Key Regulatory Topics: Weekly Update 15 December - 21 December 2023
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Amongst the many updates in this bumper festive edition, the FCA has published consultations on detailed proposals for reforms to the listing regime and on proposed changes to the bond and derivative transparency regime.
The PSR has set out final detailed parameters of the new mandatory reimbursement requirement for APP fraud and the BoE updated its approach to resolution document (the Purple Book).
In the EU, ESMA published the 2023 CRA Market Share Report and updates to a number of its Q&As and the Council and the EP have reached a common understanding on the process for selecting the seat of the future European authority for countering money laundering and terrorist financing.
Please note that our next update will be published on Friday 5 January covering the period 22 December to 4 January. Until then, season’s greetings and best wishes for the new year.
Capital markets
Please see the Markets and Markets Infrastructure section for the FCA’s consultation on proposed changes to the bond and derivative transparency regime in the UK.
FCA consults on detailed proposals for listing rules reforms
On 20 December the FCA began consulting on detailed proposals for reforms to the listing regime. The FCA sets out feedback to its earlier consultation and explains that it has broadly maintained its approach of removing the current ‘premium’ and ‘standard’ listing segments and designing a new ‘commercial companies’ category for equity share listings. Given the nature of the reforms, the FCA are proposing to create a completely new ‘UK Listing Rules’ sourcebook (UKLR). This will allow them to re-order and re-structure existing LRs with the aim of making obligations for issuers and sponsors more accessible and less complex. The FCA has split the publication of the draft UKLR instrument into two tranches: (i) a first tranche contained with this consultation, which focuses on the UKLR underpinning new commercial companies category and sponsor requirements; and (ii) a second tranche for other categories and remaining provisions impacting all issuers, providing the full draft UKLR, to be published in Q1 2024. The deadlines for comments to the consultation are: (a) 16 February 2024, for the proposals to amend current sponsor competence requirements (LR 8) to widen the range of experience that can be taken into account for this purpose. The FCA plans to implement these changes separately in the spring of 2024 ahead of the proposed timeline for the wider UKLR reforms; and (b) 22 March 2024 for UKLR proposals regarding the replacement to the current LR sourcebook. The FCA intends to publish the final UKLR in H2 2024.
ESAP legislative package published in OJ
On 20 December, the legislative package relating to the EU Single Access Point (ESAP) was published in the OJ. The package consists of the ESAP Regulation, the ESAP Omnibus Directive and the ESAP Omnibus Regulation. The ESAP will offer a single access point for public financial and sustainability-related information about EU companies and EU investment products. The ESAP Regulation, ESAP Omnibus Regulation and ESAP Omnibus Directive will each enter into force on 9 January 2024 (the twentieth day following publication). Member states have until 10 January 2026 to transpose the ESAP Omnibus Directive into national law, except for Article 3 (which relates to the Transparency Directive), in respect of which the deadline is 10 July 2025.
Conduct and governance
FCA expectations of firms selling client banks
On 19 December, the FCA set out its expectations of firms selling client banks. A client bank is a name for a list of clients or accounts maintained by someone who provides financial services. It may include all clients the firm has worked with in the past and may include a right to income streams. Evidence has shown that in a small number of cases, firms have sold a client bank when they either knew they had redress liabilities or had failed to detect them. The FCA will make clear, through its supervisory work, that in its view the client bank is the firm’s asset. Where a firm claims that someone else owns some or all the client bank, firms should expect that supervisors will want proof. The FCA’s expectations include: (i) firms intending to sell its client bank must notify the FCA via a SUP 15 notification where the sale could affect the firm’s risk profile, value or resources; (ii) firms are encouraged to carry out due diligence to ensure the firm buying the client bank can provide the same level of service - e.g. regarding ongoing servicing; (iii) when two firms agree a transfer of investment business, the receiving firm must provide its newly acquired customers with its written basic agreement; (iv) the FCA will encourage firms to address and/or amend any arrangements to reduce the risks they pose to its objectives – including the risk they could be used to assist phoenixing. The FCA sets out some measures that the selling and purchasing firm may be invited to agree to. The FCA will investigate either firms and/or individuals closely associated with firms it suspects are structuring their business in a way that avoids their liabilities. The FCA will carefully scrutinise arrangements that a firm has with its employees or third parties to ensure that they do not present a risk to effective supervision or otherwise undermine a firm's ability to meet regulatory requirements or threaten the FCA’s objectives.
Consumer/retail
The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023
On 19 December, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023 was published, together with an explanatory memorandum. The Order amends the high net worth individual and self-certified sophisticated investor exemptions from the restriction on communicating financial promotions under the FPO. Specifically, it: (i) increases the financial thresholds to be eligible for the high net worth individual exemption to either income of at least £170,000 in the last financial year; or net assets of at least £430,000 throughout the last financial year; (ii) amends the eligibility criteria for the self-certified sophisticated investor exemption by removing the criterion of having made more than one investment in an unlisted company in the previous two years and increasing the company turnover required to satisfy the ‘company director’ criterion to £1.6m; (iii) requires natural persons or corporations to provide details of themselves in any communications made using the exemptions; (iv) updates the title of the certified high net worth individual exemption by removing ‘certified’; (v) updates the high net worth individual and self-certified sophisticated investor statements; and (vi) applies the changes to the exemptions in relation to the promotion of collective investment schemes. The Order also corrects a defect in the Financial Promotion Gateway Exemptions Regulations to ensure that all of the exemptions have the intended scope. The Order comes into force on 31 January 2024.
IOSCO statement on online harm
On 15 December, IOSCO published a statement in relation to online harm. IOSCO refers to ‘online harm’ meaning financial fraud perpetrated on the Internet, primarily targeting retail investors in the securities and derivatives markets, orchestrated using deceptive acts and / or misleading or fraudulent content, including user-generated content, where the author is unauthorised, or makes false or misleading claims or impressions, to induce the purchase of financial products and / or services. The statement is intended to serve as: (i) a warning to retail investors about the serious perils of online harm. IOSCO identifies five critical threats that it wishes to draw to the attention of the retail investor community; (ii) an invitation to other relevant stakeholders, including legislators, law enforcement agencies, search engine operators, social media platforms and other intermediaries and facilitators to support global efforts to reduce online harm; and (iii) a call to action to regulators to respond holistically and innovatively to online harm, including by working with players in the broader online harm ecosystem. IOSCO notes that combatting online fraud and harm has becomes one of its biggest priorities.
Financial crime and sanctions
Please see the Consumer/Retail section for a statement from IOSCO on online harm.
Please see the Payments and Payment Systems section for the PSR’s policy statement setting out the final detailed parameters of the new mandatory reimbursement requirement.
FCA Primary Market Bulletin No. 46
On 19 December, the FCA published Primary Market Bulletin No. 46, which discusses questions raised in relation to Article 10 UK MAR and ESG stewardship, including in relation to: (i) the FCA’s approach to assessing shareholder engagement – the FCA confirms that the August 2009 letter sent to the ABI and the observations in Market Watch 20 are still relevant when considering issues of shareholder activism, engagement and co-operation. This includes in the context of ESG stewardship; (ii) strategy and voting intentions – as stated in Market Watch 20, the FCA is unlikely to consider that market abuse rules have been contravened where a shareholder trades based simply on its own intentions and knowledge of its own strategy. Where major shareholders are concerned that their voting intentions or broader stewardship plans concerning an issuer may constitute inside information they should consider the requirements under Articles 8, 10 and 14 UK MAR. The FCA encourages market transparency in ESG matters; and (iii) disclosure of major shareholdings – when collaborating, shareholders should bear in mind their disclosure obligations under DTR 5.2.1R(a), which may require shareholdings to be aggregated in certain circumstances. The FCA also discusses the outcomes of its initial review of how sponsors have made changes to their procedures to assess whether new applicants have procedures in place to enable them to comply with the new Task Force on Climate-Related Financial Disclosures (TCFD) disclosure requirements. The FCA notes that it is pleased to have found that sponsors appear to be giving increased focus to climate-related matters and shares good practices that it observed.
