Key Regulatory Topics: Weekly Update 4 – 10 June 2021
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There have been numerous publications relating to prudential regulation this week, including the BCBS’ consultation on its preliminary proposals for the prudential treatment of banks' cryptoasset exposures. These proposals divide cryptoassets into two broad groups – those eligible for treatment under the existing Basel Framework with some modifications; and others, such as bitcoin, subject to a new conservative prudential treatment. There is also a continued focus on sustainable finance, underlined by both the variety of updates in this area and the G7 finance ministers and central bank governors communique.
Capital markets
EC indicators monitoring progress on capital markets union
On 9 June, the EC published a toolkit of indicators for monitoring progress on the capital markets union (CMU) and the key CMU objectives: (i) making financing more accessible to EU companies; (ii) making the EU an even safer place for individuals to save and invest long-term; and (iii) integrating national markets into a genuine single market. The EC explains that the CMU indicators will complement evaluations and impact assessments of individual measures under the CMU action plans. The purpose is to: (a) monitor progress towards the CMU objectives; (b) provide a framework for the analysis of capital market development and an empirical basis for future analysis of the overall impact of past CMU measures; and (c) help identify the areas where existing policies may need to be adjusted or new policies may need to be developed. The EC envisages updating the indicators once per year.
Consumer/retail
Please see our Briefing and In Credit Podcast in regard to the FCA’s consultation on “A new Consumer Duty”.
Lending Standards Board (LSB) consults on review of access to banking standard
On 8 June, the LSB published a consultation on its review of the access to banking standard. The objective of the review is to determine whether the standard remains an effective means of achieving fair outcomes for customers impacted by a branch closure or reduction in access to key banking services. The review will consider whether changes are needed to the standard, or its governance and oversight, to help ensure fair outcomes for customers. The LSB states that given the breadth of activity relating to access to banking, the LSB is initiating the review with this consultation, which seeks views and evidence on how to take account of the following: (i) implementation – whether the standard, as has been implemented, seeks the right outcomes for customers and whether it is effective in achieving fair outcomes for consumers and SMEs impacted by branch closures, or a reduction in the availability of key banking services; (ii) changes in the provision and use of banking services – whether, as a result of changes since 2017, any amendments to the standard, the scope and objectives, or the governance and oversight of it, could help improve outcomes for customers impacted by branch closures or a reduction in the availability of key banking services; and (iii) changes to the regulatory environment – whether the standard could be adapted to better support industry commitments on access to banking and whether, in light of recent developments and the potential for duplication of oversight, there is still a benefit to having an industry agreement on access to banking. The deadline for comments is 4 August.
Political agreement on proposed Directive on credit servicers and credit purchasers – Non-Performing Loans (NPLs) Directive
On 7 June, the EP announced that EP negotiators agreed with the Council on common EU standards regulating the transfer of bad loans from banks to secondary buyers while protecting borrowers’ rights. The negotiators agreed on harmonised binding minimum provisions that ensure that borrowers are not worse off following the transfer of their credit agreement. Member states will be able to maintain or introduce stricter rules in order to protect consumers. The measures foster the development of professional secondary markets for credit agreements originally issued by banks and qualified as non-performing – third parties (credit purchasers) would be able to buy such NPLs across the EU. The EP, Council and EC are now working on the technical aspects of the text – thereafter, the agreement must be approved by the Economic and Monetary Affairs Committee and the EP as a whole.
FCA quarterly consultation paper 32
On 4 June, the FCA published its 32nd quarterly CP. This sets out proposed changes to the FCA’s Handbook: (i) to make minor consequential changes to CONC arising from the FCA’s update on 24 May to the statutory information sheets sent to customers in arrears and default under the Consumer Credit Act 1974 (CCA); (ii) amendment to Mortgage Lenders & Administrators Return (MLAR) reporting instructions due to cessation of LIBOR; (iii) to amend the rule in CONC 6.7.4R to enable firms providing credit cards to offer instalment plans to customers without requiring a rule modification; and (iv) amendments to DEPP and FEES as a result of a new power given in the Financial Services Act 2021 to the FCA to cancel or vary FCA-authorised firms’ Part 4A permissions. For the first two proposals listed, the deadline for comments is 5 July. For the latter two proposals listed, the deadline for comments is 2 August.
Financial crime
Please see our Other Developments section for an update on the G7 finance ministers and central bank governors communique.
Fintech
Please see our Prudential Regulation section for an update on the Basel Committee on Banking Supervision agreeing to hold a public consultation on cryptoassets.
