Key Regulatory Topics: Weekly Update 29 April - 5 May 2022
06 May 2022
It has been another relatively quiet week in the UK, perhaps due to the bank holiday, but the PRA has published a consultation paper on the definition of a ‘Simpler-regime firm’ under the proposed new prudential framework for non-systemic domestic banks, whilst the FCA has published speeches on supporting consumers in challenging times and capitalising on innovation.
In Europe, the European Supervisory Authorities have been busier, publishing a report setting out technical advice to the European Commission in response to a call for advice on the PRIIPs Regulation review. The EBA also responded to the European Commission’s call for advice on non-bank lending, and to its call for advice on the EU macroprudential framework review. In addition, ESMA published its final report on certain aspects relating to retail investor protection topics under MiFID II. On the ESG front, the EBA published a discussion paper on the role of environmental risks in the prudential framework and the FSB published an interim report for consultation on supervisory and regulatory approaches to climate-related risks.
EC call for evidence on retail investment legislative package
On 3 May, the EC published a call for evidence on a retail investment package of measures to increase consumer participation in capital markets as part of its Retail Investment Strategy. The purpose of the measures is to ensure that the legal framework for retail investments empowers consumers, enhances their participation in the capital markets and helps ensure improved market outcomes. The initiative aims to increase the level of retail investor participation in the EU’s capital markets and ensure that retail investors can take full advantage of capital markets, achieve better outcomes and better cater for their long-term financial needs. The call for evidence indicates that the types of measures the EC could explore to address identified problems include: (i) making improvements to the current disclosure regimes and promoting efforts at national level to enhance financial literacy (including on sustainability aspects); (ii) addressing conflicts of interest in the advisory and non-advisory process and improving professional standards of advisors; (iii) reducing the administrative burden for retail investors with sufficient financial capacity and knowledge and experience; (iv) shifting the focus of current suitability and appropriateness regimes from a product-centric approach to a client centric approach; (v) adapting rules to embrace the safe development of digital technology and its deployment in retail investing; and (vi) streamlining and ensuring consistency of rules across the different sectoral legislative instruments. The deadline for responses is 31 May. Responses will help inform an impact assessment on the proposed package of measures, scheduled to be submitted to the EC’s Regulatory Scrutiny Board in September. The EC plans to potentially adopt initiatives in Q4 2022.
Please see the ‘Markets and Markets Infrastructure’ section for the EBA’s response to the EC’s call for advice on non-bank lending and ESMA’s final report on retail investor protection.
Please see the ‘Capital Markets’ section for the EC’s call for evidence on a retail investment legislative package of measures to increase consumer participation in capital markets as part of its Retail Investment Strategy.
FCA speech on supporting consumers in challenging times
On 5 May, the FCA published a speech by Sheldon Mills, Executive Director, Consumers and Competition, on supporting consumers in challenging times. The speech highlights the FCA’s three-year strategy launched in April and a few of the FCA's related 13 commitments which are particularly relevant for building societies and credit unions, including putting the needs of consumers first, reducing the risk of failure and the consequential harm to consumers, and reducing the level of financial crime experienced by consumers. Key points from the speech include: (i) the new consumer duty. The extension of the FCA’s Product Design and Fair Value rules will be particularly relevant for building societies. This is a key change for lenders and the first time these rules will apply to this sector. They will ensure products and services are fit for purpose and targeted at the consumers whose needs they are designed to meet, and represent fair value to those consumers. The FCA expects to have a policy statement and any new rules finalised by the end of July, and will provide more detail on how it intends to supervise and enforce the new consumer duty over the coming months; (ii) the rising cost of living. Many consumers are feeling the impact of the cost of living crisis. The FCA notes that the financial services industry has a role to play in helping consumers manage their personal finances. All financial institutions, including building societies, should consider the base rate rises and how they balance their mortgage and savings rates. In particular, they should ensure that they are providing fair value to savers. The FCA recognises that many firms do have competitive savings rates in the market, but expects these rates to be regularly reviewed, including when base rates are raised. Firms must be operationally resilient. The cost-of-living crisis and the geopolitical uncertainty may challenge this ambition. Like other firms, building societies and credit unions should monitor and be ready for cyber risks and for sudden hikes in the volume of consumer contact. Firms should consider scenarios that may test their operations, to ensure that their processes, systems and controls are adequate; (iii) interest only mortgages and later life lending. Two areas where economic uncertainty is likely to affect borrowers are interest-only mortgages and later life lending. To serve older borrowers well, suitable advice and responsible lending are key; and (iv) ESG and innovation. Building societies and credit unions should consider the FCA’s ESG strategy in the context of designing and distributing products like green mortgages. Building societies and credit unions should also consider how these products are delivered to consumers and the associated marketing and customer communications. Firms that are diverse and inclusive will deliver better outcomes for consumers and markets. The FCA expects to see greater diversity in terms of gender and ethnicity in the building societies sector. The FCA states that Open Banking will bring opportunities for building societies and their members, for example by enhancing members’ experience or improving greater data access. Firms should unlock these benefits to consumers through innovation.
