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Key Regulatory Topics: Weekly Update 2 - 8 July 2021

08 July 2021

This week, the UK regulators published a discussion paper on plans to improve diversity and inclusion in regulated firms.  Other updates include a continued focus by policy makers on ensuring a smooth transition away from LIBOR and the adoption by the EC of a new Sustainable Finance Strategy.

Capital markets

Please see our Other Developments section for an update on the HMT joint statement on the first India-UK Financial Markets Dialogue.

FCA consults on reforms to improve the effectiveness of UK primary markets

On 5 July, the FCA published a consultation on a series of proposed reforms to improve the effectiveness of UK primary markets. The FCA’s proposals respond to the changing nature of companies coming to market – they aim to broaden investor access to companies in higher growth sectors by improving flexibility and accessibility in the FCA’s listing regime as a gateway to the UK’s main public markets. The FCA notes that it continues to prioritise high standards of corporate governance and shareholder protections – thus, the consultation seeks feedback on the way some of the rules work and whether they could be refined and enhanced to support the sustainable growth of these companies. Specifically, the FCA is consulting on the following measures: (i) allowing a targeted form of dual class share structures within the premium listing segment to encourage innovative, often founder-led companies, onto public markets sooner, thus broadening the listed investment landscape for investors in the UK; (ii) reducing the amount of shares an issuer is required to have in public hands from 25% to 10%, reducing potential barriers for issuers created by current requirements; (iii) increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from GBP700,000 to GBP50 million – raising the MMC will give investors greater trust and clarity about the types of company with shares admitted to different markets; and (iv) making minor changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules to simplify the FCA’s rulebooks and reflect changes in technology and market practices. Alongside this, the FCA has set out an additional discussion seeking views on the overall structure of its listing regime and whether wider-reaching reforms could improve the longer-term effectiveness of the regime – this seeks to understand the value placed by market participants on different aspects of the FCA’s current regime as well as to gather views on how the regime might be modernised. Subject to consultation feedback and FCA Board approval, the FCA will seek to make relevant rules before the end of this year. On the additional discussion, the FCA will provide feedback and potentially consult further on wider listing regime changes in due course, if appropriate. The deadline for comments is 14 September.
Consultation

Consumer/retail

Please see our Prudential Regulation section for an update on the PRA policy statement on Internal Ratings Based UK mortgage risk weights.

Fees/levies

PRA policy statement on regulated fees and levies – rates for 2021/22

On 6 July, the PRA published a policy statement providing feedback to responses to its consultation paper 8/21 ‘Regulated fees and levies: Rates proposals 2021/22’. It also contains the PRA’s final policy: (i) the fee rates to meet the PRA’s 2021/22 Annual Funding Requirement for the financial period 1 March 2021 to 28 February 2022; and (ii) amendments to the Fees Part of the PRA Rulebook. The PRA has confirmed that no changes have been made to the proposals outlined in the CP as a result of the responses that it has received. The implementation date for the PRA Fees Amendment (No 2) Instrument 2021 (included in the Appendix) is 8 July.
Policy Statement
Appendix

Financial crime

Please see our Other Developments section for updates on the: (i) EBA revised guidelines on internal governance; and (ii) ESMA and EBA revised guidelines on assessment suitability of management body members and key function holders.

Financial Action Task Force (FATF) second 12 month review of its standards on virtual assets and virtual asset service providers (VASPs)

