Key Regulatory Topics: Weekly Update 13 April - 20 April 2023
Headlines in this article
Related news and insights
Publications: 23 November 2023
Podcast: Electronic Trade Documents Act 2023 - perspectives part 1
Publications: 20 November 2023
Webinar - Ahead of the Curve: The insolvency framework for distressed insurers
Publications: 20 November 2023
Great Fund Insights: AIFMD II – impact on depositaries and their delegates
This week in the UK, the Bank of England published speeches on climate action, and DEI. In addition, the Joint Regulatory Oversight Committee set out its recommendations for the next phase of open banking in the UK. In Europe, the European Parliament announced that it has approved negotiating mandates for its AML/CTF legislative reform package and that it has adopted MiCA and the recast revised WTR, while the European Commission published its proposed reforms of the EU’s bank crisis management and deposit insurance framework. The FSB published a report on climate-related financial risk factors in compensation frameworks.
Conduct and governance
Please see the Sustainable Finance section for the FSB’s report, which looks at compensation practices around climate-related objectives and how the stated goal of financial institutions is incorporated into their compensation frameworks.
EBA consults on guidance to assess knowledge and experience of the management or administrative organ of credit servicers
On 19 April, the EBA began consulting on draft guidelines on the assessment of adequate knowledge and experience of the management or administrative organ of credit servicers, as a whole, under Article 5(2) of Directive (EU) 2021/2167 on credit servicers and credit purchasers (Non-Performing Loans (NPL) Directive). The guidelines: (i) specify the criteria for the assessment of the organs’ collective knowledge and experience, which will be performed baased on the individual members assessment by credit servicers, taking into account the principle of proportionality; and (ii) set out the main requirements of the credit servicers assessment process, including the good repute, and specify when such an assessment has to be performed. Where shortcomings are identified, the credit servicer must take appropriate corrective measures, including to provide induction and training or to replace members of the management body. The deadline for comments is 19 July. The EBA intends to finalise the guidelines by the end of 2023, to enter into force in early 2024.
Consumer/retail
Please see the Recovery and Resolution section for an update from the BoE on its work to improve depositor outcomes in the event of bank or building society insolvency.
Please see the Sustainable Finance section for a speech by David Geale, FCA Director of Retail Banking, on the FCA's view of green mortgages.
FCA response to Treasury Committee on high street bank savings rates
On 20 April, the Treasury Committee published the FCA’s response to its questions in relation to competition in the retail banking market. Following increases in high street banks’ net interest margins, last month the Committee asked what analysis the FCA had conducted on whether banks were earning disproportionate profits by increasing rates on mortgages far quicker than on savings products. The FCA states that is has been monitoring the speed and extent of firms’ pass-through to their savings products following increases in the base rate. It has challenged and sought further information from some outlier firms that had made relatively small increases to their variable rate savings products in 2022 and where it saw a material time lag in pass through to savings products relative to mortgages. The FCA points to its upcoming Consumer Duty as a solution to this issue. The FCA has made clear that firms should be able to justify and explain the rationale for the speed and degree to which they make changes to their various savings rates. This includes the extent to which such decisions have been subject to internal scrutiny that is consumer-focused, and how promptly and transparently consumers are told about any changes. In assessing firms’ compliance with the Consumer Duty, the FCA will review the fair value assessments firms have made of their savings products and follow up with any firm whose approach to pricing seems at risk of not providing fair value. The FCA also revealed that the number of mortgages with ‘financial stretch’ – where a household’s mortgage payment is over 30% of their total income - may increase to 356,000 by June 2024, with monthly payments rising by 50% or more for 67,000 mortgage holders. However, the regulator states that 90% of consumers with mortgages exposed to interest rate rises are not expected to become financially stretched.