Please see our Other Developments section for an update on the G7 finance ministers and central bank governors communique.
FCA regulatory sandbox seventh cohort
On 10 June, the FCA announced that it has accepted 13 firms, out of 58 applicants, into the seventh cohort of its regulatory sandbox. The FCA explains that in this cohort, in the wider context of Covid-19, it was interested in seeing more innovation and testing from firms developing businesses, products or services intended to detect fraud and scams, support the financial resilience of vulnerable consumers, or improve access to finance for SMEs. The FCA also notes that the Global Financial Innovation Network (GFIN), chaired by the FCA with a network of 72 financial regulators and related organisations, developed a cross-border testing environment for scale-up firms. Two firms in the sandbox have been accepted to proceed with domestic tests and the GFIN is working with a select group of firms to agree cross-border testing plans. The FCA reiterates its intention to move away from the cohort process of running the sandbox later in 2021, moving to availability year-round. The FCA explains that in doing so it will also expand and clarify the scope of qualifying propositions to ensure that it supports firms and sandbox tests which will lead to tangible benefits for consumers and markets.
BoE discussion paper on new forms of digital money
On 7 June, the BoE published a discussion paper aimed at broadening the debate around new forms of digital money and seeking views on its emerging thoughts on the subject. In particular, the discussion paper: (i) considers the role of money in the economy – the paper examines existing forms of money and their uses, as well as considers the conditions under which new forms of digital money might be preferred to existing forms; (ii) examines how any move towards new forms of digital money could impact the financial system and wider economy through the lens of money and credit creation; (iii) considers fundamental questions across a range of public policy objectives – the paper highlights the BoE’s close work with other UK and international authorities to understand the challenges and opportunities presented by systemic stablecoins; (iv) reiterates that the BoE has not made a decision around Central Bank Digital Currency (CBDC), but is actively exploring the opportunities and risks of doing so; (v) highlights a number of public policy considerations; (vi) considers an illustrative scenario for the demand for new forms of digital money modelled by BoE staff; (vii) considers the implications for macroeconomic stability – the paper outlines five issues arising from new forms of digital money that can create both a number of opportunities and risks for economic stability; and (viii) considers the regulatory environment – the regulation lays the groundwork for innovation and needs to be clearly established before a systemic stablecoin could safely operate in the UK. The discussion paper also details the five core principles from the responses to the March 2020 discussion paper “CBDC: opportunities, challenges and design” which will guide the BoE’s future exploration of CBDC: (a) financial inclusion should be a prominent consideration in the design of any CBDC; (b) a competitive CBDC ecosystem with a diverse set of participants will support innovation and offer the best chance to deliver the benefits of CBDC; (c) in assessing the case for CBDC, the BoE should assess whether non-CBDC payment innovations could deliver the same benefits – an assessment of the net benefits of CBDC should therefore consider to what extent they can instead be delivered by private sector proposals; (d) a CBDC should seek to protect users’ privacy; and (e) while CBDC should not harm the BoE’s ability to meet monetary and financial stability, opportunities to meet its policy objectives more effectively should also be considered in CBDC exploration. Comments can be made until 7 September 2021.
EBA opinion on the proposed regulation on digital operational resilience for the financial sector (DORA)
On 4 June, the EBA published an opinion on the proposal for DORA. Key general observations include that the ECB: (i) welcomes the proposed regulation, which aims to enhance the cyber security and operational resilience of the financial sector – in particular, the ECB welcomes the aim of the proposed regulation to remove obstacles to, and improve the establishment and functioning of, the internal market for financial services by harmonising the rules applicable in the area of information and communication technology (ICT) risk management, reporting, testing and ICT third-party risk; (ii) welcomes the aim of the proposed regulation to streamline and harmonise any overlapping regulatory requirements or supervisory expectations to which financial entities are currently subject under EU law; (iii) suggests that the EU legislative bodies reflect further on potential inconsistencies between the proposed Regulation and the Network and Information Security Directive (NIS Directive) that may hamper the harmonisation and reduction of overlapping and conflicting requirements for financial entities; (iv) suggests that there should be greater coordination between the proposed Regulation and the proposed NIS2 Directive to clarify the exact scope of reporting to which any given financial entity may be subject; (v) welcomes incentivising financial entities to share on a voluntary basis cyber threat intelligence information amongst each other to enhance and bolster their cyber resilience postures; (vi) supports information sharing and cooperation between the competent authorities for the purposes of the proposed regulation, the European Supervisory Authorities, and the Computer Security Incident Response Teams; and (vii) would welcome the introduction under the proposed regulation of rules on personal data and data retention. Furthermore, the opinion sets out specific observations on: (a) oversight and securities clearing and settlement; (b) prudential supervisory aspects; and (c) ICT risk management, incident reporting, operational resilience testing and ICT third-party risk. In addition, where the ECB recommends that the proposed Regulation is amended, it has set out specific drafting proposals in a technical working document accompanied by explanatory text. The ECB states that further clarification and reflection by the EU legislative bodies is warranted on the interplay between the proposed Regulation and the regulatory technical standards supplementing the CSDR to avert the risk of conflicting requirements. Furthermore, the EBA notes that it should be clarified that exemptions granted to CSDs operated by certain public entities under the CSDR are extended under the proposed Regulation.
