Key Regulatory Topics: Weekly Update 16 – 22 September 2022
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This week marked the publication of two Bills in the UK: the Retained EU Law (Revocation and Reform) Bill 2022, which intends to provide the UK government with the required powers to sunset retained EU law and end its supremacy over domestic legislation; and the Economic Crime and Corporate Transparency Bill 2022, which will reform the Registrar of Companies and Companies House, while providing new powers to law enforcement in relation to cryptoassets in order to fight financial crime. In the EU, the European Parliament set out the negotiating positions on the proposal for a Directive on consumer credits, to replace the current Consumer Credit Directive, as it progresses through trilogue negotiations.
Consumer/retail
FOS H1 2022 complaints data
On 22 September, the FOS published its half yearly complaints data for individual businesses for H1 2022. The FOS received a total of almost 73,000 complaints in this period. The FOS upheld 37% of complaints it received. The FOS continues to report on some of the cases it has settled pragmatically with firms, following its introduction of temporary changes to reporting outcomes. The initiative built on work it had already seen from some businesses who had already been proactively resolving significant numbers of cases during the last year, before the initiative started. Just under a third of the proactively resolved cases were about fraud and scams. The remaining cases included complaints about e-money services, personal loans, motor finance, and credit card purchases.
CCD II negotiating positions
On 16 September, the EP published a comparison table of the negotiating positions of the EU institutions on the proposal for a Directive on consumer credits to revise and replace the current CCD. The first trilogue took place on 15 September, with further trilogues scheduled for 26 October and 29 November. Among the points discussed in the first trilogue were the scope, the information provided to consumers, the creditworthiness assessment, the advertisement of credit, the overdraft facilities and overrunning, the caps, and the penalties.
Fee/levies
BoE consults on supervisory fees for FMIs
On 20 September, the BoE began consulting on proposals for the BoE’s supervisory fees for FMIs for 2022/23. The proposals include: (i) the fee rates to meet the BoE’s 2022/23 funding requirement for its FMI supervisory activity and the policy activity that supports this. This is forecast to be GBP11.6 million, an increase of 9% on the previous year; (ii) a proposed reduction of fees on a case-by-case basis for payment systems based overseas in respect of which the BoE has deference-based co-operation arrangements with the relevant home authority; and (iii) a rebate on 2021/22 fees due to an underspend of GBP0.99 million. The deadline for comments is 3 November.
Financial crime and sanctions
Economic Crime and Corporate Transparency Bill 2022 published
On 22 September, the Economic Crime and Corporate Transparency Bill 2022 was published. The Bill is effectively the second part of a legislative package to prevent the abuse of UK corporate structures and tackle economic crime. The main elements of the Bill include: (i) broadening the Registrar’s powers, including new powers to check, remove or decline information submitted to, or already on, the register; (ii) introducing identity verification requirements for all new and existing registered company directors, People with Significant Control, and those delivering documents to the Registrar; (iii) providing the Registrar with more effective investigation and enforcement powers and introducing better cross-checking of data with other public and private sector bodies; (iv) tackling the abuse of limited partnerships (including Scottish limited partnerships), by strengthening transparency requirements and enabling them to be deregistered; (v) amending the Register of Overseas Entities to maintain consistency with change to the Companies Act 2006; (vi) creating powers to quickly and more easily seize and recover cryptoassets; and (vii) creating new exemptions from the principal money laundering offences to reduce unnecessary reporting by businesses carrying out transactions on behalf of their customers, and giving new powers for law enforcement to obtain information to tackle money laundering and terrorist financing.
JMLSG consults on revisions to Part I of AML and CTF guidance
On 16 September, JMLSG began consulting on proposed amendments to Part I of its AML and CTF guidance in order to take account of The Money Laundering and Terrorist Financing (Amendment) (High-risk Countries) Regulations 2022 and The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022. The following sections will be affected: (i) paragraph 5.5.11 and annex 5-IV – as relating to high-risk third countries EDD; (ii) paragraph 5.3.129A and paragraphs 5.3.258-5.3.282 – as relating to trusts; and (iii) chapters 4 and 7 – as relating to proliferation financing. The deadline for comments is 17 October.
Fintech
Please see the ‘Financial Crime and Sanctions’ section for the Economic Crime and Corporate Transparency Bill.
