European Commission Consults on Effectiveness of DMD


The European Commission has launched a consultation relating to its evaluation of the Distance Marketing of Financial Services Directive (2002/65/EC) (DMD).

The DMD provides details on the information that a consumer should receive about a financial service and the financial services provider before concluding a distance contract. Among other things, it also gives consumers a 14-day withdrawal period for certain financial services contracts, and bans services and communications from suppliers that a consumer has not solicited or consented to.

The European Commission published a new webpage announcing a consultation relating to its evaluation of the Distance Marketing of Financial Services Directive (2002/65/EC) (DMD). The Commission explains that, since the DMD came into force, the retail financial sector has gone increasingly digital, with new products and actors available on the market, and new sales channels being used. Also, several EU laws relating to financial services have been adopted or updated. As a result, the Commission has launched an evaluation of the DMD to assess whether it is still fit for purpose.

The aim of the consultation is to ensure that all relevant stakeholders have the opportunity to express their views on the relevance, effectiveness, pertinence and coherence of the DMD. The Commission particularly wants to hear from consumers, retail financial services providers and authorities responsible for supervising and enforcing compliance with the DMD’s provisions.

Responses to the consultation can be made by completing an online questionnaire, which is linked to from the consultation webpage. Comments can be made on the consultation until 2 July 2019. The Commission expects to publish the conclusions of the evaluation exercise by the end of 2019.

Financial Services Trade Associations Urge HM Treasury to Recognize EEA Derivatives Trading Venues in Event of No-deal Brexit


A number of key UK, EU and international financial services trade associations published a letter (dated April 5) to HM Treasury on the equivalence of European Economic Area (EEA) derivatives trading venues under the EU retained versions of European Market Infrastructure Regulation (EMIR) (648/2012) (UK EMIR) and the Markets in Financial Instruments Regulation (600/2014) (UK MiFIR) if there is a no-deal Brexit.

The trade associations highlight the disruptive impact on UK market participants and European derivatives markets arising from the absence of HM Treasury equivalence determinations:

  • Under Article 28(4) of UK MiFIR with respect to EEA multilateral trading facilities (MTFs) and organized trading facilities (OTFs). This will mean that UK financial counterparties (FCs) and UK non-financial counterparties (NFCs) over the clearing threshold would cease to be able to execute transactions in over-the-counter (OTC) derivatives subject to the trading obligation under UK MiFIR on those venues in a no-deal Brexit.
  • Under Article 2a of UK EMIR with respect to EEA regulated markets. This will mean that EEA exchange-traded derivatives (EEA ETDs) are considered OTC derivatives under UK EMIR in a no-deal Brexit.

The trade associations urge HM Treasury to prepare the necessary measures to recognise the equivalence of EEA derivative trading venues under UK EMIR and UK MiFIR, with a view to those measures taking effect on or very shortly after a no-deal Brexit. They suggest that HM Treasury could make an equivalence direction under the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (SI 2019/541) or, alternatively, the FCA could grant transitional relief for this purpose using its temporary transitional powers under Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632). They urge HM Treasury and the FCA to indicate the approach that they intend to take as soon as possible.


Newly Launched MAPS Consults on National Strategy for Money and Pensions


On April 8, the Money and Pensions Service (MAPS) published a press release announcing its official launch, and a listening document on a national strategy for money and pensions and MAPS’ three-year corporate plan (together with an executive summary).

MAPS is consulting on the listening document until June 30. Written comments are invited and input will be obtained during a UK-wide program of “listening events.” Input from interested parties will influence MAPS’ strategy to collectively address building blocks to managing money and pensions well. MAPS will publish a national strategy and its corporate plan for 2020-2023 (setting out how MAPS will organize, encourage and monitor the national strategy) in autumn 2019.

MAPS has also published its business plan for 2019-2020 setting out the key performance indicators for the organization’s “transition year” during which it will continue the three services provided by Pension Wise, Money Advice Service (MAS) and the Pensions Advisory Service (TPAS). Among other things, MAPS expects to publish by the end of 2019/2020 the results of tests on different approaches for defaulting pension holders into guidance at the point they seek to access or transfer their pension savings. This will contribute to the evidence base for making the rules on referring pension scheme members to financial guidance required by sections 18 and 19 of the Financial Guidance and Claims Act 2018.

The new MAPS customer website will go live towards the end of 2019. Until then, guidance will continue to be available through the existing websites of MAS, TPAS and Pension Wise.


PRA Consults on Revisions to Branch Returns for International Banks


On April 8, the Prudential Regulation Authority (PRA) published a consultation paper (CP8/19) on the revision of the branch return for international banks.

The PRA’s proposals relate to PRA-supervised branches of deposit-takers and designated investment firms that are not UK-headquartered firms.

The PRA proposes to change the format and the content of the branch return form for these firms and to provide additional guidance for completing the form. The changes are intended to improve the quality of the information provided by firms and to enhance the return’s ability to assist the PRA in its supervision of international banks. The changes include aligning the concepts used in the return with concepts used in the PRA’s wider reporting framework, clarifying that firms must report within 30 business days and replacing the current Excel reporting format with the XBRL reporting format.

