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Key Regulatory Topics: Weekly Update 25 November - 1 December

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The publications are ramping up as we enter December, a customarily busy period.  Amongst the updates this week, the Wolfsberg Group published principles for using artificial intelligence and machine learning in financial crime compliance, the Council of the EU announced that it has adopted DORA and its related amending Directive and the UK’s PRA and HMT began consulting on the implementation of the Basel 3.1 standards

Consumer/Retail

FCA and LSB MoU

On 1 December, the FCA published a MoU that it has agreed with the LSB. The approach set out in the Memorandum: (i) seeks to ensure that the organisations have a consistent understanding of expectations in relation to the application of the LSB’s standards and codes and relevant FCA regulation; (ii) sets out how they can work collaboratively to prevent duplication of supervisory work; and (iii) allows for due consideration to be given to FCA rules and guidance and LSB standards and codes when each institution undertakes its respective policy development.

Press release

MoU

IOSCO report on investor behaviour and investor education in times of turmoil: Covid-19

On 30 November, IOSCO finalised a report on investor behaviour and investor education in times of turmoil, setting out a recommended framework for regulators based on lessons learned from the Covid-19 pandemic. The report explores changes in investor behaviour during the pandemic and regulators’ responses worldwide. The report includes seven sound practices that regulators should consider when designing financial education and investor protection initiatives, with a view to mitigating and addressing retail investor risks and vulnerabilities that may occur during a crisis period: (i) monitor -  regulators should develop tools and metrics needs to monitor deviations from typical investing and/or trading patterns during crisis periods; (ii) understand - understanding the characteristics, behaviours, attitudes, knowledge, and preferences of investors is necessary for implementing effective education and investor protection measures; (iii) customise – regulators should use simple and clear language when delivering concrete messages to retail investors and the general public; (iv) collaborate - regulators should find collaborative opportunities between their financial education and their policy, oversight and enforcement departments; (v) evaluate -  timely evaluations of swiftly enacted programmes and measures can provide helpful insights into what does and does not work when regulators face new and challenging crises; (vi) explore - regulators may at times need to be bold with their communication strategies, depending on the nature of the crisis; and (vii) remember -  regulators should keep in mind some “basics” of investor protection and investor education that can help identify, understand, and react to those risks or vulnerabilities arising from a crisis.

Press release

Report

FCA consults on improving access to financial advice for mainstream investments

On 30 November, the FCA began consulting on broadening access to financial advice for mainstream investments. The FCA is proposing to create a new, separate, simplified financial advice regime, making it cheaper and easier for firms to advise consumers about certain mainstream investments within stocks and shares ISAs. The proposals include: (i) proportionately reducing the existing qualification requirements to reflect the lower risk of this narrow scope advice, focused on only the necessary technical and regulatory understanding to advise on mainstream investments; (ii) amending the existing suitability requirements to reflect the narrower scope and complexity of this advice relevant to the decision that consumers will be making; (iii) limiting the possible investments advisers can recommend under the new regime to a set of mainstream investments by excluding any recommendations to invest in high‑risk investments; and (iv) allowing greater flexibility in charging structures to allow consumers to pay for transactional advice in instalments. The FCA also emphasises that the new consumer duty will also apply to the regime. The deadline for comments is 28 February. The FCA expects to finalise rules and guidance in spring 2023, with the aim of implementing the regime before the end of the 2023/24 financial year.

Press release

Consultation paper

BBRS report on common and recurring themes from complaints data

On 29 November, the Business Banking Resolution Service (BBRS) reported on common and recurring themes and issues arising from all registered customer complaint data to end-July 2022. The most complained about products was loans. Other complaints related to the valuation of an SMEs property, personal guarantees, fraud, administration issues and bank accounts being closed. The BBRS concludes that the need for clear communication, effective engagement, appropriate targeting of products and transparency around key features, such as fees, is clear.

Report

PRA policy statement on Depositor Protection

On 28 November, the PRA published a policy statement providing its feedback to the parts of its consultation on depositor protection relating to continuity of access (CoA) rules and the dormant account scheme (DAS). The PRA’s final CoA rules amend the Depositor Protection Part of the Rulebook by deleting 13.4-8 and amending 15.2-4 and 15.7. The DAS Part of the PRA Rulebook and Dormant Account Scheme Statement of Policy are to be deleted. There are no substantive changes to the final rules as consulted on. The changes (and deletions) came into effect on 30 November and were implemented by the PRA Rulebook: Financial Services Compensation Scheme Instrument 2022. The PRA notes however, that consequential changes to the supervisory statement on depositor protection (SS18/15) will come into effect during 2023. The other proposals set out in the consultation are still open to comments until 16 December.

