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Key Regulatory Topics: Weekly Update 2 - 8 Feb 2024

Most of the updates this week stem from progress in relation to various EU legislative files.  In particular, the Council of the EU and the EP have reached provisional political agreement on EMIR 3.0, the proposed Regulation on the transparency and integrity of ESG rating activities and the proposed Directive amending the Corporate Sustainability Reporting Directive.  The EP has adopted the proposed Directive amending AIFMD and the UCITS Directive and the proposed Regulation amending the SEPA Regulation and the Cross-Border Payments Regulation as regards instant credit transfers in euro. The Council of the EU published the texts of the proposed Regulation amending MiFIR as regards enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations, and prohibiting receiving payment for order flow and the proposed Directive amending MiFID II. Meanwhile, ESMA has updated a number of Q&A documents which are now available in ESMA’s Q&A IT-tool.

Corporates/Issuers

Please see the Sustainable Finance section for an announcement from the Council of the EU that it has reached provisional political agreement with the EP on the proposed Directive amending the Corporate Sustainability Reporting Directive, as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings.

Financial Crime

FCA update on three-year strategy reducing and preventing financial crime

On 8 February, the FCA provided an update on its 2022, three-year strategy on reducing and preventing financial crime.  The FCA sets out its key deliverables over the past 18 months and identifies four future areas of focus: (i) data and technology – firms must ensure that systems and controls keep up with the increasing sophistication of criminal groups and should use the advances in technologies to help prevent financial crime. Firms must calibrate how they use technology to their individual requirements to be as effective as possible; (ii) collaboration – the FCA strongly encourages firms and cross-sector partners to participate in data sharing initiatives and explore the latest advances in data sharing technology to improve collaboration; (iii) consumer awareness – it is essential that consumers are supported by firms and educated on how to spot the signs of a fraud; and (iv) metrics – firms should be able to measure their own effectiveness at preventing financial crime through using outcomes and metrics. The FCA encourages firms to consider how their interventions could contribute towards a reduction in overall rates of financial crime.  The FCA sets out suggested questions for firms’ boards to ask for each of the metrics. Looking ahead, a key focus for the FCA in 2024 will be to support Government proposals to reform the AML supervisory regime. The FCA considers that the complexity of the current framework hinders consistency and effective coordination and that there is an inherent risk of conflict created by many PBSs having dual roles as advocates for their members and as AML supervisors. The FCA supports the Government’s rationale for reforming the AML supervisory regime and considers that the option of a Single Professional Service Supervisor offers the best opportunity to deliver on the aims of the reform.

Update

ESMA warning about social media investment recommendations

On 6 February, ESMA published a warning for people posting investment recommendations on social media. The warning aims to raise awareness of the relevant MAR requirements and also of the risks of market manipulation when posting on social media. The warning provides information on topics including: (i) what is an investment recommendation under MAR; (ii) the consequences of non-compliance; (iii) who can produce recommendations and the different MAR recommender categories; and (iv) the MAR requirements relating to investment recommendations. ESMA also provides practical examples of different types of recommendation and unlawful disclosure of inside information.

Press release

Warning 

Fintech

Government response to AI regulation white paper

On 6 February, the Government published its response to its white paper on AI regulation. The white paper set out five cross-sectoral principles for existing regulators to interpret and apply within their remits in order to drive safe, responsible AI innovation. The Government notes that it is pleased to see how regulators are already independently implementing the principles and provides an overview of recent measures. The Government notes that the challenges posed by AI will ultimately require legislative action in all jurisdictions, however for the meantime has published initial voluntary guidance for regulators in implementing the UK’s AI regulatory principles. The Government announces a number of related initiatives, including: (i) over £100 million in investment to help realise new AI innovations, with £10 million dedicated to preparing and upskilling regulators to address the risks and harness the opportunities of this defining technology; (ii) a new commitment by UK Research and Innovation that future investments in AI research will be leveraged to support regulator skills and expertise; (iii) that key regulators including the FCA, the CMA, the ICO and Ofcom publish, by 30 April, their strategic approach to AI. Regulators have been asked to set out AI-related risks in their areas, detail their current skillset and expertise to address them, and a plan for how they will regulate AI over the coming year; and (iv) that in the coming months, the Government will formally establish a new steering committee with government and regulator representatives to support coordination across the AI governance landscape. It intends to launch targeted consultations on the cross-economy AI risk register and to assess the regulatory framework. In a related announcement, the Centre for Data Ethics and Innovation has now been renamed as the Responsible Technology Adoption Unit (RTA) to more accurately reflect its mission in developing tools and techniques that enable responsible adoption of AI.

