Key Regulatory Topics: Weekly Update 14-20 October 2022
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This week in the UK, the PRA published a statement on credit risk mitigation eligibility of guarantees under the Energy Markets Financing Scheme, as well as letters sent to credit unions on its 2022 annual assessment findings. In addition, UK Finance published a report on integrating climate risk into the prudential capital framework, and the FCA released its latest complaints data. In Europe, ACER and ESMA announced they are establishing a joint task force to strengthen oversight of energy and energy derivatives, and the Council of the EU reached provisional agreement with the European Parliament on proposed amendments to the ELTIF Regulation.
Capital markets
Please see the Financial Crime and Sanctions section for an update on the Delegated Regulation setting out a contractual template for liquidity contracts for SME growth market issuers' shares under MAR which has been published in the OJ.
Consumer/retail
FCA H1 2022 Complaints Data
On 20 October, the FCA published its half yearly complaints data for individual firms for H1 2022. Financial services firms received a total of 1.88m complaints in this period, an increase of 1% on H2 2021. The decumulation and pensions product group saw the biggest increase in complaints received by firms, up 15% from H2 2021. Insurance and pure protection also saw an increase in complaints of 5%, while all other product groups either saw the complaints numbers stay constant or fall slightly. Current accounts remain the most complained about products, although the number has stayed relatively constant. Notable increases can be seen in general insurance packaged multi products, up 214% from H2 2021; travel; and motor and transport.
FCA consumer investments strategy update
On 18 October, the FCA published an update on its consumer investments strategy, summarising the strategy’s progress over the last year. The update highlights the work that has already been delivered over the last 12 months that is impacting the market, work that will impact the market over the next 12 months, as well as setting out the FCA’s progress on long term changes to the market. Section 2 of the update illustrates how the market has evolved over the last two years, noting a growth in consumer investments accounts and increases in consumers holding investments, with cryptoassets seeing the most significant growth in ownership. However, following Russia’s invasion of Ukraine, inflation has risen sharply and is expected to remain high for the coming year, and consumers’ willingness and ability to invest has deteriorated. Section 3 of the update sets out the FCA’s progress towards the four outcomes of its consumer investments strategy: mainstream investments; higher-risk investments; scams and fraud; and consumer redress. Overall, three of the outcome metrics have fallen, with one at risk of falling. The FCA notes that it did not necessarily expect to see improvements in these long-term outcomes during the first year of the strategy. It will take time to implement and see the impact of its interventions, therefore, there is a time lag for many of the outcome indicators. In addition to the update, the FCA also published its fourth consumer investments data review, which shows its activities to protect consumers from investment harm from the beginning of April 2021 to the end of March this year.
LSB report on inclusion in business banking and credit: disability and other access needs
On 17 October, the LSB published a report on the financial inclusion of disabled customers and those with other access needs within business banking and credit. The report aims to provide insight and consideration for banks and lenders to ensure their offerings are inclusive and accessible. Practical recommendations for firms made by the report include to: (i) look at who is involved with the design and sign-off process to ensure there are diverse viewpoints being used to assess risks and opportunities; (ii) aim to improve representation across business banking, by examining recruitment processes; and (iii) ensure that customer service teams receive appropriate training, and that ‘vulnerable customer’ expertise is not contained only within one specialist team.
Financial crime and sanctions
ACER and ESMA enhance cooperation to strengthen oversight of energy and energy derivative markets
On 18 October, the EU Agency for the Cooperation of Energy Regulators (ACER) and ESMA announced that they are strengthening their cooperation by establishing a new joint task force with the aim of improving information exchange and avoiding potential market abuse in Europe’s spot and derivative markets. Regulatory oversight of potential market abuse of the trading in energy and financial products falls under two EU regulatory frameworks: REMIT; and MAR. The joint ACER-ESMA task force aims to provide a framework for broadening cooperation on the monitoring of energy and energy derivatives markets, by reinforcing their cooperation and enhancing coordination in respect of the exchange of data and knowledge among their staff and respective national authorities. The press release highlights that in the current energy crisis characterised by high prices and price volatility, vigilance in detecting market manipulation and insider trading is more important than ever to ensure confidence in EU wholesale energy and financial derivatives trading. ACER and ESMA are also ready to cooperate in additional areas in the future. This could notably be the case in the context of the possible new LNG benchmark currently under consideration by the EC, and with an enhanced monitoring of risks in energy markets, helping to preserve financial stability in EU markets.
