Key Regulatory Topics: Weekly Update 12 - 18 March 2021
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Our weekly update on key regulatory topics affecting the financial services sector.
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Brexit
Please see our Markets and Markets Infrastructure section for an update on the EC’s speech on the EU’s agenda to strengthen its capital markets.
Capital markets
Please see our Markets and Markets Infrastructure section for updates on the: (i) EU’s agenda to strengthen its capital markets; and (ii) EC’s call for evidence on the feasibility of a potential EU bank referral scheme for small and medium-sized enterprises, as part of the Capital Markets Union (CMU) action plan.
Please see our Other Developments section for an update on the FCA speech highlighting diversity and inclusion as regulatory issues.
EC consultation on supervisory convergence and single rulebook – CMU action plan
On 12 March, the EC published a consultation paper on supervisory convergence and the single rulebook. The EC states that there has been considerable progress on both supervisory convergence and the single rulebook since the three ESAs were created in 2011 – though, both require continued and appropriately targeted efforts to make further progress. As stipulated in the CMU action plan, the EC will work towards an enhanced single rulebook for capital markets by assessing the need for further harmonisation of EU rules and monitoring progress towards supervisory convergence. It will take stock of what has been achieved in Q4 2021 and consider proposing measures for stronger supervisory coordination or direct supervision by the ESAs. Furthermore, the consultation seeks targeted views on certain aspects related to the 2019 ESAs review and contributes to a wider debate on supervisory convergence and the single rulebook. The deadline for comments is 21 May.
Consumer/retail
Please see our Payment Systems and Payment Services section for an update on the Council of the EU’s conclusions on the EU Retail Payments Strategy.
Please see our Other Developments section for an update on the FCA’s regulation round-up for March.
FCA to consult on options for change – duty of care and potential alternative approaches
On 15 March, the FCA updated its webpage on its feedback statement on a duty of care and potential alternative approaches, as well as its statement on work in light of Covid-19 and changing market conditions, to announce that it aims to consult on potential options for change in May. In its feedback statement (published July 2018), the FCA set out the options for change that it thinks are, alone or in combination, most likely to deliver a higher degree of consumer protection, and which will be its primary areas of focus. In the update, the FCA states that it is doing further work to examine the options that are likely to be the most effective and proportionate, so that it can understand their likely impact on all areas of its operation, industry and consumers.
Covid-19
Please see the other sections for product-specific updates relating to Covid-19.
Fees and levies
Please see our Other Developments section for an update on the FCA’s regulation round-up for March.
PRA policy statement on its fees and levies – holding company regulatory transaction fees
On 17 March, the PRA published a policy statement on PRA fees and levies in regard to holding company regulatory transaction fees. The PS provides the PRA’s final policy following its consultation paper (CP) 21/20 in the form of amendments to the Fees Part of the PRA Rulebook, as set out in the Appendix that has also been published. The PRA confirms that it did not receive responses to the consultation. In CP21/20 the PRA proposed to make a regulatory transaction fee of £2,500 payable in respect of an application for approval or exemption as a holding company made under section 192Q of the Financial Services and Markets Act 2000. The new rule comes into force on 19 March.
Financial crime
Please see our Investigations Insight blog post on the Dubai Financial Services Authority (DFSA) Business Plan 2021/22, detailing key messages for litigators and contentious regulatory lawyers. The DFSA has published its Business Plan for 2021/22 setting out its areas of focus for the upcoming financial year. In this blog post, we provide the key highlights, with particular focus on the matters that are of most relevance to litigators and DFSA-regulated institutions.
Please see our Payment Systems and Payment Services section for an update on the Council of the EU’s conclusions on the EU Retail Payments Strategy.
FATF announces launch of new project on mitigating the unintended consequences of the FATF standards
On 18 March, the FATF announced that it launched a new project to study and mitigate the unintended consequences resulting from the incorrect implementation of the FATF Standards, in February. The project will focus on four main areas: (i) de-risking, or the loss or limitation of access to financial services – in particular, this practice has affected non-profit organisations (NPOs), money value transfer service providers, and correspondent banking relationships; (ii) financial exclusion, a phenomenon whereby individuals are excluded from the formal financial system and denied access to basic financial services; (iii) suppression of NPOs or the NPO sector as a whole through non-implementation of the FATF’s risk-based approach; and (iv) threats to fundamental human rights stemming from the misuse of the FATF Standards or anti-money laundering and countering the financing of terrorism (AML/CFT) assessment processes to enact, justify, or implement laws, which may violate rights such as due process or the right to a fair trial. The FATF will conduct the project in two phases: (a) Phase One: research and engagement – the project team will analyse these unintended consequences resulting from the misuse of the FATF’s Standards on preventing and combating money laundering and the financing of terrorism; and (b) Phase Two: solutions – this will develop options that the FATF could consider to prevent and mitigate these unintended consequences.