ESAs technical advice on PRIIPs Regulation review
On 2 May, the Joint Committee of the European Supervisory Authorities (ESAs) published a report setting out technical advice to the EC in response to a call for advice on the EC’s review of the PRIIPs Regulation. The ESAs recommend significant changes to the PRIIPs Regulation and encourage the EC to consider a broad review of the PRIIPs framework, as well as undertaking appropriate consumer testing before proposals are made to change the PRIIPs Regulation. The recommended changes aim to improve the presentation of information provided to consumers and make it easier for them to compare different products. The advice addresses all the issues requested by the EC, including how to better adapt the key information document (KID) to the digital age and whether to extend the scope of the PRIIPs Regulation to other financial products. Additionally, the advice presents the ESAs’ recommendations on a range of other issues where analysis has shown that changes are needed to achieve optimal outcomes for retail investors. In particular, the ESAs are of the opinion that the KID would prove more useful to retail investors if presented in a much simpler and more user-friendly format. The ESAs recommend: (i) harnessing the opportunities of digital disclosure, such as by allowing information to be presented in a “layered” format and making it possible to use the KID as an interactive tool; (ii) not extending the scope of the PRIIPs Regulation to additional financial products at this stage, but further specifying the existing scope, such as by developing and including in the PRIIPs Regulation a significantly longer non-exhaustive list of products that are in or out of scope and by clarifying the application of the scope to non-financial services companies; (iii) allowing different approaches for different types of products where this is necessary to ensure the appropriate understanding of retail investors; (iv) allowing more flexibility on the information provided in the performance section of the KID including the indication of past performance; (v) changing the rules for multi-option products to better facilitate comparison between different investments; and (vi) introducing a new section in the KID to give prominence to sustainable objectives. This report will serve as input to the EC’s work to develop a strategy for retail investments and to make appropriate adjustments to the PRIIPs legislative framework.
Please see the ‘Other Developments’ section for FCA Handbook Notice 98 which sets out changes to the FCA Handbook made by the FCA Board on 24 March, 22 April and 28 April.
Financial crime and sanctions
Please see the ‘Markets and Markets Infrastructure’ section for the EBA’s response to the EC’s call for advice on non-bank lending.
ESMA objects to EC’s proposed amendments on its draft ITS on insider lists
On 2 May, ESMA published two opinions (dated 29 April 2022) on the EC’s proposed amendments to ESMA’s draft RTS on liquidity contracts for SME Growth Market (GM) issuers (Opinion 1) adopted under MAR, and to the draft ITS on insider lists initially adopted by ESMA under MAR in October 2020 (Opinion 2). ESMA disagrees with the EC’s proposal to exempt SME GM issuers from the obligation to create different sections of the insider list for each piece of inside information and with the deletion of personal phone numbers from these insider lists, which would make market abuse investigations more difficult. ESMA agrees with the two additions proposed by the EC to the RTS on liquidity contracts for SME GM issuers, whereby liquidity providers would have to post orders at prices that follow the independent trading interest and would not be obliged to post buy/ sell orders in exceptional circumstances. Following the adoption of these opinions, the EC may adopt the ITS and the RTS with the amendments it considers relevant or reject them. The EP and the Council of the EU may object to the RTS adopted by the EC within a period of three-months.
The FCA and PRA are getting increasingly excited about the digitisation of financial services. We have pulled together thoughts from colleagues in our regulatory, investigations and consulting practices to explain what this means for regulated firms and new entrants to the market. Please see here for our blog post on ‘What the FCA’s Business Plan and Strategy really means: digital markets’.
Please see the ‘Markets and Markets Infrastructure’ section for the EBA’s response to the EC’s call for advice on non-bank lending.
FCA speech on capitalising on innovation
On 5 May, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, on capitalising on innovation and how to learn from the last 30 years to face the next. Among others, key points include: (i) the FCA is growing its expertise in the digital field. Mr Rathi considers that coding is a life skill, and will become essential for everyone working in financial services as the lines between tech firms and financial services are becoming ever more blurred. As a result, every course, and every module of training the FCA staff will undertake in the future, will have an element of digital upskilling. The FCA is also boosting its capabilities with a recruitment drive for data analysts and scientists; (ii) a key element of the regulatory cooperation in the Digital Regulation Cooperation Forum (DRCF) will be building digital regulatory skills across all the major UK regulators. Mr Rathi mentioned the recently published DRCF 2022/23 work plan, which includes protecting children online. This is especially relevant for the FCA as it is witnessing ever-younger participants in new financial products such as cryptoassets, and has heard of children dabbling in crypto after being bombarded with promotions on social media. This is another field where training and education is essential; (iii) technology and training are also essential in the field of ESG development. Mr Rathi mentions hearing that the ‘Big Four’ are now running their own ESG training for staff and, in some cases, clients. The FCA wants to build that capability as well; and (iv) fully harnessing diversity and inclusion across financial services. Too often, financial services organisations and leaders hire in their own image. The FCA is changing internally and has warned the sector that firms that do not embrace diversity of thought will struggle to serve the needs of a diverse customer base and manage conduct risk effectively.