Press release

Response

Voluntary guidance for regulators

RTA announcement 

Communications and Digital Committee report on large language models and generative AI

On 2 February, the HoL Communications and Digital Committee published a report on large language models (LLMs) and generative AI. The Committee welcomes the Government’s work on positioning the UK as an AI leader, but says a more positive vision for LLMs is needed to reap the social and economic benefits, and enable the UK to compete globally. The Committee set out 10 core recommendations for the Government including in relation to: (i) boosting opportunities; (ii) supporting copyright holders; (iii) addressing immediate risks and review catastrophic risks; (iv) empowering regulators; and (v) proportionate regulation.

Press release

Summary

Report

ESMA updates Q&A on MiCAR

On 2 February, ESMA updated its Q&As on MiCAR in relation to: (i) new cryptoasset service providers established before (and after) 30 December 2024; (ii) passporting rights for entities benefiting from grandfathering; (iii) prohibition of monetary and non-monetary benefits; (iv) provision of cryptoasset services by credit institutions; and (iv) notifications under Article 60. As the Q&As have been issued after 1 January, they are now available in ESMA’s Q&A IT-tool, rather than the previous Q&A document (which is not being updated as of 31 December 2023).

Press release

ESMA Q&A IT-tool 

FCA Practitioner Panel response to Big Tech data asymmetry call for input

On 2 February, the FCA Practitioner Panel responded to the FCA’s call for input on potential competition impacts from the data asymmetry between Big Tech and firms in financial services. The Panel outlines a number of areas where this is potentially an issue, including: (i) access to public and private retail data; (ii) Open Banking requirements; and (iii) the APP fraud mandatory reimbursement requirement. The Panel suggest ways of mitigating the potential risks, including: (a) changing the scope of what is regulated as financial services; (b) ensure reciprocal arrangements between Big Tech and financial services under Open Banking; and (c) require Big Tech to demonstrate appropriate data access through arm’s length commercial arrangements.

Response 

Fund Regulation

Please see the Sustainable Finance section for a new FCA webpage on its sustainability disclosure and labelling regime, introduced on 28 November 2023.

EP adopts proposed Directive amending UCITS Directive and AIFMD

On 7 February, the EP announced that it has adopted the proposed Directive amending AIFMD and the UCITS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by AIFs. The EP highlights some objectives of the adopted Directive, including: (i) contributing to the completion of the capital markets union – it removes provisions which allowed member states to adopt their own rules, leading to discrepancies across the EU, including in relation to the shareholder loan exemption; (ii) better protection for investors – including by ensuring that investment fund managers, which delegate their functions to third parties, adhere to the same standards applicable across the EU; (iii) addressing greenwashing – ESMA is tasked to produce guidelines on when the names of funds could be unfair, unclear or misleading to the investor; (iv) improving access to non-banking finance – introduces common minimal rules regarding direct lending by AIFs to companies. The EP has published the text of the adopted Directive. The Council will now need to adopt the proposed Directive before it is published in the OJ.

