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FINANCIAL SERVICES REGULATIONEXCHANGE – INTERNATIONAL NEWSLETTER

Issue 32August 2017

02 | Financial Services Regulation

CONTENTSINTRODUCTION ............................................................................................................ 03

EU .......................................................................................................................................... 04

UK ......................................................................................................................................... 10

US .......................................................................................................................................... 24

NETHERLANDS ................................................................................................................ 27

INTERNATIONAL ............................................................................................................ 29

IN FOCUS ........................................................................................................................... 33

CONTACTS ........................................................................................................................ 35

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INTRODUCTIONWELCOME

DLA Piper’s Financial Services International Regulatory team welcomes you to the thirty second edition of “Exchange – International” – our international newsletter designed to keep you informed of regulatory developments in the financial services sector.

This issue includes updates from the EUROPEAN UNION, as well as contributions from the UK, the US and The Netherlands.

In this edition, “In Focus” looks at the European Commission’s approach to FinTech, including its Action Plan for consumer financial services and its consultation paper entitled FinTech: a more competitive and innovative European financial sector.

In addition, we look at ESMA’s report on distributed ledger technology in securities markets, as well as the fifth FCA consultation and the first FCA policy statement on the implementation of MiFID II. We provide an update on the launch of the new FX Global Code, the implementation of the FAMR and the publication of the final draft RTS on strong customer authentication under PSD2. We also look at the US Treasury’s framework to introduce changes to the Volcker Rule.

Your feedback is important to us. If you have any comments or suggestions for future issues, we welcome your feedback.

– The DLA Piper Financial Services Regulatory Team

August 2017

04 | Financial Services Regulation

EUROPEAN UNION

ESMA UPDATES Q&AS ON EMIR IMPLEMENTATION

The European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&As) on the implementation of the European Market Infrastructure Regulation (EMIR) aiming to promote common supervisory approaches and practices in the application of EMIR.

Background

On 21 January 2017, the European Commission published Delegated Regulation 2017/104 (RTS) on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories and Implementing Regulation 2017/105 (ITS) laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories. The revised RTS and ITS, which will be applicable on 1 November 2017, include some provisions that were previously covered by the Q&As.

February 2017 Q&As Update

The ESMA Q&As on EMIR implementation were updated on 2 February 2017, to facilitate the transition to the revised RTS and ITS mentioned above.

As clarified in Trade Repositories Answer 44, reporting entities are not obliged to update all the outstanding trades upon the application date of the revised RTS and ITS. They are required to submit the reports related to the old outstanding trades only when a reportable event takes place, such as modification or termination of the trade. Irrespective of the date of the original trade, all reports submitted upon the application date of the revised RTS and ITS must be in accordance with the relevant standards.

The Q&As also provide clarifications with regards to the way reports will be validated by Trade Repositories (TRs). TRs will have to verify that the report contains all the fields specified as mandatory or conditionally mandatory. Counterparties should consider different implementation measures that could be adopted by the TRs, with some TRs requiring full messages to be sent for the Modifications and Correction reports and others accepting partial messages.

April 2017 Q&As Update

On 3 April 2017, ESMA further updated the Q&As to include updated versions of the questions that may be rendered obsolete or that may require amendments as a result of the revised RTS and ITS. The Q&As also include an updated question on the obligation to report outstanding trades following the entry into force of EMIR.

ESMA offers clarifications on:

■ whether the provision of position level data would be more practical for the Exchange Traded Derivatives industry;

■ whether information on valuation and collateral should be reported for contracts entered into from 6 August 2012;

■ whether an agreed Trade-ID is also necessary for backloaded trades;

■ what is the appropriate process for financial counterparties and central clearing counterparties obligated to report their contracts within 90 days or 3 years, in case they are no longer authorised, change their corporate purpose or are liquidated within the “backloading” period;

■ whether third country entities that have subsequently become financial counterparties in the EU are required to report trades that were entered into before they became subject to EMIR.

ESMA PUBLISHES REPORT ON DISTRIBUTED LEDGER TECHNOLOGY APPLIED TO SECURITIES MARKETS

On 7 February 2017, the European Securities and Markets Authority (ESMA) published a report on Digital Ledger Technology (DLT) in securities markets (report), following responses received to a discussion paper published in June 2016.

DLT, also known as blockchain, has become a hot topic in financial services regulation more recently. The technology allows the record of electronic transactions to be shared between participants of the network and therefore is not maintained on a centralised register. Another common feature is its extensive use of cryptography. The most well-known application of DLT is Bitcoin, however this is just one variant of this technology, which could be extended to the traditional financial services sector.

The report notes that although DLT is still in its formative stages, it is possible to assess the benefits that DLT could bring to securities markets, and the challenges and key risks that may arise from its use.

In the report, ESMA identifies a number of possible benefits from an application of DLT to securities markets, including:

■ more efficient post-trade processes;

■ enhanced reporting and oversight;

■ greater resilience and availability;

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■ reduced counterparty risk and enhanced collateral management; and

■ reduced costs.

These benefits, however, will only be possible to realise once certain key challenges can be overcome. Initially, this may include an early adopter problem of interoperability and the ability to standardise certain reference data. There may also be issues relating to how to provide Delivery versus Payment settlement, and early participants may require some sort of support from central banks to facilitate this. The report also identifies issues relating to scalability, recourse mechanisms, additional functionality, governance and privacy issues.

ESMA also identified various risks which may arise out of widespread DLT take-up in the market, including cyber risk, fraud, money laundering, operational risk, competition issues, systemic and volatility risk and possible privacy concerns.

The report also looks at how DLT might interact with the existing securities regulatory regime in the EU. ESMA states that, following responses from its discussion paper, it has not identified any major short term impediments in the current regulatory system to potential first movers who were able to optimise DLT within the current market structure. It did identify that there may be some overarching themes which will need to be addressed (such as legal certainty on records or settlement finality), and issues which have impact beyond merely financial services regulation, such as company or insolvency law.

The report states that ESMA considers regulatory action, at this stage, to be premature and it will continue to monitor how the technology develops to assess whether regulatory action is required. ESMA, however, encourages the industry to work towards solutions to the challenges that DLT poses and provide regulators with a clear direction to structure conversations between stakeholders and regulators.

EBA PUBLISHES FINAL DRAFT RTS ON STRONG CUSTOMER AUTHENTICATION UNDER PSD2

On 23 February 2017, the European Banking Authority (EBA) published a final report containing its draft regulatory technical standards (RTS) on strong customer authentication (SCA) and common and secure communication under Article 98 of the Payment Services Directive 2 (2015/2366) (PSD2).

The draft RTS, which were developed in cooperation with the European Central Bank (ECB), follow 224 responses to the consultation paper published in August 2016, which is understood to be the highest number of responses ever received by the EBA in response to a consultation.

The RTS are addressed to payment service providers (PSPs) and set out:

■ SCA requirements when accessing payment accounts online, initiating electronic payments or other remote transactions which may imply a risk of payment fraud;

■ exemptions from SCA;

■ requisite security measures to protect the confidentiality and integrity of the personalised security credentials of payment service users; and

■ requirements for common and secure open standards of communication between different stakeholders.

In particular, following consultation, the EBA have specifically sought to address issues relating to:

■ the scope and technology neutrality of the draft RTS;

■ third party provider access rights to payment accounts and information to be communicated to these third party providers.

The EBA has acknowledged that in developing these standards, there will always be certain trade-offs, for example the level of prescriptiveness against facilitating innovation over time, and the strength of SCA against user experience. It has sought to rely on the responses to the discussion paper and consultation paper to strike a balance in this respect.

Commission’s proposed amendments

On 23 February 2017, the final draft RTS on SCA was submitted to the European Commission (Commission) for adoption. The Commission responded with a letter dated 24 May 2017 stating its intention to introduce amendments.

The key amendments as put forward by the Commission are:

■ independent auditing of the security measures in cases when the transaction risk analysis exemption is applied;

■ new exemption to SCA for certain corporate payments using dedicated payment processes or protocols in the cases where it can be established that those processes achieve high levels of security of payment;

■ fraud reporting by PSPs directly to EBA so that the latter has access to individual fraud data and reports from the PSPs; and

06 | Financial Services Regulation

■ contingency measures, such as secure communication through user-facing interfaces, which should be used in case of unavailability or inadequate performance of dedicated communication interface.

Next steps

The EBA published the text of the draft RTS on 1 June 2017 accepting the Commission’s proposed amendments. The RTS will now be scrutinised by the European Parliament and Council, who have three months to either endorse and adopt, or amend the RTS. Upon adoption, the RTS will be applicable 18 months after entry into force by virtue of Article 115(4) PSD2, during which time the EBA expects industry to develop compliant industry standards or technical solutions to meet the RTS.

ECSG PUBLISHES NEW VERSION OF THE SEPA CARDS STANDARDISATION VOLUME AND EPC PUBLISHES UPDATED WHITE PAPER ON MOBILE PAYMENTS

March 2017 witnessed updates to two industry guidance publications relating to card standardisation and mobile payments. The European Cards Stakeholders Group (ECSG) published version 8 of its Single Euro Payments Area (SEPA) cards standardisation volume (SCS Volume) and the European Payments Council (EPC) published version 5 of its white paper on mobile payments.

SCS Volume

On 1 March 2017, the ECSG published version 8 of its SEPA SCS Volume. Although the ECSG (a not-for-profit, industry association charged with promoting card standardisation and security in SEPA) was only launched on 14 September 2016, the SCS Volume represents the latest iteration of the SEPA card standardisation document that has been in existence since 2009, originally developed by the EPC.

Although not legally binding, the SCS Volume is part of the European card industry’s self-regulation and covers both “card present” (i.e. face-to-face or local) and “card non-present” (i.e. remote) transactions. It aims to promote standardisation, interoperability and safety within the European card market, in order to facilitate the creation of a scalable and secure card and terminal infrastructure across SEPA through open, standardised requirements.

The SCS Volume is structured as 7 “books” (general, functional requirements, data elements, security, conformance verification processes, implementation guidelines and cards processing framework) and an annex showing a simplified card transaction. The SCS Volume has been updated to facilitate a

consistent approach to implementation across aspects of the Interchange Fee Regulation (EU 2015/751), including contactless payments and electronic identification. The ECSG have also confirmed that there will be a yearly “bulletin” section, which will be used to release urgent guidelines prior to the publication of any new volumes.

The changes in the SCS Volume were consulted on as part of the version 7.5 release in May 2016 by the EPC, and have immediate effect. Together with the SCS Volume, the ECSG also published a response document, which outlines the responses received to the consultation and how the ECSG has taken these on board.

White Paper on Mobile Payments

On 14 March 2017, the EPC published version 5 of its white paper on mobile payments (White Paper), which seeks to promote harmonisation amongst stakeholders of mobile payments in Europe.

The latest version of the White Paper updates version 4 of the white paper, published in October 2012, and seeks to update to encompass new types of mobile proximity payments and addresses new stakeholders and technologies in the mobile payment market. The White Paper has also been aligned with the SCS Volume (above).

The main conclusions identified in the White Paper are the following:

■ For mobile contactless SEPA card payments (i.e. based on Near Field Communication (NFC) technology), the choice between Secure Element or Host Card Emulation approach has a major impact on the service model and the roles of different stakeholders;

■ For other mobile proximity payments (i.e. non-NFC based), the lack of standardisation between technologies (e.g. Quick Response codes, Bluetooth Low Energy) is resulting in a fragmented approach; and

■ There are three primary challenges in relation to mobile remote payments: convenience of the transaction initiation and beneficiary identification for payments initiated by the payer, certainty of fate of the payment for the beneficiary, and immediate (or very fast) transfer of funds.

The EPC stated that it intends to further engage with relevant bodies within the industry and other stakeholders to develop open specifications and guidelines for the interoperability of mobile payments.

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ECB PUBLISHES GUIDANCE TO BANKS ON TACKLING NON-PERFORMING LOANS

On 20 March 2017, the European Central Bank (ECB) published its final guidance (Guidance) to banks on non-performing loans (NPLs). The Guidance provides measures, processes and best practices for banks for addressing NPLs. It invites banks to implement realistic and ambitious strategies for NPL reduction and seeks to facilitate the day-to-day supervisory dialogue with banks on various issues. The final guidance follows ECB’s consultation on the draft guidance that ran from September to November 2016.

The Guidance is applicable to all significant institutions supervised under the Single Supervisory Mechanism (SSM), although it is acknowledged that it should be considered in the light of the principles of materiality and proportionality, with some parts of more relevance to banks with higher levels of NPLs.

Despite the Guidance currently being non-binding, it is stated that banks should be able to explain any areas where the Guidance has substantially not been followed, and the Guidance will be considered as part of a bank’s Supervisory Review and Evaluation Process. The Guidance also notes that non-compliance may result in supervisory measures being adopted.

The Guidance emphasises the importance for banks with high NPL exposures to develop an NPL strategy, which should establish strategic objectives for the reduction of NPLs over a realistic but ambitious period of time. The ECB identifies that an NPL strategy should cover mechanics for assessing the operating environment, developing the NPL strategy and implementing and fully embedding this strategy.