EBA consultation on changes to its guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision under the Fourth Money Laundering Directive (MLD4)
On 17 March, the EBA published a consultation paper on changes to its guidelines on risk-based supervision of credit and financial institutions’ compliance with AML/CFT obligations under MLD4. The proposed changes address the key obstacles to effective AML/CFT supervision that the EBA has identified during its review of the existing guidelines, including the effective use of different supervisory tools to meet the supervisory objectives. The changes that the EBA is proposing include practical step-by-step approaches to addressing those aspects of AML/CFT supervision that competent authorities have found particularly challenging. Furthermore, the revised guidelines focus on helping the supervisors identify and manage ML/TF risks more effectively, including the risks that may arise from de-risking practices in some sectors or member states by providing greater detail on ML/TF risk assessments and by requiring to develop a robust supervisory strategy and plan that are based on those risk assessments. The deadline for comments is 17 June.
Fintech
Please see our Other Developments section for an update on the International Regulatory Strategy Group (IRSG) report calling on global stakeholders to reaffirm their commitment to regulatory coherence to support a digital and green economic recovery from the Covid-19 pandemic.
EP Committee on Economic and Monetary Affairs (ECON) draft report on proposal for regulation on digital operational resilience for the financial sector (DORA)
On 18 March, the EP’s ECON published a draft report (dated 17 March) on the EC’s proposal for DORA, which amends the Credit Rating Agencies Regulation (CRAR), EMIR, MiFIR and the CSDR. In the explanatory statement, the ECON states that it welcomes the EC’s proposal as a necessary step to strengthen and harmonise the regulatory framework in this area. Though, it has identified certain aspects of the proposal for improvement. The amendments included in the report are guided by three main principles: (i) proportionality – the scope of and obligations imposed by the Regulation should be proportionate to the ICT risk posed to an entity and should not discourage the continuing digitalisation of the EU’s financial services sector; (ii) preserving competitiveness – it is necessary to ensure that the digital operational resilience framework does not hinder the competitiveness of entities falling within scope or the attractiveness of the EU, which should position itself as a key player on the digital stage, while remaining open to collaborate with international partners; and (iii) futureproof – the framework must have the necessary flexibility to address new services and business models that might emerge in the near future and must not hamper innovation. The ECON has classified its amendments to the EC proposal into groups, providing detail on: (a) proportionality and scope; (b) ICT risk reporting; (c) testing; (d) ICT risk management framework; (e) sound management of ICT third-party risk; (f) oversight framework for critical third-party providers; (g) competent authorities; (h) interaction with existing financial services and cyber security frameworks; and (i) delegations.
Markets and markets infrastructure
Please see our Other Developments section for an update on the FCA’s regulation round-up for March.
Working Group on Sterling Risk-Free Reference Rates (RFRWG) revises best practice guide for GBP loans
On 18 March, the RFRWG published a revised version of its best practice guide for GBP loans, originally published in February. The updated guide includes an additional appendix, titled “Technical and System Capability Guidance” – this builds on the convention recommendations and relevant information from previous RFRWG publications. Furthermore, the appendix is intended to provide additional technical guidance and support for system implementation. Finally, the foreword section of the guide contains links to the RFRWG’s updated set of slides on detailed loan conventions, as well as its updated spreadsheet of worked examples of detailed risk-free rate (RFR) compounding conventions for the sterling loan market.
EC speech focusing on the EU’s agenda to strengthen its capital markets and addressing Brexit
On 16 March, the EC published a speech by Commissioner Mairead McGuinness, focusing on the EU’s agenda to strengthen its capital markets, as well as Brexit. The speech notes that the EU is working hard on integration – it wants to develop a deep and efficient single market for capital. Though, the speech acknowledges that the EU has been through a fragmenting event this year, Brexit, requiring a readjustment by the EU. The speech highlights that: (i) the project for a Capital Markets Union (CMU) is a top priority in the EC; (ii) only deep and integrated capital markets can provide the scale of financial support needed to power the transition towards a greener and more digital Europe; (iii) an area that the EC will reflect on in the coming months is supervision and the functioning of the EU single rulebook for financial services – this year, the EC will gather the input of stakeholders and report on issues of supervisory convergence; and (iv) the EC is getting started with the comprehensive review of MiFID, looking at the operation of infrastructure for trading in shares, bonds and derivatives – the EC will assess whether transparent regulated exchanges and more opaque alternative venues operate on a level playing field and whether transparency requirements need to be strengthened, as well as whether the current mandatory open access provisions for exchanged-traded derivatives should be maintained, modified or abandoned altogether. In respect of Brexit, Commissioner McGuinness notes that: (a) she envisages a flexible non-binding framework, similar to what the EU has with the USA; (b) once the regulatory cooperation framework is in place, the EU will resume the assessment of equivalence with the UK authorities; (c) there cannot be equivalence with wide regulatory divergence; (d) the EU will grant equivalence only when it’s in the EU’s interest – the EU will see how to develop its open strategic autonomy; (e) ESMA is currently re-assessing, in cooperation with the ECB, the systemic importance of two UK central counterparties (CCPs), and ESMA will also decide whether to advise the EC not to recognise these CCPs for some or all of the services they offer and that these CCPs should relocate to the EU; (f) the working group, set up with the ECB and other EU supervisory authorities to better identify the opportunities and challenges for transferring derivatives denominated in euros or any other EU currency from the UK to the EU, is expected to deliver recommendations by the middle of this year. The speech also discusses openness, in respect of re-balancing the EU’s relationship with the UK, covering: (1) equivalence with third countries; (2) commitment to multilateralism; (3) green finance; and (4) digitalisation.