FCA evaluates its 2019 overdrafts intervention and provides guidance on overdraft repeat use
On 19 April, the FCA published an evaluation paper of its package of remedies introduced in 2019 in the UK market for overdrafts. The rules required firms, among other things, to stop charging fixed fees for overdraft borrowing, to charge no more for an unarranged overdraft than an arranged overdraft and to identify customers who repeatedly used overdrafts. The FCA has found that its rules have reduced high fees for unarranged borrowing, removed complex charging structures and introduced help for those who were repeatedly using their overdraft. It estimates that total annual savings in charges amount to approximately £500m. The FCA invites views on the paper. The FCA has separately described good practices and areas of concern in relation to overdraft repeat use strategies. As part of the 2019 reforms, each firm was asked to develop and implement strategies to identify and provide support to customers who are repeatedly using their overdraft and paying high cumulative charges and/or are showing signs of actual or potential financial difficulty. Areas of concern include in relation to: how firms identify and monitor overdraft repeat use customer, customer communications, support interventions and monitoring effectiveness of repeat use policies and procedures. To support firms in their planning process for the new Consumer Duty, the FCA sets out how they may meet its requirements in relation to overdraft repeat use.
Evaluation paper technical annex
Wider Implications Framework annual report 2022
On 19 April, the FOS published the 2022 annual report for the Wider Implications Framework. The framework was relaunched in early 2022 to create structured collaboration on key issues and consists of the FOS, FCA, FSCS, TPR and MaPS. Key achievements highlighted include: (i) sharing information on complaints about mortgage Standard Variable Rates which ensured fair and consistent complaint outcomes with redress paid if appropriate; and (ii) joint work to ensure that the FOS is prepared for the introduction of the FCA’s Consumer Duty, including internal training sessions and engagement with external stakeholders to understand their concerns. The FOS was Chair for the first year of the framework, the FCA has taken over the Chairing for 2023.
Financial crime
Please see the FinTech section for the EP’s announcement that it has adopted the recast and revised Regulation on information accompanying transfers of funds and certain cryptoassets (recast revised WTR).
EP approves negotiating mandates on AML/CTF legislative reform package
On 19 April, the EP announced that it has approved negotiating mandates for its AML/CTF legislative reform package composed of the AMLR, MLD6 and the AMLA Regulation. Negotiations may now begin with the Council of the EU and the first meeting is due to take place at the beginning of May. On 14 April, the EP’s Committee on Economic and Monetary Affairs (ECON) and Committee on Civil Liberties, Justice and Home Affairs (LIBE) published reports on two of the proposals in the EU AML/CTF legislative package: the AMLR and MLD6. The reports set out the Committees’ adopted legislative texts, together with explanatory statements. The Committees adopted their positions on the legislative proposals on 28 March.
Insider Dealing (Securities and Regulated Markets) Order 2023: draft SI published
On 17 April, the draft Insider Dealing (Securities and Regulated Markets) Order 2023 was published, together with a draft explanatory memorandum. The draft SI updates the Criminal Justice Act 1993 (CJA 1993), which establishes the criminal offence of insider dealing, by broadening the set of securities and markets on which an offence can be committed in the CJA 1993, and therefore bringing it broadly in line with UK MAR. The draft SI: (i) replaces the securities listed in Schedule 2 of the CJA 1993 with the list of financial instruments found in Part 1 of Schedule 2 to the RAO. The current list of securities to which the offences are applicable is out of date and fails to cover an appropriate range of securities, including currency options, credit default swaps and units in collective investment undertakings, such as exchange traded funds; and (ii) replaces the outdated list of trading venues named as regulated markets with references to the definitions for regulated markets, organised trading facilities and multilateral trading facilities as used in UK MAR and UK MiFIR.
Wolfsberg Group updates anti-bribery and corruption compliance programme guidance
On 17 April, the Wolfsberg Group published its updated anti-bribery and corruption compliance programme guidance. The guidance is a risk-based approach for the adequate development and implementation of compliance programmes to prevent, detect, and report acts of bribery and corruption, and identifies areas of elevated risk. The updated guidance: (i) incorporates learnings from enforcement actions since 2017 with updates to the red flags section and an expansion of the section on customer and transaction corruption risks; (ii) includes the need for financial institutions’ programmes to be continuously evolving, and adds a new section on identifying, reporting, and mitigating emerging bribery and corruption risks; and (iii) has been aligned to current and evolving legal regulatory expectations with additional guidance for post-acquisition due diligence, the inclusion of guidance for financial institutions to include a holistic risk assessment and management as part of their control frameworks.
Fintech
Please see the Payment Services and Payment Systems section for a speech given by Aidene Walsh, PSR Chair, on innovation, and a joint report from the BIS and the BoE on innovating real-time gross settlement (RTGS) systems through synchronisation.