The Guidance also stresses the importance of ensuring there is appropriate governance and operational set-up to oversee the implementation of the NPL strategy in the short and longer term. The Guidance emphasises the importance of management’s role in approving and monitoring the NPL strategy and recommends particular operating model procedures, including the creation of “NPL workout units”, dedicated to addressing NPLs, which operate separately and independently from other aspects of the bank.

Forbearance measures can be both preventative and remedial, and should seek to ensure borrowers are able to perform their repayment obligations under the agreement. In order to avoid the misrepresentation of asset quality on the balance sheet, the ECB distinguishes between viable forbearance solutions, i.e.

those that truly contribute to reducing the borrower’s balance of credit facilities, and non-viable ones. The ultimate outcome of the forbearance measures should be the repayment of the owed amount and not the extension of the grace period.

The ECB encourages the adoption of the European Bank Authority (EBA)’s definition of non-performing exposures (NPE) based on the “past-due” and “unlikely-to-pay” criteria. The definition and identification of NPE should be consistent at the entity and banking group level, as well as in all subsidiaries and branches.

The Guidance seeks to address three principal objectives in respect of impairment:

■ adequate measurement of impairment provisions across all loan portfolios through sound and robust provisioning methodologies;

■ timely recognition of loan losses within the context of relevant and applicable accounting standards and timely write-offs; and

■ enhanced procedures including significant improvement to the number and granularity of asset quality and credit risk controls.

Under the Guidance, banks should be able, on request, to provide supervisors with data regarding the models they use to calculate impairment allowances for NPLs on a collective basis. Banks are also expected to disclose publically a detailed set of quantitative and qualitative disclosures in their financial statements regarding loan quality and credit risk control.

The ECB also provides guidance on ensuring the completeness and accuracy of immovable property valuation, including recommending the valuations are performed by independent qualified appraisers, with an appropriate level of professional indemnity insurance. The Guidance states that the frequency of valuations should be at least every year for commercial immovable property and every three years for residential immovable property, but more frequent when there are significant negative changes or signs of a decline in the value of individual collateral. The Guidance also provides further detail on the methodology for valuations and the valuation of foreclosed assets.

The ECB identifies the next steps as sending letters to banks with high levels of NPLs as part of their normal supervisory activities, to ensure that banks are managing and addressing NPLs in accordance with supervisory expectations.

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MIFID II DELEGATED LEGISLATION PUBLISHED

On 31 March 2017, 28 Delegated Regulations and one Delegated Directive supplementing the MiFID II Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR) were published in the Official Journal (OJ) of the European Union. The Delegated Regulations became effective on 20 April 2017, 20 days after publication. The majority will apply from 3 January 2018.

The Delegated Regulations and Directive published include the following:

■ Commission Delegated Regulation (EU) 2017/571 of 2 June 2016 supplementing MiFID II with regard to regulatory technical standards (RTS) on the authorisation, organisational requirements and the publication of transactions for Data Reporting Services Providers (DRSPs). MiFID II introduced data reporting services (DRSs), which will be operated by DRSPs, as services subject to authorisation and supervision. DRSs include the operation of approved publication arrangements, consolidated tapes and approved reporting mechanisms. The Delegated Regulation specifies further the information a DRSP must provide to competent authorities when seeking authorisation and on an ongoing basis, as well as setting requirements regarding publication.

■ Commission Delegated Regulation (EU) 2017/576 of 8 June 2016 supplementing MiFID II with regard to the RTS for the annual publication by investment firms of information on the identity of execution venues and on the quality of execution. MiFID II requires investment firms to publish information relating to client orders executed on trading venues and systematic internalisers, market makers or other liquidity providers (or similar entities in third countries) on an annual basis. The RTS specifies the content and format of information that should be published.

■ Commission Delegated Regulation (EU) 2017/583 of 14 July 2016 supplementing MiFIR with regard to RTS on transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives. MiFIR introduces pre and post-trade transparency requirements in respect of non-equity instruments. In this RTS, the Commission specifies the pre-trade and post-trade transparency requirements for trading venues and investment firms trading outside a trading venue, including the relevant obligations, the potential for deferred

publication, transparency requirements in conjunction with deferred publication and the methodology for the transparency calculations.

■ Commission Delegated Regulation (EU) 2017/589 of 19 July 2016 supplementing MiFID II with regard to RTS specifying the organisational requirements of investment firms engaged in algorithmic trading. MiFID II established requirements in relation to investment firms engaging in algorithmic trading. The RTS includes provisions with regards to general organisational requirements, the resilience of trading systems, direct electronic access, firms acting as general clearing members and high-frequency algorithmic trading techniques.

■ Commission Delegated Regulation (EU) 2017/591 of 1 December 2016 supplementing MiFID II with regard to RTS for the application of position limits to commodity derivatives. MiFID II requires competent authorities to establish and apply position limits on the size of a net position a person can hold in certain commodity derivatives. The RTS includes detail on the method for calculating the size of a net position and the methodology for competent authorities to calculate position limits.

■ Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing MiFID II with regard to the safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits. The Directive includes requirements relating to the safeguarding of client financial instruments and funds, product governance requirements and inducements. Member States will be required to adopt the provisions of this directive from 3 January 2018.

ESMA UPDATES MIFID II Q&AS ON MARKET STRUCTURES

On 5 April 2017, the European Securities and Markets Authority (ESMA) provided further guidance in relation to Systematic Internalisers (SIs) and Organised Trading Facilities (OTFs) through an update to its Question and Answers document (Q&As) on market structures under the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and Markets in Financial Instruments Regulation (MiFIR). The updates follow a series of communications between the European Commission (Commission), ESMA and the European Parliament’s Economic and Monetary Affairs Committee (ECON) following market developments relating to SIs operating broker crossing networks.

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Systematic Internalisers

SIs are firms that deal on own account and execute client orders outside regulated markets (RMs), multilateral trading facilities (MTFs) or OTFs without operating a multilateral system. The Q&As provide clarifications including:

■ the criteria under which SIs are functionally similar to a trading venue and thus require authorisation; and

■ SIs not being prevented from hedging the positions arising from the execution of client orders as long as it does not lead to the SI de facto executing non risk-facing transactions and bringing together multiple third party buying and selling interests.

Organised Trading Facilities

MiFID II introduced a third kind of trading venue, OTFs, as an alternative to RMs and MTFs. OTFs are systems exclusively for bonds, structured finance products, emission allowances and derivatives, where orders must be executed on a discretionary basis. The Q&As provide clarifications including:

■ the type of arrangements that qualify as an OTF and the authorisation required to operate one;

■ the characteristics of an OTF;

■ the steps required by market operators or investment firms operating an OTF with regards to the execution of orders on a discretionary basis and to the provision of best execution to clients; and

■ the form of discretion that would result in a venue being classified as an OTF.

Background

The clarifications followed an exchange of correspondence between the European authorities relating to a concern that certain SIs were looking to circumvent particular requirements

of the MiFID II regime. The concern was raised in a letter from ESMA addressed to the Commission dated 1 February 2017. ESMA stated that it had been made aware that certain investment firms, which are currently operating broker-crossing networks, were possibly looking to circumvent certain MiFID II obligations, including trade reporting and transparency requirements, by establishing networks of interconnected SIs and other liquidity providers. ESMA asked the Commission to determine whether to use its regulatory tools to remedy this, and indicated its support for this approach.

Mr Valdis Dombrovskis, Vice President of the Commission, replied with a letter dated 16 March 2017. He stated that a preliminary investigation had been carried out, which concluded that there had been attempts to establish broker-crossing networks in which both SIs and high frequency trading firms interacted in a way that some market operators had described as multilateral and which would require authorisation as an MTF. He noted that investment firms had disagreed with this characterisation. Market operators were also concerned that not all competent authorities would agree that such networks qualify as MTFs and had requested further guidance to be issued. Mr Dombrovskis proposed to engage in dialogue with ESMA and national competent regulators to determine the jurisdictions where the alleged broker-crossing networks could be established.

In response to Mr Dombrovskis’ letter, on 11 April 2017, ECON published a letter from the MiFID II negotiating team. The negotiating team were concerned that the Commission’s approach was insufficient to address the issue. The negotiating team agreed with ESMA’s view that clarifications should be provided by means of a delegated act.

Please contact michael.mckee@dlapiper.com for further information.

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UNITED KINGDOM

FCA AND PRA ISSUE JOINT POLICY STATEMENT ON ENFORCEMENT

On 1 February 2017, the FCA and PRA issued a joint policy statement (FCA PS17/1, PRA PS2/17) (Policy Statement) on the proposed implementation of the recommendations from HM Treasury’s Review of Enforcement Decision-Making at the Financial Services Regulators (Review) and Andrew Green QC’s Report into the FSA’s enforcement actions following the failure of HBOS, following the comments received in response to the joint consultation paper (FCA CP 16/10, PRA CP14/16) (Consultation) published in April 2016.

The Policy Statement broadly outlines the changes to the Decision Procedure and Penalties manual (DEPP) in the FCA Handbook and the FCA’s Enforcement Guide (EG) in relation to settlement and contested decision making. It also sets out the joint PRA and FCA policy on cooperation between the regulators in enforcement investigations and subjects’ understanding and representations in joint investigations.

The Policy Statement notes that, although broadly supportive of the proposals in the Consultation, the majority of respondents disagreed with the FCA’s proposed approach in relation to:

■ the removal of penalty discounts upon reaching stages 2 and 3 of settlement for all cases (i.e. not just penalty only) – the FCA stated in response that it would proceed with its proposal to abolish penalty discounts at stages 2 and 3, in light of the extension of the partly contested cases process (see below), an analysis of previous settlement experience and the front-loaded nature of work involved in the RDC process; and

■ usually keeping the same Regulatory Decisions Committee (RDC) members that gave the warning notice when considering representations to give a decision notice – the FCA stated in response that it would proceed with its proposal to, generally, retain the same RDC panel at the decision notice stage, but that this was not intended to be an absolute rule, for example in complex cases involving novel points of law or practice.

The FCA also noted that, in respect of their proposals on the partly contested cases, the majority of respondents sought to extend the ‘’focussed resolution agreements’’ concept beyond penalty only situations, to include situations where liability and penalty were contested or where there was a narrowed down combination of facts, liability and penalty that were contested. The FCA agreed with these proposals, and noted that the discount will reflect the extent of the agreement.

The majority of the changes in the Policy Statement came into effect on 31 January 2017, with the exception of the two areas above where respondents disagreed, which came into effect on 1 March 2017. The Policy Statement noted that the PRA intends to issue a policy statement following its consultation paper, proposing to establish an Enforcement Decision Making Committee and a short guide to the PRA’s enforcement process.

HM TREASURY CONSULTS ON THE IMPLEMENTATION OF PSD2

On 2 February 2017, HM Treasury published a consultation paper on the implementation of the revised European Union (EU) Directive 2015/2366 on payment services in the internal market (PSD2). PSD2 must be implemented in the UK by 13 January 2018. In order to keep the transition as smooth as possible, the Government aims to lay the final version of the relevant regulations before Parliament in early 2017.

Key changes

In its consultation paper, HM Treasury explains the scope of PSD2 and highlights its key changes compared to the first Payment Services Directive (PSD). The types of Payment Service Providers (PSPs) covered in PSD2 include payment, credit and e-money institutions.

PSD2 preserves PSD’s exemption on transactions executed by means of telecommunication, digital or IT devices. PSD2 updates this exemption to permit providers of electronic communication networks or services to provide certain goods, such as music and digital newspapers, without authorisation or registration.

PSD2 also provides clarification regarding the limited network exemption by making explicit that the exclusion can only apply to transactions where the payment instrument can be used within a specified retailer/retail chain, and where the payment instrument is regulated for specific social or tax purposes. For example, store cards, fuel cards and public transport cards would fall within this exemption.

Likewise, PSD2 continues to exempt independent ATM operators from authorisation but will require independent ATM operators to be subject to the same transparency requirements for services provided as banks and other PSPs.

Additionally, the geographical scope of PSD2 transparency and conduct of business requirements has been extended to apply to ‘’one-leg’’ transactions (payments to and from third countries, where one of the PSPs is located in the EU) and to transactions in non-EU currencies which have at least one leg in the EU.

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Proposed approach to implementation

The Government outlines its proposed approach to PSD2 implementation in the consultation paper. Appendix B contains a draft version of the Payment Services Regulations 2017 (PSRs 2017), the statutory instrument that the government will use to implement PSD2 in the UK.

The Government’s intention is to build on the existing framework in order to ensure consistency with the European framework, but also to keep the payment services regime as tailored to the UK payment market as possible. For this reason, the draft PSRs 2017 largely reflect the Payment Services Regulations 2009 provisions but with changes to capture PSD2 modifications. Consequential amendments to other pieces of legislation, such as the Electronic Money Regulations 2011, may also be required, but these amendments will be included in the final draft of the PSRs 2017.

The consultation paper notes that the FCA will remain the relevant competent authority and produce supervisory procedures for passporting, registration, settlement of disputes and any non-compliance, including precautionary measures.

