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Key Regulatory Topics: Weekly Update 18 - 24 June 2021

Among other key items, this week’s update includes the BoE’s consultation on the design of its CCP supervisory stress-testing framework and two FCA consultations on new proposals for climate-related disclosure rules for listed companies and certain regulated firms.

Capital markets

FCA consults on changes to its Knowledge Base in relation to the prospectus regime

On 24 June, the FCA published its Primary Market Bulletin 34, which consults on changes that it proposes to make to its Knowledge Base in relation to the prospectus regime, as set out in the guidance consultation (GC21/1). Specifically, the FCA intends to: (i) create a new Technical Note, Primary Market/TN/619.1, to adapt, as FCA Guidance, ESMA’s Guidelines on disclosure requirements under the Prospectus Regulation; and (ii) incorporate certain explanations in the Prospectus Directive Q&As into Technical Notes. The FCA proposes to no longer refer to the CESR Recommendations and the PD Q&As on its Handbook site, and the relevant substantive content will be consolidated into the FCA’s Technical Notes. Additionally, where applicable, the FCA has made changes to reflect: (i) changes arising from the Prospectus Regulation which fully applied in the EU, including the UK, from 21 July 2019, when it repealed and replaced the PD; and (ii) changes made as a result of the UK withdrawal from the EU. The deadline for comments is 4 August.




EC consults on the Distance Marketing of Consumer Financial Services Directive (DMD)

On 22 June, the EC published a consultation on the DMD. The EC explains that since the DMD came into force in 2002, the retail financial sector has become increasingly digital and several EU laws pertinent to financial services have been adopted or updated – thus, although the DMD had clear value added when it entered into force, many of its substantial elements have been taken over by sectoral legislation that has been adopted afterwards, such as in the context and aftermath of the financial crisis. Following the consultation on the DMD that ran from 9 April to 2 July 2019 (leading to the Evaluation Study of the DMD) and the fact that the adjusted EC 2020 Work Programme listed the DMD as subject to a ‘regulatory fitness’ exercise, the EC is running the consultation to gather views on an initiative that it plans to propose in Q1 2022. The consultation is an opportunity for consumers, retail financial services professionals, national authorities and other interested stakeholders to express their views on the general and technical aspects of the DMD. The deadline for comments is 28 September.


HMT consultation response on a regulatory framework for approval of financial promotions

On 22 June, HMT published responses to its consultation (published in July 2020) on a regulatory framework for approval of financial promotions. Following responses received, HMT notes, amongst other things, that the Government: (i) agrees with the majority view that a gateway should be introduced for the approval of financial promotions of unauthorised persons, and that this should be implemented through option 1 (this being that FSMA should be amended so that authorised firms are no longer able to approve the financial promotions of unauthorised persons, unless the authorised firm had passed through a new regulatory ‘gateway’ operated by the FCA); (ii) will amend section 21(2)(b) of FSMA to remove the general ability to communicate financial promotions which have been approved by authorised firms; and (iii) will make changes to FSMA to allow firms undergoing an authorisation application to apply to have the Financial Promotion Requirement varied or cancelled as part of the application process – the FCA would also be empowered to determine such requests to vary or cancel the Financial Promotion Requirement as part of the authorisation process. There are two steps that the Government and the FCA will take to put in place the regulatory framework for this gateway: (a) the Government intends to bring forward legislation when parliamentary time allows; and (b) the FCA will consult on its proposed rules for implementing the gateway in due course, and will announce its final rules once it has fully considered the responses to its consultation.

Consultation Response

Financial crime

Please see our Other Developments section for an update on the FCA’s speech on building a regulatory environment for the future.


Please see our Other Developments section for an update on the FCA’s speech on building a regulatory environment for the future.

ECB opinion on a proposal for a regulation on DLT pilot regime for market infrastructures

