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Key Regulatory Topics: Weekly Update 1 - 7 July 2022

07 July 2022

This week in the UK, HM Treasury has published a draft version of the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, which make miscellaneous amendments to financial services legislation following Brexit. Meanwhile, the FCA has published a consultation on improving equity secondary markets, as well as a policy statement on protecting investors in authorised funds following the Russian invasion of Ukraine. In the EU, the European Banking Authority has published a decision concerning the reporting of payment fraud data under the PSD2 by competent authorities. 

Financial Crime and Sanctions

Please see the ‘Other Developments’ section for Decision No 75/2022 of the EEA Joint Committee amending Annex IX (Financial services) to the EEA Agreement.

HMT updated advisory notice on money laundering and terrorist financing controls in high-risk third countries

On 4 July, HMT published its updated advisory notice on money laundering and terrorist financing controls in high-risk third countries. The advice sets out which jurisdictions will be included in the updated Schedule 3ZA of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). This is done in response to the Financial Action Task Force’s (FATF’s) two statements of 17 June which identified jurisdictions with strategic deficiencies in their AML/CTF regimes. Key points in the updated advisory notice include: (i) the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 will come into force on 11 July and substitute the list of high-risk third countries specified in Schedule 3ZA of the MLRs with a new list to mirror both the FATF ‘Jurisdictions under increased monitoring’ and ‘High-risk jurisdictions subject to a call for action’ documents; (ii) Albania, Barbados, Burkina Faso, Cambodia, the Cayman Islands, DPRK, Gibraltar, Haiti, Iran, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, the Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirate and Yemen are identified as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations; (iii) Malta is no longer subject to the FATF’s increased monitoring process due to its significant progress in improving its AML/CFT regime; and (iv) on 17 June 2022, the FATF also published a separate statement on the Russian Federation. The statement includes the following requests that firms may wish to be aware of: “The FATF continues to call upon all jurisdictions to remain vigilant of threats to the integrity, safety and security of the international financial system arising from the Russian Federation’s aggression in Ukraine. The FATF reiterates that all jurisdictions should be vigilant to possible emerging risks from the circumvention of measures taken in order to protect the international financial system.”

Advisory notice


Please see the ‘Prudential Regulation’ section for the BoE’s Financial Stability Report, and the financial policy summary and record of its Financial Policy Committee meeting held in June.

IOSCO Fintech Task Force crypto-asset roadmap 2022-23

On 7 July, the International Organization of Securities Commissions (IOSCO) published its cryptoasset roadmap for 2022-2023. The roadmap sets out its regulatory policy agenda and work program for the sector over the next 12 to 24 months, which will be overseen and taken forward by its Fintech Taskforce (FTF). The FTF, established in March, is tasked with developing, overseeing, delivering, and implementing IOSCO’s regulatory agenda with respect to Fintech and cryptoassets, and coordinating IOSCO’s engagement with the FSB and other standard setting bodies on Fintech and crypto-related matters. This work will be initially divided into two workstreams: the first, covering Crypto and Digital Assets (CDA) will be led by the FCA, while the second covers Decentralised Finance (DeFi) and will be led by the US Securities and Exchange Commission. Both workstreams will primarily focus on analysing and responding to market integrity and investor protection concerns within the cryptoasset space. The FTF will nonetheless ensure that the two workstreams are connected and adopt a coherent and coordinated cross-sectoral approach in developing policy in response to crystallized and emerging risks across the sector. The key elements and deliverables for each of the workstreams are summarised in the workplan: (i) the CDA workstream will primarily focus on issues relating to market integrity and investor protection. This will entail looking closely at fair, orderly trading, transparent markets, suitability and market manipulation (Part 1), and safekeeping, custody and soundness (Part 2); and (ii) the DeFi workstream will examine how IOSCO principles and standards could apply to common activities, products, and services in DeFi (Part 1). The DeFi workstream will also continue to explore and highlight the links between DeFi, stablecoins, and cryptoasset trading, lending and borrowing platforms, as well as the interactions of DeFi with broader financial markets (Part 2). Both workstreams are aiming to publish a report with policy recommendations by the end of 2023. The FTF will explore suitable junctures in 2023 where interim reports could be published to keep markets apprised of its ongoing work.


