FCA review of outsourcing by life insurers

This post was first published on our Digital TMT and Sourcing Notes blog.

On 4 March 2020 the Financial Conduct Authority published a short set of findings from its review of outsourcing in the UK life insurance sector. Despite the review’s narrow scope, the FCA’s findings are readily applicable to other outsourcing contexts, so regulated firms outside the life insurance sector should be aware of these. Continue reading

LIBOR transition: Regulators expect firms to accelerate preparations for end-2021

The FCA and PRA have confirmed that the next 12 months will be a critical period in transitioning away from the use of LIBOR, advising firms to accelerate their efforts to cease reliance on LIBOR by end-2021. The regulators will step up engagement with firms on LIBOR transition and have contacted senior management responsible for overseeing the transition to set out their expectations for the coming months.

In a suite of documents published last week, the Working Group on Sterling Risk Free Reference Rates (RFRWG), together with both regulators and the Bank of England (BoE), set out the priorities and other actions market participants should take to reduce LIBOR exposure. The documents published include:


Milestones for transition

The documents include the RGRWG’s key milestones and targets for firms over the coming months (see timeline below).

The UK regulators both fully support the timeframe proposed by the RGRWG. The FCA and BoE have also published a statement encouraging market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA from 2 March 2020.

Alongside these key milestones, the RGRWG will continue its own education, awareness and communication campaigns.


Key regulatory expectations

The key message from these publications is that sterling LIBOR is expected to cease to exist after the end of 2021, and no firm should plan otherwise. Transition plans should cover firms’ stock of legacy LIBOR-linked contracts, as well as new contracts entered into from this year onwards.

Firms should also note several other regulatory expectations highlighted in the documents, including:

Firms should engage proactively with clients and market initiatives

Market participants should be taking appropriate steps to establish that their clients are aware of the risks if new LIBOR transactions are entered into. This expectation to support clients is also brought out in the statement on the use cases of benchmark rates, where the RFRWG suggests within a decision tree that all clients (except large corporates where the transaction size is £25 million or greater) may need to explore with their bank contacts alternatives to compounded SONIA (such as BoE base rates or fixed rates) which are better suited to their needs.

Regulators also expect all firms to play their part in meeting the targets by actively engaging in transition efforts in the market. While progress has been made to date, regulators expect to see clear evidence of engagement from firms from the beginning of Q1 2020.

Senior management should be tracking progress

Senior management should ensure that the management information they receive in respect of LIBOR transition plans tracks performance against targets. This will be relevant to all firms for whom the transition from LIBOR is relevant, but will be particularly important for the senior managers at banks and insurers who have been identified as responsible for overseeing the implementation of the transition plans (in accordance with the FCA and PRA’s Dear CEO Letter on firms’ preparations for transition from LIBOR to risk-free rates and feedback statement published in September 2018 and June 2019, respectively).

Action is expected in key areas and should feature in firms’ planning from Q1 2020

Action in the following areas has been highlighted as being key to delivery and is expected to feature in firms’ planning from Q1 2020: product development; reviewing infrastructure (including updating loan system capabilities); client communications and awareness; and updating documentation.

Firms should be mitigating the risks from the transition

The FCA and PRA are aware that firms are transitioning at different rates, but all firms need to be proactive in taking early action to mitigate the risks from transition.


Increased focus on supervisory powers

The publications from the FCA and BoE make clear that they intend to make use of their supervisory powers if firms are seen to be falling short of their expectations.

In the letter to senior management, the regulators reminded firms that the Financial Policy Committee (FPC) will “keep the potential use of supervisory tools under review“. Firms will need to show sufficient progress by mid-2020 to avoid the FPC seeking recourse to such supervisory tools.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Nick May
Nick May
Partner, London
+44 20 7466 2617
Emma Reid
Emma Reid
Associate
+44 20 7466 2633
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789

HONG KONG SFC CONTINUES TO IDENTIFY DEFICIENCIES IN SPONSOR WORK IN SECOND THEMATIC REVIEW

On 26 March 2018, the Securities and Futures Commission (SFC) published a circular and a report following its second thematic review of sponsors. As with its first thematic review, the SFC found deficiencies in standards of conduct, due diligence practices, and internal systems and controls. Particularly serious deficiencies and instances of non-compliance were found to be prevalent in the sponsor work done for Growth Enterprise Market (GEM) listings. Continue reading

Increased focus on board and senior management in Hong Kong as HKMA issues enhanced guidance on corporate governance

On 6 October 2017, the Hong Kong Monetary Authority (HKMA) issued a circular to announce the publication of two revised Supervisory Policy Manual (SPM) modules, namely CG-1 “Corporate Governance of Locally Incorporated Authorised Institutions” and IC-1 “Risk Management Framework”. Revisions were made to the modules to incorporate guidelines issued by the Basel Committee on Banking Supervision and the Financial Stability Board on corporate governance and risk management principles, thereby bringing Hong Kong more in line with international standards. Continue reading

New corporate governance standards for Hong Kong authorised insurers came into effect on 1 January 2017

In October 2016, the Office of the Commissioner of Insurance (OCI) revised the Guidance Note on the Corporate Governance of Authorised Insurers (Revised GN10).  Under Revised GN10, the OCI not only enhanced the minimum standards of corporate governance that are expected of authorised insurers, but also widened the scope of application of such standards.

Continue reading

EU: First appeal decision of the joint Board of Appeal of EBA, ESMA and EIOPS

Last month, the joint Board of Appeal of the European Supervisory Authorities (the Appeal Board) published its first decision allowing an appeal brought by an Estonian company, SV Capital OU (“the customer”) against the European Banking Authority (EBA).  The case arose following litigation brought by a customer against its bank, from the EBA’s decision not to investigate the alleged failure of national competent authorities to take regulatory action, at the customer’s request.  The case is of interest because it effectively holds that the assessment of suitability of the management of a credit institution does not simply apply to management at the level of the credit institution, but can also apply to key function holders who have a crucial role in the day-to-day management of its business. Continue reading

UK: FCA provisional decision to fine and ban former NED of financial firm for failing to disclose conflicts of interest

The FCA has published a notice of its decision to fine a former non-executive director (NED) of two mutual societies £154,800, and to ban her from performing any role in regulated financial services.   The FCA considers that she breached the requirement to act with integrity by recklessly, and in breach of her fiduciary position as a NED, failing to recognise and disclose conflicts of interest.   The findings are contested, and have been referred to the Upper Tribunal (the Tribunal), but an application for orders to prevent publication of the Decision Notice and of particulars of the reference in the Tribunal’s register was unsuccessful.

Boards of financial firms should take note that the case squarely raises conflicts identification and management and basic corporate governance as priority issues:

“The position of NEDs is critical to the effective functioning of a board and to maintaining the confidence of customers. Because of the nature of their role, NEDs are more likely to have a portfolio of appointments and are likely to find themselves having to manage conflicts of interest more frequently than their fellow directors. NEDs need to manage scrupulously their conflicts of interest and to observe basic corporate governance principles.” Continue reading

UK: Non-executive directors – new ICSA guidance on care, skill and diligence

The Institute of Chartered Secretaries and Administrators has issued new guidance on the liability of non-executive directors in the context of the statutory duty to exercise care, skill and diligence.  The guidance suggests ways in which non-executive directors can approach their work to allow them to demonstrate to a regulator or court, if necessary, that they had taken appropriate steps to exercise care, skill and diligence in their role.  Continue reading