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Key Regulatory Topics: Weekly Update 18 November - 24 November 2022

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This week, the Bank of England published a speech on recent crypto market developments, and the FCA published a new webpage on raising standards in new firms and financial promotions, as well as announcing the formation of an ESG Data and Ratings Code of Conduct Working Group. In Europe, ESMA published its annual report on the application of waivers and deferrals for equity and non-equity instruments under MiFIR, and a separate report on sanctions imposed under MAR. In addition, ESMA also published a consultation paper on guidelines on funds’ names using ESG or sustainability-related terms.


FCA interim report and discussion paper on the credit information market

On 22 November, the FCA published its interim report and discussion paper on its market study into the credit information market. It will be of interest to new and existing credit reference agencies (CRAs), credit information service providers (CISPs), users of credit information such as lenders, and consumer organisations. The main findings of the report are; (i) the credit information sector needs to support retail lending and help ensure that credit is offered only where appropriate and at a fair price; (ii) the UK has a relatively advanced credit information sector, comparing favourably to many other countries in terms of both the depth and coverage of credit information and; (iii) there are still aspects of the market that are not working well, such as the governance arrangements that were set up in the 1990s to oversee the sharing of consumer information to help support lending decisions and reduce fraud, which are slowing down response time to emerging issues. The report sets out a range of potential remedies and a proposed phasing for discussion. The FCA aims to publish a full report in Q3 2023 and requests responses to the questions found in the Remedies Annex be submitted by 24 February 2023.

Interim Report

Remedies Annex

FCA warning about problem behaviours linked to trading app design

On 21 November, the FCA published a press release warning stock trading app operators to review design features which risk prompting consumers to take actions against their own interest. The FCA has found that apps with features such as sending frequent notifications with the latest market news or in-app points, pose a threat to customers, as evidence suggests such features make consumers more likely to invest beyond their risk appetite. Research has also raised concerns that some customers using such trading apps exhibited signs of problem gambling. The FCA intends to complete further research into trading app use and design features, but encourages firms to be reviewing their products now to ensure they are in line with the new Consumer Duty coming into force next year. Alongside this warning, the FCA also published the research article that summarises the research findings. 

Press Release

Research Article

Financial Crime and Sanctions

EBA remote customer onboarding guidelines under MLD4

On 22 November, the EBA published its final report on guidelines on the use of remote customer solutions under article 13(1) of the MLD4. The guidelines set out the steps credit and financial institutions should take when choosing remote customer onboarding tools. They suggest what credit and financial institutions should do to satisfy themselves that the chosen tool is adequate and reliable, that it remains adequate and reliable, and that it enables them to comply effectively with their initial CDD obligations. As long as the conditions set out in these guidelines are met, and to the extent that this is permitted by national law, the choice of individual technological solutions is the firm’s. The guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will enter into force six months after publication of the translations.


ESMA report on sanctions imposed under MAR

On 18 November, ESMA published its annual report on administrative and criminal sanctions, and other administrative measures imposed under MAR in 2021. From 1 January 2021 to 31 December 2021, NCAs reported a total of 366 administrative sanctions and measures, and 29 criminal sanctions for infringements of MAR. The value of the financial penalties imposed for the administrative sanctions reached EUR 54,273,686.97, while the financial penalties in relation to criminal infringements of MAR amounted to EUR 5,340,879. In comparison with 2020, the number of administrative sanctions and measures under MAR significantly decreased, whilst the financial penalties significantly increased. Both the number of criminal sanctions and the aggregated value of the sanctions decreased compared to 2020.



BoE speech on recent crypto market developments

On 21 November, the BoE published a speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability, on recent crypto market developments, in particular the recent collapse of cryptocurrency exchange FTX. Sir Jon believes that the financial service activities and the entities that now populate the crypto world should be brought into the regulatory framework in order to protect consumers and investors, to create financial stability and to foster innovation. The guiding principle for determining ‘how’ regulation should be extended to these areas is ‘same risk, same regulatory outcome’ with the existing regulatory frameworks and the level of assurance required to show that the relevant risks have been managed as the starting point. Although, he does not underestimate how it may be more difficult to provide that assurance for certain new technologies. Sir Jon goes on to explain that this is the approach being taken by the FSM Bill, which will extend the regulatory framework to the use of crypto technologies and business models in finance, the objective being to extend the current BoE and FCA regulatory regimes for e-money and payment systems to cover the use of ‘stablecoins’ for payments. The BoE intends to consult early next year on the regulatory framework that will apply to systemic payment systems and services, like wallets, that accompany them.  The BoE is also working with HMT on the issuance by the BoE of a digitally native pound sterling, with the aim of publishing a consultative report at the end of the year setting out the next steps. Throughout the speech, Sir John emphasises that the BoE’s aim is to ensure that innovation can take place but within a framework in which risks are properly managed, and which safeguards the sustainability of such innovation.


