Key Regulatory Topics: Weekly Update 31 January - 6 February 2020
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Our weekly update on key regulatory topics affecting the financial services sector.
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Brexit
Please see the Other Developments section for the FCA’s Handbook Notice 73 containing Brexit-related revisions to the FCA Handbook.
FCA update on considerations for UK firms after the Implementation Period
On 3 February, the FCA updated its webpage outlining issues for UK firms to consider during and after the implementation period ending on 31 December. The FCA set out a number of questions to assist firms on deciding whether they conduct business in the EEA and therefore how they will be affected and whether and in what form they will be able to continue. Firms are advised to look into whether there are relevant local permissions and exemptions such as reverse solicitation. Firms must have a clear understanding of their dependencies on any EEA-based outsourcing. The FCA also asks firms to consider if they need to discuss their plans with EU regulators to ensure that they will be ready and able to continue to provide services to their EEA customers.
UK government and EC on UK-EU approach to future relationship negotiations
On 3 February, the EC published its recommendation for a CEU decision authorising the opening of negotiations for a new partnership with the UK. The UK government also published a statement setting out its proposed approach. The EC states that the envisaged partnership should respect the autonomy of the EU's legal order, including the integrity of its single market, ensuring the protection of its financial interests and reflect the UK's status as a non-Schengen third country that cannot have the same rights and benefits as a member. The UK states that it: (a) cannot include any regulatory alignment or any jurisdiction for the CJEU over the UK’s laws; (b) envisages a comprehensive FTA covering substantially all trade, ‘at least as good’ as current EU FTAs; and (c) there should be ‘enhanced provision’ for regulatory and supervisory cooperation and the structured withdrawal of equivalence findings. The EC states that the agreement should: (i) in line with Article V of the General Agreement on Trade in Services, cover all modes of supply and provide for the absence of substantially all discrimination in the covered sectors; (ii) promote regulatory approaches that are transparent, efficient, compatible to the extent possible, and avoid unnecessary requirements; (iii) cover regulatory provisions in line with existing EU free trade agreements in sectors including financial services. The key instrument to regulate interactions between their financial systems will be the UK and EU’s respective unilateral equivalence frameworks. The CEU may adopt the decision at a meeting of the General Affairs Council on 25 February.
FCA and BoE on impact of Withdrawal Agreement on temporary transitional directions
On 31 January, the FCA and the BoE/PRA published an update on the status of the temporary transitional directions that were to come into effect in preparation for a no-deal Brexit at 23:00 on 31 January. Given that the EU Withdrawal Agreement was ratified, the various transitional directions in the EU Exit Instruments and regulators’ rulebooks will not come in force until the end of the Implementation Period on 31 December. The regulators will update firms on the position after this date during the coming months.
ESMA clarifies governance and reporting obligations for UK entities post-Brexit
On 31 January, ESMA published a statement clarifying issues relating to its governance and the reporting obligations for UK entities following the UK's withdrawal from the EU. Under the terms of the withdrawal agreement, from 1 February, the FCA will no longer be a member of ESMA’s Board of Supervisors nor participate in any of ESMA’s other governance bodies. EU law will continue to apply to the UK until the end of the transitional period on 31 December. This means that rights and obligations will continue to apply to UK entities such as reporting and notification obligations under MiFID II, MiFIR, EMIR, CSDR, AIFMD, and MMFR. ESMA will continue to directly supervise registered CRAs, Trade Repositories and Securitisation Repositories established in the UK during the transitional period.
Capital markets
ESMA amended guidelines on enforcement of financial information by national regulators
On 4 February, ESMA published its amended guidelines on the enforcement of financial information by national competent authorities (NCAs), which listed issuers are required to publish under the Transparency Directive. Following a 2017 peer review, ESMA is amending the Guidelines for the purposes of further harmonisation. The amendments focus on: (i) NCAs methods for selecting the issuers whose financial information will be subject to examination; and (ii) the NCAs’ examination procedures. The guidelines will come into effect on 1 January 2022.