Official translations of ESMA guidelines on stress test under MMF Regulation
On 4 May, ESMA published translations in the official EU languages of its updated guidelines on stress test scenarios under the Regulation on money market funds (MMF Regulation). The purpose of these guidelines is to ensure common, uniform and consistent application of the provisions in Article 28 of the MMF Regulation. In particular, and as specified in Article 28(7) of the MMF Regulation, they establish common reference parameters of the stress test scenarios to be included in the stress tests taking into account the following factors specified in Article 28(1) of the MMF Regulation. The updates to the guidelines apply to competent authorities, MMFs and managers of MMFs as defined in the MMF Regulation from 4 July.
Markets and markets infrastructure
Please see the ‘Sustainable Finance’ section for the ESAs’ joint consultation paper on STS securitisations-related sustainability disclosures.
Corrigendum published to ESFS Omnibus Regulation
On 5 May, a corrigendum to the Omnibus Regulation on reforms to the European System of Financial Supervision (ESFS) (ESFS Omnibus Regulation) was published in the OJ. It relates to the amendments made to Article 52 of MiFIR under Article 4(11) of the ESFS Omnibus Regulation. The corrigendum corrects the numbering of the new paragraph introduced from 13 to 14, as well as amending a subsequent reference in Article 52 of MiFIR.
EBA responds to EC call for advice on non-bank lending
On 4 May, the EBA published a final report (dated 8 April) on non-bank lending in response to the EC’s February 2021 call for technical advice on digital finance and related issues. The EBA’s proposals aim at addressing risks arising from the provision of lending by non-bank entities in the areas of supervision, consumer protection, AML/CFT, and macro- and micro-prudential risks. The EBA explains that while the magnitude of non-bank lending in the EU remains limited compared to credit provided by banks, FinTech activity has been increasing over the last years. The trends observed outside the EU also show that BigTechs and other non-traditional operators have already developed, and successfully rolled out, business models for lending. The provision of innovative financial services may bring benefits for consumers and increase competition in the market. However, the analysis of the regulatory regimes currently in place indicates that non-bank lending remains largely unharmonised across the EU, and this may create challenges for stakeholders, including regulators. In the final report, the EBA identifies the risks related to the provision of credit by non-bank lenders and puts forward some proposals to address them. In particular, the final report highlights the importance of: (i) ensuring that the consumer protection framework remains fit-for purpose in view of new players entering the market. The EBA is proposing to: (a) enhance the disclosure requirements and ensure that they are fair, effective and well-suited for new forms of lending; and (b) strengthen the requirements for creditworthiness assessment, and ensure it is conducted in the interest of consumers, in particular when AI tools are used; (ii) strengthening the provisions on authorisation and admission to activities and to clarify the identification of the prudential perimeter and the supervisory responsibilities for cross-border provision of services, to allow for a more effective oversight; (iii) covering all non-bank lenders in a more comprehensive way in the EU-wide AML/CTF framework, to achieve greater harmonisation and to capture such entities as ‘obliged entities’; and (iv) enhancing the monitoring and reporting frameworks to avoid any sudden increase of macroprudential risks remaining unaddressed and considering the introduction of activity-based macroprudential measures to cover all credit providers.
ESMA final report on retail investor protection
On 29 April, ESMA published a final report containing technical advice to the EC on certain aspects relating to retail investor protection topics under MiFID II. The report puts forward proposals that will make it easier for investors to get the key information they need to take well-informed investment decisions, whilst also protecting them from aggressive marketing techniques and detrimental practices. The proposals aim to maintain a high level of investor protection, while ensuring that retail investors can benefit from digitalisation opportunities. The reports focusses on disclosures, digital disclosures, and digital tools and channels, and includes recommendations relating to: (i) requiring machine readability of disclosure documents to facilitate the development of searchable databases available to the public; (ii) addressing information overload by proposing to define what is vital information and by using digital techniques such as layering of information; (iii) the development of a standard EU format of information on costs and charges and aligning the disclosures under MiFID and the key information document under the PRIIPs Regulation; (iv) the possibility for national competent authorities and ESMA to impose on firms the use of risk warnings for specific financial instruments; (v) addressing aggressive marketing communications; and (vi) addressing issues related to misleading marketing campaigns on social media and the use of online engagement practices, such as the use of gamification techniques by firms or third parties. In addition, ESMA also supports the EC’s proposal to prohibit the receipt of ‘payment for order flow’ to adequately address the serious investor protection risks arising from this practice. The final report has been submitted to the EC.
