Key Regulatory Topics: Weekly Update 4-10 November 2022
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This week in the UK, the FSM Bill completed its committee stage in the House of Commons. In addition, the FCA published its Q3 2022 financial promotions data, and a speech on the use of AI and the need to move from fear to trust. Meanwhile in Europe, numerous Delegated and Implementing Regulations made under the Crowdfunding regulation were published in the OJ, and the EBA published its final methodology and draft templates for the 2023 EU-wide stress test. The Council of the EU also agreed its general approach on the proposed CRR III and CRD VI.
Please see the ‘Markets and Markets Infrastructure’ section for the Delegated and Implementing Regulations made under the Crowdfunding Regulation that have been published in the OJ.
FCA financial promotions quarterly data Q3 2022
On 4 November, the FCA published its financial promotions quarterly data for Q3 2022. The data focuses on the FCA’s action against authorised firms breaching financial promotion rules and referrals and investigations into unregulated activity. During Q3, the FCA intervened to amend or withdraw 4,151 financial promotions, the highest since it started publishing the data. Retail lending, investments and banking are the sectors with the highest rate of amends to or withdrawal of adverts, amounting to 95% of the FCA’s interventions with authorised firms. The FCA also issued 303 alerts about unauthorised firms and individuals, with over 20% of these relating to clone scams. The data details various action to curb misleading and unfair behaviour by firms as well as tackling scammers. The FCA's intervention has resulted in 66 buy now pay later (BNPL) promotions from one firm across various social media platforms being amended or withdrawn. It said the adverts did not give fair or prominent risk warnings and were misleading about fees, and follows a reminder from the FCA earlier this year to BNPL firms about misleading promotions. The FCA notes that as consumers feel the financial squeeze, they could be tempted by high risk, unregulated products and services or they could become a target for scammers preying on moments of vulnerability. As a result, the FCA is doing more to tackle false claims in adverts, issue prompt warnings to customers, and is engaging with the largest tech and social media platforms as they also play an important part in protecting consumers from online harm. Mark Steward, FCA Executive Director of Enforcement and Market Oversight, stressed that now more than ever changes are needed to the Online Safety Bill to cover paid-for financial services advertising online.
FCA speech on AI
On 9 November, the FCA published a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer on the use of AI and moving from fear to trust. Ms Rusu began by stressing the importance of not being caught up in the wider debates surrounding AI and the fear of the unknown. Ms Rusu believes that a more balanced perspective can be found in the UK financial services industry. A recent BoE and FCA survey found that 72% of firms reported to be using or developing some form of AI, with many firms being upbeat about the benefits of machine learning, including enhanced data and analytics capabilities, operational efficiency and better detection of fraud and money-laundering. She believes the key question for financial services is whether AI can be managed through fine-tuning the existing regulatory framework, or whether a new approach is needed. Ms Rusu believes that the UK already has a framework – the SMCR - that can be applied to many of the new regulatory challenges posed by the use of AI in UK financial markets. Ms Rusu emphasised that it is only with strong governance that people’s approach to AI can move from fear to trust. From a practitioner’s point of view, she highlights that AI is all about data, and the importance of data quality assessment to determine relevance, representation and suitability. Ms Rusu states that in order to have safe and responsible AI adoption, it must be underpinned by high-quality data. Ultimately, Ms Rusu remains optimistic about the future uses of AI, in financial services and beyond, but stresses the need to take responsibility and not remove accountability for decision-making away from firms. The FCA encourages anyone interested in this topic to engage with its AI discussion paper to help make that regulation more agile and dynamic.