Press release

Text 

Markets and Markets Infrastructure

Council and EP provisional political agreement on EMIR 3.0

On 7 February, the Council of the EU and the EP announced that they had reached provisional political agreement on EMIR 3.0. The proposed EMIR review contains several measures designed to improve EU clearing services, notably by streamlining and shortening procedures, improving consistency between rules, strengthening CCP supervision and requiring market participants of substantial systemic importance, who are subject to a clearing obligation, to have an operationally active account at an EU CCP. The authorities highlight that agreement was reached on topics including: (i) supervisory processes – supervisory authorities will be able to apply streamlined supervisory processes, such as authorisation and validation procedures; (ii) strengthening ESMA’s role – ESMA will provide a coordination role in emergency situations, while ultimate decision making powers are the responsibility of the NCAs. ESMA will also take the role of co-chair of supervisory colleges together with the relevant NCAs, who will keep ultimate decision making powers; (iii) active account requirement – this will require certain financial and non-financial counterparties to have an account at an EU CCP, and regularly clear through it at least five trades in each of the most relevant subcategories per class of derivative contract, defined by ESMA. An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes, legal documentation, stress tests, and can demonstrate its functioning would not be affected in the event of a significant and sudden increase in clearing activity. A Joint Monitoring Mechanism is created to keep track of this new requirement; (iv) non-financial counterparties (NFC) – for an NFC to be a part of a group that benefits from the intragroup reporting exemption, its EU parent undertaking would report net aggregate positions of that NFC by class of derivatives to its competent authority. The competent authority would then share the information with ESMA; and (v) transparency – clients of EU CCPs, as well as recognised third-country CCPs, should be informed about an option to clear a derivative contract at an EU CCP, which should be transparent on fees, risks associated with the service provided and volumes of cleared transactions. The provisional political agreement is subject to approval by the Council and the EP before going through the formal adoption procedure and entering into force.

EP press release

Council press release 

ESAs Board of Appeal decision on recognition of DCCC as third-country CCP under EMIR

On 6 February, the ESA’s Board of Appeal published its decision to dismiss the Dubai Commodities Clearing Corporation’s appeal in relation to ESMA’s intention to withdraw the recognition of DCCC as a Tier 1 third-country CCP under EMIR. In December 2022, the EC added the UAE to the list of countries that have strategic deficiencies in their national AML/CTF frameworks that pose significant threats to the financial system of the EU and thus ESMA was required to withdraw recognition. DCCC did not challenge ESMA’s decision to withdraw recognition as such, but requested an extension of the adaptation period from three months to two years and a suspension of the contested decision until the outcome of the Appeal. The Board of Appeal could not find any evidence that the adaptation period of three months was disproportionate. Given the resignation of DCCC’s only EU clearing member and the fact that DCCC has not requested any maintenance of the suspension beyond the date of the decision disposing of the Appeal, the Board of Appeal also unanimously decided that it is appropriate to allow the suspension to expire on the date of publication of the present decision.

Decision 

ESMA updates Q&A on CRA Regulation

On 2 February, ESMA updated its Q&As on the CRA Regulation in relation to the level of transparency that should be provided when a credit rating is discontinued or withdrawn. ESMA’s previous Q&A document has not been updated (as of 31 December 2023) and the Q&As are instead now accessible via ESMA’s Q&A IT-tool.

Press release

ESMA Q&A IT-tool

ESMA updates Q&A on EMIR

On 2 February, ESMA updated its Q&As on EMIR in relation to: (i) exchange traded derivatives (ETD) reporting; (ii) reporting under the Settle-to-Market/Collateralise-to-Market model; (iii) updating client codes; (iv) reporting of a counterparty falling within scope of Article 1(4)(a) and (b); (v) portability of schedules; and (vi) subsidiaries. Apart from the Q&A on ETD reporting, the Q&As are available in ESMA’s Q&A IT-tool, rather than the previous Q&A document.

Press release

EMIR Q&A document

ESMA Q&A IT-tool 

ESMA updates Q&A on MiFIR

On 2 February, ESMA updated its Q&As on MiFIR in relation to transaction reporting, specifically how different national identifiers specified in Annex II of RTS 22 are represented. The Q&A is available in ESMA’s Q&A IT-tool, rather than the previous Q&A document.

Press release

ESMA Q&A IT-tool 

Council of EU publishes texts of proposed legislation to improve MiFID II market data access and transparency

On 2 February, the Council of the EU published the texts of: (i) the proposed Regulation amending MiFIR as regards enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations, and prohibiting receiving payment for order flow; and (ii) the proposed Directive amending MiFID II. The new provisions aim to reduce information asymmetries between market participants and improve orderly trading in commodity derivatives concerning energy and food. To protect investors from suboptimal trading decisions, the practice of receiving payments for forwarding client orders for execution will be banned across the EU. The Council of the EU will now need to adopt the proposed legislation before they are published in the OJ.