Primary Market Bulletin No. 46
Council and EP agree on procedure to select seat for AMLA
On 18 December, the Council and the EP announced that they had reached a common understanding on the process for selecting the seat of the future European authority for countering money laundering and terrorist financing (AMLA). The co-legislators agreed on the principle of organising joint public hearings to allow representatives of member states’ candidacies to present their applications. The co-legislators will assess each application according to the selection criteria included in the call for applications, the information provided by candidates in their application forms, the EC’s assessment of those forms as well as the outcome of the joint public hearings. The final decision on the location of AMLA’s seat should be made by the co-legislators in an informal inter-institutional meeting at political level, where the EP’s and the Council’s representatives will vote together at the same time with the same number of votes attributed to each co-legislator. Nine member states submitted applications to host AMLA: Belgium (Brussels), Germany (Frankfurt), Ireland (Dublin), Spain (Madrid), France (Paris), Italy (Rome), Latvia (Riga), Lithuania (Vilnius) and Austria (Vienna). The EC was tasked to assess the eligibility of the candidacies. The release of the EC’s assessment is expected for January 2024. The next step is to proceed with the selection.
Fintech
IOSCO finalises policy recommendation for decentralised finance
On 19 December, IOSCO finalised its policy recommendations for decentralised finance (DeFi). The nine policy recommendations follow a “lifecycle” approach in addressing the key risks identified and cover six key areas: (i) understanding DeFi arrangements and structures; (ii) achieving common standards of regulatory outcomes; (iii) identification and management of key risks; (iv) clear, accurate and comprehensive disclosures; (v) enforcement of applicable laws; and (vi) cross-border cooperation. They are principles-based and outcomes-focused, and aimed at DeFi products, services, activities, and arrangements by applying IOSCO’s widely accepted global standards for securities markets regulation. IOSCO aims to address market integrity and investor protection concerns arising from DeFi by supporting greater consistency of regulatory frameworks and oversight in member jurisdictions. Their interoperability with IOSCO’s policy recommendations for crypto and digital assets markets is set out in the “Umbrella Note”, also published.
The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023
On 18 December, the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 were published, together with an explanatory memorandum. The Regulations create the framework which will enable the regulators (the BoE and the FCA) to operate the Digital Securities Sandbox (DSS). The DSS will allow firms and the regulators to test the use of new technology across financial markets. In particular, it will involve trialling the use of developing technology (such as distributed ledger technology, or in general technology that facilitates what are commonly referred to as ‘digital assets’) to perform the activities of a central securities depository (specifically notary, settlement and maintenance), and operating a trading venue. It will enable participating entities to be subject to modified legislative requirements, where the existing requirements act as a barrier or an obstacle to using new technology. The regulations specify, among other things: (i) the activities and financial instruments in scope (as well as the relevant regulator for these activities); (ii) the eligibility criteria to apply to participate in the DSS and, if successful, become a sandbox entrant; (iii) the arrangements to ensure that regulators are able to appropriately supervise the DSS; (iv) termination and wind-down arrangements for DSS activities; and (v) the relevant legislation being modified, disapplied or applied to entities in the DSS. The regulations will come into force on 8 January 2024. The BoE and the FCA will provide guidance in due course on the operation of the DSS.
Fund regulation
FSB and IOSCO policies to address vulnerabilities from liquidity mismatch in open-ended funds
On 20 December, the FSB published its revised policy recommendations to address structural vulnerabilities from liquidity mismatch in open-ended funds and IOSCO published final guidance on anti-dilution liquidity management tools (LMTs) for the effective implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes. The revised FSB recommendations are addressed to financial regulatory and supervisory authorities. They set out the key objectives for an effective regulatory and supervisory framework to address vulnerabilities arising from liquidity mismatch in OEFs. Combined with the LMT Guidance, these recommendations aim to achieve a significant strengthening of liquidity management by OEF managers compared to current practices. The revised recommendations provide greater clarity on the redemption terms that OEFs can offer to investors, based on the liquidity of the OEF asset holdings. The Revised FSB Recommendations seek to achieve: (i) greater inclusion of anti-dilution LMTs in OEF constitutional documents; and (ii) greater use of, and greater consistency in the use of, anti-dilution LMTs in both normal and stressed market conditions. To support these objectives and ensure more effective liquidity risk management practices, IOSCO’s LMT Guidance aims to support the greater use of anti-dilution LMTs by OEFs to mitigate investor dilution and potential first-mover advantage arising from structural liquidity mismatch in OEFs. The LMT Guidance sets out key operational, design, oversight, disclosure and other factors and parameters that responsible entities should consider when anti-dilution LMTs are used, to promote greater, more consistent, and more effective use of these tools. Looking ahead: (a) IOSCO will consider how to further operationalise the Revised FSB Recommendations through amendments to the 2018 IOSCO Recommendations and supporting good practices, as needed; (b) the FSB and IOSCO will complete a stocktake by the end of 2026 to review progress by member jurisdictions in implementing their respective revised Recommendations and guidance; and (c) by 2028, the FSB and IOSCO will assess whether implemented reforms have sufficiently addressed risks to financial stability.
ESMA final draft RTS under revised ELTIF Regulation
On 19 December, ESMA finalised draft RTS for the revised European Long-Term Investment Fund (ELTIF) regulation. The draft RTS cover: (i) the circumstances in which the life of an ELTIF is considered compatible with the life cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF; (ii) the circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors; and (iii) the costs disclosure. The RTS final report delineates the specific rules that are to be applied providing a detailed framework for aspects such us minimum holding period and maximum redemption frequency, choice of liquidity management tools, notice period and maximum percentage of liquid assets that can be redeemed. The final report sets out the amendments made by ESMA in response to feedback from the last public consultation. ESMA has submitted the draft RTS to the EC for endorsement and final approval.
ESMA final guidelines on stress test scenarios under MMF Regulation
On 19 December, ESMA finalised its guidelines on stress test scenarios under the money market fund (MMF) Regulation. The final guidelines combine an update of the methodology to implement the scenario related to the hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF, with the annual calibration of the risk parameters. Based on feedback received from stakeholders, the revised methodology includes parameters reflecting the liquidity stress affecting the money market and a new risk factor to simulate the additional impact of asset sales under stress market conditions. The 2023 parameter update reflects the prevailing sources of systemic risk identified for the financial system, against the background of a prolonged period of low growth, elevated inflation and higher interest rates. The guidelines will now be translated and will become applicable two months after publication of the translations. Once the updated guidelines apply, managers will have to report the results of the new parameters to NCAs with their quarterly reports. Until then, managers should use the parameters set in the 2022 Guidelines and report accordingly.
RTS and ITS on cross-border activity notifications under UCITS Directive and AIFMD
On 15 December, the EC adopted four pieces of secondary legislation relating to the UCITS Directive and AIFMD: (i) Delegated Regulation supplementing the AIFMD with regard to RTS specifying the information to be notified in relation to the cross-border activities of managers of AIFMs under Article 33 of the AIFMD; (ii) Delegated Regulation supplementing the UCITS Directive with regard to RTS specifying the information to be notified in relation to the cross-border activities of management companies and UCITS under Articles 17, 18 and 20 of the UCITS Directive; (iii) Implementing Regulation laying down ITS for the application of the AIFMD with regard to the form and content of the information to be notified in respect of the cross-border activities of AIFMs and the exchange of information between competent authorities on cross-border notification letters; and (iv) Implementing Regulation laying down ITS for the application of the UCITS Directive with regard to the form and content of the information to be notified in respect of the cross-border activities of UCITS, UCITS management companies, the exchange of information between competent authorities on cross-border notification letters, and amending Regulation 584/2010. The Council and the EP will now scrutinise the draft legislation. If neither object, they will enter into force 20 days after publication in the OJ and apply 30 days later.
Markets and markets infrastructure
Please see the Consumer/Retail section for a statement from IOSCO on online harm.
Please see the FinTech section for: (i) the publication of the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023; and (ii) IOSCO’s finalised policy recommendations for decentralised finance (DeFi).
Please see the Regulatory Reform Post Brexit section for the publication of the Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023.
