Key Regulatory Topics: Weekly Update 10 – 16 February 2023
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This week in the UK, the PRA published a policy statement on ‘Remuneration: Unvested pay, Material Risk Takers and public appointments’ and the Joint Regulatory Oversight Committee published a report on the future development of open banking in the UK. Meanwhile in Europe, MEPs approved new rules to revive ELTIFs in the EU and the EBA published its final draft RTS setting out the conditions for the assessment of the homogeneity of the underlying exposures in a pool of a STS on-balance-sheet securitisation.
Conduct and governance
FCA refreshes recognition for LSB Standards of Lending Practice for business customers
On 16 February, the LSB announced that the FCA has renewed its recognition of the LSB’s standards of lending practice for business customers. The business standards provide protections for SMEs with a turnover of up to £25 million, in an otherwise unregulated environment. The standards set the benchmark for good lending practice in the UK and outline the way registered firms are expected to deal with their business customers throughout the entire product life cycle. The LSB’s business Standards were first recognised by the FCA in 2020, with renewed recognition occurring on a three-yearly basis.
Consumer/retail
Council compromise proposal on Directive on financial services contracts concluded at a distance
On 16 February, the Council of the EU published a compromise proposal (dated 18 January) on the proposed Directive amending the Consumer Rights Directive concerning financial services contracts concluded at a distance and repealing the Distance Marketing Directive. The cover page explains that the note is the fifth Presidency compromise proposal relating to the Directive.
FOS Quarterly complaints data
On 15 February, the FOS published its quarterly complaints data on financial products for October to December 2022. In this period, the FOS received 41,303 new complaints about financial products; of which it upheld 35%. The top five most complained about products were current accounts, credit cards, hire purchase (motor), motorcycle insurance and running account credit. These top five products are largely consistent with recent quarters.
HMT consultation on Buy-Now Pay-Later product regulation
On 14 February, HMT published a consultation on draft legislation to bring Buy-Now Pay-Later (BNPL) products into FCA regulation. The consultation follows on from a government consultation on policy options to deliver a proportionate approach to regulation in October 2021, and subsequent response in June 2022. The consultation asks for stakeholders’ views on whether the draft legislation included with the consultation, effectively delivers the policy positions set out in the government’s consultation response. The draft statutory instrument amends article 60F of the Regulated Activities Order (RAO), which exempts from regulation interest-free agreements repayable in under 12 months and in 12 or fewer instalments, so that certain agreements which currently fall within article 60F(2) will be regulated credit agreements within the meaning of article 60B(3) of the RAO and the FSMA regulatory framework. The draft statutory instrument also amends other provisions of the RAO and other legislation in relation to such agreements, such as the Consumer Credit Act and proposes a temporary permissions regime. The deadline for comments is 11 April. The governments aims to lay the legislation this year.
Financial crime and santions
ESRB report on advancing macroprudential tools for cyber resilience
On 14 February, the ESRB published a report on advancing macroprudential tools for cyber resilience. The ESRB published the report against the backdrop of a substantially heightened cyber threat environment across Europe, noting the need for a step change in enhancing system-wide cyber resilience. The ESRBs three key areas of focus being: (i) encouraging authorities to use the cyber resilience scenario testing (CyRST) approach to pilot system-wide cyber resilience scenario testing; (ii) advocating the use of systemic impact tolerance objectives (SITOs) and continuing the transition from a conceptual approach to a practical basis for implementing them; and (iii) considering which operational policy tools are most effective in responding to a system-wide cyber incident and identifying gaps across operational and financial policy tools. The ESRB also notes that work is needed on the interaction and interdependencies between financial crisis management tools and other operational crisis management tools. Reflecting this, the ESRB will consider which operational policy tools are most effective in responding to a system-wide cyber incident and identify gaps across operational and financial policy tools.
