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Key Regulatory Topics: Weekly Update 29 May – 4 June 2020

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector.

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EBF paper on the future relationship of the EU and UK in financial services

On 29 May, the EBF published a paper (dated 25 May) on the future relationship of the EU and the UK in financial services, detailing the EBF’s view on the use of the equivalence regime. Their analysis presupposes a deal, stating that the absence of which would raise a separate set of significant risks, which they analysed in 2019. They urge the EU and the UK to agree to an extension of the transitional arrangement before the end of the June deadline to give all parties more time to reach a satisfactory agreement, especially considering the exceptional circumstances arising from the ongoing Covid-19 crisis. In Annex 1, the EBF lists what the EBF have identified as First Priority Areas requiring equivalence, as well as a non-exhaustive list of other areas in Annex 2. The paper also contains a call to action to their members and on banks to finalise preparations for the end of the transition period and to envisage all the scenarios possible. 

EBF Paper
EBF Press Release

Capital markets

EC adopt Commission Delegated Regulations supplementing the Prospectus Regulation

On 4 June, the EC adopted two draft delegated regulations. Firstly, one amending and correcting Commission Delegated Regulation (EU) 2019/980 supplementing the Prospectus Regulation. Alongside other corrections, the draft regulation makes amendments in order to: (i) apply the less stringent disclosure requirements which the issuers of non-equity securities are subject (rather than the requirements that apply to equity securities) to certain types of convertible, exchangeable and derivative securities; (ii) specify where additional information on the EU Growth prospectus should be inserted; (iii) reflect the amendment made to the Prospectus Regulation (by Regulation (EU) 2019/2115) so that disclosure of the working capital statement in the EU Growth prospectus applies to all issuers of equity securities irrespective of their market capitalisation; and (iv) clarify that prospectuses approved between 21 July 2019 and the date of entry into force of the regulation will continue to be valid until the end of their validity. The regulation shall enter into force on the third day following that of its publication in the OJ, though Article 1, points (1) to (8), and Article 2 shall apply from 21 July 2019. Secondly, the EC adopted a delegated regulation amending and correcting Commission Delegated Regulation (EU) 2019/979. This draft regulation, amongst other amendments, addresses the issue in Commission Delegated Regulation (EU) 2019/979 that issuers of certain non-equity securities (i.e. debt securities convertible or exchangeable into third party shares) would be unintentionally required to publish a supplement to the prospectus in the following situations: (a) new annual audited financial statements; (b) a change in control; (c) a new take-over bid; (d) a new significant financial commitment; and (e) a change in the working capital statement. The regulation shall enter into force on the third day following that of its publication in the OJ, though Article 1, point (1), (3) and (4) and Article 2 shall apply from 21 July 2019.
EC Delegated Regulation – amending Commission Delegated Regulation (EU) 2019/980
EC Delegated Regulation – amending Commission Delegated Regulation (EU) 2019/979

IOSCO statement on the importance of disclosure in light of Covid-19

On 29 May, IOSCO published a statement on the importance of disclosure in light of Covid-19. IOSCO states that it remains fully committed to the development, consistent application and enforcement of high quality reporting standards and disclosure regulations, which are of critical importance to the proper functioning of the capital markets. As stated in the press release, the key takeaways of the statement are that IOSCO: (i) reiterates the importance of transparent and complete disclosures in financial reporting; (ii) restates that in the current environment, it is important that issuers are mindful of the elements of reliable and informative non-GAAP measures, to ensure that they are not misleading; (iii) notes that interim financial information will require more robust disclosures of material information and management’s response to the changing circumstances; (iv) reminds auditors of their responsibilities to report on Key Audit Matters (KAM), including how the auditor addressed the matters; and (v) encourages issuers to balance the flexibility provided by regulators extending the period to file financial information with the responsibility to provide timely and comprehensive financial information that includes reasonable and supportable judgments.

IOSCO Statement
IOSCO Press Release


FCA Policy Statement – final rules on extending the Senior Managers Regime (SMR) to benchmark administrators

On 2 June, the FCA published a policy statement in respect of its final rules on extending the SMR to benchmark administrators. In response to feedback received from its consultation paper (CP19/31), the FCA will make the following amendments to the draft rules: (i) ensuring a level playing field for firms administering Annex II benchmarks and firms that administer both Annex II and other benchmarks; and (ii) providing

further material on how to apply some of the Individual Conduct Rules to clarify how the rules should be interpreted in the context of benchmark administrators’ activities. The final text of the Handbook rule changes is set out in the Individual Accountability (FCA-Authorised Benchmark Firms) Instrument 2020. The SMR will come into force for benchmark administrators that do not undertake any other regulated activities on 7 December. The amendments to SYSC, SUP and PROF came into force on 3 June.
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Please see our Prudential Regulation section for updates: (i) on the PRA’s Q&A on CRR requirements for property valuations in light of Covid-19; and (ii) the EBA’s final report on the guidelines for loan origination and monitoring.

Business Banking Resolution Service (BBRS) consults on its launch

On 4 June, the BBRS published a live consultation in preparation for its launch as a new type of dispute resolution service created by its stakeholders to meet the needs of larger small business customers. In light of Covid-19 and the new economic context in which the BBRS will be launching its service, it is seeking input from registered and potential customers and interested stakeholders. This is to ensure its service is developed in line with the needs of customers and others with an interest. The BBRS are seeking to hear views from a wide range of audiences including customers, individuals or organisations who work in relevant areas of public policy including but not limited to alternative dispute resolution, banking, justice and small and medium size businesses, as well as organisations who represent members who may advise or promote the service to their customers e.g. accountancy bodies and business representative groups. In its webpage, the BBRS state that it recognises that its service will need to be the subject of continuous review including listening widely to people’s experiences, this consultation being central to that process. The deadline for comments is 15 July.
BBRS Live Consultation

BBRS Webpage

Financial Ombudsman Service (FOS) annual complaints data 2019/20 alongside analysis