The PRA Rulebook instrument containing the relevant changes to the Third Country Firms and Regulatory Reporting Parts (the CRR Firms: Non CRR Firms: Branch Rules Instrument 2019) is set out in Appendix 1 to CP8/19. An alternative version of the instrument, which will apply if there is a no-deal Brexit, is set out in Appendix 2. Appendixes 3 to 5 of CP8/19 contain proposals for the revisions to the branch return form and to the PRA’s supervisory statement on guidelines for completing regulatory returns (SS34/15), as well as draft reporting guidance for the branch return form.

The deadline for responses is July 7.

Rating Agency Developments


On April 9, Fitch published a report entitled: “U.S. Credit Card ABS Performance Mixed.” Report.

On April 8, Fitch published a report entitled: “U.S. CMBS Delinquency Rate Posts Increase in March.” Report.

On April 4, S&P published criteria and guidance reports entitled: “Structured Finance – ABS: U.S. FFELP Student Loan ABS: Methodology and Assumptions.” Criteria. Report.

European Parliament Adopts First Reading Position on Proposed Regulation and Directive on European Crowdfunding Service Providers


On the March 27, the European Parliament issued a press release announcing that it has adopted its position at first reading on the proposed Regulation on European crowdfunding service providers (2018/0048 (COD)). The Parliament’s first reading position sets out its amendments to the European Commission’s legislative proposals, in this case MEPs extended the scope of the regulation by increasing the maximum threshold for each crowdfunding offer to €8,000,000 (from €1,000,000 as proposed by the European Commission) calculated over a period of 12 months.

The proposal aims to help crowdfunding services to function smoothly in the internal market and to foster cross-border business funding in the EU. It also intends to better protect investors, including by ensuring that crowdfunding service providers give clients clear information about financial risks and charges related to their investment and that investors are provided with a key investment information sheet drawn up by the project owner for each crowdfunding offer. The initiative forms part of the European Commission’s FinTech action plan. First Reading Position.

ESMA Fines Fitch CRAs for Breaching Conflict of Interest Requirements


On March 28, ESMA fined three credit rating agencies, all belonging to the Fitch Group, a total of €5,132,500, in relation to breaching the conflict of interest requirements under the CRA Regulation (1060/2009) (CRAR). They were fined because, between June 2013 and April 2018, 20% of three Fitch subsidiaries were indirectly owned by an individual through a French entity. However, that same individual was also sitting on the boards of three entities rated by the Fitch subsidiaries.

Each of the three subsidiaries voluntarily undertook measures to ensure similar infringements would not be committed again, and this was considered by ESMA, along with other mitigating and aggravating factors, when the fines were determined. The subsidiaries can appeal the decision but this will not have a suspensive effect.

The public notice issued in relation to the fines can be found here.

ECJ Rules on Powers of National Courts to Modify or Replace Unfair Terms in Consumer Contracts


In two joined cases, Abanca Corporación Bancaria SA v García Salamanca Santos (Case C-70/17) and Bankia SA v Lau Mendoza and Rodríguez Ramírez (Case C-179/17) EU:2019:250, the European Court of Justice (ECJ) considered the power of national courts to substitute national law provisions to save a loan where deleting unfair terms would prejudice the consumer. Under Article 6(1) of the Unfair Contract Terms Directive (93/13/EEC) member states must ensure that unfair terms in consumer contracts are not binding on consumers, but that the contract will survive if it can do so without the unfair terms. The ECJ ruled that a court can substitute national law for an unfair term where deleting it would end the contract with negative consequences for the consumer.

Specifically, the ECJ confirmed that:

  • As per its decision in Banco Español de Crédito, C618/10, EU:C:2012:349, a national court cannot simply revise an unfair term to make it fair. If this were the case suppliers would continue to use unfair terms, safe in the knowledge that the court would merely amend them to make them fair; Article 6(1) would not have its intended dissuasive effect.
  • As per Kásler and Káslerné Rábai, C26/13, EU:C:2014:282, Article 6(1) does not preclude a national court from removing an unfair term and replacing it with a provision of national law if simply removing the unfair term would require the court to annul the contract in its entirety and this would penalise the consumer.

This is not new law, but highlights the ECJ’s interpretation of Article 6(1).

ESMA Publishes Guidelines on Risk Factors Under Prospectus Regulation


On March 29, the European Sescurities and Markets Authority (ESMA) published a report setting out final guidelines on how national competent authorities (NCAs) should review risk factors as required by the new Prospectus Regulation. The aim of the guidelines is to encourage more appropriate, focussed and streamlined risk factor disclosures for securities and are intended to assist NCAs in their review of disclosure. ESMA noted that in 2019 it will focus on the consistency of application of the guidelines on risk factors by NCAs.

The purpose of including risk factors in a prospectus is to help investors make informed investment decisions by enabling them to assess the risks. Risk factors generally include information concerning: the issuer’s financial situation, business activities and industry; the nature of the security; external risks such as legal and regulatory, environmental, social and governance.

A copy of the report can be found here.

CFTC Adopts Final Rule Amending De Minimis Exception to Swap Dealer Definition


On March 25, the CFTC adopted a final rule amending the de minimis exception to the definition of “swap dealer.” Under the final rule, swaps entered into by Insured Depository Institutions (IDIs) in connection with loans to customers would not count towards the $8 billion aggregate notional amount threshold used in the de minimis exception. Release. Final Rule.