Includes developments in relation to: Green bonds; Taxonomy Regulation; Prospectus Regulation; CRD IV, Solvency II; COVID-19; CSDR; EMIR; anti-money laundering and LIBOR.
General
Issue 1117 / 8 July 2021
HEADLINES
- Financial Stability Board
- European Commission
- Treasury Committee
- Bank of England, Prudential Regulation Authority and Financial Conduct Authority
Financial Stability Board
Climate-related financial risks - FSB publishes roadmap - 7 July 2021
The Financial Stability Board (FSB) has published a roadmap for addressing climate-related financial risks. The roadmap outlines the work being undertaken - and that is still to be done - by standard-setting bodies and other international organisations over a multi-year period across four key areas: disclosure; data; vulnerabilities analysis; and regulatory and supervisory approaches.
The roadmap is accompanied by a report on the availability of data with which to monitor climate-related financial stability risks, identifying limitations and gaps in the availability of such data, and a report on promoting climate-related disclosures. It is also published alongside a letter from the Chair of the FSB, Randal K. Quarles, stressing the need for co-ordinated action to address the financial risks posed by climate change, and discussing the continued elevated risks to financial stability following the coronavirus pandemic. The FSB intends to publish an interim report on the overall lessons learnt from COVID-19 from a financial stability perspective on 13 July 2021.
Report: FSB Roadmap for Addressing Climate-Related Financial Risks
Letter from FSB Chair, Randal Quarles to G20 Finance Ministers and Central Bank Governors
Report on Promoting Climate-Related Disclosures
European Commission
Taxonomy Regulation - European Commission adopts Delegated Regulation containing disclosure obligations - 6 July 2021
The European Commission has adopted a Delegated Regulation (C(2021) 4987) on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the Taxonomy Regulation ((EU) 2020/852).
Article 8(1) of the Taxonomy Regulation requires large corporates to include in their non-financial statements information on how and to what extent their activities are associated with environmentally sustainable economic activities. Under the Delegated Regulation - which specifies the content and presentation of information to be disclosed - non-financial companies will have to disclose the share of their turnover, capital and operational expenditure associated with environmentally sustainable economic activities. Financial institutions will have to disclose the share of the total assets they finance or invest in which are environmentally sustainable economic activities. The Delegated Regulation also sets out common rules relating to key performance indicators.
The Council of the EU and the European Parliament will now scrutinise the Delegated Regulation and it will enter into force 20 days after its publication in the Official Journal of the EU. It will apply from 1 January 2022.
Staff working document (SWD(2021) 183 final)
Staff working document webpage
Strategy for financing transition to sustainable economy - European Commission publishes communication - 6 July 2021
The European Commission has published a communication (COM(2021) 390) to the European Parliament, the Council of the European Union, the European Economic and Social Committee and the European Committee of Regions, on a strategy for financing the transition to a sustainable economy. This strategy proposes action in four areas – transition finance; inclusiveness; resilience and contribution of the financial system; and global ambition – and it includes six sets of actions:
- to extend the existing sustainable finance toolbox to facilitate access to transition finance;
- to improve the inclusiveness of small and medium-sized enterprises (SMEs) and consumers by giving them the right tools and incentives to access transition finance;
- to enhance the resilience of the economic and financial system to sustainability risks;
- to increase the contribution of the financial sector to sustainability;
- to ensure the integrity of the EU financial system and monitor its orderly transition to sustainability; and
- to develop international sustainable finance initiatives and standards, and support EU partner countries.
The Commission has also published a staff working document and a factsheet on the new EU sustainable finance strategy. It intends to report on the strategy’s implementation by the end of 2023.
Communication: Strategy for Financing the Transition to a Sustainable Economy (COM(2021) 390 final)
Staff working document (SWD(2021) 180 final)
Treasury Committee
Regulating financial services - House of Commons Treasury Committee publishes report on future framework - 6 July 2021
The House of Commons Treasury Committee has published its Fifth Report of Session 2021-22 on the future framework for regulating financial services. In the report, the Committee considers the future of financial services following the Brexit transition period and examines how financial regulation should be set and scrutinised by Parliament.
