Key Regulatory Topics: Weekly Update 21-27 January 2022
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This week has been fairly quiet on the UK regulatory front with most updates emanating from the European authorities. That said, the FCA has issued a consultation on its approach to compromise proposals and the PSR is consulting on four potential remedies to address shortcomings identified in its review of the card-acquiring market. The updates from Europe include a consultation launched by ESMA on a review of MiFID II suitability guidelines in relation to sustainability preferences.
Conduct
FCA on SMCR regulatory references
On 27 January, the FCA published its January 2022 regulation round-up, where amongst other topics it discusses SMCR regulatory references. The FCA clarifies some key points following feedback it has received on challenges firms face when obtaining regulatory references: (i) firms should request, and respond to requests for, regulatory references promptly. Although SYSC 22 includes guidance that they should be provided within 6 weeks, the FCA emphasises that this is a limit, not a target; (ii) when providing regulatory references, firms should use the template in SYSC 22 Annex 1. Firms should ensure the template is complete and the information provided is accurate, before sending it. Failing to use the correct template or sending incomplete or inaccurate information can cause delays; (iii) firms need only take reasonable steps to obtain regulatory references. If firms experience difficulties obtaining regulatory references from a particular firm, firms should notify the FCA. If firms are unable to obtain regulatory references as part of an application, then the FCA states that they should set out the steps taken to obtain references – this will help avoid delays during the application assessment; and (iv) firms should assess regulatory references on a case-by-case basis and individuals should not be automatically rejected due to a qualification in their references. Firms also should not have a quota for the number of qualified references they will accept, as the FCA understands is sometimes the case.
Consumer/retail
Please see the ‘Other developments’ section for the FOS’ announcement that, together with the FCA, the FSCS, the Pensions Regulator and the Money and Pensions Service, it has formally agreed the Wider Implications Framework.
Fund regulation
ESRB recommends increasing resilience of MMFs
On 25 January, the ESRB published a policy recommendation to the EC aimed at increasing the resilience of MMFs. The ESRB explains that the financial market turmoil of 2020 showed that the regulatory changes that followed the global financial crisis did not go far enough in terms of mitigating systemic risks in the MMF sector. Consequently, the ESRB is now recommending policy reforms aimed at addressing the remaining sources of systemic risk, which will also reduce the need for central bank intervention in crises. In view of the forthcoming revision of the MMF Regulation, the ESRB recommends that the EC: (i) reduce threshold effects that increase first-mover advantages, including by amending the features that make MMFs similar to deposit-taking institutions; (ii) reduce liquidity transformation by diversifying asset portfolios and improving their liquidity through requirements to hold public debt assets and by making sure that such liquidity can be used when needed; (iii) facilitate the use of liquidity management tools that impose trading costs on redeeming investors; and (iv) enhance monitoring and stress-testing frameworks. The ESRB also published a report explaining the economic rationale for its recommendations and providing an impact assessment. The report concludes that the recommended reforms would not prevent MMFs from performing their economic functions. The report also identifies the main shortcomings of the short-term debt securities market in which MMFs operate. The ESRB requests that the EC communicates the actions undertaken in response to its recommendation by 31 December 2023.
Markets and markets infrastructure
ESMA consults on review of RTS on CCP anti-procyclicality measures
On 27 January, ESMA began consulting on a potential review of its regulatory technical standards (RTS) on requirements for CCPs, specifically the requirements aiming to limit the procyclicality of margin requirements. ESMA explains that it aims to further harmonise the existing anti-procyclicality margin measures for CCPs as well as the use of specific anti-procyclicality margin tools, following the March 2020 market turmoil. While ESMA’s data show that EU CCPs have overall performed well during the early stages of the Covid-19 crisis, the surge in initial margin has raised questions as to whether some of these increases acted in a procyclical manner, potentially causing, or even, amplifying liquidity stress in other parts of the financial system. The deadline for comments is 31 March.
