Key Regulatory Topics: Weekly Update 10 - 16 Mar 2023
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The headlines this week have been dominated by the events surrounding Silicon Valley Bank and analysis around the efficacy of the regulatory framework will no doubt continue for some time. Elsewhere, the FATF published updated guidance on the beneficial ownership of legal persons and a report on counter ransomware financing. ESMA updated a number of its Q&As and in the UK, the FCA set out its priorities for payments firms. The PRA published a report on climate-related risks and the regulatory capital framework, and also launched a consultation on proposals to remove the non-performing exposures capital deduction.
Crypto’s Regulated Future in the EU & UK – What happens now? – Wednesday 22 March, 9:00 am to 10:00 am
Both the EU and the UK have announced the introduction of new legal frameworks for the provision of cryptoasset activities. The EU’s Markets in Crypto-assets Regulation (MiCA) in particular will come into force soon (from April 2023). The UK’s proposed measures are aimed at mitigating specific risks posed by crypto firms, which shall be under consultation until 30th April 2023. In this session, lawyers from our European and UK regulatory teams discuss the various ways that crypto firms can prepare for this new regulated environment, including: (i) understanding how your products, services or token offering(s) might be in-scope of these new regimes; (ii) devising a licensing strategy for your key markets; and (iii) anticipating future guidance from competent authorities.
UK individual accountability in financial services: Themes, trends and challenges – Thursday 23 March, 9:00 am to 10:00 am
Now in its seventh year, the UK Senior Managers and Certification Regime (SMCR), continues to present no shortage of tricky issues and challenges for firms to grapple with. But are we approaching a turning point? The Edinburgh Reforms have cast doubt over the future of the SMCR, but in the meantime firms must still carry on with their ‘business as usual’ SMCR activities. In our annual webinar on UK individual accountability themes and trends, Sarah Hitchins, Robbie Sinclair, Marc Teasdale and David McMenamin will share their thoughts on: (i) navigating the challenges that applicants for Senior Manager roles should expect; (ii) the latest thinking and regulatory expectations around Senior Managers and their “reasonable steps”; (iii) whistleblowing, with a particular focus on the obligations and expectations of Senior Managers; (iv) employment litigation risks; (v) handling employee misconduct, including non-financial misconduct; (vi) the regulators’ current enforcement appetite and areas of focus under the SMCR; and (vii) the Edinburgh Reforms and their likely impact on the SMCR.
Our most recent Market Horizons podcast series discusses future divergence in the prospectus space, from a debt securities perspective. Our experts consider what is coming down the track in both the EU and UK, as the reviews of both prospectus regimes progress and the UK moves forward with its future regulatory reform programme. Listen here
Conduct and governance
Please see the Prudential Regulation section for the FCA’s fast-growing firms multi-firm review findings.
Corrigendum to PRIIPs Delegated Regulation (EU) 2021/2268
On 16 March, a corrigendum to Delegated Regulation (EU) 2021/2268 amending the RTS laid down in the PRIIPs KID Delegated Regulation (2017/653), was published in the OJ. . The corrigendum amends the calculation for VaR-equivalent volatility in the market risk measure class determination for Category 2 and 3 PRIIPs in Annex II on methodology for the presentation of risk.
FCA guidance for firms supporting existing mortgage borrowers impacted by the rising cost of living
On 10 March, the FCA published final guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living. The guidance aims to ensure firms are clear about the effect of the FCA rules and the range of options available to them to support their customers, including those who are facing higher interest rates alongside the rising cost of living. The final guidance is largely unchanged from the initial draft consulted on, except for changes to: (i) clarify that not all firms will be able to offer contract variations, whether or not the variation is for forbearance purposes; (ii) set out the FCA’s view of when a switch to interest-only can be considered temporary and to avoid suggesting that the repayment basis is the only relevant question when considering whether a switch to interest-only would be appropriate and; (iii) clarify that any decision by a firm to restrict access to rate switches only to borrowers who are up to date with payments is not derived from FCA rules, rather it reflects the industry voluntary switching agreement.