Payment services and payment systems
FCA concludes review of Payment Account Regulations Linked Services List
On 29 April, the FCA published a new webpage announcing that it completed its review of the Linked Services List in April, having sought the views of industry and consumer bodies in January. The Payment Account Regulations require the FCA to maintain and publish a list of the most representative services linked to payment accounts that are subject to a fee in the UK. The list includes standard terms and definitions to describe these linked services, which payment services providers must use where applicable. The FCA has decided it is not appropriate to update the list at this time, as any benefits would not justify the cost that it would put on firms. The FCA believes that the list continues to meet the statutory requirements, containing the most representative services and that its purpose is still being fulfilled, which is helping consumers make an informed choice when choosing payment accounts. The FCA will update this page again shortly with more information.
BoE consultation paper on RTGS service roadmap beyond 2024
On 29 April, the BoE published a consultation paper on the next stage of the roadmap for the Real-Time Gross Settlement (RTGS) service beyond 2024. The BoE is in the process of renewing the RTGS service, with the move to enhanced ISO 20022 messages in April 2023 and new core settlement engine due to be introduced in Spring 2024. The BoE seeks industry views on what features they would like to see investment in for the next stage of roadmap for RTGS beyond 2024, including on: (i) new ways of connecting to RTGS that are cost-effective, based on open standards and compatible with a wide range of technologies. The BoE will develop a centralised RTGS identity service (Public Key Infrastructure – PKI) to support new services, create a new channel to send and receive payments, and evolve its application programming interfaces; (ii) innovative and flexible services to address the changing needs of users. The BoE proposes introducing a synchronisation interface, expanding its operating hours and creating more ways to generate liquidity in RTGS; and (iii) world-class resilience. The BoE will continue to maintain the highest levels of resilience. It will also leverage new technologies to provide more usable and available back-up and contingency services. In particular, the BoE proposes evolving or replacing its third settlement site to support new features, evolving its reconciliation capability and enabling CHAPS to act as a contingency for retail payments. The BoE intends to deliver the features that meet the needs of the industry in the light of the changing payments landscape, and deliver optimal value for money. The deadline for responses is 30 June. The BoE will analyse all responses and publish a feedback summary in late 2022, which will include initial thoughts on how to prioritise the delivery of new features. The BoE will then develop a roadmap, with the expectation that implementation will be gradual, through consistent close engagement with the industry.
BoE consultation paper on RTGS and CHAPS tariff framework
On 29 April, the BoE published a consultation paper setting out proposals for a new framework for the Real-Time Gross Settlement (RTGS) and CHAPS tariffs, including recovering the costs of building the renewed RTGS service as well as running RTGS and CHAPS. Given the renewal of RTGS and the changes to the payments industry, the BoE has decided to review the RTGS and CHAPS tariff framework to ensure it remains appropriate going forward. The new tariffs will not take effect until after the core settlement engine is delivered, planned for Spring 2024, and the costs of delivering the new systems are not yet final, but the BoE wants to provide industry with an indication of future costs now to support their own planning. This consultation seeks views on the BoE’s proposals, including: (i) how it plans to allocate costs between the various payment systems that settle in RTGS; and (ii) how it plans to allocate costs for CHAPS between the CHAPS Direct Participants in its capacity as the payment system operator for CHAPS. The BoE has designed the proposed framework in line with a set of high-level principles, ensuring that it supports the vision for the renewed RTGS and CHAPS services. The proposed tariff framework aims to build clear links between the costs of providing the RTGS and CHAPS services and the range of benefits which will be received by industry. The deadline for responses is 30 June. The BoE will hold two Q&A sessions for respondents, to be announced on its website. The BoE will revisit its proposals based on the feedback received and plans to publish a final tariff approach around the end of 2022. The new tariff framework will not be implemented before the delivery of the new RTGS core settlement engine, expected in Spring 2024.
Please see the ‘Sustainable Finance’ section for the EBA’s discussion paper on the role of environmental risks in the prudential framework.