On 3 June, the FOS published its annual complaints data for 2019/20, alongside analysis of the data. Key trends identified include: (i) 271,468 new complaints received; (ii) 295,596 complaints resolved; (iii) 29,746 ombudsman’s decisions; (iv) 642,556 consumer enquiries; (v) PPI as the biggest single product (122,153); and (vi) guarantor loans having the highest uphold rate of 89%. For banking and credit, key conclusions include: (a) current accounts are the most complained-about product (20,571 complaints); (b) some businesses aren’t going far enough to prevent fraud, or are relying too heavily on generic warnings about it – the FOS want to see businesses commit to ongoing learning and improvement for the future; (c) consistently high uphold rates for payday and instalment loans over the last few years, remaining the case across several high-cost short-term credit products, with some lenders still failing to follow the FOS’ established approach to these complaints – a particular theme of complaints was the affordability of borrowing, and during the year the FOS continued to engage with lenders about how to ensure fair outcomes. The overall volume of complaints was lower than last year due to a number of short-term lenders going into administration; and (d) the volumes of complaints for IT glitches were lower this year. Furthermore, in respect of SMEs, the FOS: (1) has been able to handle financial complaints from more SMEs since 1 April 2019; (2) has seen that while some of SMEs complaints have been more complex in their nature, many business customers face a lot of the same problems as individual consumers – though, the impact of such issues is often more severe, costing businesses valuable time and resources to put right; and (3) acknowledge that some of the larger SMEs had very similar complaints to some of the smallest, showing that businesses struggle with similar issues regardless of size.
FOS Annual Complaints Data 2019/2020

FOS Article – Analysis

FCA finalise mortgage guidance for firms and guidance for firms to use with consumers – Covid-19

On 2 June, the FCA updated is guidance for firms on mortgages in light of Covid-19, publishing the finalised form. This is in response to feedback received on this guidance, detailed in FS 20/6. In developing the policy and considering the responses, the FCA states that it has had regard to its consumer protection objective, and its market integrity and competition objectives, in particular in considering the different impacts on firms of the proposals. The amendments to the guidance: (i) clarify that firms can agree with customers forms of support other than a payment deferral or partial payment deferral, where it is in the customer’s best interests; (ii) clarify that where there is a disagreement between the customer and the firm about the amount the customer can afford to repay, the lender should reduce payments to a level the customer considers they can afford; (iii) include customers in payment shortfall within the scope of all aspects of the guidance; and (iv) clarify the information firms should provide to enable customers to make informed choices. The guidance came into effect on 4 June and expires on 31 October. Furthermore, the FCA has published finalised guidance on information for firms to use with consumers that are dealing with financial difficulties, covering: (a) how consumers can manage their financial situation; and (b) organisations that offer help and advice.
FCA Mortgage Guidance for Firms

FCA FS 20/6

FCA Guidance for Firms to use with Consumers


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

BoE speech on Covid-19, financial markets and the BoE’s balance sheet operations

On 4 June, the BoE published a speech by Executive Director of Markets Andrew Hauser on Covid-19, financial markets and the BoE’s balance sheet operations. Mr Hauser gives an overview on: (i) the steps taken by the BoE in response to the Covid-19 crisis to prevent the initial shock and uncertainty; (ii) the broader aspects of the crisis – medical, social, economic and personal; (iii) financial instability; (iv) the sheer scale of the balance sheet interventions necessary in recent months which pose important longer term questions; (v) the extent to which the non-bank financial system may still be capable of amplifying instability; and (vi) the appropriate balance of responsibilities between the public and private sector for dealing with vulnerabilities. Rather than providing comprehensive answers, Mr Hauser provides raw material to these topics by using seven of the most vivid ‘moments’ from his own experience of the Covid-19 crisis in the past few weeks. It is noted that the BoE’s balance sheet has expanded by almost a third in three months, and will reach nearly 40% of annual UK GDP by mid-year (and thus doing more than ten times the number of weekly operations than in the pre-Covid19 period). Mr Hauser states that the central banking response was bigger, faster, and more comprehensively co-ordinated with domestic and international partners than ever before, ensuring that core markets today are stable and well-functioning. However, financial markets could come under strain again, if there is another leg to the global infection cycle, or if economic data come out persistently worse than expected. Thus, it is essential to ask hard questions about the financial markets, and their potential to amplify the ‘dash for cash’ seen in March and April: (a) whether it is understood why intermediaries struggled to make effective markets in core government bond, money and foreign exchange instruments at crucial moments during the crisis; (b) whether one can take comfort with the central role played by highly-leveraged but thinly-capitalised non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify instability so starkly; (c) how to deal with the risks posed to financial stability by the structural tendency for Money Market and some other open-ended funds to be prone to runs, without having to commit scarce public money to costly support facilities; and (d) how to ensure timely transition away from LIBOR, whose weaknesses were highlighted so starkly by the crisis. The FPC will be reflecting on these and other issues in the months ahead.
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FCA speech on its response to Covid-19 and expectations for 2020

On 4 June, the FCA published a speech by Executive Director of Supervision Megan Butler on the FCA’s response to Covid-19 and expectations for 2020. Highlights of the speech include: (i) in operational terms, advisors and wealth managers responded well to the onset of the Covid-19 crisis; (ii) there is a need to transition from the immediate ‘incident response’ towards focusing on longer-term impacts – Ms Butler explores the FCA’s priorities and longer-term expectations for the wealth management and advice industry; (iii) key areas of focus for the FCA include operational resilience in light of Covid-19, financial resilience (and within that the preservation of client assets and money) and acting with integrity; and (iv) the FCA has identified some firms which have tried to avoid their liabilities to customers by closing down companies and setting up new ones – given that the FCA deems such practices as unacceptable, it will continue to take action against firms conducting such activities.
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FCA statement on the Covid-19 financial resilience survey

On 3 June, the FCA published a statement, asking around 13,000 firms to complete a short survey to help the FCA obtain a more accurate view of firms’ financial resilience as a result of Covid-19. The data gathered from the survey will support the FCA’s ongoing work.