EC consultation on Delegated Regulation under EMIR extending clearing obligation exemption for pension scheme arrangements (PSAs) for further year
On 16 March, the EC published a draft Delegated Regulation extending the transitional period under Article 89(1) of EMIR for consultation. EMIR provides for a temporary exemption from the clearing obligation for PSAs meeting certain criteria – this transitional period is set out under Article 89(1) of EMIR and provides further time for central counterparties (CCPs), PSAs and clearing members to develop viable technical solutions which would allow PSAs to meet the cash variation margin calls of CCPs. The EC notes that the temporary exemption has been extended over the years, since no viable technical solution has emerged – the recent review of EMIR prolonged the exemption until 18 June. In accordance with Article 85(2), it is possible to further extend it by two years maximum. Through this draft Delegated Regulation, the EC is proposing to prolong the existing exemption by an additional year. The deadline for comments is 13 April.
FCA speech provides a forward look at regulation of the UK’s wholesale financial markets
On 16 March, the FCA published a speech by Edwin Schooling Latter (Director of Markets and Wholesale Policy) providing a forward look at regulation of the UK’s wholesale financial markets. Mr Latter states that the FCA shares the Government’s determination to ensure the regulatory framework is tailored to allow UK financial markets and their users, from around the globe, to thrive. Mr Latter notes that where regulation has imposed costs without beneficial outcomes to justify that cost, then it will want to use its new ability to change direction. Firstly, in terms of the SFTR, the speech states, amongst other things, that the FCA: (i) is open to considering whether to remove commodities lending transactions from scope; (ii) will assess carefully the evidence on the relative benefits of single versus double-sided reporting; and (iii) is conscious that many UK-based firms are part of groups with EU entities subject to the EU SFTR regime – divergence between the two regimes could add additional complication or cost to groups who would then have to adhere to two different sets of reporting requirements. Secondly, the speech addresses the CSDR, noting that some may have been attracted to CSDR buy-in provisions and penalties as a constraint on short-selling activities – however, the FCA thinks that the Short Selling Regulation is the better, more direct and effective vehicle for setting regulatory parameters around that market. Mr Latter states that the FCA will remain open to ideas on whether, and, if so, how, the UK’s settlement arrangements could be refreshed to support both market liquidity and settlement efficiency – the FCA will be keen to work with the grain of market consensus if and where there is a case for change. Finally, the speech addresses the wider capital markets framework, noting that the FCA: (a) sees real efficiency and effectiveness gains in better aligning prospectus documentation requirements with the type of transaction being undertaken; (b) thinks it is timely to assess whether MiFID II rules, and the costs some of them impose, have achieved the intended benefits; and (c) is working (together with the FSB and IOSCO) on how financial markets can support that all-important transition to net zero – the most effective and efficient way of addressing global issues will be through globally connected markets, and the FCA will seek to ensure its approach in the UK is an integrated part of that coordinated international effort.
Financial Markets Law Committee (FMLC) letter responding to HMT’s consultation on supporting the wind-down of critical benchmarks
On 15 March, the FMLC published a letter responding to HMT’s consultation on supporting the wind-down of critical benchmarks. The FMLC draws attention to the legal uncertainties and the possibility of remote, if not negligible, risk of market disruption which may arise from LIBOR transition. The FMLC has expressed the view that safe-harbour legislation would address the worst-case risks of frustration, avoidance or force majeure termination which, although they may have only a small chance of crystallising, would be potentially significant in their impact owing to the systemic importance of market standard terms. The letter also offers views on the scope of a safe-harbour provision, suggesting that such a provision tracks established approaches to this issue as closely as possible and draws attention in this regard to Article 68 of the BRRD.
