Key Regulatory Topics: Weekly Update 30 July – 5 August 2021
05 August 2021
Amongst other items, this week saw the publication, in the EU’s Official Journal, of delegated legislation integrating sustainability into MiFID II, AIFMD, Solvency II, UCITS and IDD and the FCA publishing a letter, which has been sent to the Chairs of Remuneration Committees, to highlight areas for them to consider – these include remuneration policies, accountability and diversity and inclusion.
Please see the Fund Regulation section for the EC’s proposal for a Directive amending the UCITS Directive as regards the use of key information documents by management companies of UCITS.
FCA update on regulating the funeral plans sector
On 4 August, the FCA updated its webpage advising firms on how to prepare for its regulation of the pre-paid funeral plans sector. From 1 September, the authorisations gateway opens – the FCA advises that firms apply as soon as possible as the application fee will increase by 40% from 1 November. The FCA reminds firms that when they submit their application, they will need to demonstrate that they are ready, willing and organised to be authorised, how they meets the Threshold Conditions and how the firm’s management meets the FIT test. On a separate webpage on pre-paid funeral plans firms’ authorisation applications, the FCA has provided the forms and guidance notes that firms will be using to apply. Firms can begin drafting their applications now by creating a connect account. The FCA reminds firms that all funeral plan providers must be authorised by 29 July 2022. Firms that are not authorised by this date must have taken steps to either wind down their operations and/or transfer their back book of existing plans to a provider that is applying for authorisation.
EC call for advice to ESAs on PRIIPs Regulation
On 2 August, ESMA published a call for advice from the EC, sent to the Joint Committee of the ESAs, to request advice on the PRIIPs Regulation as part of the EC’s retail investments strategy. The EC invites the ESAs to provide: (i) a general survey on the use of the PRIIPs KID across the EU; (ii) a general survey on the operation of the comprehension alert, taking into account any guidance developed by competent authorities; (iii) a survey of the practical application of the rules laid down in the PRIIPs Regulation, taking due account of developments in the market for retail investment products; (iv) an assessment of the effectiveness of the administrative sanctions, measures, and other enforcement actions for infringements of the PRIIPs Regulation; (v) an assessment of the extent to which the PRIIPs regulation is adapted to digital media; and (vi) an examination of questions concerning the scope of the PRIIPs Regulation including whether it should be extended to additional financial products. The EC requests that the ESAs deliver the report by 30 April 2022.
EC call for advice to ESMA on retail investor protection
On 2 August, ESMA published a call for advice from the EC on its strategy for retail investments in the EU. The EC invites ESMA to provide advice on: (i) addressing and enhancing investor engagement with disclosures – identification of any significant overlaps, gaps, redundancies and inconsistencies across investor protection legislation that might have a detrimental effect on investors (i.e. which might confuse or hamper decision-making or comparability), how the different legal frameworks fit together and options as to how to remedy any identified shortcomings. The EC invites ESMA to reflect on whether the rules have fully attained the objective of ensuring that consumers can make informed choices and adequately reflect behavioural insights, avoid information overload and overly complex information, and the specific challenges for different types of products; (ii) drawing out the benefits of digital disclosures – an assessment of how regulatory disclosures and communications can work best for consumers in a digital, and in particular smartphone, age, and proposed options as to how existing rules might be adapted, such as allowing layered information; (iii) the risks and opportunities presented by new digital tools & channels – an assessment of both risks and opportunities with respect to retail investing stemming from both the increasing availability of digital tools and the increasing levels of direct investor participation, in particular via online trading platforms and robo advisors. It would consider in particular whether the existing regulatory requirements continue to be appropriate given these new risks, with a focus on the efficiency of safeguards such as best execution requirements and risk warnings provided to clients (e.g. as in the GameStop case). The EC requests ESMA to deliver the report by 30 April 2022. In parallel to this call for advice, the EC has sent a call for advice to EIOPA.
