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Issue No. 19

Regulatory Insights

Our quarterly overview of key legislative and regulatory developments in the

European Union

3 FOREWORD

8 EUROPE

9 Risk Reduction Measures (RRM) Package

10 Investment Firms Review (IFR)

11 Sustainable Finance

13 ESAs Review

15 EBA Outsourcing Guidelines

16 European Market Infrastructure Regulation (EMIR) – CCP Supervision

17 ESMA Statement on the Clearing Obligation

18 ESMA No-Deal Brexit Preparations

20 Equivalence

21 CCP Recovery and Resolution

22 ESMA Consultation Paper on Liquidity Stress Testing

23 ESMA Stress Testing Exercise

24 The European Insurance and Occupational Pensions Authority (EIOPA) Stress Testing

25 Supervisory Review and Evaluation Process (SREP) 2018

26 Packaged Retail and Insurance-based Investment Products (PRIIPs)

27 Solvency II

28 EUROPEAN REGULATORY TIMELINE

30 GERMANY

31 Brexit Tax Accompanying Act

32 IRELAND

33 Brexit-related Notices of Intention

34 Bond Connect – Central Bank update to UCITS and AIFMD Q&A

35 Statutory Instrument 16 of 2019: Anti-Money Laundering – Beneficial Ownership of Trusts

36 Statutory Instrument No. 110 of 2019 – European Union (Anti-Money Laundering:

Beneficial Ownership of Corporate Entities) Regulations 2019

38 ITALY

39 Italian Individual Investment Plans (PIR) and the European Long-Term

Investment Funds (ELTIFs)

40 LUXEMBOURG

41 Register of Beneficial Owners

42 CSSF Circular on Cloud Computing

CONTENTS

1

44 UNITED KINGDOM

45 Investment Platforms Market Study

46 Senior Managers and Certification Regime

47 Retail Binary Options

48 UK Regulators’ 2019/2020 Business Plans

50 Pensions Governance

51 PRA Policy Statement on Managing Risks from Climate Change

52 General Insurance Distribution Chain

53 Credit Risk Mitigation

55 ABBREVIATIONS

2 REGULATORY INSIGHTS NO. 19

Welcome to the latest edition of State Street’s Regulatory Insights, our quarterly overview of notable legislative and regulatory developments in financial services in the European Union (EU).

The second quarter of the year didn’t disappoint in terms of political and legislative developments, with the end of the legislative term and the EU elections, as well as Brexit, being the primary drivers.

At the end of May, citizens of the 28 EU Member States, including the United Kingdom (UK), were asked to vote for a new European Parliament. This forms part of the wider EU institutional changes ahead of the next five-year legislative term, which also involves the appointment of a new European Commission, a new President of the Council (representing Member States), and a new President of the European Central Bank. Overall, voter turnout in the EU elections was relatively high, and the key outcomes are as follows:

• Significant losses for the tradi tional centre-right and centre-left parties, which resulted in the loss of their combined majority in the European Parliament

• The so-called Eurosceptic and populist parties increased their share of the vote, although the predicted surge didn’t quite occur, and “pro-EU” parties continue to hold a majority

• The Green and Liberal groups also gained greater support and will therefore play a more prominent role in the legislative-making process in order for there to be any majority in the more fragmented European Parliament

FOREWORD

3

Following intense discussion, EU leaders nominated German Defence Minister Ursula von der Leyen as the next president of the European Commission. Her nomination is now up for deliberation by the European Parliament, who will have the opportunity to reject it on 16 July. However, if elected, she will then need to allocate the College of Commissioners portfolios to candidates put forward by Member States.

Turning back to the European Parliament, David-Maria Sassoli from the Italian centre-left Democratic Party was elected as the new President, along with 14 Vice-Presidents, for the first half of the next 5 year term. In addition, the Economic and Monetary Affairs Committee (ECON) – the main committee responsible for financial services legislation – has had a major shake-up, with a number of highly influential members not returning. However, this will give certain high-profile national candidates an opportunity to participate in ECON, drawing upon their economic/financial background. The official composition of ECON will be announced in July. At the European Central Bank, Christine Lagarde, Managing Director and Chairwoman of the International Monetary Fund, was put forward by EU leaders to be the new President.

As expected, the EU election results in the UK attracted special attention. Continued political drama and uncertainty led to the UK unexpectedly taking part in the elections. This was because the then UK Prime Minister, Theresa May, had been preoccupied with attempts to secure support in the House of Commons for the initial Brexit deal negotiated with the EU. Failure to do so meant that the UK requested an extension of the Article 50 negotiation period, initially moving the Brexit deadline to 12 April 2019.


This was quickly retracted with another request for a lengthier extension – until 31 October 2019 – in addition to holding EU elections in the UK so as to avoid a “no deal” Brexit outcome. It was this sequence of events that sealed May’s fate, that is, the announcement of her planned resig-nation as prime minister by 7 June 2019. The Conservative Party is now in the process of identifying her successor by the end of July 2019, which leaves limited time to solve the Brexit conundrum ahead of the 31 October deadline.

The UK’s EU election results reinforce the ongoing political divide within the country, even if both the Leave and the Remain parties are claiming victory. In reality, the Brexit Party became the largest single party with 32% of the vote, taking the votes from UKIP and the Conservative Party; however, the combined votes secured for all pro-EU parties that advocate a second referendum (the Liberal Democrats, Greens, Change UK and nationalist parties) totalled 41% of the vote. Both the Labour and the Conservative parties suffered extreme losses, given Labour lost half of its seats while the Conservatives retained only 4 of 19 former seats. It will be interesting to see how the Conservative Party’s election results will influence the positions of the various leadership candidates over the coming weeks.

5

Uncertainty around Brexit will therefore continue and, with all options remaining firmly on the table, preparations for all possible scenarios continue on both sides. One issue of special concern is the lack of a clear solution around the Share Trading Obligation under the Markets in Financial Instruments Directive II. Since the European Commission has declined calls from industry to grant at least temporary equivalence to UK trading venues, the European Securities and Markets Authority (ESMA) has to develop ways to mitigate the issue. Despite further calibration of the scope, the issue has not been fully addressed and full equivalence for UK venues is still the preferable and more workable solution, for which industry is arguing.

On the legislative front, the ending term of the European Parliament has resulted in the finalisation of a large number of significant financial services files. These include the Investment Firms Review (IFR), the review of the European Supervisory Authorities (ESAs review), amendments to the European Markets Infrastructure Regulation (EMIR REFIT and EMIR II.2), the Risk Reduction Measures (RRM) package, as well as proposals in relation to sustainable finance (benchmarks and disclosures). On a number of these files, some helpful changes to the proposed rules have been achieved, most notably with regards to the topic of delegation within the ESAs review, the third-country regime under the IFR, the Intermediate Parent Undertaking requirement for large non-EU banks and new moratorium tools for resolution authorities in the RRM package. The relevant ESAs will soon start work on more detailed imple menting technical standards.