EP adopts MiCA and recast revised WTR at first reading
On 20 April, the EP announced that it has adopted the Regulation on markets in cryptoassets (MiCA) and the recast and revised Regulation on information accompanying transfers of funds and certain cryptoassets (recast revised WTR). The recast revised WTR, among other things, extends the scope of the ‘travel rule’ to cryptoassets. Whereas MiCA establishes a regulatory framework for certain cryptoassets that are not already regulated. The texts will now have to be formally endorsed by the Council of the EU, before publication in the OJ.
Adopted text of recast revised WTR
FCA speech on innovation, AI, and future initiatives
On 17 April, the FCA published a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer on the ways in which the FCA is currently innovating with technology. Highlights include: (i) Ms Rusu announces the creation of a permanent Digital Sandbox service this summer. The service provides a solutions development, prototyping and test environment and allows participants to directly access academics, government bodies, and venture capitalists, among others; (ii) the FCA has established a single point of entry to its Innovation Services. The FCA is also working on digitising forms at the Gateway, building firm portals within RegData and revamping its website; (iii) the FCA is hosting the first global TechSprint with its Global Financial Innovation Network (GFIN) partners, in support of tackling greenwashing. Applications for participation opened on 17 April; and (iv) in May, the FCA will host a TechSprint focusing on the FS Register. The FCA aims for the TechSprint to explore innovative ways that FS Register Data can be harnessed by third parties, such as comparison websites, to enable more consumers to access and use this information proactively ahead of making investment decisions. The FCA is also looking at tech solutions to minimise the ‘Halo effect’ tactic, where an authorised firm uses its authorisation status to seem more trustworthy and reliable in relation to any unregulated activities that it also engages in.
Markets and markets infrastructure
EC adopts Delegated Regulation amending RTS on settlement fails relating to cleared transactions by CCPs under CSDR
On 19 April, the EC adopted a Delegated Regulation amending the RTS laid down in Commission Delegated Regulation (EU) 2018/1229 regarding the penalty mechanism for settlement fails relating to cleared transactions submitted by CCPs for settlement under the CSDR. Delegated Regulation (EU) 2018/1229 on settlement discipline (RTS on settlement discipline) details, amongst other things, the processes for the collection and distribution of cash penalties and any other possible proceeds from cash penalties. The amendments: (i) remove the separate process established in Article 19 of the RTS on settlement discipline for the collection and distribution of the cash penalties in relation to settlement fails relating to cleared transactions by CCPs. The amendments put CSDs in charge of the entire process of collection and distribution of penalties according to Articles 16, 17 and 18, in alignment with the general approach; and (ii) specify that in case of imbalanced positions in respect of cleared transactions the CCPs may allocate the remaining penalties’ amount, credit or debit, to their clearing members and should establish relevant mechanism in their rules to that effect. CCPs and CSDs, as well as the banking sector, expressed concerns about the duplicative process under Article 19 and how it could work in practice. The EP and the Council of the EU will now scrutinise the Delegated Regulation. If neither objects, it will enter into force 20 days after publication in the OJ and apply from the first business day after 12 months from the entry into force date.
ESMA report on quality and use of transaction data under EMIR and SFTR in 2022
On 19 April, ESMA published its third data quality report on transaction-level data under the EMIR and SFTR reporting regimes. The report highlights the increased use of transaction data by EU financial regulatory authorities in their day-to-day supervision and identifies significant quality improvements following a new approach to data monitoring. In addition, it sets out how ESMA, together with the NCAs, the ECB and the ESRB, has incorporated key insights from its data monitoring in several internal workstreams. The new framework, adopted in 2022, takes a more data-driven and outcome-focused approach to data monitoring and to collaborating with the NCAs on data quality issues under EMIR and the SFTR. At the core of the new approach are: (i) a centralised data quality dashboard with EU-wide indicators covering the most fundamental data quality aspects under EMIR. In 2023, ESMA will implement an equivalent dashboard under the SFTR; and (ii) a data sharing framework that enables relevant authorities to follow up with counterparties when potentially significant data quality issues are detected. New this year is the analysis of MiFiR transaction data from Authorised Reporting Mechanisms and Approved Publication Arrangements, following on from ESMA’s new supervisory powers over Data Reporting Services Providers. ESMA and the NCAs will continue to work on extending the new monitoring framework beyond EMIR and the SFTR in 2023. Both EMIR Refit and ESMA’s trade repository supervisory work are expected to lead to a significant improvement in quality of the underlying data when it enters into force in 2024.
