Key Regulatory Topics: Weekly Update 21 – 27 May 2021
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In publications this week, we saw the PRA set out its 2021/22 business plan – following the Covid-19 pandemic, the PRA now hopes to focus on more business-as-usual priorities and move forward with key strategic pieces of work including in relation to delivering a sustainable and resilient UK financial regulatory framework post-Brexit. We also saw HMT publish a joint statement on the fourth meeting of the US-UK Financial Regulatory Working Group which focused on the seven themes outlined below.
Brexit
Please see our Other Developments section for updates on: (i) the PRA’s 2021/22 business plan; and (ii) HMT’s joint statement on the US-UK Financial Regulatory Working Group’s fourth meeting.
Capital markets
Please see our Other Developments section for an update on the EC’s speech on European financial integration and stability.
ESMA consults on disclosure requirements for initial reviews and preliminary ratings
On 26 May, ESMA published a consultation paper on disclosure requirements for initial reviews and preliminary ratings. ESMA explains that the Credit Rating Agencies Regulation (CRAR) includes a number of provisions that are designed to provide greater clarity to market participants as to whether entities or debt instruments have been subject to an initial review or a preliminary rating by CRAs before receiving a credit rating – the objective of the provisions is to mitigate against the effects of ratings shopping through greater transparency. Moreover, ESMA notes that the purpose of the consultation is to propose guidance that will address inconsistencies in the interpretation of these provisions, and it contains the following proposals that aim to clarify: (i) how the term “initial review and preliminary rating” should be understood for the purposes of the CRAR’s public disclosure requirements; (ii) the content and timing of CRAs public disclosures for interactions that meet the standard of “initial review and preliminary rating”; and (iii) the steps to ensure that these public disclosures are more accessible for investors and the market. ESMA will consider the responses it receives in Q3 and expects to publish a final report by the end of Q4. The deadline for comments is 4 August.
Conduct
Please see our Other Developments section for an update on the PRA’s aggregated results of its 2019/20 firm feedback survey.
Consumer/retail
Please see our Payment Systems and Payment Services section for an update on the PSR consulting on phase 2 of the introduction of confirmation of payee.
Please see our Other Developments section for an update on the EC’s speech on European financial integration and stability.
FCA statement on the Recovery Loan Scheme (RLS)
On 26 May, the FCA published a statement on its approach to regulating firms in relation to the RLS, which was launched by the Government-owned British Business Bank on 6 April to provide financial support to UK businesses following the Covid-19 pandemic. The FCA states that most of the lending available as part of the RLS will not be a regulated activity, thus most lending applications will be outside its regulatory perimeter as set by Parliament. The FCA’s rules will apply as usual to regulated lending under the scheme, in this case regulated asset finance, including its rules on creditworthiness assessments (CONC 5.2A).
FCA updates information sheets – consumer credit
On 24 May, the FCA updated its webpage on information sheets for consumer credit, announcing that it has published updated consumer credit information sheets in accordance with section 86A of the Consumer Credit Act 1974 – these will come into force on 25 October, in accordance with section 86A(7). The FCA notes that it has changed these sheets to provide more targeted and useful help to customers. Up to 24 October, firms must use the current versions of the information sheets and from 25 October, firms must use the new versions of the information sheets.
Consumer Credit Information Sheet – Arrears
Consumer Credit Information Sheet – Default
Consumer Credit Information Sheet – High-cost short-term loans
Consumer Credit Information Sheet – High-cost short-term loans, peer-to-peer (P2P) lenders
Consumer Credit Information Sheet – Arrears, P2P lending
Covid-19
Please see the other sections for product-specific updates relating to Covid-19.
Financial crime
EBA consults on guidelines on cooperation and information exchange in the area of anti-money laundering (AML) and countering the financing of terrorism (CFT)
On 27 May, the EBA published a consultation paper on new guidelines on cooperation and information exchange in the area of AML and CFT, in line with provisions laid down in the CRD. The EBA explains that the guidelines put in place the practical modalities of cooperation and information exchange among prudential supervisors, AML/CFT supervisors and financial intelligence units (FIUs). Furthermore, the guidelines facilitate and support the cooperation and information exchange throughout the supervisory life cycle covering authorisations of new institutions, on-going supervision including the risk assessment, and, where relevant, the imposition of supervisory measures and sanctions, including the withdrawal of the authorisation. In particular, the guidelines help authorities exchange information in a more effective way and bring clarity on which information to exchange with whom and at what stage. The guidelines complement the European Supervisory Authorities AML/CFT Colleges Guidelines, which were published in 2019. The deadline for comments is 27 August.
