Regulatory Risk Report January 1, 2017

Quote of the Week “Treasury will use all of its financial tools as part of the US Government’s effort to counter those who engage in malicious cyber activities against our financial system or our national institutions” - US Treasury Secretary, Jacob Lew

Articles in This Issue US Banking: FDIC qualifying swap contract records; Agency 18-month exam cycles; Fed TLAC buffers for G-SIBs; Treasury terrorism insurance; Fed liquidity risk disclosures; Fed systemic BHC surcharges

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US Consumer: FDIC de novo application; Fed requests for joint accounts; FHFA acquired member assets; CFPB fair-lending 2017 priorities; HUD certified housing counselors; OCC handbook consigned items

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US Securities and Investment Management: CFTC OTC political contribution; DoL ERISA shareholder rights; NYSE fee cap on funds; SEC fund predecessor reliance; FINRA Treasury reporting to TRACE; FINRA December 2016 board meeting

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Canada: OSFI enterprise-level model risks; OSFI boards of regulated firms; OSFI life insurer deferral of IFRS 9; FINTRAC crime proceeds act; CSA sales rep compensation; CSA embedded fund commissions

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International: FSB internal TLAC; FSB access to infrastructure resolution; IAIS identification of systemic insurers; IOSCO order-routing incentives; IOSCO OTC leveraged products; IOSCO automated advice tools

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EU: Italian bailout of MPS bank; ECB SREP 2016 result and dividend; EBA supervision of large branches; ECB, EBA credit risk models; ESAs big data assessment; ESA PRIIP key disclosure standards

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UK: FCA MiFID implementation: fourth-set; BoE sterling risk-free rate; PRA solvency II matching adjustment; Treasury single debt advice body; FCA compliance behavior incentives; FCA charges for initial advice

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AML & Enforcement: Fincen FBAR extension

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Regulatory Watch List Mis-sold Government precautionary bail-out after failed capital-raising, will test new EU bank resolution directive. Use of creditor bail-in tool was rejected due to large proportion of retail bond-holders wrongly sold the instrument. Barc or Bite DoJ sues UK bank which refused to make multi-billion payment for poor crisis era mortgage loans. Ahead of trial, bank prepares its defense strategy, claiming US discriminatory treatment against foreign entities.

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US Banking FDIC Qualifying Swap Contract Records

Treasury Terrorism Insurance

On December 28, FDIC proposed rules on records to be kept for qualified financial contracts (QFCs). • Follows Treasury and FDIC October 31, 2016 final rules on QFC records effective December 30, 2016. • QFCs include derivatives, securities lending, and short-term funding trades such as repos. • FDIC requires large banks to maintain records relating to QFCs to which they are a party. • Expanded scope of QFC records required to be maintained by bank above $50B assets. • Or in group where affiliate is subject to QFC recordkeeping requirement of the US Treasury. • For other banks subject to FDIC’s QFC record rules, it added a limited number of data rules. • Will also require full scope entities to keep the QFC records for certain of their subsidiaries.

On December 21, Treasury issued rule on terrorism insurance program (TRIP) changes per 2015 Act. • TRIP reauthorization Act of 2015 directs Treasury to require insurers to file information. • Follows Treasury April 1, 2016, proposal and interim final rule on certifying terrorism acts. • Final rule adopts renumbering of section, some clarifying change in response to comment. • Rule is effective January 17, 2017, included sections on disclosure, liability, reporting.

Agency 18-Month Exam Cycles On December 12, Fed, OCC, FDIC issued final rules to expand the use of longer (18-month exam) cycles. • Rules have been in effect since February 29, 2016, pursuant to the interim final rules. • Number of banks that may qualify for the 18-month exam has increased by 600 to 4,800. • May also apply to qualifying US branches of foreign banks with less than $1B assets. • Stated future rule will apply to well-managed banks that have under $1B total assets. • Follows FAST Act enacted in December 2015, which raised eligible threshold from $500M. • For institutions with stronger rating of 1 or 2 in composite CAMELS-capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk. • Would require that bank meet additional capital, managerial and supervisory criteria.