Fund regulation
Please see our Prudential Regulation section for an update on the EBA updating methodological guide on risk indicators and detailed risk analysis tools.
Markets and markets infrastructure
Council general approach on the law applicable to the third-party effects of assignments of claims
On 7 June, the Council of the EU announced that it has approved its general approach on the proposal for a regulation on the law applicable to the third-party effects of assignments of claims. The Council notes that: (i) the draft regulation aims to ensure greater legal certainty for businesses and citizens when it comes to cross-border transfers of claims, thereby facilitating access to finance and promoting cross-border investment in the EU; (ii) at the moment, there is not enough legal certainty as to which national law applies when determining who owns a claim after it has been assigned in a cross-border case because member states' substantive rules governing the third-party effects of assignments of claims are divergent; (iii) the proposed regulation will eliminate legal risks and potential systemic consequences of cross-border transactions in claims, enabling cross-border investment, access to cheaper credit and further market integration – this will contribute to increasing legal certainty throughout the EU; and (iv) the draft regulation concerns the third-party effects of the assignment of claims, which are assets in intangible form.
ESMA framework for fourth EU-wide stress test exercise on central counterparties (CCPs)
On 7 June, ESMA published a report setting out the framework for its fourth EU-wide stress test exercise on CCPs. In summary, the 2021 ESMA stress test exercise has the following components: (i) credit stress – assess the sufficiency of CCPs’ resources to absorb losses under a combination of market price shocks and member default scenarios; (ii) concentration risk – assess the impact of liquidation costs derived from concentrated positions; (iii) operational risk – analyse external operational dependencies that are needed by CCPs to provide their critical services; and (iv) reverse stress – for credit, increase the number of defaulting entities and level of shocks to identify at which point resources are exhausted. Similarly, for concentration risk, reverse stress tests will be performed to assess model risk. In addition, the framework includes a new adverse scenario, approved by the European Systemic Risk Board.
EBA draft regulatory technical standards (RTS) on crowdfunding service providers
On 4 June, the EBA published a consultation paper on draft RTS on individual portfolio management of loans offered by crowdfunding service providers under Article 6(7) of the European Crowdfunding Service Providers Regulation. The EBA states that the draft RTS specify the information that crowdfunding service providers offering individual portfolio management of loans shall provide to investors in relation to the method to assess credit risk, and on each individual portfolio. The EBA explains that the draft RTS require crowdfunding service providers to show that the measurement techniques used for credit risk assessments are based on a sufficient number of elements and are appropriate to the complexity and level of the risks underlying: (i) the single projects; (ii) the portfolio; and (iii) the project owners. Furthermore, the draft RTS set out the information that crowdfunding platforms must disclose referring to several key characteristics of each loan included in a certain portfolio. In addition, the draft RTS specify adequate policies, procedures and governance arrangements that providers should have in place when managing, either directly or through a third party provider, contingency funds. The deadline for comments is 4 September.
Working Group on Sterling Risk-Free Reference Rates (RFRWG) updates best practice guide for GBP Loans
On 4 June, the RFRWG published a revised version of its best practice guide for GBP loans. The update addresses the calculation of SONIA-based cost of carry for loans traded on the secondary market. The RFRWG has also updated its GBP Loan Market Q&A for the Working Group’s end-Q1 2021 recommended milestone, including a new question about how the recommended milestone affects facilities with existing extension options.
