of focus include data, Fintech, stress testing, credit risk modelling, non performing loans and finalising the Basel III rule program.

EBA priorities

The EBA produce this extremely useful quarterly press newsletter which includes a combination of forthcoming publications, focus topics and key recent announcements. Or, if you have a broad interest in EBA topics and they don’t make it onto my agenda in this round-up, you could do worse than look at the EBA’s wider news and press release link.

Other European supervisors

The Chair of the European Securities Markets Association (ESMA), Steven Maijoor, gave an assessment of achievements and current priorities following MiFID II implementation. He concluded that overall it had gone quite smoothly, but noting that further improvements were needed in a few technical areas relating to third-country trading venues, the tick size regime, market data, periodic auctions, the systematic internaliser regime and bond liquidity assessment.

Both ESMA and the European parliament were active on the conduct of business front. ESMA issued prohibitions or restrictions on the marketing, distribution and sale of binary (digital) options and contracts for differences (CFDs) to retail investors. The EP meanwhile arranged a public hearing on financial product mis-selling, focusing on information requirements, the culture of selling firms, and the need for stronger supervisory requirements under EU law to deal with mis-selling in general.

Please contact Prism-Clarity if you need specific information on any European activities or publications not covered in this bulletin.

4. PRA announcements

As foreshadowed earlier, Brexit is prominent in regulatory and governmental thinking right now. So it was an exceptionally busy period for the Bank of England and HM Treasury regulatory ‘chefs’, with vital initiatives at various stages of culinary preparation.

General approach to financial services legislation post-Brexit

In June the Treasury published details of its expected general approach to UK financial services legislation after Brexit. In short, the government’s aim is to ensure a complete and robust legal framework for financial regulation in the UK, whatever the outcome of negotiations between the EU and the UK, after ‘exit day’ (currently expected to be 29 March 2019).

The Treasury also confirmed its intention, subject to parliamentary approval, to delegate powers to the various financial services regulators (Bank/PRA, FCA, Payment Systems Regulator) to make changes to the necessary ‘onshored Binding Technical Standards’ (BTS). This is a technical term for the EU laws that will become embedded in UK law on day one after exit: the onshored BTS seek to ensure seamless legal and business continuity during the withdrawal transition period.

It was clarified that the regulators will be responsible for maintaining those BTS going forward. The regulators would also be able to make changes to their own rulebooks using delegated powers. The Bank added that, as a regulator, it intends to consult this autumn, alongside the FCA where appropriate, on proposed changes to onshored BTS and rules.

See the first link under this sub-heading for more detail on the government’s expected approach.

Temporary permissions and recognition regimes

One important specific aspect of the post-Brexit regulatory landscape is the permissions and recognition regime. On 24th July the UK Government published a draft statutory instrument on the temporary permissions regime which will apply for EEA firms operating in the UK post-Brexit – assuming it is approved by parliament. This legislation aims to enable firms who want to continue carrying out business in the UK in the longer term to operate for a limited period after UK withdrawal from the EU, while they seek authorisation or recognition from UK regulators.

The Government and Bank had already indicated that firms currently providing cross-border services into the UK could assume that permanent authorisation or recognition would be needed only by the end of the Brexit implementation period. The Bank press release stated that: ‘In the event that the Withdrawal Agreement is not ratified, the temporary permissions and recognition regimes provide confidence that a back-stop will be available.’

To be eligible for the temporary permissions regime, a firm (i) must be authorised to carry on a regulated activity in the UK under the EU passporting regime; and (ii) will have to inform the relevant regulator before exit day of their intention to enter into the regime.

UK financial sector operational resilience

Another big current priority for the Bank/PRA (and the FCA for that matter) is operational resilience, the subject of PRA Discussion Paper 1/18, released jointly with the FCA (DP 18/04 in FCA notation) on 5th July. The DP explained that operational disruptions to the products and services provided by firms have the potential to cause harm to consumers and market participants, threaten the viability of individual firms, and cause instability in the financial system.

So the DP focuses on how the provision of these products and services can be maintained, and how firms and the sector as a whole can prevent, respond to, recover and learn from operational disruptions. Feedback is requested by 5th October 2018. [This is not an official Consultation Paper – i.e. at this stage not rules or guidance – but a broader industry discussion to assess the direction of travel.]

