The post The Coronavirus (COVID-19) Pandemic: A Summary of FCA Guidance & Regulatory Developments in the EU’s Investment Services and Capital Markets Sectors first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
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The FCA guidance on responding to the Coronavirus (COVID-19) pandemic is summarised below.
The FCA does not require firms to have a single senior manager responsible for their Coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face. There are existing responsibilities specified in the Senior Managers Regime (SMR), for example SMF24 for operational resilience and SMF2 for financial resilience.
The FCA emphasises that firms should pay particular attention to its statement on Key Workers in Financial Services of 20 March 2020 and recommends that the SMF1 (or another most relevant member of the senior management team), should be responsible for the firm’s approach to their key workers.
The FCA is reviewing its work plans so that it can delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. This will allow firms to focus on supporting their customers during this difficult period.
The FCA has delayed several regulatory initiatives and also scaled back its programme of routine business interactions, so that it will only contact firms on business-critical requests and responses to the current situation.
It will continue with a small number of regulatory changes which support consumers, particularly the most vulnerable, or where major long-term programmes would be disrupted.
The FCA rules already provide flexibility to firms in several areas and the FCA expect this flexibility to be used to support consumers, bearing in mind each consumers’ individual circumstances.
The FCA stated it welcomes firms taking initiatives and going beyond usual business practices to support their customers, especially relating to access to cash. When doing so, firms should notify the FCA so that it can consider the impacts and offer support as appropriate.
The FCA still expects firms to deal with complaints promptly. However, where the pandemic prevents this firms should contact the FCA. The FCA has reminded firms that they should aim to resolve any complaint within 8 weeks (15 days for payments firms). If they cannot, they should write to the customer explaining why they have not met the deadline.
On 19 March 2020, the FCA published an update on expectations for general insurance firms during the pandemic. This sets out the expectations on insurers, brokers and others involved in the service supply chain.
The FCA supports firms making consumers aware of the scope of their cover and what exemptions there may be. Consumers should also be able to find this information on firms’ websites in a clear, concise way and have access to call centres.
The FCA also expects firms to make clear any time period restrictions when consumers take out a new policy, for example if a policy will not pay out from 12 or 18 months of taking out a new policy.
On 20 March 2020, the FCA published new guidance for mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. Mortgages represent many consumers’ major financial commitment. FCA is encouraging and facilitating the granting of flexibility on mortgage payments as a way of protecting consumers.
The FCA has stated its rules give firms the flexibility to act in the best interests of the customer. The FCA welcomes the steps firms have taken to offer support to customers and to encourage them to contact their bank or lender if they are experiencing financial difficulties.
The FCA wants firms to show greater flexibility to customers in persistent credit card debt. The FCA has indicated that the normal procedure for dealing with low repayments of persistent debt should be relaxed and consumers should be given until 1 October 2020 to respond to firm’s communications regarding resolution. This means that firms would not be obliged by to suspend the cards of non-responders before then.
The FCA is working with the Bank of England and the Payment Systems Regulator to understand problems consumers may have accessing cash, and ensure the UK learns the lessons from other countries’ experience of Coronavirus.
UK banks have taken steps to help ensure consumers have access to cash, including the raising of cash machine withdrawal limits and the raising of the limit for contactless card payments.
Firms should continue to help vulnerable consumers access their banking services – online or over the phone. Firms should also remind consumers to be aware of fraud and protect their personal data.
The FCA stated it expects all firms to have contingency plans to deal with major events and that the plans have been tested. The Bank of England, Prudential Regulatory Authority and the FCA are actively reviewing the contingency plans of a wide range of firms. This will focus on assessment of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to ensure continuation of service to customers.
The FCA expects all firms to have read, taken account of and acted upon the issues raised in its Consultation Paper on Operational Resilience (CP19-32) issued in December 2019. The Consultation Paper can be downloaded from the following link – https://www.fca.org.uk/publication/consultation/cp19-32.pdf.
The FCA has indicated that firms must consider the broader control environment as they relocate people and functions to new locations/sites or work from home.
