Risk & Regulation Round-up: Sept 2019 to Feb 2020

Welcome to the latest Prism-Clarity round-up of key announcements and developments in UK financial risk and regulation.

This time I didn’t wait a whole year before penning an update. Still, six months is a fair stint to cover. As promised last time, in future we are aiming to resume doing this update quarterly – or at least more frequently than six monthly.

As last time, given the long coverage period the reporting is selective and summarised. So I present the usual curated links to underlying source stories or documents for the reader who wants more detail; including publications and announcements from individual regulators’ websites.

Also please note: I am not ignoring the virus, but trying to abstract from it, so far as possible, and look beyond it to take into account topics and concerns that there were there before it – and will still be here after it.

*** 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

So it happened. We left the EU, for good or ill (transition period notwithstanding). It all seems a long time ago now we have the virus, the market crash and the forthcoming global economic slump to contend with. How could our minds have been dominated by Brexit to such a degree and for so long?

Bank material

Over the entire run-up to Brexit the Bank of England was putting out valuable communications, which are housed in this useful portal. This source contains technical updates as well as links to substantive content such as the EU Withdrawal Act. Meanwhile in February Bank Deputy Governor Sir Jon Cunliffe made a speech to a conference in Berlin outlining the Bank’s plans for governing the future relationship between the UK and EU’s financial markets.

UK government material

More broadly there has been a lot of coverage of the government’s preparations for the upcoming trade negotiations with the EU, including a written statement to the House of Commons from the prime minister and an associated speech; plus an official announcement of the UK position on future relations with the EU. Back on financial services specifically, the chancellor and the economic secretary to the treasury both wrote officially to their EU counterparts on the sensitive topic of equivalence in financial services, and the UK’s preparations for financial services equivalence assessments.

The EU position

Meanwhile the EU side has also been setting out its own negotiating position both officially and unofficially, with speeches, meetings and intensive newspaper coverage. Chief EU negotiator Michel Barnier was particularly active in the run-up to the official UK departure date of 31 January, warning that Brussels would not compromise in its demand that Britain needed to maintain EU restrictions on state aid and regulation if the two sides were to achieve a substantive trade deal:

Nobody, nobody should doubt the determination of the commission, and my determination, to continue to defend the interests of EU27 citizens and businesses, and to defend the integrity of the single market … I hope that this point is, and will be, clearly well understood by everybody.

Michel Barnier, conference speech, Stockholm, 9 January 2020

Mr Barnier noted that the level of access for the British products to the EU market would be proportionate to the level of ambition of common agreement on these rules and standards. He also expressed scepticism that a year was long enough to achieve a substantive free trade agreement between the EU and the UK.

Links to other Brexit material

Last time I drew attention to some of the other authoritative, balanced, non- political resources out there which can help the keen student stay on top of the UK’s departure from the EU. The joint ESRC/King’s College website remains a prime source on UK/EU relations in general and Brexit in particular.

For an independent, practical, broadly-based analysis of the implications of Brexit on business and law, meanwhile, see this portal overseen by the Institute of Chartered Accountants in England and Wales (ICAEW). This page contains a list of externally produced resources which offer practical advice on the impact of the UK’s departure from the EU and opportunities for future business.

2. Basel and FSB announcements

As last time, my starting approach to summarising the vast pool of content from the BIS and FSB is to draw your attention to the press release sections on both institutions’ websites.

Bank of International Settlements

On 1st March the BIS published its latest quarterly review ‘Shaping the Future of Payments’, which noted that the speed of changes and the potential for disruption have propelled payment systems to the top of policymakers’ agendas. Earlier in our review period the BIS had issued two further quarterly reviews: in December 2019 focusing on the 2019 FX and OTC derivatives survey, and in September 2019 focusing on routine market and economic developments.