Fed TLAC Buffers for G-SIBs On December 15, Fed issued final rule on TLAC capital standards, statements by chair Yellen and Governor Tarullo. • Follows Fed October 2015 proposed rules on TLAC buffers for US and foreign banks. • Changes made since proposal will grandfather longterm debt issued prior to December 31, 2016. • Allow to count to long-term debt, even if debt has contractual clauses not allowed in rule. • Foreign firm US operations generally required to issue long-term debt to the foreign parent. • However, certain foreign firms also permitted to issue long-term debt to external entities. • Long-term debt for foreign firms is slightly reduced, so consistent treatment to US firms. • US and foreign bank trade groups were more supportive of final rule than initial proposal. • Pending Federal Register, all covered firms to be required to comply with rule by January 1, 2019. Reg-Room, LLC

Fed Liquidity Risk Disclosures On December 19, Fed issued final rules for publication of quantitative liquidity metrics by large banks. • Final rule generally similar to proposal, has extended implementation by nine months. • Effective date of rule is April 1, 2017, and pending publication in the Federal Register. • Compliance dates will range from between April 2017 through to October 2018. • Companies above $700B in total assets to comply with disclosure from April 1, 2017. • Quantitative data on LCR calculation, and discuss factors having key effect on LCR. • Applies if group consolidated assets are over $50B, and for certain bank subsidiaries. • Disclose quantitative, qualitative LCR each quarter, based on average level in last quarter. • In a direct and prominent manner on web or with a public financial or regulatory report. • Disclose main drivers of LCR; LCR changes over time; composition of eligible HQLA. • Concentration of funding sources; derivative exposures, currency mismatch in the LCR.

Fed Systemic BHC Surcharges On December 28, Fed issued 2016 indicators used to calculate the risk-capital surcharge for G-SIBs. • Follows Fed July 2015 issued rules on higher capital surcharges for systemic BHCs. • Applies to global systemically important bank holding company (G-SIB) on risk of failure. • Firm must calculate G-SIB score by a specific formula (Method 1) based on 5-weights. • Indicators are on G-SIB size, connectedness, substitutability, complexity, cross-border role. • For each indicator, firm divides own measure by the aggregate global indicator amounts. • Method 1 score is sum of weighted systemic indicator scores expressed in basis points. • G-SIB surcharge for the firm is higher of G-SIB surcharge in Method 1 and second method. • Second measure uses the firm’s reliance on wholesale funding, instead of substitutability. • Fed amounts each year in dollars, are based on Basel values issued in euros, for G-SIBs.

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US Consumer FDIC De Novo Bank Application

CFPB Fair Lending 2017 Priorities

On December 22, FDIC proposed handbook for de novo bank applications, and to increased transparency. • Describes distinct phases: pre-filing activity, application process, and pre-opening activity. • Pre-filing activities include assembling the board of directors and the management team. • Setting business goals and objectives; charter, ownership structure, and the tax election. • Define market and identifying office locations; developing business plans and their contents. • Plan for organizational expense; determine initial capital amount, pre-filing meeting. • Application process includes overview of review and evaluation; application requirement. • Application content; public vs. confidential information, evaluating the statutory factors. • FDIC staff involvement, field investigations, and condition that is required before approval. • Pre-opening activities including satisfying the conditions; and completing the capital raising.

On December 16, CFPB issued guide on fair lending priorities for 2017 on 40th anniversary of ECOA. • CFPB worked to ensure consumers are not excluded from, overcharged for mortgages. • Or on auto loans, credit cards based on their race or ethnicity, still a common problem. • Obtained $400M in payments, credit to over 500,000 consumers suffering discrimination. • Greater efforts by lenders to monitor own lending practices for possible discrimination. • Redlining: analyze if lenders intentionally avoid lending in minority neighborhoods. • Mortgage, student loan servicing: analyze if some borrowers behind on their mortgage. • Or student loan, as more difficulty working out solution because of their race/ethnicity. • Small business lending: Congress concerned about women and minority-owned business. • Experienced discrimination when applied for credit, required CFPB help fair access to this. • Shift away from auto lenders and credit card companies due to achievements made in 2016.

Fed Requests for Joint Accounts On December 19, Fed proposed rules for jointly held accounts between banks in US payment systems. • Follows change to US payment system in the Fed January 2016 strategies to improve efficiency. • Noted that Federal Reserve Banks typically permitted single master account for each bank. • Joint accounts are held for benefit of multiple banks, which are managed by a single agent. • Fed anticipates more interest by participants in establishing joint account to aid settlement. • Proposed guidelines outline its considerations for the evaluation of joint account requests. • Will evaluate requests on a case-by-case basis, more specific information is likely required.