Markets and markets infrastructure
ESMA response to EC regarding regarding the current level of margins and of excessive volatility in energy derivatives markets
On 22 September, ESMA responded to the EC’s request for ESMA to conduct assessments regarding the current level of margins and of excessive volatility in the energy derivatives markets. ESMA sets out its high-level assessment concerning: (i) measures to limit excessive volatility (circuit breakers) – a new type of trading halt mechanism would be useful to trigger halts for a limited period of time and in exceptional circumstances such as volatility spikes. It should be set at EU level and apply to all venues offering trading in energy derivatives; (ii) CCP margins and collateral – ESMA stresses the importance of avoiding an undesired shifting of risks to CCPs and the financial system more generally. It sets out an assessment of the EMIR requirements in relation to specific asset classes requested by the EC. ESMA notes that it is assessing the broader implications of the recent market developments for CCP risk management and whether the current requirements are adapted to the specificities of these markets; (iii) commodity clearing thresholds – ESMA requests that the EC adopt the measure increasing the commodity clearing threshold to €4bn; (iv) improving regulatory reporting on commodity derivatives – ESMA considers it crucial to put NCAs into a position to have increased visibility regarding OTC transactions for contracts with the same underlying as those traded on EU trading venues. This should apply independently of the country of establishment of those entities. ESMA also finds that wholesale energy products should be submitted to minimum reporting requirements, comparable to financial instruments; and (v) regulating and supervising commodity traders acting like investment firms – ESMA proposes revising or replacing the MiFID II “ancillary activity exemption”, which exempts ancillary trading activity of non-financial entities from the regulatory requirements of an investment firm. ESMA considers that all European commodity firms have been able to benefit from this exemption and due to their size and nature, the biggest entities should be duly licenced and supervised as investment firms for their trading and investment service provision activities.
ESMA consults on RTS on CCP business reorganisation plans
On 22 September, ESMA began consulting on new rules for CCPs business reorganisation plans. The proposed rules are part of the CCPs resolution regime under the CCP Recovery and Resolution Regulation (CCPRRR). The draft RTS provide clarifications and cover the minimum elements to be included in the business reorganisation plans that CCPs are expected to implement as part of their resolution tools under the CCPRRR, as well as the criteria to be fulfilled by them. The objective of the proposed measures is to ensure that CCPs which are failing or likely to fail, maintain continuity of their critical functions and core business lines, as well as to reduce the impact of any failure on the EU financial system. The deadline for comments is 1 December. ESMA intends to publish its final reports by Q1 2023.
FCA consults on guidance on trading venue perimeter
On 22 September, the FCA began consulting on new guidance on the regulatory perimeter for trading venues. The consultation is part of the Wholesale Markets Review. The FCA’s proposed guidance covers the different elements of the definition of a multilateral system and includes Q&As on the application of the general guidance to specific types of arrangements. Specifically, it clarifies: (i) that a crowdfunding platform in which the business funding interests of an issuer of shares, debentures or alternative debentures are matched with those of investors does not amount to a multilateral system; (ii) the demarcation between multilateral systems and bulletin boards; (iii) the distinction between general purpose communications systems and multilateral systems; (iv) that arranging or executing client orders over the telephone without operating a trading system or facility does not constitute a multilateral system; (v) the circumstances where the execution of trading interests by a portfolio manager does not constitute a multilateral system; and (vi) that where a firm operates a system for the purpose only of blocking trades onto a trading venue consistent with the intentions of the parties to the underlying transactions to trade on a trading venue, these arrangements do not amount to the operation of a multilateral system. The FCA also proposes that ESMA’s Q&As dealing with the trading venue perimeter, in its Q&As on MiFID II and MiFIR market structures topics, should not form part of the FCA’s supervisory expectations following the issuance of the final guidance. The FCA is also seeking views but not, at this stage, making proposals on whether the trading venue regime can be made more proportionate for smaller firms, while maintaining high standards of market integrity. The deadline for comments is 11 November. The FCA intends to publish a policy statement in Q2 2023.
