Practical Law Financial Services: what to expect in 2018 | Practical Law

Practical Law Financial Services: what to expect in 2018 | Practical Law

This article summarises the main developments that are expected to affect financial services practitioners in the UK in 2018.

Practical Law Financial Services: what to expect in 2018

Practical Law UK Articles w-012-5123 (Approx. 25 pages)

Practical Law Financial Services: what to expect in 2018

by Practical Law Financial Services
Law stated as at 05 Jan 2018 • European Union, International, United Kingdom
This article summarises the main developments that are expected to affect financial services practitioners in the UK in 2018.

The year ahead: what to expect in 2018

This article summarises the main developments we have identified for 2018 that we expect will affect financial services practitioners. Where relevant, we have included links to our more detailed content.
Throughout 2018, we will continue to monitor the progress of the developments outlined in this article. For information on how you can use our content and other materials to keep track of these and other developments over the coming year, see Keeping track of future developments below.

Keeping track of future developments

Our current awareness emails
We will track the developments identified in this article, and other developments in financial services law and regulation, in our daily and weekly current awareness emails. Our emails also cover developments in related practice areas where they have a significant impact on financial institutions. We send a daily email each week, from Monday to Friday, and our weekly email is sent on Friday to arrive in your inbox every Saturday morning. Signing up to receive the daily or weekly email is easy: just click on the "My Practical Law" link on the Practical Law Financial Services homepage and follow the "View and edit your account" link to sign up.
Our horizon scanning practice note and key dates calendar
We set out key dates of interest to financial services practitioners in our:
Our hot topics practice notes
We also track certain key developments in more detail in our hot topics practice notes, which we keep up-to-date continuously. Each hot topics note tracks the development of the topic covered and, where relevant, sets out milestones for future developments in the area. The notes also contain links to key primary source materials and related Practical Law Financial Services legal updates, checklists and practice notes. Our range of hot topics practice notes is set out in Practice note, Financial Services hot topics: resources overview.

Banking

European Deposit Insurance Scheme (EDIS)

In November 2015, the European Commission adopted a legislative proposal for a Regulation to establish the European deposit insurance scheme (EDIS). EDIS is intended to provide a common system for the protection of depositors in the single supervisory mechanism (SSM) and is sometimes referred to as the third pillar of the banking union.
Legislative progress on the proposed Regulation has stalled and, in October 2017, the Commission proposed revisions to the operation of EDIS, considerably scaling back the ambitions of its original proposals. The Commission's aim was to secure political agreement on the Regulation by the end of 2018. If the Commission's revisions are acceptable to member states, the European Parliament and the Council of the EU are likely to proceed to trialogue negotiations in 2018.
For more information, see Practice note, European deposit insurance scheme (EDIS).

Ring-fencing regime for UK banks

On 1 January 2019, the ring-fencing requirements for UK banks will enter into force. These requirements will separate critical banking services from wholesale and investment banking services. During 2018, UK banks affected by these changes must make their final preparations for the new framework.
For more information, see Practice note, Ring-fencing and ring-fenced banks.

Brexit

Brexit will dominate UK financial regulation in 2018. The date on which the UK will leave the EU has now been fixed as 29 March 2019 and there is little apparent appetite from the UK government to seek to move that date. Firms must prepare for significant regulatory changes, without knowing what those changes will be. The only certainty available is continued uncertainty.
For information on the implications of Brexit for the financial services sector, see Practice note, Brexit and financial services.

Negotiations on UK-EU relationship

Perhaps the most pressing issue is whether transitional arrangements will be agreed between the EU and the UK.
The timing of any agreement on these arrangements is critical. Industry and regulators have warned that, unless they are agreed by the end of the first quarter of 2018 at the latest, firms will assume that there will be a hard Brexit, with no market access arrangements agreed, and will activate their contingency plans on that basis. In practice, given the timescales potentially required by the process for obtaining new licences or transferring contracts, the first quarter of 2018 may be too late for some firms. Press reports suggest that a number of firms may already have activated their contingency plans on the assumption of a hard Brexit.
If the UK and the EU fail to reach an agreement on transitional arrangements, the UK will trade with the EU on the basis of World Trade Organization (WTO) rules from the date that the UK formally leaves the EU. Unless this date is extended, firms will have limited time to prepare for the impact of the loss of market access rights.
The UK government is also hoping to agree on a free trade agreement (FTA) governing the future relationship between the UK and the EU that will cover the financial services sector. The timings for agreement on this FTA are uncertain: the UK government has suggested that it could be finalised by March 2019, although Michel Barnier, the Commission's chief negotiator on Brexit, has stated that it will take considerably longer. In any case, unless the negotiations between the UK and the EU break down irretrievably, 2018 will see a great deal of discussion and lobbying on the future UK-EU relationship as it applies to financial services, particularly on the degree of access permitted to UK and EU firms into each others' markets.

Domestication of EU law and regulation

Much of the UK's regulatory regime implements, or is based on, EU legislation and regulation. Before the date that the UK leaves the EU, the UK government intends to transpose EU law into UK law and revise it, as appropriate, to ensure that it works post-Brexit.
During 2018, the government is likely to publish draft statutory instruments, to be made using powers under the European Union (Withdrawal) Act. The FCA and the PRA are also likely to publish information on how they propose to reflect EU law in their rulebooks.

Preparations for Brexit

2018 will be a critical year for firms' preparations for Brexit. Two of the most significant issues facing firms are the loss of market access and ensuring the continuity of existing contracts:
  • UK firms that are in the process of relocating some of their activities to the EU will need to finalise their post-Brexit operations, which may include the process of obtaining new licences within the EU. Similarly, EU firms with a presence in the UK will need to finalise their preparations for the loss of market access, which may require seeking new authorisations from the FCA and the PRA, as applicable.
  • Firms will also need to take steps to prepare for the impact of Brexit on their ability to service existing cross-border contracts, particularly insurance contracts and derivatives. This may require regulatory approvals for the transfer of contracts, such as transfers made under Part 7 of the Financial Services and Markets Act 2000 (FSMA). However, industry groups have warned that, in practice, there may not be sufficient time to migrate these contracts if no transitional arrangements are agreed.

Consumer credit

FCA review of retained conduct requirements from CCA

The responsibility for the regulation of consumer credit transferred from the OFT to the FCA in April 2014. By 1 April 2019, the FCA must complete a review of the conduct requirements retained in the Consumer Credit Act 1974 (CCA) and develop rule-based alternatives where possible.
Following the publication of its call for input in February 2016 to help scope the review, the FCA continued its work on this in 2017. Its aim is to simplify the regime where it can, and ensure an appropriate degree of consumer protection while not placing disproportionate burdens on consumer credit firms. The FCA was expected to publish an update on the progress of its review by the fourth quarter of 2017. However, the timing appears to have slipped. The FCA now intends to publish an interim report on the review in 2018.
For more information, see Practice note, UK consumer credit regime: overview: FCA review of retained CCA provisions.