On 5 July, the FATF published a report on the second 12 month review of its standards on virtual assets and VASPs. The report notes that since the FATF’s first 12-month review, there has been clear progress in the implementation of the revised FATF Standards by the public sector. However, there is not yet sufficient implementation of the revised FATF Standards to enable a global anti-money laundering/counter-terrorist financing regime for virtual assets and VASPs. Similarly, while there has been progress, there has not yet been sufficient advancement in the global implementation of the travel rule (the requirement that VASPs and FIs ensure that originators and beneficiaries of virtual asset transfers are identifiable and are not anonymous) or the development of associated technological solutions. Moreover, the report finds strong and rapid growth in the virtual asset sector since the FATF revised its Standards. The report also includes the first market metrics on peer-to-peer transactions of virtual assets, using data from seven blockchain analytic companies. As the FATF found in its first 12-month review, there is no need to amend the revised FATF Standards at this point in time, except for technical amendments to apply the FATF’s recent changes on proliferation financing to virtual assets and VASPs. Going forward, the FATF should prioritise promoting rapid and effective implementation of the revised FATF Standards by jurisdictions – all jurisdictions need to implement the revised FATF Standards, including travel rule requirements, as quickly as possible. Therefore, the report recommends that the FATF should: (i) focus on the effective implementation of the current FATF Standards on virtual assets and VASPs across the Global Network. Members of the FATF and its broader Global Network should implement the revised FATF Standards (R.15/INR.15) as a matter of priority. The FATF should publish its revised Guidance on virtual assets and VASPs for the public and private sectors by November 2021. The Virtual Assets Contact Group should engage with the private sector after the publication of the revised FATF Guidance and report to the FATF’s Policy Development Group on progress in implementation by June 2022; (ii) accelerate implementation of the travel rule by the private sector as a priority. To facilitate this, the FATF members should implement the travel rule into their domestic legislation as soon as possible, including consideration of a staged approach to implementation as appropriate; and (iii) monitor the virtual asset and VASP sector for any material changes or developments that necessitate further revision or clarification of the FATF Standards considering the fast changing business and technological environment of virtual assets, including through its revised Guidance project.
Report

Fintech

Please see our Financial Crime section for an update on the Financial Action Task Force second 12 month review of its standards on virtual assets and virtual asset service providers.

Please see our Markets and Markets Infrastructure section for an update on the EP’s Committee on Economic and Monetary Affairs study on shadow banking.

Please see our Other Developments section for an update on the HMT joint statement on the first India-UK Financial Markets Dialogue.

Fund regulation

Please see our Markets and Markets Infrastructure section for an update on the EP’s Committee on Economic and Monetary Affairs study on shadow banking.

FCA statement on review of authorised fund managers’ assessments of their funds’ value

On 6 July, the FCA published a statement and its findings following its review of 18 fund managers between July 2020 and May 2021, covering different business models and sizes.  The review found that most authorised fund managers (AFMs) had not implemented Assessments of Value (AoV) arrangements that met FCA standards. The review found that, while some had been conducting AoV assessments well, too many AFMs often made assumptions that they could not justify to the FCA, thus undermining the credibility of their assessments. Furthermore, the FCA notes that: (i) when considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees; (ii) firms spent a disproportionate amount of time looking for savings in administration service charges that cost investors relatively little compared with the time spent reviewing the costs of asset management and distribution that typically cost investors much more; (iii) other firms did not meet the standards that the FCA expects by using poorly designed processes that led to incomplete assessments of value; and (iv) some of the independent directors on the governing bodies (or Boards) of AFMs did not provide the robust challenge that the FCA expects and appeared to lack sufficient understanding of relevant fund rules. Overall, the FCA expects: (a) more rigour from AFMs when assessing value in funds which will help ensure that investment products represent good value; and (b) all AFMs to consider these findings and use them to assess their AoV processes – where necessary, they should make changes to address shortcomings. The FCA intends to review firms again within the next 12 to 18 months and will assess how well firms have reacted to its feedback.  The FCA will consider other regulatory tools should it find firms are not meeting the standards necessary to comply with its rules.
Statement

Markets and markets infrastructure

EP’s Committee on Economic and Monetary Affairs (ECON) study on shadow banking

On 6 July, a study entitled “Shadow Banking: what kind of Macroprudential Regulation Framework?” commissioned by ECON was published.  The study considers theoretical contributions and empirical data to then suggest possible policy options.  The report concludes that the macroprudential regulation of shadow banking can be improved in several ways including: (i) “low-volatility net asset value” mutual funds could be reformed to impose gates and redemption fees to slow down and discourage withdrawals; (ii) similar mechanisms can be introduced for open-ended funds investing in less liquid assets; (iii) closed-end funds should be limited from providing investors with an expectation that their shares can be liquidated; (iv) simple, transparent and standardised (STS) securitisations can be further encouraged by enhancing the regulatory benefits they bring to institutional investors (v) minimum haircuts and margins should be imposed on securities financing transactions and derivatives; (vi) bank-related regulations can help discipline shadow banking through measures aimed at cutting back red tape on traditional banks, while ensuring that capital buffers imposed on traditional lenders are mirrored by similar measures for non-bank entities; (vii) structural limitations on the size and operating latitude of mega-banks should be brought back into the policy debate, as there is still a risk that large institutions use their too-big-to-fail status to provide mispriced implicit support to shadow banking entities; (viii) FinTech lenders should be covered by fully harmonised EU-wide regulations; and (ix) stablecoin issuers investing in assets other than those to which their “coins” are pegged should be treated like banks or subjected to a simplified regime that closely mimics banking supervision.
Study