Fund Regulation

Please see the ‘Sustainable Finance’ section for the FCA’s consultation on sustainability disclosure requirements and investment labels.

FCA policy statement on protecting investors in authorised funds following the Russian invasion of Ukraine

On 6 July, the FCA published a policy statement on rules to allow authorised fund managers (AFMs) to take steps to protect investors in funds affected by the Russian invasion of Ukraine. The FCA consulted in April on the proposed rules to give AFMs of UK authorised investment funds a way to deal with this situation by allowing the AFM to structure the fund differently, using separate new classes of units (side pockets) to hold the affected investments. The rules introducing side pockets will help protect fund investors while empowering investment managers to isolate their holdings of Russian and Belarusian assets, avoid new investors in the fund acquiring affected investments, and facilitate winding down as opportunities arise. Following feedback on the consultation, the FCA has finalised its rules to facilitate the use of side pockets broadly as consulted on, with the following principal exceptions: (i) the Glossary term ‘sanctioned investment’ is defined more broadly, to cover any asset or investment that is subject to a relevant sanctions regime and held in a retail authorised fund; (ii) enhanced the risk warnings to be set out in the prospectus and in the information to be sent to existing investors when they receive units in the side pocket class; (iii) added a rule and guidance about how voting rights for side pocket units may be exercised at a unitholder meeting; (iv) added a rule and guidance clarifying its expectations of how AFMs should carry out the assessment of value required by COLL 6.6.20R, in relation to a fund with a side pocket class; (v) clarified some provisions around the ability of AFMs to effect redemptions and transfers of title to units in a side pocket class; and (vi) added guidance that AFMs should consider the operational needs of distributors before deciding to set up a side pocket class. The rule changes can be found in Appendix 1 of the policy statement, and are set out in the Collective Investment Schemes Sourcebook (Side Pockets) (Russia) Instrument 2022. This instrument comes into force on 11 July. The FCA is encouraging AFMs looking to implement side pockets to engage with it before submitting an application to modify scheme documents. This is so that the FCA can explain what specific information it will want them to provide as part of the application. The FCA also received feedback that retail funds should be allowed to use side pockets more broadly, as opposed to being limited to assets affected by the Russian invasion of Ukraine. The wider use of side pockets is not within the scope of this policy statement, however, the FCA will review the effectiveness of the use of side pockets in dealing with the current scenario before deciding a wider future policy position.

Policy statement

Markets and Markets Infrastructure

Please see the ‘Other Developments’ section for Decision No 76/2022 of the EEA Joint Committee amending Annex IX (Financial services) to the EEA Agreement.

Adoption of Delegated Regulation amending RTS to defer application of CSDR buy-in regime

On 6 July, the EC adopted a draft Delegated Regulation amending the RTS on settlement discipline laid down in Delegated Regulation (EU) 2018/1229 to defer the date of application of the provisions related to the mandatory buy-in regime under the CSDR. The draft Delegated Regulation defers the application of the mandatory buy-in rules for three years, to allow time for the EC, EP and Council of the EU to determine the best way forward to improve settlement efficiency. This is necessary because the CSDR Refit legislative proposal, published by the EC in March, includes potential amendments to the mandatory buy-in rules and related Level 2 measures. If neither the Council of the EU nor the EP object to the draft Delegated Regulation, it will enter into force 20 days after its publication in the OJ.

Delegated Regulation

FCA consultation on improving equity secondary markets

On 5 July, the FCA published a consultation paper on proposals aimed at improving how UK-based equity markets operate, as part of the Wholesale Markets Review. The proposals change aspects of trade reporting, waivers from pre-trade transparency and the tick size regime. They also intend to maximise execution quality for investors and aim to improve the content and the efficient consolidation of post-trade reports. The FCA also proposes to remove or amend some provisions that impose material operational and compliance costs on firms but have not delivered material benefits to end users or to market functioning. The changes would: (i) improve the content and consistency of post-trade transparency reports; (ii) establish a new designated reporter status for OTC trades; (iii) allow UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent; and (iv) permit the use of the tick size regime from overseas primary markets. The FCA is also seeking views on whether improvements can be made to the way retail orders for shares are executed in the UK. The FCA proposes to implement these changes by amending technical standards in the UK versions of Commission Delegated Regulation (EU) 2017/587, Commission Delegated Regulation (EU) 2017/583 and Commission Delegated Regulation (EU) 2017/588. The deadline for comments is 16 September. The FCA will then consider responses, submit the relevant updated technical standards to HMT for approval, and, if approved, publish a policy statement and amend the technical standards.


