Key Regulatory Topics: Weekly Update 11 – 17 March 2022
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This week, as the UK passes legislation on the sanctions regime in response to the Russian invasion, the PRA has published its final policy on operational resilience and operational continuity in resolution. Meanwhile in Europe, the European Parliament’s Committee on Economic and Monetary Affairs has adopted a report on the Markets in Cryptoassets Regulation and the European Commission has published a legislative proposal to amend the CSDR.
Capital Markets
EC proposal to amend CSDR
On 16 March, the EC published a legislative proposal for a Regulation amending the Central Securities Depositories Regulation (CSDR) as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories (CSDs). The proposal aims to make securities settlement in the EU safer and more efficient by ensuring more proportionate and effective rules to reduce compliance costs and regulatory burdens for CSDs, as well as facilitating their ability to offer a broader range of services cross-border, and improving their cross-border supervision. More specifically, changes are proposed in the following areas: (i) settlement discipline. A ‘two-step approach’ is introduced under which mandatory buy-ins could become applicable if the penalties regime alone does not improve settlement fails in the EU; (ii) banking-type ancillary services. The proposal would improve conditions under which CSDs can access banking services by amending the threshold for such services and broadening the range of service providers; (iii) passporting. The proposal simplifies passporting requirements for CSDs, through which they can operate across the EU with one single license, by removing costly and duplicative procedures facilitating the cross-border provision of services and competition; (iv) cooperation between supervisory authorities. Cooperation is improved between supervisors by requiring the establishment of colleges of supervisors for certain CSDs to increase consistent and convergent supervision; and (v) oversight of the activities of third-country CSDs. The proposal ends the grandfathering clause and introduces a notification requirement to ensure that ESMA and national supervisors have better information about the activities of third-country CSDs in the EU. The proposal is now submitted to the EP and the Council of the EU for their consideration.
Conduct and Governance
FCA portfolio letter for building societies
On 11 March, the FCA published a portfolio letter, dated 10 March, setting out its strategy for building societies. In the letter, the FCA provides an updated view of the current key risks of harm, outlines its expectations of building societies, and provides an overview of its supervisory strategy and programme of work to ensure that firms are meeting its expectations and harms are being appropriately remedied. The FCA identifies key risks relating to customer treatment and operational issues, including resilience. As a result, the FCA is prioritising its work on the fair treatment of customers and its new consumer duty. Additionally, the FCA identified the following four areas where it expects societies to pay particular attention to the needs of consumers: (i) treating customers in vulnerable circumstances fairly. Building societies should be able to evidence to the FCA how they are monitoring outcomes for customers in vulnerable circumstances and what changes they are making as a result of their monitoring to improve outcomes for these customers; (ii) supporting customers in financial difficulty. Building societies are expected to follow the FCA's tailored support guidance for mortgages, consumer credit and overdrafts; (iii) responsible lending. Building societies operating in the later life lending market are expected to treat older borrowers fairly and to pay attention to signs of vulnerability. Lenders must also ensure that they continue to assess affordability appropriately; and (iv) managing maturing interest-only (IO) mortgages. Building societies are expected to employ a communication strategy that gives customers enough time to take action where there is doubt about their ability to repay their IO mortgage. Lastly, the letter also highlights further issues concerning mortgage prisoners, cyber risk and operational resilience, LIBOR transition, ESG, the SMCR and the end of the Brexit temporary transitional powers.
Consumer/Retail
FCA portfolio letters for RMLs and NBLs
On 11 March, the FCA published a portfolio letter sent to retail mortgage lenders (RMLs), as well as a portfolio letter sent to non-bank mortgage lenders (NBLs) – both dated 15 February. These letters set out the FCA’s views on the key risks of harm for RMLs’ and NBLs’ mortgage customers over the next two years, the FCA’s expectations about what RMLs and NBLs should consider when mitigating the key risks for these customers, an update on recent FCA work relating to mortgage prisoners, its ESG strategy and Brexit, and the FCA’s regulatory strategy. For both letters, the risks are grouped into priority areas of focus including: (i) supporting mortgage customers in financial difficulty; (ii) managing maturing interest-only (IO) mortgages; (iii) responsible lending; (iv) LIBOR transition; (v) treating customers in vulnerable circumstances fairly; and (vi) improving diversity and inclusion. The FCA will next update its view of the key risks in both portfolios in 2024.
