Skip to content

Key regulatory topics: weekly update 27 March - 2 April 2020

10 April 2020

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

If you would like to receive this update by email and be added to our marketing mailing list please contact regulatorychange@allenovery.com.

Brexit

House of Commons European Scrutiny Committee Third Report - financial services equivalence

On 1 April, the House of Commons European Scrutiny Committee (ESC) published its third report, which includes consideration of, amongst a number of things, the UK's access to the EU financial services markets after Brexit. The report includes the text of a letter (dated 18 March 2020) that the Committee Chair sent to John Glen, Economic Secretary to the Treasury, asking him to clarify the government's position as to a number of unresolved questions, including: (i) links with the wider UK-EU negotiations and the potential for politicisation of the equivalence process; (ii) the specific equivalence assessments the government is prioritising, and whether due to the June deadline, to which the government is attaching such importance, it is seeking only positive equivalence assessments rather than actual legal equivalence decisions – the ESC highlights that EU equivalence decisions would have no legal effect until 1 January 2021 anyway; (iii) if the government does not get a legally binding commitment from the EU on a structured withdrawal of equivalence positions will they refrain from pursuing certain positions due to the risks to market and financial stability; (iv) whether HMT is ruling out seeking equivalence with the EU for the clearing industry if it would restrict the Bank of England's (BoE) supervisory autonomy due to EMIR; and (v) whether the upcoming Financial Services Bill 2019-21 is intended to contain clauses allowing HMT to implement EU financial services legislation after the Brexit transition period. The ESC has asked Mr Glen to respond by 3 April. 

Read more

HL EU Financial Affairs Sub-Committee findings from review of UK financial services post-Brexit

On 27 March, the House of Lords (HL) EU Financial Affairs Sub Committee published a letter to Chancellor, Rishi Sunak outlining its conclusions following a review of the UK financial services sector post-Brexit. The key points include: (i) there is a risk that equivalence decisions, which shouldn't be controversial, may be politicised by broader negotiations and a desire on the part of EU Member States to attract business; (ii) there are concerns that the EU equivalence decisions may depend on alignment with the details of the EU rulebook and therefore could be withdrawn at very short notice; (iii) a regular regulatory dialogue is crucial to provide a forum for resolving any disagreements with a phased, timeline-approach to the withdrawal of any equivalence decisions; (iv) the increased power delegated to UK regulators, whilst allowing for more flexibility to respond to changes, will require increased parliamentary oversight; (v) some divergence may be inevitable and the UK may wish to make targeted adjustment to ensure that the regulatory regime is fit for purpose and encourages innovation, though a 'bonfire of regulation' should be avoided; and (vi) the UK should take a leadership role in promoting international cooperation in financial services, developing common global standards and building closer bilateral relations with similar jurisdictions. 

Read more

Capital markets

ESMA guidance on financial reporting deadlines under Transparency Directive – COVID-19

On 27 March, ESMA, in a public statement, recommended that National Competent Authorities (NCAs) apply forbearance powers towards issuers that need to delay publication of financial reports beyond the statutory deadline under the Transparency Directive (TD). ESMA recommends that: (i) annual financial reports referring to a year-end occurring on or after 31 December 2019, but before 1 April 2020, are extended for a period of two months following the TD deadline; and (ii) half-yearly financial reports referring to a reporting period ending on or after 31 December 2019, but before 1 April 2020, are extended for a period of one month following the TD deadline. ESMA underline however, that issuers should keep their investors informed of any expected publication delays and that requirements under MAR still apply. ESMA will monitor should any further extension of the forbearance period be required. 

Read more

Consumer/retail

Please see the Payment Services and Payment Systems section for the UK Finance announcement of an increase to the contactless card payment limit.

Please see the COVID-19 section for the EBA's guidance on the treatment of public and private moratoria in light of COVID-19 measures. 

FCA consultations on draft guidance regarding personal loans and credit cards – COVID-19

On 2 April, the FCA as part of its package of measures to combat the exceptional circumstances arising as a result of COVID-19, issued two draft guidance setting out its measures in relation to personal loans and those for credit cards. The FCA expects that where a customer is already experiencing or reasonably expects to experience temporary payment difficulties as a result of circumstances relating to COVID-19, and wishes to receive a payment deferral, a firm should grant the customer a payment deferral for 3 months. Where a customer was in pre-existing financial difficulty, the FCA’s existing forbearance rules and guidance in CONC would continue to apply. Firms are not prevented from continuing to charge interest during the 3 month period, but where a customer who received a payment deferral is unable to pay at the end of the period and is entitled to forbearance under the existing rules, the interest should be waived. Firms should ensure that there is no negative impact on the customer’s credit file because of the payment deferral. Firms can offer the customer deferral periods of different lengths, or alternative relief methods, but only as long as the firm reasonably considers it is necessary to treat the customers fairly. A customer should have no liability to pay any charge or fee in connection with the permitting of a payment deferral. The FCA also intends to suspend the ‘persistent debt’ remedies provisions in CONC 6.7.27R to 6.7.40G for certain customers, in relation to communication intervals and deadlines. Firms are also expected to review their credit card rates of interest to consider whether they are consistent with their PRIN 6 obligation. The deadline for comments is 9am, Monday 6 April with measures to come into force by 9 April.