BoE and CFTC joint statement on supervision of cross-border CCPs
On 14 April, the BoE published a joint statement with the US Commodity Futures Trading Commission (CFTC) on the supervision of cross-border CCPs. The CFTC and the BoE reaffirm the primacy of the UK and US home authorities in their respective jurisdictions and recognise the importance of deference, sustained by an appropriate and proportionate framework for information sharing and cooperation. Based upon the MoU agreed in 2020 and the detailed practices set out thereunder, the BoE has determined that its relationship with the CFTC meets the expectations of the BoE’s Level 1 Informed Reliance Assessment. Consistent with the BoE’s Statement of Policy on comparable compliance, and following the recognition and tiering decisions under UK EMIR, the outcome of this assessment enables the BoE to place reliance on the CFTC’s supervision and oversight of incoming CCPs based in the US.
Payment services and payment systems
BIS and BoE report on Project Meridian: innovating in RTGS systems
On 19 April, the BIS and the BoE published a joint report on Project Meridian, which looked at how to deliver innovations in real-time gross settlement (RTGS) systems through the concept of synchronisation. Synchronisation involves settling a transaction using central bank money in an RTGS system. Funds move only if a corresponding asset on another ledger moves at the same time in the opposite direction, reducing transaction costs and risks, and increasing efficiencies. It is achieved by the introduction of a new entity called a synchronisation operator. This operator uses DLT to interlink the central bank’s RTGS system with other financial market infrastructures and ledgers, automatically orchestrating the exchange in ownership of funds and assets. Synchronisation using central bank money eliminates such risks as a counterparty failing to hand over ownership of an asset or a payment not being completed. It could also reduce liquidity costs, by cutting the amount of time that assets need to be reserved for a specific transaction. The Meridian prototype demonstrates how a DLT network could connect to the conventional centralised systems used by participants in a transaction – including the RTGS operator – using open-standard APIs. The prototype also highlights the opportunity for additional efficiencies that enable innovation beyond the direct benefits of synchronised settlement. For example, it digitises the change in asset ownership by introducing a digital deed, which is time stamped at the point of settlement finality. Central banks can use the findings from the project to inform considerations on whether to implement synchronisation in their RTGS systems. The BoE states that it will use the project's findings to inform its work considering the introduction of synchronisation in its RTGS system beyond 2024.
PSR speech on innovation
On 18 April, the PSR published a speech, given by Aidene Walsh, PSR Chair, on innovation. Points of interest include: (i) Ms Walsh considers that in some areas regulation needs to catch up with the significant innovation and change in payment systems that has occurred over the last few years in order to tackle harms including APP scams and cyber-attacks; (ii) in a couple of months, the PSR will publish a forward approach on managing fraud. The approach aims to incentivise all players in the payments ecosystem to take responsibility for addressing the issue. The PSR intends to play an influencing role and is working with various groups and organisations outside of payments to address the root cause of the scams; (iii) Ms Walsh considers that the PSR must make sure that the right conditions are in place so that account-to-account payments can deliver new options for retail payments. For the long-term growth and development of open banking, there needs to be opportunity for all parties, including account providers, to be rewarded for innovation and investment. That may mean that payment firms will increasingly see charges for value added services within open banking. Moreover, for open banking in the UK to succeed a central set of rules and standards need to be established; and (iv) Ms Walsh states that the renewal of Faster Payments is the next opportunity to improve payment systems access, with the New Payments Architecture delivering more and cheaper ways to connect through modern API standards enabling the launch of innovative new services on top of the core clearing and settlement infrastructure.