The report sets outs a number of findings, including the following:
- Regulators’ rulebooks: the Committee agrees with HM Treasury that the body of EU financial services rules onshored during the process of leaving the EU should be moved into the regulators’ rulebooks;
- Ministerial powers: the Committee has not been provided with compelling evidence to justify changing the law to allow ministers the absolute right to see financial services regulators’ policy proposals before they are published for consultation. By doing so, the perception of regulatory independence from government could be damaged;
- Activity-specific regulation: the extent to which HM Treasury wishes to implement activity-specific regulation is unclear, but the government should be sparing in its approach. There may be a role for activity-based principles to allow the government to instruct the regulators, at a more micro-level, on how it wishes them to approach the regulation of specific business sectors;
- FOS: HM Treasury should consider how the decision-making process of the Financial Ombudsman Service (FOS) would interact with the future regulatory framework for the FCA; and
- Ex-ante scrutiny: while the Committee believes that a measure of ‘ex-ante’ scrutiny by Parliament is necessary, it does not see a clear need for the creation of a new committee or a new independent body (which would recreate the role of the European Parliament’s Economic and Monetary Affairs Committee) to carry out ex-ante or ex-post scrutiny.
Report: The Future Framework for Regulation of Financial Services (HC 147)
Bank of England, Prudential Regulation Authority and Financial Conduct Authority
Diversity and inclusion in the financial sector - Bank of England, PRA and FCA publish joint discussion paper - 7 July 2021
The Bank of England (BoE), PRA and FCA have published a joint discussion paper (DP21/2) setting out policy options to improve diversity and inclusion in financial services. The FCA has also published a paper providing a review of research literature that provides evidence of the impact of diversity and inclusion in the workplace.
The regulators note that the current regulatory landscape has been driven by sector-specific developments, resulting in fragmented requirements for different types of firms. In the final section of the paper, the regulators outline a number of different policy initiatives that they believe could effectively drive and support change. These generally build on existing requirements and the regulators’ wider policy and supervisory frameworks, and include:
- extending targets for representation at board level to a wider range of firms, and creating targets for under-representation in relation to characteristics other than gender;
- requiring firms to set targets for under-represented groups for entry into the wider senior management population, and for entry into customer-facing roles;
- making senior leaders directly accountable for diversity and inclusion in their firms;
- collecting diversity data about individuals as part of the information required for senior management function (SMF) applications. Where the regulators have concerns that a proposed appointment would worsen or not address risks arising from a lack of diversity and ‘groupthink’, this could provide grounds for withholding approval of an application;
- linking progress on diversity and inclusion to remuneration;
- imposing a requirement for firms publicly to disclose a selection of aggregated diversity data on the firm’s senior management population and the employee population as a whole, as well as their diversity and inclusion policies; and
- developing expectations on product governance that specifically take into account consumers’ protected characteristics, or other diversity characteristics.
The regulators note that some of their proposals are better suited to larger firms, and they are conscious of the need for proportionality.
Responses are requested by 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022, followed by a policy statement in Q3 2022. The BoE intends to consider separately how to develop proposals to promote diversity and inclusion for financial market infrastructure firms. The FCA is also considering its approach to diversity in listed firms and will provide more detail in the coming months.
Banking and Finance
Issue 1117 / 8 July 2021
HEADLINES
- Basel Committee on Banking Supervision
- European Commission
- European Securities and Markets Authority and European Banking Authority
- European Banking Authority
- CRD IV - EBA publishes opinion on authorisation of investment firms as credit institutions in absence of RTS on reclassification thresholds- 1 July 2021
- CRD IV - EBA publishes updated guidelines on internal governance- 2 July 2021
- CRD V - EBA publishes final report on guidelines on sound remuneration policies- 2 July 2021
- Prudential Regulation Authority
- Payment Systems Regulator
- Recent Cases
Basel Committee on Banking Supervision
COVID-19 - BCBS publishes report on early lessons from pandemic on Basel reforms - 6 July 2021
The Basel Committee on Banking Supervision (BCBS) has published an interim evaluation report assessing the impact of the Basel III reforms in light of COVID-19. The report indicates that the banking system would have faced greater stress during COVID-19 had the Basel III reforms not been adopted and in the absence of extraordinary support measures taken by public authorities.
The report outlines the BCBS’s initial findings regarding:
- the overall resilience of the banking system during COVID-19;
- the usability of capital buffers, members’ experience with countercyclical capital policies and price movements of additional tier 1 capital (AT1) instruments;
- liquidity buffers;
- the impact of the leverage ratio on financial intermediation; and
- the cyclicality of specific Basel capital requirements.