Delegated and Implementing Regulations under Crowdfunding Regulation published in OJ
On 8 November, a number of Delegated and Implementing Regulations made under the Crowdfunding Regulation were published in the OJ. The following regulations will enter into force on 28 November, 20 days following their publication in the OJ: (i) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying conflicts of interest requirements for crowdfunding service providers; (ii) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying requirements and arrangements for the application for authorisation as a crowdfunding service provider; (iii) Delegated Regulation amending the Crowdfunding Regulation with regard to RTS for the exchange of information between competent authorities in relation to investigation, supervision and enforcement activities in relation to European crowdfunding service providers (ECSPs) for business; (iv) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying the entry knowledge test and the simulation of the ability to bear loss for prospective non-sophisticated investors in crowdfunding projects; (v) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying the methodology for calculating default rates of loans offered on a crowdfunding platform; (vi) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying the measures and procedures for crowdfunding service providers' business continuity plans; (vii) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying the requirements, standard formats and procedures for complaint handling; (viii) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS on individual portfolio management of loans by crowdfunding service providers, specifying the elements of the method to assess credit risk, the information on each individual portfolio to be disclosed to investors, and the policies and procedures required in relation to contingency funds; (ix) Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS for the key investment information sheet; (x) Implementing Regulation laying down ITS for the application of supplementing the Crowdfunding Regulation with regard to data standards and formats, templates and procedures for reporting information on projects funded through crowdfunding platforms; (xi) Implementing Regulation laying down ITS for the application of the Crowdfunding Regulation with regard to standard forms, templates and procedures for the co-operation and exchange of information between competent authorities and ESMA in relation to ECSPs for business; (xii) Implementing Regulation laying down ITS for the application of the Crowdfunding Regulation with regard to standard forms, templates and procedures for the co-operation and exchange of information between competent authorities concerning ECSPs for business; and (xiii) Implementing Regulation laying down ITS for the application of the Crowdfunding Regulation with regard to the standard forms, templates and procedures for the notifications of national marketing requirements applicable to crowdfunding service providers by competent authorities to ESMA.
FSB progress report on implementation of OTC derivatives market reforms
On 7 November, the FSB published a report on the progress of the implementation of OTC derivatives market reforms made by standard-setting bodies, national and regional authorities and market participants. Overall, the FSB considers the implementation of the G20’s OTC derivatives reforms to be well advanced. However, there continues to be only incremental annual progress across FSB member jurisdictions. The report highlights that: (i) there has been steady progress in the implementation of final higher capital requirements for NCCDs, now in place in 18 FSB member jurisdictions, up from 15 in the last progress report in 2021; (ii) margin requirements for NCCDs are in force in 16 jurisdictions (unchanged since the 2020 progress report); (iii) trade reporting requirements for OTC derivatives transactions are in force in all FSB member jurisdictions, except one (unchanged since the 2020 progress report). Preparations for authorising a trade repository in the remaining jurisdiction are ongoing; (iv) central clearing requirements are in force in 17 FSB member jurisdictions (unchanged since the 2020 progress report). Some jurisdictions are taking steps towards the implementation of mandatory central clearing, including authorisation of a CCP in the jurisdiction; and (v) there have been few developments in jurisdictions regarding platform trading requirements, which are in force in 13 FSB member jurisdictions (unchanged since the 2020 progress report). The report also notes that by September 2021, most jurisdictions had reported that they had withdrawn or had not extended measures, previously introduced in response to the Covid-19 pandemic, to alleviate the operational burden for OTC derivatives market participants or had embedded changes to limit and mitigate excessive procyclicality into permanent supervisory frameworks.
Council of EU agrees general approach on proposed CRR III and CRD VI
On 8 November, the Council of the EU announced that it has reached its position on the proposals amending the Capital Requirements Directive and the Capital Requirements Regulation. In its position, the Council of the EU added technical improvements to the areas of credit risk, market risk and operational risk. It also added enhanced proportionality rules for small banks, in particular concerning disclosure requirements for small and non-complex institutions. The Council of the EU also revised the EC proposals as regards the “fit and proper” framework for assessing the suitability of members of the institutions’ management bodies and key function holders, further considering national specificities and practices. In addition, the proposals aim to harmonise minimum requirements applicable to branches of third-country banks and the supervision of their activities in the EU as well as to harmonise supervisory tools and powers to make the framework more suitable for member states’ specific market conditions. The Council of the EU will now start negotiations with the EP to agree on a final version of the texts.
EBA opinion on set-up and operationalisation of intermediate EU parent undertakings under CRD IV
On 7 November, the EBA published an opinion, dated 27 October, on the set-up and operationalisation of intermediate EU parent undertakings (IPUs) under Article 21b of the CRD IV. The opinion aims to clarify aspects of the EU regulatory framework relating to the IPUs as laid down in Article 21b(2) of the CRD IV, with a view to ensuring uniform application of the relevant regime by the competent authorities and resolution authorities throughout the EU. The opinion provides guidance for cases where the third country group (TCG) intends to have in place two IPUs rather than a single IPU because it is subject to segregation of activities imposed by mandatory third country law, or because having a single IPU would make resolution less effective. It discusses the process and correct sequencing of actions for achieving the timely set-up of the IPU and sheds light on the two IPU structure, underscoring that it is an exception to the single IPU and its approval is subject to restrictive interpretation. The opinion clarifies the information requirements and the assessment criteria, both from a supervisory and resolution perspective, for the approval of the two IPU structure by the competent authority. In addition, the opinion underscores the importance of adequate and effective arrangements to ensure the safety and soundness of the IPU and its subsidiaries in the EU. It also draws attention to internal governance, outsourcing, risk management, liquidity and funding arrangements.
