Financial Regulation Year in Review and Year to Come 2017/2018

Transcription

1 Financial Regulation Year in Review and Year to Come 2017/2018

2 Contents FCA Business Plan and Mission Statement 2.1 Senior Managers and Certification Regime 3.1 Capital Markets Union 4.1 Sector 5.1 trends 1.2 Brexit 2.2 Remuneration Retail sector developments 3.2 Consumer Credit 1.3 Capital Requirements 2.3 Redress Schemes 1.4 MiFID II 2.4 Complaints 3.3 Retail Banking 4.2 and Competition 4.3 and Transparency 3.4 Mortgage Lending 1.5 EMIR 4.4 Financial Stability 3.5 Financial Advice 1.6 Financial Crime and Market Abuse 3.6 Ring-fencing 4.5 PRIIPs 1.7 Payment Systems Wholesale sector developments 1.8 Crowdfunding 3.7 Benchmarks 1.9 Fintech 3.8 CSD Regulation 3.9 SFTR 3.10 IPO Reforms 2

3 UK Retail Banking 25 Oct FCA published paper on the first phase of its strategic review of retail banking business models What happened in financial regulation: key events and publications in Jul FCA publishes terms of reference for market study into investment platforms Financial Advice 28 Feb HMT published response to proposed changes to the definition of regulated advice under RAO IPO Reforms 14 Feb FCA published review of the effectiveness of primary markets Ring-fencing 1 Feb PRA published policy statement on the implementation of ringfencing: reporting and residual matters Consumer credit 19 Jan FCA published final guidance on guarantor loans: default notices JAN 12 Jan FSB published policy recommendation paper on structural vulnerabilities associated with asset management activities STFR 13 Jan Transparency in periodic reports requirements for UCITS and AIFs apply 1 Feb FCA and PRA published a joint policy statement on implementation of the Review and the Green Report FEB 28 Mar FCA makes its first order under s.384 of FSMA requiring a listed company to pay restitution for market abuse 22 Mar Supreme Court handed down its decision in FCA v Macris, allowing appeal by FCA Contracts for difference 29 Jun FCA published findings of its review on sale of contracts for difference products MiFID II 28 Apr PRA published policy statement on implementation of MiFID II: Part 2 Benchmarks 28 Jun FCA published consultation on implementation of the Benchmarks Regulation Mortgage Lending 24 Apr FCA published final guidance on the fair treatment of mortgage customers in payment shortfall FCA 18 Apr FCA published Business Plan and Mission Statement for 2017 and Jun FCA published its final report on the Market Study SMCR 31 Oct Deadline for firms to make their first annual submission notifying breaches of the conduct rules by the extended staff now caught by those rules Consumer Credit 31 Jul FCA published feedback statement of its review into high-cost credit Financial Advice 28 Sept FCA published finalised guidance on streamlined advice and fact find process SMCR 26 Jul FCA and PRA published consultation on extending the SMCR to almost all FCA regulated firms Client Assets 25 Jul FCA published policy statement on CASS 7A and the special administration regime review Banking 17 Jul FCA published thematic review into customer understanding of transactions delivered by retail banks 18 Aug Ministry of Justice published Plevin guidance for claims management companies Complaints 29 Aug FCA launched its advertisting campaign publicising the 29 August 2019 deadline for Payment Protection Insurance claims Remuneration 12 Apr PRA published policy statement on expectations on remuneration SMCR 3 May FCA published four policy statements in relation to conduct rules Financial Crime 27 Jun Fourth anti-money laundering directive (MLD4) was implemented and HMCR published guidance on moneylaundering supervision money service businesses Complaints 2 Mar FCA published policy statement on payment protection insurance (PPI) complaints Fintech 10 Apr FCA published discussion paper on distributed ledger technology Remuneration 3 May FCA published policy statement on remuneration in CRD IV firms IPO Reforms 27 Jun FCA published policy statement on prohibition of restrictive contractual clauses MiFID II 3 Jul FCA published second policy statement on implementation of MiIFD II Banking 2 Aug CMA measures to help personal current accounts and SMEs entered into force, including the introduction of a ceiling (or cap) on unarranged overdraft charged in the form of a monhtly maximum charge MAR APR MAY JUN JUL SMCR 7 Mar firms had to complete first assessment of material risk takers as fit and proper, and conduct rules became applicable to all staff Financial Advice 18 May FCA published results of the assessing suitability review Fintech 23 Mar Commission published consultation on Fintech EMIR 4 May Commission adopted a proposal reforming EMIR Benchmarks 30 Mar ESMA published its final report with draft RTS/ITS under the Benchmarks Regulation Conduct 25 May Global Foreign Exchange Committee launched new FX Global Code PRIIPs 6 Jun ESMA published Q&A explaining that the PRIIPs costs methodology should be applied to MiFID II costs and charges disclosure for PRIIPs products even when only sold to wholesale clients CMU 8 Jun Commission published Mid-Term Review Funds 9 Jun Shareholders Rights Directive II entered into force SMCR 3 Jul Conduct rules apply to non-executive directors SFTR 13 Jul Transparency in pre-contractual documents requirements for existing UCITS and AIFs apply MMF 20 Jul Money Market Fund Regulation entered into force 14 Sept FCA makes its first Market Investigation Reference to the CMA for investment consultancy services. Financial Crime 30 Sept Criminal Finances Act 2017 came into effect Payment Systems 19 Sept FCA published policy statement on implementation of PSD2 and PSR published Approach Document to monitoring and enforcing PSD2 IPO Reforms 26 Oct FCA published policy statements on reforming the availability of the information in the UK IPO process and reviewing the effectiveness of primary markets Consumer Credit 24 Oct Government called for evidence on its plan to implement a six week breathing space scheme and statutory debt management plan Consumer Credit 19 Oct FCA launches thematic review of the debt management sector 16 Oct FCA launches Authorisation Hub Fintech 26 Sept CMA published final report on digital comparison tools Benchmarks 1 Oct FCA opened up early applications to become an authorised or registered benchmark administrator AUG SEP OCT Fintech 4 Aug EBA published discussion paper on its approach to Fintech European Union 20 Sept Commission publishes proposals for reforms to the European System of Financial Supervision Benchmarks 29 Sept Commission adopted three delegated regulations supplementing the Benchmarks Regulation AIFMD 22 Jul Commission starts a review of the Alternative Investment Fund Managers Directive (AIFMD) 22 Nov FCA issues its first fine to a bond trader for algo-baiting 29 Nov FCA brought its first case using its competition enforcement powers CSDR 28 Nov UK Central Depositories Regulations 2017 to implement (in part) CSDR, entered into force Banking 23 Nov FCA published report on the compliance function in wholesale banks SMCR 12 Nov Application date for pre-approval of individuals seeking to perform the SMF24 and SMF6 function SMCR 3 Nov FCA published consultation on extending the application of Principle 5 to unregulated markets and activities Investment Management SMCR 13 Dec FCA and PRA publish consultations on technical aspects of the extension of the SMCR FCA 11 Dec FCA publishes for consultation its approach to authorisation and to competition Retail Banking 12 Dec FCA published policy statement on information about current account services to help customers compare services Financial Stability 11 Dec PRA published policy statement on recovery planning and supervisory statement DEC Financial services 17 Oct Commission published evalulation roadmap on fitness check of supervisory reporting requirements in financial services legislation Fintech 1 Nov FSB published report considering financial stability implications of articial intelligence and machine learning in financial services Crowdfunding 30 Oct Commission published impact assessment for a crowdfunding and peerto-peer finance legislative proposal Payment Systems 27 Nov Commission adopted RTS on Strong Customer Authentication and Secure Communication under PSD2 Capital Requirements 1 Dec Council of the EU published draft Regulation amending CRR relating to IFRS 9 and draft Directive amending BRRD relating to ranking of unsecured debt instruments in insolvency hierachy Financial Crime 7 Dec BCBS published Basel III: Finalising post-crisis reforms (also referred to as Basel IV) Financial Crime 11 Dec UK Government publishes a new Anti-Corruption Strategy and established a new National Economic Crime Centre NOV EU Please click a topic to see a selection of developments FCA 6 Nov FCA published paper for consultation on its approach to consumers Show all Conduct By end of 2017 Principle 17 of the GX Global Code is expected to be amended to ban the practice of last look Payment Services Dec EBA published draft technical standards on central contact points and on the future of the electronic central register as well as final guidelines on security measures for operational and security risks

4 UK SMCR PRA expects to publish final rules on the extended SMCR in 2018 Banking Numerous FCA consultations on crowdfunding are expected in 2018 Consumer Credit H1 FCA expected to publish final rules on customers in persistent debt, staff incentives and remuneration, and creditworthiness and affordability SMCR Early 2018 FCA expected to publish follow-up paper on how it approaches supervision Financial Advice H1 FCA to consider making final rules on contract for difference products (CFDs) FCA 3 Jan Firms offering binary options will be regulated by the FCA Authorisation Hub to be phased-in throughout Q1/EARLY 2018 JAN AIFMD The Commission will continue its review of AIFMD in 2018 Financial Stability Q1 EBA expects to launch 2018 EU-wide stress test exercise EMIR Jan All exchangetraded derivatives (ETDs) will have to be cleared by CCPs Supervisory reporting European Commission to carry out a fitness check of supervisory reporting requirements throughout 2018 Crowdfunding Q1 European Commission to begin initiative on an EU framework on crowdfunding and peer-to-peer finance Benchmarks 1 Jan Benchmark Regulation applies ESMA to consult with industry to develop guidance on financial stability with a view to publishing by 2019 EMIR Phase in of clearing obligation and mandatory margin requirements to continue in 2018 EU SFTR H1 RTS on reporting SFTs is expected to be finalised EMIR Early 2018 Amended regulation is expected to be published in the OJ FCA Late Mar FCA expected to publish a new Business Plan for 2018/2019 Financial Advice 3 Jan New definition of financial advice comes into effect By Jan PRA expects UK Money Markets Code to be embedded MiFID II Further ESMA Q&A are expected througout 2018 Consumer Credit Spring 2018 FCA expected to publish high-cost credit review solutions in areas of Rentto-Own, HomeCollected-Credit and Catalogue Credit IPO Reforms 3 Jan FCA rules on prohibition of restrictive contractual clauses take effect Financial Crime Early 2018 Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is expected to be established Benchmarks Q1 Delegated acts and technical standards under the Benchmarks Regulation are expected to be finalised PRIIPs 1 Jan PRIIPs and Delegated Regulation containing RTS on the KID becomes applicable MiFID II 3 Jan MiFID II and MiFIR apply Q2 FCA expected to publish changes to the disclosure requirements FEB MAR Q2 APR EMIR 9 Feb Clearing obligations RTS for credit default swaps and interest rate derivatives take effect for Category 3 counterparties UCITS V 18 Mar UCITS V enters into force. Transitional period for depositaries ends Payment Systems 13 Jan PSD2 enters into force and all aspects of open banking are expected to be up and running. EBA guidelines on major incident reporting under PSD2 enter into force IPO Reforms 1 Jul FCA rules regarding information provided to investors during an IPO come into force Summer FCA expected to publish interim report on Investment Platforms Market Study Retail Banking Q2 FCA expects to publish update on Strategic Review of Retail Banking Business Models Benchmarks 23 Apr Bank of England reforms to SONIA take effect Mar Legislative proposals in respect of the Commission s cross-border marketing proposal are expected Financial Services Summer FCA expected to publish its final versions of its approach documents on authorisation and competition Conduct Q2 FCA expected to publish policy statement on recognising market codes of conduct covering unregulated markets Pensions Q2 FCA expects to issue final report on its Retirement Outcomes Review MiFID II 2 Apr Rules to extend MiFID II standards to Occupational Pension Scheme firms come into force Payment Systems 13 Apr Authorised payment institutions, authorised e-money institutions and small e-money institutions will need to apply for re-authorisation if they wish to carry on providing payment services after 13 July 2018 What to expect in financial regulation: key events and publications for 2018 Mortgage Lending Spring 2018 FCA expected to publish its (delayed) interim report on the market study on competition in the mortgage sector Annuity markets 1 Mar Firms expected to comply with FCA rules on information prompts CMU 1 Mar The revised EuVECA and EuSEF Regulation applies SMCR Summer FCA expected to publish final rules on extending the SMCR to all financial services firms MAY SUMMER Data Protection 25 May The General Data Protection Regulation applies Financial crime 9 May CyberSecurity Directive to be transposed Funds Jul HMT is required to review the operation and effect of the AIFM Regulations 2013 JUN MiFID II By 30 Jun Execution venues are required to publish the first execution quality data reports as required under RTS 27 EMIR 15 Jun EU firms will be required to hold significant capital for exposure to CCPs that are not Qualifying CCPs under CRR, unless this deadline is further extended JUL Prospectus 21 Jul Prospectus Regulation enters into force Funds 21 Jul Most provisions of the MMF Regulation apply Retail Banking 15 Aug Current account providers will be required to publish results on how they compare with other banks on service availability, helplines and numbers of operational and security incidents as well as publish complaints data AUG MiFID II 1 Aug ESMA to publish information on the total number and the volume of transactions executed in the EU for the first time, covering the period from 3 Jan 2018 to 30 Jun 2018 Mortgage Lending By 1 Sept HMT are required to have reviewed the implementation of the Miortgage Credit Directive Retail Banking 1 Oct Firms will need to start recording and measuring the time taken to open accounts and to replace a debit card in preparation to publishing the metrics from 15 Feb 2019 FCA By end of 2018 FCA expected to publish final versions of all Approach Documents Payment Systems By Sept Payment service providers should introduce a voluntary contingent reimbursement model to compensate victims of authorised push payment (APP) scams Payment Systems 13 Oct Deadline for small payment institutions to make application if they wish to continue providing payment services beyond 13 Jan 2019 By end of 2018 FCA to begin monitoring the AML supervision carried out by professional bodies SEP OCT DEC MiFID II 1 Sept Investment firms must perform first assessment and comply with systematic internaliser obligations SFTR Oct Trade repository reporting requirements are expected to commence for investment firms and credit institutions Banking Mid-2018 EBA expects to publish results of 2018 EU-wide stress test exercise SMCR By end of 2018 SMCR expected to apply to insurers Financial crime Dec FAFT to publish report on UK following its national risk assessment of AML/CTF PRIIPs 31 Dec European Commision to review PRIIPs CMU Q The Commission is expected to produce a report on best practice in supply chain finance MiFID II By 30 Apr Investment firms must publish the first best execution data reports, as required under RTS 28 MiFID II H1 ESMA s final report on MiFID II suitability requirements is expected Fintech Early 2018 European Commission expected to present Fintech Action Plan Please click a topic to see a selection of expected developments Investment Management Show all

