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Stand out for the right reasons, Financial Services Risk and Regulation Being better informed FS regulatory, accounting and audit bulletin FS Regulatory Insights January 2020 In this month’s edition: Operational resilience: Regulators set out their proposals Climate risks: BoE proposes stress tests Open finance: FCA issues call for input Analysis: What's on the regulatory agenda for 2020?
Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
Executive summary
In an important update for firms in all sectors, approach and timeline for delivering its how open finance might impact consumer
the UK regulators published a series of mandate related to ESG factors. The authority behaviour in their sector.
consultation papers on operational resilience in initially focuses on strategy and risk
Finally, preparing for the transition away from
December, building on their 2018 proposals for management, and associated key metrics and
LIBOR remains a priority for regulators. The
firms to identify important business services, disclosure. It then plans to focus on developing
PRA responded to the RFRWG’s recent letter
set impact tolerances, enhance governance a dedicated climate change stress test and to
highlighting the implications of the LIBOR
and undertake scenario testing and lessons look into the evidence around the prudential
transition for prudential regulatory
learned reviews. While the authorities’ overall treatment of ‘green’ exposures. The EBA
requirements. The working group had
position on operational resilience remains intends to publish a number of discussion
expressed concerns about a number of rules
largely unchanged from 2018, there is a lot papers, technical standards and further
that could apply once firms amend contracts to
more content for firms to digest on the guidance over the next five years, but it
move from LIBOR to RFRs, some of which
proposed meaning and application of the expects and encourages banks to act on
could constitute a disincentive to transition.
concepts, and timelines for action. climate-related risks now rather than waiting for
Welcome to this edition of ‘Being better The PRA letter provides reassurance on some
rules to be finalised.
informed’, our monthly FS regulatory, Meanwhile, the BoE issued an update for of the provisions and announces follow-up
accounting and audit bulletin, which banks and insurers on its work to address Elsewhere, our regulators continue to focus on supervisory work with banks planned for
aims to keep you up to speed with climate-related risks, in the form of a harnessing the benefits of digital innovation. Q1 2020.
significant developments and their discussion paper on its climate scenarios for The FCA launched a Call for Input to identify
All in all, the regulatory agenda for the coming
implications across all the financial the 2021 biennial exploratory scenario (BES) opportunities for open finance to deliver a
months contains much for firms to focus on.
services sectors. stress test. This will see the UK's largest banks wider range of innovative products and
We hope you enjoy catching up on December’s
and insurers, as well as the financial system services to consumers. This would extend the
The final weeks of 2019 brought a flurry of developments and reading about what’s on the
within which they sit, tested against different principles of open banking-like data sharing to
regulatory developments, as regulators rushed horizon for the year ahead.
climate scenarios to understand their likely other products such as savings, insurance,
to meet their end of year deadlines. In this
exposure to climate-related financial risks. mortgages and investments. The FCA believes
month’s edition, we report on updates from the
Although the BES climate scenarios are not open finance has the potential to make it easier
end of the year, including on operational
due to be finalised until the end of the year, for consumers to compare and switch
resilience and climate risk. We also look ahead
firms included in the exercise will need to products, and to drive the development of new
to what’s on the horizon for firms over the next
prepare for participation, with a key challenge services. It also acknowledges there are some
12 months, in our feature article. Across
being identifying and preparing the data the risks involved. The regulator seeks Hannah Swain
banking, insurance and asset and wealth
stress tests will require. stakeholders’ views to help inform its Director, FS Regulatory Insights
management, we assess what’s on the
regulatory strategy for open finance; firms M: +44 (0) 7803 590553
regulatory agenda for 2020, and what firms The EBA is progressing its own climate-related
should engage with the process and consider E: swain.hannah@pwc.com
should be focusing on to stay ahead of initiatives, publishing its action plan on
the curve. sustainable finance, which outlines its
1 PwC | FS regulatory, accounting and audit bulletin | January 2020
Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
Contents
How to read this bulletin? Executive summary 1
Review the Table of Contents and the What’s on the regulatory agenda for 2020? 3
relevant Sector sections to identify the news
of interest. We recommend you go directly to Cross sector announcements 8
the topic/article of interest by clicking in the
active links within the table of contents.
Banking and capital markets 15
Asset management 18
Insurance 20
Monthly calendar 23
Glossary 25
Contacts 32
2 PwC | FS regulatory, accounting and audit bulletin | January 2020
Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
What’s on the regulatory agenda for 2020?
As we head into 2020, firms are facing an Preparing for the post-Brexit environment will Many firms are well progressed in adopting OECD will launch the AI Policy Observatory in
intense and evolving regulatory agenda. This of course remain high on firms’ list of priorities these technologies, which have the potential to early 2020 to help policymakers implement its
comprises ongoing initiatives from previous this year. The 11-month transition period transform the way firms operate and interact AI principles published in May 2019.
years (such as climate risk and LIBOR creates an ambitious timetable to agree a with their customers. Separately, IOSCO has stated that it will
transition, where regulators will be expecting to future trade deal, and a cliff-edge exit at the examine the supervision of market
In the UK, the BoE and FCA have announced
see concrete progress from firms), preparing end of 2020 remains a possibility. intermediaries (including asset managers) that
they will launch a public-private forum to
for the implementation of upcoming legislation deploy AI and ML, with a view to publishing a
The Political Declaration, which both sides discuss AI and ML, including what the right
such as CRD V and CRR II, and keeping consultation paper in Q1 2020. The Basel
have agreed will guide the trade talks, regulatory and supervisory approach to these
abreast of a number of EC reviews of existing Committee will also look at the risk
suggests that future arrangements for financial tools should be. We expect they will continue
regulations, such as MiFID II, MAR and management challenges associated with the
services will be based on equivalence to adopt a ‘technology-neutral’ position,
Solvency II. use of AI and ML in financial services.
