Skip to content

Key Regulatory Topics: Weekly update 29 January 2020 – 4 February 2021

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

If you would like to receive this update by email and be added to our marketing mailing list please contact


Please see our Brexit financial services webpage, which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators’ publications.

Please see our Other Developments section for an update on the FCA Handbook Notice 84.

Capital markets

Please see our Markets and Markets Infrastructure section for an update on the Investment Association’s letter on active transition of GBP LIBOR referencing bonds.

Please see our Other Developments section for an update on the FCA Handbook Notice 84.


ESA final report – changes to the packaged retail and insurance-based investment products (PRIIPs) key information document (KID)

On 3 February, the ESAs submitted to the EC draft Regulatory Technical Standards (RTS) on amendments to the KID for PRIIPs, and have published the final report, following EIOPA’s Board of Supervisors agreeing on the changes. In October 2019, the ESAs published a consultation paper on draft RTS to amend the technical rules on the presentation, content, review and revision of KID – at that stage, the draft RTS was adopted by the Board of Supervisors of ESMA and EBA, but did not receive the support of a qualified majority at the Board of Supervisors of EIOPA. Following a request from the EC in December 2020, EIOPA’s Board of Supervisors further analysed the draft RTS, and it was adopted by a qualified majority – while some national competent authorities (NCAs) at EIOPA’s Board continued to express reservations on the draft RTS, they supported the proposal based on the further details provided by the EC on their approach to the broader review of the PRIIPs Regulation, namely that the review will thoroughly examine the application of the PRIIPs framework, including: (i) how to achieve better alignment between PRIIPs, Insurance Distribution Directive and Markets in Financial Instruments Directive II regarding provisions on costs disclosure; (ii) the scope of products as foreseen by the PRIIPs Regulation; (iii) how to ensure that the KID contains the key information necessary for retail investors while avoiding too much or too complex information for these investors; (iv) how to allow the creation of a digitalised KID allowing layered information and reviewing the default paper basis of the KID, taking into account the specific challenges for different types of products (for example, multi-option products (MOPs)); and (v) the need for a more tailored approach, such as for MOPs, in order to maximise understanding and use of the information, while continuing to allow for comparability of similar products. The ESAs draft RTS is now subject to adoption by the EC. The ESAs correspondence with the EC on PRIIPs has also been published.

Press Release

Final Report

Letter from ESAs to EC

Letter from EC to ESAs

Letter from EC to EIOPA

The Woolard Review – buy-now-pay-later (BNPL) products to be regulated

On 2 February, the Woolard Review (commissioned by the FCA Board) was published, which sets out how regulation can better support a healthy market for unsecured lending, taking into account the impact of the Covid-19 pandemic, changing business models and new developments in unregulated buy-now pay-later (BNPL) unsecured lending. Amongst other things, the review analyses BNPL and recommends that it be regulated. The review also covers recommendations on, amongst other things: (i) debt advice; (ii) forbearance; and (iii) alternatives to high-cost credit. As stated in a letter from Charles Randell (Chair of the FCA) to John Glen MP (Economic Secretary to the Treasury), the FCA Board welcomed the review and supported the recommendations directed to the FCA. Mr Randell states that the FCA Board agrees with the Review’s analysis of BNPL and agrees that there is a strong and pressing case for regulation of BNPL business. In addition, the Government has announced that interest-free BNPL credit agreements will be regulated by the FCA in order to protect consumers. Under the Government’s plans, providers will be subject to FCA rules so will need to undertake affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments. The Government states that the legislation will be brought forward as soon as parliamentary time allows, and that it will consult with stakeholders before bringing forward legislation. Furthermore, the Government has published letters sent in respect of BNPL credit agreements between Christopher Woolard (former Interim Chief Executive of the FCA) and John Glen.

FCA Press Release

The Woolard Review

FCA Letter – Woolard Review

Government Press Release

HMT Letter – BNPL

FCA Letter – BNPL


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

EBA updates report on implementation of selected Covid-19 policies

On 29 January, the EBA published a report on the implementation of selected Covid-19 policies. The report contains FAQs on the implementation of the requirements set out in the EBA's guidelines on moratoria and on Covid-19 reporting and disclosure. The update adds further FAQs, which clarify: (i) the functioning of the nine-month cap which limits the period of time for which payments on a certain loan can be suspended, postponed or reduced as a result of the application (and reapplication) of general payment moratorium; and (ii) the guidelines on reporting and disclosure – specifically, the treatment of loans and advances subject to expired moratoria. The EBA confirms that the report may be updated in the future with additional clarification on the prudential treatment of Covid-19 related measures, as well as on the implementation issues around existing policies in the context of the pandemic.