Fintech
Please see our Other Developments section for an update on the EC’s speech on European financial integration and stability.
ECB speech on the necessity of using supervisory technology (suptech)
On 27 May, the ECB published a speech by a Member of its Supervisory Board, Pentti Hakkarainen, on the necessity of using suptech. The speech explains how banks and supervisory authorities are enhancing the way that they work with advanced IT solutions, emphasising that suptech is a necessity for effective banking supervision. The speech provides reasoning for the ECB Banking Supervision not only making use of modern technology, but also aiming to become a suptech pioneer. The speech states that the ECB Banking Supervision is in the process of becoming a digital innovation house, and provides detail on the four building blocks for this vision: (i) an effective innovation model; (ii) a digital culture; (iii) an innovation ecosystem; and (iv) successful delivery of business-related use cases.
ESMA launches call for evidence on digital finance
On 25 May, ESMA launched a call for evidence on digital finance. ESMA notes that the call for evidence aims to gather relevant information on particular issues including value chains, platforms and groups’ provision of financial and non-financial services. ESMA is requesting information on three topics: (i) more fragmented or non-integrated value chains, arising as a result of financial firms increasingly relying on third parties for the delivery of their services and of technology companies entering financial services; (ii) digital platforms and bundling of financial services; and (iii) mixed activity groups providing both financial and non-financial services. The feedback will contribute to ESMA’s technical advice to the EC. The deadline for responses is 1 August.
TheCityUK report on shaping UK regulation for innovation and global leadership – cryptoassets and Distributed Ledger Technology (DLT)
On 25 May, TheCityUK published a report calling on the UK government and regulators to act quickly to capitalise on the opportunities arising from the rapid growth of cryptoassets and the use of DLT. Amongst other things, TheCityUK has set out five important principles for driving innovation and shaping regulation in this space: (i) the UK should act quickly if it is to set a global gold standard in cryptoassets and DLT regulation; (ii) specific features of novel technologies and use cases should not be overlooked; (iii) recognising that not all uses of DLT need to be regulated; (iv) maintaining industry engagement as it is crucial to achieving an appropriate risk-based approach; and (v) legislators and regulators recognising the transformative potential of stablecoins and Central Bank Digital Currencies. TheCityUK has also published a summary report.
Fund regulation
ESMA final report on its guidelines under the Regulation on cross-border distribution of funds
On 27 May, ESMA published its final report on its guidelines under the Regulation on cross-border distribution of funds. ESMA notes that the purpose of the guidelines is to clarify the requirements that funds’ marketing communications must meet. The report contains a feedback statement summarising the responses that ESMA received to its consultation on the guidelines, highlighting the amendments and clarifications introduced in the final guidelines in consideration of the feedback. ESMA states that while stakeholders generally agreed with the draft guidelines, the responses included certain recurring comments – in particular, a majority of respondents were concerned by the responsibility of fund managers to ensure that all marketing communications, even those issued by third-party distributors, meet the requirements set out in the draft guidelines. The majority of stakeholders also agreed that the online aspects of marketing communications were not sufficiently taken into account and asked that the draft guidelines are amended to facilitate online marketing. The feedback statement explains how these points have been addressed in the draft guidelines. The final guidelines are set out in Annex IV of the report and will be translated into the official languages of the EU and published on ESMA's website. They will apply six months after the date of the publication of the translations.
Markets and markets infrastructure
Please see our Other Developments section for an update on HMT’s joint statement on the US-UK Financial Regulatory Working Group’s fourth meeting.
EC consults on draft delegated act supplementing MiFID II specifying criteria for establishing when an activity is ancillary
On 27 May, the EC published for consultation a draft delegated act supplementing MiFID II by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level. MiFID II exempts persons dealing on own account, or providing investment services to clients, in commodity derivatives, emission allowances or derivatives thereof, provided this is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services within the meaning of MiFID II or banking activities under CRDIV (the Ancillary Activity Exemption). Directive (EU) 2021/338 revisited the Ancillary Activity Exemption and empowered the Commission to adopt a Delegated Regulation to replace CDR 2017/592 (RTS 20). The EC explains that this draft delegated act is based on the provisions of the current RTS 20. The changes triggered by the amended Ancillary Activity Exemption are the deletion of the Overall Market Size Test of Article 2 of RTS 20 and the introduction of the new De-Minimis Threshold Test. The amended Ancillary Activity Exemption does not change the established calculation methodology of the Trading Test and Capital Employed Test as described in RTS 20. The only change to these two tests is the level of the corresponding threshold as set out in Directive (EU) 2021/338. Therefore, this Delegated Regulation continues to apply the established calculation methodologies and principles of RTS 20. These are already implemented by nonfinancial firms and accordingly supervised by financial regulators and did not raise any concerns. In order to address the legal uncertainty that would arise for those non-financial groups that do not have a complete and representative set of data covering their main and ancillary activities, a calculation period of three years is also maintained from RTS 20. Additionally, in order to address the practical issue of an "oscillator" group, the calculations to be undertaken to verify whether non-hedging trading is ancillary or not should cover a rolling average of three years. The deadline for comments is 24 June.