Guidance – credit cards and retail revolving credit

Guidance – personal loans

Consumer Credit (Temporary Covid-19 Support Measures) Order 2020

FCA consultation on draft guidance regarding arranged overdrafts – COVID-19

On 2 April, the FCA, as part of its package of measures to combat the exceptional circumstances arising as a result of COVID-19, issued draft guidance setting out its measures in relation to overdrawn customers. Where a customer was in pre-existing financial difficulty, the FCA’s existing forbearance rules and guidance in CONC would continue to apply. Where a firm provides an arranged overdraft to a customer, and the customer has difficulties with their finances, or reasonably expects to have difficulties with their finances, due to the impacts of COVID-19, the firm should, at the customer’s request and for 3 months provide: (a) an interest free overdraft up to £500 whether that is for already overdrawn customers or for those becoming newly overdrawn; (b) offer interest free increases to overdraft limits below £500; and (c) for customers that are over £500 overdrawn, not charge interest on the first £500. Regarding interest rates, the FCA expects firms: (i) to review and ensure that they are consistent with PRIN 6; and (ii) if the firm increased prices in response to PS19/16, ensure that their customers are not worse off when compared to the prices charged prior. Firms should also reassess their strategies for addressing harm from repeated overdraft use. Firms should ensure that there is no negative impact on the customer’s credit file because they have taken advantage of interest free borrowing for a temporary period - the account of the customer should not be recorded as having any form of detrimental arrears.. The deadline for comments is 9am, Monday 6 April with measures to come into force by 9 April.

Guidance – arranged overdrafts

FCA Dear CEO Letter to firms providing services to retail investors – COVID 19

On 1 April, the FCA published a Dear CEO letter it has sent to the CEOs of firms providing services to retail investors, in the light of the COVID-19 pandemic. The FCA recognises it is a very challenging time for all firms and in order to support firms, set out their approach to issues including: (i) client identity verification, permitting flexibility within the FCA rules to allow for remote verification; (ii) supervisory flexibility, taking no enforcement action, over best execution until the end of June; (iii) supervisory flexibility, taking no enforcement action, over 10% depreciation notifications until the end of September; (iv) a pause on implementation and FCA policy with regards to investment pathways amongst others; (v) clarification as to government schemes to assist firms with their financial resilience and prudential issues. 

Read more

Covid-19

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

Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis

On 2 April, the EBA published more detailed guidance on the criteria to be fulfilled by legislative and nonlegislative moratoria applied before 30 June. The aim of these Guidelines is to (i) clarify the requirements for public and private moratoria; (ii) clarify that payment moratoria, which meet the requirements, do not trigger classification as forbearance or distressed restructuring if the measures taken are based on the applicable national law or on an industry or sector-wide private initiative agreed and applied broadly by the relevant credit institutions; (iii) recall that institutions must continue to adequately identify those situations where borrowers may face longer-term financial difficulties and classify exposures in accordance with the existing regulation - the requirements for identification of forborne exposures and defaulted obligors remain in place; (iv) request that institutions, in order to allow effective monitoring of the effects of the COVID-19 pandemic and the application of response measures, collect information about the scope and effects of the use of the moratoria.

Read more

FCA and PSR support CMA guidance on business cooperation under completion law – COVID-19

On 27 March, the FCA and PSR issued a statement in support of the CMA's guidance on its approach to business cooperation under competition law, which was published on 25 March. Both regulators will take a consistent approach to their competition law enforcement activity in the financial services sector (under the Competition Act 1998 and/or the Treaty on the Functioning of the European Union). The regulators state that it is important that competition law does not impede firms from working together to provide essential services to consumers in the current coronavirus situation, whilst at the same time, neither the FCA nor the PSR will tolerate conduct that seeks to exploit the situation and harms consumers.

Read more

FCA on work-related travel responsibilities of Senior Managers

On 27 March, the FCA issued a statement advising firms on how to prioritise who should need to travel to the office and the responsibilities of Senior Managers in doing so. The FCA states that each firm's designated Senior Manager (or equivalent) is responsible for identifying which of their employees must travel. The FCA would not expect the following to require to travel: (i) financial advisers; (ii) staff who can securely trade shares and financial instruments from home; (iii) business support staff unless looking after specific equipment or technology; and (iv) claims management companies and any others selling non-essential goods and credit. 

Read more

Fees and Levies

PRA policy statement on FSCS Management Expenses Levy Limit 2020/21

On 27 March, the PRA provided feedback to responses to its consultation (1/20) on the 2020/21 FSCS Management expenses levy limit (MELL), including the final rules for the FCSC MELL to apply for the financial year ending 31 March 2021. The MELL is the maximum amount that the FSCS may levy for management expenses in a year without further consultation. The PRA and FCA did not consider that any of the responses raised issues to the proposed MELL of £83.2 million. 