FCA review of high-cost credit

In July 2017, the FCA published a feedback statement on high-cost credit (FS17/2). High-cost credit, in this context, includes overdrafts, rent-to-own (RTO) borrowing, home-collected credit and catalogue credit. FS17/2 followed a call for input by the FCA to help inform its further work on high-cost credit.
Issues that the FCA is looking at include whether there are constraints that currently prevent new entrants or other credit providers from entering the RTO market, the impact of home-collected credit on customers' long-term indebtedness and the high level of arrears in the catalogue credit market. The FCA intends to consult on any necessary proposals relating to the issues raised in spring 2018.
For more information, see Practice note, Payday lending and other high-cost credit activities: FCA review of high-cost credit.

FCA update on work on motor finance

The FCA announced in its 2017/18 business plan, published in April 2017, that it was looking at the motor finance market to develop its understanding of the market and assess whether it was functioning as well as it could. It intends to provide an update on its work in the first quarter of 2018.
For more information, see Practice note, Consumer credit: areas of FCA focus: Motor finance.

Outstanding FCA consumer credit policy statements

FCA policy statements and feedback to its consultation papers on persistent credit card debt and earlier intervention remedies (CP17/43), assessing creditworthiness in consumer credit (CP17/27) and staff incentives and performance management in consumer credit firms (CP17/20) are due in the first half of 2018.
For more information, see Practice note, Consumer credit: areas of FCA focus: FCA consults on persistent debt and earlier intervention remedies, FCA consults on assessing creditworthiness in consumer credit and FCA consults on staff incentives and performance management in consumer credit firms.

Crowdfunding

Following a review of the regulated crowdfunding market, which consists of loan-based and investment-based crowdfunding, the FCA intends to consult on various issues. These include the following:
  • Strengthening the rules and considering additional requirements relating to wind-down plans for loan-based crowdfunding firms.
  • Extending the mortgage lending standards in the Mortgages and Home Finance Conduct of Business (MCOB) to loan-based crowdfunding platforms where the investor, or lender, is not acting by way of business.
  • Having more prescriptive rules on the content and timing of disclosures in financial promotions by loan-based and investment-based crowdfunding firms.
The FCA originally intended to consult on the above in the first quarter of 2017. The timing subsequently slipped to summer 2017. Currently there is no indication of when it will be published, but it is reasonable to assume it will be during 2018.
For more information on regulated crowdfunding, see Practice note, Regulated crowdfunding.

Data protection

UK implementation of General Data Protection Regulation

In 2018, financial institutions have the final few months in which to prepare for the application of the General Data Protection Regulation ((EU) 2016/679) (GDPR). The GDPR marks a significant development in the field of EU data protection law. It will have direct effect in all EU member states from 25 May 2018, and will replace current EU data privacy laws, including the Data Protection Directive (95/46/EC) (DPD). This will lead to the repeal of the UK Data Protection Act 1998 (DPA).
While some of the basic principles of the existing regime will be retained, the GDPR will introduce several new concepts and new data subject rights, including the "right to be forgotten", data portability and accountability. Some of these new concepts could have a significant impact on financial institutions, and may require a change to both the handling and use of personal data.
For general information on the GDPR, see EU General Data Protection Regulation toolkit, and for an article identifying the most relevant aspects of the new regime for financial institutions, see Article, What do regulated firms need to know about the General Data Protection Regulation?.
Practical Law In-house has carried out a survey to assess how informed businesses are about the GDPR, how they expect the GDPR to impact them, how confident they are about being compliant by 25 May 2018, and how they plan to achieve compliance. For information on the findings of the survey, which were published in November 2017, see Blog post, GDPR is changing the game: the results of Practical Law’s in-house compliance survey.

Financial crime

Financial crime remains an active area in 2018, with various developments expected at the UK, EU and international levels. The key developments are outlined in the sections below.

Sanctions and Anti-Money Laundering Bill 2017-19 passing through Parliament

The Financial Sanctions and Money Laundering Bill 2017-19 was introduced to Parliament in October 2017. (It was previously referred to as both the International Sanctions Bill and the Sanctions Bill.) The Bill is designed to ensure that the UK has the legislation it needs, post-Brexit, to have a proper functioning sanctions (including financial sanctions) regime in place. The new regime will enable the UK government to implement international sanctions on a multilateral or unilateral basis, and will also return decision-making powers on non-UN sanctions to the UK. In an April 2017 white paper, the government explained that:
“Many of the government's current powers flow from the European Communities Act 1972. As a result, it will need new powers to replace these. … it is not possible to achieve this through the European Union (Withdrawal) Bill 2017-19 as preserving or freezing sanctions would not provide the powers necessary to update, amend or lift sanctions in response to fast moving events. This would leave the UK in breach of international obligations, and unable to work effectively with EU and international partners to tackle shared challenges."
Secondary legislation will be needed to put in place the detailed measures for specific sanctions regimes and sanctions designations.
The Bill also gives the government the power to make, amend and repeal regulations about money laundering and terrorist financing (such as the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017)) post-Brexit. In addition, it enables the government to make regulations implementing the international anti-money laundering (AML) and counter-terrorist financing (CTF) standards produced by the Financial Action Task Force (FATF).
In 2018, the Bill is expected to progress through the UK parliamentary legislative process, and receive Royal Asset.
For more information on the Bill, see Practice note, Financial sanctions: implications for financial institutions: Impact of Brexit.

Implementation of Cyber-security Directive

The Cyber-security Directive ((EU) 2016/1148) (also known as the Network and Information Security Directive or the NIS Directive) has to be transposed by member states into national law by 9 May 2018. Before this date, the UK government is expected to publish the formal response to its August 2017 consultation paper, and to finalise and publish the necessary legal and regulatory instruments.
In the consultation paper, the government explained that, in line with Article 1(7) of the Directive, the banking and financial market infrastructures (FMIs) within the Directive's scope will be exempt from aspects of the Directive "where provisions at least equivalent to those specified in the Directive will already exist by the time the Directive comes into force." It went on to state that firms and FMIs within scope must continue to comply with the requirements and standards set by the Bank of England (BoE) and the FCA.
So far, none of the BoE, PRA or FCA have consulted on this Directive, and have not indicated that they plan to do so. As a result, the implication at this stage is that the UK financial services regime does not need amending as equivalent provisions are already in place. If this is indeed the case, in-scope firms and FMIs may need to do very little to prepare for the new regime.
For more information on the government's consultation, see Legal update, Government consults on implementing Cyber-security Directive: financial services aspects, and for information on the Directive, see Practice note, EU cybersecurity framework: Part 2: Cybersecurity Directive.