Financial crime and sanctions
Russia's military invasion of Ukraine and the formal recognition of two regions in Eastern Ukraine – Donetsk and Luhansk – as independent states have led to a series of sanctions being imposed by the US, the UK and the EU. Our sanctions, international trade and investment compliance experts are monitoring and advising on the situation and our publications can be accessed here. HMT and OFSI maintain a collection of pages listing all financial sanctions imposed in the UK by country. The lists of financial sanctions imposed in the UK in respect of Russia can be accessed here. The FCA has also published a webpage ‘Russian invasion of Ukraine: financial sanctions and information’ which collates its publications and can be accessed here.
Please see the ‘Fund Regulation’ section for the FCA’s announcement that it intends to consult on the use of 'side pockets' for retail funds with exposure to sanctioned and suspended Russian assets.
HMT approves JMLSG guidance
On 15 March, the Joint Money Laundering Steering Group (JMLSG) announced having received HMT ministerial approval for various revisions to its guidance. The revisions relate to the following issues: (i) monitoring customer activity (Part I Chapter 5.7); (ii) trade finance (Part II Sector 15); (iii) correspondent relationships (Part II Sector 16); and (iv) syndicated lending (Part II Sector 17).
Economic Crime (Transparency and Enforcement) Act 2022 published
On 15 March, the Economic Crime (Transparency and Enforcement) Act 2022 received royal assent. Key changes in the Act include: (i) lowering the liability threshold for imposition of a civil monetary penalty for breaching financial sanctions; (ii) expanding the remit of the existing unexplained wealth order tool; and (iii) creating an identity register for beneficial owners of overseas entities holding UK property.
Joint FCA, BoE and OFSI statement on sanctions and the cryptoasset sector
On 11 March, the FCA published a statement issued jointly with the BoE and the Office of Financial Sanctions (OFSI) on sanctions and the cryptoasset sector following the conflict in Ukraine. The statement first outlines the legal and regulatory requirements on all firms, including those in the cryptoasset sector. The statement explains that: (i) financial sanctions regulations do not differentiate between cryptoassets and other forms of assets. The use of cryptoassets to circumvent economic sanctions is a criminal offence under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018; (ii) the FCA has already written to all registered cryptoasset firms and those holding temporary registration status to highlight the application of sanctions on various entities and individuals; and (iii) firms are reminded to check the FCA register to identify whether any cryptoasset firms they do business with are registered, or to check the equivalent register of the jurisdiction in which the cryptoasset firm is based. Both the FCA and PRA will act if they see authorised financial institutions supporting cryptoasset firms operating in the UK illegally. In addition, the statement also sets out the steps firms can take to reduce the risk of sanctions evasion via cryptoassets, including: (a) updating business-wide and customer risk assessments to account for changes in the nature and type of sanctions measures; (b) ensuring that customer onboarding and due diligence processes identify customers who make use of corporate vehicles to obscure ownership or source of funds; (c) ensuring that customers and their transactions are screened against relevant updated sanctions lists and that effective re-screening is in place to identify activity that may indicate sanctions breaches; (d) identifying activity that is not in line with the customer profile or is otherwise suspicious and ensuring that these are reported quickly to the nominated officer for timely consideration; (e) ensuring that compliance teams understand how blockchain analytics solutions can be best used to identify transactions linked to higher risk wallet addresses; and (f) engaging with public-private partnerships and private-private partnerships to gather insights on the latest typologies and additional controls that might be relevant. Firms should also look for red flag indicators that suggest an increased risk of sanctions evasion, and consider them in context.