Payment systems and payment services
EBA guidelines on major incident reporting under PSD2
On 10 June, the EBA published its final revised guidelines on major incident reporting under PSD2. The revised guidelines introduce changes to some of the original classification criteria and introduce a new criterion on the breach of security of network or information systems, which, following the feedback from the public consultation, was narrowed down in scope from ‘breach of security measures’, as originally proposed. This new criterion focuses on malicious actions that have compromised network or information systems related to the provision of payment services and would allow the reporting of additional security incidents that would be of interest to supervisors. To reduce the reporting burden on PSPs, the EBA has removed steps from the reporting process and allowed more time for the submission of the final report. The EBA also simplified and optimised the standardised reporting template. The EBA estimates that these changes will result in a reduction of the reportable incidents by more than 10%. The guidelines will apply as of 1 January 2022. The EBA acknowledges the ongoing negotiations of the EC’s proposal for an EU regulatory framework on digital operational resilience (DORA), which contains, inter alia, a proposal to harmonise and streamline the reporting of ICT-related incidents, not only for payment services but across the entire EU finance sector. Depending on their outcome, the EBA guidelines may eventually be repealed and replaced with the DORA Regulation, which is currently estimated to apply from 2024.
PSR consults on 5-year strategy
On 9 June, the PSR began consulting on a five year strategy. The PSR has identified four strategic priorities to provide a framework for achieving its ambitions: (i) ensure users have continued access to the payment services they rely upon and support effective choice of alternative payment options; (ii) ensure users are sufficiently protected when using the UK's payment systems, now and in the future; (iii) promote competition in markets and protect users where that competition is not sufficient, including between payment systems within the UK and in the markets supported by them; and (iv) ensure the renewal and future governance of the UK's interbank payment systems supports innovation and competition in payments. To deliver these priorities, the PSR’s key proposals include: (a) promoting competition between payment systems; (b) continuing to protect access to cash; (c) making sure that, as interbank payments develop, so do the consumer protections associated with them; and (d) ensuring that regulatory approaches are aligned between regulators, and the division of responsibilities is clear. The deadline for comments is 10 September.
Prudential regulation
Please see our Recovery and Resolution section for an update on the EC’s pending BRRD II and CRD V transposition infringement proceedings.
Please see our Sustainable Finance section for an update on the BoE launching its 2021 Climate Biennial Exploratory Scenario.
Amended implementing technical standards (ITS) on mapping of credit assessments of External Credit Assessment Institutions (ECAIs)
On 10 June, the ESAs joint committee published two amended draft ITS on the mapping of credit assessments of ECAIs. The amendments reflect: (i) the recognition of two new credit rating agencies (CRAs); (ii) the outcome of a monitoring exercise on the adequacy of existing mappings; and (iii) the deregistration of a number of CRAs. In particular the ESAs propose to change the Credit Quality Step allocation for two ECAIs, and to introduce new credit rating scales for nine ECAIs. The ESAs also published individual draft mapping reports illustrating how the methodology was applied to produce the amended mappings, in line with the mandate from the CRR.
Final Report Draft ITS on allocation of credit assessments of ECAIs
Final Report Draft ITS on mapping of ECAIs’ credit assessments
BCBS consults on prudential treatment of cryptoasset exposures
On 10 June, BCBS began consulting on preliminary proposals for the prudential treatment of banks' cryptoasset exposures. The proposed prudential treatment outlined in the consultation divides cryptoassets into two broad groups: (i) those that fulfil a set of classification conditions and as such are eligible for treatment under the existing Basel Framework (with some modifications and additional guidance). These include certain tokenised traditional assets and stablecoins; and (ii) those, such as bitcoin, that do not fulfil the classification conditions. Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment. Central bank digital currencies are not within the scope of the consultation. The deadline for comments is 10 September. Given the rapidly evolving nature of this asset class, BCBS believe that policy development for cryptoasset exposures is likely to involve more than one consultation.
Regulatory Technical Standards (RTS) relating to the standardised approach for counterparty credit riskpublished in OJ
On 10 June, Commission Delegated Regulation (EU) 2021/931 was published in the OJ. The Delegated Regulation contains RTS, supplementing the CRR and: (i) specifying the method for identifying derivative transactions with one or more than one material risk driver for the purposes of Article 277(5); (ii) the formula for calculating the supervisory delta of call and put options mapped to the interest rate risk category; and (iii) the method for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in the given risk category for the purposes of Article 279a(3)(a) and (b) in the standardised approach for counterparty credit risk. The Delegated Regulation will enter into force on 30 June - the twentieth day following its publication in the OJ.