Payment Services and Payment Systems

FSB report on options to improve adoption of LEI for cross-border payments

On 7 July, the FSB published a report exploring options to improve the adoption of the legal entity identifier (LEI), in particular for use in cross-border payments. The G20 roadmap to enhance cross-border payments has launched several initiatives to reduce frictions in data processes, including by promoting the use of common message formats, data exchange protocols, conversion and mapping approaches from legacy formats and standardised data. To address data handling issues and improve compliance processes, it is also examining the scope for a global unique identifier that links to account information in payment transactions. As part of this work, the FSB has been requested to explore options to improve the LEI’s adoption. This report, which was produced in close coordination with the Global LEI Foundation (GLEIF), the LEI Regulatory Oversight Committee (ROC) and national authorities, sets out a series of recommendations for promoting the use of the LEI in cross-border payments and highlights the potential benefits of the LEI in supporting straight-through processing and assisting in KYC. The recommendations are addressed to FSB member jurisdictions, the FSB itself, ROC and GLEIF, relevant standard-setting bodies, and international organisations. Achieving these goals will depend on promoting uptake of the LEI among non-financial corporates as well as financial institutions. The FSB will review progress in implementing the recommendations and publish a progress report by end-2024, together with a review of progress in implementing the recommendations of the LEI peer review.


FSB interim report on implementation approach for cross-border payments targets

On 7 July, the FSB published an interim report on the approach for monitoring progress towards meeting the targets for the G20 roadmap for enhancing cross-border payments. The report makes preliminary recommendations about key performance indicators (KPIs) that could be used to monitor progress over time and identifies existing and potential sources of data for calculating those KPIs. In October 2021, the FSB set quantitative global targets for addressing the four challenges faced by cross-border payments (cost, speed, access, transparency) as a key foundational step in the G20 roadmap. These targets were set for each of the three main segments of the market (wholesale, retail and remittances). However, measuring progress towards these targets will not be straightforward because no comprehensive data sources currently exist. The FSB invites feedback on the preliminary proposals in this report, and, in particular, on the following questions: (i) has the FSB identified appropriate potential sources of data for efficiently monitoring progress towards the roadmap’s targets? What, if any, additional or alternative public or private data sources should the FSB also consider and for what KPIs; (ii) has the FSB defined the KPIs appropriately, such that they are closely and meaningfully tied to the relevant target? What, if any, additional considerations should inform the calculation of the KPIs so that they provide sufficiently representative measurements of progress toward the targets without being overly burdensome; and (iii) the FSB is evaluating the use of proxies for monitoring progress towards some of the targets. Are the proxies proposed appropriate? What, if any, additional or alternative proxies should the FSB consider that are sufficiently representative and simplify monitoring? The deadline for feedback is 31 July. The responses will help to inform the FSB’s report in October to the G20 and the public with further details of the implementation approach and the KPIs.

Interim report

EBA decision on reporting of payment fraud data under PSD2

On 1 July, the EBA published a decision, dated 24 June, concerning the reporting of payment fraud data under the PSD2 by competent authorities. The decision covers the reporting to the EBA of aggregated statistical data on fraud from competent authorities designated under the PSD2 in accordance with Article 96(6) of the PSD2 and the EBA Guidelines on fraud reporting under the PSD2. Competent authorities shall report to the EBA the payment fraud data under the PSD2, as specified in the EBA Guidelines on fraud reporting, via the European Centralised Infrastructure of Data (EUCLID), and according to the EBA Data Point Model (DPM). This decision allows for data to be submitted by the relevant competent authorities via the ECB to the EBA, with the aim of providing a streamlined submission of data and avoiding a burden of double reporting for competent authorities to both the EBA and the ECB. This is also the case for other data transmitted under the EUCLID decision, provided that the data submitted by the competent authorities is in accordance with the data breakdowns and validation rules set out by the EBA and in line with the format and timelines set out in the decision. The decision entered into force on 24 June.