Policy statement

Fees/Levies

FCA consults on proposed fees and levies for 2023/24

On 29 November, the FCA began consulting on its policy proposals for its regulatory fees and levies for 2023/24. The consultation covers: (i) the main assumptions on which the FCA proposes to base the 2023/24 fee rates consultation. The FCA notes that it intends to consider the freeze on minimum and flat-rate fees for the 34,500 firms which pay minimum fees only, introduced during the pandemic. As a result of the significant inflationary pressures on businesses in the current climate the FCA also proposes not to increase application fees generally in 2023/24; (ii) fees policy updates - the FCA proposes to maintain the charges that principal firms pay for appointed representatives. In response to issues in allocating firms subject to the IFPR to corresponding fee blocks, the FCA considers potential options for redefining tariff measures. The FCA will consult in full in Autumn 2023; (iii) changes to the FEES manual. The FCA proposes a new category 5 application fee (£5,000) to contribute to the costs of processing applications under the new financial promotions regime. The FCA proposes to increase the fees for data reporting service providers, trade repositories (TRs) and securitisation repositories and for overseas firms seeking recognition as 3rd country TRs. The FCA also clarifies the definition of gross income in fee-block A.9 (managers and depositaries of investment schemes or pension schemes); and (iv) an update on HMT’s Economic Crime Levy (ECL) to be collected under the Finance Act 2022 for firms supervised by HMT under the MLRs. Since the ECL is governed entirely through legislation and HMT orders, and not by FCA rules, the FCA does not consult on it. However, the FCA sets out the four payment bands, which are set according to firm size. The deadline for comments is 16 January 2023.

Consultation

BoE fees regime for FMI supervision 2022/23

On 25 November, the BoE published a policy statement setting out, in relation to the fees regime for FMIs (UK CCPs, UK CSDs and payment systems and service providers): (i) the final fee rates in relation to the BoE’s 2022/23 funding requirement for its FMI supervisory activity and the policy activity that supports this; (ii) the outcome of the 2021/22 actual costs incurred and the impact on FMI fees charged for 2022/23, including its confirmation of the shortfall/surplus in fees for 2021/22; (iii) the BoE’s policy on fees for payment systems based in other jurisdictions, in respect of which the BoE has a deference arrangement with the home authority; and (iv) the new hourly rates for the special projects fee. The BoE has made no changes to the proposals as consulted on.

Policy statement

BoE fees regime for incoming CSDs and CCPs

On 25 November, the BoE published two policy statements on the fees regime for non-UK CSDs non-UK CCPs respectively. The BoE sets out its feedback to responses to its consultations on the regimes, although it has not made any changes to the proposals. The BoE has included Statements of Policy for each regime that set out the recognition fees (and supplementary recognition fees and comparable compliance assessment fees for Tier 2 CCPs) and annual fees for incoming CSDs and CCPs. The fee policies for institutions recognised by the BoE will come into effect on 1 December.

CCP policy statement

CSD policy statement

Financial Crime and Sanctions

Wolfsberg principles for using AI and ML in financial crime compliance

On 1 December the Wolfsberg Group finalised its principles for using artificial intelligence (AI) and machine learning (ML) in financial crime compliance. The Group has identified five principles that support an ethical and responsible use of AI/ML: (i) legitimate purpose - programmes to combat financial crimes should be anchored in regulatory requirements, and a commitment to help safeguard the integrity of the financial system, while reaching fair and effective outcomes; (ii) proportionate use – firms should balance the benefits of use with appropriate management of the risks that may arise from these technologies; (iii) design and technical expertise – firms should carefully control the technology they rely on and understand the implications, limitations, and consequences of its use; (iv) accountability and oversight – firms are responsible for their use of AI/ML, including for decisions that rely on AI/ML analysis, regardless of whether the AI/ML systems are developed in-house or sourced externally; (v) openness and transparency – firms should be open and transparent about their use of AI/ML, while ensuring that this transparency does not facilitate evasion of the industry’s financial crime capabilities, or breach reporting confidentiality requirements and/or other data protection obligations. The Group calls for the principles to be operationalised by each financial institution according to a risk-based approach dependent on the prevailing and evolving regulatory landscape, as well as on its use of AI/ML against financial crime, and governed accordingly.