On 22 June, the ECB’s opinion, on a proposal for a regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on DLT, was published in the OJ. Key points include that the ECB: (i) welcomes the proposed regulation; (ii) welcomes the limitations that the proposed regulation brings, both in terms of asset classes and market size, as regards the DLT transferable securities available for registration, trading and settlement via DLT multilateral trading facilities (MTFs) and a DLT securities settlement systems (SSS) while facilitating the mitigation of potential risks associated with the use of DLT – nevertheless, the ECB notes that it could be further considered whether to extend the asset classes, while maintaining the thresholds, to include sovereign bonds; (iii) emphasises that its opinion is predicated on the understanding that the specific thresholds set out in the proposed regulation are preserved; (iv) believes that, bearing in mind the level of capital markets’ development in some EU member states, it would be advisable to consider providing the national competent authorities with an option to lower the relevant thresholds – consequently, the ECB wishes to be reconsulted on the proposed regulation if there is any material alteration to the thresholds; (v) notes that the proposed regulation does not seem to ensure a level playing field between DLT MTFs and DLT SSSs as well as between these DLT market infrastructures and CSDs operating SSSs based on traditional technology; (vi) believes that while the proposed regulation envisages that an operator of an MTF can settle DLT transferable securities, the opposite possibility of a CSD operating a DLT SSS also operating an MTF should be explored; and (vii) notes that as regards e-money tokens that may be used for the settlement of DLT transferable securities transactions, the proposed regulation does not seem to respect the principle of technological neutrality. In addition, the opinion sets out specific observations on: (a) monetary policy aspects; (b) oversight and systemic/financial stability aspects; and (c) prudential supervisory aspects.


Fund regulation

ESMA guidelines on Article 25 of the Alternative Investment Fund Managers Directive (AIFMD)

On 23 June, ESMA published guidelines on Article 25 of the AIFMD. ESMA notes that the objectives of the guidelines are to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision and to ensure the common, uniform and consistent application of Article 25 of the AIFMD. In particular, they relate to the assessment of leverage-related systemic risk and aim to ensure that competent authorities adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met. The guidelines will apply from two months after the date of publication of the guidelines on ESMA’s website in the EU official languages.


Markets and markets infrastructure

Please see our FinTech section for an update on the ECB’s opinion on a proposal for a regulation on a DLT pilot regime for market infrastructures.

Please see our Prudential Regulation section for an update on the EC adopting a final one-year extension of the transitional regime for capital requirements for non-EU central counterparties.

Please see our Other Developments section for an update on the FCA’s speech on building a regulatory environment for the future.

HMT call for evidence on the review of the Securitisation Regulation

On 24 June, HMT published a call for evidence on the review of the Securitisation Regulation. HMT explains that Article 46 of the Securitisation Regulation places a legal obligation on HMT to review the functioning of the Regulation and lay a report in Parliament by 1 January 2022. There are a number of areas that HMT must assess – each of these areas is covered in the call for evidence. Whilst the call for evidence is a targeted review of the regulatory approach taken under the Securitisation Regulation, HMT is separately conducting a wider Future Regulatory Framework (FRF) review to determine how the overall framework for financial services will need to adapt to the UK’s position outside of the EU. HMT confirms that the Government will publish a second consultation on the FRF Review later this year. Furthermore, HMT is using the call for evidence to seek more detailed views on two potential changes which, if considered desirable, might be brought forward at the appropriate legislative opportunity: (i) whether a change is required to scope out certain non-UK Alternative Investment Fund Managers (AIFMs) marketing in the UK from certain requirements in the Securitisation Regulation, as described in Chapter 9; and (ii) whether it would be desirable to introduce a simple, transparent and standardised (STS) equivalence regime. The deadline for responses is 2 September.

Call for Evidence

EC, ECB Banking Supervision, EBA and ESMA encourage market participants to cease all LIBOR settings

On 24 June, the EC, ECB Banking Supervision, EBA and ESMA published a joint statement strongly encouraging market participants to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposures to these rates. The statement also encourages market participants to cease using the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and by 31 December 2021 at the latest. Participants are also called on to limit the use of any LIBOR setting published under a changed methodology (also known as “synthetic” LIBOR) only to contracts that are particularly difficult to amend ahead of LIBOR’s cessation (commonly referred to as “tough legacy”), and to include robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.