Regulatory Technical standards (RTS) on specification of an economic downturn published in OJ
On 10 June, Commission Delegated Regulation (EU) 2021/930, which contains RTS on the specification of the nature, severity and duration of an economic downturn referred to in Article 181(1) (b), and Article 182(1) (b) of the CRR. This is to be taken into account in downturn loss given default (LGD) and downturn conversion factor (CF) estimation, where these parameters are estimated under the IRB approach. Given the interplay with other EU acts relevant for own-LGD and own-CF estimations, the date of application of this Delegated Regulation has been deferred until 1 January 2021. In particular, institutions will need to comply with the revised materiality threshold set by competent authorities in accordance with Commission Delegated Regulation (EU) 2018/171.
Regulatory Technical Standards (RTS) on criteria to identify material risk takers under CRD IV published in OJ
On 9 June, Commission Delegated Regulation (EU) 2021/923, which contains RTS supplementing the remuneration provisions in CRD IV, was published in the OJ. The RTS set out criteria: (i) to define managerial responsibility, control functions, material business units and a significant impact on a material business unit’s risk profile; and (ii) for identifying staff members or categories of staff whose professional activities have an impact on the institution’s risk profile that is comparably as material as that of staff members or categories of staff referred to in Article 92(3) of CRDIV. The Delegated Regulation repeals Commission Delegated Regulation (EU) No 604/2014, except with regards to investment firms, to which it continues to apply until 26 June. For all other firms the Delegated Regulation enters into force on 14 June.
The Financial Services Act 2021 (Commencement No. 1) Regulations 2021
On 7 June, the Government published the Financial Services Act 2021 (Commencement No. 1) Regulations 2021, which were made on 4 June. The Regulations set out commencement dates for provisions in the Financial Services Act 2021 (the Act) concerning the prudential regulation of investment firms and credit institutions. Firstly, Regulation 2 brings into force on 9th June sections 3, 4 and 5 and Schedule 3 of the Act, which transfer certain prudential regulation matters into rules made by the PRA. Secondly, Regulation 3 brings into force on 26th June section 7 and paragraph 12 of Schedule 4 of the Act, for the purpose of amending article 500d of the CRR. Thirdly, Regulation 4 brings into force on 1st July section 2 and Schedule 2 of the Act, which amend FSMA for the purpose of the prudential regulation of certain investment firms by the FCA. Finally, Regulation 5 brings into force on 1st January 2022 section 1 and Schedule 1 of the Act, which amend the CRR and the Capital Requirements (Country-by Country Reporting) Regulations 2013.
EBA draft Regulatory Technical Standards (RTS) on the reclassification of investment firms as credit institutions
On 7 June, the EBA published a second consultation on its draft RTS on the calculation of the threshold for investment firms. The EBA explains that the identification of large investment firms, which will be subject to the application of the CRR and CRD, depends on the size of the investment firms and of the groups they belong to. The EBA notes that based on the feedback received in the first consultation (published on 4 June 2020), it became clear that further consideration needed to be given to ensure a level playing field for firms, irrespective of where they are domiciled. Thus, the amended proposals included in the second consultation aim at ensuring that the framework is neutral with regards to geographical limitations. Furthermore, the draft RTS set out a proportionate and technically consistent methodology for the calculation of the level of total assets to be compared to the €30 billion threshold and further clarify the notion of relevant entity. In addition, the draft RTS clarify elements related to the application of accounting standards, the treatment of branches, and the treatment of intragroup exposures. The EBA intends to finalise the RTS and submit them to the EC in early Q4. The deadline for comments is 17 July.
EBA methodological guide on risk indicators and detailed risk analysis tools (DRATs)
On 7 June, the EBA published an updated version of its methodological guide on risk indicators and DRATs. The EBA notes that the update includes additional indicators on the topics of Covid-19, funding plans, resolution, and remuneration, as well as updates to other indicators, which are used to better understand institutions' profitability, exposures to sovereign counterparties and own funds requirements for operational risk. The updated guidance is based on the EBA reporting framework version 2.10. The EBA has also published an updated list of EBA risk indicators and DRATs.