ESMA consults on review of MiFID II suitability guidelines
On 27 January, ESMA began consulting on amendments to update its guidelines on certain aspects of suitability requirements under MiFID II, particularly in relation to sustainability. The proposals consider: (i) the collection of information from clients on sustainability preferences – firms will need to collect information from clients on their preferences in relation to the different types of sustainable investment products to what extent they want to invest in these products; (ii) the assessment of sustainability preferences – once the firm has identified a range of suitable products for a client, in accordance with the criteria of knowledge and experience, financial situation and other investment objectives, it shall identify the product(s) that fulfil the client’s sustainability preferences; (iii) organisational requirements – firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and any updates of these preferences; (iv) the integration of the good and poor practices identified in the 2020 Common Supervisory Actions to complement the current guidelines; and (v) the amendments introduced through the Capital Markets Recovery Package to Article 25(2) of MiFID II. The deadline for comments is 27 April. ESMA expects to publish a final report in Q3 2022.
ESMA on how to report net short positions under new reporting threshold of 0.1%
On 26 January, ESMA published a statement explaining how position holders should report their net short positions (NSPs) in shares when the reporting threshold changes from 0.2% to 0.1%. The last day of application of the old reporting threshold (0.2%) will be in relation to 28 January, with NSPs to be reported to competent authorities by 15:30 of the following trading day. From 31 January onwards, position holders will have to report when their NSPs in shares exceed or are equal to 0.1% of the issued share capital and each 0.1% above that. The statement requires position holders to report NSPs between 0.1% and 0.2% on the day of application of the 0.1% reporting threshold, even where they were entered into ahead of that date. This is to give competent authorities the full picture of NSPs above the new threshold, which otherwise would be incomplete.
FCA consults on guidance on approach to compromises
On 25 January, the FCA began consulting on proposed guidance on: (i) how it considers compromises and the factors it considers when assessing them; and (ii) its role when a firm proposes a compromise. The FCA explains that it has seen an increase in the number of firms developing proposals, such as schemes of arrangement, to deal with significant liabilities to consumers, in particular redress liabilities. The proposed guidance focuses on three types of compromise: schemes of arrangement, restructuring plans and voluntary arrangements. The proposed guidance only relates to compromises in relation to liabilities and does not apply to schemes of arrangement or restructuring arrangements in other circumstances such as with-profits restructuring. The draft guidance covers: (a) engagement with the FCA - firms are required to notify the FCA if they propose a compromise and engage with it at an early stage. The guidance outlines the minimum information that the FCA expects to be provided by a firm, as part of their initial notification or at an early stage thereafter; (b) the FCA’s assessment of compromises - its approach to assessing a compromise and the factors it will consider; (c) the FCA’s participation in the court process - the factors the FCA will consider when deciding whether to participate in the court process; and (d) the FCA’s use of supervisory tools/regulatory action. The guidance is relevant to firms authorised under FSMA and firms authorised or registered under the PSRs or EMRs, as well as their advisers. The deadline for comments is 1 March.
Payment services and payment systems
PSR consults on remedies for card-acquiring market review
On 26 January, the PSR began consulting on four potential remedies to address the shortcomings for merchants that it identified in its review of the card-acquiring market published in November 2021. The proposed remedies and issues the PSR aims to address are: (i) greater transparency – to help merchants understand the pricing elements of any services they use, require card-acquirers to provide summary information boxes setting out key price and non-price service elements of card-acquiring services. These should be in both bespoke form and published with general information in generic format; (ii) access to comparison tools – the PSR wants the industry to help stimulate Digital Comparison Tools for merchants so they can see whether they are getting the best deal; (iii) greater engagement – to help merchants know when their contracts are due for renewal, there needs to be an agreed standard of messaging by providers that will help merchants understand that their contract is due for renewal and the terms of the contract on an annual basis; and (iv) the ability to change providers easily – in relation to Point of Sale (POS) terminal leases, the PSR wants to address barriers to switching between card-acquiring services by allowing merchants to switch without incurring undue cost or suffering inconvenience from having to also exchange their POS terminal. The deadline for comments is 6 April. The PSR intends to issue a provisional decision and draft remedies notice, and a final remedies notice later this year.