provisions, and the UK and EU will strive to meaning firms will be obliged to treat
So what’s on the horizon for the next 12 conclude the equivalence assessments by 30 customers fairly, establish robust governance Cryptoassets: regulatory evolution
months, and what does the upcoming agenda June 2020. At this stage, firms should focus on arrangements and manage risks irrespective of
mean for firms? understanding what is possible under the EU’s the mechanism through which they provide
Tom Boydell
current equivalence framework, and how that services. But equally there is likely to be an Manager
Preparing for the post-Brexit
may impact their desired business model. But ongoing focus from the regulators on
environment
until the equivalence landscape becomes more explainability, bias, data protection,
EU legislation remains important for UK firms, certain in mid-2020, firms can expect accountability and governance of the use of AI. The regulatory framework for cryptoassets is
despite the UK being due to leave the EU on continuing pressure from EU-27 regulators to also still evolving, and we expect the focus in
31 January 2020. The UK is due to enter an In the EU, EC President Ursula von der Leyen 2020 to be on two key questions: whether
build capability in their EU entities.
11-month transition period on that date, during has pledged to introduce EU-wide rules to certain types of cryptoassets that are currently
which EU law will continue to apply, and while AI: an increased regulatory focus govern the deployment of AI by March 2020. unregulated should be brought within the
the future direction for financial services The EC may draw on the principles set out by scope of relevant regulation, and whether
Leo Donnachie the High-Level Expert Group on AI, which
remains uncertain beyond that point, UK existing regulatory frameworks are appropriate
regulators are likely to adopt those pieces of Senior Associate emphasise that the use of AI should be lawful, for cryptoassets which fall within the perimeter,
regulation that are ‘inflight’ (i.e. agreed prior to ethical and robust. It may also incorporate whatever that eventually looks like.
the UK leaving the EU but not in force until aspects of an October 2019 report by the
after the transition period). After the transition As the financial services sector embraces German-based Data Ethics Commission, which In the UK, HMT is exploring whether so-called
period, it is unclear how closely the UK will innovation and technological change, the proposes a stricter, rules-based framework ‘utility tokens’ will be brought into the FCA’s
follow EU regulation, but any significant regulators are considering their regulatory and for AI. regulatory perimeter, and the BoE has
deviation will have to be balanced with the supervisory response to these changes. An indicated that work on prudential aspects is
example of this is the regulatory response to We expect to see increased output from the underway. Both ESMA and the EBA have
desire to achieve equivalence determinations. international standard setters in 2020 too. The
firms’ use of AI and machine learning (ML). already been considering whether the
3 PwC | FS regulatory, accounting and audit bulletin | January 2020
Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
regulatory framework is fit for purpose in Beyond the UK, we await a consultation on the 2021 biennial exploratory scenario (BES) the IFR, and the amended EBA Regulation as
relation to securities, banking, payments and e- operational resilience from the Basel stress test. This will see the UK's largest banks well as various initiatives under the EC’s
money regulation. They have been exploring Committee. This will be the first time a global and insurers, as well as the financial system sustainable finance action plan. While it has
where existing EU legislation may have gaps standard setter has made public its view on within which they sit, tested against different been charged with a broad remit to look at
which fail to address specific risks associated this topic (to date such organisations have climate scenarios to understand their likely ESG risks within these initiatives, the EBA has
with cryptoassets. So firms should continue to focused more narrowly on cyber), and is likely exposure to climate-related financial risks. said its initial focus will be on climate-related
engage with policymakers in this area, as to trigger further action from NCAs. Meanwhile, Although the BES climate scenarios are not risks, given their materiality. Firms can expect
regulatory clarity continues to emerge this the EC launched a consultation on digital due to be finalised until the end of the year, to see a discussion paper on a uniform
year. operational resilience on 19 December 2019. firms included in the exercise will need to definition of climate risks (and other ESG risks)
This reflects a broadening of EU regulatory prepare for participation, with a key challenge and the potential inclusion of these in the
Operational resilience: digesting the
focus beyond cyber security (covered by the being identifying and preparing the data the SREP, in the second quarter of this year.
regulators’ proposals
NIS directive) into other components of stress tests will require.
Domestically, firms can expect a particular
operational resilience.
It's likely that before we get too far into 2020, focus on climate change next year in the lead
In addition, EIOPA and ESMA will be the PRA will provide banks and insurers with up to the UN Climate Change Conference in
confirming guidelines on outsourcing to the feedback on the plans they submitted in November 2020. Five years on from the Paris
cloud (EIOPA published a consultation on 1 October 2019 setting out how they'd be Agreement, there will be considerable pressure
Operational resilience will remain a key focus July 2019, with ESMA yet to publish its tackling climate-related risks. The prudential on governments to make progress on climate
for all firms this year. After a long period of proposals). Firms will also be focusing on regulator will be keen to see progress on the change commitments, which is likely to have
reflection, 5 December 2019 saw the implementing the finalised guidelines on ICT items firms committed to in these plans, and is an impact on regulation and firms.
publication of a package of consultation papers and security risk management over the next 12 likely to focus on how the SMFs responsible for
from UK regulators, focusing on how the
Wholesale conduct: LIBOR and
months. The guidelines, which come into force climate risk are discharging their obligations.