ESMA’s technical advice on third country equivalence under article 29 of the Prospectus Regulation
On 31 January, ESMA published a letter to the EC in relation to the EC’s request for technical advice on general equivalence criteria under the Prospectus Regulation, to guide future assessments of third country regulatory frameworks. ESMA, following discussion with national authorities and market participants, has concluded that an equivalence regime under Article 29 of the Prospectus Regulation would raise serious practical challenges. In particular: it permits national authorities to approve third country prospectuses if the third country’s laws impose equivalent information requirements to the Regulation. This limits the added value of the equivalence regime because third country prospectuses would be drawn up under the third country’s disclosure rules, but then scrutinised under the Prospectus Regulation disclosure rules. Article 29 also leaves out some crucial aspects, which should form the basis of the general equivalence criteria such as disclosure rules on risk factors. ESMA concludes that Article 28 already provides third country issuers with access to EU markets and there is limited demand for an equivalence regime from stakeholders.
Conduct
Culture, Compliance and corporate governance in the new decade
Please see our digest on culture, compliance and corporate governance: “This year marks the beginning of a new decade, challenging us to look back at the progress and innovation the business community has made with regard to compliance and corporate governance, but also to look ahead to the 2020s and what will be required of companies to thrive in an increasingly diverse and global consumer market. Highly-developed and formalized ethics and compliance programs are not enough and inadequate compliance training programs may subject a company to civil and criminal liability.”
Fourth FCA webinar on transforming firm culture
On 4 February, the FCA published a webinar (held on 24 January) hosted by Jonathan Davidson, FCA Director of Retail Supervisions and Authorisations that discussed how approaches to assessing firm culture can contribute to a great understanding and management of culture in financial services. The webinar looks at the variety of different approaches that firms are taking and how advances in research, technology and behavioural science have had an effect on this. The webinar’s purpose is to assist firms in assessing their own culture so that they can better identify and manage issues when they occur.
Consumer/retail
FCA Dear CEO Letter to platforms
On 6 February, the FCA published a Dear CEO letter outlining its main concerns with regards to firms that provide a ‘platform service’. The key areas of harm include: (i) technology and operational resilience – ensuring up to date, tested platforms with reports to the FCA of incidents including cyber attacks; (ii) inadequate governance, oversight and risk management of third-party outsourcing; (iii) potential conflicts of interests regarding funds that are listed and best-buy lists; (iv) the implementation of the Investment Platforms Market Study 2019 recommendations regarding transfers, best execution and charges information; and (v) Brexit preparations. The FCA highlight that SM&CR requires firms to have individuals accountable for both operational resilience and outsourced functions with clear prescribed responsibilities.
First Reading of Goods Mortgages Bill [HL] 2019-20
On 5 February, the Goods Mortgages Bill had its first reading in the House of Lords, having been introduced as a Private Members' Bill. A previous attempt to introduce the Bill during the 2017-19 Parliament was stalled when Parliament was dissolved prior to the December 2019 general election. Under the Bill, a charge can be created by an individual over qualifying goods as security for the discharge of an obligation (other than excluded obligations). Qualifying goods are defined as tangible moveable property that are within England and Wales when the charge is created. Excluded goods include aircraft registered in the UK and ships. A register of goods mortgages is to be kept by the Secretary of State in accordance with regulations made by the Treasury or the Secretary of State. A date for the Bill's second reading has yet to be scheduled.
FCA Dear CEO letter about credit card firms approach to persistent debt customers
On 3 February, the FCA published a Dear CEO letter requesting credit card firms to review their approach to customers who have been in persistent debt for 36 months (PD36). The FCA’s two main concerns are that: (i) customers are not responding to letters from firms and that the firms are proposing repayment options that are not reasonable; and (ii) firms are cancelling or suspending credit cards for all PD36 customers, despite the fact that they must have, and notify the customer of, an objectively justifiable reason under the CCA (simply being a PD36 customer is not one of these). Where the FCA identifies poor practice, it will take action.
