Key Regulatory Topics: Weekly Update 30 September – 6 October 2022
06 October 2022
This week in the UK, the PSR published its final policy statement setting out its final decision on remedies for the card-acquiring market review. In addition, the FCA published a new information for firms webpage on the consumer duty, where it explains more on the areas of the duty that it has been receiving queries from firms on. In the EU, the revised recast Wire Transfer Regulation and the Markets in Cryptoassets Regulation edged closer to formal adoption, as the Council of the EU endorsed and published the final compromise texts.
FCA portfolio letter to high-cost lending firms
On 6 October, the FCA published a portfolio letter setting out its supervisory strategy for firms providing high-cost lending products. The FCA outlines its expectations for the sector, which include: (i) to consider how the cost-of-living crisis is likely to impact consumers and take the necessary steps to support consumers and mitigate harm; (ii) to continue progress made in reviewing creditworthiness assessment policies, which has led to higher standards in responsible lending; and (iii) firms' boards and senior management to prioritise embedding a healthy culture that is reflected in its policies. The FCA also sets out its supervisory priorities over the next three years: (a) to support firms with implementing the consumer duty and review the effectiveness of that implementation; (b) to continue to focus on responsible lending, particularly regarding: how firms promote and describe their products and the information they give customers; on firms’ approach to affordability including creditworthiness assessments; and sustainable borrowing for consumers; (c) to continue to focus on the treatment of borrowers in financial difficulty; and (d) to focus on how Senior Managers execute their roles and the oversight of firm’s activities by their Boards.
FCA information for firms on new consumer duty
On 5 October, the FCA published a new webpage providing further information for firms with regards to the new consumer duty. In particular, the webpage covers: (i) October implementation plans – the FCA does not expect firms to have necessarily fully scoped all work required to embed the duty by the October deadline, but the FCA does expect firms to have set out how they will do so in time to ensure timely implementation. Firms should also consider any work needed with other parties to prepare for the duty and ensure their plan allows enough time for this; (ii) consumer duty Board champions - the primary role of the Board champion is to support the Chair and CEO in ensuring that that the duty is being raised regularly in all relevant discussions, and that the Board is challenging the firm’s governing body/management on how it is embedding the duty and focusing on consumer outcomes. While the champion should be an independent non-executive director where possible, this is not a requirement, and the FCA expects firms to set up the role in a way that is effective for their organisation; and (iii) definition of closed products - closed products are those that are no longer marketed or distributed to retail customers or open to renewal. Where existing customers can continue to make payments under the existing product terms this would still be considered closed, as long as the product or service is not open to new customers.
Financial Crimes and Sanctions
Council of the EU approves final compromise text of recast revised WTR
On 6 October, the Council of the EU published the final compromise text of the proposed Regulation on information accompanying transfers of funds and certain cryptoassets (recast revised WTR). The Council also published a note (dated 30 September) inviting its Permanent Representatives’ Committee (COREPER) to approve the text and to inform the Chairs of the EP’s ECON and LIBE Committees that, should the EP adopt the text of the proposal in this exact form, the Council would adopt the proposed Regulation thus amended, subject to legal-linguistic revision by both Institutions. On 5 October, the Council of the EU published an information note, attaching the letter sent to the ECON Chair.
Please see the Financial Crime and Sanctions section for the Regulation on information accompanying transfers of funds and certain cryptoassets compromise text, which has been agreed by the Council of the EU.
Council of the EU approves MiCA final compromise text
On 5 October, the Council of the EU published the final compromise text of the proposed Regulation on markets in cryptoassets (MiCA). The Council also published a note (dated 4 October) inviting its Permanent Representatives’ Committee (COREPER) to approve the text and inform the Chairs of the EP’s ECON and LIBE Committees that, should the EP adopt the text of the proposal in this exact form, the Council would adopt the proposed Regulation thus amended, subject to legal-linguistic revision by both Institutions. On 5 October, the Council of the EU published the information note, attaching a letter sent to the ECON Chair.
Markets and Markets infrastructure
FCA Market Watch issue 70
On 3 October, the FCA published Market Watch issue 70. The FCA highlights transaction reporting issues that it has recently observed, including: (i) some firms are not conducting sufficient checks on their data. The FCA reminds firms that reconciliations should not be limited to certain fields, or to data samples that do not adequately reflect the trading scenarios and asset classes traded by a firm; (ii) variable levels of information in breach notifications. Some firms include limited details and unhelpful references to proprietary reporting systems or processes. The FCA reminds firms that notifications should be comprehensive, including adequate background to facilitate a full review of the incident; (iii) 1st priority national identifiers are not being used wherever available to identify natural persons in transaction reports. Despite previous warnings, the FCA continues to see firms failing to conduct sufficient due diligence when onboarding clients to obtain these identifiers; (iv) insufficient care from principal firms in overseeing the activity of ARs has led to incorrect transaction reports. Principal firms are responsible for ensuring that their transaction reports are complete and accurate, and for implementing an adequate systems and controls framework to identify potential data quality issues, including where caused by an AR; and (v) branch reporting. The FCA sets out its expectations of UK branches of third country investment firms when determining the location where a specific transaction is executed. The FCA sets out the factors that should be considered in addition to the geographic location of a trader. The FCA also highlights issues identified in relation to instrument reference data. The FCA reminds trading venues and systematic internalisers (SIs) that they must have arrangements in place to enable them to identify incomplete or inaccurate instrument reference data. Where a trading venue or SI identifies incomplete or inaccurate instrument reference data in its submissions, the FCA expects to be notified promptly via the submission of an instrument reference data errors and omission notification form.