reporting high on the agenda
provision of important business services can on 30 June 2020, cover topics including There's lots for firms to do across risk
be maintained in the event of disruptions governance and strategy, change management, scenario analysis and preparing Arthur Marquis
(including a PRA paper on outsourcing and management, business continuity management for appropriate climate-related disclosures, but
third party arrangements). While the overall Manager
and information security measures. the regulator is likely to focus on ensuring firms
position on operational resilience remains have the right governance in place to support
largely unchanged from 2018, there is a lot
Climate risk: the hard work begins
this activity. So making sure boards and senior
more content for firms to digest on the management are equipped to provide Daniela Bunea
Luke Nelson
proposed application of the concepts. We challenge and oversight should be an area of Senior Associate
expect the regulators to issue their final Senior Manager
focus for all firms.
policies by the end of the year. Firms should
establish whether or not they are in scope for In the EU, the EBA has set itself up for a busy
Turning to the wholesale conduct agenda, we
While last year saw climate risk land firmly on year on climate risk as it outlined in its
these policy requirements; those in scope expect the main themes for the year ahead to
the regulatory map, 2020 looks set to be the sustainable finance action plan in December
should evaluate their progress and ensure their be the transition away from LIBOR, transaction
year the hard work really starts. At the end of 2019. It's committed to provide guidance on
planned future work fits with the proposed reporting, and the progression of certain
December, the BoE left us the Christmas gift of ESG factors and risks under a range of new
timelines. regulatory reviews.
a discussion paper on its climate scenarios for legislative acts including CRR II and CRD V,
4 PwC | FS regulatory, accounting and audit bulletin | January 2020
Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
As preparations for the LIBOR transition pressing with SFTR and EMIR Refit reporting challenges, including overlap with wider to consider how these principles will be
deadline at the end of 2021 intensify, this year coming up. initiatives such as the FRC’s Stewardship implemented, which could result in new rules.
regulators will want to see concrete action. In Code 2020 and the revised Shareholder Rights We expect a broader supervisory focus on
Meanwhile, the EC has an agenda to review a
particular, the FPC indicated in October 2019 Directive. Firms will welcome upcoming ESMA structural vulnerabilities in the sector, in
number of post-crisis regulations, including
that it’s considering further policy and technical ‘Level 2’ work to provide further particular on fund leverage in light of IOSCO’s
MIFID II, the BMR third-country regime and
supervisory tools that authorities could deploy clarity around regulatory expectations. recommendations from December 2019.
MAR. It plans to assess whether they have
to reduce the stock of legacy LIBOR contracts
achieved their intended objectives and/or have As firms rush to meet demand in the growing Value assessment - what’s in store
to an irreducible minimum ahead of end-2021.
given rise to unintended effects. For instance, sustainable investments market, there may be for ‘Day 2’?
ISDA will start the year by proposing fallbacks the EC is considering a review of the research greater scope for conduct risk. We expect The FCA’s new value assessment rules require
for legacy derivatives trades, which firms will regime, adjustments to the trading obligations, regulators to take a closer look at this during AFMs to conduct a root and branch review of
need to sign up to. The RFRWG will seek to and a second look at the third country 2020, given ESMA’s technical advice to the EC their UK funds, and then publicly report their
eliminate the latest regulatory dependencies benchmarks regime, but we expect to see on incorporating sustainability concepts into findings - meaning previously unseen aspects
for a smooth transition, and focus its efforts on formal proposed amendments in 2020. How various existing regulatory frameworks (e.g. of their operations will be open to public
any sectors where the transition is slower. The the UK responds to these adjustments in light MiFID II), and the FCA’s plans to look at how scrutiny. This is given further weight by the
regulators are likely to become less permissive of Brexit remains to be seen. firms are mitigating the risk of ‘greenwashing’. new prescribed responsibility for value
with firms that continue to reference LIBOR in With FCA work on product governance now assessments introduced under SM&CR. With
new contracts and those less advanced in their
Asset and wealth management underway, firms need to be on top of this. the first reporting deadline fast approaching in
progress. They will also expect firms to take a January 2020, firms should prepare
Ongoing focus on structural
proactive stance in mitigating conduct risk, themselves for close ongoing scrutiny from the
vulnerabilities
following guidance published by the FCA in regulator, before considering how to refine their
November 2019. Firms should anticipate an active agenda on
own processes when the industry has been
fund liquidity. Supervisory scrutiny from the
SFTR reporting is around the corner, with a through a full reporting cycle.
Spotlight on sustainable investments FCA will be central to this, following its ‘Dear
first deadline in April 2020 for banks and
The sustainable investments agenda is set to AFM Chair’ letter setting out expectations on Wealth management - more change
broker-dealers, followed by FMIs, asset liquidity management from November 2019. ahead?
ramp up for the asset and wealth management
managers and insurers later in the year. Firms Fund managers with NURS holding illiquid In wealth management, the FCA’s follow-up
(AWM) sector in 2020, as EU policymakers
that have already been reporting under EMIR assets will, by 30 September 2020, also need reviews to FAMR and RDR will assess whether
progress the sustainable finance action plan.
will find similarities with this regime, yet to implement new FCA rules aimed at advice markets are affordable and accessible,
The ESG Disclosure Regulation in particular is
catering for SFTs will be no small task. improving investors’ understanding of liquidity which could have significant implications for
set to create lots of work for AWM firms, now
Meanwhile, EMIR Refit introduces from June risks and strengthening liquidity management. firms. Ahead of the expected findings in
that it has reached political agreement and we
2020 new mandatory delegated reporting for autumn 2020, wealth managers should
move into the implementation phase. Firms will Related to this, the BoE and FCA have
FCs trading with NFCs not subject to the consider whether their business models are
need to develop their approach to disclosing conducted a review into systemic risks created
clearing obligation, with the legal liability that conducive to evidencing value, as well as
how they integrate ESG considerations into by open-ended funds. The FPC’s December
comes with it. As for MiFID II transaction innovating to develop services that can appeal
investment decision-making and reporting on 2019 Financial Stability Report sets out
reporting, we know the FCA hasn’t been to a broader range of clients.