FCA policy statement and final rules on mortgage advice and selling standards
On 31 January, the FCA published policy statement (PS20/1) setting out its final rules and summarising feedback to CP19/7 relating to changes to giving mortgage advice and selling standards. The changes are being implemented as proposed, with some small changes where feedback suggested they could be clearer or more effective. The changes will: a) make it easier for firms to present options to consumers without giving regulated advice by permitting more customer interaction; and b) help firms make execution-only sales channels easier to use. The FCA is changing its Perimeter Guidance to align it with recently updated guidance on advising on retail investments and make clear that search and filter tools are not necessarily giving advice. Advisers will also be required to explain why they have not recommended a cheaper option where it meets the customer’s needs. Subject to transitional provisions that run to 30 July, the rules with come into force immediately.
Financial crime
EBA factsheet on its strategic objectives for new AML/CTF role
On 5 February, the EBA published a factsheet on its new AML/CTF mandate. Since 1 January, the AML/CTF mandates previously shared among the EBA, ESMA and EIOPA have been consolidated within the EBA. In the factsheet, the EBA sets out its strategic priorities which include: (i) making targeted revisions to guidelines on risk factors (see below); (ii) developing the methodology for risk assessments under CRD IV; (iii) setting out how authorities should address risks in relation to qualifying holdings; (iv) establish a committee comprised of senior members of national authorities and the ESAs; and (v) create a new database to facilitate EU-wide information sharing.
EBA report on competent authorities’ approaches to AML and CTF supervision of banks
On 5 February, the EBA published a report on seven competent authorities' approaches to the AML/CTF supervision of banks. The EBA found that all seven had undertaken significant work to apply the risk-based approach with several in the process of implementing significant reforms. Many had significantly expanded their supervisory teams and staff across the board had a good understanding of EU and international standards. Some common challenges experienced by all seven authorities include: (i) translating theoretical knowledge of ML/TF risks into practice; (ii) shifting the focus from ticking boxes to systems and controls’ actual effectiveness; (iii) taking sufficiently dissuasive measures where required; and (iv) cooperating effectively domestically and internationally. As part of its broadened mandate (see above) the EBA will throughout 2020 continue implementation reviews, training and support and seek to issue further guidance in the common challenging areas.
EBA consultation on revised AML/CTF risk factor guidelines
On 5 February, the EBA began consulting on revised guidelines on AML/CTF risk factors under MLD4 to reflect changes to the legislative framework and emergence of new risks. The updates include: (i) provisions on enhanced CDD related to high-risk third countries; (ii) business-wide and individual ML/TF risk assessments; (iii) CDD measures and the identification of beneficial owners; and (iv) innovative solutions for CDD purposes to tackle emerging risks. The EBA also intends to introduce additional sectoral guidance relating to crowd-funding platforms, providers of currency exchange services, corporate finance, and payment initiation services providers (PISPs) and account information service providers (AISPs). The paper has been developed by the Joint Committee of the three ESAs, although since 1 January ESMA and EIOPA no longer have direct responsibility for AML/CTF (see above). The deadline for comments is 5 May.
JMLSG proposed revisions to guidance reflecting MLRS 2019
On 4 February, the JMLSG published proposed amendments to its AML/CTF guidance, which take into account the MLRs 2019 that came into force on 10 January and also correct some other minor issues. It has made revisions to a number of areas and is in the process of creating a new sector to provide sector specific guidance for cryptoasset exchanges and custodian wallet providers. JMLSG aims to publish this sector by the end of the month. The deadline for comments is 3 April.
Fund regulation
ESRB letter on issues within AIFMD framework
On 5 February, the European Systemic Risk Board (ESRB) published a letter from Francesco Mazzaferro, Head of ESRB Secretariat, to John Berrigan, Director General for Financial Stability, Financial Services and Capital Markets Union at the EC, on shortcomings in the AIFMD framework. The ESRB focus on three areas in its analysis: (i) the suitability of the AIFMD reporting framework and access to data for monitoring systematic risk; (ii) the need to operationalize existing macroprudential policy instruments; and (iii) the on-going development of the macroprudential framework for investment funds. Areas for improvement include: (a) the availability and reporting of legal entity identifiers; (b) a more accurate fund classification framework, reducing the ‘other’ category; (c) more information on fund interconnectedness; (d) revising the metrics on risks of leverage; and (e) revising how funds report liquidity risk. The ESRB notes that work at the European level on the IOSCO 2018 recommendations is on-going, and is aimed at developing a macroprudential framework for investment funds. The letter indicates that the EC will report on its review of the AIFMD in early 2020.