FCA consults on proposed decision to require synthetic LIBOR for 6 sterling and Japanese yen settings

On 24 June, the FCA published a consultation on its proposed decision to use one of its powers under the Benchmarks Regulation (BMR) to be introduced by the Financial Services Act 2021. This power will enable the FCA to require the LIBOR administrator, IBA, to change the benchmark’s methodology. The FCA notes that the consultation is a key step in ensuring an orderly wind down of LIBOR. Furthermore, the FCA notes that: (i) for the three Japanese yen LIBOR settings, the FCA intends to compel their publication for one year only until end-2022, after which they will cease; (ii) it proposes to use its Article 23D(2) BMR powers to require a synthetic LIBOR to be calculated using a forward-looking term version of the relevant risk-free rate (ie SONIA for sterling and TONA for yen) and the fixed ISDA spread adjustment published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol for the respective LIBOR setting; (iii) for sterling, there are two term SONIA reference rates (TSRRs) provided by Refinitiv and IBA, both TSRRs being compliant with BMR requirements – the FCA has selected the TSRR provided by IBA as a component for the specific purpose of a potential synthetic sterling LIBOR; and (iv) for yen, it has selected the Tokyo Term Risk Free Rate (TORF) provided by QUICK Benchmarks Inc (QBS) as a component for a potential synthetic yen LIBOR. The FCA’s proposed decision is in line with its policy framework for whether and how it would use the Article 23D(2) powers to ensure an orderly cessation of a critical benchmark – the FCA consulted on this policy framework in November 2020 and published it in final form in March 2021. The FCA intends to confirm its final decisions as soon as practicable in Q4. The deadline for comments is 27 August.


Consultation: Proposed Decision

The Financial Services Act 2021 (Commencement No. 2) Regulations 2021

On 22 June, the Financial Services Act 2021 (Commencement No. 2) Regulations 2021 were published. Regulation 3 of the Regulations brings into force, on 1 July, provisions of that Act dealing with: (i) benchmarks; (ii) access to financial services markets; (iii) variation or cancellation of permission to carry on regulated activity; (iv) rules about level of care provided by authorised persons; (v) insider dealing and money laundering; and (vi) miscellaneous matters.


Investment Association (IA) encourages transition of LIBOR-linked bonds

On 22 June, the IA published a document emphasising the need to address the large number of outstanding LIBOR-linked bonds which have still not yet transitioned to a new rate, despite the rapidly approaching deadline. This follows a letter that it sent earlier this year, detailing the broader market disruption that delaying this transition could cause. The IA states that the large number of outstanding LIBOR-linked bonds which have still not yet transitioned to a new rate is a matter of serious concern for the industry more widely, and for the buy-side in particular – the potential impact of these bonds not being transitioned to the new rate ahead of the deadline is severe, with the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate.


BoE discussion paper on supervisory stress testing of central counterparties (CCPs)

On 21 June, the BoE published a discussion paper on supervisory stress testing of CCPs, setting out a range of proposals and options for the design of its CCP supervisory stress-testing framework across eight components of CCP supervisory stress testing, as well as considering how those design options might contribute to its objectives. The BoE considers that the most appropriate approach to scenario design is likely to differ according to the emphasis it places on its different objectives within each individual supervisory stress test – thus, while the BoE proposes to maintain a degree of flexibility in the number, severity and design of market shock scenarios, it also welcomes feedback on: (i) the potential benefits of adopting standardised scenarios; (ii) using consistent underlying methodology to select risk factors and generate risk factor shocks; and (iii) the characteristics of reference dates that it should seek to examine. Furthermore, the BoE notes that undertaking analysis of alternative default assumptions will help it better assess individual and system-wide CCP resilience. The BoE also intends to use sensitivity and reverse stress testing when undertaking supervisory stress tests – while the exact approach taken to these components could differ between tests, the BoE considers that these components will enable it to examine the impact of deviations in its assumptions, and to identify combinations of assumptions that deplete CCP resources beyond normally acceptable levels. The feedback received will be used in conjunction with the findings from running the BoE’s first public CCP supervisory stress test in 2021–2022 to inform the further development of the BoE’s CCP supervisory stress-testing framework before the BoE’s final framework is published. The deadline for comments is 17 December.

Discussion Paper

ESMA recommends changes to supervisory fees for credit rating agencies (CRAs)

On 21 June, ESMA published its final report providing technical advice to the EC on the supervisory fees charged to CRAs. The report is based on feedback from ESMA’s recent consultation, and it proposes changes to the calculation and the collection of supervisory fees set out in the current Commission Delegated Regulation (EU) No 272/2012. ESMA proposes to charge: (i) a fixed registration fee of EUR40,000; and (ii) an annual supervisory fee of 0.5% of turnover to CRAs with annual revenues of between EUR4,000,000 and EUR15,000,000. ESMA states that the proposed changes will ensure that it meets the regulatory obligation to charge fees that cover its costs while remaining proportionate to the revenues of the firms supervised. ESMA has not recommended changes to the calculation of annual supervisory fees paid by CRAs with annual revenues of over EUR15 million, as these fees are already calculated proportionately to cover the regulator’s costs. ESMA also recommends a number of changes to streamline the fee collection process and to align ESMA’s approach across its supervisory mandates – these include the requirement for supervisory fees to be paid in a single instalment in the first quarter of the financial year to ensure that ESMA has funds available for its ongoing supervision.