EU equivalence of risk mitigation rules under EMIR in new jurisdictions

On 6 July, six equivalence decisions relating to EMIR risk mitigation requirements were published in the OJ. Specifically, the decisions recognise the legal, supervisory and enforcement arrangements as equivalent to certain requirements of Article 11 of EMIR, in: (i) the USA – Commission Implementing Decision (EU) 2021/1108; (ii) Brazil – Implementing Decision (EU) 2021/1103; (iii) Canada – Implementing Decision (EU) 2021/1104; (iv) Singapore – Implementing Decision (EU) 2021/1105; (v) Australia – Implementing Decision (EU) 2021/1106; and (vi) Hong Kong – Implementing Decision (EU) 2021/1107. The decisions enter into force on 26 July, 20 days following their publication in the OJ.
Decision 2021/1108
Decision 2021/1103
Decision 2021/1104
Decision 2021/1105
Decision 2021/1106
Decision 2021/1107

FSB urges action to complete the transition away from LIBOR by end of this year

On 6 July, the FSB published a progress report to the G20 on LIBOR transition and remaining issues. The FSB: (i) encourages authorities to set globally consistent expectations and milestones that firms will rapidly cease the new use of LIBOR, regardless of where those trades are booked or in which currency they are denominated – market participants are urged to cease new use of LIBOR in all currencies as soon as practicable, respecting national working group timelines and supervisory guidance where applicable, and in any case no later than the end of this year; (ii) strongly urges market participants to act now to complete the steps set out in its Global Transition Roadmap – financial and non-financial institutions need to accelerate adoption of robust benchmark rates in new contracts, as well as active conversion of legacy LIBOR-referencing contracts to directly reference risk-free rates and/or insert robust fallback language; (iii) notes that supervisory authorities should step up their efforts for active and adequate communication to increase awareness of the scope and urgency of relevant IBOR transitions for all clients; (iv) will undertake work to support transition in emerging market and developing economies, where engagement with financial institutions on transition planning is in general lagging; (v) stresses that collaboration and coordination remain crucial in expediting transition progress, on the international front; and (vi) notes that loan markets remain an area of concern, with much new lending still linked to LIBOR, increasing the stock of contracts affected by its discontinuation – the FSB stresses that the tools necessary to complete the transition are currently available, and have been for some time, and market participants must not wait for the development of additional tools.
Press Release
Progress Report

FCA speech on approaching the end of LIBOR transition

On 5 July, the FCA published a speech on the transition away from LIBOR, in light of six months before the end of the sterling LIBOR panel. The speech emphasises that the shift to overnight SONIA has been decisive, as the challenges of LIBOR transition have been overcome over the years. For example, in sterling markets, where LIBOR used to be deeply embedded, liquidity has moved from LIBOR to overnight SONIA, highlighting that overnight (as opposed to forward-looking) rates, compounded over the interest period, worked better. Furthermore, the speech notes that: (i) for the LIBOR panels ending this year (sterling, yen, swiss franc, euro) the central challenge in the next months is ensuring that all legacy contracts that can be converted do convert by year end; (ii) the FCA encourages firms to put in place plans that mean arrangements for the actual change of rates payable have been completed in good time, in line with the Q3 milestone; (iii) it is essential that firms have their active conversion plans in place in the next three months; and (iv) it does not want to see transition to new so-called 'credit sensitive' rates that some have suggested as a possible successor to LIBOR in some contracts, as they share many of the same flaws as LIBOR since they are derived largely from transactions in Commercial Paper and Certificate of Deposit markets, and liquidity in those markets has not proved robust to stress – the FCA asks that any regulated UK market participants looking to use these so-called 'credit sensitive' rates in UK-based business consider the risks carefully, and raise with their FCA supervisors before doing so. In light of what the official sector has left to complete: (a) for most of the LIBOR rates, the end of the panels means an end to LIBOR publication altogether – however, the FCA thinks there is a case to propose a different path in relation to 1-month, 3-month and 6-month sterling and yen LIBOR settings; (b) in line with its published policy framework, the FCA is proposing that synthetic LIBOR rates would be based on forward-looking term risk-free reference rates and the relevant ISDA spread adjustment – the FCA still needs to confirm its final policy framework for determining who will be permitted to use these rates, after it has considered the feedback that it has received to its consultation; and (c) the FCA will then consult on a specific application of this policy to the 6 sterling and Japanese yen LIBOR settings – precisely, which legacy contracts will be permitted to use any sterling and yen synthetic LIBOR rates.
Speech