Reforms to improve governance and response of UK economic crime agencies

The Cabinet Office has been working on a project to examine the UK's response to economic crime. This has involved consideration of the UK agencies involved in the investigation and prosecution of high value or complex economic crime, to determine the effectiveness of the UK's organisational framework and the capabilities, resources and powers available to the relevant agencies. The agencies in question include the FCA, the National Crime Agency (NCA), the Serious Fraud Office (SFO) and the Competition and Markets Authority (CMA)). In the course of the project, officials have consulted non-governmental organisations, academics, members of the financial services industry, and the agencies themselves.
The government announced its package of reforms on 11 December 2017, in the form of the UK anti-corruption strategy for 2017 to 2022. Implementation of the reforms, which seek to improve the governance and operational response of the UK's economic crime agencies, will be progressed during 2018.
For more information, see Legal updates, Government intends to announce by end of 2017 its package of reforms to improve UK response to economic crime and Government publishes UK Anti-Corruption Strategy 2017-22.

FCA supervisory focus on financial crime

As outlined in the FCA's 2017/18 business plan, financial crime remains one of its top priorities. During 2018, the FCA is expected to continue with its work in this area, including on de-risking (that is, where a financial institution withdraws financial services from certain customers in the light of a perceived increase in compliance costs and its own financial crime risk appetite), and on how new technology can make AML processes more efficient and less onerous for firms and their customers.
For more information, see Legal update, FCA's 2017/18 business plan: Financial crime and anti-money laundering (AML) and Practice note, FCA financial crime role, responsibilities and approach: Financial crime: key areas of focus.

Continued focus on cyber security

In a speech given in November 2017, Nausicaa Delfas, FCA Chief Operating Officer, advised that cyber security remains one of the top risks for the financial services industry. As a result, it is no surprise that, during 2018, many in the financial services sector will be involved in initiatives that aim to strengthen the resilience of the financial services sector to cyber risk, including the following:
For more information on cyber security, see Cybersecurity toolkit.

Adoption and implementation of MLD5

Political agreement on the European Commission's legislative proposal to amend the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4), known as the Fifth Money Laundering Directive (MLD5), was reached on 15 December 2017. As a consequence, MLD5 is expected to be formally adopted, and the final text published in the OJ, in early 2018. MLD5 will enter into force 20 days after publication in the OJ, and member states are expected to have 18 months from that date in which to transpose MLD5 into national legislation.
MLD5 amends MLD4 as part of the Commission's action plan to strengthen the fight against terrorist financing, which was produced as a direct result of the terrorist attacks in Paris in November 2015. When it originally published MLD5, the Commission advised that the amendments proposed are limited to what is necessary to achieve the objectives of tackling terrorist financing and increasing the transparency of financial transactions and legal entities, building on the EU rules already in force.
Depending on when MLD5 is finalised, 2018 may also see the UK government launching its consultation on transposing MLD5. However, it is currently unclear what the MLD5 transposition date will be, or the implications of a transposition date after 29 March 2019 (that is, the date the UK will leave the EU) (see Brexit above).
For more information, see Practice note, Hot topics: MLD5.

New methodology for assessing high-risk third countries under MLD4

Under Article 9 of MLD4, the European Commission is required to identify third-country jurisdictions that have "strategic deficiencies" in their national AML or CTF regimes that pose significant threats to the EU financial system. These jurisdictions are referred to in MLD4 as "high-risk third countries". The Commission is empowered to adopt delegated acts naming the high-risk third countries it identifies. Firms are required to apply enhanced due diligence (EDD) measures when dealing with natural persons or legal entities established in high-risk third countries identified by the Commission under Article 9 (Article 18, MLD4).
The first Commission Delegated Regulation (Regulation (EU) 2016/1675) identifying high-risk third countries entered into force on 23 September 2016. However, subsequently, the European Parliament objected to the Commission's November 2016 Delegated Regulation amending the list of high-risk third countries set out in Delegated Regulation (EU) 2016/1675. The Parliament had hoped that the Commission would be more ambitious in its revisions to create a blacklist that is fit for purpose, advising that the list should be expanded to include, for example, territories that facilitate tax crimes. The Parliament also objected to the Commission's March 2017 Delegated Regulation amending the list of high-risk third countries set out in Delegated Regulation (EU) 2016/1675. This time, the Parliament advised that the EU should have an independent, autonomous process for determining whether countries pose a threat of financial criminality, rather than relying on the judgement of an external body (in this case, the FATF).
In June 2017, the Commission expressed its commitment to develop a new methodology for assessing high-risk third countries. In 2018, it will continue working on the new methodology, and plans to adopt a new Delegated Act, based on the new methodology, by the end of 2018. Pending completion of the third-country assessments under the new methodology, the Commission will continue to adopt Delegated Acts updating Delegated Regulation (EU) 1675/2016.
For more information on Article 9 of MLD4, and the work of the Commission, the Parliament and the Council of the EU on Delegated Regulations under this Article, see Practice note, Fourth Money Laundering Directive (MLD4): Third-country policy (Article 9).

FATF's fourth mutual evaluation of UK AML and CTF regime

The FATF monitors the progress of its members in implementing its international AML and CTF standards. It does this by carrying out peer reviews of each member on an ongoing basis. The peer reviews are known as mutual evaluations. During 2018, the FATF will be carrying out its fourth mutual evaluation of the UK AML and CTF regime. The evaluation is expected to be completed around October 2018.
As the largest AML and CTF supervisor in the UK, the FCA is playing a major part in this exercise.
For more information, see Practice notes, FATF international AML and CTF standards and FCA financial crime role, responsibilities and approach: FATF's mutual evaluation of the UK AML and CTF regime.