In December the Basel Committee for Banking Supervision (BCBS) launched the final version of its consolidated standards, the draft version of which was described in our last round-up. This framework brings together all the BCBS’s global standards for the regulation and supervision of banks and presents them in a new section of the BIS website. The final version includes some ironing out of inconsistencies and ambiguities that emerged in the consolidation process. The framework consists of 14 broad standards listed below:

SCO Scope and definitions
CAP Definition of capital
RBC Risk-based capital requirements
CRE Calculation of RWA for credit risk
MAR Calculation of RWA for market risk
OPE Calculation of RWA for operational risk
LEV Leverage ratio
LCR Liquidity Coverage Ratio
NSF Net Stable Funding Ratio
LEX Large exposures
MGN Margin requirements
SRP Supervisory review process
DIS Disclosure requirements
BCP Core Principles for Effective Banking Supervision

A new Excel mapping table links each paragraph of the Committee’s original published standards to their locations within the new consolidated framework.

The BIS enjoyed an active period on the regulation of cryptocurrencies and other financial innovations. This included interventions on stablecoins, digital tokens, and the design of a suitable prudential framework for cryptoassets, as well as a report on the growing trend towards open banking and the use of APIs to deliver banking solutions.

Financial Stability Board

LIBOR reform

Progress towards LIBOR reform is one of the key regulatory themes of the review period, and the FSB issued its own take on that topic in December. The report commented that continued reliance on LIBOR creates serious risks to global financial stability, and supported the global effort to transition to new interest rate benchmarks by 2021. The co-chairs of the FSB’s steering group, new Bank of England Governor Andrew Bailey and FRBNY President John Williams, noted that FSB members were committed to transitioning to more robust financial benchmarks:

It is essential that both firms and national authorities around the world take steps now to ensure a smooth transition. As a matter of priority, authorities should discuss with financial institutions, and financial institutions with their clients, the transition process and agree on the steps needed.

A Bailey and J Williams, FSB steering group co-chairs, December 2019
Ten year progress review

In a wide-ranging speech to the EBF European Banking Summit in October, FSB Chair Randal Quarles reviewed the first ten years of the board’s work. He focused particularly on the key areas of priority at the time the board was set up in 2009, in the immediate aftermath of the global financial crisis: OTC derivatives reform, the bank resolution framework, prudential standards for banks and non bank financing. He also offered some views on current and future priorities for the board; including a major internal review of its resolution (too big to fail) framework, enhancements to market surveillance, financial innovation and market fragmentation.

Non bank financial intermediation

In January the FSB published its latest annual report on another of its key areas of concern: non bank financial intermediation (also sometimes known as shadow banking). The board found that asset growth in the non-bank sector in 2018 proved slower than over the previous five years when it had averaged around 8% per annum; and that interconnectedness between Other Financial Institutions and the banking sector was also broadly unchanged. Signs of stability, then, in a previously concerning area. The FSB indicated it would be further enhancing its monitoring and data framework for NBFI, to ensure that the sector remained resilient.

3. European supervisory announcements

As with the FSB and BIS, one way to assess what has happened over a long period in European financial supervision is to look at the press releases. Here are the European Banking Authority’s releases going back to the beginning of September (70 in total).

Another approach is to take a functional or subject matter perspective, notably by looking at the EU’s portal on financial supervision and risk management which contains five big topics of interest under the heading of European financial supervision.

As before, we can’t do much more than scratch the surface of such a large body of material. Still, below are a few of the entries that caught my eye from a quick review of these sources.

EU stress test launch

In what will turn out a very timely launch, just before the real life serious stress imposed by Covid-19, in January the EBA launched its latest EU-wide stress testing exercise. Appropriately the adverse scenario follows a ‘lower for longer’ narrative, a recession coupled with low or negative interest rates for a prolonged period: EU real GDP declines by 4.3% cumulatively by 2022, resulting in the most severe scenario to date.

Ironically, of course, this scenario may turn out to be distinctly less stressful than the real life stress now under way. The EBA expects to publish the results of the exercise by 31 July 2020, although it remains to be seen whether it will be postponed given the operational resilience and regulatory pressures of dealing with the current real life crisis. A few days earlier, in fact, the EBA had issued a consultation of possible future changes to the stress testing framework, scheduled to complete in April 2020.