Delegated Regulation setting out template for liquidity contracts for SME growth market issuers' shares under MAR published in OJ
On 18 October, Commission Delegated Regulation (EU) 2022/1959 containing RTS setting out a contractual template for liquidity contracts for the shares of issuers whose financial instruments are admitted to trading on an SME growth market under MAR was published in the OJ. The Delegated Regulation will enter into force on 7 November, 20 days following its publication in the OJ.
Fund regulation
Council of the EU reaches provisional agreement on proposed amendments to ELTIF Regulation
On 19 October, the Council of the EU announced that it has reached provisional agreement with the EP on the review of the regulation on ELTIF. The amendments aim to make ELTIFs more attractive and easier to invest in. In their agreement, the co-legislators intend to overcome a number of supply-side and demand-side limitations. In particular, they clarified the scope of eligible assets and investments, the portfolio composition and diversification requirements, the conditions for borrowing and lending of cash and other fund rules, including sustainability aspects. The package also includes rules to make it easier for retail investors to invest in ELTIFs while ensuring strong investor protection. The next step will be for the Council of the EU and the EP to approve the provisional agreement before going through the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published.
Markets and markets infrastructure
Please see the Financial Crime and Sanctions section for ACER and ESMA’s enhanced cooperation to strengthen oversight of energy and energy derivative markets.
ESMA updates Q&As on CSDR
On 20 October, ESMA published an updated version of its Q&As on the implementation of the CSDR. ESMA has updated three Q&As in relation to settlement discipline. In particular, the new Q&As concern the calculation, scope, and costs and process of cash penalties.
EC adopts Delegated Regulation amending RTS on EMIR commodity derivative clearing thresholds
On 18 October, the EC adopted a Delegated Regulation amending RTS laid down in Delegated Regulation (EU) 149/2013 relating to the value of the clearing threshold for positions held in OTC commodity derivative contracts and other OTC derivative contracts under EMIR. In June, ESMA published a report with the final draft of the Amending Regulation in which it proposed a EUR 1 billion increase in the clearing threshold for commodity derivatives. The Amending Regulation introduces this modification by ESMA by increasing the clearing threshold for commodity derivatives in Delegated Regulation (EU) 149/2013 from EUR 3 billion to EUR 4 billion. As explained in the explanatory memorandum to the Amending Regulation, this relief will only benefit non-financial counterparties, and should avoid non-financial counterparties becoming subject to margin requirements for undue reasons, without creating risks to financial stability. The increase in the clearing threshold should not have any impact for financial counterparties as they are subject, in all cases, to risk-mitigation techniques, including bilateral margining, whether they are above or below the clearing thresholds. The EC also confirmed its intention to further reflect on how to improve the methodology to compute the position towards the clearing threshold for non-financial counterparties, including looking how to better take into account fluctuating prices, and OTC derivatives transactions that are already cleared, after which, another review of the thresholds to cater for any changes is likely to be necessary. The Amending Regulation will now be scrutinised by the Council of the EU and the EP. If neither object, it will enter into force on the day after its publication in the OJ.
