Skip to content

Key Regulatory Topics: Weekly Update 24 - 30 Mar 2023

Amongst the updates this week, the Council of the EU published a table comparing the initial position of the Commission, and the negotiating positions of the Council and the EP on the proposal for a Directive amending the AIFMD and the UCTIS Directive. The EBA published a consultation paper on amendments to its guidelines on risk-based AML/CFT supervision, to extend the scope to AML/CFT supervisors of cryptoasset service providers. In the UK, a number of items announced as part of the Edinburgh reforms have been published.  In particular, the FCA, PRA and HMT are seeking views on the effectiveness, scope and proportionality of the SM&CR and HMT has published a consultation on the future regulatory regime for ESG ratings providers.

On account of the Easter bank holiday, we will be publishing next week’s update on Thursday 6 April covering regulatory developments from 31 March until 5 April.

Capital Markets

Please see the Markets and Market Infrastructures section for ESMA’s finalised report on guidelines on MiFID II product governance requirements.

FCA speech on reforming the capital markets ecosystem

On 29 March, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, on reforming the capital markets ecosystem. Key points include: (i) the FCA aims to launch an FMI sandbox over the next year, to explore whether there are regulatory barriers that hinder the creative use of technology; (ii) the FCA believes that the proposed ESG labelling regime for investment products will build trust in the growing sustainable investment category; (iii) the UK remains one of the chosen locations for domicile and primary listing; (iv) Mr Rathi, goes on to discuss the attitude to risk in the UK Market, asking how far should investors be in charge of their own risk appetite and move away from ex-ante regulatory rules, asking firms to consider the pros and cons of different approaches to risk. Ultimately, Mr Rathi stresses the importance of market engagement, explaining that he sees consultation not as a legal nicety but a means to improve reforms and ensure inherent policy trade-offs are recognised, discussed, agreed. 

Speech

Conduct and Governance

PRA and FCA review of the SM&CR and HMT call for evidence

On 30 March, the FCA and the PRA published a joint discussion paper seeking views on the effectiveness, scope and proportionality of the SM&CR. The paper: (i) provides an overview of the SM&CR, outlining the elements that comprise the regime; (ii) seeks high-level responses on the extent to which the current regime is effective in meeting its objectives; (iii) asks a series of questions on the component parts of the SM&CR, with a view to identifying potential specific enhancements; and (iv) summarises international work relating to individual accountability. The deadline for comments is 1 June. In parallel, HMT has launched a call for evidence to look at the legislative aspects of the regime. HMT and the regulators are encouraging the two documents to be read alongside each other. Both pieces of work aim to understand stakeholders’ views on the functioning of the SM&CR and to identify ways to improve the regime to help it work better for firms and regulators, while preserving its underlying aims. The deadline for responses to the call for evidence is 1 June.

Discussion Paper

HMT Call for Evidence

Review of UK whistleblowing framework

On 27 March, the UK government launched a review of the whistleblowing framework set out in the Public Interest Disclosure Act 1998. The review will cover the following central topics, key to the whistleblowing framework: (i) who is covered by whistleblowing protections; (ii) the availability of information and guidance for whistleblowing purposes (both that provided by the government and that provided by employers); and (iii) how employers and prescribed persons respond to whistleblowing disclosures, including best practice. The review will seek views and evidence from whistleblowers, key charities, employers and regulators. The government expects to conclude the research by Autumn.

Press release

Terms of reference

Consumer/Retail

IOSCO toolkit for emerging retail market conduct issues

On 30 March, IOSCO published a report on retail market conduct issues, which includes a toolkit for regulators to consider in developing their respective approaches. The report highlights: (i) a wide range of retail trends and sources of potential retail investor harm in an increasingly online environment, where social media is now a major source of information; (ii) that the increasing digitalisation of financial services and greater use of online distribution methods provide fraudsters with easier and cheaper ways of spreading false communications and information to a wider target audience; (iii) that cryptoasset scams and greenwashing are two important examples of misconduct arising from global trends and technological developments; and (iv) the persistent challenges regarding supervision and enforcement of cross border misconduct and the importance of deepening co-operation between jurisdictions in combatting financial fraud on a global scale. IOSCO considers that regulators need to address retail investor harm at its source. Regulators can employ technological tools to eliminate detrimental online marketing channels, identify misconduct early on and intervene rapidly. IOSCO’s toolkit includes various approaches under five overarching categories: (a) heightening regulators’ digital presence and online strategy to proactively address retail investor harm; (b) honing approaches to better identify and mitigate misconduct; (c) enhancing cross-border and domestic supervisory and enforcement cooperation frameworks, both bilaterally and multilaterally; (d) addressing retail investor harm that stems from cryptoassets; and (e) implementing new regulatory approaches against retail misconduct.