Report

ESMA updates Q&As on MAR

On 25 November, ESMA updated its Q&As on MAR, revising the Q&A as to the scope of the obligation to detect and report market abuse. The revision makes clear that the obligation applies to, among other firms, investment firms providing direct electronic access (DEA) with respect to their DEA clients’ trading activity.

MAR Q&A

Fintech

Please see the Financial Crime and Sanctions section for the Wolfsberg Group’s finalised principles for using artificial intelligence (AI) and machine learning (ML) in financial crime compliance

Please see the Other Developments section for the Council of the EU’s adoption of DORA and its related amending Directive.

UK-Singapore Financial Dialogue and FinTech MoU

On 25 November, HMT published a joint statement with the Monetary Authority of Singapore following the seventh meeting of the UK-Singapore Financial Dialogue. Both countries renewed their commitment to deepening the UK-Singapore Financial Partnership that was agreed in 2021 and discussed mutual priorities including: (i) sustainable finance - both countries agreed to work together on transition finance and committed to phase in mandatory climate-related financial disclosures. They agreed that regulators should continue discussing how to adopt a global, coherent, and co-ordinated approach on regulatory oversight of ESG ratings and data products providers, grounded in IOSCO’s recommendations. Both countries agreed to collaborate to build capacity and understanding of the potential for nature loss and degradation to generate financial risks and cause adverse impacts to business and society; and (ii) FinTech and innovation -  the UK and Singapore agreed on a MoU on the UK-Singapore FinTech Bridge. The FinTech Bridge seeks to support continued growth, investment, and technological innovation in this sector, building on active interest of FinTech players in the areas of payments, RegTech and wealth management. The two countries agreed to a roadmap for engagements in sustainable finance, FinTech and innovation, and other areas of mutual interest, leading up to the next Dialogue scheduled to take place in London in 2023.

Press release

Fund Regulation

Updated ESMA guidelines on stress test under MMF Regulation

On 30 November, ESMA finalised updated guidelines on stress test scenarios under Article 28 of the MMF Regulation. The updated guidelines set out on specifications on the type of the stress tests and their calibration, so that managers of MMFs have the information needed to fill in the corresponding fields in the reporting template. Moving forward, MMFs and managers of MMFs are expected to measure the impact of the common reference stress test scenarios specified in the guidelines. On the basis of the measurements they are then expected to fill in the reporting template and send the results to NCAs, with quarterly reports required by Article 37. The guidelines will become applicable 2 months after the publication of their official translations. The new 2022 parameters have to be used for the purpose of the first reporting period following the start of the application of the updated guidelines. Until then, managers should use the parameters set in the 2021 Guidelines and report the results accordingly. ESMA may consult on the revision of section 4.8 of the guidelines in H1 2023. The ESRB adverse scenario for the stress-testing exercise has also been published.

Press release

Final report

ESRB adverse scenario

FCA statement on liability driven investment

On 30 November, the FCA published a statement on liability driven investment (LDI). Following on from the events that occurred in the gilt market, the FCA has been working with other regulators in the UK and Europe, as well as firms involved in the management of LDI portfolios to ensure they have increased resilience to deal with the possible future volatility. The FCA expects asset managers to take any necessary or appropriate action following these communications and to operate their products and services in a way that will not create risks to market integrity or financial stability. Managers should remember that measures such as liquidity buffers are a necessary but only partial solution as there can always be events or conditions that exceed them. Managers of LDI funds are expected to learn lessons from these events to understand and reduce the consequences of tail events. All market participants should also be factoring in recent market conditions into their risk management, and should adopt a wider horizon of events that might be considered extreme but plausible. The FCA aims to publish a further statement on good practice in Q1 2023.

Statement

ESMA welcomes NCAs work to maintain resilience of liability driven investment funds

On 30 November, ESMA welcomed NCA’s work on maintaining the resilience of liability driven investment (LDI) funds. The Central Bank of Ireland, and the Commission de Surveillance du Secteur Financier have published letters addressed to LDI fund managers requesting that they maintain the current level of resilience and the reduced risk profile of GBP LDI funds. The letters explain that managers wanting to reduce GBP LDI fund’s yield buffers below the current levels must inform their NCA in advance and provide a justification. ESMA supports these coordinated supervisory actions and information sharing among NCAs, as well as converging measures to address risks, which may pose a potential threat to financial stability.