EC adopts Delegated Regulation easing collateral requirements under EMIR
On 18 October, the EC adopted a Delegated Regulation (together with an Annex) amending the RTS laid down in Delegated Regulation (EU) 153/2013 as regards temporary emergency measures on collateral requirements under EMIR. The recent political and market developments have led to significant price and volatility increase on energy markets, which have triggered substantial margin increases by CCPs to cover the related exposures. These margin increases have created liquidity strains on non-financial counterparties (NFCs), resulting in them either reducing their positions or leaving them improperly hedged, exposing them to further price variations. The Amending Regulation temporarily expands the pool of eligible collateral to uncollateralised bank guarantees for NFCs acting as clearing members, and to public guarantees for all types of counterparties. These provisions will expire 12 months after the entry into application of the Regulation. However, depending on how the situation on energy derivative markets evolves, the EC is ready to ask ESMA to consider an extension of the temporary measures. The Amending Regulation will enter into force on the day following its publication in the OJ.
ESMA temporarily amends RTS on CCP collateral requirements on energy derivative markets
On 14 October, ESMA published a final report setting out draft RTS providing measures aimed at alleviating the liquidity pressure on non-financial counterparties (NFCs) active on gas and electricity regulated markets cleared in EU-based CCPs. The draft RTS amend Delegated Regulation 153/2013, which supplements EMIR, to temporarily expand for a period of 12 months the pool of CCP eligible collateral to uncollateralised bank guarantees for NFCs acting as clearing members and to public guarantees for all types of counterparties. ESMA also published a Q&A clarifying the eligibility of bonds and commercial paper as collateral for CCPs. ESMA has sent the final report to the EC for endorsement and it will then be subject to a scrutiny procedure by the EP and the Council of the EU. The amended RTS will enter into force the day after their publication in the OJ. ESMA states that it will continue to work on other potential measures, as outlined to the EC in its September letter, to respond to the extreme volatility in the energy markets.
ECON draft report on CSDR Refit
On 14 October, ECON published a draft report on the EC’s CSDR Refit proposal. The Rapporteur suggests modifications to the proposal, including: (i) to remove the mandatory buy-in regime entirely, while reintroducing into the Short Selling Regulation the CCP buy-in provisions against naked short-selling that already existed prior to the CSDR. The Rapporteur also suggests enhancements to the penalties regime; (ii) to require only one college based on the substantial importance of a CSD in a Member State, rather than one college for passports and one for CSDs belonging to groups with two or more CSDs; (iii) to provide more granular guidance at Level I as to which considerations the EBA should take into account when setting the risk limit for the provision of ancillary foreign currency settlement without authorisation, and also the accompanying risk management and prudential mitigating requirements. The Rapporteur suggests that ESMA is given responsibility for monitoring compliance with the threshold. Additionally, the scope of services to be offered by banking CSDs to user CSDs should be limited to services which are provided for the purposes of settlement in foreign currencies; (iv) limiting the scope of the obligation for CSDs to submit information for financial instruments constituted under the law of another Member State to shares; (v) introducing specific requirements to address risks stemming from CSDs operating securities settlements systems that use netting arrangements; (vi) introducing an LEI obligation for issuers; and (vii) including in the next CSDR review a consideration of the DLT pilot regime and the possibility of moving towards a T+1 settlement cycle.
Prudential regulation
Please see the Sustainable Finance section for the UK Finance report on integrating climate risk into the prudential capital framework, and the EBA’s opinion on the EC’s proposed amendments to the EBA’s final draft ITS on prudential disclosures of ESG information under the CRR.
Corrigendum to Implementing Regulation on competent authority reports under IFD published in OJ
On 20 October, a Corrigendum to Implementing Regulation (EU) 2022/389 laying down ITS for the application of the IFD with regard to the format, structure, content lists and annual publication date of the information to be disclosed by competent authorities, was published in the OJ. The Corrigendum corrects drafting errors in Annex IV of the Implementing Regulation including references to reporting templates.