Fund Regulation

Please see the ‘Sustainable Finance’ section for ESMA’s consultation paper on guidelines on funds’ names using ESG or sustainability-related terms.

Markets and Market Infrastructure

Corrigendum to Implementing Regulation on ITS under EMIR

On 24 November, a Corrigendum to Commission Implementing Regulation (EU) 2022/1860 laying down ITS under EMIR with regard to the standards, formats, frequency and methods and arrangements for reporting was published in the OJ. The Corrigendum corrects drafting errors within Article 4(1) of the Implementing Regulation.


FCA consultation paper on ‘synthetic’ US Dollar LIBOR

On 23 November, the FCA published a consultation paper on ‘synthetic’ US dollar LIBOR. The consultation paper follows on from the FCA’s June consultation that addressed the winding down of synthetic sterling LIBOR. In light of responses received to its June consultation, the FCA considers that there is a case for: (i) requiring publication of the 1-, 3- and 6-month synthetic US LIBOR settings under a synthetic methodology for a temporary period until the end of September 2024; (ii) using CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for a synthetic US dollar LIBOR; and (iii) permitting the use of these synthetic US LIBOR settings in all legacy contracts except cleared derivatives. The deadline for comments is 6 January 2023. The FCA expects to announce its final decision towards the end of Q1 or early Q2 of 2023. On the same day, the FCA also announced that it intends to continue to require LIBOR’s administrator, ICE Benchmark Administration Limited, to continue publishing 3-month sterling LIBOR until the end of March 2024, after which it will cease permanently.


Press Release

ESMA amending RTS on settlement discipline under CSDR

On 21 November, ESMA published a final report on draft RTS amending Article 19 of Commission Delegated Regulation (EU) 2018/1229 supplementing the CSDR with regard to settlement discipline. The proposed amendment would remove the CCP-run separate process for the collection and distribution of cash penalties for settlement fails on cleared transactions. It would put CSDs in charge of the process of collection and distributing all penalties according to Articles 16, 17 and 18 of the same Regulation, establishing a single harmonised process for all transactions (both cleared and uncleared). ESMA will submit the draft RTS to the EC for endorsement. Following endorsement, the resulting Delegated Regulation will be subject to the non-objection of the EP and the Council.

Final Report

ESMA annual report on the application of waivers and deferrals

On 21 November, ESMA published its annual report on the application of waivers and deferrals for 2022. Under Articles 4(4), 7(1), 9(2) and 11(1) of MiFIR, ESMA is required to monitor the application of pre-trade transparency waivers and deferred trade-publication. As part of this mandate, it submits an annual report to the EC on how equity and non-equity waivers and deferrals regimes are applied in practice. The report found that even though UK venues were excluded from the analysis, the results suggest that trading under waivers and deferrals is significant, specifically for shares and interest rate derivatives. Trading volumes have also significantly increased from 2020 to 2021 in the equity space since Brexit. Meanwhile, ETFs remained the equity instruments with the highest percentage of “dark” trading with respect to the overall volume traded in ETFs. While ESMA sees merit in providing an overview of the trading volumes executed under waivers and deferrals for non-equity instruments, the use of an ad-hoc data collection has not proven effective. Therefore, ESMA recommends that MiFIR be amended to allow ESMA to request such data from trading venues via FITRS. Additionally, ESMA considers that the current deferral regime is too complex and that it would benefit from a set of targeted amendments to streamline the regime as suggested in ESMA’s MiFID II/MiFIR Review Report for non-equity instruments. ESMA also maintains its proposal to delete the SSTI waiver.


ACER updates its REMIT data reporting guidance

On 18 November, the Agency for the Co-operation of Energy Regulators (ACER) announced it has updated its REMIT data reporting guidance. This updated guidance follows a consultation launched in June that aimed to improve REMIT data reporting. ACER has published (i) the updated Transaction Reporting User Manual (TRUM) and its Annexes; (ii) the updated FAQs on REMIT transaction reporting; and (iii) a new version for the reporting of REMIT Table 1 transactions. The amendments provided in the updated TRUM mainly focus on clarifying the reporting obligations for broker organised market places, and also for market participants entering into transactions on wholesale energy markets via third party accounts. Several Annexes of the TRUM have also been updated. The new edition of the FAQs on REMIT transaction reporting provides additional guidance on specific business scenarios to better reflect the development of the trading activity on the EU wholesale energy market. Whilst the new version of the electronic format for the reporting of REMIT Table 1 transactions implements selected changes from the public consultation on the revision of electronic formats for transaction data, fundamental data and inside information reporting, as well as changes required for the alignment of the electronic format with the TRUM. ACER plans to retire the older versions of the electronic format for the reporting of REMIT Table 1 transactions after a transition period. Reporting entities can continue using Version 1 until 16 May 2023 and Version 2 until 16 October 2023.