BoE consults on approach to statutory notice decisions for use of its new FMI requirements powers
On 21 December, the BoE began consulting on its approach to statutory notice decisions for use of its new FSMA 2023 requirements powers in relation to FMIs. Under FSMA 2023, the BoE has been given a number of new powers, matched by new obligations and accountabilities, in its role as the UK’s regulator for CCPs and CSDs. These include the power to issue requirements to recognised UK CSDs, recognised UK CCPs and systemic third-country CCPs. This power will allow the BoE to require such entities to take, or refrain from taking, a specified action. Consistent with the new regulatory principles introduced under the Act, any burden or restriction imposed by the BoE should be proportionate to the benefits expected to result. The introduction of the new power is not unfettered and is matched by more stringent requirements in respect of transparency of the decision-making and publication processes, including important safeguards for how the BoE will engage with entities in respect of the decision and the ability for a decision to be referred to the Upper Tribunal. The BoE is therefore consulting on a statement of policy (SoP) with respect to allocation of decision-making regarding statutory notices, its approach to supervisory statutory notice decision-making, and its approach to publication of supervisory statutory notice decisions. However, the BoE is not consulting on the likely conditions where it may choose to use the power itself. The deadline for comments is 21 March 2024.
ESMA consults on securitisation disclosure templates
On 21 December, ESMA began consulting on the possible revision of the securitisation disclosure templates set out in the Disclosure RTS and ITS. These standards relate to the specific information and details of securitisation transactions that should be made available. ESMA has proposed four options: (i) putting the template review on hold until revision of the Level 1 text; (ii) expanding the current framework with the introduction of few amendments to the currently used disclosure templates; (iii) focusing on a targeted review for streamlining the information required and developing a new dedicated and simplified template for private securitisations only; or (iv) undertaking a thorough review of the current disclosure framework proposing a significant simplification of the templates. The deadline for comments is 15 March 2024.
FCA update to ancillary activities exemption for commodity derivatives (2024-2025)
On 20 December, the FCA provided an update on the ancillary activities exemption for commodity derivatives for 2023-24. The exemption enables firms carrying on investment services and activities relating to commodity derivatives and emission allowances on an ancillary basis to their main business to avoid the need for FCA authorisation. Firms seeking to rely on the exemption must perform the market share test under UK Commission Delegated Regulation (EU) 2017/592 (UK MiFID RTS 20). ESMA no longer publishes the data that UK firms relied on to make calculations for the test. Following HMT’s decision to put back the application of relevant changes to the ancillary activities test to 1 January 2025 the FCA will enable firms to continue using the ancillary activities exemption for 2024-2025 where they were able to rely on the exemption for 2022-2023 based on trading relating to the last published information (which relates to 2018-2020) on the overall size of the market. The FCA’s approach also maintains the additional flexibility for firms to have regard to their daily trading activity of the previous 3 years (2021-2023) for the purposes of continuing to rely on the exemption.
FCA policy for UK consolidated tape and consultation on data provider payments and DRSP forms
On 20 December, the FCA published a policy statement for the framework for a UK consolidated tape (CT) for bonds, together with a consultation on payments to data providers and forms for data reporting services providers (DRSPs). The policy statement sets out the main points raised in feedback and the changes to the final policy that the FCA has made as a result, including in relation to: (i) the number of CT providers per asset class; (ii) the scope, operation and economic model for a CT for bonds; (iii) the framework of rules for a bond CT provider (CTP), approved publication arrangements (APAs) and approved reporting mechanisms (ARMs); and (iv) the consolidation of the provisions applying to ARMs and APAs currently in the draft Data Reporting Services Regulations 2023 (DRSRs), MiFID RTS 13 and the Handbook chapter MAR 9. The final rules are set out in the Data Reporting Services (Amendment) Instrument 2023. The FCA has also published the Technical Standards (Authorisation, Organisational Requirements and the Publication of Transactions for Data Reporting Services Providers) Instrument 2023, which revokes MiFID RTS 13 and MiFID ITS 13. These will come into force on 5 April 2024, in line with the draft DRSRs, if Parliament approves them. The FCA also sets out the consultation feedback in relation to its proposals on the bond CTP’s terms of access to input data. The FCA is now launching a narrower consultation on proposals in relation to the payments from the bond CTP to trading venues and APAs that will have to give data to the CTP, as this was the subject of significant comment in the feedback. The FCA is also consulting further on proposals on changes to authorisation and other forms for CTPs, APAs and ARMs. The changes are necessary to reflect the proposed changes to the DRSRs, consolidation of requirements in the Handbook and the new provisions about the operation of CTPs. The deadline for comments is 9 February. Looking ahead: (a) the FCA will develop tender criteria with a view to commencing the tender itself to appoint a bond CTP during 2024. As part of this process, the FCA will speak to a full range of market participants to gather their views on relevant issues; (b) the FCA expects that a bond CTP will start operation in H2 2025; (c) the FCA expects to complete changes to the transparency regime during 2024 with the changes starting to apply during 2025 before the CTP goes live; and (d) the FCA will provide an update on next steps for an equities CT in 2024.
Policy statement and consultation
Data Reporting Services (Amendment) Instrument 2023
FCA consults on improving transparency for bond and derivatives markets
On 20 December, the FCA began consulting on proposed changes to the bond and derivative transparency regime in the UK and on the definition of a systematic internaliser (SI) for all financial instruments. The proposals aim to deal with issues identified in the Wholesale Markets Review and other issues that have been identified in discussions with market participants, including: (i) the classes of financial instruments for which there is a strong policy case for minimum harmonised transparency requirements. The asset classes specified are sovereign bonds, corporate bonds and certain derivatives subject to the clearing obligation; (ii) transaction reporting; (iii) rebalancing the relative importance between pre-and post-trade transparency, with greater emphasis on the quality and timelines of the latter; and (iv) the definition of a SI in UK MiFIR. The proposed new definition of a SI is based on qualitative criteria which aim to balance clarity for investment firms to decide if they are SIs with the need for the definition to flexibly apply to different markets and business models. The FCA are proposing guidance in PERG to help with interpretation of the new definition. The FCA is using its new powers under FSMA 2023 to bring all the relevant requirements into the Handbook, mostly in a new a chapter (MAR11). The FCA will work closely with HMT to make sure there is a smooth and effective change from the existing transparency regime in miscellaneous legislation including UK MiFIR, the MiFID Org Regulation and MiFID RTS 2 to a new single streamlined source of regulation in MAR 11 of the Market Conduct Sourcebook. The deadline for comments is 6 March 2024.
ESMA 2023 CRA Market Share Report
On 20 December, ESMA published the 2023 CRA Market Share Report. Article 8d of the CRA Regulation requires issuers or related third parties, who intend to appoint two or more CRAs to rate an issuance or entity, to consider appointing at least one CRA with no more than 10% of the total market share in the EU. Where an issuer or related third party does not chose to appoint a CRA with a less than 10% total market share, the CRA Regulation (Article 8d) requires this decision to be documented. The Market Share Report contains a list of registered CRAs and the types of credit ratings they issue, together with a calculation of CRAs’ revenues from credit rating activities and ancillary services at group level to assist firms in complying with the requirement.
ESAs propose extending the EMIR equity option exemption
On 20 December, the ESAs finalised amending draft RTS on the risk mitigation techniques for OTC derivative contracts not cleared by a CCP (bilateral margining) under Article 11 of EMIR. The draft RTS propose to amend Commission Delegated Regulation (EU) No 2016/2251 that sets out the detailed bilateral margin requirements. The ESAs propose a two-year delay to the application of requirements related to the exchange of bilateral margins to OTC derivative contracts on single-stock equity options and index options not cleared by a CCP. The current temporary exemption to the application is set to expire on 4 January 2024. This interim solution comes in the context of the still ongoing EMIR Review negotiations, which the ESAs expect will provide a long-term decision regarding the treatment of equity options with respect to bilateral margining. The final report has been sent to the EC, and the ESAs are submitting the draft RTS for endorsement, in the form of a Commission Delegated Regulation. Following endorsement, they are then subject to non-objection by the EP and the Council. Given this practical challenge for the proposed amendment to be processed by 4 January 2024, the ESAs have issued a no-action Opinion in order both to provide the EC with their view on any action they consider appropriate and to further ensure the consistent, efficient and effective supervisory and enforcement practices, and the common, uniform and consistent application of the relevant provision dealing with the exemption from bilateral margining for equity options by competent authorities.