Where normally required to do so, firms should continue to record calls, where possible. They should make the FCA aware if they are unable to meet these requirements. Firms are required to consider what steps they could take to mitigate such outstanding risks if they are unable to comply with their obligations to record voice communications.
Firms may experience difficulties in submitting their regulatory data, in which case the FCA expect them to maintain appropriate records during this period and submit the data as soon as possible.
Firms should continue to take all steps to prevent market abuse risks. This could include enhanced monitoring, or retrospective reviews.
The FCA is supportive of the recent ESMA statement regarding upcoming changes to the tick size regime for certain firms, required by the EU Investment Firms Regulation. The FCA will not prioritise supervision of the new requirements at this time. It expects firms to focus on minimising the potential for operational disruption.
Guidance issued by the FCA can be accessed or downloaded from the following link: https://www.fca.org.uk/coronavirus
The FCA has decided to extend the closure dates for the following published consultation papers and calls for input until 1 October 2020.
| Delayed consultation papers | Date |
| CP20/4: Quarterly Consultation No 27 | 1 October 2020 |
| CP19/32: Building operational resilience: Impact tolerances for important business services | 1 October 2020 |
| CP20/1: Introducing a Single Easy Access Rate for cash savings | 1 October 2020 |
| CP20/3: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations | 1 October 2020 |
| CP20/5: Consultation paper on ETF Listing: Premium to Standard Listing | 1 October 2020 |
| Delayed calls for input | Date |
| Open Finance | 1 October 2020 |
| Accessing and using wholesale data | 1 October 2020 |
The FCA has decided to delay the following publications due before end June. The FCA will provide updates at an appropriate point.
| Other delayed publications | Date |
| Joint PRA-FCA work with the Climate Financial Risk Forum (CFRF) to develop industry led guidance on how to integrate climate related risks into business decision making across the financial services sector | TBC |
| Motor Finance Policy Statement | TBC |
| Consultation Paper on mortgage switching | TBC |
| Vulnerability Guidance and Vulnerability Research | TBC |
| Options to change our regulatory framework following Duty of Care Feedback Statement | TBC |
| Consumer Credit Act (CCA) review | TBC |
| Credit Information Market Study – Interim Report | TBC |
| GI Pricing Final report and Consultation Paper on remedies | TBC |
Ever since the escalation of the COVID-19 outbreak in Europe, the status quo in the EU’s investment services sector and capital markets has dramatically changed. New developments emerge on an almost daily basis, while the industry is experiencing a major turmoil. Below we summarise the most important EU regulatory developments that have occurred in response to this pandemic in March.
Extreme adverse circumstances that constitute a serious threat to market confidence and financial stability have prompted a number of national competent authorities in the EU to ban net short positions for any shares or debt instruments listed on Trading Venues for which they are the designated regulator. Such bans were issued by the competent authorities of Austria, Belgium, France, Greece, Italy and Spain.
The net short position prohibits both short selling and any transaction that creates or relates to a financial instrument, and the effect or one of the effects of that transaction is to confer a financial advantage on the natural or legal person in the event of a decrease in the price or value of another financial instrument (meaning, among others, options, CFDs, spread bets). The ban applies irrespective of whether the transactions occur on Exchange or OTC. The only entities exempted from the net short position ban are authorised primary dealers and market makers who have applied for the exemption afforded under Article 17 of the Short Selling Regulation.
ESMA has also issued a decision temporarily requiring the holders of net short positions in shares traded on an EU regulated market to notify their relevant competent authorities if the net short position reaches or exceeds 0.1% of the issued share capital after the entry into force of said decision. ESMA considers that lowering the reporting threshold is a precautionary action, taken so that the relevant authorities can carefully monitor market developments following the coronavirus fallout.
In an effort to mitigate COVID-19’s impact, ESMA issued a public statement clarifying that it expects competent authorities not to prioritise their supervisory actions towards entities subject to Securities Finance Transactions (SFT) reporting obligations from 13 April 2020 to 13 July 2020. Moreover, ESMA has clarified in an updated public statement that SFTs concluded between 13 April 2020 and 13 July 2020 and SFTs subject to backloading under SFTR are also not to be prioritised as part of the competent authorities’ supervisory actions.