FHFA Acquired Member Assets On December 19, FHFA issued rules on application of acquired member asset (AMA) programs. • Removed and replaced the references and requirements to use a published credit rating. • On required issue by a nationally recognized statistical ratings organization (NRSRO). • Provided flexibility in model to estimate credit enhancement required for AMA loan. • Allowed bank to authorize the transfer of mortgage servicing rights on AMA loans. • To any institution, including nonmembers of the Federal Home Loan Bank System. • Will allow banks to acquire mortgage loans that exceed the conforming loan limits. • If mortgage is guaranteed or insured by department or agency of US government. • Rule excluded proposal to end loan private supplemental mortgage insurance (SMI).

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HUD Certified Housing Counselors On December 14, HUD issued rules on the certification of counselors for administered housing programs. • Helps renters and homeowners by greater assurance, more knowledgeable counselors. • Expected to lead to better identification of housing issues, resolve barriers, avoid scams. • Applicant must function as private or public nonprofit organization, submit evidence. • Have experience of administering housing counseling programs for at least one year. • Functioned for at least one year in geographical area the applicant proposes to serve. • Sufficient resources to implement proposed counseling plan at date of HUD approval. • Rule gives guidance for agencies required to have housing counseling certified staff.

OCC Handbook Consigned Items On December 15, OCC issued examination handbook on consigned items, related customer services. • Replaced a booklet of same name issued June 1996, and exam procedures from February 1998. • Updated guide to examiners assessing risk on consigned items and customer services. • Consigned items include travelers' checks, money order and US commemorative coins. • Other related customer services included safe deposit boxes, and messenger services. • Updated statutory and regulatory citations to reflect changes since the last publication. • Integration of OTS into OCC, and revised examination procedures to guide examiners.

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US Securities and Investment Management CFTC OTC Political Contributions

SEC Fund Predecessor Reliance

On December 23, CFTC issued relief to swap dealers, for political contribution to government officials. • Interpretation of Reg 23.451 setting limit on political contributions by swap dealers (SDs). • Rule prohibits dealers from entering swap with “governmental special entity,” as defined. • For a two-year period after SD or its associates have made a contribution to an official of GSE. • Official of GSE, means person responsible for selecting swap dealer it will do business with. • Contribution includes gift, subscription, loan, advance and deposit of money by the dealer. • Interpretation applies to dealer's contribution made for GSE transition or inaugural expenses. • If expense incurred by successful candidate, in relation to federal, state, or local office. • Only covered expense if a candidate successful as an official of a governmental special entity.

On December 1, SEC issued guidance on relying on a registration by a predecessor investment advisor. • Successor to a registered IA, is required to file an application to register within 30 days. • Succession by application if unregistered successor acquires a registered IA business. • Must file new application for registration on Form ADV within 30 days of doing business. • Succession by amendment, if is not effective change in control, make changes to form only. • May file an amended Form ADV within thirty days after related change or reorganization. • New adviser must file to indicate succession method, otherwise considered as unregistered. • Reliance on the succession rule depends on whether new legal entity has been created. • If merely change of place or form of business, succession will be deemed as an amendment. • On legal dissolution but no change in control, succession by such amendment is allowed. • If practical changes in control or management, succession by application may be warranted.

DoL ERISA Shareholder Rights On December 29, DoL updated ERISA guidance on the exercise of shareholder rights by their fiduciaries. • Guidance on exercising shareholder rights for securities held within employee benefit plans. • Includes voting proxies, compliance with the statement of investment policy, other rights. • Focus on the exercise of shareholder rights to influence management and board of directors. • DoL found 2008 version misunderstood, out of step with benefits from shareholder activism. • Had been read by some as prohibiting ERISA plans from exercising rights of shareholders. • Some understood as need to perform a cost-benefit analysis for each particular proxy vote. • Concluded action likely to have quantifiable increase of economic value of the investment. • Clarified is no need for CBA on every single exercise of proxy voting, only major issues. • No intent to discourage taking account of the longterm, and non-quantifiable benefits.

NYSE Fee Cap on Investment Funds On December 22, NYSE proposed cap on fees charged to investment managers and portfolios companies. • Proposed rule would amend Section 902.02 under the NYSE manual for listed companies. • Caps fee for investment management entities, as well as their eligible portfolio companies. • Investment management entity usually a listed firm and managing non-SEC-registered funds. • A small number of such companies are NYSE-listed and manage private equity funds. • Portfolio company is so defined if a manager owns at least 20% of the fund's common stock.

