Includes developments in relation to: COVID-19; Online Safety Bill; Russian invasion of Ukraine; Central Bank Digital Currencies; Cryptoassets; and Central clearing
Click on the headings below to access each section:
GENERAL
Issue 1152 / 24 March 2022
HEADLINES
- Financial Stability Board
- UK Parliament
- Financial Policy Committee
- Financial Conduct Authority
- Financial Ombudsman Service
- Network for Greening the Financial System
Financial Stability Board
COVID-19 - FSB publishes report on financial stability, FinTech and market structure - 21 March 2022
The Financial Stability Board (FSB) has published a report on the financial stability impact of the COVID-19 pandemic on FinTech and market structure. The report refers to the FSB’s earlier paper published in February 2019 on the financial stability implications of FinTech and market structure as well as its December 2019 paper relating to BigTechs in finance.
The FSB’s primary finding is that the pandemic has accelerated the trend toward the digitalisation of retail financial services. The report notes that BigTech and FinTech firms’ expansion into financial services can bring a range of benefits, such as improved cost efficiencies and wider financial inclusion for previously underserved groups. However, it warns of “negative financial stability implications from dependence on a limited number of BigTech and FinTech providers in some markets, the complexity and opacity of their partnership activities, and potential incentives for risk taking by incumbent financial institutions to preserve profitability”. It also notes the risks associated with a limited number of cloud service providers magnifying the impact of any operational vulnerability.
The report outlines the types of actions that regulatory authorities have taken during the pandemic that may affect market structure. These actions relate to financial stability, competition, data privacy and governance. The report also stresses the importance of cooperation between financial authorities and, where relevant, their cooperation with competition and data protection authorities.
FSB: FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability
UK Parliament
Online Safety Bill - revised text and explanatory notes published - 17 March 2022
A revised Online Safety Bill (the Bill) has been published and introduced to Parliament, together with explanatory notes. The Bill follows various consultation papers and policy documents published since the Department for Digital, Culture, Media and Sport (DCMS) proposed the Bill in December 2020, following the final outcome of its ‘online harms’ White Paper. The revisions follow the Joint Committee’s pre-legislative scrutiny of the Bill and December 2021 report. The government’s response sets out 66 of the Joint Committee’s recommendations that will be incorporated in the revised Bill.
The Bill will introduce new rules for firms which host user-generated content, i.e. those which allow users to post their own content online or interact with each other, and for search engines, which will have tailored duties focused on minimising the presentation of harmful search results to users.
Online Safety Bill: Explanatory notes
Policy Paper: Government response to the Joint Committee report on the draft Online Safety Bill
Financial Policy Committee
Financial stability - FPC publishes Summary and Record of meetings - 24 March 2022
The Bank of England’s (the Bank’s) Financial Policy Committee (FPC) has published a Summary and Record of its meetings on 9 and 18 March 2022. The FPC meets to identify risks to financial stability and to further agree policy actions to safeguard the resilience of the UK financial system.
The summary and record make a number of observations, including:
- Russian invasion of Ukraine: global financial markets have been volatile in the wake of the invasion. The FPC specifically notes stress in commodity markets while also observing that major UK banks’ capital and liquidity positions remain strong. The FPC considers that the UK financial system is at a heightened risk from cyber threats;
- macroprudential measures: the FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at 1%. It intends to announce a revised timeline for the Bank’s annual cyclical scenario stress testing framework, in the light of uncertainty relating to the Russian invasion of Ukraine;
- cryptoassets: the FPC judges that, while direct risks to the stability of the UK financial system from cryptoassets are currently limited, this could change if recent growth continues. This has driven the FPC’s recommendation in its financial stability report (see the item in the Banking and Finance section) that enhancements are made to regulatory and law enforcement frameworks. It also states that, in its judgment, a systemic stablecoin issued by a non-bank without a resolution regime and deposit guarantee scheme could meet its expectations, provided the Bank applies a regulatory framework that is designed to mitigate such risks; and
- cost of living increases: the FPC considers that increased costs of living are likely to affect household resilience in relation to domestic debt, although it notes that there is limited current evidence of a deterioration in lending standards.
Financial Policy Summary and Record of the Financial Policy Committee Meeting on 11 March 2021
Financial Conduct Authority
Russian invasion of Ukraine - FCA updates webpage on operational and cyber resilience - 24 March 2022
The FCA has updated its webpage on operational and cyber reliance in view of the Russian invasion of Ukraine. The webpage notes that the National Cyber Security Centre (NCSC) gave its support to US President Biden’s call for increased cyber security vigilance among firms in response to Russia’s invasion.
The FCA also provides links to NCSC guidance for various sizes of firms (large firms, small and medium sized firms, microbusinesses and small traders) as well as encouraging firms to review the NCSC Cyber Essentials scheme. In addition, the FCA encourages firms to consider their ability to withstand a cyber attack and ensure business continuity and incident management arrangements are up to date, so that firms are ready to report any material operational incidents to the FCA in a timely way. Finally, the FCA warns against false information being gathered or shared about a particular firm, its staff and the financial services sector in general.
Financial Ombudsman Service
Increased award limits - FOS publishes announcement - 18 March 2022
The Financial Ombudsman Service (FOS) has announced the following increases in its award limits for complaints referred to it with effect from 1 April 2022: (i) £375,000 for complaints about acts or omissions by firms on or after 1 April 2019; and (ii) £170,000 for complaints about acts or omissions by firms before 1 April 2019. These award limits will be automatically adjusted each year in line with inflation. For any complaints referred to the FOS before 1 April 2022, the limits will remain at £350,000 and £160,000, respectively.
