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Key Regulatory Topics: Weekly Update 26 Feb - 4 Mar 2021

Our weekly update on key regulatory topics affecting the financial services sector.

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Brexit

FCA provides information on the Temporary Permissions Regime (TPR)

On 3 March, the FCA published new webpages providing information on the TPR. Firstly, the FCA published a webpage on how it will supervise firms in the TPR. The FCA notes that: (i) in most instances, firms in the TPR are supervised in the same way as other authorised firms; (ii) firms within the TPR will also be subject to portfolio analysis – where they cause harm, or pose a significant risk of causing harm, the FCA may use its regulatory tools; and (iii) in some cases, firms in the regime are subject to different rules than applied to them when they were passporting into the UK – for example, rules in relation to safeguarding client money or custody assets, or status disclosure. Secondly, the FCA published a webpage on landing slots for firms in the TPR that have previously passported into the UK under Schedule 3 or Schedule 4 to FSMA in the TPR, setting out what these firms should do when they have received a landing slot to apply for full authorisation in the UK. The FCA explains that the landing slot is the period when a firm can apply for full (non-temporary) Part 4A permission or to vary its existing Part 4A permission if it has a UK top-up permission. Finally, the FCA published a webpage explaining how firms (in the TPR or the supervised run-off (SRO) regime) that no longer have business which requires them to have UK permission, can apply to the FCA to cancel their temporary/limited permission and leave UK regulation. 

Webpage – Supervising Firms in the TPR

Webpage – Landing Slots for Firms in the TPR

Webpage – Cancelling a Temporary Permission 

FCA response to HOC Treasury Committee inquiry into the future of financial services post-Brexit

On 2 March, the HOC Treasury Committee published the FCA’s written response to the Treasury Committee’s inquiry into the future of financial services following the UK’s withdrawal from the EU. The FCA’s response covers: (i) opportunities for the UK’s financial services sector after withdrawal from the EU; (ii) development and scrutiny of financial services policy making after withdrawal from the EU; and (iii) the current challenges facing regulators.

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Capital markets

Please see our Other Developments section for an update on the EC’s speech on its current priorities.

ESMA guidelines on disclosure requirements under the Prospectus Regulation

On 4 March, ESMA published its guidelines on disclosure requirements under the Prospectus Regulation – these apply to competent authorities as defined in the Prospectus Regulation and market participants, including the persons responsible for a prospectus under Article 11(1) of the Prospectus Regulation. ESMA states that the purpose of the guidelines is to help market participants to comply with the disclosure requirements set out in Commission Delegated Regulation (EU) 2019/980, as well as to enhance consistency across the EU in the way that the Annexes to the Commission Delegated Regulation are understood. The guidelines apply from two months after the date of their publication on ESMA’s website in all official languages of the EU.

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UK Listing Review recommends reforms to UK Listing rules to boost growth and markets

On 3 March, the Government published a report on the UK Listing Review (chaired by Lord Hill) which has shown that reforms to the rules that govern how companies raise finance on public markets will ensure that the UK remains one of the most attractive places to grow and list successful innovative companies. Recommendations from the review include: (i) modernising listing rules to allow dual class share structures in the London Stock Exchange’s (LSE’s) premium listing segment, giving directors (in particular, founders) enhanced voting rights on certain decisions, with safeguards to maintain high corporate governance standards; (ii) reducing free float requirements (the amount of a company’s shares that are in public hands) from 25% to 15% and allow companies to use other measures to demonstrate liquidity; (iii) an annual report on the state of the City, and its competitive position, delivered to Parliament by the Chancellor; (iv) rebranding and repositioning the LSE’s standard listing segment to increase its appeal to companies of all sizes and types; (v) a fundamental review of the prospectus regime so that in the future, admission to a regulated market and offers to the public are treated separately; (vi) liberalising the rules regarding special purpose acquisition companies (SPACs), with appropriate safeguards for investors; (vii) making it easier for companies to provide forward-looking guidance when raising capital; (viii) considering how technology can help retail investors participate in stewardship; (ix) updating the FCA’s statutory objectives to include a duty to take into account the UK’s attractiveness as a place to do business; (x) tailoring information to meet investors’ needs better; (xi) improving the efficiency of the listing process; and (xii) addressing issues in the wider financial ecosystem. The Government will examine the review’s recommendations and set out its next steps. In addition, the FCA has published a statement welcoming Lord Hill’s Listing Review report. Amongst other things, the FCA states that it will carefully consider Lord Hill’s recommendations for changes to its listing rules, in line with its objectives, including on free float, dual class share structures, and special purpose acquisition companies (SPACs). The FCA aims to publish a consultation paper by the summer – subject to consultation feedback and FCA Board approval, the FCA will seek to make relevant rules by late 2021.