Press release

EBA retail risk indictors

On 28 March, EBA published a new set of retail risk indicators. Under the EBA Regulation, the EBA is required to develop retail risk indicators (RRIs) for the timely identification of potential consumer harm. The report includes a list of RRIs that cover a wide variety of products in the EBA’s remit including mortgage credit, consumer credit, payment and deposit accounts. The RRIs aim to facilitate the monitoring of the banking markets across the EU, by measuring the risk of detriment arising to consumers from the misconduct of institutions, and from wider economic conditions. The indicators will be used to help the EBA and NCAs to prioritise their regulatory and supervisory work in the area of consumer protection. The RRIs are summarized in a table, accompanied by a set of charts showing results at Member State-level, as well as a methodological note explaining the interpretation of the results.  The indicators will be updated and refined on an annual basis and published as part of the EBA’s annual Risk Assessment Report.

Report

Financial Crime and Sanctions

Amendments to discrepancy reporting regime under MLRs in force 1 April

Regulations 9, 16 and 17 in the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022 that amend the discrepancy reporting regime under the MLRs will come into force on 1 April. Regulation 30A of the MLRs requires relevant persons to report to the registrar of companies any discrepancies between the information they hold about the beneficial owners of companies, as a result of customer due diligence measures, and the information recorded by Companies House on the public companies register. The amendments: (i) extend the scope of the discrepancy reporting regime so that it is an ongoing requirement, not limited to time before a business relationship is established; (ii) clarify that the reporting requirements only apply to ‘material discrepancies’ as defined in the MLRs; and (iii) expand the discrepancy reporting regime to extend the obligation to include discrepancies on the new Register of Overseas Entities.

Amendment Regulations

HMT Economic Crime Plan 2 (2023-2026)

On 30 March, HMT and the Home Office published the economic crime plan 2. The plan builds on the first economic crime plan, by delivering real-world outcomes to cut crime, protect national security, and support the UK’s legitimate economic growth and competitiveness. The plan sets out a holistic response to tackling economic crime, acting as the overarching document under which the forthcoming fraud strategy sits.  It also should be viewed alongside the forthcoming new anti-corruption strategy and the commitments made through the recent review of the UK’s AML/CFT regulatory and supervisory regime. The three-year plan focuses on achieving tangible outcomes, and commits to: (i) reducing money laundering and recovering more criminal assets; (ii) combatting kleptocracy and driving down sanctions evasion; and (iii) cutting fraud.

Economic Crime Plan

Press Release

EBA draft amendments to risk based supervision guidelines

On 29 March, the EBA published a consultation paper on amendments to its guidelines on risk-based AML/CFT supervision. The proposed changes extend the scope of these guidelines to AML/CFT supervisors of cryptoasset service providers (CASPs). The revised guidelines: (i) emphasise the importance of cooperation among competent authorities, other stakeholders and prudential supervisors; (ii) highlight the importance of a consistent approach to setting supervisory expectations where multiple competent authorities are responsible for the supervision of the same institutions; (iii) provide guidance on the sources of information available to competent authorities when supervising CASPs; (iv) set out how competent authorities should determine the type of guidance needed within the sector and how to communicate this guidance in the most effective manner; and (v) stress the importance of training to ensure that staff from competent authorities are well trained and have the technical skills and expertise necessary for the execution of their functions, including the supervision of CASPs. The deadline for comments is 29 June. The EBA will finalise the guidelines once the consultation responses have been assessed.