the sustainability performance of certain regulatory principles aimed at minimising risk
satisfied with the trades reported so far. Its
products. This brings complexity and from liquidity mismatch, and work is underway
concerns are likely to become even more
5 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
Investment firms review - timeline Banking potential to shape the way consumers access Other implementation challenges, which may
becomes clear and understand their credit information, along be ‘under the radar’ for some, include the need
Retail conduct - a balancing act
On the prudential side, the IFR was published with the way in which data is reported, for banks to report new FRTB alternative
in the Official Journal on 5 December 2019. Tom Boydell recorded and used. This could result in standardised capital requirements from March
Setting a tailored and proportionate prudential changes to reporting systems for banks and 2021 alongside their existing binding market
Manager retail lenders, along with requirements to better risk requirement. This is well in advance of
framework for MiFID investment firms in the
EU, the regime introduces strategic, inform consumers at the point of sale (an FCA FRTB becoming a binding capital requirement
operational and regulatory challenges for firms. trend of 2019). in the EU. CRR II also introduces a new
The past year has seen considerable change
The IFR will take effect from 26 June 2021 with standardised counterparty credit risk capital
for retail banks and lenders. Not only have a Finally, vulnerable consumers will continue to
a transition period of five years for capital requirement methodology with ‘order of
number of product-specific rules been drive regulatory intervention. 2020 will see the
requirements. We expect the FCA to provide magnitude’ increases in complexity and data
consulted upon and finalised (e.g. overdrafts publication of final guidance setting out the
more clarity in the coming months on how it will inputs - a step change for smaller banks
and mortgage responsible lending), but FCA’s expectations for firms’ understanding,
implement the regime in the UK. compared to what they are used to. Other
increased competition from challenger banks, management and monitoring of vulnerability.
areas covered by this regulation include pillar 3
In the meantime, UK investment firms should FinTechs and BigTech has continued at pace. While a number of firms are ahead of the
disclosures, large exposures, IRRBB, pillar 2
start familiarising themselves with the new In 2020, things are not about to let up. Banks game, others may find they have work to do to
capital and intermediate EU parent company
regime, including ensuring they have the and lenders must balance their implementation meet expectations.
requirements.
processes and systems to capture the data and reflection of 2019’s changes with their
Capital and liquidity - a year of
which will be required for calculating the K- embrace of technology and open finance, all Banks also face increased expectation and
implementation
Factors and for the regime’s reporting while continuing to ride the wave of new scrutiny in relation to their existing prudential
requirements. While there is a five-year regulatory change. David Brewin reporting, with the PRA ratcheting up the
transitional arrangement, firms will need certain intensity of its supervision. The PRA expects
The FCA’s first move of 2020 was to propose Senior Manager
data covering a rolling 15-month period up to banks to be able to demonstrate the efficacy of
the introduction of a Single Easy Access Rate
June 2021, which means action is needed in the design and operation of their systems and
(SEAR) for cash savings accounts. By
the first quarter of this year. 2020 is set to be a year of ‘nitty-gritty’ controls over regulatory reporting - including in
introducing a SEAR, the FCA hopes to improve
preparation for implementation of CRD V and relation to key judgements and interpretations.
the value received by customers in the cash
CRR II. This is wide ranging, implements parts In addition to making direct information
savings market, facilitate better competition
of the Basel III reforms, and includes a binding requests, the PRA is increasing its use of third
and bolster consumer awareness. Banks and
leverage ratio and NSFR. While these party skilled person reviews over these areas.
building societies must get on the front foot
early this year and devise strategies based on regulations were finalised in June 2019 and Further down the track, the EC is expected to
the proposals. It will be interesting to see many of the requirements take effect from June publish legislative proposals to implement the
whether deeply ingrained customer inertia can 2021, they are underpinned by a range of RTS, final elements of the Basel III reforms in mid-
be fixed through these changes. ITS and guidelines that will emerge during 2020. These proposals will include provisions
2020 and beyond, adding friction to banks’ relating to credit risk, operational risk, credit
The FCA expects to release its preliminary preparations. valuation adjustments and the output floor as
conclusions from the credit information market
well as binding FRTB capital requirements.
study in spring 2020. The market study has the
Under the Basel timetable, these changes are
6 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
due to start applying from January 2022. The relating to reserving adequacy, governance governance arrangements in areas such as to focus on new trends and developments
Government has announced that it will legislate and controls. It also plans to focus on remuneration practices, diversity and corporate across the industry such as
to implement the Basel reforms in the UK, as underwriting controls, especially in the London governance at board level. Similarly the FCA FinTech/InsurTech, cyber risk, climate risk and
they will come into force after the transitional market, and exposure management. Following expects general insurers to tackle non-financial sustainability.
period ends, assuming the transitional period is negative reports regarding sexual harassment misconduct and unhealthy corporate culture.
All in all, there’s a great deal for firms to focus
not extended beyond 31 December 2020. and bullying within the London market, the Senior managers will need to show they have
on this year, encompassing both sector-
PRA says it’s clear some firms have ‘more taken reasonable steps to address non-
Insurance work to do’ to improve aspects of corporate financial misconduct and firms are expected to
specific developments and broader issues.