The consultation paper also provides the proposed responsibilities of firms seeking full authorisation, in respect of issues such as capital requirements and safeguarding funds received by a payment institution in the course of executing payment transactions.

Notably, the consultation paper also provides new rules to ensure that credit institutions provide access to payment account services (including to new market entrants) on a proportionate, objective and non-discriminatory basis. The government proposes to keep the same conditions for the exemption for Small Payment Institutions regarding authorisation.

The consultation also outlines new rules for Account Information Services and Payment Initiation Services, noting that ‘’the PSD II obligations are closely aligned with the government’s vision for enhancing competition in the retail banking market through the delivery of an Open Banking Standard’’. These new services introduced by PSD2 represent some of the most important changes to the payments industry, and have the potential to significantly alter competition within the industry.

The consultation paper also outlines transparency and information requirements for PSPs and new conduct of business rules.

FCA DISCUSSION PAPER ON ILLIQUID ASSETS AND OPEN-ENDED INVESTMENT FUNDS

On 8 February 2017, the FCA published a discussion paper (DP17/1), which considers some of the risks created when consumers use open-ended investment funds to gain exposure to assets that may be difficult for the fund manager to buy, sell, or value quickly. These “illiquid assets” may include land and buildings, infrastructure and financial assets such as unlisted securities.

In publishing DP17/1, the FCA aims to gather evidence to decide whether more (or different) rules and guidance are needed to support market stability and protect consumers. The FCA notes that such regulation should ideally allow a wide range of investors to share in the potential returns of illiquid assets and give them an appropriate level of protection that reflects their understanding of the nature and risks of the investment, while ensuring that the vehicles they use do not create or exacerbate risks to market integrity and stability.

As discussed in the FCA’s accompanying press release, one particular issue raised in DP17/1 is the balance of interests between investors who want to withdraw their money and those who want to remain. Open-ended funds that invest in illiquid assets can encounter difficulties in meeting daily redemption requests, as, in practice, it may be difficult for a manager to calculate a daily unit price for a fund where the value of its assets are assessed less frequently than every day.

The FCA notes that these difficulties can be exacerbated in the event of an upsurge in redemption demand or market conditions in respect of the underlying assets materially change. This was the case after the Brexit referendum vote in June 2016, as liquidity management issues arose in some UK open-ended property funds which forced managers to either suspend trading on funds or apply asset valuation adjustments. In response to these trading suspensions, the FCA began to closely supervise the affected asset managers, with a view to putting a plan in place for lifting the suspensions as a matter of priority.

On 8 July 2016, the FCA published a guidance note on the use of liquidity management tools in exceptional market circumstances. The guidance reminded firms of the procedures they should follow and that fund managers have a duty to act in the best interests of all investors. The intention of the guidance was to make clear the FCA’s expectation that firms take all unitholders’ interests fully into consideration in managing funds during a period of stress, including being prepared to use the full range of tools available to them.

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DP17/1 follows the publication of this guidance and suggests that some of the approaches adopted by managers in response to the Brexit market crisis may have fallen short of the FCA’s expectations. The FCA is now asking for stakeholders to comment on: (i) what problems exist where open-ended funds hold illiquid assets; (ii) how well the current rules address those problems; and (iii) what further regulatory intervention may be needed.

In advance of receipt of stakeholder comments, the FCA proposed in DP17/1 certain improvements that may be made to the rules and guidance affecting the use of liquidity management tools, including:

■ Separate share classes for retail and professional investors: issuing of guidance to managers to encourage different classes of shares to be issued to retail and professional investors in Non-UCITS Retail Schemes (NURS), so that their respective money is not comingled and their respective interests can be balanced;

■ Caps on investor holdings in funds: changing the rules in respect of diversification of investors to more closely reflect the rules for property authorised investment funds (PAIFs), which require alternative fund managers to prevent certain investors holding more than 10% of a fund;

■ Enhanced portfolio diversification rules: augmenting the rules on portfolio diversification to set a cap on the proportion of a portfolio that may be held directly in illiquid assets, or imposing a minimum amount to be held in uncommitted cash;

■ Liquidity buckets: adopting rules similar to those currently applied in the United States on the use of liquidity “buckets” so that fund portfolios are subject to hard or soft limits on the proportion of assets that could be realised for cash within a specific timeframe;

■ Imposing conditions on investments in other funds holding illiquid assets: amending the rules which allow one fund to invest in units or shares of another fund, so as to impose specific conditions for when the underlying fund invests mainly in illiquid assets;

■ Additional guidance on usage of liquidity management tools: issuing additional guidance to managers as to when and how certain liquidity management tools should be used, requiring managers to make provision in scheme documents for their potential use, or requiring other regulated persons to change their procedures and processes to meet the fund manager’s needs; and

■ Enhanced or better targeted investor communications: requiring clearer investor communications which help investors to understand the possible impact of fund liquidity problems on their own situation.

However, the FCA recognised that any change to its current rules which has the effect of making investment in illiquid assets by open-ended investment companies less appealing, has the potential to create tension with various government-led initiatives, directly or indirectly promoting increased investment in illiquid assets. Such initiatives include: (i) the National Infrastructure Delivery Plan; (ii) the government’s plans for local government pension schemes to bring their assets together into a small number of pools; and (iii) the European Long Term Investment Fund, aimed at professional and retail investors and providing opportunities to gain exposure to illiquid assets.

The FCA requested comments on DP17/1 by 8 May 2017. The FCA will consider the feedback and publish a response later in 2017. If it decides to make proposals for new or amended rules, it will proceed to publish a consultation paper.

The Financial Stability Board (FSB) also previously published recommendations in January 2017, addressing liquidity mismatches between a fund’s assets and its terms of redemption. As part of its review in this area, the FCA will work to develop and implement some of the FSB’s recommendations.

HM TREASURY RESPONSE TO CONSULTATION ON MIFID II TRANSPOSITION

On 9 February 2017, HM Treasury published its Response (Response) to a consultation on transposing the MiFID II Directive (2014/65/EU) into national law, which ran from 27 March 2015 to 18 June 2015. The Response summarises the responses received from market participants, as well as the government’s position.

HM Treasury states that although respondents mainly agreed with its proposed approach, where there was some confusion or uncertainty about the proposed new rules, HM Treasury has tried to clarify the position in the response. The Annexes to the response contain three draft statutory instruments that will give effect to the transposition policy set out in the response, as well as amend or augment the current UK regime.

The response covers a number of different areas, including:

■ Third countries: Article 39 MiFID I permits Member States to require a third country (i.e. non-EEA) firms to establish a branch in their jurisdiction when they provide

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MiFID investment services and activities to retail or elective professional clients. HM Treasury has confirmed it will not be implementing this provision in the UK and that its current third-country regime, known as the “overseas persons exclusion”, will be maintained.

■ Unauthorised persons: The government will consider whether an amendment to the Financial Services and Markets Act 2000 (FSMA) is necessary with respect to unauthorised persons who have proprietary rights in a benchmark, in order to appropriately enforce the obligations in Article 37 of the Markets in Financial Instruments Regulation (MiFIR). Article 37 MiFIR requires such rights holders to license benchmarks on a non-discriminatory basis.

■ Data reporting services: HM Treasury confirms that it will create a specific standalone regime for Data Reporting Service Providers (DRSPs) in relation to the obligations placed on Member States under Article 59(1) of MiFID II. The government considers this to be appropriate in light of the inherent differences between activities carried out by DRSPs and activities carried out under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544).

■ Power to remove board members: HM Treasury states that it does not consider the existing powers under the FSMA sufficient for the purposes of transposing Article 69(2(u)) of MiFID II, which requires the competent authorities of Member States to have the power to require the removal of a natural person from the management board of an investment firm or market operator. This is because not all natural persons on a management board of a designated investment firm will necessarily be FCA approved persons (e.g. certain non-executive directors). The government has therefore created a standalone power to remove board members, which applies to investment firms, credit institutions and market operators.

■ Binary options: HM Treasury confirms that that it will be legislating for binary options to be treated as financial instruments. Binary options are a form of financial contract which typically pays a fixed sum if the option is exercised or expires in the money, or nothing at all if the option is exercised or expires out of the money. They are frequently used for betting purposes but their characteristics are more akin to other financial options.

■ Organised Trading Facilities (OTF): HM Treasury confirms that OTFs will not be required to obtain a separate permission of dealing on own account and that such trading would be more appropriately dealt with through introduction of a notification regime and compliance with

new FCA rules in relation to OTFs. OTFs, like regulated markets and multilateral trading facilities, are a type of trading venue in which multiple buying and selling interests can interact in a way that results in contracts. However, OTFs can only facilitate the trading of non-equity financial instruments on a discretionary basis.

The Response states that the government will lay before parliament finalised statutory instruments for implementing MiFID II in early 2017.

Once they come into force, market participants will be able to apply formally to the FCA or PRA for new authorisations or variations of permission where necessary. The statutory instruments will come into force in the early part of 2017 to enable firms to make such applications, although the obligations in MiFID II and MiFIR will apply generally from 3 January 2018.

PRA FINES BANK OF TOKYO-MITSUBISHI AND MUFG SECURITIES FOR FAILURE TO BE OPEN AND COOPERATIVE

On 9 February 2017, the PRA published a final notice in respect of the Bank of Tokyo-Mitsubishi UFJ Ltd (BTMU) and MUFG Securities EMEA plc (MUFG) imposing fines of £17.9 million and £8.9 million respectively for failing to be open and cooperative with the regulator in respect of an enforcement action against BTMU by the New York Department of Financial Services (NYDFS).

On 18 November 2014, the NYDFS announced a fine of $315 million for BTMU in relation to a historical transaction review report submitted by BTMU to the NYDFS relating to potential breaches of US sanctions and BTMU having applied “improper pressure” onto the writers of the report to remove certain aspects. As part of the settlement, one of BTMU’s former compliance employees, and the then chair and controlled function holder (CF2) of MUFG was banned from conducting business involving any New York banks regulated by NYDFS. MUFG had been aware of BTMU considering the implications of this investigation in early October 2014, and was aware in early November 2014 that it may face restrictions on its banking activities in the US. Neither BTMU nor MUFG notified the PRA in advance of the NYDFS’s public announcement.

BTMU was found to be in breach of Fundamental Rules 6 (organising and controlling its affairs responsibly and effectively) and 7 (dealing with regulators openly and cooperatively) of the PRA Rulebook. The PRA stated that the failure to have in place appropriate procedures, policies, systems and controls to communicate the relevant information to the PRA meant UK regulatory implications were not adequately considered

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by those managing BTMU’s negotiations with the NYDFS, and that those with regulatory reporting responsibilities could not give appropriate consideration as to whether notifications needed to made to the PRA. The PRA also noted that there was a failure to circulate relevant information within the group, including within MUFG. The PRA stated that any fine or reputation damage could have prudential implications for the global business, and potentially the safety and soundness of the UK financial system, and therefore the NYDFS investigation was a matter which the PRA would have expected notice of.

MUFG was also found in breach of Fundamental Rule 7. The PRA stated that not being aware of the NYDFS action in a timely manner meant that the PRA was prevented from considering the potential impact of these circumstances on the Chairman’s fitness and propriety.

The PRA’s enforcement action is unusual, in that it relates to a failure to communicate regarding another enforcement investigation, rather than directly to the malpractice which the NYDFS enforcement investigation related to. The case gives further clarity as regards PRA’s expectations with regard to Fundamental Rules 6 and 7, including the following:

■ Firms should take initiatives to ensure that the PRA has all relevant information at an early stage, including information on the potential for material sanctions by an overseas regulator, on matters that may adversely impact a firm’s reputation, as well as on matters that may be relevant to the assessment of the fitness and propriety of regulated individuals;

■ Firms operating across multiple jurisdictions should ensure they are able to appropriately consider the cross-border implications of operations in one jurisdiction; and

■ Individuals with multiple roles across entities within a group must consider their own r esponsibilities to the UK regulators, as well as the regulatory responsibilities of each firm.

MARKET ABUSE REGULATION: FCA POLICY STATEMENT ON CHANGES TO DTR 2.5 (DELAYING DISCLOSURE OF INSIDE INFORMATION)

On 24 February 2017, the FCA published a policy statement (PS17/2) summarising feedback received on its consultation paper CP16/38 and setting out changes to Rule 2.5 of its Disclosure Guidance and Transparency Rules sourcebook (DTR), which concerns the delayed disclosure of inside

information. The changes ensure consistency of DTR 2.5 with the guidelines issued by the European Securities and Markets Authority (ESMA).

Under Article 17 of the Market Abuse Regulation, an issuer must announce inside information as soon as possible, unless it can satisfy three criteria:

1. that immediate disclosure would prejudice the issuer’s legitimate interests;

2. that delay is not likely to mislead the public; and

3. that confidentiality will be preserved.

The primary change to DTR 2.5 arising out of the consultation, is the removal of a statement that delaying disclosure of inside information is only likely to be allowed where there is an ongoing negotiation that would be jeopardised by early disclosure. As the sole respondent to the consultation noted, the wording conflicted with ESMA’s non-exhaustive list of situations in its guidelines where delay might be permissible on the grounds that immediate disclosure would prejudice an issuer’s legitimate interests.