ESMA consults on synthetic securitisations Regulatory Technical Standards (RTS) and amendments to simple, transparent and standardised (STS) templates
On 27 May, ESMA published a consultation paper on its draft RTS implementing the amended Securitisation Regulation (SECR). The amended SECR requires that certain securitisations meeting pre-defined STS requirements must be reported using standardised templates for STS notification published on ESMA’s website. ESMA explains that the consultation sets out ESMA’s proposed draft RTS and implementing technical standards (ITS) specifying the content and the format of the standardised templates for STS notification of on-balance sheet (synthetic) securitisations – it builds on the existing technical standards for STS notification of traditional securitisations, while taking into account specific features of synthetic securitisations. The consultation also includes targeted technical amendments to the STS notification templates for traditional securitisations. The draft RTS and ITS will be submitted to the EC for endorsement by 10 October. The deadline for comments is 20 August.
ESMA letter provides proposals for the EC’s review of the CSDR
On 26 May, ESMA published a letter (dated 20 May) addressed to Mairead McGuinness, European Commissioner, on the review of the CSDR. The letter highlights ESMA’s views on a number of key points that should be addressed in the review, and brings forward proposals on the following topics: (i) status of TARGET2-Securities (T2S) – ESMA believes that it is no longer appropriate to entirely exclude this systemic settlement platform completely from the CSDR's scope; (ii) arrangement for the supervision/oversight of T2S – ESMA considers that the CSDR should be amended to ensure the legislative framework provides for a co-operative arrangement for the supervision and oversight of T2S, with clear roles for the participating authorities, taking the form of a college of supervisors; (iii) third-country CSD (TC-CSD) recognition regime – ESMA supports an enhanced regime that requires TC-CSDs to notify ESMA regarding services provided in the EEA and broadens the scope of the TC-CSD recognition regime by also covering the provision of settlement services in the EEA; and (iv) the frequency of ESMA reports to the EC on CSDR implementation – ESMA highlights the need to recalibrate the frequency of the reports, and introduces a proposal on reducing the frequency of the reports under Article 74 of CSDR is included in the Annex.
ESMA consults on draft RTS for commodity derivatives
On 26 May, ESMA published a consultation paper on its draft RTS for commodity derivatives, as part of the post-Covid MiFID II Recovery Package. ESMA’s proposals relating to the application of position limits to commodity derivatives focus on: (i) developing procedures for financial entities undertaking hedging activities and for liquidity providers to apply for an exemption from position limits; and (ii) suggesting other technical adjustments to improve the application of the position limit regime in practice. In addition, the consultation also contains ESMA’s proposals for technical standards on position management controls. The deadline for comments is 23 July.
ESMA response to EC consultation on the functioning of the European Supervisory Authorities (ESAs)
On 26 May, ESMA published a letter containing its response to the EC’s targeted consultation on the functioning of the ESAs. ESMA notes that the response reflects the views of the Board of Supervisors on some existing issues and limitations that could be addressed in the ESMA Regulation, and other relevant EU financial services legislation. Specifically, the recommendations focus on: (i) reinforcing ESMA’s approach to supervisory convergence; (ii) considering the merits of EU level direct supervision; (iii) building ESMA’s data capabilities; (iv) ensuring the single rulebook remains fit-for-purpose; and (v) alleviating funding issues.
ESMA final report on guidelines on the calculation of positions in Securities Financing Transactions (SFTs) by Trade Repositories (TRs) under the SFTR
On 25 May, ESMA published its final report on its guidelines on the calculation of positions in SFTs by TRs under the SFTR. ESMA notes that the guidelines aim to ensure consistency of position calculation across TRs, with regard to the: (i) time of calculations; (ii) scope of the data used in calculations; (iii) data preparation; (iv) recordkeeping of data; and (v) calculation methodologies. The guidelines contain relevant clarifications to TRs as to: (a) the calculations carried out by TRs and the format of provision of access to data pursuant to Article 80(4) of EMIR as referred to in Article 5(2) of SFTR and detailed under Article 5 of RTS on data aggregation; and (b) the level of access to positions provided by TRs to the entities included in Article 12(2) of SFTR with access to positions in line with Article 3 of RTS on data access. The guidelines will apply from 31 January 2022.