Joint Regulatory Oversight Committee recommendations for next phase of open banking in UK
On 17 April, the Joint Regulatory Oversight Committee (the FCA, PSR, CMA and HMT) set out its recommendations for the next phase of open banking in the UK. The report includes a roadmap of 29 actions relating to five key themes that will be progressed in the next two years: (i) levelling up availability and performance; (ii) mitigating the risks of financial crime; (iii) ensuring effective consumer protection if something goes wrong; (iv) improving information flows to third party providers and end users; and (v) promoting additional services, using non-sweeping variable recurring payments as a pilot. Over the coming year, the Committee highlights that it will collectively improve visibility and understanding around the level of financial crime across the open banking ecosystem and the availability and performance of APIs across different account servicing payment service providers. The PSR will also improve the functioning of the ecosystem – for instance, by ensuring consistent error messaging. One priority highlighted by the Committee is finalising the design of, and beginning the transition to, the future Open Banking entity, including its appropriate corporate structure. The government is taking steps to establish the long-term regulatory framework as soon as parliamentary time allows The Committee will work with open banking participants over the next few months to undertake further analysis of potential options; an overview of those under consideration is included in the paper. The Committee will hold a webinar to summarise its proposals in May. The Committee expects to conclude this analysis by Q3. In Q4, it will use this to set out a detailed plan for the future entity and the transition to it.
Prudential regulation
EC adopts Delegated Regulation on treatment of non-trading book positions subject to FX or commodity risk under CRR
On 20 April, the EC adopted a Delegated Regulation supplementing the CRR with regard to RTS on the calculation of the own funds requirements for market risk for non-trading book positions subject to foreign exchange (FX) risk or commodity risk and the treatment of those positions for the purposes of the regulatory back-testing requirements and the profit and loss attribution requirement under the alternative internal model approach (IMA). The RTS specify how institutions calculate: (i) the own funds requirements for non-trading book positions that are subject to FX risk or commodity risk in accordance with the alternative standardised approach and the IMA; and (ii) the changes in hypothetical profit and loss, actual profit and loss and risk theoretical profit and loss for the purpose of the back-testing and profit and loss attribution requirements.
Official translations of joint EBA and ESMA guidelines on SREP under IFD
On 19 April, ESMA published a webpage with the official translations of the joint EBA and ESMA guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) under Article 45(2) of the IFD. The guidelines will apply from 19 June.
RTS on prior permission to reduce own funds and eligible liabilities requirements under CRR published in OJ
On 19 April, Delegated Regulation (EU) 2023/827 laying down RTS amending Delegated Regulation (EU) No 241/2014 as regards the prior permission to reduce own funds and the requirements related to eligible liabilities instruments under the CRR was published in the OJ. The amendments are as a result of revisions to the CRR made by CRR II. We previously set out the amendments in our update published on 14 October, 2022. The Delegated Regulation comes into force on 29 April, 20 days after its publication in the OJ.
EC report on second SSM Regulation review
On 18 April, the EC published a report on the single supervisory mechanism (SSM). The report follows the second review by the EC of the SSM Regulation. The EC concludes that overall, the SSM is functioning well and that there are no major changes required to the SSM Regulation at this stage. It has become a mature, established supervisory authority that delivers on the objectives set out when it was created. It helps ensure that banks are well prepared and capitalised for economic and financial crises. It also provides good quality and proactive banking supervision, rapidly adapting to supervisory challenges, as shown during the Covid-19 crisis. Cooperation within the SSM between the ECB and the national competent authorities is working well. Equally positive feedback was received on how close cooperation is working. However, three areas that will require continued focus are: (i) the SSM is facing challenges on the availability of the skills that are required to conduct supervision in highly specialised areas – this limits the possibility to prioritise the work in areas such as ICT/cyber risks and internal model assessments; (ii) the importance of external communication and cooperation – in the coming years, it is important to ensure that MoUs that have been put in place with other authorities are used effectively, in particular in relation to cooperation with non-bank supervisors, resulting in better supervisory outcomes; and (iii) the harmonisation of certain legislative areas – the review notes that this falls outside the control of the SSM itself, however, it highlights the difficulties that the SSM is facing in the areas of fit and proper assessment, sanctioning powers and AML, where the SSM is largely dependent on national law. Supervision would benefit from a more harmonised legal framework as this would address concerns about an unlevel playing field within the SSM.