EBA updates ITS on benchmarking of internal models
On 5 May, the EBA published a final report on draft ITS amending Commission Implementing Regulation (EU) 2016/2070 with regard to benchmarking of internal models. Article 78 of the CRD IV requires competent authorities to conduct an annual assessment of the quality of internal approaches used for the calculation of own funds requirements. Commission Implementing Regulation (EU) 2016/2070 contains ITS which specify the benchmarking portfolios, templates and definitions to be used as part of the annual benchmarking exercises. For the 2023 benchmarking exercise, the following changes are suggested: (i) for credit risk, no changes are proposed with respect to the data collection templates, and two minor changes have been made to the portfolio’s definition. However, in order to improve further the data collection and benchmarking analysis, some further clarifications are included in the instructions; (ii) for market risk, in order to keep the exercise updated and informative for supervisors, the set of instruments is proposed to be extended. Therefore, to the previous set of instruments, which are mostly plain vanilla, the proposal is to add a more complex set of instruments that could provide additional information and analysis insights to supervisors and banks; and (iii) for IFRS 9, no changes to existing templates are envisaged. The annexes to the draft ITS replace or are added to the existing set of templates in order to create a consolidated version of the updated draft ITS package. The draft ITS will be submitted to the EC for endorsement before being published in the OJ. The technical standards will apply 20 days after publication in the OJ.
EBA guidelines on equivalence of confidentiality and professional secrecy regimes of third-country authorities
On 3 May, the EBA published a final report setting out its updated guidelines on the equivalence of confidentiality and professional secrecy regimes of third-country authorities. Over the past few years, the EBA has assessed the confidentiality regimes of third country authorities to facilitate their participation in EU supervisory colleges, in accordance with Article 116(6) of the CRD IV. Under the EBA Regulation, the EBA has the task of establishing a closer link between equivalence and cooperation with authorities from equivalent third countries through cooperation arrangements. The EBA has updated its guidelines to allow for: (i) a wider scope of the equivalence assessment, to include all relevant provisions in the CRD IV, PSD2, BRRD and MLD4, as applicable to the specific third country authorities; and (ii) a wider purpose, to support cooperation arrangements and facilitate participation in supervisory, resolution and AML colleges. In addition, the EBA has also updated the document showing how the principles that govern the EU confidentiality regime are reflected in the EU framework as defined by the relevant provisions in the CRD IV, BRRD, MLD4 and PSD2. The guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply two months after the publication date at the latest.
EBA final report and amended ITS on the mapping of credit assessments of ECAIs for securitisation
On 3 May, the EBA published a final report containing final draft amended ITS on the mapping of credit assessments of external credit assessment institutions (ECAIs) for securitisation in accordance with the CRR set out in Commission Implementing Regulation (EU) 2016/1801. Commission Implementing Regulation (EU) 2016/1801 specifies the mapping tables’ correspondence with the credit quality steps set out in the CRR, as applicable before 1 January 2019. The CRR amendments brought about by the new Securitisation Framework make it necessary to update Commission Implementing Regulation (EU) 2016/1801 accordingly. Further, Article 270e of the CRR states that ‘mappings’ should be specified for all ECAIs, which are defined according to Article 4(1)(98) of the CRR as Credit Rating Agencies (CRAs) registered or certified in accordance with the CRA Regulation or a central bank issuing credit ratings that are exempt from the application of the CRA Regulation. Since the draft ITS on the mapping of credit assessments of ECAIs for securitisation positions were drawn up, one additional CRA has been established in the EU with methodologies and processes in place for producing credit assessments for securitisation instruments, while two existing ECAIs have extended their credit assessments to cover securitisations. Additionally, ESMA has withdrawn the registration of a CRA that was previously reflected in the mapping tables. The mapping tables will therefore be updated to reflect these changes accordingly. Individual mapping reports are also published on the EBA website to enhance transparency. The final draft ITS will be submitted to the EC for endorsement before being published in the OJ. The technical standards will apply 20 days after their publication in the OJ.
PRA consults on definition of simpler-regime firm
On 29 April, the PRA published a consultation paper on the definition of a ‘Simpler-regime firm’ under the ‘strong and simple’ initiative that would seek to simplify the prudential framework for non-systemic domestic banks and building societies, while maintaining their resilience. Since this would be a major change in prudential policy applying to banks and building societies in the UK, taking a number of years to develop and implement, the PRA is starting to achieve its aim by developing a ‘simpler regime’ for the smallest firms. The PRA considers that to be a ‘Simpler-regime firm’, a firm must: (i) have a maximum size threshold of £15 billion of total assets, calculated using the average of the firm’s total assets it was required to report during the previous 36 months in accordance with Rule 7.1 of the Regulatory Reporting Part of the PRA Rulebook; (ii) have no or minimal trading books; (iii) have no internal ratings based models; (iv) not provide clearing, settlement, custody or correspondent banking services (including by acting as an intermediary) to another bank or building society, or operate payment systems; and (v) have at least 85% of its credit exposures to obligors located in the UK. The PRA also proposes that whether a firm is a ‘Simpler-regime firm’ should be assessed at the highest level of the UK consolidation group. The PRA intends to set out proposals for how a firm would transition from one set of rules to another when it becomes or ceases to be a ‘Simpler-regime firm’. The PRA also intends to set out proposals for how a firm would be treated if it unexpectedly and temporarily becomes or ceases to be a ‘Simpler-regime firm’. The consultation closes on 22 July. The PRA will publish a Policy Statement on the definition of a ‘Simpler-regime firm’ later in 2022 or early 2023. The PRA plans to consult on other aspects of the simple regime layer of the strong and simple framework, including the requirements that would apply under this regime, in early 2023. The second set of proposals are likely to follow in 2024.