Other developments on the more technical side include publication of revised European Banking Authority guidelines on outsourcing arrangements applicable to credit institutions and certain investment firms, joint-ESA draft technical standards on the Packaged Retail and Insurance-based Investment Products (PRIIPs), and an ESMA consultation on liquidity stress testing. Implementation work on key files such as the revised Shareholder Rights Directive, the Securities Financing Trans actions Regulation and the Central Securities Depositary Regulation is ongoing, with key compliance dates fast approaching.

So what should we expect from the upcoming quarter? Unsurprisingly, Brexit and the rapidly evolving UK political situation will continue to dominate the European political landscape. It will be interesting to see which personnel choices are made at the European level, particularly the final composition of the European Parliament and its various committees. These decisions will fundamentally influence and drive the legislative and regulatory agenda for the next five years. Although it’s clear that there are already certain regulatory priorities lined up for the next term: the next stage of the Capital Markets Union, Sustainable Finance, and Anti-Money Laundering, to name just a few. So things will certainly remain interesting.

7

EUROPE


On 7 June, the RRM package was published in the EU Official Journal, introducing a number of important changes to existing prudential and resolution requirements.

The RRM package was originally proposed by the European Commission in November 2016 and has been negotiated separately by policymakers since then. The package amends the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) IV, the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation. These revisions implement outstanding international reforms established by the Basel Committee on Banking Standards (BCBS) and the Financial Stability Board (FSB).

Amongst other things, the package specifically covers the following topics:

• A requirement for non-EU banking entities to establish an Intermediate Parent Undertaking (IPU) in the EU

• The fundamental review of the trading book (FRTB), revising market risk rules

• A binding 3% leverage ratio and a surcharge for the largest banks, calibrated at 50%

• The Net Stable Funding Ratio (NSFR) to encourage long-term funding

• Total Loss Absorbing Requirements (TLAC)/Minimum Requirements for own funds and Eligible Liabilities (MREL) to ensure banks have sufficient capacity on their balance sheet to absorb losses

• Moratorium powers for competent authorities to suspend the payment and delivery obligations of a troubled bank for up to two business days

Negotiations between the EU Institutions were strained from the outset, given the politically sensitive nature of certain files as well as external uncertainties in relation to international requirements. Trilogue negotiations were expedited earlier this year to ensure the package was finalised by March, ahead of the European elections in May. The RRM package was published in the EU Official Journal on 7 June and entered into force 20 days later. While the majority of capital rules contained in the CRR become applicable on 28 June 2021, certain provisions relating to TLAC/MREL became applicable from the point of entry into force.

RISK REDUCTION MEASURES (RRM) PACKAGE

9

The EU co-legislators have formally endorsed the political agreement on the IFR, establishing a dedicated prudential framework for EU investment firms.

The political agreement on the IFR proposal was reached by the Romanian Presidency and the European Parliament’s negotiating team on 26 February, following a concerted effort by both to resolve the remaining outstanding issues.

The IFR will effectively categorise firms based on the size and scope of their activities. The largest investment firms, often referred to as “Class One”, will remain subject to the framework established by the CRR/CRD IV for EU banks. The political agreement also introduces an additional category, whereby an investment firm with consolidated assets between €5 billion and €15 billion may be requested by its national competent authority to apply the CRR/CRD IV rules. In this regard, particular consideration will be given where the activities or service provided could present financial stability risks.

One of the most controversial areas of the proposal has been the equivalence regime. While the stringent proposals put forward by the European Parliament were not taken on board, such as the branch requirement when performing certain activities under the Markets in Financial Instruments Directive (MiFID), the existing regime has been strengthened. For example, third-country investment firms engaged in underwriting and/or dealing on their own account will be subject to additional monitoring and reporting requirements. Other notable provisions relate to remuneration and disclosure requirements.

The political agreement was endorsed by a plenary session of the European Parliament on 16 April 2019. It is expected to be published in the EU Official Journal in Q3 2019 and, depending on this date, the provisions are expected to apply from mid-2021.

INVESTMENT FIRMS REVIEW (IFR)

EUROPE


The EU progresses work on a unified classification system for economic sustainable activities. In addition, the EU finalises new rules in relation to sustainability benchmarks and enhanced disclosures.

The European Commission published the Sustainable Finance Action Plan setting out 10 legislative and non-legislative initiatives in March 2018. The first legislative proposals outlined in the Action Plan were released in May 2018. These cover an EU classification system, or taxonomy, to help investors identify what constitutes a sustainable invest-ment; enhanced disclosure requirements to clarify investor duties regarding sustainability; sustainable benchmarks; and incorporating environmental, social and governance (ESG) factors into financial advice.

Taxonomy

The Commission published a proposal for a framework in which sustainability taxonomy can be evolved, outlining six objectives to which economic activities have to contribute in order to be considered sustainable investments. It also establishes a platform with public-private representatives to advise on the underlying technical screening criteria.

The European Parliament finalised its position on this proposal in December 2018, while negotiations in the Council are still ongoing. Meanwhile, the Commission-established Technical Expert Group is continuing its work on the technical screening criteria, for which it will initially focus on climate change. A full taxonomy covering all aspects of ESG issues is not expected until 2024.

Disclosures

The legislative proposal on enhanced disclosure of sustainable investments and risks was agreed in April. It applies to all financial market participants and financial advisors, although there is greater proportionality envisaged for disclosures surrounding financial products/instruments that do not pursue an ESG objective. Amongst other things, the Regulation will introduce European definitions of a “sustainability risk”, which has been amended to focus specifically on the risk to financial returns, as well as a “sustainable investment”.

SUSTAINABLE FINANCE

11

The ESAs are now expected to draft Regulatory Technical Standards (RTS) on the content, methodologies, and presentation of information of these new disclosure requirements. The Regulation is expected to be published into EU law in Q3 2019.

Benchmarks

The legislative proposal on sustainable benchmarks was agreed in February and will make a number of amendments to the existing EU Benchmarks Regulation. It introduces two new benchmark categories, namely, an “EU climate transition benchmark” and an “EU Paris-aligned benchmark”.

Administrators of such benchmarks must explain how ESG factors are reflected in their investment strategy, as well as how the methodology aligns with the target of reducing carbon emissions. The amendments also extend the former transitional period “critical” and “third-country bench marks” by two years (to 31 December 2021). The amended Regulation is expected to be published into EU law in Q3 2019.

Detailed requirements will be further specified as part of Level 2 measures to support implementation of the sustainability disclosures and benchmarks initiatives.

EUROPE


On 21 March 2019, the Council and European Parliament reached a political agreement on the review of the European System of Financial Supervision, also known as the ESAs Review.

The European Supervisory Authorities’ (ESAs) Review was proposed by the European Commission in September 2017, with a view to improving the powers, governance and funding of the three ESAs as well as the functioning of the European Systemic Risk Board (ESRB). The objective was to encourage and facilitate more integrated financial supervision across the EU.

The political focus, both amongst Members of the European Parliament (MEPs) and Member States, was primarily on the governance and funding elements of the proposal. With regards to governance, the Commission’s original amendments, which would have effected significant changes to the ESAs’ decision-making process, were not taken on board.

However, the role of the independent Chairperson has been reinforced. Similarly, with regards to funding, the current system has been maintained, with contributions from the EU budget and from national competent authorities (NCAs). The Commission’s original proposal sought to reduce the contributions from the EU budget.