Expert group assessment of ECB’s SREP
On 17 April, the ECB published an independent expert group report assessing the ECB’s supervisory review and evaluation process (SREP). The report acknowledges that European banking supervision has made good progress in ensuring that banks maintain sufficient capital levels and notes that the current level of capital requirements for supervised banks looks broadly adequate. While the SREP has significantly helped to increase the resilience of the European banking sector and to promote a level playing field for all significant institutions, the report found that the ECB could further improve the efficiency and effectiveness of its existing supervision processes by making them more integrated and risk sensitive. The report invites the ECB to reform risk scores and the process of determining Pillar 2 capital requirements. Considering that capital alone cannot address all risks, the report recommends that the ECB make full use of all the instruments in its toolbox, including impactful qualitative measures encouraging banks to tackle weak business models and governance practices. The ECB states in a related press release that as it has already been focusing on the need to target specific risk areas during the SREP, it will therefore be able to implement some of the recommendations of the report as early as in the 2023 cycle. Otherwise, the ECB Supervisory Board will evaluate the report’s input as part of a review of supervisory processes planned for 2024.
Recovery and resolution
EC publishes legislative proposals reforming CMDI framework
On 18 April, the EC published its proposed reforms of the EU’s bank crisis management and deposit insurance (CMDI) framework. The main elements of the proposed reforms are: (i) clarification of the public interest assessment in managing bank crises to ensure that a full range of crisis management tools, such as transfer tools, can also be applied to failing smaller and medium-sized banks, if this can more effectively achieve the objectives of safeguarding financial stability, depositor confidence and protecting taxpayers’ money; and (ii) facilitating the use of deposit guarantee scheme (DGS) funds in the financing of crisis management tools as an alternative to the basic pay-out function. This would be enabled by amending the hierarchy of claims in insolvency, but must only be a complement to the banks’ internal loss absorption capacity, which remains the first line of defence. Alternative use of DGS funds in funding crisis management tools must also be subject to a harmonised least cost test. Use of DGS funds, when applied to smaller/medium sized banks in resolution, including to access the Single Resolution Fund (SRF), should be possible only: (a) when the resolution authority(ies) deem(s) it necessary to safeguard financial stability and protect taxpayers while facilitating the exit from the market; (b) when it avoids imposing losses on depositors; and (c) when it is subject to adequate conditions and safeguards, notably in the case of accessing the SRF where the bank concerned must have been previously planned to be resolved. The EC has published three legislative proposals that it has adopted amending the BRRD, SRM Regulation and the DGSD to implement its reforms: (1) a Directive amending the BRRD as regards early intervention measures, conditions for resolution and financing of resolution action; (2) a Regulation amending the SRM Regulation as regards early intervention measures, conditions for resolution and funding of resolution action; and (3) a Directive amending the DGSD as regards the scope of deposit protection, use of DGS funds, cross-border cooperation, and transparency.
Proposed Directive amending BRRD
Proposed Regulation amending SRM Regulation
Proposed Directive amending the DGSD
EC publishes proposed Directive reforming MREL: “daisy chain” proposal
On 18 April, the EC published a proposal for a Directive amending the BRRD and SRM Regulation as regards certain aspects of the minimum requirement for own funds and eligible liabilities (MREL), the “daisy chain” proposal. This follows up on a review clause introduced by the EP and the Council of the EU in the “daisy chain” Regulation of October 2022 (Regulation 2022/2036). The proposed amendments, primarily: (i) remove the obligation for resolution authorities to set MREL for liquidation entities in specific circumstances; and (ii) give resolution authorities the discretionary power to set internal MREL on a consolidated basis to a subsidiary of a resolution entity. The choice to separate this proposed Directive from the wider CMDI reform package (which we have covered in the item above) is in order to facilitate its swift negotiation, in view of the entry into force of the requirements for banks in January 2024.
BoE update on work to improve depositor outcomes in bank or building society insolvencies
On 18 April, the BoE provided an update on work launched in December 2021 to improve depositor outcomes in the event of bank or building society insolvency. UK authorities have identified three initial areas that could better support timely payout of eligible depositors’ covered balances and improve continuity of payments and other banking services. The BoE is proposing to take these forward as a potential solution, underpinned by three component parts to minimise the disruption caused by a bank or building society insolvency procedure, which are: (i) an online portal, enabling depositors to provide alternative account details so that the FSCS can electronically transfer the covered balance of their deposit at the failed firm to another bank or building society. Electronic transfer would therefore replace cheques as the primary means of payout. Such electronic payout mechanisms already exist and have been successfully used in a number of other countries following the failure of small banks; (ii) improved continuity of banking services potentially utilising the infrastructure used to support the sharing of payment information and redirection of payments made to/from the insolvent institution when a customer moves banks, enabling the transfer of certain payment information such as direct debits and standing orders; and (iii) for those depositors who need to open a new bank account to achieve continuity, exploring better operational support and capacity at receiving banks, especially where there are challenges to opening a current account for the depositor. UK authorities are agreed on the need to make meaningful progress towards a solution in 2023.