5 1.1 FCA Mission Statement and Business Plan Key Points The FCA published its Mission Statement alongside the 2017/2018 Business Plan in April 2017, giving detail on both the FCA approach to regulation and on the FCA s to-do list for the year. Following the drive for transparency in FCA approach launched by the Mission Statement, the FCA published FCA Approach Documents on consumers, authorisation and competition in the form of consultation papers which will close in FCA to publish a new Business Plan covering the period 2018/2019 in late March/April We expect the final versions of the FCA Approach Documents already published in draft, as well as consultation and final versions of Approach Documents covering enforcement and supervision to be published by the end of If you d like to find out more about this, click here 5

6 1.1 FCA Mission Statement and Business Plan Year in Review The FCA published its Business Plan for 2017/18 in April which set out the focus areas for the year within sectors such as wholesale markets, retail investments and investment management and highlighted cross-sector priorities (including topics such as cybercrime, technology, governance and financial crime). Alongside the Business Plan, the FCA also published its Mission Statement, in which it runs through the FCA s objectives, how it makes regulatory decisions, how it interprets its objectives, assesses its impact and measures its performance, considers users needs and what consumers and firms can expect. Our summary note of the two documents is available here. The Mission Statement promised the publication of several FCA Approach Documents over the year in order to provide further transparency in relation to its approach in several areas. The Approach Documents take the form of consultations which allow stakeholders to comment on the FCA proposals. In 2017, the FCA published Approach Documents on consumers (November 2017), authorisation and competition (both December 2017). In August, the FCA commenced its highprofile advertising campaign publicising the 29 August 2019 deadline for Payment Protection Insurance (PPI) claims. Year to come The FCA will publish a new Business Plan covering the period 2018/2019 in late March/April. Prior to the publication of the next FCA Business Plan, we expect the rest of the Approach Documents, covering enforcement and supervision, to be published for consultation. The periods for responding to the Approach Documents published in 2017 will close in 2018 (the consultation on consumers closes on 5th February 2018, while the consultations on competition and authorisation close on 12th March 2018). We therefore expect to see the final versions of all the FCA Approach Documents by the end of

7 1.2 Brexit Key Points Article 50 triggered and negotiations moved into phase 2. EU regulators emphasise supervisory consistency. During 2018 Negotiating on three fronts: transitional arrangements, withdrawal agreement and future relationship. UK and EU27 regulators to work with firms on licence applications. If you d like to find out more about this, click here 7

8 1.2 Brexit Year in Review The Supreme Court s ruling in Miller required the UK government to pass the EU (Notification of Withdrawal) Act 2017 before serving notice to leave the EU under Article 50 Lisbon Treaty on 29 March Withdrawal negotiations began with phase one focusing on the issues of citizens rights, the Irish border and financial settlement. In December, the European Council agreed that sufficient progress had been made on these issues to allow talks to proceed to the next phase. The European Supervisory Authorities published opinions on issues relating to Brexit, including how regulators should treat businesses moving from the UK to the EU27. The EU (Withdrawal) Bill has been debated in the House of Commons and is currently at the report stage. The Bank of England published consultation papers on its approach to the authorisation and supervision of international banks and insurers and guidance on its approach to international central counterparties. Year to come Agreeing transitional arrangements will be the priority for both sides of the negotiating table in Q1. In her Florence speech, Theresa May suggested that a period of around two years would be needed. The second phase of the withdrawal negotiations will begin. On the basis that nothing is agreed until everything is agreed, it is likely to be late 2018 before there is clarity on what any withdrawal agreement will look like. Moving onto the second phase of negotiations means that negotiations may also begin regarding the future trading relationship between the UK and the EU27. Firms will continue to discuss their plans with regulators in the EU27 and the UK to ensure that they have the appropriate licences to continue to operate in the relevant markets after Brexit. Our note on the impact for financial services firms is available here. Firms may submit authorisation applications to the PRA from January. The PRA has predicted at least 130 applications will be made to seek authorisation in the UK for after Brexit. Parliament is due to pass the EU (Withdrawal) Bill and other Brexitrelated bills, e.g. on trade and immigration, will be introduced. The Bank of England s consultations will close in February and the new approach to authorising international firms will apply. 8

9 1.3 Capital Requirements Key Points Negotiations on the CRD V and CRR II proposals have stalled and will resume in the next EU Presidency (January June). With its adoption at the very end of 2017, the IFRS 9 Regulation will apply from 1 January This delay makes adoption of the legislation likely in early The Insolvency Hierarchy Directive was also adopted at the end of the year and must be transposed by 29 December 2018, at the latest. However, two elements of the capital reforms, relating to IFRS 9 and the setting of a creditor hierarchy for banks in resolution, have reached political agreement. In early December, the Basel Committee published its long awaited final standard Basel III: Finalising post-crisis reforms (also referred to as Basel IV). Banks should keep an eye on national implementation of the directive to ensure their capital structures fit the new rules. In the CRR II / CRD V proposals, the controversial intermediate parent undertaking concept has been fiercely negotiated, but at the moment it appears that opposition to the proposal is a minority position. If you d like to find out more about this, click here 9

10 1.3 Capital Requirements Year in Review In November 2016, legislative proposals were set out by the Commission containing amendments to CRR and CRD IV (known as CRR II and CRD V). In the course of 2017, the Parliament and Council have been considering the proposals. In November, the Member States concluded that they could not reach general approaches on the proposals during the current Presidency and the negotiations on the proposals will be resumed in January 2018 under the Bulgarian Presidency of the Council (January June). However, political agreement was reached on elements of the Commission s original proposal relating to transitional provisions to phase in the regulatory capital impact of IFRS 9 and to phase out the current large exposures treatment of public sector debt. This was spun off from the original package because this part of the package had to be ready for 2018 whereas other aspects of it did not. The change means that some of the pain that IFRS 9 would otherwise have inflicted on firms in 2018 will be softened. This is good news for firms affected by IFRS 9. Year to come Also, political agreement was reached on a directive the Insolvency Hierarchy Directive which sets a new creditor hierarchy for banks (which, like the IFRS element, was spun out of the original November 2016 package, and, amending BRRD, has been turned into a discrete piece of legislation). By creating a new class of non-preferred senior debt that would be bailed in in resolution after capital but before other senior liabilities, the new rules should avert the risk of no creditor worse off claims in bank resolution that had previously been a concern because of the possibility of MREL eligible instruments ranking pari passu with instruments that were immune to bail-in. Some member states firmly oppose the measures while others aim to ensure a sufficiently lengthy transitional period of up to four years, together with support for use of a dual IPU structure by third country groups for whom a single EU IPU would interfere with structural separation rules in their home country. The IFRS 9 Regulation and the Insolvency Hierarchy Directive were adopted by the Council in early December and were published in the Official Journal before the end of the year. One of the purposes of CRR II is to implement various of the Basel III reforms in the EU, particularly in relation to the leverage ratio, total loss absorbing capital, market risk, counterparty credit risk, and large exposures. Whilst the delay prolongs the period within which the EU is not in full compliance, it is far from alone in being late on Basel III implementation, as the latest BIS jurisdiction by jurisdiction report makes clear. In December 2017, the Commission published a proposal for a regulation and a directive to create a completely new prudential framework for all investment firms, other than systemic firms which will remain subject to the CRR/CRD IV requirements. The Commission s proposed IPU requirement is far from being settled and the Council will also need to negotiate this with the European Parliament in 2018, but at this stage of the internal negotiations in the Council it appears that opposition to the proposal is a minority position will bring further developments and national implementation measures in respect of the Insolvency Hierarchy Directive. Having been adopted at the end of 2018, it must be transposed into local law by 1 January 2019 at the latest. The Regulation on IFRS 9 and Large Exposures will apply from 1 January The European Parliament and Council will consider the proposals for revising the EU prudential framework for investment firms. The final standard Basel III: Finalising post-crisis reforms (also referred to as Basel IV) is intended to follow on from and complement the original Basel III package of proposals first published in December The new standards are primarily focused on bringing consistency to the calculation of risk weighted assets and thereby improving the comparability of capital ratios between banks. This is to be achieved by amending the standardised approaches for calculating credit and operational risk and the credit valuation adjustment and separately by constraining the use of, and inputs to, models and imposing a floor on the capital benefits which can be recognised by using a model. In addition, G-SIBs will be subject to an additional leverage ratio buffer. The PRA has already imposed additional leverage ratio requirements on G-SIBs in the UK and, although the PRA requirements are calculated somewhat differently to the Basel proposal, the impact for UK G-SIBS may be less significant. The new proposals are to be implemented by 1 January 2022 subject to transitional arrangements relating to the application of the floor which apply until 1 January It will be important for banks to monitor relevant local implementation of the Insolvency Hierarchy Directive in 2018 to ensure that their capital structures fit the new rules. 10

11 1.4 MiFID II Key Points Vast majority of legislation published in the Official Journal, and an increasing amount of ESMA guidance was issued. The UK implementation of MiFID II was finalised. MiFID II/MiFIR apply from 3 January action with respect to non-compliance is unlikely where firms have made positive efforts to be ready. Further ESMA Q&A expected throughout the year. If you d like to find out more about this, click here 11

