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Being better informed FS regulatory, accounting and audit bulletin
PwC FS Regulatory Centre of Excellence October 2012 In this issue: EU publishes Banking Union proposal UK, IOSCO and EU benchmark (LIBOR) reforms ESAs submit EMIR draft technical standards to EC Executive Fixing LIBOR Cross Sector Banking and Asset Insurance Monthlycalendar PwCinsights Glossary summary Announcements Capital Markets Management
Executive summary
Welcome to this edition of “Being After a relatively quiet August the pace IOSCO established a benchmark firms have only just started planning better informed”, our monthly FS of regulatory developments review taskforce in September, co- for AIFMD, but the July 2013 deadline regulatory, accounting and audit accelerated in September and is likely chaired by Martin Wheatley and Gary is fast approaching. bulletin, which aims to keep you up to to continue for the foreseeable future. Gensler, the CFTC Chairman, to There is lots more in this edition to speed with significant developments review the setting of benchmarks such The EC published its proposal for a help you stay up-to-date on the and their implications across all the as LIBOR. Also, the EC launched a Banking Union on 12 September 2012. regulatory developments coming financial services sectors. consultation in early September The proposal would give the ECB through this autumn. reviewing the production and use of responsibility for the prudential indices used as benchmark. Clearly, supervision of all Eurozone banks, this issue will preoccupy regulators bank-led financial conglomerates and globally for some time to come. financial holding companies, replacing the national competent authorities, OTC derivative reforms under EMIR Laura Cox through a single supervisory progressed last month. The EBA FS Regulatory Centre of Excellence mechanism (SSM). The EBA would be submitted its draft final technical 020 7212 1579 responsible for developing the single standards on the capital requirements [email protected] rule book and a supervisory handbook for CCPs on 26 September and on 27 Laura Cox covering all 27 EU countries. We September ESMA published its draft Lead Partner examine the Banking Union proposals final technical standards setting out FS Regulatory Centre of Excellence in this month’s edition. many implementing details for firms. LIBOR reform also dominated the In early October the EU- debate in September. Martin Wheatley commissioned Liikanen Report, which published The Wheatley Review of considers ways for restructuring the LIBOR: Final Report which proposes EU banking industry, was published - significant changes to the LIBOR we will cover this in more detail next setting process. In our Feature article month. Later this month we expect we review the proposals and assess the publication of the long-awaited impact on participating banks. AIFMD final Level 2 measures. Many
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How to read this bulletin? Contents Review the Table of Contents the relevant Executivesummary 1 Sector sections to identify the news of Fixing LIBOR 3 interest. We recommend you go directly to the topic/article of interest by clicking in the Cross Sector Announcements 7 active links within the table of contents. Banking and Capital Markets 14 Asset Management 18 Insurance 20 Monthly calendar 24 PwC insights 30 Glossary 31 Contacts 35
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Fixing LIBOR
Martin Wheatley, Chief Executive banks should review the report in detail by a panel of contributing banks which What went wrong? designate of the FCA, issued his final and consider what changes they must use their “expert judgement” to report on the LIBOR review on 28 make to their internal LIBOR processes estimate the interest rates that they will An extensive investigation by the FSA September 2012. The final report and procedures. have to pay to borrow from each other. and the SEC found that traders at recommends that the UK Government The LIBOR rates serve as the primary Barclays Bank plc had manipulated The report should be viewed as a wake- “press the reset button” on LIBOR in an benchmark interest rates in many LIBOR for financial gain. In June 2012, up call for all institutions that effort to save the benchmark which is markets. the bank agreed to pay $450 million to participate in any type of benchmark “broken”, but not beyond repair. settle this case and admitted to two setting process. They must review the Each day these contributors wrongdoings. Between 2005-2007 the The report envisages a root-and-branch robustness of their submission (exclusively large international banks) bank took requests from its own traders overhaul of LIBOR to close the processes and the adequacy of their submit rates for 10 currencies and 15 into account when making submissions loopholes that made the rate-setting governance standards. Benchmark loan durations to the BBA, the current to LIBOR. The bank also admitted to process vulnerable to manipulation. setting will continue to be an LIBOR administrator. Thomson low-balling its LIBOR rate submission Wheatley wants the “unfettered enforcement focus for the EU, US and Reuters calculates LIBOR on behalf of to give a false impression of its stability latitude” previously enjoyed by other regulators over the coming the BBA and uses a trimmed arithmetic during the financial crisis. At the height contributors to be replaced with a more months, as well an area where policy mean approach to calculate the final of the crisis, the bank was posting much rigorous, transparent and regulated and legislation will change rates. This requires the highest and higher rates than other banks and this submission process. fundamentally. lowest rates to be thrown out and the triggered market concerns that Barclays rest to be averaged for each rate. Many of the changes recommended in LIBOR setting process was facing a funding problem. After internal debate, the bank decided to the report will be included in the today This process is designed to minimise Financial Services Bill which will be the effect of outliers and to reduce the artificially lower its LIBOR LIBOR refers to a set of banking short- finalised early next year. But the report potential for manipulation. However, submissions to improve the market’s term interest rates which affect also calls for the BBA and banks that the banks’ own submissions are perception of its financial health. borrowing costs for households and participate in the LIBOR setting subjective and vulnerable to conflicts of businesses around the world. Designed The FSA has indicated that more banks process to make certain changes in the interest, which means that the risks of to reflect rates available in wholesale are likely to face enforcement action submission process now. Participating manipulation and collusion still exist. banking markets, LIBOR rates are set
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and sanctions as a result of its LIBOR expanding the Approved Persons of the firms and individuals involved in transactions in the unsecured inter- investigations. regime to include LIBOR setting and the process; and take regulatory action bank deposit market and other administration for misconduct. The FSA would have markets Key recommendations powers to impose financial penalties on transferring responsibility for observations of third party the firms for breach of the relevant The report recommends that the LIBOR calculation to a new private transactions in the same markets regulatory requirements. When the LIBOR submission process should be sector administrator reformed immediately to ensure that FCA launches next year, it would take quotes by third parties offered to “expert judgement” is supplemented by introducing a code of conduct over the FSA’s roles. contributing banks underlying transaction data to verify applicable to all rate submitting The UK enforcement regime would expert judgement which submitters banks’ submissions. Wheatley proposes banks. complement ongoing EU proposals should use in the absence of culling all currencies and tenors that do It is expected that the Government will introduce new rules governing transaction data relating to a not have sufficient transaction data and incorporate these reform benchmarks. The EC proposed draft specific LIBOR benchmark. introduces new submission guidelines recommendations to the Financial amendments in the Market Abuse that have immediate effect. He also The report states that the BBA should Services Bill which is currently making Directive II/Regulation in July which calls on all LIBOR users to evaluate stop publishing LIBOR for currencies its way through the UK Parliament and would make benchmark manipulation a whether or not their use of the rate is and tenors where there is insufficient expected to come into force in early criminal offence. The EC is not appropriate and to include contingency trade data. Wheatley proposes the 2013. proposing minimum types and levels of current 150 benchmark rates are plans in their contracts should LIBOR criminal sanctions at this stage, but become unavailable. New regulatory and wants Member State to develop reduced to just 20 in five currencies and four maturities. Wheatley is Further, the report calls for: enforcement regime criminal sanctions in their national laws which punish benchmark proposing to phase out LIBOR rates for making LIBOR manipulation a The report recommends that the the Australian, Canadian and New Government creates a purpose built manipulation and attempted criminal offence manipulation. Zealand dollars, Swedish krona and regulatory regime which would give the Danish krone over the next 12 months delaying the publication of banks’ FSA sufficient powers to oversee the Submission process or sooner. Moreover, the review calls on individual rates submissions for LIBOR rate setting process. Under the the BBA to reduce the tenors for the three months, to avoid immediate Rate submitting banks should comply new regime, LIBOR would become a remaining currencies by removing the negative market reaction to a bank’s immediately with the new submission regulated activity under FSMA. The four, five, seven, eight, ten and 11 submission of high rates guidelines outlined in the report. Banks FSA would have powers to: write and month maturities. implement rules in relation to the should determine and base their LIBOR process; supervise the conduct submissions on a hierarchy of Wheatley wants the BBA to encourage transactions types including: banks that not participate in the rate