Read more

Financial crime

FATF President on measures to combat illicit financing – COVID-19

On 1 April, FATF issued a statement by its President on addressing COVID-19-related financial crime risks. FATF, amongst other things (i) requests that supervisors, financial intelligence units and law enforcement agencies continue to share information with the private sector to prioritise and address key ML risks, particularly those related to fraud, and TF risks linked to COVID-19; (ii) cautions that criminals and terrorists may seek to exploit gaps and weaknesses in national anti-money laundering/counter-financing of terrorism (AML/CFT) systems while they assume resources are focused elsewhere; (iii) encourages the use of digital/contactless payments and digital on boarding as a means of reducing the risk of spreading the virus; (iv) highlights the vital work of charities and NPOs to combat COVID-19 and asks national authorities and financial institutions to apply a risk-based approach to ensure that legitimate NPO activity is not unnecessarily delayed, disrupted or discouraged; and (v) summarises its efforts with international organisations and those of national bodies to ensure coordinated policy responses and mitigate the impacts of the crisis. 

Read more

EBA statement on actions to mitigate financial crime risks – COVID-19

On 31 March, the EBA issued a statement on actions to mitigate financial crime risks in light of the pandemic. The EBA reminds credit and financial institutions that it remains important to continue to put in place and maintain effective systems and controls to ensure that the EU’s financial system is not abused for money laundering or terrorist financing (ML/TF) purposes whilst asking competent authorities to support them in this regard. The EBA states that there is some indication of increased levels of cybercrime, COVID19-related scams, and criminal networks selling rationed goods at a higher price. The EBA therefore urges competent authorities, to inter alia: (i) work closely with other authorities; (ii) ensure that there is awareness of new ML/TF risks that may arise as a result of the financial downturn and update assessments accordingly and (iii) remind credit and other financial institutions to continue monitoring transactions and take risk sensitive measures to establish the legitimate origin of unexpected financial flows, where they stem from customers in sectors impacted by the economic downturn. The EBA expects competent authorities to plan their supervisory activities pragmatically such as by postponing non-essential onsite inspections. 

Read more

Fund regulation

ESMA consultation on standardised information to facilitate cross-border funds distribution

On 31 March, ESMA began consulting on draft ITS to determine the standard forms, templates and procedures for the publication and notifications that national competent authorities (NCAs) are required to make, under Regulation (EU) 2019/1156 in relation to (i) national provisions concerning marketing requirements applicable within their jurisdiction; and (ii) fees and charges levied by them in relation to activities of AIFMs, EuVECA managers EuSEF managers and UCITS management companies. The ITS must also specify the information necessary for the creation and maintenance of the central database on cross-border marketing of AIFs and UCITS, and the technical arrangements necessary for the functioning of the notification portal where the NCA uploads this documentation. The deadline for comments on this consultation is 30 June. ESMA expects to publish a final report by 2 February 2021. 

Read more

ESMA delays submission date for first reports by Money Market Funds (MMF) until September On 31 March, ESMA announced that it was delaying the submission dates for MMF managers' first reports from April until September. ESMA states that this is due to an update to the XML schemas that should be used following feedback on the first schemas, used last year, by market participants and its technical committee. The amended schemas will be published shortly. Due to the delay, MMF managers will be expected to submit quarterly reports for Q1 and Q2 in September. 

Read more

ESMA consultation on guidance to address leverage risk in the AIF sector

On 27 March, ESMA began consulting on its draft guidance on Article 25 of Directive 2011/61/EU (AIFMD) as part of its response to the April 2018 recommendations of the ESRB to address liquidity and leverage risk in investment funds. Article 25 requires NCAs to identify the extent to which the use of leverage in the AIF sector contributes to the build-up of systemic risk, disorderly markets and risks to long-term growth of the economy. The guidance is seen as crucial given the rapid expansion of the investment fund sector and the higher risk-taking due to low interest rates. The draft guidelines aim to promote supervisory convergence in the way NCAs asses how the use of leverage within this sector contributes to the build-up of systemic risk, as well as how they design, calibrate and implement leverage limits. The deadline for comments is 1 September.

Read more

Markets and markets infrastructure

ESMA technical advice on impact of the MiFID II inducements and costs and charges disclosure requirements

On 1 April, ESMA published a final report, dated 31 March setting out its technical advice to the EC on the impact of inducements and costs and charges disclosure requirements under the MiFID II. This final report solely deals with technical advice in relation to certain investor protection topics under MiFID II: (i) the second paragraph of Article 24(9) of MiFID II on the provision of investment services and ancillary services other than portfolio management and investment advice provided on an independent basis; and (ii) Article 24(4)(c) of MiFID II on the provision of investment services and ancillary services. The report summarises the feedback received to the Call for Evidence published by ESMA on 17 July 2019 and the rationale behind ESMA’s final proposals.