Press release: Increase to our award limits
Network for Greening the Financial System
Nature-related financial risks - NGFS publishes statement - 24 March 2022
The Network for Greening the Financial System (NGFS) has published a statement on nature-related financial risks. In April 2021, the NGFS established a joint NGFS-INSPIRE Study Group on Biodiversity and Financial Stability (the Study Group) to develop a research-based assessment of the implications of biodiversity loss for central banks and financial supervisory authorities to use in delivering against their mandates. The NGFS’ statement follows the Study Group’s final report, published on 24 March 2022.
The Study Group’s final report makes five recommendations to central banks and financial supervisory authorities to help them fulfil their mandates in the face of biodiversity loss:
- recognise biodiversity loss as a potential source of economic and financial risk, and commit to developing a response strategy to maintain financial and price stability;
- build the skills and capacity among central bank and supervisory staff as well as market participants to analyse and address biodiversity-related financial risks;
- assess the degree to which financial systems are exposed to biodiversity loss by, for example, conducting assessments of impact and dependency, developing biodiversity-related scenario analysis and stress-tests;
- explore options for supervisory expectations for financial institutions’ governance, risk management, strategy, disclosure and financial conduct in relation to biodiversity-related financial risks and opportunities; and
- help build the necessary financial architecture for mobilising investment for a biodiversity-positive economy, including by considering how central banks’ monetary policy operations and non-monetary policy portfolio management should be conducted in the context of biodiversity loss.
The NGFS’s statement indicates that it welcomes the Study Group’s recommendations. However, it notes that the implementation and prioritisation of the recommendations are subject to each member’s mandate, internal capacity, jurisdictional context, and the actions of other stakeholders such as governments. To help achieve the recommendations, the NGFS sets out the key tasks ahead for central banks, financial supervisors and financial institutions, namely:
- building a scientifically-grounded analytical framework to assess the interactions between nature, the macroeconomy and the financial system;
- bridging the likely data gaps that will emerge from this framework; and
- using this framework and datasets to align policies with environmental sustainability and inform the assessment of nature-related financial risks.
The NGFS concludes by announcing that it will create a task force to make the consideration of nature-related financial risks mainstream across its activities.
NGFS Statement on Nature-Related Financial Risks
BEYOND BREXIT
Issue 1152 / 24 March 2022
HEADLINES
European Systemic Risk Board
Central clearing framework review - ESRB publishes response to European Commission’s targeted consultation - 22 March 2022
The European Systemic Risk Board (ESRB) has published its response to the European Commission’s (the Commission’s) targeted consultation on the review of the EU central clearing framework. It follows the ESRB’s response to the European Securities and Markets Authority’s (ESMA’s) December 2021 consultation on determining the degree of systemic importance of LCH Ltd and ICE Clear Europe and some of their clearing services. The ESRB welcomes the fact that the Commission’s plans reflect the proposals in the ESRB’s response to ESMA.
Key points made by the ESRB in its response include:
- provided the Commission’s forthcoming proposals succeed in addressing the risks to financial stability identified, the ESRB would be in favour of allowing the two UK Tier 2 central counterparties (CCPs) (i.e. LCH Ltd and ICE Clear Europe) to continue offering clearing services in the EU beyond the end of the temporary equivalence period on 30 June 2025;
- the Commission’s proposals should be embedded in a framework that applies to any other CCP that might be classified as Tier 2 in the future; and
- macroprudential measures, aimed at aligning the incentives of all market participants, should be seen as complementary to voluntary, market-based solutions.
The ESRB also notes that the Commission plans to put forward proposals in relation to building central clearing capacity within the EU and strengthening the EU’s supervisory framework for this. It states that, for these considerations to be turned into proposals, the Commission would first need to conduct a cost-benefit analysis to test their viability, particularly as any exposure targets or limits would need to be calibrated carefully.
BANKING AND FINANCE
Issue 1152 / 24 March 2022
HEADLINES
- European Commission
- European Banking Authority
- European Central Bank
- HM Treasury and Bank of England
- Financial Policy Committee
- Bank of England
- Prudential Regulation Authority
- Financial Conduct Authority
- Competition and Markets Authority
European Commission
CRR - Commission Delegated Regulation containing RTS on assessment methodology for use of IRB approach published in OJ - 18 March 2022
Commission Delegated Regulation (EU) 2022/439 containing regulatory technical standards (RTS) on the specification of the assessment methodology for competent authorities regarding the compliance of an institution with the requirements to use the internal ratings based (IRB) approach under the Capital Requirements Regulation (575/2013) (CRR) has been published in the Official Journal of the European Union.
The European Commission adopted the RTS on 20 October 2021. They will enter into force and apply from 7 April 2022.
European Banking Authority
CRD IV - EBA publishes final report and guidelines on common supervisory procedures and methodologies for SREP and supervisory stress testing - 18 March 2022
The EBA has published its final report (EBA/GL/2022/03) and revised guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under the Capital Requirements Directive (2013/36/EU) (CRD IV). It follows the EBA’s consultation (EBA/CP/2021/26) on the draft guidelines, published in June 2021.
Following the consultation, the EBA has made several changes to the final guidelines, including to further reflect the principle of proportionality.
The guidelines will apply from 1 January 2023.