Sustainable finance
Please see the FinTech section for a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, on the ways in which the FCA is currently innovating with technology, including in relation to tackling greenwashing.
FSB report on climate-related financial risk factors in compensation frameworks
On 20 April, the FSB published a report, which looks at compensation practices around climate-related objectives, and how the stated goal of financial institutions is incorporated into their compensation frameworks. Climate-related metrics incorporated in compensation frameworks include the reduction of carbon footprint, provision of sustainable finance and products, and accountability type measures such as leadership in the climate-related area. Some financial institutions also use external-based metrics, such as ratings and indices, to benchmark themselves against their peers. Where they are included in compensation frameworks, climate-related metrics are generally applicable at individual and/or collective level for executives and senior management only. The report does not aim to present and compare practices across jurisdictions, but rather to identify challenges and to provide an early insight in a fast-moving field to assist ongoing initiatives of regulators and financial institutions. Common challenges identified include: (i) gaps in data availability and reliability that make it difficult to apply consistent metrics and monitor them in performance evaluation and compensation determination; (ii) development of objectively measurable metrics that are aligned with financial institutions’ strategies; and (iii) misalignment of timeframes between compensation assessment periods and the materialisation of climate-related results. Incorporation of climate-related metrics into compensation frameworks is expected to evolve further. Continuous revision and adaptation of metrics by financial institutions, in response to a fast-changing environment, is needed to ensure effective alignment of compensation with prudent risk taking. Financial regulators can facilitate this process by helping share regulatory and industry practices with each other and with industry.
FCA speech on green mortgages
On 19 April, the FCA published a speech by David Geale, FCA Director of Retail Banking, on the FCA's view of green mortgages. Green mortgages, Mr Beale explains, include an incentive for people to either purchase an energy-efficient property, or improve the energy efficiency of an existing property. The incentives vary, but typically involve a discount to the fixed rate, or cashback payable after completion of the improvement. Points of interest include: (i) Green mortgages have a growing role to play in decarbonising the UK’s housing stock, which account for around a fifth of the UK’s greenhouse gas emissions. With over 9 million regulated mortgages in the UK, the mortgage sector can be hugely influential in helping borrowers reduce emissions and the costs of their energy bills; (ii) lenders risk missing their decarbonisation targets if they don’t evolve their support for homeowners to enhance energy efficiency – emissions from mortgaged homes are estimated to account for 80% of mortgage lenders’ total emissions; (iii) brokers have a key role to play in helping borrowers navigate a complex and nuanced landscape in terms of green home finance. Different lenders offer different types of incentive, depending on a huge range of variables. It’s not easy to compare them, especially when some products require a jump in EPC rating, while others need a specific type of energy efficiency improvement to be carried out; (iv) several risks are also inherent. If lenders fail to develop credible plans to meet their stated decarbonisation targets, the FCA is likely to take a very dim view and it could be perceived by the market as greenwashing. Lenders adopting a blinkered approach and targeting only the most efficient properties would have the unintended consequence of making it difficult, or very expensive, to secure a mortgage for properties with lower energy efficiency, even if those properties could be significantly upgraded. It would also penalise those homeowners who are not currently able to make those improvements without help, who are likely to be more vulnerable; (v) the FCA’s Innovation Sandbox can provide support and guidance for firms seeking to innovate in this way; and (vi) to support firms in their planning process for the new Consumer Duty, Mr Geale sets out how they may meet its requirements in relation to ESG products. The government has indicated it is considering further action and will report by the end of this year on potential initiatives for all housing tenures. This includes the possibility of legislating for new minimum EPC ratings for homes, creating further drivers for growth in ‘green’ lending.