Read more

Financial crime

Office of Financial Sanctions Implementation (OFSI) aims for 2021

On 4 February, the OFSI published a blog post by its new director Giles Thomson, which discusses the OFSI aims for 2021. Amongst other things, Ms Thomson states that the OFSI look forward to increasingly utilising the new flexibility and powers it has so that the effective design and implementation of sanctions can play the fullest possible role in supporting the UK’s foreign and security policy. Furthermore, the UK will continue to work on sanctions with key partners such as the US and the EU, but also with a wider range of partners as showed last year in the UK’s collaboration with Canada on the Global Human Rights sanction regime. Looking further ahead, Ms Thomson wants the OFSI to: (i) consolidate and build on the successes of its first 5 years – there is more it can do to fulfil its twin objectives of helping the private sector understand and implement financial sanctions and in turn, improving compliance; and (ii) deepen and broaden its relationships with key stakeholders in the private and public sectors through its engagement and guidance, earning a reputation for expertise, openness, transparency and collaboration – for example, Ms Thomson emphasises that last year’s maritime guidance was successful and widely read, and the aim is to continue responding to the needs of industry to ensure greater compliance and understanding of sanctions particularly around emerging issues such as the increasing use of cryptoassets. Therefore, the OFSI will be conducting some targeted outreach on licensing in the spring, to note the changes, additions and practical application of this important tool. Ms Thomson also wants to enhance the OFSI’s compliance work by further developing its relationships with law enforcement agencies, regulators and private sector bodies, so as to improve its collective understanding of compliance risks and trends, and take a ‘whole-of-system’ approach to tackling them.

Read more


Please see our Financial Crime section for an update on the Office of Financial Sanctions Implementation (OFSI) aims for 2021.

EC request to EBA, EIOPA and ESMA for technical advice on digital finance

On 2 February, the EC published a request to the EBA, EIOPA and ESMA for technical advice on digital finance and related issues. The EC explains that the digital finance strategy (DFS) adopted in September 2020 set out the EC’s intention to review the existing financial services legislative frameworks in order to protect consumers and safeguard financial stability, protect the integrity of the EU financial sectors and ensure a level playing field. To prepare these actions, the EC is requesting advice from the ESAs on how to address “same activity, same risk, same rules” issues, more fragmented value chains, the scope of the supervisory perimeters, the prudential risks related to non-bank lending and the protection of clients’ funds. As the cover letter that was published explains, the request calls on the three authorities to provide advice on the regulation and supervision of more fragmented or non-integrated value chains, platforms and bundling of services, and risks of groups combining different activities. In addition, it calls upon the EBA to also provide advice on: (i) nonbank lending; and (ii) protection of client funds and the articulation to the deposit guarantee scheme directive.

Request for Technical Advice

Cover Letter

Fund regulation

ESMA highlights improvements for European long-term investment funds (ELTIF) Regulation

On 3 February, ESMA published a letter, sent to the EC, which highlights areas for improvement for the ELTIF Regulation. ESMA explains that while ELTIFs can play an important role in the post-Covid recovery, only a small number of ELTIFs have been launched – the letter provides some data gathered by ESMA on the current shape of the ELTIF market. ESMA states that the need for investments in the real economy to accelerate the recovery from Covid-19 requires some areas of the regulatory framework for investment vehicles, such as ELTIFs, to improve further. The letter shares ESMA’s views on the key topics of the ELTIF review where it sees the need to consider amendments to the framework – specifically, ESMA proposes amendments in the following areas: (i) eligible assets and investments; (ii) authorisation process; (iii) portfolio composition and diversification; (iv) redemptions; and (v) prospectus and cost disclosure.

Read more

ESMA finalises implementing technical standards (ITS) on standardised information to facilitate cross-border distribution of funds

On 1 February, ESMA published its final report (dated 29 January) on its draft ITS under the Regulation on cross-border distribution of funds. The ITS focus on the publication of information by national competent authorities (NCAs) on their websites, the notification of information by NCAs to ESMA and the publication of information by ESMA on its website. The report summarises the feedback received to the consultation that ESMA published on 31 March 2020. ESMA confirms that the final report and draft ITS largely reflect the original consultation proposals, focused on the information to be published on the NCAs websites regarding the national rules governing marketing requirements for funds, and the regulatory fees and charges levied by NCAs in relation to fund managers’ cross-border activities. ESMA notes that the consultation did not encompass the ITS on the: (i) communication of information by NCAs to ESMA; (ii) ITS relating to the central database on crossborder marketing of AIFs and UCITS; and (iii) related notification portal. ESMA confirms that the final report, however, includes all of the relevant ITS required under the Regulation. The draft ITS have been submitted to the EC. The EC will decide whether to adopt the draft ITS within three months of the date of submission.

Read more

Markets and markets infrastructure

Please see our Other Developments section for an update on the FCA Handbook Notice 84.