Delegated Regulation supplementing EMIR and SFTR on fees charged to TRs in 2021 published in OJ
On 25 May, Commission Delegated Regulation (EU) 2021/822, amending Delegated Regulations (EU) 1003/2013 and (EU) 2019/360 as regards the annual supervisory fees charged by ESMA to TRs for 2021, was published in the OJ. The text explains that fees paid to ESMA by TRs are calculated using a methodology established in Delegated Regulations (EU) No 1003/2013 and (EU) 2019/360 – the reference period for the applicable turnover in those Delegated Regulations is the year previous to the year in which the revenues are paid. Following the UK’s withdrawal from the EU, two TRs established in the UK transferred part of their services and activities to the EU to be able to continue providing their services and activities to counterparties established in the EU. The new EU TRs effectively started their activity in the EU in January 2021, their level of activity in 2020 being almost non-existent, meaning that their annual supervisory fee for 2021 would be negligible, although their activities are likely to be significant. To ensure that they pay a fee which is proportionate to their actual turnover in the EU, their annual supervisory fee for 2021 should be calculated on the basis of their applicable turnover during the first half of 2021. Thus, the Delegated Regulation changes the reference period for the calculation of annual fees paid by trade repositories to ESMA in 2021. The Delegated Regulation entered into force on 26 May.
International Organization of Securities Commissions (IOSCO) industry surveys on conduct risks in leveraged loans (LLs) and collateralised loan obligations (CLOs)
On 24 May, IOSCO published four questionnaires for industry participants on conduct risks in LLs and CLOs. IOSCO notes that through its Committee on Regulation of Market Intermediaries and its Committee on Investment Management, it is conducting work to understand the potential conflicts of interest and misaligned incentives among participants in the LL and CLO markets across the chain of intermediation, from credit origination to the sale to end-investors. To help inform this analysis, the Committees are asking bank lenders, CLO investors, CLO managers and LL sponsors to complete surveys. IOSCO states that the purpose of the questionnaires is to support its project by furthering its understanding of the LL and CLO markets. In particular, the questionnaires seek to determine where potential conflicts of interest and conduct issues may exist and how they are managed by market participants. The deadline for responses is 30 June.
Leveraged Loan Sponsors Survey
Payment systems and payment services
Draft report on the proposal for a regulation on cross-border payments
On 26 May, the EP’s Legal Affairs Committee (JURI) published a draft report on the EC’s legislative proposal for a Regulation on cross-border payments in the EU, codifying and replacing the existing Regulation. This contains the EP’s draft legislative resolution, as well as the opinion of the consultative working party, the Council of the EU and the EC. The legislative resolution explains that the proposal contains a straightforward codification of the existing texts without any change in their substance. Thus, the EP has adopted its position at first reading, taking over the EC proposal, as adapted to the recommendations set out in the consultative working party’s opinion. The EP has also instructed its President to forward its position to the Council, the EC and the national parliaments. The next stage is for the draft report to be adopted. As stated in the updated procedure file, the Regulation is currently awaiting committee decision, and it will be considered in plenary on 23 June.
PSR consults on phase 2 of the introduction of confirmation of payee (CoP)
On 21 May, the PSR published a consultation paper on phase 2 of the introduction of CoP. The PSR discusses its analysis of information and data that it has gathered so far, which provides evidence that CoP has had a positive impact on reducing the relevant types of misdirected payments. The consultation sets out the PSR’s findings of its analysis of the impact of Phase 1 of CoP, and the feedback it has received on Phase 2. In addition, the consultation contains a call for views – specifically, the PSR welcomes views on: (i) the progress, dependencies and expected costs and benefits of Phase 2; (ii) feedback on whether certain types of accounts with secondary reference data (SRD) should be excluded from Phase 2’s scope and whether alternative solutions are more appropriate for SRD accounts overall; and (iii) how CoP messaging works and how it could be enhanced. Moreover, the PSR outlines a number of policy responses that it could implement for CoP – these include options such as issuing a further direction mandating PSP actions to enable Phase 2, bringing about improvements to the CoP service, and the future of Specific Direction 10. The deadline for comments is 30 June.