Press Release

Governance and Conduct

FCA portfolio letter for CFD providers

On 1 December, the FCA published a portfolio letter setting out its supervisory strategy for firms with retail client permissions that predominantly generate revenue from contracts for difference (CFDs). The FCA outlines its expectations and highlights areas of poor practice seen in firms. The letter groups the areas of risk into four groups: (i) dealing with problem firms - the FCA has identified three core, often concurrent, poor behaviours: scam/churn activities, circumvention of FCA rules and unauthorised affiliate marketers/introducers; (ii) putting customers’ needs first – as CFD firms’ business models often involve inherent conflicts of interest (CoIs), due to generating revenue primarily from the spread clients cross when trading CFDs, the FCA expects firms to pay special attention to these CoIs and consider all relevant FCA rules and guidance. The FCA sets out how the incoming Consumer Duty is likely to be relevant to CFD providers; (iii) delivering assertive action on market abuse – the FCA remains concerned at the level of suspicious transaction activity in the CFD sector and the weakness of some firms’ controls. It is considering publishing wider feedback and holding a roundtable to share common themes; and (iv) reducing harm from firm failure - the FCA sets out its expectations for firms' financial resilience, the protection of client assets, and operational resilience. By end-January 2023, the FCA expects all CEOs to have discussed this letter with their fellow directors and/or Board and to have agreed next steps.

Letter

Press Release

FCA speech on benefits of changing culture in financial services

On 29 November, the FCA published a speech by Emily Shepperd, FCA Chief Operating Officer and Executive Director of Authorisations, on how culture in financial services can change for everyone's benefit. Highlights include: (i) the FCA expects senior leaders to nurture healthy cultures in the firms they lead. Cultures that are purposeful, that have sound controls and good governance and where employees feel psychologically safe to speak up and challenge. Where remuneration does not encourage irresponsible behaviour that can ultimately damage the business and wider markets; (ii) there has been understandable resistance from some firms in initial discussions on the Consumer Duty, mainly because it requires enormous cultural and operational change. The FCA considers that the Consumer Duty will encourage firms to analyse their culture and how that affects their conduct. It does not set out to be prescriptive about culture but will step in when consumers are at risk of harm; (iii) the FCA expects firms to collect data on the diversity of their staff, actively monitor it with interest and take bold action where needed, paying attention as to where it intersects; (iv) on fostering an innovative culture, the FCA notes that it wishes to support industry as it draws on new tools, like AI. The FCA considers that many of the rules to cover governance risks arising from AI are already in place or on the way, not least the Senior Managers and Certification Regime and the upcoming Consumer Duty; (v) the FCA notes that just 5% of crypto firms who applied for registration showed understanding of the AML rules, but half of those who engaged seriously with the FCA to address concerns about capability, business models and controls were registered (a further 15%); and (vi) the FCA is looking closely at what support firms offer to employees to improve their culture so that it boosts the conduct of their business or function.

Speech

Markets and Markets Infrastructure

Please see the Recovery and Resolution section for three Delegated Regulations adopted by the EC containing RTS supplementing the Regulation on the recovery and resolution of CCPs.

Please see the Other Developments section for the Council of the EU’s adoption of DORA and its related amending Directive.

FMLC response to FCA consultation on proposed guidance on trading venue regulatory perimeter

On 1 December, the FMLC published the response that it has submitted to the FCA’s consultation on proposed guidance on the regulatory perimeter for trading venues (TVs). The FMLC’s response draws attention to the legal uncertainty which may arise in relation to the FCA’s proposed treatment of certain ESMA Q&As on MiFID II and MiFIR market structures topics, in particular the absence of clarification on the FCA’s treatment of Q&A 25. The FCA stated that it would have regard to all Q&As bar 7, 10, 11, 12 and 15. However, Q&A 25 has to date been considered incompatible with the UK’s overseas persons exclusion and Article 31(10) of UK MiFIR. The FMLC therefore recommends that the FCA carve out Q&A25 from its endorsement.

Response

Financial Services and Markets Act 2000 (Qualifying Provisions) (Amendment) Order 2022 published

On 30 November, the Financial Services and Markets Act 2000 (Qualifying Provisions) (Amendment) Order 2022 was published, together with an explanatory memorandum. This Order makes amendments to the Financial Services and Markets Act 2000 (Qualifying Provisions) Order 2013. The FSA 2021 established new rule-making powers for the FCA in certain retained direct EU legislation, UK PRIIPs Regulation, UK MiFIR and UK EMIR. The purpose of the amending Order is to specify rules made under these retained direct EU legislation as qualifying provisions for the purposes of various provisions of FSMA 2000. This is necessary as only if a rule is a qualifying provision in FSMA will a regulator be use their FSMA enforcement powers in response to breaches of these requirements. The amendments also establish a definition for MiFIR, which was previously undefined. The Order will come into force on 1 January 2023.