Payment systems and payment services

Collaboration between Pay.UK and the BoE on ISO 20022 payment messages

On 24 June, Pay.UK and the BoE published a press release in respect of their collaboration on ISO 20022 payment messages. Throughout 2021 and beyond, their key areas of collaboration will include: (i) working with UK Finance and the Payments Standards Strategy Group on the strategic direction for the governance of payment standards in the UK; (ii) working closely with industry to develop meaningful use cases and end-to-end journeys for utilising enhanced data to address existing challenges, such as Authorised Push Payment fraud and tax administration; (iii) providing to industry a CHAPS and New Payments Architecture schema comparison view against the original pacs.008 Common Credit Message, outlining where the schemas align and diverge; and (iv) further developing the requirements with industry for how the key enhanced data would be consistently implemented and used.

Press Release

EC adopts draft Delegated Regulation supplementing PSD2 with Regulatory Technical Standards (RTS) on framework for home-host cooperation and information exchange

On 21 June, the EC published a webpage containing a draft Delegated Regulation (adopted on 18 June) and accompanying Annex supplementing PSD2 with RTS on the framework for home-host cooperation and information exchange. The RTS specify: (i) the framework for cooperation and for exchanging information between the competent authorities of the home member state and of the host member state under Title II (Payment service providers) of PSD2; and (ii) how to monitor compliance with national law transposing Titles III (Transparency of Conditions and Information Requirements) and IV (Rights and obligations in relation to provision and use of payment services) of PSD2. The Council of the EU and the EP will now analyse the draft Delegated Regulation. The Regulation will enter into force on the 20th day following that of its publication in the OJ.


BoE speech on the evolution of payments systems in the UK

On 21 June, the BoE published a speech by Victoria Cleland (Executive Director for Banking, Payments and Innovation) on the evolution of payments systems in the UK. Victoria Cleland confirms that the BoE will transition to enhanced ISO 20022 messaging in February 2023. Furthermore, in September 2023, the BoE will introduce a state-of-the-art core settlement engine: the heartbeat of the new Real Time Gross Settlement (RTGS) service. The speech also covers: (i) the criticality and evolution of payments – specifically, it is predicted that by 2028 just 9% of all payments will be made by cash; (ii) RTGS at the heart of UK payments – Victoria Cleland emphasises that the time is right to drive yet further resilience and innovation through the RTGS Renewal Programme; (iii) industry engagement as a cornerstone to joint success – industry engagement is crucial in creating the BoE’s vision of the renewed RTGS; (iv) the growing importance of cross-border payments; and (v) future proofing the payments infrastructure, stating that innovation is crucial to the future payments landscape.


Payment and Electronic Money Institution Insolvency Regulations 2021

On 18 June, the Payment and Electronic Money Institution Insolvency Regulations 2021 were published, and were made on 17 June. In the Explanatory Memorandum that was also published, it is explained that the instrument creates a new special administration regime for payment and electronic money institutions. It also makes an amendment to the Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 and to the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (BRRD2 SI) to correct a minor defect in the BRRD2 SI.


Explanatory Memorandum

Prudential regulation

Please see our Markets and Markets Infrastructure section for an update on the BoE’s discussion paper on supervisory stress testing of central counterparties.

Please see our Sustainable Finance section for an update on the EBA’s report on management and supervision of ESG risks for credit institutions and investment firms.

