Key Regulatory Topics: Weekly Update 17-23 Sept 2021
24 September 2021
In addition to a number of publications focused on the transition to net zero and with year-end fast approaching, this week also sees the FCA outline its expectations regarding LIBOR transition and speeches from both the FCA and the PRA on their future work, challenges and priorities.
Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021 published
On 23 September, the Markets in Financial Instruments, Benchmarks and Financial Promotions (Amendment) (EU Exit) Regulations 2021 (SI 2021/1074) were published together with an explanatory memorandum. The regulations address deficiencies in retained EU law in relation to the non-discriminatory access regime for exchange-traded derivatives (ETDs), amend the low carbon benchmarks regime, and make technical amendments to certain exemptions to the financial promotions regime. The Regulations will come into force on 18 October 2021.
HM Treasury consultation response and draft legislation on Economic Crime Levy
On 21 September, the HM Treasury published its response to the Economic Crime Levy consultation, which focused on the introduction of an economic crime levy to be paid by entities subject to the Money Laundering Regulations (MLRs) to fund new government action to tackle money laundering, as well as the draft legislation to implement such a levy. The consultation response addresses the issues of spending, calculation and collection of the levy. Importantly, in relation to calculation, the government has decided that all ins-cope entities will pay the levy based on UK revenue. The government also agreed to define revenue in accordance with UK GAAP standards and that the calculation will not include a money laundering risk metric. All regulated entities with UK revenue below £10.2 million will be exempt from paying the levy. The government has decided that the first set of levy payments will not be made until the year 2023/24 (running 1 April 2023 to 31 March 2024). In addition to the consultation response, the HM Treasury published the draft legislation to implement this Economic Crime Levy.
Response to the consultation
OPBAS publishes report on progress and themes from 2020/21
On 20 September, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) released its latest report on progress made in tackling money laundering by professional body anti-money laundering supervisors (PBS) of the accountancy and legal sectors over the past year. The report states that that PBSs have improved in recent years to achieve a level of compliance with the technical requirements of the Money Laundering Regulations (MLRs), however OPBAS still finds differing levels of achievement and some significant weaknesses. The report highlights key areas which require improvements: (i) not all PBSs had effective governance structures in place; (ii) many PBSs had not implemented a risk-based approach that effectively prioritised their AML supervisory and enforcement work; (iii) most PBSs had not maintained an effective supervisory approach to ensure members took adequate and timely corrective actions; (iv) while PBSs took part in information and intelligence sharing arrangements, there are gaps and inconsistencies in many PBSs’ approach which limit their overall effectiveness in this area; (v) gaps remain in most enforcement frameworks; (vi) there is a low effectiveness in staff competence and training; and (vii) improvements are needed in record-keeping.
Please refer to our Sustainability section for the ESMA speech on investment funds’ costs and performance.
IMF Paper: Investment Funds and Financial Stability: Policy Considerations
On 17 September, the IMF published a paper entitled ‘Investment Funds and Financial Stability: Policy Considerations’, where it outlines the tools policymakers can use to further strengthen the resilience of the investment fund sector to financial shocks. Four key policy objectives are identified: (i) addressing incentives of investors to front run others when adverse shocks occur; (ii) decreasing the existing tension between daily liquidity and exposure to illiquid assets; (iii) exploring options to increase structural and cyclical liquidity in some important asset markets; and (iv) mitigating cross-border spillovers to emerging market and developing economies. The reports identifies specific tools which could be deployed to address these objectives – for example, in the context of stronger liquidity backstops, considering market-based solutions, such as dealer pre-commitments or more robust trading arrangements, buttressed in the event of tail episodes, by central bank emergency liquidity support. The paper states that if identified tools are combined with appropriate domestic macroeconomic and macroprudential policies, these measures would also lessen cross-border contagion.
