Key Regulatory Topics: Weekly Update 21-27 October 2022
28 October 2022
There has been a wide variety of updates this week including the adoption by the European Commission of amendments to extend the temporary exemptions regime for intragroup contracts under EMIR and to provide temporary emergency measures on collateral requirements in view of the recent political and market developments affecting energy markets. Also in the EU, the ‘daisy-chain’ Regulation, which focuses on the treatment of the indirect subscription of instruments eligible for internal MREL, was published in the OJ. Meanwhile in the UK, Regulations were published which amongst other matters, extend the temporary recognition of EU STS securitisations and extend the FCA’s temporary transitional relief powers to modify the STO and DTO, in each case to the end of 2024.
Discussion of potential competition impacts of Big Tech on retail financial services
On 25 October, the FCA published a discussion paper on the potential competition benefits and harms from Big Tech firms’ entry into a range of retail financial services sectors. The discussion paper focuses on the potential competition impacts on four vital retail sectors; payments, deposit taking, consumer credit and insurance. The FCA recognises that by combining financial services with their existing businesses, Big Tech firms can bring benefits to consumers, such as innovative new offers and highly competitive pricing. However, they are also fearful of the long-term competition risks Big Tech firms could pose, if they rapidly gain market share and exploit their market power. The discussion paper does not propose any regulatory changes; it simply aims to stimulate discussion to inform its approach to Big Tech firms as part of the UK pro-competitive regime for digital markets. The FCA are asking for comments by 15 January.
Financial Crime and Sanctions
EC assessment of money laundering and terrorist financing risks
On 27 October, the EC published a report to the EP and the Council on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities. This report is the third supranational risk assessment by the EC and this year is made up of two documents: the report and a detailed Staff Working Document, which read together provide a comprehensive mapping of risks on all relevant areas, as well as the necessary recommendations to counter them. The report also assesses the degree to which the EC’s recommendation for mitigating measures in its 2019 report have been implemented and evaluates the remaining risks. The EC will monitor the implantation of the report, in principle by 2024. That review will also assess how EU and national measures affect risk levels, in the light of the changes that may be introduced to the current EU regulatory framework.
FATF consultation on the transparency and beneficial ownership of legal arrangements and legal persons
On 26 October, FATF published two consultations: (i) a public consultation reviewing recommendation 25 and its interpretive note on the transparency and beneficial ownership of legal arrangements. The aim is to make improvements to prevent the misuse of legal arrangements for money laundering and terrorist financing. FATF is also considering amending the ‘beneficial ownership’ definition in the glossary to its recommendations in the hopes of providing clarity on legal arrangements. FATF calls for input from financial institutions, stakeholders, trustees, designated non-financial businesses and professions (DNFBP’s) and non-profit organisations, on whether its proposals are adequate and clear and whether implementation challenges may arise; and (ii) a consultation on its updated guidance paper on recommendation 24 on the transparency and beneficial ownership of legal persons. FATF seeks views from companies and other legal persons, financial institutions, DNFBPs and non-profit organisations.The deadline for comments on both consultations is 6 December. All comments will be reviewed at the FATF meetings in February 2023.
EBA call for input on guidelines to prevent the abuse of fund transfers for money laundering / terrorist financing purposes
On 21 October, the EBA published a Call for Input on the 2017 Joint Guidelines to prevent the abuse of fund transfers for ML/TF purposes. The aim of the Call for Input is to identify practical issues that financial institutions experience when complying with the existing guidelines. These guidelines need to be amended and extended to reflect the recast regulation on information accompanying transfers of funds, which seeks to bring the EU’s legal framework in line with the FATF’s standards by extending the obligation to include information about the originator and beneficiary to Crypto Assets Service Providers (CASPs) – the so-called “travel rule”. The deadline for responses is 15 November.
Markets and Markets Infrastructure
Please see the Regulatory Reform post-Brexit section for an update on Financial Services (Miscellaneous Amendments)(EU Exit) Regulations.
Corrigendum to Delegated Regulation on RTS on position management controls under MiFID II
On 27 October, a corrigendum to Commission Delegated Regulation (EU) 2022/1299 supplementing MiFID II with regard to RTS specifying the content of position management controls by trading venues was published in the OJ. The Corrigendum corrects drafting errors in Article 2(1) of the Delegated Regulation.