Payment systems and payment services

European Payments Council (EPC) new version of Clarification Paper on SEPA Credit Transfer and SEPA Instant Credit Transfer rulebooks

On 6 July, the EPC published a new version of Clarification Paper on SEPA Credit Transfer and SEPA Instant Credit Transfer rulebooks. The objective of this new document is to offer information and recommendations to scheme participants. Amongst other things, the new version includes clarifications about changes to the SCT inquiry process that is entering into force in November.
Clarification Paper

Prudential regulation

Please see our Markets and Markets Infrastructure section for an update on the EP’s Committee on Economic and Monetary Affairs study on shadow banking.

Please see our Sustainable Finance section for an update on the FSB letter addressing financial stability risks and roadmap addressing climate-related financial risks.

Please see our Other Developments section for updates on the: (i) EBA revised guidelines on sound remuneration policies under CRD V; (ii) EBA revised guidelines on internal governance; and (iii) ESMA and EBA revised guidelines on assessment suitability of management body members and key function holders.

Basel Committee of Banking Supervision (BCBS) report on assessment of the impact of implemented Basel reforms

On 6 July, the BCBS published an interim report giving a preliminary assessment of the impact of implemented Basel reforms during the pandemic, as part of a broader evaluation of their effectiveness. The report: (i) indicates that the banking system would have faced greater stress during this period had the Basel III reforms not been adopted, and in the absence of extraordinary support measures taken by public authorities to mitigate the impact of the pandemic; (ii) finds that the increased quality and higher levels of capital and liquidity in the global banking system since the adoption of the Basel III reforms helped banks absorb the significant impact of the Covid-19 shock, suggesting that the reforms have achieved their broad objective of strengthening the resilience of the banking system; (iii) notes that throughout the pandemic, banks continued to lend and provide other critical services; and (iv) highlights a number of areas that the Committee intends to continue to monitor. In particular, the report outlines the Committee's initial findings regarding the: (a) overall resilience of the banking system during the pandemic; (b) usability of capital buffers, members' experience with the countercyclical capital policies and price movements of additional tier 1 capital instruments; (c) capital framework – specifically, liquidity buffers; (d) impact of the leverage ratio on financial intermediation; and (e) cyclicality of specific Basel capital requirements. The report's empirical analysis will be updated as additional data regarding the impact of the pandemic becomes available – any updates will be included in a comprehensive evaluation report covering the Basel reforms implemented over the past decade, which the BCBS plans to publish in 2022. The findings will also be reflected in the FSB’s interim report on financial stability lessons learnt from the Covid-19 pandemic, which is to be submitted to G20 Finance Ministers and Central Bank Governors.
Press Release
Interim Report

PRA policy statement on Internal Ratings Based (IRB) UK mortgage risk weights – managing deficiencies in model risk capture

On 6 July, the PRA published a policy statement providing feedback to responses to consultation paper 14/20 ‘IRB UK mortgage risk weights: Managing deficiencies in model risk capture’. It also contains the PRA’s final policy, this being an updated Supervisory Statement (SS) 11/13 ‘IRB approaches’. In response to the feedback received to the consultation, which included useful quantitative data that enabled the PRA to better gauge the distribution of risks weights across mortgage exposures, and therefore the likely impact of its proposals, the PRA has made two changes to the draft policy as consulted on: (i) the PRA will not introduce the proposed 7% minimum risk weight expectation on individual UK mortgage exposures. Instead, the PRA will consider carefully the calibration of the incoming Probability of Default (PD) and Loss Given Default (LGD) parameter floors for mortgage exposures as part of the PRA’s implementation of the Basel 3.1 standards; and (ii) mortgage exposures classified as in default will be excluded from the 10% average minimum risk weight expectation. The PRA notes that not introducing the minimum risk weight expectation on individual UK mortgage exposures will mean those mortgage risk weights below the proposed value will continue to be permitted. As part of the full implementation of the Basel 3.1 standards, the PRA will consider carefully the calibration of the incoming PD and LGD parameter floors for mortgage exposures – these minima were agreed by the Basel Commission on Banking Standards, but the PRA will consider whether higher levels would be more appropriate in the UK to reflect concerns about low individual mortgage risk weights. The amendments to SS11/13 will take effect from 1 January 2022.
Policy Statement
SS11/13