Markets and markets infrastructure
LEI ROC Revised Technical Guidance on Harmonisation of critical OTC derivatives data elements
On 22 September, the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC) published a revised version of its technical guidance on the harmonisation of critical OTC derivatives data elements. This revised version reflects the feedback received to its May 2021 consultation paper, and includes corrections that the LEI ROC considers appropriate to facilitate its jurisdictional implementations. The LEI ROC state that the corrections do not change the substance of the data elements, but rather are introduced to: (i) eliminate factual errors and typos; (ii) align the format specifications with the ISO 20022 standard, and (iii) better clarify the content of the elements by avoiding ambiguities. The LEI ROC consider the corrections necessary to further improve the standardisation and understanding of the data. Corrections are highlighted in track-changes in Section 2 of the revised guidance and the title of revised data elements has been highlighted in yellow in the Table of Contents so that they can be easily identified. The LEI ROC still intends to consult by the end of 2021 on more substantial amendments to the guidance.
FCA speech on LIBOR transition
On 21 September, the Association for Financial Markets in Europe (AFME) published a speech given by Toby Williams, Technical Specialist, Benchmarks Policy, FCA, on the state of play on LIBOR transition. In the speech, Mr Williams points out the issues firms should consider ahead of the cessation of LIBOR at the end of the year, and emphasises the need for firms to have timelines and clear plans in place. Points of interest in the speech include: (i) synthetic LIBOR rate: the FCA pledged to launch a consultation on which legacy contracts will be able to use any synthetic sterling and yen LIBOR settings – however, the FCA’s view is that synthetic LIBOR should be seen as a “bridging solution” only; (ii) Term rates are now being produced in both sterling and dollar markets and in both markets, suitable limited use cases have been developed by industry groups; (iii) in relation to credit sensitive rates, the FCA has been clear that firms thinking about using these rates should also carefully consider the conduct risks involved and make sure their clients are also aware of these risks – firms are requested to speak to their FCA supervisors first; and (iv) robust fallbacks – it is prudent that contracts include robust fallbacks, no matter the primary rate that is selected reflecting the legal requirement set out in both the UK and EU Benchmarks Regulation. The FCA also stated that, where a fallback rate could be subject to the same vulnerabilities as the primary rate, it is unlikely to meet this standard.
Payment services and payment systems
EBA Report on the use of digital platforms in the EU banking and payments sector
On 21 September, the EBA published a report on the platformisation of the EU banking and payments sector. The report provides an overview of market developments regarding digital platforms, and sets out the EBA’s findings and suggested areas for future action to ensure that digital platforms can be leveraged effectively for the provision of banking and payment services within the EU. The EBA has identified a sharp acceleration in the digitalisation of both front- and back-office processes in the EU’s banking and payment sector, and a rapid growth in the use of digital platforms to ‘bridge’ customers with financial institutions. The EBA observes that the platformisation of financial services poses some challenges in monitoring market developments and any risks arising from these interdependencies. The EBA therefore intends, as a priority in 2022, to support competent authorities to deepen their understanding of platform-based business models in: (i) developing common questionnaires for regulated financial institutions on digital platform and enabler use; and (ii) sharing information about financial institutions’ reliance on digital platforms and enablers to facilitate co-ordinated EU-wide monitoring. Building on that information, the EBA proposes to: (i) develop a framework to facilitate the aggregation of information about financial institutions’ dependencies on digital platforms and enablers to identify cumulative dependencies in the context of the marketing and distribution of financial products and services; and (ii) establish indicators that could help in assessing potential concentration, contagion and potentially future systemic risks and could be taken into account in the context of supervision.