Prudential regulation
Please see the ‘Sustainable finance’ section for the EBA’s final draft ITS on Pillar 3 disclosures on ESG risks, and the ECB 2022 climate risk stress test.
ESRB recommends establishing a systemic cyber incident coordination framework
On 27 January, the ESRB published a recommendation for the establishment of a pan-European systemic cyber incident coordination framework (EU-SCICF). The ESRB explains that the EU-SCICF would strengthen coordination among financial (and other) authorities in the EU, as well as key actors at international level. It would complement the existing EU cyber incident response frameworks by addressing the risks to financial stability stemming from cyber incidents. Alongside the recommendation, the ESRB published a report on mitigating systemic cyber risk. The report: (i) presents a macroprudential strategy for developing the capabilities needed to mitigate the risk of financial instability in the event of a cyber-incident. It reviews the current macroprudential framework and suggests how it could be adapted to better address the risks and vulnerabilities stemming from systemic cyber risk. Furthermore, the report sets out how macroprudential authorities should improve their analytical and monitoring capabilities and discusses mitigants which could contribute to financial stability; (ii) calls for a new set of macroprudential tools, which address both cyber and financial risk stemming from cyber incidents. The ESRB states that a monitoring and analytical framework for systemic cyber risk needs to be implemented to help design and calibrate this new set of tools. For example, testing the cyber resilience of the financial system through scenario analysis can show how systemic institutions in the financial system would respond to and recover from a severe but plausible cyber incident scenario. To draw conclusions from such cyber resilience stress tests on financial stability, macroprudential authorities need to set an acceptable level of disruption to operational systems that provide critical economic functions. It is also important to increase the understanding of systemic cyber risk-related vulnerabilities and contagion channels in the financial system. To this end, systemically important nodes at financial and operational levels should be identified – including third-party providers. The ESRB and its dedicated European Systemic Cyber Group intend to explore a monitoring and analytical framework for systemic cyber risk and the required tools to address this risk in their future work.
EBA proposes amendments to ITS on currencies with constraints on the availability of liquid assets
On 26 January, the EBA published its final draft amendments to its implementing technical standards (ITS) on currencies with constraints on the availability of liquid assets in the context of the liquidity coverage ratio. Following the addition of a new derogation as part of the Risk Reduction Measures package, the EBA has been tasked to amend the existing regulatory technical standards (RTS) specifying the use of derogations and the conditions of their application. Given their interdependence, it was necessary to review the corresponding ITS on the effective list of currencies with constraints, which currently consists of one single currency, the Norwegian Krone (NOK). Based on the updated data analysis, which demonstrates that there is no longer a shortage in the supply of liquid assets in the NOK currency, the EBA proposes to amend the ITS by removing NOK from the list. Since this amendment will lead to an empty list, in order to keep its regulatory efforts proportionate to their impact, the EBA will not update the corresponding RTS. If a future assessment shows the need for a currency to be added to the list, the EBA will propose an update of the corresponding RTS. The draft ITS will be submitted to the EC for endorsement before being published in the OJ.
EBA consults on revised guidelines on data collections exercises regarding high earners
On 21 January, the EBA issued a consultation on revisions to its guidelines on the data collection exercise on high earners which were last updated in 2014. The review of the data collection exercises reflects: (i) the amended remuneration framework laid down in CRD V, including the introduction of derogations to pay out a part of the variable remuneration in instruments and under deferral arrangements; and (ii) the specific remuneration regime that has been introduced for investment firms in the IFR and IFD. The CRD and the IFD require competent authorities to collect information on the number of natural persons, per institution and investment firm respectively, who are remunerated EUR 1 million or more per financial year, in pay brackets of EUR 1 million. The information should also include details on their job responsibilities, the business area and the main elements of the salary, bonus, long-term award, and pension contribution. The new reporting format will be used for the annual collection of data regarding high earners, starting for the financial year that ends in 2022. The deadline for comments is 21 March.