Wolfsberg Group updated Questionnaires, Guidance, Glossary and FAQs
On 10 February, the Wolfsberg Group published version 1.4 of the Correspondent Banking Due Diligence Questionnaire (CBDDQ) and version 1.2 of the Financial Crime Compliance Questionnaire (FCCQ), along with updated Guidance, Glossary and FAQs. The CBDDQ was updated to include a new section on Fraud and additional questions related to whistleblower policies, virtual bank licenses, the approval of sanctions policies, and other changes designed to improve the logic, usability and flow of the questionnaire. The previously issued Completion Guidance and Capacity Building Guidance have been combined into a single guidance document, highlighting the potential risk addressed by questions, and considerations the Respondent should make. The FAQ and Glossary documents have also been updated to address changes in the Questionnaires. Notable changes to the FAQs include the recommended timeframe for updating the Questionnaires being adjusted to 12-18 months.
Fintech
Please see the ‘Financial Crime and Sanctions’ section for the ESRB report on advancing macroprudential tools for cyber resilience
FSB report on the financial stability risks of decentralised finance
On 16 February, the FSB published a report on the financial stability risks of decentralised finance (DeFi). DeFi is an umbrella term commonly used to describe a variety of services in crypto-asset markets that aim to replicate some functions of the traditional financial system (TradFi) while seemingly disintermediating their provision and decentralising their governance. The report considers the risks that can arise as a result of DeFi, and the specific risks related to the crypto-assets underpinning much of DeFi. The report: (i) describes the DeFi ecosystem, its key elements and players, as well as the main products; (ii) discusses financial vulnerabilities of DeFi, including those stemming from its specific features; (iii) sketches possible scenarios for DeFi and the implications for financial stability; and (iv) sets out additional work to analyse, monitor and address vulnerabilities in the DeFi ecosystem. While the report notes that current interlinkages are limited, should the DeFI ecosystem grow significantly there is the potential for the stress originating from DeFi to spill over to TradFi and the real economy. Looking forward, the FSB will be analysing the financial vulnerabilities of the DeFi ecosystem as part of its regular monitoring of the wider crypto-asset markets, as well as in collaboration with SSBs and regulatory authorities, exploring approaches to measure and monitor such interconnectedness. The FSB also aims to explore the extent to which its proposed policy recommendations for the international regulation of crypto-asset activities may need to be enhanced to take account of DeFi-specific risks and facilitate the enforcement of rules. In coordination with the SSBs, the FSB will also be assessing the regulatory perimeter across jurisdictions to determine which DeFi activities and entities fall or should fall within that perimeter or outside of it.
SMSG advice to ESMA on potential practical challenges regarding the implementation of the DORA
On 14 February, ESMA published advice it has received from its securities and markets stakeholder group (SMSG) on potential practical challenges regarding the implementation of DORA. Ultimately, the SMSG welcomes the introduction of the DORA framework, and is looking forward to supporting ESMA in the exercise of its mandate. However, SMSG also makes a number of recommendations regarding DORA’s implementation, these include: (i) formal arrangements between authorities implementing the DORA, the Directive on Network and Information Security (Directive 2022/2555, NIS 2) and the Directive on the Resilience of Critical Entities (Directive 2022/2557, CER), frameworks to create permanent structures. The SMSG notes that there are significant overlaps between these legislative frameworks, which could dilute their effectiveness unless their respective scopes of application are clearly delineated and criteria and definitions aligned as closely as practicable; (ii) the risk assessment recommended under recital 31 of DORA should be made in a balanced way, bearing in mind that the potential benefits of tighter control of in-house units sometimes fail to materialise. The SMSG suggest that this balance should also be addressed by, and incorporated into regulatory standards and guidance, where appropriate; (iii) guidance from the ESAs and the EDPB to align and integrate the process for issuing notifications under Art. 19(3) DORA and Art. 34 GDPR in all cases when both provisions apply; and (iv) the SMSG also consider it of critical importance to align criteria for the designation of CTPPs under DORA with the definition of ‘essential’ and/or ‘important entities’ under NIS 2 and CER. Overall, the SMSG stresses the importance of not creating overly cumbersome or costly rules and that the principle of proportionality should be applied by the ESAs when drafting standards or guidelines.