Consultation Paper

Press Release

Webpage

Council negotiating mandate on EU law on criminal finances and NCA access to centralised bank account registries

On 29 March, the Council of the EU announced that it has agreed its negotiating mandate for the proposed Directive amending Directive (EU) 2019/1153, as regards access of competent authorities to centralised bank account registries through the single access point. The negotiating mandate will now allow the Council president to start negotiations with the European Parliament.

Press Release

The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023

On 28 March, the Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023 and an accompanying explanatory memorandum were published. The Regulations amend the Economic Crime (Anti-Money Laundering) Levy Regulations 2022, relating to levy enforcement frameworks, appeals, provisions for collection authorities to require information from their population, record preservation obligations, cooperation between collection agencies and information sharing, recovery of overpayments and penalties. Administration of the levy will be organised by the FCA, the Gambling Commission and HMRC. The Levy came into force on 28 March.

Regulations

Explanatory Memorandum

ECON and LIBE position on EU AML and CTF draft legislation

On 28 March, the European Parliament announced that the Economic and Monetary Affairs (ECON) and Civil Liberties, Justice and Home Affairs (LIBE) committees had adopted a position on three pieces of draft legislation on the financing provisions of EU AML/CFT policy. The draft legislation includes: (i) the EU ‘single rulebook’ Regulation; (ii) MLD6; and (iii) the AMLA Regulation. The next steps are for the European Parliament to start negotiations on the AML/CFT package, after confirmation during a plenary session in April.

Press Release

HMT and FCA statement on the UK criminal market abuse regime review

On 24 March, HMT and the FCA published a joint statement on the criminal market abuse regime review. The review is now complete and has identified a number of areas the government believe it would be appropriate to update the criminal regime, although the statement does not provide further information about the detail of these areas. The government will consider changes to the criminal regime alongside any reforms to the UK MAR through the FRF Review and will therefore consider how to take forward the recommendations from the criminal regime review at that point.

Joint Statement

Fintech

Please see the Financial Crime and Sanctions section for an EBA consultation on the extension of its guidelines on risk-based AML/CFT supervision to cryptoasset service providers.

Please see the Consumer/Retail section for an IOSCO report on retail market conduct issues, which includes a toolkit for regulators to consider in developing their respective approaches.

UK Government AI white paper

On 29 March, the Department for Science, Innovation and Technology, published a white paper titled, ‘A pro-innovation approach to AI regulation’.The government intends to empower existing regulators to come up with context-specific approaches that suit the way AI is actually being used in their sectors, so as not to stifle innovation. The white paper outlines 5 principles that these regulators should consider: (i) safety, security and robustness: applications of AI should function in a secure, safe and robust way where risks are carefully managed; (ii) transparency and explainability: organisations developing and deploying AI should be able to communicate when and how it is used and explain a system’s decision-making process in an appropriate level of detail that matches the risks posed by the use of AI; (iii) fairness: AI should be used in a way which complies with the UK’s existing laws, and must not discriminate against individuals or create unfair commercial outcomes; (iv) accountability and governance: measures are needed to ensure there is appropriate oversight of the way AI is being used and clear accountability for the outcomes; and (v) contestability and redress: there should be clear routes to dispute harmful outcomes or decisions generated by AI. Over the next 12 months, regulators will issue practical guidance to organisations, as well as other tools and resources like risk assessment templates, to set out how to implement these principles in their sectors. When parliamentary time allows, legislation could be introduced to ensure regulators consider the principles consistently. The deadline for comments is 21 June. The government published a number of other related updates: (a) a report setting out evidence to compare different regulatory framework options for AI governance in the UK. The report favoured the approach set out in the white paper, whereby the existing framework is modified and the existing regulators empowered; (b) a letter that was sent to the Digitial Regulation Cooperation Forum (DRCF) that confirms its role within the AI regulatory framework; and (c) a report on public expectations for AI governance that helped inform the development of the white paper.

White Paper

White Paper press release

Evidence to support analysis of impacts for AI governance

Letter to DRCF

Report on public expectations for AI governance

Royal Mint to no longer proceed with NFT

On 27 March, HMT published a response to a question on whether the Royal Mint intends to issue an NFT. Andrew Griffith, Economic Secretary, responded to the question, explaining that after consultation with HMT, the Royal Mint has decided not to proceed with the launch of an NFT at this time. Although, Mr Griffith does state that the Royal Mint will keep the proposal under review.

