Financial Services Regulatory Update – January 2020 Round Up

Central Bank – Consumer and Investor Protection Priorities for 2020

Derville Rowland, Director General, Financial Conduct delivered a speech outlining the Central Bank of Ireland’s (“Central Bank”) priorities in the areas of consumer and investor protection on 15 January 2020 (here). These included the following:

Consumer Protection – the Central Bank will continue to focus on behaviour and culture in the retail banking sector. It will complete Consumer Protection Risk Assessments on product oversight and governance at some of the main retail banks and require banks to take action to address any high-risk practices identified.  The Central Bank will also examine price differentiation in the motor and home insurance markets and publish an interim report on its findings at the end of the year.

The Central Back will monitor compliance with regulatory requirements regarding the treatment of borrowers in mortgage arrears and take follow-up supervisory action as required. Firms applying for authorisation under the Credit Servicing Act 2018 will be challenged regarding their plans for the fair treatment of borrowers in arrears.  The Central Bank will also begin the process of substantially reviewing the Consumer Protection Code to ensure that it reflects the changing financial services landscape.

Investor Protection and Market Integrity – the Central Bank is working on developing a more systematic risk-based approach to supervising funds and wholesale securities markets. It is also scoping a thematic review that will build on the findings of its first year of deployment of the Central Bank’s new approach to wholesale market conduct supervision.

For funds, the Central Bank will target a number of topics, including:

• concluding its review of how the sector is implementing its rules and guidance related to fund management company effectiveness;
• working with fellow regulators and ESMA to complete a common supervisory action on liquidity management in UCITS; and
• commencing a review of UCITS’ use of securities lending.

The Central Bank will also conduct a deep dive on property funds to assess the resilience of this form of market-based finance.

Money Laundering and Terrorist Financing – the Central Bank will focus on transaction monitoring, including the IT systems utilised for transaction monitoring by higher risk firms, and on the design and operation of money laundering and terrorist financing risk assessments by firms. The Central Bank will also focus on a number of specific sectors, namely Schedule 2 firms and virtual asset service providers.  It plans to subject virtual asset service providers to enhanced supervision in 2020.

Dividend Distribution

On 21 January 2020, the ECB published a recommendation on dividend distribution policies, which relates to credit institutions paying dividends in 2020 for the 2019 financial year (here).

ESMA’s Key Priorities for 2020-2022

On 9 January 2020, ESMA published its strategic orientation for 2020 – 2022 (here). The strategic orientation sets out ESMA’s future focus and objectives and reflects its newly expanded powers and responsibilities.

European Commission 2020 Work Programme

On 29 January 2020, the European Commission published its 2020 Work Programme (here).

New initiatives include:

• an action plan on fintech including a strategy on an integrated EU payments market;
• a proposal on crypto assets;
• cross-sectoral financial services act on operational and cyber resilience;
• an action plan on the Capital Markets Union to be published in Q3 2020;
• a review of MiFID II and MiFIR, including the establishment of an EU consolidated tape;
• a review of the Benchmark Regulation;
• an action plan on money laundering to be published in Q1 2020; and
• review of the Capital Requirements legislation.

REFIT initiatives (the Commission’s regulatory fitness and performance programme) include:

• publication of a report from the Commission to the European Parliament and the Council on the application of  the eIDAS Regulation 910/2014 by 1 July 2020;
• evaluation of the ‘SME’ definition in the Commission Recommendation concerning the definition of micro, small and medium sized enterprises (2003/361/EC); and
• Commission proposals to review Directive 2002/65/EC on the distance marketing of consumer financial services and Directive 2008/48/EC on credit agreements for consumers.

EMIR

On 21 January 2020, the Central Bank published the first edition of the EMIR Q&A (here). The Q&A updates and replaces the Frequently Asked Questions webpage on EMIR. In particular, Q&A ID 1009 (NFCs – what is the clearing threshold?) has been updated in light of the EMIR Refit Regulation.

Investment Funds

The Central Bank has published the twenty-eighth edition of the Central Bank UCITS Q&A (here). The updated Q&A includes a new Q&A ID 1094, relating to investment by UCITS in Contracts for Difference (“CFDs”), Collateralised Loan Obligations (“CLOs”), Contingent Convertible Securities (“CoCos”) and binary options.

It sets out the Central Bank’s approach where a UCITS proposes to invest in CFDs, CLOs, CoCos or binary options and how that UCITS may be subject to enhanced scrutiny at the authorisation phase with a view to ensuring that the proposal is appropriate taking into account the overall portfolio of assets proposed for the UCITS.