HMT decision under the share trading obligation (STO) for Switzerland now in force and FCA updates statement on the operation of MiFID markets

On 3 February, HMT published a press release announcing that its decision under the STO for Switzerland, which was laid before Parliament on 13 January, is now in force. HMT explains that this decision means that UK firms can meet their obligations under the STO on BX Swiss AG and SIX Swiss Exchange AG. Switzerland have reciprocated by removing restrictions on UK trading venues, by removing the UK from the list of jurisdictions relevant for recognition – as a result of this, UK venues can register with The Swiss Financial Market Supervisory Authority (FINMA) in order to trade Swiss shares. FINMA has published guidance on this topic as well as the updated list of recognised trading venues. Additionally, on 2 February, the FCA updated its statement on the operation of the MiFID markets regime in respect of the trading of Swiss shares. The FCA confirms, consistent with its supervisory statement on the operation of the MiFID markets regime after the end of the EU withdrawal transition period, how aspects of UK markets regulation will apply to Swiss shares that resume trading on UK trading venues.

HMT Press Release

FINMA Press Release

FINMA Guidance

FINMA List of Recognised Trading Venues

FCA Statement

ESMA updates Q&As on MiFID II and MiFIR market structures topics

On 3 February, ESMA published its updated Q&As on MiFID II and MiFIR market structures topics. The updated Q&As provide clarification on: (i) the classification of direct electronic access (DEA) trades; and (ii) matched principal trading by investment firms.

Read more

Investment Association (IA) letter on active transition of GBP LIBOR referencing bonds

On 3 February, the IA published a letter to companies using LIBOR-linked sterling bonds encouraging them toactively transition from GBP LIBOR. In the letter, the IA warns of the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate after the transition deadline (31 December). The IA states that there remains a significant number of outstanding LIBOR-linked bonds which have not yet transitioned to a new rate. The IA’s members highlight their support for past consent solicitations launched by issuers looking to transition their LIBOR bonds to a new rate, and are also willing to consider alternative arrangements with companies, such as buybacks. In response, the FCA has stated that it welcomes the IA’s initiative to help issuers of LIBOR securities reach out to IA members who hold their bonds to agree conversion through consent solicitation.

Read more

International Swaps and Derivatives Association (ISDA), Futures Industry Association (FIA), and FIA European Principal Traders Association (EPTA) respond to EC consultation on CSDR review

On 2 February, ISDA, the FIA and the FIA European Principal Traders Association published a joint response (dated 1 February) to the EC’s targeted consultation on the review of the settlement and the CSDR. The associations outline their members’ concerns with regards to the detrimental effects arising from the application of the CSDR mandatory buy-in regime for derivatives markets. The associations ask the EC and the co-legislators to clarify that the mandatory buy-in requirements of the CSDR settlement discipline regime do not apply in the context of margin transfers, physically settled derivatives and emission allowances.

Read more

European Money Markets Institute (EMMI) announces outcome of the first annual review of the Hybrid Methodology for Euribor

On 2 February, the EMMI published a press release announcing that it communicated the outcome of the first annual review of the Hybrid Methodology for Euribor. The EMMI states that its analysis in 2020 suggests that four non-material adjustments would improve the Hybrid Methodology for Euribor, namely: (i) reducing the minimum size threshold for eligible transactions from EUR 20 million to EUR 10 million; (ii) including T+3 settlement amongst eligible transactions; (iii) increasing the lookback period of usable historical Level 1 contributions by one day; and (iv) rolling forward the quarterly Euribor futures used to adjust historical contributions by one Target day. The EMMI states that in close collaboration with the Panel Banks, these amendments to the Hybrid Methodology for Euribor will be implemented on 19 April.

Read more

Council of the EU adopts new rules addressing LIBOR cessation

On 2 February, the Council of the EU adopted amendments to the Benchmark Regulation (BMR) addressing the termination of financial benchmarks. The Council states that the aim of the new rules is to reduce legal uncertainty and avoid risks to financial stability by making sure that a statutory replacement rate can be put in place by the time LIBOR is no longer in use. The Council explains that under the new framework, the EC will have the power to replace so-called 'critical benchmarks', which could affect the stability of financial markets in the EU, and other relevant benchmarks, if their termination would result in a significant disruption in the functioning of financial markets in the EU. Additionally, the EC will be able to replace third-country benchmarks if their cessation would result in a significant disruption in the functioning of financial markets or pose a systemic risk for the financial system in the EU. The new rules also cover the replacement of a benchmark designated as critical in one member state, through national legislation. Furthermore, the amendments extend the transition period for the use of third-country benchmarks until the new rules governing the use of such benchmarks are applied. The Council notes that EU supervised entities will be able to use third-country benchmarks until the end of 2023 – the EC may further extend this period until the end of 2025 in a delegated act to be adopted by 15 June 2023, if it provides evidence that this is necessary in a report to be presented by that time. The text of the regulation will be signed on 10 February and is expected to be published in the Official Journal on 12 February. It will enter into force and apply from the following day.