Commission Implementing Regulation (EU) 2021/1018 amending the implementing technical standards (ITS) as regards the disclosure of indicators of global systemic importance published in the OJ

On 24 June, Commission Implementing Regulation (EU) 2021/1018, amending the ITS laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of indicators of global systemic importance and repealing Implementing Regulation (EU) No 1030/2014, was published in the OJ. Article 441 of CRR, as amended by CRR II, requires global systemically important institutions (G-SIIs) to disclose, on an annual basis, the values of the indicators used for determining their score in accordance with the identification methodology referred to in Article 131 of CRD IV, as amended by CRD V. The Implementing Regulation (EU) 2021/1018 amends Commission Implementing Regulation (EU) 2021/637 by adding a new Article 6a, incorporating the Article 441 disclosure provisions into the ITS on institutions' public disclosures of the information referred to in Part 8 of CRR. In addition, the Implementing Regulation repeals Commission Implementing Regulation (EU) 1030/2014, given the Implementing Regulation (EU) 2021/637 was adopted on the basis of Article 434a of CRR (introduced by CRR II) and lays down new disclosure requirements as opposed to those set out in Commission Implementing Regulation (EU) 1030/2014. To ensure a seamless transfer from Commission Implementing Regulation (EU) 1030/2014, the date of application of the Implementing Regulation needs to be the same as the date of application of Commission Implementing Regulation (EU) 2021/637. Hence, the Implementing Regulation entered into force on 24 June and applies from 28 June.

Implementing Regulation

EC adopts final one-year extension of the transitional regime for capital requirements for non-EU central counterparties (CCPs)

On 24 June, the EC extended, by one additional year, the current transitional regime regarding the capital requirements that EU banks and investment firms must maintain when exposed to non-EU CCPs. This transitional regime will therefore continue to apply until 28 June 2022. The EC notes that this is the last and final extension possible under the CRR – exposures to those non-EU CCPs which will not be recognised by ESMA by 28 June 2022 will no longer be eligible for lower capital requirements after that date.

Press Release

EBA consultation to amend technical standards on credit risk adjustments

On 24 June, the EBA published a consultation paper on amendments to its Regulatory Technical Standards (RTS) on credit risk adjustments in the context of the calculation of the Risk Weight (RW) of defaulted exposures under the Standardised Approach (SA). The proposed amendments follow up on the EC’s Action Plan to tackle non-performing loans in the aftermath of Covid-19, which indicated the need for a revision of the treatment of defaulted exposures under the SA. The EBA notes that the update is necessary to ensure the prudential framework does not disincentivise the sale of non-performing assets. Furthermore, the EBA states that the proposed amendment to the existing RTS on credit risk adjustments introduces a change to the recognition of total credit risk adjustments, which ensures that the risk weight can remain the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight. However, the EBA also recommends that the treatment set out in this RTS be included in the EC’s considerations as part of the revised Capital Requirements Regulation (CRR3) proposal, which is expected at a later stage. The deadline for comments is 24 September.


EBA updates on monitoring of Additional Tier 1 (AT1) instruments and recommendations for ESG-linked capital issuances

On 24 June, the EBA published its updated report on the monitoring of AT1 instruments including an update on the monitoring of the implementation of the EBA’s Opinion on legacy instruments and its considerations on ESG capital bonds. The EBA notes that the objective of the update is to further strengthen the robustness and quality of EU institutions’ own funds and eligible liabilities instruments. The updates to the report reflect: (i) the amendments to the Capital Requirements Regulation (CRR2); (ii) the monitoring of the implementation of the EBA Opinion on legacy instruments; and (iii) observations on new market trends, such as ESG-linked capital instruments. As a result of the high standardisation of the AT1 issuances, only limited new observations have been added to the report since its last update. However, in the context of the end of the transitional period for legacy instruments, the EBA draws attention to the need to keep the capital structure simple and avoid additional layers within a capital class that would increase complexity. Therefore, further clarification on the implementation of the options in the EBA Opinion on legacy instruments is provided in the report. In addition, the EBA has identified differences in the clauses of the environmental, social and governance (ESG) issuances made for capital/loss absorbency purposes. The EBA has provided best practices or practices that should be avoided for these issuances.


EBA consultation on amendments to reporting on securitisation, asset encumbrance and global systemically important institutions (G-SIIs)

On 23 June, the EBA published a consultation paper to amend its Implementing Technical Standards (ITS) on Supervisory Reporting with regards to COREP and asset encumbrance reporting as well as the reporting for the purposes of identifying G-SIIs. The EBA notes that the consultation aims to enhance proportionality in the area of asset encumbrance reporting, as recommended by the EBA’s Report on the Study on the Cost of compliance with supervisory reporting requirements (CoC report). The EBA states that following the proposals for enhanced proportionality on asset encumbrance reporting, small and non-complex institutions will be exempted from the reporting of more granular data, as proposed in the CoC report. Furthermore, the EBA has suggested changing the definition of the level of asset encumbrance. Regarding the reporting of information for determining G-SIIs and assigning G-SII buffer rates, the EBA is proposing to slightly expand the scope of application of the reporting obligation, to include standalone entities, and not only banking groups, that meet the relevant criteria. The EBA expects to submit the draft ITS to the EC in Q4 2021 or Q1 2022. The revised requirements are intended to apply from the reference date 31 December 2022. The deadline for comments is 23 September.