Firms must continue to evolve if they are to
culture and individual behaviour. The PRA have strong whistleblowing processes and
Tania Lee meet both the regulators’ and consumers’
makes clear it will consider any instances of appropriate incentive structures.
expectations in an ever-changing market.
Senior Manager non-financial misconduct and personal integrity
Developing regulation
when assessing the fitness and propriety of
individuals under the SM&CR. While it is unclear how the UK’s regulatory
Over the next year, insurers will need to focus regime might evolve after Brexit, the UK has
on a number of shortcomings identified by the For life insurers, the PRA plans to continue its brought Solvency II into UK law as part of
PRA and FCA, while keeping a watching brief programme of asset reviews (with particular Brexit preparations. In its 2020 review of
on developments at the European and global focus on illiquid assets and internally rated Solvency II, the EC is expected to examine the
level. From a prudential perspective, reserving, assets), implement its updated supervisory application of the long-term guarantee
underwriting and corporate culture are in the statement on equity release mortgages, and measures and capital requirements. It also
spotlight for general insurers, while asset renew its focus on the adequacy of life intends to consider harmonisation of rules on
reviews, equity release mortgages and life insurance reserving. insurance guarantee schemes and the rules on
insurance reserving are the main issues for life early intervention and resolution. In October
Focus on fair treatment and
insurers. From a conduct perspective, the fair governance 2019, EIOPA consulted on proposals for
treatment of customers is the key regulatory resolving deficiencies in the volatility
The fair treatment of both new and existing
concern, while non-financial misconduct adjustment, group supervision, reporting and a
customers, particularly the vulnerable, remains
remains very much under scrutiny. recovery and resolution framework. Insurers
a high priority for the FCA and PRA. In
It’s important that insurers also assess the should look out for the final opinion in
particular, in early 2020, insurers should look
implementation challenges of major regulatory June 2020.
out for the FCA’s final report on its general
developments on the horizon. These include insurance pricing practices review and At a global regulatory level, the IAIS is focusing
developments coming out of the EC’s 2020 consultation on proposed remedies. on the implementation of its newly adopted
review of Solvency II, the implementation of the Common Framework for internationally active
From December 2019, the SM&CR fully
IAIS’ regulatory frameworks and IFRS 17. insurance groups and Holistic Framework for
applies to insurance firms, and FCA-regulated
Prudential concerns Systemic Risk. It intends to use the capital
insurance intermediaries enter the regime’s
standard in confidential reporting to group
The PRA wrote to general insurers in transition phase. The PRA plans to continue to
supervisors and discussion in supervisory
November 2019 setting out its priorities for evaluate the effectiveness of the SM&CR and
colleges for a five-year monitoring period from
2020. It highlights a number of concerns remuneration policies, as well as review firms’
1 January 2020. The IAIS and EIOPA also plan
7 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
Cross sector announcements
In this section: Regulation To address the dependencies on counterparty
credit risk, market risk and IRRBB, the PRA will
Regulation 8
Benchmarks take three measures. First, it plans to meet
Benchmarks 8 with major firms in Q1 2020 to discuss their
FSB reports on LIBOR transition progress
Finance 8 approach to managing these risks. The PRA
The FSB published its 2019 report on the risks
will expect firms to include an analysis of these
Financial stability 9 of LIBOR transition to financial stability on 18
dependencies in their upcoming ICAAP.
Market infrastructure 9 December 2019. The report notes the good
Second, the PRA will write to firms with
progress in derivatives and securities markets,
MiFID II 9 approval for Internal Model Method and
but also the slower pace of transition in loan
Internal Model Approach to ask them to identify
Operational resilience 10 markets that needs to accelerate. It
the number and type of models that will need
Pensions 11 encourages firms not to wait for term rates. It
amending. Finally, the PRA will communicate
also alerts firms that they should expect
Technology 11 its plans for model review in Q2 2020. Please
increased scrutiny of their transition plans as
see our At a glance publication for more
Accounting 11 the December 2021 deadline approaches.
information.
PwC publications 11 The FSB is planning on conducting a survey of Finance
Also this month 11 exposures to LIBOR and supervisory
EU launches cryptoasset consultation
A brief roundup of other regulatory measures taken to address transition issues in
developments early 2020, with the goal of publishing a report The EC published a Consultation document on
on the remaining challenges to the transition in an EU framework for markets in cryptoassets
time for the G20 meeting in July 2020. on 19 December 2019. The EC acknowledges
that cryptoassets have the potential to create
PRA reviews prudential impact of LIBOR
opportunities and benefits for markets, but the
transition
new risks must be adequately managed. It is
The PRA published its response to the therefore gathering views from market
regulatory dependencies of the LIBOR participants, regulators and consumers to help
transition on 18 December 2019. According to support the direction and focus of future work.
the PRA’s review, transitioning away from
LIBOR has an impact on a number of The first section of the consultation is aimed at
prudential requirements, including the eligibility the general public to gain a better
of instruments for AT1 and Tier 2 capital, understanding of the current state of the
resolution, and the market risk framework. cryptoasset market. This will help to establish
the scale of adoption and harms caused.