12 1.4 MiFID II Year in Review The vast majority of the remaining delegated acts and technical standards were published in the Official Journal, and further final guidelines and several questions and answers were published by ESMA. ESMA published a number of opinions in 2017 including ones on the meaning of traded on a trading venue and potential third-country trading venue equivalence for the purposes of post-trade transparency and commodity position limits. In August 2017, the European Commission proposed an amendment to the MiFID II Delegated Regulation to provide further detail on acceptable matching arrangements for systematic internalisers. This amendment was published in the Official Journal in December In September, ESMA published a revised work plan to reflect that it would be unable to publish all of its opinions with respect to pre-trade transparency and commodity position limits by the end of 2017 and set out that National Competent Authorities could provide waivers and limits pending ESMA s opinions. In December, the European Commission issued an equivalence decision with respect to certain US CFTC governed trading venues for the purposes of the mandatory derivative trading obligation, meaning in-scope firms can trade on those US trading venues in compliance with their obligations. In the UK, five statutory instruments were published and the FCA and PRA published further consultation papers as well as policy statements setting out final rules implementing MiFID II which take effect from 3 January Our MiFID II and MiFIR status microsite is available here. In a speech from September 2017, Mark Steward (Director of and Market Oversight, FCA) stated that the FCA will act proportionately in its enforcement approach for firms that are not 100% compliant by 3 January 2018, where there is evidence that they have taken sufficient steps to meet the new obligations by the start date. The FCA s disposition will be different where firms have made no real attempt to be ready. Year to come MiFID II and MiFIR apply in all Member States from 3 January. Firms subject to the transaction reporting obligations of MiFIR will be unable to execute a trade on behalf of a client who is eligible for a Legal Entity Identifier (LEI) and does not have one. ESMA will collate trade data in the first half of 2018 to collate and publish systematic internaliser calculation data. This data will enable firms to assess whether they meet the stated systematic internaliser thresholds. Firms are required to complete those assessments, and inform its National Competent Authority by September Investment firms must publish the first best execution data reports (as required under RTS 28) by 30 April Execution venues are required to publish the first execution quality data reports (as required under RTS 27) by 30 June Further ESMA Q&A are expected throughout In the UK, the FCA is likely to continue working with industry on MiFID II implantation and compliance plans. The FCA may take interest in firms approaches to some of the new, more unclear requirements, such as costs and charges disclosure. 12

13 1.5 EMIR Key Points Phase in of EMIR obligations continued in 2017: > Initial and variation margin requirements applied to largest market participants from February, variation margin requirement applied to other market participants from March. > Phase in of clearing obligations for Cat 1 and 2 counterparties in 2017, but postponed for Cat 3 counterparties until June Equivalence decision made in respect of CFTC s risk monitoring and mitigation rules for uncleared OTC contracts. Commission made REFIT Proposal for reforming EMIR which includes proposed changes to the clearing obligation, definition of financial counterparty and reporting obligation. Commission also published CCP Proposal for enhanced EU supervision of CCPs. Phase in of clearing obligation and mandatory margin requirements to continue in Changes to Margin RTS expected to align variation margin rules for FX forwards with certain non-eu jurisdictions. Significant capital requirements, from June 2018, for EU banks in respect of exposures to CCPs that are not Qualifying CCPs under CRR (unless timing is further extended). REFIT amendments to EMIR likely to come into force by Q4 2018, with timing on proposed enhancements to EU supervision of CCPs less clear. If you d like to find out more about this, click here 13

14 1.5 EMIR Year in Review The European Market Infrastructure Regulation ( EMIR ) continued to be phasedin during the year. From 4 February 2017, the phase-in of the mandatory margin provisions under the regulatory technical standards on margin for uncleared derivatives ( EU Margin RTS ) commenced. From this date, the largest market participants became subject to both initial and variation margin requirements. All remaining in-scope entities became subject to variation margin requirements from 1 March The deadline for the latter requirement was, however, the subject of some regulatory forbearance. The European Commission published an implementing decision on equivalence under Article 11 of EMIR concluding that Commodity Futures Trading Commission ( CFTC ) rules on risk monitoring and mitigation for OTC derivative contracts not cleared by a central counterparty are equivalent to EMIR. The decision came into force on 3 November 2017 and provides some relief for counterparties otherwise required to comply with both EU and US margin rules, in certain circumstances. While the phase-in of the clearing obligation continued for Category 1 and 2 counterparties, a postponement to the phasein of the clearing obligation for Category 3 counterparties came into force on 19 May 2017 delaying the commencement of this requirement until 21 June On 4 May 2017, the European Commission proposed reforming EMIR with a view to improving the proportionality and efficiency of the rules under its regulatory fitness and performance initiative, the so-called REFIT Proposal. The proposal includes changes to the application of the clearing obligation, an expanded definition of financial counterparty, changes to the reporting obligation, a new transitional exemption from the clearing obligation for pension scheme arrangements and further harmonisation of rules and procedures for trade repositories. On 13 June 2017, a second legislative proposal for the revision of, inter alia, EMIR to provide for enhanced EU supervision of central counterparties ( CCPs ) was published by the European Commission (the CCP Proposal ). Year to come The phase-in of the clearing obligation and the mandatory margin requirements for uncleared derivatives under EMIR will continue during Further to guidance issued by the Joint Committee of the European Supervisory Authorities in November 2017, changes to the Margin RTS are anticipated to bring the EU variation margin requirements for FX forwards into line with the narrower requirements for such instruments in certain other jurisdictions. Once the transitional period related to own funds requirements for EU banks exposures to CCPs expires (recently extended to 15 June 2018), EU firms will be required to hold significant capital for exposure to CCPs that are not Qualifying CCPs under CRR (i.e. authorised under EMIR or recognised as equivalent ) unless this deadline is further extended. The European Commission s proposals to amend EMIR will continue to be considered by the European Parliament and the Council. The amendments to EMIR arising from the REFIT Proposal are expected to come into force by Q The likely timing of the CCP Proposal is less clear. From 1 November 2017, amended regulatory technical standards and implementing technical standards on the minimum details of the data to be reported to trade repositories and format and frequency of trade reports to trade repositories, respectively, apply. Amended regulatory technical standards on indirect clearing arrangements under EMIR came into force on 11 December 2017 and will apply from 3 January

15 1.6 Financial Crime and Market Abuse Key Points June 2017 MLD4 implemented across the EU UK implementation was through the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, and through the Information about People with Significant Control (Amendment) Regulations 2017, while the FCA published updated guidance on PEPs. FCA made AML and counter terrorist financing a priority in their 2017/8 Business Plan. Going forward, continued FCA focus on AML and counter terrorist financing. MLD5 to be formally endorsed by the European Parliament and the Council of the EU. Member States will then have 18 months to transpose the Directive. FCA focus on MAR investigations and MAR post-implementation work. Council of the EU and the European Parliament reached political agreement on the proposed Fifth Money Laundering Directive ( MLD5 ) (including improving transparency in relation to trusts and company ownership). Criminal Finances Act 2017 introduced a new offence of failing to prevent the criminal facilitation of tax evasion. If you d like to find out more about this, click here 15

16 1.6 Financial Crime and Market Abuse Year in Review While 2016 saw a focus on market abuse with the implementation of the Market Abuse Regulation, 2017 focused on the implementation of the fourth anti-money laundering directive ( MLD4 ), which had to be implemented across the EU by 27 June MLD4 requires firms to take a more risk-based approach to AML procedures and controls, including client due diligence, and greater clarity on beneficial ownership. In the UK, MLD4 was implemented through the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, and through the Information about People with Significant Control (Amendment) Regulations 2017 which extend the scope of the Persons with Significant Control Register to cover unregistered companies and listed companies on UK secondary markets. The FCA is responsible for AML supervision for regulated firms and has made AML and counter terrorist financing an FCA priority for the year 2017/2018 in their Business Plan. The FCA has also been involved in the implementation of MLD4, for example publishing updated finalised guidance FG17/5 in July on the treatment of politically exposed persons (PEPs) following the changes introduced by MLD4. Consultations are currently underway regarding the appointment of the FCA as the Office for Professional Body AML Supervision ( OPBAS ), which will see the FCA become the supervisor of supervisors for professionals such as lawyers and accountants. At a wider UK level, the government published its second National Risk Assessment (NRA) of money laundering and terrorist financing in October The NRA finds that high-end money laundering and cash-based money laundering remain the greatest areas of money laundering risk to the UK. As well as the AML developments, the UK also saw Criminal Finances Act 2017 (CFA) come into effect from 30 September 2017, which introduces the new offences of failing to prevent the criminal facilitation of tax evasion. Other aspects of the Act will be brought into force separately. We have two notes on aspects of the CFA, The Criminal Finances Act 2017: Tackling money laundering, terrorist financing and tax evasion, and the new failure to prevent the criminal facilitation of tax evasion offences. In an FCA speech in November 2017, the FCA stated that it now expects firms to be compliant with all the requirements under the Market Abuse Regulation ( MAR ), and noted that firms should align their efforts to combat financial crime with market abuse, for example, if a firm has had repeated concerns about the trading behaviour of a client, leading them to raise multiple STORs, it is wholly legitimate for the FCA to also ask whether that firm has properly considered its regulatory obligations (set out in SYSC 6.1.1R) to counter the risk of financial crime. In April, the new Office of Financial Sanctions Implementation (OFSI) enforcement regime came into force for breaches of financial sanctions under the Policing and Crime Act In December 2017, the Council of the EU and the European Parliament reached political agreement on the proposed Fifth Money Laundering Directive ( MLD5 ) which makes various amendments to MLD4 (including improving transparency in relation to trusts and company ownership). Year to come The FCA will continue to focus on AML and counter terrorist financing into 2018, for example it is expected to complete its Financial Crime thematic review of e-money in 2018 /19. The FCA expects OPBAS to be up and running by the beginning of 2018 and for it to operate within the FCA s existing governance arrangements. The Financial Action Task Force ( FATF ) is due to evaluate the UK s AML and CTF frameworks in early 2018, culminating in a published report in December At the EU level, the proposal for MLD5 needs to be formally endorsed by the European Parliament and the Council of the EU. Member States will have 18 months after its publication in the Official Journal to transpose the Directive into national legislation. On market abuse, MiFID II will introduce the second tranche of MAR implementation regarding instruments listed on OTFs and Emission Allowance products. The FCA has said that it has significantly bolstered its resources focusing on market manipulation. Added to this, it is receiving more data on orders and trades under the MAR regime, as well as further trade information once MiFID II comes into effect. We therefore expect to see more investigations in this area, as well as further work by the FCA on the post-implementation of MAR generally. 16

17 1.7 Payment Systems Key Points PSD2 Although running behind schedule, much of the level 2 and level 3 legislation was finalised. PSD2 in the UK the Payment Services Regulations 2017 came into effect and the FCA published PS 17/19 on PSD2, as well as an updated Payment Services and Electronic Money approach document in September PSD2 PSD2 must be transposed across the EU by 13 January FCA have advised that existing authorised payment institutions, authorised e-money institutions and small e-money institutions have until 13 April 2018 to apply for re-authorisation or re-registration (authorisation of payment authorisation requirements apply from July 2018). If you d like to find out more about this, click here 17

18 1.7 Payment Systems Year in Review The journey toward implementing the Payment Services Directive 2 ( PSD2 ) continued apace in 2017, with both the European Banking Authority (EBA) and the FCA taking further steps toward meeting the January 2018 deadline. The EBA has published various final versions of level 2 and level 3 legislation, and it is anticipated that the final version of the level 2 legislation on one of the more challenging areas of PSD2 (security measures on Strong Customer Authentication and Secure Communication) will be published in the official journal at the end of 2017 or early In the UK, the Payment Services Regulations 2017 implement PSD2, and the FCA has published several documents on the PSD2 implementation, including consultation papers 17/11 and 17/22, and the policy statement 17/19. In addition to these documents, the FCA provided an updated Payment Services and Electronic Money approach document in September The FCA also opened to applications for authorisation under PSD2 in October 2017 and has published further guidance on the process on its website. Year to come January 2018 is a critical milestone for payment services. PSD2 will apply from 13 January (except for the security measures on Strong Customer Authentication and Secure Communication, which will apply between September 2018 and Q1 2019). Existing authorised payment institutions, authorised e-money institutions and small e-money institutions have until 13 April 2018 to apply for re-authorisation or re-registration. Whilst existing small payment institutions have until 13 October 2018 to apply for reregistration. The CMA s package of reforms to implement Open Banking in January, together with implementation of the General Data Protection Regulation (GDPR) in May, will accelerate technological change in the UK retail banking sector. Open Banking will enable customers to share their data securely with other banks and third parties. 18

19 1.8 Crowdfunding Key Points As part of the competition objective, and with an eye to Fintech developments, crowdfunding continues to be an FCA focus. Numerous FCA consultations expected in 2018 reflecting the fact that when the rules were produced (2014) the sector was much less developed. FCA s post-implementation review continues, with anticipated consultations on a range of topics related to consumer detriment pending. In the EU, the Commission is expected to take forward its legislative proposal in Q In the EU, in October the Commission announced its intention to produce legislation in this area. If you d like to find out more about this, click here 19