During negotiations, industry attention was primarily on enhanced powers for the ESAs. One of the key concerns, particularly for the asset management industry, was in relation to the proposed changes to delegation and outsourcing arrangements, which would have seen the European Supervisory Markets Authority (ESMA) given a more prominent role in the authorisation process. This was largely interpreted as a restriction of current market practice, which could potentially have resulted in higher costs and significant market uncertainty. However, this was not adopted by the co-legislators.

ESAs REVIEW

13

Other notable provisions include ESMA being designated as the competent authority for third-country and critical benchmarks. In addition, the product inter-vention powers of the ESAs have been strengthened. Furthermore, the ESAs may issue regulatory “no-action” letters, in exceptional circumstances and on a time-limited basis.

A relatively recent development in the ESAs Review is the enhanced role and powers granted to the EBA with regards to the supervision of anti-money laundering (AML). This has largely been in response to a number of recent and high-profile AML cases in the EU.

The European Parliament endorsed the political agreement in a plenary vote on 16 April 2019. The proposal is expected to be published in the Official Journal later in 2019, and the provisions are expected to apply from January 2020.

EUROPE


On 25 February, the EBA published revised guidelines on outsourcing arrangements, setting out specific provisions for governance frameworks regarding outsourcing arrangements, in addition to supervisory expectations and processes.

The new guidelines aim to ensure that financial institutions within the scope of the EBA’s mandate can apply a single framework on outsourcing for all their banking, investment and payment activities and services. The recommen-dation on outsourcing to cloud service providers, published in December 2017, has also been integrated into the guidelines. The revised guidelines clarify that the management body of each financial institution remains responsible for that institution and its activities. They also clarify which arrangements with third parties are to be considered as outsourcing and differentiate between requirements on critical outsourcing arrangements and other outsourcing arrangements.

NCAs are required to supervise financial institutions’ outsourcing arrangements, including identifying and monitoring risk concentrations at individual service providers and assessing whether such concentrations could pose a risk to the stability of the financial system. The guidelines enter into force on 30 September 2019.

There are some transitional periods for implementing a register of all outsourcing arrangements, agreeing cooperation agreements between competent authorities, reintegrating outsourced functions or moving them to other service providers if the requirements of the guidelines cannot be met.

EBA OUTSOURCING GUIDELINES

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On 13 March 2019, the co-legislators reached a political agreement on the so-called EMIR II.2 legislative proposal, which addresses the supervision of EU and third-country central counterparties (CCPs) operating in the EU.

The proposal introduces a number of changes to the EU’s current approach towards CCP supervision. The proposal also introduces amendments to the third-country framework, with firms being differentiated between “Tier 1” and “Tier 2” CCPs. Tier 1 CCPs are those deemed to be non-system-ically important, whereas Tier 2 CCPs will be designated as systemically important. As such, Tier 2 CCPs will be subject to additional and more stringent rules in order to continue to provide clearing services in the EU.

One of the most notable provisions under the revised third-country framework relates to the authori-sation and recognition process. The existing European Markets Infrastructure Regulation (EMIR) regime is enhanced such that the European Commission, following a fully reasoned recommendation from ESMA not to recognise the CCP, could determine that the CCP must establish itself in the EU in order to continue operating in the Union.

This is particularly controversial in the context of Brexit and the relative dominance of LCH in the clearing of euro-denominated contracts.

Other jurisdictions have also raised concerns over the final agreement, including in the US. Following the announcement of the agreement, Vice-President Valdis Dombrovskis of the European Commission and Chairman Christopher Giancarlo of the US Commodity and Futures Trading Commission (CFTC), which is the main supervisor of CCPs in the US, issued a joint statement over their commitment to work together as the proposal is implemented.

The European Parliament plenary endorsed the political agreement on 18 April 2019, with publication in the EU Official Journal expected towards the end of the year.

EUROPEAN MARKET INFRASTRUCTURE REGULATION (EMIR) – CCP SUPERVISION

EUROPE


On 28 March 2019, ESMA issued a statement regarding the application of the clearing obligation, following the finalisation of the EMIR REFIT proposal.

The EMIR REFIT proposal was agreed in February 2019 and, amongst other things, introduced a new approach to determine whether a financial counterparty (FC) and non-financial counter-party (NFC) would be subject to the clearing obligation.

Under the newly agreed frame-work, an FC or NFC may be subject to the clearing obligation where either of the following applies:

• Following calculation of their aggregate month-end average position for the previous 12 months, they exceed any of the relevant clearing thresholds (the previous clearing thresholds, as specified in a delegated regulation, still apply)

• They choose not to undertake the above calculation

Upon confirmation that an FC or NFC is subject to the clearing obligation, it must immediately notify ESMA.

The statement also clarifies the scope of the clearing obligation and its application, following the calculation of their respective positions. For an NFC, it will only be subject to the clearing obligation for the asset class in which its position exceeds the clearing threshold. For an FC, on the other hand, should it exceed the clearing threshold in relation to one asset class, it will be subject to the clearing obligation for all asset classes.

Finally, ESMA’s statement also clarifies the timing. As the EMIR REFIT does not specify an implementation period, the majority of provisions (including the revised clearing obligation) will apply upon the date of entry into force, which was 17 June 2019. ESMA has clarified that in light of this, counterparties should be in a position to notify ESMA and the relevant NCA whether they are subject to the clearing obligation on the day of entry into force.

ESMA STATEMENT ON THE CLEARING OBLIGATION

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ESMA outlined further elements of its preparation for a potential no-deal Brexit scenario, through the publication of temporary equivalence decisions for CCPs and central securities depositories (CSDs), and its statement clarifying the application of the share trading obligation (STO).

On 18 February 2019, ESMA clarified that in the event of the UK leaving the EU without a withdrawal agreement, it would recognise the three CCPs established in the UK, so that they would be able to continue to provide their services in the EU. The three CCPs in question are:

• LCH Limited

• ICE Clear Europe Limited

• LME Clear Limited

Then on 1 March 2019, ESMA stated that it would also recognise the UK CSD Euroclear in the event of a no-deal Brexit. The ESMA decision in both cases was to mitigate any potential market disruption and wider risks to financial stability.

Separately, on 19 March 2019, ESMA published a statement outlining the scope of the trading obligation in shares under the Markets in Financial Infrastructure Regulation (MiFIR) in the event of a no-deal Brexit scenario. Under the STO, investment firms are generally required to conclude transactions in shares admitted to trading on an EU trading venue, a systematic internaliser or a third-country trading venue that has been deemed to be equivalent. As such, shares within the scope of the EU STO would no longer be permitted to be concluded on UK trading venues. ESMA’s statement was accompanied by a list of shares subject to the EU STO, as specified by their International Securities Identification Number (ISIN). This included 14 UK-listed shares that are considered liquid in the EU, based on their trading volume on EU trading venues.

ESMA NO-DEAL BREXIT PREPARATIONS

EUROPE


However, in light of significant concerns raised by both the industry and policymakers, on 29 May 2019, ESMA issued an additional statement that further adjusted the scope of the STO. The new statement clarifies that the UK-listed shares are out of the scope of the EU STO. The move, which is intended to minimise market disruption, has largely been welcomed by the industry.