Economic Crime (Anti-Money Laundering) Levy Regulations 2022 published
On 11 March, the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 were published, alongside an explanatory memorandum. The Regulations make provision relating to the assessment, payment, collection and recovery of the Economic Crime (Anti-Money Laundering) Levy which is charged in accordance with Part 3 of the Finance Act 2022 (FA) for the financial year commencing 1 April 2022 and subsequent years. The statutory instrument makes provision in respect of administration by each of the appropriate collection authorities: the FCA, the Gambling Commission and the HMRC Commissioners – as provided for in section 53(3) of the FA. It also sets out definitions and includes regulation-making powers (most notably in section 58 of the FA) to provide for details on assessment, payment, collection and recovery of the levy. The first payments will be due in the financial year 1 April 2023 to 31 March 2024. The instrument comes into force on 1 April.
Fintech
Please see the ‘Financial Crime and Sanctions’ section for the joint FCA, BoE and OFSI statement on sanctions and the cryptoasset sector.
ESAs warn consumers on the risks of cryptoassets
On 17 March, the European Supervisory Authorities (EBA, ESMA and EIOPA – the ESAs) published a statement warning consumers that many cryptoassets are highly risky and speculative. The ESAs underline the key risks presented, and set out key steps consumers can take to ensure they make informed decisions. In their warning, the ESAs highlight that these assets are not suited for most retail consumers as an investment or as a means of payment or exchange, as consumers: (i) face the very real possibility of losing all their invested money if they buy these assets; (ii) should be alert to the risks of misleading advertisements, including via social media and influencers; and (iii) should be particularly wary of promised fast or high returns, especially those that look too good to be true. The ESAs also warn consumers that they should be aware of the lack of recourse or protection available to them, as cryptoassets and related products and services typically fall outside existing protection under current EU financial services rules.
BCBS newsletter on artificial intelligence and machine learning
On 16 March, the Basel Committee on Banking Supervision (BCBS) published a newsletter on artificial intelligence and machine learning, to provide greater detail on its internal discussions. The BCBS states that banks are increasingly exploring opportunities for using artificial intelligence (AI), including machine learning (ML), which presents significant opportunities but can also heighten certain risks and challenges. The BCBS explains that it is analysing banks’ use of AI/ML and potential implications for bank supervision. The BCBS has identified several areas for continued analysis by supervisors: (i) AI/ML models may be more difficult to manage than traditional models as they can be more complex. The BCBS notes that banks still maintain the responsibility and accountability for appropriate due diligence and oversight for AI/ML models; (ii) as AI/ML deployment often involves the use of large data sets, interconnectivity with third parties, and the use of cloud technologies, it can also create multiple possible points of cyber risk. The volume and complexity of data sources commonly used to support AI/ML models may also present greater data governance challenges in ensuring data quality, relevance, security and confidentiality; and (iii) AI/ML models can reflect biases and inaccuracies in the data they are trained on, and potentially result in unethical outcomes if not properly managed. In continuing its work on the supervisory implications of the use of AI/ML, the BCBS will focus on three areas: (a) the extent and degree to which the outcomes of models can be understood and explained; (b) AI/ML model governance structures, including responsibilities and accountability for AI/ML-driven decisions; and (c) the potential implications of broader usage of AI/ML models for the resilience of individual banks and more broadly, for financial stability. The BCBS believes that the rapid evolution and use of AI/ML by banks warrant more discussions on the supervisory implications, which will be facilitated by continued sharing of experiences among supervisors, industry and subject matter experts.