The report is part of a broader evaluation of the effectiveness of the Basel III reforms. The analysis will be updated and included, as relevant, in a more comprehensive evaluation report covering the Basel reforms implemented over the past decade. The BCBS intends to publish this in 2022 as additional data on the impact of COVID-19 becomes available.
Report: Early lessons from the COVID-19 pandemic on the Basel reforms
European Commission
MREL requirements - Commission Delegated Regulation setting our RTS published in the OJ - 8 July 2021
Commission Delegated Regulation (EU) 2021/1118 which lays out regulatory technical standards (RTS) regarding the methodology to be used by resolution authorities in estimating the Pillar 2 requirements and combined buffer requirements for the purposes of setting the minimum requirement for own funds and eligible liabilities (MREL), at the level of the resolution group, has been published in the Official Journal of the European Union (OJ). Resolution groups are required to comply with this MREL obligation under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).
As well as setting out the methodology to be used, the RTS also specifies, through the setting of a materiality threshold, that the methodology only applies to resolution groups that are sufficiently different to the applicable prudential group.
The regulation will enter into force on 28 July 2020, 20 days after its publication in the OJ.
Commission Delegated Regulation (EU) 2021/1118
European Securities and Markets Authority and European Banking Authority
CRD IV and MiFID II - ESMA and EBA revise guidelines on assessment of suitability of management body members - 2 July 2021
The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have published a final report (ESMA35-36-2319/EBA/GL/2021/06) containing updated joint guidelines on the assessment of the suitability of members of the management body and key function holders in accordance with the Capital Requirements Directive (2013/36/EU) (CRD IV) and the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II).
The updated guidelines reflect amendments introduced by the CRD V Directive ((EU) 2019/878) and the Investment Firms Directive ((EU) 2019/2034) (IFD). In particular, the guidelines:
- clarify that the ability to understand money laundering and terrorist financing risks is part of the assessment of the collective suitability of the members of the management body and the assessment of key function holders;
- specify that institutions should take measures to attain a more gender-balanced composition of staff in management positions; and
- provide further guidance on the recovery and resolution framework introduced by the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). As part of early intervention measures and during resolution, the suitability of newly-appointed members of the management body and of the management body collectively is relevant and requires an assessment.
The original guidelines, published in September 2017, will be repealed. The updated guidelines will apply from 31 December 2021.
Annex I – Joint ESMA and EBA guidelines on the assessment of suitability
European Banking Authority
CRD IV - EBA publishes opinion on authorisation of investment firms as credit institutions in absence of RTS on reclassification thresholds - 1 July 2021
The European Banking Authority (EBA) has published an opinion on the appropriate supervisory and enforcement practices for the process of authorising investment firms as credit institutions under Article 8a of the Capital Requirements Directive (2013/36/EU) (CRD IV) (EBA/Op/2021/08). Article 8a of CRD IV, introduced by the Investment Firms Directive ((EU) 2019/2034) (IFD), specifies the triggers for when a systemically important investment firm must seek authorisation as a credit institution. The purpose of the opinion is to ease the implementation of the Investment Firms Regulation ((EU) (2019/2033) (IFR) and the IFD, both of which entered into force on 26 June 2021.
The EBA explains that, for the vast majority of investment firms, sufficient clarity already exists with regards to the prudential regime which applies to them. However, in a few cases - especially for investment firms of third country groups - the opinion provides guidance on the actions to be taken in cases where it is uncertain whether these investment firms should apply for authorisation as a credit institution. This opinion is published in the absence of the final regulatory technical standards (RTS) on the relevant thresholds for reclassification, on which the EBA published a second consultation in June 2021.
The EBA recommends that, in cases where it cannot be determined whether the Article 8a(1) thresholds have been reached in the absence of the final methodology in the RTS, national competent authorities should not prioritise any supervisory or enforcement action in relation to the Article 8a requirements until six months after the methodology is finalised. Competent authorities should, according to the EBA, apply Article 8a in all other cases where the question of whether the threshold has been reached can be reliably determined without the final methodology.
The EBA is not expecting to finalise the draft RTS for submission to the European Commission before the end of October 2021. It requests the Commission to adopt the technical standards as quickly as possible after submission.