Order

Explanatory memorandum

FCA CRA market share report for 2021

On 30 November, the FCA published a credit rating agency (CRA) UK market share report for 2021. The report sets out the list of UK registered CRAs, their total market share, and the rating sectors in which they are active. The report is the first of these annual FCA reports and uses revenue data from the end of December 2021, and covers the nine registered CRAs in the UK. Three of these CRAs represent 92% of the total market. The FCA intends for issuers and third parties to use this report as a starting point for their consideration when meeting their obligation in Article 8d of the CRA regulation that where they intend to use two or more CRAs, they should consider appointing one with no more than 10% of total market share.

Report

Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2022

On 30 November, the Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2022 were published, together with an explanatory memorandum. The Regulations extend the temporary recognition regime (TRR) for overseas CCPs by 12 months, until 31 December 2024. This allows overseas CCPs currently in the regime to continue to offer clearing services in the UK whilst they wait for their applications for recognition to be determined by the BoE. The Regulations also extend the transitional regime for qualifying CCPs contained within Article 497 of the CRR for an additional 12 months. The expiry date of this transitional regime differs between individual CCPs as it is dependent on when a firm has applied for recognition in the UK. However, for most firms within the regime, the expiry date currently falls on 31 December 2022. The extension ensures that UK firms with indirect exposures to these qualifying CCPs can continue to benefit from favourable capital treatment and will not face a sudden and disruptive increase in their capital requirements on the expiry of the transitional regime. The Regulations will come into force on 22 December.

Regulation

Explanatory memorandum

CPMI and IOSCO report on FMI’s cyber resilience

On 29 November, the CPMI and IOSCO published a report reviewing the implementation status of its guidance on cyber resilience for FMIs, as of February 2021. The report found a reasonably high adoption of the guidance, however it identified one serious issue of concern relating to a small number of FMIs not fully meeting expectations regarding the development of cyber response and recovery plans to meet the two-hour recovery time objective (2hRTO). The report also highlights four additional issues of concern relating to: (i) shortcomings in established response and recovery plans to meet the 2hRTO under extreme cyber-attack scenarios; (ii) a lack of cyber resilience testing (e.g. integrity of backup data, vulnerability assessments or penetration testing) after a significant system change; (iii) a lack of comprehensive scenario-based testing; and (iv) inadequate involvement of relevant stakeholders (e.g. FMI participants, critical service providers or linked FMIs) in testing of their responses. The CPMI and IOSCO urge the relevant FMIs and their supervisors to address these issues with the highest priority. Further observations are set out in the report.

Press release

Report

ESMA final draft RTS and consultation on standards for benchmark administrator applications

On 28 November, ESMA finalised draft RTS amending Delegated Regulation (EU) 2018/1645, supplementing the BMR with RTS as regards the form and content of applications for recognition of third country administrators. The draft RTS aim at aligning the information provided in a recognition application with the amended BMR following the transfer of direct supervisory responsibilities to ESMA. ESMA states that this is to ensure that these applications include all necessary information in order for ESMA to assess whether the applicant meets BMR requirements. In response to feedback to the consultation, ESMA has amended the draft RTS in order to take account of commodity benchmarks for which different requirements are applicable, to ensure consistency with the BMR. ESMA will submit the draft RTS to the EC, which has three months to consider whether to endorse them. Following endorsement by the EC, the RTS will then be subject to the non-objection of the EP and the Council. ESMA also began consulting on amendments to Commission Delegated Regulation (EU) 2018/1646, supplementing the BMR with RTS as regards the information that EU benchmark administrators need to provide in applications for authorisation and registration. The amendments reflect the changes made to the final draft RTS on the recognition regime, as set out above, in order to ensure an equal treatment of EU and third country-based administrators. ESMA proposes requesting additional information or further specifying some of the information already requested in the existing RTS in order to allow NCAs and ESMA to properly assess whether the applicant has established all the necessary arrangements under the BMR. The deadline for comments is 31 January 2023. ESMA expects to finalise the draft RTS and submit them to the EC for endorsement in Q1 2023.

Press release

Report on review of RTS on recognition regime

Consultation paper

Delegated Regulation increasing clearing threshold for OTC commodity derivative contracts

On 28 November, Delegated Regulation (EU) 2022//2310 amending the RTS laid down in Delegated Regulation (EU) 149/2013 as regards the value of the clearing threshold for positions held in OTC commodity derivative contracts and other OTC derivative contracts under EMIR, was published in the OJ. In response to the recent increase in commodity prices and its effect on non-financial counterparties taking positions in OTC commodity derivative contracts, the amendments increase the clearing threshold value for positions held in OTC commodity derivatives from EUR 3 billion to EUR 4 billion. The Delegated Regulation entered into force on 29 November, the day following its publication in the OJ.