FinTech

There is no doubt that financial technology is disrupting the traditional financial services industry and the regulators at EU and UK level are challenged with keeping abreast of market developments. FinTechs are making the most of the opportunities to move into traditionally regulated space occupied by banks and similar institutions (for example, in the areas of payments with the arrival of open banking under PSD2). But what does this mean from a regulatory point of view?
At EU level, there has been a lot of discussion and consultation in 2017 to help understand and scope the scale of the issues relating to FinTech (and the need or not for regulation), so we can expect to see some developments arising out of this. On the back of its consultation in 2017, the Commission expects to launch a FinTech initiative in the first quarter of 2018 in the form of a FinTech action plan. Areas the Commission has been considering, which may well make their way into the plan, include crowdfunding, peer-to-peer lending, privacy and cyber-security.
The Commission also intends to give a stronger role to the ESAs on FinTech as part of its proposed reforms to the European System of Financial Supervision (ESFS) (see Reform of ESFS below). In its work programme for 2018 (see Legal update, Joint Committee of ESAs 2018 work programme), the Joint Committee of the European Supervisory Authorities (ESAs) (that is, the EBA, ESMA and EIOPA) state that they will continue to monitor evolution of the market in their three sectors, with a view to identifying at a later stage specific cross-sectoral relevant FinTech and digitalisation issues that need addressing. The Joint Committee expects to publish a joint report in 2018.
At UK level, we can expect to hear more from the FCA in terms of learning points for firms arising from its regulatory sandbox (see Legal update, FCA reports on regulatory sandbox), as well as output on how this initiative is feeding into the FCA’s broader regulatory work, including policymaking and supervisory activities.
It will be interesting to see whether, in 2018, consumer warnings issued at UK and EU level (such as in relation to initial coin offerings (ICOs) and crytocurrency contracts for differences (CFDs), see Legal updates, ESMA statements on ICO risks for investors and firms and FCA consumer warnings on risks of investing in cryptocurrency CFDs and binary options) are followed by any targeted action. The FCA has already committed to gathering further evidence in the coming year on the ICO market and conducting a deeper examination of developments, to determine whether there is a need for further regulatory action in this area (see Legal update, FCA feedback statement on distributed ledger technology). It is not unrealistic to expect more from regulators in 2018 on issues arising from new technologies that potentially threaten consumer protection, such as the use of blockchain and cryptocurrencies, as well as ICOs.

Individual accountability

Extension of SM&CR

The senior managers and certification regime (SM&CR) and the senior insurance managers regime (SIMR) came into force for deposit-takers and PRA-designated investment firms (collectively, relevant firms), and insurers, in March 2016.
In 2017, the FCA and PRA published the following consultation papers on extending the SM&CR:
  • In July:
    • FCA CP17/25, which sets out the FCA's proposals on extending the SM&CR to all other firms authorised under FSMA. Among others, the extension of the SM&CR will impact asset managers, investment firms, insurance and mortgage brokers, and consumer credit firms; and
    • FCA CP17/26 and PRA CP14/17, which set out the FCA and PRA's proposals on extending the SM&CR to insurers.
  • In December:
    • FCA CP17/40, which sets out the FCA's proposals relating to transitioning firms and individuals that are regulated solely by the FCA (FCA solo-regulated firms) to the SM&CR;
    • FCA CP17/41 and PRA CP28/17, which set out the FCA and PRA's proposals relating to transitioning insurers and individuals to the SM&CR; and
    • FCA CP17/42, which sets out draft guidance on the extension of the duty of responsibility to FCA solo-regulated firms and insurers.
The closing date for responses to the December 2017 consultations is 21 February 2018. The regulators are expected to publish their respective policy statements and final rules in summer 2018. HM Treasury has yet to confirm the exact date when the extended SM&CR will come into force, but it is expected to be late 2018 for insurers and mid-to-late 2019 for FCA solo-regulated firms.
For more information on the extension of the SM&CR, see Practice notes, Hot topics: Extension of SM&CR to all FSMA authorised firms and Hot topics: Extension of SM&CR to insurers.

Clarity on treatment of legal function under SMR

Currently, the legal function within relevant firms is caught by the senior managers regime (SMR). However, there has been significant industry uncertainty as to whether an individual in charge of a firm's legal function requires approval under the SMR, and concerns have been raised over whether the SMR should apply to the legal function at all. To clarify how and why the legal function is currently captured, and to consider whether the legal function should be part of the SMR going forwards, the FCA published a discussion paper (DP16/4) in September 2016.
The FCA has yet to provide feedback to DP16/4, although it has indicated that it intends to consult on proposals relating to the inclusion of the legal function within the SMR. As yet, no timing has been given for the consultation, but it is expected to be in 2018 to tie in with the extension of the SM&CR to all FSMA authorised firms (see Extension of SM&CR above).
For more information, see Practice note, Senior managers regime (SMR): overall responsibility and the legal function.

Enforcement action under the SM&CR and SIMR?

2018 may see the regulators holding senior managers to account under the SM&CR and the SIMR where they are at fault for misconduct that falls within their area(s) of responsibility.
For more information on SM&CR and the SIMR, see Practice notes, SM&CR for banks and PRA-designated investment firms and Hot topics: Senior insurance managers regime (SIMR) for insurers.

Insurance

Adoption of legislation to delay application date of IDD and IDD Delegated Regulations to 1 October 2018

Member states are currently required to transpose the Insurance Distribution Directive ((EU) 2016/97) (IDD) by 23 February 2018. This is also the application date for Delegated Regulation (EU) 2017/2358 supplementing the IDD with regard to product oversight and governance (POG) requirements for insurance undertakings and insurance distributors, and Delegated Regulation (EU) 2017/2359 supplementing the IDD with regard to information requirements and conduct of business rules applicable to the distribution of insurance-based investment products (IBIPs). However, there are concerns that firms will not be ready because the Delegated Regulations were finalised so late in the day. As a result, in October 2017, the European Parliament called on the Commission to adopt a legislative proposal setting the IDD application date to 1 October 2018.
The Commission considers that the insurance sector has already been given considerable time to adapt. However, despite this, it decided to act on the Parliament's request and, on 20 December 2017, adopted a legislative proposal to delay the IDD application date to 1 October 2018. It also adopted a second legislative proposal to delay the application date of the Delegated Regulations, so they are aligned with the IDD. The Parliament did not ask the Commission to extend the IDD transposition date. As a result, member states are still required to transpose the IDD into national law by 23 February 2018.
The Parliament believes that the extended application dates will allow the insurance sector (especially smaller firms), to better prepare for a correct and effective IDD implementation, and to implement the necessary technical and organisational changes to comply with the Delegated Regulations and the applicable national transposition measures.
In the light of the urgency in postponing the application dates, the Commission, the Parliament and the Council of the EU will need to agree on the new legislative proposals in an accelerated legislative procedure.
In the UK, HM Treasury has yet to make the final regulations making the necessary legislative changes. In addition, the FCA's third policy statement, following its third IDD consultation paper (CP17/33), is expected to be published in January 2018.
For more information on work at the EU level on delaying the IDD and the Delegated Regulations, see Practice note, Hot topics: IDD: Work on amending IDD application date and Commission adopts Delegated Regulation to amend application date of Delegated Regulations on POG and IBIPs: December 2017. For more information on the work in the UK to transpose and implement the IDD, see Practice note, Hot topics: UK implementation of IDD.