FCA resumes credit information market study
On 30 July, the FCA announced that it has resumed its work on the credit information market study, which was paused in April 2020 because of the Covid-19 pandemic. The FCA states that it will continue with the same scope set out in the original Terms of Reference, however its work will reflect market and regulatory developments over the last 18 months, including: (i) CRA and lenders’ response to the pandemic; (ii) the impact that the growth in different/new forms of credit could have on credit information; (iii) technological and behavioural changes that may alter the way people interact with their credit information (e.g. greater uptake of Open Banking); and (iv) the Woolard Review recommendations to the FCA. The FCA intends to engage with industry and consumer groups and complete its analysis during Q3 2021, ahead of publishing an interim report in Q1 2022. The interim report will set out its vision for the credit information sector, emerging findings (including on lenders’ reporting of forbearance) and the FCA’s early thinking on any potential remedies.
Please see our Markets and Markets Infrastructure section for an update on supervisory fees, fines/penalties & derogation criteria for data reporting service providers
EC consults on draft Delegated Regulation specifying fees and fines for ESMA’s supervision of critical benchmark administrators
On 30 July, the EC began consulting on a draft Delegated Regulation supplementing the BMR, specifying fees and rules of procedure for measures applicable to the supervision by ESMA of certain benchmark administrators. The explanatory memorandum explains that Regulation (EU) 2019/2175, amended the BMR, granting new supervisory powers to ESMA in relation to benchmark administrators – ESMA will be the competent authority for administrators of a critical benchmark and third country administrators of benchmarks under the BMR's recognition regime. The draft Delegated Regulation sets out provisions on fines, fees and penalties based on Article 48i(10) of BMR and Article 48l(3) of the BMR. The deadline for comments is 27 August. The EC expects to adopt the draft Delegated Regulation in Q3 2021.
A&O Publication - MAR: the First Five Years
This month marks five years since the Market Abuse Regulation (EU MAR), which has recently been retained into UK law following the expiry of the Brexit transition period (UK MAR), came into force. In this publication we look back at some of the key issues and areas of regulatory scrutiny that have emerged since the introduction of EU MAR from the perspectives of both financial services firms and listed issuers from all sectors. We also look forward to the implications of the areas of divergence between EU MAR and the UK’s retained version of it, as well as potential market abuse issues and themes that may arise in the near future.
EBA consults on new guidelines on the role of AML/CFT compliance officers
On 2 August, the EBA began consulting on new guidelines on the role, task and responsibilities of AML/CFT compliance officers. The EBA explains that the draft guidelines address the whole AML/CFT governance set-up: (i) they set expectations of the role, tasks and responsibilities of the AML/CFT compliance officer and the management body and how they interact, including at group level. AML/CFT compliance officers need to have a sufficient level of seniority, which entails the powers to propose, on their own initiative, all necessary or appropriate measures to ensure the compliance and effectiveness of the internal AML/CFT measures to the management body in its supervisory and management function; (ii) they specify the tasks and role of the member of the management board, or the senior manager where no management board exists, who are in charge of AML/CFT overall, and on the role of group AML/CFT compliance officers; and (iii) set out which information should be at least included in the activity report of the AML/CFT compliance officer to the management body. Provisions in the draft guidelines are designed to be applied in a proportionate manner, taking into account the diversity of financial sector operators that are within the scope of the AML Directive. The deadline for comments is 2 November.
FMLC response to Law Commission call for evidence on digital assets
On 30 July, the FMLC published its response to the Law Commission’s call for evidence on digital assets. The FMLC conclude that attempting to reform the law in a way that addresses “digital assets” in the “very broad sense” identified in paragraph 1.20 of the Call for Evidence is likely to prove impracticable and to give rise to more uncertainty. The need for law reform is most acute in respect of the narrower category of digital assets, defined in the FMLC’s response - “cryptoassets” in the sense used by the UK Jurisdiction Taskforce Legal Statement on Cryptoassets and Smart Contracts - since both the technologies underpinning these and the means by which they are being used in practice are novel and are not assimilated readily with other assets familiar to law and practice. The FMLC also consider that the law needs to recognise digital assets as capable of being in possession. This should be done in a manner which is sensitive to those features of digital assets which are distinct. For this reason, the FMLC has proposed the recognition of a third category of property recognising digital assets as both intangible and yet capable of possession.