The FCA has also published the Disclosure Guidance and Transparency Rules Sourcebook (Delayed Disclosure) Instrument 2017 which implements the changes outlined in the policy statement. The changes to DTR 2.5 took effect on 24 February 2017.

DELEGATED REGULATION ON RTS ON KEY INFORMATION DOCUMENTS REQUIRED UNDER PRIIPS PUBLISHED IN OJ

On 8 March 2017, the European Commission (Commission) adopted an amended Delegated Regulation as a supplement to the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (1286/2014). The Delegated Regulation lays down regulatory technical standards (RTS) regarding the content, presentation specific provisions, review, revision and delivery of KIDs. The Delegated Regulation was published in the Official Journal (OJ) on 12 April 2017 and came into force on 2 May 2017.

Background

The PRIIPs Regulation requires manufacturers of PRIIPs to draw up standardised KIDs for such products before they are made available to retail investors to enable them to understand the product and allow for comparisons between products.

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The Commission had initially adopted a Delegated Regulation on KIDs for PRIIPs on 30 June 2016, however this was objected to by the European Parliament (Parliament) in September 2016, as not being within the spirit of the PRIIPs Regulation.

The Commission proposed certain amendments and asked the European Supervisory Authorities (ESAs) to submit their opinion, however the ESAs failed to reach a consensus at the time. As such, the Commission adopted the RTS with the amendments it considered relevant.

Amended version of the Delegated Regulation

The key amendments introduced by the Commission include the following:

■ Until 31 December 2019, manufacturers may use the key investor information document (KIID) drawn for the purposes of the UCITS IV Directive (2009/65/EC) in relation to products which have at least one UCITS or non-UCITS fund as an underlying investment option;

■ A comprehension alert is required where a PRIIP is a non-exempt complex insurance-based investment product or where a PRIIP is an investment product that does not meet the requirements of MiFID II;

■ Clarifications and amendments have been introduced for the summary cost indicator, namely that a 3% performance return should be used; and

■ The option for a fourth performance scenario has been replaced with a mandatory additional “stress” scenario.

On 5 April 2017, the Parliament issued a notice stating its non-objection to the Delegated Regulation, which it stated was consistent with the objectives of the Parliament as stated in its September 2016 objection letter. The Council of the EU issued a press release announcing that it decided not to object to the Delegated Regulation. The Delegated Regulation was published in the OJ on 12 April 2017 and came into force 20 days after.

PAYMENT SERVICES REGULATOR PUBLISHES POLICY STATEMENT ON FINANCIAL PENALTY SCHEME

On 24 March 2017, the Payment Systems Regulator (PSR) published a policy statement (PSR PS17/1) on its financial penalty scheme (Scheme). The PSR is responsible for the regulation of both the major payment services providers operating in the UK who have been specifically designated by HM Treasury such as Bacs, CHAPS, Faster Payments, LINK, MasterCard and Visa Europe (PSPs) and other payment systems operators and regulated entities (such as

infrastructure providers or indirect payment service providers) under its concurrent competition powers under the Enterprise Act 2002 and Competition Act 1998.

As part of its enforcement powers under the Financial Services (Banking Reform) Act 2013 (FSBRA) and other legislation including the Interchange Fee Regulation ((EU) 2015/751) (IFR), the PSR has the power to impose penalties for compliance failures on persons subject to its regulation. It should be noted that both PSPs and other payment systems operators and regulated entities may be subject to penalties for compliance failures.

When the PSR receives a penalty payment, it is required to pay this to HM Treasury after retaining an amount to cover its relevant enforcement costs (Retained Amount). FSBRA requires the PSR to use the Retained Amount in a way which benefits participants in regulated payments systems. Under the final version of the Scheme, published contemporaneously with PSR PS17/1, the PSR proposes to return the Retained Amount to PSPs through a reduction in the fees it collects from them, while ensuring that any PSPs who are subject to a penalty do not benefit from this reduction.

The Scheme sets out the approach to be adopted in allocating the Retained Amount in the following scenarios:

■ One or more PSPs become liable to pay penalties: The Retained Amount will be returned by reducing the fees of all PSPs except those that were liable to pay a penalty in the previous year.

■ One or more payment system operators become liable to pay penalties: As the person(s) liable to pay a fine is/are not PSPs, the Retained Amount will be returned by reducing the fees of all PSPs.

■ Other regulated entities (such as infrastructure providers or indirect PSPs) become liable to pay penalties: As the person(s) liable to pay a fine is/are not fee payer(s), the Retained Amount will be returned by reducing the fees of all PSPs.

■ Several different entities become liable to pay penalties, such as when both a PSP and a payment system operator (or other regulated entities) become liable to pay penalties during the same financial year: In this scenario, the PSR will combine the above approaches.

The PSR consulted on the Scheme in November 2016. PSR PS17/1 outlines the feedback from respondents and the changes to the draft version of the Scheme made in response to that feedback. The PSR states that, while the majority of respondents supported its proposals, a key concern raised

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by respondents was that the scheme may add an additional layer of complexity to the fee collection process and increase administrative costs for payment system operators. In this regard, while the PSR recognises that implementation of the Scheme will add another layer of complexity to its fee collection process, it believes that the approach it has adopted for the Scheme will minimise additional administrative burdens and ensure that invoice adjustment is not required.

FCA FINES FORMER BANKER FOR SHARING CONFIDENTIAL CLIENT INFORMATION VIA WHATSAPP

The FCA has fined a former investment banker £37,158 for sharing confidential client information via the WhatsApp instant messaging service.

The FCA published its final notice, dated 29 March 2017, in relation to a former managing director at Jefferies International Limited, who between January and May 2016 had discussed the confidential affairs of his clients via social media with two individuals, “Friend A” and “Client A”, on numerous occasions. Some of the disclosures to Client A related to a person who, at the time, was a competitor of Client A.

The FCA accepted that there was no trading, nor intent to trade, by Friend A or Client A, nor had there been any intention, in sharing the information, to effect this. Despite this, the FCA found that the disclosure, without the permission of his clients and without reasonable grounds for doing so, was in breach of Principle 2 (failure to act with due skill, care and diligence). On review of the facts, the FCA determined the breach to be of “level 3” seriousness on its five-point scale.

The case highlights the perils of social media use by employees of financial institutions and demonstrates that the FCA is alert to the issue and takes such cases seriously.

FCA PUBLISHES FIRST POLICY STATEMENT ON MIFID II IMPLEMENTATION

On 31 March 2017, the FCA published its first policy statement (PS17/5) on implementation of the MiFID II Directive (2014/65/EU). PS17/5 contains near-final rules on a number of the areas consulted on in the FCA’s first four MiFID II consultations CP15/43, CP16/19, CP16/29 and CP16/43, such as trading venues, transparency of trading and algorithmic and high frequency trading. It also provides an update on the taping of telephone conversations by retail financial advisers.

The near-final rules in PS17/5 give the financial services industry clarity on the MiFID II regulatory framework that will apply from 3 January 2018. The FCA has advised that firms

may rely on these rules in their preparation for compliance, as any further changes will be minor and will mainly refer to EU and other measures which have not yet been finalised. The publication of PS17/5 comes after the FCA published its applications and notifications guide for MiFID II in January 2017.

The near-final rules will apply to trading venues including regulated markets, multilateral trading facilities, a new type of regulated market known as organised trading facilities (OTFs), and systematic internalisers, as well covering market data and transparency obligations.

Many of the measures under MiFID II take direct effect under UK law, meaning that the FCA has limited or no discretion over many areas raised in the previous consultations. The near-final rules therefore contain few surprises for industry following the consultation. For example, the FCA consulted on signposting references to applicable EU law provisions on regulated markets as opposed to reproducing EU law provisions in the FCA Handbook. In PS 17/5, the FCA has confirmed this approach.

The following key areas are addressed in the near-final rules:

■ Multilateral systems: With the introduction of MiFID II, the concept of an OTF is introduced, significantly broadening the scope of arrangements or activities which may amount to the regulated activity of operation of a trading venue. The FCA intends to publish perimeter guidance on this, but is awaiting guidance from the European Securities and Markets Authority (now published through ESMA Q&As) before it decides how to address its own interpretation. Trading venues should be aware of this potential expanding regulatory perimeter.

■ Post-trade transparency deferrals: The FCA has decided to permit trading venues to use the maximum permitted deferrals available under Article 11 of the Markets in Financial Instruments Regulation (MIFIR). Article 11 MIFIR permits the competent authorities of Member States to authorise the deferred publication of the details of certain transactions in financial instruments, based on the size or type of the transaction.

■ Transaction reporting and collective portfolio managers and pension funds: The FCA consulted on, and confirmed in PS 17/15, that it will remove the current requirement for collective portfolio managers and pension funds to transaction report because it does not consider the benefits of requiring them to report transactions under MiFID II would outweigh the costs.

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■ Transaction reporting and third parties: PS 17/15 confirms that trading venues may use approved reporting mechanisms to report transactions to the FCA. For firms in a corporate group, the FCA’s near-final rules also permits the aggregation of transactions and reporting to the FCA via an internal hub. The near-final rules also contain a regulatory framework for DRSPs, including authorisation procedures.

■ Commodity derivatives: CP16/19 proposed a new section in the FCA Handbook setting out guidance and directions on MiFID II’s regime for position limits, position management and position reporting for commodity derivative contracts. The FCA took the view that it was not necessary to introduce a new provision in order to set an obligation for non-financial entities to submit applications for position limit exemptions.

■ Taping: The FCA requires Article 3 retail financial advisers either to tape all relevant conversations or keep a contemporaneous written note of them. The FCA acknowledged that a full taping obligation may not always be proportionate and proposed that firms can comply with the “at least analogous” requirement by either taping all relevant conversations or compiling a written note of all relevant conversations.

■ Asset management market study: The FCA has confirmed that its proposals in this market study (which addresses how asset management services and products can work better for retail and institutional investors), will, when finalised, be consistent with MiFID II and the Packaged Retail and Insurance based Investment Products Regulation.

Next Steps

Issues consulted on in the first four MiFID II consultations that are not addressed in PS17/5 will be included in the FCA’s second policy statement on MiFID II implementation, which it planned to publish at the end of June 2017.

FIFTH FCA CONSULTATION ON UK IMPLEMENTATION OF MIFID II

On 31 March 2017, the FCA published its fifth Consultation Paper (CP 17/8) on the UK implementation of Markets in Financial Instruments Directive (2014/65/EU) (MiFID II).

CP 17/8 proposes changes in the FCA Handbook in the following areas:

Specialised regimes: Occupational Pension Scheme (OPS) firms are exempt from the first MiFID and this will not change under MiFID II. However, OPS firms are subject to conduct rules as implemented by the first MiFID. The FCA proposes

to apply revised conduct standards in MiFID II to OPS firms as the FCA has done for other investment managers not subject to MiFID II.

DEPP and EG: The FCA proposes to change its Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) to reflect various aspects of MiFID II, including extending the FCA’s enforcement powers to cover persons subject to the UK’s MiFID II implementing legislation. The FCA already has the majority of the enforcement powers conferred by MiFID II, the main exception being the power to require regulated firms to remove persons from their management boards. The FCA’s approach to the use of this new power will be reasonable and proportionate, taking into account all relevant circumstances.

Consequential changes to the FCA Handbook and reporting financial instrument reference data and position in commodity derivatives: The FCA also proposes certain consequential changes to the Handbook and plans to issue guidance on third parties where firms may use third parties to send the FCA financial instrument reference data or commodity derivative position reports.

Industry participants wishing to respond to CP 17/8 had until 23 June 2017 to make submissions in respect of the proposed rules for OPS firms and until 12 May 2017 for the remaining aspects of CP 17/8.

FCA INTRODUCES NEW RULES FOR CREDIT CARD CUSTOMERS IN PERSISTENT DEBT

On 3 April 2017, the FCA published a further consultation paper as part of its Credit Card Market Study. The consultation paper (CP17/10) sets out measures to require credit card providers and issuers to help customers in persistent debt. A customer is in “persistent debt” when the customer has paid more in interest, fees and charges in the preceding 18 months than the principal.

Background

On 26 July 2016, the FCA concluded its study of the credit card market, which was launched in November 2014. The study was launched soon after the FCA took over regulation of consumer credit in the UK. The FCA has published its final findings report (MS14/6.3: Market Study: Credit Card Market Study – Final Findings Report). This report builds on an interim report (MS 14/6.2: Credit Card Market Study: interim report) published by the FCA on 3 November 2015. In the final findings report, the FCA sets out new measures to encourage customers to shop around more effectively, take better control of their spending and, where appropriate,

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repay balances faster. More information about the final report can be found in our September 2016 edition of “Exchange – International”.

Consultation paper 17/10

The key proposals detailed in the consultation paper include:

1. Monitoring requirements (CONC 6.7.3A R)

Firms are currently required to monitor a credit card customer’s repayment records and taking appropriate action where there are signs of actual or possible financial difficulties. But under the new proposals firms will also be required to monitor “any other relevant information it holds about that customer”. There is no further FCA guidance on what other relevant information could include and its interpretation is therefore potentially very wide.