ESMA issued a public statement clarifying that, considering the exceptional circumstances created by the COVID-19 outbreak, some scenarios may emerge where the recording of relevant conversations required by MiFID II may not be practicable. If firms, under these exceptional scenarios, are unable to record voice communications, ESMA expects them to consider the alternative steps they could take to mitigate the risks related to the lack of recordings.
Firms are expected to deploy all possible efforts to ensure that the above measures remain temporary and that the recording of telephone conversations is restored as soon as possible.
ESMA issued a public statement to promote the consistent application of IFRS in the EU and avoid divergence in practice on the application of IFRS 9 given the COVID-19 outbreak. The statement addresses the accounting implications of the measures taken or proposed by the national governments and EU bodies (for example, the moratoria on the repayment of loans) to address the adverse systemic economic impact of COVID-19.
In its statement, ESMA provides guidance to issuers and auditors, specifically regarding the calculation of expected credit losses and related disclosure requirements.
The EBA has also issued a related statement on the prudential framework and accounting implications of COVID-19. The two statements are consistent as with regards to financial reporting.
In light of the difficulties encountered by issuers in preparing financial reports and the challenges faced by auditors in carrying out timely audits of accounts due to the COVID-19 pandemic, ESMA issued a public statement recommending that national competent authorities apply forbearance powers towards issuers who need to delay the publication of financial reports beyond the statutory deadline. At the same time, the statement underlines that issuers should keep their investors informed of the expected publication delay and that the requirements under the Market Abuse Regulation still apply.
ESMA also highlighted that financial reporting is an important anchor for the economic decisions of users of financial information, as well as for exercising their rights to vote or otherwise influence management actions. The preparation of periodic information must continue to be carried out in accordance with the applicable financial reporting framework to ensure investor protection and to preserve the integrity and proper functioning of the EU’s financial markets.
The EBA announced that it has decided to postpone the EU-wide stress test to 2021 as a way of alleviating the immediate operational burden for banks during this challenging juncture. The final timeline for the EU-wide stress test will be communicated by the EBA in due course.
In another recent public statement, ESMA urged financial market participants to apply their contingency plans, including the deployment of business continuity measures, to ensure operational continuity in line with the regulatory obligations.
Similarly, several national competent authorities urged their regulated entities to do the same, alongside reviewing their business continuity and disaster recovery systems and making the necessary amendments based on each entity’s size, complexity and nature of business.
ESMA has announced that it has decided to extend by four weeks the response date for all ongoing consultations with a closing date on or after 16 March.
The COVID-19 outbreak significantly impacted the activities of all market stakeholders, pushing them to reprioritise their efforts to address the crisis. To mitigate the impact of COVID-19, several national regulators have extended, where possible, several local reporting deadlines and other obligations. In an effort to limit the spread of the virus, some national regulators have announced working from home plans as well as suspended relevant activities such as examinations and training courses.
Furthermore, regulators are alarmed over COVID-19’s effect on the industry and are constantly gathering data across the market to understand and assess the extent of its impact with the aim of taking appropriate actions where necessary.
In another recent public statement, ESMA acknowledges the difficulties encountered by execution venues and firms in preparing the general best execution reports required under RTS 27 and 28 of MiFID II. In this respect, ESMA recommends that national competent authorities take into account these circumstances by considering the possibility that:
Furthermore, ESMA encourages national competent authorities not to prioritise supervisory action against execution venues and firms in respect of the deadlines of the general best execution reports for the periods referred to above.
The application date of the new tick-size regime for systematic internalisers under the Markets in Financial Instruments Regulation (MiFIR) and the Investment Firms Regulation (IFR) was set at 26 March 2020. In response to developments related to the COVID-19 pandemic, ESMA issued a public statement clarifying that it expects competent authorities not to prioritise their supervisory actions in relation to the new tick-size regime until 26 June 2020, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.