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setting process to participate. submissions, the calculation of the introduce a code of conduct for rate to work closely with the BBA and banks Expanded participation would buffer benchmark, its publication, and all of submitting banks which clearly defines: to implement the reforms and the system against manipulation by the systems and controls related to transition to the new approach. guidelines for the explicit use of individual banks and improve the these functions. Approved persons transaction data to determine accuracy of rates. He has called for would be subjected to “fit and proper” Other investigations and submissions policy makers to give the regulator the tests and encouraged to supervise and reviews power to compel LIBOR submissions influence the behaviours of others systems and controls for submitting Fallout from the LIBOR scandal is from non-participating banks. involved in the process. The FSA would firms ongoing and a number of investigations have powers to impose public censure Despite these changes, the submission transaction record-keeping and reviews are underway. In all, more or financial penalties on individuals process will still provide rate responsibilities for rate submitting than a dozen banks across the world who breach the rules, and prohibit submitting banks some discretion. The banks have received subpoenas and them from being involved in any guidelines allow rate submitting banks information requests from authorities. regulated activity. a requirement for regular external to consider adjustments to ensure that In the UK, the SFO formally accepted audits of rate submitting banks. the submission is representative of, and New code of conduct the LIBOR matter for investigation in consistent with, the market for inter- Timing July. The SFO is reviewing evidence bank deposits. A new private sector administrator received from the FSA and is would assume responsibility for setting The Government is examining the considering whether it is both Approved persons regime and governing LIBOR, including report’s recommendations, including appropriate and possible to bring responsibility for surveillance and the the costs and benefits of the proposals, Wheatley recommends extending the criminal prosecutions. The TSC is also transparency of submissions. The and the design and implementation Approved Persons regime to include undertaking its own investigation into report recommends that the new options and intends to respond to the LIBOR, which would give the FSA the case and will be looking at, amongst administrator demonstrate review after Parliament returns. Any power to exercise control and oversight other things, the failure of the FSA’s independence and have transparent necessary legislation will be introduced over rate setting individuals as well as supervisory process systems, processes and structures, with under the Financial Services Bill that is rate setting banks. New controlled The EC’s reaction to the scandal has clear accountabilities at every level. The currently being considered by the functions would be created in relation been swift. In addition to the draft new administrator would be required to House of Lords. to both submitting and administering provide access to the LIBOR amendments to MAD II/MAR proposed LIBOR. Assuming that the recommendations benchmark rates on fair and non- in July, the EC released a consultation are adopted, the legislative Therefore, the scope of the regulated discriminatory terms. on financial benchmarks and market requirements would take effect in early activities in relation to LIBOR would indices on 15 September 2012. The According to Wheatley, the new 2013. In the meantime, the FSA plans include: the production of the consultation aims to identify the key administrator should, as a priority,
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issues and shortcomings in the considered. Banks would also be well our trust – it has torn the very fabric LIBOR aside, the report makes it clear production and use of benchmarks and advised to consider how risks around that our financial system is built on.” that banks and other financial indices and to assess the need for any LIBOR setting are reflected in their institutions which sponsor or The proposed reforms seek to prevent changes to the EU legal framework to overall risk frameworks. participate in benchmarks should be abuse and while minimising the ensure their integrity. The consultation closely examining their participation, to All banks and other institutions should disruption to markets. With $300 closes on 15 November 2012. identify any other areas where their review their business activities to trillion of global contracts based on governance and process improvements International standards could also be in identify any benchmarks that they LIBOR, Wheatley insisted that any may be needed. This area will be a the offing. On 14 September 2012 participate in setting, and consider wholesale replacement of LIBOR with a major focus of FSA in the coming IOSCO created a board level Task Force whether or not their governance, new benchmark would create an months, so firms need to be prepared to on financial market benchmarks and processes and policies are sufficient, in “unacceptably high” risk of financial explain why they believe that their will propose its own remedial action. light of the lessons from the LIBOR instability. benchmark participation processes and Martin Wheatley will be co-chairing setting scandal. Bringing LIBOR into the regulatory governance are sound. this task force, along with Gary Gensler, regime is a sensible first step to chairman of the CFTC. Conclusion More work at the international level on ensuring that it functions effectively. benchmarks is clearly needed and this The comprehensive programme that But the parameters of Wheatley’s What firms need to do now report takes that discussion forward on Martin Wheatley sets out for reforming proposed regulatory enforcement several fronts. The UK should play a Banks that participate in the LIBOR the regulation, oversight and setting of powers and the sanctions regime will central role in developing common setting process should review the report LIBOR is an important first step in re- require further scrutiny and debate. in detail, determine which of the establishing trust and confidence in standards for benchmarks that markets recommendations they can implement financial markets. In reality Martin The new independent LIBOR and the public can trust. now, and begin the process of Wheatley had little option but to administrator will be critical to the operationalising those changes. recommend a highly regulated proper functioning of checks and approach to setting and governing balances in the system, and getting the This process should involve a LIBOR – nothing less would have level of public disclosure right. The comprehensive review of the bank’s answered the depth of public concern proposed new regime seeks to achieve a governance processes in relation to about the integrity of LIBOR. As delicate balance between making LIBOR setting, the personnel involved Wheatley suggests himself “the submission information more and all relevant policies and disturbing events we have uncovered in transparent while avoiding the credit procedures. The compliance team’s role the manipulation of LIBOR have signalling problem that banks feared in monitoring LIBOR setting, and the severely damaged our confidence and during the financial crisis. role of internal audit should also be
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Cross Sector Announcements
In this section: IFRS 13 IASB Insurance Contracts Project – IFRS 4 Phase II 13 Regulation 8 Other accounting news 13 Capital and liquidity 8 IASB issues review draft on hedge accounting 13 Basel Committee publishes Basel III monitoring results 8 Dodd-Frank Act 8 Final Title VII rules published in Federal Register 8 CFTC Title VII announcements 8 Financial stability 9 ESRB issues first risk dashboard 9 Market infrastructure 9 ESMA consults on short selling exemptions 9 ESMA publishes short selling Q & A 10 ESMA publishes draft EMIR technical standards 10 EBA publishes draft EMIR RTS on CP capital requirements 10 FSB publishes LEI progress report 11 MiFID 11 ESMA publishes official translations of MiFID compliance guidelines 11 Other regulatory 11 IMF publishes financial surveillance strategy 11 ESMA reports to EP Committee 11 ESMA Chairman looks at financing future European growth 12 Basel Committee finalises principles for financial conglomerates 12 Regulators agree to improve disclosure in Islamic capital markets 13 Accounting 13
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Regulation 9.2%. Group 2 banks noted a comparatively smaller Relationship Documentation, Swap Confirmation, decline in all the ratios. Reconciliation and Compression of Swap Portfolios was published in the Federal Register on 11 The analysis shows that Group 2 banks are generally Capital and liquidity September 2012. Confirmation, portfolio less leveraged than Group 1 banks and this difference Basel Committee publishes Basel III monitoring reconciliation, and portfolio compression have been increases under Basel III. The aggregate LCR shortfall results recognized as essential post-trade processing was estimated to be €1.8 trillion which represents The Basel Committee published results of the Basel mechanisms for reducing risk and improving approximately 3% of the €61.4 trillion total assets of III monitoring exercise on 20 September 2012, operational efficiency. These rules also will help the aggregate sample. The aggregate NSFR shortfall of looking at the impact of the Basel III framework on highlight risk management concerns for swap dealer required stable funding is €2.5 trillion. banks. and major swap participant senior management and The Committee intends to continue monitoring the regulators at an earlier stage. The rules come into The Committee asked national supervisors to gather impact of Basel III implementation on banks in the force 60 days after publication in the Federal Register. data on capital ratios, the leverage ratio and liquidity coming years. metrics on a representative sample of institutions in The effective date is 13 November 2012. each Basel Committee country. The report Dodd-Frank Act CFTC Title VII announcements summarises the aggregate results, assuming full Final Title VII rules published in Federal Register implementation of the Basel III framework as of 31 The CFTC published its response to questions on Conforming Amendments to Part 4 Regulations timing of swap dealer registration rules on 10 December 2012. A total of 209 banks participated in Governing Operations and Activities of Commodity the study which includes 102 Group 1 banks that have September 2012. The swap dealer registration