8 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
Subsequent sections target the views of needed for a quick sale of a representative recommendation for NCAs to not take any The temporary exemption from margin
regulators, public bodies and market sample (or vertical slice) of those assets or enforcement actions in this regard. requirements for intragroup transactions with
participants. The EC asks for views on the time period needed for a sale to avoid a third country entities should be extended from
In parallel, a legislative amendment is also
cryptoasset classifications, particularly on how material price discount. The US SEC has 4 January 2020 until 21 December 2020, the
being negotiated at EU level to set that relief
unregulated tokens may be subdivided further. recently adopted measures of this nature. ESAs argue. The proposal would align this
into law. This proposal addresses one of the
Thirdly, it seeks views on whether a regulatory exemption with the similar exemption from the
Redeeming investors should receive a key regulatory dependencies flagged by the
framework is needed for unregulated tokens clearing obligation.
price for their units in the fund that reflects market in relation to LIBOR transition.
and new market participants (e.g. wallet
the discount needed to sell the required ESAs amend EMIR bilateral margining rules They add that the temporary derogation for
providers) and what this may look like. Finally,
portion of a fund’s assets in the specified single-stock equity options and index options
the EC asks whether the current framework is The ESAs published a final report on EMIR
redemption notice period. should be extended from 4 January 2020 until
fit for purpose - if it is hindering innovation, or RTS on various amendments to the bilateral
4 January 2021.
gaps exist, what can be changed? Redemption notice periods should reflect margin requirements in view of the
the time needed to sell the required portion international framework on 5 December 2019. The ESAs acknowledge that the entry into
The consultation is open until 19 March 2020.
of a fund’s assets without discounts beyond They propose to amend the existing RTS on effect of the revised RTS may not take effect
Financial stability those captured in the price received by bilateral margining to facilitate further before some effective dates applying under the
FCA and BoE review open-ended funds redeeming investors. international consistency, as detailed below. current RTS. Hence, they recommend NCAs to
The FPC published its Financial Stability not enforce the application of the relevant
During 2020, the review will consider how The ESAs state that phase V of the initial
Report on 16 December 2019, which sets out requirements in the existing RTS.
these principles could be implemented. The margin requirements should apply from 1
initial findings of a joint review conducted by FCA will use the conclusions of the review to September 2020 to firms with an aggregate Next, the EC needs to adopt the amendments
the BoE and FCA of risks posed by open- inform the development of the FCA’s rules for average notional amount (AANA) of between and then send them for the scrutiny of the EP
ended funds. open-ended funds. €50bn and €750bn, while phase VI would apply and the Council.
The BoE and FCA consider there to be a from 1 September 2021 to firms with an AANA
Market infrastructure MiFID II
mismatch between redemption terms and the between €8bn and €50bn. This proposal is
ESAs propose EMIR exemption for LIBOR ESMA publishes first review report for MiFID II
liquidity of the assets held by some funds, fallbacks aligned with the international timeline that the
Basel Committee and IOSCO recommended in ESMA published its first review report for MiFID
which has the potential to become a systemic The ESAs issued a public statement about the
July 2019. II on 5 December 2019, covering the
risk through forcing asset sales, testing the introduction of fallbacks in OTC derivative development of prices for market data and on
ability of markets to absorb them, amplifying contracts and the requirement to exchange For physically settled FX forward and swap the consolidated tape for equity. This follows a
price movements and transmitting stress to collateral on 5 December 2019. They contracts, the ESAs state that counterparties consultation paper from July 2019, and
other parts of the financial system. The initial recommend that amending legacy contracts to shouldn’t be mandated to post or collect represents the first in a series of reports that
conclusions of the review suggest there should introduce benchmark fallbacks shouldn’t result variation margin when one of the will inform the EC’s review of MiFID II.
be greater consistency between the liquidity of in margin or clearing obligations on these counterparties is not a credit institution or an
a fund’s assets and its redemption terms. The contracts. This decision is aligned with the investment firm. This proposal restricts the MiFID II/MiFIR aims to ensure fair access to
regulators have put forward the following international recommendation that the Basel mandatory exchange of variation margin on market data and established a legal framework
principles to achieve this: Committee and IOSCO issued in March 2019. these contracts to transactions between the for the provision of a consolidated tape (CT).
Hence, the ESAs issued a ‘no action’ most systemic counterparties. ESMA notes that, so far, no CT has emerged
Liquidity of funds’ assets should be
and that MiFID II is not delivering on its
assessed either as the price discount
9 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
objective in relation to access to market data. tolerances for important business services on 5 proposals on operational resilience; facilitating objective of the guidelines is to provide
The regulator suggests this can be explained December 2019. greater resilience and adoption of the cloud clarification on the minimum expected
by the lack of commercial incentive to operate and other new technologies; implementing the information and cyber security capabilities.
The CPs continue the themes introduced in the
a CT, an overly restrictive regulatory EBA Outsourcing Guidelines; and taking into
regulators' 2018 discussion paper, focusing on EIOPA sees an increasing reliance on ICT in
framework, and competition from non- account the draft EIOPA Guidelines on
how the provision of important business the provision of insurance services and in the
regulated entities. Outsourcing to Cloud Service Providers and
services can be maintained in the event of undertakings' normal operating functioning, as
EBA Guidelines on ICT and security risk
The EU regulator suggests that the emergence disruptions. While the overall position on well as interconnectedness through
management.
of a CT would provide clear benefits, including operational resilience remains largely telecommunications channels. It therefore
through centrally providing post-trade unchanged, there is a lot more content for firms We have summarised the key points from the wants to ensure that undertakings are
information on the trading activity for equity to digest on the proposed meaning and consultation paper in this Hot Topic. The adequately prepared to manage ICT and
instruments in a single format. ESMA puts application of the concepts (such as business consultation period runs until 3 April 2020, with security risks. The consultation ends on 13
forward some initial ideas for establishing a services and impact tolerances) and proposed final policy expected to be published by the March 2020.
CT, drawing on experiences in the US and timelines for action. The papers were end of 2020.