Press Release


HMT consultation response on implementation of the Investment Firms Prudential Regime (IFPR) and Basel III standards

On 22 June, HMT published the responses to its consultation (published on 4 February) on the implementation of the IFPR and Basel III standards. Following responses, HMT states, amongst other things, that: (i) the Government now considers that applying the equivalence provision in Article 132 of the UK CRR would be a disproportionate method for addressing the prudential risks arising from UK banks’ investments in overseas funds – the Government has therefore decided to remove the equivalence provision contained in Article 132 of the UK CRR; (ii) the Fundamental Review of the Trading Book (FRTB) Standardised Approach (SA) reporting requirements will be implemented alongside any changes to FRTB revisions to Pillar 1 capital requirements (as part of Basel 3.1 and not from 1 January 2022); (iii) the Government will make further consequential amendments in due course to complete work on ensuring the macroprudential framework, in relation to the FPC’s powers of direction, is consistent with the updated prudential regime for banks, following the passing of the Financial Services Act 2021; (iv) given that the equivalence assessment carried out under Article 391 of the UK CRR is identical to that under Article 107 of the UK CRR, the Government will seek a legislative opportunity to streamline the approach by providing for the current effect of an equivalence decision under Article 391 of the UK CRR to be conferred under Article 107 of the UK CRR; and (v) the Government has decided to remove FCA-regulated EUR 730,000 Initial Capital Requirement firms from the scope of the UK resolution regime. HMT notes that the changes to the scope of the resolution regime will require changes to the legislation underpinning the UK resolution regime – the Government intends to deliver this via secondary legislation later this year. The consultation response also provides clarity on the scope of the use of bail-in and resolution stays.

Consultation Response

PRA consultation on financial holding companies – further implementation

On 21 June, the PRA published a consultation paper, setting out its proposed rules in respect of the application of existing consolidated prudential requirements to financial holding companies and mixed financial holding companies (holding companies) that have been approved or designated in accordance with Part 12B of FSMA. The PRA also proposes guidance with respect to directions and penalties over holding companies under Part

12B of FSMA, covering the taking of measures, including: (i) directions; (ii) the imposition of penalties; and (iii) the amount of penalties. The proposals would also result in a new Statement of Policy (SoP) ‘Supervisory measures and penalties in relation to financial holding companies’, as well as amendments to the SoP ‘The Prudential Regulation Authority’s approach to enforcement: statutory statements of policy and procedure’. The PRA states that the purpose of these proposals is to give effect to the changes in the CRD V, as transposed, and CRR II, as onshored, which impose direct responsibility for compliance with consolidated prudential requirements on approved or designated holding companies. The PRA intends to implement its proposals on 15 September. The deadline for comments is 22 July.


ECB extends the temporary exclusion of certain exposures to central banks from the leverage ratio total exposure measure (TEM)

On 18 June, the ECB adopted a decision to extend the temporary exclusion of certain exposures to central banks from the leverage ratio TEM. In view of Covid-19, the ECB determined on 16 September 2020 (through Decision (EU) 2020/1306) that exceptional circumstances exist that warrant the exclusion of the central bank exposures listed in points (a) and (b) of Article 500b(1) of the CRR from the total exposure measure, in order to facilitate the implementation of monetary policies. Article 500b, which was introduced by CRR II, will cease to apply on 27 June 2021, with its provisions on the exclusion of central bank exposures replicated in new Article 429a inserted by CRR II. The ECB has decided to extend the effect of the exclusion as it has determined that exceptional circumstances exist that warrant the exclusion of the central bank exposures listed in points (i) and (ii) of Article 429a(1)(n) of CRR II from the total exposure measure, in order to facilitate the implementation of monetary policies. The decision will apply in relation to any institution that is a significant supervised entity established in a euro area member state. The decision applies for a period starting on 28 June 2021 and ending on 31 March 2022. The decision also repeals Decision (EU) 2020/1306 with effect from 28 June 2021.