2. Establishment of a policy (CONC 6.7.3C R)

In addition to having a clear, effective and proportionate arrears policy, firms will be required to establish, implement and maintain “an adequate policy to identify and deal with customers showing signs of actual or possible financial difficulties, even where they have not missed a payment”.

3. New requirements in respect of “persistent debt” (CONC 6.7.27 R to 6.7.40 G)

Firms will be required to identify whether a customer is in “persistent debt” (assessment to be conducted on a monthly basis) and communicate that to the customers. Firms will also need to warn the customer that if they continue to be in “persistent debt”, that their account may be suspended, which may be reported to credit reference agencies and encourage the customer to seek assistance from the firm or a not-for-profit debt advice body.

Sometime between month nine and month ten after the date of the first communication, the firm needs to analyse whether the customer is likely to be in “persistent debt” in the next twelve months and if so, send a second communication to the customer.

Where a customer has been in “persistent debt” for 36 months, the firm will be required to take reasonable steps to assist the customer to repay the balance on their credit card as it stands more quickly and in a way that does not adversely affect the customer’s financial situation.

Where a firm has not suspended or cancelled the use of the credit card of a customer in “persistent debt” for a period of 36 months, the firm will be required to “take reasonable steps to ensure that the customer does not” fall into “persistent debt” in the next 18 months.

These new “persistent debt” requirements do not apply if the firm is already taking steps equivalent to, or more favourable than, those required.

HM TREASURY’S REGULATORY INNOVATION PLAN FOR FINANCIAL SERVICES SECTOR

On 4 April 2017, HM Treasury published a regulatory innovation plan for the financial services sector (Plan). Publication of the Plan follows a consultation on a draft of the Plan in April 2016.

The Plan covers the work of the UK’s financial services regulators, the FCA, Payment Systems Regulator (PSR), PRA and the wider Bank of England and addresses how these bodies are adapting to new technologies and disruptive business models.

The Plan outlines how each of the regulators plan to support and promote innovation, facilitating the development of new technologies and disruptive business models in financial services. HM Treasury states that its priority is to ensure that regulation is proportionate and promotes innovation, rather than constraining or inhibiting it.

HM Treasury recognises that the UK’s decision to exit the EU raises a number of important questions for the financial services sector and that encouraging innovation in financial services is now an even greater priority. In this regard, it states that the government’s vision is for UK financial services to be the most competitive and innovative in the world, supplementing existing services with greater choice and value for consumers. HM Treasury notes that the government has already taken significant action to achieve this vision, including:

■ Working with regulators to substantially lower barriers to entry: Initiatives resulting from the government’s work with regulators to make it quicker and easier for new innovative firms to enter the market include the FCA’s Project Innovate, Innovation Hub and Regulatory Sandbox.

■ Driving industry to deliver the Current Account Switch Service (CASS): Since CASS was launched in 2013, customers have switched accounts over 3.5 million times.

■ Legislating to require major banks to share credit data of Small to Medium Enterprises (SMEs): By making SME credit data more available, alternative credit providers and FinTechs will be able to compete and make more effective lending decisions.

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■ Supporting an open banking standard for application programme interfaces (APIs): An open banking standard will create an environment where authorised third parties will be able to access bank data, allowing delivery to customers of innovative services tailored to customer needs.

The Plan also highlights the importance of the role of the financial services regulators, not only in promoting competition and innovation, but also in using and promoting technological advances to reduce regulatory burdens on firms and drive efficiency savings. HM Treasury notes that with the higher regulatory standards and reporting requirements imposed on firms following the Global Financial Crisis, new technologies that help firms better manage these regulatory requirements and reduce compliance costs (RegTech) help promote effective competition and innovation. To this end, it states that both the FCA and PRA are seeking to improve compliance and reduce the cost of regulation for both firms and themselves as regulators and that they are actively engaging with the FinTech/RegTech community to promote the development and adoption of RegTech.

FCA FINES AND BANS INDIVIDUALS FOR MARKET ABUSE

On 7 April 2017, the FCA issued two final notices, the first in respect of Niall O’Kelly (NO), the former Chief Financial Officer of Worldspreads Limited (WSL), and the second in respect of Lukhvir Thind (LT), former Financial Controller of WSL.

WSL was a spread-betting firm, which went into administration in March 2012. In August 2007, WSL was admitted to trading on the Alternative Investment Market of the London Stock Exchange. NO was involved in the drafting and approval of the formal documentation required for the purposes of flotation, which was found to be materially misleading and failed to disclose key information.

NO was also found to have helped manage an undisclosed “internal hedging” strategy using fake client trading accounts and using actual client trading accounts without authorisation. NO’s actions resulted in the artificial inflation of assets on WSL’s balance sheet.

Additionally, NO and LT were found to have knowingly falsified critical financial information that resulted in WSL’s 2010 and 2011 annual accounts being materially inaccurate. By 31 March 2011, these misstatements had amounted to almost £16 million, which meant that WSL was unable to meet its client liabilities, and resulted in WSL’s collapse.

The FCA found that NO and LT had been engaging in market abuse contrary to section 118(7) of the Financial Services and Markets Act 2000. The individuals’ conduct was found to be deliberate and with the intention to mislead the market. The two final notices are based on the former UK market abuse regime that was applicable until 3 July 2016 and thus still in force at the time of the conduct.

FCA PUBLISHES DISCUSSION PAPER ON DISTRIBUTED LEDGER TECHNOLOGY

On 10 April 2017, the FCA published a discussion paper on Distributed Ledger Technology (DLT) (DP17/3). The publication of DP17/3 follows the introduction of several initiatives by the FCA in an effort to encourage innovation, such as its Innovation Hub and Regulatory Sandbox.

DLT (of which Blockchain is perhaps the best known and most publicised example), may broadly be described as a set of technological solutions that enable a single, sequenced, standardised and cryptographically-secured record of activity to be safely distributed to, and acted upon by, a network of varied participants. This record could contain for example, transactions, asset holdings or identity data. DLT may be contrasted with centralised ledger systems which are owned and operated by a single trusted entity.

The FCA notes that DLT has the potential to provide various benefits for regulated markets. These benefits are likely to emerge in sectors where multiple participants need to share data and/or processes safely, particularly where firms are still reliant on paper-based records. As a consequence, technology companies seeking to provide DLT-based solutions to the financial services sector have grown sharply in number and size, and regulated firms have invested increasing resources in using this technology to provide financial services.

In response to the pace of development of DLT, DP17/3 is intended to start a dialogue on the potential for future development of the technology in the markets the FCA regulates and is aimed at both users and providers of DLT solutions. Although the FCA has traditionally taken a “technology neutral” approach to regulation, it is now considering whether there is anything distinctive about DLT that would require a different approach to be taken. As such, the FCA is seeking views on the potential benefits and risks of the following aspects of DLT:

■ Governance and technology resilience: The integrity of the technological systems which regulated firms use to run their businesses are of paramount importance to achieving the FCA’s aim of market integrity and consumer protection. The FCA states that from a regulator’s perspective, systems outages compromise the orderly functioning of markets,

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deprive consumers of access to financial services and undermine faith in the financial services sector. DLT, as a combination of existing technology types, is likely to present similar challenges, risks and benefits to other types of technology currently being used today.

■ Alternatives to DLT: DLT is just one example of a number of different shared database systems which exist and the FCA notes that it is possible that such other systems may have advantages over DLT in terms of technological resiliency.

■ Record keeping and auditability: DLT offers the ability to aggregate and verify data from multiple sources and offer a shared view of the same record; it therefore has the potential to reduce discrepancies and costs substantially.

■ Smart contracts: DLT can facilitate greater levels of automation through so-called “smart contracts”, a phrase which pre-dates the Bitcoin network by over a decade and relates chiefly to executing terms of legal contracts digitally.

■ Digital currencies: The most widespread use of DLT presently is for digital currencies. Although the buying and selling of digital currencies themselves is outside the FCA’s regulatory perimeter, derivative instruments which reference digital currencies may be regulated financial products. The FCA sees a risk in some consumers perceiving digital currencies to be regulated financial investments.

The FCA also examines a number of regulatory areas where amendments to existing regimes may be required to ensure DLT’s compatibility with them. Such areas include rules on collateral management, asset trading, data protection and the allocation of responsibilities, noting that in an environment without a single controlling entity it may not always be clear who is responsible for what.

FAMR UPDATES, CONSULTATIONS AND REPORTS

FCA and HM Treasury Publish the FAMR Progress Report

On 11 April 2017, the FCA and HM Treasury issued a joint progress report on implementing the Financial Advice and Markets Review (FAMR) recommendations.

The FAMR was launched in August 2015 to examine how financial advice could operate better for consumers. The final FAMR report sets 28 recommendations in total. More information about this report can be found in our May 2016 edition of “Exchange International”.

The FCA and HM Treasury confirmed that they have completed, or are on track to complete, all of the FAMR’s 28 recommendations. More specifically, the implementation of ten recommendations had been completed, eleven were reported to be on track and, for each of the remaining seven recommendations, there was a consultation underway. The FCA and HM Treasury announced that they will conduct a review of the outcomes from the FAMR in 2019.

FCA GUIDANCE CONSULTATION ON IMPLEMENTATION OF THE FAMR

On 11 April 2017, the FCA published the first part of a two-part guidance consultation, Financial Advice Market Review: Implementation part 1 (GC17/4) proposing measures to address the FAMR recommendations. The consultation on guidance on non-advised services closed on 23 May 2017 and consultation on the rest of the guidance closes on 11 July 2017. The second part of the consultation is expected in Summer 2017.

The FCA clarified that the guidance is based on MiFID II requirements and so some of the proposed rules will be subject to the third FCA consultation on the UK implementation of MiFID II. The FCA’s response to the Part 1 consultation is expected in September 2017 and the FCA is aiming for the proposed measures to take effect in January 2018, in line with the Handbook changes implementing MiFID II.

Streamlined Guidance

Despite its non-binding nature, the FCA stated that it would expect firms to use the guidance, where appropriate, to inform the development and delivery of streamlined advice and services to retail clients. The term ‘’streamlined advice’’ in the guidance covers both:

■ simplified advice – where the firm sets out the boundaries of the service it provides; and

■ focused advice – where the client stipulates the boundaries of the service.

The consultation requests views on the proposed good practice guidance, as well as suggested questions for firms to consider, in respect of processes and governance for developing streamlined advice services which deliver good outcomes for clients and comply with regulatory requirements. The FCA plans to consolidate the guidance in this area and to replace the majority of the existing guidance on these matters currently found in FG15/1 and FG12/10.

Fact find process

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The FCA proposed not introducing a standardised pro-forma fact find, given the existing high level of consistency in more quantitative elements, and the complexity in trying to standardise more qualitative aspects, which need to be both sufficiently broad to capture all relevant information, whilst remaining sufficiently flexible to allow for follow up questions by the advisor. The FCA did highlight, however, that it saw opportunities in technology to allow certain elements of fact finds to become ‘’portable’’, such that elements of a fact find by one advisor could be utilised by another.

Non-advised services

The FCA stated it will also be consulting on changes arising from changes in the regulated activities order (RAO) in part 2 of the FAMR consultation. The RAO changes will come into effect in January 2018 and will mean the majority of regulated firms will only require permission where they provide personal recommendations.

In advance of this consultation, the FCA sought views on whether greater detail was required in certain areas, including implicit personal recommendations, discussing the implications of a transaction, the use of risk profiling and supporting a client with budgeting.

Employer and trustee factsheet

The consultation also requested views on its proposed guidance on how employers and trustees can provide factsheets to employees regarding financial advice or pensions advice without straying into regulated advice. The concern, outlined by the FAMR, had been that many stakeholders had refrained from giving advice because of concerns about needing authorisation to do so. The consultation sought to clarify the kinds of advice that an employer might or might not be able to give, and includes guidance on promoting financial products, pensions and other workplace financial benefits.

Next Steps

The second part of the consultation is expected in the summer of 2017 and will cover:

■ Consequential Handbook changes;

■ Perimeter and non-advised services;

■ Consolidation of non-Handbook guidance; and

■ Guidance informed by the experiences of the FCA’s Advice Unit.

FINANCIAL ADVICE WORKING GROUP REPORTS FOLLOWING THE FAMR

On 11 April 2017, the Financial Advice Working Group (FAWG), established following the FAMR final report, published three reports for the FCA and HM Treasury:

The first of these was the rules of thumb and nudges paper, which related to recommendation 18 of the FAMR. The report provides for five new financial rules of thumb along with principles for designing ‘’nudges’’ to encourage behaviour. For each rule of thumb, the FAWG identified actions that people can take in order to follow the rule in question, as well as an illustrative example to prompt them to act. However, the FAWG recommended that the rules of thumb should be further tested, refined and embedded, while nudges should be implemented to prompt people to act on the rules of thumb.

The second paper was the financial well-being in the workplace paper, which related to recommendation 12 of the FAMR. The FAWG has developed a web-based portal that offers employers a place to access information that can help employees manage their money. The FAWG has also developed a simple guide for employers to give to employees, including tips for money management. The FAWG also makes additional recommendations addressed to the Money Advice Service, the FCA and HM Treasury.