Prudential Regulation

Please see the ‘Other Developments’ section for Decision No 76/2022 of the EEA Joint Committee amending Annex IX (Financial services) to the EEA Agreement.

EBA analysis on implementation of opinion on legacy instruments

On 7 July, the EBA published a report analysing how its opinion on the prudential treatment of legacy instruments, in the context of the end of the grandfathering period in December 2021, has been implemented across the EU. The October 2020 opinion identified two main issues which could create infection risk (the risk of other layers of own funds or eligible liabilities instruments being disqualified). The EBA complemented its opinion with additional guidance and interpretation, and clarified that there are several tests that the instruments need to pass in addition to the test of the infection risk. Since the issuance of the opinion, the EBA has been working in close cooperation with competent authorities to monitor any action taken by institutions to mitigate the infection risk related to such legacy instruments. Overall, the EBA found that both institutions and competent authorities have made significant efforts to implement the opinion in an effective and consistent manner. Legacy instruments have been addressed mostly through the use of calls, redemptions, repurchases, buy-backs or amendments to the terms and conditions. In addition, the EBA found that in a few jurisdictions, the transposition of Article 48(7) of the BRRD helped mitigate the infection risk, by ensuring all claims resulting from own funds items have, in national laws governing normal insolvency proceedings, a lower priority ranking than any claim that does not result from an own funds item. However, for a limited residual number of instruments, actions are still ongoing or under consideration, with call options planned to be exercised in the course of 2022 or later. A few instruments will be kept in a lower category of own funds or as eligible liabilities or in the balance sheet as non-regulatory capital. Further actions could be undertaken or announced in the near future. A new generation of legacy instruments has been created by the new grandfathering period running until June 2025 and resulting from the provisions introduced by the CRR II. Against this background, the EBA will re-assess when the time comes the need for additional scrutiny on these actions and on the remaining stock legacy instruments.


BCBS high-level considerations on proportionality

On 7 July, the Basel Committee on Banking Supervision (BCBS) published a report containing high-level considerations on proportionality. The Basel Framework which sets minimum requirements for internationally active banks also allows for a degree of proportionality by providing options to implement simpler standardised approaches. The BCBS acknowledges that, while the simpler standardised approaches in the Basel Framework may also be suitable for banks that are not internationally active, in some cases regulation might require even further adaptation. The aim of these high-level considerations is to provide practical support to authorities seeking to implement proportionality in these situations in their domestic frameworks, in a way that does not undermine financial stability or the safety of financial institutions. The high-level considerations include: (i) depending on local circumstances, it might be appropriate to tailor regulation for non-internationally active banks. This includes potentially applying the Basel Framework in its current form, or earlier or modified forms, for jurisdictions that have simpler banking systems, implemented in a way that is consistent with the underlying objective of the international standard; (ii) effective proportionate approaches strive to be both conservative and simple to understand and implement. The objective of proportionality is to reflect jurisdictions’ circumstances and supervisory capacity, not to dilute the robustness of the standards; (iii) proportionality approaches that include supervisory discretion allow supervisors to respond to bank behaviours and financial system developments. The BCBS encourages supervisors to ensure that proportionality approaches do not create opportunities for regulatory arbitrage or particular (dis)incentives for any group of banks. In general, simple segmentation rules work well for most, but not necessarily all, banks. In addition, financial systems may evolve in ways that are not foreseen when a proportionality approach is first designed. The considerations are voluntary and do not modify any of the BCBS’s existing standards, guidelines or sound practices.


Delegated Regulation on RTS on public disclosure of investment policy under IFR published

On 6 July, Commission Delegated Regulation (EU) 2022/1159 supplementing the Investment Firms Regulation (IFR) with regard to RTS on the public disclosure of investment policy by investment firms was published in the OJ. Article 52 of the IFR requires investment firms other than small and non-interconnected investment firms to publicly disclose information on their investment policy. The disclosure required includes information on the proportion of voting rights attached to the shares held directly or indirectly by the investment firms, information on their voting behaviour, an explanation of votes and the ratio of proposals put forward and approved, information on the use of proxy advisor firms and information on their voting guidelines. This Regulation aims at specifying templates for the required disclosure, in response to the need for consistent and comparable public information on the public policy of investment firms. The provisions of the Regulation aim at ensuring that the templates and tables used by investment firms for investment policy disclosures convey sufficiently comprehensive and comparable information on their voting behaviour and how it influences their investee companies. The Delegated Regulation will enter into force on 26 July.