Press Release

Prudential Regulation

EC adopts Delegated Regulation on RTS for the calculation of risk-weighted exposure amounts of collective investment undertakings

On 24 November, the EC adopted a Delegated Regulation on RTS for the calculation of risk-weighted exposure amounts of collective investment undertakings (CIUs) under the mandate-based approach under Article 132a(4) of the CRR. The provisions of the Delegated Regulation specify how institutions are to calculate the risk-weighted exposure amount referred to in Article 132a(2) of the CRR, as introduced by the CRR II, where one or more of the inputs required for that calculation are not available. The RTS clarify the steps that need to be taken to calculate the exposure value of CIUs’ derivative exposures where the underlying is unknown. It then sets out what to do in cases where the calculation of the exposure value to the counterparty credit risk of a netting set of CIUs’ derivative exposures is needed. The Delegated Regulation will enter into force on the twentieth day following its publication in the OJ.

Delegated Regulation

BCBS newsletter on bank exposures to non-bank financial intermediaries

On 24 November, the Basel Committee on Banking Supervision (BCBS) published a newsletter on bank exposures to non-bank financial intermediaries. The newsletter explains that the non-bank financial intermediary (NBFI) sector is continuing to grow and has the potential to cause financial stability concerns. However, its size and associated risks vary amongst member jurisdictions. The BCBS recently conducted a risk horizon scanning exercise related to banks' NBFI activities and discussed supervisory and policy implications resulting from the recent distress of specific NBFIs. Discussions highlighted that: (i) supervisors consider exposures to highly leveraged counterparties via derivatives and securities financing to be the riskiest. These types of exposures raise concerns about opaque concentration risks and potential sudden market stress, stemming from margin calls and fire sales of assets. In some instances, supervisors also note an increasing risk with regards to cryptoasset-related services provided by NBFIs; (ii) deficiencies in some banks' risk management practices have been noted; (iii) supervisors have encouraged banks to improve their practices by reviewing and enforcing existing guidelines and standards. Supervisors have put an increased focus on banks' risk management practices, emphasising rigorous onboarding due diligence and ongoing monitoring, risk-sensitive margining and the importance of robust information disclosures from investment fund counterparties; (iv) recent supervisory work revealed weaknesses in some banks' risk management practices related to commodities trading and also highlighted broader counterparty credit risk measurement and management challenges; and (v) existing supervisory infrastructure regarding NBFI-related risk is generally sufficient. However, the Committee is discussing how to close data gaps and improve the visibility of interconnections between banks and NBFIs. The BCBS strongly encourages the proper application of existing standards and guidelines, as well as the full and timely implementation of the Basel III standards. It is committed to continuing to exchange supervisory views on banks' exposures to NBFIs including on recent episodes highlighting leverage, concentration and liquidity concerns in the non-bank sector and related supervisory practices.


PRA letter on proposed expectations on unvested pay, MRTs and public appointments

On 24 November, the House of Commons Treasury Sub-Committee on Financial Services published a letter (dated 8 November) from Sam Woods, PRA CEO. The letter is a response to a letter from the Sub-Committee seeking clarification on aspects of the PRA’s July consultation paper on Remuneration: Unvested Pay, Material Risk Takers (MRTs) and public appointments. The PRA’s consultation paper set out expectations in respect of changes to the instruments or claims that comprise unvested, deferred sums awarded to MRTs as part of their variable pay. In particular, cases where changes are prompted by the need to manage conflicts of interest arising from an MRT seeking a senior public appointment linked to financial policy or financial services regulation. The letter addresses a number of areas, including: (i) the PRA’s rationale behind the proposed changes; (ii) how the PRA intends to define a ‘senior public sector appointment linked to financial policy or financial services regulation’; (iii) whether the PRA anticipates individuals to start seeking short periods of employment in the public sector for the primary purpose of converting their variable pay; and (iv) whether malus and clawback provisions will continue to create conflicts of interests for former MRTs in public sector roles, even after these proposals take effect. The PRA aims to implement the relevant changes to its supervisory statement on remuneration on 12 December.