The third paper was the consumer explanations of “advice” and “guidance” paper, which related to recommendation 17 of the FAMR. The FAWG recommends that the terms for “advice” and “guidance” are not changed as the benefit to the customers’ understanding would be marginal, while the costs for the relevant change would be high. It also recommends that the market should adopt a single and consistent set of consumer-friendly explanations for advice and guidance. The FAWG also makes some additional recommendations with regards to the use of explanations.

FCA PUBLISHES OCCASIONAL PAPER ON BEHAVIOURAL INSIGHTS INTO FINANCIAL PRODUCT ADVERTISING

On 12 April 2017, the FCA published occasional paper 26 on behavioural insights into the advertising of financial products. The paper summarises the relevant academic literature and explores the mechanics behind consumer attention, understanding and behaviour. The paper focuses on financial advertisements, as consumers are particularly prone to errors of judgement in this area. The FCA also published an insight article, commenting on the framing of information, pragmatic implications and the interpretation of numbers in abstract forms.

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In the paper, the FCA builds on its earlier work on behavioural biases, including its Occasional Paper 1 published in April 2013, which set out an approach to behavioural economics and financial regulation and developed a framework for understanding behavioural biases and their effects on consumers and firms.

The FCA set out the three stages of how consumers process information in the form of advertisements and consider how they can influence adverts and be taken into account during drafting to ensure they are clear, fair and not misleading:

■ See: Attention may be predicted by the of the extent to which information stands out and may be affected by consumers’ motivations and intentions;

■ Interpret: Certain ways of presenting information, especially those that rely on consumers’ behavioural biases or involve percentages, may be misleading for consumers; and

■ Act: Techniques triggering appeals to emotion or to principles of influence (for example, scarcity or reciprocity), rather than reason, may influence consumers to act.

The FCA suggests that firms and regulators should think about advertisements from the perspective of the consumer/recipient. A number of tools, including comprehension tests, eye tracking and consumer “juries” may be employed for these purposes. The FCA notes that additional quantitative data was needed, as there is still a lot not covered by the existing research. The FCA notes that understanding consumer psychology and information processing is vital in order to determine the impact of advertisements and identify the cases where advertisements are unclear, unfair and misleading and where behavioural techniques lead to misunderstanding on behalf of the customers.

The FCA clarifies that the purpose of the occasional paper is to provide rigorous research results and stimulate debate. The FCA noted that such findings may not necessarily represent the FCA’s position, however, they may be taken into account when informing its views in certain areas.

FCA PUBLISHES 2017/18 BUSINESS PLAN

On 5 May 2017, the FCA published its Business Plan for 2017/2018 (Business Plan), setting out its cross-sector priorities and sector priorities. FCA Chairman, John Griffiths, noted in the Business Plan that the central function of the FCA’s work will remain the challenge of poor conduct in the industry. He further stated that: “there is a clear link between poor culture and poor conduct, and industry must continue its work to achieve and embed its own cultural change”.

The FCA’s cross-sector priorities for the year ahead include:

■ Firms’ culture and governance

– The FCA intends to consult on the extension of its Senior Managers Regime to all FSMA firms and complete preparation to implement the Regime from 2018. The Regime will be tailored to reflect the different risks, impact and complexity of firms.

– The FCA will continue work on reviewing its framework that governs remuneration, including helping firms to understand and implement remuneration requirements.

– A key focus will be on supervision, so as to ensure firms’ management keep appropriate culture as a top priority.

■ Financial crime and Anti-Money Laundering (AML)

– The FCA will review early responses to its recently introduced Financial Crime Annual Data Return. Where firms have poor AML controls, the FCA will use its enforcement powers to impose business restrictions to limit the level of risk, provide deterrence messages to industry, or both.

– Preparing for its new role as AML watchdog towards the end of 2017, the FCA will be given formal powers and will put in place a “supervisor of supervisors” called the Office for Professional Body AML Supervision (OPBAS) within the FCA.

■ Promoting competition and innovation – The FCA will be publishing resources to help firms develop “robo-advice” services and investigating how regulatory burden (e.g. regulatory reporting) can be reduced with near and real-time compliance monitoring.

■ Technological change and resilience – The FCA has created a dedicated Cyber Specialists Team to oversee the way that firms manage cyber risk. It will undertake technology and cyber-capability assessment on all firms to assess those considered “high impact” if disruption were to occur.

■ Treatment of existing customers – The FCA aims to ensure that closed book customers do not receive less attention than new customers (e.g. customers of life insurance firms and in the add-ons market). In the pensions section, the FCA will consider the effect of wake-up packs on consumers’ decisions at point of retirement. In retail lending, it will look at how firms treat interest-only mortgage borrowers approaching maturity.

■ Consumer vulnerability and access – Many of the FCA’s planned activities within the different sectors focus on vulnerability and access issues. For example, the FCA

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intends to continue work in the consumer credit sector, including continued focus on high-cost credit and the debt management sector.

The FCA’s sector priorities for the year ahead include:

■ Investment management

– The FCA intends to publish the final report of its asset management market study in Q2 2017 and will consult on proposed remedies and interventions. Such proposals could include: reforms to hold asset managers to account for how they deliver value for money and introducing an all-in fee.

– Following stakeholder feedback to its Discussion Paper on liquidity management in open-ended funds, the FCA will assess how adequate the available tools are in managing conduct risk and addressing financial stability concerns.

– The FCA is also planning a number of interventions in the custodian banking sector.

■ Retail banking sector – The FCA will launch in 2017/18 a “discovery work” to examine the retail banking business models, focusing on the links between different parts of the business and their relative profitability. The FCA will use the analysis to “enhance [its] approach to current and future regulation of retail banks”.

■ Retail lending – Concerned about the potential lack of transparency, conflicts of interest and irresponsible lending, the FCA will conduct an exploratory piece of work into motor finance. Following the review, the FCA will assess whether and how to intervene in the market.

■ General insurance and protection – The FCA plans to conduct a market study on the wholesale insurance market. Following the publication of this market study, the FCA will consider appropriate remedial actions.

■ Retail investments – The FCA will focus on completing the implementation of Financial Advice Market Review (FAMR) and MiFID II. The FCA will also conduct a market study to explore how “direct to consumer” and intermediated investment platforms compete to win new and retain existing customers and undertake further work to address the risks in the Contracts for Difference market.

Annex 1 to the Business Plan contains a summary table, listing a number of the FCA’s thematic reviews, market studies and other reviews, with indicative timings for delivery, while Annex 2 sets out a list of EU financial services initiatives that the FCA is involved in, together with high-level timings.

Please contact michael.mckee@dlapiper.com for further information.

24 | Financial Services Regulation

UNITED STATES

SEC’S DIVISION OF INVESTMENT MANAGEMENT ISSUES GUIDANCE FOR “ROBO ADVISERS” – KEY TAKEAWAYS

The Staff of the SEC’s Division of Investment Management (IM), in conjunction with the Office of Compliance Inspections and Examinations (OCIE), has issued its second Guidance Update of 2017 (Guidance). This Guidance focuses on “automated advisers”, which it refers to by their more colloquial name, “robo-advisers.”

Guidance from IM staff is generally noteworthy. In this instance, moreover, the Guidance is reasonably specific and lays out a relatively clear set of directives (and factors) that the Staff believes robo-advisers should follow in managing their businesses.

Given the involvement of OCIE staff in the preparation of the Guidance, the Staff’s detailed suggestions appear to present advisory firms with a blueprint for minimizing SEC staff criticism of their contracting, client interaction and disclosure practices.

What is a “robo-adviser”?

The term “robo-adviser” encompasses a wide variety of business models and a range of advisory services. While some robo-advisers operate as stand-alone companies, others are part of larger and/or more traditional investment advisers. Furthermore, some enable clients to access their services directly, while others are offered by advisers as portfolio management tools.

What robo-advisers have in common, according to the Guidance, is their use of “innovative technologies to provide discretionary asset management services to their clients through online algorithmic-based programs”. In brief, such advisers utilize information provided by clients through a digital platform or otherwise, and generate and subsequently manage a portfolio for the client’s account.

Guidance for robo-advisers

The Guidance is founded upon the Staff’s belief that robo-advisers face “unique challenges” in meeting their obligations under the Investment Advisers Act of 1940. Drawing on its observations and experience (including input received during the SEC’s November 2016 Fintech Forum), the Guidance emphasizes certain “unique considerations” that robo-advisers should keep in mind when structuring their operations and delivering advisory services to clients, with particular focus on three areas: (i) disclosure to clients; (ii) suitability issues; and (iii) compliance programs.

Disclosure practices and related operational issues

Investment advisers have a duty to disclose all material facts to and to take care to avoid misleading clients. Moreover, as emphasized in the Guidance, all required information must be presented in a manner that clients are likely to read and understand.

This is an important point, because clients of such firms typically interact with them through an electronic or even mobile platform. The Guidance focuses on robo-advisers’ reliance on algorithms and the internet as a means of providing advisory services, and advises robo-advisers to consider the most effective way to communicate to their clients the limitations, risks, and operational aspects of their advisory services. It also reminds advisers to consider whether their written disclosures are likely to be effective.

The Guidance identifies specific considerations that robo-advisers should keep in mind when creating their disclosure and makes a series of concrete suggestions regarding specific disclosures items. Advisers should view these suggestions as a starting point and perhaps a “punch list” of disclosure items:

■ the risks inherent in the use of an algorithm to manage client accounts, including the circumstances (if any) that might cause the adviser to override the algorithm used to manage client accounts;

■ any involvement by a third party in the development, management, or ownership of the algorithm, including an explanation of any conflicts of interest such an arrangement may create;

■ fees charged to and costs borne by clients, directly or indirectly;

■ the degree of human involvement (if any) in the oversight and management of individual client accounts;

■ a description of how the robo-adviser uses the information gathered from a client to generate a recommended portfolio and any associated limitations; and

■ an explanation of how and when a client should update information he or she has provided to the adviser.

The Guidance also addresses some of the more operational types of issues that robo-advisers face in light of the fact that their client interactions occur primarily on-line and/or through a digital platform.

These are the following:

■ whether key disclosures are presented prior to the sign-up process;

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■ whether key disclosures are specially emphasized through design features, such as pop-up boxes;

■ whether some disclosures should be accompanied by interactive text or addressed in a “Frequently Asked Questions” section; and

■ whether disclosure for a mobile platform has been appropriately formatted.

Suitability of Advice

An investment adviser must determine that the advice provided is suitable for the client based on the client’s financial situation and investment objectives. As stated in the Guidance, given the somewhat limited interaction between a robo-adviser and its clients, such an adviser should consider whether its questionnaire is designed to elicit sufficient information to support its suitability obligation. According to the Staff, robo-advisers should consider including the following factors:

■ whether the questions elicit sufficient information to allow the robo-adviser to conclude that its initial recommendations and ongoing investment advice are suitable and appropriate for that client based on his or her financial situation and investment objectives;

■ whether the questions in the questionnaire are sufficiently clear and/or whether the questionnaire is designed to provide additional clarification or examples to clients when necessary; and

■ whether steps have been taken to address inconsistent client responses, such as incorporating into the questionnaire a mechanism to alert a client when his or her responses appear internally inconsistent or implementing a system to flag apparently inconsistent information provided by a client for review by the adviser’s staff.

Compliance

The Guidance states clearly that a robo-adviser should be mindful of the unique aspects of its business model when developing its compliance program. For example, an adviser’s reliance on algorithms, the limited, if any, human interaction with clients, and the provision of advisory services over the internet may create or accentuate risk exposures for the adviser that should be addressed through written policies and procedures. It suggests that robo-advisers should consider whether to adopt and implement written policies and procedures that address areas such as:

■ the development and testing of the algorithmic code and post-implementation monitoring of its performance;

■ assessing whether the questionnaire elicits sufficient information to allow the robo-adviser to conclude that its advice is suitable and appropriate for that client based on his or her financial situation and investment objectives;

■ ensuring disclosure to clients of changes to the algorithmic code that may materially affect client portfolios;

■ ensuring oversight of any third party that develops, owns, or manages the algorithmic code or software modules utilized by the robo-adviser;

■ constructing a plan to prevent, detect and respond to cybersecurity threats;

■ overseeing the use of social and other forms of electronic media in connection with the marketing of advisory services; and

■ protection of client accounts and key advisory systems.

Please contact john.grady@dlapiper.com for further information.

TREASURY’S FRAMEWORK TO RELAX AND “IMPROVE” THE VOLCKER RULE: KEY RECOMMENDED CHANGES

On 12 June 2017, the US Treasury Department issued a fairly detailed report, A Financial System That Creates Economic Opportunities – Banks and Credit Unions, of proposed changes to financial regulation primarily stemming from the Dodd-Frank Act.

Treasury’s report is clear that banks with access to FDIC deposit insurance and the Federal Reserve’s discount window “should not engage in speculative trading for their own account”, but it criticizes the Volcker Rule’s design and implementation which “far overshot the mark”. Changes to both scope and operation of the Volcker Rule “are necessary to clarify the rule’s prohibitions, reduce unnecessary compliance burdens and promote market making and other economically important activities”. While the report is critical of both proprietary trading and the covered fund restrictions in the rule, more attention is focused on revisions to the former.