Read more

ESMA completes review of MiFID II commodity derivatives regime

On 1 April, ESMA published a review report and technical advice to the EC on the impact of position limits and position management on commodity derivatives markets, following over two years of MiFID II. The report contains proposals to make the commodity derivatives framework operate more efficiently for market participants and competent authorities. The report inter alia: (i) provides a summary of the position limit regime under MiFID II and an assessment of the impact of the application of position limits on market abuse, orderly pricing and settlement conditions; (ii) provides an assessment of the impact of position limits on the liquidity of commodity derivatives markets and sets out proposals for amending the Level 1 text in order to improve the efficiency of the position limit regime; (iii) assesses the impact of position management controls on commodity derivatives markets and proposes to amend the Level 1 text to further enhance convergent implementation by trading venues' and (iv) considers the impact of Brexit on the position limit regime and the commodity derivatives framework. The review report will feed into the EC’s review on the same matter. Review Report

Technical Advice

ESMA clarifies issues related to reporting by execution venues and firms under RTS 27/8 – COVID 19

On 31 March, ESMA published a public statement clarifying issues relating to the rules under MiFID II RTS 27 and RTS 28 on publication of general best execution reports by execution venues and firms and to promote coordinated action by competent authorities (NCAs). Due to the exceptional circumstances created by the COVID-19 outbreak ESMA recommends that NCAs consider the possibility that: (i) execution venues unable to publish RTS 27 reports due by 31 March may only be able to publish them as soon as reasonably practicable after that date and no later than by the following reporting deadline (on 30 June); and (ii) firms may only be able to publish the RTS 28 reports due by 30 April on or before 30 June. ESMA encourages NCAs to generally apply a risk based approach in the exercise of supervisory powers in their day-to-day enforcement of RTS 27 and 28 concerning these deadlines and not to prioritise supervisory action in respect of the deadlines for the periods referred to above. ESMA recommends that firms and execution venues keep records of the internal decisions taken in relation to the expected delay.

Read more

FCA updates statement on short selling bans and reporting – COVID-19

On 31 March, the FCA announced that it would begin applying ESMA's decision to temporarily amend the threshold for notifying net short positions to competent authorities under the SSR from 0.2 to 0.1% of issued share capital from Monday 6 April. The slight delay from the FCA's initial confirmation on 17 March was to enable the regulator to make the required changes to its systems. Firms are not required to amend and resubmit notifications submitted before 3 April. The FCA requests firms to make best efforts to report at the new lower threshold and to contact them should they not be able to amend their systems by this date. The new reporting obligation applies only to shares for which the FCA is the relevant competent authority, and therefore not to those where the principal venue for the trading of the shares is located outside of the EU, in line with the SSR. 

Read more

ESMA technical advice on procedural rules for penalties imposed on TC-CCPs, TRs and CRAs

On 31 March, ESMA published its final report on its technical advice to the EC on the rules of procedure to impose penalties on third country central counterparties (TC-CCPs), trade repositories (TRs) and credit rating agencies (CRAs). In the final advice ESMA includes proposals for draft procedural rules on the imposition of penalties on TC CCPs and amendment proposals to the current imposition of penalties rules for TRs. ESMA is also including proposals to align the procedural rules applicable to CRAs with the proposed procedural rules applicable to TRs and TC CCPs. ESMA is advising solely on the procedural aspects. ESMA will submit the technical advice to the EC.

Read more

ESMA final report on draft RTS for CCP colleges under EMIR 2.2

On 30 March, ESMA published its final report containing amended draft RTS for CCP colleges under EMIR 2.2. The proposed amendments are limited in scope and concern the practical arrangements for the functioning of the college regarding: (i) voting procedures; (ii) college meetings' agenda setting procedures; (iii) review and evaluation of the arrangements, strategies, processes and mechanisms implemented by the CCP and the risks to which the CCP is exposed; (iv) the minimum timeframes for the assessment of the relevant documentation by college members; and (v) the modalities of communication between college members. Following endorsement by the EC, the Commission Delegated Regulation will then be subject to the non-objections of the EP and the CEU. 

Press release

Final report

ESMA confirms application date of equity transparency calculations under MiFID/MIFIR – COVID-19 On 30 March, ESMA issued a press release (dated 27 March), confirming that it has decided not to change the application date of 1 April for transparency calculations for equity instruments, despite requests for a delay by some stakeholders due to the extraordinary market circumstances arising from the COVID-19 pandemic. ESMA reasons that adapting to new transparency results for equity instruments is a process that market participants have performed several times in the past and it should not require IT releases. Delaying the application date would in itself entail some risks and create operational burdens for those that have already planned. The results of the MiFID II/MiFIR transparency calculations for equity instruments were published on 28 February. As announced on that date, ESMA will also publish ahead of 1 April the result for several instruments that were not published then due to data quality limitations. 