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FCA statement on branch access for essential services

On 4 June, the FCA published a statement (updating its prior statement made on 25 March) for banks, building societies and credit unions in respect of branch access for essential services. The FCA does not expect banking services to fully return to normal immediately, and there may be further adjustments required depending on the public health situation. The FCA states that firms need to follow the relevant guidance from the government and the devolved administrations. This will mean continuing to balance the needs of their customers with the safety and welfare of their staff. Firms should continue to consider the needs of their most vulnerable customers who may struggle to access essential services, particularly if they are self-isolating. Essential services for these customers may include access to cash, telephone banking and the ability to make in-person payments through third parties.

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SRB speech – the future of European Banking regulation in the aftermath of Covid-19

On 2 June, the SRB published a speech by Board Member Sebastiano Laviola on the future of European Banking regulation in the aftermath of Covid-19. The speech outlines: (i) the impact of Covid-19 on the economy and financial markets; (ii) the policy responses at national and EU level; (iii) the SRB’s response – including that it will continue to monitor carefully market conditions and will assess the potential impact on transition periods needed for the build-up of MREL, and are ready to use the flexibility allowed by the regulatory framework to adapt transition periods and interim targets applied to banking groups, as well as to adjust MREL targets in line with capital requirements, in particular with the changed capital buffers; and (iv) further detail on banks and regulators, interpreting analysis conducted by the EBA on the basis of the 2018 stress test with caution given the overall uncertainty on the severity of the crisis – it is expected that NPLs will increase substantially notwithstanding all the support measures taken, although banks are certainly more resilient than in 2008 and the impact of the crisis will also make more evident the problems of banks with unviable business models. Overall, Mr Laviola concludes: (a) there is a need to establish a European deposit insurance – the present crisis shows the need for decisive action towards harmonisation to avoid ring-fencing and fragmentation along national lines; and (b) there is a lack of credible solution for liquidity in resolution and the operationalisation of the common backstop to the Single Resolution Fund, as well as an alignment between resolution and insolvency frameworks, including a European bank liquidation regime for small and medium size banks.
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PRA statement on the use of electronic signatures to evidence forms and other documents delivered to the PRA

On 2 June, the PRA published a statement on the use of electronic signatures to evidence forms and other documents delivered to the PRA. In the absence of any specific legal provisions to the contrary, the PRA confirm that firms may use electronic signatures for such purposes, although it may in specific instances request a ‘wet signature’ (signing a document by hand using a pen) where it is appropriate to do so. The PRA are unable to comment on the use of electronic signatures more generally, and firms should obtain their own legal advice on the validity of such signatures in specific circumstances. PRA-regulated firms are reminded of Fundamental Rules 1-3 and 5-7 and other parts of the PRA Rulebook concerning the adequacy of systems and controls.
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Financial crime

Please see our Investigations Insight Blog on cross-border information sharing within corporate groups. HMT and the Home Office have issued a joint statement and guidance on cross-border information sharing within corporate groups for the purpose of combating economic crime. Echoing the previous sentiments of the Economic Crime Plan 2019, the guidance makes clear that effective and diligent practice in intra-group cross-border data sharing is critical for identifying and combatting instances of money laundering and terrorist financing, whilst also processing personal data in a way that is consistent with the General Data Protection Regulation (GDPR) and the Data Protection Act 2018.

Please see our Other Developments section for an update on the EBA’s report on the convergence of supervisory practices in 2019.

Joint Money Laundering Steering Group (JMLSG) finalise anti-money laundering (AML) and counter-terrorist financing (CTF) guidance

On 1 June, the JMLSG published the final versions of Parts I, II and III to its AML and CTF guidance. The Board approved revisions take account of comments received on the consultation text that was published in February, and have been submitted to HMT for Ministerial approval. The final versions take account of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 which came into force on 10 January. Chapter 22 for Part II on sectoral guidance relating to cryptoasset exchanges and custodian wallet providers has not yet been finalised.
JMLSG Guidance – Part I
JMLSG Guidance – Part II
JMLSG Guidance – Part III


Please see our Financial Crime section for an update on the JMLSG finalising its AML and CTF guidance.

Please see our Markets and Markets Infrastructure section for an update on the BoE’s report on the future of post-trade, detailing findings from the post-trade technology Market Practitioner Panel.

EP draft report with recommendations to the EC on digital finance

On 4 June, the EP published a draft report with recommendations to the EC on digital finance. In respect of general considerations, the EP state the importance of aligning the EC’s work with international regulatory bodies in developing international standards given the cross-jurisdictional nature of digital finance and calls on the EC to: (i) deploy a proportionate, cross-sectorial and holistic approach to its work on FinTech; (ii) act as first mover in order to create a favourable environment for European FinTech hubs and firms to scale up. The EP also stress that law and supervision in the area of FinTech should be based on specific

principles (these being that the same services and their associated similar risks should be subject to the same rules, technology neutrality and a risk-based approach). For defining a framework for cryptoassets, the EP state that: (a) applying existing regulations to previously unregulated cryptoassets will be necessary; (b) clear guidance on the applicable regulatory and prudential processes is needed in order to provide regulatory certainty regarding crypto-assets; (c) any further categorisation of cryptoassets should be balanced and flexible in order to give space for innovation in the sector while ensuring that risks can be identified at an early stage; and (d) a common Union framework on crypto-assets should help increase consumer and investor protection. In respect of a common approach to cyber resilience of the financial sector, the EP: (1) calls on the EC to propose legislative changes in the area of ICT and cyber security requirements for the EU financial sector in order to address any inconsistencies, gaps and loopholes that are found to exist in relevant law; and (2) stresses the need for further information sharing and enhanced coordination between relevant regulatory and supervisory authorities. For the collection and analysis of data, the EP calls for effective oversight of ’big data’ analytics in a way that addresses the opacity of models while ensuring that there is sufficient access to relevant and quality data, and also requests that the EC: (I) examines how to ensure that digital finance entities can access on an equitable basis relevant and useful data to help ensure that innovative FinTech businesses can grow within the EU and beyond; and (II) considers a framework for digital onboarding and the use of digital financial identities, which would aim to harmonise these measures across the EU insofar as necessary.

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Fund regulation

Please see our Covid-19 section for an update on the BoE’s speech on Covid-19, financial markets and the BoE’s balance sheet operations.