Our team of experts can offer you the following services:
Complyport is a regulatory compliance consulting firm supporting the UK financial services industry for around 20 years. They specialise in providing Governance, Risk and Compliance services to firms in the financial services industry in the UK and overseas. Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. They have successfully assisted over 300 firms to become authorised with the FCA and have been providing regulatory support to over 500 regulated firms on an ongoing basis at a Group level. With presence in the UK, EU and Hong Kong, Complyport can assist firms across multiple jurisdictions.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers. The team assists firms on issues relating to corporate governance, risk management, business controls, compliance and business improvement. They conduct audits and reviews of a firm’s products, processes, policies and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Complyport offers full support with financial reporting, capital adequacy assessments and compliance training as well as a suite of online RegTech applications to enable a firm to demonstrate continued compliance with the regulatory obligations.
For more information on our services, please visit our website at 185.183.35.69/~complyport or contact our team at +44 20 7399 4980 or via email at info@complyport.co.uk.
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]]>The post Are you ready for the reporting obligations under SFTR? first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The Regulation captures:
The types of firms to be affected by SFTR include; UCITS, AIFs, Pension Funds, Central counterparties (“CCPs”), Central Securities Depositories (“CSDs”), Insurance, Reinsurance, Banks, Investment Firms and Non-Financial Counterparties.
Where the SFT counterparty is a UCITS or AIF, the reporting obligation applies to the management company or AIFM as opposed to the fund itself.
Broadly speaking, an SFT is any transaction where securities are used to borrow cash, or vice versa.
SFTs provide market participants with the opportunity to access secured funding through the temporary exchange of their collateralised assets as a guarantee. Lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions (reverse repo) and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps are some typical examples of SFTs.
In each of the cases above, ownership of the securities temporarily changes in return for cash.
At the end of an SFT, the ownership reverts, with both counterparties being left in their original position. This will also be plus or minus a small fee (depending on the purpose of the transaction).
In this respect, SFTs act in a similar way to collateralised loans.
The SFTR introduces, among others: a) a transaction reporting obligation in respect of securities financing transactions; b) an obligation to make prescribed pre-contractual disclosures to UCITS and AIF investors in respect of SFTs and total return swaps in the UCITS/AIF prospectus and annual return, and; c) provisions for minimum transparency requirements relating to the “re-use” of collateral (financial instruments only) under financial collateral agreements.
The SFTR requires both financial and non-financial market participants to report details of their SFTs to an approved EU Trade Repository (“TR”). This is in addition to any requirement to report transactions that occur under the European Market Infrastructure Regulation (“EMIR”) and MiFID/MiFIR and is part of a general move to increase transparency in the capital markets.
In order to align reporting standards to the maximum extent possible, the European Securities and Markets Authority has developed its reporting standards for SFTs building on its experience with EMIR and other EU-wide reporting regimes.
Transactions that must be reported under SFTR include, repurchase transactions, securities or commodities lending and borrowing, buy-sell back and sell-buy back transactions, margin lending transactions, collateral swaps, liquidity swaps, modifications, collateral updates and valuations, margin valuations for CCP-cleared transactions, collateral reuse and margin lending funding sources and transaction terminations and positions for CCP-cleared SFTs, if opting to report modifications and collateral updates at the position-level.
Broadly speaking, the SFTR applies to all EU financial and non-financial counterparties, including all branches irrespective of their location, as well as the EU branches of non-EU entities.
The SFTR overall represents another significant challenge for firms engaged in SFTs, however some of the key issues that will be faced include:
There are 155 reportable fields, although the XML currently has 170-180 fields depending on the type of SFT and the XML structure is complex. Firms need to ensure for reporting purposes that they have populated all the necessary fields correctly. If one single validation rule fails, then the entire report fails.
In addition, the LEI of the issuer is mandatory for firms within the EU, or where it is an EU security.
Coupled with the above, the timeframe of T+1 is incredibly short to obtain all the data required in order to make a valid report. The validation rules are strict and have proven hard to meet. This is then compounded by the fact that as noted above, if a single validation rule fails, then the whole report fails, and the firm is likely to breach the T+1 requirement.