Response

Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

On 27 March, a draft version of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 and an accompanying explanatory memorandum was published. The draft instrument proposes to expand the scope of the financial promotion restriction in section 21 of FSMA, to include financial promotions in respect of certain cryptoassets. The instrument, and relevant FCA rules, will provide for the regulation of in-scope cryptoasset financial promotions. The aim is to improve consumers’ understanding of the risks associated with cryptoasset investments and ensure that cryptoasset promotions are held to the same standards as broader financial services. The draft order: (i) amends the Financial Promotion Order (FPO) by creating a new controlled investment (defined as a ‘qualifying cryptoasset’); (ii) amends relevant controlled activities to incorporate reference to qualifying cryptoassets; (iii) applies and modifies certain existing exemptions in the FPO to qualifying cryptoassets and creates a temporary, limited exemption to the financial promotion restriction, for cryptoasset businesses (which are not authorised persons) on the FCA’s anti-money laundering register; and (iv) provides for an implementation period of four months from the day after the SI is made before it comes into force.

Draft Order

Explanatory Memorandum

Keeling Schedule

Fund Regulation

Comparison table of negotiating positions on Directive amending the AIFMD and the UCITS Directive

On 28 March, the Council of the EU published an information note on the proposal for a Directive amending the AIFMD and the UCTIS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds. The information note includes a table comparing the initial position of the Commission, and the negotiating positions of the Council and the EP.

Information note

Markets and Markets Infrastructure

ESMA guidance for the supervision of copy trading services

On 30 March, ESMA published a briefing setting out the supervisory expectations of ESMA and NCAs in relation to firms providing copy trading services. This briefing includes guidance on: (i) information requirements; (ii) product governance; (iii) suitability and appropriateness assessment; (iv) remuneration and inducement; and (v) qualifications of traders whose trades are being copied. The supervisory briefing also includes indicative questions that supervisors could ask themselves, or firms, when assessing firms’ approaches to the application of the relevant MiFID II rules. Moving forward, ESMA and NCAs will continue to monitor the development of this area and may in future undertake other steps to ensure that copy trading is provided in a manner that is consistent with the applicable MiFID II requirements and that investment services continue being provided in the best interest of the client.

Supervisory Briefing

Press Release

FCA and ESMA statements on the application of the DTO to certain credit default swaps

On 30 March, the FCA published a statement on the application of the derivatives trading obligation (DTO) to certain credit default swaps. The FCA explains that following the cessation of clearing on ICE Clear Europe for all classes of CDS contracts from 27 October, counterparties will need to close out their CDS positions and establish equivalent ones on other CCPs before this date. The FCA will not require counterparties subject to the trading obligation to apply that obligation to transactions in the relevant CDS, which are concluded for the purpose of transferring existing positions to a new CCP. The FCA does not expect counterparties to publicly report those trades in accordance with article 21 of UK MiFIR. The FCA explains that it expects all such trades to have been completed by 27 October, and may contact firms to validate that off venue trades in relevant instruments were executed. The FCA is acting in coordination with the US Commodity Futures Trading Commission and ESMA who are also issuing statements on the application of their derivatives trading obligations to the migration of positions in CDS. ESMA, in its statement, notes that while neither it nor the national competent authorities (NCAs) possess the appropriate powers to formally disapply the DTO, it nonetheless expects NCAs not to prioritise their supervisory actions in relation to the DTO for transactions in certain index CDSs until 31 October.

FCA statement

ESMA statement

Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

On 29 March, a draft version of the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 and an accompanying explanatory memorandum was published. The instrument amends the RAO, and aims to streamline the process for determining when a firm trading commodity derivatives or emission allowances needs to be authorised as an investment firm. The FCA will put in place a simpler and therefore lower cost regime for determining when a firm that trades commodities or emission allowances as an ancillary activity does not need to be authorised as an investment firm. The order will come into force on 1 January 2025.