EBA publishes final standards and guidelines on interest rate risk arising from non-trading book activities
On 20 October, the EBA published a final set of guidelines and two final draft RTS specifying technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions. These guidelines and RTS complete the onboarding into EU law of the Basel standards on IRRBB and are of particular importance given the current interest rate environment. The EBA will also closely monitor their implementation and the impact of the evolving interest rates on the management of IRRBB by EU institutions and on other prudential aspects. The guidelines on IRRBB and credit spread risk arising from non-trading book activities (CSRBB) will replace the current guidelines on technical aspects of the management of interest rate risk arising from non-trading activities under the supervisory review and evaluation process (SREP) published in 2018. Notable new aspects of the guidelines include the criteria to identify non-satisfactory internal models for IRRBB management and those to assess and monitor CSRBB. These guidelines will apply from 30 June 2023, except for the part on CSRBB, which will apply from 31 December 2023. The final draft RTS on the IRRBB standardised approach specify the criteria used to evaluate the risks arising from potential changes in interest rates that affect both the economic value of equity (EVE) and the net interest income of an institution’s non-trading book activities. They will also provide a simplified standardised approach for smaller non-complex institutions. The final draft RTS on IRRBB supervisory outlier tests specify the modelling and parametric assumptions and the supervisory shock scenarios to identify institutions for which the EVE would decline by more than 15% of Tier 1 capital, as well as to evaluate if there is a large decline in the net interest income, that could trigger supervisory measures. The draft RTS will be submitted to the EC for endorsement, following which they will be subject to scrutiny by the EP and the Council of the EU before being published in the OJ.
PRA statement on CRM eligibility of guarantees under Energy Markets Financing Scheme
On 18 October, the PRA published a statement on credit risk mitigation (CRM) eligibility, risk-based capital treatment, and leverage ratio treatment of guarantees under the Energy Markets Financing Scheme (EMFS). The statement sets out the PRA’s observations on the capital requirements relating to firms’ exposures under the EMFS, particularly eligibility for recognition as unfunded CRM under the UK CRR. The statement also sets out observations on the treatment of exposures under the UK leverage ratio framework. The PRA explains that a guarantee is one form of unfunded credit protection which, where it meets the conditions in Article 194 and Articles 213 to 215 of the UK CRR, may allow a firm to adjust their capital requirements. The PRA considers that the terms of the guarantee provided under the EMFS do not contain features that would render the guarantee ineligible for recognition as unfunded credit risk protection under the UK CRR, and the effects of the guarantee would appear to justify such treatment. The PRA provides observations on the EMFS scope of protection, and also considers the implications of the EMFS for (i) firms applying the standardised approach for credit risk; (ii) firms applying the internal ratings based (IRB) approach for exposures to the obligor, with a permanent partial use (PPU) exemption for exposures to the guarantor; and (iii) firms applying an IRB approach for exposures to the obligor and for exposures to the guarantor. The PRA also expects firms to include exposures relating to the EMFS in their leverage ratio total exposure measure. HMT and the BoE launched the EMFS on 17 October to address the extraordinary liquidity requirements faced by energy companies operating in UK wholesale physical gas and electricity markets.
EBA peer review report on ICT risk assessment under the SREP
On 17 October, the EBA published the conclusion of its peer review of how competent authorities (CAs) supervise institutions’ ICT risk management and have implemented the EBA guidelines on ICT risk assessment under the supervisory review and evaluation process (SREP). The EBA’s findings include: (i) CAs generally apply a risk-based approach to the supervision of ICT risk where the frequency and depth of the assessments correlate with the level of ICT risk of the institutions; (ii) the main challenges faced by CAs are building the necessary ICT supervisory capacity and expertise, applying proportionality in the assessment, and incorporating the ICT risk assessment into the overall SREP; and (iii) no significant concerns regarding the ICT risk assessment under the SREP were identified in the course of the peer review, but the EBA makes a number of recommendations for further improvements of supervisory practice.