Delegated Regulation

ESMA report on fourth stress test exercise for CCPs

On 5 July, ESMA published a report setting out the results of its fourth EU-wide stress test exercise for CCPs, which includes both EU and Tier 2 third-country CCPs, alongside accompanying Q&As. The results confirm the overall resilience of EU CCPs, as well as Tier 2 third-country CCPs, to credit, concentration and operational risks under the tested scenarios and implemented framework. However, it also identifies areas where some CCPs may need to strengthen their risk management frameworks, or where further supervisory work should be prioritised, including on concentration and operational risks. The report’s key findings include: (i) CCPs have sufficient buffers to withstand adverse market developments in combination with the default of the two clearing members with the largest exposures; (ii) gaps exist between the necessary and available buffers for concentration risks for some CCPs, particularly in commodity derivatives markets; (iii) CCPs remain overall resilient despite increased market volatility in the wake of Russia’s invasion of Ukraine; (iv) for operational risk, differences in terms of risk sources, exposures and mitigation tools across CCPs are observed and need to be further assessed on an individual basis before potential recommendations can be issued; and (v) most of the analysed operational events stem from third-party services, whereas a number of critical third-party service providers have the potential to affect the critical functions of multiple CCPs in a correlated manner. Where the assessments expose shortcomings in the resilience of one or more CCPs, ESMA will issue the necessary recommendations.



BoE Financial Stability Report and FPC financial policy summary and record

On 5 July, the BoE published its July Financial Stability Report, and the financial policy summary and record (FPSR) of its Financial Policy Committee (FPC) meeting held on 16 June. The announcements made in the FPSR include: (i) the economic outlook and UK financial stability. The economic outlook for the UK and globally has deteriorated materially. The outlook is subject to considerable uncertainty and there are a number of downside risks that could adversely affect UK financial stability; (ii) financial markets and the resilience of market-based finance. Reflecting these developments in the economic outlook, global financial markets have been volatile in recent months. Cryptoasset valuations have fallen sharply, exposing a number of vulnerabilities within cryptoasset markets, but not posing risks to financial stability overall. In addition, in the event of further shocks, impaired liquidity conditions could be amplified by the vulnerabilities in the system of market-based finance previously identified by the FPC. The FPC notes that increasing the resilience of money market funds is an important step towards reducing the systemic risks that they pose to the UK and global financial system; (iii) UK bank resilience. The FPC judges that major UK banks have considerable capacity to support lending to households and businesses even with the deterioration in the economic outlook. Although downside risks will present headwinds, the FPC judges that UK banks have capacity to weather the impact of severe economic outcomes; (iv) global debt vulnerabilities. Tighter financial conditions and reduced real incomes will weigh on debt affordability for households, businesses and governments in many countries, increasing the risks from global debt vulnerabilities. These pose risks to UK financial stability through economic and financial spillovers; (v) the UK countercyclical capital buffer (CCyB) rate decision. The FPC is increasing the UK CCyB rate to 2%. This rate will come into effect on 5 July 2023. Given the considerable uncertainty around the outlook, the FPC will continue to monitor the situation closely and stands ready to vary the UK CCyB rate in line with the evolution of economic conditions, underlying vulnerabilities and the overall risk environment; and (vi) the 2022 annual cyclical scenario (ACS). To support the FPC’s monitoring and assessment of the resilience of banks to potential downside risks, the BoE will commence its ACS stress test in September. Results will be published in summer 2023. Alongside the FPSR, the BoE published its July Financial Stability Report covering the same issues.

Financial policy summary and record

Financial stability report

FCA update on delays in processing change in control notifications

On 1 July, the FCA published an update on its change in control webpage relating to delays in processing notifications for changes in control. The FCA explains that it has experienced delays in allocating FCA-led notifications to case officers over recent months. It has been recruiting additional case officers, and continues to reduce the time taken to allocate and determine cases. Currently, there is a delay of approximately one and a half months between submission of a complete notification and allocation to a case officer. The FCA will allocate each notification as soon as a case officer becomes available, and confirm whether it is complete as soon as possible after that point. The FCA also reminds firms that it is a criminal offence to proceed with acquiring or increasing a control in an authorised firm or its parent undertaking before requesting, and receiving, approval for the transaction (or before the statutory assessment period has expired). The FCA notes that a substantial proportion of the notifications it receives are incomplete. These incomplete submissions are processed on longer timelines than complete notifications. To avoid delays in processing notifications once it has been allocated, the FCA recommends that firms provide all relevant information and documents in their initial submissions.


