Financial Services Regulation & Compliance - Cross Sectoral September 2018 algoodbody.com/insights-publications/financial-services-regulation-compliance-cross-sectoral-september-2018 DOMESTIC Colm Kincaid delivers speech titled 'A Properly and Effectively Supervised Private Equity Market' Colm Kincaid, Director of Securities & Markets Supervision at the CBI spoke at the recent SuperReturn CFO/COO Regulation and Compliance Summit. Mr. Kincaid highlighted the important role of the CBI in safeguarding stability and providing a trusted financial system supporting the wider economy. He then discussed how the characteristics of private equity make it an important catalyst for economic growth and providing a means for injecting capital into the economy. The risks associated with the lack of transparency with private equity when compared to publicly listed investments, in the valuation of illiquid assets and the operations of portfolio companies were also discussed. Moreover the management of portfolio companies may have information advantages or possess the ability to control portfolio companies in a way that is not transparent to investors. CBI publishes key messages for industry on cybersecurity, accountability and money laundering controls The CBI published key messages from speeches delivered by Sylvia Cronin and Seana Cunningham. Seana Cunningham, Director of Enforcement and Anti Money Laundering, spoke to the Association of Compliance Officers about the CBI's enforcement priorities and its approach to supervising Anti Money Laundering/Countering the Financing of Terrorism. She advised that protected disclosure reports are an important supervisory tool to assist the Central Bank in discharging its supervision and enforcement mandate and discussed how improvements have been seen in controls around money laundering but there is still some work to be done. Governor Philip R. Lane delivers speech discussing the Management of Systemic Risks Governor Philip R. Lane delivered a speech on the management of systemic risk. He discussed the role of macroprudential policies in building resilience during the current phase of economic expansion across Europe. The non-bank sector was also discussed and emphasis was placed on the importance of deepening our understanding of the stability properties of the entire financial system, which calls for a special focus on the interconnections across markets and across different types of intermediaries. He highlighted with macroeconomic and financial recovery in Europe, the potential for macroprudential policy to build resilience and curb excesses during good times may prove to be essential in limiting the costs of future downturns. Governor Lane advised that policymakers need to take a wide angle as the stability of the financial system rests not just on the banking sector but also on the market-based financial sector. 1/6
Seana Cunningham delivers speech titled "Enforcement and AML - our approach and priorities" Seana Cunningham, Director of Enforcement and Anti-Money Laundering at the CBI delivered a speech discussing the role played by the CBI in protecting the integrity of the financial system through the effective risk based supervision of AML/CFT compliance in credit and financial institutions. The upcoming transposition of the Fourth AML Directive and the importance of firms bringing their policies in line with the Directive were discussed. Ms. Cunningham advised that the embedding of an effective and ethical culture in financial services is essential given the central role that the financial sector plays in our everyday lives and the modern economy, supporting growth, employment and future prosperity. It is also essential to the sustainability of financial services firms themselves, with growing evidence that the lack of a consumer-focused culture in firms erodes competitiveness and damages their long-term prospects. CBI issues Notice of Intention to amend the CBI Prospectus Handbook The CBI has issued a Notice advising on its intention to amend the Prospectus Handbook. These amendments are currently expected to come into effect from 8 October 2018 when the CBI will publish an amended Prospectus Handbook. The CBI is upgrading its document management and workflow system and this will affect submissions under the Prospectus legislative regime. In particular, submission templates containing details related to each submission will be required for most submission types. The Procedures Section of the Prospectus Handbook requires updating to reflect the system changes however the Prospectus Rules will remain as issued in November 2014. CBI issues Notice of Intention to amend the CBI Transparency Guidance The CBI has issued a Notice advising on its intention to amend the Transparency Guidance. These amendments are currently expected to come into effect from 8 October 2018 when the CBI will publish an amended Transparency Guidance. The CBI Guidance on Transparency (Regulated Markets) Law requires updating to reflect the system changes. In particular, submission templates containing details related to each submission will be required for most submission types. No changes are being made to the Transparency Rules. CBI issues Markets Update Issue 13 of 2018 The CBI has issued the Markets Update issue 13 of 2018. The update includes the review of UCITS Performance fees which highlighted instances of non-compliance with Guidance, an update on MIFID II: ESMA issues latest Double Volume Cap Data, the ESMA publication regarding the responses to the CP No. 6 under EMIR and the ESMA updates to the Benchmarks Register. The Markets Update also includes further ESMA publications. CBI publishes Anti-Money Laundering (AML) Bulletin Issue 5 This edition is the second publication of 2018 and relates to the CBI s Anti-Money Laundering /Countering the Financing of Terrorism & Financial Sanctions (AML/CFT) engagement with firms in the Money Remittance Sector and sets out the CBI s key 2/6