20 1.8 Crowdfunding Year in Review The crowdfunding market continues to grow rapidly and the FCA is asked to consider an increasing number of applications for regulatory approval from crowdfunding platforms. As at early December, these consultations have not been published, and FCA has confirmed that its post-implementation review into the sector continues, so we can expect to hear more next year. Getting crowdfunding right is considered an FCA priority, as its proper functioning in the market may improve competition in the banking sector, as well as being part of wider Fintech developments. At a European level, the 2016 publication of a staff working document on crowdfunding in the Capital Market Union has led to the Commission publishing an impact assessment document for a crowdfunding and peer-to-peer finance legislative proposal. This was published in October. As a result of issues identified in 2016 in the post-implementation review of the rules (FS16/13), consultations were expected in Q1 and Q These would be on a range of topics including wind-down plans, restrictions on cross-investment, extension of mortgagelending standards in MCOB to crowd funding platforms, and concerns with the quality of communications made to potential investors. Year to come Given that consultations arising from FS16/13 have not been opened in 2017 as anticipated, we can expect to see them in The FCA has not announced revised timings, but has commented that they will be released in due course. FCA has also said that it may consult on: > Greater controls for complicated crowdfunding models; In the EU, in Q the Commission is expected to take forward an EU framework on crowd and peer-to-peer finance that it signalled in October, as part of the Commission s priority of establishing a Capital Market Union. The overall aim of the initiative is to enable crowdfunding activity to grow by making better use of the Single Market potential. It seeks to encourage platforms to enable cross-border activity and to provide platforms with a proportionate and effective risk management framework. > Imposition of investment limits; > Additional rules to address differences in levels of borrower protection between commercial and non-commercial agreements; > Need for increased supervision of the client assessment process. These would be part of the package that we expect to see in

21 1.9 Fintech Key Points Regulators looking more closely at how they can adapt rules to encourage Fintech. Increasing regulatory scrutiny on token offerings. EU Fintech initiatives most likely to focus on retail financial services. FCA to continue sandbox and techsprint initiatives. Look out for regulatory enforcement against token offerings. If you d like to find out more about this, click here 21

22 1.9 Fintech Year in Review In August, the EBA published a discussion paper to investigate the impact of Fintech on the financial system and its regulation and supervision. This is the latest step in the EU s drive to accelerate the development of Fintech within the EU. The Commission had previously launched a consultation on the challenges and opportunities that Fintech offers to consumers, industry and the market and also hosted a Fintech conference on 23 March. The FCA celebrated a year of its regulatory sandbox with a report on lessons learned, it signed more co-operation agreements to promote financial innovation with international authorities including in Canada, Japan and Hong Kong, and it published a discussion paper exploring its regulatory approach to distributed ledger technology (DLT). Our debrief on the FCA s subsequent feedback statement on DLT is available here. The Bank of England set up a Fintech community to share developments, trends and insights across the sector. The Financial Stability Board published a report on the financial stability implications of Fintech and another report on artificial intelligence and machine learning in financial services. Both the value of Bitcoin and the amount of money invested in token offerings rose inexorably in 2017, sparking consumer warnings about the risks of investing in token offerings from regulators including the FCA, BaFin and ESMA. Bitcoin futures were also launched on the CME and Cboe exchanges allowing more investors to gain exposure to Bitcoin. ISDA and Linklaters published a white paper on smart contracts and DLT and the legal considerations for using them in a derivatives context. Year to come The Commission will continue to assess whether more proportionate licensing arrangements for Fintech activities and firms are warranted, as well as whether Fintech firms doing cross-border business should benefit from EU-wide passporting. In Q1 2018, the Commission is due to put forward a Fintech initiative for retail financial services and is also expected to publish its legislative proposal for an EU framework on crowd and peer to peer finance. Regulators will continue to walk the tightrope between encouraging innovation and competition on the one hand and warning against the risks of new technologies for firms and consumers on the other. Regulators will want to be seen to take action against any token offerings which they deem to breach their rules, including securities laws or financial promotion restrictions. Our guide to global token regulation is available here. A third cohort of firms will have their products tested via the FCA s regulatory sandbox, and a fourth cohort will be tested from June The FCA will also hold a series of roundtables to work with the industry to assess the outcome of its techsprint on machine executable regulatory reporting. In November, the FCA also hosted a twoweek techsprint to explore how technology could provide solutions to the challenges firms face in implementing their regulatory reporting obligations. 22

23 2.1 S enior Managers and Certification Regime Key Points The final provisions of the SMCR and SIMR took effect in Certain refinements (such as the extension of the conduct rules to all NEDs) were also made. The FCA and PRA published several rounds of consultations on the extension of the SMCR to all regulated firms, including insurers currently within SIMR. The FCA consulted on its reach over unregulated activities of regulated firms. The FCA will publish final rules on the SMCR extension in Summer 2018, and the PRA will do so sometime in The SMCR is expected to apply to insurers from the end of 2018 and to solo-regulated firms from mid- to late-2019 (although those dates will be confirmed by HM Treasury during 2018). Final rules (and possibly a further consultation) on the FCA s reach over unregulated activities are expected in Q If you d like to find out more about this, click here 23

24 2.1 S enior Managers and Certification Regime Year in Review Culture and governance, and the role of senior managers in instilling good culture in regulated firms, remained a key priority for regulators saw the final pieces of the Senior Managers and Certification Regime ( SMCR ) applicable to banks and PRAdesignated investment firms, and of the Senior Insurance Managers Regime ( SIMR ) take effect. Conduct rules (and related breach reporting) extended to all staff, certified persons needed to be assessed as fit and proper, and the regulatory reference requirements came into force. As regulators and relevant firms worked to embed the new regimes, 2017 also saw a number of amendments and refinements, including an extension of the conduct rules to all NEDs and of aspects of the whistleblowing rules to UK branches of EEA and third country banks, amended guidance on the duty of responsibility and on statements of responsibilities, and amended rules and guidance on Head of Key Business Area and Chief Operations Senior Management Functions. These changes are covered in more detail here. FCA CP17/26 and PRA CP 14/17, also published in July, proposed rules to extend the SMCR to Solvency II insurers and large non-directive firms (NDFs) building on the SIMR - and a streamlined regime for small NDFs, small run-off firms and insurance special purpose vehicles. July 2017 saw the long-awaited publication of FCA CP17/25 extending the SMCR to almost all FCA regulated firms. The new regime will replace the Approved Persons Regime in firms as diverse as asset managers, mortgage providers, crowdfunding platforms and consumer credit firms. The proposed rules divide firms into limited scope firms (which will be subject to a reduced set of requirements), core firms (to which a standard set of SMCR requirements will apply) and enhanced firms (whose size and complexity warrant additional requirements being imposed). The CP also made changes which are relevant to firms already covered in the existing SMCR. Our summary note on the proposed rules is available here. Year to come The FCA is expected to publish the final rules on the extended SMCR in Summer 2018, and the PRA will do so during The extended regime is expected to apply to insurers from the end of 2018 and to solo-regulated firms from mid- to late-2019 (although those dates will be confirmed by HM Treasury during 2018). Firms should prepare now for the changes to their governance framework and documentation which will need to be put in place. The FCA s views on whether the Head of Legal function is within the Senior Managers Regime (in response to FCA Discussion Paper 16/4) remain outstanding and are expected to be published in the first half of The final rules on the FCA approach to industry codes and unregulated markets are expected to be published, and apply from, Q The FCA may also publish a formal proposal on the extension of Principle 5 to unregulated activities. In December, the FCA published CPs 17/40, 17/41 and 17/42 on transitioning insurers and FCA solo-registered firms to the SMCR, and on extending the duty of responsibility to Senior Managers in these firms. The PRA published CP 28/17 proposing changes to forms and certain other amendments to streamline SMCR and SIMR and to deal with transitioning. In November, the FCA published a consultation and discussion paper which proposes formalising its reach over the unregulated activities of financial services firms through the recognition of industry codes and a possible extension of Principle 5 (proper standards of market conduct). Please refer to this note for further detail. 24

25 2.2 Remuneration Key Points New rules on buyout awards took effect in January MiFID II remuneration rules will apply from 3 January EBA prohibition on dividends or dividend equivalents in relation to deferred variable remuneration came into effect for CRD firms in respect of remuneration for the 2017 year (i.e. awards to be made in 2018). Replacement of the relevant CRD IV regime, including the application of the bonus cap and changes to the deferral rules, is still subject to negotiation. If you d like to find out more about this, click here 25

26 2.2 Remuneration Year in Review New rules on buyout awards took effect from 1 January If an employee s bonus from his/her old employer is bought out by the new employer, the buyout award can be clawed back by reference to behaviour at the old firm. This is intended to deal with the problem of rolling bad apples. The new employer will be required to act on the instructions of the former employer. Click here for more. Year to come The MiFID II remuneration rules will apply from 3 January These rules are not as prescriptive as the rules under the other regimes (e.g. CRD IV), but they apply to a different (and maybe occasionally overlapping) group of staff and also affect companies whose core business is not financial services. The rules focus on staff with a material impact on: > the firm s investment and ancillary services; or > on its corporate behaviour, and are intended to ensure that they are not paid or assessed on performance in a way that could conflict with clients best interests. To this end, remuneration schemes should not solely or predominantly rely on quantitative commercial criteria. Qualitative criteria based on regulatory compliance/ fair treatment of clients and quality of client service should be used. Firms must develop remuneration policies for the relevant staff which reflect these requirements. For CRD firms, the EBA s prohibition on dividends or dividend equivalents in relation to deferred variable remuneration came into effect for remuneration for the 2017 year. This means that the terms of awards deferring variable remuneration of the 2017 year (to be made in 2018) will need to reflect the prohibition. Negotiations to replace CRD IV continue. The main changes originally proposed include applying the bonus cap to all CRD IV firms and narrowing the group of firms and individuals which can disapply the deferral rules on a de minimis basis. The extension of the bonus cap seems likely to go ahead, but the latest round of changes seems to walk back some of the changes on the deferral rules. This could, however, change again before the rules are finally agreed. The directive is expected to be passed in the summer of 2018 and Member States are likely to have 18 months to implement the changes. 26

27 2.3 R edress Schemes Key Points 2017 saw the first FCA-ordered corporate market abuse restitution scheme. A number of other redress schemes were established, worth hundreds of millions of pounds. Court decisions reinforced the finality of settlements concluded under redress schemes. Restitution will remain a central plank of the FCA s enforcement strategy and may be given increasing credit in the context of enforcement negotiations. Firms will rush to demonstrate that they are providing redress, hoping to reduce potential financial penalties. If you d like to find out more about this, click here 27

28 2.3 R edress Schemes Year in Review In March 2017, Tesco agreed to an 85m FCA-mandated redress scheme for shareholders affected by misleading financial statements the first exercise of these powers in a corporate market abuse case, and notable also because the FCA accordingly imposed no financial penalty. See our note. In July 2017, Lloyds agreed to set up a redress scheme to pay an estimated 283m to customers who may have been placed on unsustainable mortgage arrears payment plans. Two court decisions reinforced the finality of settlements concluded under redress schemes. In Cameron the High Court decided that a customer s acceptance of a redress offer pursuant to an interest rate hedging products misselling review precluded a subsequent claim for consequential loss. In CGL Group the Court of Appeal decided that banks owed no duty of care to customers with respect to such reviews. Year to come The two major redress schemes established in 2017 (Tesco and Lloyds) underscore the centrality of restitution within the FCA s enforcement strategy a point emphasised repeatedly by FCA Director of Mark Steward over the last two years. We expect to see redress placed front-and centre within supervisory and enforcement action in Mr Steward has expressly indicated that firms that provide prompt redress and exhibit exceptional co-operation with the regulator may avoid financial penalties, citing the 2017 Tesco action as a key example of this. Several other schemes were established, including a 66m payment by Capita Financial Managers to the FCA to be distributed for mis-selling of investments in the mis-managed Connaught Income Fund Series 1 (in liquidation), a 15m redress scheme for customers of a rent-to-own firm, a 12.5m scheme for customers of a direct sales business who were mis-sold insurance of minimal value, and a 4m scheme in respect of an unreasonable debt collection charge by HSBC. 28