FCA consults on creation of baseline financial resilience regulatory return
On 3 October, the FCA began consulting on its proposed rules to introduce a new financial resilience regulatory return for solo-regulated firms. The new return will be referred to as ‘FIN073 - Baseline Financial Resilience Report’ and will replace the current FCA Financial Resilience Survey (FRS) data collection (formerly “Covid-19 Impact Survey”). The FRS was launched in June 2020 to collect basic financial data as a response to the Covid-19 pandemic and has enabled the FCA to rapidly assess financial resilience risks at firms, resulting in early intervention where appropriate. This data has helped the FCA monitor the risk of firm failure through both the Russia/Ukraine conflict, and other macroeconomic changes. The FCA is proposing to rationalise and standardise this data collection, reducing the administrative and financial burden on firms, in the form of a regulatory return, submitted through RegData. The FCA hopes this will also increase the quality and consistency of financial resilience data received. FIN073 will not apply to dual-regulated firms, to MIFIDPRU investment firms or to firms in the Temporary Permissions Regime. The deadline for comments is 2 December. The FCA will publish final rules in Spring 2023, and intends to launch FIN073 by the end of next year.
EMIR equivalence for CCPs in Colombia and Taiwan
On 30 September, Implementing Decisions on the equivalence of the regulatory framework for CCPs in Colombia and Taiwan to the requirements under EMIR were published in the OJ: (i) Commission Implementing Decision (EU) 2022/1683 on the equivalence of the regulatory framework for CCPs in Colombia to the requirements of EMIR. The Decision entered into force on the day following its publication; and (ii) Commission Implementing Decision (EU) 2022/1684 on the equivalence of the regulatory framework for central counterparties in Taiwan to EMIR as regards futures clearing houses under the supervision of the Financial Supervisory Commission. The Decision will come into force on 20 October (20 days after publication in the OJ).
Payment Systems and Payment Services
PSR final decision on card-acquiring market remedies
On 6 October, the PSR published a policy statement setting out its final decision on remedies for the card-acquiring market review. The three remedies that the PSR has decided to mandate and implement through Specific Directions are: (i) Specific Direction 14 – summary boxes containing bespoke key price and non-price information to be sent individually to each merchant and made available in their online account. Merchants will be able to use these with the new online quotation tools, which providers will be required to make available. This will help merchants compare all available offerings; (ii) Specific Direction 15 - trigger messages to prompt merchants to shop around and/or switch to be sent by providers of card-acquiring services to their merchant customers and shown prominently in their online account. The timing of these messages will be linked to minimum contract term expiry dates or, where contracts are indefinite, required to be provided at least once every 30 calendar days; and (iii) Specific Direction 16 – a maximum duration of 18 months for POS terminal lease and rental contracts, and maximum one-month notice after any renewal. The PSR has also published implementation advice on the format and content of information required for the summary boxes, online quotation tools and trigger messages under Specific Directions 14 and 15. The 14 firms subject to the Specific Directions must implement the remedy relating to POS terminal contracts from January 2023, and the two other remedies from July 2023. The PSR will monitor the firms’ compliance with the Directions and the impact of the remedies to determine whether any further action is required.
EC adopts RTS on assessment of risk weights and appropriateness of minimum LGD values under CRR
On 5 October, the EC adopted a Delegated Regulation containing RTS specifying the types of factors to be considered to assess the appropriateness of risk weights for exposures secured by immovable property and the conditions to be taken into account for the assessment of the appropriateness of minimum loss given default (LGD) values for exposures secured by immovable property under Articles 124(4) and 164(8) of the CRR as amended by CRR II. The RTS specify: (i) for institutions applying the Standardised Approach, the types of factors to be considered during the appropriateness assessment of risk weights on the basis of the loss experience and forward-looking immovable property market developments; and (ii) for institutions applying the Internal Ratings Based Approach to retail exposures secured by residential or commercial immovable property, the conditions to be considered when assessing the appropriateness of minimum LGD values. The Delegated Regulation will enter into force 20 days following its publication in the OJ.