Council agrees negotiating mandate on proposed Regulation amending BMR
On 20 December, the Council of the EU announced that it has agreed its negotiating mandate on the proposed Regulation amending the BMR as regards the scope of the rules for benchmarks, the use in the Union of benchmarks provided by administrator located in a third country, and certain reporting requirements. The proposal aims to reduce the regulatory burden on administrators of benchmarks that are not economically significant in the EU by removing them from the scope of current rules. It also aims to simplify the current approach to non-EU country benchmarks in the EU. The Council highlights points on which it reached agreement, including that: (i) the regulatory treatment of commodity benchmarks should be tailored to their specific characteristics; (ii) only those benchmarks designated as critical, as significant (either by meeting a quantitative threshold, or by designation of the national competent authority concerned or by ESMA), EU Paris-aligned Benchmarks, EU Climate Transition Benchmarks, and certain commodity benchmarks should remain under the scope of regulation; and (iii) administrators of those benchmarks that were authorised, registered, endorsed or recognised on the date of application of this amending regulation should not be obliged to re-apply for authorisation, registration, recognition, or endorsement. Once the EP has adopted its negotiating position, the proposal will enter interinstitutional negotiations.
Delegated Regulation updating rules on EU ETS auctioning of greenhouse gas emissions
On 20 December, Commission Delegated Regulation (EU) 2023/2830 supplementing Directive 2003/87/EC by laying down rules on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances was published in the OJ. The Delegated Regulation replaces the EU ETS Auctioning Regulation 2010 ((EU) No 1031/2010). Amendments were necessary in order to, amongst other things, take account of the new rules and elements introduced in Directive 2003/87/EC, including the extension of the scope of the existing emission trading system to maritime transport and the introduction of a new and separate emissions trading system for buildings, road transport and industrial activities not covered by the existing emission trading system. In addition, minor modifications were made to clarify and fine-tune existing provisions, based on the lessons learned from implementation. The regulation entered into force on 21 December.
ESMA finalises amendments to guidelines on position calculation under EMIR Refit
On 18 December, ESMA published its final report on amendments to its guidelines on position calculation under Article 80(4) of EMIR, as amended by technical standards introduced under the EMIR Refit Regulation. The revised guidelines will apply to trade repositories (TRs) that are registered or recognised by ESMA in accordance with Articles 55 and 77 of EMIR respectively. The guidelines provide clarification regarding the time of calculations, the scope of the data to be used in calculations and the calculation methodologies under the new EMIR Refit standards. The final report also clarifies the way forward for TRs to manage the 6-month EMIR Refit transition period. Having assessed the current usage and dependencies of the position report and in response to stakeholder feedback, ESMA plans to delay the application date of the revised guidelines until the EMIR Refit transition period has been concluded. The existing guidelines will be repealed on 29 April 2024 and replaced with the new guidelines that will apply from 28 October 2024, providing for a 6-month transition period.
PRA/FCA policy statement on UK EMIR margin requirements for non-centrally cleared derivatives
On 18 December, the PRA and FCA published a policy statement on margin requirements for non-centrally cleared derivatives. The final policy amends Binding Technical Standard (BTS) 2016/2251. After considering responses, the regulators have decided to maintain: (i) the status quo under the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements until 4 January 2026, allowing the PRA and FCA to gather the evidence necessary to create a permanent regime; and (ii) the current framework for margin model reviews. The amendments to the BTS were effective on 18 December, which is when the final technical standards instrument by the PRA and FCA came into force.
FCA update on implementation of increase of net short position notification threshold
On 18 December, the FCA provided an update on its implementation of the increased notification threshold for the reporting of net short positions in shares from 0.1% to 0.2%. The amended threshold comes into force on 5 February 2024, as provided in the Short Selling (Notification Threshold) Regulations 2023. The FCA confirms that it is ready to receive notifications at the 0.2% threshold from 5 February 2024. The FCA requests that firms make the necessary changes to their systems and internal processes to allow them to submit notifications at the higher threshold via its Electronic Submission System. Until the threshold change is implemented on 5 February 2024, firms are required to continue to report positions which are at or above 0.1%.
BoE supervision of FMIs – annual report 2023
On 18 December, the BoE published its annual report on its supervision of FMIs. The BoE’s objectives for the coming year include: (i) delivering against its new objectives and using its rulemaking powers as provided by FSMA 2023. The BoE’s initial focus in implementing the new rulebook will be EMIR; (ii) taking forward work on extending SM&CR to CCPs and CSDs – the BoE notes that this will require secondary legislation from HMT; (iii) continuing work with FMIs on new standards for operational resilience; (iv) finalising its policy on its new powers in relation to critical third parties; (v) to continue work on enhancing CCP financial resilience, recovery and resolution. The BoE intends to publish the final statement of policy on the approach to its power to temporarily restrict or prohibit discretionary payments to shareholders or employees of UK CCPs in severe circumstances; (vi) to strengthen the resolution toolkit for all FMIs; (vi) to work with the FCA to open the Digital Securities Sandbox for applications; and (vii) consult on final proposals on the proposed regulatory regime for systemic payment systems using stablecoins.
Government reports on UK ETS and consults on future markets policy and free allocation review
On 18 December, the UK Government launched two consultations in relation to the UK ETS on the future markets policy and on free allocation review. The future markets policy review aims to ensure that the policy remains fit for purpose and is effective in managing the risks faced by an established and maturing scheme. This will help to maintain stable and effective market conditions that will continue to incentivise decarbonisation in the traded sector. The consultation seeks views on: (i) the most significant risks to effective market functioning; (ii) the suitability of different policy options to address the risks identified; and (iii) how individual market stability policies should be designed to most effectively address market risks while minimising intervention and disruption in the market. The Government is also seeking views on proposals to alter the free allocation methodology for the stationary sectors to better target those most at risk of carbon leakage and ensure that free allocations are fairly distributed. This will broadly focus on four key areas: (a) how emissions and activity is accounted for; (b) benchmarks; (c) the carbon leakage list; and (d) additional factors that might be introduced to the free allocation methodology. The Government also published a statement on the long-term pathway for the UK ETS, in response to the Independent Review of Net Zero. The statement, among other things: (1) affirms that the Government intends to legislate to continue the UK ETS beyond 2030 and until at least 2050; and (2) sets out the Government’s intention to continue exploring expanding the UK ETS to more sectors of the economy, including to high-emitting sectors. It gives a framework for assessing new sectors before bringing them into the scheme. The Government has also published a report reviewing the UK ETS in its first years of operation. The report’s main conclusion is that the UK ETS has been achieving its purpose so far and continues to be an integral part of the transition to net zero. The UK ETS Authority will be better able to assess and understand the scheme’s impacts and contribution towards long-term decarbonisation after a longer period of operation, through further planned evaluation. The next formal ETS review will be before 31 December 2028.
Future markets policy consultation
Free allocation methodology consultation
Gas Emissions Trading Scheme (Amendment) (No.2) Order 2023
On 15 December, the Greenhouse Gas Emissions Trading Scheme (Amendment) (No.2) Order 2023 was published together with an explanatory memorandum. The instrument makes various amendments to the UK Emissions Trading Scheme (ETS) to provide for the capping of aviation free allocation at 100% of emissions, clarifying the treatment of Carbon Capture and Storage (CCS) plants and amendments to free allocation rules for electricity generation. The instrument is part of a package of legislation implementing reforms to the UK ETS. The instrument comes into force on 1 January 2024.
ESMA updates Q&As on MiFID II and MIFIR investor protection topics
On 15 December, ESMA updated its Q&As on investor protection and intermediaries under MiFID II Directive and MiFIR. ESMA has: (i) updated the Q&A on aggregating costs and charges to clarify the requirement in relation to all in-fees; and (ii) added a new question explaining how investment firms should indicate the parts of the total costs and charges paid in or represented in an amount of foreign currency in their ex-ante and ex-post costs and charges disclosure.
ESMA updates Q&As on BMR
On 15 December, ESMA updated its Q&As on the BMR. ESMA has: (i) clarified its question on whether the provision of and contribution to benchmarks that are used outside the EU only fall within the scope of the BMR; and (ii) on the transitional provisions applicable to third country benchmarks.
ESMA updates Q&As on the Crowdfunding Regulation
On 15 December, ESMA updated its Q&As on the Crowdfunding Regulation. ESMA has added new questions in relation to: (i) whether a crowdfunding service provider can only accept sophisticated investors; (ii) how placement without a firm commitment and reception and transmission of orders as referred to in Article 2(1) of the Crowdfunding Regulation should be understood in the context of the Crowdfunding Regulation; and (iii) how NCAs should apply Article 11(2)(c) of the Crowdfunding Regulation at the point of authorisation and how and to what extent can an insurance policy be combined with own funds?