Press Release

Text of the Regulation

ESMA annual report on the application of waivers and deferrals for equity instruments

On 2 February, ESMA published its annual report on the application of waivers and deferrals for equity instruments under MiFIR. The report includes an analysis based on waivers for equity and equity-like instruments for which ESMA issued an opinion to the competent authority (CA) in the period between 1 January and 31 December 2019. The report also includes an overview of the deferral regime for equity and equity-like instruments applied across the different member states. It also includes an overview of the deferral regime for equity and equity-like instruments applied across the different EU Member States. The main findings are that: (i) the Large In Scale (LIS) waiver is the most used; (ii) shares are the instrument type for which waivers are requested most frequently; (iii) the volume under the waivers, both in turnover and number of transactions, is for largely executed in shares; (iv) ETFs are the instruments with the highest percentage of dark trading with respect to the overall volume traded in those instruments; (v) compared to 2018, the percentage of segment MICs applying the LIS deferral regime slightly fell; and (vi) the UK was the country that submitted the highest number of waiver notifications in 2019. The annual report analysing the same aspects for non-equity financial instruments will be published separately in February.

Read more

ESMA final report on proposed fees for benchmarks administrators

On 1 February, ESMA published its final report on its technical advice regarding supervisory fees for benchmarks administrators under the Benchmark Regulation (BMR). ESMA notes that the aim of the report is to advise the EC on fees to be paid by benchmark administrators that will be supervised by ESMA starting in January 2022. Supervisory fees will be collected from administrators of critical benchmarks and those of third-country benchmarks that are subject to the EU recognition regime – the report specifies the type of fees, the services for which fees are due, the amount of the fees as well as the frequency of payment.

Read more

ESMA launches common supervisory action (CSA) with national competent authorities (NCAs) on MiFID II product governance rules

On 1 February, ESMA published a press release announcing that it is launching a CSA with NCAs on the application of MiFID II product governance rules across the EU. ESMA confirms that the CSA will be conducted during this year. ESMA notes that this will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of these key requirements. ESMA states that the CSA will help in the analysis of: (i) how manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument's return expectations; (ii) how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and (iii) what information is exchanged between manufacturers and distributors and how frequently this is done.

Read more

ESMA updates Q&As on the implementation of EMIR

On 29 January, ESMA published its updated Q&As on the implementation of EMIR. It has amended the trade repository (TR) Q&A 3b to explain how to report the direction of derivatives in specific cases that are described. Furthermore, a new Q&A for TRs: (i) clarifies the steps to be taken for the due termination of derivatives when the reporting counterparty ceases to exist; and (ii) specifies how to deal with non-terminated reports of inactive (dissolved) counterparties to ensure that accurate information is provided to the authorities.

Read more

ESMA consults on fees charged to Credit Rating Agencies (CRAs)

On 29 January, ESMA published a consultation paper setting out its main proposals to be included in its Technical Advice to the EC on the revision of Commission Delegated Regulation 272/2012 (the Fees Regulation, which sets out the calculation and payment of fees charged to CRAs). The purpose of the Technical Advice is to highlight areas where the Delegated Regulation might be revised in order to: (i) reflect ESMA’s experience of applying the Delegated Regulation in practice; (ii) incorporate the findings of the EC’s Internal Audit Service and European Court of Auditors reports; and (iii) consider ways to align the fees collection process across ESMA’s supervisory mandates where possible. Alongside the proposed amendments to the Fees Regulation, ESMA intends to amend the general budgetary approach and fee collection process. In addition, the consultation sets out the fees that ESMA intends to charge. ESMA aims to submit its final technical advice to the EC by 31 June. The deadline for comments is 15 March.

Read more

ESMA consults on guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements

On 29 January, ESMA published a consultation paper on draft guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements. ESMA notes that the purpose of these draft guidelines (set out in Annex III) is to enhance clarity and foster convergence in the application of certain aspects of the appropriateness and execution-only requirements. The consultation builds on relevant parts from ESMA’s guidelines on certain aspects of the MiFID II suitability requirements, while adjusting these to the appropriateness and execution-only framework. In addition, the report takes into account the results of supervisory activities conducted by national competent authorities (NCAs) on the application of the appropriateness and execution-only requirements, in particular resulting from the 2019 common supervisory action (CSA) on appropriateness. The deadline for comments is 29 April.