Regulatory Reform Post Brexit

Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022published

On 5 July, HMT published a draft version of the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, alongside a draft explanatory memorandum. These Regulations are made in exercise of the powers in section 8 of the European Union (Withdrawal) Act 2018, and make miscellaneous amendments to financial services legislation to remedy deficiencies following Brexit. The instrument contains a range of measures to address deficiencies in retained EU law by amending: (i) the territorial application of the Payment Services Regulations 2017. This will require a small payment institution applicant to demonstrate that, where it has “close links” with a person outside the UK, there is nothing which would impede the FCA’s effective supervision of the applicant in question; (ii) the Central Counterparties (Amendment, etc, and Transitional Provision) (EU Exit) Regulations 2018, to expand the scope of the Temporary Recognition Regime to allow overseas CCPs within it to offer new products into the UK, provided that they have notified the BoE of their intention to offer these products in the UK; (iii) the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, so that the period during which the FCA may give a transitional direction modifying the STO and the DTO is extended to the end of 2024, and the period during which such transitional directions may remain in effect is also extended to the end of 2024; (iv) the UK Credit Rating Agencies Regulation, to ensure that where appropriate the FCA has the power to share information obtained thereunder with other regulators (domestic and third country), consistent with the approach taken to information collected under its other regulatory functions; and (v) the UK Securitisation Regulation, to extend the temporary recognition of EU Simple, Transparent, and Standardised securitisations to the end of 2024 (it currently lasts until 31 December). The Regulations will come into force 21 days after the day on which they are laid.


Explanatory memorandum

Sustainable Finance

NGFS final report on bridging data gaps

On 6 July, the Network for Greening the Financial System (NGFS) published its final report on bridging climate-related data gaps. This final report provides specific NGFS policy recommendations for improving the availability, quality, and comparability of climate-related data. In identifying the main climate-related data gaps, this report provides concrete policy recommendations that policymakers and other stakeholders can adopt to address climate-related data challenges, and highlights in particular areas where the directory can prove useful in meeting these challenges. Recommendations include: (i) fostering convergence towards a common and consistent set of global disclosure standards. The NGFS explains the need to substantially increase the availability of decision-useful granular data on emissions, and to improve the reliability of reported climate-related data; (ii) increasing efforts towards mutually shared and operationalised principles for taxonomies and sustainable finance classifications. The NGFS calls for the harmonisation of taxonomies and sustainable finance classifications across the globe and to foster interoperability. The availability of comparable and consistent data can help to achieve this objective; (iii) developing well-defined and decision-useful metrics, and methodological standards. The NGFS calls for a substantial increase in the harmonisation of forward-looking metrics; and (iv) better leveraging available data sources, approaches and tools. The NGFS explains that many existing data sources, approaches, and tools have already improved data availability. Knowledge sharing and capacity building are key to enhancing their use and development. Despite recent progress, the NGFS believes there is an urgent need for further action on the climate-related data front, and this is why the NGFS work programme for 2022-2024 provides for the workstream on bridging the data gaps to evolve into an internal data experts’ network, after publication of this final report.

Final report

EP does not object to inclusion of nuclear and gas as environmentally sustainable economic activities

On 6 July, the EP rejected a motion to oppose the inclusion of nuclear and gas as environmentally sustainable economic activities. In a press release, the EP announced that it did not object to the EC’s Taxonomy Delegated Act to include specific nuclear and gas energy activities, under certain conditions, in the list of environmentally sustainable economic activities covered by the EU Taxonomy. As the EC believes there is a role for private investment in gas and nuclear activities in the green transition, it has proposed the classification of certain fossil gas and nuclear energy activities as transitional activities contributing to climate change mitigation. The inclusion of certain gas and nuclear activities is time-limited and dependent on specific conditions and transparency requirements. According to the press release, 278 MEPs voted in favour of the resolution, 328 against and 33 abstained. An absolute majority of 353 MEPs was needed for the EP to veto the EC’s proposal. If neither the EC, nor the Council of the EU object to the proposal by 11 July, the Taxonomy Delegated Act will enter into force and apply as of 1 January 2023.