Prudential regulation
Please see our Other Developments section for an update on the EC’s speech on European financial integration and stability.
EBA final draft technical standards on own funds and eligible liabilities
On 26 May, the EBA published its final draft Regulatory Technical Standards (RTS) on own funds and eligible liabilities. Specifically, EBA states that the draft RTS: (i) align existing provisions to changes introduced in the revised CRR in the area of own funds – in particular, for provisions relating to the regime of supervisory prior permission for the reduction of own funds; and (ii) specify some of the newly introduced criteria for eligible liabilities instruments derived from the own funds regime – these include the absence of direct or indirect funding for the acquisition of ownership of eligible liabilities, the absence of incentives to redeem, and the need for the resolution authority’s prior permission for the reduction of eligible liabilities. Furthermore, the EBA notes that following the feedback received during the consultation, the calibration of the threshold for determining the predetermined amount for the general prior permission for reducing eligible liabilities instruments was increased from 3% to 10% of the total amount of outstanding eligible liabilities instruments. Moreover, the final draft RTS have been revised in order to recognise some relief for the renewal of general prior permission both for own funds and eligible liabilities and for introducing a proportionate approach for liquidating entities for which their minimum requirement for own funds and eligible liabilities does not exceed the loss absorption amount.
PRA statement on updating requirements on the identification of ‘material risk takers’ (MRTs)
On 25 May, the PRA published a statement on its approach to updating the applicable requirements on the identification of MRTs, and its position concerning applications for exclusion of MRTs in the current performance year. The PRA explains that as set out in paragraphs 3.4 and 3.5 of Policy Statement (PS) 26/20 ‘Capital Requirements Directive V (CRD V)’, in light of the EU having not adopted an updated version of the MRT Regulatory Technical Standards (RTS) before the transposition of CRD V on 28 December 2020, the revised draft of the MRT RTS published by the EBA in June 2020 is currently used as the basis for the application of the Remuneration Part of the PRA Rulebook. As PS26/20 also set out, this means that there is a discrepancy between MRT RTS 604/2014, which continues to apply in UK law, and the revised draft MRT RTS, which applies in determining the application of the Remuneration Part of the PRA Rulebook. The PRA intends to consult on updating this position later this year. In light of this, the PRA has set out its view of the current position: (i) firms must continue to comply with MRT RTS 604/2014 as it continues to apply and be binding; (ii) firms must also apply the revised draft MRT RTS for the purposes of determining the individuals, as its application will result in the identification of a broader scope of individuals than the application of MRT RTS 604/2014 – thus, in applying the revised draft MRT RTS, the PRA considers that firms will also meet the requirements of MRT RTS 604/2014; (iii) though, in any instance where MRT RTS 604/2014 requires firms to identify individuals who do not meet any of the criteria under the revised draft MRT RTS, the PRA considers that firms do not need to apply the requirements of the Remuneration Part of the PRA Rulebook in relation to those individuals solely on the basis that they meet the criteria of MRT RTS 604/2014, if the firm does not consider that the professional activities of said individuals have a material impact on the firm’s risk profile; (iv) the templates that may be used by firms on a voluntary basis to communicate to the PRA information on their MRTs’ identification and exclusion, as set out in Supervisory Statement 2/17, are being reviewed by the PRA – amended templates for Stage 1 and 2 submissions will be published this summer, and the remaining templates by November this year; (v) if firms wish to exclude an MRT in line with the criteria set out in the revised draft MRT RTS, firms have to apply to the PRA for a waiver under Section 138A of FSMA – the PRA will provide more details on how firms may apply for such waivers when it publishes the updated templates; and (vi) firms with a fiscal year-end of 31 December may require additional time to submit the RPS tables on MRT Identification and Exclusion, the RPS Questionnaires and Annex 1 “malus” – firms may submit these by 30 September for the 2021/22 remuneration round.
Recovery resolution
Please see our Prudential Regulation section for an update on the EBA’s final draft technical standards on own funds and eligible liabilities.
Please see our Other Developments section for an update on the PRA’s 2021/22 business plan.