FMLC letter on financial promotions rules for cryptoassets
On 15 March, the Financial Markets Law Committee (FMLC) published a letter to HMT, following HMT’s response to its 2020 consultation on cryptoasset promotions and the FCA’s consultation on strengthening financial promotion rules for high-risk investments, including cryptoassets. In the letter, the FMLC highlights several potential areas of legal uncertainty in relation to the regulation of cryptoassets and related activities in the UK. In particular, the letter covers the following: (i) the disjointed nature of cryptoasset regulation in the UK. While the existing financial promotion regime works together with and complements the regulated activities regime established under FSMA, the FMLC warns that there is little connection between the proposed regulation of cryptoasset promotions and the authorisation regime in FSMA, leading to the creation of a complex authorisation scheme; (ii) the proposed requirement that an authorised firm is only permitted to approve financial promotions for authorised persons if the FCA has assessed the firm as suitable and competent. To do so may, in practice, prove to be a significant barrier to entry and an inhibitor of innovation. Indeed, the FMLC comments that relatively few authorised firms will have a track record that would enable them to establish their suitability and competence in relation to cryptoassets; and (iii) the uncertainty regarding where the proposed regulatory regime addressing stablecoins will stop and the e-money regime start. This, in turn, has implications for cryptoasset promotions, as it is proposed that the financial promotion regime will apply to stablecoins but not to e-money. Stakeholders have highlighted to the FMLC further questions arising around which authorised firms, if any, will approve cryptoasset promotions should proposed FCA rules regarding the expertise of approving firms come into force. The potential effect of the proposals is heightened by the lack of tailored exemptions for cryptoassets. As a result, firms face onerous compliance requirements, uncertainty around what regulation applies, and possible regulatory overlap. The FMLC therefore recommends that authorities consider a coordinated approach to creating a bespoke regulatory regime for cryptoassets, which may be informed by existing regimes, but which tailors requirements to accommodate the novel aspects of the asset type so as to offer a single, coherent and appropriately calibrated regime just for cryptoassets.
ECON adopts report on MiCA
On 14 March, the Economic and Monetary Affairs Committee (ECON) of the EP published a press release announcing that it had adopted, with 31 votes to 4 and 23 abstentions, its position on the proposed Markets in Cryptoassets Regulation (MiCA). Key provisions agreed for those issuing and trading cryptoassets cover transparency, disclosure, authorisation and supervision of transactions. The agreed text also includes measures against market manipulation and to prevent money laundering, terrorist financing and other criminal activities. ECON focuses on: (i) climate change. To reduce the high carbon footprint of crypto-currencies, ECON asks the EC to present a legislative proposal to include in the EU taxonomy for sustainable activities any cryptoasset mining activities that contribute substantially to climate change, by 1 January 2025. ECON also calls on the EC to work on legislation addressing issues arising from other sectors that consume energy resources that are not climate-friendly, such as the video games and entertainment industry, as well as data centres; and (ii) supervision. ECON wants ESMA to supervise the issuance of asset-referenced tokens, whereas the EBA would be in charge of supervising electronic money tokens.
Fund Regulation
FCA to consult on use of side pockets by retail funds
On 16 March, the FCA announced that it intends to consult on the use of 'side pockets' for retail funds with exposure to sanctioned and suspended Russian assets. The FCA has started discussions with stakeholders about options to allow UK authorised retail funds to make exceptional use of 'side pockets' given the significant practical challenges in disposing of Russian and Belarussian assets in the context of suspensions and extensive global sanctions. The FCA states that side pockets would potentially give authorised fund managers the option to separate Russian and Belarussian assets, that are difficult to sell or hard to value (or both), from the fund’s other core investments. Side pockets could allow: (i) new investors to enter the fund without getting exposure to Russian assets; (ii) existing investors to redeem the rest of their investment, while illiquid Russian assets remain in the separate side pocket (and in many cases marked to zero), while retaining rights to any eventual value; and (iii) some funds to end their current suspension of dealing. The FCA will consult on proposals with the aim of ensuring that any side pockets that are introduced, and the date on which the side pocket takes effect, treat existing, redeeming and subscribing investors fairly, and do not encourage speculative new investment at the expense of existing investors. The use of side pockets by the authorised fund manager would be optional, based on acting in the best interests of each fund it manages. The side pocket proposals would be limited in scope to assets that are illiquid as a result of the Russia/Ukraine war, and its precise scope would be determined as part of the consultation.