Draft Order

Explanatory Memorandum

HMT guidance on extending pension fund clearing exemption and intragroup exemption regime

On 28 March, HMT published guidance setting out how it intends to extend the pension fund clearing exemption and the temporary intragroup exemption regime. HMT intends to lay an SI amending UK EMIR and The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019, to extend to expiry date of the pension fund exemption by two years to 18 June 2025 and the intragroup exemption by three years to 31 December 2026. HMT will conduct a review of the pension fund exemption ahead of its expiry in 2025, allowing time for consideration and implementation of a longer-term approach. HMT intends to lay the SI shortly to ensure it comes into force before the current expiry date of the pension fund clearing exemption on 18 June.

Guidance

ESMA statement on derivatives on fractions of shares

On 28 March, ESMA published a public statement on derivatives on fractions of shares. The statement is addressed to firms and NCAs, clarifying the application of certain investor protection requirements established under MiFID II. The statement reminds firms that they are required to provide clients in good time, i.e. before the provision of investment services, with a description of the nature and risks of the relevant financial instruments. The statement emphasises that: (i) all information to clients, including marketing information, shall be fair, clear, and not misleading; (ii) firms offering these derivatives must clearly disclose all direct and indirect costs and charges relating to them and the services provided; (iii) as derivatives are complex financial instruments, an appropriateness assessment needs to be carried out where non-advised services are provided; and (iv) where derivatives on fractions of shares are packaged retail and insurance-based investment products, the PRIIPs Regulation applies and firms need to provide retail clients with a PRIIPs KID.

Statement

ESMA amendments to guidelines on position calculation under EMIR

On 28 March, ESMA published a consultation on amendments to guidelines on position calculation under EMIR. The guidelines have been amended to ensure that trade repositories (TRs) calculate positions in derivatives in a harmonised and consistent manner in accordance with Article 80(4) of EMIR and in line with the changes introduced by EMIR Refit technical standards. The guidelines provide specific information on the aggregation of certain data fields and how those should be calculated by TRs prior to the provision of the data to relevant authorities. The aim is to ensure the consistency of position calculation across TRs, with regards to the time of calculations, the scope of the data to be used in calculations and the calculation methodologies under the new EMIR Refit standards. The amended guidelines will also address to what extent continuity should be ensured by TRs during the EMIR Refit transition period when pre- and post-Refit data will coexist. The deadline for comments is 9 May. ESMA expects to publish a final report on these amended guidelines during Q3 2023, to allow for at least a 6-month implementation period before the EMIR Refit goes live on 29 April 2024.

Consultation Paper

MiFID II product governance requirements guidelines

On 27 March, ESMA published a final report on guidelines on MiFID II product governance requirements. The report summarises and analyses responses to the July 2022 consultation on the guidelines, explaining how the responses, together with the SMSG advice, have been taken into account. The final guidelines are set out in Annex V. They will now be translated into the official EU languages and published on ESMA’s website. NCAs will then have two months to notify ESMA if they intent to comply with the guidelines or not.

Final Report

Payment Services and Payment Systems

PSR annual plan and budget 2023/24

On 30 March, the PSR published its key aims, activities and budget for the next year. The PSR’s priorities include: (i) protection, the PSR is now working on introducing minimum standards of customer protection and sharpening the incentives for payment firms to prevent fraud; (ii) competition, a major part of the PSR’s work will be continuing its investigation of the fees wrapped up in card transactions; (iii) unlocking account-to-account payments, over the coming years there will be a focus on putting conditions in place so that account-to-account payments can deliver new options for retail payments and realise the potential for new ways of paying that offer consumers greater levels of control; and (iv) access and choice, setting out how the PSR intends to support the take-up of digital payment methods. To deliver this work successfully, in 2023/24 the PSR will evolve its approach so it can be quick to respond to, and influence, emerging trends in payments. It also aims to boost its effectiveness by broadening its engagement with stakeholders and building a new team to increase the focus on reducing firms’ non-compliance with the rules it enforces.