Delegated Regulation

Delegated Regulation temporarily expanding eligible collateral under EMIR

On 28 November, Delegated Regulation (EU) 2022/2311 amending the RTS laid down in Delegated Regulation (EU) 153/2013 as regards the temporary emergency measures on collateral requirements under EMIR, was published in the OJ. Delegated Regulation (EU) No 153/2013 lays down RTS on requirements for CCPs to accept highly liquid collateral with minimal credit and market risk. In response to recent liquidity strains in energy derivatives markets, the amendments temporarily expand the pool of eligible collateral available to non-financial clearing members to include uncollateralised bank guarantees and guarantees issued or backed by public entities. The temporary measures entered into force on 29 November and will apply until 29 November 2023.

Delegated Regulation

ESMA updates Q&As on implementation of CSDR

On 25 November, ESMA updated its Q&As on the implementation of CSDR. ESMA has added a Q&A which explains that CSDs should publish the information set out in Annex III of the RTS on settlement discipline on their website for free, on an annual basis, by the end of February of each year. The first publications should take place by the end of February 2023.

CSDR Q&A

Payments Services and Payment Systems

SEPA Payment Account Access Scheme Rulebook

On 30 November, the EPC published the first SEPA Payment Account Access (SPAA) Scheme Rulebook. The Rulebook consists of a set of rules, practices and standards that allow the exchange of payment accounts related data and facilitates the initiation of payment transactions in the context of ‘value-added’ (‘premium’) services provided by asset holders (i.e. Account-Servicing Payment Service Providers) to asset brokers (e.g. Third Party Providers ). All the services listed are currently positioned as optional. The SPAA scheme adherence process will be open on 1 September 2023 to allow applicants to prepare their adherence application ahead of the effective date of the scheme, 30 November 2023. Additional work prior to this date includes: (i) a public consultation, expected to be launched before the end of 2022 on strong customer authentication, to complement the current rulebook sections on it; (ii) the SPAA Multi-Stakeholder Group will progress defining a ‘minimum viable product’ (MVP), i.e. a sub-set of services - among those contained in the rulebook - that will have to be supported by the asset holders participating in the SPAA scheme. These will be reflected in an updated version of the rulebook which will clearly identify those mandatory services and be published by Q2 2023; (iii) by Q2 2023, default business conditions, covering a set of default asset fees for the ‘premium’ assets exposed by the asset holder to the asset broker as well as default API access fees for the use of the SPAA API itself, as provided by the asset holder, will be added; and (iv) the SPAA related specifications are envisaged to be added to the API security framework by Q2 2023.

Rulebook

Press Release

Prudential Regulation 

Please see the Markets and Markets Infrastructure section for an update on the Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2022.

EC adopts Implementing Regulation on prudential disclosures on ESG risks under CRR

On 30 November, the EC adopted an Implementing Regulation amending the ITS laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of ESG risks under the CRR. The Regulation specifies uniform disclosure formats and associated instructions for the disclosures required under Title II and III of the CCR. The Implementing Regulation will enter into force twenty days following its publication in the OJ.

Implementing Regulation

HMT and PRA consult on implementation of Basel 3.1 standards

On 30 November, the PRA began consulting on the implementation of the Basel 3.1 standards. The proposals address the last remaining elements of the Basel 3 reforms. They are designed to improve the measurement of risk in internal models (IMs) and standardised approaches (SAs) and reduce excessive variability in the calculation of risk weights, thereby making firms’ capital ratios more consistent and comparable. In particular: (i) a revised SA for credit risk; (ii) revisions to the internal ratings based approach for credit risk; (iii) revisions to the use of credit risk mitigation techniques; (iv) the removal of the use of IMs for calculating operational risk capital requirements, and a new SA to replace existing approaches; (v) a revised approach to market risk; (vi) the removal of the use of IMs for credit valuation adjustment risk, replaced by new standardised and basic approaches; and (vii) the introduction of an aggregate ‘output floor’ to ensure total RWAs for firms using IMs and subject to the floor cannot fall below 72.5% of RWAs derived under SAs, to be phased in over five years. As part of the consultation the PRA has also set out its proposed revised criteria for determining which firms would be in scope of its future ‘strong and simple’ prudential framework. Firms meeting this criteria would not apply the Basel 3.1 standards, but enter a transitional regime, substantively the same as that under the CRR, which would apply until the PRA has completed the permanent framework for the simpler regime. The deadline for responses is 31 March 2023. The implementation date for the proposals for the implementation of Basel 3.1 is 1 January 2025, with the exception of specific provisions that are subject to transitional arrangements. HMT has launched a separate consultation on the legislative changes to the UK CRR that are necessary in order to facilitate the PRA’s implementation of the Basel 3.1 reforms. The proposals set out: (a) the articles of the UK CRR to be revoked in order for them to be replaced with the PRA’s proposed rules; (b) consequential amendments to ensure coherence and continuity of the regime, such as savings provisions; (c) amendments to the equivalence regimes; and (d) the deletion of provisions relating to internal MREL. The deadline for comments is 31 January.