Pool Operators (CPOs) and Commodity Trading regulations are effective on 12 October 2012, and capital in excess of €3 billion and internationally Advisers (CTAs) was published in the Federal active, and 107 Group 2 banks below that threshold. entities that have more than the de minimis level of Register on 5 September 2012. The Dodd-Frank Act dealing must register by no later than two months Compared to the Basel III’s new minimum capital broadened the CPO and CTA definitions in the after the end of the month in which they surpass the requirement, participating banks would have an Commodity Exchange Act (CEA) to include swap- de minimis level. overall capital shortfall of €11.9bn for Group 1 banks related activity. The CFTC amendments revise Part 4 and €7.6bn for Group 2 banks. This rises to €374.1bn of the CEA by requiring CPOs and CTAs to include The CFTC approved the application of DTCC Data for Group 1 and €21.7bn for Group 2 for CET1 target information on swap intermediaries and activities Repository, LLC (DTCC) for provisional registration level of 7.0%. As a reference point, the report provides under the disclosure, reporting and recordkeeping as a swap data repository on 19 September 2012. A the aggregate profits after tax prior to distributions for requirements under Part 4. CPOs and CTAs will now swap data repository is a category of CFTC registered the participating banks: €356 billion for Group 1 be subject to the same regulatory structure for both entity created by the Dodd-Frank Act to perform a banks and €24 billion for Group 2 banks. their futures and swaps activities. variety of functions related to the collection and maintenance of swap transaction data and Capital ratios for banks decline under the Basel III The effective date is 5 November 2012. information. DTCC is required to demonstrate framework. For Group 1 banks the CET1 ratio goes Final Rules Establishing Swap Dealer and Major compliance with existing regulations and to comply down from 10.4% to 7.7%; the Tier 1 ratio from 11.7% Swap Participant Requirements for Swap Trading with new regulations, amendments, guidance and to 8.0%; and the total capital ratio from 14.2% to
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other requests in accordance to obtain and maintain the second half of 2011, but is still low by historical European Parliament and the Council on short permanent registration. standards. selling and certain aspects of Credit Default Swaps on 17 September 2012. Market makers and primary CFTC’s Division of Clearing and Risk announced that A number of indicators point to challenges ahead for dealers are exempt from certain SSR requirements to it was extending the effective date of compliance with financial institutions: facilitate their role in providing liquidity to the real certain pre-trade screening requirements on 26 the EU economy shows no signs of a recovery with economy. September 2012. The CFTC is extending the unemployment remaining stubbornly high compliance effective date to 1 June 2013, to allow The SSR exempts entities undertaking market making market participants time to coordinate the limits for liquidity in the financial system is weak activities from net short position transparency futures and swap give-ups and bunched orders. The requirements and the restrictions on uncovered short credit standards have tightened in the past 6 CFTC is also extending the compliance effective date sales. Primary dealers are exempt from: months for pre-trade screening for transactions executed on requirements to notify net short positions in designated commodity markets that do not have banking lending is well below its historical sovereign debt systems which permit participants to set pre- averages and in some cases is in negative territory execution limits. The extension expires on the earlier restrictions on uncovered short sales in sovereign dependence on central bank funding is high and of 1 June 2013 or when designated commodity market debt instruments implements such systems. banks’ loan-to-deposit ratio remains flat despite prohibitions from entering into an uncovered efforts to attract further deposits Financial stability sovereign CDS transaction. Insurance companies’ balance sheets have also been ESRB issues first risk dashboard However, these exemptions can only be relied on if affected by the adverse environment. Gross premium The ESRB released its first risk dashboard on 20 the market maker has given its supervisor 30 days growth was slow in 2011 although some September 2012. The dashboard brings together a notice before it intends to rely on the exemption. series of data on risk categories comprising the improvements have been noted in the first half of interlink ages and composite measures of systemic 2012 both in life and non-life insurance business. The guidelines specify the notice contents and provide a template notification form. The guidelines also risk, macroeconomic risk, credit risk, liquidity and The dashboard provides a good snapshot on the introduce a common approach to submission funding risk, market risk, and solvency and current state of the European financial system. It requirements: guidance on assessing the eligibility of profitability risk. should help identify and measure systemic risk in the the notifying entity’s activities and on monitoring EU financial system and will provide important input The dashboard’s composite indicator of systemic ongoing exemption eligibility. stress experienced a steady increase during the first to the ESRB’s discussion on risks and vulnerabilities. ESMA alerted the market and regulators on 30 August half of 2011. But from July it reversed this trend and is Market infrastructure now well below the peak values reached at end-2008 2012 to the commencement of the exemption notice ESMA consults on short selling exemptions and end-2011. In turn, banks’ profitability improved period from 1 September 2012. ESMA advises market marginally in the first quarter of 2012, compared with ESMA published a consultation Exemption for participants and regulators to use the draft guidelines market making activities and primary market as an interim benchmark for the application and operations under Regulation (EU) 236/2012 of the assessment process, until the guidelines are available.
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The consultation closes on 5 October 2012. pragmatic approach to delivering its technical reporting obligations. ESMA has confirmed that standards, addressing many stakeholder concerns collateral can be reported on a portfolio basis. The ESMA publishes short selling Q & A within the constraints of the Level 1 text and where technical standards also clarify that reporting of ESMA published Q&A on the Implementation of the the suggestions do not affect the management of mark-to-market values is not applicable to non- Regulation on short selling and certain aspects of systemic risk. financials trading under a specified threshold. credit default swaps on 13 September 2012. The Q&A is designed to promote common supervisory ESMA’s technical standards include clarify the The technical standards define CCP organisational, approaches and practices amongst the EU’s “hedging definition” for non-financial counterparties. prudential, liquidity risk management, default supervisors on the application of SSR. ESMA confirmed in this draft that employees’ waterfall and investment policy requirements. The benefits, such as stock options and acquisitions calculation of the look-back period has been The Q&A also provides clarity on the practical (patents, products, companies) fall under ‘normal substantially changed to ensure that pro-cyclicality is requirements of the new regime to market activity’ of a non-financial counterparty and therefore addressed in a more flexible manner. participants and investors. The Q&A covers issues would be within the hedging definition. Threshold The EC has a three month period to endorse this set of such as territorial scope, transparency, calculation of levels and the calculation of non-hedging positions technical standards, then the Council and Parliament net short positions and the enforcement regime. The have not changed from the previous version. Q&A should help supervisors and market participants are granted a three month ‘no objection’ review period prepare for the new SSR regime which comes into The technical standards provide clarity on aspects of for RTS standards. After legislative process concludes, force on 1 November 2012. the risk mitigation requirements for non-centrally a final version of the technical standards will be cleared OTC derivatives. ESMA has introduced published in the Official Journal and come into force ESMA publishes draft EMIR technical standards phased-in approach for these requirements and 20 days later. ESMA published its recommendations for EMIR adjusted the frequency of reconciliation requirements. technical standards in the Draft technical standards The ESAs will publish consultations on EMIR under the Regulation (EU) No 648/2012 of the Regarding confirmation requirements, several interim technical standards relating to third country European Parliament and of the Council of 4 July dates are set for periods beginning from the entry into application and margin and collateral standards for 2012 on OTC Derivatives, CCPs and Trade force of the technical standards, then August 2013, uncleared trades later this year. February 2014 and August 2014. The phased-in Repositories [EMIR] on 27 September 2012. ESMA EBA publishes draft EMIR RTS on CP capital delivered the technical standards, which include RTS, approach will allow the market to continue to improve requirements systems before implementing the desired goal of ITS and certain delegated acts, to the EC in time to The EBA finalised the Draft Regulatory Technical ‘trade date plus one’ for most confirmations and the meet the 30 September deadline set by EMIR. The Standards on Capital Requirements for Central second business day following execution for trades technical standards are accompanied by an impact Counterparties under Regulation (EU) No 648/2012 made by non-financial firms below the clearing assessment which presents ESMA's cost benefit on 26 September 2012. analysis. threshold. Under EMIR much of the risk of counterparty default Firms should take note of the transaction reporting The 197-page technical standards set out the specific will be concentrated within CCPs which act as information, which contains the data reporting detail EMIR implementing details and feedback from intermediaries in bilateral OTC derivative that firms will need to implement the new transaction ESMA’s June 2012 consultation. ESMA has taken a transactions. Therefore, regulators want CCPs to hold