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FINRA Treasury Reporting to TRACE On December 14, 2016, FINRA revised proposed rules for reporting Treasuries to clarify their definition. • Would require reporting of transactions in all Treasuries with the exception of savings bond. • Auction is defined as a transaction where firm is awarded US Treasury security in an auction. • Thus, acquisition of a Treasury on issue date, on successful bid in auction is not reportable. • But secondary market trade in security, after initial acquisition on issue date, is reportable. • When-issued definition is Treasury trade that is executed before the auction for a security. • Definition now extends beyond the auction, to include the full period before the issue date. • Report yield on when-issued up until auction for a security, and price following the auction. • On December 20, 2016, SEC approved rules with immediate effect, and December 27 Federal Register.

FINRA December 2016 Board Meeting On December 15, FINRA announced rulemakings on disqualification agreed at its December board meeting. • Rules give FINRA staff discretion to accept application related to statutory disqualification. • Involving willful failure to disclose bankruptcy, judgment, liens, will approve directly to SEC. • Proposed simplified arbitration Rules 12800, and 13800, to amend the hearing provisions. • Rule will provide additional shorter telephone hearing option for parties in an arbitration.

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Canada OSFI Enterprise-Level Model Risks

FINTRAC Crime Proceeds Act

On December 21, OSFI proposed guidelines to manage the risks from models on an enterprise-wide basis. • Aims to establish common understanding of expectations for bank enterprise-wide models. • Applicable to all models which have material impact on the risk profile of the institution. • Use heightened standards if bank has approval to use the internal model for capital purpose. • Internal models approved institutions (IMAI), relative to other standardized institutions (SI). • IMAIs should comply with all components of guidelines, including section on specific risks. • For additional model risk in credit, operational, market risk and components used in Pillar II. • Included specifics risk on the internal capital adequacy assessment processes (ICAAP). • Market risk on: standardized/stressed/specific VaR; incremental/comprehensive charge. • Also for interest rate risk in the banking book (IRRBB), and requirements on margining.

On December 20, FINTRAC issued guidance on AML risks of dealing with politically exposed persons. • Effective on June 17, 2017, proceeds of crime (money laundering), terrorist financing act. • The associated regulations,will result in new obligations for politically exposed persons. • Both for domestic and foreign PEPs, and to the heads of international organizations (HIOs). • FINTRAC published guidance describing new obligations and updated existing guidelines. • Indicated minor change to report of suspicious transaction, as well as large cash transactions. • On casino disbursement and terrorist property reporting forms, changes to exchange rate. • Has new PEP guidelines for financial entities; securities dealers; MSBs; and life insurance. • Revised guidelines: background; suspicious trades; filing reports electronically; by paper.

CSA Sales Rep Compensation

On December 16, OSFI launched a review of expected practices for use by firms' boards of directors. • Board plays critical role in ensuring firm safety and soundness and for compliance with laws. • OSFI prudential supervision of firms, relies on boards to discharge their mandate effectively. • Expectations for directors are in its corporate governance guideline, last updated in 2013. • However, other guidelines on specific risk oversight areas also cover board expectation. • Further requirements are placed on individual boards, and OSFI may send supervisory letter. • Feedback by boards indicate expectations can be challenging to navigate, and burdensome. • Board feedback also indicated that challenges can be felt more acutely by smaller firms.

On December 15, CSA, IIROC issued a review of types of compensation for securities representatives. • Identified compensation and incentives firms use to motivate behavior of representatives. • Sets out conflicts of interest which could arise if practices are not properly controlled. • Part of work to address issues and concerns arising from the client-registrant relationship. • Included proposed reforms on client-registrant relationship in March 2016, CSA advisory. • Survey found that firms use a wide range of practices to compensate their representatives. • They included direct tools, e.g., commission, performance reviews and sales-level targets. • Included indirect tools, e.g., promotions and valuation of representative books of business. • CSA may also issue further guidance and/or proposed regulations related to compensation.