Prudential regulation
Text of proposed ‘Daisy Chain’ Regulation and changes to SRB policy
On 21 September, the Council of the EU published the text of the Regulation making targeted amendments to the CRR relating to total loss absorbing capacity (TLAC) and the minimum requirement for own funds and eligible liabilities (MREL). The Council published the text ahead of its adoption of the Regulation. The SRB also issued a statement on related changes to its policy. The proposed revisions clarify that a resolution authority can only take TLAC surpluses into consideration for loss absorbing or recapitalisation purposes when they are located in third countries with a legally enforceable resolution framework that meets the standards of the FSB Key Attributes of Effective Resolution Regimes as well as the TLAC term sheet. Where the SRB recognises such surpluses for the purpose of TLAC resources of the parent entity, the subsidiary shall deduct the corresponding amount in accordance with CRR Article 72e(4). The SRB will apply the same principles when determining the MREL for all MPE banks, including for non-GSIIs. Under the new rules, a transition period will operate until 31 December 2024 during which the SRB can recognise a surplus in a third country that does not yet have in place a resolution regime if: (i) there is no generally applicable current or foreseen material practical or legal impediment to the prompt transfer of assets from the subsidiary to the parent institution; and/or (ii) the relevant third-country authority of the subsidiary has provided an opinion to the resolution authority of the parent institution that assets equal to the amount to be deducted by the subsidiary in accordance with CRR Article 72e(4) could be transferred from the subsidiary to the parent institution.
RTS on emerging markets and advanced economies under CRR published in OJ
On 21 September, Commission Delegated Regulation (EU) 2022/1622 on RTS on emerging markets and advanced economies was published in the OJ. The RTS reflect a mandate set out in Article 325ap of the CRR to specify what constitutes an emerging market and an advanced economy for the purposes of specifying risk weights for the sensitivities to equity and equity repo rate risk factors for the calculation of the own funds requirement under the alternative standardised approach. All markets not specified as advanced economies should be considered to be emerging markets. The Delegated Regulation will enter into force on 11 October, 20 days after its publication in the OJ.
PRA consults on changes to regulatory regime for credit unions
On 21 September, the PRA began consulting on changes to the regulatory regime for credit unions. The proposals would result in amendments to the Credit Union Part of the PRA Rulebook, and a new Supervisory Statement ‘Supervising credit unions’ which the PRA proposes would supersede SS2/16 ‘The prudential regulation of credit unions’, which will be deleted. The purpose of the proposals is to: (i) provide more flexibility for credit unions when investing their surplus funds so long as they meet specified requirements and consider applicable guidance; (ii) set higher requirements and expectations of credit unions that pose greater risk to the PRA’s safety and soundness objective (either due to their size, or activities undertaken). The PRA considers that setting higher expectations of credit unions that pose greater risk (due to their size or activities undertaken) to the PRA’s primary safety and soundness objective would help ensure higher standards among those credit unions, while at the same time retaining a simple PRA Rulebook in recognition of the diversity of the sector; and (iii) clarify the PRA’s existing expectations in key areas. The deadline for comments is 21 December. The proposed changes are intended take effect on publication of the final policy.
Final draft RTS on performance-related triggers for non-sequential amortisation systems in STS on-balance-sheet securitisations
On 20 September, the EBA published its final draft RTS specifying the minimum performance-related triggers for simple, transparent and standardised (STS) on-balance-sheet securitisations that feature non-sequential amortisation. The Capital Markets Recovery Package amended the Securitisation Regulation in several aspects, including creating a specific framework for STS on-balance-sheet securitisation. With the purpose of standardisation, the amended Securitisation Regulation sets out that sequential amortisation shall be applied to all tranches of STS on-balance-sheet securitisations. However, as a derogation, STS on-balance-sheet securitisation might feature non-sequential amortisation to avoid disproportionate costs of protection, as long as some minimum performance-related triggers determine the application of sequential amortisation. This will ensure that tranches providing credit protection have not already been amortised when significant losses occur at the end of the transaction. These draft RTS further specify: (i) the minimum backward and forward-looking triggers and establish criteria to be fulfilled by the parties involved in the securitisation in order to set the level of the triggers. For this purpose, in the case of the minimum backward-looking triggers, the parties involved in the securitisation shall test the effectiveness of the trigger in a back-loaded loss distribution scenario taking into account the losses expected over the maturity of the transaction at inception; (ii) the transitional provisions in respect of STS on-balance-sheet securitisations, which include triggers related to the performance of the underlying exposures in accordance with Article 26c (5) of the Securitisation Regulation. The final draft RTS will be submitted to the EC for adoption, and will then be subject to scrutiny by the EP and the Council before being published in the OJ.