CRR - EBA publishes final report on draft RTS on estimating default probabilities and losses given default - 21 March 2022
The European Banking Authority (EBA) has published a final report (EBA/RTS/2022/02) on draft regulatory technical standards (RTS) on the requirements related to the use of the Internal Model Approach (IMA) to estimate default probabilities and losses given default (LGD) under article 325bp(12) of the Capital Requirements Regulation (575/2013/EU). The EBA consulted on the draft RTS in July 2020 (EBA/CP/2020/12).
The draft RTS specify that an internal methodology used to calculate probabilities of default (PDs) and LGDs under the default risk model should meet all requirements that apply to the corresponding internal ratings‐based (IRB) approach. The RTS permit institutions to use conservative ‘fallback’ PD and LGD values under this internal methodology where needed. They also clarify the requirements relating to the use of external sources under the default risk model, with a view to ensuring that the methodology employed to derive the PDs and LGDs from these sources is conceptually sound.
European Central Bank
Securitisation Regulation - ECB publishes guide on notification of securitisation transactions - 18 March 2022
The ECB has published a guide for banks on the notification of securitisation transactions, following the ECB’s consultation on the same matter published in November 2021. The guide relates to the notification process for originators or sponsors of securitisation transactions with reference to the risk retention, transparency and resecuritisation requirements under articles 6 to 8 of the Securitisation Regulation ((EU) 2017/2402).
New transactions are to be notified to the ECB within one month of the origination date. The annex to the guide sets out the information that is to be provided.
The guide will be updated periodically to reflect developments in the regulation and supervision of securitisations.
HM Treasury and Bank of England
Central Bank Digital Currencies - HM Treasury and Bank of England publish response to House of Lords report - 18 March 2022
HM Treasury and the Bank of England (the Bank) have published their responses (dated 9 March 2022 and 16 March 2022, respectively) to the House of Lords Economic Affairs Committee’s (the Committee’s) January 2022 report on a potential UK Central Bank Digital Currency (UK CBDC) - a new type of digital money that would be issued by the Bank but which would not replace cash and bank deposits. The responses follow the February 2022 announcement that a consultation will be launched in 2022 on potential plans for a UK CBDC.
Key points of interest in the responses include the following:
- no decision has been made on whether to introduce a UK CBDC. The Joint CBDC Taskforce (the Taskforce) will continue to engage with Parliament and other stakeholders on its CBDC work to ensure open and transparent discussions and appropriate scrutiny of any proposals;
- the 2022 consultation paper will set out the Taskforce’s assessment of the case for a UK CBDC and make some conclusions on the merits of any further work to develop an operational and technology model for a UK CBDC. The consultation will explore a range of issues in more detail, including those raised by the Committee. It will also include discussion of how the case for a CBDC relates to wider developments in the payments landscape, including cryptoassets and stablecoins;
- while the use of cash is declining in the UK, it remains important for millions of people’s daily lives;
- cross-border functionality will be crucial to the success and uptake of any CBDC; and
- responding to the Committee’s recommendation that the Taskforce consults on the use case for a wholesale CBDC alongside the retail CBDC consultation, the Bank points out that it already provides wholesale digital central bank money through its real-time gross settlement (RTGS) system. The RTGS is due to move to a new platform in 2023. In spring 2022, the Bank will issue a public consultation on the roadmap for further enhancements to the RTGS platform beyond 2024.
HM Treasury response to House of Lords (Economic Affairs Committee) report
Bank of England response to House of Lords (Economic Affairs Committee) report
Financial Policy Committee
Cryptoassets and decentralised finance - FPC publishes report on financial stability - 24 March 2022
The Bank of England’s Financial Policy Committee (FPC) has published a report setting out its view on the impact of cryptoassets and decentralised finance on financial stability.
The FPC continues to judge that direct risks to the stability of the UK financial system from cryptoassets and decentralised finance are currently limited. However, if the pace of growth seen in recent years continues and as cryptoassets become more interconnected with the wider financial system, they will present a number of financial stability risks. These include risks from interlinkages between cryptoassets and the traditional financial sector, new forms of financial and operational risk for financial institutions, a growth in activity outside the existing regulatory perimeter and challenges in regulating new forms of entities and business models.
The FPC also notes that where crypto technology is performing an equivalent economic function to one performed in the traditional finance sector, this should take place within existing regulatory arrangements and that the regulatory perimeter should be adapted to ensure an equivalent regulatory outcome. The FPC outlines several initiatives that are already underway domestically and internationally to adjust regulatory frameworks to mitigate risks and support innovation.
The FPC concludes that enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to address market developments and activities, and encourage sustainable innovation as well as maintain broader trust and integrity in the financial system. The FPC considers that financial institutions should take a “cautious and prudent” approach to any adoption of these assets until such enhancements are in place.
Please see below in this section for associated items from the Bank of England, the PRA and the FCA.
Financial Stability in Focus: Cryptoassets and decentralised finance
Bank of England
New forms of digital money - Bank of England publishes responses to discussion paper - 24 March 2022
The Bank of England has published the responses to its June 2021 discussion paper on new forms of digital money.
The Bank notes that it has not yet made a decision on any of the topics in the discussion paper. It highlights the following key takeaways from the responses: (i) access to cash should be preserved; (ii) the Bank should continue to engage with stakeholders including the wider public; and (iii) any regulation for systemic stablecoins should be clear, proportionate and risk-based.
The majority of respondents are supportive of the Bank’s work in this area and stressed the importance of the general public having direct access to central bank money. They agreed that any private sector firm issuing or intermediating payments of new forms of digital money would need to be fully complaint with the regulatory frameworks on data protection. Respondents also noted that interoperability between all forms of money was essential for an effective and competitive payments ecosystem.