RTS extending temporary exemptions regime for intragroup contracts under EMIR
On 25 October, the EC adopted two amending Delegated Regulations containing RTS that extend the temporary exemptions regime for intragroup contracts for three years under EMIR. The first amends the RTS laid down in Delegated Regulations 2015/2205, 2016/592 and 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts. The amendments extend the date of application of the clearing obligation for intragroup transactions set in the three commission delegated regulations to 30 June 2025.The second Delegated Regulation amends the RTS laid down in Delegated Regulation 2016/2251 as regards the date of application of certain risk management procedures for the exchange of collateral. The date of application of the margin requirements for intragroup transactions set in the margin RTS, is also extended to 30 June 2025. The two Delegated Regulations will enter into force on the day after publication in the OJ.
FCA thematic findings on the effectiveness of governance in CRAs
On 24 October, the FCA published a Dear CEO letter on the thematic findings on the effectiveness of governance in credit rating agencies (CRAs). Overall, the FCA found that multiple CRAs could do more to benefit from the value that a well-functioning Board can bring to the strategic direction and oversight of an organisation. The global nature of many CRAs heightens this issue, often leading to an inadequate level of consideration and control given to the UK Board. The FCA identified four main areas of concern, (i) purpose of the Board, (ii) composition of the Board, (iii) role of INEDs, and (iv) how the Board operates. All CRAs are expected to consider the risks outlined in the letter and act where necessary. The FCA also requests that all CRAs provide them with a Board-approved summary of the firms’ assessment of key risks relating to governance and details of action plans including timescales by 30 January 2023. They also require firms to notify them who in the senior management team will oversee the provision and implementation of these plans by 11 November.
Delegated Regulation temporarily expanding the pool of eligible collateral under EMIR
On 21 October, the EC adopted a Delegated Regulation amending the RTS laid down in Delegated Regulation 153/2013 relating to temporary emergency measures on collateral requirements under Article 46(3) of EMIR. As a result of the recent political and market developments, there have been significant price and volatility increases on energy markets and CCPs have imposed margin increases to cover the related exposures. These increases have created liquidity strains on NFCs, resulting in them either reducing their positions or leaving them improperly hedged, which exposes them to further price variations. The amending regulation attempts to manage this issue by temporarily expanding the pool of eligible collateral to uncollateralised bank guarantees for NFCs acting as clearing members and public guarantees for all types of counterparties. The amending Regulation will enter into force on the day after its publication in the OJ. The amendments are temporary and will expire 12 months after the amending Regulation enters into force. however, depending on the evolution of the energy derivatives market the Commission would be prepared to ask ESMA for an extension.
Guidelines on best-execution process for NPL sales
On 21 October, a communication from the EC on guidelines for a best execution process for sales of NPL on secondary markets was published in the OJ. These guidelines aim to encourage good sell- and buy-side processes for NPL transactions in EU secondary markets, in particular to help sellers and buyers that have less experience with secondary market transactions. It should be noted that while market participants are not obligated to follow the guidelines, the EC does believe that the guidelines provide NPL sellers and buyers with a clear and structured process that should enable them to achieve a successful outcome. It is also believed that these guidelines could lead to a number of benefits for EU secondary markets by increasing efficiency and transparency of transactions, enabling more standardisation of processes and improving market practices in Member States, especially those where the secondary markets are less developed.
FCA notice regarding LIBOR
On 21 October, the FCA published a notice of first decision (dated 29 September), issued to ICE Benchmark Administration Ltd (IBA) regarding the publication of one and six month sterling LIBOR. The notice states that the FCA intends to exercise their powers under Article 21(3) of the Benchmarks Regulation to compel IBA to continue publishing the 2 LIBOR versions until 31 March 2023, after which the FCA has stated that it has no intention of compelling IBA to continue publishing. The FCA’s reasoning behind the extension is to ensure that market participants have adequate notice of cessation. It is also hoped that a clear cessation date will provide additional impetus for parties to act. This notice does not relate to three month sterling LIBOR, the FCA intends to provide further information on that in due course. The notice has been published following the deadline for written representations by IBA.
Delegated Regulation extending transitional period under Crowdfunding Regulation
On 21 October, Delegated Regulation 2022/1988 extending the transitional period for continuing to provide crowdfunding services under the Regulation on European Crowdfunding service providers for business was published in the OJ. The Delegated Regulation extends the transitional period by 12 months until 10 November 2023, to allow crowdfunding platforms authorised before 10 November 2021 and competent authorities time to adapt to the new regime. The Delegated Regulation enters into force on 22 October.
Payment Services and Payment Systems
Please see the Regulatory Reform post-Brexit section for an update on Financial Services (Miscellaneous Amendments)(EU Exit) Regulations.