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sufficient capital to reduce the probability of failure in Committee (ROC) to meet the tight November 2012 In the absence of a response, a national authority will the advent of a counterparty default. deadline. The Charter is the first step in forming the be considered non-compliant. ROC as the permanent governance arrangement for The draft RTS states that the capital position of CCPs, the LEI system, a prerequisite for creating the global Other regulatory including retained earnings and reserves, should be at LEI foundation. IMF publishes financial surveillance strategy least equal to the sum of: The IMF published a paper setting out its strategic The FSB’s LEI Implementation Group are reviewing the CCPs gross operational expenses during an priorities for financial surveillance on 21 September responses to its August consultation, Seeking views appropriate time span for winding down or 2012 (dated 28 August 2012). on matters regarding the jurisdiction for restructuring its activities establishment of the Global Legal Entity Identifier The IMF’s strategy focuses on three key aspects: (LEI) Foundation and Central Operating Unit (COU) the capital necessary to cover the overall improving risk identification and macro-financial of the global LEI system to help formulate operational and legal risks policy analysis - particularly important as recommendations on the jurisdiction for the LEI the capital necessary to cover credit, counterparty interdependencies between countries and financial foundation and the appropriate legal form for the LEI credit and market risks not covered by specific systems become increasingly complex administrator. financial resources and business risk. upgrading the instruments and products of The group commissioned an urgent study from its The EBA believes that national supervisors should be financial surveillance to foster an integrated policy Private Sector Preparatory Group on an appropriate able to vary the capital levels of individual CCPs based response to risks - involving closer collaboration numbering scheme for the global LEI system. on their risk profile, such as reputational risk. The between the IMF’s functional areas and reviewing Commentators are urging the group to develop an draft RTS also recommends that a floor is introduced the frequency and scope of IMF’s assessments and identifier generation scheme that is flexible, to ensure a prudent level playing field for the capital operationally efficient and cost effective in terms of increasing the traction and impact of financial requirements of CCPs. short-term implementation and integration of local surveillance by engaging more actively with The EBA will send the draft RTS to the EC which will systems, but offering long-term flexibility and stakeholders – managing public communication have three months to endorse it. Following resilience as well. carefully as well as broadening collaboration with institutions such as the World Bank and the FSB. endorsement, EP and the Council may object (a MiFID further three months, unless they both decide to The IMF recognises that it will face challenges in shorten this period) before it enters into force. The ESMA publishes official translations of MiFID pursuing those strategic goals but overall it expects to standards will take the legal form of a Regulation and compliance guidelines improve its capacity and effectiveness in helping to will be published in the Official Journal of the EU. ESMA published the official translations of its guidelines on certain aspects of MiFID compliance mitigate crises and deliver a sounder financial system. FSB publishes LEI progress report function requirements on 28 September 2012. This ESMA reports to EP Committee The FSB published its second progress note on the triggers a two month period during which national Stephen Maijoor, Chairman of ESMA, provided ECON implementation of the global LEI Initiative on 20 authorities must confirm their intention to comply with a progress update on the work of the Joint September 2012. Good progress is being made on with the guidelines or explain their non-compliance. Committee of the ESAs (JCESA), which he currently drawing up a Charter for the Regulatory Oversight
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chairs, and on ESMA’s work over the last year on 19 match their increased responsibilities to avoid their funding from the banking sector for the foreseeable September 2012. The JCESA focused on a number of work quality suffering. future. consumer protection issues over the past year, such as ESMA Chairman looks at financing future European Additionally, Maijoor believes that regulation has a cross-selling and complaints. Additionally, a sub- growth key role in financing future growth. In particular, he group has been formed to work on the delegated acts Steven Maijoor, the ESMA Chairman, delivered a believes ESMA has made a contribution in three areas of PRIPs, the proposal for which was issued by the EC speech on Financing European growth: the challenge to increased growth: on 3 July. Further, the JCESA worked on developing for markets, policy-makers and investors at the RTS for EMIR and formed a Financial Conglomerates investor protection Association for Financial Markets in Europe on 18 Sub-Committee focused on reviewing FICOD. September 2012. stability of the financial system Interestingly, the JCESA is working on high-level principles for product approval which may require Maijoor focused on how alternative funding and promoting a single European market. regulatory pre-approval of all products in future, financial regulation can help finance growth in Maijoor concluded by noting financial stability is rather than just regulated CIS. Europe. Maijoor believes alternative funding methods needed for financial growth. This stability can only be are needed to aid growth because the traditional Maijoor reported that ESMA’s activities over the past achieved through efficient and effective regulation. banking sector is still struggling at the moment. year have focused on the regulatory agenda, financial Therefore, regulatory change is a necessary Maijoor considered three areas of alternative funding: stability and crises, investor protection, prerequisite of future financial growth. implementation and execution of CRA supervision, capital market financing through equity and bonds Basel Committee finalises principles for financial and its own organisational development. ESMA has – he sees this as the most important source of conglomerates provided advice and support on legislative proposals alternative finance including MiFID II and MiFIR, AIFMD, MAD, MAR The Basel Committee finalised its Principles for the and CSD. shadow banking – Maijoor believes that the Supervision of Financial Conglomerates on 24 regulatory response to shadow banking over the September 2012, following a consultation in Internationally, Maijoor stated that ESMA has last few years has made it a ‘safer place’, and that December 2011. The new version updates its participated in the international coordination of OTC the focus needs to shift now from rule-making to supervisory principles (Principles) for financial derivatives reform and the conclusion of multi- improving the supervisory framework and conglomerates. The Principles, created in 1999, country Memoranda of Understanding on CRA provide national supervisors with a set of financing for small and medium sized companies - supervision. internationally agreed standards, targeted at firms although most rely on bank funding in the EU, he with significant cross-border operations, which Maijoor reiterated the ESAs’ pleas for additional believes the emergence of trading venues targeted support consistent and effective supervision of resources to help ESMA achieve its aims going at such companies should increase the funding financial conglomerates. forward. The ESAs are all up against tight deadlines to they can access. develop advice and technical standards, stretching The finalised version expands and supplements the However, Maijoor notes that any additional funding their current resources already; going forward their 1999 Principles in areas such as supervisory powers from alternative sources will only complement budgets need commensurate increases in resources to and authority, supervisory responsibility, corporate governance and risk management.
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Regulators agree to improve disclosure in Islamic Accounting1 presenting, in other comprehensive income, the capital markets effect of changes in the discount rate used to IOSCO held a roundtable meeting with the Islamic measure the insurance contract liability and Financial Services Board (IFSB) and the Securities IFRS the approach to transition. Commission Malaysia on 18 September 2012, to IASB Insurance Contracts Project – IFRS 4 Phase II discuss disclosure practices in Islamic capital market The IASB is working alongside the FASB to develop a The boards also tentatively agreed that direct activities. harmonised IFRS for insurance contracts although acquisition costs incurred in the pre-coverage period differences remain between the IASB and FASB’s should be recognised as part of the insurance liability The regulators analysed the risks and challenges positions. For further background information see our for the portfolio of contracts where the contract will arising from inadequate disclosures in sukuk offerings webpage on this project and also the IASB’s high level be recognised once the coverage period begins. and Islamic collective investment schemes. The group summary of the current status on the project. identified potential approaches that standard-setters, In its latest workplan, the IASB has moved the regulators and market participants could adopt. The boards met on 26 September 2012 to continue expected date of publication of the new Exposure discussions on proposals for insurance contracts Draft from the second half of 2012 to the first half of IOSCO and the IFSB believe these measures will accounting (see PwC minutes from the September 2013. It hasn’t confirmed dates for the publication of represent a significant step towards the development PwC minutes from September board meeting). The the final standard and its implementation yet. of international regulatory standards and best IASB concluded that they should issue a limited practices on disclosure requirements for Islamic exposure draft seeking feedback on only a limited Other accounting news capital market products. range of questions (See press release). The targeted IASB issues review draft on hedge accounting questions in the new Exposure Draft will relate to The IASB has issued a review draft that details new proposed requirements for: hedge accounting requirements. See Straight away 93 - IASB issues review draft on hedge accounting for treatment of participating contracts more detail. presentation of premiums in the statement of comprehensive income treatment of the unearned profit in an insurance contract