However, there remain outstanding concerns with regards to EU shares for which UK trading venues are the primary source of liquidity. Industry participants have flagged that this reduced access to UK trading venues, and thereby liquidity, could result in higher costs for clients and the inability to fulfil “best-execution” obligations towards clients.

19

The European Commission published a response to the European Parliament’s resolution on equivalence in financial services regulation and supervision.

The European Parliament’s resolution, which was non-binding, was prepared by the Irish MEP Brian Hayes and finalised in September 2018. At the time it was considered rather contro-versial amongst other MEPs, given the far-reaching nature of the recommendations contained within the resolution and the unambiguous link to the then-ongoing Brexit negotiations. However, these elements were revised during discussion between MEPs, and the resolution endorsed by the Parliament called for:

• The Commission to engage with the Parliament in a more transparent manner

• The Parliament to have an enhanced oversight role in relation to equivalence decisions

• Greater consistency in the granting of equivalence decisions

In its response, the European Commission effectively rejected calls to significantly reform the process around the granting of equivalence decisions. Similarly, while the European Commission recognises that certain proce-dural areas could be enhanced, it does not indicate any support for granting further scrutiny powers to the co-legislators.

EQUIVALENCE

EUROPE


On 27 March 2019, the European Parliament formally approved its position on the long-standing CCP recovery and resolution (CCP R&R) proposal.

The vote in the plenary session was an endorsement of the position of the European Parliament’s Economic and Monetary Affairs (ECON) Committee, which was agreed at the start of 2018. However, since then, there has been very little progress made on the side of the Council, effectively preventing the proposal from moving ahead to inter-institutional trilogues negotiations.

The CCP R&R proposal introduces a number of provisions intended to mitigate the risks associated with the potential failure of a CCP. One of the most controversial elements has been the specification of “variation margin gains haircutting” as a tool to be used by the resolution authority. Various parts of the industry have flagged the potential distortionary effects should such a tool be used, including the loss of market liquidity.

Given the status of the proposal in the Council, the plenary vote was largely symbolic, intended to prevent any reopening of the Parliament’s position and indicating their intent to begin trilogues as soon as possible. During the plenary session, the outgoing co-rapporteur, Kay Swinburne MEP, strongly encouraged the European Commission and Council to make the proposal a priority under the next legislative mandate.

CCP RECOVERY AND RESOLUTION

21

ESMA launched its consultation paper on the guidelines for liquidity stress testing (LST) in Undertakings Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs).

The consultation paper was part of ESMA’s response to the ESRB’s recommendations to address liquidity and leverage risk in investment funds, which were published in April 2018.

The consultation paper consists of 15 guidelines as well as more detailed explanatory considerations. It appears that ESMA has adopted a high-level and principles-based approach in developing the guidelines, which was largely welcomed be industry participants. With regards to scope, ESMA clarified that the guidelines would apply to UCITS, open-ended AIFs, leveraged closed-ended AIFs, and specifically to both exchange-traded funds (ETFs) and money market funds (MMFs). If adopted, inclusion of the latter could give rise to some confusion, given MMFs already have dedicated stress testing guidelines in place, as part of the EU MMF Regulation.

The consultation paper is the latest step in the increased regulatory focus on potential systemic risks in the asset management sector, from both European and international regulators, as well as both securities and prudential supervisors. The deadline for the consultation was 1 April 2019. ESMA is expected to publish a final report on LST in mid-2019.

ESMA CONSULTATION PAPER ON LIQUIDITY STRESS TESTING

EUROPE


On 3 April 2019, ESMA outlined the framework for its latest stress testing exercise of European CCPs, as required under the EMIR.

This is ESMA’s third stress testing exercise of CCPs in the EU, and will focus on assessing their resilience to stressed market conditions and identifying areas for improvement. The exercise will include the 16 CCPs that are authorised in the EU, and will include UK CCPs provided a “no-deal Brexit” scenario is avoided.

For its latest exercise, ESMA has enhanced its existing framework, which focused primarily on credit and liquidity risks, by also considering the impact of concen-tration risk. The exercise will also include analysis in relation to the interconnectedness of CCPs and potential secondary impacts on clearing members. ESMA intends to outline its findings in a final report, which is expected to be published in the first half of 2020.

ESMA STRESS TESTING EXERCISE

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On 2 April 2019, EIOPA launched its biennial stress test exercise for EU Institutions for Occupational Retirement Provision (IORPs).

The EIOPA stress testing exercise focuses on the resilience of the European occupational pension sector and identifying its main vulnerabilities within the broader economic landscape. The stress test will be carried out in the 19 euro-area Member States, with the addition of the UK, and will analyse both defined benefit and defined contribution retirement plans provided by IORPs.

The pension funds will undergo shocks on their portfolio’s assets in order to determine possible spill-over effects on the real economy when affected by adverse market conditions. The variables considered in the adverse scenario include, among others, sovereign bonds yield shocks for the euro-area countries, the United States, other developed countries, and emerging markets featuring maturities ranging from 1 to 20 years.

EIOPA had previously announced that the 2019 stress test will feature an evaluation of IORPs’ exposures towards ESG policies following publication of the EU Sustainable Finance Action Plan last year.

The deadline for the submission of data by IORPs to NCAs was 19 June, which will be followed by the validation of submissions by EIOPA by the end of September. After analysing the data, EIOPA will publish the stress test report in December.

THE EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY (EIOPA) STRESS TESTING

EUROPE


On 8 April, the European Central Bank (ECB) published the outcome of its 2018 SREP.

The purpose of the SREP is to promote a resilient banking system, as a prerequisite for a sustainable and sound financing of the real economy, by assessing the risk profiles of banks in the eurozone.

The results show that the overall SREP demand for common equity tier 1 (CET1) capital increased to 10.6% in 2018 from 10.1% in 2017, which was driven by the last step of the phase-in of the capital conservation buffer. The overall SREP demand excludes systemic buffers and countercyclical capital buffers. Most significant institutions already have capital levels above the CET1 levels and buffers required by the ECB and national authorities, respectively. The overall 2018 SREP outcome shows banks’ governance and risk management worsened from the previous SREP cycle, while the assessment of management of liquidity and funding risk management remained largely unchanged. As a result, the ECB notes that the risk management framework of a number of banks should continue to improve.

In addition to asking banks to hold certain amounts of capital, the ECB also imposed liquidity measures as part of the SREP, which may include improving the process of assessing their liquidity needs, their funding plans and/or intraday liquidity. Lastly, the ECB imposed qualitative measures on more than 80 banks, covering a wide range of weaknesses from internal governance and risk management to nonperforming loans and data quality.

SUPERVISORY REVIEW AND EVALUATION PROCESS (SREP) 2018

25

On 8 March 2019, the ESAs submitted draft Regulatory Technical Standards (RTS) to the European Commission regarding an amendment to the PRIIPs Key Information Document (KID) Delegated Regulation.

The intention of the RTS was to align timelines between the Delegated Regulation and the PRIIPs Level 1 text. This follows the extension of the exemption for UCITS from having to produce a PRIIPs KID, which was agreed by the co-legislators as part of the cross-border distribution of funds proposal earlier in 2019.