OSFI Life Insurer Deferral of IFRS 9

CSA Embedded Fund Commissions

On December 19, OSFI proposed deferral of IFRS 9 accounting application for life insurers. • Responded to IASB September 2016 approved amendment to IFRS 4 on insurance contracts. • Allowed insurers to defer applying IFRS 9 on financial instruments, until January 1, 2021. • OSFI decided is a strong prudential need for further accounting guidance for life insurers. • Due to IASB amendment to IFRS 9 financial instruments with IFRS 4 insurance contracts. • OSFI believed that IASB amendment could lead to inconsistencies among life insurers. • New guidance will provide consistency and comparability for the life insurance industry.

On December 15, 2016, CSA issued an update to its consultation on use of embedded commissions. • Use of sales and trailing commissions, which are paid for by investment fund managers. • Practice raises investor protection, market efficiency questions, suggest need for change. • Considered opportunity to align interests of fund managers, dealers, and reps to investors. • Review direct pay arrangement to address if prior CSA initiatives address investor issues. • Assess discontinuing commissions on market structure and access to advice for investors.

OSFI Boards of Regulated Firms

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International FSB Internal TLAC Consultation

IOSCO Order-Routing Incentives

On December 16, FSB issued principles for allocation of TLAC in internal sub-groups of organization. • Enable full and consistent implementation of TLAC, orderly resolution within large groups. • Set of high-level guiding principles is to assist home and host authorities in resolution action. • Internal TLAC is the loss absorbing capacity provided by resolvable entity to a sub-group. • TLAC process requires the down-streaming of resources to major subsidiaries in sub-group. • In the event of resolution, ensures that assets can be passed in the group with legal certainty. • Without need to resolve subsidiary or group members, so can continue orderly functioning. • Principles cover: definition of subsidiary; the size of TLAC; trigger used; and cooperation. • Crisis management group (CMG) of firm will establish list stating home and host authorities.

On December 21, IOSCO issued report into use of order routing incentives by exchanges and platforms. • Contained overview of existing order routing incentives as part of consultation document. • Provided an overview of practices used by market regulators to deal with the incentives. • Examined regulatory conduct requirements for brokers or firms to manage resulting conflicts. • Assessed how the regulations interacted with market practices across different jurisdictions. • Assessed use of discount or rebates offered as incentives to direct order flow towards venue. • Focused on monetary incentives paid out or received by brokers, to or from third parties. • Noted internalization and use of affiliated venues may lead to commercial benefits. • Also, provision of goods and services bundled into execution by brokers, such as research.

FSB Access to Infrastructure in Resolution

IOSCO OTC Leveraged Products

On December 16, FSB issued consultation on access to market infrastructures (FMIs) during a resolution. • Maintaining ongoing access to FMIs for firms in resolution is aspect of FSB's Key Attributes. • Maintain access during resolution, to clearing, payment, settlement, and custody services. • Such access can be via direct participation or indirectly through other correspondent banks. • Proposed arrangements for: FMI key serviceproviders; for FMI participant; and regulators. • Service-providers to FMI must plan for FMIresolution, interact with members, regulators. • Must clarify details of own risk management framework, enhance readiness for resolution.

On December 21, IOSCO issued report on usage and sales of OTC leveraged products to retail clients. • IOSCO reported on the market for retail OTC leveraged products and type of firms involved. • As well as common features of OTC leveraged retail products and authorization by regulators. • Concludes that market segment is a significant phenomenon in a number of jurisdictions. • Via use of on-line advertising, social media, expert blogs and other cross-border marketing. • Concern and regulatory response to them will vary depending on the particular product. • Raises concerns about number of unregulated firms that operate illegally in some countries. • IOSCO to continue to take interest in the area due to the significant cross-border aspect.

IAIS Identification of Systemic Insurers On December 16, IAIS issued report on identification of global systemically important insurer (G-SII) lists. • Outlined identification process, used updated method to identify recommended G-SII list. • Used a five-phase approach containing fact-based qualitative and quantitative elements. • Phases I and II have quantitative components, used in a updated assessment methodology. • Undertook data collection of 50 firms (Phase I), to determine quantitative threshold (Phase II). • Phase III collected quantitative and qualitative information not included in Phase II indicators. • Phase IV enables prospective G-SII to receive information on status from the first three phases. • Phase V combined overall assessment result, along with IAIS’ recommendation to FSB.