Financial crime and sanctions
OFSI enforcement and monetary penalties guidance for breaches of financial sanctions
On 16 March, the Office of Financial Sanctions Implementation (OFSI) updated its enforcement and monetary penalty guidance. The guidance outlines OFSI’s compliance and enforcement approach with sections on its: (i) case assessment process; (ii) monetary penalty assessment process; and (iii) procedural rights. The updated guidance now includes information on OFSI’s approach to assessing breaches of financial sanctions, where an incorrect assessment of ownership and control of an entity is relevant to the commission of the breach. The updated guidance sets out examples and a principles-based approach for conducting due diligence and making assessments.
FATF counter ransomware financing report
On 14 March, FATF published a report on counter ransomware financing, with the aim of improving global understanding of the financial flows linked to ransomware and highlight good practices to address this threat. The report analyses the methods that criminals use to carry out their ransomware attacks and how payments are made and laundered. The report notes that criminals are almost exclusively using crypto, or virtual assets and have easy access to virtual asset service providers (VASPs) around the world. Jurisdictions with weak or non-existent AML/CFT controls are therefore an area of concern. To strengthen the global response against ransomware and related laundering, FATF proposes that jurisdictions take the following actions: (i) implement relevant FATF Standards, including on VASPs, and enhance detection; (ii) promote financial investigations and asset recovery efforts; (iii) adopt a multi-disciplinary approach to tackle ransomware; (iv) support partnerships with the private sector; and (v) improve international co-operation. The FATF also finalized a list of potential risk indicators that can help public and private sector entities identify suspicious activities related to ransomware.
FATF updated guidance on beneficial ownership of legal persons and FATF recommendations
On 10 March, FATF published updated guidance on the beneficial ownership of legal persons (Recommendation 24). The guidance explains types and sources of relevant information on the beneficial ownership of legal persons, and the mechanism and sources to obtain such information. This includes the use of a multi-pronged approach, i.e., a combination of different mechanisms, for collection of beneficial ownership information to ensure that adequate, accurate and up-to-date information is available and can be accessed by the competent authorities in a timely manner. The revisions to Recommendation 24 also require countries to follow a risk-based approach and consider the risks of legal persons in their countries, not only those posed by legal persons created in their countries, but also by foreign-created legal persons with sufficient links with their country. The guidance aims to assist policy makers, practitioners in national authorities and private sector stakeholders in implementing the necessary measures to prevent shell companies from being a safe haven for illicit proceeds. In addition to the revised guidance, FATF also published a revised version of the FATF recommendations. The revisions include amendments to Recommendation 25, INR.25 and the glossary definitions of “beneficial owner”, “beneficiary” and “legal arrangements”, to strengthen the standards on beneficial ownership of legal arrangements.
Pro-innovation regulation of technologies review and government response
On 15 March, HMT published Sir Patrick Vallance’s pro-innovation regulation of technologies review, along with the government’s response. Sir Vallance’s review considers how pro-innovation regulation can support emerging digital technologies. The recommendations include: (i) that the government works with regulators to develop a multi-regulator sandbox for AI, to be in operation within the next six months; (ii) a clear policy position on the relationship between intellectual property law and generative AI, to provide confidence to innovators and investors; (iii) greater industry access to public data, and wider data sharing and linkage across the public sector, to help deliver the government’s public services transformation programme. The government’s response details how it plans to implement these recommendations. It intends to launch a new sandbox based on the features and principles set out in the review, and create of a code of practice to provide guidance to support AI firms to access copyrighted work as an input to their models. In addition, the government has pledged its commitment to unleashing the power of data for innovation across the UK.
Final text on regulation amending the ELTIF Regulation
On 15 March, the final text agreed by both the European Parliament and the Council regarding a regulation amending the ELTIF Regulation was published. The text was approved by both the EP and Council at first reading. The regulation will make the following changes: (i) differentiate between ELTIFs marketed to professional investors and those to which retail investors can have access; (ii) remove barriers to retail investor access to ELTIFs; and (iii) establish an optional liquidity window mechanism for redemptions, for cases where investors need to exit early. The Regulation aims to increase the uptake of long-term investment vehicles and make them more appealing to investors. The regulation will enter into force on the twentieth day following its publication in the OJ and apply nine months after entering into force.
Updated ESMA Q&As on AIFMD, EuSEF and EuVECA
On 10 March, ESMA published updated versions of two Q&A documents. In the Q&A document on the application of the AIFMD, ESMA added a new section XVI on exemptions, containing a new question on how the notion of “substantive direct or indirect holding” in Article 3(2) of the AIFMD should be interpreted. In the application of the EuSEF and EuVECA Regulations Q&As, a new question on investment in another qualifying venture capital fund/qualifying social entrepreneurship fund has been added.