Review and reform of Solvency II Directive regime

A number of EU-level initiatives relating to the regime under the Solvency II Directive (2009/138/EC) will continue in 2018, including the following:
  • As part of its capital markets union (CMU) action plan work, the European Commission intends to amend the Solvency II Delegated Regulation ((EU) 2015/35) to align it with the Regulation laying down common rules on securitisation and creating a European framework for simple and transparent securitisation (STS) (Securitisation Regulation).
  • The Commission plans to assess whether changes are needed to the prudential treatment of private equity and privately placed debt under the Solvency II regime. If it considers changes are needed, it will prepare amendments that could be introduced as part of its review of Solvency II (see the last bullet below).
  • The Commission's legislative proposals to reform the ESFS includes the proposed Omnibus Directive (COM(2017) 537), which among other things will amend the Solvency II Directive. The proposed Directive amends the Solvency II Directive to give EIOPA a greater role to contribute to supervisory convergence in the areas of internal model application, through provisions on co-operation and information-sharing and giving EIOPA the power to adopt opinions in this area. These reforms are intended to address the Commission's concerns that major inconsistencies remain in national competent authorities' requirements for internal models for the calculation of the solvency capital requirement (SCR). For more information, see Reform of ESFS below.
  • The Commission's review of the Solvency II Delegated Regulation involves a review of the methods, assumptions and standard parameters used when calculating the SCR with the standard formula. The purpose of the review is to ensure that the standard formula continues to meet the requirements set out in Article 101(2) and (3) of the Solvency II Directive. EIOPA intends to submit its final advice in this area to the Commission by February 2018. The review is expected to be completed by December 2018.
For more information, see Practice note, Hot topics: Solvency II.

Review and reform of UK insurance regulation

By 31 March 2018, the House of Commons Treasury Committee expects the PRA to submit a progress report:
  • Setting out clearly how the PRA's implementation of the regime under the Solvency II Directive ensures proportionality and meets its secondary competition objective.
  • Including commentary on the extent to which there has been change or substantive progress on the recommendations set out in the committee's October 2017 report on its inquiry into Solvency II, and where the industry has agreed to the approaches taken.
The committee has also asked the PRA and industry to develop an agreed strategy designed to provide a roadmap on changes to insurance regulation pre- and post-Brexit.
For more information, see Legal update, Treasury Committee report on Solvency II and impact on UK insurance market and Brexit above.

Development of IAIS' international insurance standards

During 2018, the International Association of Insurance Supervisors (IAIS) will continue work to integrate its ComFrame standards for internationally-active insurance groups (IAIGs) into its insurance core principles (ICPs), alongside its work to field test version 2.0 of its insurance capital standard (ICS).
In mid-2018, the IAIS is planning to consult on a complete version of ComFrame integrated with ICPs, although it notes that the ICPs related to ComFrame may require further adjustments before ComFrame is finalised and adopted.
The adoption of the final version of ComFrame, integrated with the ICPs, is planned for 2019.
For more information, see Practice note, International Association of Insurance Supervisors (IAIS).

FCA supervisory work in insurance sector

As outlined in the FCA's 2017/18 business plan, one of its sector priorities relates to general insurance and protection. During 2018, the FCA is expected to continue with its work in this area, which includes assessing how effectively competition is working in the wholesale insurance market, and looking at pricing practices.
For more information, see Legal update, FCA's 2017/18 business plan.

Investment funds and asset management

Implementation of the FCA’s asset management market study (AMMS)

The FCA published its final findings from the AMMS in summer 2017, but initiatives and developments relating to its implementation will continue throughout 2018. Our Practice note, Hot topics: Implementing the FCA asset management market study (AMMS) tracks ongoing initiatives and developments relating to how the FCA is implementing the AMMS.
Specifically, the AMMS emphasised the importance of funds having clear objectives and identified room for improvement in this area. The FCA is chairing a working group on the topic and the output from this group will inform any consultation proposals. If the FCA does consult on changes to its rules, this will be during the first quarter 2018. The FCA also wants to make it clearer to firms what it expects from them when they are explaining to investors how they use a benchmark (or why they do not) for measuring fund performance. The FCA is aligning this work with other remedies and plans to consult on benchmarks and performance reporting in the first quarter of 2018. The FCA is also expected to publish findings from behavioural testing in the first quarter of 2018. If the testing shows that there are ways in which the FCA can make costs and charges disclosures more effective for investors, it will consult on changes to rules and guidance.
Following publication of the AMMS, the FCA subsequently published terms of reference for its investment platforms market study. The FCA aims to publish an interim report by summer 2018, setting out its analysis and preliminary conclusions. The FCA notes that if it finds that competition is not working well, it may intervene to promote more effective competition. This may include rule-making, publishing general guidance, proposing enhanced industry self-regulation, introducing firm-specific remedies, or enforcement action.

Cross-border distribution of investment funds

As part of completing the CMU, the European Commission is considering a possible legislative proposal to facilitate the cross-border distribution of UCITS and alternative investment funds (AIFs) in Q1 2018.
For more information on the CMU, see Capital markets union (CMU) below.

Money Market Funds Regulation

The Regulation on money market funds (Regulation 2017/1131) (MMF Regulation) introduces a framework of requirements to enhance the liquidity and stability of MMFs. It will apply from 21 July 2018.
Our Practice note, Hot topics: Money Market Funds Regulation (MMF Regulation) tracks ongoing developments relating to the legislation, while our Practice note, Money Market Funds Regulation (MMF Regulation): overview contains practitioner commentary on issues including:
  • The definition of an MMF.
  • MMF investment policies, restricted activities, and diversification rules.
  • Implementing an internal credit quality assessment procedure.
  • Risk management and transparency rules.

Amendments to EuVECA Regulation and EuSEF Regulation

The Regulation amending the European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) and the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation) (Regulation (EU) 2017/1991) entered into force on 30 November 2017 and applies from 1 March 2018.
The Regulation forms part of the CMU and:
  • Widens the range of managers eligible to set up and manage EuVECA and EuSEF funds to include those with assets under management of more than EUR500 million.
  • Widens the range of firms that EuVECAs can invest in to include unlisted companies with up to 499 employees.
  • Broadens the definition of enterprises that EuSEFs can invest in to include "services and goods generating social return".
  • Enables EuSEF and EuVECA registered managers to market their funds across the EU.
  • Gives ESMA an oversight role to ensure that funds are consistently registered and supervised.
For more information, see Practice notes, European Venture Capital Funds (EuVECA) Regulation and European Social Entrepreneurship Funds (EuSEF) Regulation.

Mortgages

FCA market study on competition in mortgage sector

The FCA launched its market study on competition in the mortgage sector in December 2016. The aim of the study is to consider whether:
  • At each stage of the consumer journey, consumers are able to make effective decisions relating to mortgages.
  • Commercial arrangements between lenders, brokers and other players lead to conflicts of interest, or misaligned incentives, to the detriment of consumers.
The FCA intends to publish an interim report, setting out its analysis and preliminary conclusions in spring 2018 (originally this was due to be published in 2017). This will be followed by the final report later in 2018.
For more information, see Practice note, Mortgages: areas of FCA focus: FCA launches market study on competition in the mortgage sector.