ESMA updates statement on impact of Brexit on BMR
On 15 December, ESMA updated its statement in relation to the consequences of Brexit for the ESMA register for benchmark administrators and third country benchmarks under the BMR. As the BMR transitional period has been extended to 31 December 2025, the deletion of UK based administrators has yet to take effect. During the extended transitional period, third country benchmarks can still be used by supervised entities in the EU if the benchmark is already used in the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund. Therefore, EU supervised entities can until 31 December 2025 use third country UK-based benchmarks even if they are not included in the ESMA register. In the absence of an equivalence decision by the EC, UK based administrators have until 31 December 2025 to apply for recognition or endorsement in the EU, in order for the benchmarks provided by these UK based administrators to be included in the ESMA register again. The extension and the need to apply again for recognition or endorsement in the absence of an equivalence decision, also applies to UK recognised or endorsed third country benchmarks.
ESMA consults on potential changes to CSDR penalty mechanism
On 15 December, ESMA began consulting on technical advice to the EC, following three requests in relation to the CSDR penalty mechanism. The co-legislators have concluded negotiations on the review of the CSDR. The provisional agreement on CSDR maintains mandatory buy-ins as part of the settlement discipline toolkit. However, they will only apply as a measure of last resort where the rate of settlement fails in the EU is not improving and is presenting a threat to financial stability. Hence, to ensure that mandatory buy-ins are a necessary, appropriate and proportionate means to address the level of settlement fails on the EU capital market, the full potential of other measures to address settlement fails, in particular cash penalties, must be explored. ESMA is therefore consulting on the effectiveness of the current penalty mechanism in discouraging settlement fails and incentivising their rapid resolution, and on ESMA’s preliminary proposals on: (i) alternative parameters, when the official interest rate for overnight credit charged by the central bank issuing the settlement currency is not available; (ii) the treatment of historical reference data for the calculation of late matching fail penalties; and (iii) alternative methods for calculating cash penalties, including progressive penalty rates. The deadline for comments is 29 February 2024. ESMA expects to send the technical advice to the EC by the end of September 2024.
EBA guidelines on assessment of management or administrative organ of credit servicers
On 15 December, the EBA finalised its guidelines on the assessment of adequate knowledge and experience of the management or administrative organ of a credit servicer as a whole, under the NPL Directive. The guidelines aim at ensuring that the organs are suitable to conduct the business of the credit servicer in a competent and responsible manner. Among other things, the guidelines specify: (i) the criteria for the assessment of the organs’ collective knowledge and experience. This will be performed based on the individual members’ assessment by credit servicers, taking into account the principle of proportionality; and (ii) the assessment process by credit servicers and competent authorities, which also covers the assessment of good repute of the members of the credit servicers organs. The guidelines will apply from three months after the date of publication on the EBA's website in all EU official languages. The guidelines do not apply to a credit institution established in the EU, an AIFM authorised or registered in accordance with AIFMD or other those other entities listed in Article 2(5)(a) of the NPL Directive.
Payment services and payment systems
Please see the Other Developments section for the ECON’s draft report on the proposed FiDA Regulation.
PSR policy statement on APP fraud reimbursement requirement
On 19 December, the PSR published a policy statement setting out the final detailed parameters of the new mandatory reimbursement requirement, including: (i) clarifying the consumer standard of caution exception, which narrows the consideration of gross negligence to four specific circumstances, including the requirement to have regard to interventions, prompt notification, responding to requests for information and police reporting. This exception does not apply to vulnerable consumers; (ii) allowing sending payment service providers to apply an excess up to £100 to a claim under this policy, except for claims made by vulnerable consumers; and (iii) setting the maximum level of mandatory reimbursement at £415,000. This level applies to all consumers. The PSR notes that the maximum level of reimbursement has attracted a particularly high level of feedback, and involves difficult trade-offs. The PSR will monitor the incidence and impact of high value APP scams over the next ten months before the start date and may consult on revising the level ahead of the start date on 7 October if there is convincing evidence to do so. To implement the reimbursement requirement, the PSR has published three legal instruments: (a) Specific Requirement 1 – imposed on Pay.UK to include the reimbursement requirement in the Faster Payments scheme rules; (b) Specific Direction 20 – given to participants in Faster Payments, obliging them to comply with the reimbursement requirement and the reimbursement rules; and (c) Specific Direction 19 – given to Pay.UK to create and implement an effective compliance monitoring regime. The PSR also sets out next steps, which include a clarifications process in Q1 2024 to encourage a consistent approach to implementation across industry.
PSR consults on expanding variable recurring payments
On 19 December, the PSR began consulting on extending variable recurring payments (VRPs) to additional low-risk use cases. VRPs enable customers to safely connect authorised payment providers to their bank account using open banking so that they can initiate recurring payments. The CMA mandated nine UK banks to implement VRPs for payments between accounts belonging to the same person (sweeping VRP), however the PSR proposes to extend VRPs to enable payments between accounts in different names (non-sweeping VRP or commercial VRPs (cVRPs)). In phase 1, by Q3 2024, the PSR proposes to enable VRPs for payments to regulated financial services, regulated utilities sectors, and local and central government. The deadline for comments is 2 February. The PSR will consult again on updated policy proposals in 2024. The PSR published the VRP Working Group’s blueprint for implementing cVRPs on 18 December The blueprint: (i) identifies suitable use cases which should be included in a “Phase 1” roll-out; (ii) discusses the measures that need to be taken to build customer trust in cVRPs as a payment method beyond sweeping; (iii) addresses the functional issues that may occur from the adoption of cVRPs and sets out recommendations to address these; and (iv) defines the set of commercial model requirements needed to support this roll-out. The blueprint summarises the differing views within the Working Group on how to bring cVRPs to market. In its response to the blueprint, the Joint Regulatory Oversight Committee (JROC) stated that it largely agreed with the actions and sequencing set out in the blueprint and proposes the formation of two implementation groups: (a) a Functional Implementation Group, co-chaired by Open Banking Limited (OBL) and Pay.UK, to deliver recommended changes to functional capabilities; and (b) a Dispute Resolution Implementation Group chaired by Pay.UK, to develop a formal dispute resolution framework. By Q1 2024, JROC expects the implementation groups to create and agree a delivery plan with guidance and support from regulators to carry out and complete Phase 1 actions by Q3 2024.
JROC update on actions to enable next phase of open banking in the UK
On 19 December, the JROC provided an update on progress made to enable the next phase of open banking in the UK. The report provides an update on the roadmap outlined in the April 2023 report and identifies key next steps. To drive the work forward the JROC established a Future Entity Working Group, chaired by the FCA, which submitted ecosystem recommendations on the capabilities, governance and funding model of the future open banking entity at the end of November. The JROC is carefully considering the report along with other inputs. The future entity will be instrumental for the future success of open banking in the UK, and in Q1 next year, the JROC will publish this decision and the immediate steps which will be taken to establish the future entity. In Q1 2024, the JROC will commence Phase 2 of the roadmap, which should reach completion by the end of the year, and Phase 3 within the next two years, with each phase building on the last. Phase 3 actions may also require support from the long-term regulatory framework , and/or other FCA or PSR regulatory intervention. The Government has committed to unlocking the full potential of open banking-enabled payments and confirmed it will seek to legislate next year to support this. The government’s intention is for the new regulatory framework to require firms beyond the largest banking providers to participate in a sustainable and equitable commercial model through which the technology and necessary consumer protections will be developed, with appropriate regulatory backstops. The government will set out further details in relation to the proposed smart data scheme for open banking in due course.
Prudential regulation
Please see the Regulatory Reform Post Brexit section for the publication of the Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023.
Please see the Other Developments section for FCA Handbook Notice 114, which sets out changes to the FCA Handbook made by instruments including the Senior Management Arrangements, Systems and Controls Instrument 2023.