EBA response to EC call for advice on macroprudential framework review
On 29 April, the EBA published its response to the EC’s call for advice on the review of the EU macroprudential framework, proposing targeted changes to simplify the procedures around some of the existing macroprudential tools and to increase harmonisation for others. Regarding the four areas of the EC’s call for advice, the EBA’s recommendations include: (i) overall design and functioning of the buffer framework. The EBA considers that it may be desirable to simplify the procedures and increase harmonisation for existing macroprudential tools. It argues that a more comprehensive evaluation of the effects of the implementation of the CRR II, CRD V and BRRD II frameworks should be performed before considering more substantial changes to the current framework; (ii) missing or obsolete instruments. The EBA does not advocate applying additional tools and powers to enact system-wide restrictions, given the effectiveness of national measures during the Covid-19 pandemic. It also considers that it is too early to draw conclusions on the interaction between the input and output floors and the macroprudential measures. However, the EBA notes that borrower-based measures may help ensure sound lending standards and thereby mitigate financial stability risks; (iii) internal market considerations. The EBA recommends harmonising and simplifying certain aspects of the framework. It: (a) calls for a mandate to develop, in cooperation with the ESRB, common methodologies covering both the identification of O-SIIs and the setting of buffer rates; (b) sees room for enhancing and simplifying the procedures of the macroprudential measures in the CRR framework and proposes targeted changes to Article 124, Article 164 and Article 458 of the CRR; and (c) proposes a couple of clarifications to be made in the CRD IV on the sectoral systemic risk buffer concerning scope and governance procedures; and (iv) global risks. The EBA considers it premature to introduce new macroeconomic tools to address the systemic risks from environmental risks, cyber security and cryptoassets. Article 513 of the CRR requires the EC to complete a review of the macroprudential provisions in the CRR and CRD IV by June and, if appropriate, to submit a legislative proposal to the EP and to the Council of the EU by December.
ESAs joint consultation paper on STS securitisations-related sustainability disclosures
On 2 May, the Joint Committee of the ESAs published a joint consultation paper on Simple, Transparent and Standardised (STS) securitisations-related sustainability disclosures. The consultation paper seeks input on draft RTS specifying the content, methodologies and presentation of information in respect of sustainability indicators for STS securitisations. The proposed draft RTS aim to: (i) facilitate disclosure by the originators of the principal adverse impacts of assets financed by STS securitisations on ESG factors; (ii) supplement the single rulebook under the Securitisation Regulation as amended by the Capital Markets Recovery Package; and (iii) draw upon the ESAs’ work in respect of sustainability-related disclosures in the financial services under the SFRD. The deadline for responses is 2 July.
EBA discussion paper on role of environmental risks in the prudential framework
On 2 May, the EBA published a discussion paper on the role of environmental risks in the prudential framework for credit institutions and investment firms. The EBA notes that environmental risks are changing the risk picture for the financial sector and will become even more prominent going forward. This affects all traditional risk categories, such as credit, market and operational risks. It also raises the question as to whether the current prudential framework can account for these new risk drivers. The discussion paper provides an analysis of the extent to which environmental risks are already reflected in the Pillar 1 own funds requirements via internal and external ratings, valuation of financial instruments and collateral, or scenario analysis. The EBA takes a risk-based approach to ensure that the prudential framework reflects underlying risks and supports resilience of financial institutions. The purpose of the prudential framework is not to achieve specific environmental objectives. These could be supported by the risk-based framework, particularly if coupled with other policy actions. The discussion paper focuses on Pillar 1 own funds requirements, however, it also highlights the need for a holistic regulatory approach and should be seen as part of the EBA’s broader work in the area of ESG risks, which include transparency, risk management, Pillar 2 supervision and macroprudential capital buffers. The discussion paper also highlights interlinkages with the accounting framework. The deadline for responses is 2 August. The EBA is seeking broad feedback from stakeholders to deliver its final report.
