Financial Services Regulation & Compliance - Cross Sectoral Oct 2017

DOMESTIC

Central Bank publishes Markets Update Issue 8 2017

The Market Update makes reference to the Central Banks publication of the Twentieth Edition of Central Bank UCITS Q&A, the Twenty-Sixth Edition of the Central Bank AIFMD Q&A and the Third Edition of its Investment Firms Q&A. On 6 October 2017, the Central Bank published the Third Edition of its Investment Firms Q&A. This replaces the second edition of the Central Bank Investment Firms Regulations 2017 Q&A and contains new questions ID 1026-1031 focusing on MiFID II and the definition of “local firm” as defined in Article 4(1)(4) of the Capital Requirements Regulation.

Central Bank confirms provision of MiFID Local Licences

The Central Bank confirmed that it will offer MiFID Local Licences to proprietary trading firms under a new category of MiFID licence to be known as the MiFID Local Licence. A MiFID Local Licence firm is exempt from the CRD IV requirements. This development now means there are 9 categories of MiFID firms in Ireland. The MiFID Local Licence would require a reduced level of minimum initial capital (€50,000 – a significant decrease from the minimum €730,000 requirement), will be exempt from the CRD IV Own Funds Regime and is exempt from the Bonus Cap. The Bonus Cap limits variable remuneration to 100% of fixed remuneration, subject to an upper limit of 200%, with shareholder approval. An applicant will need to confirm that it trades solely on its own account in derivatives, has no external clients, does not act as a market maker, uses only exchange traded instruments and will access clearing on a client or indirect client basis only.

Central Bank publishes new application forms and Guidance Note on completing certain applications

On 20 October 2017, the Central Bank published draft application forms meeting the ‘European Banking Authority (EBA) Guidelines on the information to the provided for authorisation as a payment institution or electronic money institution and for registration as an account information service provider under PSD2' published in July 2017.  The application forms affected concern applications for authorisation as a Payment Institution, Electronic Money Institution, registration as an Account Information Service (AIS) Provider and as a Small Electronic Money Institution. The Central Bank has also published a guidance note on completing these application forms. The guidance provides assistance to applicants in relation to the requirements of the Central Bank in obtaining authorisation.

Central Bank publishes Guide to the 2017 Industry Funding Regulations and related legislation

Following a consultation process, the Central Bank has implemented a new methodology for the calculation of levies payable by certain institutions. The Central Bank has published a Guide to Industry Funding Regulations 2017 (the Guidelines) setting out how the 2017 Industry Funding Regulations are calculated. The Guidelines also highlight the changes to the levy in 2017 together with changes to the categorisation of regulated financial service providers. It also sets out how net Annual Funding Requirement is determined.

The Central Bank has published the Central Bank Act 1942 (Section 32D) Regulations 2017 [S.I. No. 442 of 2017] (the Funding Levy Regulations). The Funding Levy Regulations impose an obligation on regulated entities during the levy period to pay, on or before the due date, the levy contribution and the supplementary levy contribution (if applicable), to the Central Bank.

Central Bank of Ireland publishes first Systemic Risk Pack

The Central Bank is responsible for monitoring the risks to financial stability and the implementation of policies to mitigate risks to the financial system and the real economy. As a result of its role as Ireland's macroprudential authority, they Central Bank has published a Systemic Risk Pack (SRP), which presents indicators and visualisation methods for monitoring systemic risk in the Irish financial system. The intention is that this will be a bi-annual indicator pack and it will provide an overview on the current level of systemic risks in order to assist with macroprudential analysis. The SRP adds to existing financial stability analysis such as the sectoral risk analysis provided by the Central Bank’s Macro-Financial Review, SME and Household Credit Market Reports. The objective of the SRP is to review risk in line with the Central Bank's macroprudential policy framework and key objectives under this framework, which include reducing the potential for systemically important banks to adopt destabilising strategies.