EBA consults on guidelines on remuneration and gender pay gap benchmarking exercise for banks and investment firms
On 21 January, the EBA began consulting on revisions to its guidelines on the remuneration benchmarking exercise under the CRD which were last updated in 2014. The revisions include: (i) additional requirements introduced by CRD V regarding the application of derogations to the requirement to pay out a part of variable remuneration in instruments and under deferral arrangements and the benchmarking of the gender pay gap; (ii) new guidance on how to harmonise the benchmarking of approvals granted by shareholders to use higher ratios than 100% between the variable and fixed remuneration; (iii) amendments to the data collection templates in order to take into account the implementing technical standards on disclosures under the CRR. Additional information is collected on the application of the derogations to the application of the requirements to pay out parts of the variable remuneration in instruments and under deferral arrangements; and (iv) specific templates for the benchmarking of the gender pay gap to ensure that it covers a representative sample of institutions and different levels of pay. The EBA plans to collect the benchmarking data under the updated guidelines in 2023 for the financial year 2022. Whereas, the first data on the gender pay gap will be collected in 2024 for the financial year 2023. In parallel, the EBA is consulting on new guidelines specific to investment firms under the IFD. The templates take into account the specificities of investment firms and their remuneration framework, as well as the disclosure requirements under the IFR. The EBA states that it has taken a consistent approach with both guidelines. For investment firms, the EBA plans to collect the first data under the new guidelines in 2023 for the financial year 2022. The deadline for comments on both guidelines is 21 March.
Consultation for investment firms
Sustainable finance
Please see the ‘Markets and Markets Infrastructure’ section for ESMA’s consultation on amendments to its guidelines on certain aspects of suitability requirements under MiFID II, in particular in relation to sustainability.
ECB 2022 climate risk stress test
On 27 January, the ECB launched a supervisory climate risk stress test. The ECB aims to identify vulnerabilities, best practices and challenges banks face when managing climate-related risk. It notes that it is not a pass or fail exercise, nor does it have direct implications for banks’ capital levels. The exercise consists of three distinct modules: (i) a questionnaire on banks’ climate stress test capabilities; (ii) a peer benchmark analysis to assess the sustainability of banks’ business models and their exposure to emission-intensive companies; and (iii) a bottom-up stress test targeting transition and physical risks. To ensure the proportionality of the exercise, smaller banks will not need to provide their own stress test projections. The stress test targets specific asset classes exposed to climate risk rather than banks’ overall balance sheets. It focuses on exposures and income sources that are most vulnerable to climate-related risk, combining traditional loss projections with new qualitative data collections. The test will use macro-financial scenarios based on scenarios prepared by the Network of Central Banks and Supervisors for Greening the Financial System. These reflect possible future climate policies and assess both physical risks, such as heat and droughts and floods, and short and long-term risks stemming from the transition to a greener economy. The results will feed into the Supervisory Review and Evaluation Process (SREP) from a qualitative point of view. This means that this stress test could indirectly impact Pillar 2 requirements through the SREP scores, but will not directly impact capital through Pillar 2 guidance. The ECB has sent a letter to the CEOs of participating banks to provide a methodological note with further guidance on how to conduct the exercise and complete the relevant templates. The ECB will run the test throughout H1 2022, after which it will publish aggregate results.