Read more

Payment services and payment systems

UK Finance report – Payments Futures vision for 2030

On 3 February, UK Finance published a report setting out its 10 year vision for the UK payments industry. UK Finance states that the Payments Futures vision for 2030 is to deliver further customer benefit, innovation and to enhance competition. UK Finance further notes that the aim of its strategy is to take a proactive approach to ensure that the UK payments industry is best placed to adapt to a changing world, as well as delivering the best outcomes for all its customers whilst supporting payment providers who wish to compete and flourish within the highly competitive market. UK Finance explains that to focus this work, the industry launched Payments Futures, tasked to look ten years out, considering the conditions, context, constraints, and opportunities for the payments industry as a whole and developing a vision for payments in 2030 – this report provides detail of this work and UK Finance’s collective recommendations.

Read more

Prudential regulation

Please see our Covid-19 section for an update on the EBA’s updated report on the implementation of selected Covid-19 policies.

Please see our Structural Reform section for an update on HMT’s terms of reference and panel members for independent reviews of ring-fencing and proprietary trading.

Please see our Other Developments section for an update on the FCA Handbook Notice 84.

PRA Dear CEO letter – feedback on firms' operational readiness for zero or negative BoE Bank Rate

On 4 February, the PRA published a Dear CEO letter from its Deputy Governor, Sam Woods, in respect of feedback on his previous request (on 12 October 2020) for information about firms’ readiness to deal with a zero or near-zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration, in the event that the BoE’s Monetary Policy Committee (MPC) employs a zero or negative Bank Rate. Amongst other things, Mr Woods states that: (i) the responses to his October letter showed that firms are already able to deal with near-zero rates and that a zero Bank Rate would pose less of an operational challenge than a negative Bank Rate, and would take less time to implement; (ii) whilst a small number of firms do not need to do any development work to implement a negative Bank Rate, the majority of firms would need to make some changes to systems and processes in order to implement either a strategic or tactical solution; (iii) the PRA understands that the majority of firms would be able to implement tactical solutions to accommodate a negative Bank Rate within six months, without material risks to safety and soundness; (iv) the PRA considers that an implementation period of shorter than six months would attract increased operational risks and could adversely impact some firms’ safety and soundness and the PRA’s wider statutory objectives; (v) the PRA will now engage with PRA-authorised firms on their development of tactical solutions, with the aim of having firms put themselves in a position to be able to implement a negative Bank Rate at any point after six months; and (vi) strategic solutions to implement a negative Bank Rate have been reported by many firms as having a significantly longer timeframe than tactical solutions – the PRA would not expect firms to commence work to implement these strategic solutions unless they are already in their plans.

Read more

HMT consultation on implementation of the investment firms prudential regime (IFPR) and Basel 3 standards

On 4 February, HMT published a consultation paper on the implementation of the IFPR and Basel 3 standards. HMT explains that on 21 October 2020, HMT introduced the Financial Services Bill (FS Bill) to Parliament – once the Bill receives Royal Assent, it will enable the FCA and the PRA to introduce the IFPR, and the outstanding Basel 3 prudential standards for credit institutions. The latter includes those standards which make up the UK equivalent to the outstanding elements of the Capital Requirements Regulation II (CRR II). HMT states that the FS Bill will enable the PRA to implement requirements in line with the outstanding Basel 3 standards (those contained in CRR II) which credit institutions and PRA-designated investment firms must comply with. To do this, HMT needs to revoke the sections of the CRR on which the PRA will be implementing requirements themselves. Therefore, this consultation: (i) contains a statement of how HMT intends to exercise its revocation power, including its policy approach to two issues where HMT will not be taking the same approach as the CRR II; (ii) seeks respondents’ views on HMT’s approach to applying the Standardised Approach reporting requirements in relation to the Fundamental Review of the Trading Book (FRTB); (iii) outlines the need for amendments to ensure the macroprudential framework is consistent with the new regime; (iv) proposes consequential amendments to the PRA RAO reflecting new initial capital levels for investment firms; and (v) considers the potential scope of application of the UK resolution regime to FCA investment firms.

HMT confirms that the PRA and the FCA will be consulting on the key elements of the new regimes in the first half of this year. HMT notes that the matters being consulted on in this document will inform secondary legislation, to be made once the FS Bill once it receives Royal Assent. The deadline for comments is 1 April.

Read more

BoE will not be restarting the 2019 liquidity Biennial Exploratory Scenario (BES)

On 3 February, the BoE published a press release to announce that it will no longer be restarting the 2019 liquidity BES. This follows the BoE’s announcement that it was pausing the 2019 liquidity Biennial Exploratory Scenario to alleviate burdens on core treasury staff at participating banks.