The Central Bank has also relaxed its requirements regarding index confirmations in the context of both pre and post authorisation processes in circumstances where a UCITS proposes to use, or is using, a financial index (see our briefing here).

On 30 January 2020, ESMA, together with the national competent authorities, launched a Common Supervisory Action on the supervision of UCITS’ managers liquidity risk management across the EU, which will be conducted during 2020 (here).

Prospectus

Amendments to Part 23 of the Companies Act 2014 relating to prospectus law were signed into law on 10 December 2019 by way of the Finance (Tax Appeals and Prospectus Regulation) Act 2019 (here). The amendments to Companies Act 2014:

• amend and align the definitions in the Companies Act 2014 with the new Prospectus Regulation;
• extend the existing threshold for the application of the Prospectus Regulation from €5,000,000 to €8,000,000;
• extend the limited liability for the summary to the EU Growth Prospectus; and
• make amendments to the local offer regime regarding the required warnings to be included in the local offer document.

The amendments have applied since 18 December 2019.

The European Union (Prospectus) Regulations 2019 have also been amended in order to align the threshold for local offers under the Prospectus Regulation with the new €8,000,000 threshold in the Companies Act 2014. These amendments were made by the European Union (Prospectus) (Amendment) Regulations 2019 (here).

Securities Financing Transactions Regulation

On 6 January 2020, ESMA published a Final Report and Guidelines on reporting under the Securities Financing Transactions Regulation (“SFTR”) (here).

The Guidelines aim to clarify a number of provisions of SFTR and to provide practical guidance on the implementation of some of those provisions.  The Guidelines have applied since 7 January 2020. While ESMA's Final Report on its Guidelines contains an explicit statement that non-EU Alternative Investment Funds ("AIFs") with Alternative Investment Fund Managers authorised or registered in accordance with Directive 2011/61 are subject to the SFTR reporting obligation, the European Commission subsequently confirmed in response to a letter from the Alternative Investment Management Association, that such AIFs are not in fact subject to that reporting obligation. 

Separately, ESMA published a statement providing clarification on the expectations regarding reporting of LEI for issuers of securities used in SFTs, as well as the relevant supervisory actions to be carried out by authorities. It has also updated the SFTR validation rules. The validation rules and statement are available at the above link.

Securities Market Conduct Risk

On 21 January 2020, the Central Bank published a Dear CEO letter on securities market conduct risk (here). The letter provides an overview of the key findings from the Central Bank’s 2019 market conduct supervisory work and sets out areas where regulated entities should improve their organisational arrangements for managing market conduct risk. The letter also outlines areas of Central Bank supervisory focus in 2020.

Firms are requested to bring the letter to the attention of their Board at the next meeting. Regulated entities should review the expectations set out in the Appendix and address misalignments with their internal frameworks and practices. Issuers should focus on the relevant concerns regarding failure to identify market abuse risk.

Consultations/Discussion Papers Published

EBA - Consultation on draft regulatory technical standards on the treatment of non-trading book positions subject to foreign-exchange risk or commodity risk (here).  The closing date is 10 April 2020.

EBA – Consultation on future changes to the EU-wide banking sector stress test (here).  The closing date is 30 April 2020.

ECB – Consultation on draft ECB guideline on the exercise of the discretion under Article 178(2)(d) of Regulation 575/2013 by national competent authorities in relation to less significant institutions with regard to the threshold for assessing the materiality of credit obligations past due (here).  The closing date is 17 February 2020.

ESMA - Consultation on draft guidelines on securitisation repository data completeness and consistency thresholds (here).  The closing date is 16 March 2020.

ESMA - Consultation on draft technical standards on the provision of investment services and activities in the EU by third-country firms under the new framework introduced by the new Investment Firms Regulation 2019/2033 and Directive 2019/2034 (here). The closing date is 31 March 2020.

You may also be interested in...

McCann FitzGerald regularly publishes briefings on topics relevant to financial services regulation, which you may find interesting, including:

• Compliance, Corporate Investigations and White Collar Crime – 2019 in Review (here)
• Pending Reform of Consumer Insurance Contracts (here)
• The A-Z of Regulatory Deadlines for Irish Funds and Fund Service Providers in 2020 (here)
• Investment Management – 2019 Regulatory Round Up (here)
• Knowledge Network - Legislation of 2019 and Anticipated Developments of 2020 (here)