ESMA to allow decision on reporting of net short position of 0.1% and above to expire
On 15 March, ESMA announced that it has decided not to renew its decision to require holders of net short positions in shares traded on an EU regulated market, to notify the relevant national competent authority (NCA) if the position reaches, exceeds or falls below 0.1% of the issued share capital. The measure, which has applied since 16 March 2020, will expire on 19 March 2021. The last reporting where the lower threshold of 0.1% applies will be in relation to 19 March 2021, and must be reported to NCAs by 22 March 2021. From 20 March 2021 onwards, positions holders will need to send notifications only if they reach or exceed the 0.2% threshold again, while any outstanding net short position between 0.1% and 0.2% will not have to be reported. ESMA’s view is that with GDP forecasts showing moderate optimism for recovery, volatility decreasing and the main EU stock indices close to pre-pandemic levels, the current situation in financial markets no longer resembles the emergency situation required by the Short Selling Regulation to maintain the measure. ESMA notes that the overall level of net short positions is decreasing across the EU, reducing the risk that selling pressures could initiate or exacerbate potential negative developments connected with the evolution of the pandemic. The EFTA Surveillance Authority has also announced its decision not to renew its current measure that will similarly expire on 19 March 2021, applicable to EEA EFTA States' markets.
EFTA Surveillance Authority Press Release
EC call for evidence on the feasibility of potential EU bank referral scheme for small and medium-sized enterprises (SMEs) – CMU action plan
On 12 March, the EC published a call for evidence on the feasibility assessment for a potential EU referral scheme for SMEs. The EC states that in the CMU action plan published in September 2020, the EC committed to analysing (by Q4 2021) the merits and feasibility of setting up a referral scheme to require banks (and other providers of funding) to direct SMEs whose funding applications they have turned down to providers of alternative funding. The EC notes that the objective of the scheme, if implemented, is to facilitate SMEs’ access to a wider set of funding options, including alternative funding options. The objectives of the feasibility study are to: (i) analyse the scale of the problem of SMEs failing to secure financing; (ii) balance possible benefits of wider and more diversified sources of financing that such referral scheme can offer to SMEs with the possible additional burden for banks or other providers of financing, who would be under an obligation to refer SMEs; and (iii) if supported by a positive result of the feasibility study, formulate possible options for the scope, features and governance of the potential scheme. The deadline for responses is 9 April.
Payment systems and payment services
Council of the EU invites its Permanent Representatives Committee (COREPER) to approve conclusions on EU Retail Payments Strategy
On 12 March, the Council of the EU published an I/A item note, inviting the COREPER to suggest that the Council approve the conclusions on the EU Retail Payments Strategy which areset out in a separate note (dated 8 March). Amongst the conclusions, the Council welcomes the EC’s communication on a Retail Payments Strategy for the EU. Furthermore, the Council states that: (i) it acknowledges significant improvements brought about by the Single Euro Payment Area (SEPA) and by the harmonisation of retail payments legislation; (ii) a strong focus on consumer protection will be vital in achieving the EU’s strategic goals in the retail payments area; (iii) it agrees with the identified closely interlinked ‘pillars’ for strategic action; (iv) it considers that legislative action may be needed to promote adherence to the SEPA Instant Credit Transfer scheme and to its additional functionalities, and that other ways to foster its adoption could be explored; (v) it encourages the preparation of a study on the level of acceptance of digital payments, before any possible legislative proposal is developed to increase the latter; (vi) it encourages the promotion of digital and financial literacy to tackle the risk of financial exclusion; (vii) it welcomes a comprehensive review of the implementation of the PSD II; (viii) it supports an extension of the scope of the Settlement Finality Directive (SFD) to include e-money and payment institutions; (ix) it encourages the adoption of the ISO 20022 global standard in order to facilitate the inclusion of richer data in payment messages; and (x) the emergence of new payment solutions entails a number of policy challenges for the EU, in terms of regulation and supervision, particularly in terms of security, consumer protection, competition, data protection, anti-money laundering and combating the financing of terrorism.
Note – Council of EU conclusions
Prudential regulation
ECB speech on non-performing loan (NPL) management – Covid-19
On 18 March, the ECB published a speech by Elizabeth McCaul (Member of the Supervisory Board of the ECB), at the NPL Summit 2021, on managing NPLs in the context of the Covid-19 crisis. The speech notes that NPLs are expected to increase in the coming months as the impact of the Covid-19 crisis on the real economy intensifies – it is necessary to address this challenge effectively. Furthermore, Ms McCaul states that banks need to ensure that they have the operational capacity to swiftly and thoroughly address NPLs at an early stage – alongside market-based solutions, other more systemic solutions should be further explored. The speech emphasises that a comprehensive plan to tackle rising NPLs across Europe is essential to deal with the consequences of the Covid-19 crisis.