Application of the EuSEF and EuVECA Regulations Q&As
Markets and markets infrastructure
Please see the Recovery and Resolution section for the Delegated Regulations on RTS under CCP Recovery and Resolution Regulation.
ESMA updates Q&As on CSDR
On 13 March, ESMA published an updated version of its Q&As on the implementation of the regulation on improving securities settlement in the EU and on central securities depositories (CSDR). ESMA has added new questions on settlement discipline, regarding partial settlement functionality.
IBA to launch USD SOFR Spread-Adjusted ICE Swap Rate® as a Benchmark
On 10 March, ICE Benchmark Association (IBA) announced plans to launch USD SOFR Spread-Adjusted ICE Swap Rate® for use as a benchmark in financial contracts and financial instruments by licensees. IBA has been publishing USD SOFR Spread-Adjusted ICE Swap Rate settings on an indicative, ‘Beta’ basis for an initial testing period since October 2021. The settings are determined in line with the methodology suggested by the Alternative Reference Rates Committee (ARRC) in its paper “Suggested Fallback Formula for the USD LIBOR ICE Swap Rate”. Assuming continued satisfactory testing and feedback, IBA expects to publish USD SOFR Spread-Adjusted ICE Swap Rate settings as a benchmark, for use by licensees on and subject to the terms of their current USD ICE Swap Rate licensing agreements from 3 July. USD SOFR Spread-Adjusted ICE Swap Rate settings are expected to be made available for the same tenors and published at the same time as the current USD LIBOR® 1100 ICE Swap Rate settings. They will be available alongside IBA’s other ICE Swap Rate benchmark runs covering USD, GBP and EUR currencies in tenors ranging from one to 30 years. In addition, IBA also announced that it will cease the publication of all USD LIBOR ICE Swap Rate benchmark “runs” for all tenors immediately after publication on June 30, 2023.
Payment services and payment systems
PSR consultation on a proposed revised penalty statement
On 16 March, the PSR published a consultation paper on a proposed revised penalty statement. The PSR explains that the proposed changes will help firms more easily understand how the regulator determines the amount of any penalty it imposes. Currently, the PSR has three penalty statements that it applies when determining penalties and exercising its associated powers of publication in different contexts. The PSR is proposing to make the following five changes: (i) to combine its three penalty statements into one; (ii) to change the way in which it considers the duration of a compliance failure and how it takes account of revenue when calculating penalties; (iii) to clarify what it means by senior management; (iv) to add further clarity around when it considers a compliance failure is deliberate or reckless; and (v) to reinforce the principle that penalties should disincentivise compliance failures. The deadline for comments is 27 April and the PSR expects to publish a final penalty statement in Q3.
FCA priorities for payments firms
On 16 March, the FCA published a portfolio letter on the FCA’s priorities for payments firms. The FCA welcomes the competition and innovation it has seen in the payments sector and the improved choice, convenience and value this can provide for customers. However, it remains concerned that many payments firms do not have sufficiently robust controls. This has resulted in some firms presenting an unacceptable risk of harm to their customers and to financial system integrity. The FCA goes on to note that the risk of customer harm is currently heightened by the tightening economic conditions and the cost-of-living crisis. Payments firms are encouraged to identify the messages in the letter that are relevant to their firms, and take appropriate action to deliver on the following three outcomes set by the FCA: (i) ensure that customers’ money is safe; (ii) ensure that the firm does not compromise financial system integrity; and (iii) meet customers’ needs, including through high quality products and services, competition and innovation, and robust implementation of the FCA Consumer Duty. In addition to the three outcomes, the FCA also specified the following three cross-cutting priorities: (i) governance and leadership, firms are expected to take action to ensure that their governance and leadership meets FCA expectations; (ii) operational resilience, firms are expected to monitor their dependency on providers of critical services and to have appropriate contingency plans to move providers if necessary; and (iii) regulatory reporting, with a sustained non-compliance with the FCA reporting requirements, the FCA notes that it will make more frequent use of its right to charge firms that fail to meet the reporting deadlines, warning firms that ongoing failure may result in a referral to enforcement for cancellation.