EBA report on the application of the BRRD early intervention (EI) framework
On 27 May, the EBA published a report on the application of the BRRD EI framework. The report follows the discussion paper launched in June 2020 to explore ways of enhancing crisis management tools available for competent authorities (CAs) in addition to well-established and widely used supervisory powers laid down in the CRD and in the Single Supervisory Mechanism Regulation (SSMR). The report concludes the EBA’s work on EI measures (EIMs) and also provides an overview of the feedback received from public consultations as well as the EBA conclusions, highlighting the key challenges faced by supervisors in the application of the current regulatory framework on the EIMs and various options for addressing them. The EBA notes that it observed supervisory consensus on the need to eliminate existing overlaps between EIMs and other supervisory powers, as well as to remove the formal sequencing of EIMs specified in Articles 27-29 of the BRRD. In addition, the EBA observed that CAs supported the importance of amending Article 27(1) of the BRRD that includes an example of a quantitative early intervention trigger. For EI triggers specified in regulatory technical standards, the EBA will conduct further work and amend its current guidelines on the EI triggers upon finalisation of the ongoing review of the BRRD.
Single Resolution Board (SRB) publishes updated minimum requirements for own funds and eligible liabilities (MREL) policy under the Banking Package
On 26 May, the SRB published its updated minimum requirements for own funds and eligible liabilities (MREL) policy under the Banking Package. In particular, the SRB notes that the updated policy introduces: (i) the MREL maximum distributable amount (MDA), allowing the SRB to restrict banks’ earnings distribution if there are MREL breaches; (ii) policy criteria to identify systemic subsidiaries for which granting of an internal MREL waiver would raise financial stability concerns; and (iii) the approach to MREL-eligibility of UK instruments without bail-in clauses. Furthermore, the updated policy refines the: (a) methodology to estimate the Pillar 2 requirements post-resolution; (b) MREL calibration on preferred vs variant resolution strategy, confirming that the SRB computes MREL in line with the preferred strategy; and (c) MREL calibration methodology for liquidation entities, where the SRB clarifies that the loss absorption amount may increase beyond the default adjustment in proportion to financial stability concerns. The SRB has also published its MREL dashboard covering the reporting period Q4 2020, setting out key findings in regard to: (1) MREL issuances; (2) the average final MREL target; (3) average MREL shortfalls against the final target; and (4) funding costs.
Sustainable finance
Please see our Other Developments section for updates on: (i) HMT’s joint statement on the US-UK Financial Regulatory Working Group’s fourth meeting; and (ii) the EC’s speech on European financial integration and stability.
Network for Greening the Financial System (NGFS) progress report – preliminary findings on climate-related data gaps
On 26 May, the NGFS published a progress report forming part of the first phase of its work programme on bridging data gaps. The NGFS notes that the report sets out the issues that need to be considered going forward, and lays the groundwork for a comprehensive assessment of climate-related data needs and gaps. The report also provides input into the work on climate-related data undertaken at the international level by the FSB and the G20. The NGFS states that reliable and comparable climate-related data is indeed crucial for financial sector stakeholders to assess financial stability risks, properly price and manage climate-related risks, and take advantage of the opportunities arising from the transition to a low-carbon economy – however, persistent gaps in climate-related data hinder the achievement of these objectives. Furthermore, the NGFS notes that to ensure the availability of reliable and comparable climate-related data, a mix of policy interventions is needed to catalyse progress – for this, three building blocks are paramount: (i) rapid convergence towards a common and consistent set of global disclosure standards; (ii) efforts towards a minimally accepted global taxonomy; and (iii) the development and transparent use of well-defined and decision-useful metrics, certification labels and methodological standards. The NGFS will continue its evidence-based identification of the most prevalent data gaps.
EBA report on results of EU-wide pilot exercise on climate risk
On 21 May, the EBA published a report on the findings of its first EU-wide pilot exercise on climate risk, which has the main objective of mapping banks’ exposures to climate risk and providing an insight into the green estimation efforts banks have carried out so far. The EBA states that the findings give a clear picture of banks’ data gaps and highlight the sense of urgency to remedy them if they are to achieve a meaningful and smooth transition to a low-carbon economy – a more harmonised approach and common metrics are needed to ensure that banks’ efforts will prove meaningful in addressing and mitigating the potentially disruptive impacts of environmental risks. Furthermore, the EBA notes that: (i) regarding the EU taxonomy classification, banks are currently in different development phases to assess the greenness of their exposures – two estimation techniques, banks’ bottom-up estimates and a top-down tool, are considered in the exercise and the report highlights the differences in outcomes; (ii) given the outlined constraints and based on a first estimate coming from a top down tool, an EU aggregated green asset ratio (GAR) stands at 7.9%; and (iii) the scenario analysis shows that the impact of climate-related risks across banks has different magnitudes and is concentrated in some particular sectors – tools for scenario analysis are quickly developing and further progress should be made on modelling the transmission channels of climate risk shocks to banks’ balance sheets. The EBA states that the findings are a key starting point in view of building up consistent and comparable climate risk assessment tools, and it will continue to work actively on measuring and assessing climate-related risks in the banking sector.