Following terminology associated with the House’s Financial CHOICE Act, the report proposes a Volcker Rule “Off-Ramp” for highly capitalized banks. Noting that increased capitalisation can effectively mitigate risks posed by proprietary trading, the report supports the position that highly capitalised banks, referencing the 10 percent leverage ratio proposed by the Financial CHOICE Act, should be permitted to “opt out of the Volcker Rule altogether”.

26 | Financial Services Regulation

Additional recommended changes include:

Small bank exemption – Exempting from the rule in its entirety banking organisations with $10 billion or less in total consolidated assets. “The relatively small risk that these institutions pose to the financial system does not justify the compliance burden of the rule, and the risk posed by the limited amount of trading that banks of this size could engage in can easily be addressed through existing prudential regulation and supervision.”

Limited activity exemption – Exempting from the rule’s proprietary trading restrictions banking organisations, regardless of their size, with less than $1 billion in trading assets and trading liabilities provided their trading assets and trading liabilities represent 10 percent or less of total assets.

Revised scope of enhanced compliance requirements – In response to the rule’s “progressively more stringent requirements based on a banking entity’s size and involvement in covered activities”, triggering enhanced compliance requirements for banking entities with $10 billion or more in consolidated trading assets and liabilities rather than the current trigger of $50 billion in total consolidated assets.

Foreign fund exemption – Exempting foreign funds owned or controlled by foreign affiliates of US or foreign banks from the definition of banking entity, and thus from the scope of the Volcker Rule.

Simplification or elimination of subjective proprietary trading tests – Revising or eliminating the “purpose test” for determining whether trading activity is proprietary trading and eliminating the presumption that positions held for less than 60 days constitute proprietary trading. The report notes that two of the three proprietary trading tests, namely the “market risk capital rule test” and the “status test,” are linked to objective calculations and thus are more workable from a compliance perspective.

Increased market making flexibility – Giving banking entities flexibility in determining inventory of securities needed for market making and the ability of opt out of the “reasonably expected near term demand” or RENTD requirement entirely if the banking entity is fully hedged against “all significant risks arising from its inventory of that instrument”.

Simplified hedging exemption – Monitoring interest rate, credit, market and other risks as part of standard business practice and hedging accordingly, rather than instituting a specific Volcker Rule hedging compliance program and

satisfying the associated documentation requirements. In making this recommendation, the report noted that “[t]he Volcker Rule appropriately exempts risk-mitigating hedging transactions from the proprietary trading prohibition” but the compliance requirements are “unnecessarily burdensome”.

Improved coordination among regulators – Mandating increased consistency and coordination among the five agencies responsible for enforcing the Volcker Rule. “The regulators’ existing approach to coordination has not worked and, as a result, banks have had difficulty obtaining clear, consistent guidance. These agencies should ensure that their interpretive guidance and enforcement of the Volcker Rule is consistent and coordinated”.

Limited definition of covered funds – Adopting a simple definition of a covered fund focused on the characteristics of hedge and private equity funds (the actual focus of Section 619 of the Dodd-Frank Act) rather than reliance on reference to the Investment Company Act. In making this recommendation, the report states that the current definition is overly broad and encompasses funds that are not hedge or private equity funds. It is possible such a change would clarify the inapplicability of the rule to certain CDO and other fund structures.

Extension of a covered fund’s seeding period – Extending the current seeding period for new funds from one to three years.

Allowing certain affiliated transactions with covered funds – Restoring the allowance for certain transactions between a banking entity and its covered funds that are otherwise permitted by Section 23A of the Federal Reserve Act between a bank and other affiliates.

Relaxation of fund naming restrictions – Allowing sponsored funds to share a name with banking entities other than the insured bank itself.

Please contact jeffrey.hare@dlapiper.com, christopher.steelman@dlapiper.com and david.goldstein@dlapiper.com for further information.

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NETHERLANDS

PAYMENT SERVICES LEGISLATION IN FULL SWING

The legislation that is applicable to the payment services market is currently subject to a lot of changes. In this article we provide an update on these developments from the first Payment Services Directive to the final draft regulatory technical standards, as published by the European Banking Authority on 23 February 2017. We also focus on the first Dutch draft of legislation for the second Payment Services Directive, that was published for consultation in November 2016.

Payment Services Directive

The first Payment Services Directive (PSD) was adopted in 2007. PSD aimed to regulate the payment industry and to enhance consumer protection. PSD, however, did not accurately reflect the manner in which certain payment methods operated. In addition, the application of PSD was not always clear. Furthermore, the European Commission (EC) was concerned that many payment service providers (PSPs) escaped the regulation under PSD. Consequent to the above, the EC proposed a second iteration of PSD.

Payment Services Directive 2

On 2 June 2015, the Council of the EU published its final compromise text for the second Payment Services Directive (PSD2). PSD2 will take effect from 13 January 2018. The five main objectives of PSD2 are to:

1. contribute to a more integrated and efficient European payments market;

2. improve the level playing field for payment service providers;

3. make payments safer and more secure;

4. protect consumers; and

5. encourage lower prices for payments.

Second Payment Services Directive in the Netherlands

The first Dutch draft of legislation for PSD2 was published for consultation in November 2016. The three most significant changes in payment services regulation in the Netherlands following PSD2 are depicted below:

1. Extension of the scope (beyond Europe)

Under PSD, the scope of application includes inter alia all types of payment services carried out in EU currencies, provided within the EU, to the extent that both the payer’s PSP and the payee’s PSP are located in the EU (in other words, “both legs in”). PSD2 extends the scope beyond Europe by including

transactions in which at least one PSP that is involved in the transaction is established in the EU (in other words, “one leg in transactions”). Furthermore, PSD2 is applicable regardless of the currency used.

In addition, the scope of PSD2 is extended with the purchase of physical goods and services through a telecom operator and third party PSPs, being: (i) payment initiation service providers, (ii) account information service providers and (iii) issuers of payment instruments.

2. Surcharging

PSD states that charges shall be agreed between the payment service user and the PSP and shall be appropriate and in line with the PSP’s actual costs. Furthermore, PSD left it up to each Member State to decide upon surcharging of card payments. This discretion created a scattered European landscape in which some countries banned surcharges and some others allowed it.

PSD2 seeks to standardise the different approaches to surcharges on card-based transactions:

■ surcharging will in principle still be allowed, but strictly limited by the direct costs borne by the payee;

■ surcharging for payment cards that are regulated by Chapter II of the Multi-interchange Fee (MIF) Regulation and the Regulation establishing technical requirements for credit transfers and direct debits in euro and amending Regulation (SEPA Regulation) – basically transactions by way of payment cards based on “four party payment card schemes”, money transfers and direct debit collections – are prohibited; and

■ PSD2 still leaves room for the Member States to prohibit or limit the right of the payee to request charges taking into account the need to encourage competition and promote the use of efficient payment instruments.

Under Dutch law, currently section 6:230k of the Dutch Civil Code (het Burgerlijk Wetboek, the DCC) states that surcharging for the use of a payment instrument can be charged on to a consumer, to the extent that the costs do not exceed the actual costs of the PSP. The Netherlands does not take advantage of the possibility to further prohibit or limit the right of the payee to surcharge. The content of the aforementioned section will therefore remain unchanged.

3. Introduction of strong customer authentication

Introduction of strong customer authentication (SCA) means an authentication based on the use of two or more elements categorised as (1) knowledge (something only the user knows), (2) possession (something only the user possesses) and

28 | Financial Services Regulation

(3) inherence (something the user is) that are independent, in that the breach of one does not compromise the reliability of the others, and is designed in such a way as to protect the confidentiality of the authentication data.

Under PSD2 Member States should ensure that a PSP applies strong customer authentication where the payer:

accesses its payment account online;

initiates an electronic payment transaction; or

carries out any action through a remote channel which may imply a risk of payment fraud or other abuses.

On 23 February 2017, the European Banking Authority (EBA) provided further guidance on how the new rules concerning SCA should be explained. In this framework, EBA published final draft regulatory technical standards (RTS) specifying the requirements of SCA and the exemptions from the application of SCA. In short, specific characteristics for the three

elements constituting SCA were removed from the previous RTS, to ensure technological neutrality and allow for future innovations. Furthermore, with regard to the exemptions from the principle of SCA, the EBA introduced two new exemptions: one based on transaction-risk analysis and the other for payments at ‘unattended terminals’ for transport or parking fares.

The final draft RTS will be submitted to the Commission for adoption, following which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union. The RTS will be applicable eighteen months after its entry into force, which would suggest an application date of the RTS in November 2018 at the earliest.

Please contact paul.hopman@dlapiper.com, juliet.degraaf@dlapiper.com and linda.vanhal@dlapiper.com for further information.

www.dlapiper.com | 29

INTERNATIONAL

BCBS PUBLISHES PILLAR 3 STANDARDS DOCUMENT FOLLOWING SECOND PHASE REVIEW

On 29 March 2017, the Basel Committee on Banking Supervision (BCBS) published its standards document on Pillar 3 disclosure requirements (March 2017 Standard). Following the BCBS consultation paper in March 2016, the March 2017 Standard concludes the second phase of BCBS’s review of the Pillar 3 framework, and follows publication of the first phase Pillar 3 disclosure requirements document issued in January 2015 (the January 2015 Standard).

The March 2017 Standard considers five main areas:

■ Consolidates existing and prospective BCBS disclosure requirements into the Pillar 3 framework – The March 2017 Standard consolidates requirements across the various Basel prudential disclosure standards, including composition of capital, higher loss absorbency for Globally Systemically Important Banks (G-SIBs), the countercyclical capital buffers, the leverage ratio, the liquidity cover ratio, the net stable funding ratio, interest rate risk and remuneration. The March 2017 Standard is not intended to make fundamental changes to these disclosure requirements, although there are some changes to the frequency and format required.

■ Key Prudential Metrics Dashboard – The March 2017 Standard introduces two new templates, which will serve to provide a dashboard of key prudential metrics, giving users of the data an ability to compare banks’ performance and trends over time.

■ Granular breakdown of calculations for prudential valuation adjustments (PVAs) – The standard introduces a new disclosure template to be completed by banks that record PVAs to disclose a detailed breakdown of how the aggregate PVAs have been ascertained. It is recognised that the template will need to be tailored by national supervisors depending on how PVAs were implemented in different jurisdictions.

■ Revisions and additions to the Pillar 3 disclosure framework from reforms in other areas – The March 2017 Standard also introduces new disclosure templates to incorporate the finalised standards in other areas, including total loss-absorbing capacity for G-SIBs, minimum capital requirements for the market risk framework published by the BCBS and operational risk.

■ Clarifications – The BCBS also made further clarifications in the March 2017 Standard following comments received in consultation, which build on the requirements in the

January 2015 Standard, including in relation to retrospective disclosures, disclosures of transitional metrics, reporting periods and electronic reporting.

These disclosure requirements, together with those in the January 2015 Standard, are to be implemented at a number of times. The dates are detailed on pages 13 to 16 of the March 2017 Standard, together with descriptions of the format (fixed or flexible), frequency and timings of the disclosures.

In the March 2017 Standard, BCBS states it has commenced phase three of its Pillar 3 review, which will seek to develop disclosure requirements relating to:

■ a standardised approach to risk weighted assets in order to benchmark internally modelled capital requirements;

■ asset encumbrance;

■ operational risk; and

■ ongoing policy reforms, including consequential disclosure requirements arising out of finalisation of the Basel III reforms.

BCBS CONSULTS ON REVISED ASSESSMENT FRAMEWORK FOR G-SIBS

On 30 March 2017, the Basel Committee on Banking Supervision (BCBS) published a consultative document to update its July 2013 assessment framework for globally systemically important banks (G-SIBs).

This consultation was envisaged by the 2013 assessment framework, which acknowledged that the type and scale of risks posed by or to G-SIBs could change over time, in light of changes to the financial system or in banking business models, and therefore prescribed that the BCBS would review the methodology every three years.

In summary, the changes proposed are:

■ removing the cap on the substitutability category;

■ expanding the scope of consolidation to cover insurance subsidiaries;

■ amending the definition of cross-jurisdictional indicators;

■ modifying the weights in the substitutability category and introducing a trading volume indicator;

■ revising the disclosure requirements;

■ providing further guidance on bucket migration and the associated higher loss absorbency (HLA) surcharge; and

30 | Financial Services Regulation

■ proposing a transitional schedule in respect of any revised G-SIB framework being adopted.

The paper accompanies the suggested changes with quantitative data to estimate the impact of the proposals, using end-2015 data submitted by banks. The inclusion of insurance subsidiaries activities is stated to be the proposal which could have the broadest impact.

In addition, BCBS is seeking feedback on the inclusion of a new indicator for short-term wholesale funding. BCBS stated that the effect of its inclusion is likely to be relatively mild on the G-SIB scores of individual banks.