EBA final draft ITS on Pillar 3 disclosures on ESG risks
On 24 January, the EBA published final draft implementing technical standards (ITS) on Pillar 3 disclosures on ESG risks, which provide tables, templates and instructions in relation to the CRR requirement to disclose prudential information on ESG risks, including transition and physical risk. The ITS are addressed to large institutions that trade securities on EU regulated markets. The ITS include: (i) tables for qualitative disclosures on ESG risks; (ii) templates with quantitative disclosures on climate change transition risk; (iii) a template with quantitative disclosures on climate change physical risk; and (iv) templates with quantitative information and key performance indicators on climate change mitigating measures, including the Green Asset Ratio on taxonomy-aligned activities according to the Taxonomy Regulation. The EBA explains that the Pillar 3 framework that these ITS implement will support institutions in the public disclosure of meaningful and comparable information on how ESG-related risks and vulnerabilities, and in particular climate change, may exacerbate other risks in their balance sheet. It will allow comparability between the sustainability performance of institutions and of their financial activities. Furthermore, it will help institutions in providing transparency on how they are mitigating those risks, including information on how they are supporting their customers and counterparties in the adaptation process to e.g. climate change and in the transition towards a more sustainable economy. The EBA has integrated proportionality measures that should facilitate institutions’ disclosures, including transitional periods and the use of estimates. The ITS will amend the final draft ITS on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should integrate all of the relevant Pillar 3 disclosure requirements.
Pillar 3 disclosures factsheet
EU Platform on Sustainable Finance report on draft Taxonomy Complementary Delegated Act
On 24 January, the EU Platform on Sustainable Finance published a feedback report on the draft Taxonomy Complementary Delegated Act. The report provides feedback on the draft technical screening criteria (TSC), focusing on environmental performance and usability aspects. The Platform explains that in the time available it has identified limitations with the TSC, but has not devised alternatives. The Platform’s key feedback points are: (i) that the EC should ensure consistency with the Taxonomy Regulation and the Climate Delegated Act and allow sufficient time for impact assessments; (ii) the TSC for climate change mitigation in relation to gaseous fossil fuels that allow emissions above the do no significant harm (DNSH) level in the Climate Delegated Act should be removed; (iii) the TSC for new and existing nuclear energy facilities do not ensure DNSH and are therefore not Taxonomy aligned; and (iv) the disclosure arrangements do not significantly distinguish the activities from other Taxonomy aligned disclosures and the measurement and verification requirements are insufficient for monitoring performance and thus taxonomy alignment. The Platform proposes specific changes to the disclosure arrangements, should the criteria be adopted. The Platform also notes that it will respond in the coming weeks to the EC’s request to develop a proposal for an extended Taxonomy. This will set out an intermediate performance category and an unsustainable category from which there must be an urgent and just transition. The Platform explains that such an approach is necessary because the existing green Taxonomy was not intended to include every activity in the economy, in particular energy activities that must transition because emissions are currently too high or significant harm is present.
Other developments
FCA and BoE joint transformation programme on data collection
On 26 January, the FCA published a new webpage on its joint transformation programme on data collection, providing an overview of the work it is undertaking with the BoE. The programme will focus on: (i) integrating reporting to increase consistency in designing and delivering collections for value, reuse, and efficiency; (ii) modernising reporting instructions to improve how data is interpreted and implemented by firms; and (iii) defining and adopting common data standards that identify and describe data in a consistent way. The FCA states that there will be further engagement with firms this year.
Regulators establish Wider Implications Framework
On 25 January, the FOS announced that, together with the FCA, the FSCS, the Pensions Regulator and the Money and Pensions Service, it has formally agreed and produced the Wider Implications Framework. The Framework provides a process for structured collaboration between the organisations involved, consistent with each member’s independent role and statutory functions: (i) to discuss openly and frankly risks and issues that may have wider implications as soon as the members become aware of them; (ii) to agree the most appropriate approach to managing these risks and issues, including which member(s) should lead on that approach; and (iii) to provide an escalation point, where necessary. The FOS explains that an issue with potential wider implications is one that could have a wider impact across the financial services industry. It suggests that an issue of this kind might arise because of the number of consumers that are affected, the amount of redress at stake or the risk of business failure.