PRA letters to credit unions on 2022 annual assessment findings
On 14 October, the PRA published two letters sent to credit unions (CUs) providing an overview of the findings from its 2022 annual assessment: (i) to small CUs with total assets of less than GBP15 million and fewer than 10,000 members; and (ii) to large CUs with total assets above GBP15 million or with more than 10,000 members. In response to the challenging lending environment on account of the cost of living crisis, the PRA expects, among other actions, for all CUs by the end of December to review their financial projections. CUs should ensure that these are, and continue to be, realistic, especially with regards to the anticipated income and expenditure over the next 36 months. This review should happen at board level and be evidenced accordingly. Large CUs are also expected to include stress/scenario testing in their financial planning. The PRA states that it will shortly approach small CUs where it has identified that they are holding insufficient financial and/or non-financial resources. This includes where they have repeatedly failed to submit regulatory returns, or submit returns that are materially inaccurate. The PRA expects small CUs to provide a plan to demonstrate how they will address their particular issues. The PRA will only grant more than three months for such a plan to be provided in exceptional circumstances. Where a small CU is unable to provide assurance that it is capable of compliance, the PRA expects the Board to consider credible strategies such as wind-up/wind-down and/or transfer of its engagement to another CU. In the Appendices to the letters, the PRA outlines its expectations in relation to other matters including: (1) the end of the modification of PRA provisioning rule 3.11; (2) succession planning; (3) operational change notifications; and (4) the Financial Services Compensation Scheme self-verification portal and frequent issues with single customer view files.
Recovery and resolution
Please see the Prudential Regulation section for letters sent from the PRA to credit unions discussing the findings from its 2022 annual assessment of the sector.
Regulatory reform post Brexit
Draft Financial Services (Miscellaneous Amendments) Regulations 2022 laid before Parliament
On 18 October, a draft version of the Financial Services (Miscellaneous Amendments) Regulations 2022, along with a draft explanatory memorandum, was published on legislation.gov.uk. The draft Regulations aim to address certain deficiencies in retained EU Law relating to: (i) Part 3 of the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 (SI 2019/680) which saved the effect of certain legislation in relation to Gibraltar-based firms and activities. Regulation 2 of these draft Regulations transfers certain functions from EU bodies to the FCA and HMT in relation to Gibraltar-based firms and activities; and (ii) the retained EU Law version of EMIR (UK EMIR) and the retained EU law version of the Securitisation Regulation. Regulations 3 and 4 of the draft Regulations extend the requirement for institutional investors to conduct specific due diligence prior to investing in EU STS securitisations, and extend the exemption from the clearing obligation in relation to EU STS securitisations to those notified prior to 11pm on 31 December 2024 (both currently apply in relation to EU STS securitisations notified prior to 11pm on 31 December 2022). The Regulations will come into force at 11pm on 31 December.
Sustainable finance
UK Finance report on integrating climate risk into the prudential capital framework
On 18 October, UK Finance published a report on integrating climate risk into the prudential capital framework, which outlines industry views on the appropriateness of capital for climate-related financial risks, and the options for integrating climate-related risks into the prudential capital framework. The report reflects the outcome of the work UK Finance carried out with the six UK banks that are in scope of the BoE’s climate change stress test, as well as associate member KPMG. The views set out in the report include: (i) the banks agreed with the BoE’s view that any proposed changes to the capital framework should be for the purpose of mitigating climate-related financial risks and not for the primary purpose of supporting green finance; (ii) the banks agreed that until it is clear how climate risks will manifest differently from traditional financial risks it makes sense to focus on capturing climate through the application of existing regulatory tools, rather than fundamentally redesigning the framework in the short to medium-term; (iii) the stress testing component of the PRA Buffer is likely to be the most feasible and appropriate element of the capital framework to implement changes related to climate risk in the medium-term; (iv) modelling and access to consistent data remains a challenge and therefore addressing ‘capability gaps’ is a key dependency for introducing any changes to the capital regime in the short-term; (v) in the longer-term, climate change should be reflected in Pillar 1 as a driver of Credit, Market and Operational Risks, but these rules should be agreed at the international level by the BCBS; (vi) limited changes are expected to be required to Pillar 2a in the near-term; (vii) there were concerns around the potential use of Risk Management and Governance scalars for climate risk purposes at this stage unless regulators first provide further clarity on what ‘good’ looks like for climate risk management capabilities; and (viii) the banks did not identify a need to introduce a climate systemic risk buffer (SyRB) at this stage, as it is not yet clear whether aggregate capital requirements need to increase in response to climate change, or by how much. It was agreed that the BoE should publish a structured roadmap setting out the future regulatory direction of integrating climate into the capital framework, to support banks with planning and capability development.