Press release

FCA consultation on sustainability disclosure requirements and investment labels

On 1 July, the FCA updated its webpage on sustainability disclosure requirements and investment labels. It previously published a discussion paper on sustainability disclosure requirements and investment labels, seeking views on new sustainability disclosure requirements for asset managers and FCA-regulated asset owners, as well as a new classification and labelling system for sustainable investment products. The input received will inform policy proposals for a future consultation paper, which was due to be published in Q2. However, the FCA is now planning on consulting in the autumn, to allow the FCA to take account of other international policy initiatives and ensure stakeholders have time to consider these issues.


Other Developments

Decisions of EEA Joint Committee amending Annex IX (Financial services) of EEA Agreement

On 7 July, three Decisions of the EEA Joint Committee, dated 18 March, amending Annex IX (Financial services) to the EEA Agreement were published in the OJ. These include: (i) Decision No 75/2022, which incorporates into the EEA Agreement Delegated Regulation (EU) 2022/229 on adding Burkina Faso, Cayman Islands, Haiti, Jordan, Mali, Morocco, the Philippines, Senegal, and South Sudan to the list of high-risk third countries with strategic AML/CTF deficiencies set out in the table in point I of the Annex of Delegated Regulation (EU) 2016/1675, and deleting the Bahamas, Botswana, Ghana, Iraq and Mauritius from this table; and (ii) Decision No 76/2022, which incorporates into the EEA Agreement Regulation (EU) 2019/2160 on exposures in the form of covered bonds, and Directive (EU) 2019/2162 on the issue of covered bonds and covered bond public supervision. Both Decisions entered into force on 19 March. A third decision relates to Solvency II which is not within scope of this update.

Decision No 75/2022

Decision No 76/2022

EC report on qualification of financial advisors framework

On 7 July, the EC published a report, dated 30 June, on the current framework for qualification of financial advisors in the EU, and assessment of possible ways forward. This report examines the feasibility of possible improvements to the quality of financial advice in the EU, as well as the feasibility of setting up a pan-EU label for financial advisors. It analyses the current framework for financial advisors, including the legal framework for qualifications of advisors in MiFID II and the Insurance Distribution Directive, and provides an overview of national requirements regarding knowledge and competence for individuals providing advice, as well as a rationale for improving quality of financial advice at EU level. Higher retail investor participation in capital markets is crucial to help EU capital markets grow and offer individuals more opportunities to manage their financial situation. However, the EC found that despite requirements introduced at EU level, the level of qualifications, knowledge and skills of financial advisors continues to differ across Member States. Accordingly, the report identifies that the specific objectives in this area should be on: (i) increasing the level of qualification of financial advisors in the EU, including in relation to sustainability; (ii) aligning standards across Member States and across sectorial legislation in order to ensure consistency; and (iii) facilitating cross-border provision of services and recognition of standards. Several ways forward are identified by the report, but the feasibility of a pan-EU label for advisors is ruled out, notably due to concerns regarding its successful uptake and the likely high administrative costs. The EC concludes that options to further strengthen the requirements and standards for advisors at EU level could be further explored, notably as part of the future Retail Investment Strategy.


EC report on an EU SME referral scheme

On 7 July, the EC published a report, dated 28 June, the merits and feasibility of setting up a referral scheme to require banks (and other providers of funding) to direct small and medium enterprises (SMEs) to alternative providers of funding in case they turn down their funding application. The EC examined how SMEs might be directed to alternative providers of funding to facilitate their access to a wider set of funding options. The report sets out the perceived problems, current rules and their limitations and the objectives of the scheme, provides background on SME funding and rejected loan applications and analyses the merits of a number of possible solutions to the identified problems. It also considers a number of ongoing developments that might impact the feasibility of a referral scheme in the future and that might, therefore, warrant an update of the analysis. The report presents three alternative approaches to setting up an SME referral scheme. The EC concludes that the approach involving uploading SME information onto the European Single Access Point (ESAP), could have the most potential to address the identified issues effectively and with the least costs for stakeholders. Under this approach, banks turning down an SME credit application could be required, upon the SME’s consent, to upload information directly onto the public ESAP platform, making them more visible to investors. The EC, in view of the ongoing negotiations on the ESAP proposal and SMEs’ current stance on the data privacy, intends to wait for an actual setup of ESAP before considering any next steps. The EC notes that as ESAP is being implemented, both SMEs and alternative funding providers can be expected to become more familiar with the platform and make use of it as a means to seek and offer alternative funding. In parallel, the principles of “open finance” could also be further investigated as a possible alternative avenue. Here, banks and other funding providers could share the SME information directly amongst each other, subject to SME’s consent.