BoE speech on climate action
On 18 April, the BoE published a speech by Sarah Breeden, BoE Executive Director, Financial Stability Strategy and Risk, on climate action. Ms Breeden explores current progress in how the UK’s banks and insurers are building their approaches to climate risks across four dimensions: scenario analysis, firm risk management capabilities, disclosure, and green finance. The shift Ms Breeden had hoped to see in stronger linkages between climate change and strategic decision making across the economy have proved harder to deliver in practice. She sets out four key challenges the UK will need to overcome if it is to turn aspiration into action that advances the transition: (i) filling capability gaps in the transition finance infrastructure takes time, so urgent steps need to be taken now – a necessary foundation is investing in education to increase staff understanding of climate issues. Transition plans are also fundamental to driving the right transition; (ii) the world does not stand still – Ms Breeden considers that it is prudent to assume that unexpected political and economic headwinds, such as those experienced over the last few years, will continue to occur. This requires an adaptable approach in the near-term, while continuing to make progress in the long-term; (iii) it is difficult, but essential, for real economy and financial firms to make transition-driven business decisions in the absence of complete clarity on our pathway to net zero – setting clear and comprehensive policy will likely take years, but firms should not delay taking action to better understand how transition might impact their businesses; and (iv) system wide change is complex as the actions of one are dependent on actions of others, so it is important to coordinate action throughout the supply chain – economy-wide emissions reductions will come through proactive engagement with counterparties and suppliers, and decisions aligned to the transition over time.
EC adopts answers to ESAs’ questions on interpretation of SFDR
On 14 April, the EC published a Decision stating that it has adopted a set of answers to questions submitted by the ESAs relating to the application of the SFDR. In order to ensure consistency, previous answers adopted on 6 July 2021 and 13 May 2022 have also been amended. The Q&As, set out in the Annex to the EC’s Decision, relate to, among other topics: (i) the interpretation of “sustainable investment”, “investment in an economic activity that contributes to an environmental objective” and “investment in an economic activity that contributes to a social objective” in Article 2(17); (ii) product design of financial products that have a reduction in carbon emissions as their Article 9(3) objective; (iii) whether financial products can “promote” carbon emissions reduction as an “environmental characteristic”, as opposed to having it as an “objective”, and therefore disclose information in accordance with Article 8; (iv) the meaning of “consider” in the disclosure obligation in Article 7(1)(a); and (v) the meaning of employee in relation to the 500 employee principal adverse impacts threshold in Article 4. The EC has also published the covering letter sent to the ESAs requesting them to publish the Q&As.
Other developments
EBA consults on approach to resubmission of historical data under the EBA reporting framework
On 18 April, the EBA began consulting on draft guidelines on the resubmission of historical data under the EBA reporting framework. The objective of the draft guidelines is to provide a common approach to the resubmission by the financial institutions of historical data to the competent and resolution authorities in case there are errors, inaccuracies or other changes in the data reported in accordance with the supervisory and resolution reporting framework. The general approach aims at limiting the amount of past historical periods subject to resubmission, depending on the frequency of the original reporting and reference dates affected by the errors or inaccuracies that require corrections and resubmissions. Financial institutions are expected to resubmit the corrected data for the current reporting date and historical data for past reference dates going back at least one calendar year (except for the data with monthly reporting frequency). The guidelines also set out general circumstances when the resubmission of historical data may not be required. They also specify the role of the competent and resolution authorities, and the EBA, when dealing with corrections of historical reported data, noting that depending on the supervisory needs of the competent authorities, resolution authorities or the EBA, the authorities may require the financial institutions to resubmit historical data for more reference dates compared to the guidelines’ requirements. The deadline for comments is 31 July. The guidelines are expected to apply from 31 December.
BoE speech on diversity, equity and inclusion
On 19 April, the BoE published a speech given by Afua Kyei, BoE CFO and Executive Director, Finance, on diversity, equity and inclusion (DEI). Ms Kyei discusses some common themes across the banking and financial sector, including: (i) it is important for colleagues to have a strong sense of purpose in the work they are doing; (ii) across the public and commercial banking sector, there is a real drive to make the workplace inclusive so that people can be themselves; (iii) it is important to have role models that people can identify with at the top, as otherwise it suggests a glass ceiling and can affect morale and willingness to buy into the leadership vision; (iv) people must be given equal opportunity and equal support to progress. It is important that there is challenge and discussion amongst the decision-makers to help reach more fair outcomes; (v) employee networks can foster a sense of belonging and community for staff, and drive changes to policies; and (vi) qualitative and quantitative DEI data and metrics are important in order to track progress. It is also important to actually understand the lived experiences of colleagues while they are at work.