EMIR notifications and exemptions: EMIR Refit
EMIR has been amended in the context of the European Commission’s Regulatory Fitness and Performance Programme (REFIT). EMIR REFIT enters into force on 17 June 2019, 20 days after it was published in the Official Journal of the EU.
Upon the entry into force of EMIR REFIT, certain firms are required to submit the following new or amended notifications to the FCA, as appropriate:
- FC clearing obligation notification: a new notification from financial counterparties (FCs) which relates to FCs exceeding or ceasing to exceed the relevant clearing thresholds as well as those choosing not to calculate their positions against those thresholds (Article 4a). This notification should be submitted using the clearing threshold notification form found on the Connect system (which needs to be used to submit notifications relating to both the FC and NFC clearing obligations);
- NFC clearing obligation notification: an amended notification from non-financial counterparties (NFCs) which relates to NFCs exceeding or ceasing to exceed the relevant clearing thresholds as well as those choosing not to calculate their positions against those thresholds (Article 10). This notification should be submitted using the clearing threshold notification form found on the FCA’s Connect system (which should be used to submit notifications relating to both the FC and NFC clearing obligations); and
- reporting exemption notification: a new notification which relates to a reporting exemption for certain intragroup OTC derivatives with an NFC (Article 9). This notification should be submitted using the reporting exemption notification form found on the FCA’s Connect system.
PRA consults on changes to SM&CR prescribed responsibility to reflect resolution assessments
On 7 June 2019, the PRA published a consultation paper (CP12/19): Strengthening individual accountability: Resolution assessments and reporting amendments.
In CP12/19, the PRA seeks views on proposed changes to the prescribed responsibility (PR) for recovery and resolution under the senior managers regime and the certification regime (SM&CR). The PRA is intending to amend the Allocation of Responsibilities Part so that the senior manager who is assigned the PR for recovery plans and resolution packs would have an additional equivalent responsibility for resolution assessments. This amendment would be applicable only to firms with £50 billion or more in retail deposits on an individual or consolidated basis. The PRA also intends to make consequential changes to its supervisory statement on strengthening individual accountability in banking (SS28/15).
The proposals reflect the PRA’s proposed rule changes concerning resolution assessments set out in its December 2018 consultation paper (CP31/18). In CP31/18, the PRA proposed requirements for banks to assess their preparations for resolution, identifying any risks to implementation and their plans to address these.
The PRA also intends to make minor amendments to the Statement of Responsibilities (SoR) form to correct minor discrepancies to ensure consistency between the wording of the PRs as they appear in the SoR form compared to the PRA Rulebook and the FCA Handbook.
The proposed PRA Rulebook instrument making the relevant changes to the Rulebook is set out in Appendix 1 to CP12/19: PRA Rulebook: the CRR firms: Non CRR firms: Solvency II Firms: Non Solvency II Firms: Allocation of Responsibilities and Notifications Instrument 2019.
The deadline for responses is 7 August 2019. The PRA intends to publish its final rules and guidance and SoR form in the fourth quarter of 2019, provided that it introduces new rules on resolution assessments as consulted on in CP31/18.
ESMA updates Q&As on application of AIFMD: June 2019
On 4 June 2019, ESMA published a press release announcing that it had updated its Q&As on the application of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).
ESMA has updated Section VI of the Q&As (Depositaries) to include new Q&As relating to the following issues:
- The distinction between depositary tasks and mere supporting tasks.
- Depositary tasks entrusted to third parties.
- The performance of depositary functions where there are branches in other member states.
- The supervision of depositary functions where there are branches in other member states.
Delegation by a depositary to another legal entity in the same group.
FCA publishes final report in relation to RBS GRG
On 13 June 2019, the FCA published the final report on its investigation in to RBS’s treatment of small and medium-sized enterprise (SME) customers transferred to its Global Restructuring Group (GRG). This follows the update provided in July 2018 on the investigation. In that update, the FCA said that given the serious concerns that were identified in the independent review it would launch a comprehensive and forensic investigation to see if there was any action that could be taken against senior management or RBS. Also, that it was important to recognise that the business of GRG was largely unregulated and the FCA’s powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.
The FCA concluded that taking action was therefore always going to be difficult and challenging but after carefully considering all the evidence it concluded that its powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success. The FCA also found no evidence that RBS artificially distressed and transferred otherwise viable SME businesses to GRG to profit from their restructuring or insolvency.
The FCA consulted with independent, external leading counsel who confirmed that the FCA’s conclusions were correct and reasonable. Following that decision and recognising the significant public interest in this matter, the FCA committed to publishing a fuller account of its findings. Today’s report sets out in detail why the FCA came to the decision it did. Andrew Bailey, FCA Chief Executive said:
“This report provides an extended account of the FCA’s investigative work on GRG. Our investigation has found that GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so our powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited. GRG has been highly damaging for those customers impacted and more widely for the reputation of the banking industry. Combined with other issues that have impacted SME’s it is important for all who work in this sector to regain the public’s trust.
The situation has, however, changed since GRG in several important respects. Two stand out: first, the Senior Managers and Certification Regime now defines the responsibilities and accountability of senior managers in authorised firms in a way which applies to all activities they conduct whether they are regulated activities or not. Second, there has been an extension of the scope of the Financial Ombudsman Service in terms of both substantially increasing the coverage to include many more SMEs, and an increase in the amount that can be awarded in such cases by the FOS. These are very important changes.
This announcement concludes our work on GRG. However, we continue to closely monitor the sector and the complaints process overseen by Sir William Blackburne to ensure that things are put right.”