Markets and Markets Infrastructure
ESMA updates guidance on third-country trading venues for the purpose of transparency under MiFIR
On 14 March, ESMA published updated guidance on the Annex to its opinion determining third-country trading venues for the purpose of transparency under MiFIR. ESMA specifies that, in the context of the EU sanctions on Russia, trading venues established in Russia are considered inactive from 14 March onwards and until further notice.
FCA update on the market share test under the ancillary activities exemption for commodity derivatives
On 14 March, the FCA published an update on its approach to the market share test under the ancillary activities exemption for commodity derivatives. Article 2(1)(j) of MiFID II sets out the ancillary activities exemption which enables firms trading in commodity derivatives, emission allowances and emission allowance derivatives to be exempt from authorisation as a MiFID investment firm if they fulfil certain criteria. As part of verifying that they fulfil these criteria, firms are currently required to perform the ‘market share test’ as set out in UK MiFID RTS 20, which requires the calculation of the aggregate notional value of all trades in commodity derivatives, emission allowances and emission allowance derivatives traded on, or outside, trading venues across the EU. In the past, ESMA produced consolidated figures for trading across the EU. However, following changes to the EU MiFID regime in February 2022, ESMA will no longer publish this data. The FCA will also not publish this data. The FCA states that Article 72J of the RAO enables firms seeking to rely on the UK ancillary activities exemption to carry on their business without obtaining authorisation if there is no data from an EU institution or a regulator to enable them to perform the ‘market share test’. Firms otherwise meeting the criteria may rely on Article 72J of the RAO where they cannot perform the calculations the test requires.
ESMA letter on legislative proposals to MiFID II and MiFIR
On 11 March, ESMA published a letter, dated 9 March, to the Council of the EU and EP on the legislative proposals for amendments to the MiFIR and the MiFID II Directive that the EC adopted on 25 November 2021. In the letter, ESMA shares technical comments on issues including: (i) consolidated tape providers (CTPs). ESMA recommends extending the timetable for the CTP selection process as the current one appears unfeasible both for ESMA as well as potential CTP applicants, while maintaining the overall ambition of the proposal. ESMA supports a staggered approach for appointing CTPs, for instance by running no more than two selection procedures in parallel before launching the selection procedure for the remaining two CTPs. Further, ESMA underlines ambiguities in the drafting of the proposals regarding the authorisation of CTPs. ESMA also shares its concerns on the practicalities of the “fall-back clause”. Lastly, ESMA highlights inconsistencies in the EC’s proposal between the scope of the derivatives CTP and the scope of the transparency requirements, which is likely to raise significant practical implementation issues; (ii) equity and non-equity transparency. Overall, ESMA is supportive of the proposals on equity transparency and the general push to streamline the transparency regime for non-equity instruments. Nonetheless, ESMA raises some technical concerns on the proposal to amend the non-equity deferral regime. It is also concerned that the proposal as it currently stands is overly complex and may result in inconsistent calibrations of the pre- and post-trade transparency requirements. ESMA therefore recommends a simpler approach. ESMA also raises concerns about the derivatives trading obligation only including an investment-firm specific suspension; (iii) data reporting. ESMA suggests that co-legislators consider replacing the traded on a trading venue concept with the systematic internaliser approach to avoid gaps in reporting and transparency publications under MiFIR; and (iv) payment for order flow (PFOF). ESMA shares the EC’s analysis regarding PFOF.