Other developments
EC speech on European financial integration and stability
On 27 May, the EC published a speech by Mairead McGuinness, European Commissioner for Financial Services, on European financial integration and stability. Mairead McGuinness notes that following the Covid-19 pandemic, three main risks to financial stability remain: (i) disruptive repricing of assets – financial markets saw strong performance in the second half of 2020, as a result of monetary and fiscal support measures which ensured access to low-cost funding, though this risks a decoupling of valuations from fundamentals which might lead to volatility and sharp price corrections; (ii) the sustainability of debt; and (iii) possible stress in the banking sector – although the sector has proved resilient during the crisis, concerns about profitability and asset quality remain. Other key points of the speech include that: (a) part of the response to ensure that capital markets cater for the demand for risk capital is building a deep and integrated capital market – thus, the EC published the Capital Markets Union action plan last year, to tackle key obstacles to integration; (b) monitoring and supervision has become even more important, which needs to be consistent across member states as integrated capital markets need a common set of rules, consistently applied by all national regulators – therefore, converging supervision and coordination of national supervisors is vital; (c) the pandemic has shown that sustainability is not integrated enough in economies, and the recovery offers a chance to support sustainable finance – the EC will shortly be presenting its Renewed Sustainable Finance Strategy which will aim to make sure that climate and environmental risks become mainstream in the financial system; (d) digitalisation will need to be carefully considered in the EC’s retail investment strategy, which it is planning for early next year. The EC wants a framework that empowers retail investors to make the right decisions as well as one that protects them, encouraging their participation in capital markets. – digitalisation can provide easier access to capital markets at a lower cost, including access to more complex or riskier products; and (e) the EC will also look at financial literacy, including digital financial literacy – it is crucial that consumers understand the risks and rewards of retail investing, as well as the different options that are available.
Financial Ombudsman Service (FOS) annual complaints data 2020/21
On 25 May, the FOS published its annual complaints data for the 2020/21 financial year with commentary and insight, including analysis and case studies covering banking and credit, borrowing, insurance and investments. The FOS notes that the figures published reveal the significantly increased demand for the FOS in the last financial year – the overall number of new complaints received increased by 2% to 278,033, compared to the 271,468 complaints received in the 2019/20 financial year.
PRA speech on countering cyber risk
On 25 May, the PRA published a speech by Lyndon Nelson, PRA Deputy CEO and BoE Executive Director, on steps to counter cyber risk. The speech provides detail on the Financial Policy Committee’s ongoing strategy and work on cyber risk and operational resilience, divided into: (i) assessment (testing); (ii) capabilities; and (iii) coordination. Mr Nelson notes that testing and exercising have steadily demonstrated improvements in cyber resilience, but there are still too many instances of failure in “basic cyber hygiene”. Examples of cyber hygiene issues include: (a) shortcomings in vulnerability management and information storage; (b) poor configuration of IT infrastructure; and (c) poor user account and password management. Mr Nelson states that the PRA is working hard on developing a testing strategy and a framework that will allow it to increase the coverage and frequency of assessment – this will include a more approachable CBEST-style test that will be applicable for a wider range of firms, and the PRA hopes to be reaching far more parts of the financial sector. Furthermore, the speech outlines the steps that lie ahead for countering cyber risk: (1) the full roll-out of the PRA’s operational resilience policy; (2) greater momentum for collective action from the financial sector as it tackles important issues such as safeguarding firms against data corruption and the response to a large bank becoming operationally paralysed; (3) greater maturity in the international approach based on the lead taken by the G7 Cyber Experts Group and the Basel Committee; and (4) a suitable regime for critical third parties. Mr Nelson also outlines what he expects his successor to report in the Cyber Security Forum of 2027.