Sustainability
Canada. The report sets out the following accompanied by a speech by FCA Executive EC consults on digital operational resilience BoE consults on climate change stress tests
principles for establishing a real time CT: Director Megan Butler, where she introduced
The EC launched a consultation on digital The BoE published a Discussion Paper on the
the key themes to members of The Investing
high data quality, mandatory financial operational resilience in financial services on 2021 Biennial Exploratory Scenario (BES) for
and Savings Alliance.
contribution by trading venues 19 December 2019. This reflects a broadening large insurers and banks participating in the
We have summarised the key points from the of EU regulatory focus beyond cyber security 2021 annual cyclical scenario on 18 December
Approved Publication Arrangements to the
CPs in this Hot Topic. The consultation period (covered by the NIS directive) into other 2019. The BoE is consulting on the design of
CT
runs until 3 April 2020, with final policy components of operational resilience. the proposed stress test of climate change
mandatory consumption of the CT by expected to be published by the end of 2020. risks. The stress test will assess the resilience
Rather than putting forward a proposal for
market data users The new policy will not apply to all firms, as of large banks and insurers' business models,
consideration, the paper sets out 62 questions
previously suggested, so it is incumbent on and of the financial system as a whole, to
a strong governance framework. on topics such as: ICT risk management
firms to establish whether or not they are in financial risks from climate change.
frameworks; ICT and security incident reporting
ESMA also proposes legislative changes and scope.
requirements; resilience testing frameworks; The BoE intends to use the 2021 BES to help
supervisory guidance to frame the prices for PRA consults on outsourcing and third party oversight of third party providers; information firms address any data gaps and to develop
pre- and post-trade transparency data, aimed arrangements
sharing; and risk transfer. The deadline for cutting-edge risk management approaches,
at ensuring that market data is provided on a
As part of the suite of consultation papers responses to the consultation is 12 March
reasonable commercial basis. rather than testing their capital adequacy or
relating to operational resilience, the PRA 2020. A summary of the paper can be found in setting their capital requirements. It proposes
Operational resilience published CP30/19 on outsourcing and third this PwC At a glance publication. to base its stress testing exercise on three
Regulators set out how to build operational party risk management on 5 December 2019.
EIOPA proposes guidelines for ICT security scenarios, including those that embody the
resilience The consultation seeks to strengthen and and governance risks of earlier and later policy action to reach
The BoE, PRA and FCA published a suite of modernise the micro-prudential framework on
EIOPA published a consultation paper on the the Paris Agreement target, as well as a ‘no
consultation papers (CPs) under the cover all forms of outsourcing and third party risk
proposal for guidelines on ICT security and additional policy action’ scenario under which
paper Building operational resilience: impact management by: complementing the policy
governance on 12 December 2019. A key
10 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
global temperatures increase by 4C from pre- costs and charges relative to the quality of The FCA has requested responses to the Call Andrew Bailey, the current Chief Executive of
industrial levels. the pathway solution and associated for Input by 17 March 2020. the FCA, is to become the next Governor of the
services BoE, the Chancellor announced on 20
The BoE plans to publish the final 2021 BES Accounting December 2019. Bailey will take over from
scenarios in the second half of 2020 and to ensure a pathway solution that is
current Governor Mark Carney on 16 March
give firms three to four months to run the appropriate for the pathway objective and PwC publications 2020. It’s not yet been announced who will
exercise, avoiding overlapping with the annual the characteristics of the consumers likely
Our IFRS and UK GAAP year end replace Bailey at the FCA.
cyclical scenario. It also plans to publish the to be using it.
accounting reminders -December 2019
results of the exercise in 2021 and to consult Council
The final rules follow an earlier consultation, outlines the IFRS and UK GAAP reporting
separately on any additional scenarios for the
launched in April 2019, and will come into force requirements as at 31 December 2019. It The Council finalised its position on the
2021 Insurance Stress Test. CCP recovery and resolution proposal on 4
on 6 April 2020. includes the standards, interpretations and
Pensions other guidance that apply at this date; and December 2019. The negotiations with the
Technology EP (which agreed its position in March
FCA to increase IGCs' pensions duties the standards that are published but
FCA seeks views on open finance 2019) will take place next. Following the
The FCA published PS19/30: Independent effective at later dates and hence required
The FCA launched its Call for Input: Open to be disclosed, plus a summary of the finalisation of its position on the CCP
Governance Committees on 17 December
Finance on 17 December 2019, exploring the latest topical issues. recovery and resolution proposal on 27
2019, which sets out final rules to extend the
potential opportunities and risks associated November 2019, the Council published
remit of independent governance committees Our In brief - IFRS IC decision on IFRS 16
with open finance. The FCA believes that open Addendum 1 and Addendum 2 on 19
(IGCs) responsible for overseeing workplace lease term looks at the implications of the
finance can build upon the foundation set by December 2019. The addendums compare
pension schemes. IFRS Interpretations Committee’s
open banking in recent years and offer the positions of the three institutions - the
Under current rules, IGCs provide independent consumers and small businesses greater conclusion that the enforceable period of a EC, the EP and the Council - to facilitate
oversight of the value for money of workplace control over their financial data, as well as lease under IFRS 16 Leases reflects the forthcoming trilogue negotiations.
personal pensions in accumulation. IGCs now access to new and innovative products from broader economics, not just legal rights
and termination cash payments. The Council published its Conclusions on
have a new duty to consider and report on their third party providers.
strategic priorities on AML and CTF on 5
firm’s policies on ESG issues, member Our In brief - FRC amends FRS 102 for
The FCA has requested views from across the December 2019. It recommends the EC to
concerns and stewardship, for the products IBOR reform considers the FRC’s
financial services sector to understand the review current barriers to information
they oversee. They will also have to oversee amendments to FRS 102 to provide certain
steps that need to be taken for the sector to sharing between relevant authorities, to
the value for money of investment pathway reliefs in connection with interest rate
support the expansion of open finance, in consider whether regulation could better
solutions for pension drawdown. benchmark reform. The reliefs relate to
areas such as mortgages, pensions, insurance address issues and to assess the feasibility
Ultimately, the changes are intended to: and investment management. This call for hedge accounting and have the effect that of conferring AML/CTF supervisory powers
input offers interested firms an opportunity to IBOR reform should not generally cause to an EU body.
protect consumers from investments that hedge accounting to terminate.
have their views heard on the development of EBA and ESMA
may be unsuitable because of ESG risks,
rules, as well as highlighting both the Also this month
and encourage good stewardship of The EBA and ESMA published their respective
opportunities and possible risks stemming from
investments reports regarding undue short-term pressures
open finance.