Read more

Council of the EU corrigendum to CRR II for observation by Member States

On 3 February, the Council of the EU published a corrigendum to the CRR II for observation by Member States within 8 days. The corrigendum applies to all language versions of the CRR II.  The amendments include to: (i) Article 6, Article 11, Article 13, Article 92a, Article 494 – in each case, deleting the references to “or that are part of a G-SII”; (ii) correct a number of incorrect cross references and use of defined terms across the regulation; (iii) Article 22 to include institutions whose parent undertakings where the parent undertaking is a financial holding company or mixed financial holding company have an institution or financial institution as a subsidiary in a third country (or hold a participation in such an undertaking); (iv) the formula and definitions in Articles 279a, 279b, 280a, 280c, 280d, 280e, 325r, 325w and 501; (v) include non-trading book positions subject to foreign exchange or commodity risk in the introductory parts of Articles 325bb and 325bd and in Article 325bc; (vi) include “capital items or instruments“ in Articles 428k, 428l, 428al, and 428am; and (vii) Article 500 to clarify that the benchmark is the “outstanding amount of all defaulted exposures as at the date of the first disposal”.

Read more

EBA launches 2021 EU-wide stress test exercise and ECB to conduct additional stress test

On 29 January, the EBA launched the 2021 EU-wide stress test exercise and released the macroeconomic scenarios. The EBA notes that this stress test will provide valuable input for assessing the resilience of the European banking sector, and will be conducted on a sample of 50 EU banks. Given the specific macroeconomic conditions caused by the Covid-19 pandemic coupled with a high degree of uncertainty, the EBA states that the focus on the different objectives will depend on the conditions closer to the publication date – the outcome might also provide valuable input to make informed decisions on possible exit strategies from the flexibility measures granted to banks due to the Covid-19 crisis, or on the need for additional measures, should the economic conditions deteriorate further. In terms of the key elements of the scenarios, the EBA notes that: (i) the baseline scenario for EU countries is based on the projections from the national central banks of December 2020, while the adverse scenario assumes the materialisation of the main financial stability risks that have been identified by the European Systemic Risk Board (ESRB) and which the EU banking sector is exposed to; (ii) the adverse scenario also reflects recent risk assessments by the EBA; and (iii) the adverse scenario is based on a narrative of a prolonged Covid-19 scenario in a lower for longer’ interest rate environment, in which negative confidence shocks would prolong the economic contraction. The EBA expects to publish the results of the exercise by 31 July 2021. The EBA has also published a letter from the ESRB, which officially transmits the adverse macrofinancial and adverse market risk scenarios for the stress test. In respect of the adverse macrofinancial scenario, the ESRB states that its calibration has taken into account several of the recommendations proposed by the European Court of Auditors, such as the increase in the overall level of severity and the reduction of the cross-country variation of shocks. The EBA has also published a: (1) methodological note; (2) template guidance; and (3) general FAQs. In addition, as part of the EBA’s 2021 EU-wide stress test exercise, the ECB has announced that it will stress test the 38 largest banks covering broadly 70% of euro area banking assets. The ECB also confirms that in parallel, it plans to conduct its own stress test for 53 banks it directly supervises but that are not included in the EBA-led stress test sample – this exercise will be consistent with the EBA’s methodology and apply the same scenarios, while also including proportionality elements as suggested by the overall smaller size and lower complexity of these banks. The ECB notes that the results of both stress tests will be used to assess each bank’s Pillar 2 capital needs in the context of the Supervisory Review and Evaluation Process (SREP).

EBA Press Release

Macrofinancial Scenario

Market Risk Scenario

ESRB Letter

Methodological Note

Template Guidance

General FAQs

ECB Press Release

Joint Committee of ESAs consult on amendments to the Implementing Regulation for the mapping of external credit assessment institutions' (ECAIs) credit assessments under the CRR

On 29 January, the Joint Committee (JC) of ESAs published a consultation paper on draft implementing technical standards (ITS) amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs’ credit assessments under Article 136(1) and (3) of the CRR. The JC note that since the second amendment to the draft ITS on mapping was developed, two additional credit rating agencies (CRAs) have been registered in the EU, and ESMA has withdrawn the registration of a number of CRAs. Furthermore, the JC is required to monitor the existing mappings and has thus analysed whether the mapping of existing ECAIs remains appropriate – the JC note that the monitoring review has identified that the existing mapping tables of the ITS are to be amended for 10 ECAIs either as a result of: (i) changes in the allocation of Credit Quality Steps (CQS) due to an updated assessment of risk in line with the EBA methodology, based on additional information collected since the mapping was produced; or (ii) assignment of mappings for newly introduced credit rating scales by existing ECAIs. Therefore, the JC state that the Implementing Regulation will need to be amended accordingly – the revised draft ITS will propose amendments to the mapping tables specified in Annex III of Implementing Regulation (EU) 2016/1799. The following changes will be made: (a) introduction of mappings for the two newly established ECAIs and removal from the mapping tables of credit rating agencies that have lost ECAI status following their de-registration as a CRA under the CRA Regulation; and (b) amendments due to the re-allocation of CQS and amendments due to new credit rating scales. The deadline for comments is 5 March.