Updated 2023 EPC SEPA Instant Credit Transfer Rulebook
On 27 October, the EPC published version1.1 of the 2023 EPC SEPA Instant Credit Transfer rulebook and related document on the SCT Inst maximum amount. The new rulebook will replace, with immediate effect version 1.0 of the 2023 SCT Inst rulebook published in May. The update makes two changes to the previous rulebook, the first change is the amended entry into force time of the 2023 SCT Inst rulebook, which is now set at 03:30 CET on 18 November 2023. The second change is a SEPA wide 30 minute downtime period for the SCT Inst scheme from 03:00 CET to 03:30 CET. During the downtime, no single SCT Inst instruction, transaction, r-transaction, transaction investigation and any response message related to them will be possible across SEPA. It is hoped that these changes will help all SCT Inst scheme participants and their SCT Inst service-supporting technical partners to make a smooth changeover of their relevant systems, infrastructures and applications. The EPC has also published version 2.0 of the guidance document on migration to the 2019 version of the ISO 20022-based XML messaging standard.
PSR market reviews into card fees
On 27 October, the PSR published final terms of reference outlining the next stages of its two market reviews into card fees – one on card scheme and processing fees and one on cross-border interchange fees. The market review of card scheme and processing fees looks in detail at the levels, structure and types of scheme and processing fees. The PSR expects to publish a report setting out its interim conclusions on card scheme and processing fees in Q4 of 2023 and a final report, which would include any proposed remedies in Q2 of 2024. The PSR’s second market review focuses on consumer cross-border interchange fees between the UK and the EEA. The PSR wants to understand the reason behind the increase in fees associated with some UK-EEA payments, as well as to engage with businesses to better understand how the increases are impacting them. The PSR expects to publish a report setting out its interim conclusions on UK-EEA consumer cross-border interchange fees by Q3 of 2023 and its final report in Q4 of 2023.
2023 EBA European Supervisory Programme for Prudential Supervisors
On 27 October, the EBA published its 2023 European Supervisory Programme for Prudential Supervisors. The programme aims to inform competent authorities’ supervisory priorities for 2023 and their supervisory examination programmes. Four key topics are identified for supervisory attention: (i) macroeconomic and geopolitical risks, (ii) operational and financial resilience, (iii) transition risks and (iv) ML and TF risks in SREP and internal controls and governance. The EBA will follow up on how the key topics are embedded in competent authorities’ priorities for 2023 as well as how they form part of their supervisory activities throughout the year.
Delegated Regulations containing RTS under CRR relating to own funds requirements
On 26 October, three Commission Delegated Regulations supplementing the CRR were published in the OJ. The first Delegated Regulation contains RTS on liquidity horizons for the alternative internal model approach (A-IMA) as referred to in Article 325bd(7) of the CRR. The second Delegated Regulation sets out RTS specifying the technical details of back testing and profit and loss attribution requirement under Articles 325bf and 325bg of the CRR. The third Delegated Regulation prescribes RTS specifying the criteria for assessing the modellability of risk factors under the IMA and specifying the frequency of that assessment under Article 325be(3) of the CRR. All three Delegated Regulations will enter into force on 15 November, 20 days following their publication in the OJ.
EBA Report on the integration of ESG risks in the supervision of investment firms
On 24 October, the EBA published a report on how to incorporate ESG risks in the supervision of investment firms. The report, addressed to NCAs, provides an initial assessment of how ESG factors and ESG risks could be included in the supervisory assessment of investment firms. It sets out the foundations for integrating ESG risk-related considerations in the supervisory process, covering the main SREP elements including: (i) business model analysis, (ii) assessment of internal governance and risk management, and (iii) assessment of risks. The report suggests proportionality when integrating ESG considerations, taking into account the investment firms’ business model, size, internal organisation and the nature, scale and complexity of its services and activities, alongside the materiality of its exposure to ESG risks. The EBA recommends that the integration of ESG risks into supervisory review should be gradual, the primary focus being the recognition of ESG risks in investment firms’ strategies, governance arrangements and internal processes, with a view to later incorporating them in the assessments of risks to capital and liquidity. Competent authorities are expected to monitor and encourage further developments in the data and quantification methodologies of ESG risks, as part of the supervisory review.