Central Bank publishes Guidance on Transaction Reporting under Regulation 600/2014

With effect from 3 January 2018 MiFIR will introduce a new transaction reporting regime.  MiFIR has prescribed new standards and formats for reporting. The scope will include additional financial instruments, trading venues and reporting firms.  The guidance sets out the operational and technical arrangements for submitting transaction reports under MiFIR to the Central Bank systems and it should be read in conjunction to the Technical Reporting Instructions published by ESMA. It contains information on those entities that are authorised to submit MiFIR transaction reports, the different methods of submissions and the required format and content of those submissions.

Central Bank Test Online Reporting System- MiFIR Transaction Reporting User Procedure Document

The Central Bank has published a draft MiFIR Transaction Reporting User Procedure Document. The document will be updated post testing phase and finalised pre- January 2018.

Asset Management Supervision: The landscape today and 2018 supervision priorities - Michael Hodson, Director of Asset Management Supervision

Mr. Hodson outlined the Central Bank’s supervisory priorities for 2018, the outsourcing arrangements within the asset management sector and developments at a European level.. He spoke at length about the supervisory priorities next year noting that firms should be planning now to ensure they are adequately prepared should a hard Brexit materialise. In 2018 the Central Bank will have an increased focus on IT risk, analysing MiFID II and the safeguarding of investor money. Mr. Hodson noted the Central Bank's interest in outsourcing and its related risks which firms need to be mindful of such as governance or oversight risk. He also warned that assessing culture risk is a priority for the Central Bank and in 2018 firms can expect their supervisors to challenge them on the appropriateness of their culture and the behaviours that culture is promoting.

The Irish Financial Services sector: a Prudential Regulation Perspective - Speech by Deputy Governor Ed Sibley

Mr. Sidley gave a speech at the Financial Centres Summit 2017 where he spoke about financial stability, prudential regulation, perspectives on the Irish financial sector and Brexit. With regards to prudential regulation, he noted that the Central Banks approach will continue to be risk-based and anchored by the PRISM supervisory methodology, and underpinned by the credible threat of enforcement. He warned firms not to let history repeat itself. Mr. Sidley touched on business model development, governance, risk management and culture stating they will strongly feature in the work plans for 2018.   The speech also noted the importance of firms’ preparations for MiFID II and the completion of the Capital Markets Union. 

Brexit and other current issues in financial services regulation - Gerry Cross, Director of Policy and Risk

Mr. Cross' speech touched on the impact of, and preparations for, Brexit. He advised that financial firms in Ireland who sell services to the UK market will need to ensure that they have considered the implications for their business models of a loss of passporting rights on the UK’s exit. He highlighted that ensuring that regulated firms are planning effectively for this risk remains an important focus for the Central Bank and he noted their expectation that firms who have material UK-related business to have procedures in place for dealing with the risks of a hard Brexit occurring in early 2019. Mr. Cross also spoke at length about innovation in the financial services sector, the need for it, but also the related risks it can bring.

Introductory statement by Governor Philip Lane at the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach

Governor Lanes statement focused on the Tracker Mortgage Examination; Brexit; the banking sector; the insurance sector; and the macroprudential mortgage measures. In relation to the banking sector, he noted that there has been no Brexit-related deterioration in asset quality among the Irish retail banks now prudentially supervised by the SSM of the ECB. He highlighted that in fact, these institutions have made good progress in examining their exposures and have implemented processes within their frameworks to ensure that Brexit-related risks are factored into decision making. He noted that although the recovery in the banking sector is continuing, the sustainability of bank business models is still a risk factor. Governor Lane outlined that balance sheets declined in the first half of 2017 as well as the yields on bonds issued by Irish banks.  He also spoke about non-performing loans (NPLs) noting that the expectation is that there will be further NPL reductions through restructuring, recoveries, and loan portfolio disposals.

EUROPEAN

ESMA updates Q&A on the Benchmarks Regulation

ESMA has updated its Q&A on the Benchmarks Regulation. The new Q&As include the following topics:

  • the scope of the Regulation
  • definitions
  • transitional provisions

ESMA Consultation Paper - Draft guidelines on non-significant benchmarks

ESMA has published a Consultation Paper on draft guidelines on non-significant benchmarks. The Consultation Paper covers the following areas:

  1. procedures, characteristics and positioning of oversight function
  2. appropriateness and verifiability of input data
  3. transparency of methodology
  4. governance and control requirements for supervised contributors

ESMA has invited comments on all matters in its draft guidelines on non-significant benchmarks, and particularly on the specific questions highlighted in Annex I. The closing date for comments is 30 November 2017.