Over 80% of respondents agree with the Bank’s four stylised regulatory models for systemic stablecoins. Most support the use of temporary limits to manage any transition from commercial bank deposits to new forms of money.
Please see above and below in this section for associated items from the FPC, the PRA and the FCA.
Responses to the Bank of England’s Discussion Paper on new forms of digital money
Prudential Regulation Authority
UK implementation of Basel III - PRA clarifies intended timetable - 21 March 2022
The PRA has published a statement on UK implementation of the Basel III standards. The statement refers to the PRA’s two earlier policy statements (PS17/21 ‘Implementation of Basel standards’, published in July 2021, and PS22/21 ‘Implementation of Basel standards: Final rules’, published in October 2021) on a number of the Basel III standards that remained to be implemented in the UK. It notes that, since then, the PRA has continued to develop proposals to implement all of the remaining elements of Basel 3.1 (the final package of banking prudential reforms developed in response to the 2008/09 financial crisis).
The timing of the PRA’s work on Basel 3.1 has been uncertain for a number of reasons, “including the internationally agreed delay as part of the response to Covid-19, the need to respond to other priorities and the new processes that the PRA has had to develop to turn Basel standards into detailed rule-making proposals under a UK legal framework.” To support firms in their planning processes, the PRA confirms in the statement that it intends to publish a Consultation Paper on Basel 3.1 implementation in the fourth quarter of 2022 and that it intends to consult on a proposal that these changes will become effective on 1 January 2025.
Press release: Implementation of Basel standards
Cryptoassets - PRA publishes Dear CEO Letter - 24 March 2022
The PRA has published a Dear CEO Letter from Sam Woods, Deputy Governor and CEO of the PRA, to the CEOs of banks and designated investment firms on existing or planned exposures to cryptoassets. It follows Mr Woods’ previous letter, sent in 2018, and is intended to complement the FPC’s financial stability report, the Bank of England’s response to its discussion paper on new forms of digital money and the FCA’s statement on the risks relating to cryptoassets (see items above and below in this section).
The letter aims to highlight aspects of the existing regulatory framework that the PRA expects firms to consider when measuring and mitigating risks resulting from cryptoasset activities. These cover:
- strong risk controls: cryptoassets should be considered fully by the board and by the highest levels of executive management. An individual approved by the PRA to perform an appropriate senior management function should be actively involved in reviewing and signing off on the risk assessment framework for any planned business direct exposure to cryptoassets and/or entities heavily exposed to cryptoassets.
The PRA also highlights the need for firms to adapt their existing risk management strategies and systems to suit the different risk profiles of many crypto activities through any of: (i) increased monitoring; (ii) factoring greater uncertainty into modelling or valuation; (iii) applying lower risk tolerance levels; (iv) greater reliance on proxies; and (v) using stress tests;
- the prudential framework: firms should consider the full prudential framework when assessing and mitigating risks and exposures to cryptoassets;
- Pillar 1: the PRA reminds firms of the requirements for specific activities and details its position on market risk and counterparty credit risk; and
- Pillar 2: the PRA reminds firms to set out their consideration of risks relating to crypto exposures in their Internal Capital Adequacy Assessment Processes. It highlights operational risks that are particularly relevant to certain crypto-related activities and advises firms on residual liabilities when outsourcing.
The Dear CEO Letter also announces that the PRA is launching a survey of firms’ current and planned crypto exposures over 2022. It requests receipt of this information from firms by 3 June 2022.
Finally, the PRA highlights that it is likely that the long-term treatment of cryptoassets will differ from that under the current framework. As this is developed, the PRA will consult on any proposed changes to the regulatory framework.
PRA letter to CEOs: Existing or planned exposure to cryptoassets
PRA Cryptoasset Data Collection Template
Financial Conduct Authority
Priorities for credit regulation - FCA publishes speech - 23 March 2022
The FCA has published a speech delivered by Brian Corr, Interim Director of Retail Lending, at the 2022 Credit Summit. The speech details the FCA’s priorities for credit regulation in light of the rising cost of living, Brexit, COVID-19 and the Russian invasion of Ukraine.
To help consumers, Mr Corr notes that, “we need credit markets that are innovative, competitive, and focused closely on delivering the right outcomes for the consumers they serve”. To achieve this, he highlights the FCA’s new Consumer Duty (the Duty), which is “intended to be flexible to allow [the FCA] and [consumers] to respond to circumstances”. Mr Corr expects the FCA to have in place a policy statement and any new rules on the Duty by the end of July 2022.
In the interim, Mr Corr highlights work already begun by the FCA to improve consumer outcomes. This includes consulting on the introduction of a ban on debt packagers from accepting referral fees for passing customers on to other providers of debt solutions; buy-now-pay-later products; the ongoing scrutiny of firms’ contracts; and securing improved contract terms and refunds for consumers.
For borrowers in financial difficulty, the FCA is now running a comprehensive programme on the treatment of borrowers so that it can ensure those who need help are receiving it. A full report setting out the findings of this programme will be published in H2 2022.