In the accompanying letter sent to the Director-General in DG FISMA, Olivier Guersent, the ESAs state that the RTS, and the expedited process under which they have been developed, were necessary to provide certainty to market participants when fulfilling their regulatory obligations.

PACKAGED RETAIL AND INSURANCE-BASED INVESTMENT PRODUCTS (PRIIPS)

EUROPE


On 11 April, EIOPA published a supervisory statement on the application of the proportionality principle in the supervision of the solvency capital requirement (SCR) standard formula under Solvency II.

EIOPA has identified some areas of potential divergence in the supervision of the calculation of immaterial SCR sub-modules. To encourage supervisory conver-gence and consistency, EIOPA has therefore provided additional guidance. An SCR sub-module should be considered immaterial if the amount is not relevant for the decision-making process of the undertaking or the supervisory authorities, while immaterial SCR sub-modules should be calculated using prudently estimated inputs.

Insurance undertakings, when calculating the SCR at an individual level, may adopt a propor-tionate approach to immaterial SCR sub-modules, provided that they can demonstrate certain facts to the satisfaction of the supervisory authority (such as stability of the sub-module pattern over the past three years and proper risk management processes). Furthermore, supervisory authorities must ensure risks are appropriately monitored, including the setting of early warning indicators.

Undertakings should also include information on their risk management systems in the Own Risk and Solvency Assessment Report and on the sub-modules in their regular supervisory reporting, as well as the Solvency and Financial Condition Report. Finally, supervisory authorities should agree with the approach followed by the undertaking, be kept informed of any material changes, and should make the undertaking aware of any concerns.

SOLVENCY II

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European Regulatory Timeline

2016 2017 2018 2019

2016 2017 2018 2019

Q2Q1 Q1 Q1 Q1Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q42020Q1 Q2 Q3 Q4


Publication in Official Journal



Application date for settlementinternalisation reporting

Application date for general provisions

Level 2 rules on settlement internalisation and CSD requirements

Level 2 rules on prudential requirements for CSDs

Level 2 rules on settlement discipline

Application date (extended)

Level 2 rules on facilitatingvoting rights

Application date(users)

Date by which fund prospectuseswill need to be updated

Publication of Level 1 textin the Official Journal

Deadline for specific technical standards to be submitted to the European Commission

Entry into force for reporting requirement rules

Application dateDelegated Acts and RTS published

Member Statetransposition date

Application date for new funds

Application date for existing funds

Application date for regulatory reporting requirements

Application date (administrators and contributors)

Application date for settlement discipline regime

Final Level 2 rules on the Key Information Document

Political agreement on Level 1 textreached (fast track elements)

Publication of fast trackelements in Official Journal

Political agreement onremaining elements reached

Estimated application date for phase-in of reporting requirements

Application date (intermediary requirements)

Application date for rules on reuse

Application date for transparency requirements

Discussion paper on draft Level 2 rules

Application date (transparency requirements)

Application date forTLAC requirements


ESMA Final Report on Level 2 measures published

Political agreement on Level 1 text reached

EMIR REFIT

MiFID II/MiFIR

MMFs

PRIIPs

SFTR

Risk Reduction Measures (RRM) Package

Shareholders Rights Directive

CSDR

Benchmarks

Completed milestones Future milestones Application date


2016 2017 2018 2019

2016 2017 2018 2019






Application date for settlementinternalisation reporting

Application date for general provisions

Level 2 rules on settlement internalisation and CSD requirements

Level 2 rules on prudential requirements for CSDs

Level 2 rules on settlement discipline

Application date (extended)

Level 2 rules on facilitatingvoting rights

Application date(users)

Date by which fund prospectuseswill need to be updated

Publication of Level 1 textin the Official Journal

Deadline for specific technical standards to be submitted to the European Commission

Entry into force for reporting requirement rules

Application dateDelegated Acts and RTS published

Member Statetransposition date

Application date for new funds

Application date for existing funds

Application date for regulatory reporting requirements

Application date (administrators and contributors)

Application date for settlement discipline regime

Final Level 2 rules on the Key Information Document

Political agreement on Level 1 textreached (fast track elements)

Publication of fast trackelements in Official Journal

Political agreement onremaining elements reached

Estimated application date for phase-in of reporting requirements

Application date (intermediary requirements)

Application date for rules on reuse

Application date for transparency requirements

Discussion paper on draft Level 2 rules

Application date (transparency requirements)

Application date forTLAC requirements


ESMA Final Report on Level 2 measures published

Political agreement on Level 1 text reached

EMIR REFIT

MiFID II/MiFIR

MMFs

PRIIPs

SFTR

Risk Reduction Measures (RRM) Package

Shareholders Rights Directive

CSDR

Benchmarks

Completed milestones Future milestones Application date

29

GERMANY


On 28 March 2019, the Brexit Tax Accompanying Act (Brexit-Steuerbegleitgesetz – Brexit-StBG) was published in the Federal Law Gazette. The Act entered into force on 29 March 2019.

For banks and financial service providers, the supervisory elements of the Act deal with the comprehensive termination or transfer of financial instruments contracts to institutions in addition to providing for the necessary licenses in the event that the UK has a disorderly withdrawal from the EU (i.e., a “no-deal” scenario).

Under the terms of the Act, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) may allow institutions currently located in the UK and conducting cross-border banking business or providing financial services in Germany to continue their activities in Germany, on the basis of the European passport for a transitional period.

Another newly inserted transitional provision ensures that BaFin may determine that trading venues established in the UK continue to be treated as trading venues in terms of the German Securities Trading Act. This means that German market participants would continue to be able to trade without restriction on these UK trading venues in the event of no-deal Brexit.

Furthermore, the Act provides that risk-takers of significant institutions whose annual fixed remuneration exceeds three times the contribution assessment threshold of the public pension scheme will be treated as executive employees under the terms of the German Employment Protection Act.

BREXIT TAX ACCOMPANYING ACT

31

IRELAND


During February and March, the Central Bank of Ireland (CBI) issued “Notices of Intention” in relation to a number of Brexit-related matters.

In the event that the UK leaves the EU without a withdrawal agreement, the CBI has advised that it will consider a number of matters. Firstly, CBI will take into consideration whether the UK is a country that continues to satisfy the residency requirements for fund management company directors, which make reference to the European Economic Area (EEA) or other such country as the CBI determines.

For the period while this is under consideration, the CBI does not propose adopting a default position that would treat the UK as not satisfying this requirement.

The CBI will also consider whether UK UCITS, which at that point will become non-EU AIFs, should be identified in CBI guidance as a category of investment fund in which UCITS and Retail Investor AIFs may invest.

For the period while this is under consideration, the CBI does not propose adopting a default position that would treat the UK AIFs as ineligible. Nevertheless, the CBI has said that in the case of UCITS, any investment in UK AIFs must fall within with the aggregate limit of 30% for investments in all AIFs. Such determination may be changed, including if circumstances change.

Finally, the CBI has said that it will assess whether UK invest-ment firms, currently authorised under MiFID, should be treated as a category of eligible financial derivative counterparty for UCITS and Retail Investors AIFs.

For the period while this is under consideration, the CBI does not propose adopting a default position that would treat UK investment firms as ineligible. Such determination may be changed, including if circumstances change.