Read more

ESMA call for evidence on credit rating information and data

On 30 March, ESMA published a call for evidence to gather information on the specific uses of credit ratings and how users of the ratings are currently accessing this information. ESMA will use the feedback to map the principal activities (regulatory or otherwise) such as risk management, market research and regulatory reporting in order to identify users' specific rating data needs and how they correspond with the information currently provided. ESMA is also seeking an answer as to why users often choose to subscribe to third party data fee service providers rather than rely on the information published free of charge on the credit rating agencies (CRAs) and European Rating Platform's (ERP) websites. The deadline for comments is 3 August and is open to all interested stakeholders. 

Press release

Call for Evidence

ESMA consultation on draft ITS and RTS in relation to trade repositories (TRs) under EMIR Refit On 27 March, ESMA published its consultation (dated 26 March) on the technical standards on reporting requirements and procedures to reconcile and validate the data and access by the relevant authorities under EMIR Refit. ESMA also proposes to revise certain aspects of reporting to the TRs in order to align EU reporting requirements with the global guidance as developed by CPMI and IOSCO. Specifically the consultation covers: (i) ITS on the reporting of derivatives to TRs; (ii) ITS and RTS on the registration of TRs; (iii) RTS on the procedures to be applied by TRs to reconcile and validate the data; (iv) RTS on the publication and provision of data by the TRs to the relevant authorities; and (v) proposed amendments to the RTS on reporting of derivatives to the TRs pursuant to the empowerment set out in the Regulation (EU) No 648/2012 (EMIR). The proposals on which ESMA is consulting build up on the existing rules and on the experience in implementing EMIR since 2012 thus address several essential aspects related to enhancement of the quality of the reported derivatives data. The deadline for comments is 19 June and ESMA expects to publish the final report for EC endorsement in Q4 2020. 

Read more

Two Delegated Regulations with regards to EMIR RTS published in OJ

On 27 March, Commission Delegated Regulation (EU) 2020/448 was published in the OJ. It amends the EMIR RTS in Commission Delegated Regulation (EU) 2016/2251, as regard the treatment of OTC derivatives in connection with certain simple, transparent and standardised securitisations (STSs) for hedging purposes. It provides that securitisation special purpose entities (SSPE), for OTC derivatives in connection with securitisations that meet the requirements to be classified as STSs, will be exempted from posting and collecting initial margins and from posting variation margins. Commission Delegated Regulation (EU) 2020/447 was also published, supplementing EMIR with regards to RTS on criteria for establishing the arrangement to adequately mitigate counterparty credit risk associated with covered bonds and securitisations, and amending Delegated Regulations (EU) 2015/2205 and (EU) 2016/1178. Amongst other things it: (i) sets out the clearing exemption conditions for OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond and by a SSPE in connection with a securitisation; and (ii) addresses the new drafting of EMIR Article 4 which includes two clearing exemption conditions for covered bonds included in the delegated regulations it amends. Both Delegated Regulations will enter into force and apply on 16 April.

Commission Delegated Regulation (EU) 2020/448

Commission Delegated Regulation (EU) 2020/447

Payment services and payment systems

Please see the Other Developments section for the PSR's statement in support of the CMA's guidance on its approach to business cooperation under competition law in response to COVID-19. 

UK Finance on Contactless card payment limit increase – COVID-19

On 1 April, UK Finance announced an immediate spending limit increase for contactless card payments from £30 to £45 across the UK. This increase follows swift action by the payments industry to increase the contactless limit as part of the financial services industry’s response to the Covid-19 pandemic. The decision to raise the limit was taken following consultation between the retail sector and the finance and payments industry and follows similar increases in several other European countries. The payments industry, including all contactless card issuers, has completed all the work to enable retailers to upgrade as soon as they are able to. If a retailer wants to start accepting contactless payments at the higher limit of £45 it should get in touch with its acquirer.

Read more

FCA updates on Strong Customer Authentication (SCA) – COVID-19

On 31 March, the FCA updated its SCA webpage, explaining that it expects firms to protect consumers from risks, including the risk of unauthorised transactions and fraud. The FCA expects firms to monitor their fraud rates and take swift action if they see their fraud rates rising or new patterns of fraud. However the FCA has taken some measures to assist firms: (i) it welcomes the industry's initiative to increase the contactless limit, confirming that, it is very unlikely to take enforcement action if a firm does not apply SCA when the cumulative amount of transaction values has exceeded EUR50 or there are five contactless transactions in a row, as long as the firm sufficiently mitigates the risk of unauthorised transactions; (ii) the FCA will monitor the situation and delay SCA progress milestones if necessary; and (iii) for online banking firms to which SCA already applies and which are facing further delays due to COVID-19, the FCA will consider appropriate further measures on a case-by-case basis. 