EBA handbook on data submission for supervisory benchmarking of internal models
On 16 March, the EBA published a handbook on supervisory benchmarking of internal models. The handbook is an online tool, that will be regularly updated. It provides guidance and links to relevant documents and information on the supervisory benchmarking to facilitate their accessibility. It includes overviews for all applicable Q&As relevant to credit risk, market risk and IFRS9 benchmarking. More detailed information is also provided for the key credit risk elements of the data submission. The Q&As for supervisory benchmarking will no longer be included in the Single Rulebook Q&A tool. A new Q&A submission form for supervisory benchmarking Q&As, has also been added and is available on the webpage of the handbook.
PRA consultation on the non-performing exposures capital deduction
On 14 March, the PRA published a consultation paper on the non-performing exposures (NPE) capital deduction. The paper sets out the PRA’s proposal to: (i) remove the CET 1 deduction requirement for NPE exposures that are treated as insufficiently provided for by firms and; (ii) remove the associated reporting requirements for the NPE deduction. The PRA considers that removing the NPE deduction requirement would enhance the definition of capital in a way that aligns with international standards. It would increase the scope for the PRA to take a judgement-led approach to the prudential risks associated with NPEs under provisioning where necessary. The change would also remove a requirement that imposes a potential competitive disadvantage compared to firms in jurisdictions that are not subject to the NPE deduction. Removing the associated reporting requirements would reduce all firms’ costs of monitoring, compliance, and data gathering in relation to the NPE deduction requirement. The deadline for comments is 14 June.
FCA Fast-growing firms multi-firm review findings
On 10 March, the FCA published findings from its multi-firm review of fast-growing firms. During 2021-2022, the FCA conducted a multi-firm review of 25 FCA solo-regulated firms, which had experienced fast growth over a 3-year period. It assessed the impact of this rapid growth on their financial and non-financial resources, based on business plans, ICAAP documents, wind-down plans and other documents submitted by firms. The review found that for most of such firms: (i) risk management frameworks and governance arrangements did not keep pace with the growth in their business activities; (ii) firms’ assessment of the adequacy of financial resources did not consider the growth in their underlying business, resulting in financial resources assessments that were not commensurate with the size, business model and underlying risks and; (iii) wind-down plans were inadequate following the fast growth of these firms, increasing the risk of harm in the event of firm failure. The FCA recommend the following actions for firms to address the concerns identified: (a) updates to risk management and governance arrangements, including resourcing needs in risk, compliance and audit functions, to help ensure that firms have adequate resources in place to identify, assess, manage and monitor risks and potential for harms; and (b) updating assessments of adequacy of financial resources and wind-down plans, this helps to reduce the likelihood of disorderly wind down, which can cause harm to consumers and markets. The FCA urge all firms that have grown rapidly, or have plans to do so, to read the findings and consider whether they need to make changes to their own arrangements.
Recovery and resolution
The failure of Silicon Valley Bank sent shock waves across the world. Our experts in the US, UK and Asia explain the events that led to its collapse, how authorities stepped in to stabilise the situation and what their intervention means for SVB and the broader market here.
Delegated Regulations on RTS under CCP Recovery and Resolution Regulation
On 14 March, the European Commission adopted two Delegated Regulations on RTS supplementing the CCP Recovery and Resolution Regulation (CCPRRR). The first Delegated Regulation supplements the CCPRRR with regard to RTS specifying the content of the written arrangements and procedures for the functioning of the resolution colleges . The second Delegated Regulation supplements the CCPRRR with regard to RTS specifying the contents of the resolution plan. Both Delegated Regulations will now be scrutinised by the Council of the EU and the European Parliament.
Delegated Regulation on written arrangements
Delegated Regulation on contents of the resolution plan
Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023 published
On 13 March, the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023 (SI 2023/319) was published, along with an explanatory memorandum. The purpose of the instrument is to make certain amendments to the law, in order to enable powers under Part 1 of the Banking Act 2009 to be used effectively, in connection with the sale of Silicon Valley Bank UK Ltd (SVBUK) to HSBC Bank UK plc (HSBC UK). The Order was made under section 75 of the Banking Act 2009, which allows primary and secondary legislation and common law to be modified, where it is necessary to do so to enable the effective use of the powers in Part 1. The Order amends the law to make that transfer effective by: (i) amending the FSMA 2000 (Excluded and Prohibited Activities) Order 2014 in connection with the application of ringfencing rules, permitting the provision of liquidity from HSBC UK to SVBUK Ltd and; (ii) making modifications to certain sections of FSMA with respect to PRA and FCA rule-making powers and duties to consult on rule changes, in relation to SVBUK Ltd. The Order came into force at 8:00am on 13 March.