Annual Plan and Budget

Press Release

PRA thematic findings from the 2022 cyber stress test

On 29 March, the PRA published a letter from the BoE and PRA to PRA-regulated firms and FMIs outlining the thematic findings from the 2022 Cyber Stress Test. The 2022 Cyber Stress Test was an exploratory, voluntary test based on a hypothetical data integrity scenario in retail payments. Key findings include:

(i) industry co-ordination, timely and co-ordinated decision-making and action across the industry is critical in

limiting the impact of an incident; (ii) communication, consistent, effective, and timely communications are important throughout an incident; (iii) contingencies, it is important for firms to explore what contingencies are already available to them and consider how different contingencies could work together in an incident. Further work may be needed to develop options for responding to an incident, by improving existing contingencies and/or developing and investing in new ones; (iv) mitigants, suitable mitigating actions, such as providing emergency cash or extending overdrafts in the case of retail payments, could help to maintain public confidence in the financial system and therefore limit the risk of an incident causing financial instability; (v) reconciliation, it is important for firms to develop and test suitable tools and/or scripts to help automate data reconciliation in advance of an incident; and (vi) testing capabilities, firms are reminded that it is important to undertake appropriate planning, preparation, and testing to further strengthen individual firm capabilities and the underpinning assets, including technologies and processes which support the industry’s ability to respond and recover. Firms are encouraged to consider these findings in their continuing implementation of operational resilience and related policies.

Letter

Prudential Regulation

BCBS technical amendments to Basel Framework and answers to FAQs

On 30 March, the BCBS began consulting on various technical amendments to the Basel Framework and answers to FAQs. The set of interpretative issues addressed relate to: (i) the standardised approach to operational risk; (ii) the disclosure standards for credit valuation adjustment risk; (iii) the description of the calculation of indicator scores for global systemically important banks; (iv) terminology used in the countercyclical capital buffer; and (v) the application of the liquidity standards to certain products. The deadline for comments is 15 May.

Consultation

BoE financial policy summary and record of FPC meeting 

On 29 March, the BoE published the financial policy summary and record of the financial policy committee (FPC) meeting on 23 March. Key takeaways from the meeting include: (i) the FPC is closely monitoring the impact of overseas bank failures and their impact on financial markets; (ii) the countercyclical capital buffer will be maintained at 2%, which should ensure that UK banks are resilient and strong enough to support households and businesses; (iii) UK household and business finances remain under pressure from higher borrowing costs and prices; (iv) non-bank financial institutions need more resilience. The FPC notes that money market funds (MMFs) in particular are vulnerable to rapid and large investor withdrawals and could be a source of risk to the financial system and the wider economy. As such the BoE is working with other authorities to improve MMFs’ resilience. UK authorities are set to consult on these issues soon; and (v) the FPC has updated its impact tolerance for critical payments, based in part on the findings of the 2022 cyber stress test (see Payment Services and Payment Systems section above). Firms required to consider financial stability risks under BoE, PRA and FCA operational resilience policies should consider the FPC's impact tolerance for critical payments when formulating their own payment impact tolerances, alongside other applicable requirements. The FPC’s next policy meeting will be on 22 June, with the record of the meeting to be published on 12 July 2023. 

Financial policy summary and record

Webpage

Draft RTS on supervisory shock scenarios under CRD IV

On 27 March, the European Commission published an amended version of draft Delegated Regulation containing RTS specifying the supervisory shock scenarios, the common modelling and parametric assumptions and the definition of a large decline, for the purposes of the supervisory outlier tests under Article 98(5) of CRD IV. In a letter sent to the EBA (dated 13 March), the Commission explains that while it agrees with the overall substance of the submitted draft RTS, it believes that the approach proposed to determine the notion of a large decline under the supervisory outlier test for the net interest income, would not adequately reflect the current different interest rate environment, and could therefore result in the identification of a disproportionate number of outliers in the context of the supervisory review and evaluation process. A key concern raised by stakeholders relates to the risk that the specific threshold would be interpreted in practice as a hard limit, triggering sizeable corrective actions to remain below such threshold and avoid possible supervisory actions that being an outlier may bring about. In turn, if a large number of institutions face the prospect of being identified as an outlier and react in a similar fashion, the risk of an unduly significant market correction could materialize. The draft RTS have been amended to reflect these points.