BREXIT-RELATED NOTICES OF INTENTION

33

In April 2019, the CBI updated its UCITS and AIFMD Q&A document in relation to the acquisition of Chinese bonds.

The updated Q&As indicate that Irish UCITS and AIFs may be permitted to acquire Chinese bonds via Bond Connect subject to the following requirements:

• Before an Irish-authorised UCITS/AIF acquires such bonds, its depositary must ensure that the manner in which the bonds are held allows the depositary to meet its legal obligation under the UCITS/AIFM Regulations, the AIFMD Level 2 Regulation, and any conditions imposed by the CBI

• If an Irish-authorised UCITS/AIF proposes to acquire Chinese bonds through Bond Connect, the depository of the UCITS/AIF, or an entity within its custodial network (i.e., a subcustodian), must ensure it retains control over the bonds at all times

• It is incumbent on the depositary to review and keep under review the Bond Connect infra structure arrangements to ensure that its legal obligations can continue to be met

The CBI’s updates can be viewed in full at ID 1089 of the UCITS Q&A and ID 1130 of the AIFMD Q&A.

BOND CONNECT – CENTRAL BANK UPDATE TO UCITS AND AIFMD Q&A

IRELAND


On 31 January 2019, the Department of Finance released a regulation requiring trustees to set up and maintain registers of beneficial owners, in line with the requirements of the EU’s Anti-Money Laundering (AML) Directive. These regulations took effect from 1 February 2019.

The new regulation applies to express trusts whose trustees are resident in Ireland or which are otherwise administered in Ireland. From a funds industry perspective, the requirements apply to collective investment undertakings constituted as trusts and include the establishment of an internal register on which adequate, accurate and current information in respect of the beneficial owners (i.e., name, date of birth, nationality and residential address) of the trust must be maintained.

Among other things, the regulation provides for the register to be made available to the Revenue Commissioners, the CBI, the Department of Finance and other competent authorities, upon request. By March 2020, Ireland must have established a central State register of trust beneficial owners to which trustees will be required to report beneficial ownership information. The information on this central register will be shared, held and exchanged with other EU Member States.

STATUTORY INSTRUMENT 16 OF 2019: ANTI-MONEY LAUNDERING – BENEFICIAL OWNERSHIP OF TRUSTS

35

On 22 March 2019, the majority of provisions under the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2019 (the 2019 Regulations) came into force.

Part 3 of the Regulations, which relates to the new Central Register of Beneficial Ownership, became operative on 22 June 2019.

The existing regulations in this area, the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 (the 2016 Regulations), were revoked as of 22 March 2019 and replaced by the 2019 Regulations.

The purpose of the 2019 Regula-tions is to bring Ireland’s beneficial ownership regulations in line with the Fourth Money Laundering Directive (4MLD) as amended by the Fifth Money Laundering Directive (5MLD).

The 2019 Regulations introduce a number of additional provisions relating to topics such as:

• The collection of enhanced information on beneficial owners (including Personal Public Service numbers)

• Significantly increased penalties for noncompliance

• An obligation on corporates to furnish beneficial ownership information to “designated persons” when forming a business relationship or entering into an occasional transaction

STATUTORY INSTRUMENT NO. 110 OF 2019 – EUROPEAN UNION (ANTI-MONEY LAUNDERING: BENEFICIAL OWNERSHIP OF CORPORATE ENTITIES) REGULATIONS 2019

IRELAND


• The creation of a Central Register of Beneficial Ownership of Companies (by 22 June 2019) and the appointment of a Registrar

• The delivery by corporates of beneficial ownership inform-ation to the Registrar by 22 November 2019 (or within five months of incorporation, where applicable)

• Time periods for updating the Central Register to reflect changes to the beneficial ownership information

• Public access the Central Register

• Further obligations on desig-nated persons, including a requirement to consult the Central Register and report any discrepancies

37

ITALY


The Italian Tax Authority (ADE or Agenzia delle Entrate) has published a resolution on Long-Term Investment Funds (ELTIFs).

The new resolution clarifies whether an ELTIF can be deemed as a qualified investment for the purposes of the Italian individual investment plans for retail investors (PIR or Piani individuali di Risparmio), and how the starting date of the holding period must be identified.

The ELTIF is a new fund structure aimed at channeling capital towards long-term investments in the real economy, increasing levels of non-bank financing for unlisted and certain listed small and medium enterprises (SMEs). Investments include projects related to energy, transport and communication infrastructure, industrial and service facilities and social housing.

Firstly, the Agenzia underlines how ELTIFs and PIR have similar characteristics. For example, the former aims at addressing resources to unlisted companies and SMEs; the latter aims at channeling family savings towards businesses.

Consequently, the ADE has indicated that these funds could be considered as qualified investments for PIR purposes, provided that the related prospectus (or the offer documentation) indicates the limits, restrictions

and prohibitions established by the tax legislation in force.

As background, there are four set time frames in relation to the life of an ELTIF:

• The “subscription phase” (up to a maximum of six months)

• The “investment period” (up to a maximum of 24 months)

• The “management period” of five years plus a fraction of a year

• The “grace period” of one year during which investments are sold

The ADE states that in relation to the application of the PIR with -holding tax exemption regime for the subscribers of the units of a PIR compliant fund, the fund (whose shares are included in the PIR) must meet certain investment thresholds outlined in the PIR legislation in order to be considered applicable. It is therefore anticipated that such an exemption could not automatically apply at the point of subscription, but later during the management period of the life cycle of an ELTIF. This means that any income distributed prior to this time will not benefit from the PIR withholding tax exemption.

ITALIAN INDIVIDUAL INVESTMENT PLANS (PIR) AND THE EUROPEAN LONG-TERM INVESTMENT FUNDS (ELTIFS)

39

LUXEMBOURG


The Luxembourg Law of 13 January 2019 establishes the Luxembourg Register of Beneficial Owners (RBE or Registre des Bénéficiaires Effectifs), requiring all entities that are registered with the Luxembourg trade and companies register (RCS or Registre de Commerce et des Sociétés) – including investment funds – to disclose and regularly update information on their beneficial owners.

The information to be filed with the RBE regarding a beneficial owner includes the owner’s full name; nationality; date and place of birth; residence or business address; national identification number; and the nature and extent of the interests held. For companies listed on a regulated market in Luxembourg, the EEA or another country with obligations similar to those imposed by the EU transparency rules, more limited information may be acceptable, such as the company only needing to provide the name of the regulated market on which its shares are listed.

Certain information contained on the RBE should be made available to the public. However, the address and national identification number of beneficial owners may be accessed only by national authorities (e.g., the public prosecutor, Financial Intelligence Unit, tax authorities and the Commission de Surveillance du Secteur Financier (CSSF)).

Access to information regarding the beneficial owner(s) of an entity can be restricted to national authorities, credit institutions, financial institutions, bailiffs and notaries upon request from the entity or the beneficial owner(s) in certain circumstances.

Criminal fines between €1,250 and €1.25 million can be imposed on entities or beneficial owners that do not comply with their obligations under the new law. The Law took effect on 1 March 2019. Companies have until 1 September 2019 to be in compliance and provide their information on their beneficial owners to the RBE.