BoE Statement on Silicon Valley Bank UK
On 13 March, the BoE published a statement on SVBUK. The BoE, in consultation with the PRA, HMT and the FCA, has taken the decision to sell SVBUK to HSBC UK. In the statement, the BoE explains that this decision was made to stabilise SVBUK, ensure the continuity of banking services, minimise disruption to the UK technology sector and support confidence in the financial system. The BoE and HMT also confirm that all depositors’ money with SVBUK is safe and secure, as a result of this acquisition. SVBUK’s business will continue to be operated normally by SVBUK, all services will continue to operate as normal and customers should not notice any changes. Customers are advised to continue contacting SVBUK through the usual channels and that borrowers should make any loan repayments to SVBUK as normal. SVBUK staff remain employed by SVBUK, and SVBUK continues to be a PRA/FCA authorised bank. This statement supersedes the BoE’s 10 March statement, that absent any meaningful further information, it intended to apply to the Court to place SVBUK into a Bank Insolvency Procedure. Given the emergence of a credible purchaser for SVBUK, the BoE determined that using its resolution powers banks was appropriate. The BoE stated that no other UK banks are directly materially affected by these actions, or by the resolution of SVBUK’s US parent bank. The wider UK banking system remains safe, sound, and well capitalised. In addition to the statement, the BoE also published the Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument 2023, which came into force at 7:00am on 13 March.
Commission proposes reform of the EU electricity market
On 14 March, the Commission proposed to reform the EU's electricity market design, with the aim of accelerating a surge in renewables and the phase-out of gas, make consumer bills less dependent on volatile fossil fuel prices, better protect consumers from future price spikes and potential market manipulation, and make the EU's industry clean and more competitive. The proposed reform revises several pieces of EU legislation, including the Electricity Regulation, the Electricity Directive, and the REMIT Regulation. It also introduces measures that incentivise longer-term contracts with non-fossil power production and bring more clean flexible solutions into the system to compete with gas. The reform aims to decrease the impact of fossil fuels on the consumer electricity bills, as well as ensure that the lower cost of renewables gets reflected. The commission also believes the proposed reform will boost open and fair competition in the European wholesale energy markets by enhancing market transparency and integrity. The proposed reform will now be put before the European Parliament and the Council.
Joint statement on disclosure on climate change for structured finance products
On 13 March, the ESAs and ECB published a joint statement on disclosure on climate change for structured finance products. The statement explains that the ESAs and the ECB are committed to contributing to the transition towards a more sustainable economy with their respective mandates. With the increasing focus on financial products meeting ESG standards within the EU, it has also become a priority for structured finance products to disclose climate-related information on the underlying assets. As such, ESMA, with the contribution of the ESAs, is working towards enhancing disclosure standards for securitised assets by including new, proportionate and targeted climate change-related information. The ESAs and the ECB are also calling on issuers, sponsors and originators of such assets at EU level to proactively collect high-quality and comprehensive information on climate-related risks during the origination process.
PRA report on climate-related risks and the regulatory capital frameworks
On 13 March, the PRA published a report on climate-related risks and the regulatory capital framework. The PRA has found that capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses, which represents a risk appetite challenge for micro and macroprudential regulators. Regulators need to form judgements on whether quantified and unquantified risks are within its risk appetite. The report emphasises that effective risk-management controls within firms can reduce the quantum of capital required in the future for resilience, but the absence of controls might suggest a greater quantum of capital will be required. In the short-term, the PRA is focused on ensuring firms make progress to address ‘capability gaps’ to improve their identification, measurement, and management of climate risks. The report also highlights that the unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than that used for many other risks. Scenario analysis and stress testing will play a key role in this. The PRA will undertake further analysis to explore whether changes to the regulatory capital frameworks may be required. In particular, ensuring that firms continue to make progress to address capability gaps and building its own capabilities and forward-looking tools to judge the resilience of financial system to climate risks.