Recovery and resolution

Single Resolution Board (SRB) speech on the challenges of resolving mid-sized banks

On 23 June, the SRB published a speech by Pedro Machado (Director of Resolution Planning and Decisions) on the challenges of resolving mid-sized banks. The speech notes that in the absence of a credible insolvency legal framework for mid-sized banks, the problem tends to be rooted in the liability structure of these banks – this makes their loss-absorption capacity in resolution rather thin and hampers ultimately the very implementation of their resolution strategy. Pedro Machado notes that no matter what the size of a bank, to ensure financial stability there is a need for an implementable solution should mid-sized banks get into difficulty – to end publicly-funded bail-outs, Europe must ensure that the solution for this cohort of banks is one that is fiscally neutral. The speech sets out some of the challenges and potential solutions in respect of resolving mid-sized banks, which include: (i) defining mid-size; (ii) applying resolution tools; (iii) delivering on depositor protection; (iv) delivering on an EU liquidation regime; and (v) delivering on a harmonised insolvency regime. The speech notes that proposals for harmonisation across the board will inevitably be fraught with political perils and resistance – an incremental approach may be a more pragmatic solution, though the ultimate goal must be to put in place an EU liquidation regime alongside an EU resolution regime, something akin to a European Federal Deposit Insurance Corporation (FDIC).


SRB policy on approach for notifying impracticability to include bail-in recognition clauses in contracts

On 21 June, the SRB published guidance, containing its policy on how banks can notify the authorities when bail-in recognition clauses cannot be added to contracts under third-country law. This explains how the SRB will apply, in practice, the rules set out in Article 55(2) BRRD. The guidance is based on the EBA’s final draft regulatory and implementing technical standards on Article 55. The SRB has identified, based on Article 55(7) BRRD, four preliminary categories of liabilities, for which the impracticability notification and assessment are simplified: (i) liabilities resulting from trade finance operations, under internationally agreed frameworks and protocols; (ii) liabilities resulting from project finance activities, under official standardised terms; (iii) liabilities to FMI service providers, where the services are provided on standard terms not susceptible to bilateral negotiation; and (iv) minor operating liabilities, arising from (non-critical) business operations, where the terms of the contract are set by the provider and not bilaterally negotiated. The SRB notes that it is banks’ responsibility to make themselves resolvable, including incorporating bail-in recognition clauses in all relevant liabilities that are out of scope of the impracticability regime.


Sustainable finance

Please see our Prudential Regulation section for the EBA’s update on the monitoring of Additional Tier 1 instruments and recommendations for ESG-linked capital issuances.

Please see our Other Developments section for an update on the FCA’s speech on building a regulatory environment for the future.

EBA report on management and supervision of ESG risks for credit institutions and investment firms

On 23 June, the EBA published a report providing a comprehensive proposal on how ESG factors and ESG risks should be included in the regulatory and supervisory framework for credit institutions and investment firms, based on feedback that the EBA received on its discussion paper published in November 2020. The report focuses on the resilience of institutions to the potential financial impact of ESG risks across different time horizons – the EBA states that this requires careful assessments by institutions and supervisors who should take a comprehensive and forward-looking view, as well as early, proactive actions. Furthermore, the report: (i) outlines the impact that ESG factors, especially climate change, can have on institutions’ counterparties or invested assets, affecting financial risks; (ii) illustrates available indicators, metrics and evaluation methods that are needed for effective ESG risk management and identifies remaining gaps and challenges; (iii) provides recommendations for institutions to incorporate ESG risks-related considerations in strategies and objectives, governance structures, and to manage these risks as drivers of financial risks in their risk appetite and internal capital allocation process; (iv) recommends developing methodologies and approaches to test the long-term resilience of institutions against ESG factors and risks including the use of scenario analysis; and (v) states that to further enhance the supervisory review and evaluation process (SREP), there is a need to extend the time horizon of the supervisory assessment of the resilience of institutions’ business models, applying at least a 10 year horizon to capture physical risks, relevant public policies or broader transition trends – the report proposes a phase-in approach, starting with the inclusion of climate-related and environmental factors and risks in the supervisory business model and internal governance analysis. The EBA will publish Pillar 3 disclosure requirements on ESG risks, transition risks and physical risks, as defined in the report, later this year. The EBA has also published an accompanying factsheet.