EBA 2020 work programme

Again this may end up being superseded by real life resilience and crisis management, but in January the EBA published its 2020 work programme. This gives a very useful indicator, other things being equal, of the regulator’s key priorities at the time of publication. Six strategic areas were highlighted:

  • Support the development of the risk reduction package and the implementation of the global standards in the EU
  • Provide efficient methodologies and tools for supervisory convergence and stress testing
  • Move towards an integrated EU data hub and a streamlined reporting framework
  • Make Anti Money Laundering a real priority for the EU
  • Contribute to the sound development of financial innovation and sustainability
  • Promote an operational framework for resolution.

In similar vein, back in October the joint ESAs (European Supervisory Authorities) published their priorities for 2020, although again these seem likely to need to evolve in the wake of virus effects which could not have been envisaged at that time.


In February the EBA published a substantive report on EU national authorities’ approaches to the supervision of banks’ anti money laundering and counter terrorism financing activities. This publication is part of the EBA’s new role leading, coordinating and monitoring the fight against money laundering and terrorist financing in all EU Member States, which was further explained in an accompanying factsheet.

The report found progress in supervisors’ prioritisation and resourcing of the fight against financial crime; but that significant challenges remained across the board. These included a need to move away from tick box compliance to a more effective assessment of banks’ AML/CFT systems and controls. Also the EBA found that cooperation with other domestic and international stakeholders could be improved in most countries. At the same time the EBA consulted on revised guidelines around the risk factors associated with both AML and CTF.

Risk capital initiatives

Over the period the EBA published a few different proposals to bring its trading and non trading risk capital rules up to date; including counterparty credit risk standard capital rules in December; followed in January by new proposals on FX and commodity risk in the non trading book under the new (FRTB) market risk framework. Then in February we saw the annual review of RWA consistency for banks with regulatory capital approval for their internal models.

Back in October, meanwhile, the EU issued a targeted consultation on their proposed alternative standardised treatments for market risk under the FRTB.

Bank profitability

There were three separate EBA announcements over the six months on the difficult operating environment for banks in terms of profitability and sustainability. It is only when looking over a long period that you pick up the consistent and dire nature of the warnings.

Just to demonstrate the point: warnings were issued on 4th October (following publication of the quarterly EBA Risk Dashboard); on 29th November (following publication of the annual report on risks and vulnerabilities in the banking sector); on 8th January (following another Risk Dashboard).

Other EBA announcements

I also picked up on the following miscellaneous publications which demonstrate the EBA’s growing maturity and range as a leading global supervisor: a February report urging banks to increase diversity through more balanced composition of their management boards; an October consultation on improving standards of Pillar 3 disclosure; and in November a set of final guidance on ICT and security risk management.

3. Bank of England/PRA announcements

Financial Stability Report

As last time, a good place to start after a little while away is the Bank’s Financial Stability Report (FSR), most recently published in December 2019. This highlights in clear terms the issues that the Bank was most concerned about at the time of publication, and how banks and markets are (were) responding to those concerns. Of course back in December Covid-19 was only just taking hold and has since superseded all other concerns from both an economic and an operational perspective. That doesn’t mean the concerns weren’t valid or still aren’t. They have just been de-prioritised in a bigger battle, until such time as the virus is under control. At which point they will re-emerge, perhaps even more concerning than before.

LIBOR transition

Key documents and milestones

One of the big preoccupations of regulators and other market participants outside of Brexit and the virus remains LIBOR transition. In February the Bank, the FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a detailed set of documents outlining LIBOR transition priorities and milestones for 2020. The topic was also alluded to by the Bank’s Financial Policy Committee in December 2019, noting that while good progress had been made, firms needed to accelerate efforts to ensure they were prepared to stop using LIBOR by the target date of end-2021.