EBA technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms

On 5 July, the EBA published its final draft RTS and ITS on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms. The EBA notes that these draft standards, developed in consultation with ESMA, provide a solid framework for: (i) cooperation in the supervision of investment firm groups through colleges of supervisors; and (ii) information exchange for investment firms operating within the EU through branches or the free provision of services. The draft standards are part of the phase 2 mandates of the EBA roadmap on investment firms. The final draft RTS on colleges of supervisors for investment firm groups specify the conditions under which colleges of supervisors exercise their tasks – these draft RTS are structured around four main sections: (a) establishment of colleges; (b) functioning of colleges; (c) planning and coordination of supervisory activities in going concern situations; and (d) planning and coordination of supervisory activities in preparation for and during emergency situations. The final draft RTS and ITS on information exchange between the competent authorities of home and host member states complement the RTS on colleges of supervisors and address situations where investment firms operate in another member state through branches or the free provision of services, where colleges may not be established. In particular, the final draft RTS specify the information that competent authorities in the host member state and those in the home member state shall exchange, whereas the final draft ITS establish standard forms, templates, and procedures for sharing the information specified in the RTS. The final draft RTS will be submitted to the EC for adoption. Following the submission, the RTS will be subject to scrutiny by the EP and the Council of the EU before being published in the OJ. The draft ITS will be submitted to the EC for endorsement before being published in the OJ. 
RTS: Colleges of Supervisors
RTS and ITS: Information Exchange

PRA consultation on changes to its policy on designating investment firms

On 5 July, the PRA published a consultation on making minor changes to its policy on designating investment firms. The proposals seek to ensure that the PRA’s policy reflects the impact of the new Investment Firms Prudential Regime proposed by the FCA and HM Treasury’s proposed amendments to the PRA Regulated Activities Order. In particular, the proposals (i) reflect the change in the scope of the firms that can be designated; (ii) explain that there will usually be six months, rather than three months, between the Prudential Regulation Committee designating an investment firm and it becoming PRA-regulated; (iii) note that the PRA will take into account whether or not an investment firm is a clearing member of a central counterparty offering clearing services to other financial institutions (that are not clearing members themselves) when making a designation decision; and (iv) delete any obsolete text and make other minor textual amendments. The CP also proposes to change the Definition of Capital Part to increase the base capital resources requirement for PRA-designated investment firms from €730,000 to £750,000 and to denominate it in Sterling. This change would align with changes to the same requirement for firms undertaking the same type of business that are only regulated by the FCA and not by the PRA (solo-regulated firms). The proposals in the consultation would result in amendments to the: (i) statement of Policy ‘Designation of investment firms for prudential supervision by the PRA; and (ii) definition of Capital Part of the PRA Rulebook. The PRA proposes that the changes resulting from the consultation would take effect on 1 January 2022. The deadline for comments is 5 October.
Consultation

Recovery and resolution

Please see our Bulletin on the PRA’s expectations on Operational Continuity in Resolution (OCIR). The PRA has published updates to its policy and a revised supervisory statement on ensuring OCIR following its consultation paper in October 2020. Our bulletin highlights what this means for firms, who is impacted, what they need to do and by when.

Regulatory technical standards on estimating Pillar 2 and combined buffer requirements for setting MREL, published in OJ

On 8 July, Commission Delegated Regulation (EU) 2021/1118 was published in the OJ. This supplements the BRRD with regard to RTS specifying the methodology to be used by resolution authorities to estimate the requirement referred to in Article 104a of CRD IV, as well as the combined buffer requirement for resolution entities at the resolution group consolidated level where the resolution group is not subject to those requirements under CRD IV. Specifically, the Regulation covers: (i) estimation of the additional own funds requirement; (ii) adjustments for the estimation of the additional own funds requirement; and (iii) methodology for the estimation of the combined buffer requirement of resolution entities. The Regulation will enter into force on 28th July.
Delegated Regulation

Sustainable finance

Please see our Other Developments section for an update on the HMT joint statement on the first India-UK Financial Markets Dialogue.