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IOSCO Automated Advice Tools On December 21, IOSCO issued update on report of automated advice tools and protecting investors. • Noted that market for automated investment advice has developed rapidly since last report. • Updated report concluded that continued development of market requires monitoring. • Use is expanding as intermediaries seek to provide advice in a more efficient manner. • A growing number of retail investors are moving to online tools to manage portfolios. • Functionality and analytics provided by tools are improving in sophistication and range. • Provided a summary of responses from 2016 survey of IOSCO members on automation.

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EU Italian Bailout of MPS Bank

ECB, EBA Credit Risk Models

On December 22, Italian government agreed to use new €20B bailout fund to recapitalize Banca MPS. • Monte dei Paschi di Siena failed to raise the €5B from private investors needed to save it. • First step of bailout is to increase liquidity, potential sale of government-backed bonds. • After initial bounce, shares dropped 7.5% due to uncertainty, stress test performance. • On December 26, 2016, MPS said ECB shortfall translated to a capital requirement of €8.8B. • Under EU rules, subordinated debt-holders must bear losses prior to government money. • Italian government said it will convert into equity, which later will convert to senior debt. • Consob suspended trade in Banca MPS stock after ban on short positions until January 5, 2017. • Also updated terms of public offer of Banca MPS subordinated debt, to convert to shares.

On December 16, ECB consulted on assessment of the materiality for changes to credit risk models. • Explained the approval criteria for changes to internal models at directly-supervised banks. • Used to calculate the capital requirement for counterparty credit and credit valuation risks. • Assists firms to self-assess the materiality of changes and extensions of internal models. • Uses, as much as possible, the approaches already defined by EBA for other risk types. • Models focus is over-the-counter derivatives contracts and securities finance transactions. • On these products, exposure is calculated in different ways than for traditional lending. • Output from models is one input factor in calculating bank's Pillar-1 capital requirement. • On December 16, EBA also issued a qualitative survey on internal models and instructions.

ECB SREP 2016 Result, Dividend

ESAs Big Data Assessment

On December 15, ECB issued result of SREP, variable dividend for 2017 and guidance on methodology. • Aggregate capital required in 2017 for directly supervised banks was similar to level in 2016. • With an average and median of 10% common equity Tier 1 (CET1), mostly in common stock. • Required that certain banks implement higher liquidity coverage than regulatory minimum. • Where over-reliance on wholesale short-term funding or exposure to collateral management. • Imposed minimum levels of liquid assets and qualitative measures where weak governance. • Published updated recommendations on level of 2017 dividends and variable remuneration. • Reflected new differentiation in type Pillar 2 capital, which banks are required to hold.

On December 19, EIOPA, ESMA and EBA issued joint discussion paper on big data in financial sector. • Covered increased use of big data across the banking, insurance and securities sectors. • Included the collection, processing and use of high volumes of different types of user data. • On risk micro-segmentation, refined scoring, tailor products, use based insurance models. • Better credit assessment may improve product pricing, possibly higher premiums for some. • On December 16, EIOPA also issued report on the impact of digital technology for consumers. • How influences consumers' interaction with insurers, enable design innovative products. • Allows personalized products, but potential negative impact, on availability, affordability.

EBA Supervision of Large Branches

ESA PRIIP Key Disclosures

On December 20, EBA consulted on guidelines for intensified supervision of significant branches. • Applied to the largest systemically-important branches, to coordinate competent authorities. • Followed an increasing demand to establish branches across EU, to utilize single market. • Use framework to identify ‘significant-plus' branches, cooperative supervisory approach. • Assessment of recovery planning facilitated through framework of college of supervisors. • Principles for risk assessment by authorities, and the exchange of supervisory intelligence. • Plan supervisory activities, spot checks, apply supervisory measures, and allocation of tasks. • Should not interfere with task of consolidating supervisor and home and host in CRD, BRRD.

On December 23, ESAs issued a response to EC on the amendments to standards on KIDs for PRIIPs. • Follows April 2016 ESMA, EBA, EIOPA final rules for key information documents (KID). • EBA and ESMA agreed by qualified majority, EIOPA view differed on multi-option product. • On inclusion of comprehension alert in KID, and credit risk mitigation factor for insurers. • All ESAs agreed performance scenario had comprehension issues and may be misleading. • Under moderate scenario if is either zero or, once costs included, showed expected loss. • ESA prefer five-year historic returns to reflect performance of asset classes, cost of product. • If EC still wishes to amend distribution of risk free returns, adjusted for dividend is better.