Milestones for this transition include:

  • Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020
  • Taking steps that demonstrate that compounded SONIA is easily accessible and usable
  • Shifting derivative transaction volumes from LIBOR to SONIA
  • Establishing a framework for the transition of legacy LIBOR products
  • Considering how best to address issues “tough legacy” contracts.
Further catalysts

The Bank and FCA published two other documents designed to further catalyse these transition efforts. First, a joint letter to major UK banks and insurers setting out their expectations for 2020. Second, a joint statement encouraging market makers to switch the convention used for sterling interest rate swaps from LIBOR to SONIA on 2nd March 2020: designed to help progress transition in the derivatives market. Other technical documents were published at the same time by the RFRWG.

None of these ‘further catalyst’ documents are directly linked here. See the link at the top of this section for the relevant links; which include useful ‘lessons learned’ and a factsheet of ‘whys and whats’ from the RFRWG.

The Bank concluded its announcement with the following call to arms:

The time to act is now: with the tools published today and the support of the official sector domestically and internationally, market participants have what they need to leave LIBOR behind.

Bank of England/FCA joint publication, February 2020: ‘Next steps for Libor transition: The time to act is now’

Bank of England speeches

In the last roundup I drew attention to the large number of speeches produced by a modern central bank: I counted 33 in the six month period under review. As before the topics covered give a healthy indication of the preoccupations of our senior central bankers, and included the usual diverse range: diversity and inclusion itself (Lea Paterson in February, Victoria Cleland back in September), climate and the environment (Mark Carney in September and again in October), and even health, wealth and happiness (Andrew Haldane in February). I.e. not just prices, markets, jobs and Brexit.

On top of the ones mentioned above, two other speeches caught my eye as reflecting the preoccupations of readers of this note.

The future of money

Sir Jon Cunliffe in a speech to the LSE in February made a wide ranging speech about the nature and future of money, taking in all kinds of topics from cash availability to cryptoassets and stablecoins to the prospect of central bank digital currencies. He reminded us that the form money takes had always evolved and that such change could not be held back. We needed to be thinking about and debating these issues now, because they had implications that went much wider than finance and economics, into areas such as privacy, competition, inclusion, the role of the public sector
and other broad societal issues. These required engagement with the political authorities and a broad public debate. It was, therefore “time for us to talk about money”.

Pay gaps

When Andrew Haldane speaks it is always worth listening. In October, at the joint BoE, Fed and ECB conference on gender and career progression, he turned his attention to gender and ethnicity pay gaps. He drew attention to the evidence of progress in shrinking both gaps over the past 25 years or so, by around half for women, and a little less than half for ethnic minorities. But he added that the gaps remained large and persistent in absolute terms, suggesting that, despite progress, much remained to be done. He concluded with a skip through the policy implications for central banks and others in continuing to address the gaps: including targets, reporting and disclosure, better data and more comprehensive analysis. He ended by drawing attention to an analogy with inflation-targeting in monetary policy. Namely, a single target does not wholly or perfectly summarise all dimensions of the economy.

But having the target serves as a catalyst for explanation and action – an explanation for misses and an action plan for returning inflation to target. That improves policy accountability and societal outcomes. The same could be true of companies when it comes to diversity policies and outcomes.

Andrew Haldane, Speech to central bank gender and career progression conference October 2019

Other PRA announcements and publications

The Bank/PRA website page What’s New summarises PRA rules currently out for consultation and due for implementation. Alternatively, as always, a good source to catch up on PRA technical publications is the regulator’s monthly prudential regulatory digest. The last three editions of this digest are linked in the ‘Other Resources’ section at the foot of this blog.

Photo by Samuel Zeller at Unsplash

4. FCA announcements

Over the period the FCA was significantly preoccupied with first Brexit transition and now the virus. Still, routine regulatory life goes on: see this link for a guide to currently open FCA consultations and recent policy/guidance papers not necessarily related to Brexit or Covid-19.

Sector concerns

In February the FCA published its annual Sector Views document, an assessment of the risks and potential harm to consumers across financial services markets. The document looks at the impact of macroeconomic developments and common drivers of change emerging across financial markets; especially focusing on areas where there may be a negative impact on consumers or the integrity of the financial system in that sector. The report sets out what factors are driving harm, as well as considering how the harm may develop over time.