expectations regarding the training of agents that such firms utilise for the provision of money transfer services. This bulletin sets out the CBI's key expectations regarding the implementation of an AML/CFT agent training model, including: quality of training, optimizing face-to-face engagement, system for delivery and oversight. CBI publishes Guidance Note on Completing an Application for Authorisation as a Retail Intermediary The CBI has published a Guidance Note on completing an application for authorisation as a Retail Intermediary under the: Investment Intermediaries Act 1995 (IIA); European Union (Insurance Distribution) Regulations 2018 (IDR); European Union (Consumer Mortgage Credit Agreements) Regulations 2016 (CMCAR) and Consumer Credit Act 1995 (CCA). EUROPEAN ESMA updates Benchmarks Register ESMA has published a list of EU benchmark administrators and third country benchmarks. The Register provides a list of all administrators located in the Union authorised or registered pursuant to Article 34 of the Benchmarks Regulation (Regulation (EU) 2016/1011 of 8 June 2016), administrators located outside the Union that comply with the conditions laid down in Article 30(1) of the Regulation, administrators located outside the Union that acquired recognition in accordance with Article 32 of the Regulation and administrators located outside the Union which provide benchmarks that are endorsed in accordance with Article 33. The Register provides a list of all benchmarks provided by administrators located outside the Union that comply with the conditions laid down in point (c) of Article 30(1) of the Benchmarks Regulation (Regulation (EU) 2016/1011 of 8 June 2016), all benchmarks provided by administrators located outside the Union that acquired recognition in accordance with Article 32 of the Regulation and which may be used in the Union and benchmarks that are endorsed in accordance with the procedure laid down in Article 33 of the Regulation. ISDA publishes Benchmarks Supplement ISDA has published the ISDA Benchmarks Supplement, which gives firms the ability to improve the contractual robustness of derivatives that reference interest rate, FX, equity and commodities benchmarks. The ISDA Benchmarks Supplement was developed in response to the European Union Benchmarks Regulation (BMR). By incorporating the ISDA Benchmarks Supplement into the terms of their interest rate, FX, equity and commodity derivatives, market participants will be able to ensure these events are taken into account in their contracts and specify the fall-back arrangements that would apply. The ISDA Benchmarks Supplement covers a much broader range of benchmarks than ISDA s work to implement robust fall-backs to specific rates for certain interbank offered rates (IBORs). The IBOR fall-backs will take precedence for specified IBORs once implemented, but the ISDA Benchmarks Supplement will continue to provide an additional layer of protection with respect to index cessation in the event an IBOR fall-back fails. The European Banking Authority (EBA) publishes update to Single Rulebook Q&A - Directive 2015/2366/EU (PSD2) 3/6
The EBA has published an update to Article 97 of the Single Rulebook Q&A of the Second Payment Services Directive (PSD2) on the application of the exemption for transactions to trusted beneficiaries to face-to-face transactions. The question posed was whether the exemption for transactions to trusted beneficiaries ( white-listing ) set out in Article 13 of Regulation (EU) 2018/389 apply to face-to-face transactions. The EBA confirmed that Article 13 of the Commission Delegated Regulation (EU) 2018/389 does not limit the application of the exemption to remote transactions only (by contrast for instance with the transaction risk analysis exemption under Article 18 of the Delegated Regulation). Accordingly, the exemption could apply to non-remote transactions provided this is technically feasible to do so. ESMA updates its Q&A's regarding the Benchmark Regulation The ESMA has updated its Q&A's on the Benchmarks Regulation (BMR). The updated BMR Q&As provide new clarifications regarding when the written plan to be produced by users of benchmarks should be considered robust and how such plans should be reflected in the contractual relationship with clients, the reference to systematic internaliser in the definition of financial instruments and when banks issuing certificates classify as users of benchmarks. The Q&A also includes clarification on why NAV of investment funds should be considered input data and not benchmarks, the application for endorsement of family of benchmarks and the language of benchmark statements. Michel Barnier issues statement following his meeting with Dominic Raab, UK Secretary of State for Exiting the EU Michel Bernier issues a statement following his meeting with Dominic Raab in relation to the UK leaving the EU. They discussed internal security, and noted that the UK will become a third country, outside of Schengen. In keeping with Council guidelines, the partnership will consist of four pillars: the effective exchange of information, the support for law enforcement cooperation, judicial cooperation in criminal matters and a partnership to combat money laundering and terrorism financing. The UK's recent White paper was discussed as it contained positive guarantees on the protection of fundamental rights and the recognition of the European Court of Justice as the ultimate arbiter of EU law. Also discussed was building an effective relationship between the EU and the UK on several subjects, including a framework for extradition mechanisms, reciprocal cooperation on airplane passenger data to better identify individuals involved in terrorist acts, the exchange of DNA data, fingerprints and vehicle data. Yves Mersch delivers Speech titled "Strengthening the European financial industry amid disruptive global challenges" Yves outlined that Europe s financial industry still faces a number of challenges, such as high levels of legacy assets and the burden of stricter regulation as a result of the financial crisis. It was noted that the way to protect the integrity of European payment services is not by closing them off to the world, but by making them global players. Yves proffered that if the EU is to succeed at a global level, the issue of domestic governance needs to be addressed and European card schemes should make interoperability and full pan- European reach their main priorities, enabling any card to be used at any terminal. 4/6