FSB letter addressing financial stability risks and roadmap addressing climate-related financial risks

On 7 July, the FSB published a letter from its Chair, Randal K. Quarles, to G20 Finance Ministers and Central Bank Governors ahead of their 9-10 July meeting, which notes mounting evidence of global recovery, even if uneven across regions. Though, the FSB notes that some risks to financial stability remain elevated – there are areas where there is a need to understand better whether the reforms have functioned as intended, and others where the Covid-19 pandemic has surfaced vulnerabilities that need to be addressed with urgency, notably in non-bank financial intermediation, including in money market funds. The letter also reiterates the importance of completing the transition away from LIBOR to robust alternative rates by end-2021, The letter stresses the need for coordinated action to address financial risks posed by climate change, noting the large, and growing, number of international initiatives underway.. Moreover, the FSB has submitted to the G20 for endorsement a comprehensive roadmap to address climate-related financial risks. The roadmap outlines the work underway and still to be done by standard-setting bodies and other international organizations over a multi-year period in four key policy areas: disclosures, data, vulnerabilities analysis, and regulatory and supervisory approaches. Alongside the roadmap, the FSB has published two additional reports on: (i) availability of data with which to monitor climate-related financial stability risks and remaining data gaps; and (ii) promoting climate-related disclosures.
Press Release
Letter
Roadmap
Report on Availability of Data
Report on Promoting Climate-related Disclosures

EC adopts Sustainable Finance Strategy and a proposal for new European Green Bond Standard (EUGBS)

On 6 July, the EC adopted a number of measures to help improve the flow of money towards financing the transition to a sustainable economy. First, the EC has published a Communication and factsheet on its adoption of the new Sustainable Finance Strategy which sets out several initiatives to tackle climate change, and other environmental challenges. The EC has also published a summary of responses to its previous consultation on the strategy. The Sustainable Finance Strategy includes six sets of actions: (i) extend the existing sustainable finance toolbox to facilitate access to transition finance; (ii) improve the inclusiveness of SMEs and consumers, by giving them the right tools and incentives to access transition finance; (iii) enhance the resilience of the economic and financial system to sustainability risks; (iv) increase the contribution of the financial sector to sustainability; (v) ensure the integrity of the EU financial system and monitor its orderly transition to sustainability; and (vi) develop international sustainable finance initiatives and standards, and support EU partner countries. The EC will report on the Strategy's implementation by the end of 2023. Secondly, the EC adopted a proposal for a new EUGBS, which it notes will create a high-quality voluntary standard for bonds financing sustainable investment. There are four key requirements under the framework for the EUGBS proposal: (a) the funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy; (b) there must be full transparency on how bond proceeds are allocated through detailed reporting requirements; (c) all EU green bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the Taxonomy; and (d) external reviewers providing services to issuers of EU green bonds must be registered with and supervised by ESMA. The EC has also published an impact assessment on this proposal, as well as the opinion of the Regulatory Scrutiny Board.
Webpage
Communication
Factsheet
Responses
EUGBS Proposal
Impact Assessment
Opinion

HOC Treasury Committee evidence – climate change and finance

On 8 July, the HOC Treasury Committee published oral evidence on climate change and finance, given by Mark Carney (the Prime Minister’s Finance Adviser for COP26). Amongst other things, this outlines: (i) the beginning of Mark Carney’s goals in terms of his involvement at COP26, and what he is trying to achieve; (ii) Mark Carney’s goals in light of the Covid-19 pandemic; (iii) whether there is a role for the regulators to actively incentivise the transition to net zero; (iv) whether the ‘brown penalising factor’ should be a measure that is kept; (v) progress made on getting firms to voluntarily disclose climate-related financial risks; (v) the expected timeframe for making climate change reporting mandatory, and whether this will be globally agreed; (vi) the integrity of the new measurements and disclosures to avoid greenwashing; (vii) to what extent the UK Government are relying on the support of the private sector to achieve the goals of international climate finance; (viii) what is considered to be a good outcome from COP26, and what is sought in a Glasgow agreement; and (ix) Mark Carney’s role as informing (rather than influencing) the Basel Committee in respect of risk weightings that Basel would put on financing.
Evidence

EC adopts Delegated Act based on Article 8 of Taxonomy Regulation

On 6 July, the EC adopted a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the Taxonomy Regulation – this will be transmitted for scrutiny by the EP and the Council of the EU for a period of 4 months, extendable once by 2 months. The EC has also published FAQs to accompany the Delegated Act, covering amongst other things the Delegated Act’s interaction with the (i) climate Delegated Act adopted on 4 June; (ii) the future environmental Delegated Act specifying the technical screening criteria for the remaining environmental objectives; (iii) the Non-Financial Reporting Directive and related proposal for a Corporate Sustainability Reporting Directive; and (iv) the SFDR, and the forthcoming Ecolabel and EUGBS. The FAQs also discuss the timeframe for the Delegated Act’s adoption and implementation. The delegated act is intended to come into application from 1 January 2022.
Delegated Act
FAQs

