EMEA Centre for Regulatory Strategy in Financial Services UK
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In April, the Joint Committee of the European Supervisory Authorities (ESAs) published their advice to the European Commission on the strengthening of EU cyber and IT security regulation in the financial sector.
These recommendations are an early signal of what we believe will be increased activity by EU financial authorities on cyber risk from 2020 onwards. Going beyond cyber risk, they show an interesting convergence of thinking with UK authorities in recognising that all forms of IT operational disruptions increasingly threaten the stability of the financial sector. The recommendations also note that the emergence of various approaches to cyber and technology risk across countries in the EU could benefit from added facilitation, harmonisation and cooperation. While a number of regulatory challenges could arise from a strengthened EU approach to cyber risk in the financial sector, greater alignment between countries in addressing this risk area should be welcome news for cross-border financial services firms.
EMIR Refit, also referred to as EMIR 2.1, was signed off in the European Parliament plenary on 18 April, paving the way for it to enter into force, potentially as soon as this month.
Refit makes some targeted revisions to the clearing, risk mitigation, reporting and trade repository rules in the European Market Infrastructure Regulation (EMIR). It should not be confused with EMIR 2.2, which makes revisions to EMIR CCP supervision rules and was also signed off at the European Parliament plenary. While some of the Refit revisions aim to make rules simpler and more proportionate, others in effect are likely to increase the regulatory burden already faced by firms. How significant the impact of these modifications is likely to be will depend on a firm’s derivatives trading model, as well as other factors, such as whether it transacts with non-financial counterparties (NFCs), is a clearing member, or has EU-established Alternative Investment Funds (AIFs) in the group.
This blog provides an overview of some of the key requirements in Refit and the potential impact they will have on firms. Please see here for a more comprehensive look at the EMIR Refit changes.
Despite the uncertainty that still surrounds the final date and terms on which the UK will leave the EU, many firms are already looking ahead to how they might optimise their post-Brexit business. Future EU market access, and the associated equivalence regimes, will be a fundamental consideration in this.
The FCA highlights the importance of firm culture and customer vulnerability as part of its debt management thematic review
The first review found that the quality of debt advice received by consumers was often “very poor” and that “firms were treating customers unfairly.” These poor practices led the FCA to include the debt management sector as a priority area as part of its 2017/18 Business Plan.
This blog explores the main findings from the most recent review and sets out the wider lessons that can be drawn both for debt management firms and the consumer credit sector more generally.
On 16 April, the European Parliament formally ratified the EU’s Risk Reduction Measures (RRM) package on bank capital and liquidity, clearing the way for the finalisation of one of the most significant pieces of EU-level banking regulation in years.
This has been more than two-and-a-half years in the making, with a long period of difficult political negotiations following the RRM’s proposal by the European Commission in November 2016. The RRM is a combination of the EU’s fifth Capital Requirements Directive (CRD5), the second Capital Requirements Regulation (CRR2), and the second Bank Recovery and Resolution Directive (BRRD2).
EIOPA embraces the latest trends in European conduct regulation on value for money, firm culture and customer vulnerability
The European Insurance and Occupational Pensions Authority (EIOPA) recently published a framework to help EU national supervisors (also known as National Competent Authorities – NCAs) assess conduct risks throughout the lifecycle of insurance products. The framework is designed to foster supervisory convergence amongst EU supervisors, and to “provide input to the types of risks EIOPA and NCAs should focus on.”
Importantly, EIOPA has highlighted conduct themes that have been of growing importance and visibility across EU markets. These include the need for supervisors to assess firms’ culture; the importance of value for money as one of the key outcomes firms must deliver to consumers; and the need to protect more vulnerable groups of customers. Some of these conduct themes are already being pursued, to varying degrees, across the EU. However, EIOPA’s framework shows that they are also gathering momentum at a pan European level, and that EIOPA will, as part of its convergence remit, increasingly push for these issues to be scrutinised by supervisors across the EU.
Retail holdings of bail-in-able debt have caused concern for a number of years for supervisors and resolution authorities. From the perspective of supervisors, conduct risks arise from the fact retail investors may not fully understand the risks involved.Partly because of this, and because of high volumes, resolution authorities are concerned that retail holdings of bail-in-able debt have created impediments to resolution.
The Single Resolution Board (SRB) has re-affirmed its opinion that large retail holdings of bail-in-able debt create impediments to resolvability – flagging the potential franchise damage to the restructured bank and the risk that litigation (e.g. for mis-selling) offsets the capital benefit of bail-in. To these impediments could be added the practical difficulty of bailing in a large number of individual investors, and the added political scrutiny it would bring.
The FCA has recently published the final findings of its review of the motor finance sector. The review found that the way some commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale1. The FCA has started work to assess the options for policy interventions - including banning certain commission models - to address the potential harm it found.
The FCA is also not satisfied that firms are meeting regulatory requirements around customer communications and affordability assessments. It plans to follow up its concerns through supervisory work with individual firms.
This blog summarises the key findings of the FCA’s review and sets out the implications for firms, recognising that, whilst the findings and potential remedies of the FCA’s review are targeted at motor finance lenders and brokers, they raise issues of potential relevance to commission models, customer communications and creditworthiness assessments across the consumer credit sector.
- a consultation aimed at improving outcomes in the drawdown market including the introduction of ‘investment pathways’ to help non-advised consumers choose the best way to invest their money; and
- final rules and guidance aimed at improving the information consumers receive in the lead-up to, and after, accessing their pension savings.