Commission launches European Regulatory Sandbox for Blockchain
On 14 February, the Commission launched the European Regulatory Sandbox for Blockchain. This Sandbox aims to provide legal certainty for decentralised technology solutions including blockchain, by identifying obstacles to their deployment from a legal and regulatory perspective and providing legal advice, regulatory experience and guidance in a safe and confidential environment. The Sandbox should also allow regulators and supervisors to enhance their knowledge of cutting-edge blockchain technologies and share best practices through dialogues. It will run from 2023 to 2026, and will support 20 projects annually, including public sector use cases on the European Blockchain Services Infrastructure (EBSI). The first call for applications will be open until 14 April 2023.
Fund regulation
Please see the ‘Other Developments’ section for the eight EEA Joint Committee Decisions amending Annex IX(Financial Services) of the EEA Agreement published in the OJ
MEPs approve new rules to revive ELTIFs
On 15 February, the European Parliament announced that it has adopted the proposed Regulation amending the ELTIF Regulation. The changes aim to boost regulatory oversight and investor protection safeguards in order to accelerate the uptake of ELTIFs. In turn, it is hoped that the amendments will support the financing of long-term projects, such as infrastructure projects, real estate or SMEs throughout the EU. On 16 February, the European Parliament published the provisional version of the text of the legislative resolution on the proposed Regulation. The next step is for the Council to formally adopt the Regulation. It will enter into force 20 days after its publication in the OJ and will apply nine months after that date.
Markets and markets infrastructure
Please see the ‘Other Developments’ section for the eight EEA Joint Committee Decisions amending Annex IX(Financial Services) of the EEA Agreement published in the OJ
ESMA peer review on supervision of CSDs providing cross-border services or participating in interoperable links
On 15 February, ESMA published a Peer Review Report on the supervision of CSDs providing cross-border services or participating in interoperable links. The review assesses six NCAs in respect of how they supervise CSDs which make use of the freedom to provide services in another Member State. The report found that NCAs generally have satisfactory initial authorisation processes, using adequate tools and procedures to assess the cross-border links. However, it considers that there is room for improvement in some NCAs’ approval processes during passporting procedures when acting in their capacity as host authority. Overall, the report found that NCAs conduct ongoing supervision of CSDs in a holistic way, considering the entire organisation without distinguishing between domestic and cross-border services and that supervisory approaches should follow a risk-based approach and rely on adequate tools to monitor risks. ESMA expects to carry out a follow-up assessment in two years to review the level of improvements achieved based on the findings and recommendations of this peer review.
EBA final draft RTS defining the homogeneity of the underlying exposures in STS securitisation
On 14 February, the EBA published its final draft RTS setting out the conditions for the assessment of the homogeneity of the underlying exposures in a pool of a STS on-balance-sheet securitisation. Homogeneity is one of the key simplicity requirements enabling originators and investors to properly assess the underlying risks while facilitating investors due diligence. The draft RTS amends the original RTS on homogeneity for non-ABCP and ABCP securitisation. While extending the scope to include on-balance-sheet securitisations, these draft RTS also establish the same conditions for the homogeneity of the assets for all types of securitisations. They carry over a significant part of the provisions on homogeneity set out in the previous RTS, with some modifications. The final draft RTS will now be submitted to the Commission for endorsement. Following the submission, these RTS will be subject to scrutiny by the European Parliament and the Council before being published in the OJ.
CPMI-IOSCO stocktake of industry progress on auctions
On 14 February, the Committee on Payments and Markets Infrastructures (CPMI) and IOSCO published a press release on industry progress relating to CCP default management auction processes. In a report published in June 2020, CPMI-IOSCO encouraged the industry to undertake work to advance the development of effective auction practices and procedures. Since the report, CPMI-IOSCO considers that the industry has made good progress on the issues that needed to be addressed. In particular, the report highlights that: (i) there has been a broad consensus to support development of auction terminology and certain operational aspects of auction procedures; (ii) there is a need for further substantive discussion regarding the governance of CCP’s default management process, use of traders in default management groups, and the scope of client participation in an auction; and (iii) the industry is encouraged to study potential nascent and emerging practices that may require further coordination and harmonisation among the default management processes of multiple CCPs.