PRA press release – Basel 3.1

PRA press release – strong and simple framework

PRA consultation paper

HMT consultation paper

PRA amends approach to identifying O-SIIs

On 29 November, the PRA published its final policy and feedback to its consultation on its approach to identifying other systemically important institutions (O-SIIs). The PRA has: (i) removed the EBA’s scoring methodology from the O-SII identification process, and deleted the EBA Guidelines, such that the scores used to inform O-SII identification are based solely on the PRA’s scoring methodology; and (ii) updated the specific indicators and weights in the PRA’s scoring methodology for O-SII identification. The PRA has made two modifications to the draft SoP, as consulted on: (a) in response to feedback received, added a paragraph to clarify the interaction of O-SII designation with the O-SII buffer; and (b) in an effort to further streamline the O-SII identification process, the PRA has decided to remove its intention to publish scores and the rationale for any use of supervisory judgement. The PRA explains that O-SII designation is a binary decision, with scores informing the designation decision alongside supervisory judgement; the level of O-SII designated firms’ scores has no implications. The PRA’s updated Statement of Policy (SoP) on its approach to O-SII identification and updated SoP on it and the BoE’s approach to interpreting EU Guidelines and Recommendations are effective immediately from 29 November. The PRA has also published the 2022 list of firms designated as O-SIIs, under the updated policy.

Policy statement

List of 2022 O-SIIs

PRA maintains freeze on O-SII buffer rates for 2022

On 29 November, the PRA confirmed that it will continue to freeze firms’ other systemically important institutions (O-SII) buffer rates for 2022. O-SII buffer rates will therefore be maintained at 2019 levels. The PRA will reassess O-SII buffer rates in 2023 based on the FPC’s updated framework and in line with the PRA’s statement of policy. The decision on O-SII buffer rates taken in December 2023 will be based on end-2022 financial results and will take effect from January 2025.

Statement

Delegated Regulation on specific exotic underlyings and residual risks under the CRR

On 29 November, Delegated Regulation (EU) 2022/2328 supplementing the CRR with regard to RTS specifying exotic underlyings and the instruments bearing residual risks for the purposes of the calculation of own funds requirements for residual risks was published in the OJ. As mandated by Article 325u of the CRR, the RTS: (i) set out non-exhaustive lists of instruments bearing residual risks and risks which should not in themselves trigger the inclusion of an instrument under the definition of instruments bearing residual risks; and (ii) specify that longevity risk, weather, natural disasters and future realised volatility meet the specification of an exotic underlying, in line with the indication provided in the BCBS international framework. The RTS do not further specify what an exotic underlying is, as no further specification of the meaning of an exotic underlying was considered necessary, during the legislative process. The Delegated Regulation is directly applicable in all Member States and will enter into force on 19 December (twenty days after its publication in the OJ).

Delegated Regulation

Recovery and Resolution 

Dominique Laboureix appointed as SRB Chair

On 29 November, Council Implementing Decision (EU) 2022/2331 on the appointment of the Chair and a full-time member of the SRB was published in the OJ. Dominique Laboureix has been appointed as SRB Chair for a five-year term of office, with effect from 9 January 2023. Mr Laboureix will succeed Elke König, who has been SRB Chair since its establishment in 2014. The decision also appoints Tuija Taos as a full-time member of the SRB for a five-year term of office, with effect from 22 March 2023.