EBA final amended guidelines on specification and disclosure of systemic importance indicators
On 20 December, the EBA finalised its amendments to the guidelines on the specification and disclosure of systemic importance indicators, which are applied by the largest institutions in the EU whose leverage ratio exposure measure exceeds EUR 200 bn. Amendments to the guidelines include: (i) to reflect a new template published by BCBS for the 2023 identification exercise of global systemically important institution; and (ii) following the last review of the EBA Guidelines on the specification and disclosure of systemic importance indicators, which introduced a new paragraph 10a on SRM cross-jurisdictional indicators, these guidelines introduce further clarifications, for the Single Rulebook, on which relevant cross-jurisdictional indicators concerning SRM jurisdictions should be used for identification and, hence, reported and disclosed, without being considered ‘memorandum’ or ‘ancillary’ items or indicators for the EU.
PRA consults on leverage ratio treatment of omnibus account reserves
On 19 December, the PRA began consulting on proposals to: (i) introduce new rules to exclude reserves held on omnibus accounts from the leverage ratio, subject to specific conditions, and to add related material to supervisory statement (SS) 45/15 – The UK leverage ratio framework; (ii) make minor amendments to SS45/15 to ensure clarity and consistency with PRA rules on other parts of the leverage ratio framework; and (iii) make minor amendments to the leverage ratio disclosure and reporting instructions to provide clarification of the PRA’s expectations and ensure consistency with PRA rules. The PRA considers that applying the current exclusion to omnibus account reserves, with the effect that these reserves are excluded in the same way as those held on traditional individual accounts, would implement the FPC’s leverage ratio direction consistently by excluding all asset types which are claims on central banks. The PRA also considers that the proposal would remove a disincentive to the adoption of omnibus accounts and would thereby help facilitate competition in wholesale payment systems, as well as the international competitiveness of the UK financial sector. The PRA therefore proposes to extend the existing exclusion. In support of the PRA’s primary safety and soundness objective, the PRA is proposing to introduce further conditions on the application of the exclusion to omnibus account reserves in its rules. This aims to ensure that, where the exclusion applies, any risks associated with omnibus account reserves, additional to those arising in respect of reserves held on traditional accounts, are mitigated. The deadline for comments is 8 April 2024.
ECB SSM supervisory priorities 2024-26, SREP 2023 results updated SREP methodology
On 19 December, the ECB published the results of its Supervisory Review and Evaluation Process (SREP) for 2023 and updated its SREP methodology applied to significant institutions under the SSM. The SREP is periodically updated to ensure alignment with the EBA Guidelines on SREP and to reflect new regulations. Andrea Enria announced in a speech, also published on 19 December, that the revised methodology reflects the independent expert report produced in April this year. The ECB has also published its SSM supervisory priorities for 2024-26, noting that the EU banking sector is facing several challenges that require enhanced vigilance by supervisors and banks alike. Supervised institutions will primarily be asked to: (i) strengthen their resilience to immediate macro-financial and geopolitical shocks – while rising interest rates have had a positive impact on profitability so far, banks must be prepared to cope with more volatile funding sources, higher funding costs, a potential fall in asset quality and a further repricing in financial markets in the short and medium term. Consequently, banks need to strengthen their credit risk management and asset and liability management frameworks; (ii) accelerate the effective remediation of shortcomings in governance and the management of climate-related and environmental risks – banks will be asked to step up their efforts and adequately reflect the relevant risk dimensions in their business strategies and risk management frameworks in order to fully comply with the corresponding supervisory expectations by the end of 2024; and (iii) make further progress in their digital transformation and building robust operational resilience frameworks. The ECB expects banks to develop and execute sound digital transformation plans through adequate arrangements to strengthen their business model sustainability and mitigate risks related to the use of innovative technologies. Banks should have robust outsourcing risk arrangements and IT security and cyber resilience frameworks to proactively tackle any unmitigated risks that might lead to material disruption.
Supervisory priorities 2024-26
EBA response on deposit coverage level and coverage of public authorities’ deposits
On 18 December, the EBA published a report in response to the EC’s request for data regarding the proportion of public authorities’ deposits in deposit guarantee schemes (DGS), as part of the EC’s review of the crisis management and deposit insurance (CMDI) framework. The EBA’s response provides a quantitative analysis of the current EU deposit coverage of EUR 100,000. The analysis shows that currently under the EUR 100,000 coverage across the EEA, 96% of depositors are fully covered. The 4% of depositors that are not fully covered are mostly companies, and, despite being few in number, they hold more than half of deposits held in the EEA. The report shows that a potential change to the current coverage level of EUR 100,000 would have positive but limited impact on financial stability and depositor protection. On the other hand, it would be costly and have a somewhat negative impact on moral hazard. The analysis also shows that the extension of coverage to public authorities’ deposits would have limited impact on the industry, mainly because there are relatively few public authorities in comparison to the overall number of depositors across the EU.
Recovery and resolution
EBA final draft ITS amending disclosures and reporting on MREL and TLAC
On 20 December, the EBA finalised its draft ITS on amendments to disclosure and reporting of the minimum requirement for MREL and TLAC. The final ITS on disclosure and reporting of MREL and TLAC had to be adjusted in response to amendments to the CRR as well as to clarify requirements in response to Single Rulebook Q&A process. In particular the amendments focus on: (i) the reflection of the requirement to deduct investments in eligible liabilities instruments of entities belonging to the same resolution group (‘daisy chain’ framework); (ii) the reflection of the prior permission regime for buying back eligible liabilities instruments issued by the reporting entities and groups; and (iii) other minor updates to the ITS and the accompanying technical package to address some identified issues. A final review of the ITS and its annexes will be done against the final text of Regulation (EU) 2022/2036 amending the CRR (‘daisy chain’ framework) once it is published. The amendments are envisaged to apply for the reference date of June 2024.
BoE updates approach to resolution
On 15 December, the BoE updated the document on its approach to resolution (the Purple Book), last updated in 2017. The Purple Book: (i) outlines the key features of the resolution regime; (ii) looks at how the BoE would be likely to implement a resolution; (iii) describes the Bank’s Resolvability Assessment Framework.; and (iv) explains the BoE’s approach to resolution planning, third-country recognition and international co-ordination. The BoE explains that 2023 has been a significant year for the UK’s resolution regime and this is reflected in this updated Purple Book. Following the secondary legislation for the CCP resolution regime under FSMA 2023 being put in place, the BoE will separately publish a description of the CCP resolution regime.
FSB 2023 Resolution Report
On 15 December, the FSB published its 12th report on implementation of its resolution reforms. The FSB’s review of the 2023 bank failures: (i) underscored the strengths of the international resolution framework and the work carried out by banks and authorities to increase resilience and crisis preparedness, while also identifying areas for further work; (ii) reinforced the need to maintain momentum and advance the work on bank resolvability and to avoid complacency; and (iii) found that, while obstacles to mobilising collateral or liquidity across borders cannot be completely removed, several mitigating measures can be adopted. Looking ahead, the FSB’s 2024 resolution workplan builds on the lessons learnt from the 2023 bank failures and includes several areas of work to further increase the resolvability of banks, CCPs and insurers. For the banking sector, this includes further work on: (a) effective designs for public sector backstop funding mechanisms to support resolution; (b) the choice of resolution strategies and optionality of resolution tools; the operationalisation of bail-in and enhancements to cross-border recognition processes; and (c) ways for resolution authorities to respond to the speed of bank runs. On resolution of CCPs, the FSB will publish the final report on financial resources and tools for CCP resolution following analysis of the consultation feedback and will review members’ experiences in applying the 2020 FSB guidance on financial resources to support CCP resolution.
Regulatory reform post Brexit
Please see the Capital Markets section for the FCA’s consultation on detailed proposals for reforms to the listing regime.
Please see the Markets and Markets Infrastructure section for: (i) the FCA’s consultation on proposed changes to the bond and derivative transparency regime in the UK; (ii) the FCA’s publication of a policy statement for the framework for a UK consolidated tape for bonds, together with a consultation on payments to data providers and forms for data reporting services providers; and (iii) ESMA’s updated statement in relation to the consequences of Brexit for the ESMA register for benchmark administrators and third country benchmarks under the BMR.