Read more

PSR annual plan and budget for 2020/21

On 31 March, the PSR published its annual plan and budget, setting out its key aims and activity for the coming year. The plan was drafted prior to the uncertainty that has arisen as a result of the COVID-19 pandemic, so it is likely that the work plans contained will continue with a slightly revised timetable. The PSR affirms its commitment to allow all firms to focus their efforts on supporting their customers and has extended certain deadlines in response. The PSR's key initiatives include: (i) the ongoing work with Pay.UK in building the New Payments Architecture; (ii) a card-acquiring market review; (iii) publishing updated powers and procedures guidance in response to its recent consultation; (iv) working with the payments industry, FCA and other authorities to ensure reasonable coverage of ATM networks and to support other ways of accessing cash; and (v) workstreams on authorised push payment scams such as ensuring compliance with Specific Direction 10 and ensuring adequate protection through the contingent reimbursement model code. 

Read more

Prudential regulation

PRA statement on regulatory reporting and Pillar 3 disclosure amendments – COVID-19

On 2 April, the PRA outlined their amended approach to regulatory reporting and Pillar 3 disclosure for UK banks, building societies, designated investment firms and credit unions, where the deadlines fall on or before 31 May, in response to COVID-19 and the EBA's statement on 31 March (see below). For CRR and BRRD reporting the PRA will accept a delay of up to one month, except for (i) information on liquidity coverage ratio and on the Additional Liquidity Monitoring Metrics; and (ii) information on institutions’ liability structure, including intra-group financial connections that is required as part of reporting for resolution planning purposes. For PRA-owned regulatory reporting, the PRA will accept a delay of up to one month, except for annual reports and accounts, for which it will allow a two month delay. The statement also contains advice as to branch returns and funding plans. Pillar 3 disclosures, as they are required to be published in accordance with financial statements under the CRR, will also be afforded a two month delay (or a reasonable amount of time after the financial statements as is usual practice). For quarterly, half-yearly or annual disclosures that firms would normally expect to disclose on or before 31 May, the PRA will take a flexible approach to assessing the reasonableness of any delay to the publication of the Pillar 3 disclosure. Where firms follow the EBA's recommendation to assess the need for additional disclosures on the impact of COVID-19 and, in that context, choose to make additional disclosures relating to the LCR, these should be calculated using the average of 12-monthly end points as specified in the EBA guidelines on the LCR disclosure. Firms should inform supervisors and market participants of any delay in relation to Pillar 3 reports. 

Read more

Joint PRA and HMT statement on the implementation delay of the outstanding Basel III standards

On 2 April, HMT and the PRA welcomed the announcement made on 27 March by the Group of Central Bank Governors and Heads of Supervision (GHOS), delaying the implementation of the outstanding Basel III standards by one year. The PRA/HMT stated that it will provide operational capacity for banks and supervisors to respond to the immediate financial stability priorities from the impact of Covid-19. They remain committed to the full, timely and consistent implementation of the Basel III standards and will work together towards a UK implementation timetable that is consistent with the one year delay. Read more

PRA statement on deposit takers’ approach to dividend payments, share buybacks and cash bonuses – COVID-19

On 31 March, the PRA issued a statement on deposit takers’ approach to dividend payments, share buybacks and cash bonuses in response to COVID-19. The PRA welcomes the decisions by the boards of the large UK banks to suspend dividends and buybacks on ordinary shares until the end of 2020, and to cancel payments of any outstanding 2019 dividends in response to the PRA's request. The PRA also expects banks not to pay any cash bonuses to senior staff, including all material risk takers, and is confident that bank boards are already considering and will take any appropriate further actions with regard to the accrual, payment and vesting of variable remuneration over coming months. Read more

EBA statement on supervisory reporting and Pillar 3 disclosures – COVID-19

On 31 March, the EBA issued a statement on supervisory reporting and Pillar 3 disclosures in the light of the COVID-19 pandemic, with the aim of providing additional clarity to its statement on 12 March by outlining further possible actions to be taken by firms, national competent authorities (NCAs) and national resolution authorities (NRAs). NCAs and NRAs should assess the extent to which a delayed submission of all the data or subsets of the data included in the EBA reporting framework would be justified in these extraordinary circumstances, allowing up to one additional month for submitting data. The EBA advises that this additional period should not apply to information on the liquidity coverage ratio or the additional monitoring metrics, or for reporting for resolution planning purposes. For the time being, such supervisory actions are only being considered for submissions due between March and end of May. The EBA, recommends that NCAs are flexible when assessing firms' compliance with the publication deadlines for their Pillar 3 reports. In addition, NCAs and firms should assess the need for additional Pillar 3 disclosures on prudential information that may be necessary to properly convey the risk profile of a firm in the context of COVID-19. Read more

EBA statement on dividends distribution, share buybacks and variable remuneration – COVID-19 On 31 March, the EBA issued a statement supporting the measures taken so far by national competent authorities to ensure banks maintain a sound capital base, emphasising the importance that the capital relief resulting from these measures is not used to increase the distribution of dividends or remunerate shareholders. The EBA urges all banks to refrain from these activities reverting to their competent authorities should they consider themselves legally required to pay-out dividends. The EBA also asks competent authorities to ask banks to review their remuneration policies, practices and awards to ensure that they are consistent with and promote sound and effective risk management also reflecting the current economic situation. The EBA states that remuneration should be set at a conservative level, suggesting that a larger part of the variable remuneration could be deferred for a longer period and a larger proportion could be paid out in equity instruments. 