EBA study of the cost of compliance with supervisory reporting requirements
On 7 June, the EBA published a report which analyses EEA credit institutions’ experience with the EBA supervisory reporting requirements and process. The report focuses on the costs and challenges they face in that process and sets out 25 recommendations to further improve the proportionality that already exists in the supervisory reporting. The report also considers the benefits of standardised supervisory reporting to the public authorities using that information to carry out their role. The EBA states that the combined effect of the identified recommendations could reduce the reporting costs faced by up to 15-24%. The recommendations address four broad areas: (i) changes to the development process for the EBA reporting framework; (ii) changes to the design of EBA supervisory reporting requirements and reporting content; (iii) coordination and integration of data requests and reporting requirements; and (iv) changes to the reporting process, including the wider use of technology. The report discusses the recommendations across four dimensions: (a) potential qualitative impact on the overall reporting costs; (b) time to take effect on costs once implemented; (c) quantitative estimate of the potential impact on the reporting costs of small and non-complex institutions; and (d) potential impact on the reported data points, in relation to supervisory reporting requirements. The EBA Board of Supervisors agrees with the recommendations in this report – the EBA will incorporate the recommendations into its work programme and gradually implement them as part of the ongoing work. The EBA notes that certain recommendations would lead to specific policy products, such as amendments to the ITS on supervisory reporting, or guidelines/recommendations for the resubmission policies.
BCBS discusses effects of Covid-19 on banks, assesses post-crisis reforms and agrees public consultation on cryptoassets
On 7 June, the BCBS published a press release following a meeting that it held on 4 June to take stock of Covid-19 risks to the banking system and to discuss policy and supervisory initiatives. Regarding Covid-19 risks and vulnerabilities, the BCBS reiterates its guidance that banks should make use of Basel III capital and liquidity buffers to absorb shocks and maintain lending to creditworthy households and businesses – members stressed that it was important for banks to strengthen their operational resilience in line with the recently finalised principles for operational resilience and risk. Furthermore, the BCBS reviewed a report that provides a preliminary assessment of the impact of the implemented Basel III standards during the pandemic – the report will be published in July, and elements of its findings will be included in the FSB's interim report to G20 Finance Ministers and Central Bank Governors on the financial stability lessons learnt from Covid-19. Finally, the BCBS agreed to hold a public consultation to seek the views of external stakeholders on the design of prudential treatment of banks' exposures to cryptoassets – this builds on an earlier discussion paper and the responses received from a broad range of stakeholders, and ongoing initiatives under way at other global forums and standard-setting bodies. The consultation was published on 10 June (please see update above).
PRA policy statement on credit risk – approach to overseas Internal Ratings Based (IRB) models
On 7 June, the PRA published a PS on credit risk, providing feedback to responses to its consultation paper 16/20 “credit risk: the approach to overseas IRB models”. The PS contains the PRA’s final policy: (i) an updated Supervisory Statement (SS) 11/13 IRB approaches; and (ii) an updated pro-forma for firms to complete and submit to the PRA for overseas models moving onto the overseas models approach (OMA). The PRA notes that respondents generally supported the PRA’s proposals, though some responses outlined specific concerns and requested further clarification. The PRA has detailed the specific areas where it has amended or clarified the proposals. Furthermore, the PRA notes that it considers the main issues raised during the consultation relate to the: (a) aggregate amount of credit risk risk-weighted assets (RWAs) derived using overseas models and the aggregate amount of exposure value allowed on the OMA; (b) scope of jurisdictions eligible for the OMA; and (c) scope of asset classes eligible for the OMA.
Recovery and resolution
Please see our Prudential Regulation section for an update on the EBA updating methodological guide on risk indicators and detailed risk analysis tools.
EC pending BRRD II and CRD V transposition infringement proceedings
On 4 June, the EC updated its webpages on transposition statuses to announce that due to the lack or delay of the notification of national transposition measures or their incompleteness, in respect of BRRD II and CRD V, infringement proceedings for non-communication of the national transposition measures are pending against various EU member states.
Sustainable finance
Please see our Other Developments section for an update on the G7 finance ministers and central bank governors communique.
HMT establishes Green Technical Advisory Group (GTAG)
On 9 June, HMT established a new independent group to oversee the Government’s delivery of a green taxonomy. The GTAG will provide independent, non-binding advice to the Government on developing and implementing a green taxonomy in the UK context, including: (i) the rationale, implications and recommendations for any deviations from existing international frameworks or taxonomies; and (ii) the roles of the taxonomy in supporting the UK's transition to Net Zero and in tracking green financial flows. The GTAG will be chaired by the Green Finance Institute and made up of financial and business stakeholders, taxonomy and data experts, and subject matter experts drawn from academia, NGOs, the Environment Agency and the Committee on Climate Change. HMT, the FCA and the BoE will be observers. HMT notes that the Government will also establish an Energy Working Group as part of the GTAG to provide advice on key technologies such as hydrogen, carbon capture, utilisation and storage, and how to address nuclear power in the taxonomy. Other expert groups may also be established where required as work progresses. The GTAG will first meet this month and is expected to run for at least two years. It will provide initial recommendations to the Government in September.