29 2.4 Complaints Key Points PPI continued to dominate complaints workloads. Moves may be made to extend the FOS to cover SMEs. The High Court confirmed that the FOS cannot oversee the conduct of internal redress schemes. PPI will continue as a major focus in the wake of Plevin and leading up to the complaints deadline. The FCA issued bans for noncompliance with FOS awards. There may be regulatory interventions targeted at products generating proportionally greater numbers of complaints. If you d like to find out more about this, click here 29

30 2.4 Complaints Year in Review In 2017 H1, PPI accounted for a third (1.1m) of complaints to firms and half (177k) of complaints to the FOS, followed by current accounts for firms (519k) and banking and credit for FOS (86k). 59 per cent of complaints to firms were upheld and total redress paid was just under 2bn ( 0.33bn excluding PPI) both steady against 2016 H1. The Mazarona High Court decision confirmed that the FOS has no jurisdiction to consider complaints about the conduct of an internal review and redress scheme, as it is not part of the underlying specified regulated activity. In July 2017, the FCA followed up on its 2016 findings about packaged bank accounts complaints handling, by recommending improvements to final response letters for clarity, consistency and completeness. In August 2017, final FCA rules and guidance on handling PPI complaints came into force, incorporating changes in light of the Plevin Supreme Court decision, and firms are writing to potentially newly eligible complainants. The FCA banned a firm (Foreman Financial Services Limited), is set to ban another firm (Larksway Investments Limited) after its Upper Tribunal reference failed, and banned two individuals, for failing to comply with FOS awards. Year to come Initial consultations may take place to extend the FOS to cover small and medium-sizes enterprise (SME) customers. This is the option most favoured by the FCA Chief Executive to improve SMEs access to redress an issue raised by the experience of some SMEs referred to RBS Global Restructuring Group. This may fundamentally change the operation of the FOS: SME cases can be complex and bespoke. The FCA may follow up its September 2017 Dear CEO letter to consumer credit firms requesting evidence that the FCA s concerns have been addressed relating to explaining complaints outcomes to customers, informing them of their FOS options and undertaking internal remedial action. The FOS is gearing up to tackle 410,000 new cases in the next financial year. PPI will continue to be a major focus as the August 2019 deadline for new PPI complaints approaches. The FOS has modified its voluntary jurisdiction rules to implement this deadline. With the January 2018 implementation of the EU Payment Services Directive II ( PSD2 ), businesses will have to resolve certain types of complaints within 15 days, rather than the current eight weeks, which may mean the FOS will see more complaints referred to it sooner. The FOS expects packaged bank accounts complaints to continue to fall in The FOS will likely proceed (as proposed in October 2017) to alter its voluntary jurisdiction by excluding benchmarks complaints and including nonpersonal recommendation advice. 30

31 3.1 Capital Markets Union Key Points In its mid-term review, the Commission added to the CMU s core objectives with additional priority areas, inlcuding: > Role of the European Supervisory Bodies 2018 a busy year for CMU as it hurtles towards its 2019 deadline. We expect progress with many legislative proposals including in relation to: > Prudential treatment of investment firms > CRR II and CRD V > Licensing and passporting framework for Fintech activities > PEPPs > EMIR If you d like to find out more about this, click here 31

32 3.1 Capital Markets Union Year in Review In 2015, the Commission unveiled its Capital Markets Union (CMU) Action Plan which identified six areas for action and set out a roadmap of concrete steps to be taken to create a single market for capital by These areas included business solvency, securitisation, EuVECA and EuSEF regulation, covered bonds and pan-european personal pension arrangements. In June 2017, the European Commission supplemented its existing CMU Action Plan with new initiatives in its mid-term review. These new areas include: > a legislative proposal for a review of the European Supervisory Authorities; > a legislative proposal to review the prudential treatment of investment firms; > an assessment of the case for an EU licensing and a passporting framework for Fintech activities; and Year to come 2018 will be a busy year as the main building blocks for the CMU are intended to be put in place by the Commission by Many reviews are already under way, but continuing into 2018, the Parliament and the Council will (likely) consider legislative proposals for the following (amongst others): > CRR II and CRD V Directive; In the Spring, the Commission intends to publish a report, with a legislative proposal if appropriate, on amendments to the CRR relating to a prudential backstop for nonperforming loans. The revised EuVECA and EuSEF Regulation (amending the existing regimes for venture capital and social entrepreneurship funds on the basis of the lack of take-up in the previous regime) will apply from March > Revisions to EMIR; > a legislative proposal to strengthen certainty of cross-border securities ownership. > A regulation on a pan European pension product; In Q4 2018, the Commission will produce a report on best practice in supply chain finance. > Omnibus Directive and Regulation (broadly on the operation, powers and responsibilities of the ESAs); > Covered bonds; > EU framework for crowdfunding and peer-to-peer finance; and > a more proportionate regulatory environment to support SME listing on public markets. 32

33 3.2 Consumer Credit Key Points As well as consulting on its approach to consumers, the FCA also published consultations on processes for customers in persistent debt and on the rules on creditworthiness and affordability. With plenty of thematic work in this area, the FCA published feedback on the staff remuneration and incentives review, along with proposals to address some of the risks identified. A feedback statement on the highcost credit review was accompanied by the FCA retaining the existing payday loan price cap. The FCA also announced a thematic review of the debt management sector. PRA summarised findings of its consumer credit lending review. Details of FCA s review of retained provisions of the Consumer Credit Act are overdue and expected. Final rules on customers in persistent debt, staff incentives and remuneration, and creditworthiness and affordability expected in first half of FCA s final approach to consumers expected in Summer High-cost credit review solutions in areas of Rent-to-Own, Home-Collected-Credit and Catalogue Credit expected in Spring 2018, and possible reforms of unarranged overdrafts. Ongoing thematic review of debt management sector throughout New agreed industry standards apply to credit card firms from If you d like to find out more about this, click here 33

34 3.2 Consumer Credit Year in Review Consumer credit (along with mortgage lending) remained a priority for regulators as levels of household borrowing increased. In April, the FCA published CP 17/10, proposing rules to put in place processes to help customers in persistent debt. The CP is part of the FCA s work to implement the July 2016 findings of their Credit Card Market Study. In December, the FCA published an update on the persistent debt proposals, including a further consultation (CP 17/43) on changes to its thinking on certain aspects (such as the proposals around warnings and content of communications to customers, and an extension of the implementation period to 6 months). In July, the FCA published findings from the thematic review of staff remuneration and incentives in consumer credit firms, along with CP 17/20 proposing measures to address risks that can arise from the way consumer credit firms pay or incentivise their staff. Also in July, the FCA published feedback statement 17/2 of its review into high-cost credit. This included an assessment of the effectiveness of the payday loan price cap, which was left unchanged but will be subject to a review within three years. The FCA continued work on the high-cost credit review and overdrafts. The FCA also published a consultation paper (CP17/27) on proposals to clarify its rules on creditworthiness and affordability, and a webpage on its work on motor finance. In October, the Government called for evidence on its plan to create a six-week breathing space scheme and statutory debt management plan. The FCA also announced a thematic review of the debt management sector which will consider customer outcomes as well as the initial advice process. In November, the FCA published a consultation on the FCA Mission: Our Future Approach to Consumers. The PRA issued a statement in July which summarises the findings of the PRA review of consumer credit lending, PRA-regulated firms asset quality and underwriting practices for credit cards, unsecured personal loans and motor finance. Firms with material exposure in the sector have been asked to respond to the PRA statement. Year to come We still await a feedback statement on the FCA s call for input on the retained provisions of the Consumer Credit Act (which was due to be published in the first half of 2017) with an outline of the scope of the review and timeline to Final rules on creditworthiness and affordability are expected in the first half of The further FCA consultation on persistent debt and earlier intervention remedies closes on 25 January, and a policy statement is expected as soon as possible after that date. Firms may then need to amend their customer terms to reflect the new persistent debt interventions. Credit card firms will need to comply with agreed industry standards to inform customers that promotional offers are due to end and allowing customers to request a later than payment date from April 2018, and with the agreed industry standard to notify customers who are close to their credit limit from July Final rules on the risk management by consumer credit firms in respect of their staff incentives, remuneration and performance management practices are expected in early The high-cost credit review identified the areas of Rent-to-Own, Home-Collected-Credit and Catalogue Credit as areas for further investigation. The FCA is expected to consult on proposed solutions in Spring The regulator is also still forming a view on reforms to unarranged overdrafts. We expect an update on the FCA s motor finance work in Q The Government is expected to publish further details on its breathing space scheme once it has considered responses to the call for evidence (which closes in January). The FCA s thematic review of the debt management sector will continue throughout 2018, with the review due to complete in the first half of The FCA is due to publish their final Approach Document in relation to consumers in Summer

35 3.3 Retail Banking Key Points Regulatory focus on embedding general major regulatory changes affecting the sector rather than on dedicated sector initiatives. Update on FCA strategic review of retail banking business models due in Q In terms of thematic activity, FCA launched a strategic review of retail banking business models and published findings from its thematic review into firms assessment of customers understanding of transactions. First phase of current account reporting rules start to apply. Reporting on ISA switching came into force, and reporting rules on current account service and performance were consulted on and finalised. FCA business plan notes a number of areas where FCA is considering whether to intervene to improve competition and customer outcomes, and relevant regulatory action may follow in Work towards implementation of EU action plan on retail financial services throughout FCA published occasional paper with ageing population strategy. If you d like to find out more about this, click here 35

36 3.3 Retail Banking Year in Review Firms operating in retail banking are subject to major structural changes due to new regulation, including ring-fencing, the impact of the Payment Services Directive 2, the Senior Managers and Certification Regime, requirements around financial crime and IT resilience, and PPI redress schemes. Much of the FCA s focus this year has been on embedding these changes, rather than on dedicated retail banking sector initiatives. The FCA launched its strategic review of retail banking business models in May (with a purpose and scope paper published in October). The review examines the impact of significant economic, technological, social and regulatory changes on relevant business models and, in turn, competition and conduct. One aspect of this work is a review of whether free-if-in-credit banking leads to distributional concerns between different types of consumers. In July 2017, The FCA published findings from its thematic review into firms assessment of customers understanding of transactions delivered by retail banks and building societies. The report shares examples of how some firms have responded to earlier PCBS recommendations in this area. Year to come Since April 2017, firms have had to provide performance reports on the speed of cash ISA transfers. The FCA is expected to publish an update on its strategic review of retail banking business models in Q The FCA consulted on proposals to require current account providers to publish information on service and performance. Final rules (PS 17/26) were published in December. From 15 August, current account providers will need to publish information on service availability, helplines and numbers of operational and security incidents. From 1 October, they will need to measure the time taken to open current accounts and replace debit cards, ready for publication of these metrics in February In September, the FCA published an occasional paper with findings on how an ageing population would impact the financial services industry. The paper explores findings and ideas to ensure that older consumers can access the financial products and services they need. The House of Commons retail banking inquiry closed in May, when Parliament dissolved for the general election. It cannot be reopened, although the evidence gathered may be used for related future inquiries. The FCA business plan notes that the regulator is considering whether regulatory intervention is required to improve switching speed in savings account market more generally, with action possible in Following the CMA s final report on competition in the retail banking market, the FCA has continued working with firms and stakeholders on measures to improve transparency for overdraft users and service information indicators, and to prompt better customer engagement, and a publication on this could follow in At EU level, the Commission will continue with the implementation of its retail financial services action plan. In many areas (such as product switching, quality comparison websites, or the online selling of financial services), this will involve exploring how improvements can be achieved, before proposing any particular actions or legislative changes. The FCA is also considering whether its Sunlight remedy (pursuant to which the FCA published the lowest interest rates available on open and closed easy access cash savings accounts and easy access cash ISAs) should be included in Handbook rules. The FCA may consult on these rules, and possibly on other remedies to facilitate greater competition and better treatment of longstanding customers, during

37 3.4 Mortgage Lending Key Points FCA market study on competition in the mortgage sector continued throughout Pre-2004 first charge Consumer Credit Act 1974 mortgages became regulated mortgage contracts, and the administration of these mortgages is now a regulated activity. PRA underwriting standards for buyto-let mortgages took effect. PRA also amended its rules on loan to income ratios in mortgage lending. Interim report on the FCA s market study on competition in the mortgage sector due in Spring 2018, followed by final report in second half of Thematic work expected in the areas of interest-only mortgages and forbearance where customers have long-term mortgage arrears. Remediation in respect of automatic capitalisation of payment shortfalls to be complete by June Review work of the implementation of themortgagecreditdirectiveandoftheimpact of the mortgage market review. If you d like to find out more about this, click here 37