Read more

Structural reform

HMT terms of reference and panel members for independent reviews of ring-fencing and proprietary trading

On 2 February, HMT published the terms of reference for the two independent reviews of the operation of the legislation relating to ring-fencing, as well as banks’ proprietary trading activities, including the announcement of panel members. HMT has appointed Keith Skeoch as chair of the panel, with responsibility to deliver the reviews. HMT explains that the panel should examine how the ring-fencing regime meets its intended purpose of supporting financial stability and minimising risks to public finances through the effective separation of core banking services from other banking activities. Furthermore, HMT states that the panel’s assessment on the effectiveness of ring-fencing should take into account the wider context of changes to banking regulation in recent years. In addition, HMT notes that the panel should assess the impact of the ring-fencing legislation on the following areas: (i) competition in the banking sector, examining both any benefits from ring-fencing and the extent to which it may have acted as a barrier to growth for smaller banks; (ii) competition in the UK mortgage market, including considering the impact of ring-fencing on the price of mortgages and any risk-taking incentives the regime may have created for certain banks; (iii) the international competitiveness of the UK banking sector; and (iv) the provision of finance and related financial services to the economy, considering in particular whether ring-fencing has had any impact on lending conditions to small and medium-sized enterprises and on the provision of productive finance. HMT also explains that it is within the panel’s scope to: (a) examine any unintended consequences of the ring-fencing legislation and consider any areas that may require further clarification; and (b) review the PRA’s report in respect of proprietary trading engaged in by relevant authorised persons, and assess whether the risks related to proprietary trading are appropriately mitigated and consider any consequences from the evolution of proprietary trading in its assessment. HMT states that the panel should aim to finalise written reports on ring-fencing and proprietary trading within one year of the beginning of the reviews.

Read more

Sustainable finance

ESAs final report and draft regulatory technical standards (RTS) on disclosures under SFDR

On 4 February, the ESAs delivered to the EC the final report, including draft RTS on the content, methodologies and presentation of disclosures under the SFDR. The EBA states that the proposed RTS aim to strengthen protection for end-investors by improving ESG disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. The ESAs have adjusted the proposed disclosures as a result of the responses received to the consultation published on 23 April 2020, which are set out in the report. The EC is expected to endorse the RTS within 3 months of their publication. Furthermore, the draft RTS contain templates for pre-contractual and periodic product disclosures that were subject to an online public survey and to two consumer testing exercises conducted in the Netherlands and Poland – the ESAs have published the results of this consumer testing. The ESAs note that feedback from the public survey and consumer testing confirmed that the information was too complex for retail investors, but the presentation was too simple for institutional investors – however, the ESAs believe that the RTS strike a workable compromise within the very difficult constraints of the SFDR documents listed in Article 6(3). Thus, the ESAs state that in order to devise a single set of pre-contractual disclosures, the ESAs have opted for a balance between the comprehensibility and comprehensiveness – the policy approach chosen for the pre-contractual granularity of information is of minimum standardisation of requirements, which includes mandatory templates while allowing for some tailoring of the approach to specificities of financial products. The ESAs have proposed that the application date of the RTS should be 1 January 2022. The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR. The ESAs have also confirmed that they will publish a consultation on taxonomy-related product disclosures under the Taxonomy Regulation.

Press Release

Final Report

Consumer Testing Results – Netherlands

Consumer Testing Results – Poland

UK joins International Platform on Sustainable Finance (IPSF)

On 3 February, HMT published a press release announcing that the UK has joined the IPSF. HMT states that the UK will contribute to the IPSF’s goals to scale up the mobilisation of private capital towards environmentally sustainable finance at global level and promote integrated markets which aim to deliver on the UK’s domestic and international commitments to tackle climate change. The joint statement of the IPSF (signed by Rishi Sunak, Chancellor of the Exchequer, on 12 January) has also been published.