Press Release



FCA consults on further climate-related disclosure rules

On 22 June, the FCA published two consultations on new proposals in respect of climate-related disclosure rules for listed companies and certain regulated firms. Specifically, the FCA has published a: (i) consultation paper (CP) on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP 21/17); and (ii) CP on enhancing climate-related disclosures by standard listed companies (CP 21/18). The proposals follow the introduction of climate-related disclosure rules for the most prominent listed commercial companies in December 2020, which are aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). In the consultations, the FCA is proposing to: (a) extend the application of its TCFD-aligned Listing Rule for premium listed commercial companies to issuers of standard listed equity shares – specifically, the FCA proposes adding a new rule Listing Rule (LR) 14.3.27R directly mirroring LR 9.8.6R(8) to require in-scope standard listed companies to include a statement consisting of certain information on climate-related disclosures in their annual financial reports. The new rule would apply on a ‘comply or explain’ basis, and would take effect for accounting periods beginning on or after 1 January 2022; and (b) introduce TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers, with a focus on the information needs of clients and consumers. Alongside these proposals, the FCA is also seeking views on other topical environmental, social and governance (ESG) issues in capital markets, including on green and sustainable debt markets and the increasingly prominent role of ESG data and rating providers. The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021. The FCA will separately consider stakeholder views on the ESG-related discussion topics in capital markets, with a view to publishing a Feedback Statement in the first half of 2022. The deadline for comments on both consultations is 10 September.

CP 21/17

CP 21/18

Other developments

EBA proposes to further harmonise EU law applicable to branches of third country credit institutions

On 23 June, the EBA published a report, based on Article 21b(10) of the CRD, on the treatment of incoming third country branches (TCB) under the national law of member states. The report, which is addressed to the EP, EC, and Council of the EU illustrates the results of a stock-taking exercise conducted with competent authorities about their national regulatory law/regulations and supervisory practices and a mapping of the TCBs established in member states. Considering the increased volume of activities carried out by TCBs in a context of regulatory fragmentation across the EU, the report lays down 14 high-level policy recommendations for further harmonisation of EU law. The EBA report considers: (a) whether and to what extent supervisory practices under national law for third country branches differ between member states; (b) whether different treatment of third country branches could result in regulatory arbitrage; and (c) whether further harmonisation of national regimes for third country branches would be necessary and appropriate, especially with regard to significant third country branches. The EC will, if appropriate, submit a legislative proposal to the EP and to the Council of the EU, based on the recommendations made by EBA.

Press Release


FCA speech on building a regulatory environment for the future

On 22 June, the FCA published a speech by its CEO, Nikhil Rathi, on building a regulatory environment for the future. The speech notes, among other things, that: (i) the flexibility that the FCA has gained since Brexit will allow it to tailor rules to suit markets, while maintaining high, internationally consistent standards at least equivalent to the EU; (ii) in secondary markets regulation, the FCA is consulting on the regime for research and best execution reporting under MiFID – thereafter, the FCA’s attention is turning to the broader MiFID regime; (iii) in respect of primary markets, effective public markets are critical in enabling companies to finance their businesses; (iv) in response to the recommendations of the UK Listings Review, the FCA is in the process of consulting on a set of clear conditions where it will not look to suspend the listing of a Special Purpose Acquisition Company; (v) next month, the FCA will be bringing forward a consultation seeking views on removing other barriers to companies listing – this will increase opportunities for investors without compromising on safeguards, and the consultation will include a wider discussion, seeking views on the purpose of the listing regime and whether wider-reaching reforms could improve its effectiveness; and (vi) the lack of mutual equivalence creates obvious market inefficiencies and results in increased costs for consumers both here and in the EU – the FCA will in time need to consider the extent to which its objectives are at risk, and whether this state of affairs is sustainable. The speech also notes that: (a) although the UK is open for business, it is not open to firms who do not meet the FCA’s regulatory expectations and all firms can expect to be held to the same high standards – there are 1,450 EEA firms currently accessing UK markets via the Temporary Permissions Regime, and as the FCA moves to a more permanent arrangement, there will be a rigorous review of all firms seeking to enter the UK authorisation gateway; (b) an example of how the FCA is tackling financial crime at the gateway is through its registration of cryptoasset firms; and (c) the FCA’s robust approach continues in supervision of firms, and the FCA anticipates that in more cases, where there are significant risks, it will need to supervise overseas firms accessing the UK market more directly to make sure that they meet its standards.