Other developments

HMT joint statement on the first India-UK Financial Markets Dialogue

On 8 July, the first India-UK Financial Markets Dialogue took place. According to HMT’s joint statement, both sides agreed that there is significant scope for strengthened financial services cooperation between India and the UK. The Dialogue focused on four themes: (i) Gujarat International Finance Tec-City (GIFT) City – India’s flagship international financial centre; (ii) banking and payments; (iii) insurance; and (iv) capital markets. Amongst other things, both sides: (a) agreed to continue to engage bilaterally on these areas in the coming months, in the run up to the next Economic and Financial Dialogue and the beginning of negotiations for a future India-UK Free Trade Agreement, both expected to take place later this year; (b) in light of discussion on the progress on the UK-India GIFT City Strategic Partnership, agreed on areas for further collaboration, including sustainable finance and FinTech, with the aim of supporting increased UK industry presence in the centre; and (c) recognised the key role the banking sector has played in maintaining stability during the Covid-19 pandemic. In respect of capital markets cooperation, there was discussion on opportunities for increased cross-border activity.  Participants also provided updates on their respective banking and payments landscapes, with a view to increase cross-border activity in this area.
Joint Statement

FCA webpage on agreements with overseas regulators

On 8 July, the FCA published a webpage listing the multilateral and bilateral Memoranda of Understanding (MoUs) and other agreements that it has signed with overseas regulators. The FCA notes that these agreements help it to cooperate and exchange information with other regulators, and working with its overseas counterparts helps it to meet its objectives, tackle shared risks and supervise cross-border firms effectively. The FCA further notes that the list is not exhaustive and that some agreements are confidential.
Webpage

FCA, PRA and BoE discussion paper on plans to improve diversity and inclusion in regulated firms

On 7 July, the FCA, PRA and BoE published a discussion paper seeking views on regulatory plans to improve diversity and inclusion in financial services. The discussion paper: (i) sets out the role of the regulators, including how improving diversity and inclusion links to their objectives and Public Sector Equality Duty. It also covers the steps that they have taken to improve diversity and inclusion internally within the regulators; (ii) summarises current expectations and requirements on diversity for UK‑regulated firms – many of the existing policies have been driven by sector‑specific developments, resulting in fragmented requirements for different types of firms; (iii) explains why good data is critical and discusses the importance of measuring progress and reporting in order to improve progress on diversity and inclusion – the discussion paper also sets out suggestions for developing metrics to monitor progress; and (iv) outlines different policy initiatives that the regulators think could be effective for driving and supporting change – these generally build on existing requirements, and the regulators’ wider policy and supervisory frameworks. The paper notes that some proposals are better suited to larger firms and the regulators request views on how any changes could be tailored to specific categories of firms to ensure they are proportionate. Taking into account feedback to the discussion paper, the PRA and FCA intend to consult on more detailed proposals in Q1 2022 followed by a Policy Statement in Q3 2022. The deadline for comments is 30 September. The BoE will separately consider how to develop proposals to promote diversity and inclusion for FMIs. The FCA is also considering its approach to diversity in listed firms and will provide more detail in the coming months.  In addition, the FCA has published a report on a review of the academic and other research literature on the impact of diversity and inclusion in the workplace.
BoE Press Release
Discussion Paper
FCA Report

HOC Treasury Committee report on future regulatory framework of financial services