Markets and markets infrastructure
FCA update on EMIR submissions web portal decommissioning
On 6 February, the FCA updated its webpage assisting firms in using Connect to submit their EMIR notifications and applications. The legacy EMIR web portal will be decommissioned on 31 March meaning that all counterparties must register and use the FCA Connect system, except for application for intragroup exemptions from bilateral margining which must be submitted by email. The page sets out how both FCA authorised firms (which will already have a Connect account) and non-financial counterparties can enrol and make submissions. From 10 February non-financial counterparties will need to be enrolled on Connect in order to submit EMIR notifications and applications..
ESMA on compliance with MiFIR pre-trade transparency requirements in commodity derivatives
On 6 February, ESMA published a statement to provide an update on the implementation of its June 2019 supervisory briefing on pre-trade transparency in commodity derivatives. The briefing was issued as a response to an inconsistent implementation of the requirements among national competent authorities (NCAs) and contained a commonly agreed action plan-timetable to improve convergence. All NCAs bar the FCA managed to: (i) identify non-compliant trading venues (TVs); and (ii) confirm the implementation of improvement measures by the April and December 2019 deadlines. The FCA expects to complete these stages in relation to LME and ICE Futures Europe by June.
The International Swaps and Derivatives Association (ISDA) to re-consult on pre-cessation fallbacks
On 5 February, ISDA announced that it will re-consult on how to implement pre-cessation fallbacks. Based on the results of the consultation, ISDA will deliver the appropriate solution later this year. Their decision to re-consult follows the FCA’s and ICE Benchmark Administration’s release of new information on the length of time LIBOR may be published if the benchmark is no longer representative of the underlying market, as well as a consultation by LCH (dated 27 January) which clarified pre-cessation issues. The ISDA consultation will ask whether their 2006 Definitions should be amended to include fallbacks that would apply to all covered derivatives following the permanent cessation of an IBOR or a ‘non-representative’ pre-cessation event, whichever occurs first. If there is insufficient support for this approach, then ISDA will amend their 2006 Definitions to enable derivatives counterparties to incorporate pre-cessation fallbacks alongside permanent cessation fallbacks if they choose to. A protocol for amending legacy derivatives would also be published with a similar ability to opt-in to pre-cessation fallbacks when implementing permanent cessation fallbacks. On 6 February ISDA updated its FAQs on the IBOR Fallback Rate Adjustments, as well as publishing a table identifying its current work streams on interest rate reform.
The Investment Association (IA) on the standardisation of reject codes in FX Trading
On 5 February, the IA published proposals for the standardisation of reject codes in FX Trading. The IA suggest that a standardised messaging protocol with a defined set of reject codes could assist asset managers and their clients. The IA recognise that some execution providers may wish to distinguish their level of service by providing tailored reject codes and does not wish to restrict such service distinction nor the right of parties to decide the specificities of their business relationships. The IA proposes a number of high-level reject code categories which could be consistently used across all execution providers so as to facilitate comparison and automation. The proposed reject codes are intended to ensure that the proximate reasons for a quote or trade being rejected would be reported under one of the high-level categories. The IA will also explore the possibility of using agreed digital protocols, such as by use of tags under FIX messages.