EC consults on proposed Directive amending UCITS Directive regarding use of KID
On 5 August, the EC began consulting on a proposal for a Directive amending the UCITS Directive as regards the use of key information documents (KID) by management companies of UCITS. The date by which firms would be required to provide a KID was originally set as 31 December 2021, however the EC has separately proposed to extend the temporary exemption period from the requirement until 30 June 2022. With this extension, as of 1 July 2022 retail investors in UCITS would receive both a KID in accordance with the PRIIPs Regulation and key investor information in accordance with the UCITS Directive. The EC explain in the proposal that it is desirable to avoid a situation where retail investors receive two different pre-contractual disclosure documents in respect of the same UCITS. This Directive proposal therefore inserts a new Article 82a in the UCITS Directive to ensure that a KID drawn up, provided, revised and translated for a given UCITS in accordance with the PRIIPs Regulation is considered as satisfying the key investor information requirements of the UCITS Directive. The deadline for comments is 9 September.
Official translations of ESMA guidelines on marketing communications of funds
On 2 August, ESMA published the official translations of its guidelines for funds' marketing communications under Article 4 of the Regulation on the cross-border distribution of collective investment undertakings. The guidelines establish common principles on the identification of marketing communications, the description of risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner, and the fair, clear and not-misleading character of marketing communications, taking into account on-line aspects of such marketing communications. However, the guidelines do not intend to replace existing national requirements on the information to be included in marketing communications (such as those relating to the fiscal treatment of the investment in the promoted fund) to the extent these are compatible with any existing harmonised EU rules (e.g. rules on disclosure of costs or performance in the KIID should not be contradicted or diminished by different national disclosure requirements on costs or performance in marketing communications). The guidelines will apply from February 2022 (six months after the date of the publication of the translations).
Please see the Payment Systems and Payment Services section for the Committee on Payments and Market Infrastructures’ (CPMI) work programme for 2021/22 – this is the first time the CPMI has released its work programme publicly.
FCA revised direction on application for recognised overseas investment exchange status
On 5 August, the FCA published a revised direction regarding the manner in which applications for recognised overseas investment exchange (ROIE) status should be made. This replaces the temporary direction put in place in September 2018 to streamline the application requirements for EEA market operator applicants. The revised direction is effective immediately but does not affect current complete applications submitted by EEA market operators. The FCA has also updated its webpage providing a list of EEA market operators applying to become a ROIE to state that the list is no longer current and will not be updated. A complete list of ROIEs can be found on the FCA register.
The Benchmarks (Provision of Information and Documents) (Amendment) Regulations 2021
On 4 August, the Benchmarks (Provision of Information and Documents) (Amendment) Regulations 2021 were published together with an explanatory memorandum. This instrument amends the Benchmarks (Provision of Information and Documents) Regulations 2021 to correct a drafting error, as the Regulations only apply to benchmarks specified as critical under Article A20 or Article 20 of the Benchmarks Regulation. This excludes LIBOR, the only critical benchmark in the UK at present. The amendment ensures that the Regulations also apply to an administrator of a critical benchmark that is listed in Commission Implementing Regulation (EU) 2016/1368, under which LIBOR is listed. The amending Regulations come into force on 8 August.
EC consults on draft Implementing Regulations designating statutory replacement rates for CHF LIBOR and EONIA
On 3 August, the EC began consulting on draft Implementing Regulations designating the statutory replacement rates for EONIA and Swiss franc LIBOR (CHF LIBOR). The EC explain that the designated rate will replace contractual references to EONIA in the EU on 3 January 2022 and CHF LIBOR on 1 January 2022. The deadline for comments on both consultations is 31 August.