HMT joint statement on US-UK Financial Regulatory Working Group meeting
On 24 May, HMT published a joint statement on the fourth meeting of the US-UK Financial Regulatory Working Group. The Working Group meeting focused on seven themes: (i) international and bilateral cooperation; (ii) sustainable finance; (iii) updates on domestic initiatives and priorities; (iv) benchmark transition; (v) cross-border regimes; (vi) operational resilience; and (vii) banking and insurance. Furthermore, US and UK participants discussed: (a) the financial sector implications of the UK’s withdrawal from the EU, as well as areas of mutual interest where international and bilateral cooperation could be intensified; (b) the importance of preserving the global asset management industry’s portfolio management delegation model, continuing cooperative efforts to promote the free flow of cross-border financial services data, and avoiding regulatory fragmentation and data localisation; (c) the risks around any regulatory driven fragmentation in derivatives clearing markets and the benefits that the global nature of derivatives clearing can bring; (d) FSB work on non-bank financial intermediation; (e) US administration efforts to tackle climate change and other issues relating to sustainable finance, and the UK’s implementation of its Green Finance Strategy; (f) the US’ update on sustainability-related financial disclosures, and the UK’s progress on the implementation of mandatory Task Force on Climate-related Financial Disclosures-aligned climate-related financial disclosures; (g) views on a broader assessment of and possible responses to climate-related financial risks, as well as cooperation on international efforts to address climate change issues within the financial sector; (h) updates on financial regulatory agendas; (i) ongoing public and private efforts in relation to benchmark transition, SOFR and SONIA market developments, and transition implications for other jurisdictions, noting the importance of providing a coordinated approach to the challenges that benchmark transition presents; (j) updates on the US’ and UK’s cross-border regimes, including equivalence and substituted compliance frameworks; (k) co-operative efforts relating to operational resilience and the upcoming US-UK Financial Innovation Partnership meeting in June; (l) implementation of Basel III reforms; and (m) the US-UK financial regulatory relationship, recognising the continued role that the Working Group will play in supporting and deepening this relationship.
PRA 2021/22 business plan
On 24 May, the PRA published its business plan for 2021/22, which sets out the PRA’s hope, following the Covid-19 pandemic, to focus more on business-as-usual priorities and moving forward with key strategic pieces of work. Amongst other things, the business plan outlines the PRA’s strategic goals for 2021/22: (i) having in place robust prudential standards, and holding regulated firms, and those who run them, accountable for meeting these standards (“robust prudential standards and supervision”); (ii) continuing to adapt to changes in the markets in which the PRA is involved and pre-empt and mitigate risks to its objectives ("adapt to market changes and horizon scanning”); (iii) ensuring that firms are adequately capitalised, and have sufficient liquidity, for the risks they are running or planning to take (“financial resilience”); (iv) developing the PRA’s supervision of operational resilience in order to mitigate the risk of disruption to the provision of important business services (“operational resilience”); (v) ensuring that banks and insurers have credible plans in place to enable them to recover from stress events, and that firms work to remove barriers to their resolvability to support the management of failure, proportionate to the firm’s size and systemic importance, in an orderly manner (“recovery and resolution”); (vi) facilitating effective competition by actively considering the proportionality of the PRA’s approach as it contributes to the safety and soundness of the UK financial system (“competition”); (vii) continuing to deliver a sustainable and resilient UK financial regulatory framework following the end of the transition period arising from the UK’s exit from the European Union (“EU withdrawal”); and (viii) operating efficiently and effectively by ensuring that resources are allocated to work that best advances the PRA’s strategy and reduces the greatest risks to the delivery of our statutory objectives, and by providing an inclusive working environment in which all staff can perform to their potential (“efficiency and effectiveness”). In addition, the business plan notes that the PRA's budget for 2021/22 is £297 million, including implementation and transaction fees of £9 million – this is an increase of £12 million (4%) on the 2020/21 budget.
PRA aggregated results of 2019/20 firm feedback survey
On 21 May, the PRA published the aggregated results of its 2019/20 firm feedback survey. In addition, the PRA has updated its webpage on supervision, summarising responses and action taken: (i) firms commented that time scales for SMCR approvals were in some cases too long, and also indicated that on occasion the time limit was exceeded – the PRA states that the FCA had a large increase in applications contributing to the delays, and has increased resourcing to resolve this, and the PRA is also considering ways of helping firms improve the quality of their applications, such as engaging with larger firms and trade bodies; (ii) in regard to information requests, the PRA has increased demand for data during the Covid-19 outbreak, and has taken steps to increase notice and reduce volume where possible – the PRA is actively seeking to develop more consistent data to be used in times of stress, so that firms can be better placed to respond and for the longer term, the PRA is looking to invest in better data capability to reduce the burden on firms; (iii) although firms said they prefer a consistent supervision team, they have recognised the better quality handovers that supervision provides; and (iv) the PRA has enhanced the search function on its website and used reference numbers for papers to generate more streamlined results – the PRA is also planning to introduce a mega-menu’ to aid navigation and is exploring additional methods to upgrade usability.