Insurance regulation: Solvency II

July saw a raft of important publications relating to the Solvency II regime which covers prudential (capital) and conduct regulation of insurers, including the extension of the Senior Managers & Certification Regime (SM&CR) to insurance firms. The final rule updates are summarised in the PRA’s Solvency II page here. Essentially the prudential part of the rules covered technical aspects of the insurer capital calculation, including model use and change, and the use of so-called ‘matching adjustments’, which allow insurers to use behavioural assumptions rather than contractual maturity in certain circumstances to reduce their capital charge liability.

The final policy statement on extending the SMC&R to insurers – alongside a final further consultation intended to tidy up the Solvency II parts of the PRA rulebook as a consequence of the extension – has been in consultation and development for a long time. It remains, however, a vital cog in the regulators’ effort to improve the conduct and accountability regime across all firms.

Data, reporting and other technical Solvency II requirements or consultations were also issued during the period – for details see the PRA monthly prudential regulatory digest or the PRA ‘What’s New’ section highlighted below.

PRA annual report

The PRA published its 2017/2018 annual report, revealing that for the first time since the launch of official stress testing in the UK in 2014, no bank needed to strengthen its capital position as a result of the stress tests. The report also focused on structural reform (ring fencing), accountability and enforcement, operational resilience and of course Brexit preparations. In general, though, the report struck a positive tone about the ability of the financial sector to continue to serve households and businesses, despite the many uncertainties around geopolitical risk, the emergence of new technologies, the transition to a low carbon economy, and other challenges. Bank Governor Mark Carney said it was time for the PRA to ‘lift its sights’ and to ‘aim to meet the opportunities and challenges of the future with dynamism, imagination and the highest standards’.

Other PRA announcements and publications

The Bank of England Prudential Regulation Authority (PRA) website page What’s New summarises PRA rules currently out for consultation and due for implementation. This is what it looks like, just to give you an idea:

Alternatively, as always, a good source to catch up on PRA technical publications is its monthly prudential regulatory digest, linked in the ‘Other Resources’ section at the foot of this blog.

5. FCA Announcements

It goes without saying that the FCA is also preoccupied with Brexit. Nevertheless this section deals with some of the conduct regulator’s other concerns as set out in various publications and announcements. See this link for a guide to currently open FCA consultations and recent policy/guidance papers.

Annual report and business plan

In July the FCA published its 2017/18 annual report and accounts, alongside other mandated routine reports on diversity, anti money laundering, competition and enforcement. Focus points from the year under review were Brexit, MiFID II and PSD2, extending the SM&CR, the ongoing work on high cost credit and consumer debt, and the campaign to alert PPI customers to the deadline for complaints about mis-selling.

Earlier in a speech on the FCA’s business plan Chief Executive Andrew Bailey set out seven cross-sector priorities for the regulator over 2018-19. These were (i) firms’ culture and governance; (ii) high-cost credit; (iii) tackling financial crime; (iv) data resilience, security and outsourcing; (v) innovation, Big Data, technology and competition; (vi) the treatment of existing customers; and (vii) long-term savings, pensions and inter-generational differences. Bailey also noted the FCA’s plans to do more work on general insurance, in particular on the treatment of existing customers and firms’ use of customer data.

Retirement outcomes review

In June the FCA published the final report from its retirement outcomes review. The regulator found that the freedom and choice which the new UK pensions rules give consumers are popular. But also that people’s decisions about retirement are now more complicated, and that consumers who do not take advice, in particular, are at risk of harm. The FCA thus proposes a range of remedies to address these issues and put the market on a good footing for the future – focusing on better communications, support and guidance at three stages of the process: (i) before consumers access their pension savings; (ii) at the point of entering drawdown or buying an annuity; and (iii) once a consumer has entered drawdown. Follow up consultations are, or will shortly be, under way.

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 I use daily:
A comprehensive portal of regulatory news and analysis covering the UK and Ireland (and thereby the EU)
Contact: Suzanne Charles ([email protected], tel +44 207 6656639)

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 +44 207 3034791)

The Prudential Regulation Authority, a division of the Bank of England, is the primary UK prudential regulator: the links below are to its three latest monthly Regulatory digests, which summarise key prudential developments in different financial market sectors:
May 2018
June 2018
July 2018

The Financial Conduct Authority is the primary UK conduct regulator: the links below are to its three latest monthly Regulation round-ups, which summarise key regulatory conduct developments in different financial market sectors:
May 2018
June 2018
July 2018

Coffee and Biscuit

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