Read more

Implementing Regulation amending ITS on supervisory reporting under CRR published in OJ

On 30 March, Commission Implementing Regulation (EU) 2020/429 amending Implementing Regulation (EU) 680/2014 laying down ITS on supervisory reporting of institutions under the CRR was published in the OJ. It amends the supervisory reporting requirements of: (I) common reporting (COREP); and (ii) financial information reporting (FINREP) on non-performing exposures (NPE) and forbearance to allow the monitoring of reporting institutions' NPE strategies, the reporting requirements on P&L items and the implementation of the new IFRS 16 on leases. It entered into force on 31 March, with the amendments to the reporting framework applying on later dates for: (a) own fund and own funds requirements, 30 March; (b) liquidity, 1 April; and (c) NPEs, debt obligations subject to forbearance measures, operating and administrative expenses and financial information, 1 June. 

Read more

PRA statements on temporary approach to VAR back-testing and calculating the exposure value for counterparty credit risk – COVID-19

On 30 March, the PRA issued a statement on its approach to VAR back-testing exceptions due to exceptional levels of market volatility leading to elevated levels. In order to mitigate the possibility of excessively pro-cyclical market risk capital requirements through the automatic application of a higher VAR multiplier, firms may temporarily offset increases through a commensurate reduction in risks-not-in-VAR capital requirements. The PRA will review in September. The PRA also issued a statement with regard to the significant shifts in counterparty credit risk exposures experienced by some firms as a result of large margin calls after intraday market price movements, leading them to temporarily have material overnight unsecured exposures on collateralised portfolios. The PRA clarifies, inter alia, that the CRR does not preclude firms from using the internal models method to measure the exposure value including collateral which has not yet settled at the time of calculation. 

VAR back-testing approach statement

Calculating exposures under IMM CCR statement

EBA final draft RTS on key areas for the implementation of the FRTB

On 27 March, the EBA published its final draft RTS on the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB).The RTS on liquidity horizons for the IMA clarifies, inter alia, how institutions are to map risk factors to the relevant category and subcategory as well as providing a definition of large and small capitalisation reflecting the specificities of the EU equity market. The RTS on back-testing and profit and loss attribution (PLA) requirements specify, inter alia: (i) the elements to be included for the purpose of those tests in the hypothetical, actual and risk-theoretical P&L; (ii) all keyelements characterising the PLA requirements; and (iii) the formula for institutions to use for aggregating the own funds requirements. The RTS on criteria for assessing the modellability of risk factors under the IMA set out, inter alia: (a) the criteria for identifying the risk factors that are modellable and that institutions may therefore include in their expected shortfall calculations; and (b) the frequency under which the assessment should be performed. The adoption of these RTS is expected under CRR2, to trigger the 3 year period after which institutions with the permission to use FRTB internal models must, for reporting purposes, calculate their own funds requirements for market risk with those internal models.

Read more

ECB requests banks not to pay dividends or buy back shares until at least October – COVID-19 On 27 March, the ECB updated its recommendation to banks on dividend distributions, in that they should refrain from share buy-backs aimed at remunerating shareholders and from paying dividends for financial years 2019/20 until at least 1 October. The ECB's reasoning is for institutions to conserve capital in order to retain their capacity to support the economy in the current context of heightened uncertainty. This does not retroactively cancel any dividends already paid out by some banks, however it does apply to any proposals that banks have asked for shareholders to vote on in their upcoming general meetings. The ECB will continue to evaluate the situation. 

Press release

ECB Recommendation

BCBS defers Basel III implementation – COVID-19

On 27 March, BCBS's oversight body, the Group of Central Bank Governors and Heads of Supervision endorsed a set of measures to provide additional operational capacity for banks and supervisors to financial stability priorities arising as a response to the COVID-19 pandemic. The measures comprise a deferral of the implementation dates of the outstanding Basel III standards by one year. Specifically, a deferral until 1 January 2023: (i) for the standards finalised in December 2017 (with a deferral of one year until 1 January 2028 for the accompanying transitional arrangements for the output floor); (ii) for the revised market risk framework finalised in January 2019; and (iii) for the revised Pillar 3 disclosure requirements finalised in December 2018. A summary table is include in the Annex to the press release. 

Read more

Recovery and resolution

SRB ' Expectations for Banks' 

On 1 April, the SRB published its final 'Expectations for Banks (EfB)' document along with an overview of its responses to the industry consultation that took place between October and December last year. The EfB sets out the capabilities the SRB expects banks to demonstrate in order to show that they are resolvable. It describes best practice and sets benchmarks for assessing resolvability, setting out specific principles in relation to seven 'dimensions' of resolvability including governance, loss absorbing and recapitalisation capacity, separability and restructuring. The main change in response to the consultation is with regards to a new chapter on the gradual phase-in of the EfB up to the end of 2023, except where indicated otherwise. The expectations are tailored to each individual bank and its resolution strategy, allowing for flexibility and proportionality. Should it be required due to COVID-19, the SRB will give banks flexibility to implement the EfB on an individual basis. 