1 This section includes accounting developments with a direct or potential impact on the financial services industry only. For a complete update on accounting developments in the UK visit http://www.pwc.co.uk/eng/services/ifrs_services.html
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Banking and Capital Markets
In this section: Banking & Capital Markets Regulation 15 Mark James Capital and liquidity 15 +44 (0) 1534 838304 EBA reports to EP Committee 15 [email protected] EBA publishes second progress report on Basel III 15 Consumer protection 15 Nick Vermeulen EC reviews access to basic payment accounts 15 +44 (0) 1481 752089 Financial stability 15 [email protected] ESRB calls on banks to repair their balance sheets 15 Regulatory reform 16 James de Veulle Basel Committee updates Core Banking Supervisory Principles 16 +44 (0) 1534 838375 Single supervisory mechanism 16 [email protected] EC launches first step in banking union 16 ECON respond to banking union supervisory proposals 17
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Regulation Enria noted that, with the state of the the additional regulatory surcharge for provides a set of essential payment financial markets over the last year, the GSIFIs. services and is offered free of charge or EBA has made slow progress on its at a reasonable charge. The EC’s Compared to the previous exercise Capital and liquidity consumer protection aims. However, it recommendations set out features of a based on data as of June 2011, the EBA reports to EP Committee is now working at greater speed to meet basic retail payment account and results of the current monitoring show Andrea Enria, EBA Chair, provided a consumer protection targets, including included principles on the right of an average increase in Group 1 banks’ progress update for 2011-2012 to issuing guidelines soon on mortgage access, guidance on reasonable charges CET1 ratio of 0.4 percentage points and ECON on 19 September 2012. The EBA lending and finalising its review of the and designated providers. a decrease in the corresponding capital has been advocating a ‘three-pronged risks consumers face from financial shortfall, with respect to the 7% target Only a few Member States are close to approach’ to address the sovereign debt innovations such as ETFs, contracts for level, by €32.3 billion (i.e. 14%). complying with the Recommendations. crisis including measures to strengthen differences and structured products. Nearly half of all Member States have banks’ capital, arguments for European These results do not reflect all the Like ESMA and EIOPA, Enria pleaded no measure in force concerning the interventions to support bank funding additional efforts made by banks to for additional resource for EBA over the right to open an account. In the and actions to directly remedy the fulfil the requirements of the EBA’s coming years to enable it to fulfil its remaining Member States, the Review sovereign debt crisis. recapitalisation exercise, the impact of intense workload. found that compliance with the which on the forthcoming Basel III Enria stated that the EBA supports the Recommendations is inconsistent. EBA publishes second progress report monitoring results based on data as of move towards an EU Banking Union on Basel III 30 June 2012 is expected to be The EC will now consider whether but that it needs to be accompanied by The EBA published its second report of published in early 2013. legislation may be required to raise and an even stronger commitment to the the Basel III monitoring exercise, harmonise the standard across the EU. Single Rulebook and a Single Consumer protection Results of the Basel III monitoring Supervisory Handbook. Both are Financial stability exercise based on data as of 31 EC reviews access to basic payment needed so there is no polarisation December 2011, on 27 September 2012. accounts ESRB calls on banks to repair their between Eurozone and non-Eurozone The EC published National measures balance sheets banks which will be subject to national The 44 largest EU banks need to raise and practices as regards access to ESRB issued a press release outlining supervisory regimes. The EBA has an additional €8 billion of CET1 to basic payment accounts: Follow-up to areas for discussion at the seventh contributed significantly to the meet the minimum common equity the Recommendation of 18 July 2011 regular meeting of its general board on establishment of the Single Rulebook capital ratio of 4.5% by 2015; and €199 on access to a basic payment account 20 September 2012. The board over the last year by preparing various billion to meet the 7.0% target (i.e. (the Review) on 4 September 2012. The members are concerned about the draft technical standards, e.g. for CRD including the conservation buffer) by EC wants all EU citizens, regardless of ongoing uncertainty about the fragility IV. 2019. The latter shortfall also includes their financial situation, to have access of the EU financial system. They called to a basic payment account which on banks to progress their balance
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sheet reparations to help mitigate some Interconnectedness and contagion – The revised Principles take into account supervisory assessments (part of its of the uncertainties surrounding analysing the way risks could key supervisory trends arising from the Financial Sector Assessment Program). markets. propagate in credit default swap financial crisis: markets and in the interbank Single supervisory The EBA wants banks to repair their encouraging greater supervisory market. mechanism balance sheets through: intensity EC launches first step in banking union It believes the macro-prudential arrears management and addressing systemic risk by bringing The EC published its proposed benefits of a Eurozone single supervisor provisioning a macro perspective to micro- Regulation conferring specific tasks on will be optimised if the EU implements prudential supervision and the European Central Bank concerning assessments of loan classification adequate bank resolution procedures in policies relating to the prudential parallel. The ESRB plans to examine developing effective crisis disclosure of more public supervision of credit institutions the possible implications of establishing management, recovery and information on their restructuring COM(2012) 511 final on 12 September a single supervisor for macro- resolution measures to reduce process 2012. prudential oversight in the EU. probability and impact of banks’ failure Under this proposal, the ECB will establishing an asset management Regulatory reform company to deal with poor quality assume responsibility for the prudential The Basel Committee has introduced a assets and Basel Committee updates Core supervision of all banks, bank-led new Core Principle to reflect the Banking Supervisory Principles financial conglomerates and financial involving third parties in asset importance of strong corporate The Basel Committee published its holding companies in the Eurozone evaluation. governance and risk management. It updated “Core principles for effective from 1 January 2013. From that date also stressed the role of robust market The ESRB is focusing on three medium- banking supervision” (Principles) on 14 the ECB will have access to all financial discipline in fostering a safe and sound term projects: September 2012. institutions in scope, but the ECB’s banking system, adding two new supervisory tasks will be phased in over Long-term guarantees in insurance - The Principles were last updated in Principles on greater public disclosure a year so it can build up the appropriate due to concerns about their long- 2006. They set out minimum standards and transparency, and enhanced resources. It will start with systemically term treatment by the insurance for sound prudential regulation and financial reporting and external audit. important banks and banks that have industry, arising from the draft supervision of banks. Their main The Basel Committee and the IMF received public support, and eventually Omnibus II Directive purpose is to promote effective banking supervision and to enhance financial acknowledged that it will take time for will have full responsibility for micro- Vulnerabilities linked to bank stability, but national supervisors also national regulators to integrate the prudential supervision of all Eurozone funding - in light of the impairment use them to benchmark the revised Principles into their supervisory financial institutions (excluding of credit and interbank markets and performance of their supervisory regimes. The IMF will take this into insurers) from 1 January 2014. regimes. consideration in its ongoing national
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The EC clearly intends the ECB to role of EBA going forward. The EC EU. Notably, the EC stressed that EP border banks, while the Swedish continue working closely with national wants the EBA to retain its existing and Council need to give priority to Finance Minister expressed specific supervisors, both during the transition powers and tasks, notably in respect of concluding negotiations on CRD IV, concerns about the limited powers of period and thereafter. National the creation of the EU ‘single rule book’ bank resolution and recovery and non-Eurozone countries which decide supervisors may effectively become the and in terms of supervisory deposit guarantee schemes proposals, to opt in (there are legal impediments ECB’s ‘agents’ in respect to prudential convergence. In fact the EC has now because these all provide essential to this which the EC is now reviewing). supervision, but they will retain gone further by tasking the EBA with foundations for the banking union. The EC’s timetable is ambitious and, primary responsibility for consumer developing a single supervisory Once bank resolution and deposit although political support for its quick protection and preventing financial handbook. The ECB’s new role raises guarantee schemes exist at the national adoption is strong in some quarters, it crime at a national level. The EC’s particular questions around EBA voting level, the stage will be set for the may prove challenging to meet. proposal provides little insight how this procedures. Currently, the EBA’s Board banking union’s final elements: single ECON respond to banking union arrangement will work in practice. of