HMT Press Release

UK Listing Review Report

FCA Statement

Regulation amending the Prospectus Regulation to facilitate the recapitalisation of companies affected by Covid-19 published in OJ 

On 26 February, Regulation (EU) 2021/337, amending the Prospectus Regulation as regards an EU Recovery prospectus and other amendments to facilitate the recapitalisation of companies affected by the Covid-19 pandemic, was published in the OJ. The Regulation will come into force on 18 March (this being the 20th day following its publication in the OJ). 

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Consumer/Retail

In Credit is a podcast series where our leading Consumer Finance team discuss regulatory updates and provide industry insight. Please click here to listen to the most recent episode in which the team discuss what is on the horizon for 2021, rounding up the key matters on the agenda for consumer credit and mortgages. If you would like to keep up to date with the most up to date podcasts, briefings and webinars from our retail and digital finance team, please sign up here.

Please see our Payment Systems and Payment Services section for updates on the: (i) Lending Standards Board roadmap, on the review of the contingent reimbursement model code for authorised push payment scams; and (ii) FCA increasing the thresholds for contactless payments.

Please see our Other Developments section for an update on the FCA’s Handbook Notice 85.

FCA policy statement on Breathing Space Regulations – changes to Handbook

On 26 February, the FCA published a policy statement following its consultation paper 202/21, setting out changes that the FCA is making to the Handbook as a result of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium (England and Wales) Regulations 2020) which come into force on 4 May. The FCA states that it is making the changes to provide clarity on some specific issues where there may be duplication or uncertainty about firms’ obligations under the Regulations and its rules. The FCA is making the changes that it proposed in the consultation to CONC – this is to clarify how its rules apply where the Regulations also apply, and to avoid duplicating the effects of the Regulations in a disproportionate way. As proposed in its consultation, the FCA is not making changes to its rules or guidance in MCOB or CONC 8 (Debt Advice).

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Covid-19

Please see the other sections for product-specific updates relating to Covid-19.

Financial crime

FATF guidance for supervisors on a risk-based approach 

On 4 March, FATF published guidance for supervisors on how to assess risks in the sectors that they oversee and adapt their resources accordingly and includes strategies to address common challenges. FATF has set out: (i) high-level guidance; (ii) practical advice to address common implementation challenges; and (iii) country examples, including strategies and examples of supervision of designated non-financial business and professions and virtual asset service providers. FATF notes that the guidance should be read alongside forthcoming guidance on proliferation financing which explains new requirements introduced in October 2020 for countries and regulated entities to assess proliferation financing risks and implement risk-based measures.

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EBA opinion on key money laundering (ML) and terrorist financing (TF) risks across the EU

On 3 March, the EBA published its biennial opinion on risks of ML and TF affecting the EU’s financial sector. The ML and TF risks identified by the EBA include those that are applicable to the entire financial system (for instance, the use of innovative financial services) while others affect specific sectors (such as de-risking). The list also includes ML and TF risks that emerge from wider developments such as the Covid-19 pandemic that has an impact on both firms’ anti-money laundering (AML) and counter terrorist financing (CTF) compliance and competent authorities’ supervision. The opinion sets out recommendations to competent authorities aimed at closing these gaps.