EC consults on draft Delegated Regulation on supervisory fees, fines/penalties & derogation criteria for data reporting service providers
On 2 August, the EC began consulting on a draft Delegated Regulation supplementing MiFIR, specifying fees, rules of procedure for measures and criteria for derogation relating to the supervision by ESMA of data reporting service providers (DRSPs). The explanatory memorandum explains that Regulation (EU) 2019/2175 amended MiFIR transferring the supervision of DRSPs from national competent authorities to ESMA from January 2022. This draft Delegated Regulation establishes: (i) the derogation criteria for DRSPs that will continue to fall under national supervision instead of ESMA supervision; (ii) the fees that DRSPs need to pay ESMA for supervision; and (iii) the procedure ESMA needs to follow to impose fines or penalties on DRSPs under its supervision. The draft Delegated Regulation follows the measures proposed by ESMA in its technical advice. The deadline for comments is 27 August.
LSB update on next steps for Contingent Reimbursement Model Code
On 5 August, the LSB provided an update on the next steps for the Contingent Reimbursement Model (CRM) Code, which sets out consumer protection standards to detect, prevent and respond to authorised push payment (APP) scams. The LSB explains that responses to its March call for input suggest that: (i) the risk of APP scams is not evenly distributed amongst payment providers, and it was perceived by some respondents that the Code does not take account of more diverse business models; and (ii) APP scams continue to evolve to use different mediums such as cryptocurrencies, perhaps due to their unregulated nature which favours the evasion of expedient tracing. The LSB will therefore be undertaking work to further review the wording of the Code to ensure that a wider range of firms are able to sign up to it and implement its provisions. To that end, the LSB has introduced interim registration, allowing firms to demonstrate their commitment to becoming a full registered firm with an LSB Standard or Code and a timeframe in which to become compliant, whilst the LSB conducts due diligence of the firm to ensure the protections for customers are met at the point they reach full registration. The LSB will also set out a timeline for making the Confirmation of Payee (CoP) provisions, as set out in the Code, effective for those firms who have this functionality, and will remain conversant with the PSR and Pay.UK as they strive towards Phase 2 of CoP activity. The LSB intends to publish a full report from this Call for Input in the Autumn.
CPMI work programme 2021-22
On 5 August, the Committee on Payments and Market Infrastructures (CPMI) published its work programme for 2021/22 – this is the first time the CPMI has released its work programme publicly. The work programme outlines the strategic priorities for its monitoring and analysis, policy, and standard-setting and implementation activities, under its two overarching themes: (i) shaping the future of payments will include enhancing cross-border payments and addressing policy issues arising from digital innovations in payments (such as central bank digital currencies and stablecoins), while monitoring changing trends in payments; and (ii) evaluating and addressing risks in financial market infrastructures including work on issues related to central clearing and the resilience of FMIs.
Codified Regulation on cross-border payments in the EU published in OJ
On 30 July, Regulation (EU) 2021/1230 on cross-border payments in the EU was published in the OJ. The Regulation lays down rules on cross-border payments and on the transparency of currency conversion charges in the EU. It codifies and replaces the existing Regulation on cross-border payments (924/2009) on 19 August (twenty days after publication in the OJ).
ECB and EBA 2021 EU-wide stress test results
On 30 July, the ECB and the EBA published the results of their respective 2021 EU-wide stress tests. The stress tests assess the resilience of EU banks over a three-year horizon under both a baseline and an adverse scenario, which is characterised by severe shocks taking into account the impact of the pandemic. The EBA stress test found that banks have continued building up their capital base, and at the beginning of the exercise (i.e. end-2020), had a CET1 ratio of 15% on a fully loaded basis (15.3% on a transitional basis), the highest since the EBA has been performing stress tests. The stress test was initially scheduled for 2020 but postponed by one year as part of the temporary relief measures decided by the EBA due to the pandemic. The ECB's stress test looked at data from 38 banks in the EBA sample and a further 51 medium-sized ECB supervised banks. It is the first time the ECB has published individual information for banks that are not part of the EBA exercise. The ECB stress test is not a pass or fail exercise and no threshold is set to define the failure or success of banks for the purpose of the exercise. Instead, the findings of the ECB stress test will be part of the ongoing supervisory dialogue. The ECB stress test found that the main drivers of capital depletion were credit risk, market risk and income-generation capacity. The EBA and ECB have also published FAQs on their respective tests.