BoE 2021 Climate Biennial Exploratory Scenario (CBES)
On 8 June, the BoE launched its 2021 CBES. The BoE has published the key elements of the CBES, stating that the desired outcomes of the CBES are to: (i) size the financial exposures of participants and the financial system more broadly to climate-related risks; (ii) understand the challenges to participants’ business models from these risks, and gauge their likely responses and the implications for the provision of financial services; and (iii) assist participants in enhancing their management of climate-related financial risks – this includes engaging counterparties to understand their vulnerability to climate change. The BoE states that the CBES will explore the vulnerability of current business models to future climate policy pathways and the associated changes in global warming. Furthermore, the CBES will explore how firms intend to adapt their business models over time, in light of climate changes. Moreover, the BoE notes that the CBES uses three scenarios to explore two key risks from climate change – the Early Action and Late Action scenarios primarily explore transition risks from climate change (risks that arise as the economy moves from a carbon-intensive one to net zero emissions), whilst the No Additional Action scenario primarily explores physical risks from climate change (risks associated with the higher global temperatures likely to result from taking no further policy action). In addition, the BoE has published updated and final guidance for participants of the CBES, which accompanies the final data templates and the final qualitative questionnaire. The purpose of the guidance is to help participants understand the data requirements, including any changes to requirements as compared to those published in April. The final guidance includes additional sections with more detail on the approach to analysis participants should adopt for different asset types, explicitly linking that approach to scenario narratives and published variable paths.
Task Force on Climate-related Financial Disclosures (TCFD) guidance on climate-related metrics, financial impacts, targets and transition plans
On 7 June, the TCFD published a consultation on its proposed guidance on climate-related metrics, targets, and transition plans. Through the consultation, the TCFD aims to learn more about the potential usefulness of climate-related metrics in promoting comparability across financial disclosures as well as feedback on the proposed changes to climate-related targets and transition plans. The proposed guidance has two purposes: (i) providing general guidance for organisations seeking to establish relevant metrics, targets, and transition plans around their climate-related risks and opportunities, similar to the TCFD’s 2020 guidance documents on scenario analysis and risk management; and (ii) proposing specific changes to the Guidance for All Sectors and Supplemental Guidance in the 2017 TCFD Final Report and 2017 TCFD Annex. The TCFD will take the consultation responses into consideration when releasing final guidance in Autumn 2021. In addition, the TCFD published a technical supplement on measuring portfolio alignment. The TCFD explains that the TCFD conducted a public consultation from 29 October 2020–28 January 2021, to gather feedback on potential forward-looking metrics for financial institutions – in conjunction with this consultation, the Portfolio Alignment Team (PAT) issued a report in 2020 titled Measuring Portfolio Alignment: Assessing the Position of Companies and Portfolios on the Path to Net Zero. In light of the findings of the Forward-Looking Metrics consultation, the TCFD commissioned the PAT to conduct further analysis and to: (a) develop technical guidance on emerging best practice as it relates to building portfolio alignment tools and producing forward-looking measurements of financial portfolio alignment with the goals of the Paris Agreement; and (b) identify future research priorities where the field is not yet mature enough to identify best practice. The technical supplement expands on and supersedes the previous PAT report, providing a critical assessment of the strengths and trade-offs of the options available when using forward-looking metrics to measure the alignment of financial portfolios with climate goals. The consultation is open until 7 July.