EBA to make its Basel III monitoring exercise mandatory from December
On 16 March, the EBA published a decision which will change the Basel III monitoring exercise from its current voluntary nature to a mandatory exercise from December. The EBA states that the change stems from the need to expand the sample to more jurisdictions and credit institutions, making it more representative, as well as to reach a stable sample over time by providing authorities with a sound legal basis that frames institutions’ participation. The EBA notes that the initiative introduces a clear, transparent and fair methodology on how institutions should be included in the sample, and guarantees enhanced stability of the sample over time by taking into account the proportionality principle. In addition, the decision provides competent authorities and institutions of the Member States with provisions for a reduced frequency of reporting Basel III data (annually, and for mandatory submission of only a part of the Basel templates). The decision applies clear selection criteria for defining the country samples – each member state should apply, sequentially, the following criteria: (i) all Global and Other Systemically Important Institutions (G-SIIs and O-SIIs) are included in the country sample at the highest level of EU consolidation, irrespective of their size; (ii) if 80% RWA coverage is not exceeded, and the sample is smaller than 30 banks, additional large banks that are not O-SIIs, are included until 80% RWA coverage is exceeded; and (iii) if 80% RWA coverage is not exceeded, additional medium-sized and small banks, that are not O-SIIs, are selected from the eligible population of three different broad business models according to predefined percentages per business model. Additionally, the decision intends to limit the burden on small jurisdictions, as a whole by limiting the participation to O-SIIs only, irrespective of whether the 80% RWA coverage is exceeded or not.
Commission Implementing Regulation laying down implementing technical standards (ITS) for the application of the CRR with regard to specific reporting requirements for market risk
On 15 March, Commission Implementing Regulation (EU) 2021/453 laying down ITS for the application of the CRR with regard to the specific reporting requirements for market risk was published in the OJ. The ITS introduce elements of the Fundamental Review of the Trading Book (FRTB) into the EU prudential framework by means of a reporting requirement, and specifically cover: (i) reference dates and reporting dates; (ii) reporting on thresholds set out in Articles 94(1) and 325a(1) of the CRR; (iii) reporting on the alternative standardised approach; and (iv) data exchange formats and information associated with submissions. The Regulation will enter into force on 5 April (this being the 20th day following that of its publication in the OJ) and it will apply from 5 October.
EBA reports on the monitoring of the liquidity coverage ratio (LCR) implementation in the EU
On 15 March, the EBA published its second report on the monitoring of the LCR implementation in the EU. The EBA states that the report, which complements the one published on 12 July 2019, highlights areas in which further guidance is deemed useful for banks and supervisors in order to foster a common understanding and harmonisation of the application of the liquidity standard across the EU, as well as to reduce some level playing field issues. In particular, the report provides guidance on the treatment of fiduciary deposits, LCR optimisation risk, interdependent inflows and outflows and assessment of deposit guarantee schemes (DGS) conditions for a 3% outflow rates in stable retail deposits. In addition, the EBA notes that the report discusses a number of items in the context of a crisis, in particular in view of the Covid-19 pandemic: (i) the usage of liquidity buffers; (ii) guidance on unwinding mechanism waivers; (iii) recourse to central bank support; and (iv) additional outflows from derivatives. Finally, the report assesses the effects of the guidance issued in the first report.
EBA results of annual assessment of the consistency of internal model outcomes for 2020
On 15 March, the EBA published two reports on the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements for 2020. The reports cover credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. The results confirm that the majority of risk-weights (RWs) variability can be explained by fundamentals. These benchmarking exercises are a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restoring trust in internal models.
Report – Market Risk Benchmarking
Report – LDPs and HDPs Credit Risk and Annex
EBA consults on draft regulatory technical standards (RTS) on gross jump-to-default (JTD) amounts and on residual risk add-on under Fundamental Review of Trading Book (FRTB) – CRR
On 12 March, the EBA published two consultation papers for the implementation of the alternative standardised approach for market risk as part of its Fundamental Review of the Trading Book (FRTB) roadmap under the CRR. Firstly, the EBA published a consultation on draft RTS on gross JTD amounts under Article 325w(8) of the CRR. The EBA notes that the draft RTS set out in this consultation paper specify how gross JTD amounts are to be determined for institutions’ exposures in the trading book under the alternative standardised approach for market risk in scope of the Default Risk Charge (DRC) for non-securitisations. The draft RTS are intended to address the three mandates set out in Article 325w(8): (i) how the components P&Llong, P&Lshort, Adjustmentlong and Adjustmentshort are to be determined for the purposes of calculating gross JTD amounts of exposures to debt and equity instruments with the formulae in Article 325w(1), (2) and (5); (ii) which alternative methodologies institutions are to use for estimating gross JTD amounts of exposures referred to in Article 325w(7); and (iii) how to determine the notional amount of instruments other than the ones referred to in Article 325w(4). Secondly, the EBA published a consultation on draft RTS on the specification of what an exotic underlying is and which instruments are instruments bearing residual risks for the purposes of Article 325u(2) under Article 325u(5) of CRR II. The draft RTS specify what an exotic underlying is and which instruments are instruments bearing residual risks. In addition, longevity risk, weather, natural disasters and future realised volatility were assessed and determined as constituting exotic underlyings. The deadline for comments for both consultations is 12 June. The draft Delegated Regulations state that they will enter into force 20 days after publication in the OJ.