Payment Services and Payment Systems
UK Finance report on UK payments regulation review
On 16 March, UK Finance published a report on the impact of UK payments regulation. The report explores how industry, lawmakers and regulators can work together to strengthen and enhance the UK’s payments infrastructure and regulatory and supervisory frameworks, following both Brexit and in light of the expanding digitalisation of the economy. The report identifies a number of opportunities that regulators and industry have to improve the engagement on key regulatory change and supervision initiatives, including: (i) market change. Proactive engagement by market participants and legislative and regulatory stakeholders must be improved; (ii) regulatory coordination and public policy. The report explains that a payments sector served and represented by a dynamic and varied body of firms, which has and continues to meet the costs and demands of significant regulatory change, requires a framework with flexibility and proportionality at its core. Such a framework can be enhanced by greater coordination of implementation requirements and timelines, and regulatory change that is informed by detailed and timely reviews of the effectiveness of past regulatory interventions. Supervision must deliver certainty to market participants so that products can be developed, and investments made, at the time and in the places that they are needed; and (iii) EU and international. The UK’s approach to alignment with, and divergence from EU regulation must not risk access to markets or infrastructure and must support the sector’s continued competitiveness with the EU and international markets.
Prudential Regulation
PRA modifications of Liquidity (CRR) Part
On 15 March, the PRA published a direction for modification by consent amending Article 411 and Article 428da of the Liquidity (CRR) Part of the PRA Rulebook, which relate to the treatment of derivative client clearing under the net stable funding ratio (NSFR). The PRA states that the amendment extends the carve-out that is applied to derivative client clearing activities, to capture situations in which firms face a clearing broker to clear client trades, rather than facing a qualifying central counterparty directly. In addition, the PRA has also updated its webpage on waivers and modifications of rules.
PRA March 2022 occasional consultation paper
On 15 March, the PRA published an occasional consultation paper, which sets out the PRA’s proposals to make minor amendments to UK Technical Standards (UKTS), PRA rules, supervisory statements (SS), legacy supervisory statements, and a statement of policy. The consultation paper proposes to change various policy material, including: (i) the PRA’s statement of policy on its approach to the publication of Solvency II technical information; (ii) the leverage ratio with a minor amendment to its SS entitled ‘The UK leverage ratio framework’; (iii) amendments consequential on CRR Rules with changes to the Draft PRA Rulebook: (CRR 2 and other Consequentials) Modification Instrument 2022 and Draft PRA Standards Instrument: the Technical Standards (Consequential Amendments) Instrument 2022; (iv) the deletion of various non-relevant policy material; (v) consequential amendments to its Rulebook and various UKTS arising from the introduction of the IFPR; (vi) amendments to its Pillar 3 Liquidity disclosure template and instructions; and (vii) the CRR Rule Administration Instrument. The consultation closes on 10 May.
Delegated Regulation on RTS on disclosure of investment policy under IFR
On 11 March, the EC adopted a Delegated Regulation supplementing the Investment Firms Regulation (IFR) with regard to RTS for public disclosure of investment policy by investment firms. The RTS specify uniform disclosure formats and associated instructions for the requirements on investment policy by investment firms referred to in Article 52(1) of the IFR. The disclosure required includes: (i) information on the proportion of voting rights attached to the shares held directly or indirectly by the investment firms; (ii) information on their voting behaviour; (iii) an explanation of votes and the ratio of proposals put forward and approved; and (iv) information on the use of proxy advisor firms and information on their voting guidelines. The Delegated Regulation will now be scrutinised by the Council of the EU and the EP, and, if neither object, it will enter into force 20 days after its publication in the OJ.
Recovery and resolution
SRB operational guidance on the identification and mobilisation of collateral in resolution
On 17 March, the Single Resolution Board (SRB) published its operational guidance on the identification and mobilisation of collateral in resolution. This guidance aims to suuport banks’ capacity to identify and mobilise certain asset classes that could be used as collateral in resolution in a timely way to support financial continuity. The guidance is structured around three objectives: (i) ensuring that banks’ collateral governance and management is able to support the resolution scheme and contribute to the financial continuity of the group; (ii) ensuring that banks have capacity to identify collateral, including its amount, location, governing law, currency and overall availability; and (iii) assessing banks’ capacity to mobilise collateral, and in particular non-marketable assets and assets not eligible for ordinary central bank funding. The guidance provides a clear understanding of the operational and legal requirements that banks need to anticipate in order to maximise the amount of assets that could be mobilised as collateral in and after resolution. This concept allows the SRB to access the necessary information and analysis from banks to make full use of resolution tools should a bank get into difficulty, and to ensure financial stability of banks in resolution.