HM Treasury review of UK implementation of MCD

The Mortgage Credit Directive (2014/17/EU) (MCD) was implemented in the UK in March 2016. HM Treasury must undertake a review of the UK implementing legislation (namely the Mortgage Credit Directive Order 2015 (SI 2015/910)) by 1 September 2018. The outcome of the review will feed into the European Commission's review of the MCD in 2019.
For more information on the UK implementation of the MCD, see Practice note, UK implementation of Mortgage Credit Directive (MCD).

Payment services

UK implementation of PSD2

The revised Directive on payment services in the internal market ((EU) 2015/2366) (PSD2) will be implemented in the UK on 13 January 2018. Its aims include contributing to a more integrated and efficient European payments market, making payments safer and more secure, and protecting consumers.
In the UK, PSD2 is being implemented by the Payment Services Regulations 2017 (SI 2017/752), which will revoke and replace the Payment Services Regulations 2009 (SI 2009/209).
At European level, the job of implementing some of the provisions has been delegated to the EBA. These provisions include developing regulatory technical standards (RTS) and guidelines. Some of these will not be effective until after January 2018, including the RTS on strong customer authentication and common and secure communication, which is not expected to apply before the summer of 2019 at the earliest.
For more information, see Practice notes, Hot topics: UK implementation of PSD2 and Hot topics: PSD2.

Pensions

At UK level, during 2018:
  • The FCA is due to launch a pensions strategy, setting out for first time its assessment of the major regulatory issues in the sector.
  • The FCA will publish the final report on its retirement outcomes review, and potentially a further round of Handbook rule changes for this sector to address its findings. For more information, see Practice note, FCA retirement outcomes review.
  • A number of new rules are expected to come into force arising out of the FCA’s implementation of the pensions freedoms and its subsequent review of its pension and retirement income rules. These include new rules relating to:
    • the introduction of an information prompt in the annuity market; and
    • the presentation of risk warnings concerning a personalised projection regarding a transfer out of safeguarded flexible benefits into flexible benefits.
  • New rules on the regulatory reporting of retirement income data come into force on 30 September 2018.
  • The FCA is also expected to publish final rules for advice relating to pension transfers of safeguarded benefits (primarily for transfers from defined benefit (DB) to defined contribution (DC) schemes) in a policy statement in the first quarter of 2018, following its June 2017 consultation paper on advising on pension transfers (CP17/16).
For more information on the above developments, see Practice note, Hot topics: FCA personal pensions regulatory developments.
At EU level, during 2018, the Commission will progress its proposal for a Regulation on a pan-European personal pension product (PEPP), an EU-wide voluntary scheme for saving for retirement. For more information, see Practice note, Hot Topics: EU personal pension framework.

Prudential

CRR II and CRD V

In 2018, the European Parliament and the Council of the EU will continue to consider the Commission’s November 2016 legislative proposals for amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the CRD IV Directive (2013/36/EU). The proposed Regulation amending the CRR is known as the CRR II Regulation and the proposed Directive amending the CRD IV Directive is known as the CRD V Directive.
The Parliament and the Council are likely to embark on trialogue discussions on the Commission's proposals, with the aim of reaching a political agreement before the end of 2018.
For more information, see Practice note, Hot topics: CRR II and CRD V.

New EU prudential framework for investment firms

In 2018, the Parliament and the Council will consider the Commission’s December 2017 legislative proposals for a Regulation and a Directive establishing a new prudential framework for investment firms.
For more information, see Practice note, Hot topics: Revised EU prudential framework for investment firms.

Non-performing loans

In spring 2018, the Commission will adopt a package of reforms intended to address the issue of non-performing loans (NPLs). This is likely to include a legislative proposal for amendments to the CRR relating to the minimum levels of provisioning that banks must take for future NPLs as arising from newly-originated loans and a common definition of non-performing exposure (NPE).
For more information, see Practice note, Capital Requirements Regulation (CRR): Non-performing loans (NPLs).

Implementation of final Basel III reforms

In December 2017, the Basel Committee on Banking Supervision (BCBS) agreed on the final version of Basel III standards relating to issues including the standardised and internal ratings-based approaches for credit risk, minimum capital requirements for operational risk, output floors and the leverage ratio. These standards are sometimes referred to as "Basel IV". The BCBS expects its member to enforce measures implementing these standards from 1 January 2022.
In 2018, the Commission will begin the process of implementing these reforms, which will require amendments to the existing prudential regime for banks set out in the CRR and related legislation. This is likely to involve it seeking technical advice from the EBA on the approach it should take to implementation and may lead to the adoption of a legislative proposal before the end of the year.

Recovery and resolution

BRRD II and EU implementation of TLAC

In 2018, the European Parliament and the Council of the EU will continue to consider the Commission's November 2016 legislative proposal amending the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD), sometimes referred to as BRRD II. The proposed amendments relate to the harmonisation of the EU minimum requirement for own funds and eligible liabilities (MREL) with the international standard for total loss absorbing capacity (TLAC) set by the Financial Stability Board (FSB).
The Parliament and the Council are likely to embark on trialogue discussions on the Commission's proposals, with the aim of reaching a political agreement before the end of 2018.
As part of the BRRD II reforms, the Commission fast-tracked proposed amendments to the BRRD relating to the ranking of unsecured debt instruments in insolvency hierarchy. These amendments have been set out in a separate Directive ((EU) 2017/2399) (BRRD Insolvency Hierarchy Directive) and member states are expected to introduce measures implementing this Directive by 29 December 2018.
For more information, see Practice note, Hot topics: BRRD II and EU implementation of TLAC.

Regulation on recovery and resolution of CCPs

In 2018, the Parliament and the Council will continue to consider the Commission’s November 2016 legislative proposal for a Regulation establishing an EU framework for the resolution of central counterparties (CCPs) operating in the EU. The aim of the proposed legislative framework is to reduce the risk of a CCP failing, and to establish procedures for the resolution of a CCP that has failed to limit impact on the financial system and on public funds.
To date, little legislative progress has been made on these reforms. However, the Parliament and the Council will presumably embark on trialogue discussions on the Commission's proposals during 2018, with the aim of reaching a political agreement before the end of the year.
For more information, see Practice note, Hot topics: EU CCP recovery and resolution framework.