Capital Requirements Regulation (Amendment) Regulations 2021
On 23 September, the Capital Requirements Regulation (Amendment) Regulations 2021 (SI 2021/1078), as well as an explanatory memorandum, were published. These regulations contain amendments to the UK Capital Requirements Regulation (UK CRR). The Regulations see the exercise by HMT of the power granted to it under The Financial Services Act 2021 to revoke provisions in the CRR, in order to allow the PRA to introduce updated prudential rules for credit institutions and PRA-designated investment firms. In particular the Regulations revoke: (i) (i) large portions of Part Three (capital requirements), the majority of Part Four (large exposures), all of Part Six (liquidity requirements), Part Seven A (reporting requirements) and the majority of Part Eight (disclosure requirements); and (ii) the UK versions of Commission Delegated and Implementing Regulations containing regulatory technical standards and implementing technical standards made in respect of revoked provisions of the CRR. The Regulations also contain additional EU Exit-related amendments to UK CRR which are required to ensure that it continues to operate effectively now the UK has left the EU, in particular in relation to the treatment of CCPs outside the temporary recognition regime as qualifying CCPs and large exposure limits. The Regulations will come into force on 1 January 2022.
EC call for advice from EBA on review of the macroprudential framework for banking
On 21 September, the EBA published a letter from John Berrigan, EC Director General of FISMA, to José Manuel Campa, EBA Chair, together with a call for advice relating to the EC’s review of the EU banking macroprudential framework, as required under Article 513 of the Capital Requirements Regulation (575/2013) (CRR). The EC requests technical advice from the EBA to assist in the review of the EU macroprudential framework for banking. The EC requests advice from the EBA on: (i) the overall design and functioning of the buffer framework from the macroprudential perspective. The EBA should consider whether there is scope for optimising the overall design and use of the buffer framework to prevent and mitigate financial stability risks, and to reduce the pro-cyclicality of the financial system. In particular, the EBA should consider the appropriateness of buffers for global systemically important institutions (G-SIIs), and other systemically important institutions (O-SIIs); (ii) missing or obsolete instruments. The EBA should assess whether there any tools missing in the current macroprudential framework, or that have or may soon become obsolete; (iii) internal market considerations. The EBA should consider whether the current macroprudential framework strikes the right balance between national decision-making and a well-functioning internal market; and (iv) global risks. The EBA should evaluate whether the current macroprudential framework provides sufficient and appropriate tools to protect financial stability in the EU against adverse developments in third countries and other challenges The EC requests the EBA to deliver its advice by 31 March 2022, as the EC is required to conduct a review of the macroprudential provisions by June 2022 and, if appropriate, to submit a legislative proposal to the EP and to the Council of the EU by December 2022.
Call for advice
Basel Committee discusses cyber security, climate-related financial risks and digitalisation of finance
On 20 September, the Basel Committee on Banking Supervision (BCBS) published a press release following meetings on 15 and 20 September 2021. In the context of cyber security, the BCBS published a newsletter calling for increased efforts to improve banks' resilience to cyber threats by adopting tools, effective practices and frameworks for cyber risk management aligned with widely accepted industry standards. This newsletter complements previous BCBS publications including the set of principles for operational resilience and operational risk. The BCBS also discussed climate-related financial risks, and is currently assessing the extent to which the current Basel framework adequately mitigates climate-related financial risks. It is also developing a set of related supervisory practices, which it plans to consult on later this year. Lastly, the BCBS also discussed the impact of digitalisation and disintermediation of finance on the banking system.
Recovery and resolution
EC publishes Delegated Regulation 2021/1527 supplementing BRRD
On 17 September, the EC published Delegated Regulation 2021/1527, with regard to regulatory technical standards (RTS) for the contractual recognition of write down and conversion powers. The regulation stipulates how the conditions under which it would be legally or otherwise impracticable for an institution or entity to include the contractual term in certain categories of liabilities should be defined in a way that allows for an appropriate level of convergence, while enabling resolution authorities to take into account differences in relevant markets. The Delegated Regulation shall enter into force on 7 October, the twentieth day following its publication in the Official Journal of the European Union.
Delegated Regulation 2021/1527
Please refer to our Prudential section for the Basel Committee’s discussion on climate-related financial risks.