BCBS report on buffer usability and cyclicality in the Basel framework
On 5 October, the BCBS published its second evaluation report assessing the impact of the implemented Basel reforms regarding buffer usability and cyclicality. The BCBS’ findings include that: (i) there are some indications of a positive relationship between capital headroom and lending. The BCBS notes that while some constraint on lending by less well capitalised banks is to be expected, excessive contraction of credit supply in a systemic stress period could be detrimental to financial stability; (ii) temporary reductions in capital requirements supported lending during the pandemic, although there is weaker evidence for countercyclical capital buffer (CCyB) releases specifically, which may reflect more limited use of the CCyB to date. The BCBS considers that the apparent reluctance of banks to cross regulatory capital thresholds and a positive impact of capital releases on lending demonstrate the value of an effective countercyclical regulatory capital regime; (iii) there is limited evidence on whether reluctance by banks to use liquid asset buffers has affected their lending and market activity given the short-lived liquidity pressures during the pandemic. The BCBS considers that further monitoring of this issue may be helpful; (iv) provisioning could be another source of cyclical pressure on capital. The BCBS found little sign of procyclical effects on lending during the pandemic related to the recent introduction of the expected credit loss framework, although effects are hard to discern given the extensive economic support provided by authorities. More broadly, there are potential benefits of a forward-looking approach to loan loss provisions, which enables regulatory capital measures to better reflect the underlying resilience of banks. Given the evaluation findings, the longer-term impacts of the pandemic, ongoing geopolitical events, and the potential for new risks to emerge, the BCBS stresses the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks. To facilitate this, the BCBS notes that some jurisdictions have chosen to implement positive cycle-neutral CCyB rates. In a newsletter also published on 5 October, the BCBS supports the ability of authorities to take this approach on a voluntary basis. The BCBS will publish a third broader report providing a more holistic analysis of the reforms.
Council of the EU adopts Daisy Chain proposal
On 4 October, the Council of the EU announced that it has adopted the Regulation making targeted amendments to the CRR relating to total loss absorbing capacity and the minimum requirement for own funds and eligible liabilities. This marks the final step in the legislative process. It will now be published in the OJ and enter into force 20 days following its publication.
Please see the Other Developments section for the ESAs’ Joint Committee 2023 work programme.
EC publishes FAQs on interpretation of Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation
On 6 October, the EC published Commission Notice on the interpretation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of eligible economic activities and assets. The FAQs aim to clarify the content of Commission Delegated Regulation (EU) 2021/2178 (Disclosures Delegated Act), which sets out the content and presentation of information to be disclosed. These FAQs complement FAQs published by the EC in December 2021.
ESAs draft RTS on fossil gas and nuclear energy investments disclosures
On 30 September, the ESAs published a joint final report on draft RTS on information to be provided in pre-contractual documents, on websites, and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities. The ESAs propose to add specific disclosures to provide transparency about investments in taxonomy-aligned gas and nuclear economic activities. Specifically, the disclosures: (i) add a yes/no question in the financial product templates of the SFDR Delegated Regulation to identify whether the financial product intends to invest in such activities; if the answer was yes, a graphical representation of the proportion of investments in such activities would be required; and (ii) implement minor technical revisions to the Delegated Regulation to correct inconsistencies observed after its publication. The EC will now scrutinise the draft RTS and endorse them within three months of their publication.
ESAs’ Joint Committee 2023 work programme
On 30 September, the Joint Committee of the ESAs published its 2023 work programme (dated 5 September). Workstreams highlighted by the Committee include: (i) sustainable finance – to review and submit amendments to the SFDR Delegated Regulation, as requested by the EC in April. The ESAs will monitor the application of the SFDR to determine whether an optional ITS on marketing communications is necessary. The ESAs will also carry out activities on climate risk stress testing, including running a one-off system wide climate risk stress test and developing guidelines for supervisors on ESG stress testing; (ii) digital finance package – to deliver on DORA mandates, including technical standards on ICT risk management framework and guidelines on the methodology for calculating costs, and quantifying losses for response and recovery; (iii) financial conglomerates – to develop ITS for financial conglomerates’ reporting templates; and (iv) external credit assessment institutions (ECAIs) – to develop ITS on the mapping and monitoring of ECAIs under the CRR.
FCA Handbook Notice No. 102
On 30 September, the FCA published Handbook Notice 102, which sets out changes to the FCA Handbook made by the following Handbook instruments: (i) Consumer Duty Instrument 2022; (ii) Appointed Representatives Instrument 2022; (iii) Financial Promotions and High-Risk Investments Instrument 2022; (iv) Decision Procedure and Penalties Manual (Amendment) Instrument 2022; (v) Handbook Administration (No 61) Instrument 2022; and (vi) Investment Firms Prudential Regime (Amendment) (No 2) Instrument 2022. The next scheduled FCA board meeting is scheduled for 28 October.