Supervisors vote either by qualified Eurozone deposit protection and bank supervisory proposals or simple majority (one person, one resolution mechanisms. The ECB will manage all aspects of ECON gave a lukewarm response to vote), depending on the issue. The micro-prudential supervision The EC’s proposals now pass to the EP EC’s single Eurozone supervisory ECB’s new role may distort EBA including: and the Council for negotiation. The EP proposals following a meeting on 24 decision-making because the Eurozone has clearly indicated that it is prepared September 2012. In its follow-up paper, authorising and withdrawing bank countries will have their vote taken on to adhere to the timeline imposed by Banking union: Economic Affairs licences by the ECB, perhaps giving the ECB the EC. It also wants the two proposals Committee, the Committee called for a power over decisions within the EBA. imposing higher capital and to be adopted as a package so it can act clear division of supervisory tasks Consequently, the EC has also proposed liquidity buffers as co-legislator on both. But at the between EU and national levels, an amendment to the EBA Regulation moment the proposed ECB regulation including non-Eurozone countries, assessing corporate governance and (Regulation (EU) No 1093/2010) to requires unanimous agreement in the differing supervision arrangements for risks management processes and give voting powers to an independent Council (following consultation of the different banks and strong systems panel. EP and the ECB). accountability mechanisms for the new conducting on-site supervision and In its Communication Roadmap Eurozone supervisor. Sweden, Poland and Germany have all investigations towards a Banking Union, the EC expressed concerns about the speed Various MEPs stated that although the stated that the proposals are part of a with which the EC wants the proposal institutional structure must be built early intervention and wider plan to create a deep and adopted. The German Finance Minister quickly, it must not fall apart at the first recapitalisation. integrated “banking union” in the believes that the ECB’s role should be crisis. Eurozone. This approach will rely on a The ECB’s proposed supervisory role limited to the supervision of cross- clearly raises issues in relation to the single rule book for the whole of the
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Asset Management
In this section: Regulation 19 Asset Management Product rules 19 Chris Stuart ESMA publishes Q&A for KIIDs 19 +44 (0) 1534 838232 [email protected]
Mary Bruen +44 (0) 1534 838251 [email protected]
Nicola Mills +44 (0) 1481 752023 [email protected]
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Regulation should be the one that charges the investment manager should not be highest fees. included. Product rules ESMA also addresses past performance Whilst the Q&A largely reinforces ESMA publishes Q&A for KIIDs issues. If a fund has no valid past existing requirements for KIIDs, it is a performance and cannot produce useful reminder for fund managers of ESMA published Questions and synthetic past performance then it the requirements. Answers: Key Investor Information should note this in the KIID. UCITS Document (KIID) for UCITS (Q&A) on that use a benchmark should present 25 September 2012. ESMA produces past performance against this Q&As to promote supervisory benchmark (even if they do not track convergence. This Q&A focuses on the the benchmark), UCITS that use a KIID. benchmark as an indicator of the sort of ESMA confirms that all UCITS (other investments the fund will hold should than those being liquidated) need to not present past performance against produce an up-to-date KIID, even funds that benchmark. Further, past that are no longer marketed to the performance for periods before a public. The KIID needs to be delivered material change was made to a fund’s to all investors, even professional investment objective and policy should investors. Investors that top-up an still be presented in the KIID. existing investment or switch their ESMA further confirms fund managers investment into a new fund should be can shorten references to the UCITS to presented with the latest KIID. ‘fund’ and refer to the ‘share class of the ESMA confirms that a KIID is not fund’ rather than a share class’ full needed for every share class: fund name. Also, fund managers can use a managers can present more than one glossary for the KIID as long as the share class in a KIID as long as it still KIID is still readable. Lastly, ESMA meets the requirements (e.g. around stated that only the UCITS layout and length), or can use a management company’s name should representative share class for a fund. If be given in the KIID; the name of any a representative share class is used it
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Insurance
In this section: Regulation 21 Insurance Solvency II 21 Evelyn Brady Latest developments 21 +44 (0) 1481 752013 Other regulatory developments 21 [email protected] IAIS comments on G-SIIs Proposed Assessment Methodology 21 Adrian Peacegood EIOPA reports to the EP 21 EIOPA and FINMA agree MoU 22 +44 (0) 1481 752084 EU/US insurance regulatory Dialogue Project Report 22 [email protected] EIOPS publish conference notes on global insurance supervision 22 PwC video ‘Insurance regulation goes beyond Solvency II’ 22 Accounting 23 IFRS 23 Practical Guide 29 - IFRS 10 ‘Consolidated financial statements’ for the insurance industry 23 Revenue recognition 23 IFRS news 23
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Regulation (and comes into force twenty days Impact assessment for long-term available. This would mean a further later). guarantees and impact on Omnibus II delay in the timetable for Omnibus II. timetable Although the whole process will not be Solvency II The trilogue negotiations have focused Other regulatory finalised, it is possible, given the Solvency II is a fundamental review of is the treatment of contracts with long- developments timetable that formal consultations on the prudential regulatory requirements term guarantees and, in particular, the IAIS comments on G-SIIs Proposed the Level 2 measures may commence as for the European insurance industry. appropriate discount rate to be used Assessment Methodology soon as political agreement is reached, when calculating technical provisions IAIS released a summary of comments The Omnibus II Directive will amend even though the text will not be able to for such contracts. on its proposed methodology for Solvency II to specify areas of, and be finalised until the Directive comes identifying Global Systemically timing for, further Solvency II into force. The EC sent a letter to EIOPA on 26 Important Insurers (See G-SIIs for legislation; incorporate new powers September 2012 requesting that they Latest developments further information). given to EIOPA; and make a number of examine the Solvency II calibration and Implementation date other technical amendments. Trilogue design of capital requirements for EIOPA reports to the EP discussions are taking place between The timetable set out in a short investments in long-term finance (e.g. Gabriel Bernardino, EIOPA Chair, the EC, ECON and the Council which amending Directive adopted on 3 July infrastructure financing). The letter provided a progress update for 2011- aim to reach an agreed position on the 2012 requires the transposition of the asks EIOPA (in conjunction with EBA 2012 to ECON on 19 September 2012. Omnibus II proposals. However, they Solvency II Directive by Member States and ESMA) to review the capital have yet to reach an agreement. by 30 June 2013, for 1 January 2014 requirements for investments in such EIOPA has been working on 55 implementation. But Michel Barnier assets to see if they can be reduced standards and guidelines for insurers in After EU legislators reach a ‘political (European Commissioner) recently under the current economic conditions preparation for the launch of Solvency agreement’, the EP will hold a plenary mooted a possible further delay of one without jeopardising the prudential II. It is currently preparing the final set vote to adopt the proposal. Once the EP year in Solvency II’s implementation nature of the regime. of regulatory measures for Solvency II, vote has been held, the dossier is then (to 1 January 2015) at a trilogue including the development of a passed to the Council which then meeting of 18 September 2012, The European Commission has harmonised set of reporting ensures all final technical changes are although no official confirmation of this requested that EIOPA provide feedback requirements, establishing supervisors’ made, that it is assessed by the EU legal has yet been made. by 1 February 2013. expectations of the Own Risk and services and that translations are made Insurance Europe’s press release also Solvency Assessment (ORSA) and the into all EU languages. With this done, indicates that the finalisation of process of pre-application of internal the Council also adopts the text and Omnibus II (presently scheduled for 20 models. On occupational pensions, passes it to the EU publication service November 2012) will be delayed until EIOPA recommended a comprehensive for publication in the Official Journal the results of the impact assessment are framework for risk-based supervision of