FCA finalised guidance on its approach to compromises for regulated firms

On 5 July, the FCA published finalised guidance on its approach to compromises (arrangements between a firm and its creditors and/or shareholders that can be used to reorganise a company or group structure) for regulated firms. This guidance aims to help firms understand what information the FCA needs and how it approaches compromises in line with its statutory objectives to protect consumers and enhance the integrity of UK financial markets, with a view to reducing the number of proposed compromises that the FCA does not consider to be appropriate. The guidance is primarily aimed at firms solely regulated by the FCA and firms that are dual regulated by the FCA and PRA from the perspective of conduct regulation. It is also relevant to advisers of regulated firms considering compromises (including insolvency practitioners and professional advisers), trade associations and consumers and consumer protection organisations. Annex 2 summarises feedback received to the FCA's January guidance consultation on its approach to compromises for regulated firms and sets out its response to the feedback received and the changes made to the guidance as a result. Respondents largely welcomed the proposed guidance. However, the FCA has amended its guidance following comments in various areas, including: (i) the timeframe for engagement with the FCA; (ii) the information to be provided to the FCA for assessment of a compromise; (iii) engagement with the FSCS and Financial Ombudsman Service; (iv) the treatment of consumers. The guidance has been amended to avoid any conflicts with the proposed new Consumer Duty; and (v) participation in the court process. The FCA confirms that its overall position is the same for all types of compromises, but clarifies that the legislative framework for its participation in the court process is different for voluntary arrangements compared to schemes of arrangement and restructuring plans. The FCA also explained that its consideration of whether to exercise its regulatory functions will be determined on a case-by-case basis and its merits taking account of its statutory objectives. The guidance will not apply retrospectively to any compromise where the firm has issued a practice statement letter or proposal to its creditors before the date that the guidance comes into effect. The FCA will review these on a case-by-case basis, however the principles in the proposed guidance may be relevant.


FCA appoints six directors

On 5 July, the FCA announced it has appointed six directors as it expands its headcount to meet its growing remit. Roma Pearson has been appointed as the FCA’s Director of Consumer Finance, responsible for the supervision and policy development in the consumer lending sector. Ms Pearson will take up her new position in July. Camille Blackburn will join the FCA in October to the newly created role of Director of Wholesale Buy-Side. She will be responsible for policy development and the effective supervision across asset management, alternative investments, custody banks and investment research. Matthew Long has been appointed as Director of Payments and Digital Assets, a new role overseeing the e-money, payment and cryptoasset markets and leading related policy development. He will join the FCA in October. Anthony Monaghan has been promoted within the FCA to Director of Retail and Regulatory Investigations, which he has been covering on an interim basis since April 2021. He will be responsible for the FCA’s regulatory investigations in sectors including banking, insurance, financial advice and personal pensions. Karen Baxter will join the FCA’s enforcement team as Director of Strategy, Policy, International and Intelligence. In her role, Ms Baxter will lead the specialised functions that support the breadth of the FCA’s enforcement and market oversight activities, helping ensure it has the tools it needs to do its work effectively. She will join the FCA in September. Simon Walls, who was appointed interim director in May, will continue in the role of Director of Wholesale, on a permanent basis, with a focus on the Wholesale Sell-Side.

Press release

ECON report on proposed amendments to ELTIF Regulation

On 1 July, the European Parliament’s Economic and Monetary Affairs Committee (ECON) published its report (dated 28 June) on the proposal for a Regulation amending the Regulation on European long-term investment funds (ELTIFs). ECON voted to adopt the report in June. The Council of the EU adopted its negotiation position in May.