FCA Thematic Review: Understanding the money laundering risks in the capital markets
The FCA has carried out a thematic review to look at the money-laundering risks and vulnerabilities in the capital markets and, where possible, to develop case studies to help inform the industry. It sought information to enhance our view of these risks and vulnerabilities but did not assess the systems and controls of those visited. In the thematic review it defined ‘capital markets’ as financial markets where shares, derivatives, bonds and other instruments are bought and sold.
The FCA’s visits covered a broad range of market segments, including investment banks, recognised investment exchanges, trade bodies, a custodian bank, clearing and settlement houses, inter-dealer brokers and trading firms. Its primary focus was on money-laundering risks in the secondary markets. The FCA’s findings are summarised below:
- the money-laundering risks identified are mitigated to an extent by the nature of the firms in the market, however there remain some risks particular to the capital markets;
- some firms needed to be more aware of the money-laundering risks in the capital markets and many were in the early stages of their thinking in relation to these risks and needed to do more to fully understand their exposure;
- effective customer risk assessment and customer due diligence are key to reducing opportunities for money laundering, particularly in the capital markets due to the nature of the transactions.
- it identified a wide range of approaches to anti-money laundering transaction monitoring and the report highlights some specific challenges and risks relating to this; and
- some participants were not clear on their obligations to report Suspicious Activity Reports and that accountability and ownership of money-laundering risk in the first line of defence needs to increase, rather than being viewed as a compliance or back-office responsibility.
The Annex to the report contains a non-exhaustive set of typologies which may help inform risk a assessments, transaction monitoring and training. The FCA concluded that it expects firms to consider their approaches to identifying and assessing the money-laundering risks they are exposed to in light of its report, and the FCA is also considering its supervisory approach in response to this work.
Select Committee condemns state of UK sanctions policy
On 12 June 2019, the Foreign Affairs Select Committee published its report entitled Fragmented and incoherent: the UK’s sanctions policy. The report acknowledges the centrality of a robust, effective and coherent sanctions policy to the UK’s desire to be a global actor and in ensuring financial and national security but notes that little high-level thought appears to have been given to identifying priorities for post-Brexit sanctions. Additionally, the report identifies that the cross-Whitehall structures which underpin sanctions policy-making, implementation and enforcement are highly fragmented thereby undermining strategic coherence and permitting the various departments of state to avoid taking full responsibility for their lack of effectiveness. As part of their criticism, the report identifies the lack of engagement of the Foreign and Commonwealth Office as a critical agent in the deployment of a coherent sanctions policy as particularly telling. As well as criticising the current and planned approach, the report also identifies steps the government ought to take to address the current failings. These include appointing a Senior Responsible Officer for sanctions policy who will be personally accountable to the National Security Council as well as a request for the government to commission a major review of its approach to sanctions at every stage.
The report concludes with the warning that, without significant and fundamental reform, the UK runs the risk of allowing its sanctions policy to be dictated by the decisions of others and for it to thereby cede its place as a global leader in this area.
G20 communique from June 2019 meeting of finance ministers and central bank governors: financial services aspects
On 10 June 2019, the G20 published a communique following a meeting of finance ministers and central bank governors on 9 June 2019 in Fukuoka, Japan.
On financial sector-related reforms, the communique states that the G20, among other things:
- Will continue to monitor and, as necessary, address vulnerabilities and emerging risks to financial stability, including with macro-prudential tools.
- Will continue to identify, monitor and address related financial stability risks relating to non-bank financing as appropriate.
- Will address unintended, negative effects of market fragmentation, including through regulatory and supervisory co-operation. It looks forward to receiving progress updates in October 2019 from the Financial Stability Board (FSB) and International Organization of Securities Commissions (IOSCO) on market fragmentation. These updates will follow on from the FSB and IOSCO reports published on 4 June 2019 (see Legal updates, FSB report on market fragmentation and IOSCO report on market fragmentation and cross-border regulation).
- Continues to monitor and address the causes and consequences of the withdrawal of correspondent banking relationships, and issues on remittance firms’ access to banking services.
- Asks the FSB and standard setting bodies to monitor risks relating to cryptoassets and to consider work on additional multilateral responses as needed.
- Asks the Financial Action Task Force (FATF) to report back in 2021 on progress on monitoring the risks and opportunities of financial innovation and ensuring the FATF standards remain relevant and responsive.
FSB discussion paper on solvent wind-down of derivatives and trading portfolios
On 3 June 2019, the Financial Stability Board (FSB) published a discussion paper on the solvent wind-down of derivatives and trading portfolios.
In the paper, the FSB sets out considerations relating to the solvent wind-down of derivative and trading book activities of global systemically-important banks (G-SIBs) that may be relevant for recovery and resolution planning. The FSB is concerned that a disorderly close-out of derivative and trading portfolios held by a G-SIB could potentially propagate substantial cross-border risks to financial stability.
The FSB considers the approaches that could be used to achieve a solvent wind-down, as well as the capabilities and arrangements that may need to be put in place within a firm to ensure that a solvent wind-down plan can be effectively executed. The FSB also considers how authorities can assess firms’ capabilities and potential approaches for co-operation between home and host authorities.
The FSB invites comments on specific issues relating to its analysis and calls for feedback on any other actions that firms or authorities could take to facilitate successful solvent wind-downs.
Firms should not view the discussion paper as guidance, although the FSB will use the responses to the consultation to determine whether the development of guidance would be useful.
The deadline for responses is 2 August 2019.
Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.
If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.
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