FSMA 2000 (Central Counterparties, Investment Exchanges, Prospectus and Benchmarks) (Amendment) Regulations 2020
On 5 February, The FSMA 2000 (Central Counterparties, Investment Exchanges, Prospectus and Benchmarks) (Amendment) Regulations 2020 were published. These Regulations seek to update UK law to reflect developments in EU law, in particular in relation to (i) EMIR 2.2; (ii) the SME Growth Markets Regulation (which updates the Prospectus Regulation); (iii) the Low Carbon Benchmarks Regulation; and (iv) MiFID II as amended by the IFD. The Regulations: (a) update the definition of EMIR in section 313 of the FSMA 2000, The FSMA 2000 (Qualifying EU Provisions) Order 2013, The FSMA 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013, The FSMA 2000 (Markets in Financial Instruments) Regulations 2017 and The FSMA 2000 (Regulated Activities) Order 2001; (b) amend the FSMA 2000 (Prospectus) Regulations 2019 to provide clarity over which UK regulator is responsible for issuing prior approval of documents for the purposes of exemptions under Article 1(4)(f) and (5)(e) of the Prospectus Regulation ((EU) 2017/1129); and (c) amend the Qualifying Provisions Order to ensure that the FCA can apply its powers to enforce obligations in relation to low carbon benchmarks. These amendments come into force on 27 February. The Regulations also give effect to the amendments to the MIFID II tick size regime as introduced by the IFD by amending the FSMA 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulations 2001. This amendment comes into force on 26 March
ESMA launches common supervisory action with NCAs on MiFID II suitability rules
On 5 February, ESMA announced the launch of a common supervisory action (CSA) with national competent authorities (NCAs) relating to the suitability requirements under MiFID II. The CSA will allow ESMA and the NCAs to gauge the progress made by intermediaries in the application of the suitability assessment as well as how they take into account the costs of investment products when they are recommending them to clients.
ESMA technical advice on effect of MiFIR production intervention requirements
On 4 February, ESMA published a final report containing technical advice to the EC on the effects of the product intervention measures set out in MiFIR. The measures seek to protect retail investors by limiting distribution of speculative products such as binary options and CFDs to retail clients. ESMA’s advice includes: (i) a recommendation to address the risk arbitrage between MiFID firms and fund management companies; (ii) advice on how to improve convergence and the level playing field across the single market by making temporary measures permanent and extending ESMA’s powers to allow the introduction of temporary 18 month bans; (iii) a request for clarity in applying the measures to firms acting on a cross-border basis; (iv) measures to facilitate the adoption by a national authority of a measure already adopted by ESMA.
ESMA final report on RTS postponing entry into force of CSDR RTS on settlement discipline
On 4 February, ESMA published a final report containing draft regulatory technical standards (RTS) postponing the entry into force of Commission Delegated Regulation (EU) 2018/1229, which supplements CSDR containing RTS on settlement discipline. It was originally meant to apply from 13 September 2020. Stakeholders have informed ESMA of the need for more time to carry out the extensive IT developments, market testing and adjustments to legal arrangements implementation of the RTS requires. An additional factor is the fact that necessary developments such as TARGET2 Securities penalty mechanism being established by the eurosystem will not actually go live until 22 November. ESMA proposes to postpone the entry into force of the RTS until 1 February 2021.
ESMA consults on MiFIR transparency regime for equity instruments
On 4 February, ESMA began consulting on potential amendments to the MiFIR transparency regime for equity and equity-like instruments, the double volume cap (DVC) mechanism and the share trading obligation. ESMA’s key proposals include: (i) to reduce the number of waivers available to market participants or make use of them subject to stricter requirements; (ii) to simplify the DVC regime, if maintained, applying it in a wider and stricter way; (iii) to address the concerns of the volume of trading and perceived lower transparency by systematic internalisers; and (iv) to clarify the share trading obligation in relation to third-country shares. ESMA intends to submit its final report to the EC by July. The deadline for comments is 17 March.
ESMA consults on MiFIR report on systematic internalisers in non-equity instruments
On 3 February, ESMA published a consultation paper on the MiFIR pre-trade transparency regime for systematic internalisers (SIs) active in non-equity instruments. MiFIR require ESMA and competent authorities to monitor SIs application of their pre-trade transparency obligations in relation to non equity instruments: bonds, structured finance products, emission allowances and derivatives. ESMA is seeking views on proposals to make the framework more simple and efficient and presents their analysis of the quantitative monitoring of sizes at which quotes are made available by SIs to their clients and other market participants. ESMA intends to submit its final report to the EC in July. The deadline for comments is 18 March.