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Financial Action Task Force (FATF) consultation on draft guidance on proliferation financing risk assessment and mitigation

On 1 March, the FATF published a consultation on its draft guidance on proliferation financing risk assessment and mitigation. The FATF notes that in October 2020, it revised Recommendation 1 and its Interpretive Note (R.1 and INR.1) to require countries, financial institutions and designated non-financial businesses and professions to identify, assess, understand and mitigate their proliferation financing risks.  The FATF states that the guidance seeks to develop a common understanding about the impact of the amendments to R.1 and INR.1, in particular, on how countries and private sector entities could implement the new requirements to assess and mitigate proliferation financing risks given the rules-based nature of the targeted financial sanctions under Recommendation 7. The FATF notes that the purpose of the guidance is to provide: (a) guidance to assist public and private sectors in implementing the new requirements to identify, assess and understand their proliferation financing risk as defined in R.1; (b) guidance to assist public and private sectors in implementing the requirement to mitigate the proliferation financing risks, which they identify; and (c) additional guidance to supervisors/self-regulatory bodies on supervision or monitoring of proliferation financing risk assessment and mitigation.

Consultation 

Webpage

EBA final report on revised AML and CTF risk factors guidelines under the Fourth Money Laundering Directive (MLD4)

On 1 March, the EBA published its final report setting out revised guidelines on customer due diligence (CDD) and the factors credit and financial institutions should consider when assessing ML and TF risk associated with business relationships and occasional transactions under Articles 17 and 18(4) of MLD4. The EBA states that to support firms’ AML/CFT compliance efforts and enhance the ability of the EU’s financial sector effectively to deter and detect ML/TF, these guidelines have been updated regarding: (i) business-wide and individual ML/TF risk assessments; (ii) customer due diligence measures including on the beneficial owner; (iii) TF risk factors; and (iv) new guidance on emerging risks, such as the use of innovative solutions for CDD purposes. The guidelines will be translated into the official EU languages and published on the EBA website, and will apply three months after publication in all EU official languages. Upon the date of application, the original guidelines will be repealed and replaced with the revised guidelines.

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Financial Action Task Force (FATF) outcomes from its February plenary meeting

On 26 February, the FATF published a document setting out the outcomes of its second plenary meeting that took place on 22, 24 and 25 February. Amongst other things, during the discussions, delegates finalised work in a number of important areas: (i) guidance to help countries take an effective, risk-based approach to supervision; (ii) guidance investigating and prosecuting TF; and (iii) work on illicit arms trafficking and TF. Delegates also agreed to release for public consultation draft guidance to assist countries, financial institutions and designated non-financial businesses and professions in identifying, assessing and mitigating the risks of the financing of the proliferation of weapons of mass destruction, as well as updated guidance on virtual assets and virtual asset service providers. The FATF also advanced its work on ongoing key issues, including digitalisation – in particular, the FATF agreed to start new work on digital transformation of AML/CFT for operational agencies. The FATF also continued discussions on the strategic review. Furthermore, delegates explored potential amendments to further strengthen the FATF requirements on beneficial ownership.

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Fintech

Please see our Financial Crime section for updates on the: (i) FATF’s outcomes from its February plenary meeting; and (ii) EBA’s opinion on key ML and TF risks across the EU.

Please see our Capital Markets section for an update on the UK Listing Review report.

Please see our Markets and Markets Infrastructure section for an update on IOSCO’s work programme for 2021-2022.

HMT Kalifa Review on UK FinTech

On 26 February, HMT published a report setting out the findings of the Kalifa Review on UK FinTech. In the report, Ron Kalifa OBE states that the review sets out a strategy and a delivery model for the UK to provide leadership in FinTech. Mr Kalifa has also put forward recommendations to support FinTech scaleups with the capital and skills that they need to succeed – Mr Kalifa emphasises that these measures must be combined with world-leading policy and regulation. The recommendations are divided into a five point plan: (i) policy and regulation; (ii) skills; (iii) investment; (iv) international; and (v) national connectivity. In terms of policy and regulation, the report recommends to: (a) deliver a digital finance package that creates a new regulatory framework for emerging technology; (b) implement a “Scalebox” that supports firms focusing on scaling innovative technology; (c) establish a Digital Economy Taskforce (DET) to ensure alignment across government; and (d) ensure that FinTech forms an integral part of trade policy. The executive summary notes that one year from the report being published, both the public and private sector must come back to report on the progress they have made to deliver the recommendations in this Review. The summary also concludes that the Government should consider appointing a FinTech ‘business champion’, to support FinTech and deliver the report’s strategy.