RTS relating to the alternative standardised approach for market risk

On 18 November, Commission Delegated Regulation (EU) 2022/2257 on RTS specifying the calculation methods of gross jump-to-default amounts for exposures to debt and equity instruments and for exposures to default risk arising from certain derivative instruments, and specifying the determination of notional amounts of instruments other than the instruments referred to in Article 325w(4) of the CRR was published in the OJ. The Delegated Regulation will enter into force on 8 December (the twentieth day following its publication in the OJ).

Delegated Regulation 

Regulatory Reform Post Brexit

UK government decides against public interest intervention power in FSM Bill

On 23 November, Andrew Griffith, Financial Secretary, HMT, sent a letter to the Treasury Select Committee, explaining that the government will not proceed with a proposal to provide HMT with a public interest intervention power with regards to financial services regulators.  After consulting further, the government is of the view that the existing provisions in the FSM Bill are sufficient and therefore the amendment is not necessary. In the letter, Mr Griffith goes on to explain that the government will keep the matter under review, and will return to the issue, if in the future it emerges that the regulatory framework is not able to fully support the government’s vision for the UK’s financial services sector.


Financial Services (Miscellaneous Amendments) Regulations 2022 published

On 23 November, the Financial Services (Miscellaneous Amendments) Regulations 2022 (SI 2022/1223) were published on, along with an explanatory memorandum. The Regulations amend: (i) Part 3 of the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019, to enable HMT and the FCA to apply their powers in respect of Gibraltarian firms operating in the UK in relation to the UK Short Selling Regulation, UK MiFIR and the UK PRIIPs Regulation; and (ii) UK EMIR and the UK Securitisation Regulation, by extending the requirement for institutional investors to conduct specific due diligence prior to investing in EU STS securitisations, and by extending the exemption from the clearing obligation in relation to EU STS securitisations to those notified prior to 11pm on 31 December 2024. The Regulations enter into force at 11pm on 31 December.


Explanatory Memorandum

Sustainable Finance

FCA code of conduct for ESG data and rating providers

On 22 November, the FCA announced the formation of an ESG Data and Ratings Code of Conduct Working Group (DRWG), to develop a code of conduct for ESG data and rating providers. The FCA hopes to have its regulatory perimeter extended so that it can oversee certain ESG data and ratings providers, promoting greater transparency and trust in the market. Until that time, the FCA has convened industry participants to develop a voluntary code of conduct. The DRWG has two main objectives: (i) to develop a globally consistent voluntary code of conduct for ESG data and rating providers, taking account of IOSCO’s recommendations; and (ii) to consider how the code should be periodically reviewed so that it continues to reflect best practices and to meet market participants’ expectations until a potential regulatory regime is established. The FCA has convened ICMA and the IRSG as the secretariat of the DRWG, which will in turn appoint and lead the independent group to develop the code, aiming to deliver a consultation in the first half of 2023.

Press Release

Terms of Reference

EC requests advice from the EBA regarding green loans and mortgages

On 22 November, the EBA published a letter it received from the EC requesting advice on green loans and mortgages. Alongside this letter, the EBA also published a call for advice on green loans and mortgages. In the EC’s ‘Strategy on Financing the Transition to a Sustainable Economy’, published in July 2021, it outlined four policy areas in which further work is needed. One of the areas is a more inclusive sustainable finance framework that would enable households and SMEs to access sustainable finance, such as green loans and mortgages. To this end, the EC requests an overview of current market practices and the prevalence of green loans in the banking market. The EC would also like the EBA to propose and consider the merits of an EU definition of green loans, and to consider measures that would encourage the uptake or access to green finance by retail and SME borrowers. The EBA’s advice will allow the EC to consider measures to encourage the development of the green loans and mortgages market. The EBA has until 29 December to deliver its advice.


Call for Advice

ESMA consultation on guidelines on funds using ESG or sustainability-related names