Consultation – gross JTD amounts
Consultation – residual risk add-on
Recovery and resolution
EBA consultation on its revised guidelines on recovery plan indicators under the BRRD
On 18 March, the EBA published a consultation paper on its revised guidelines on recovery plan indicators under Article 9 of the BRRD. While maintaining overall stability to the current recovery plan indicators framework, the revised guidelines provide additional guidance on indicators’ calibration, monitoring and breaches notifications. The amendments aim at strengthening the quality of recovery indicators framework and contributing to effective crisis preparedness of institutions. The EBA notes that the: (i) revised guidelines provide a common EU standard for the recovery plan indicators to ensure they can promptly signal a stressed situation and enable the institution to consider timely and effective recovery actions; (ii) key objective of the revised guidelines is to strengthen the quality of the recovery indicators framework in order to ensure institutions’ effective crisis preparedness; and (iii) amendments of the revised guidelines introduce few changes to the minimum list of recovery indicators and focus on practical aspects such as calibration of the thresholds of recovery plan indicators and their monitoring. The EBA further notes that: (a) the revised guidelines provide additional guidance on the calibration of thresholds of recovery indicators to ensure that recovery options are implemented early enough to be effective; (b) the amendments also emphasise the importance of constant monitoring of recovery indicators and timely notification of their breaches to supervisors; and (c) three new recovery indicators (MREL/TLAC, asset encumbrance and liquidity position) have been added to the minimum list of recovery indicators and one (cost of wholesale funding) has been removed. As confirmed in its press release, the EBA will be holding a public hearing on 15 April. The deadline for comments is 18 June.
EBA consultation on its draft guidelines for institutions and resolution authorities on improving resolvability
On 17 March, the EBA published a consultation paper on its draft guidelines for institutions and resolution authorities on improving resolvability. The guidelines represent a significant step in complementing the EU legal framework in the field of resolution. They aggregate existing international standards, leverage on existing EU best practices and implement them into an EU-wide legal document. The guidelines take stock of the best practices developed so far by EU resolution authorities on resolvability topics – in particular, the guidelines set out requirements to improve resolvability in the areas of operational continuity in resolution, access to Financial Market Infrastructure (FMI), funding and liquidity in resolution, bail-in execution, business reorganisation and communication. The guidelines aim to be the policy point of reference for both authorities and institutions on resolvability related topics in the EU – the aim is to ensure consistent progress on resolvability for all institutions and facilitate resolvability work for cross-border groups and its monitoring in resolution colleges. The EBA has also published Annex 2 containing a resolvability assessment template. As confirmed in its press release, the EBA will be holding a public hearing on 20 April. The deadline for comments is 17 June.
Sustainable finance
Please see our bulletin “SFDR Principles explained: New RTS provides guidance on key issues”. Under the SFDR, the ESAs have been mandated to develop various Level 2 measures, to take the form of RTS. On 4 February, the ESAs published their final report on a draft RTS. The recitals and certain articles in this RTS contain useful guidance as to the position being taken by regulators on key issues of interpretation. This bulletin gives further detail on these points, to assist firms in making sense of the new SFDR regime.
Please see our bulletin “ESG Update for Private Banks, Wealth Managers and Advisers – including SFDR”. The Environmental, Social and Governance (ESG) agenda continues to be a focal point for the EC and other bodies, with a number of updates to the initiatives currently in the pipeline. This briefing gives a summary of new developments as well as updates to the key developments discussed in our briefing from the end of last year, including what is proposed and any relevant next steps.
Please see our Markets and Markets Infrastructure section for an update on the EC’s speech on the EU’s agenda to strengthen its capital markets.
Please see our Other Developments section for an update on the International Regulatory Strategy Group (IRSG) report calling on global stakeholders to reaffirm their commitment to regulatory coherence to support a digital and green economic recovery from the Covid-19 pandemic.
ECB preliminary results of first economy-wide climate stress test
On 18 March, the ECB published a blog post by Luis de Guindos (Vice-President of the ECB) in regard to climate risks, and its first economy-wide climate stress test. Amongst other things, the blog post states that preliminary results show that a timely and effective transition to a greener economy is always the preferable course of climate policy action – while firms’ probability of default initially rises, mainly due to the costs of adapting to green policies, this increase is more than offset in the medium to long term by the much lower costs to cover physical risk. The post notes that the development of new and more sustainable technologies allows firms to become more energy efficient and to achieve significant production cost gains – in the long run, these cost efficiencies outweigh the cost of adopting new technologies, thereby boosting corporate profitability and creditworthiness. The post also outlines the ECB’s plans to broaden and strengthen the preliminary results: (i) the firm-level impacts will be used to assess banks’ resilience to climate risks through loans, security and equity holdings; (ii) the full set of results will be available by mid-2021, including how changes in firms’ solvency translate into changes in bank-level vulnerability to transition and physical risk; (iii) the exercise will include more than 2,000 consolidated banking groups; (iv) the current framework will then be extended to include a more dynamic response by banks to climate change – in particular, the decline in the creditworthiness of certain firms could incentivise banks to adjust the composition of their portfolios, shifting their investments towards less risky firms; (v) the current framework will be expanded to consider these dynamics in the second half of 2021; and (vi) finally, the impact on the portfolios of non-banks such as asset managers and insurance companies will also be considered to arrive at a comprehensive view of the impact of climate change on the entire financial sector.