CRD IV - EBA publishes updated guidelines on internal governance - 2 July 2021
The European Banking Authority (EBA) has published its final report (EBA/GL/2021/05) containing updated guidelines on internal governance under the Capital Requirements Directive (2013/36/EU) (CRD IV). The updated guidelines reflect amendments introduced by the CRD V Directive ((EU) 2019/878) and the Investment Firms Directive ((EU) 2019/2034) (IFD) relating to sound and effective governance arrangements of credit institutions and investment firms. In particular, the guidelines:
- clarify that sound internal governance arrangements and credit institution risk management frameworks involve identifying, managing and mitigating money laundering and financing of terrorism risk;
- reinforce the framework regarding loans to members of the management body and their related parties which may constitute a specific source of actual or potential conflicts of interest; and
- set out guidance to ensure that credit institutions take all necessary measures to avoid any form of discrimination, guarantee equal opportunities to staff of all genders, and monitor the gender pay-gap.
The updated guidelines will apply from 31 December 2021.
CRD V - EBA publishes final report on guidelines on sound remuneration policies - 2 July 2021
The European Banking Authority (EBA) has published its final report (EBA/GL/2021/04) on its guidelines on sound remuneration policies (EBA/GL/2015/22) under the Capital Requirements Directive ((EU) 2019/878) (CRD V). The guidelines have been revised to reflect changes introduced by CRD V which require remuneration policies to be gender neutral. Among other things, the revised guidelines also consider supervisory practices and clarify some aspects relating to retention bonuses and severance payments.
The revised guidelines will apply to both national competent authorities and institutions (on an individual and consolidated basis) and enter into force on 31 December 2021. The EBA will follow up on how institutions apply the gender-neutral remuneration policies with a report, which it will publish at some point over the next two years.
Prudential Regulation Authority
IRB UK mortgage risk weights - PRA publishes policy statement - 6 July 2021
The PRA has published a policy statement (PS16/21) on internal ratings based (IRB) UK mortgage risk weights, focusing on managing deficiencies in model risk capture. The statement includes feedback on responses to the PRA’s September 2020 consultation paper (CP14/20). Respondents were generally not in favour of the proposed minimum expectations on mortgage risk weights applying to all levels of consolidation and to all UK residential mortgage exposures, including buy-to-let. Particular concerns were raised about the proposed 7% risk weight minimum expectation for individual UK mortgage exposures.
In response to the feedback, the PRA has made two changes to the draft policy:
- it will not introduce the proposed 7% minimum risk weight expectation on individual UK mortgage exposures. Instead, it will consider the calibration of the incoming Probability of Default (PD) and Loss Given Default (LGD) parameter floors for mortgage exposures as part of the PRA’s implementation of the Basel 3.1 standards; and
- mortgage exposures classified as ‘in default’ will be excluded from the 10% average minimum risk weight expectation.
The PRA explains that not introducing the minimum risk weight expectation on individual UK mortgage exposures will mean those mortgage risk weights below the proposed value will continue to be permitted.
The policy statement also sets out the PRA’s final policy in this area, in the form of an updated supervisory statement on IRB approaches (SS11/13). The amendments to SS11/13 will take effect from 1 January 2022.
Updated supervisory statement (SS11/13)
Payment Systems Regulator
Protected ATMs - PSR publishes second annual review of Specific Direction 8 - 1 July 2021
The Payment Systems Regulator (PSR) has published a report following its second annual review of Specific Direction 8 (SD8), together with a paper setting out stakeholder responses to its call for views. SD8 requires LINK (the UK’s largest ATM network) to do all that it can to fulfil its commitment to maintaining the broad geographic spread of free-to-use ATMs.
Based on the evidence it has collected and its analysis of stakeholder responses, the PSR considers that SD8 should remain in place until it expires in January 2022. SD8 has been successful in maintaining access to cash and has also enhanced the transparency of the measures LINK has implemented. The PSR has also identified three areas for further action by LINK:
- reviewing its financial incentives for maintaining and replacing protected ATMs;
- publishing further details on the efficiency and transparency of direct commissioning; and
- improving resilience to support continued access to cash in the future.
The PSR is aware that many of the reasons that support keeping SD8 in place until January 2022 are likely to apply beyond this date. As a result, it is currently minded to issue a new direction to replace SD8 when it expires; however, the PSR plans to assess the evidence in detail over the summer. If the PSR decides that a new direction is required, it will consult on a draft direction later in 2021.