ESMA updates reporting instructions for reporting under the Money Market Fund Regulation (MMFR)

On 4 June, ESMA published updated reporting instructions to be used for reporting under the MMFR. ESMA has implemented amendments on the XML schema and reporting instructions in a new version, v1.1. Reporting entities should use the version v1.1 to submit reports required under Article 37 of MMF regulation by September.

ESMA Press Release

ESMA Updated Reporting Instructions

ESMA Updated Validations

ESMA Updated Schemas

ESMA promotes convergence in the supervision of costs in the Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs)

On 4 June, ESMA published a supervisory briefing, promoting convergence in the supervision of costs in UCITS and AIFs. Following the publication of its first annual statistical report in January 2019 on costs and performance of retail investment products which showed the significant impact of costs on the final returns for investors, ESMA started work with national competent authorities (NCAs) to assess different national approaches to the supervision of the cost-related provisions under UCITS and AIFMD. To reduce the risk of regulatory arbitrage and ensure equal levels of investor protection throughout the EU, ESMA has produced the supervisory briefing addressed to NCAs which focuses on how NCAs supervise the relevant cost-related provisions under UCITS and AIFMD and on the managers’ obligation to prevent undue costs being charged to investors. The briefing is expected to be considered by NCAs when supervising cost-related issues, including the duty of not charging undue costs to investors. The briefing can also give market participants indications of compliant implementation of the relevant UCITS and AIFMD provisions.
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Markets and markets infrastructure

Please see our Conduct section for an update on the FCA’s Policy Statement in respect of its final rules on extending the Senior Managers Regime (SMR) to benchmark administrators.

Please see our Covid-19 section for an update on the BoE’s speech on Covid-19, financial markets and the BoE’s balance sheet operations.

Please see our Taxes/Levies section for an update on the BoE consulting on the fees regime for FMI supervision for 2020/21.

BoE letter to financial market infrastructures (FMIs) and specified providers on the distribution of profits given demands arising from Covid-19

On 4 June, the BoE published a letter addressed to CEOs of FMIs and specified providers on the distribution of profits given demands arising from Covid-19. The BoE states that when UK FMIs’ boards are considering any distributions to shareholders or making decisions on variable remuneration, it expects them to pay close attention to the additional risks and potential financial and operational demands arising from Covid-19, as well as discuss with the BoE in advance of making any distribution to shareholders. The BoE also states, given that UK FMIs are critically important, it is vital that they ensure their financial resources continue to be sufficient to maintain the services they provide to the wider financial system, and to absorb potential losses.
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ESMA updates transparency and position limit opinions for third country venues

On 3 June, ESMA published updated versions of its opinions on determining third-country trading venues (TCTVs) for the purpose of: (i) transparency under MiFID II/MiFIR; and (ii) position limits under MiFID II. ESMA has now finalised the review of the information provided by TCTVs following its assessment of over 200 TCTVs against criteria published in opinions in 2017. In respect of the opinion on post-trade transparency, the annex includes a list of 136 venues from 25 countries. Most have a positive assessment for all the instruments available on the venue, while several have a partially positive assessment, i.e. a positive assessment which is limited to a subset of instruments. The instruments for which the assessment is not positive are specified in the excel file. Investment firms concluding transactions on TCTVs absent from the list should make those transactions post-trade transparent via an approved publication arrangement (APA) by 3 October 2020. In respect of the opinion on position limits, The annex to the opinion on position limits includes a list of 7 venues from 4 countries. All venues on that list have a fully positive assessment – thus, commodity derivatives traded on venues included on that list should be not be considered as economically equivalent OTC contracts for the purpose of the position limits regime. ESMA remains open to future submissions from TCTVs, should they have EU market participants which consider that such assessment would be relevant.
ESMA Press Release

ESMA Opinion – Transparency under MiFID II/MiFIR

ESMA Opinion – Position Limits under MiFID II

ESMA final report – technical advice on fair, reasonable, non-discriminatory and transparent (FRANDT) commercial terms for clearing services under Article 4(3a) of EMIR

On 2 June, ESMA published a final report which presents ESMA’s final technical advice to the EC on how to specify the conditions under which the commercial terms of clearing service providers (CSPs) are to be considered to be FRANDT in accordance with Article 4(3a) of EMIR (as amended by EMIR Refit). In response to the feedback received to its consultation, ESMA state, amongst other things, that the FRANDT principles should build on the existing requirements, in particular the current requirements for public disclosure and risk assessments. ESMA also discusses its suggestions on the: (i) scope of the FRANDT principles; (ii) information that ought to be subject to public disclosure; (iii) client categorisation; (iv) public disclosure and transparency – information provided in the RFP, as well as the contract terms proposed in the “Proposal and Agreed Terms”; (v) onboarding process; (vi) risk assessment by clearing service providers (CSPs); (vii) fees; (viii) standard agreements and contract terms; (ix) technology; and (x) enforcement of FRANDT requirements. The requirements covered in the technical advice have been designed to address clearing clients and CSPs’ concerns and aim to: (a) facilitate comparability of the information disclosed; (b) address the process of onboarding clearing clients; (c) standardise the information disclosed to clients bilaterally; and (d) encourage further standardisation of contractual terms.
ESMA Final Report

ESMA Press Release

BoE report on the future of post-trade – findings from the post-trade technology Market Practitioner Panel

On 2 June, the BoE published a report on the future of post-trade, detailing findings from the post-trade technology Market Practitioner Panel. The Panel members see significant scope for improvements in efficiency and resilience. The report sets out the Panel’s analysis of the underlying issues, highlights some specific action areas, and sets out plans for further work aimed at catalysing reform in post trade. For example, the Panel state that post‑trade activities, such as accurate reporting and collateral management, still too often rely on a patchwork of manual or outdated technological processes, using systems and data definitions that can vary widely between and often even within firms. Additionally, the Panel states, amongst other things, that the operational processes underpinning financial markets have been put to the test during the outbreak of Covid‑19. Also, it is stated that enacting change will require sustained effort and entail the effective use of industry co‑ordination mechanisms to help overcome barriers to market‑wide action. In recognition of this, the Panel has decided to establish a Post‑Trade Task Force to take forward its work in 2020/21.