UK and Switzerland sign agreement on mutual recognition in financial services
On 21 December, the UK and Swiss governments signed an agreement on mutual recognition in financial services, the Berne Financial Services Agreement. The agreement covers the recognition of equivalence in the areas of banking, investment services, insurance, asset management and financial market infrastructures for sophisticated clients. The purpose of the agreement is to improve the supply of financial services between the countries through outcomes based mutual recognition of the respective domestic regulatory and supervisory frameworks, by: (i) removing barriers to the supply of financial services in the covered sectors; (ii) ensuring financial stability, market integrity and the protection of investors and consumers within scope; (iii) establishing an institutional framework for enhancing regulatory and supervisory cooperation in the covered sectors; (iv) promoting a stable and predictable relationship in the field of financial regulation and supervision ensuring the maintenance of mutual recognition; and (v) providing for future expansion of the agreement. The agreement must be ratified by the UK and Swiss Parliaments before it can come into force. It will enter into force on the first day of the second month following the date of receipt of the latter of the notifications of completion of domestic procedures by the UK and Switzerland.
The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023
On 19 December, the Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 were published, together with an explanatory memorandum. The Regulations make targeted modifications to specific provisions of retained EU law to ensure that it continues to function effectively before the repeal of the relevant pieces of retained EU law have been fully commenced: (i) Regulation 2 reintroduces a ‘discount factor’ which was unintentionally removed from the CRR in both the UK and the EU. The discount factor reduces the amount of capital small- and medium-sized firms hold for their trading and derivative activities. Regulation 2 came into force on 20 December. Regulation 3 amends the UK BMR to extend the transitional period for the third country benchmarks regime from 31 December 2025 to 31 December 2030. The regime stipulates that only third country benchmarks approved for use via one of the prescribed routes set out in the UK BMR may continue to be used within the UK. This third country regime does not apply for the duration of the transitional period. This extension ensures that firms do not lose access to non-UK benchmarks that are critical to their operations and provides time for the government to consider where reforms are needed to the third country benchmarks regime. Regulation 3 shall come into force on 1 January 2024.
The Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023
On 19 December, the Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023, together with an explanatory memorandum. FSMA 2023 repeals retained EU law in financial services, which will be replaced with rules set by the UK’s regulators, operating within a framework set by government and Parliament. The Regulations make consequential amendments to reflect certain revocations, repeals and amendments of retained EU law, including: (i) Article 92b of the CRR; (ii) legislation relating to Long-Term Investment Funds; (iii) Part 2 of Schedules 1 and 2 to the Payment Accounts Regulations; and (iv) legislation containing certain restrictions on powers of the FCA to make rules that modify, amend or revoke retained direct EU legislation. The Regulations also make other miscellaneous consequential amendments relating to FSMA 2023. The Regulations come into force on 1 January 2024.
Retained EU Law (Revocation and Reform) Act 2023 (Commencement No.1) Regulations 2023
On 15 December, the Retained EU Law (Revocation and Reform) Act 2023 (Commencement No.1) Regulations 2023 were published. Regulation 2 brings into force Schedule 1 to the Act immediately before the end of 2023. That schedule lists retained EU law to be revoked at the end of 2023. Regulation 3 brings into force: (i) section 3 – the abolition of supremacy of EU law; (ii) section 4 – the abolition of general principles of EU law; (iii) section 5(3) and Schedule 2 –assimilated law terminology; and (iv) section 8 – duty of courts to make an “incompatibility order” where the abolition of supremacy leaves a conflict between retained direct EU legislation and other domestic law.
Sustainable finance
Please see the Capital Markets section for the legislative package relating to the EU Single Access Point (ESAP), which has been published in the OJ.
Please see the Financial Crime and Sanctions section for the FCA’s Primary Market Bulletin No. 46, which discusses questions raised in relation to ESG stewardship, and sponsor procedures in relation to TCFD-aligned disclosures.
Please see the Markets and Markets Infrastructure section for publications relating to the UK ETS: (i) consultations on future markets policy and free allocation methodology; (ii) a statement on the long-term pathway for the UK ETS; (iii) a review of the functioning of the UK ETS; and (iv) the publication of the Gas Emissions Trading Scheme (Amendment) (No.2) Order 2023.
Please see the Markets and Markets Infrastructure section for Commission Delegated Regulation (EU) 2023/2830 supplementing Directive 2003/87/EC by laying down rules on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances was published in the OJ.
Please see the Other Developments section for FCA Handbook Notice 114, which sets out changes to the FCA Handbook made by instruments including the Sustainability Labelling and Disclosure of Sustainability-Related Financial Information Instrument 2023.
EC draft notice on interpretation and implementation of Disclosures Delegated Act
On 21 December, the EC published a draft notice on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of the EU Taxonomy Regulation on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets. The notice sets out guidance to financial undertakings in the form of replies to FAQs on the reporting of their key performance indicators (KPIs) under the Disclosures Delegated Act. The guidance is intended to help the financial market participants concerned prepare their first mandatory reporting exercise in 2024. It covers topics including: (i) the scope of covered entities; (ii) the scope of consolidation of disclosures; (iii) the taxonomy-assessment of exposures to individual undertakings, of groups, and of specific exposures; and (iv) specific questions related to credit institutions, insurance undertakings and asset managers. The draft was approved in principle by the EC on 21 December and its formal adoption in all the official languages of the EU will take place as soon as the language versions are available.
Council agrees negotiating mandate on proposed Regulation on ESG rating activities
On 20 December, the Council of the EU announced that it had reached an agreement on its negotiating mandate on the proposed Regulation on the transparency and integrity of ESG rating activities. The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers, making ratings more comparable and preventing potential conflicts of interests. Under the proposed rules, ESG rating providers will need to be authorised and supervised by ESMA and comply with transparency requirements, in particular with regard to their methodology and sources of information. Changes made to the EC’s proposal, highlighted by the Council, include: (i) clarification of the circumstances under which ESG ratings fall under the scope of the regulation, providing further details on the applicable exemptions; (ii) clarification of its territorial scope, outlining what constitutes operating in the EU, and further clarification on the applicable provisions under the endorsement regime; (iii) introduction of a lighter, temporary and optional registration regime of three years for existing small ESG rating providers and new small markets entrants; and (iv) introduction of the possibility for ESG ratings providers to not have a separate legal entity for certain activities, provided that there is a clear distinction between activities and that they put in place measures to avoid conflicts of interests. This derogation would not be applicable to consulting or audit activities when they are provided to rated entities. The EP agreed on its negotiating mandate in the plenary session held between 11 and 14 December. Today’s agreement on the Council mandate paves the way to interinstitutional negotiations that are expected to start in January 2024.
UK Transition Finance Market Review
On 18 December, the Government launched the Transition Finance Market Review, as announced as part of the 2023 Green Finance Strategy. It will explore how best to create the conditions for: (i) scaling transition focused capital raising with integrity. The Government wants to grow the UK market for new, innovative transition finance services, which should be designed as attractive, investible instruments to unlock long term capital (such as sustainability linked debt and transition bonds); (ii) maximising the opportunity for UK based financial services to develop, structure and export high integrity transition finance services; and (iii) positioning the UK’s professional services ecosystem as a global hub - supporting this innovative activity and ensuring market confidence (legal, accountancy, consultancy, data and analytics, skills and education). The Review will report back to the government by July 2024, although there is a possibility for a three month extension.
Joint ECB/ESRB report on macroprudential frameworks for managing climate risk
On 18 December, the ECB and ESRB published a joint report on macroprudential frameworks for managing climate risk. The report finds that banks have a key role to play within the financial system when it comes to managing and reducing risks to financial stability that arise from emissions of the EU economy. This is because banks lend disproportionately to sectors with high exposure to climate-related risk. Reassessing and repricing climate risk could create financial instability through numerous channels with high exposure to climate-related risk. This includes the transmission of climate shocks through global value chains and the potential for financial contagion as both banks and financial markets seek to simultaneously reposition their asset portfolios against the backdrop of a significant insurance protection gap. The report proposes three frameworks to tackle climate risks to financial stability: (i) addressing risk surveillance – it takes stock of advances in measuring and modelling the impacts of climate risk, proposing a list of indicators for regular financial stability risk monitoring. Details of these indicators are set out in a chartbook accompanying the report; (ii) macroprudential policy – it outlines both the features of a robust strategy as well as an initial operational design based on existing instruments, which can be scaled up as further information and more tailored policy options emerge; and (iii) on prospective financial stability impacts stemming from nature degradation, which could serve to exacerbate the financial stability impacts of climate change.