Regulatory reform post Brexit
Retained EU Law (Revocation and Reform) Bill 2022 published
On 22 September, the Retained EU Law (Revocation and Reform) Bill 2022 was published. The purpose of the Bill is to provide the UK government with all the required provisions that allow for the amendment of retained EU law (REUL), and remove the special features it has in the UK legal system. To achieve this, the Bill will: (i) repeal or assimilate REUL, within a defined scope, by the end of 2023. Excluded from scope, however, is any retained EU law in Schedule 1 of the Financial Services and Markets Bill, any rules of the PRA or FCA or BoE, and any PSR generally applicable requirements or directions of general application. The possibility of extension until 23 June 2026 is also provided for any legislation within scope of this provision; (ii) repeal the principle of supremacy of EU law from UK law by the end of 2023; (iii) facilitate domestic courts departing from retained case law; (iv) provide a mechanism for UK government and devolved administration law officers to intervene in cases regarding retained case law, or refer them to an appeal court, where relevant; (v) repeal directly effective EU law rights and obligations in UK law by the end of 2023; (vi) abolish general principles of EU law in UK law by the end of 2023; (vii) establish a new priority rule requiring retained direct EU legislation to be interpreted and applied consistently with domestic legislation; (viii) downgrade the status of retained direct EU legislation for the purpose of amending it more easily; and (ix) create a suite of powers that allow REUL to be revoked or replaced, restated or updated and removed or amended to reduce burdens.
Sustainable finance
ESMA sustainable finance implementation timeline
On 16 September, ESMA updated its sustainable finance implementation timeline, which covers the key pieces of legislation under the EU sustainable finance framework: SFDR, Taxonomy Regulation, Corporate Sustainability Reporting Directive, MiFID, Insurance Distribution Directive, UCITS and AIFMD. The timeline includes key developments up until 2028. Key dates remaining in 2022 are that on 30 December: (i) Art 7 SFDR disclosures on product-level ‘principle adverse impact’ consideration applies; and (ii) the EC is expected to have issued an evaluation of the SFDR.
Other developments
EEA Joint Committee Decisions amending Annex IX (Financial Services) to EEA Agreement published in OJ
On 22 September, 14 EEA Joint Committee Decisions that amend Annex IX (Financial Services) to the EEA Agreement were published in the OJ. The Decisions incorporate a number of Implementing and Delegated Regulations, Decisions and Directives with regards to the CRR, CRD IV, SFDR, Taxonomy Regulation, PRIIPs Regulation, the SSR, the BMR and the MMFR into the EEA Agreement. BRRD II is also incorporated.
FSSC insight paper on collecting socioeconomic background data
On 21 September, the Financial Services Skills Commission (FSSC) published an insight paper on collecting socioeconomic background data, best practices for financial services firms. The FSSC explains that understanding an individual's socioeconomic background has become increasingly important as firms seek to further understand the make-up of their workforce. Collecting socioeconomic background data enables firms to identify these links to make meaningful interventions. Data collection can support greater representation and improve attraction and retention of talent and skills to drive sustainable growth. Based on its 2021 Member Survey, while all members who responded measured inclusion in 2021, less than 15% of them measured the socioeconomic background of employees. The paper therefore sets out best practices with regards to: (i) how to measure socioeconomic background – the paper includes links to the Social Mobility Commission’s financial and professional services toolkit, which sets out key questions organisations should ask; and (ii) how best to approach measuring – the FSSC highlights the importance of senior sponsorship, a simplified process, and effective communication.
EC infringement decisions following non-transposition of EU legislation
On 21 September, the EC announced that it is adopting a package of infringement decisions due to the absence of communication by Member States of measures taken to transpose EU directives into national law. The EC is sending a letter of formal notice to those Member States who have failed to notify national measures transposing directives. In this case, there are 24 Member States who have not yet notified full transposition measures for 10 EU directives whose transposition deadline expired between 1 July and 31 August. Member States concerned now have two months to reply to the letters of formal notice and complete their transposition, or the EC may decide to issue a reasoned opinion. Amongst others, the press release refers to: (i) Commission Delegated Directive (EU) 2021/1269 amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into MiFID II product governance obligations; and (ii) Commission Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for UCITS.