PRA policy statement on operational resilience and operational continuity in resolution
On 11 March, the PRA published a policy statement on operational resilience and operational continuity in resolution (OCIR) for CRR firms, Solvency II firms, and Financial Holding Companies. The PRA provides feedback to responses to its previous consultation, as well as its final policies. The PRA explains that respondents were supportive of the proposals, and that, as a result, it has amended certain aspects of the proposed policy. Key amendments include: (i) the introduction of new rules to Chapter 8 of the Operational Resilience Part requiring CRR consolidation entities to comply with the requirements in Chapter 8 within a reasonable time, and by no later than 30 June; and (ii) CRR consolidation entities will need to assess the ability of group members to remain within impact tolerances for their important group business services, and ensure that the CRR consolidation entity’s board approves the CRR consolidation entity’s assessment. Additionally, the appendices to the policy statement set out: (a) the PRA Rulebook: CRR Firms, SII Firms: Operational Resilience Instrument 2022 (Appendix 1); (b) an updated version of the PRA supervisory statement on ‘Operational resilience: Impact tolerances for important business services’ (Appendix 2); and (c) the amendments to the operational continuity part of the PRA Rulebook (Appendix 3). The PRA’s new rules for the operational resilience and the group supervision parts will come into force on 31 March, and its rules on OCIR on 1 January 2023.
Structural reform
Ring-fencing and proprietary trading independent review final report
On 15 March, the Ring-Fencing and Proprietary Trading (RFPT) Review Panel published its final report. The report sets out the final conclusions and recommendations of the Review Panel. The Panel concluded that (i) the ring-fencing regime is worth retaining at present but needs to be more adaptable to better serve customers and address future risks. Recommendations include changing the scope of the ring-fencing regime to focus on large, complex banks, and better aligning the ring-fencing regime with the resolution regime. This recognises that resolution is overtaking ring-fencing in providing a more comprehensive solution for tackling too-big-to-fail; and (ii) classic proprietary trading is not undertaken to any significant extent by banks operating in the UK. It concludes that the risks of proprietary trading activities in the UK banking sector have been and continue to remain appropriately mitigated, and the PRA’s powers are currently sufficient to manage any associated risks. Recommendations include monitoring risks from proprietary trading activities undertaken by banks in the UK, and monitoring and mitigating potential risks from proprietary trading activities undertaken in the non-bank sector.
Sustainable Finance
TNFD consults on first version of its framework
On 15 March, the Taskforce on Nature-related Financial Disclosures (TNFD) published the first beta version of its nature-related risk and opportunity management and disclosure framework for consultation. This first beta version comprises three components: (i) foundational guidance, including key science-based concepts and definitions, to help a wide range of market participants understand nature, and nature-related risks and opportunities; (ii) disclosure recommendations aligned with the approach and language of the climate-related guidance developed by the Task Force on Climate-related Financial Disclosures (TCFD). The TNFD recommendations have the same four pillars as the TCFD pillars, and the high-level disclosure recommendations are as aligned as possible; and (iii) practical guidance on nature-related risk and opportunity analysis for companies and financial institutions to consider incorporating into their enterprise risk and portfolio management processes. The beta framework is also designed for future alignment with the global baseline for sustainability standards under development by the International Sustainability Standards Board, while providing flexibility for those organisations that wish to, or need to, report to different materiality thresholds and regulatory requirements. The beta release of the framework proposes a new location-specific disclosure and provides guidance on how market participants can begin to incorporate location-based nature-related dependencies, impacts and risks into their enterprise and portfolio risk management processes. By following an open innovation approach, The TNFD hopes to accelerate the framework’s development and steadily improve its relevance, usability, and effectiveness before releasing its recommendations in Q3 2023. A further three iterations of the beta versions are planned for release in June, October and February 2023. This will culminate in the final release of the TNFD’s recommendations planned for September 2023.