ESMA consultation on technical standards on MiFID II and MiFIR third-country firm regime
On 31 January, ESMA published a consultation paper on draft technical standards relating to the provision of investment services and activities to eligible counterparties and per se professional clients in the EU by third-country firms. ESMA is consulting on: (i) draft RTS and ITS to reflect the changes introduced to MiFIR by the IFR; and (ii) draft ITS to reflect changes to MiFID introduced by the IFD. Such changes include new annual reporting requirements and a new power for ESMA to ask third country firms in the ESMA register to provide data relating to all orders and transactions in the EU for a period of 5 years. ESMA is newly mandated to publish an annual list of all active branches within the Union and the branches must report annual details of their activities to their respective national competent authorities. ESMA intends to publish the draft technical standards in Q3 2020. The deadline for comments is 31 March.
Payment services and payment systems
Pay.UK consultation on approach to adopting ISO 20022 for UK payment systems
On 4 February, Pay.UK published a consultation paper setting out its proposals for the adoption of ISO 20022, the common global messaging standard, along with other key standards for the clearing and settlement capability that will be enabled by the New Payments Architecture (NPA). The NPA is the UK payments industry's proposed new way of organising the clearing and settlement of payments between banks, and will eventually replace Bacs and Faster Payments. The paper sets out: (i) the recommended direction that Pay.UK is proposing following their work with the BoE; (ii) the technical details for the ISO 20022 message standard; and (iii) future direction on concepts that have emerged through the consultation process, which require a degree of standardisation across the payments ecosystem. Pay.UK plans to publish its findings in the second half of 2020. The deadline for comments is 31 March.
BoE RTGS renewal programme timeline
On 3 February, the BoE published an indicative timeline relating to its real time gross settlement (RTGS) renewal programme. The programme aims to deliver a range of new features and capabilities in the areas of increased resilience, improved user functionality and wider interoperability, which the timeline now sets out. The timeline includes the BoE issuing the enhanced ISO 20022 message set and technical guidance later on in 2020, to go live in 2022. It also outlines the expected timescales for each step of the renewal programme up to its completion at the beginning of 2025. The BoE intends to provide greater clarity in summer 2020 once it has appointed a technology partner to develop the renewed RTSG service.
RTGS Renewal Programme webpage
Prudential regulation
Second ECB consultation on guide on assessment methodology for IMM and A-CVA
On 5 February, the ECB published for consultation a guide outlining its assessment methodology of the internal models banks apply to calculate their counterparty credit risk (CCR) exposure under the CRR. The guide also describes how the ECB will assess the advanced methods banks use to calculate the own funds required to account for the risks related to credit valuation adjustments. For CCR the ECB draws on approaches already used for other risk types, aiming to harmonise practice. This is the second ECB consultation on this matter, having published a draft version of the guide for consultation in December 2017. The ECB states that it has revised the previous version of the guide to reflect feedback received on the first consultation and the final version of its guide to internal models. The deadline for comments is 31 March.
EBA launches 2020 EU-wide stress test
On 3 February, the EBA published the 2020 EU wide stress test methodological note describing the common methodology that defines how banks should calculate the stress impact of the common scenarios and setting the constraints for their bottom-up calculations, as well as providing guidance for performing the test. The sample of banks involved covers about 70% of the banking sector assets in the Euro area. The EBA has also published the adverse macro-financial scenario that follows a ‘lower for longer’ narrative of historically low interest rates, which coupled with a strong drop in confidence and international trade tensions leads to a significant weakening of economic growth. By 2022, the EU real GDP would decline by 4.3% cumulatively. The EBA has also published a press release, which has links to the associated templates, methodological note, scenario and guidance. The EBA expects to publish results by 31 July 2020.