ESMA updates Q&A on Market Abuse Regulation (MAR)

ESMA has updated its Q&A document on the implementation of the MAR. The purpose of the Q&A document is to promote common supervisory approaches and practices in the application of MAR and its implementing measures. The updated Q&A includes a new detailed answer on the obligations of issuers in the particular case of delayed inside information that then loses its price sensitivity feature during the delay period.

ESMA updates its EMIR and CSDR Q&As

ESMA has updated its Q&As regarding the Emerging Market Infrastructure Regulation (EMIR) and the Central Securities Depositaries Regulation (CSDR) in order to promote common supervisory approaches and practices in the application of EMIR/ CSDR and its implementing measures.

Legal Entity Identifier - Briefing

ESMA produced a briefing on the Legal Entity Identifier (LEI), providing explanations on who needs LEIs, why they are important and how to obtain them. The LEI is a 20-digit alpha-numeric code that enables clear and unique identification of legal entities participating in financial transactions that can also be used on a cross border basis, through a free and open database updated on a daily basis. These LEIs are needed in order for firms to fulfil their reporting obligations under financial regulations and directives. LEIs are also used for matching and aggregating market data, both for transparency and regulatory purposes.

ESMA produces first overview of EU derivative markets size

ESMA has produced data on the size of the interest rate, credit, equity, commodity and foreign exchange derivatives markets in the EU, for the first time, based on the weekly data it receives from trade repositories. ESMA's initial analysis, performed on data available on 24 February 2017 estimated the notional value of the EU's derivatives markets across all asset classes as €453 trillion and 33 million transactions.

ESMA updates its Q&A under the Alternative Performance Measures guidelines

ESMA has published six new questions in its Q&A document, on the implementation of its Guidelines on the Alternative Performance Measures (APMs) for listed issuers. The new questions provide information on:

  • the definition of APMs
  • the scope of the APM guidelines
  • application of the scope exemption
  • definition of the APM ‘organic growth’
  • how to carry out reconciliation
  • how to apply the fair review principle

Steven Maijoor on the State of European Financial Markets

Steven Maijoor, Chair of ESMA, spoke at ESMA 2017 on 17 October 2017 about the challenges facing European financial markets.

The three key issues Mr Maijoor focused on were the following:

  1. to build a Capital Markets Union, especially by protecting retail investors
  2. a strong convergent European supervisory culture including Brexit
  3. improving understanding of trends, risks and vulnerabilities in financial markets

European Commission publishes Guidelines on the application and setting of administrative fines for the purposes of the Regulation 2016/679

The Article 29 Working Party has released draft guidelines which supervisory authorities should refer to before issuing administrative fines under the GDPR. The guidelines prescribe a number of factors to be taken into consideration before a fine is issued, including, but not limited to the nature, gravity and duration of the breach, the number of data subjects involved, the scope and purpose of the processing, the damage suffered by data subjects and any action taken by the organisation to reduce such damage.

European Commission publishes Roadmap – Fitness Check of supervisory reporting requirements

The Commission is currently conducting a fitness check of the EU reporting requirements in the financial sector to assess any gaps relating to supervisory reporting. The assessment will focus on whether the requirements are effective, relevant and add value, whether there is coherence between the varying reporting frameworks and whether the cost and burden of the reporting obligations is efficient.

European Securities Market Authority publishes Securities and Markets Stakeholder Group (SMSG) Response to the Public Consultation on Prospectus Regulation Level 2           

The SMSG's response notes their agreement with the changes brought about in the Prospectus Regulation, the aim of which is to simplify access to capital markets for small and medium enterprises while also communicating to investor's information on issuers and financial instruments so they can make an informed investment decision.

The European Securities and Markets Authority updates its Q&A on Prospectuses

ESMA has updated its Q&A on prospectus related issues. This update includes the deletion of one Q&A (Q&A 27 Convertible or exchangeable securities) and updates to four others (Q&A 29, 31, 32 and 44 relating to exemptions). The changes do not relate to the substance of the Q&As and come as a result of the Prospectus Regulation (EU) 2017/1129 becoming applicable on 20 July 2017.