REGISTER OF BENEFICIAL OWNERS

41

On 27 March 2019, the CSSF published a new Circular (19/714), which updates Circular 17/654 on IT outsourcing relying on a cloud computing infrastructure.

The purpose of this circular is to make substantial amendments to Circular CSSF 17/654, called the “Cloud Circular”, in order to take into account the experience gained by the CSSF and the supervised entities through its application since its entry into force in May 2017.

This circular is applicable to all credit institutions and PFS (authorised under the Law of 5 April 1993 on the financial sector (LFS)), all payment insti-tutions and electronic money institutions (authorised under the Law of 10 November 2009 on payment services (LPS) and to all investment fund managers (subject to Circular CSSF 18/698).

The Circular makes the following key amendments to Circular CSSF 17/654:

• The addition of investment fund managers in the scope of application (in line with Circular CSSF 18/698)

• A reminder of the general principle of proportionality; in this context, introduction of optionality for some requirements for non-material activities only

• The introduction of a register to be maintained by the supervised entities that includes all the cloud computing outsourcing of material as well as non-material activities

• The cancellation of the necessity to notify the CSSF of a cloud computing outsourcing of non-material activities in favour of maintaining the register

• The replacement of the “compliance table” by more specific and pragmatic forms

• The rewording and/or reorganisation of some paragraphs for more clarity (minor changes)

CSSF CIRCULAR ON CLOUD COMPUTING

LUXEMBOURG


UNITED KINGDOM


On 14 March 2019, the UK Financial Conduct Authority (FCA) published the final report of its Investment Platforms Market Study (IPMS).

The IPMS was initiated by the FCA in 2017 to assess whether consumers were able to make informed decisions in relation to the choice of platform and the investment options presented on a given platform, as well assessing the degree of competition between platforms, to ensure value for consumers.

In its final report, the FCA observes that the market appears to be generally functioning well, with platforms appearing to facilitate informed decision-making by consumers and financial advisors, and there being apparent factors to suggest that platforms are competing to provide value to their consumers. However, the FCA also notes that the process for considering alternative platforms, and ultimately switching platforms, could be made less burdensome. Furthermore, the FCA notes that platforms should be able to negotiate with fund managers to secure discounts for funds made available on their platform, in order to further competition.

The final report also set out a number of remedies proposed by the FCA to address the issues identified in the IPMS – these changes could be brought about through ongoing monitoring, supervisory activity or through changes to the FCA Handbook. The FCA launched a consultation alongside the final report to get stakeholder feedback on remedies that would involve changes to their Handbook. This consultation paper also welcomed views on potential changes to exit fees, including their possible prohibition or the imposition of a cap. The deadline for responses to the consultation was 14 June 2019.

The FCA will review the progress made by industry in implementing the changes to the switching process by the end of year, and industry progress on broader observations over 2020.

INVESTMENT PLATFORMS MARKET STUDY

45

On 8 March 2019, the FCA published further guidance regarding the senior managers and certification regime (SM&CR), ahead of its extension to all FCA-regulated firms later in the year.

The SM&CR establishes a new general personal code of conduct and intends to increase the accountability of senior management. The FCA’s guidance relates to the statement of responsibilities and the respon-sibilities map, which are both requirements under the SM&CR regime. The guidance incorporates feedback the FCA received on its consultation on the draft guidance, which closed in December 2018.

The SM&CR will apply to firms authorised under the UK Financial Services and Markets Act (FSMA) 2000 from December 2019.

SENIOR MANAGERS AND CERTIFICATION REGIME

UNITED KINGDOM


On 29 March 2019, the FCA published a Policy Statement confirming the permanent prohibition on the sale, marketing and distribution of binary options to retail consumers.

The Policy Statement outlines the final position of the FCA, following the consultation process initiated in December 2018, and sets out the changes to the Handbook to effect this position. The FCA’s concerns with binary options relate to evidence of harm to consumers, as a result of their “inherent risks”, and the conduct of firms that are engaged in their sale. The FCA’s position came into force on 2 April 2019.

In the wider EU, ESMA currently has a temporary prohibition on the sale of binary options, which is in effect until 2 July 2019. However, the FCA prohibition goes further with regards the products within scope.

RETAIL BINARY OPTIONS

47

On 15 April 2019, the Prudential Regulation Authority (PRA) published its business plan for 2019/2020. This was followed by the publication of the FCA’s business plan, on 17 April 2019, setting out its priorities for the coming year.

The PRA’s business plan outlines the work plan and actions it will take to achieve its strategic goals over the next 12 months, in order to achieve its overall strategy. The business plan identifies eight strategic goals for 2019/2020, which include:

• Robust prudential standards and supervision

• Financial resilience

• Operational resilience

• Recovery and resolution

• EU withdrawal

With regards to Brexit, the PRA notes the importance of super-visory cooperation with EU regulators. While the PRA has established the relevant memoranda of understanding with key counterparts, the priority will be to now “operationalise” these agreements.

In addition, the PRA will contribute to the UK government’s ongoing work on the future of the financial services sector, including the future EU-UK relationship and the UK’s future approach to third countries.

Regarding the FCA, the business plan splits its priorities both across sectors and within individual sectors. In terms of cross-sector priorities, the FCA also highlights supporting the UK’s withdrawal from the EU as its immediate priority. This entails supporting a smooth transition to the new UK-EU relationship, while strengthening the relationship between the FCA and supervisory counterparts in the EU and the rest of the world and continuing to contribute to the development of global standards. Other cross-sector priorities include ongoing work relating to culture and governance, operational resilience, and innovation and data.

UK REGULATORS’ 2019/2020 BUSINESS PLANS

UNITED KINGDOM


Regarding sector-specific priorities, the FCA’s business plan highlighted seven broad sectors and the activities it plans to undertake in each over the coming year, including:

• Investment management Continued focus on stewardship, the prudential framework for MiFID investment firms and liquidity risk management

• Insurance Continued work on pricing practices and oversight of the distribution chain

• Pensions and retirement Addressing remedies from the Retirement Outcomes Review and further work to improve transfers from DB schemes

• Wholesale financial markets Continued work on the replacement of LIBOR and further implementation of EU legislation, such as the Prospectus Regulation, the Securitisation Regulation and the Covered Bonds Regulation

49

On 15 April 2019, the FCA launched a consultation paper on proposals to extend the role of Independent Governance Committees (IGCs), with regards to ESG issues and value for money.

Currently, ICGs act on behalf of consumers and provide independent oversight of workplace pensions during the accumulation phase. Many smaller firms may have Governance Advisory Arrangement (GAAs) as alternatives to IGCs; the FCA clarifies that its proposals would apply to both IGCs and GAAs.

The FCA’s consultation is seeking feedback on proposals to expand the role played by IGCs by intro-ducing two new requirements.

Firstly, IGCs would have a duty to report on how their respective firms approach ESG-related issues, to ensure that consumer concerns are considered by the firm and also to encourage the firm to undertake “good stewardship”. The FCA previously defined stewardship as being the “responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society”.

The FCA notes that its proposals in this regard are in response to recommendations made by the UK Law Commission’s report on Pension Funds and Social Investment in 2017.