Whilst there is no explicit requirement in the Regulations to reconcile, there is the obligation to ensure accurate and complete reports are made, which implies that the data must be reconciled somewhere/somehow. The main issue here is that the only place that will have access to all the data likely to be needed to reconcile correctly, will be the TRs.
Firms should look to select a TR or a third-party agent that best suits their reporting needs in terms of cost and operational efficiency. Another challenge is to analyse the SFTR’s requirements and produce an action plan for compliance based on their business and/or operations. In terms of reporting, firms should also produce sample reports based on the nature of the transactions they carry out. Once a firm fully understands the requirements and drafts its report templates, it has to develop systems to automate report generation while ensuring consistency and accuracy. This process requires careful organisation and coordination between the dealers, compliance and IT personnel.
Complying with the regulatory obligations introduced by SFTR is costly, both in terms of labour and capital. Careful planning and regulatory expertise are required to meet the challenge of analysing the SFTR’s obligations and developing the technical means and infrastructure to cope with the requirements. Furthermore, reporting to TRs entails out-of-pocket costs, and the reporting and reconciliation process has the potential to take a substantial amount of time if not automated.
Furthermore, firms should consider their internal resources and, where required, hire appropriate additional resources or utilise the services of an experienced external consultant to assist with relevant tasks. A suitable compliance advisor should be able to bridge the gap between law and practice, identify and find solutions to problems, and help affected firms dealing with shortages in resources to comply with SFTR.
In today’s financial services sector, businesses are largely driven and impacted by developments in the regulatory landscape. Financial institutions are under heightened scrutiny, and there is a need to invest significantly in compliance to protect organisations from reputational damage and costly penalties.
Given the above, there is very little time left for firms to ensure they are going to be compliant with SFTR, and firms should ensure that any areas of uncertainty are covered off in good time.
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]]>The post SFTR – Transparency Requirements for UCITS and AIFs first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Of Relevance to:
UCITS Management Companies and AIFMs
Although the principal requirement under the Securities Financing Transactions Regulation (2015/2365) (“SFTR”) is the obligation on counterparties to securities financing transactions (“SFT”) to report details of any concluded SFTs to a trade repository, it also brought transparency requirements – see Regulatory Roundup 72 for further information on the SFTR as a whole, including on the reuse of collateral.
A SFT is defined in Article 3(11) of the SFTR as:
By virtue of recital 7 of the SFTR, the definition of a SFT does not include derivative contracts as defined in EMIR, but does include transactions that are commonly referred to as liquidity swaps and collateral swaps which do not fall under the definition of derivative contracts under EMIR.
The transparency obligations for UCITS Management Companies and AIFMs arise under Article 13 (periodical reports) and Article 14 (pre-contractual documentation – UCITS prospectus and AIFMs disclosures to investors).
The transparency obligations under Article 13 applied from 13 January 2017 (see Regulatory Roundup 84).
As mentioned in the above Regulatory Roundup, the transparency obligations under Article 14 will apply from 13 July 2017.
Note that transparency obligations under Article 13 and Article 14 concern both the use of SFTs and total return swaps.
The requirements are copied out into the Handbook as follows (transitional provisions in place ensure that the requirements do not take effect until 13 July 2017):
There is no obligation to include information on the above in pre-sale documentation where SFTs or total return swaps are not used (see COLL 4.2.5A(4) or COLL 8.3.4A(4) or FUND 3.2.4A(3) as relevant).
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]]>The post UCITS and AIFs: Transparency Requirements first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>A reminder to UCITS management companies and AIFMs that certain transparency obligations arising under the Securities Financing Transactions Regulation (“SFTR” – 2015/2365) apply from 13 January 2017 – see Regulatory Roundup 76.
A SFT is defined as:
a margin lending transaction.
The effect is that affected firms will need to include in their periodic reports (half-yearly and annual for UCITS and annual for AIFs) the information as set out in section A of the Annex to the SFTR, although this is copied out in the Handbook as to:
The above obligations arise from Article 13 of the SFTR which extends transparency to the use of SFTs and to total return swaps.