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IORP’s which accounts for pensions personal pensions. Therefore, EU/US insurance regulatory Dialogue convergence worldwide, similarities funds’ specificities and proposed Bernardino proposed that EIOPA’s Project Report and differences between several reinforcing transparency towards mandate be extended to cover these The Project’s objective is to deepen jurisdictions as well as benefits from pension funds members through types of pensions. insight into the overall design, function supervisory convergence for both providing them with a Key Information and objectives of the key aspects of the supervisors and insurance Like the other ESAs’ chairmen, Document. insurance supervisory regimes in the undertakings. EIOPA has published the Bernardino asked for increased EU and the US, and to identify speech of Gabriel Bernardino, EIOPA has also started work on a resources for EIOPA. important characteristics of both Chairman of EIOPA, ‘Creating a global Supervisory Handbook to provide EIOPA and FINMA agree MoU regimes. The Draft Report published insurance supervisory language’. guidance on supervision under this month identifies key Solvency II, to facilitate implementing a The Swiss Financial Market PwC video ‘Insurance regulation goes commonalities and differences of the more consistent framework for the Supervisory Authority (FINMA) and beyond Solvency II’ EIOPA have signed a Memorandum of two regimes in seven key areas. conduct of supervision. In addition to Solvency II there are a Understanding to ensure optimal There are to be two public hearings to range of other policy makers, such as Bernardino argued EIOPA urgently supervision for insurance groups with consider these findings in Washington the IAIS, FSB, G20 and EC that are needs to be given powers to ban international activities in the EEA and (on 12 October) and Brussels (on 16 working on a host of other Directives, products and restrict financial activities Switzerland. October). Submissions to the public initiatives that may well have an impact that lead to consumer detriment. He hearings should be sent by 10 October on the global insurance market. In this believes that, without such provisions, Gabriel Bernardino, Chairman of 2012 while other written submissions video, Jim Bichard (UK Insurance EIOPA cannot fulfil its mandate on EIOPA, said: "This is the first are requested by 28 October 2012. Regulatory leader) and Paul Clarke consumer protection. These powers Memorandum of Understanding ever (Global Solvency II leader) of PwC would be similar to those that may be signed by EIOPA. We are committed to EIOPS publish conference notes on discuss the drivers of convergence of given to the other ESAs, e.g. ESMA’s pursue a constructive dialogue, global insurance supervision effective cooperation and information insurance regulation internationally. proposed product banning powers EIOPA published notes from a exchange with FINMA. This MoU is an under MiFID II. Conference on Global Insurance important step to reinforce the Supervision, held in cooperation with Bernardino recognised that, in relation efficiency of supervision and to enhance the International Centre for Insurance to pensions, EIOPA’s mandate only consumer protection in an increasingly Regulation (ICIR). covers occupational pensions. However, global insurance market." the implementation of the EU agenda The objective of the conference was to for ‘adequate, safe and sustainable’ encourage the exchange between pensions would also require a sufficient supervisors and the insurance industry level of regulation and supervision of on such issues as supervisory
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Accounting2 Revenue recognition How to classify a joint FASB and IASB (the boards) met on 24 arrangement and 27 September to discuss their joint Quiz on operating segments IFRS project on revenue recognition. The Practical Guide 29 - IFRS 10 boards reached decisions on certain ‘Consolidated financial statements’ for topics relating to the constraint on the insurance industry recognising variable consideration, IFRS 10, ‘Consolidated financial collectability, time value of money, and statements’, introduces new guidance distributor and reseller arrangements. on control and consolidation. This The boards' decisions are tentative and standard, which combines the concepts subject to change. of power and exposure to variable returns, is presently due to be effective The boards directed their staff to for financial years beginning on or after conduct further analysis on certain 1 January 2013 (unless it is postponed items, including aspects of the variable by the EU to 1 January 2014 which is consideration constraint and under consideration). Early adoption is presentation issues relating to permitted. collectability. Other key issues still to be redeliberated include licenses, contract Our publication, Practical guide 29 – modifications, allocation of transaction IFRS 10 for the insurance industry, price, disclosures, and transition. See considers the implications of these new Straight Away 94 – FASB and IASB requirements for insurance entities. make progress on revenue redeliberations for more information. IFRS news
2 This section includes accounting developments IFRS news is our monthly newsletter with a direct or potential on the financial highlighting developments at the IASB. services industry only. For a complete update on The September 2012 edition includes: accounting developments in the UK visit http://www.pwc.co.uk/eng/services/ifrs_servic The IASB's 'review draft' on hedge es.html accounting
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Monthly calendar
Open consultations
Closing date for Paper Institution responses
12/10/12 Consultative document Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions BCBS
15/10/12 Consultation on the early implementation of a ban on above cost payment surcharges Dept. BIS
18/10/12 IP/12/853 – European Commission launches consultation on future framework for investment funds (UCITS VI) EC
05/11/12 Tax problems linked to cross-border venture capital investment EC
13/11/12 Consultation on the recommendations of the High-level Expert Group on Reforming the structure of the EU banking sector EC
23/11/12 Implementing the UK-US FATCA Agreement HMRC
29/11/12 Consultation on a Possible Framework for the Regulation of the Production and Use of Indices serving as Benchmarks in Financial EC and other Contracts
11/12/12 The Financial Services Bill: the Financial Policy Committee’s macro-prudential tools HMT
21/12/12 Further amendments to ESMA’s Recommendations for the consistent implementation of the Prospectus Regulation regarding ESMA mineral companies
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Closing date for Paper Institution responses
28/12/12 Consultation on a possible Recovery and Resolution Framework for Financial Institutions other than banks EC
31/12/12 Discussion paper: toward a disclosure framework for the notes FRC
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Forthcoming publications in 2012
Date Topic Type Institution Banking Structure Q4 2012 Large exposures regime Policy statement FSA Capital and Liquidity Q1-Q4 2012 CRR/CRD IV 76 regulatory technical standards, 32 implementing technical EBA standards and 20 guidelines Q4 2012 Review of Financial Conglomerates Directive Legislative proposals EC TBC 2013 Revision of Financial Conglomerates Directive (FICOD II) Legislative proposals EC Consumer protection Q4 2012 Directive on misleading and comparative advertising Communication EC (2006/114/EC) Q4 2012 An EU framework for collective redress Legislative proposals EC Q4 2012 Investor Guarantee schemes- revision Legislative proposals EC Q4 2012 Bank accounts Legislative proposals EC Financial crime, security and market abuse Q3 2012 Financial message data transfer from the EU to the USA for the Report EC purposes of the Terrorist Finance Tracking Program Q4 2013 Market Abuse Review Technical advice ESMA TBC 2012 Third Anti-Money Laundering Directive Legislative proposals EC
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Date Topic Type Institution Insurance Q3 2013 Institutions for Occupational Retirement Provision Legislative proposals EC Securities and markets Q4 2012 OTC Derivatives, CCP Requirements, Trade Repositories and CCP Guidelines ESMA Interoperability (EMIR) Q4 2012 Securities Law Directive Legislative proposals EC Q4 2012 Limitation period and further procedures for fining credit rating Regulation EC agencies Q4 2012 Revision of the Transparency Directive Discussion papers ESMA Q4 2012 Close-out netting Legislative proposals EC TBD 2013 Credit Rating Agencies III Regulation Technical advice ESMA Products and investments Q3 2012 Alternative Investment Fund Managers Directive – Level 2 measures Regulation EC Q4 2012 Alternative Investment Fund Managers Directive – cooperation Technical standards ESMA agreements TBD 2013 Packaged Retail Investment Products Technical standards ESMA Q4 2012 Social Investment Funds Technical advice ESMA Q4 2012 Venture Capital Technical advice ESMA TBD 2013 Undertakings For The Collective Investment Of Transferable Technical advice ESMA Securities V
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Date Topic Type Institution TBD 2013 Markets in Financial Instruments Directive II Technical advice ESMA TBD 2013 Markets in Financial Instruments Directive II Guidelines ESMA Recovery and resolution Q4 2012 Rescue and restructuring of financial institutions in Europe Guidelines EC TBD 2013 EU framework for recovery and resolution plans Technical advice EBA Solvency II Q1 2013 Draft Level 2 delegated acts Level 2 text EC TBD 2013 Solvency Level 3 measures Level 3 text EIOPA Supervision, governance and reporting Q3 2012 Corporate reporting Guidelines/recommendations ESMA Q4 2012 EU corporate governance and company law Action plan EC Q4 2012 Storage of regulated information at ESMA Discussion paper ESMA Q4 2012 Supervisory convergence Discussion paper ESMA Q4 2012 Revision of Enforcement Standards Consultation paper ESMA Q4 2012 Remuneration and supervisory co-operation arrangements Guidelines/recommendations ESMA
Main sources: ESMA 2012 work programme; EIOPA 2012 work programme; EBA 2012 work programme; EC 2012 work programme.
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Education – Conferences and event (October)
Date Topic Institution
11/10/2012 FSA Non-Executive Directors’ Conference - The PRA’s approach to supervision: What it means for the UK Board of international FSA banks
15/10/2012 Anti-money Laundering Case Studies BBA
17/10/2012 Annual International Banking Conference BBA
17/10/2012 Introduction to Credit Risk BBA
19/10/2012 Funds Transfer Pricing and Bank Asset-Liability Management BBA
19/10/2012 Training, Competence and Culture BBA
22/10/2012 The Prudential Regulation Authority – our approach to prudential regulation for insurance firms FSA
22/10/2012 The Prudential Regulation Authority – our approach to prudential regulation for deposit-takers and designated investment firms FSA
24/10/2012 CRD4 and Basel 3 Seminar BBA
25/10/2012 European Markets Infrastructure Regulation (EMIR) Seminar BBA
FSregulatory,accountingandauditbulletin–October2012 PwC 29 Executive Fixing LIBOR Cross Sector Banking and Asset Insurance Monthlycalendar PwCinsights Glossary summary Announcements Capital Markets Management
PwC insights