Secondly, the consultation seeks to establish a new oversight duty on IGCs in relation to “investment pathways”. These were previously defined by the FCA as being the range of investment solutions that best help non-advised consumers to meet their retire-ment objectives. Under the FCA’s proposals, IGCs would be required to assess the value for money of investment pathways.

The deadline for responses to the consultation is 15 July 2019. The responses received by the FCA will help inform its Policy Statement, which is expected to be published in Q4 2019.

PENSIONS GOVERNANCE

UNITED KINGDOM


On 15 April 2019, the PRA published its Policy Statement on financial risks from climate change.

The Policy Statement, which is of relevance to insurers/reinsurers, banks and PRA-designated investment firms, provides feedback to the responses received by the PRA on its 2018 consultation paper, “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”, as well as the final supervisory statement.

The supervisory statement outlines the PRA’s expectations of the firms approach to managing the financial risks from climate change. These are set out under three broad headings:

• Governance

• Risk management

• Disclosure

PRA POLICY STATEMENT ON MANAGING RISKS FROM CLIMATE CHANGE

51

On 10 April 2019, the FCA published a report outlining its key findings from its ongoing work on the general insurance distribution chain. The report was accompanied by a consultation paper with proposed guidance for insurance product manufacturers and distributors.

The FCA report primarily focuses on whether various distribution chains have an impact on value. In addition, the report assesses whether the findings from the FCA’s previous, separate review on firms that outsource activities have been taken on board. The report concludes that customers of general insurance firms:

• Could be paying potentially excessive prices

• Could be purchasing unsuitable products

• Are not receiving the services they need

The FCA’s report identifies two key causes, including insufficient focus on customers and inadequate governance and oversight frameworks.

In order to address these concerns, the FCA has proposed additional non-Handbook guidance in a separate consultation paper, published on the same date. The guidance specifically focuses on the responsibilities of insurance product manufacturers and distributors, outlining the FCA’s expectations as well as relevant considerations for these entities. The deadline for providing feedback to the FCA is 9 July 2019.

GENERAL INSURANCE DISTRIBUTION CHAIN

UNITED KINGDOM


On 13 March 2019, the PRA published its Policy Statement on credit risk mitigation, which includes updated supervisory statements.

The Policy Statement outlines the feedback received by the PRA, and its responses to this feedback, on the PRA’s consultation paper on the eligibility of guarantees as credit protection, under the EU CRR. The consultation paper, which closed in May 2018, included proposed changes to previous PRA supervisory statements.

In light of the feedback, the PRA notes that it will make a number of substantive amendments to its previously proposed changes, including removing the proposal relating to paying out in a “timely manner”, and introducing new expectations regarding risks arising from eligible guarantee arrangements and the recognition of any residual risks.

The following supervisory statements will be updated as a result of the Policy Statement:

• SS17/13 “Credit risk mitigation”

• SS31/15 “The Internal Capital Adequacy Assessment Process (ICAAP) and the SREP”

These changes will be effective from 13 September 2019.

CREDIT RISK MITIGATION

53

4MLD Fourth Money Laundering Directive 5MLD Fifth Money Laundering Directive ADE Italian Tax AuthorityAIF Alternative Investment FundAIFM Alternative Investment Fund ManagerAIFMD Alternative Investment Fund Managers DirectiveAML Anti-Money LaunderingBaFin German Financial Supervisory AuthorityBCBS Basel Committee on Banking StandardsBRRD Bank Recovery and Resolution DirectiveCBI Central Bank of IrelandCCP Central CounterpartyCCP R&R Central Counterparty Recovery and ResolutionCET 1 Common Equity Tier 1CFTC Commodity and Futures Trading CommissionCRD Capital Requirements DirectiveCRR Capital Requirements RegulationCSD Central Securities DepositoryCSSF Commission de Surveillance du Secteur FinancierDG FISMA Directorate-General for Financial Stability,

Financial Services and Capital Markets Union EBA European Banking AuthorityECB European Central BankECON European Parliament’s Committee on

Economic and Monetary AffairsEEA European Economic AreaEIOPA European Insurance and Occupational Pensions AuthorityELTIFs European Long-Term Investment FundsEMIR European Market Infrastructure RegulationESAs European Supervisory AuthoritiesESG Environment, Social and GovernanceESMA European Securities and Markets AuthorityESRB European Systemic Risk BoardETFs Exchange Traded FundsFC Financial CounterpartyFCA Financial Conduct AuthorityFRTB Fundamental Review of the Trading BookFSB Financial Stability BoardGAAs Governance Advisory Arrangement

ABBREVIATIONS

55

ICAAP Internal Capital Adequacy Assessment ProcessIFR Investment Firms ReviewIGCs Independent Governance CommitteesIORPs Institutions for Occupational Retirement ProvisionIPMS Investment Platforms Market StudyIPU Intermediate Parent UndertakingISIN International Securities Identification NumberKID Key Information Document under PRIIPsLFS Law of 5 April 1993 on the Financial SectorLIBOR London Inter-bank Offered RateLPS Law of 10 November 2009 on Payment Services LST Liquidity Stress TestingMEPs Members of the European ParliamentMiFID Markets in Financial Instruments DirectiveMiFIR Markets in Financial Instruments RegulationMMFs Money Market FundsMREL Minimum Requirements for Own Funds and Eligible LiabilitiesNCAs National Competent AuthoritiesNFC Non-Financial CounterpartyNSFR Net Stable Funding RatioPIR Italian Individual Investment PlansPRA UK Prudential Regulation AuthorityPRIIPs Packaged Retail and Insurance-based Investment ProductsQ&A Question and AnswerTLAC Total Loss Absorbing RequirementsUCITS Undertakings Collective Investment in Transferable SecuritiesUKIP United Kingdom Independence PartyRBE Luxembourg Register of Beneficial Owners RCS Luxembourg Trade and Companies Register RRM Risk Reduction MeasuresRTS Regulatory Technical StandardsSCR Solvency Capital RequirementSM&CR Senior Managers and Certification Regime SMEs Small and Medium EnterprisesSREP Supervisory Review and Examination ProcessSTO Share Trading Obligation


ABBREVIATIONS

Important InformationThe information contained in this communication is not a research recommendation or “investment research” and is classified as a “Marketing Communication” in accordance with the European Communities (Markets in Financial Instruments) Regulations 2007. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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EUROPE AND THE UNITED KINGDOMSven Kasper +44 20 3395 3723 [email protected]

Rayhan Oddud +44 20 3395 3395 [email protected]

Ciara Horigan +44 20 3395 3457 [email protected]

FRANCE AND LUXEMBOURGAngdy Ma +33 44 45 43 37 [email protected]

GERMANYInes Cieslok +49 69 667745 104 [email protected]

IRELANDMary McCarthy +353 1 776 8411 [email protected]

Simon Firbank +353 1 776 8726 [email protected]

ITALYAlberta Castoldi +39 02 3211 7135 [email protected]

Francesco Carboni +39 02 3211 7370 [email protected]

SWITZERLANDSchabo Hanno +41 44 560 5400 [email protected]

THE NETHERLANDSMerijn Boender +31 20 718 1060 [email protected]

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