EBA report on benchmarking of diversity practices under CRD IV
On 3 February, the EBA published a report on the benchmarking of diversity practices in credit institutions and investment firms under CRD IV, which requires firms: (i) to take into account the diversity of their management body when recruiting; (ii) implement a diversity policy; and (iii) significant institutions must set actual targets for the under-represented gender. The EBA’s data shows that institutions with a more gender-balanced body are more profitable when compared to the average. Despite this, as of September 2018 almost 42% of institutions have still not adopted a diversity policy and two thirds of institutions have executive directors of only one gender. Small credit institutions performed worse than significant ones with the proportion of women in management bodies actually falling since 2015. There was also a significant difference between different member states with regard to policies, targets and levels of diversity. The EBA also collected data on remuneration for the management body to establish if there is a gender pay gap. In most institutions, the remuneration of male members of the management body is higher than that for female members. The EBA will consider the need to issue guidelines.
Two EBA reports on the consistency of risk weighted assets (RWAs)
On 31 January, the EBA published two reports on the consistency of RWAs across all EU institutions authorised to use internal approaches for the calculation of capital requirements. The reports cover credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. In its announcement, the EBA summarised the reports, including exercises conducted in them. The results confirm that the majority of risk-weights variability can be explained by fundamentals. The credit risk report covers the results from the 2019 LDPs and HDPs exercise and it examines the different drivers leading to the observed dispersion across banks' models. On HDPs, the EBA performed a comparison with the standardised approach risk weights. The market risk report covers the results from the 2019 market risk benchmarking exercise and summarises the conclusions drawn from a hypothetical portfolio exercise that was conducted by the EBA during 2018/19. The 2019 analysis shows a substantial reduction in terms of dispersion in the initial market valuation and some reduction in risk measures, especially for the aggregated portfolios.
Sustainable finance
ESMA Sustainable Finance Strategy
On 6 February, ESMA published its sustainable finance strategy setting out how it will embed ESG factors in its work. ESMA’s key sustainable finance priorities include: (i) completing the regulatory framework on transparency obligations via the Disclosures Regulation in collaboration with the ESAs; (ii) trends, risks and vulnerabilities reporting in particular with green bond, ESG investing and emission allowance trading indicators; (iii) climate-related stress testing; (iv) pursuing convergence of national practice on ESG factors with a focus on mitigating green-washing and mis-selling practices; and (v) participating in the development of the EU taxonomy.
Other developments
FRC consultation on plans for greater regulatory oversight
On 5 February, The Financial Reporting Council (FRC) announced a major shakeup of its oversight and supervisory functions in response to last year’s independent review, which concluded, amongst other improvements, that the FRC should transition to a new regulatory body. As a result of redefining its purpose, principles and objectives, it will be reorganised into four Divisions: (i) Regulatory Standards and Codes; (ii) Supervision; (iii) Enforcement; and (iv) Corporate Services. To meet the requirements of the independent review, the FRC will recruit over 100 additional employees and streamline its decision-making processes, involving an increase in levies from £41.7m to £47.2m. With regard to its supervision role: (a) the FRC will increase the resources for those working on Audit Quality and Corporate Reporting Reviews by 25%; (b) expand Audit Firm monitoring from the Big 4 to challenger firms; and (c) expand its oversight of professional bodies and take initial steps on auditor registration governance as recommended in the review. The deadline for comments is 28 February.
FCA Handbook Notice 73
On 31 January, the FCA published Handbook notice 73 reflecting a number of changes made by the FCA board to the Handbook due to the following instruments: (i) Conduct of Business Sourcebook (Independent Governance Committees) Instrument 2019 FCA, taking account of ESG factors and stewardship in workplace personal pensions and pathway solutions; (ii) Fees (Cryptoasset Business) Instrument 2020 (FCA 2020/1), setting cryptoasset firm registration fees; (iii) Mortgages (Advice) Instrument 2020 (FCA 2020/4), giving mortgage consumers more choice about support and barriers to mortgage distribution innovation. There were two Brexit related instruments: (a) Exiting the European Union: Deferral of Commencement and Miscellaneous Fees Instrument 2020 (FCA 2020/6), deferring guidance on Fees until the end of the implementation period (IP); and (b) Exiting the European Union: IP (Guidance) Instrument 2020 (FCA 2020/7), on interpreting the handbook during the IP.