European Securities and Markets Authority to provide recurring reports on the cost and past performance of retail investment, insurance and pension products

ESMA received a mandate from the European Commission to provide recurring reports on the cost and past performance of retail investment, insurance and pension products. This request implements the action announced in the Commission communication on the Mid Term Review of the Capital Markets Union of 8 June 2017. The action will contribute to the objective of the CMU Action Plan to increase investor awareness of net returns and the impact of costs and charges on performance.

Commission publishes Delegated Regulation supplementing MiFIR

The Delegated Regulation (EU) 2017/1799 supplements MiFIR with regards to the exemption of certain third countries central banks in their performance of monetary, foreign exchange and financial stability policies from pre- and post-trade transparency requirements.

MiFID II: EU issues guidance on obtaining brokerage and research services from non-EU brokers

In response to industry concerns on how firms can obtain brokerage and research services from other jurisdictions, the Commission has issued guidance in the form of FAQs to clarify how EU investment firms should interact when they seek out brokerage and research services from broker-dealers in non-EU countries. The FAQ outlines the relevant provisions and explains how EU firms can obtain international research and brokerage services in full compliance with their obligations.

European Commission Request to the European Supervisory Authorities to Report on the Cost and Past Performance of the Main Categories of Retail Investment, Insurance and Pension Products

The Commission submitted a formal request in accordance with the founding Regulations establishing the European Supervisory Authorities (ESAs), inviting the ESAs to issue recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products. This request implements the action announced in the Commission communication on the Mid Term Review of the Capital Markets Union of 8 June 2017 on recurrent reporting by the ESAs of cost and performance of the main categories of retail investment, insurance and pension products.

Updated European PRIIPs Information Exchange Templates

Insurance Europe and EFAMA published updated PRIIPs information exchange templates which were originally published in June 2017 to provide a functional description of the set of data to be exchanged from asset managers and banks to insurers to help fulfil their PRIIPs regulatory obligations. While the use of the templates is not compulsory and the changes described below are optional, Insurance Europe strongly encourage that stakeholders use the most recent versions to ensure operability amongst all users.

The changes to the templates are as follows:

  • The European PRIIPs Template (EPT) was amended by two optional parts (items 82 to 101). The first addition is relevant only for funds/structured products offered in the German market whereas the second part amends the EPT for data fields related to structured products which were not catered for in the initial template.
  • The “Comfort” EPT (CEPT) does not make any content changes, but merely provides two possible methods for the VEV calculation for regular premium. Please note that this template includes more data, so its delivery is subject to bilateral agreements between insurers and asset managers.

ECON report on action plan on retail financial services

The European Parliament updated its procedure file on the report by its Committee on Economic and Monetary Affairs (ECON) on the European Commission's action plan on retail financial services and published the final report on 31 October 2017. The procedure file indicates that the Parliament will consider the report during its plenary session which will be held from 13 to 16 November 2017.

A number of amendments have been made to the draft report which was published in June 2017. The amendments include ECON:

  • Stating that the action plan falls short of the ambition to create a regulatory environment conducive to transparency, growth and innovation and with a high level of trust on the part of businesses and consumers in retail financial products. It notes the continued high levels and opacity of fees and commissions in relation to private pensions, investment funds and other retail products that significantly reduce the real returns to retail investors.
  • Emphasising the importance of ensuring that financial services of all kinds can be provided on a cross-border basis.
  • Asking the Commission to investigate the possibility of introducing a 29th regime for retail financial products and calling on the Commission to look into the possibility of creating a harmonised legal framework for standardised default options for the most commonly used EU financial products.
  • Calling on the Commission to propose rapidly an amendment to the SEPA Migration Regulation (Regulation 924/2009) to reduce charges for cross-border transactions in all member states.
  • Calling on the Commission to consider omnibus legislation to move away from existing sectoral legislation and towards the completion of a solid and consistent consumer transparency framework.

For further information please contact a member of the Financial Regulation team.

Date Published: 8 November 2017