Governance arrangements need to cater for European needs, given that cards are the single most important electronic payment instrument in Europe. European payment systems should be used by pan-european providers to offer innovative, safe and userfriendly solutions for the benefit of people across Europe and all over the world. European Parliament (EP) issues new rules to tackle terrorism and criminal financing EP has issued new rules pertaining to tackling terrorism and criminal financing which await Council approval. The new laws will make it harder for criminals to finance their activities, by closing the loopholes in the current money laundering rules. The new rules introduce EU-wide definitions of money laundering-related crimes, EU-wide minimum penalties and new additional sanctions. The new rules extend the definition of cash to include prepaid electronic cash cards. Under certain conditions, authorities will have the right to follow the movements of cash below the 10,000 threshold and detain it temporarily if there are indications of criminal activity. Member states will have 24 months from the date of entry into force of the criminalisation of money laundering directive to bring the new rules into force. The rules on cash controls will apply 30 months from the date into force of the regulation. European Supervisory Authorities (ESAs) Joint Committee releases new risk report outlining the return of volatility The European Union s securities, banking and insurance sectors continue to face a range of risks, the latest report on risks and vulnerabilities in the EU financial system by the Joint Committee of the ESAs shows. The autumn 2018 ESA report highlights some risks as potential sources of instability: abrupt yield increases could generate substantive asset price volatility and lead to losses across asset classes; repricing of risk premia and potentially increasing interest rates could affect financial institutions and may bring with them a risk of contagion between different sectors and uncertainties around the terms of the UK's withdrawal from the EU. The ESAs advise that further stress testing should be conducted across all sectors, continued attention should be paid to the risk appetite of all market participants and the planning of appropriate action to prepare for Brexit. Jean-Claude Juncker, President of the European Commission, delivers State of the Union address Jean-Claude Juncker, President of the European Commission, delivered his fourth State of the Union address on 12 September 2018. The address focussed on the progress of the Commission's ten priorities, progress in the economic situation, better regulation and the policy implementation report. In relation to the ten priorities President Juncker advised that the EU's economy is performing well with growth at its 10 year peak and vowed to prioritise investment for the purpose of job creation. The importance of a connected digital single market was outlined and the reform of the Economic and Monetary Union to preserve the stability of the single currency and to enhance the convergence of economic, fiscal land labour market policies between the Member States that share the single currency were also outlined. Communication from the Commission on strengthening the Union framework for 5/6
prudential and anti-money laundering supervision for financial institutions The Commission issued a communication to the European Parliament, the European Council, the Council, the ECB and the Economic and Social Committee with regards to strengthening the Union framework for AML supervision for financial institutions. Several recent cases of in European banks have given rise to concerns that gaps remain in the Union s supervisory framework. In particular, there is no clear articulation between the prudential and AML rules for financial institutions. The current framework involves different authorities across jurisdictions, with different supervisory tasks, powers and responsibilities. The Fifth Anti-Money Laundering Directive (5AMLD) will remove obstacles to cooperation between AML and prudential supervisors. It was noted that tackling financial crime needs proper implementation of the new rules and stronger coordination between the different authorities. European Parliament issues draft report on relationships between the EU and third countries concerning financial services regulation and supervision The draft report issued advises that the EU should promote global financial regulatory reforms aimed at reducing systemic risk and should work towards an open, integrated and resilient financial system that supports sustainable economic growth, job creation and investment. The report also underlines the importance of the EU s role in global standardsetting as a means of working towards international consistency in financial regulation, maximising financial stability, preventing regulatory loopholes between jurisdictions and developing an efficient international financial system. The report calls for active involvement from the Commission, the Member States and ESAs in global standard-setting bodies in financial services; it stresses the need for the consistent implementation of international standards in order to achieve better regulatory cooperation with other jurisdictions. Steven Maijoor delivers keynote speech titled "New technologies within and beyond capital markets" Steven Maijoor, Chair of the ESMA, delivered the key note speech on how technology is transforming capital markets at the AFME/Euromoney Global Innovation Institute conference in Paris. Steven discussed the developments such as automated advice pioneered by FinTech firms which is already having an impact on the way investment funds are distributed to clients. A benefit of automated advice is financial inclusion in the investment fund sector and it can help widen access to investment funds and provide low cost professional advice at lower entry minimums to EU households. Steven also advised how AI powered investment and trade execution strategies are being used by portfolio managers to detect subtle patterns in data to help predict price movements. It was noted that Regulators face a balancing act in understanding and responding to the risks that new technologies may introduce while not wanting to stifle innovation. Date published: 10 October 2018 6/6