BoE in the financial sector as part of the EC's Action
ensure pathway solutions deliver value for
Plan on ‘Financing Sustainable Growth’ on 18
money for consumers, including in terms of
11 PwC | FS regulatory, accounting and audit bulletin | January 2020Executive summary What’s on the regulatory Cross sector Banking and capital Asset management Insurance Monthly calendar Glossary
agenda for 2020? announcements markets
December 2019. Based on their respective The EC decided on 19 December 2019 to (STOR) and suggests that NCAs could do 2021) or until and unless their application
findings, both the EBA’s report and ESMA’s extend the temporary equivalence for the more to ensure all market participants play for approval in the EU is denied. It adds a
report call on firms to consider long-term three UK CCPs under a no-deal Brexit an active role in tackling market abuse. new Q&A to clarify that an annual review of
horizons in their strategies, business activities scenario until the end of March 2021. ESMA stresses that STORs help to IOSCO principles for Oil Price Reporting
and risk management. Following that, ESMA decided to extend preserve market integrity and enhance Agencies by an independent external
the recognition of the UK CCPs on 23 investor protection by allowing NCAs to auditor is sufficient to ensure compliance
EC
December 2019. These decisions aim to analyse and investigate possible cases of with Annex II paragraph 18.
The EC adopted a Delegated Regulation bring legal certainty to global derivatives insider dealing or market manipulation.
under EMIR on 16 December 2019 with ESMA issued a briefing on the recognition
markets during the Brexit transition period.
regard to RTS specifying criteria for ESMA updated its public register with the regime under BMR on 11 December 2019
arrangements to mitigate CCP counterparty The EU reached political agreement on the latest double volume cap (DVC) data under addressed to non-EU benchmark
credit risk associated with covered bonds sustainable finance ‘taxonomy’ regulation MiFID II on 6 December 2019. This administrators that intend to apply for BMR
and securitisation. The regulation sets the on 18 December 2019, aimed at providing included DVC data for the period of 1 recognition. To help their recognition
conditions for the clearing exemption for companies and investors with an EU-wide November 2018 to 31 October 2019, applications, ESMA clarifies the means to
OTC derivative contracts concluded by classification system to identify what together with updates to historic data which determine the Member State of reference
covered bond entities or securitisation economic activities can be considered had already been published. The data and the instances where cooperation
special purpose entities. Next the environmentally sustainable. In an shows that there have been 56 breaches in arrangements between EU and non-EU
regulation needs to be ratified by the EP accompanying press release, the EC states equities at the 8% cap, applicable to all NCAs are needed.
and the Council before entering into force. that the next steps are for the taxonomy trading venues, and 14 breaches in
ESMA released a public statement listing
regulation to be formally adopted by the equities at the 4% cap that applies to
The EC adopted a Commission Delegated Council and EP following the legal and individual trading venues.
the pending BMR applications by EU
Regulation amending Delegated benchmark administrators on 13 December
linguistic revision of the text. The taxonomy
Regulation (EU) 2016/2251 as regards the ESMA updated its BMR Q&As on 3 2019. It states that EU supervised entities
for climate change mitigation and
specification of the treatment of OTC December 2019. A new Q&A clarifies can continue to use existing benchmarks
adaptation should be established by end-
derivatives in connection with certain STS ESMA’s expectation that an annual review provided by the administrators included in
2020 to ensure its full application by end-
securitisations for hedging purposes, on 17 of IOSCO principles for Oil Price Reporting the list unless and until such authorisation
2021, while the taxonomy for water and
December 2019. The regulation provides Agencies by an independent external or registration is refused.
marine resources, transition to a circular
that SPVs be exempted from posting and auditor is sufficient to ensure compliance
economy, pollution, and biodiversity should ESMA published revised Q&As related to
collecting initial margin and from posting with Annex II paragraph 18. The other Q&A
be established by end-2021 for an the investor protection measures under
variation margin for uncleared OTC sets out the role and responsibilities of the
application by end-2022. MiFID II on 4 December 2019. The EU
derivatives in connection with an STS legal representative under article 32(3).
regulator clarifies expectations on
securitisation. The EC justifies the ESMA
ESMA updated its BMR Q&As on 3 and 11 information to disclose when providing
exemption due to SPVs having less assets ESMA published Final Report: Peer December 2019. It confirms that all third- portfolio management services, and the
that they can use for the exchange of Review on the collection and use of STORs country benchmarks referenced in EU application of product intervention
collateral because they are usually under the MAR as a source of information contracts on or before 31 December 2021 measures when services are provided on a
structured to generate little excess of in market abuse investigations on 12 can be used during the extended cross-border basis.
liquidity. December 2019. This shows an increase in transitional period (until 31 December
suspicious transaction and order reporting
12 PwC | FS regulatory, accounting and audit bulletin | January 2020You can also read