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Working Group on Sterling Risk-Free Reference Rates (RFRWG) paper on identification of Tough Legacy issues

On 29 May, the RFRWG, through its "Tough Legacy Taskforce" (Taskforce), published a paper on identification of Tough Legacy issues. The paper discusses characteristics of tough legacy contracts across various asset classes, and also considers: (i) market participants’ expectations for the scope of products across markets which may be at risk of forming part of the ‘tough legacy’ category; (ii) specific issues which mean certain contracts are less likely to be able to convert; (iii) the likely market outcomes in relation to those contracts in the event of LIBOR cessation; and (iv) the range of potential options suggested by market participants for mitigating those outcomes, with consideration of their benefits and risks, and limitations around their effectiveness and feasibility.
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ESMA updates Q&As on MiFID II and MiFIR: (i) market structures topics; and (ii) transparency topics

On 29 May, ESMA published two updated Q&As on MiFID II and MiFIR in respect of: (i) market structures topics; and (ii) transparency topics. On market structures topics, the update adds a new question in respect of multilateral systems facilitating the execution of repurchase agreement (repo) transactions, asking whether the operation of a system facilitating the multilateral interaction of trading interests in securities financing transactions requires authorisation as a trading venue. On transparency topics, the update: (a) in respect of the conversion of large in scale (LIS) and size specific to the instrument (SSTI) thresholds in lots, modifies the answer to how trading venues should convert LIS and SSTI thresholds into lots under Article 13(9) of RTS 2; and (b) provides new questions on default liquidity status, SSTI and LIS thresholds of non-equity instruments as well as on publication of transactions in an aggregated form.

ESMA Q&As – Market Structure Topics

ESMA Q&As – Transparency Topics

Payment and payment services

EBA opinion on obstacles to the provision of third party provider (TPP) services under the Payment Services Directive (PSD)

On 4 June, the EBA published an opinion on the obstacles to the provision of TPP services under the PSD, the Regulatory Technical Standards (RTS) on strong customer authentication (SCA) and common and secure communication (CSC). The opinion aims to support the objectives of PSD2 of enabling customers to use new and innovative payment services offered by TPPs by addressing a number of issues regarding the interfaces provided by account servicing payment service providers (ASPSPs) to TPPs. The opinion: (i) clarifies when mandatory redirection is an obstacle to the provision of TPPs’ services and the authentication procedures that ASPSPs’ interfaces are required to support; (ii) provides clarifications on a number of obstacles identified in the market, including requiring multiple SCAs, the manual entry of the IBAN in the ASPSPs’ domain, or imposing additional checks of the consent given by the customer to the TPP; and (iii) explains that requiring re-authentication every 90 days for account information services in accordance with the RTS on SCA & CSC is not an obstacle. The EBA expects National Competent Authorities to take the necessary actions to ensure compliance of the interfaces offered by ASPSPs with the PSD2 and the RTS and, where obstacles are identified, to ensure that ASPSPs remove them within the shortest possible time. The EBA will monitor the way in which the clarifications provided in the opinion are taken into account. Where the EBA identifies inconsistencies, despite the clarifications provided in the opinion, it will take the actions needed to remedy them.
EBA Opinion

EBA Press Release

Payment Systems Regulator (PSR) speech on innovation and regulation of payment systems

On 3 June, the PSR published a speech by its Head of Policy Genevieve Marjoribanks on the innovation and regulation of payment systems. Firstly, the speech addresses supporting innovation and greater competition by delivering a robust architecture, the New Payments Architecture (NPA) being one of the PSR’s key priorities. It is stated that creating the NPA requires a balance between the speed of realising benefits and managing the costs and risks of the transition. Despite the impact of Covid-19, there remains a strong commitment from industry to realise the Payments Strategy Forum’s vision of the NPA. Secondly, the speech highlights access to cash as another priority. The PSR wants to ensure that innovation in payment systems doesn’t have a detrimental impact on those who want or need to use cash. The gradual shift away from cash to digital payments has been accelerated by Covid-19, with a 50% fall in ATM withdrawals and an increase in online shopping. Although cash usage has dropped, innovation continues to be critical in protecting access to cash such as organisations adapting and transforming existing services as well as introducing new ones to suit the needs of their customers. The PSR has also seen, more generally, industry working to ensure access to cash is maintained alongside digital solutions so that all consumers can make payments in ways that work for them. Thirdly, it is emphasised that Confirmation of Payee is another significant innovation, which the PSR wants to see rolled out across industry given reports that it helps towards significant reduction in authorised push payment (APP) fraud. Finally, the PSR’s future work is discussed, an important consideration being whether the new habits people are making in light of Covid-19 will remain once lockdown is over.
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Prudential regulation

Please see our Other Developments section for an update on the EBA’s report on the convergence of supervisory practices in 2019.

BoE letter on IFRS 9 and capital requirements — further guidance on initial and further payment deferrals in light of Covid-19

On 4 June, the BoE published a letter to the CEO of the PRA on IFRS 9 and capital requirements, detailing further guidance on initial and further payment deferrals in light of Covid-19. The principles underlying the guidance in the letter are summarised as follows: (i) when there has been a payment deferral, counting of days past due should be based on the agreed schedule for the purposes of the ECL backstops and for the CRR definition of default – however, loans that are not past due can still have suffered a significant increase in credit risk (‘SICR’), credit impairment or default; (ii) eligibility for, and use of, Covid-19 related initial and further payment deferrals taken up in accordance with the FCA’s guidance on the subject does not on its own automatically result in a loan being regarded as having suffered a SICR or being credit-impaired for ECL, or triggering a default under the CRR; (iii) firms are likely to have limited borrower-specific information to make the determinations on an individual borrower-basis; (iv) the BoE do not envisage that these holistic assessments for accounting and CRR purposes will be made at the time when a payment deferral is taken up, as the FCA guidance does not require such information to be available at that time. It is also stated that the plausible illustrative economic scenario in the BoE’s Monetary Policy Committee’s latest Monetary Policy Report (MPR) helps to illustrate the potential impact of Covid-19 on the economy and the channels through which the impact is felt and it might be one of many useful data points to take into account in developing forward looking scenarios for ECL purposes. The BoE further clarify that the desktop stress test in the Financial Policy Committee’s (FPC’s) interim financial stability report was a stress test, not a forecast, and was intended to enable the FPC to make judgments as to whether the core banking system would have sufficient capital buffers and capacity to provide credit to support the UK economy. Unlike a regular stress test, the desktop stress test did not draw on submissions from banks. Ahead of banks’ Q2 2020 reporting, the PRA intends to gather further information from firms on estimated provision levels to enable it to compare the timing and amount of losses modelled under the FPC desktop stress test to those anticipated by banks.
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EBA consultations – delivery on the implementation of the new regulatory framework for investments firms