Proposed Regulation

Proposed Directive  

Payment Services and Payment Systems

BoE discussion papers on RTGS and CHAPS operating hours and RTGS access policies

On 8 February, the BoE launched two discussion papers on RTGS and CHAPS operating hours and RTGS access policies. The BoE explains that the introduction of the new core ledger later this year, among other changes, will unlock the capability of longer settlement hours and will have the capacity to support broader participation and simplified onboarding. The BoE is therefore seeking views on how it can take advantage of these new features. The discussion papers summarise the key benefits and risks that the BoE has identified. The BoE intends to issue a consultation on a proposal for RTGS and CHAPS operating hours in 2025. If an extension is agreed, at minimum, the BoE will give at least one year’s notice before implementing any changes. The BoE intends to respond to the discussion paper on access policies within the next 12 months.

Press release

Discussion paper – operating hours

Discussion paper – access policies

EP adopts proposed Regulation on instant payments in euro

On 7 February, the EP announced that it has adopted the proposed Regulation amending the SEPA Regulation and the Cross-Border Payments Regulation as regards instant credit transfers in euro. The EP highlights some objectives of the adopted Regulation, including: (i) instant credit transfers – an instant credit transfer is supposed to be executed regardless of the day or hour and the money must arrive into the recipient’s account within ten seconds. The payer should be informed within ten seconds of whether or not the funds transferred have been made available to the intended recipient. Member states whose currency is not the euro will also have to apply the rules, where the accounts already offer regular transactions in euro, after a longer transition period. There will however be a special derogation from making the payment within ten seconds for such accounts outside business hours, given possible concerns about access to liquidity in euro; (ii) customer safety, penalties and sanctions – PSPs should have in place robust and up-to-date fraud detection and prevention measures, to avoid credit transfers going into the wrong account due to fraud or error. To this end, PSPs operating in the EU should immediately, and without any additional charges or fees, provide a service to verify the identity of the recipient; and (iii) equal charges – charges applied by a PSP in respect to instant credit transfer transactions in euro cannot be higher than the charges applied to “non- instant” credit transfer transactions in euro. The EP has published the text of the adopted Regulation. The Council must now adopt the proposed Regulation before it is published in the OJ. The rules will enter into force 20 days after publication in the OJ. PSPs located in the euro area will have 9 months to be ready to receive instant credit transfers in euro and 18 months to send them. Member states will have 12 months to make changes to PSD2 and the SFD.

Press release

Text

Recovery and Resolution

RTS on business reorganisation plans under CCPRRR published in OJ

On 7 February, the Commission Delegated Regulation (EU) 2024/450 supplementing the CCP Recovery and Resolution Regulation (CCPRRR) with regard to RTS specifying the minimum elements to be included in a business reorganisation plan and the criteria to be fulfilled for its approval by the resolution authority, was published in the OJ. Amongst the minimum elements that must be included are: (i) the factors or circumstances that caused the CCP to fail or to be likely to fail; (ii) a description of the measures to be adopted to restore the CCP’s long-term viability; and (iii) a timetable for implementing these measures. The criteria to be fulfilled for the approval of the plan include viability performance criteria, financial performance criteria, awareness and commitment criteria, credibility, awareness, and appropriateness. The Delegated Regulation will enter into force on 27 February, 20 days after it was published in the OJ.

Delegated Regulation 

Official translations of ESMA guidelines under CCPRRR

On 2 February, ESMA published the official translations of its guidelines on: (i) the types and content of the provisions of cooperation arrangements under Article 79 of the CCP Recovery and Resolution Regulation (CCPRRR); and (ii) written arrangements and procedures for the functioning of resolution colleges. Both sets of guidelines will apply from 2 April, two months after the publication of the official translations. NCAs must notify ESMA by this date whether they comply, do not comply but intend to comply, or do not intend to comply with the guidelines.