On 6 July, the HOC Treasury Committee published a report on the future regulatory framework of financial services, together with conclusions and a summary. In the report, the Committee considers the future of financial services following the Brexit transition period and examines how financial regulations should be set and scrutinised by Parliament. In summary, the Committee: (i) agrees with the Treasury that the EU financial services rules that were on-shored during the process of leaving the EU should be moved into the regulators' rule books – keeping rules in statute could require Parliament to amend or pass new legislation every time regulators wished to make changes, which would be resource intensive and impractical; (ii) does not believe there is compelling evidence for legislating to allow Ministers the absolute right to see regulators’ policy proposals before they are published for consultation – thus, regulators must be free to choose what they share with the Treasury; (iii) whilst acknowledging there may be a role for the Government to use ‘activity based’ principles to instruct regulators’ approach to specific business sectors, recommends that the Government is sparing in this respect; (iv) is concerned that the creation of too many ‘activity based’ principles would add a further layer of issues to which regulators would have to have regard; (v) recommends that the Treasury consider how the decision-making processes of the Financial Ombudsman Service would interact with the future regulatory framework for the FCA; (vi) believes that effective scrutiny of regulatory proposals can be more targeted; and (vii) does not see a clear need for the creation of a new committee or independent body to scrutinise financial regulations – the Committee believes that a more efficient use of Parliamentary resources would be to use the structures already available in both Houses. The Committee will continue to maintain an open mind as to how best to scrutinise the significant flow of financial services proposals that will be made by the regulators, and look forward to engaging constructively with the Government once more detailed proposals emerge from the Government’s consultation response later this year.
Press Release
Report
Summary
Conclusions

FCA Primary Market Bulletin 35

On 2 July, the FCA published the 35th edition of its Primary Market Bulletin, covering the FCA’s proposed approach to assessing eligibility and listing applications for companies with cannabis-related activities. The proposed technical note confirms that the FCA will not admit the securities of a company with any recreational cannabis business, directly or indirectly, to the Official List. As a result of the legal risks outlined in the technical note, the FCA considers that additional due diligence is necessary for companies carrying on cannabis-related activities. The FCA notes that companies carrying on cannabis-related activities such as the development, production and sale of cannabis-based medicinal products and products containing cannabidiol may be admitted to the Official List provided that the criteria for listing are satisfied and the FCA is satisfied that their business does not give rise to any money laundering offence under the Proceeds of Crime Act 2002. Furthermore, the scope and extent of the due diligence will be determined on a case by case basis, and it will consider the specific risks presented by the new applicant – this may include evidence regarding relevant licenses and appropriate legal opinions. The deadline for comments is 12 August.
Bulletin
Consultation
Technical Note

EBA revised guidelines on sound remuneration policies under CRD V

On 2 July, the EBA published revised guidelines on sound remuneration policies under CRD V. The guidelines have been updated to reflect amendments introduced by CRD V, requiring remuneration policies to be gender neutral. Furthermore, the guidelines specify in detail the respective governance arrangements and processes that should be applied when remuneration policies are implemented. Also, the guidelines on severance pay, retention bonuses and discretionary pension benefits have been clarified to avoid such payments being used to circumvent remuneration requirements. Within two years of the date of publication of the guidelines on gender-neutral remuneration policies, the EBA will issue a report on the application of gender-neutral remuneration policies by institutions. The guidelines enter into force on 31 December.
Final Report

EBA revised guidelines on internal governance

On 2 July, following consultation in July 2020, the EBA published a final report on its updated guidelines on internal governance under CRD IV. The guidelines have been updated to reflect amendments introduced by CRD V and the Investment Firms Directive (IFD). Specifically, the guidelines: (i) clarify that identifying, managing and mitigating money laundering and financing of terrorism risk is part of sound internal governance arrangements and credit institutions’ risk management framework; (ii) specify measures that should be implemented by institutions to prudently manage conflicts of interests that may arise from granting loans to and entering into other transactions with members of the management body and their related parties; and (iii) contain guidance so that credit institutions take necessary measures to avoid discrimination, ensure equal opportunities to staff of all genders, and monitor the gender pay-gap. The original guidelines, published in September 2017, will be repealed. The updated guidelines will apply from 31 December.
Final Report

ESMA and EBA revised guidelines on assessment of suitability of management body members and key function holders

On 2 July, following consultation in July 2020, ESMA and EBA published a final report on their updated guidelines on the assessment of suitability of management body members and key function holders in accordance with CRD IV and MiFID II. The guidelines have been updated to reflect amendments introduced by CRD V and the IFD. Specifically, the guidelines: (i) clarify that the knowledge, experience and skill requirements of at least the member of the management body who is responsible for the implementation of the laws, regulations and administrative provisions necessary to comply with the Anti-Money Laundering Directive include identifying, managing and mitigating money laundering and financing of terrorism risk; (ii) emphasise the importance of a gender-balanced composition of the management body; and (iii) take into account the recovery and resolution framework introduced by BRRD, and provide further guidance on it. The original guidelines, published in September 2017, will be repealed. The updated guidelines will apply from 31 December.
Final Report