On 4 June, following its roadmap for the implementation of the new regulatory framework for investment firms, the EBA launched four public consultations on its first set of regulatory deliverables on prudential, reporting, disclosures and remuneration requirements. The first consultation paper on prudential requirements includes three draft RTS on the reclassification of certain investment firms to credit institutions, five draft RTS on capital requirements for investment firms at solo level, and one draft RTS on the scope and methods of prudential consolidation for investment firms at group level. The second consultation paper on reporting requirements and disclosures, includes draft ITS on the levels of capital, concentration risk, liquidity, the level of activities as well as disclosure of own funds; and draft RTS specifying the information that investment firms have to provide in order to enable the monitoring of the thresholds that determine whether an investment firm has to apply for authorisation as a credit institution. The third and fourth consultation papers on remuneration requirements include draft RTS on the criteria to identify all categories of staff whose professional activities have a material impact on the firm’s risk profile or assets it manages (‘risk takers’); and draft RTS specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration of risk takers. The deadline for comments, for all of the consultations, is 4 September.

EBA Press Release

EBA Consultation Paper – Prudential Requirements

EBA Consultation Paper – Reporting Requirements

EBA Consultation Paper – Instruments for Investment Firms Remuneration

EBA Consultation Paper – Pay Out in Instruments for Variable Remuneration under the IFD

EBA consults on technical standards on the capitalisation of non-modellable risk factors (NMRFs) under the Fundamental Review of the Trading Book (FRTB)

On 4 June, the EBA published a consultation paper on the capitalisation of NMRFs for institutions using the new Internal Model Approach (IMA) under the FRTB. The draft RTS specify all of the technical details that are essential for determining the own funds requirements related to non-modellable risks. In particular, they set how institutions are to determine the stress scenario risk measure corresponding to a NMRF. The draft RTS identify two over-arching approaches that may be used by institutions for determining an extreme scenario of future shock: (i) the first over-arching approach (Option A) requires institutions to identify a stress period for each broad risk factor category and to collect data for NMRFs on the stress period in order to determine an extreme scenario of future shock; and (ii) the second over-arching approach (Option B) recognises that, for NMRFs, data availability in a period of stress might be limited and requires institutions to collect data on NMRFs on the current period – this approach aims at improving the quality of the data that is used to calibrate the extreme scenarios of future shocks. Under this first approach, the draft RTS set that institutions can use a direct method or stepwise method. Under the second approach, institutions should use the stepwise method. The deadline for comments is 4 September.

EBA Consultation Paper

EBA Press Release

EBA study of institutions’ reporting costs under the CRR

On 3 June, the EBA published a draft cover note on its ‘cost of compliance study’ of institutions’ reporting costs under Article 430(8) of the CRR. The draft cover note discusses, amongst other things, the: (i) scope of the compliance study which aims at understanding the overall reporting costs of institutions, including ad hoc supervisory requests, with the core objective being understanding the costs and their drivers associated with supervisory reporting; (ii) EBA’s approach to the study; (iii) overall indicative timeline for the study - the original intention of the EBA also considering the timelines specified in the CRR mandate was to complete the cost of compliance study and deliver the results to the EC by the end of 2020 but this timeline is severely affected by the Covid-19 pndemic and will need to be adjusted and finalised; and (iv) communication with stakeholders – the EBA is working on the cost of compliance study together with relevant competent authorities across the EU. The EBA is planning to organise the analytical work based on four components: (a) an initial questionnaire to credit institutions to collect quantitative and qualitative information on reporting costs and cost drivers as well as benefits. This will be the main source of information for the study. The EBA want to understand the degree of effectiveness of proportionality measures put in place so far. and test respondents’ views on potential future changes to the supervisory reporting requirements and the EBA reporting framework; (b) a second questionnaire to the users of reporting, which aims to gather a deeper understanding of the benefits of standardised supervisory reporting for its various users; (c) interviews with selected industry associations and institutions; and (d) fact finding case studies.

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EBA roadmap on investment firms (IFs) in respect of mandates under the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR)

On 2 June, the EBA published its roadmap on IFs, which sets out the intentions of the EBA in respect of delivering various regulatory products as mandated under the IFD and IFR. The roadmap sets out four principles which the EBA will rely on during the development of the framework: (i) ensuring proportionality with regard to the regulatory requirements aimed at IFs of different size and complexity is a key aspect of the new regime; (ii) recognising that the regimes applicable to credit institutions and IFs are interlinked and overlap; (iii) ensuring that the main risks of IFs are well covered; and (iv) further strengthening a harmonised regulatory environment, in order to foster a European level playing field across types and categories of IFs. In the roadmap, the EBA also provide an overview of the timeline for the planned deliverables as well as detailing relevant policy and strategy. The EBA’s delivery is grouped into six thematic areas: (a) thresholds and criteria; (b) capital requirements and composition; (c) reporting and disclosure; (d) remuneration and governance; (e) supervisory convergence and SREP; and (f) economic Social and Governance (ESG) factors and risks. The timetable for the mandates is divided into four phases, which determine which of the following work will be focused on: capital requirements and composition, remuneration and governance, reporting and disclosure, supervisory convergence and the supervisory review and evaluation process (SREP), as well as ESG factors and risks. The timings for the four phases are: (1) phase one to be delivered by December; (2) phase two by June 2021; (3) phase three by December 2021; and (4) phase four during 2022-2025.