Decision

EC adopts three RTS under CCP Recovery and Resolution Regulation

On 25 November, the EC adopted three Delegated Regulations containing RTS supplementing the Regulation on the recovery and resolution of CCPs (CCPRRR): (i) specifying the order in which CCPs are to pay the recompense referred to in Article 20(1), the maximum number of years during which those CCPs are to use a share of their annual profits for such payments to possessors of instruments recognising a claim on their future profits and the maximum share of those profits that is to be used for those payments; (ii) specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources to be used in accordance with Article 9(14); and (iii) specifying the factors to be taken into consideration by the competent authority and the supervisory college when assessing the recovery plan of CCPs. The Council and the EP will now scrutinise the Delegated Regulations. They will enter into force twenty days following their eventual publication in the OJ.

RTS(i)

RTS(ii)

RTS(iii)

Regulatory Reform Post Brexit

FSM Bill third reading scheduled for 7 December

On 1 December, an update was provided on the legislative progress of the FSM Bill, with its report stage and third reading scheduled for 7 December. Amendments can be made to the Bill at report stage. Amendments to be considered are selected by the speaker.

Update

Sustainable Finance

Please see the FinTech section for a joint statement from HMT and the Monetary Authority of Singapore following the seventh meeting of the UK-Singapore Financial Dialogue, where the countries discussed sustainable finance related developments, amongst other items.

Methodology and technical screening criteria for EU taxonomy climate and environmental objectives

On 28 November, the EU Platform on Sustainable Finance published a report providing supplementary advice on the methodology and technical screening criteria for the climate and environmental objectives under the EU Taxonomy Regulation. This report is a supplement to the recommendations published by the Platform in March. The report includes: (i) an update on the work undertaken since March; (ii) a framework methodology to consider in more detail ‘enabling activities’, as defined in Article 16 of the Taxonomy Regulation. The Platform notes that the framework is intended to aid the Platform and the EC in developing criteria for enabling activities, not to provide guidance to companies on whether their activities are ‘enabling’; (iii) recommendations for the EC to consider in its further work on the EU Taxonomy, including that it develop and complete all ‘do no significant harm’ criteria for all objectives, for all activities and that it provide guidance on the application of adaptation criteria; and (iv) additional technical screening criteria that have been developed in the past seven months.

Report

Other Developments

FCA responds to Treasury Committee on improving operational effectiveness

On 1 December, the FCA published its response to the Treasury Committee’s request for an update on the FCA’s improvements to its operational effectiveness. The FCA refers to the detailed report that it published in July as part of its Annual Report, setting out its performance on a number of operating service metrics where it concluded that there is still room for improvement. The FCA discusses its proposals in relation to improving its data reporting metrics, including publishing more detail on the time taken to determine applications.  Following the recommendations of the Gloster report, the FCA now applies additional scrutiny to approved persons, appointed representatives and payments agent applications, which means the historic voluntary service standards are no longer appropriate. Rather than set new voluntary standards, the FCA intends to achieve a greater level of transparency by publishing the average determination times for each of these categories of application. The FCA notes that the data on operational metrics that it chooses to publish will need to be agreed by the FCA Board. It will also discuss its approach with the PRA. Whilst they do not receive the high volume of applications that the FCA receives in some areas, the FCA consider that dual regulated firms would benefit from a degree of consistency.

Response

EU Council adopts DORA

On 28 November, the Council of the EU announced that it has adopted the proposed Regulation on digital operational resilience for the financial sector (DORA) and its related amending Directive. This marks the final step in the legislative process. The legislation will enter into force twenty days following its publication in the OJ. DORA will apply 24 months after entering force, while the amending Directive allows for a 24 month transposition period.

Press release

BoE and FCA update on progress of data collection joint transformation programme

On 28 November, the BoE provided an update on the progress of the joint transformation programme, led by the BoE and the FCA, to transform data collection from the UK financial sector. The update refers to: (i) the progress of phase two of the programme, which began on 22 September; (ii) the progress in implementing recommendations following the end of phase one; (iii) an update on the Data Standards Review, which is now accepting feedback on challenges that the programme seeks to address, on its online portal up until 6 December; and (iv) information about a Town Hall event taking place on 29 November.

Communication

FCA Handbook Notice 104

On 25 November, the FCA published Handbook Notice 104, which sets out changes to the FCA Handbook made by the following Handbook instruments: (i) Pension Schemes (Information to Dashboards) Instrument 2022 – changes effective 30 march 2023; (ii) Prudential Standards for Investment Management Firms (Amendment) Instrument 2022 – changes effective 25 November; (iii) Conduct of Business Sourcebook (Annuitant Mortality Amendment) Instrument 2022 – changes effective 1 October 2023; and (iv) Consumer Credit and Mortgages (High Net Worth) Instrument 2022 – changes effective 25 November 2022.

Handbook notice