European Supervisory Authorities (ESAs) consult on taxonomy related product disclosures
On 17 March, the ESAs published a consultation paper seeking input on draft Regulatory Technical Standards (RTS) regarding disclosures of financial products investing in economic activities that contribute to an environmental investment objective – these economic activities are defined by the Taxonomy Regulation. The draft RTS aim to: (i) facilitate disclosures to end investors regarding the investments of financial products in environmentally sustainable activities; and (ii) create a single rulebook for sustainability disclosures under the Regulation on sustainability-related disclosures in the financial services sector (SFDR) and the Taxonomy Regulation. This will be done by amending the draft RTS under the SFDR, to minimise overlapping or duplicative requirements between the two regulations. The consultation paper includes additional taxonomy-related disclosures in respect of information about which environmental objectives the investments of the product contribute to, and information about how, and to what extent, the activities funded by the product are taxonomy-aligned. The ESAs’ proposal on how and to what extent activities funded by the product are taxonomy-aligned, consist of two elements: (a) a graphical representation of the taxonomy-alignment of investments of the financial product and a key performance indicator calculation for that alignment; and (b) a statement that the activities funded by the product that qualify as environmentally sustainable, are compliant with the detailed criteria of the Taxonomy Regulation. The ESAs also propose to standardise the presentation of the disclosures by amending the templates for the pre-contractual and periodic disclosures proposed in the draft RTS under the SFDR.
Other developments
International Regulatory Strategy Group (IRSG) report calls on global stakeholders to reaffirm their commitment to regulatory coherence to support a digital and green economic recovery from the Covid-19 pandemic
On 18 March, the IRSG published a report calling on global stakeholders to renew their commitment to global regulatory coherence, together with an enhanced commitment to solving issues with international co-operation. The report argues that the case for a renewed commitment to global solutions to global problems, with practical examples on where market fragmentation may give rise to financial instability and other risks. The report makes recommendations as to how local and international bodies can ensure this principle remains central to their work in the coming months and years. It makes recommendations in three specific areas, specifically to: (i) foster operational resilience – a call on global regulators and standard setters, in co-operation with national stakeholders, to play a leading role in global economic recovery by developing guidance and a set of standards to foster operational resilience of global supply chains within the financial services industry in the post-pandemic environment; (ii) encourage innovation in digital governance – create, shape and influence the global digital regulatory framework by fostering regulatory and standard-setting collaboration and information-sharing in critical emerging areas, including cyber security, data privacy, cross-border data transfers, FinTech and RegTech, in order to avoid regulatory fragmentation, promote an open and level-playing field, and mitigate emerging digital security risks and vulnerabilities; and (iii) incentivise sustainable finance – encourage the development of a better financial services framework for incentivising green finance, financial inclusion and sustainable finance objectives, including where appropriate common standards on disclosure, to prevent green washing, and enhance environmental, social, and corporate governance (ESG) data and ratings.
FCA speech on building ethnic diversity and inclusion in investment management
On 18 March, the FCA published a speech by Georgina Philippou (Senior Adviser to the FCA on the Public Sector Equality Duty) on building ethnic diversity and inclusion in investment management. Ms Philippou notes that there is plenty of work to do to secure diversity and inclusion in investment management, particularly ethnic diversity. Key points in the speech are that: (i) the ability to share best practice and exchange ideas and experience is a crucial part of making progress on diversity and inclusion (D&I) at an individual firm level and at a collective sector level; (ii) a one size fits all approach to D&I is not practical and it would be inappropriate for the FCA to mandate particular cultures; (iii) there is no rule in the FCA’s Handbook that says regulated firms have to be diverse or even have an internal or external diversity policy, but that does not mean that the FCA is silent or powerless – the FCA has a range of tools at its disposal, from formal to informal and in particular, it has a unique power to influence and convene; (iv) there are opportunities for the FCA to consider its Public Sector Equality Duty (PSED) in all of its interactions with financial services firms; (v) leaders must acknowledge their status and actively recognise how their behaviour and actions can influence and support an environment of safety and collaboration; and (vi) getting D&I right is a virtuous chain of events – when the FCA gets it right as an employer, it helps it to get the regulation of firms right, whether that’s as a supervisor or as a policy maker.
