EMEA Centre for Regulatory Strategy in Financial Services UK
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With the end of the final authorisation landing slots looming in early 2016, the majority of firms in the consumer credit market will have now submitted their applications for Financial Conduct Authority (FCA) authorisation.
But what comes next?
Affordability of credit and the way firms assess this is a key focus area for the Financial Conduct Authority (FCA). The FCA is using the authorisation process as a means of gathering information on the affordability assessment processes used by firms. It is likely to use this information to determine whether or not further rules or guidance are required in this area. This blog explores the insights that we have gained from both our client work and our interactions with the FCA. So what have we learnt and how should the affordability assessment rules be applied in practice?
On Monday, ESMA published its final draft technical standards detailing the MiFID II / MiFIR rules for firms caught by the Directive and Regulation. The technical standards (28 in total) were consulted on in three papers (in May 2014, December 2014 and February 2015), and since then have been widely debated and long-awaited by the industry. In the revised standards, ESMA has made a number of substantial changes, particularly regarding the liquidity assessment for non-equity instruments, best execution and algorithmic trading. However, further clarification is still pending across a number of areas, such as the use of dealing commissions, costs and charges, and thresholds for defining systematic internalisers (SIs), which will be set out in the Delegated Acts to be released later this year.
The FCA issued a loud wake-up call to the market in its recent thematic review of firms’ oversight and controls in relation to financial benchmarks.1 Although the FCA identified some positive changes, it found that none of the firms it had reviewed between August 2014 and June 2015 (12 in total) had “fully implemented changes across all benchmark activities” and that all firms still have work to do.
In September 2015 the EU Commission is expected to bring forward a legislative proposal in on ‘high-quality’ securitisation as part of the Capital Markets Union. The Commission suggests it may be possible to incentivise the issuance of high quality securitisation through a differentiated capital charge relative to standard securitisation. This in turn could re-invigorate the European securitisation market.
HM Treasury, the Bank of England and the Financial Conduct Authority have delivered the final report on the Fair and Effective Markets Review (FEMR), a broad and comprehensive analysis of the fixed income, currency and commodities (FICC) markets. The review seeks to identify the root causes of the recent misconduct and other sources of perceived unfairness in FICC markets, evaluate the impact of regulatory reforms, and make recommendations to fill the remaining gaps.
When it comes to talking about the new Senior Managers Regime (SMR) for banks, both Andrew Bailey and Martin Wheatley have taken to referring to Agatha Christie’s “Murder on the Orient Express”, characterising the SMR as putting an end to the “safety in numbers” defence. Fans of the novel and film will recall that 12 people enter the victim’s darkened train compartment and take it in turns to stab him. As Poirot observes “They themselves would never know which blow actually killed him”. This may strike readers as rather an extreme example. More prosaically, however, the regulators want to remove ambiguity - for perfectly understandable reasons - and to be able to hold individual Senior Managers to account when things go wrong on their watch. It should always be clear “whodunnit”.
The start of May marked six months of operation for the Single Supervisory Mechanism (SSM), the new framework for banking supervision in the Eurozone. The largest banks in the SSM have had their first taste of ECB-led supervision. The learning curve for them - and for supervisors at the ECB and national authorities - has been steep. And just as banks grapple with the task of responding to the new regime, the ECB has started tackling its supervisory priorities for 2015.
Regulators are placing increasing emphasis on the management of conduct risk within financial services firms. Central to this is the right management information (MI). The importance of MI is also set to increase in the UK under the Senior Managers Regime (SMR) and Senior Insurance Managers Regime (SIMR), where strong conduct risk MI will help Senior Managers to demonstrate that they have taken reasonable steps to understand conduct risks and that they have put in place appropriate controls.
The Bank of England has published details of its 2015 stress testing exercise for the largest UK banks and building societies, its second concurrent exercise (the first was in 2014).