Memorandum of understanding between ESMA and SFC and updated list of recognised third party CCPs
On 14 February, ESMA published a memorandum of understanding related to ESMA’s monitoring of the ongoing compliance with recognition conditions by CCPs established in Colombia and supervised by the Superintendencia Financiera de Colombia (SFC). The memorandum affirms SFC and ESMA’s willingness to cooperate and exchange information to proportionately fulfil their respective supervisory and regulatory responsibilities with respect to the CCPs established in Colombia that have applied, or that may apply to ESMA for recognition as third-country CCPs, or that are already recognised by ESMA as Covered CCPs. ESMA has also published an updated list of third country CCPs recognised to offer services and activities in the Union (dated 10 February). The list states that as of 10 February, the Cámara de Riesgo Central de Contraparte de Colombia S.A. was recognised to offer services and activities to the EU.
Delegated Regulations extending temporary exemptions regime for intragroup contracts under EMIR
On 13 February, two amending Delegated Regulations containing RTS that extend the temporary exemptions regime for intragroup contracts for three years under EMIR were published in the OJ. The first Delegated Regulation 2023/314, amends the RTS laid down in the margin RTS as regards the date of application of certain risk management procedures for the exchange of collateral. It extends the deferred date of application of the margin requirements for intragroup transactions set in the margin RTS to 30 June 2025. The second Delegated Regulation 2023/315 amends the RTS laid down in Delegated Regulations (EU) 2015/2205, (EU) No 2016/592 and (EU) 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts. Again, it extends the deferred date of application of the clearing obligation for intragroup transactions set out in the three Delegated Regulations to 30 June 2025. Both Delegated Regulations entered into force on 14 February.
Payment services and payment systems
Joint Regulatory Oversight Committee report on the future development of open banking
On 15 February, the Joint Regulatory Oversight Committee published a report by the SWG on the future development of open banking in the UK. The first half of the report focuses on gap analysis, which aims to understand key gaps between the current state of open banking and a more optimal future state. It also analyses how various stakeholders perceived these gaps and examines possible drivers underpinning their perceptions. The second half of the report focuses on exploring a diverse range of potential solutions, both in the short-term and in the long-term, that could bridge those gaps, ‘level up’ the ecosystem and make it ‘fit-for-purpose’, including a discussion on the future industry structure based on the evidence collected and views collated. The Committee aims to publicly set out its recommendations relating to the vision for open banking, alongside the design of the Future Entity, in Q1 2023.
BoE RTGS – CHAPS tariff consultation response
On 13 February, the BoE published a consultation response to its April 2022 consultation on a set of proposals for a revised RTGS – CHAPS tariff framework. The consultation response document summarises the BoE’s decisions, taking into consideration industry feedback, and sets out the structures it will use to recover the costs of the investment in and the running of, the renewed RTGS services. Respondents to the consultation expressed support for a revised approach that was proportionate, simple, and predictable, while supporting competition and access, and the Bank’s mission. Responses also acknowledged the benefits that RTGS and CHAPS provide and recognised the need to review the tariff framework. The new framework will be introduced once the new core settlement engine is introduced in 2024. The BoE expects to share more detail on expected costs for the first years of the new service with current tariff payers in summer 2023. Given the continuing evolution of the payments landscape, the BoE will undertake regular reviews to ensure the RTGS and CHAPS tariff frameworks remain appropriate, any changes will be consulted on. However, the BoE does not currently envisage any material changes to the framework before 2028.