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EBA final report – guidelines on reporting and disclosure of exposures subject to measures applied in response to the Covid-19 crisis

On 2 June, the EBA published a final report on guidelines in respect of reporting and disclosure of exposures subject to measures applied in response to the Covid-19 crisis. The EBA state that monitoring of the application of the moratoria on loan repayments, Covid-19-related forbearance measures and the use of public guarantees to new lending is crucial for the purposes of risk analysis of individual institutions and for the overall financial stability in the EU. The guidelines cover: (i) reporting requirements to monitor the use of payment moratoria and the evolution of the credit quality of the exposures subject to such moratoria in accordance with the EBA Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the Covid-19 crisis (GL on moratoria); (ii) disclosure requirements for the exposures subject to the payment moratoria in accordance with the GL on moratoria; (iii) reporting and disclosure requirements for the new loans subject to specific public guarantees set up to mitigate the effects of the Covid-19 crisis; and (iv) reporting requirements on other forbearance measures applied in response to Covid-19 crisis. The reporting and disclosure requirements are strictly in the context of the Covid-19 pandemic, and are therefore expected to be time limited. The EBA also state that reporting should be performed on a quarterly basis, with the first reference date of 30 June, and for an expected period of 18 months. Also, disclosure should be performed semi-annually on 30 June and 31 December. The EBA has decided not to carry out public consultations and has notified the Banking Stakeholder Group (BSG) of its intention to issue these guidelines, requesting their advice. To facilitate reporting on the basis of these guidelines, the EBA will provide a technical package and will fully integrate the new reporting into the EBA reporting framework. The EBA will also link the technical release of the new reporting requirements with the existing planned release (as a separate module in 2.10 phase 2) and will publish the v2.10 Phase 2 release this month.

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EBA consults on draft Regulatory Technical Standards (RTS) on own funds and eligible liabilities under the CRR

On 29 May, the EBA published a consultation paper on draft RTS on own funds and eligible liabilities under the CRR. As the eligibility criteria for own funds and to draft corresponding RTS have now been amended by CRR II, and the rules relating to the own funds permission regime have been changed, in particular with the introduction of the notion of ‘general prior permission’ to the Level 1 text, the RTS on own funds needs amendment to reflect these changes. The amended CRR also contains several new mandates for the EBA to specify some of the criteria for eligible liabilities instruments, with some conditions derived from the own funds regime, in order to constitute high quality loss absorbing capacity. Thus, the amended RTS which the EBA are consulting on: (i) updates the own funds framework; and (ii) extends the standards to eligible liabilities instruments. The deadline for comments is 31 August.
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PRA Q&A on CRR requirements for property valuations in light of Covid-19

On 29 May, the PRA published a Q&A on residential and commercial property valuations for CRR purposes during the period of disruption caused by Covid-19. The questions answered are: (i) for existing mortgage exposures, what is expected in relation to the monitoring and review of property valuations under CRR Articles 229(1) and 208(3); and (ii) what approach a firm should take if a house price index that is used to update property valuations for capital requirements purposes is unreliable or unavailable.
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EBA final report on the guidelines for loan origination and monitoring

On 29 May, the EBA published a final report on guidelines for loan origination and monitoring. The objectives of the guidelines are to: (i) improve institutions’ practices and associated governance arrangements, processes and mechanisms in relation to credit granting, in order to ensure that institutions have robust and prudent standards for credit risk taking, management and monitoring, and that newly originated loans are of high credit quality; and (ii) ensure that the institutions’ practices are aligned with consumer protection rules and respect fair treatment of consumers. Through these objectives, the EBA aims to improve the financial stability and resilience of the EU banking system. The guidelines: (a) clarify the internal governance and control framework for the credit-granting and credit decision-making process (as laid down in Article 74(1) of the CRD and further specified in the EBA guidelines on internal governance, as well as requirements on credit and counterparty risk under Article 79) – section 4; (b) specify requirements for the creditworthiness assessment of borrowers, differentiating between lending to consumers, micro and small enterprises and medium-sized and large enterprises, and set out the requirements for handling information and data for such assessments (referring to Articles 18 and 20 of the Mortgage Credit Directive (MCD) as well as Article 8 of the Consumer Credit Directive) – section 5; (c) set out supervisory expectations for the risk-based pricing of loans – section 6; (d) provide guidance on the approaches to the valuation of immovable and movable property collateral at the point of credit granting, and the monitoring and review of the value of such collateral, based on the outcomes of the monitoring – section 7 which applies to any valuation, monitoring and revaluation of immovable property and movable property collateral, excluding financial collateral, conducted after 30 June 2021; and (e) specify the ongoing monitoring of credit risk and credit exposures, including regular credit reviews of borrowers – section 8 which will apply to all credit facilities originated after 30 June 2021. Sections 5 and 6 will apply to loans and advances that are originated after 30 June 2021. Section 5 will also apply to loans and advances that already exist on 30 June 2021 if their terms and conditions are changed after 30 June 2022, provided that the changes follow a specific credit decision approval, and if their implementation requires a new loan agreement with the borrower or an addendum to the existing agreement. The guidelines also envisage specific phase-in requirements for addressing data gaps in the monitoring of already existing credit facilities up until 30 June 2024. The guidelines will repeal existing EBA guidelines on creditworthiness assessments under the MCD which were published in June 2015. The deadline for competent authorities to report whether they comply with the guidelines will be 2 months after the publication of the translations into the official EU languages, and the guidelines will apply from 30 June 2021.
EBA Final Report – Guidelines

EBA Explanatory Note

Recovery and resolution

Please see our Covid-19 section for an update on the SRB’s speech on the future of European Banking regulation in the aftermath of Covid-19.