FSB interim report on supervisory and regulatory approaches to climate-related risks
On 29 April, the FSB published for consultation an interim report that aims to assist supervisory and regulatory authorities in developing their approaches to monitor, manage and mitigate cross-sectoral and system-wide risks arising from climate change and to promote consistent approaches across sectors and jurisdictions. The FSB believes that a more consistent global approach to addressing climate-related risks will help to better assess and mitigate financial vulnerabilities and to reduce the risk of harmful market fragmentation. The recommendations focus on three areas: (i) supervisory and regulatory reporting and collection of climate-related data from financial institutions. Consistent and comparable firm disclosures, based on a global baseline climate reporting standard, provide a good starting or reference point for the future development of regular standardised regulatory reporting requirements. Authorities may also require more granular and specific information for supervisory or regulatory purposes. The report includes recommendations on the identification of authorities’ information needs, reliability of data, use of common definitions and coordination towards common regulatory reporting requirements; (ii) system-wide supervisory and regulatory approaches to assessing climate-related risks. Supervisory and regulatory risk assessments and policies need to better incorporate understanding of the channels through which climate-related risks to financial institutions may be transferred across sectors or borders. The report includes recommendations on how authorities’ approaches should account for the potential widespread impact of climate-related risks across the financial system, including with respect to use of scenario analysis and stress testing exercises; and (iii) early consideration of other potential macroprudential policies and tools to address systemic risks. Microprudential tools alone may not sufficiently address the cross-sectoral, global and systemic dimensions of climate-related risks. The report presents some of the early thinking on macroprudential policies and tools that could complement microprudential measures, and trade-off considerations. The FSB is inviting comments on its recommendations. The deadline for responses is 30 June. The final recommendations, incorporating feedback from the public consultation, will be published in Q4.
FCA board agrees approach to APPG and supports Single View initiative
On 5 May, the FCA published the minutes of the meeting of the FCA Board on 23 and 24 March. Section 18 of the minutes sets out the decisions of the Board and Board committee members taken at the meeting. Among others, the Board decided that the FCA should defend the application for permission for judicial review and, if permission is granted, the judicial review itself, brought by the All-Party Parliamentary Group on Fair Business Banking (APPG). The Board further approved the paper, which proposed internal governance processes, but requested that the Chair and the CEO should continue to be engaged on significant decisions. On the Single View initiative (section 12), the Board discussed how Single View would be used to access key information on firms across the FCA and provide risk indicators against key metrics highlighting areas of concern and the ability to cross reference data relative to peer firms. The Board was informed that findings from the piloting phase showed a reduction in triaging time and how the Single View highlighted potential harms requiring investigation and supervision. The Board noted the role of the Single View towards automation of some case work, and observed that it was a delivery against the Gloster report recommendations. The Board discussed the processes in place to support the embedding of the use of Single View across the FCA and the measures being developed to track successful outcomes. The Board was informed how the data collection process worked and the proactive approach being undertaken to close data gaps and the feedback on how Single View had improved operational efficiency of frontline teams. Overall, the Board was supportive of the Single View initiative.
Findings from FCA investment platforms costs and charges review
On 4 May, the FCA published the findings of its investment platforms costs and charges review. As part of its Investment Platforms Market Study, the FCA explained it would keep under review the role of platforms in helping consumers understand their investment costs. The FCA focused on the experience of non-advised consumers, and looked at how easy it is to access charging information and whether the information available helps them understand what they pay. The FCA could generally identify and compare the main platform charges and found that the fund charges were signposted. However, activity-based charges were sometimes harder to locate, such as telephone trades costs, foreign exchange, and interest on cash. Where the FCA could not find information about certain charges, it was left not knowing whether they would be charged for. The FCA identified a variety of good practices, including single comprehensive lists of all applicable fees and charges, interactive tools, infographics, calculators and worked examples, simple and clear explanations of charges, for example via information buttons when hovering over terms or phrases used and platforms stating whether any exit fees apply or not. Poor practices were also identified, including information being spread out across different webpages or too many links to different sections and pages. The FCA advises platforms to provide both existing and potential clients with: (i) all costs and charges, clearly explained; (ii) total prices/aggregated costs, expressed both as a cash amount and as a percentage, with a breakdown available; and (iii) illustrations showing effect of costs on returns. This information needs to be provided in good time, before the provision of the investment business. Platforms need to consider how they satisfy this timing requirement in an online environment, where transactions are typically concluded in a short timeframe. They may need to provide all the information in a manner which is immediately available, such as openly published on websites, to ensure they meet the information needs of potential clients. Platforms should review the information on this page and ensure their compliance with the FCA’s Handbook rules. They should familiarise themselves with the FCA’s proposed consumer duty, and be aware of its Consumer Investments Strategy. The FCA plans to carry out a review of industry progress in improving the switching process.