The most recent G-SIB assessment in November 2016 designated 30 banks as G-SIBs which were subject to the HLA, total loss absorbing capacity and resolvability requirements as well as higher supervisory expectations in relation to risk management, monitoring, governance and controls.

The consultation period closed on 30 June 2017. If the revisions to the assessment framework are adopted, and the transitional schedule is approved, the revised framework published 2017 would be used for assessments in 2019.

FSB CONSULTATION DOCUMENT ON THE PROPOSED FRAMEWORK FOR POST-IMPLEMENTATION EVALUATION OF G20 FINANCIAL REGULATORY REFORMS

On 11 April 2017, the Financial Stability Board (FSB) issued a consultation document on the main elements of the proposed framework for the post-implementation evaluation of the effects of the G20 financial regulatory reforms, including its objectives, scope, concepts and evaluation approaches.

Background

After the global financial crisis, the G20 launched a comprehensive programme of financial reforms. The programme’s aim was to increase the resilience of the global financial system and encourage strong, sustainable and balanced growth, while preserving its open and integrated structure. More specifically, the regulatory reform process follows a four step policy cycle:

(i) identification of a market failure, risk or problem;

(ii) design, consultation on and adoption of the appropriate policy response;

(iii) implementation of the policy and monitoring of the implementation; and

(iv) evaluation of the effects and if necessary return to step (ii).

The effective implementation of the post-crisis reforms is one of the FSB’s priorities under the German G20 presidency, as identified in the letter sent by Mark Carney, Chair of the FSB, to G20 Finance Ministers and Central Bank Governors, dated 10 March 2017. The letter outlines four priorities in total:

■ move shadow banking into resilient market-based finance and addressing structural vulnerabilities in asset management;

■ make derivative markets safer;

■ procure full and consistent implementation of the post-crisis reforms; and

■ address new and emerging vulnerabilities.

Following the G20 meeting of finance ministers and central bank governors in Baden-Baden, Germany on 17–18 March 2017, a communiqué was issued by the G20 finance ministers and central bank governors, which explicitly endorsed a number of the FSB objectives and policy recommendations in the letter.

In addition, the communiqué also requested some additional progress and assessment reports, including a stock take report relating to the regulations, supervisory practices and international guidance relating to malicious use of information and communication technologies, to be delivered by the FSB in October 2017, with a progress report to be delivered for the Hamburg summit.

Framework for the post-implementation evaluation of the G20 financial regulatory reforms

The consultation focuses on establishing the objectives and scope of the framework. The FSB suggests the framework would serve as a guide, analysing whether reforms are achieving outcomes and whether there are unintended consequences that can be mitigated. The consultation states that the evaluation is only intended to cover those G20 reforms for which implementation is largely or fully completed. The consultation states that the framework will focus on making financial institutions more resilient, ending too big to fail, making derivatives markets safer and transforming shadow banking into resilient market-based finance.

The consultation suggests clarifications on the following concepts and terms:

■ implementation monitoring: the FSB will monitor whether and to what extent the reforms have been implemented in a comprehensive, timely and consistent manner;

www.dlapiper.com | 31

■ evaluation objectives: the articulation of measurable outcomes that can be compared against measurable benchmarks will help identify regulatory gaps, as well as remaining or newly identified benefits or risks, or potential positive or negative unintended consequences;

■ effectiveness of individual reforms, interactions and overall effects of reforms: the FSB and standard setting bodies (SSBs)’s evaluations will base their analysis on various factors, including the effectiveness of individual reforms, the interactions and coherence among reforms and the evaluation of overall effects;

■ measuring benefits and costs: the evaluation of the overall effects of reforms should take into consideration both the social and private benefits and costs, both the temporary and permanent effects, as well as the benefits and costs of both the intended objectives and unintended consequences of the reforms;

■ stylised policy evaluation concept prioritisation of evaluations: timing and frequency of evaluations, priority of evaluations, scope and depth of analysis and available data and information should be taken into consideration when assessing the effects of the G20 reforms.

■ prioritisation of evaluations: the priority of evaluations can be made on the basis of materiality and feasibility.

The consultation states that evaluations should focus on three main questions, namely whether the reform caused the outcome, whether the reform had a broadly similar effect in all situations and whether the reform achieved the overall objectives.

The consultation also emphasises the importance of choosing the right analysis tools (i.e. qualitative analysis, indicators and descriptive statistics, partial equilibrium analysis and general equilibrium analysis) depending on the types of evaluation being conducted. The FSB also clarifies that the design of the evaluation process of the G20 reforms should consider data and information requirements, engagement with stakeholders, transparency and follow-up by the appropriate bodies on a more specific basis.

Next Steps

The consultation paper closed on 11 May 2017. The framework will be presented to the Leaders’ Summit in Hamburg in July 2017 and the application is intended to begin over the following years.

GFXC LAUNCHES NEW FX GLOBAL CODE

On 25 May 2017, the Global Financial Exchange Committee (GFXC) launched a new FX Global Code (Code). The Code includes a set of 55 global principles of good practice and replaces the existing codes. It was developed to promote the integrity and effective functioning of the wholesale foreign exchange market (FX market).

Background and content of the Code

The Code was developed by a partnership between central banks and market participants from 16 jurisdictions. The first phase of the Code was published by BIS in May 2016 covering areas such as ethics, information sharing, aspects of execution and confirmation and settlement. The second phase further covers aspects of execution including e-trading and platforms, prime brokerage, governance, risk management and compliance. Annex I of the Code provides examples for each of the key principles. These examples aim to illustrate situations where the principles could be applicable, but they do not constitute prescriptive or comprehensive guidance.

Applicability

The Code applies to all FX market participants engaging in the FX market, including both sell-side and buy-side entities, non-bank liquidity providers, operators of e-trading platforms and other entities providing brokerage, execution and settlement services. It does not impose any legal or regulatory obligations on market participants, but its works as a voluntary supplement to applicable rules by identifying global good practices and processes. Market participants must still ensure that internal policies and procedures are in place and they must also comply with the laws, rules and regulations applicable to them. The relevance of the principles depends on the nature, size, complexity and type of the engagement with the FX market. Annex III of the Code includes a sample “statement of commitment”, which is voluntary and which market participants may use to support the objectives of the Code, enhancing transparency, efficiency and functioning in the FX market.

BoE, FCA and EBA’s reaction

The Bank of England (BoE) issued a press release stating that the Code “supersedes and substantively updates existing guidance for participants in FX markets provided by the Non-investment Products (NIPs) Code”. In its statement, the FCA welcomed the Code and stated that standards can be “a useful way for the industry to police itself in support of their regulatory work and can help firms to communicate expectations of individuals when linked to the Senior Mangers and Certification Regime”. The FCA statement also mentions that firms have begun work to ensure

32 | Financial Services Regulation

their FX businesses satisfy the principles of the Code. The FCA also noted that firms can help promote the wide adoption of the Code by expecting that their FX counterparties also take steps to adhere to it. In a press release, the EBA also welcomed the launch of the complete Code and confirmed that its “guidelines for responsible participation in the FX market

are in line with the EBA’s work aimed at fostering financial institutions’ effective governance and enhanced consumer protection in all areas of financial products and services”.

Please contact michael.mckee@dlapiper.com for further information.

www.dlapiper.com | 33

IN FOCUS

EUROPEAN COMMISSION’S APPROACH TO FINTECH

Action Plan for consumer financial services published by the European Commission

On 23 March 2017, the European Commission (Commission) published its consumer finance Action Plan (Action Plan) to set out steps to increase consumer choice, competition and cross-border supply of retail financial products in the EU. The Action Plan sets out the Commission’s plans to ensure that consumers can choose from retail financial products across the single market and get value for money, whilst being reassured they are properly protected.

The Commission also published an annex, which summarised the Commission’s action points and provided an indicative timetable, a press release, FAQs, a fact sheet, a speech by Commission Vice-President Valdis Dombrovskis and a new webpage.

Background

The Action Plan follows the Commission’s green paper on retail financial services, published in December 2015, and forms parts of the Commission’s work towards establishing a Capital Markets Union.

Key actions identified

The Action Plan identifies some of the measures that have already been taken to overcome obstacles to closer integration, but highlights that there are areas where the market in consumer financial services remains fragmented.

The Commission considered a number of supply – and demand – side factors which were holding back closer integration, and identified three main areas for focus:

1. Increase consumer trust and empower consumers

Some of the Commission’s key observations in this area included:

■ Although firms can decide where to offer their services, there remained instances of unjustified discrimination against customers based on their residence, particularly where firms provided different products in different jurisdictions. The Commission said it would consider appropriate measures to resolve this, without seeking to impose undue regulatory burdens on firms.

■ The Commission noted it will propose widening the scope of currencies covered by the regulation on cross border payments (No. 924/2009) to reduce cross-border transaction fees for all currencies.

■ Currency conversion rates, in some areas, remain insufficiently transparent and the Commission proposed a review of good and bad practices in this area.

■ With the exception of accounts covered by the Payment Accounts Directive (2014/92/EU) (PAD), switching providers for financial services can sometimes be difficult. The Commission will review this area building on the lessons from implementation of the PAD, and will also look at enhancing the quality and reliability of price comparison websites in financial services.

The Commission noted that the evolution of new types of consumer credit lending (for example on-line and peer-to-peer) has resulted in some EU legislation failing to adequately cover developments in some areas, and stated the increased availability of consumer credit could result in risks of irresponsible lending and borrowing causing over-indebtedness. The Commission stated it would explore ways of facilitating cross-border lending whilst maintaining high standards of consumer protection.

2. Reduce legal and regulatory obstacles affecting businesses

The Commission identified that differences in consumer protection and conduct rules between Member States may create unjustified barriers for the cross-border provision of financial services, and stated it would examine this area further.

The Commission also noted that the cross-border creditworthiness assessments could be facilitated and carried out in a more harmonised way, and will seek to introduce common creditworthiness assessment standards and principles for consumer lending, and look to develop a minimum set of creditworthiness information to be shared between credit registers.

3. Support the development of an innovative digital world

The Commission stated its aim to create an environment where technology and innovation can be used for the benefit of consumers. To this end, it encouraged new regulatory and supervisory approaches and cross-border co-operation when dealing with innovative firms, so long as customers remain well protected. The Commission stated it would decide on its approach in this area building on the work of its newly launched internal FinTech Task Force, and the responses to its public consultation on financial technology (see “European Commission published consultation paper on FinTech” below for further information).

34 | Financial Services Regulation

The Commission also stated it would seek to enable cross-border digital identification of customers through e-identification methods and KYC transferability, as well as looking for potential optimisations in the distance selling regulations, including pre-contract disclosure requirements.

Next steps

The Commission identified various “action points” to support its Action Plan. It stated the initiatives would be facilitated through various public consultations and impact assessments. The Action Plan sets out a roadmap for further work until 2019, with the first actions expected in Q4 2017.

EUROPEAN COMMISSION PUBLISHED CONSULTATION PAPER ON FINTECH

On 23 March 2017, the Commission published a consultation document, FinTech: a more competitive and innovative European financial sector. The Commission is seeking input from both providers of financial services and consumers in order to further shape its policy towards technological innovation in financial services and make the single market for financial services more competitive, inclusive and efficient. Interested parties could submit their responses online by 15 June 2017.

The consultation identifies the creation of a connected digital single market as one of the political priorities of the Commission in order for the EU economy, industry and citizens to take full advantage of an increasingly digital world. The Commission’s approach with regard to FinTech relies on three core principles: technological neutrality, proportionality and market integrity.

The consultation is structured along four broad policy objectives:

1. Fostering access to financial services for consumers and businesses

The Commission explores the benefits and assesses the potential risks and challenges faced by consumers, investors and firms as a result of FinTech. Among other benefits, the Commission considers how innovative technologies can help

individuals and small and medium-sized enterprises access alternative funding sources. The Commission invites comments specifically on artificial intelligence and big data analytics, social media and automated matching platforms and sensor data analytics in the insurance industry.

2. Bringing down operational costs and increasing efficiency for the industry

The Commission inquires about how FinTech, by means of streamlining processes in the provision of services, can lead to better, more efficient and more innovative services at lower operational costs. The Commission also examines the potential challenges for financial stability and financial sector employment. In this area, the Commission specifically addresses questions relating to the development of RegTech, cloud computing, distributed ledger technology and outsourcing.

3. Making the single market more competitive by lowering barriers to entry

The Commission describes how FinTech may be of benefit to the competitiveness of the single market by facilitating the entry of newcomers, but also preserving fair competition. The Commission also looks into the role that the regulators, supervisors and industry can play in supporting innovation in the financial sector. The Commission looks at both the role FinTech can play in reducing barriers to entry, but also the barriers that remain, the role of market participants and regulators and the challenges faced with respect to the safety and soundness of incumbent firms.

4. Balancing greater data sharing and transparency with data security and protection needs

The Commission focuses on the protection of privacy and personal data. Considering the access to large amounts of data that traditional channels have offered, the Commission explores how FinTech can impact the estimation and monitoring of risk in the financial sector. The Commission notes that although FinTech can lower information barriers and strengthen supervisors’ monitoring ability, the new environment will need to rely on greater transparency and data sharing.

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