Amended Draft Regulation

Letter

EBA standards for assessing the new market risk internal models under the FRTB

On 24 March, the EBA published a consultation paper on draft RTS on the assessment methodology under which competent authorities verify an institution’s compliance with the internal model approach as per Article 325az(8) of the CRR 2. CRR 2 implemented, inter alia, the revised requirements to compute own funds requirements for market risk of the Basel III package, i.e. the Fundamental Review of the Trading Book (FRTB). One of the prerequisites for an institution to use the new internal model approach (IMA) for calculating its own funds requirements for market risk is the approval from its competent authority. To obtain such an approval, the institution is subject to a thorough and comprehensive assessment of its internal model by the competent authority to ensure it complies with the relevant regulatory provisions. The draft RTS, aim to set out a framework for competent authorities to assess those requirements. They are divided into three main chapters: (i) governance; (ii) the internal risk-measurement model covering for the expected shortfall and the stress scenario risk measure; and (iii) the internal default risk model. The RTS include some compulsory assessment techniques that the competent authorities must apply, as well as some optional techniques that may be applicable depending on the situation of the institution. These RTS are part of the phase 4 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. The deadline for comments is 26 June.

Consultation Paper

Recovery and Resolution

ESMA draft RTS on business reorganisation plans under the CCPRRR

On 29 March, ESMA published a final report on draft RTS on business reorganisation plans under Articles 37(4) and 38(4) of CCPRRR. The final report: (i) sets out the proposal with respect to further specifying the minimum elements to be included in the business reorganisation plan; (ii) sets out the proposal with respect to specifying the criteria that a business reorganisation plan has to fulfil; and (iii) contains annexes that set out the cost and benefit, the legal mandate and the draft RTS. ESMA will submit the Final Report and draft regulatory technical standards to the Commission.

Final Report

ESMA guidelines on recovery plans under CCPRRR

On 24 March, ESMA published the official translations of the following guidelines: (i) guidelines on CCP recovery plan scenarios; and (ii) guidelines on CCP recovery plan indicators. Both guidelines will apply from two months after this date of publication on ESMA’s website, i.e. 24 May.

Guidelines on CCP recovery plan scenarios

Guidelines on CCP recovery plan indicators

SRB signs cooperation arrangements with Australia, Argentina, New Zealand and Malaysia

On 24 March, the SRB announced that it had reached cooperation arrangements with the Australian Prudential Regulation Authority (APRA), the Central Bank of the Argentine Republic – Banco Central de la República Argentina (“BCRA”) and the Reserve Bank of New Zealand. The arrangements focus on the exchange of information and cooperation related to bank resolution planning, and how that is implemented for banks with cross-border operations. On 30 March, the SRB announced it had also reached a cooperation agreement with the Perbadana Insurans Deposit Malaysia (PIDM), to enhance cross-border communication and cooperation for resolving entities with cross boarder operations.

Press Release (24 March)

Press Release (30 March)

Agreement with APRA

Agreement with BCRA

Agreement with Reserve Bank of New Zealand

Agreement with PIDM

Sustainable Finance

Future UK regulatory regime for ESG ratings providers

On 30 March, HMT began consulting on the future regulatory regime for ESG ratings providers, announced as part of the Edinburgh reforms. HMT considers that there is clear benefit to be gained from improving the transparency of methodologies, governance, and processes of ESG ratings providers. The consultation sets out proposals for the regime and its scope and seeks views on whether regulation on providers of ESG rating should be introduced. HMT proposes to amend the Regulated Activities Order (RAO), to bring within scope the direct provision of an assessment of ESG factors to a user in the UK, where the assessment is used in relation to a specified investment in the RAO, unless an exclusion applies. It notes that further activities may also be brought into regulation, including some cases of indirect provision of these assessments, and where these assessments are used in relation to certain things other than RAO specified investments. Overseas firms providing ratings to UK users will be captured. An ESG rating in the context of a new regulated activity would cover an assessment regarding one or more ESG factors, whether or not it is labelled as such. The deadline for comments is 30 June.