LSB business plan and budget for 2022/23
On 3 May, the Lending Standards Board (LSB) published its business plan and budget for 2022/23. In the plan, the LSB sets out its four strategic priorities and further details on the activities it intends to undertake during 2022/23, alongside a timeline of its major activities. The main activities include: (i) end-to-end compliance reviews focused on the Standards of Lending Practice for business customers to understand firms’ treatment of their business customers and to ensure that fair customer outcomes have been prioritised and achieved for SMEs in light of the impact of the pandemic on business lending; (ii) a significant project focusing on the identification, treatment and evolving needs of vulnerable customers spanning the personal and business Standards and the Contingent Reimbursement Model Code. The outputs of this project will inform whether updates to the Standards or Code, or the accompanying guidance documents, are required, in addition to insight and thought leadership work, which will be shared with registered firms; (iii) an internal review of the Standards of Lending Practice for personal customers against the backdrop of the regulatory roadmap, including the FCA’s requirements for the new consumer duty; (iv) introducing a programme of cyclical compliance reviews of firms to ensure that all registered firms will be assessed over a regular cycle of between three and four years for their adherence to the end-to end customer journey as set out in the Standards; (v) continuing to implement the recommendations from the LSB’s 2020/21 review of the CRM Code for Authorised Push Payment (APP) and its 2021 call for input; (vi) developing new research in respect of the effective warnings provisions of the CRM Code, the output of which will be made available for signatory firms; (vii) working closely with UK Finance, the FCA and HMT to progress the implementation of the recommendations from the LSB’s 2021 review of the Access to Banking Standard.
FCA appoints new senior hires
On 3 May, the FCA published a new webpage, announcing it has recruited three experienced individuals to its senior leadership team. These include: (i) Mel Gunewardena, who will take up a Senior Advisor role at the FCA. Mel is currently Chief Market Intelligence Officer at the Commodities and Futures Trading Commission based in Washington DC and a former Managing Director at Goldman Sachs. Mel will join the FCA in mid-May; (ii) Graeme Reynolds, who has been appointed Director of Competition. Graeme is currently one of the FCA’s deputy chief economists. Graeme will bring to bear his significant analytical skills by leading the FCA’s teams undertaking competition market studies, as well as those who investigate competition enforcement cases; and (iii) Simon Walls, who has been appointed as an Interim Wholesale Director. Simon has been Head of Wholesale Markets since 2016 and has been with the FCA/ FSA since 2006 in a variety of wholesale roles, including 7 years in asset management supervision. The FCA is currently recruiting two permanent Wholesale Directors to join the FCA’s Supervision, Policy and Competition senior leadership team. The FCA also noted it has successfully recruited over 250 people so far this year as staff turnover returns to pre-pandemic levels.
FCA Handbook Notice 98
On 29 April, the FCA published Handbook Notice 98, setting out changes to the FCA Handbook made by the FCA Board on 24 March, 22 April and 28 April. The Handbook Notice reflects changes made to the Handbook by the following instruments: (i) Listing Rules and Disclosure Guidance and Transparency Rules (Diversity and Inclusion) Instrument 2022. This instrument makes changes to the Handbook to require, as an ongoing listing obligation, issuers that are in scope to include a statement in their annual financial report setting out whether they have met specific board diversity targets on a ‘comply or explain’ basis, as at a chosen reference date within their accounting period and, if they have not met the targets, why not. It came into force on 20 April; (ii) British Steel Pension Scheme (Financial Resilience) Instrument 2022. This instrument introduces temporary asset retention rules, which apply to certain firms that provided transfer advice to British Steel Pension Scheme members. The rules require firms to retain assets to help ensure that they can meet redress liabilities if they provided unsuitable advice. It came into force on 27 April and applies on a temporary basis up to 31 January 2023; (iii) Technical Standards (Electronic Reporting Format) Instrument 2022. This instrument makes changes to the RTS on the specification of a single electronic reporting format to amend the definition of the UK Single Electronic Format (UKSEF) 2022 in the range of permitted taxonomies listed in Article 2(4B) of the Transparency Directive European Single Electronic Format (TD ESEF) Regulation so that it refers to UKSEF 2022 v2.0.0 for reports filed on or after 3 May, instead of v1.0.0. It came into force on 29 April; (iv) Market Conduct Sourcebook (Data Reporting Services Cancellation) Instrument 2022. This instrument makes changes to the Handbook to amend Chapter 9 of the Market Conduct sourcebook (MAR) to include wind-down guidance for a data reporting service provider (DRSP) which wishes to cancel all of its DRSP authorisation under MAR 9.2.5. It came into force on 29 April; and (v) Application Fees (Amendment) Instrument 2022. This instrument introduces a new £250 charge (Category 1 under the new pricing structure) for notifications of functions under the senior managers regime and controlled functions for appointed representatives. It comes into force on 27 May.