Report

Executive Summary

Markets and market infrastructure

FCA revises statement of policy about the use of its temporary power under UK MiFIR – double volume cap mechanism 

On 4 March, the FCA published a statement about the use of its temporary power that it has under UK MiFIR. The FCA explains that the temporary power allows it to choose to apply the Double Volume Cap (DVC) if it considers it necessary to advance its integrity objective, for example if dark trading is harming the ability of market participants to make well-informed decisions. In December, the FCA announced that it would not automatically apply the DVC to UK equities and it is now extending this to all equities. In the revised statement of policy, the FCA has set out that it is willing to use its temporary powers flexibly and amend its approach to the DVC if another jurisdiction makes an equivalence decision in respect of the UK.

Statement

Revised Statement of Policy

ESMA publishes results of annual transparency calculations for equity and equity-like instruments

On 1 March, ESMA published the results of the annual transparency calculations for equity and equity-like instruments, which will apply from 1 April. The calculations made available include the: (i) liquidity assessment as per Articles 1 to 5 of Commission Delegated Regulation 2017/567; (ii) determination of the most relevant market in terms of liquidity as per Article 4 of Commission Delegated Regulation 2017/587 (RTS 1); (iii) determination of the average daily turnover relevant for the determination of the pre-trade and post-trade large in scale thresholds; (iv) determination of the average value of the transactions and the related the standard market size; and (v) determination of the average daily number of transactions on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime. ESMA’s annual transparency calculations are based on the data provided to Financial Instruments Transparency System (FITRS) by trading venues and approved publication arrangements in relation to the calendar year 2020. The transparency requirements based on the results of the annual transparency calculations published from 1 March 2021 for equity and equity-like instruments will apply from 1 April 2021 until 31 March 2022. From 1 April 2022 the next annual transparency calculations for equity and equity-like instruments, to be published by 1 March 2022, will become applicable.

Press Release

Equity Transparency Calculation Results

Non-Equity Transparency Calculation Results

International Organization of Securities Commissions Organisation (IOSCO) work programme 2021-2022

On 1 March, IOSCO published its work programme for 2021-2022. IOSCO notes that the work programme encompasses work with respect to two new priorities, namely: (i) financial stability and systemic risks of non-bank financial intermediation activities (NBFI); and (ii) risks exacerbated by the Covid-19 pandemic – misconduct risks, fraud, and operational resilience. Furthermore, IOSCO states that with concerns persisting about the continuing impact of the pandemic on global economic activity and the macro-financial outlook, the response to the pandemic will remain a core focus of the work programme. With respect to sustainability-related issues in capital markets, IOSCO will continue to focus, under the stewardship of its Sustainable Finance Task Force (STF), on three main areas covering: (a) sustainability-related disclosures for issuers; (b) sustainability-related disclosures for asset managers, including greenwashing; and (c) credit rating agencies, ESG ratings, and ESG data providers. IOSCO will also further its efforts in other important areas, including: (1) matters of special importance to growth and emerging markets; (2) the ongoing implications for securities markets of financial innovation and digitalization developments through the ICO and FinTech Networks; (3) its collaboration with other standard setting bodies; (4) implementation monitoring; (5) capacity building for its members; and (6) supporting investor education as a critical pillar of investor protection.

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The Working Group on Sterling Risk-Free Reference Rates (RFRWG) best practice guide for GBP loans

On 26 February, the RFRWG published its best practice guide for GBP loans. The RFRWG notes that the guide is addressed to all parties active in GBP loan markets, including lenders, borrowers, investors, advisors and legal firms. The RFRWG recognises that the loan market involves a wide range of lenders and borrowers, from the most complex global banking groups and largest multinational corporates to the smallest lenders and businesses – accordingly, the latter of these parties may require additional background information and guidance in respect of the cessation of LIBOR and use of SONIA. The guide highlights key conventions and consolidates relevant information from previous RFRWG publications to provide a single point of reference for best practice for GBP loans maturing after the end of 2021. The RFRWG has also published a Q&A on the GBP loan market.