Mr Corr also notes actions the FCA has taken to help people who cannot access credit. He cautions that the FCA’s analysis suggests that, in the future, there will be limited supply of credit available to consumers at the highest risk end of the market, in large part due to too much unaffordable lending, which has caused direct and significant harm to borrowers. Mr Corr highlights that the FCA sees ‘no case’ for lowering the Financial Ombudsman Service’s standards for assessing affordability complaints, noting that it will not assist consumers if the lending process is made easier for firms, potentially leading to a greater number of loans to consumers who unable to repay them. However, he sets out the FCA’s continued commitment to working with government and industry to ensure that people who need ways to manage short-term income shortfalls, and consumers who can afford to use high-cost credit, are supported.
Speech by Brian Corr, Interim Director of Retail Lending at the FCA, delivered at Credit Summit 2022
Cryptoassets - FCA publishes notice - 24 March 2022
The FCA has published a notice to all regulated firms, reminding them of their existing obligations when interacting with or becoming exposed to cryptoassets and related services.
The FCA highlights areas of risk that firms need to consider, including: (i) being clear with customers; (ii) financial crime and registering cryptoasset business; (iii) having appropriate systems and controls in place; (iv) assessing risks; (v) relevant prudential requirements; and (vi) client money requirements under the CASS regime.
The FCA notes that this is not an exhaustive list and reminds firms to consider its latest guidance on how to manage financial crime risks associated with cryptoassets in the ongoing Russia/Ukraine conflict. The FCA also recommends that firms read the PRA’s letter on existing or planned exposures to cryptoassets, as well as the Bank of England and Financial Policy Committee’s publications on cryptoassets and new forms of digital money (see items above in this section).
As a final point, the FCA states that it is continuing to work with international bodies, including the International Organization of Securities Commissions, the Financial Stability Board and the Financial Action Task Force, to achieve international co-operation and standards, as well as with the UK government and other bodies through the Cryptoassets Taskforce to achieve a UK approach that balances innovation and competition with orderly markets and consumer protection.
Notice to all FCA regulated firms with exposure to cryptoassets
Competition and Markets Authority
Retail Banking Market Investigation Order 2017 - CMA publishes letters to two banks - 21 March 2022
The Competition and Markets Authority (CMA) has published letters sent to Barclays Bank UK PLC and Lloyds Banking Group (the Banks) about breaches of Part 2 of the Retail Banking Market Investigation Order 2017 (the Order).
Part 2 of the Order implements Open Banking by requiring the largest banks to make accurate, comprehensive and up to date product and service information continuously available through Open Banking Application Programming Interfaces (APIs). This allows third party app and website providers to make available personalised services and information. The CMA notes in the letters that the Banks have already resolved the breaches and that no further formal action is required at present.
CMA Letter to Barclays: Breach of the Retail Banking Order
CMA Letter to Lloyds: Breach of the Retail Banking Order
Webpage
Retail Banking Market Investigation Order 2017 - CMA publishes letter to OBIE - 23 March 2022
The Competition and Markets Authority has published a letter to the Open Banking Implementation Entity (OBIE) updating the status of its Roadmap items. The OBIE was established by the Retail Banking Market Investigation Order 2017 to implement Open Banking and is funded by the UK’s nine largest retail banks (known as the CMA9).
The CMA highlights that there are three remaining Roadmap items that require implementation:
- variable recurring payments for sweeping, due for completion by July 2022;
- consent and access dashboards as part of version 3.1.10 of the Open Banking standard, due for completion by September 2022; and
- delivery of the enhanced management information submission mechanism, also due for completion by July 2022.
The CMA requests the OBIE to continue monitoring progress and to keep the CMA updated. The CMA anticipates being in a position to determine that the Roadmap has been completed later in 2022 and encourages progress on these final implementation steps to achieve full transition to Open Banking.
CMA letter: OBIE update on status of the Roadmap items
OBIE Roadmap Progress - Outstanding Items
SECURITIES AND MARKETS
Issue 1152 / 24 March 2022
HEADLINES
- International Organization of Securities Commissions
- European Commission
- European Parliament
- European Central Bank
- Bank of England
- Financial Conduct Authority
- International Financial Reporting Standards Foundation
International Organization of Securities Commissions
Emerging retail market conduct issues - IOSCO publishes consultation - 21 March 2022
The International Organization of Securities Commissions (IOSCO) has published a consultation report (CR03/2022) on recent retail investor trends and related conduct implications. The findings of the report are based on IOSCO’s 2021 survey and public information issued by IOSCO members. The report builds on a paper issued by the IOSCO Retail Market Conduct Task Force in December 2020 on the impact of the COVID-19 pandemic on firm and retail investor behaviour.
According to the press release: “Increased retail participation in securities markets could mean retail investors increasingly influence market trends and pricing, with corresponding regulatory implications for retail market conduct. Increased retail participation carries with it the threat of misconduct. Misconduct in capital markets has far reaching consequences for financial consumers, investors, national economies and the overall global financial system.”
Among the most important retail investor trends and developments identified in the consultation, the report notes that IOSCO members are concerned about the suitability for retail investors of cryptoassets and platforms, and possible related fraudulent platforms and scams. The report also considers some authorities’ strategies in detail, including approaches to disclosure and investor education.
IOSCO has asked 14 consultation questions in the report. The deadline for comments is 23 May 2022. IOSCO plans to engage further with consumer groups and other stakeholders on these issues at a roundtable in the first quarter of 2022.