BCBS and World Bank survey report on proportionality in banking regulation and supervision
On 30 July, the BCBS and the World Bank published the results of a global survey conducted with bank supervisors and regulators on proportionality in banking regulation and supervision. Besides taking stock of details about the different approaches to proportionate and full implementation of the BCBS standards, the survey inquires about the motivation for proportional and full implementation, any associated challenges and unintended outcomes, and factors that could help jurisdictions to achieve an effective proportionate implementation. Key takeaways from the analysis of survey responses are: (i) proportionate implementation is practised widely, across geographic regions and income groups and the use of proportionality is growing; (ii) proportionality is acknowledged by respondents as promoting banking stability, reducing unnecessary regulatory burden and compliance costs, and making effective use of scarce supervisory resources; (iii) challenges remain for jurisdictions that have adopted or are considering adopting proportionality. These challenges are during the design of proportionate approach (e.g. how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage) and after proportionality is implemented (e.g. how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints); and (iv) implementation is motivated by factors other than risk profile or systemic relevance in some cases. For example jurisdictions seeking to obtain or retain correspondent banking relationships, meet the expectation of host jurisdiction supervisors or of rating agencies, regional pressure and peer pressure.
PRA banking supervisory disclosures
On 30 July, the PRA published a webpage on banking supervisory disclosures. The PRA states that prior to Brexit it was required, as a competent authority, to publish information on rules and guidance, options and discretions, supervisory review and evaluation process, and aggregate statistical data, alongside submitting the information to the EBA in line with Article 143 of CRD IV and Commission Implementing Regulation 650/2014. The PRA explains that it has agreed, on a voluntary basis, to provide this data for the period to end-2020.
EBA amended ITS on resolution planning reporting
On 3 August, the EBA published draft implementing technical standards (ITS) amending the ITS on the provision of information for the purpose of resolution plans. The EBA explains that the amendments are minimal and aim at re-aligning the standards with the provisions of the BRRD, following the changes to the minimum requirement for own funds and eligible liabilities introduced in the revised BRRD II, as well as to remove some identified obstacles, at the technical level, that hamper compliance with the requirements specified in these ITS. The amended ITS will be submitted to the EC for endorsement before being published in the OJ. The amended ITS are envisaged to apply for the first time with the reference date of 31 December.
The Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) (No. 2) Regulations 2021
On 4 August, the Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) (No. 2) Regulations 2021 were published, together with an explanatory memorandum. These amend the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021, which provide the rules covering the auctions and the secondary market for emissions allowances. The amending Regulations clarify the policy intent in the Auctioning Regulations as regards the calculation of the auction share and information sharing channels. They also allow the Cost Containment Mechanism to access allowances that remain unallocated to stationary installations and in the flexible share. The amending Regulations come into force on 25 August.
Platform on Sustainable Finance call for feedback on preliminary recommendations for technical screening criteria for the EU taxonomy
On 3 August, the Platform on Sustainable Finance published a draft report and call for feedback on preliminary recommendations for technical screening criteria for the six environmental objectives set out in the EU taxonomy. The draft report focuses primarily on presenting a first set of priority economic activities and draft recommendations for associated substantial contribution and “do no significant harm” technical screening criteria in relation to the four non-climate environmental objectives: water, circular economy, pollution prevention, and biodiversity & ecosystems. A small number of economic activities and corresponding draft recommendations for technical screening criteria related to the climate mitigation and adaptation objectives have also been included. Based on the resources, workload and time available, the Platform addressed a first set of economic activities per environmental objective in its first phase of the work, setting out the proposed methodology for the selection and prioritisation of the activities in the draft report. The Platform highlight that the draft criteria presented in the report are working documents and do not represent a final view of the Platform. It notes that an activity that is not included in this first batch of activities for the remaining four environmental objectives, for which the Platform will develop recommendations for technical screening criteria, may still be addressed as part of a second batch. It is likely that the recommendations for additional activities and criteria included in that second batch would be addressed in a later update of the delegated act by the EC. The deadline for comments is 24 September. After considering the stakeholder input, the Platform will submit its report to the EC in November.