Network for Greening the Financial System (NGFS) climate scenarios for climate risk assessments
On 7 June, the NGFS published a new set of climate scenarios for climate risk assessments. Although the scenarios are primarily for central banks and supervisors, the NGFS suggests that other actors, including in the financial communities could use the scenarios to help set more granular targets, enhance strategic thinking and their resilience to particular physical risks and form a part of climate-related financial disclosures. The NGFS scenarios have been brought up to date, including by incorporating countries’ commitments to reach net-zero emissions, and have been enriched with an expanded set of macroeconomic variables, country-level granularity, and an online portal through which users can explore the physical risks from climate change. Furthermore, the NGFS states that: (i) reaching net zero CO2 emissions by 2050 on a global basis will require an ambitious transition across all sectors of the economy – the NGFS scenarios highlight important themes to tackle remaining hard-to-abate emissions; (ii) the impacts on the economy will be modest, and positive depending on how smoothly the transition occurs – while stronger policy incentives will be needed to encourage the transition, new economic modelling in this release suggests that higher private and public investment in new technologies and sectors would offset impacts on both demand and supply; and (iii) it is prudent to assess a wide range of outcomes across different sectors and regions given the potential uncertainties – the NGFS scenarios also highlight the increased macro-financial risks that could crystallize in scenarios with divergent policies or delay followed by stronger action, and from physical risks. The NGFS scenarios explore a set of six scenarios which are consistent with the NGFS framework published in the first NGFS comprehensive report covering the following dimensions: (a) orderly scenarios assume climate policies are introduced early and become gradually more stringent – both physical and transition risks are relatively subdued; (b) disorderly scenarios explore higher transition risk due to policies being delayed or divergent across countries and sectors – for example, carbon prices would have to increase abruptly after a period of delay; and (c) hot house world scenarios assume that some climate policies are implemented in some jurisdictions, but globally efforts are insufficient to halt significant global warming – the scenarios result in severe physical risk including irreversible impacts like sea-level rise. Ahead of COP26, NGFS members will undertake a number of case studies with the scenarios and share key learnings, and it will also collaborate with industry to ensure that the scenarios are suitable for wider use. In addition, the NGFS published a website which acts as a portal for the scenarios.
EC adopts Taxonomy Climate Delegated Act
On 4 June, the EC confirmed that it has adopted Commission Delegated Regulation supplementing the Taxonomy Regulation relating to climate change mitigation and adaptation. The text of the Delegated Act, alongside its Annexes, has also been published. The Delegated Act will enter into force 20 days after it has been published in the OJ, and it will apply from 1 January 2022.
Other developments
International Regulatory Strategy Group (IRSG) report on ESG and global progress on social standards
On 7 June, the IRSG published a report on ESG, including a roadmap for global progress on social standards. The aims of the report are to: (i) make recommendations as to how public policy, companies and financial markets participants can all work to achieve better social standards; (ii) identify and summarise key market trends that have brought social issues to the forefront and highlight the growing impact of socially sustainable business; (iii) discuss the challenges which are holding back progress, including the lack of consistency in the different methods for measuring, managing and reporting social impacts; (iv) provide clarity on some leading measurement frameworks and principles and consider how these can be used to effect change; and (v) develop insight from interviews with financial institutions and global standard setters, in recommending how to measure and adhere to principles and frameworks.
G7 finance ministers and central bank governors communique
On 5 June, the G7 finance ministers and central bank governors issued a communique following their meeting that took place in London on 4-5 June to agree actions to address current challenges. Amongst other things, the communique states that the ministers and governors: (i) commit to a multi-year effort to deliver the significant structural change needed to meet net zero commitments and environment objectives in a way that is positive for jobs, growth, competitiveness and fairness; (ii) commit to properly embed climate change and biodiversity loss considerations into economic and financial decision-making, including addressing the macroeconomic impacts and the optimal use of the range of policy levers to price carbon; (iii) emphasise the need to green the global financial system so that financial decisions take climate considerations into account; (iv) support moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants and that are based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks – the ministers and governors agree on the need for a baseline global reporting standard for sustainability, and welcome the International Financial Reporting Standards Foundation’s programme of work to develop this baseline standard; (v) note that G7 Central Banks will assess the financial stability risks posed by climate change, and will consider drawing on scenarios published by the Network for Greening the Financial System; (vi) commit to increasing and improving climate finance contributions through to 2025, including increasing adaptation finance and finance for nature-based solutions; (vii) agree that beneficial ownership registries are an effective tool to tackle illicit finance – the ministers and governors are implementing and strengthening registries of company beneficial ownership information to provide timely, direct and efficient access for law enforcement and competent authorities to adequate, accurate and up-to-date information; (viii) call on all countries to fully implement the Financial Action Task Force (FATF) Standards and strengthen them; (ix) commit to publish creditor portfolios on a loan-by-loan basis for future direct lending by the end of 2021, and urge all other G20 members to do the same, and to undertake the self-assessment in line with the G20’s Operational Guidelines for Sustainable Financing; and (x) commit to work together to consider the wider policy implications of central bank digital currencies – the ministers and governors will work towards common principles, and will publish conclusions later in the year.