BoE roadmap for the RTGS service beyond 2024 consultation response
On 13 February, the BoE published a follow up on its consultation on the roadmap for RTGS service beyond 2024. The consultation published in spring 2022, sought views on a set of features that could be implemented in the RTGS system, once the new core settlement engine goes live in 2024. Overall, respondents to the paper strongly welcomed the opportunity to provide early input in designing the roadmap, agreeing that the Bank had considered the right features for RTGS beyond 2024. While responses were overall positive, many respondents noted they needed greater detail on the service propositions to assess business cases. They also expressed concern over the current high level of change occurring in the industry and supported an incremental and co-ordinated approach to the roadmap. Having considered the feedback, the BoE has prioritised two categories of features, specifically; (i) resilient channels, as a large number of responses were on the interlinkages and dependencies that resilience features have with other roadmap features; and (ii) innovation and global initiatives. Feedback highlighted the potential interoperability between the UK and other payment infrastructures internationally. Following on from this response document, the BoE aims to develop and publish a plan for the industry co-creation work on the priority features in Q2 2023.
Prudential regulation
Please see the ‘Other Developments’ section for the eight EEA Joint Committee Decisions amending Annex IX(Financial Services) of the EEA Agreement published in the OJ
Updated EBA Q&As on own funds and eligible liabilities
On 14 February, the EBA updated some of its existing Q&As on own funds and eligible liabilities to ensure consistency with the revised final draft RTS on own funds and eligible liabilities submitted to the Commission in May 2021. While the RTS have not yet been finally adopted, the EBA deemed it necessary to provide clarity to institutions and market participants on some undisputed aspects related to the RTS that are particularly relevant for their practical implementation of the CRR and the RTS. In particular, the EBA updated Q&A 2017_3277 on the notion of ‘sufficient certainty’, and extended the scope of the treatment to eligible liabilities instruments. The EBA updated other Q&As with the aim of extending to eligible liabilities the treatment initially applied to own funds instruments, consistent with the approach of the final RTS on own funds and eligible liabilities.
Regulation amending ITS on benchmarking of internal approaches for 2023 benchmarking exercise under CRD IV Directive published in the OJ
On 14 February, Implementing Regulation (EU) 2023/313 amending ITS laid down in Implementing Regulation (EU) 2016/2070, as regards benchmark portfolios, reporting templates and reporting instructions for the reporting referred to in Article 78(2) of the CRD IV Directive, was published in the OJ. The Implementing Regulation extends the set of exposure positions included in the market risk benchmarking portfolios. The Regulation shall enter into force on 6 March, 20 days after its publication in the OJ.
ECON reports on CRIII and CRD VI amendments
On 10 February, the ECON committee published two reports relating to legislative proposals for CRR III and CRD VI. The first report is on the proposal for a directive amending the CRD IV Directive as regards supervisory powers, sanctions, third-country branches, and ESG risks. The second report (dated 9 February) is on the proposal for a regulation amending the CRR as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor. Both reports include a draft European Parliament legislative resolution, detailing the suggested amendments to the document. The committee adopted the reports at its meeting on 24 January.
Recovery and resolution
EBA Guidelines on the publication of the write-down and conversion and bail-in exchange mechanic
On 13 February, the EBA published a final report on guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic under the BRRD. These guidelines aim to ensure that a minimum level of harmonised information is made public on how authorities would effectively execute the write-down and conversion of capital instruments and the use of the bail-in tool. To ensure that authorities’ approaches are credible and that institutions have the necessary information to prepare, the EBA is asking authorities that have not yet done so, to start publishing from January 2024, a high-level document setting out the key aspects of their favoured approach. In particular, resolution authorities are asked to specify if they intend to make use of interim instruments and to set out a timeline of the bail-in process. Those authorities that have already published information are expected to check if that publication complies with these guidelines. The guidelines will apply from 1 January 2024.
Sustainable finance
Please see the ‘Other Developments’ section for the eight EEA Joint Committee Decisions amending Annex IX(Financial Services) of the EEA Agreement published in the OJ
EBA seeks input from credit institutions on green loans and mortgages
On 13 February, the EBA announced that it had launched an industry survey to receive input from credit institutions on their green loans and mortgages, as well as market practices related to these loans. The purpose of the survey is to collect both quantitative and qualitative information that the EBA can use to advise the European Commission. The work is part of the Commission’s strategy for financing the transition to a sustainable economy. Institutions that would like to take part in the survey need to contact their NCA to receive the survey templates as well as information on the process. The deadline for comments is 7 April.