EBA response to EC’s call for advice on green loans and mortgages
On 15 December, the EBA responded to the EC’s call for advice on green loans and mortgages. The EBA’s response provides an overview of green lending and associated practices in the banking sector, and outlines issues identified in the green loans market. To facilitate a more active participation by banks in the green loans market, the EBA advises to make available a voluntary EU definition and label for green loans based on the use of the loan proceeds. These initiatives should leverage current market practices and industry standards that are in line with the EU’s environmental objectives. In particular, the EBA proposes that: (i) the EU definition and labelling framework for green loans, while based on the Taxonomy, incorporate a degree of flexibility to facilitate market participants’ credible efforts in contributing to environmental objectives; (ii) the labelling framework for green loans provides the necessary information and transparency for prospective borrowers. These include information on the long-term benefits of investing in energy-efficient solutions, documentation requirements and availability of financial support schemes; and (iii) when reviewing the Mortgage Credit Directive, it consider integrating the concept of green mortgages as well as the expected features of these loans. Important aspects include information about energy performance, the use of energy performance certificates as part of pre-contractual information and enhancing competence and knowledge related to green mortgages.
ESMA consults on draft guidelines on supervision of sustainability information under CSRD
On 15 December, ESMA began consulting on draft guidelines on enforcement of sustainability information, as required by the Corporate Sustainability Reporting Directive (CSRD). The main goals of the draft guidelines are to: (i) ensure that NCAs carry out their supervision of listed companies’ sustainability information under the CSRD, the European Sustainability Reporting Standards and Article 8 of the Taxonomy Regulation in a converged manner; and (ii) establish consistency in, and equally robust approaches to, the supervision of listed companies’ sustainability and financial information; this will facilitate increased connectivity between the two types of reporting. The deadline for comments is 15 March 2024. ESMA expects to finalise the guidelines in Q3 2024.
Other developments
Delegated Directive amending thresholds for determining size categories of companies published
On 21 December, the Delegated Directive amending the Accounting Directive ((EU) 2013/34) as regards the adjustments of the size criteria for micro, small, medium-sized and large undertakings or groups, was published in the OJ. The thresholds have been adjusted in order to take account of the significant inflation during 2021 and 2022. The Delegated Directive will enter into force on the 24 December, the third day following publication. Member states must ensure that the laws, regulations and administrative provisions necessary to comply with the Delegated Directive apply at the latest for financial years beginning on or after 1 January 2024. Member States may allow undertakings to apply those provisions for financial year beginning on or after 1 January 2023.
FCA regulation round-up – December 2023
On 20 December, the FCA published its regulation round-up for December 2023. Points of interest include: (i) new Appointed Representative (AR) requirements now live – REP025 is now live and firms must log on to RegData to check when their return is due as this is dependent on their accounting referencing date (ARD). Failure to report on time will incur a late return notification and £250 administration fee. Principals are reminded to confirm their AR details when completing their annual Firm Details Attestation (FDAs). FDAs must be completed within 60 business days of firm’s ARD. Failure to report will incur a late return notification, £250 late return fee, and possible enforcement action; and (ii) Innovation Advisory Group survey – in collaboration with the Innovation Advisory Group, the FCA is conducting a short survey to understand stakeholder views on FCA Innovation which will inform future work and how it engages with the industry. It is an opportunity to feedback on the FCA’s Innovation services, flagging what firms would like to see more of as well as what firms would like to see done differently.
FPC response to HMT’s remit and recommendations letter
On 20 December, the BoE published its response to HMT’s recommendations and remit letter to the FPC, published in November. The response addresses the FPC’s approach, including in relation to: (i) the Government’s economic policy; (ii) matters that the FPC should regard as relevant to the BoE’s financial stability objective, and the responsibility of the FPC in relation to the achievement of that objective; (iii) the responsibility of the FPC in relation to support for the Government’s economic policy; and (iv) matters to which the FPC should have regard in exercising its functions. Consistent with its remit, the FPC is prioritising four areas over the next three years: market-based finance; structural changes and new risks; lessons learned from periods of stress; and the macroprudential oversight of operational resilience. The FPC is fully committed to supporting the Government’s economic policy in line with the FPC’s secondary objective. The Committee will continue to assess, as an important element of its work, where it can support the Government’s economic objectives. Where it judges that it can do so in a way that is consistent with its primary objective, the Committee will act accordingly. The FPC supports the Chancellor’s commitment to the effective regulation of financial services, retaining high international standards, given the crucial role they play in underpinning the FPC’s primary objective, and subject to that, supporting the government’s economic policy to achieve strong, sustainable and balanced growth.
2023 annual CBEST thematic report
On 19 December, the BoE, the PRA and the FCA published their annual CBEST thematic report. CBEST tests the cyber resilience of firms and financial market infrastructures (FMIs) through live testing that mimics the actions of cyber attackers. The report is intended to inform the sector on findings and lessons learned from the CBEST programme. The thematic findings include: (i) identity and access management – weak or absent access management for critical assets makes unauthorised access to critical information, services, and resources more likely. The regulators regard effective identity and access management as a key objective for foundational cyber hygiene; (ii) staff awareness and training – without sufficient training, employees could cause accidental or intentional damage to the confidentiality, integrity, or availability of information assets; (iii) secure configuration – appropriately configured IT assets and systems can prevent unintended or unauthorised misuse of critical assets. Ensuring that systems are designed, provisioned, and tested correctly and robustly reduces the attack surface to both internal and external attackers; and (iv) network security – weaknesses in networks make unauthorised access to sensitive data and systems more likely. Weaknesses also assist an attacker by making it easier to move around the target infrastructure, increasing the impact of an attack. The regulators note that security weaknesses in relation to corporate networks remain a recurring issue in CBEST testing. The regulators expect that firms and FMIs read the CBEST thematic and consider embedding the findings into their cyber strategies.
EBA guidelines on benchmarking diversity practices under CRD and IFD
On 18 December, the EBA finalised guidelines on the benchmarking of diversity practices, including diversity policies and gender pay gap, under the CRD and IFD. Under Article 91(11) of the CRD, the EBA and competent authorities are required to benchmark diversity practices in institutions’ management bodies. The same applies to investment firms as specified in Article 9(1) of MiFID. The EBA and the competent authorities are also mandated to collect information on the gender pay gap of members of the management body under Article 75(1) of the CRD and 34(1) of the IFD. Under the guidelines the EBA shall collect the data from a representative sample of institutions and investment firms regarding their diversity policies, diversity practices and the gender pay-gap at the level of the management body every three years. The EBA has published a decision on common criteria for competent authorities to determine the composition of the sample of reporting firms. The first data collection under the guidelines will be conducted in 2025 with a reference date of 31 December 2024.
FCA Handbook Notice 114
On 15 December, the FCA published Handbook Notice 114, which sets out changes to the FCA Handbook made by instruments, including: (i) Sustainability Labelling and Disclosure of Sustainability-Related Financial Information Instrument 2023 – the instrument aims to help consumers navigate the market for sustainable investment products. It came into force on 28 November; (ii) Senior Management Arrangements, Systems and Controls Instrument 2023 – the instrument makes changes to the FCA Handbook to ensure
that the remuneration rules for smaller, less complex UK banks, building societies and PRA-designated investment firms, including third-country branches, are proportionate to the risks they pose to consumers and markets in the UK. It came into force on 8 December; and (iii) Handbook Administration (No 68) Instrument 2023 – the instrument makes minor changes to various modules of the Handbook. It came into force on 15 December. The next scheduled FCA board meeting is 25 January 2024.
ECON draft report on proposed FiDA Regulation
On 15 December, the EP’s ECON published a draft report on the proposed Regulation on a framework for financial data access (FiDA). The report sets out the ECON Rapporteur’s proposed amendments to the EC’s draft text. The Rapporteur’s key amendments relate to: (i) enhancing customer trust – the changes include more clearly circumscribing the categories of personal data that can made available under FiDA and removing the possibility for undertakings that are not established in the EU to benefit from an authorisation as a financial information service provider; (ii) promoting innovation – the changes include adapting the narrative to focus the FiDA framework on a customer’s data access right, rather than sharing the customers’ data. The Rapporteur also suggests more closely aligning provisions on compensation with the market-driven approach under the Data Act; and (iii) improving interoperability and supervision – the modifications include a closer alignment of FiDA with the GDPR, the Data Act and Data Governance Act and also a further strengthening of ESA’s role vis-à-vis that of NCAs.