Sustainable finance

EP’s Economic and Monetary Affairs Committee (ECON) and Environment, Public Health and Food Safety Committee (ENVI) recommendation for second reading of the proposed Taxonomy Regulation

On 2 June, the EP’s ECON and ENVI published a recommendation for a second reading of the proposed Taxonomy Regulation. This contains: (i) a draft EP legislative resolution; (ii) a short justification, proposing that ECON-ENVI recommend that the Plenary confirms the position of the Council at first reading, without amending it; (iii) procedure – committee responsible; and (iv) the final vote by roll call in committee responsible.
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BoE consults on the fees regime for FMI supervision for 2020/21

On 29 May, the BoE published a consultation paper on the fees regime for FMI supervision for 2020/21. The BoE states that: (i) the annual FMI supervisory fee includes the costs of FMI supervision staff together with relevant policy support, specialist resources, corporate services and other costs associated with the work of the FMI Directorate – the proposed fees for 2020/21 are expected to total £9.1 million, this being an increase of £0.6 million (7%) on the 2019/20 budget; (ii) the final fee for 2020/21 will reflect the level of supervisory resource expenditure over the course of the year and any adjustments required to phase in the fee increase; (iii) the BoE expects to recover approximately £0.39 million through a Special Project Fee (SPF), which is for supervisory work associated with a significant activity that is time limited and requires additional supervisory resource – the BoE has informed the relevant FMI(s) of its intention to recover these costs in addition to the annual FMI fee; (iv) the proposals in this CP have been prepared under a number of resource assumptions that were made prior to recent events in relation to Covid-19 – thus, there may be variation in the final fee rates for the 2020/21 fee year and these will be addressed at the conclusion of the fee year through either a rebate or a request for additional fees; (v) the BoE intends to allocate a rebate in the 2019/20 fees collected among the FMI fee-blocks; and (vi) the BoE proposes an amendment to the way that it invoices SPFs, as well as a change to the rates charged for work undertaken on special projects – the BoE proposes that where an SPF is used to fund the BoE’s work on a special project, then invoices will be issued on a quarterly basis and the BoE is also proposing to increase the hourly rates charged for work on special projects. The proposed implementation date for the proposals contained in this consultation is Q3, at which point invoices are expected to be issued for the 2020/21 fee year. The deadline for comments is 29 July.
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Other developments

Council presidency progress report on the strengthening of the Banking Union

On 3 June, the Council of the EU published a report (dated 29 May) on the presidency progress report on the strengthening of the Banking Union. With a view to facilitate strengthening the Banking union, and in line with the stated priorities of the Croatian Presidency in the area of deepening the Economic and Monetary Union, the Council Ad Hoc Working Party on the Strengthening of the Banking Union (AHWP) members held an informal videoconference on 18 May 2020, where they discussed the progress achieved in the various work streams. This progress report summarises the state of play as discussed at that informal meeting and has been prepared under the responsibility of the Croatian Presidency, taking into account the views expressed by AHWP members. At the meeting, there was support in favour of a hybrid model as the best basis for further discussions on the liquidity phase of EDIS (with disagreement over some of its main parameters). The ECB gave a presentation on risk-based contributions (RBCs), considered key to address concerns related to deposit insurance and concluded that when considering distribution across Member States and banks, RBCs benchmarked at Banking Union level would be key to tackle moral hazard concerns and to avoid cross-subsidisation, by implementing a “polluter pays” approach. In respect of the EDIS RBC and of the data collection exercise launched under Finland's Presidency, the progress of these has slowed down due to the Covid-19 emergency. The ECB also elaborated on the scope of EDIS application, covering: (i) the impact on EDIS depending on whether IPS (Institutional Protection Scheme) membership is recognised for the purpose of contributions or not – the ECB concluded that IPS account for a significant share of covered deposits and that full exclusion of IPS from EDIS would lead to a reduction of the target size of the deposit insurance fund; (ii) the treatment of non-CRR institutions; and (iii) the inclusion of measures other than pay-outs under Article 11(3) and (6) of the DGSD. The meeting also covered monitoring of other developments in the Banking Union: (a) implementation of the banking package; (b) specific Covid-19 related measures; and (c) measures to tackle non-performing loans (NPLs). The Presidency invites the Committee of Permanent Representatives to take note of this report, with a view to progressing work further.

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ESMA consults on draft guidelines on outsourcing to cloud service providers

On 3 June, ESMA published a consultation paper on draft guidelines on outsourcing to cloud service providers. The purpose of these draft guidelines is to provide guidance on the outsourcing requirements applicable to firms where they outsource to cloud service providers. These draft guidelines are intended to help firms identify, address and monitor the risks that may arise from their cloud outsourcing arrangements (from making the decision to outsource, selecting a cloud service provider, monitoring outsourced activities to providing for exit strategies). ESMA sets out nine guidelines on: (i) governance, oversight and documentation; (ii) pre-outsourcing analysis and due diligence; (iii) contractual requirements; (iv) information security; (v) exit strategies; (vi) access and audit rights; (vii) sub-outsourcing; (viii) written notification to competent authorities; and (ix) supervision of cloud outsourcing arrangements. ESMA will consider the responses it receives in Q3 and expects to publish a final report and guidelines in Q4 of this year or Q1 2021. The deadline for comments is 1 September.
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EBA report on the convergence of supervisory practices in 2019

On 29 May, the EBA published a report on the convergence of supervisory practices in 2019. The report: (i) summarises the assessment of convergence of supervisory practices in 2019 – overall, the report finds that the key topics for supervisory attention identified in the EBA 2019 convergence plan have been largely implemented in supervisory work across the EU, although to different degrees; (ii) provides detail on the EBA’s policy work supporting supervisory convergence in 2019 and training as an important tool for the EBA in ensuring that the foundations for a common approach are widely shared; and (iii) sets out the EBA’s further work in 2020 – significant supervisory efforts and resources are and will be dedicated to monitoring institutions’ preparation for the crisis in 2020, as well as further implications of Covid-19 on credit institutions’ operations and financial soundness, including policies implemented to protect the economy. The EBA state that the key topics that they have identified in the 2020 Convergence Plan are particularly relevant in the context of the challenges posed by the Covid-19 crisis, namely: (a) ICT risk and operational resilience; (b) loan origination standards; (c) profitability; (d) capital and liability management; and (e) money laundering and terrorism financing risks as well as other conduct risks for prudential supervisors.
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