Best Practice Guide

Q&A – GBP loan market

ESMA updates Q&As, templates and technical instructions for securitisation reporting

On 26 February, ESMA announced that it has updated its Q&As, templates and technical instructions for securitisation reporting. ESMA states that the new Q&As include instructions on how to report split and merged underlying exposures. The modified Q&As include revised instructions on how to report income fields for buy-to-let residential real estate mortgages. The revised reporting instructions address technical issues identified by stakeholders since August 2020 – ESMA notes that to facilitate the smooth implementation of the updated rules, reporting entities may choose to use version 1.2.0 or version 1.3.0 of the XML schema and of the validation rules until 1 September of this year. ESMA confirms that as of that date, reporting entities may only use the latest version. ESMA has also published an XML schema for each of the two standard reports which a registered securitisation repository (SR) must provide in accordance with the regulatory technical standards on securitisation repository operational standards: (i) the end-of-day report contains summary information about all securitisations reported to a SR including the name, data cut-off date, data completeness score and the most prevalent type of underlying exposure of each securitisation – this report must be made available by SRs on a daily basis; and (ii) the rejection report contains information about data submissions that were rejected by a SR because they failed to meet one or more requirements including those related to data completeness and consistency – this report must be made available by SRs on a weekly basis.

Press Release

Q&As – Securitisation Regulation 

XML Schema 

Directive amending MiFID II to help economic recovery from Covid-19 published in OJ 

On 26 February, Directive (EU) 2021/338, amending MiFID II to help the economic recovery from the Covid-19 pandemic, was published in the OJ. The Directive amends MiFID II in regard to information requirements, product governance and position limits, specifically how they apply to investment firms. The amendments form part of the EU’s Capital Markets Recovery Package. The Directive is now in force, as of 27 February (the day following its publication in the OJ).

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FCA report on MiFID II – asset management product governance review

On 26 February, the FCA published a report on its review looking at product governance in a sample of eight asset management firms. The review examined how these firms, as product providers (manufacturers), take MiFID II’s product governance rules into account, particularly the interests of the end clients, throughout the product lifecycle. Amongst other things, the FCA states that the review: (i) suggests that some asset managers are not undertaking activities in line with MiFID II’s PROD regime which increases the risk of investor harm, particularly where investors buy products that may not be appropriate – as a result, the FCA believes there is significant scope for asset managers to improve their product governance arrangements; and (ii) found that the reliance on intermediated services in the UK investment market also means manufacturers commonly rely on those who distribute their products to give them relevant information on the end consumer, as the review found that distributors rarely pass this information on to asset managers, hindering firms’ ability to effectively meet best practice on product governance – the FCA notes that asset managers and product distributors need to prioritise effective cooperation and information sharing to address the potential harm to consumers from poor product design and distribution processes. Furthermore, the report sets out the FCA’s key observations from the review, grouped into four main areas: (a) product design; (b) product testing; (c) distributors; and (d) governance and oversight. Following its observations, the FCA notes that it is likely to undertake further work on this subject – part of this may be to consider whether it needs to make further changes to its product governance rules and guidance for both asset managers/manufacturers and distributors.

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ESMA consultation on draft technical standards under the Regulation on European crowdfunding service providers (ECSPR)

On 26 February, ESMA published a consultation paper on its draft technical standards under the ECSPR, seeking input on the following issues: (i) complaint handling; (ii) conflicts of interest; (iii) business continuity plans; (iv) applications for authorisation; (v) information to clients on default rate of projects; (vi) entry knowledge tests and simulation of the ability to bear loss; (vii) key investment information sheets; (viii) reporting by crowdfunding service providers to NCAs (and NCAs to ESMA); and (ix) publication of national provisions concerning marketing requirements. The deadline for comments is 28 May.

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Payment systems and payment services

FCA confirms increase in thresholds for contactless payments

On 3 March, the FCA published a policy statement confirming the increase in the single transaction contactless payment threshold from £45 to £100. Furthermore, the contactless threshold for multiple transactions will increase from £130 to £300. The policy statement includes feedback that the FCA received to its consultation (CP21/3).

Although some respondents expressed concern that higher limits could result in an increase in fraudulent transactions and associated crime, the FCA has concluded that it has not seen evidence to suggest that the increased thresholds will materially increase risk to customers. Furthermore, to support consumers and merchants during coronavirus, the FCA had previously confirmed that they were very unlikely to take enforcement action where a firm fails to require Chip and PIN when a customer exceeds the cumulative transaction value threshold. Though, as a result of the new changes, the FCA states that this flexibility is no longer needed – firms will be required to comply with the new thresholds and the FCA may take appropriate measures, including enforcement action, where breaches of the limits set in new rules are identified.