Reform of ESFS

The Commission considers that the process of financial integration in the EU is a work in progress and needs to keep pace with developments both within the EU and at a global level. Following a review of the ESFS (which comprises the ESAs and the European Systemic Risk Board (ESRB)), the Commission decided that increased financial integration within the EU requires a further strengthened and more integrated EU supervisory framework. The Commission also has the long-term objective of establishing a single European capital markets supervisor to ensure the effective supervision of the CMU. In addition, the UK's decision to leave the EU prompted the Commission to reassess the management of supervisory relations with third countries to ensure proper management of all financial sector risks.
As a result, in September 2017, the Commission published legislative proposals to reform the ESFS. The reform aims to give additional powers and responsibilities to the ESAs and the ESRB. In particular, the Commission is proposing to reinforce the ESAs' co-ordination role, and give new direct supervisory powers to ESMA. To make this work, it is also proposing to make the ESAs' governance and funding fit for their new tasks. The proposals are also a response to new opportunities and challenges in supervision, and ensure the EU is up-to-speed with new financial technologies (that is, FinTech). For more information, see FinTech above.
In 2018, the Parliament and the Council will continue their consideration of these proposals. The Commission has asked them to agree on the proposals as a matter of urgency to ensure that they enter into force before the end of the current EU legislative term in 2019.
For information on the Commission's review of the ESFS, see Practice note, European System of Financial Supervision (ESFS): first European Commission review, and for more information on the legislative proposals, see Practice note, European System of Financial Supervision (ESFS): Commission legislative proposals to reform ESFS: September 2017.

Securities markets and investments

Benchmarks Regulation (BMR)

The Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) 2016/1011) (Benchmarks Regulation or BMR) has applied across the EU since 1 January 2018.
The principal objectives of the BMR are to restore investor and consumer confidence in the accuracy, robustness and integrity of benchmarks and the benchmark setting process itself. The BMR aims to achieve this by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately, and reflect the actual market or economic reality they are intended to measure. It therefore seeks to address potential issues at every stage in their production, contribution and use.
In the UK, the FCA will be the national competent authority under the BMR. In December 2017, the FCA published a policy statement (PS17/28) containing near-final rules on Handbook changes to reflect the implementation of the BMR. However, the UK government is required to legislate to:
  • Provide the FCA, as the competent authority under the BMR, with supervisory, disciplinary and investigatory powers in relation to benchmark administrators and others.
  • Introduce sanctions for breach of the BMR.
  • Make any necessary changes to give effect to the authorisation, registration, endorsement and recognition regimes under the BMR.
HM Treasury is expected to do this by way of a statutory instrument amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO). This SI has not yet been made, but it is expected in early 2018. The FCA will make its final rules once the necessary legislative process is complete.
The BMR has a much wider scope than the former UK regulatory regime for benchmark administrators and contributors. It covers all indices used in the EU as the basis for financial instruments or certain financial contracts (that is, mortgages and consumer credit contracts), or that are used to measure the performance of an investment fund. As a result of the BMR's wider scope, many firms that are not currently supervised by the FCA will have to apply to it for authorisation or registration under the BMR. From 2 January 2018, the FCA has been accepting final applications for authorisation and registration, and applications for recognition of third country benchmark administrators and endorsement of third country benchmarks.
Although the BMR does not require persons who contribute input data to a benchmark to be authorised or regulated, there are rules on governance and controls that apply to contributors, including those who are already regulated. These known as "supervised entities", such as credit institutions, investment firms, UCITS and alternative investment fund managers (AIFMs)).
Supervised entities that use benchmarks will no longer be allowed to use a benchmark unless it is provided by an authorised or registered administrator in the EU or, in the case of third countries, the third country administrator has been recognised or the benchmark has been endorsed.
The FCA will consult separately in 2018 on extending the SM&CR to benchmark administrators (see Extension of SM&CR above) and applying the BMR rules on users of benchmarks to supervised UK branches of third country firms, to the extent that they are not supervised entities for the purposes of the BMR.
For more information on UK implementation of the BMR, see Practice note, Hot topics: UK implementation of Benchmarks Regulation (BMR). For a detailed overview of the BMR, see Practice note, Benchmarks Regulation (BMR).

Capital markets union (CMU)

The Commission intends to put in place the main building blocks of the capital markets union (CMU) by the start of 2019. It has indicated that it expects to see progress on the following initiatives relating to CMU during 2018:
  • Prudential treatment of investment firms. The Council of the EU and the European Parliament will consider the Commission's legislative proposal for a new prudential framework for investment firms, which was adopted in December 2017 (see New EU prudential framework for investment firms above).
  • ESFS. The Council and the Parliament will consider the Commission's legislative proposals for reforms to the ESFS, which were adopted in September 2017 (see Reform of ESFS above).
  • PEPP. The Council and the Parliament will consider the Commission's legislative proposal a Regulation introducing the PEPP, which was adopted in June 2017 (see Pensions above).
  • Barriers to cross-border distribution of investment funds. In the first quarter of 2018, the Commission is expected to launch an impact assessment with a view to a possible legislative proposal to facilitate the cross-border distribution and supervision of UCITS and AIFs (see Cross-border distribution of investment funds above).
  • FinTech. In the first quarter of 2018, the Commission is expected to publish a FinTech action plan (see FinTech above).
  • Crowdfunding. In the first quarter of 2018, the Commission is expected to adopt a legislative proposal for an EU framework for crowdfunding and peer-to-peer financing (see Crowdfunding above).
For more information on the CMU, see Practice note, Capital markets union (CMU): overview.

EMIR

EMIR (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (Regulation 648/2012)) imposes a number of requirements on counterparties to derivative contracts, CCPs and trade repositories. It came into force on 16 August 2012. There are currently two separate Commission legislative proposals to amend EMIR:
  • A Regulation to amend EMIR following the Commission's November 2016 review under Article 85(1) of EMIR. Areas addressed by the proposed Regulation include the clearing obligation for certain counterparties, risk mitigation techniques for non-cleared OTC derivative contracts, reporting obligation and quality of trade data reported to trade repositories.
  • Proposals relating to the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs. The proposed Regulation focuses on targeted amendments to the supervisory regime for EU and third-country CCPs.
Although these developments are expected to be finalised by mid-2019, much of the work will take place during 2018.
For more information on the legislative proposals to amend EMIR, see Practice note, Hot topics: EMIR.