Official translations – Cooperation Arrangements

Official translations – resolution colleges 

Sustainable Finance

Provisional political agreement on proposed delay of sustainability reporting standards

On 7 February, the Council of the EU announced that it has reached provisional political agreement with the EP on the proposed Directive amending the Corporate Sustainability Reporting Directive (CSRD), as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings. The objective of the agreement is to give two further years for companies to prepare for the sectorial European Sustainability Reporting Standards (ESRS) and for specific standards for large non-EU companies, which will now be adopted on 30 June 2026. This will allow companies to focus on the implementation of the first set of ESRS. It will also allow more time to develop sector-specific sustainability standards as well as standards for specific third-country companies. The provisional agreement modifies the legal nature of the text from a Commission decision to a directive. It also suggests that the EC publishes eight sector-specific reporting standards as soon as they are ready before the new deadline. The provisional agreement now needs to be endorsed and formally adopted by both the Council and the EP.

Council press release 

Provisional political agreement on proposed ESG rating activities Regulation

On 5 February, the Council of the EU and the EP announced that they have reached provisional political agreement on the proposed Regulation on the transparency and integrity of ESG rating activities. The proposed new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests. The authorities highlight that agreement was reached on topics including: (i) scope – the authorities provided further details on the applicable exclusions from regulation and clarified its territorial scope by setting out what constitutes operating in the EU; (ii) marketing – if financial market participants or financial advisers disclose ESG ratings as part of their marketing communications, they must include information about the methodologies used in such ESG ratings on their website; (iii) ESG ratings – ESG ratings encompass environmental, social and human rights or governance factors. Separate E, S and G ratings may be provided rather than a single ESG metric that aggregates these factors. If a single rating is provided, the weighting of the E, S and G factors should be explicit. E factor ratings must provide information on whether that rating takes into account the alignment with the Paris Agreement and any other relevant international agreements. If an ESG rating covers the S and G factors, information must be given on whether that rating takes into account any relevant international agreements; (iv) Non-EU ratings providers – these providers will need to obtain an endorsement of their ratings by an EU ESG rating provider, a recognition based on a quantitative criterion or be registered in the EU on the basis of an equivalence decision concerning their home state and following a dialogue between ESMA and the relevant third-country competent authority; (v) small ratings providers – the agreement introduces a lighter, temporary and optional registration regime of three years for small undertakings and groups providing ESG ratings; and (vi) conflicts of interest – ESG ratings providers may not need to set up a separate legal entity for certain activities, provided that there is a clear separation between activities and that they put in place measures to avoid potential conflicts of interests. However, this derogation would not apply to ESG rating providers that carry out consulting activities, audit activities and credit rating activities. The provisional political agreement is subject to approval by the Council and the EP before going through the formal adoption procedure.

Council press release

EP press release 

New FCA webpage on sustainability disclosure and labelling regime

On 2 February, the FCA published a new webpage on its sustainability disclosure and labelling regime, introduced on 28 November 2023. The regime includes: (i) an anti-greenwashing rule that applies to all FCA-authorised firms who make sustainability-related claims about products and services; (ii) investment labels, disclosure and naming and marketing rules that apply to UK asset managers; and (iii) targeted rules that apply to distributors of investment products to retail investors in the UK. The webpage includes: (a) guidance on how firms should prepare for the regime; (b) an implementation timeframe for the different measures; and (c) further information on the investment labels.

Webpage 

Other Developments

FCA and PSR approaches to cost benefit analysis

On 6 February, the FCA updated its approach to its cost benefit analysis (CBA) of its policies, while the PSR set out its draft approach. The regulators cover among other topics: (i) why they use CBAs; (ii) when CBAs are carried out; and (iii) the methodology of the CBAs. Under FSMA 2023, the FCA is required to establish an independent CBA panel and prepare and publish a Statement of Policy in relation to CBA after consultation with the panel. The FCA states that it will establish the panel later this year. The PSR states that following engagement with the FCA CBA panel, once established, it will revise its draft policy and launch a public consultation.

FCA CBA framework

PSR CBA framework 

ECON report on proposed Regulation to facilitate data sharing and re-use

On 2 February, ECON published a report on the proposal for a regulation amending the ESRB Regulation, EBA Regulation, EIOPA Regulation, ESMA Regulation and InvestEU Regulation as regards certain reporting requirements in the fields of financial services and investment support. The proposal aims to reduce reporting burdens on companies by reducing duplicative reporting and increasing the sharing and reuse of data amongst financial services authorities. ECON adopted the report on 29 January. It contains the draft legislative text, indicating amendments to the EC’s proposal.

Report