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Lending Standards Board (LSB) roadmap – review of the contingent reimbursement model code (CRM Code) for authorised push payment (APP) scams

On 1 March, the LSB published a roadmap outlining the activity that it will be undertaking in 2021 as part of its review of the CRM Code for APP scams. The timeline includes updates to the wording of the Code, a Call for Input and ongoing activity with key stakeholders. Furthermore, the LSB has announced that alongside the activity outlined in the roadmap published, it has begun work on a follow up review of provision R2 1(c), approach to reimbursement of customers – the outcomes of this review will be published later this year.

Press Release

Roadmap

Prudential regulation

Please see our Other Developments section for an update on the EC’s speech on its current priorities and timing of implementation of the Basel III standards.

ECB guide on method of determining penalties for regulatory breaches

On 2 March, the ECB published a guide on its method of determining penalties for regulatory breaches under Article 18(1) and (7) of the Regulation establishing the Single Supervisory Mechanism (SSM Regulation). The guide outlines the principles and methods for calculating the penalties used to sanction banks for breaches of prudential requirements. The guide clarifies that the ECB sets the level of a penalty in relation to the severity of the breach and, in order to ensure proportionality, also to the size of the supervised entity. For breaches classified as very severe or below, the ECB sets the base amount for the penalty either with reference to a predefined “penalty grid” according to the severity of the breach and the size of the institution, or by multiplying the total profits gained or losses avoided, if they can be determined, by an amount corresponding to the severity of the breach. Where breaches are classified as extremely severe, the ECB sets the base amount as a percentage of the supervised entity’s total annual turnover. In a final step, the ECB may increase or reduce the base amount to account for all mitigating and aggravating circumstances and ensure that the penalty is proportionate, effective and dissuasive.

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EC adopts draft Delegated Regulation supplementing CRR with regulatory technical standards (RTS) on economic downturn

On 1 March, the EC adopted a draft Delegated Regulation supplementing the CRR with regard to RTS on the specification of the nature, severity and duration of an economic downturn to be taken into account in downturn loss given default (LGD) and downturn conversion factor (CF) estimation, where these parameters are estimated under the IRB approach. The final draft RTS set out a notion of economic downturn, which may encompass one or several disjunctive downturn periods. The nature of an economic downturn is specified by a set of economic factors relevant for the underlying businesses, sectors and jurisdictions. The severity is specified in relation to these economic factors by the worst value observed in the past 20 years on each economic factor. The duration is specified in relation to the downturn periods, which are identified as periods in time where one or several economic factors show their most severe values. Some exemptions are possible for the specification of the severity and duration where the macroeconomic conditions are better captured by these. The EC notes that institutions will use these final draft RTS to identify the relevant downturn periods to be taken into account in downturn LGD and CF estimation. The Council of the EU and the EP will scrutinise the draft Delegated Regulation, which will enter into force 20 days after its publication in the OJ.

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EC adopts draft Delegated Regulation supplementing the CRR – regulatory technical standards (RTS) on the standardised approach for counterparty credit risk

On 1 March, the EC adopted a draft Delegated Regulation supplementing the CRR with regard to RTS on the standardised approach for counterparty credit risk. The final draft RTS specify the method for identifying the material risk drivers of derivative transactions, on the basis of which the mapping to one or more of the risk categories set out in Article 277 of the CRR is to be done. Specifically, the draft RTS set out a three-pronged method for the identification of the material risk drivers of derivative transactions: (i), a purely qualitative approach identifies derivative transactions that have clearly only one material risk driver; (ii) a qualitative and quantitative approach, requiring a detailed assessment of sensitivities of a derivative transaction to risk drivers, identifies the material risk drivers of those derivative transactions for which the mapping cannot immediately be done on the basis of the purely qualitative approach; and (iii) a fallback approach identifies all the risk drivers of a derivative transaction as material. In addition, the final draft RTS set out the formula that institutions are to use to calculate the supervisory delta of options, when mapped to the interest rate risk category, that is compatible with negative interest rates. The Council of the EU and the EP will scrutinise the draft Delegated Regulation, which will enter into force 20 days after its publication in the OJ.