MAR

The Market Abuse Regulation (Regulation 596/2014) (MAR) has applied across the EU since 3 July 2016. However, the application of MiFID II (see MIFID II below) from 3 January 2018 means that, with effect from this date, relevant provisions of MAR apply in relation to organised trading facilities (OTFs), small and medium-sized enterprise (SME) growth markets, emission allowances and auctioned products based on those allowances. This means MAR's scope now covers the full range of instruments and venues under MiFID II, which is effectively an extension to its initial scope of application during the period of 3 July 2016 to 2 January 2017. Firms and individuals should be aware of this change and make the necessary adjustments to their oversight, reporting, systems and controls.
Ongoing compliance with MAR remains a key matter for firms. In November 2017, Julia Hoggett, FCA Market Oversight Director, described compliance with MAR, at its most effective, as "a state of mind" (see Legal update, FCA speech on effective compliance with MAR). The FCA expects firms to ensure that their systems and controls are constantly developing and adapting to meet the changing nature and needs of the businesses within which they operate, including evolving regulatory demands.
The FCA's ability to detect market abuse is expected to be strengthened with effect from January 2018 as a result of two developments stemming from the application of MiFID II:
  • An estimated increase from the current volume of around 20 million transaction reports per day to around 30-35 million transactions and more than 50 million orders per day.
  • The introduction of legal entity identifiers (LEIs), which will enable the FCA to focus on particular client data.
The FCA has reiterated its commitment to seeking out evidence of market abuse and has made clear that it will not shy away from pursuing large and complex market abuse cases when they arise.
In December 2017, for the first time following MAR's application, the FCA imposed a fine on an AIM company for late disclosure (see Legal update, Market abuse: FCA final notice for failure to disclose inside information under MAR). It is possible that 2018 may see further FCA enforcement action under MAR.
For an overview of MAR, see Practice note, Market Abuse Regulation (MAR): overview.

MIFID II

MIFID II (the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR)) repealed and recast the Markets in Financial Instruments Directive (2004/39/EC) (MiFID). Together, they form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers (DRSPs) and third-country firms providing investment services or activities in the EU. MiFID II came into effect on 3 January 2018.
The FCA has made a number of significant changes to its rules and guidance to ensure that the UK is compliant with the new regime from 3 January 2018. This includes an overhaul of its rules relating to inducements, investment research, telephone taping, product governance, and trade data and transaction reporting. As a result, firms have needed to implement many new systems and procedures to comply with these new requirements. This will be an ongoing process for firms throughout 2018 as they bed in their new procedures.
MiFID II has been implemented in the UK by a mixture of legislation (such as amendments to FSMA and the RAO), and FCA rules. For more information how MiFID II has been implemented in the UK, see Practice note, Hot topics: UK implementation of MiFID II. For a list of Practical Law's MiFID II materials, see Practice note, A guide to key resources: MiFID II.

PRIIPs Regulation

One year after its original proposed application date, the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) (Regulation 1286/2014) finally came into force in the UK on 1 January 2018. The PRIIPs Regulation, as it is commonly known, introduces a new three-page pre-contractual disclosure document, the key information document (KID), which is intended to enable retail investors to readily compare the key features of different products when they are making investment choices. PRIIPs include a wide range of products, including funds, structured products, unit-linked and with-profits insurance contracts, and structured deposits. The PRIIPs Regulation applies to manufacturers of PRIIPs, who are responsible for producing the KID, and those who advise on or sell PRIIPs, who must provide retail investors with the KID.
Alongside the PRIIPs Regulation, a level 2 Delegated Regulation ((EU) 2017/653) setting out detailed requirements on the content, presentation and timing of delivery of the KID, also came into force on 1 January 2018. In response to widespread criticism from industry that the Delegated Regulation does not provide sufficient clarity in a number of important areas, the European Commission issued guidelines on the application of the PRIIPs Regulation and the Joint Committee of the ESAs published level 3 Q&As on the PRIIPs KID, in July 2017. The committee updates the Q&As from time to time (most recently in November 2017). Those still grappling with implementing the PRIIPs Regulation and complying with the relevant requirements relating to the KID may find it useful to refer to the guidelines and Q&As. It is also possible to submit new questions to the ESAs to the following address: [email protected].
The Commission must review the PRIIPs Regulation by 31 December 2018, so it will be interesting to see the outcome of this review in due course.
For more information, see Practice note, Hot topics: Regulation on key information documents for PRIIPs.

Transition from LIBOR and development of sterling risk-free reference rates

In November 2017, the FCA confirmed that the London Interbank Offered Rate (LIBOR) panel banks have voluntarily agreed have agreed to support the LIBOR benchmark and to remain as submitters until the end of 2021. This followed a July 2017 speech by Andrew Bailey, FCA Chief Executive, on the future of LIBOR in the light of concerns about its sustainability in the absence of active underlying markets, highlighting the need for a broad-based transition away from using LIBOR (see Legal update, FCA Chief Executive speech on future of LIBOR).
Given the panel banks' support for a transition period, the FCA's intention is that, at the end of 2021, it will no longer be necessary, through its influence or legal powers, to persuade, or compel, banks to submit to LIBOR. The FCA has made clear that transition work is of central importance to reducing the risks from financial markets' current dependence on LIBOR. Its focus is now on developing alternative rates and working with firms and trade associations towards a transition that can be executed smoothly.
The BoE is overseeing the development of sterling risk-free reference rates (RFRs). This is in response to recommendations by the FSB which are designed to increase confidence in the reliability and integrity of interest rate benchmarks.
A public consultation in 2017 confirmed strong support for the Sterling Overnight Index Average (SONIA) (which is administered by the BoE) as the preferred alternative to sterling LIBOR. The BoE is in the process of reforming SONIA. The reforms will take effect on 23 April 2018 (see Legal update, BoE confirms SONIA reform to be implemented in April 2018).
From January 2018, the market-led working group on sterling RFRs has an extended mandate and broader participation is being sought. The new mandate is to catalyse a broad-based transition to SONIA over the next four years, across sterling bond, loan and derivative markets. The aim is to ensure that SONIA is established as the primary sterling interest rate benchmark by the end of 2021, to tie in with the date from which transition can be made from LIBOR to alternative rates (see Legal update, BoE and FCA give new SONIA transition mandate to working group on sterling risk-free reference rates).
The BoE is calling for active engagement from participants across all relevant sectors and markets. Membership of the working group (which is by invitation of the BoE and the FCA) is therefore being broadened to include investment managers, non-financial corporates and other sterling issuers, infrastructure firms and trade associations, alongside banks and dealers.
The FCA and the BoE have indicated that a key near-term priority for the working group will be to make recommendations relating to the potential development of term SONIA reference rates. It is expected that a public consultation will be published in the first half of 2018.
The BoE has described the transition from LIBOR and the move to alternative sterling RFRs as a "challenging and complex exercise" for market participants, which will have to assess the potential impacts, (including on their documentation, internal systems, processes and controls) and take steps to manage them in a way that minimises disruption.

Forthcoming events for 2018

Annual Insurance Law and Financial Services Forums

Two key events in 2018 that we hope will be of interest to financial services practitioners are:
  • Our Fifth Annual Insurance Law Forum, which is being held on 20 March 2018. Visit the Insurance Law Forum 2018 website for the most up-to-date information regarding the agenda and speakers.
  • Our Sixth Annual Financial Services Forum, which is being held in June 2018 (precise details to be confirmed).
Please look out for invitations to these events in our Practical Law Financial Services daily and weekly emails.