IOSCO Retail Market Conduct Task Force (CR03/2022)
European Commission
PRIIPs KID - European Commission adopts Delegated Regulation on extension of transitional arrangements - 17 March 2022
The European Commission (the Commission) has adopted Commission Delegated Regulation C(2022) 1541 (final) amending regulatory technical standards (RTS) laid down in Commission Delegated Regulation (EU) 2017/653 on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs KID Delegated Regulation). The amendments concern the extension of transitional arrangements in article 14(2) of the PRIIPs KID Delegated Regulation and amend the RTS laid down in Commission Delegated Regulation (EU) 2021/2268 regarding the date of application of the PRIIPs KID Delegated Regulation.
The Commission Delegated Regulation aligns the application deadline in article 18(3) of Commission Delegated Regulation (EU) 2017/653 with the end of the transitional exemption laid down in article 32 of the PRIIPs Regulation (1286/2014/EU) (that is, 1 January 2023).
The Council of the EU and the European Parliament will now scrutinise the Commission Delegated Regulation. If neither object, it will enter into force 20 days after its publication in the Official Journal of the European Union.
MiFIR - Commission Delegated Regulation on derogation criteria for DRSPs published in OJ - 24 March 2022
Commission Delegated Regulation (EU) 2022/466, supplementing the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR) by specifying criteria for derogation from the principle that approved publication arrangements and approved reporting mechanisms are supervised by the European Securities and Markets Authority (ESMA), has been published in the Official Journal of the European Union.
The European Commission adopted the Commission Delegated Regulation in December 2021. It will enter into force on 27 March 2022.
European Parliament
MiCA - ECON publishes report on proposed Regulation - 23 March 2022
The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published its report, dated 17 March 2022, on the proposed Regulation on ‘Markets in Crypto-Assets’ (MiCA) (2020/0265(COD)). The European Commission adopted the proposed Regulation in September 2020 as part of its Digital Finance Strategy.
ECON adopted the report on 14 March 2022 and the procedure file for the legislative initiative indicates that the report was tabled for consideration by the European Parliament in its plenary session on 17 March 2022.
European Central Bank
Central clearing - ECB publishes speech - 22 March 2022
The European Central Bank (ECB) has published the welcome address speech by Fabio Panetta, a member of the Executive Board of the ECB, at the Fourth Annual Joint Conference of the Deutsche Bundesbank, ECB and Federal Reserve Bank of Chicago on central counterparty (CCP) risk management.
On CCPs’ resilience, Mr Panetta highlights recent events, including the COVID-19 pandemic, supply chain bottlenecks, rapidly rising energy and commodity prices, and now the fallout from the Russian invasion of Ukraine. This has prompted the ECB to revisit the procyclicality of margins and to examine its system-wide impact. Mr Panetta also notes the heightened threat of cyber attacks. He promotes the cyber information and intelligence sharing initiative launched by the Euro Cyber Resilience Board for pan-European Financial Infrastructures as a platform to promote preparedness and resilience.
Mr Panetta champions a diversified approach towards risk management that will provide banks and end users with the flexibility to react and adapt to individual crisis scenarios and other challenges. He foresees a “dynamic and robust” European clearing ecosystem that can increase the overall attractiveness of central clearing and further reduce systemic risk, to the benefit of global financial markets, and believes that the euro’s relevance as an international currency, combined with the size of the European economy, means that there is ample room for the EU to expand the availability of clearing options. To this end, Mr Panetta notes the European Commission’s consultation on expanding EU clearing capacity and revising the supervisory framework to ensure that risks remain appropriately managed.
Mr Panetta cautions that the fast evolution of the clearing ecosystem may produce risks that have not been considered previously, while new channels might help spread existing risks. He highlights the importance of understanding new risks stemming from climate change and notes that ESMA’s work to develop a climate risk stress test for CCPs is an important step that the ECB is actively supporting. Mr Panetta also sets out the importance of understanding the role of CCPs in relation to cryptoassets, noting that oversight and supervision is the minimum that must be done and that the impact of cryptoassets from the perspective of corporate responsibility should also be considered.
Bank of England
FX Global Code - Bank of England publishes statement of commitment - 18 March 2022
The Bank of England (the Bank) has published a statement of commitment to the Global Code of Conduct for the wholesale foreign exchange market (FX Global Code, the Code), acknowledging that the Code represents a set of principles generally recognised as good practice in the wholesale foreign exchange market (FX Market). The Code was first published in 2017 and updated in July 2021 by the Global Foreign Exchange Committee.
In an accompanying press release, the Bank strongly encourages all market participants, including its regular counterparties, to adhere and commit to the updated Code.
Bank of England Statement of Commitment to the FX Global Code
Financial Conduct Authority
COVID-19 - FCA publishes Primary Market Bulletin No.39 - 23 March 2022
The FCA has published its Primary Market Bulletin No.39. Among other things, this edition announces the removal of the temporary measures the FCA introduced in 2020 allowing for delayed annual and interim financial reporting, and rescinds the temporary measures regarding working capital statements and general meetings.
The temporary reliefs will cease to apply from 28 June 2022.
FCA Primary Market Bulletin No.39
International Financial Reporting Standards Foundation
Sustainable finance - IFRS Foundation announces alignment with GRI - 24 March 2022
The International Financial Reporting Standards Foundation (IFRS Foundation) has announced a collaboration agreement, in the form of a Memorandum of Understanding, with the Global Reporting Initiative (GRI). Under the agreement, their standard-setting boards, the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB), will seek to coordinate their work programmes and standard-setting activities. The establishment of the ISSB was announced at COP26 in November 2021 and established shortly afterwards with a mandate to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ demand for reporting.