On 18 November, ESMA published a consultation paper on guidelines on funds’ names using ESG or sustainability-related terms. The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims, while providing both competent authorities and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms. These guidelines apply to UCITS management companies, AIFMs, EuVECA, EuSEF and ELTIF managers, as well as competent authorities. The main elements of the consultation paper on which ESMA is seeking stakeholders’ feedback are: (i) if an investment fund has any ESG-, or impact-related words in its name, a minimum proportion of 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy, which are disclosed in Commission Delegated Regulation (EU) 2022/1288 (SFDR Delegated Regulation); (ii) if an investment fund has the word “sustainable” or any other term derived from the word “sustainable” it should allocate within the 80% of investments to “meet the environmental or social characteristics or sustainable investment objectives” at least 50% of minimum proportion of sustainable investments as defined by Article 2(17) of the SFDR, which is also disclosed in the SFDR Delegated Regulation; (iii) minimum safeguards are recommended for all investment funds using an ESG- or sustainability-related term in their name; (iv) funds designating an index as a reference benchmark should use ESG and sustainability-related words in their name only if specified thresholds are met; and (v) the use of the word “impact” or “impact investing” or any other impact-related term should be used only by funds meeting the quantitative thresholds, and additionally whose investments are made with the intention to generate positive, measurable social or environmental impact alongside a financial return. The deadline for responses is 20 February 2023. ESMA expects to issue the final guidelines by Q2 or Q3 2023. The guidelines will apply three months after the date of their publication on ESMA’s website. A transitional period of six months will apply to funds already existing before the date of the publication of the guidelines.

Consultation paper

Other Developments

FCA speech on driving change in diversity and inclusion

On 22 November, the FCA published a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition, on driving change in diversity and inclusion in the financial services sector. Mr Mills stressed that driving change and working with the industry to achieve a more diverse and inclusive financial services industry is a core objective for the FCA. He highlighted that while progress is being made, there is still more work to be done. He encouraged firms to not lose sight of the importance of ensuring diverse representation and inclusive cultures, even when facing the heightened pressures of the cost-of-living crisis. As highlighted in the FCA’s most recent FCA Financial Lives Survey data, disabled adults are twice as likely, and black individuals are almost twice as likely, to struggle with keeping up with their domestic bills and credit commitments. He also stressed the importance of diversity within D&I strategies, as research found that most strategies focused on gender, with ethnicity a close second, with less focus paid to disability or LGBTQ+. Firms should be looking beyond the current diversity characteristics that are visible. He also comments that while attention should be paid to the diversity and inclusivity within senior leadership, the more meaningful strategies are the ones that create a sustainable diverse talent pipeline from the point of recruitment and through the organisation to leadership. Overall, Mr Mills finds that as an industry progress is being made and that firms are taking important steps to develop their capabilities. However, there is a difference between setting a strategy and actually executing it. As an industry, the focus should be on maintaining and expanding the momentum that already exists. 


FCA webpage on raising standards in new firms and financial promotions

On 22 November, the FCA published a new webpage on raising standards in new firms and financial promotions. Aware that many newly authorised firms can grow quickly in their early stages, the FCA has created a new Early and High Growth Oversight function that provides closer supervision and help through the first stages of being authorised. The new function will also raise standards, help the FCA to spot and act on potential harm sooner, rather than later, whilst also promoting competition. During 2021 to 2022, the FCA ran a pilot with 32 newly authorised firms to help them adapt to its supervision, understand FCA requirements and improve their standards where needed to. One of the most common themes was how well these firms understood the FCA rules on promoting financial products to the public. The FCA found that some firms: (i) were describing their products and services as “FCA approved” on their websites; (ii) wrongly claimed on their websites “we worked with the regulator to deliver a product/service”; (iii) were advertising services they did not have permission for; and (iv) were advertising attractive investment returns they could not substantiate, potentially attracting customers with rates they would never get. The FCA intervened in each case and made sure the firms made the necessary changes. In phase 2 of the pilot, which has already been launched, the number of newly authorised firms being reviewed has increased to 300. The FCA aims to use the findings from this next stage to identify other common areas where firms need to raise their standards.


ESRB report on fiscal support and macroprudential policy

On 21 November, the ESRB published a report on fiscal support and macroprudential policy – lessons from the Covid-19 pandemic. At the start of the pandemic, the ESRB established a working group to analyse the effects of crisis-related fiscal measures and loan moratoria on the stability of the financial system. In line with the macroeconomic effects of the pandemic levelling off and the associated measures being phased out, the ESRB has decided to discontinue its pandemic-related data collection and monitoring work. The key takeaways from this work are: (i) the swift and ample fiscal support measures provided and sustained the liquidity and solvency of the real economy; (ii) the amount of available fiscal support peaked in Q1 2021 and has since been decreasing; (iii) the phasing out of fiscal support measures has not yet come with noticeable disruptions for the real economy; (iv) active fiscal support during the pandemic weakened the link between economic and financial losses; and (v) authorities are using macroprudential tools to build up resilience amid heightened macroeconomic and systemic risks, while limiting the risk to procyclicality. The ESRB hopes that despite the work on Covid-related measures being phased out, the lessons learnt could be carried over to a monitoring of the impact of fiscal policies on macropruential risks in other contexts.