Press release

Expectations for Banks

Industry responses

SRB letter on operational relief measures for resolution planning and MREL – COVID-19

On 1 April, the SRB published a letter that it sent to banks under its remit, outlining potential operational relief measures related to the COVID-19 outbreak. The SRB is committed to working on the 2020 resolution plans and MREL decisions according to the planned deadlines in early 2021. However, in close cooperation with national resolution authorities, the SRB will apply a pragmatic and flexible approach in order to consider, where necessary, postponing less urgent information or data requests. The SRB consider The Liability Data Report, the Additional Liability Report and the MREL quarterly template too essential to be delayed. Internal Resolution Teams will assess difficulties in achieving work programme updates and in submitting other deliverables on an individual basis with banks. The SRB will monitor market conditions and analyse the potential impact on transition periods needed for the build-up of MREL. It will adapt transition periods and interim targets applied to banking groups and adjust MREL targets in line with capital requirements, with particular reference to capital buffers if considered necessary. 

Read more

Sustainable finance

Postponement of COP 26 UN climate change – COVID 19

On 1 April, the President-Designate of the 26th conference of the parties (COP 26) to the United Nations

Framework Convention on Climate Change (UNFCCC) and Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma, announced that COP 26, due to take place in November, would be postponed until 2021 due to the COVID-19 pandemic. Dates for a rescheduled conference in 2021, hosted in Glasgow by the UK in partnership with Italy, will be set out in due course following further discussion with parties. The UK government said it would continue to work with all involved to increase climate ambition, build resilience and lower emissions.

Read more

Guidance on Impact Analysis and Portfolio Impact Analysis Tool for banks

On 31 March, the UN Environment Programme Finance Initiative (UNEP FI) published a guidance document on impact analysis for banks and a portfolio impact analysis tool, through a collaboration of Principles for Responsible Banking Signatories and UNEP FI member banks. The guidance document on impact analysis provides banks with: (i) more detailed explanations of the requirement for conducting an impact analysis; (ii) what data is required; (iii) who in a bank one should reach out to; and (iv) examples of the external stakeholders that banks can engage with. The analysis tool guides banks through a holistic analysis of their retail and wholesale portfolios. UNEP FI describe the tool as a significant step for impact analysis in banking. UNEP FI encourages banks to join the working group on 'application and further development of the Portfolio Impact Analysis Tool for Banks', which provides support and training on using the tools.

Read more

Other developments

FSB reprioritises work programme and addresses financial stability risks of COVID-19

On 2 April, the Financial Stability Board outlined in a new webpage its work to address the financial stability risks of COVID-19 and explained the effect this has had on its 2020 work programme. The FSB's overall COVID-19 work includes: (i) regularly sharing information on evolving financial stability threats and on financial authorities' policy measures; (ii) assessing financial risks and vulnerabilities; and (iii) coordinating policy responses to maintain global financial stability, keep markets open and functioning, and preserve the financial system’s capacity to finance growth. The main elements of the reprioritisation of its work programme include: (a) focusing on the impact of COVID-19 on the resilience of the financial system; (b) timely discussion of policy issues arising from vulnerabilities in non-banking financial intermediation that are surfacing in the COVID-19 crisis, and decisions on how to organise such work in the FSB going forward; (c) in relation to financial innovation, prioritisation will ensure that key deliverables to the Saudi G20 Presidency will be provided, and that the FSB completes initiatives on topics that are likely to remain of policy relevance in the near term; (d) the three-stage work to develop a roadmap on cross-border payments, in coordination with the Committee on Payments and Market Infrastructures (CPMI), will continue as scheduled; (e) technical work on central counterparty resolution and the implementation of the Total Loss-Absorbing Capacity standard remains a priority; (f) in relation to OTC derivatives, finalising the oversight arrangements for Unique Product Identifier (UPI) and Unique Transactions Identifier will continue as the UPI service provider awaits clarity on the oversight arrangements; (g) the transition from LIBOR remains a priority as firms cannot rely on LIBOR being produced after end 2021; (h) implementation monitoring will track regulatory relief measures taken by international standard setting bodies. The FSB explains that other work not mentioned will be reduced to the completion of near-final projects and the production of a streamlined annual report to the G20.

Read more

FCA Handbook Notice 75

On 27 March, the FCA published its latest Handbook notice to reflect and summarise the changes made by: (i) Handbook Administration (No 52) Instrument 2020; (ii) Financial Services Compensation Scheme (Management Expenses Levy Limit 2020/2021) Instrument 2020; (iii) Listing Rules (Contents of Circulars) (Amendment) Instrument 2020; and (iv) Listing Rules (Disclosure of Rights of Securities) Instrument 2020. 

Read more