EBA methodology and draft templates for 2023 EU-wide stress test
On 4 November, the EBA published the final methodology, draft templates and template guidance for the 2023 EU-wide stress test, along with the milestone dates for the exercise. The methodology and templates cover all relevant risk areas and have considered the feedback received from industry. The 2023 EU-wide stress test uses a constrained bottom-up approach with some top-down elements. Focus is on the assessment of the impact of adverse shocks on banks’ solvency. Banks are required to estimate the evolution of a common set of risks (credit, market, counterparty, and operational risk) under an adverse scenario. Banks are also asked to project the impact of the scenarios on main income sources. For net fee and commission income, risk weights of securitisation, and the credit loss path of sovereign exposures, banks are required to make use of prescribed parameters. The methodology includes the sample of banks participating in the exercise. The stress test templates along with a template guidance have been published in their draft versions as they can still be subject to minor technical adjustments before their final publication. The stress test exercise will be launched in January 2023 with the publication of the macroeconomic scenarios. The results will be published by the end of July 2023.
Regulatory reform post Brexit
Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2022 made
On 9 November, the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2022 were published on legislation.gov.uk, along with an explanatory memorandum. The Regulations extend by 12 months, to 31 December 2023, the transitional arrangements under Parts 2 and 3 of the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019, which enable specified categories of Gibraltar-based firms to provide financial services in the UK and facilitate the access by similar types of UK-based firms to Gibraltar’s financial services market. The Regulations will come into force on 15 December.
FSM Bill committee stage in House of Commons completed
On 4 November, a revised version of the Financial Services and Markets Bill (FSM Bill) was published, as amended in the committee stage. The FSM Bill will return to the House of Commons for its report stage, where the amended FSM Bill can be debated and further amendments proposed. The date for the House of Commons report stage has not yet been scheduled.
TPT consultation on disclosure framework
On 8 November, the UK Transition Plan Taskforce (TPT) published for consultation its disclosure framework for private sector climate transition plans and accompanying implementation guidance. It has also launched a Sandbox for companies and financial institutions to test implementation. The aim of the TPT disclosure framework is to assist entities to disclose credible, useful, and consistent transition plans. The framework builds on the existing recommendations to disclose transition plans under the TCFD Recommendations and accompanying guidance, as well as transition plan disclosure recommendations in the ISSB’s proposed standards. The framework builds on these existing recommendations by providing specificity and granularity on what UK transition plans should include. The TPT considers that a good practice transition plan should cover: (i) an entity’s high-level ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG and climate resilient economy. This includes GHG reduction targets (e.g., a net zero commitment); (ii) short-, medium- and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed; (iii) governance and accountability mechanisms that support delivery of the plan and robust periodic reporting; and (iv) measures to address material risks to, and leverage opportunities for, the natural environment and stakeholders such as the workforce, supply chains, communities, or customers which arise as part of these actions. The TPT recommends disclosures in relation to 19 sub-elements, within five elements: foundations; implementation strategy; engagement strategy; metrics and targets; and governance. The accompanying draft implementation guidance recommends that (a) entities publish a standalone transition plan which sits alongside the Annual Financial Report at least every three years, and sooner if there are significant changes to the plan; and (b) in interim years, that progress against the transition plan and material updates should be reported annually in general financial reporting. The drafts of the TPT disclosure framework and implementation guidance will be open to consultation until 28 February 2023. The TPT will then reflect on feedback received with a view to finalising the framework in 2023. The final version of the implementation guidance will include further guidance such as case studies and examples of good practice.
IOSCO call for action to promote good practices to counter risk of greenwashing
On 7 November, IOSCO published a call for action calling upon all voluntary standard setting bodies and industry associations operating in financial markets to promote good practices among their members to counter the risk of greenwashing related to asset managers and ESG rating and data providers. As part of the call for action, IOSCO will engage with voluntary standard setting bodies and industry associations to promote the adoption and implementation of the good practices stemming from the IOSCO recommendations amongst their members. The call for action sets out IOSCO Good Practices: (i) section 1 addresses asset managers; and (ii) section 2 addresses ESG rating and data providers. The IOSCO Good Practices are voluntary and are not intended to conflict with national or regional legal and regulatory frameworks.