38 3.4 Mortgage Lending Year in Review Mortgage lending (along with consumer credit) remained a priority for regulators as levels of household borrowing increased. The FCA s market study on competition in the mortgage sector continued throughout The market study focuses on first charge residential mortgages and analyses whether available tools (including advice) help mortgage consumers make effective decisions, and whether commercial arrangements between firms operating in the mortgage sector lead to conflicts of interest or misaligned incentives to the detriment of consumers. The interim report on this market study, which was due in Summer 2017, has been delayed until Spring On 21 March, pre-2004 first charge Consumer Credit Act 1974 mortgages became regulated mortgage contracts. Administration of these mortgages now constitutes a regulated mortgage activity (in accordance with rules and guidance published in March 2016). In April, the FCA published final guidance on the fair treatment of mortgage customers in payment shortfall and the impact of automatic capitalisation, which sets out a remediation framework for affected customers. In the Autumn, the FCA consulted on proposals to facilitate retirement interest-only mortgages. The PRA published PS 5/17 amending the PRA rules on loan to income ratios in mortgage lending, and PS 13/17 on changes to the residential mortgage risk weights. The PRA s new underwriting standards for buy-to-let mortgage contracts (finalised in PS 28/16 and SS 13/16 of September 2016) were phased in this year. Year to come The FCA is due to publish its (delayed) interim report on the market study on competition in the mortgage sector in Spring This will include the FCA s analysis, preliminary conclusions and possible remedies. The final report on the market study is expected to follow in the second half of In its 2017/18 Business Plan, the FCA indicated that it planned a thematic review into how firms treat customers whose interestonly mortgages are approaching maturity. At the same time, the FCA also announced that it planned a thematic review on how firms use forbearance for customers with long-term mortgage arrears and how well this serves customers. The FCA is expected to commence these reviews in Firms who need to undertake remediation work in respect of automatic capitalisation of payment shortfalls, in line with the new FCA guidance on the issue, will need to complete that work by 30 June By 1 September, HM Treasury are required to have reviewed the implementation of the Mortgage Credit Directive. Final rules on retirement interest-only mortgages are expected. During 2018, the FCA may also commence its formal review of the impact of the mortgage market review (MMR) rules which is due in April 2019, five years after the implementation of the MMR rules. 38

39 3.5 Financial Advice Key Points Implementation of FAMR recommendations throughout Consultations and final rules amending Art.53 RAO and related FCA Handbook provisions. Consultations and final guidance on streamlined advice, portable fact finding, insistent clients, and experiences of the FCA s Advice Unit, with final guidance on personal recommendations to follow. MiFID definition of regulated advice applies to regulated firms from 3 January Finalised guidance on personal recommendation to follow. Unregulated firms still require permission for activity of advising on investments. The FCA will closely and critically supervise emerging robo-advice platforms and intervene where mis-selling issues come to light. If you d like to find out more about this, click here 39

40 3.5 Financial Advice Year in Review The final report of the Financial Advice Markets Review ( FAMR ) in March 2016 made a number of recommendations to improve the markets for financial advice and guidance. These include proposals to clarify the boundary between regulated advice and unregulated financial guidance services, which should allow firms to offer, and consumers to access, more tailored guidance services. Implementation of the FAMR recommendations continued throughout In February, HM Treasury published a response to its proposed changes to the definition of regulated advice in Art. 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order ( RAO ). The original proposal was to narrow the broad Art. 53 definition of advising on investments such that firms would only require permission where they provide a personal recommendation (in line with the MiFID definition of advice). However, to address the risk of consumers being scammed, the Treasury decided to only limit the definition in that way for regulated firms. This means that (otherwise) unregulated firms still need to obtain permission to advise on investments under the Art 53 RAO definition for a wider range of services, whilst regulated firms will be able to provide more advanced guidance services (without providing personal recommendations) without this constituting a regulated activity. The FCA consulted on and finalised guidance (FG 17/8) on, amongst other things, streamlined advice processes (including automated advice), along with guidance clarifying standard types of information required as part of the portable fact find process, and setting out key considerations for verifying a fact find that has been performed by third parties. The guidance includes examples of good and poor practices. In June, the FCA extended the scope of its Advice Unit, which was set up in 2016 to support firms developing automated ( robo ) advice models, to also cover firms within the mortgage, general insurance and debt sectors, and firms who wish to provide guidance rather than regulated advice. In August, the FCA consulted in CP 17/28 on its approach to applying the amendments to Art. 53 RAO in its rules. The August CP also proposed new guidance on insistent clients and guidance based on experience of the FCA s Advice Unit, as well as guidance around personal recommendations. The FAMR Working Group provided on update on progress in the areas assigned to it. Tasked with producing a shortlist of potential terms which could replace the terms advice and guidance, the Working Group concluded that the market should instead adopt a single, consistent set of consumer-friendly explanations of advice and guidance. The Working Group also suggested five rules of thumb and suggested further work on nudges to increase consumer engagement. Year to come From 3 January 2018, regulated firms will only require a permission for advising on investments (pursuant to Art. 53 RAO) if they provide a personal recommendation, rather than enhanced guidance, in line with the MiFID definition of advice. This will enable regulated firms to provide more tailored guidance on the merits and risks associated with buying or selling particular investments than was previously the case, without the need for an advice permission. However, the broader definition of advising on investments will continue to apply to unregulated firms. Finalised guidance on what constitutes a personal recommendation is due to be published early in In November 2017, the FCA expressed concern that poorly designed robo-advice could lead to systemic mis-selling. We expect that the FCA will closely and critically supervise robo-advice platforms in this light as adoption increases throughout 2018 and beyond. In December, the FCA published PS 17/25 with final rules and guidance largely as proposed in the August CP, with the exception of the guidance on personal recommendations which the regulator will clarify further. 40

41 3.6 Ring-fencing Key Points Final rules in relation to PRA data requirements were published, along with a few minor consequential amendments. Otherwise a quiet year from the point of view of regulatory publications. Several banks engaged in ring fencing transfer schemes sought directions from the High Court mainly as to the adequacy of their communications to customers impacted by the scheme will be extremely busy for banking groups getting ready for 1 January 2019 implementation deadline. Court processes are expected to last into 2018, with restructuring activity taking place into the middle of the year. Whilst all regulation is in place and finalised, PRA may consult on its supervisory approach in the light of these new ring-fenced banks. If you d like to find out more about this, click here 41

42 3.6 Ring-fencing Year in Review The ring-fencing regime will apply from 1 January 2019 and will require the UK s largest banks to separate their retail and investment banking activities. Whilst 2017 has been a quieter year than 2016 in terms of the output of legislation and regulatory rules and requirements in this area, the banks subject to the regime have been preparing intensely for implementation which has included continuing to discuss plans with the regulators, preparing court applications and obtaining new licences where necessary. On 1 February 2017, the PRA published a policy statement on the implementation of ring-fencing: reporting and residual matters (PS3/17). The policy statement contains the final rules and supervisory statements in relation to the data the PRA intends to collect in support of its obligations in relation to ring-fencing. The policy statement also provides feedback on responses received to two 2016 papers (CP25/16 and CP36/16) on consequential and reporting amendments; the outcome being that only minor amendments were required as a result of the responses. In both May and July, the High Court gave directions to a number of banks concerning their ring-fencing transfer schemes ( RFTS ). In May, Barclays, HSBC, Lloyds and Santander asked for a direction that they only needed to give notice individually to those customers who were likely to be adversely affected by the scheme, as suggested by the FCA in its March 2016 guidance. The court gave a direction that individual notice should be given to any and all customers who might wish to allege that they would be adversely affected by the carrying out of an RFTS. The court did not wish to limit the scope of the notifications only to persons whom a bank had determined were likely to be adversely affected by the RFTS. Year to come Whilst the regulatory publications in relation to ring-fencing are expected to be few and far between in 2018, it will be an extremely busy year for those banks in scope of the regime. It will also be busy for the Authorisations team at the PRA in a speech given in June 2017, the Bank of England said that by 2019, the PRA is expecting to have authorised the three largest new banks ever created in the United Kingdom. In its June 2017 speech, the Bank of England noted that the bulk of restructuring activities will take place from mid-2017 to mid-2018 in order to meet the 1 January 2019 deadline for implementation. Court processes necessary to move the assets and liabilities of significant numbers of customers from one legal entity to another are expected to last into The PRA is considering how to supervise banks with ringfenced structures and whether this will require changes to its current supervisory approach and operating model, and it may consult on this in In July, Barclays returned to court, this time with Woolwich Plan Managers Ltd., to ask the court to look at the sufficiency of proposed communications to those adversely affected by the carrying out of the scheme. Whilst the court broadly approved of the approaches, it made suggestions as to ways in which communications could be made clearer. 42

43 3.7 Benchmarks Key Points 2017 saw EU and UK proposals for implementing the BMR. In 2018, BMR takes effect, including transitional provisions. FCA announced plans to end LIBOR. A reformed SONIA to be lined up to replace LIBOR. If you d like to find out more about this, click here 43

44 3.7 Benchmarks Year in Review In June, the FCA published a consultation on proposed changes to the FCA Handbook so that it is consistent with the Benchmarks Regulation. Our guide to the Benchmarks Regulation is available here, and our guide to the FCA s proposals is available here. Since 1 October, the FCA has invited early applications to become an authorised or registered benchmark administrator ahead of the process formally opening on 1 January EURIBOR, EONIA and LIBOR were designated critical benchmarks by the Commission. Andrew Bailey (FCA CEO) announced plans to transition away from LIBOR to alternative reference rates by the end of Year to come The Benchmarks Regulation will apply, with some exceptions, from 1 January. Transitional provisions include allowing EU index providers who already provide a benchmark until 1 January 2020 to apply for authorisation or registration. As a result, the FCA s remit will broaden as they will now regulate a far greater number of benchmarks and their administrators, although some contributors will no longer need regulatory approval. With the FCA signalling the replacement of LIBOR as a reference rate, 2018 will see the market considering how best to address this major change. Bank of England reforms to the SONIA benchmark will take effect on 23 April. Our briefing on the practical implications of the transition away from LIBOR for derivatives, bonds and loans is available here.. Delegated acts and technical standards are expected to be finalised and published in the Official Journal in Q1. 44

45 3.8 CSD Regulation Key Points The implementation of CSDR has involved fairly lengthy transitional arrangements and additional implementing measures, which have largely been provided in The UK s implementation of the regime has continued, with only one further SI required to complete UK implementation. The delay to MiFID II implementation has delayed finalisation of aspects of the CSDR relating to settlement discipline. Following application of MiFID II from January 2018, the CSDR RTS on settlement discipline is expected in mid If you d like to find out more about this, click here 45

46 3.8 CSD Regulation Year in Review The CSDR sets up a European-wide regulatory framework for the institutions responsible for securities settlement, called Central Depositories. Although in force since 2014, there have been a number of transitional provisions which are being worked through. In March 2017, four delegated and two implementing regulations were published in the Official Journal, setting out specific technical standards for the implementation of CSDR. In September 2017, HM Treasury published the first stage of its response to its December 2015 consultation paper on implementing the CSDR. In November 2017, the UK s Central Depositories Regulations 2017 (SI 2017/1064) were published with an explanatory memorandum which noted that a further statutory instrument was required to complete the implementation of the CSDR. This is in relation to the Uncertificated (Amendment) Regulations, which is expected to follow in due course. Year to come The delay in the application of MiFID II by one year (in force from 3 January 2018) has had knock-on consequences for CSDR, affecting provisions relating to settlement discipline in the context of MTFs. CSD authorisations are expected during Q1/ Q (6 months after RTS published). As a result of the MiFID II delay, the RTS on settlement discipline is expected to come into force in mid

47 3.9 SFTR Key Points In the programme of SFTR implementation, the critical next step is for the RTS and ITS to be endorsed by the Commission. This is overdue the Commission s view was scheduled for June 2017 but has still not been given, and will likely slip into next year. Once the reporting obligation RTS enters into force, the countdown for reporting to commence begins, with the reporting obligations being phased in for different types of reporting counterparties. Of particular interest, credit institutions and investment firms have to start reporting 12 months after the RTS enters into force. If you d like to find out more about this, click here 47