By working together, the IFRS Foundation and GRI provide two ‘pillars’ of international sustainability reporting: (i) investor-focused capital market standards of IFRS Sustainability Disclosure Standards developed by the ISSB; and (ii) GRI sustainability reporting requirements set by the FSSB.
Commenting on the agreement, Erkki Liikanen, Chair of the IFRS Foundation Trustees said, “this agreement with GRI will help ensure capital market standards are developed in a way that minimises the reporting burden for those companies also using GRI Standards”. Eelco van der Enden, CEO of GRI, similarly remarked that the agreement “is a strong signal to capital markets and society that a comprehensive reporting system, which combines financial and impact materiality for sustainability reporting, is possible on a global scale”.
The announcement highlights that the ISSB intends, next week, to publish proposed Climate and General Sustainability-related Disclosure requirements that will form the global baseline for climate-related disclosures. The global baseline concept has been welcomed by the G20 Leaders, the International Organization of Securities Commissions and others.
ASSET MANAGEMENT
Issue 1152 / 24 March 2022
HEADLINES
European Systemic Risk Board
AIFMD and UCITS Directive - ESRB responds to European Commission’s proposed amendments - 23 March 2022
The European Systemic Risk Board (ESRB) has responded to the European Commission’s (the Commission’s) proposed amendments to the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) (UCITS Directive) by way of letters to the Council Working Party and the European Parliament. The proposed amendments cover delegation arrangements, liquidity risk management, supervisory reporting, provision of depository and custody services, and loan origination by alternative investment funds (AIFs).
The ESRB welcomes the proposed changes in broad terms, stating that they reflect most of the considerations the ESRB presented in response to the Commission’s 2021 consultation on the review of the AIFMD and the ESRB’s 2017 recommendation on liquidity and leverage risks in investment funds.
The ESRB also highlights three areas which it considers have not been addressed and invites EU legislators to enhance the proposals in relation to these. These are: (i) addressing liquidity mismatches in open-ended AIFs; (ii) access to data for monitoring systemic risk in order to enhance the work of macroprudential authorities; and (iii) more guidance on the use of macroprudential leverage limits.
ESRB Letter to Council Working Group: Review of the AIFMD and UCITS Directive
ESRB Letter to European Parliament: Review of the AIFMD and UCITS Directive
Financial Conduct Authority
Custody and fund services firms - FCA publishes portfolio letter - 22 March 2022
The FCA has published a portfolio letter (dated 23 March 2022), which it has sent to the CEOs of custody and fund services firms. It sets out the FCA’s view of the key risks of harm in the custody and fund services sector, outlines the FCA’s expectations, and provides an overview of the FCA’s strategy and its programme of work across certain areas, including in relation to:
- operational resilience and cyber: by March 2022, and further to Policy Statement PS21/3, in-scope firms must have identified their important business services, set impact tolerances for maximum tolerable disruption and carried out mapping and testing to a level of sophistication necessary to do so. Firms must have also identified any vulnerabilities in their operational resilience. As soon as practicable after March 2022, and no later than 31 March 2025, in-scope firms must have performed mapping and testing so that they are able to remain within impact tolerances for each important business service, and must have made the necessary investments to enable them to operate consistently within impact tolerances;
- protection of custody assets and money: in addition to complying with existing standards, the FCA expects firms to have considered and to be appropriately prepared for technological developments, such as the potentially increasing use of distributed ledger technology; and
- depository oversight: the FCA may seek evidence that firms have an appropriate level of access to an authorised fund manager’s (AFM’s) operations and adequate resourcing, and ask firms to demonstrate that they have been able to challenge AFMs effectively in investors’ and unitholders’ interests.
The letter also refers to speculative and illiquid investments, noting that although the FCA has not observed custody and fund service firms manufacturing or promoting these products, firms in this sector may contract with and provide services to the issuers or promoters of these products, such as trustee, safekeeping and administrative services. Where firms are engaged in unregulated activity related to speculative and illiquid investments, they are still subject to certain relevant regulatory requirements, including specific FCA Principles for Businesses.
Portfolio letter: FCA custody and fund services supervision strategy
National Audit Office
British Steel Pension Scheme - NAO publishes report - 18 March 2022
The National Audit Office (NAO) has published a report setting out the conclusions of its investigation into the FCA’s regulation of defined benefit transfer advice given to members of the British Steel Pension Scheme (BSPS) and subsequent redress. The NAO’s investigation was launched in October 2021. Gareth Davies, head of the NAO, notes that “the BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place”.
The NAO acknowledges that the FCA has implemented measures to improve the regulation of the pensions advice market and, alongside the Financial Ombudsman and Financial Services Compensation Scheme (FSCS), is attempting to remedy the financial detriment suffered by BSPS members. However, it notes that the redress arrangements have not compensated all individuals fully and that the costs of redress have had an adverse effect on the wider financial services industry, with the number of firms providing define benefit pensions transfer advice halving.
With this in mind, the NAO recommends, among other things, that the FCA and HM Treasury should consider whether there are lessons to be learned about the way they work together to identify and mitigate risks to consumers as policy is being developed. Moreover, regulators and oversight bodies with responsibilities for protecting pension scheme members should consider what further changes can be made to minimise the risks associated with transferring out of a pension scheme.
NAO Report: Investigation into the British Steel Pension Scheme (HC 1145)
INSURANCE
Issue 1152 / 24 March 2022
HEADLINES
European Insurance and Occupational Pensions Authority
2021 EU-wide insurance sector stress test - EIOPA publishes recommendations - 21 March 2022
The European Insurance and Occupational Pensions Authority (EIOPA) has published its recommendations to national competent authorities (NCAs) under article 21(2)(b) of the EIOPA Regulation (1094/2010/EU). This follows the findings of EIOPA’s 2021 Insurance Stress Test, published in December 2021.