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EBA consultation on draft implementing technical standards (ITS) on prudential disclosures on ESG risks in accordance with Article 449a of the CRR

On 1 March, the EBA published a consultation and fact sheet on draft ITS on prudential disclosures in regard to ESG risks in accordance with Article 449a of the CRR. The consultation paper puts forward proposals on tables and templates that specify the disclosures required in Article 449a CRR, including: (i) tables for qualitative disclosures on ESG risks; (ii) templates with quantitative disclosures on climate change transitional risk; (iii) templates with quantitative disclosures on climate change physical risk; and (iv) templates with quantitative information and KPIs on climate change mitigating measures, including the green asset ratio (GAR) on taxonomy-aligned activities and other mitigating actions. The EBA is proposing a sequential approach for the implementation of the prudential disclosure requirements. In the case of climate change transition risk, the EBA proposes that institutions should disclose information on exposures towards sectors that highly contribute to climate change, with a breakdown on the one hand of exposures towards fossil fuel and other carbon related sectors and on the other hand of taxonomy aligned exposures. In the case of climate change physical risk, the EBA states that institutions should start working on the identification of those exposures towards sectors and geographies exposed to climate change events linked to physical acute and chronic risks, and a disclosure template including this information is included for consultation. Finally, institutions should disclose quantitative information on the actions that they are putting in place to mitigate climate change related risks, including information on taxonomy-aligned actions and on other mitigating actions. On the qualitative side, the EBA includes in the consultation paper three tables that specify the disclosure requirements on qualitative information related to ESG risks. The EBA recommends that the consultation paper is read in conjunction with its final report to the EC under Article 8 of the Taxonomy Regulation (please refer to the sustainable finance section below). The deadline for comments is 1 June. 

Consultation Paper

Factsheet

Corrigendum on amendments to CRR II published in OJ

On 26 February, a corrigendum containing amendments to the CRR II was published in the OJ. Amongst other things, the corrigendum amends provisions in the CRR II relating to: (i) the leverage ratio; (ii) the net stable funding ratio; (iii) requirements for own funds and eligible liabilities; (iv) counterparty credit risk; (v) market risk; (vi) exposures to central counterparties; (vii) exposures to collective investment undertakings; (viii) large exposures; and (ix) reporting and disclosure requirements.

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Recovery and resolution

Single Resolution Board (SRB) Banking Union Resolution Dossier for Financial Market Infrastructures (FMIs)

On 1 March, the SRB published the Banking Union Resolution Dossier for FMIs. The document provides a brief overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to FMIs services in resolution. To the extent necessary, it also covers the resolution framework (institutional setup, objectives and decision processes) and the relevant legal provisions supporting continued access to FMI services in resolution.

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Sustainable finance

Please see our Prudential Regulation section for an update on the EBA’s consultation paper looking at implementing technical standards in relation to Pillar 3 disclosures on ESG risks.

Please see our Markets and Markets Infrastructure section for an update on IOSCO’s work programme for 2021-2022.

Please see our Other Developments section for updates on: (i) HMT’s letter on the remit and recommendations for the Financial Policy Committee (FPC) for 2021; and (ii) the EC’s speech on its current priorities.

EBA and ESMA advise EC on key performance indicators (KPIs) for transparency on institutions’ environmentally sustainable activities 