Consultation

UK 2023 green finance strategy

On 30 March, the UK government set out its 2023 green finance strategy, setting out how it aims to become a net-zero aligned financial centre by 2050. In the strategy the government’s commitments include: (i) to commission an industry-led market review into how the UK can enhance the regime for raising transition capital; (ii) to consult in Q3/4 2023 on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them. To ensure parity between listed and private companies, as well as to ensure requirements are consistent and comparable across the economy, the government expects to consult on the basis that these requirements could align closely with those of the FCA, including the ‘comply or explain’ basis; (iii) to set up a framework to assess the International Sustainability Standards Board’s standards for their suitability for adoption in the UK as soon as the final standards are published – expected this Summer; (iv) to launch a call for evidence on scope 3 greenhouse gas (GHG) emissions reporting, in order to better understand the costs and benefits of producing and using this information. The government will update the Environmental Reporting Guidelines, including for Streamlined Energy and Carbon Reporting, which provides voluntary guidance for UK organisations; (v) in collaboration with industry partners to improve the approach to the 2023 Green Finance Strategy climate resilience assessment and disclosure through the development of adaptation metrics and guidance. The government expects to finalise the approach alongside its adaptation finance deliverables and action plan in 2024; (vi) to consult on the UK Taxonomy in Autumn; and (vii) in collaboration with the FCA, FRC and The Pensions Regulator, to review the regulatory framework for the effective stewardship that is crucial to climate and environmental oversight, including the operation of the UK Stewardship Code.

Strategy

Press Release

FCA update on SDR and investment labels consultation

On 29 March, the FCA published a press release providing an update on its SDR and investment labels consultation (CP22/20). Due to the significant amount of responses received, the FCA has decided to delay publication of the policy statement to Q3 this year, instead of the initial aim of H1. The proposed effective dates will be adjusted accordingly. In the 240 responses the FCA received, there was broad support for the proposed regime and outcomes. The FCA goes on to explain that it is carefully considering the feedback to ensure that first and foremost the regime protects consumers but also recognises and takes account of any practical challenges that firms may have.

Press Release

Nature-Related Risk & Opportunity Management and Disclosure Framework

On 28 March, the Taskforce on Nature-related Financial Disclosures (TNFD) published its fourth and final beta framework for nature-related risk management and disclosure. This latest framework enables market participants to view a full representation of the framework, including the TNFD’s proposed approach to disclosure metrics. Feedback from market participants and other stakeholders has broadly endorsed the three core elements of the draft framework: the core concepts and definitions; the proposed risk and opportunity assessment approach (LEAP); and the draft disclosure recommendations aligned with those of the TCFD. The TFND has only made minor adjustments to its proposed risk and opportunity assessment process and reduced its proposed recommended disclosures from 15 to 14 based on feedback. In addition to these changes, the TFND has also outlined its approach to disclosure metrics, proposing a tiered approach of leading indicators. Following a final 60-day consultation process, from 30 March to 1 June, the TNFD’s final recommendations based on final feedback and pilot testing (v1.0) will be published in September.

Framework

Press Release

ECB speech on stepping up the management of climate and environmental risks

On 27 March, the ECB published a speech given by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, on 2023 being a key milestone in stepping up the management of climate and environmental (C&E) risks. Mr Elderson explains that the results are mixed, as to where banks stand in integrating C&E risks into their strategy and risk management. While banks have made some progress, Mr Elderson emphasised that overall risk management capabilities are still insufficient, adding there is still a material gap between where banks currently stand and the ECB’s supervisory expectations. Three examples of practices banks need to improve on are: (i) stress testing; (ii) identification of C&E risks; and (iii) broader environmental risks. By the end of 2024, the ECB expects all banks under its supervision to be fully aligned with its expectations, stating that after 2024, a limbo of identifying a risk as material but not adequately addressing it will no longer be tolerated. The ECB will be closely monitoring banks’ progress, and, if necessary, will use all measures in its toolkit to ensure compliance with its expectations, including imposing periodic penalty payments and setting Pillar 2 capital requirements as part of the annual Supervisory Review and Evaluation Process.

Speech

Other Developments

BoE joint transformation programme update

On 24 March, the BoE updated firms on the progress of the joint transformation programme, led by the BoE and FCA to transform data collection from the UK financial sector. In this update, the BoE provides an update on the progress of the programme including the phase two use cases and the solution development for the phase one recommendations.

Update