EBA opinion on EC proposed amendments to draft ITS on Pillar 3 disclosures on ESG risks
On 17 October, the EBA published an opinion on the EC’s proposed amendments to the EBA’s final draft ITS on prudential disclosures of ESG information under the CRR. The EC has made two substantive changes, mainly with regard to the calculation and disclosure of the Banking Book Taxonomy Alignment Ratio (BTAR), in particular to emphasise: (i) that institutions ‘may’ choose to disclose this information, instead of being required to do it on a ‘a best effort basis’; and (ii) that the collection of the information from the counterparties will be on a ‘voluntary basis’, including that institutions need to inform the counterparties about the voluntary nature of this request of information. The EBA recognises the importance of proportionality and, therefore, although favouring the original ‘best effort basis’ wording, it accepts the amendments proposed by the EC. The EBA encourages institutions to request this information from the relevant counterparties even if it is on a voluntary basis, and, ultimately, to calculate the BTAR by using estimates or proxies, and to provide further explanations in the narrative on the unavailability of information. The EBA also agrees with the remaining non-substantive changes, due to their nature as non-substantive and given their usefulness in clarifying the text.
Other developments
EC publishes 2023 Work Programme
On 18 October, the EC published a communication outlining its work programme for 2023. The work programme was also accompanied by a series of annexes. Annex III sets out 116 priority pending proposals, to which the EC wants the EP and Council of the EU to take swift action. These include the following proposals in relation to financial services: (i) proposal for a Regulation amending the CSDR (CSDR Refit); (ii) proposal for a Regulation amending MiFIR as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders; (iii) proposal for a Directive amending MiFID II; (iv) proposal for a Regulation amending the Regulation on ELTIFs as regards the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorisation, investment policies and operating conditions of European long-term investment funds; (v) proposal for a Directive amending the AIFMD and UCITS Directive (AIFMD II) as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment fund; (vi) proposal for a Regulation amending the CRR as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR III Regulation); (vii) proposal for a Directive amending the Solvency II Directive ; (viii) proposals to strengthen the EU's AML and CTF rules; and (ix) proposal for a Directive on consumer credits. As set out in Annex I, the EC also intends to further improve data access in financial services with an initiative for a framework on open finance. It will also revise the Payment Services Directive. On the basis of the 2023 work programme, the EC, the EP and the Council of the EU will establish a joint declaration on the EU's legislative priorities, committing to take swift action.
FSB consultative report on achieving greater convergence in cyber incident reporting
On 17 October, the FSB began consulting on proposals to achieve greater convergence in cyber incident reporting. The proposals include: (i) 16 recommendations to address the challenges to achieving greater convergence in cyber incident reporting; (ii) further work on establishing common terminologies related to cyber incidents. A key instrument for achieving convergence in cyber incident reporting is the use of a common language. In particular, a common definition and understanding for what constitutes a ‘cyber incident’ is needed that avoids the over reporting of incidents that are not meaningful for financial authorities or financial stability; and (iii) a proposal to develop a common format for incident reporting exchange. A review of incident reporting templates and a stocktake of authorities’ cyber incident reporting regimes indicated a high degree of commonality in the information requirements for cyber incident reports. Building on these commonalities, the FSB proposes the development of a common reporting format that could be further considered among financial institutions and financial authorities. The deadline for comments is 31 December.