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UK FCA MiFID Implementation: 4th-Set

Treasury Single Debt Advice Body

On December 16, FCA proposed fourth and final set of technical rule changes to implement MiFID II. • Covered COBS 18, range of conduct regimes for specialist designated investment business. • For MiFID and non-MiFID business, regime links to parts of COBS, conforming changes. • Tied agents regime no longer discretionary for EU States, under new requirements in MiFID. • Proposed new clarification, updated reference, UK has already adopted tied agent regime. • Rules for firms seeking to become authorized data reporting service providers (DRSPs). • Report included the trade venues’ use of an approved reporting mechanism (ARM). • Described supervisory expectations on data reporting, aggregation, integrity, technology. • Eligibility rules for small growth markets run by investment firms to register as an SME. • Transitional rules on fees for firms that seek authorization under MiFID II, before in force.

On December 19, 2016, Treasury consulted on having a single publicly-funded body to provide advice. • The delivery of government-backed financial advice will be overhauled to be easier to use. • Proposed combining debt advice, pension and money guidance together within a single body. • To ensure consumers can access high-quality, impartial guidance and debt advice to decide. • New body could also work with charities and financial sector, so consumer value for money. • Government plans single financial guidance body will be in place from autumn of 2018.

BoE Sterling Risk-Free Rate On December 6, 2016, BoE published letter and minutes from its Sterling Risk-Free Working Group. • BoE delayed planned vote on recommending a new risk free rate (RFR), until the 2017 year. • No consensus whether to recommend reformed SONIA, or a secured benchmark as the RFR. • BoE reiterated objectives and provided some guidance on expectations for the timeframe. • Any change should be market-driven as most likely to lead to best outcome for the market. • Due to stability risk on use of LIBOR, important that any decision is reached relatively soon. • Original timeline now not possible, suggested spending a further three months on OlS transition. • Supported an OlS transition plan that would plausibly succeed over a two-three year timeframe.

PRA Solvency II Matching Adjustment On December 15, PRA proposed rules on the matching adjustment (MA) used for illiquid unrated assets. • Observed that insurance firms have increased usage of illiquid assets in their MA portfolios. • Proposed valuation approach on fundamental spread to apply for equity release mortgages. • PRA plans to monitor the level of MA benefit claimed by firms investing in illiquid assets. • Will establish an appropriate threshold, above which it will seek to get additional assurances. • On December 15, PRA also proposed rules on using transitional technical provisions in Solvency II. • Included update to SS6/16 on recalculation of transition measure for technical provisions.

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FCA Compliance Behavior Incentives On December 16, FCA issued occasional papers on behavior, and on incentivizing good compliance. • Existing approach combined use of detection and punishment, for credible deterrence. • Paper considered insights using psychology, to determine effective alternative strategies. • Suggested changing choice architecture of compliance decisions, to increase observance. • Involved a changing perception of detection, punishment and the costs of wrongdoing. • De-biasing firms’ decision-making and asking staff members to identify other staff biases. • Use of decision-making tools such as check-lists to avoid the use of mental shortcuts. • Improved culture, managers should lead by example, ensure firms have right incentives. • Separate paper reviewed economic theory of incentives and how can enhance compliance. • Consider measures used by HMRC to ensure tax compliance, given longer history in area. • On December 16, FCA also issued insight article on topic of compliance cultures and psychology.

FCA Initial Investment Advice Charge On December 15, FCA issued guidance on charges for initial advice relating to certain investments. • Follows March 2016 FCA financial advice market review (FAMR) on consumer access. • Flexible rules allow payment by installments for advice relating to lump sum investment. • Followed adviser charging rules on how to charge clients and how it must explain costs. • Some responses that post-RDR rules remove flexibility in how advisers can charge fees. • The FAMR report found installment-based payments could make advice more affordable. • For certain consumers, provided that terms of the installment payments were clear and fair. • Report noted few firms use flexibility, need to draw firms’ attention to available options.

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AML & Enforcement FinCEN FBAR Signatory Extension On December 16, FinCEN extended time for reporting foreign bank accounts (FBAR), to April 15, 2018. • Extension is for individuals having a signature authority for FBAR, but no financial interests. • Applied to reporting signature authority held in 2016 calendar year, and any prior extension. • For all other individuals that had FBAR filing obligation, due date remained April 15, 2017. • Also, revise annual FBAR file date to April 15, to coincide with US income tax filing season.

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Regulatory Risk Report: January 1, 2017 9

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