Second annual review of Specific Direction 8: Response to call for views
Stakeholder submissions to Calls for Views
Recent Cases
Re Santander UK plc [2021] EWHC 1813 (Ch)
The High Court handed down a judgment that considered the approach a court should take when determining whether to sanction a banking business transfer scheme under Part VII of FSMA. Under section 111(3) of FSMA, a court must consider that, in all the circumstances of the case, it is appropriate to sanction a banking business transfer scheme, before it can make an order sanctioning the scheme. The court considered the following issues relating to the exercise of this discretion:
- following Re ING Direct NV [2013] EWHC 1697 (Ch), the issue for the court will primarily be whether the interests of those affected will be adversely affected by the transfer. In banking business transfer schemes, the parties potentially affected are likely to include the non-transferring customers of the banks involved, as well as transferring customers, together with any employees of the transferring business. In this particular case, the court placed weight on the fact that the transferring customers were sophisticated entities that could be expected to have formed their own views on the benefits of the scheme and could simply take their business elsewhere;
- the court considered how far it should go in applying its own experience of specialist financial and regulatory matters gained from hearing Part VII schemes in scenarios where there is no independent expert report or input from the regulators on a banking business transfer scheme. It concluded that if, in a particular case, the assessment of any relevant factor requires more specialist expertise, the court must be entitled to ask for suitable evidence from a Civil Procedure Rule-compliant expert; and
- if the regulators have chosen not to attend the hearing, the court concluded that this can legitimately be taken as an indication that they have no material concerns about the scheme that they feel should be drawn to the attention of the court. However, their decision not to attend cannot in itself satisfy the court that it would be appropriate to sanction a scheme.
Securities and Markets
Issue 1117 / 8 July 2021
HEADLINES
- European Commission
- Official Journal of the European Union
- European Banking Authority
- HM Treasury
- Prudential Regulation Authority
- Financial Conduct Authority
- Financial Stability Board
European Commission
CSDR - European Commission adopts report on review - 1 July 2021
The European Commission has published its report (COM(2021) 348 final) to the European Parliament and the Council of the EU following a review of the EU rules on central securities depositories (CSDs) under the Central Securities Depository Regulation (909/2014/EU) (CSDR). The report concludes, in broad terms, that the CSDR is achieving its original objectives of enhancing the efficiency of settlement in the EU and the soundness of CSDs.
The Commission notes, however, concerns that have been raised regarding the implementation of specific CSDR rules. These concerns relate to the cross-border provision of services, access to commercial bank money, settlement discipline and the framework for third-country CSDs. The report also identifies areas where further action may be required to achieve the CSDR’s objectives in a more proportionate, effective and efficient manner. In view of the issues raised, the Commission is considering presenting a legislative proposal to amend the CSDR, subject to an impact assessment that will examine the most appropriate solutions in more depth. Such a proposal would aim to ensure an effective post-trading infrastructure, enhance competition among CSDs and strengthen cross-border investment, contributing to the development of a genuine single market for capital in the EU.
European Green Bond standard - European Commission proposes Regulation - 6 July 2021
The European Commission has proposed a Regulation on a voluntary European Green Bond Standard (EUGBS). The EUGBS aims to set a ‘gold standard’ for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious investments, while meeting tough sustainability requirements and protecting investors from ‘greenwashing’.
The new EUGBS will be open to any issuer of green bonds, including those outside the EU. There are four key requirements under the proposed framework:
- funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy;
- there must be full transparency, achieved through detailed reporting requirements, on how bond proceeds are allocated;
- all EU green bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the EU Taxonomy; and
- external reviewers providing services to issuers of EU green bonds must be registered with and supervised by the European Securities and Markets Authority (ESMA) as this will ensure the quality and reliability of their services and reviews, thereby protecting investors and ensuring market integrity.
Next steps involve the Commission submitting the proposal to the European Parliament and the Council of the European Union as part of the co-legislative procedure.
Proposal for a Regulation on European green bonds (COM(2021) 391 final)
Impact assessment (SWD(2021) 181 final)
Summary of impact assessment (SWD(2021) 182 final)
Regulatory Scrutiny Board Opinion: Proposal for a Regulation on European green bonds (SEC(2021) 390)
Press release (See section titled ‘A European Green Bond Standard (EUGBS)’)
Official Journal of the European Union
EMIR - European Commission Implementing Decisions on equivalence for third country derivatives regimes published in OJ - 5 July 2021
Six European Commission Implementing Decisions on the equivalence of the regulatory regimes of third countries under the European Market Infrastructure Regulation (648/2012/EU) (EMIR) have been published in the Official Journal of the European Union (OJ). The Commission has determined that the regulatory framework for non-EU central counterparties in the following jurisdictions meet the requirements under Article 11 of EMIR:
- Brazil (Commission Implementing Decision ((EU) 2021/1103);
- Canada (Commission Implementing Decision ((EU) 2021/1104);
- Singapore (Commission Implementing Decision ((EU) 2021/1105);
- Australia (Commission Implementing Decision ((EU) 2021/1106);
- Hong Kong (Commission Implementing Decision ((EU) 2021/1107); and
- United States (Commission Implementing Decision ((EU) 2021/1108).