Delegated legislation integrating sustainability into AIFMD, IDD, MiFID II, Solvency II and UCITS Directive published in OJ
On 2 August, four Delegated Regulations and a Delegated Directive were published in the OJ: (i) Commission Delegated Regulation (EU) 2021/1253 amending Delegated Regulation (EU) 2017/565 (which supplements MiFID II) as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms; (ii) Commission Delegated Regulation (EU) 2021/1255 amending Delegated Regulation (EU) 231/2013 (which supplements AIFMD) as regards the sustainability risks and sustainability factors to be taken into account by alternative investment fund managers; (iii) Commission Delegated Regulation (EU) 2021/1256 amending Delegated Regulation (EU) 2015/35 (which supplements Solvency II) as regards the integration of sustainability risks in the governance of insurance and reinsurance undertakings; (iv) Commission Delegated Regulation (EU) 2021/1257 amending Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359 (which both supplement the Insurance Distribution Directive (IDD)) as regards the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products; and (v) Commission Delegated Directive (EU) 2021/1270 amending Directive 2010/43/EU (which supplements the UCITS Directive) as regards the sustainability risks and sustainability factors to be taken into account for UCITS. The legislation enters into force on 22 August (20 days after publication in the Official Journal). Delegated Regulations (EU) 2021/1253, (EU) 2021/1255, (EU) 2021/1256 and (EU) 2021/1257 will apply from 2 August 2022.
FCA new online whistleblowing form and webpage
On 3 August, the FCA published a new online whistleblowing form. The FCA has also published a new webpage to assist individuals in deciding where to make a report in order to ensure they are put in contact with the right team.
FCA Dear Chair of Remuneration Committee letter
On 3 August, the FCA published a letter sent to the Chairs of Remuneration Committees to highlight areas for them to consider: (i) remuneration policies – Chairs should remain satisfied that their firm’s remuneration policies are aligned with their firm’s purpose, business strategy and values and incentivise the right behaviours; (ii) accountability – the FCA expects that for instances of poor behaviour or misconduct, ex-post risk adjustments are made which are appropriate and timely; (iii) non-financial measures – during these challenging times, the FCA has observed firms redefining their purpose to support the issues that really matter to them and in the context of ESG issues, particularly the ‘social’ element. The FCA expects to see more firms using non-financial measures in scorecards to support ESG factors; and (iv) diversity and inclusion – the FCA recognises the steps firms have already taken to embed diversity and inclusion but believes there is much more that needs to be done. The FCA urges Chairs to review pay data across all protected characteristics and to act swiftly to address any disparities. The FCA also reminds firms that by 30 September, firms with a fiscal year-end of 31 December should submit: (a) their Remuneration Policy Statement together with a short summary; (b) an explanation of how they have assured themselves that the firm’s remuneration policies support the firm’s purpose, business strategy and values and incentivise the right behaviours; and (c) how the firm’s approach to paying variable remuneration will be considered in the continuing context of the pandemic.
FCA opens regulatory sandbox
On 2 August, the FCA opened its regulatory sandbox permanently for the first time. Firms will now be able to submit their applications throughout the year rather than in certain application periods. The FCA explains that it has implemented this change following a recommendation from the Kalifa Review of UK FinTech to move away from the cohort approach to receiving applications. The FCA has published a new guide to assist firms in making their applications.