FCA regulation round-up – March
On 18 March, the FCA published its regulation round-up for March. Amongst other things, the FCA states that it has recognised that some existing LIBOR contracts are particularly difficult to amend, often known as ‘tough legacy’ – the FCA is taking steps to help reduce disruption in these cases and will consult in Q2 on using proposed new powers that the government is legislating to grant the FCA, to require continued publication on a ‘synthetic’ basis for some sterling LIBOR settings and, for 1 additional year, some Japanese yen LIBOR settings. The FCA will also continue to consider the case for using these powers for some US-dollar LIBOR settings. Furthermore, the FCA confirms that any ‘synthetic’ LIBOR will not be representative for the purposes of the Benchmarks Regulation (BMR) and is not for use in new contracts. The regulation round-up also states that: (i) as part of its wider data strategy, the FCA is also launching a new online invoicing portal on 12 April for firms to access their invoices and arrange payment of their fees – this system will replace its existing portal, which will no longer be available after 31 March; (ii) the FCA will shortly publish its research into self-directed investors' behaviours, attitudes and financial resilience – this research will underpin the FCA's work in the consumer investment market and help shape a new campaign to address the harm caused from consumers investing in high-risk, high-return, illiquid investments that may not be suitable for their needs; and (iii) following the publication of the Consumer Prices Index (CPI) figures for January, the FCA confirms no adjustments will be made this year to the Financial Ombudsman Service (FOS) award limits in DISP 3.7.4R.
FCA speech highlights diversity and inclusion as regulatory issues
On 17 March, the FCA published a speech by its CEO, Nikhil Rathi, at the launch of the HMT Women in Finance Charter Annual Review, outlining that diversity and inclusion are regulatory issues. Highlights of the speech include that: (i) the charter, which challenges the financial services industry to do better, is making a difference; (ii) diversity will be crucial in the FCA’s consideration of vulnerability; (iii) the FCA is working with the PRA on a joint approach to D&I for all financial services firms; (iv) the FCA will increasingly be asking tough questions firms about representation across grades and whether their culture is open and inclusive and provides a safe space for colleagues at all levels of the organisation; and (v) as part of its regulatory work on diversity and inclusion and the listings framework, the FCA will be exploring whether it should make diversity requirements part of its premium listing rules.
Investment Association (IA) report highlights industry efforts to strengthen ethnic diversity
On 16 March, the IA published a report setting out new steps to improve ethnic diversity and inclusion in investment management. Some of the key findings include: (i) 75% of firms currently collect, or have begun work towards collecting, data on the protected characteristics of their workforce, including ethnicity – however, legal, data protection and issues of trust currently stand as obstacles to full disclosure, with only a handful of firms currently obtaining sufficient data to draw meaningful conclusions, and thus the report attempts to address this issue; (ii) 96% of firms are running regular training to educate their employees on D&I related issues – the report emphasises the importance of refreshing and re-evaluating training on a regular basis to ensure it is effective; (iii) 96% of firms are currently engaged and supporting at least one charity or organisation seeking to open industry access to a more diverse cohort of young people; (iv) 42% of firms have signed up to at least one initiative, pledge or charter that suggests or requires action or targets to improve their ethnic diversity; and (v) 87% of firms have dedicated diversity networks, which play a central role in supporting employees and shaping, producing and driving change.
ECB Decision amending Decision on reporting of funding plans of credit institutions by national competent authorities (NCAs) to the ECB published in OJ
On 12 March, Decision (EU) 2021/432, amending Decision (EU) 2017/1198 on the reporting of funding plans of credit institutions by NCAs to the ECB, was published in the OJ. Decision (EU) 2017/1198 requires funding plans to be reported in accordance with the harmonised templates and definitions referred to in the funding plan template attached to the EBA Guidelines on harmonised definitions and templates for funding plans of credit institutions under Recommendation A4 of ESRB/2012/2 – these guidelines have been repealed and replaced with effect from 31 December 2020 by the EBA guidelines on harmonised definitions and templates for funding plans of credit institutions under Recommendation of the European Systemic Risk Board of 20 December 2012 (ESRB/2012/2) (the EBA 2019 guidelines). Furthermore, the EBA Decision concerning supervisory reporting by competent authorities to the EBA (EBA/DC/2020/334), repealing the EBA Decision of 23 September 2015 (EBA/DC/2015/130), requires competent authorities to submit data on funding plans of all credit institutions under their supervisory remit in accordance with the EBA 2019 guidelines. That Decision also classifies all credit institutions as either ‘Largest institutions in the Member State’ or ‘Smaller Institutions’ for the purposes of determining the submission dates of the requested data from competent authorities to the EBA. To align reporting to the ECB by national competent authorities of funding plans of credit institutions with the most recent harmonised definitions and templates in the EBA 2019 guidelines, and to ensure compliance with EBA Decision EBA/DC/2020/334, Decision (EU) 2017/1198 has been amended.
FCA policy development update (PDU) – March 2021
On 12 March, the FCA published its PDU webpage for March, which sets out information on recent and future FCA publications. The update summarises the FCA's proposed future publications and the dates given by the FCA for publication. Additionally, the update indicates where upcoming publications listed in the previous month's PDU have not been included in this PDU. Upcoming publications include: (i) a consultation paper on exit fees in investment platforms and comparable firms, due for publication in 2021; and (ii) a consultation paper on FCA regulated fees and levies, rates proposals 2021/22, due for publication in April. The FCA has also listed upcoming quarterly consultation papers.