Asset Management Insurance Cross Financial Services what European regulation is out there and the issues that firms should be thinking about and looking to address Building AIFMD risk structures in a Insurance regulation goes beyond Are you taking control of the MiFID II now. Read more here. Euro storm Solvency II agenda? In the run up to the introduction of Solvency II dominates regulation for MiFID II is much more broad than AIFMD over the next year, Europe’s insurers, but there are a range of other MiFID I and it is expected to be hedge, private equity and real estate policy makers, such as the International implemented by mid 2015. The managers will have to start Association of Insurance Supervisors, implications of the regulation for firms revolutionising their risk management. the Financial Stability Board, G-20 and are complex and far-reaching. We explore the key challenges facing the European Commission that are working Based on our experience and data from industry and argue that having a reliable on other standards and initiatives that our recent European-wide survey, we risk management framework has never may impact on the global insurance outline the strategic, commercial, been more important. Read more here. market. operational and technological impacts The impact of AIFMD Harmonisation is an attractive for asset managers, retail banks and In three short reports we highlight the proposition, but what is going on behind broker dealers. See how you measure up key challenges facing the Hedge Fund, the scenes to encourage this? In this to your peers. Read more here. short video insight Jim Bichard, UK Real Estate and Private Equity markets. Finding your way through the Read more here. Insurance Regulatory leader, and Paul regulatory storm: Reward regulations Clarke, Global Solvency II leader, in financial services discuss the drivers of convergence of Financial services pay models for firms insurance regulation internationally. To access our library of insights into with European operations have changed Read more here. issues affecting asset management, visit profoundly since the financial crisis, as a our online library at: result of European Union and domestic http://www.pwc.com/gx/en/asset- regulation. But the story is far from To access our library of insights into management/publications/index.jhtml over. It’s likely that all financial services issues affecting the insurance industry, firms in the UK and across the EU will visit our online library at: face increased challenges. Working http://www.pwc.com/insurance through this sea of regulation can be complex – so we’ve provided a guide on FSregulatory,accountingandauditbulletin–October2012 PwC 30 Executive Fixing LIBOR Cross Sector Banking and Asset Insurance Monthlycalendar PwCinsights Glossary summary Announcements Capital Markets Management
Glossary
ABI Association of British Insurers Committee of European Insurance and Occupational CEIOPS Pensions Supervisors (predecessor of EIOPA) Alternative Investment Fund Managers Directive (Directive AIFMD 2011/61/EU) Committee of European Securities Regulators (predecessor of CESR ESMA) AIMA Alternative Investment Management Association Ordinary procedure for adopting EU law requires agreement AMICE Association of Mutual Insurers and Insurance Cooperatives Co-legislators between the Council and the European Parliament (who are AML anti-money laundering the ‘co-legislators’) AML3 3rd Anti-Money Laundering Directive (Directive 2005/60/EC) CFPB Consumer Financial Protection Bureau (US) ASB UK Accounting Standards Board CFTC Commodities Futures Trading Commission (US) Basel CGFS CommitteeontheGlobalFinancialSystem(oftheBIS) Basel Committee of Banking Supervisors (of the BIS) Committee CIS collective investment schemes Basel II: International Convergence of Capital Measurement Common Framework for the Supervision of Internationally Basel II ComFrame and Capital Standards: a Revised Framework Active Insurance Groups Basel III Basel III: International Regulatory Framework for Banks Generic term representing all ten configurations of the Council BBA British Bankers’ Association Council of the European Union BIBA British Insurance Brokers Association CPI Consumer Price Index BIS Bank for International Settlements CPSS CommitteeonPaymentandSettlementSystems(oftheBIS) BoE Bank of England CRA1 Regulation on Credit Rating Agencies (EC) No 1060/2009 CCD Consumer Credit Directive 2008/48/EC Regulation amending the Credit Rating Agencies Regulation CRA2 CCPs central counterparties (EU) No 513/2011 CDS credit default swaps proposal to amend the Credit Rating Agencies Regulation and CRA3 directives related to credit rating agencies COM(2011) 746 Committee of European Banking Supervisors (predecessor of CEBS final EBA) CRAs credit rating agencies FSregulatory,accountingandauditbulletin–October2012 PwC 31 Executive Fixing LIBOR Cross Sector Banking and Asset Insurance Monthlycalendar PwCinsights Glossary summary Announcements Capital Markets Management
‘Capital Requirements Directive’: collectively refers to EIOPA European Insurance and Occupations Pension Authority CRD Directive 2006/48/EC and Directive 2006/49/EC Regulation on OTC Derivatives, Central Counterparties and EMIR CRD II Amending Directive 2009/111/EC Trade Repositories (EC) No 648/2012 CRD III Amending Directive 2010/76/EU EP European Parliament CRD IV Proposal for a Directive COM(2011) 453 final amending CRD European Supervisory Authority (ie generic term for EBA, ESA EIOPA and ESMA) Regulation COM(2011) 452 final amending and recasting CRR CRD ESCB European System of Central Banks Capital Requirements Regulations ESMA European Securities and Markets Authority CRR 2006 (S.I. 2006/3221) ESRB European Systemic Risk Board DFBIS Department for Business, Innovation and Skills EURIBOR Euro Interbank Offered Rate Internal Market and Services Directorate General of the DG MARKT European Commission Eurosystem System of central banks in the euro area, including the ECB Dodd-Frank Wall Street Reform and Consumer Protection FASB Financial Accounting Standards Board (US) Dodd-Frank Act Act (US) FATCA Foreign Account Tax Compliance Act (US) D-SIBs domesticallysystemicallyimportantbanks FATF Financial Action Task Force EBA European Banking Authority FCA Financial Conduct Authority EC European Commission FDIC Federal Deposit Insurance Corporation (US) ECB European Central Bank FiCOD Financial Conglomerates Directive 2002/87/EC ECJ European Court of Justice FiCOD1 Amending Directive 2011/89/EU of 16 November 2011 Economic and Financial Affairs Council (configuration of the Proposal to overhaul the financial conglomerates regime FiCOD2 ECOFIN Council of the European Union dealing with financial and (expected 2013) fiscal and competition issues) FMI financial market infrastructure Economic and Monetary Affairs Committee of the European ECON Parliament FOS Financial Ombudsman Service EEA European Economic Area FPC Financial Policy Committee EFAMA European Fund and Investment Management Association FRC Financial Reporting Council FSA Financial Services Authority FSregulatory,accountingandauditbulletin–October2012 PwC 32 Executive Fixing LIBOR Cross Sector Banking and Asset Insurance Monthlycalendar PwCinsights Glossary summary Announcements Capital Markets Management
FSB Financial Stability Board ISDA International Swaps and Derivatives Association FSCS Financial Services Compensation Scheme ITS implementing technical standards FSI Financial Stability Institute (of the BIS) JMLSG Joint Money Laundering Steering Committee FSMA Financial Services and Markets Act 2000 JURI Legal Affairs Committee of the European Parliament G30 Group of 30 LEI legal entity identifier GAAP Generally Accepted Accounting Principles LIBOR London Interbank Offered Rate G-SIBs globally systemically important banks MAD Market Abuse Directive 2003/6/EC G-SIFIs globally systemically important financial institutions Proposed Directive on Criminal Sanctions for Insider Dealing MAD II and Market Manipulation (COM(2011)654 final) G-SIIs globally systemically important insurers Proposed Regulation on Market Abuse (EC) (recast) MAR HMRC Her Majesty’s Revenue & Customs (COM(2011) 651 final) HMT Her Majesty’s Treasury MCR minimum capital requirement IAIS International Association of Insurance Supervisors Member States countries which are members of the European Union IASB International Accounting Standards Board MiFID Markets in Financial Instruments Directive 2004/39/EC ICB Independent Commission on Banking Proposed Markets in Financial Instruments Directive (recast) MiFID II IFRS International Financial Reporting Standards (COM(2011) 656 final) Proposed Markets in Financial Instruments Regulation (EC) IIF Institute for International Finance MiFIR (COM(2011) 652 final) IMA Investment Management Association MMR Mortgage Market Review IMD Insurance Mediation Directive 2002/92/EC MoJ Ministry of Justice Proposal for a Directive on insurance mediation (recast) IMD2 COM(2012) 360/2 OCC Office of the Comptroller of the Currency (US) IMF International Monetary Fund OECD Organisation for Economic Cooperation and Development Institutions for Occupational Retirement Provision Directive Official Journal Official Journal of the European Union IORP 2003/43/EC Directive 2010/78/EU amending 11 existing Directives to Omnibus I IOSCO International Organisations of Securities Commissions reflect Lisbon Treaty and new supervisory architecture
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Second Directive amending existing legislation to reflect TSC Treasury Select Committee Lisbon Treaty and new supervisory infrastructure Undertakings for Collective Investments in Transferable Omnibus II (COM(2011) 0008 final) – amends the Prospectus Directive UCITS (Directive 2003/71/EC) and Solvency II (Directive Securities 2009/138/EC) UCITS IV UCITS Directive 2009/65/EC OTC over-the-counter PRA Prudential Regulation Authority Member State which takes the leadership for negotiations in Presidency the Council: rotates on 6 monthly basis PRIPs Packed Retail Investment Products PRIPs Proposal for a Regulation on key information documents for Regulation investment products COM(2012) 352/3 Financial Services and Markets Act 2000 (Regulated RAO Activities Order) 2001 RDR Retail Distribution Review RRPs recovery and resolution plans RTS regulatory technical standards SCR solvency capital requirement (under Solvency II) SEC Securities and Exchange Commission (US) SFD Settlement Finality Directive 98/26/EC SFO Serious Fraud Office SOCA Serious Organised Crime Agency Solvency II Directive 2009/138/EC SSR Short Selling Regulation EU 236/2012 T2S TARGET2-Securities TR trade repository
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Contacts
Laura Cox 020 7212 1579 [email protected]
Asset Management Banking & Capital Markets Insurance Local regulations & AML Chris Stuart Mark James Evelyn Brady Nick Vermeulen +44 (0) 1534 838232 +44 (0) 1534 838304 +44 (0) 1481 752013 +44 (0) 1481 752089 [email protected] [email protected] [email protected] [email protected]
Mary Bruen Nick Vermeulen Adrian Peacegood Chris Stuart +44 (0) 1534 838251 +44 (0) 1481 752089 +44 (0) 1481 752084 +44 (0) 1534 838232 [email protected] [email protected] [email protected] [email protected]
Nicola Mills James de Veulle Chris van den Berg +44 (0) 1481 752023 +44 (0) 1534 838375 +44 (0) 1534 838308 [email protected] [email protected] [email protected]
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