PRA Dear CEO letter on supervision of climate-related financial risk
On 21 October, the PRA published a Dear CEO letter on thematic feedback on the supervision of climate-related financial risk and the BoE’s Climate Biennial Exploratory Scenario exercise. Overall, the PRA has observed that banks and insurers have taken positive steps to implement their expectations, with governance of climate risks advancing in most firms, as well as a general improvement in risk management. The PRA goes on to list the areas they expect firms to demonstrate capabilities in meeting their expectations. Boards are now expected to be able to demonstrate that they understand how their firm is integrating climate considerations into their business strategies, governance structures and risk management processes. Firms should have embedded an appropriate understanding of climate risk within their Risk Management Framework (RMF), Risk Appetite Statement (RAS), committee structures, and three lines of defence, using both qualitative and quantitative measures. There is also an expectation for firms to have a counterparty engagement strategy, that informs firms about how their counterparties will look to manage climate exposures. Firms’ Own Risk and Solvency Assessments (ORSAs) or Internal Capital Adequacy Assessment Processes (ICAAPs) should by now provide sufficient contextual information to allow a reader to understand analysis of climate risks and capital. Firms should also be able to show that they have embedded scenario analysis into their risk management and business planning processes. Compliance with the PRA’s expectations in Supervisory Statement 3/19 will be assessed on an ongoing basis, in particular the Board and senior management team will be expected to demonstrate appropriate oversight and control of the climate agenda. Those deemed not to have made sufficient progress embedding the PRA’s progress will be asked to provide a roadmap explaining how they intend to overcome the gaps.
Recovery and Resolution
2023 EBA European Resolution Examination Programme for Resolution Authorities
On 27 October, the EBA published its 2023 European Resolution Examination Programme for Resolution Authorities. The programme identifies key topics for resolution attention across the EU and aims to shape resolution authorities’ work priorities and respective practices. The programme identifies four key topics that resolution authorities are expected to consider, these are: (i) how MREL shortfalls are being addressed, (ii) the development of management information systems for valuation in resolution, (iii) preparations for managing liquidity needs in resolution, and (iv) operationalisation of the bail-in strategy. The EBA will follow up on these key topics, looking at how they are embedded in resolution authorities’ priorities for 2023 and how they are reflected in their respective activities throughout the year. Resolution colleges are also expected to consider these topics.
MREL and TLAC amendments to CRR and BRRD published
On 25 October, Regulation 2022/2036, which covers the prudential treatment of global systemically important institutions, with a multiple point of entry resolution strategy and methods for the indirect subscription of instruments eligible for meeting the MREL was published in the OJ. The Regulation, often referred to as the ‘daisy-chain proposal’, amends provisions in the CRR relating to MREL and TLAC focusing on the treatment of the indirect subscription of instruments eligible for internal MREL, with consequential amendments also made to the BRRD. Consequential amendments to Articles 45d(4) and 45h(2) of the BRRD must be brought into force by 15 November 2023. Amendments to the CRR relating to indirect subscription of internal MREL eligible instruments within resolution groups, will apply from 1 January 2024. All remaining provisions in the Regulation will apply from 14 November.
Regulatory Reform Post Brexit
PRA speech on growth and competitiveness
On 27 October, Sam Woods, Deputy Governor for Prudential Regulation of the BoE and Chief Executive of the PRA, gave a speech setting out how independent regulators can support the UK as a global financial centre. His argument consisted of three main points: (i) financial stability is the single most important ingredient of competitiveness in financial services; (ii) there is a good argument for Parliament to require regulators to place more weight on growth and competitiveness as part of post-Brexit reforms; and (iii) he fully supports the Financial Services and Markets Bill (FSM Bill), as it strikes a sensible balance between competing considerations at play. Mr Woods believes that a well-designed regulatory regime supports economic growth, but that a balance needs to be struck between having robust, global, independent prudential regulation, and a framework that is also proportionate and open to innovation. Mr Woods urges caution in relation to any measure that would undermine – or be perceived to undermine – the independence of regulators from government. He makes particular reference to the anticipated amendment to the FSM Bill to introduce an ‘intervention power’. Mr Woods suggests that a power which allowed ministers to override regulatory decisions would represent a significant shift away from a model of independent regulation. Leaving aside the evidence on financial stability, Mr Woods considers that it would undermine the UK’s international credibility and create a system in which financial regulation blew much more with the political wind - features, he argues, which would not make the UK an attractive place for international firms to do business. Mr Woods also sets out the programme of early priority areas for regulatory reform, these being; (a) Solvency II reform; (b) the ‘Strong and Simple’ project, to develop a simpler prudential regime for smaller banks; (c) Basel 3.1 implementation; (d) remuneration standards; (e) reporting rules; (f) the creation of a regulatory framework for systematic stablecoins; (g) the PRA’s enforcement policies and; (h) making the PRA’s rules more accessible and user friendly. Ultimately, Mr Woods, and by extension the PRA’s and BoE’s main priority is the preservation of the UK’s reputation for robust, independent and open regulation.