TNFD consults on third draft of disclosure framework
On 4 November, the Task Force on Nature-related Financial Disclosures (TNFD) published the third version of its beta framework for nature-related risk management and disclosures. The TNFD framework aims to provide guidance for organisations to report and act on evolving nature-related risks and opportunities, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes. Updates to the framework include: (i) expansion of the draft disclosure recommendations to incorporate dependencies and impacts on nature alongside risks and opportunities to the organisation; (ii) proposed new disclosure recommendations related to supply chain traceability; the quality of stakeholders, including rights-holders, engagement; and the alignment of an organisation’s climate and nature targets; (iii) an adaptive approach to the application of TNFD’s disclosure recommendations to accommodate the varying materiality and reporting preferences and needs of report preparers; and to support early action by companies and financial institutions and encourage increasing disclosure ambition over time; (iv) additional guidance on risk and opportunity assessment and the metrics proposed to support that analysis; (v) enhanced practical usability of its proposed risk and opportunity assessment approach and; (vi) draft guidance on target-setting developed with the Science Based Targets Network and draft disclosure guidance for financial institutions. The TNFD also published two new discussion papers on scenarios and societal dimensions of nature-related risk management and disclosure. It is hoped that the papers will encourage market participants to contribute further to the TNFD’s work in these areas. It aims to release a further updated beta version in February 2023. The TNFD beta framework is open for feedback until 1 June 2023, ahead of the Taskforce publishing its complete recommendations of the TNFD framework in September 2023.
FSB progress report on enhancing resilience of non-bank financial intermediation
On 10 November, the FSB published a report on the past year’s progress and planned work by the FSB, as well as by standard setting bodies (SSBs) and other international organisations, to enhance the resilience of non-bank financial intermediation (NBFI). The main focus of the FSB’s work over the past year was to assess and address vulnerabilities in specific NBFI areas that may have contributed to the build-up of liquidity imbalances and their amplification in times of stress. The report presents the findings of the work by the FSB and SSBs in these areas. The report also includes a set of policy proposals to address systemic risk in NBFI, focusing on key amplifiers. These proposals aim to (i) reduce liquidity demand spikes; (ii) enhance the resilience of liquidity supply in stress; and (iii) enhance risk monitoring and the preparedness of authorities and market participants. The policy proposals involve largely repurposing existing policy tools rather than creating new ones, given the extensive micro-prudential and investor protection toolkit already available. However, the FSB notes that experience with the use of these tools for systemic risk mitigation in NBFI is limited to date. The FSB will therefore assess in due course whether repurposing such tools is sufficient to address systemic risk in NBFI, including the need to develop additional tools for use by authorities. The main focus of the policy proposals is to reduce excessive spikes in the demand for liquidity by addressing the vulnerabilities that drive those spikes or by mitigating their financial stability impact. One set of policies focuses on addressing structural liquidity mismatch in open-ended funds and promoting greater inclusion and use of liquidity management tools, including by developing guidance on the design and use of those tools. The second set comprises policy work to address procyclicality of margining in centrally cleared and non-centrally cleared derivatives and securities markets. The FSB will also carry out work to assess and, where necessary, take policy action to address vulnerabilities associated with leverage. Moving forward, the FSB and IOSCO plan to carry out work to enhance the functioning and resilience of short-term funding markets. The FSB also aims to develop additional metrics and tools to monitor NBFI vulnerabilities; enhance its analysis of NBFI vulnerabilities through targeted deep dives; and integrate findings from the work on the use of already available data (e.g. in trade repositories) for monitoring systemic risk.
IOSCO consultation and discussion paper on development of sound carbon markets
On 9 November, IOSCO published a consultation report on compliance carbon markets (CCMs), and a discussion paper on voluntary carbon markets (VCMs). The consultation report explores the functioning of existing and well-established compliance markets in order to gain an understanding of the potential vulnerabilities in the functions of these markets and how to mitigate them. The report delves into both primary markets and secondary markets considerations, spot and derivatives trading. It makes a total of twelve recommendations for CCMs, addressing issues relating to integrity and orderly functioning. The discussion paper explores what sound and efficient VCMs should look like and the role financial regulators might play in promoting those markets. IOSCO seeks feedback on a potential approach that regulatory authorities and market participants could take to foster sound and well-functioning voluntary carbon markets and, as a consequence, scale up these markets to allow them to achieve their environmental objectives. A total of eleven considerations have been put forward, ranging from open access to enterprise risk management. The deadline for comments is 10 February 2023.