ICMA Report on the Sustainability Disclosure Regime of the EU
On 22 September, the International Capital Market Association (ICMA) published an update on the EU sustainability disclosure regime. The report provides a summary of the new and amended EU legislation which introduces significant sustainability and ESG related disclosure requirements, and what these changes mean for participants in the European capital markets. More precisely, the paper covers: (i) the Taxonomy Regulation, which under article 8 creates reporting obligations, including the delegated act adopted on 6 July 2021; (ii) the Sustainable Finance Disclosure Regulation (SFDR) and the Regulatory Technical Standards which enhance the sustainability transparency of certain financial products and those who issue/sell them; (iii) the Non-financial Reporting Directive (NFRD) and proposed Corporate Sustainability Reporting Directive (CSRD), which aim is to facilitate disclosures required from financial market participants; (iv) the Low Carbon Benchmark Regulation; and (v) the Credit Rating Regulation.
ECA calls for more consistent EU action to redirect finance towards sustainable investment
On 22 September, the European Court of Auditors (ECA) published a Special Report on sustainable finance, calling for more consistent EU action to redirect finance towards sustainable investment, as well as a reply from the EC. The ECA conducted an audit to examine whether the EC has been taking the right action to redirect finance by focusing on whether the 2018 Sustainable Finance Action Plan (Action Plan) addressed the key issues related to sustainable finance and was implemented on time. The ECA also assessed whether EU financial support follows consistent sustainability criteria, and contributes to supporting sustainable investment. The ECA concludes that more consistent EU action is needed and recommends that the EC should: (i) complete the measures of the Action Plan and clarify compliance and audit arrangements; (ii) better contribute to sustainable finance by pricing greenhouse gas emissions; (iii) apply the “do no significant harm principle” and the EU Taxonomy criteria consistently across the EU budget; and (iv) monitor and report on the results of the Action Plan and any future strategies.
UKEF Climate Change Strategy 2021 to 2024
On 22 September, the UK Export Finance (UKEF) launched its new Climate Change Strategy and revealed its plan to increase its support for green exports and to ensure its operations and financial portfolio will contribute net zero emissions by 2050. To ensure that it reaches its plan, the UKEF’s strategy is based on five pillars which will help UK exporters prepare for a net zero world. The UKEF will: (i) increase its support to clean growth and climate adaptation; (ii) reduce greenhouse gas emissions from its portfolio; (iii) improve understanding and mitigation of its climate-related financial risks; (iv) report against climate-related commitments in order to enhance transparency and disclosure; and (v) provide international leadership on climate change amongst export credit agencies and relevant financial institutions. To ensure that it delivers on its pledge, UKEF will provide additional details over the next four years, and will then publish another strategy detailing progress on its 2050 goal of net zero in 2025.
UKEF Climate Change Strategy
ECB Occasional Paper: economy-wide climate stress test results
On 22 September, the ECB published an Occasional Paper on the results of its economy-wide climate stress test, which assessed the impact of climate change on more than four million non-financial corporates (NFCs) worldwide and 1,600 euro area banks under three different climate policy scenarios. The results show that: (i) there are clear benefits from adopting green policies early, as the short-term costs of the transition are small in comparison to the costs of unfettered climate change in the medium to long term; (ii) although the effects of climate risks would increase moderately on average until 2050, if climate change is not mitigated, they are concentrated in certain geographical areas and sectors; (iii) if policies to transition towards a greener economy are not introduced, physical risks become increasingly higher over time; (iv) climate change represents a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and in specific geographical areas; and (v) the anticipated impact on banks in terms of losses would mostly be driven by physical risk and would potentially be severe over the next 30 years. This economy-wide climate stress test marks the first step in the ECB’s climate roadmap. The results and methodology will inform the 2022 supervisory climate stress test for the banks that the ECB directly supervises. These will also feature in the climate stress test of the Eurosystem balance sheet, which is being planned for Q1 2022.