Financial Services (Miscellaneous Amendments) (EU Exit) Regulations
On 25 September, the Financial Services (Miscellaneous Amendments)(EU Exit) Regulations 2022 were published on legislation.gov.uk, alongside an explanatory memorandum. The regulations make a number of amendments to retained EU law to ensure it operates effectively following Brexit. The amendments include: (i) the removal of references to the EEA in conditions for the registration of small payment institutions from the Payment Services Regulations 2017;, (ii) an expansion of the scope of the temporary recognition regime (TRR) to allow overseas CCPs within the TRR to offer new products in the UK; (iii) removing Article 32 of the CRA Regulation, to ensure that where appropriate the FCA has the power to share information obtained with the PRA, BoE and other third country regulators; (iv) extending the temporary recognition of EU STS securitisations to the end of 2024; and (v) extending the FCA’s temporary transitional relief powers to modify the STO and DTO to the end of 2024. The Regulations will come into force on 15 November.
ESMA updates Strategy for 2023-2028 to include ESG disclosures
On 27 October, ESMA published a press release announcing that it is updating its Union Strategic Supervisory Priorities to include ESG disclosures alongside market data quality. The new priority of ESG disclosures replaces costs and performance for retail investment products. ESMA and the NCAs also intend to foster transparency and comprehensibility of ESG disclosures across key segments of sustainable finance value chain such as issuers, investment managers or investment firms and hence tackle greenwashing, to accompany the growing demand for ESG-related financial products. ESMA also aims to gradually promote an increased scrutiny on ESG disclosures through effective and consistent supervision.
FCA consultation on SDR and investment labels
On 25 October, the FCA published a consultation paper on sustainability disclosure requirements (SDR) and investment labels. The paper is part of the FCA’s clampdown on greenwashing; they are proposing several new rules with the aim of protecting customers and improving trust in sustainable investment products. The FCA is proposing to introduce: (i) sustainable investment labels that will help consumers navigate the landscape and enhance consumer trust; (ii) consumer‑facing disclosures, to help consumers understand the key sustainability-related features of a product;, (iii) detailed disclosures targeted at a wider audience; (iv) naming and marketing rules restricting the use of certain sustainability-related terms in product names and marketing materials unless the product uses a sustainable investment label; and (v) requirements for distributors to ensure that product-level information is made available to consumers. The FCA is also proposing that they introduce a general ‘anti-greenwashing’ rule that applies to all FCA regulated firms. However, initially the key provisions of this CP will only apply to asset managers. The FCA welcomes contributions from all parts of the financial sector by 25 January 2023. The FCA aims to set out final rules by the end of the first half of 2023.
FCA regulation round up: October 2022
On 27 October, the FCA published its regulation round up for October. Included in the round up are two particular reminders for firms: (i) The new rules for appointed representatives (ARs) will begin on 8 December and new AR notification forms will also commence on this date. The FCA will be sending principle firms a section 165 request requiring information about their ARs, firms should expect to receive this request between 8 and 10 December. Firms have until 28 February 2023 to respond; and (ii) EEA based firms in the temporary permissions regime (TPR) that intend to seek full authorisation/registration in the UK must submit their applications before the end of 31 December, irrespective of whether they have been given a ‘landing slot’ or not. In 2023, the TRP should only include firms with long-term UK plans that have applied for full authorisation/registration. Firms that have not applied will be expected to voluntarily leave or otherwise expect enforcement action to remove them.
BoE publishes a Data Standards Review Update
On 26 October, the BoE published an update on the Data Standards Review, commissioned by the Transforming Data Collection joint transformation programme led by the BoE and the FCA. The programme’s vision is that 'the BoE and the FCA get the data they need to fulfil their mission, at the lowest possible cost to industry'. The BoE and the FCA set up the Data Standards Committee, to be a forum for industry to discuss data standardisation issues relevant to the Transforming Data Collection programme. During phase one, Ernst and Young will perform a review of data standards and will submit a report to the Data Standards Committee by the end of 2022 The review will look at key questions around the development and adoption of data standards in the financial sector. As part of the Data Standards Review, the programme would like industry to provide their views regarding data standards, either as part of a series of interviews with selected stakeholders in the financial sector or via an online platform, where industry can submit their views. Industry can provide input for the review until 6 December. EY will run a series of three ‘challenge’ periods, each lasting around two weeks, where firms can comment on a different set of questions. The Bank of England and FCA strongly encourage all interested parties in industry to engage with this opportunity, to ensure the widest possible set of views are collected. The three challenge periods will run as follows: (i) How do firms, regulators and consumers benefit from data standards? 25 October to 8 November; (ii) How should data standards for financial services be developed and managed? 9 November to 22 November; and (iii) What drives adoption of data standards in financial services? 23 November to 6 December.