Topics of particular concern to the FCA in the latest edition include:

  • The large number of people in the UK (over 7 million) who are over-indebted and find their financial commitment a burden
  • The loyalty penalty in home and motor insurance, which cost 6 million consumers over £1 billion in 2018
  • The fact that high-risk retail investment products are exposing consumers to more risk than they can absorb, often with poor communication of the risks involved and the suggestion that they are regulated even when they, when this is not the case.
  • Many new payments firms have been able to enter the market and grow quickly, but some of their products don’t have protection in place for consumers; for example the Financial Services Compensation Scheme doesn’t cover e-money services even though some of them advertise themselves as ‘current accounts’.

Operational resilience

Operational resilience has been a theme for the regulators for some time, with good reason as things have turned out. In February the FCA and PRA jointly published a consultation paper (CP19/32 in FCA terminology, CP29/19 in PRA terms) and joint policy statement on the topic, focusing on the need for firms to identify impact tolerances for their important business services. This followed an earlier discussion paper published in July 2018.

One of the key aims is to increase firms’ investment in operational resilience where they provide important products and services. The regulators want firms to consider the impact of disruption in a range of areas, including technology failures, cyber-related and other operational incidents, including those outside of a firm’s control. These can adversely impact people, businesses and markets that are relying on the firm’s products and business services. Thereby if they are disrupted it can cause wide-reaching harm to consumers and market integrity, threaten the viability of firms and cause instability in the financial system. Firms were requested to create plausible but severe scenarios which shock or disrupt the provision of their important products and services, and identify their tolerance for the impact of the disruption.

Again, as with EU stress testing highlighted above, Covid-19 may be an apt live test of the kind of real life operational resilience envisaged by the regulators. The FCA consultation ends in October 2020. An earlier date of April 2020 is mentioned in the shared policy summary: Prism-Clarity is investigating the distinction between the two dates.

Other key FCA publications

Illiquid assets in funds: Back in September the FCA issued its final policy statement on illiquid assets held in open ended investment funds; an issue which has been periodically in the news since the Brexit referendum, most recently as a result of the well publicised problems with the Woodford funds stable.

Climate change and green finance: In October the FCA provided a feedback statement on its major consultation on climate change and green finance. The FCA designed this statement to help firms manage the risks from moving to a low carbon economy, while also supporting the development of the green finance market and ensuring appropriate protection for consumers. The FCA set out a number of next steps including on possible new rules to improve climate-related disclosures; the enhancement of firms’ responsibilities on environmental, social and governance (ESG) and stewardship policies; and participation in a range of collaborative initiatives with the likes of the Climate Financial Risk Forum (CFRF), the Fair and Effective Markets Review (FEMR) working group and the European Commission’s Sustainable Finance Action Plan (SFAP).

Open finance: In December the FCA issued a call for input on the topic of open finance. The regulator said it wanted to explore the opportunities and risks, and ensure open finance develops in the best interests of consumers. The UK has led the development of open banking – where consumers and small businesses can give access to their payment account data to third party providers to get new services. Open finance would extend open banking principles to give consumers and businesses more control over a wider range of financial data on things like savings, insurance, mortgages, investments, pensions and consumer credit.

5. Other resources

The above items represent only a small selection of developments in financial risk and regulation over half a year. More comprehensive information is available online, including the following resources which Prism-Clarity always finds useful.
A comprehensive portal of regulatory news and analysis covering the UK and Ireland (and thereby the EU)
Contact: Suzanne Charles ([email protected])

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 produced by the Deloitte EMEA Centre for Regulatory Strategy
Contact: David Strachan ([email protected])

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:
February 2020 January 2020 December 2019

The Financial Conduct Authority is the primary UK conduct regulator and publishes monthly Regulation Round-ups, which summarise key conduct developments in different financial market sectors. You need to sign up here to receive these updates, as the FCA no longer publishes them on their website. For something a bit broader from the FCA which is immediately accessible, see the FCA’s main news portal here.

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