ECB report on supervisory assessment of banks’ C&E risks disclosures
On 14 March, the ECB published a report on the supervisory assessment of banks' climate-related and environmental (C&E) risks disclosures. The report provides an updated assessment of the progress European banks have made on disclosing C&E risks as set out in the ECB’s November 2020 guide. Although there have been improvements since the ECB’s first assessment in late 2020, no bank fully meets the supervisory expectations. The ECB has therefore sent individual feedback letters to the banks under its supervision setting out key gaps in their disclosures and expects them to take decisive action to ensure they convey their risk profile comprehensively. With regard to the transparency of the materiality of risks and methodologies, the supervisory review demonstrated that one-third of institutions do not yet transparently disclose that they are materially exposed to C&E risks in line with their internal materiality assessments. Overall, institutions still scarcely substantiate their C&E metrics and targets. The ECB will conduct a full review of banks’ preparedness to manage C&E risks in the first half of 2022. It also plans to gradually integrate C&E risks into its methodology for the supervisory review and evaluation process, which will influence Pillar 2 capital requirements, as well as its on-site inspection methodology. The ECB will review banks’ climate and environmental disclosures again at the end of 2022.
IOSCO 2022 sustainable finance work plan
On 14 March, the International Organization of Securities Commissions (IOSCO) published a press release detailing its 2022 sustainable finance work plan. In 2022, IOSCO will: (i) conduct a review of the IFRS International Sustainability Standards Board (ISSB) exposure drafts of proposed climate and general sustainability disclosure requirements, as well as the final standards when they are produced. If IOSCO determines that the IFRS Sustainability Standards are fit for purpose, its decision will provide its members the basis to decide how they might adopt, apply or be informed by the ISSB standards; (ii) push forward work to develop assurance standards, with a special focus on independent assurance of the quality of corporate reporting of sustainability information; (iii) conduct an in-depth review of carbon markets to identify the vulnerabilities in nascent voluntary carbon markets, as well as the transparency and integrity in the functioning of carbon markets from the perspective of financial regulation; and (iv) step up its engagement with both national regulators and market participants to push for the implementation of its recommendations addressed to asset management and ESG ratings and data providers.
Other Developments
Government response to the Joint Committee report on the draft Online Safety Bill
On 17 March, the Government published its response to the Joint Committee report on the draft Online Safety Bill. The Government agrees with the Joint Committee on the core objectives of the Bill. Under the new laws, in-scope platforms will need to: (i) tackle illegal content and activity; (ii) protect children; and (iii) give adults greater control, while protecting freedom of expression. The Government strengthened the legislation by incorporating 66 of the Joint Committee’s recommendations. These recommendations include: (a) protecting users from illegal content and activity. A new standalone duty in the Bill will be introduced, which requires Category 1 (the largest and highest risk services in scope) services to take action to minimise the likelihood of fraudulent adverts being published on their service. The Government also welcomes the Joint Committee’s recommendations on the issue of online fraud, and confirms that fraud offences will be included in this list; (b) anonymity. The Government strengthened the Bill’s provisions by including two new additional duties on Category 1 services to ensure adult users are given the option to verify their identity, and tools to have more control over the legal content that they see as well as who they interact with; (c) communications offences. The Government accepts the recommended offences on harm-based communications, false communications and threatening communications; (d) child safety. The Government added a provision to the Bill to require all service providers that publish or display pornographic content on their services to prevent children from accessing this content. All services included in this provision will be subject to the same enforcement measures as other services in the Bill; and (e) enforcement. Ofcom can now require a company with a substandard risk assessment to take measures to mitigate risks it has missed at the same time as it redoes its risk assessment.