ECB Occasional Paper
ICMA’s ERCC summary report on the role of repo in green and sustainable finance
On 20 September, the ICMA’s European Repo and Collateral Council (ERCC) published a summary report following a market consultation on the role of repo in green and sustainable finance, as well as to explore the existing opportunities and potential risks in this area. The report highlights the key themes raised in the submitted responses. Building on the consultation results, ICMA is currently establishing a dedicated taskforce under the auspices of the Executive Committee of the Green & Social Bond Principles, to work with the ERCC with the aim of developing potential guidance on repo and sustainability.
ESMA Speech on investment funds’ costs and performance, distribution of retail investment products and ESG disclosures
On 17 September, Natasha Cazenave, the European Securities and Markets Authority (ESMA) Executive Director, delivered a speech on retail investors’ challenges, and what investor protection safeguards should accompany increased retail participation in capital markets. The speech focused on: (i) the impact of costs on investors’ participation; (ii) the issues related to retail investment products’ distribution; and (iii) the challenges from an investor protection perspective of the growing demand for products marketed as sustainable or deemed to incorporate ESG factors. To address these topics, ESMA is currently coordinating a Common Supervisory Action (CSA) on costs and fees in UCITS funds across Europe, to assess the compliance of supervised entities with a number of provisions in the UCITS framework. Regarding the digital distribution of investment products, ESMA plans to publish a call for evidence to gather information which may contribute to shape the policy advice that will be shared with the Commission. Finally, ESMA, EIOPA and the EBA are working on a second set of rules relating to taxonomy-specific product disclosures under the Taxonomy Regulation ((EU) 2019/2088). ESMA is also prioritising the prevention of greenwashing, and pledged to work with national competent authorities to identify ways to enhance supervisory convergence, and effective means to limit the risk of greenwashing.
Nine EEA Joint Committee Decisions amending Annex IX (Financial Services) to EEA Agreement published in OJ
On 23 September, nine Decisions of the EEA Joint Committee which amend Annex IX (Financial Services) to the EEA Agreement were published in the OJ. These decisions incorporate: (i) the Omnibus II Directive (2014/51/EU); (ii) Commission Implementing Regulation (EU) 2018/1078 of 30 July 2018 laying down technical information for the calculation of technical provisions and basic own funds for reporting with reference dates from 30 June 2018 until 29 September 2018 in accordance with the Solvency II; (iii) MLD4 and Commission Delegated Regulation (EU) 2016/1675 supplementing MLD4 identifying high-risk third countries with strategic deficiencies; (iv) Regulation (EU) 2015/847 on information accompanying transfers of funds (revised Wire Transfer Regulation (WTR)); (v) Commission Delegated Regulation (EU) 2018/105 amending Delegated Regulation (EU) 2016/1675, and Commission Delegated Regulation (EU) 2018/212 amending Delegated Regulation (EU) 2016/1675; (vi) Commission Delegated Regulation (EU) 2018/1467 amending Delegated Regulation (EU) 2016/1675; (vii) Commission Delegated Regulation (EU) No 382/2014 supplementing the Prospectus Directive with regard to regulatory technical standards (RTS) for publication of supplements to the prospectus; (viii) Commission Delegated Regulation (EU) 2015/1604 amending Regulation (EC) No 809/2004 implementing the Prospectus Directive as regards elements related to prospectuses and advertisements; and (ix) Commission Delegated Regulation (EU) 2016/301 supplementing the Prospectus Directive with regard to RTS for approval and publication of the prospectus and dissemination of advertisements and amending the Prospectus Regulation.