The recommendations are grouped into three different subject matters: (i) identified vulnerabilities (recommendations 1-3); (ii) availability of actions to manage adverse conditions (recommendations 4 and 5); and (iii) an individual undertaking-specific recommendation (recommendation 6).
The stress test exercise focused on a prolonged COVID-19 scenario in a ‘lower for longer’ interest rate environment and evaluated its impact on the capital and liquidity position of the entities in scope. The scenario identified a set of market and insurance shocks specifically constructed to reflect the EIOPA and ESRB assessment of prevailing systemic risks to the financial system at that point in time.
EIOPA 2021 Insurance Stress Test Recommendations (EIOPA-BoS-22/123)
Financial Conduct Authority
Operational resilience in the insurance sector - FCA publishes webpage - 24 March 2022
The FCA has published a new webpage on operational resilience for insurance firms. This follows the FCA’s Policy Statement (PS21/3) on operational resilience published in March 2021, alongside the PRA’s operational resilience Policy Statement (PS7/21) and the Bank of England’s policy documents for financial market infrastructure firms.
The website covers:
- actions for insurance firms: as set out in in PS7/21, by 31 March 2022, in scope firms must have: (i) identified their important business services; (ii) set impact tolerances for the maximum tolerable disruption and carried out mapping and testing to a level of sophistication necessary to do so; and (iii) identified any vulnerabilities in their operational resilience. The FCA expects all in-scope firms to address any remaining gaps or shortcomings in their operational resilience frameworks, and meet all obligations under the FCA’s rules, by 31 March 2025;
- firms that are in scope: this includes all Solvency II insurers and insurance intermediaries that meet the definition of an enhanced scope Senior Managers and Certification Regime firm (firms whose size, complexity and potential impact on consumers or markets warrant more attention). EEA firms and overseas firms are not in scope;
- examples of good practice across the FCA’s sample of 47 firms: these include: (i) considering possible harms at each point of the customer journey, including purchasing, and amending and renewing a policy, as well as the ability to make a claim or a complaint; and (ii) providing carefully calibrated tolerances with accompanying rationales and possible alternatives; and
- areas for improvement across the FCA’s sample of 47 firms: these include: (i) failing to identify important business services that would reasonably be expected for the firm's business model or including internal or irrelevant businesses services; and (ii) selecting extremely short impact tolerances (without recognising their practicality) or extremely long impact tolerances (by ignoring the reputational and other consequences of operational disruption).
Webpage: Operational resilience insights for insurance firms
FINANCIAL CRIME
Issue 1152 / 24 March 2022
HEADLINES
European Banking Authority
AML/CFT - EBA publishes round 2 report on NCAs’ approaches to bank supervision - 22 March 2022
The European Banking Authority (EBA) has published a report (EBA/REP/2022/08) detailing the second round of its findings from its assessment of national competent authorities’ (NCAs’) approaches to the anti-money laundering and countering the financing of terrorism (AML/CFT) supervision of banks. The first and second round of the reviews took place in 2019 and between 2020 and 2021 respectively.
In round two, review teams assessed seven NCAs from seven EU/EEA member states and made recommendations tailored to each NCA. In line with round one of the reviews, the EBA found that all NCAs sampled had undertaken significant work to implement a risk-based approach to AML/CFT. Significantly, since round one, awareness of the synergies that exist between AML/CFT and prudential supervision has increased, and supervisory cooperation has become a clear focus for all NCAs sampled. The EBA highlights that AML/CFT teams in almost all NCAs have grown significantly and are set to expand further.
The report notes challenges in operationalising the risk-based approach to AML/CFT. A number of challenges are common to all NCAs and include: (i) identifying money laundering and terrorist financing (ML/TF) risks relating to the banking sector; (ii) translating ML/TF risk assessments into risk-based supervisory strategies; (iii) using available resources effectively, including by ensuring sufficiently intrusive onsite and offsite supervision; and (iv) taking proportionate and sufficiently dissuasive enforcement measures to correct AML/CFT compliance weaknesses. The EBA also highlights that cooperation with national financial intelligence units was largely ineffective in most sampled EU member states but notes that several NCAs have started to take steps to address this.
Round three of the reviews is now underway. As part of this, the EBA will follow up with NCAs from rounds one and two on steps they have taken since to strengthen their approaches to AML/CFT supervision.
HM Treasury
AML/CTF controls in overseas jurisdictions - HM Treasury updates advisory notice - 17 March 2022
HM Treasury has updated its advisory notice on anti-money laundering (AML) and counter-terrorist financing (CTF) controls in high-risk third country jurisdictions under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The updated advisory notice takes into account two statements published by the Financial Action Task Force on 4 March 2022, identifying jurisdictions with strategic deficiencies in their AML and CTF regimes.
The notice identifies Albania, Barbados, Burkina Faso, Cambodia, the Cayman Islands, DPRK, Haiti, Iran, Jamaica, Jordan, Mali, Malta, Morocco, Myanmar, Nicaragua, Pakistan, Panama, the Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirate and Yemen as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations. Zimbabwe is no longer subject to the Financial Action Task Force’s increased monitoring process due to its significant progress in improving its AML/CFT regime.
HM Treasury advisory notice on AML and CTF controls in high-risk third country jurisdictions