48 3.9 SFTR Year in Review The Financing Transactions Regulation ( SFTR ) is a key part of the EU s programme of financial market reform. It aims to reduce perceived risks in the use of securities financing transactions or SFTs, which are defined to include repos, buy-sell back transactions and stock loans, and margin loans in connection with the purchase of securities. However, the ambit of the regulation is broader than SFTs, imposing obligations on collateral arrangements involving financial instruments where the collateral is provided by way of title transfer or by security interest. SFTR came into force in 2016, except for certain provisions which were subject to transitional arrangements. The principal measures introduced by the SFTR are: Although the Commission should have made its decision by June, as at mid-december we are still waiting. > reporting and record-keeping obligations in respect of SFTs (art.4); As such, article 13 came into force for annual reports published after 13 January 2017 and article 14 took effect from 13 July Following its consultation paper in September 2016, ESMA published its final report on the level 2 measures under the SFTR on 31 March 2017 and submitted its draft technical standards to the Commission for endorsement. Year to come The Commission has not commented on its delay in endorsing the Level 2 technical measures, but we expect the Commission to make its decision in the course of Once this has happened and the measures are in force, the clock will start ticking on the reporting obligation timetable, with a phased-in approach turning on the reporting counterparty type. The relevant timeframes are as follows: > 12 months after reporting obligation RTS enter into force investment firms and credit institutions start reporting > 15 months after reporting obligation RTS enter into force central securities depositories and central counterparties start reporting > 18 months after reporting obligation RTS enter into force all other financial counterparties (including UCITS and AIFs) and third country entities start reporting > 21 months after reporting obligation RTS enter into force non-financial counterparties start reporting. > requirements for risk warnings and express prior consent for reuse of collateral (art.15); and > enhanced requirements for disclosure to investors by funds of their use of SFTs and total return swaps (art.13 & 14). 48

49 3.10 IPO Reforms Key Points FCA reform of the IPO process was carried out through a programme of works culminating in new rules regarding information provided to investors during the UK equity IPO process (PS17/23), enhancements to the listing regime (PS17/22) and Feedback Statement (FS17/3) that provides an overview of stakeholder responses to DP17/2 on the ffectiveness of the primary markets regime. FCA published new rules on restrictive covenants (PS17/13) banning clauses which restrict an entity s choice of provider for future primary market and M&A services. Following PS17/23, the new regime regarding information provided to investors during an IPO will come into force from 1 July The rules to enhance the listing regime in PS17/22 will take effect from 1 January New FCA rules on restrictive covenants set out in PS17/13 come into effect for agreements which are entered into from 3 January If you d like to find out more about this, click here 49

50 3.10 IPO Reforms Year in Review The FCA embarked on a programme of work in order to increase the efficiency and effectiveness of primary markets. On 14 February 2017, the FCA published a Discussion Paper DP17/2 on the effectiveness of the UK primary markets landscape and how they serve their purpose of providing access to capital for issuers, and investment opportunities for investors. Feedback Statement FS17/3 published an overview of the feedback the FCA received and promised further stakeholder engagement. Following DP 17/2, the FCA consultation paper CP 17/5 published in March 2017 looked at information provided to investors during the UK equity IPO process. A policy statement was subsequently published (PS17/23) on reforming the availability of information in the UK equity IPO process which proposed mandatory early publication of a registration document before the publication of any connected research, a requirement to offer unconnected research analysts an opportunity to cover the company on a broadly equal footing to connected analysts and prohibiting contact between the issuer and connected research analysts when an investment bank is involved in a pitching process and before syndicate roles are confirmed in writing by the issuer. In addition, the FCA Consultation Paper CP17/4 on technical enhancements to the Listing Rules was published. Many of the proposals were confirmed in the October issued policy statement PS17/22. Our summary note on the IPO process reform is here. Following the FCA s final report on the market study of investment and corporate banking, published in October 2016, the FCA published new rules banning clauses which restrict an entity s choice of provider for future primary market and M&A services in June The ban applies to regulated firms that provide primary market services, irrespective of the location of the firm s client and its size or type. Our summary note is available here. Year to come The changes to be introduced to information provided during the IPO process in PS17/23 will take effect on 1st July 2018, in order to minimise potential disruption to existing or prospective IPOs. The FCA have said that during this window, they will work with relevant trade associations to develop industry guidelines to support firms following the new rules requiring syndicate banks to provide unconnected analysts with management access. The rules to enhance the listing regime confirmed in PS17/22 will take effect from 1 January Finally, we expect the FCA will follow up with stakeholders on the three topics highlighted in FS17/3 which included retail access to debt markets and the relative positioning of standard versus premium listing. The new FCA rules on restrictive covenants set out in PS17/13 come into effect for agreements which are entered into from 3 January The FCA has noted that it will monitor the implementation of the ban and that it remains open to extending the ban to other wholesale market services if there is evidence that restrictive clauses are being used to the detriment of clients using those other services. 50

51 4.1 Sector Key Points EU Commission published impact assessment for initiative to reduce barriers to cross-border EU marketing of investment funds. Legislative proposals in respect of the Commission s cross-border marketing proposal are expected in March Five areas for proposed regulatory action have been identified marketing practices, administrative requirements, regulatory fees, notification requirements, and online distribution. EU Commission, Parliament and Council to agree proposals around the ESAs supervisory powers (including ESMA s powers in respect of delegation arrangements). Legislative proposals are expected during 2018, with a view to adopting these by March EU Commission published package of proposals to increase supervisory powers of ESAs, including certain powers of ESMA to review (and issue guidance to national competent authorities on) applications for AIFMD/UCITS authorisations using extensive delegation/outsourcing models. If you d like to find out more about this, click here 51

52 4.1 Sector Year in Review In June 2017, the EU Commission published an impact assessment on its initiative to reduce barriers to cross-border EU marketing of investment funds (having previously consulted on the matter in 2016). The initiative forms part of the Capital Market Union action plan and aims to simplify cross-border marketing requirements through reducing national differences in these requirements. The impact assessment identifies five policy areas for addressing regulatory barriers: > Marketing practices options include harmonising national marketing requirements and practices, harmonising what constitutes marketing and sharing of best practices. > Notification requirements options include simplifying processes for updating notifications, amended criteria for when updates are needed, and a central hub for notifications. > Online distribution options include clarifying marketing rules for online distribution and addressing barriers around national implementation of AML and KYC requirements. In September 2017, the EU Commission published a package of proposals to increase coordination and supervisory powers of the European Supervisory Authorities ( ESAs ). The proposals are discussed here and include the following: > Administrative requirements options include prohibiting (or imposing conditions on) national requirements to appoint local agents, and possibly harmonising national disclosure requirements. > A change of ESMA s role in respect of delegation. > Regulatory fees options include establishing a central repository for regulatory fees and introducing a principle of proportionality between the fee and supervisory work undertaken. > A new and potentially more political approach to ESMA s governance and role. > ESMA gaining direct supervisory powers over EuVECAs, EuSEFs and ELTIFs. On delegation, the proposals envisage national competent authorities ( NCAs ) referring to ESMA any applications for authorisation under AIFMD or UCITS which suggest that a material part of activities are to be outsourced or delegated, or that key functions or risks are to be transferred, into third countries. ESMA is to have power to review such arrangements and to issue guidance to NCAs, including a recommendation to refuse or withdraw authorisation. These proposals follow a number of developments since 2016 which suggested a tighter approach by ESMA to delegation (through its AIFMD Q&A and opinions published in May and July 2017). Together, the developments suggest increased intolerance of extensive delegation models, which need to be on the radar of UK investment managers who (e.g. as part of Brexit planning) have or hope to establish management entities in other EU countries and delegate functions back to a UK team. Year to come If the scope of the EU Commission s marketing proposals is not extended, legislative (and/or other) proposals, which could amend provisions of AIFMD, UCITS Directive and possibly MiFID II, are expected in March The EU Commission, Parliament and Council need to agree the content of the proposals around the ESAs supervisory powers, including ESMA s proposed role in respect of asset managers delegation models. It is intended that relevant legislation is to be adopted by the end of the current legislative term of the European Parliament (March 2019), so legislative proposals are expected during

53 4.2 and Competition Key Points The Market Study final report was published in May he anticipated criticisms of the sector, T focussing on a finding of weak price competition in the market, were confirmed, and a raft of remedies proposed. Additionally, the investment consulting sector was singled out as presenting signs of weak competition and a Market Investigation Reference has been made by the FCA to the CMA in respect of it. Following the launch of its New Bank Start-up Unit, the FCA created the Authorisation Hub in October 2017, to mitigate the impact of regulatory hurdles on competition that start-ups can bring to the market. Amongst the proposed remedies of the Asset Management Market Study, new rules in respect of fund objectives, benchmark and performance reporting, and the all-in fee can be expected in the earlier part of Interim report on Investment Platforms Market Study expected in Summer New rules on governance, box profits and share class switching, expected in Q Changes to disclosure requirements expected around Q Activity by Authorisation Hub to engage with new entrants to the sector expected throughout If you d like to find out more about this, click here 53

54 4.2 and Competition Year in Review The FCA published its final report on the Market Study on 28 June. Its findings were not a surprise given the indications in the interim report, and it concluded that: > there is weak price competition in the industry particularly in the retail sector; > there is considerable scope to improve cost transparency and communication of fund objectives and performance; and On 16th October 2017, the FCA launched the Authorisation Hub. The hub is designed to remove unnecessary barriers to the regulatory journey of an asset manager and thereby increase competition in the sector while still maintaining high regulatory standards by providing firms with more information and dedicated support. The initial Asset Manager Authorisation Hub consists of: Year to come The outcome of the Market Study was a raft of proposed remedies requiring further consultation and review. Consultation, the setting up of working groups and behavioural testing in relation to fund objectives, benchmarks and performance reporting and the all-in fee is leading towards policy development covering governance, box profits and share class switching, new rules in relation to which we can currently expect to see in Q A working group was set up in Q to look at issues around institutional disclosure, and we can expect changes to the disclosure requirements to be published around Q With regards to the Authorisation Hub, future phases of its operation will feature open days and surgeries for firms and will be rolled out throughout > dedicated web pages for asset managers; > changes should be made to the operation of the investment consulting market. To address these findings, the FCA published a suite of remedies and further actions, many of which they are consulting on, including: > Independent directors on fund governance boards; > A strengthened requirement for fund governance boards to act in the best interests of fund investors, and to explicitly consider value for money; > An expectation of action if boards encounter poor fund performance; and > A requirement to return risk-free box profits to funds. Further, the FCA has made a market investigation reference to the CMA on the investment consultancy sector. > weekly pre-application meetings for asset managers; > dedicated and named case officer from day one; and > improved support in transitioning newly authorised firms to supervision. Finally, on enforcement, in November the FCA brought its first case using its competition enforcement powers. The FCA believes the four firms under investigation may have breached the Competition Act 1998 by colluding on prices for flotations and a share placement in 2014 and Its findings are provisional and may not necessarily lead to an enforcement decision. The four firms will be given the opportunity to respond to the FCA which will carefully consider any representations from the firms before deciding whether the law has been broken. The firms objections will not be made public, however any final decision taken by the FCA will be published, providing more detail about the case. In Summer 2018 we expect to see an interim report on the Investment Platforms Market Study which follows on from the Asset Management Market Study and was launched in July The study explores whether online platforms for retail investment products help investors make good investment decisions, and if they offer value for money (including whether the platforms use their relationships to get investors a good deal). It also assesses whether relationships between investment and other platforms, advisers, asset managers and fund rating providers work in investors interests. 54

55 4.3 and Transparency Key Points With transparency continuing to be a key regulatory priority for regulators looking at the asset management sector, asset managers have a range of other regulatory developments to keep abreast of. As well as MiFID II and SMCR, ones to be aware of are: > Shareholders Rights Directive, > SFTR, and >A IFMD (as changes to the transparency obligations may come out of the AIFMD review). Whilst the timing of Brexit means that UK implementation of the Shareholders Rights Directive is still very uncertain, should it happen asset managers will need to get to grips with further transparency obligations, this time in respect of listed companies. With the AIFMD due for its review, the Commission is especially mandated to review the functioning of the transparency and reporting requirements, and we may see a strengthening of those requirements as a result. If you d like to find out more about this, click here 55