Decision – Omnibus II Directive
Decision – Implementing Regulation 2018/1078
Decision – MLD 4
Decision – Revised WTR
Decision – High risk third countries
Decision – Delegated Regulation 2018/1467
Decision – Delegated Regulation 382/2014
Decision – Delegated Regulation 2015/1604
Decision – Delegated Regulation 2016/301
PRA Speech on its Future Work
On 22 September, the PRA published a speech by Sam Woods, the BoE Deputy Governor for Prudential Regulation and PRA CEO, in which he sets out the PRA’s future work. Mr Woods first confirmed that across the banking and insurance sectors as a whole, capital and liquidity positions are strong and operational resilience has mostly held up to Covid and cyber pressures. The PRA have identified a number of priorities to improve its work going forward, including updating the PRA’s operating model to reflect changes to its role after Brexit, and an increased emphasis on ease of exit. By “exit”, the PRA means the point at which a firm becomes unviable and can no longer sustainably meet obligations to customers using its own resources. Improving this process will entail: (i) developing the PRA’s approach to wind-down and run-off planning, so that it and supervised firms can execute a safe and orderly exit should they enter distress; (ii) building this in a proportionate way into BAU supervisory activity and tools, using skilled person reports where needed; and (iii) assessing whether there is scope to reform any aspects of the protection framework of the financial services compensation scheme (FSCS). In relation to the change in the PRA’s role following Brexit, the PRA is busy preparing itself for whatever new role Parliament allocates to it. Parliament has already decided this for the latest round of Basel rules, and the PRA is re-tooling its policy-making function for this new era.While the wider debate unfolds, the PRA is getting on with important reforms. This is procedurally complex because the position inherited from the on-shoring of EU rules is one in which the location of rules sprawls rather uncomfortably across different levels of legislation and the rulebook. Mr Woods hopes for a more coherent structure through time, as proposed by the government in its Future Regulatory Framework consultation. This includes the PRA’s proposal to introduce a simpler regime for smaller banks and building societies. The PRA vouched to bring forward proposals for consultation in due course. Lastly, Mr Woods emphasised the recent focus of the PRA on both climate change and diversity and inclusion, illustrated by the various recently published consultations and discussion paper.
FCA Speech on its challenges and priorities
On 22 September, the FCA published a speech delivered by Nikhil Rathi, the FCA CEO, on the challenges and priorities for the FCA. The highlights of the speech include: (i) the FCA will become a regulator that tests its powers to their limits. It is now applying a bolder risk appetite in dealing with serious misconduct, including using criminal powers in the most serious cases involving financial crime or money laundering. The FCA, even if it will not win every aspect of every case, vouched to litigate more if needed to provide legal certainty for the industry; (ii) the FCA will publish its third annual perimeter report in October 2021, sharing its views on how the regulatory framework might evolve; (iii) as it considers far-reaching reform, international standards remain the FCA’s anchor. Mr Rathi flagged in particular that the FCA: (a) is changing listing rules to ensure investor protection but also support new sectors and new forms of capital raising; (b)has cooperated with the Financial Stability Board, IOSCO and other international partners to ensure a global transition to a world without LIBOR; and (c) is working with international counterparts to establish a Sustainability Standards Board, led by the International Financial Reporting Standards (IFRS) Foundation; and (iv) the FCA is investing to become as much a data regulator as a financial one, and by the end of 2021, will publish feedback to its March 2020 call for input on wholesale data. Responses to the call for input indicated that trading data licensing fees are too complex, benchmark switching costs too high and data vendors are subject to high barriers to market entry.
HoC Treasury Committee publishes response to Future Regulatory Framework of Financial Services report
On 20 September, the HoC Treasury Committee published the Government’s response to its July 2021 report on the Future Regulatory Framework of Financial Services. Responses have been received from the HM Treasury, the FCA and the BoE. HM Treasury confirms it will publish a second Financial Services Future Regulatory Framework Review Consultation in Autumn 2021. The government reiterates its commitment to preserving the regulators’ operational independence and notes the Committee’s view that on-shored EU financial services law should be moved into rulebooks. The FCA first accepts the Committee's conclusions that any additional ex-ante scrutiny should not be built into the rule-making process, but welcomes increased Parliamentary engagement with its consultation proposals. The response from the BoE first notes that the proposed transfer of on-shored EU law into regulators’ rulebooks would give the UK the opportunity to make rules more accessible while moving towards a more coherent and tailored prudential regime. This model will also allow the BoE to act more dynamically in targeting responses to changes in the market. However, this proposal represents a major undertaking for regulators, requiring appropriate resources.