For the record, Article 14 requires transparency in pre-contractual documentation (content based upon section B of the Annex to the SFTR) although this does not come into force until 13 July 2017 for those funds constituted before 12 January 2016. Interested firms can find these requirements in the Handbook now as to:
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]]>The post Securities Financing Transactions Regulation: Disclosure Obligation first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Firms concluding Securities Financing Transactions
A reminder that, as advised in Regulatory Roundup 72, the ‘risks and consequences’ disclosure obligation arising under the Securities Financing Transactions Regulation (2015/2365) (“SFTR”) applies from 13 July 2016.
A Securities Financing Transaction (SFT) is defined as per Article 3(11) of the SFTR as:
For the avoidance of doubt, recital 7 informs us that the definition of a SFT does not include derivative contracts that are reportable under EMIR (648/2012).
The ‘risks and consequences’ obligation refers to Article 15 of the SFTR on the reuse of financial instruments received under a collateral agreement.
Any right of counterparties to reuse financial instruments, as defined in Section C of Annex I of Directive 2014/65 (‘MiFID II’), must be subject to at least the following conditions:
Any exercise by counterparties of their right to reuse must only be undertaken in accordance with the arrangement referred to in the second bullet above and the financial instruments involved must be transferred from the account of the providing counterparty.
The ‘reuse’ obligation applies to
See Article 15 for further details.
The SFTR is concerned with the reporting and transparency of SFTs and the above is simply one of the provisions coming into force shortly – see Regulatory Roundup 72 for an overview of the SFTR as a whole.
The requirement applies from 13 July 2016, including for collateral arrangements existing on that date (Article 33(2)(d)).
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]]>The post UCITS V and Securities Financing Transactions Regulation: Changes to the Handbook first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The FCA has published Consultation Paper CP16/14 – “UCITS V Level 2 Regulation, SFTR and consequential changes to the Handbook”.
In basic terms the consultation can be broken down in to two specific areas: UCITS V Level 2 Regulation and Securities Financing Transactions Regulation (“SFTR”).
Whilst UCITS V had to be implemented by 18 March 2016, the Level 2 Regulation (2016/438) does not apply until 13 October 2016, being 6 months after it came into force – see Regulatory Roundup 73 (pdf).
Although largely aimed at those firms that are acting as a trustee or depositary of a UCITS, the management companies of UCITS will also have a general interest in the Regulation e.g. the contract for the appointment of a depositary, liability for loss of a financial instrument held in custody etc. as well as areas directly relevant to them such as Article 22 and the need for a management company to have in place a decision-making process for choosing and appointing the depositary.
Being a Regulation it is, of course, directly binding on all firms. However the FCA has taken the opportunity to propose amendments to certain areas of the Handbook (COLL and CASS) to ensure consistency with the Level 2 measures as well as a clarification in SYSC 19E on when a remuneration committee will be required.
The changes can be found in Appendix 1 of CP16/14.
Although the reporting obligations under the SFTR are a good year or two away, certain transparency requirements arising under the SFTR that impact upon both UCITS management companies and AIFMs will apply from next year.
For a general overview of the Securities Financing Transactions Regulation, including what falls under the definition of “securities financing transactions”, key dates, transparency etc. please see e.g. Regulatory Roundups 72 and 74.
Once again, as a Regulation, the SFTR is directly applicable to firms and does not require transposition by Member States. However CP16/14 introduces certain changes to the Handbook (COLL and FUND) to help firms comply with these new transparency requirements. Note that although the required disclosures in the annual report (and also in the half-yearly report in the case of a UCITS) will apply from 13 January 2017, those relating to the pre-contractual documentation/prospectus will apply from 13 July 2017 (or with immediate effect for those funds constituted after 12 January 2016).
The changes being consulted on can be found in Appendix 2 of CP16/14. It will be seen that the FCA will bring the changes relating to pre-contractual disclosure into force later this year, but subject to transitional provisions expiring on 12 July 2017.
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