On 1 March, the EBA published its final report and a related opinion (dated 26 February) which set out its advice to the EC under Article 8 of the Taxonomy Regulation, specifically on the information to be provided by credit institutions and investment firms to comply with their disclosure obligations under the Non-Financial Reporting Directive (NFRD). The EBA notes that: (i) the proposed KPIs, notably a Green Asset Ratio (GAR), will help stakeholders understand institutions’ pathway towards sustainability and financing activities such as those consistent with the Paris Agreement; (ii) proportionality measures and policy recommendations to the Commission are advised in order to facilitate institutions’ disclosures and eventually extend the scope of the KPIs; and (iii) it has developed the advice in parallel and consistently with its consultation on Pillar 3 disclosures on ESG risks, including a common proposal for a GAR. Furthermore, the report elaborates on the definition of KPIs and related methodology for the disclosure by credit institutions and by investment firms of information on how and to what extent their activities are related to economic activities that are environmentally sustainable in accordance with the Taxanomy Regulation. The EBA has also provided advice on qualitative information that institutions should disclose and on policy recommendations to the EC, with a view to facilitating transparency and disclosure by institutions. In addition, ESMA has also published a final report on its advice to the EC under Article 8 of the Taxonomy Regulation. ESMA’s advice on the KPIs that will be disclosed by non-financial undertakings provides the definitions that entities should use for the calculation of the three metrics namely the turnover KPI, the capital expenditure (CapEx) KPI and the operating expenditure (OpEx) KPI. Furthermore, ESMA’s advice sets out the content of the information that should accompany these disclosures and the level of granularity that should be provided to comply with these reporting obligations. ESMA’s advice mainly focuses on activities which are covered by the EU Taxonomy. In respect of asset managers, ESMA proposes the KPI that asset managers should disclose along with a number of methodological considerations relating to the calculation of this metric. ESMA furthermore proposes the use of standardised tables for the Article 8 disclosures by nonfinancial undertakings and asset managers and recommends a transitional application of the Level 2 provisions.

EBA Final Report

EBA Opinion

EBA Opinion – Annex I

EBA Opinion – Annex II 

ESMA Final Report

Other developments

EC speech on its current priorities and timing of implementation of Basel III standards

On 4 March, the EC published a speech by Commissioner McGuinness at a hearing before the Finance and EU Affairs Committees of the French Senate. The speech lays out some of the EC’s priorities: (i) addressing the impact of the Covid-19 crisis, and economic recovery from it; (ii) making sure that the banking sector stays resilient which requires completing the Banking Union; (iii) developing the Capital Markets Union (CMU); (iv) addressing sustainable finance issues; and (v) the importance of the EU’s open strategic autonomy. The speech also notes that in terms of implementation of the final Basel III standards, the EC aims to table a proposal in July.

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HMT letter on the remit and recommendations for the Financial Policy Committee (FPC) for 2021-2022

On 3 March, HMT published a letter from Rishi Sunak (Chancellor of the Exchequer) to Andrew Bailey, (Governor of the Bank of England), setting out Mr Sunak’s perspective on the current economic context and its relevance for the FPC’s priorities for the year ahead. Amongst other things, Mr Sunak notes that: (i) the FPC has a critical role to play in maintaining the resilience and stability of the UK financial system and supporting the government’s economic objective of achieving strong, sustainable and balanced growth; (ii) the current economic circumstances mean that the FPC’s productive finance agenda has taken on heightened importance, as a critical means of examining how the supply of long-term capital, that businesses need to grow, can be facilitated; (iii) the FPC’s continued commitment to the implementation of robust prudential standards in the UK is welcomed; (iv) the FPC is expected to make use of the opportunities arising from the end of the transition period when exercising its functions, with a view to supporting the government’s economic policy towards the financial services industry; (v) the UK will issue its first ever Sovereign Green Bond this year, helping to fund projects to tackle climate change, finance much-needed infrastructure investment, and create green jobs across the UK; (vi) finance will be a key focus of COP26, which will be hosted by the UK in November; and (vii) consistent with its objectives, the FPC should continue to act with a view to building the resilience of the UK financial system to the risks from climate change and support the government’s ambition of a greener industry.

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FCA Handbook Notice 85

On 26 February, the FCA published Handbook Notice 85, setting out changes to the FCA Handbook made by the FCA Board on 25 February. The Handbook Notice outlines changes made to the Handbook by the following instruments: (i) Consumer Credit (Debt Respite Moratorium) Instrument 2021 (FCA 2021/4) – this instrument comes into force on 4 May; (ii) Handbook Administration (No 55) Instrument 2021 (FCA 2021/5) – this instrument comes into force on 26 February; and (iii) Supervision Manual (Reporting No 15) Instrument 2021 (FCA 2021/6) – this instrument comes into force on 4 March. The FCA notes that, as it did not receive responses to its consultation (CP20/23), no alterations were made to its proposals.

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