FCA Discussion paper on finance for positive sustainable change
On 10 February, the FCA published a discussion paper on finance for positive sustainable change: governance, incentives and competence in regulated firms. The aim of the discussion paper is to encourage an industry-wide dialogue on firms’ sustainability-related governance, incentives and competencies. The discussion paper is split into two parts; the first part examines how governance, incentives and competence are considered in the TCFD’s recommendations and how expectations in these areas are evolving with the work of the ISSB, the TPT and GFANZ. It also reflects on how asset managers and asset owners organise and govern their stewardship activities to influence positive change. The second part of the paper includes a collection of FCA commissioned articles from experts. The FCA believes that these articles may help firms to reflect on how their approaches to governance, incentives and competence support positive change, which may in turn encourage firms to review their practices, even without setting further regulatory expectations. The deadline for comments is 10 May. The FCA will use the feedback, along with ongoing analysis and supervisory engagement with firms, to consider how it can better support the industry in this evolving field and whether there is a case for further regulatory measures in the area of firm governance incentives and competencies to support the role of finance in contributing to positive change. The FCA encourages firms to reflect on the matters discussed, and consider, as appropriate, incorporating them as they review and refine their current approaches to governance, remuneration, incentives and training.
Other developments
Eight EEA Joint Committee Decisions amending Annex IX(Financial Services) of the EEA Agreement published in the OJ
On 16 February, eight decisions of the EEA Joint Committee on 7 February 2020 that amend Annex XI (Financial Services) of the EEA Agreement were published in the OJ. The decisions incorporate into the EEA Agreement: (i) Commission Implementing Regulation (EU) 2019/1902 laying down technical information for the calculation of technical provisions and basic own funds for reporting; (ii) Regulation (EU) 2019/630 amending the CRR as regards minimum loss coverage for non-performing exposures; (iii) Commission Implementing Regulation (EU) 2019/439, which amends Implementing Regulation (EU) 2016/2070 as regards benchmark portfolios, reporting templates and reporting instructions under the CRD IV Directive, as well as Commission Implementing Regulation (EU) 2019/912, which amends Commission Implementing Regulation (EU) 650/2014 containing ITS on supervisory disclosure under the CRD IV Directive and Commission Implementing Decision (EU) 2019/536 on the lists of third countries considered equivalent for the purposes of the treatment of exposures under the CRR; (iv) Commission Implementing Decision (EU) 2019/684 on the recognition of the legal, supervisory and enforcement arrangements of Japan for derivatives transactions supervised by the JFSA; (v) the ELTIF Regulation and Commission Delegated Regulation (EU) 2018/480 supplementing the ELTIF Regulation with regard to RTS; (vi) Regulation (EU) 2019/2089 amending the BMR as regards EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks; (vii) Commission Implementing Decisions (EU) 2019/1274 and (EU) 2019/1275 under the BMR on the equivalence of the legal and supervisory framework applicable to benchmarks in Australia and Singapore; and (viii) the MMF Regulation and related ITS. Every decision entered into force on 8 February 2020, provided all the notification under Article 103(1) of the EEA Agreement have been made.
PRA policy statement on Remuneration: Unvested pay, Material Risk Takers and public appointments
On 10 February, the PRA published a policy statement providing feedback on its consultation paper ‘Remuneration: Unvested pay, Material Risk Takers and public appointments’. It is relevant to PRA-authorised banks, building societies, and PRA-designated investment firms that are subject to the Remuneration Part of the PRA Rulebook. The statement sets out the final version of revisions to its supervisory statement 2/17, which include clarifications around circumstances other than public appointments, where a conversion is appropriate and the use of the terms ‘equity’ and ‘other instruments’. It also explains that in the event of a conflict of interest arising from a public appointment due to instruments being held during a retention period, the onus should be on a public sector employer to determine whether (or not) its conflicts of interest policy is able to address any conflicts. The PRA has also published a revised version of supervisory statement SS2/17. The new policy took effect on 10 February.