56 4.3 and Transparency Year in Review The trend towards increasing transparency continued in As well as developments arising in areas such as MiFID II, SMCR and PRIIPs, asset managers have needed to be aware of other new and developing initiatives. hareholders Rights Directive II. The S purpose of the directive being broadly to enhance shareholders rights in listed companies, amendments to the first directive were agreed at the end of 2016 and the amended directive entered into force on 9 June Member states have 24 months from that date to implement. Recognising that asset managers (on behalf of their managed funds and accounts) are often exercising significant votes in European listed companies, the directive requires asset managers to be more transparent about their approach to shareholder engagement in such companies. This takes the form of a comply or explain requirement to publish a policy on shareholder engagement, and the requirement to publicly disclose information about the implementation of such engagement policy. The directive also imposes public disclosure requirements on institutional investors (insurance companies and pension schemes), including in relation to how they incentivise their asset managers and how they monitor their performance. FTR. The transitional periods for investor S disclosure requirements imposed by the SFTR ended in As a result, AIFMs and UCITS managers have had to include specified data on total return swaps and STFs in (i) annual reports of AIFs and UCITS published after 13 January and (ii) in pre-contractual disclosures to investors from 13 July. Year to come With the two-year implementation period (from 9 June 2017), it is by no means certain that the Shareholders Rights Directive will be implemented in the UK given the anticipated timing for Brexit. To the extent it is, UK asset managers will be familiar with these sorts of obligations from the Stewardship Code. However, the Directive will create an additional layer of transparency in relation to investments in listed companies. As noted, the AIFMD review is underway and will continue in The likely issues for review are: > impact of the transparency and reporting requirements; > the third country passport; > definition of marketing ; > regulatory processes for cross border marketing; and > definition of professional investor. Review of AIFMD. The EU Commission was required to begin a review of AIFMD by 22 July 2017, and one of the topics for review is the impact of the transparency and reporting requirements. The Commission has taken preliminary steps by commissioning a pan-eu survey on the functioning of the AIFMD rules and the experience acquired in applying them. 56

57 4.4 Financial Stability in the sector Key Points Financial stability in the asset management sector remains a concern of regulators, national and international. FSB is focussing on: > Liquidity mismatch > Leverage > Operational risk > lending activities Financial stability being identified as an ESMA 2018 priority, ESMA wants to improve information sharing and access rights amongst national regulators. It also intends to continue its analysis of active vs passive funds, and expects the FCA s findings from its market study to be helpful in this regard. The Money Markets Funds Regulation, which applies from July 2018, is intended to increase the liquidity and stability of MMFs. If you d like to find out more about this, click here 57

58 4.4 Financial Stability in the sector Year in Review In recent years the Financial Stability Board has been looking into the potential financial stability risks arising from structural vulnerabilities associated with asset management activities. On 12 January 2017, it released a policy recommendation paper containing recommendations in four areas: > Liquidity mismatch between fund and investment assets and redemption terms and conditions for open ended funds recommendations linked to increasing information and transparency to regulators and investors, as well as strengthening liquidity risk management frameworks and practices of those funds; > Leverage within investment funds recommendations focussing on the measurement and monitoring of leverage; Some of these recommendations were intended to be taken forward by IOSCO, and others by national regulators. Following this, the FCA published a discussion paper in February which sought stakeholder views on the practice of investing in illiquid assets through open-ended investment funds and the risks that this can pose to investors and managers. A response to this was expected in 2017 but has not been published yet. The Money Market Fund Regulation entered into force on 20 July Its purpose is to establish a framework for and increase the liquidity and stability of MMFs. Year to come At an EU level, Steven Majoor in November identified financial stability in the asset management sector as an ESMA priority for 2018 (at a speech to EFAMA s Investment Management Forum). He explained that ESMA wants to increase its central role in developing EU databases which would allow for mutual access by EU and national authorities, and the public, as necessary, and which would in turn reduce duplication of data collection and processing by multiple authorities. To complement its analysis on costs and returns in the context of the CMU, ESMA intends to carry out a more detailed analysis of the performance of active and passive funds. In this regard, ESMA anticipates it will benefit from the FCA s asset management market study, since this touched on some similar issues. Steven Majoor also explained that ESMA is working on developing an operational framework for the identification and quantification of potential industry risks to be used in stress simulations. It will soon be publishing a package of measures under the Money Market Funds Regulation. To complement its work on the macro stress scenarios and the specific framework for stress testing under the MMF Regulation, ESMA is also planning to provide more general guidance on stress testing practices covering both UCITS and AIFs. With regard to MMFs, most provisions of the new regulation will apply from July In 2018, ESMA intends to consult with industry to develop guidance on financial stability in the asset management space, with a view to publishing this guidance by > Operational risk and challenges at asset managers recommendation intended to ensure risk management frameworks are appropriate for the level of risk; and > lending activities of asset managers and funds recommendations focussing on situations where indemnifications are provided. 58

59 4.5 PRIIPs Key Points Intended to apply from 2016, the Parliament and Council rejected the PRIIPs RTS, which delayed application of the PRIIPs regime by nearly two years. Given uncertainty over the parameters of the PRIIPs definition, further guidelines were published by the Commission in July. ESMA published an important Q&A which explained its view that the PRIIPs costs methodology should be applied to MiFID II costs and charges disclosure for PRIIPs products even when only sold to wholesale clients. The PRIIPs Regulation and associated Delegated Regulation will be applicable in Member States from 1 January By the end of 2018 we can expect to hear from the Commission on its review of the working of the PRIIPs regime. There is still a lack of clarity surrounding scope of the PRIIPs definition, which we can expect to be the subject of further guidance, and review at the end of If you d like to find out more about this, click here 59

60 4.5 PRIIPs Year in Review The purpose of the PRIIPs Regulation was to encourage efficient EU markets by helping retail investors to better understand the key features, risks, rewards and costs of different packaged retail investment and insurance based products (PRIPPs) through access to a Key Information Document (the KID). The European Commission published its revised RTS on KIDs (2017/653) on 8 March 2017 having received objection to its initial RTS on KIDs by the European Parliament in The revised RTS on KIDs has been in force from 2 May MiFID II Investor Protection Q&A published in June 2017 applies the PRIIPs costs methodology to MiFID costs disclosure of PRIIPs products even if only sold to wholesale clients. ESMA published Level 3 guidance on the KID in July, August and November In the UK, in May 2017 the FCA published its policy statement (PS17/6) on amendments to the disclosure requirements in the FCA Handbook to reflect the introduction of the PRIIPs Regulation. The FCA final rules will apply from 1 January The FCA launched a consultation (CP17/32) on its enforcement approach to breaches of the PRIIPs Regulation and its approach to the provision of personalised projections alongside the KID in September Feedback on the enforcement approach is expected in December but has not been published yet. Year to come The PRIIPs Regulation, which entered into force on 29 December 2014, becomes applicable in individual Member States on 1 January The delegated regulation containing RTS on the KID will also apply from 1 January. The Commission is required to review the PRIIPs Regulation by 31 December We can expect the review to include a consideration of the scope of the PRIIPs definition, as there is still a lack of clarity on this. Feedback from the FCA on its consultations, expected in December 2017, looks likely to slip into the new year. In July 2017, the Commission published guidelines on the application of the PRIIPs Regulation to try to iron out potential interpretative difference across the EU. These guidelines have been published in the Official Journal. 60

61 5.1 trends Key Points There were fewer enforcement actions and fines, but more investigations opened a consequence of the FCA s new diagnostic approach to investigations. Tesco was the first corporate to be ordered to pay redress for market abuse but escaped a financial penalty from the FCA in part because of exceptional co-operation. actions will pick up again as the FCA s new approach beds in. Claims to privilege will remain an area of continued focus. The FCA will continue to exercise its competition powers. Action for breaches of AML and market abuse rules remain key priorities. Procedural reforms make it easier to partially settle enforcement actions and to fast-track to the Upper Tribunal. The Macris Supreme Court decision significantly narrowed third party rights in respect of published notices. If you d like to find out more about this, click here 61

62 5.1 trends Year in Review Only 15 financial penalties (totalling 181m) were levied in 2016/17, down from 24 (totalling 885m) in 2015/16. However, 75 per cent more investigations were commenced in 2017 year-on-year. This is likely a consequence of the FCA s shifting approach to enforcement opening more investigations and using them as diagnostic tools rather than as a precursor to inevitable enforcement action (as explained in the FCA s 2017 Mission Statement and related public comments). This means that a greater proportion will be closed without further enforcement action. Additionally, the higher work volume may be presenting internal resourcing challenges, slowing the progress of investigations towards formal enforcement saw some notable firsts: the first FSMA s.384 order for a listed company to pay restitution in connection with market abuse (Tesco), the first fine for algo-baiting (Paul Walter) and the FCA s first Market Investigation Reference to the Competition and Markets Authority (in relation to investment consultancy and fiduciary management services). Other notable actions included the PRA s largest fine to date - 27m - imposed following regulatory reporting failings under EMIR, a 34.5m FCA fine for Merrill Lynch for transaction reporting failures, and substantial redress schemes (see here). The FCA announced changes to its enforcement procedure rules and guidance, intended to increase the speed and rigour of enforcement decisions. To encourage earlier agreement, stage two and three settlement discounts have been scrapped. On the other hand, subjects of investigations can enter into Focused Resolution Agreements which allow for the FCA s Regulatory Decisions Committee ( RDC ) to determine cases in which there is some agreement as to facts/breach without parties losing their settlement discounts. Parties may also fast-track cases directly to the Upper Tribunal, bypassing the RDC an option that may be especially appealing to individuals. See our note. In November 2017, the Bank of England opened its second consultation into its proposed new Decision Making Committee ( EDMC ). The proposal is closely modelled on the FCA s RDC and is intended to strengthen the independence and robustness of the process of making final decisions in contested enforcement cases in respect of prudential regulation, financial market infrastructure and resolution. See our note. The Macris Supreme Court decision significantly narrowed the test for identification under FSMA s.393, making it easier for the regulators to settle with firms before completing investigations into related individuals and for firms to negotiate notices that limit culpability to individuals and teams. See our note. Year to come action is likely to pick up again in 2018 as new investigations reach the enforcement stage. We expect the 2017 trend of focusing on restitution and redress to continue (see here). Privilege remains contentious. We have seen regulators asking parties to revisit decisions on privilege in the light of the SFO v ENRC decision in May 2017: see our note. The looks set to continue at least until the appeal from the case is heard, likely in late 2018 or The industry will be watching carefully for the first penalties for breaches of the SMCR (see here). The FCA s new diagnostic approach means that individuals, like firms, will experience a greater number of investigations and parallel investigations look set to become the norm. Individuals whose investigations are closed without further action will nevertheless face the career consequences of the investigation being noted in their record and disclosable to future potential employers. The FCA s exercise of its competition powers will continue. There was a significant amount of activity in the area during The regulator s confidence in enforcing competition rules in the financial services space will only increase the more familiar it becomes with its powers in this area. AML will remain a key concern for the FCA. Continued deep-dives by a team of specialist staff within the FCA, additional powers granted by the UK law implementing the latest EU Money Laundering Directive (MLD4) and the announcement that, by the end of 2018, the FCA will begin monitoring the AML supervision carried out by professional bodies, mean that this is an issue which should remain firmly at the top of all firms agendas. The appointments during 2017 of Vincent Coughlin QC as the FCA s new Chief Criminal Counsel and ex-fbi agent Michael Welch as head of its retail and regulatory investigations look set to reinvigorate the regulator s criminal enforcement work. Action in respect of all aspects of market abuse, from DTR and LR breaches by corporates to attempts to manipulate and mislead the market by individuals and firms is a further area of anticipated focus. The FCA is capturing and analysing a significantly larger amount of market order/trading data under MAR. 77 per cent more Suspicious Transaction and Order Reports ( STORs ) were lodged in 2016/17 year-on-year a trend that will accelerate under MiFID II once it commences in January This will enable it to detect attempts to distort market behaviour more easily and with greater accuracy. The Bank of England is likely to establish an EDMC as foreshadowed in its July 2016 and November 2017 consultations. See our note. 62

63 Key contacts Financial Regulation Group Michael Kent Partner Tel: (+44) Carl Fernandes Partner Tel: (+44) Martyn Hopper Partner Tel: (+44) Peter Bevan Partner Tel: (+44) Harry Eddis Partner Tel: (+44) Nikunj Kiri Partner Tel: (+44)