Press Release

Joint Statement

ESMA letter on addressing challenges in ESG ratings and assessment tools

On 29 January, ESMA published a letter (dated 28 January) by its Chair Steven Maijoor addressed to the EC, sharing ESMA’s views on challenges that it sees in the area of sustainable finance, and which it considers require further attention – specifically, the unregulated and unsupervised nature of the market for ESG ratings and ESG assessment tools, as well as the need to match the growth in demand for these products with appropriate regulatory requirements to ensure their quality and reliability. Mr Maijoor notes that the risks of capital misallocation, product mis-selling and greenwashing are high while, at present, there are no appropriate legal tools to address these issues. The letter provides some of ESMA’s thoughts on what possible actions could be taken to address these issues in an effective and proportionate manner. Specifically, detail is given on a potential future legal framework – Mr Maijoor states that: (i) a common legal definition should be developed for an ESG rating that captures the broad spectrum of assessment tools that are currently available in the market; (ii) any legal entity whose occupation includes the issuing of these ESG ratings and assessments should be required to be registered and supervised by a public authority; (iii) there should be specific product requirements applicable to the ESG ratings and assessments provided by that entity; and (iv) any regulatory framework in this area should ensure that larger more systemic entities are subject to a full suite of organisational and conflict of interest requirements that reflect their growing importance in sustainable finance. In addition to these elements, ESMA encourages further consideration to be given as to how any regulatory framework could accommodate ESG ratings and assessments elaborated outside the EU – ESMA believes the CRA Regulation could be an informative starting point. ESMA notes the high level of consolidation in the market for ESG ratings and ESG rating providers, which often belong to larger groups providing services such as green bond certifications and credit ratings – given this market structure and the overlap with ESMA’s existing mandate for CRAs, ESMA can see merits in being the authority entrusted with direct supervisory responsibilities for these actors.

Read more

Other developments

FCA approach to international firms

On 3 February, the FCA has published a document setting out its general approach to international firms providing or seeking to provide financial services that require authorisation in the UK, following a consultation published in September. In the document, the FCA explains how it will assess these international firms against minimum standards when they apply for authorisation and during ongoing supervision, and its general expectations for these firms including issues relating to the choice between a branch and a subsidiary and in relation to governance, systems and controls. The FCA also set out the circumstances when these international firms could present higher risks of harm and how those risks can be mitigated. The FCA has also published a feedback statement, setting out the main points raised by respondents to the consultation.

Approach Document

Feedback Statement

UK applies to join huge Pacific free trade area Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)

On 1 February, the Government published a statement by Elizabeth Truss (Secretary of State for International Trade), announcing the UK’s request to join the CPTPP.  Assuming that the CPTPP Commission accepts the UK’s request, formal negotiations are set to start this year. The Government states that benefits that the CPTPP membership will bring for businesses include: (i) modern digital trade rules that allow data to flow freely between members, remove unnecessary barriers for businesses, and protect commercial source code and encryption; (ii) eliminating tariffs quicker on UK exports including whisky (down from 165% to 0% in Malaysia) and cars (reducing to 0% in Canada by 2022, two years earlier than through the UK-Canada trade deal); (iii) rules of Origin that allow content from any country within CPTPP to count as ‘originating’; and (iv) easier travel for business people between CPTPP countries, such as the potential for faster and cheaper visas.

Press Release

Written Statement by Elizabeth Truss

FCA Handbook Notice 84

On 29 January, the FCA published Handbook Notice 84, setting out changes to the FCA Handbook made by the FCA Board on 22 December and 28 January. The Handbook Notice reflects changes made to the Handbook by the following instruments: (i) Financial Conduct Authority Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) (No 2) Instrument 2020 (FCA 2020/88); (ii) Technical Standards (Miscellaneous Amendments) (No 2) (EU Exit) Instrument 2020 Instrument 2020 (FCA 2020/89); (iii)  Fees (Trade Repositories and Securitisation Repositories) Instrument 2021 (FCA 2021/1); (iv) Markets in Financial Instruments (Tick Sizes) Instrument 2021 (FCA 2021/2); and (v) Listing Rules (Open-ended Investment Companies) Instrument 2021 (FCA 2021/3). The Handbook Notice also states that, on 22 December 2020, the Board made the Financial Conduct Authority Technical Standards (Capital Requirements Directive and Regulation) (EU Exit) (No 2) Instrument 2020 (FCA 2020/88) and the Technical Standards (Miscellaneous Amendments) (No 2) (EU Exit) Instrument 2020 (FCA 2020/89). FCA 2021/3 comes into force on 4 January 2022, and all of the other instruments are now in force.

Read more

Financial Services Bill 2019-21 second reading

On 29 January, the Financial Services Bill 2019-21 had its second reading in the HOL. As noted in the Bill stages webpage, the Bill will proceed to the committee stage in the HOL, at a date which is yet to be announced.

Second Reading

Bill Stages Webpage

HOC Treasury Committee correspondence highlights concerns with Financial Ombudsman Service (FOS)

On 29 January, the HOC Treasury Committee published correspondence between Rt Hon Mel Stride MP (Chair of the Treasury Committee) and Caroline Wayman (FOS Chief Ombudsman and Chief Executive) relating to FOS's operations and case handling. The correspondence covers issues related to: (i) budget and funding proposals; (ii) case handling times and costs, and ensuring that cases are handled well; (iii) the backlog of cases that have not yet been allocated or resolved; and (iv) timescales for how long each stage of a case should take. The Committee intends to invite Ms Wayman and Baroness Manzoor (FOS Chair) to provide further evidence around the time that the FOS publishes its final budget in the spring.

Read more