The Decisions were adopted on 5 July 2021 and enter into force 20 days following publication in the OJ, which is 26 July 2021.
Brazil - Commission Implementing Decision (EU) 2021/1103 (C/2021/4840)
Canada - Commission Implementing Decision (EU) 2021/1104 (C/2021/4845)
Singapore - Commission Implementing Decision (EU) 2021/1105 (C/2021/4846)
Australia - Commission Implementing Decision (EU) 2021/1106 (C/2021/4847)
Hong Kong - Commission Implementing Decision (EU) 2021/1107 (C/2021/4848)
United States - Commission Implementing Decision (EU) 2021/1108 (C/2021/4852)
European Banking Authority
IFD - EBA publishes final reports on technical standards on supervisory co-operation - 5 July 2021
The European Banking Authority (EBA) has published the following final reports on technical standards supplementing the Investment Firms Directive ((EU) 2019/2034) (IFD):
- Final Report on Draft Regulatory Technical Standards (RTS) and Draft Implementing Technical Standards (ITS) on information exchange between national competent authorities of home and host member states (EBA/RTS/2021/07, EBA/ITS/2021/05). The draft RTS and ITS concern information exchange between competent authorities in relation to an investment firm which operates either through a branch or through its freedom to provide services in one or more member states other than those in which it is incorporated; and
- Final Report on Draft RTS on colleges of supervisors for investment firm groups (EBA/RTS/2021/06). The RTS specify the conditions, established with a view to making supervision of cross-border investment firms more effective and efficient, under which colleges of supervisors exercise their tasks.
The draft RTS will be submitted to the European Commission for adoption. Following submission, they will be subject to scrutiny by the European Parliament and the Council of the European Union before being published in the Official Journal of the EU. The draft ITS will be submitted to the European Commission for endorsement before being published.
HM Treasury
UK prospectus regime - HM Treasury publishes consultation - 1 July 2021
HM Treasury has published a consultation on the UK’s prospectus regime as part of its stated commitment to improving the prospectus regime inherited from the EU. This consultation follows a recommendation from Lord Hill’s UK Listings Review, published in March 2021, that the government carry out a fundamental review of the UK’s prospectus regime.
Matters on which the government seeks views include, among other things:
- Overall approach: the government proposes that the two regulatory issues that the Prospectus Regulation ((EU) 2017/1129) deals with, admissions of securities and public offer rules, are dealt with separately in future so that they can be addressed on their individual merits;
- New FCA powers on admissions to regulated markets: the government is seeking views on whether the FCA should be granted discretion to set rules on whether or not a prospectus is required when securities are admitted to trading on a UK regulated market; and
- Junior markets: the government is proposing a number of options for companies admitted to multilateral trading facilities (MTF), including SME growth markets. These include a simple exemption from the restriction on public offerings of securities in section 85(1) of FSMA;
The consultation closes on 17 September 2021. Subject to the outcome of the consultation, the proposals in the consultation will be implemented by legislation and the FCA will review and consult on rules to replace the Prospectus Regulation.
Consultation paper: UK Prospectus Regime review
Prudential Regulation Authority
Designating investment firms - PRA publishes consultation paper - 5 July 2021
The PRA has published a consultation paper (CP15/21) setting out proposals making minor changes to its policy on designating investment firms. The aim of the proposals is to ensure that the PRA’s policy reflects the impact of the new Investment Firms Prudential Regime (IFPR) proposed by the FCA. They also reflect HM Treasury’s proposals, published on 28 June 2021, to revise the Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order 2013 (SI 2013/556) (PRA RAO).
The proposals in the consultation paper would amend the Statement of Policy, ‘Designation of investment firms for prudential supervision by the PRA’, to:
- reflect HM Treasury’s proposed amendments to the PRA RAO, including the change in the scope of the firms that can be designated;
- explain that there will usually be six months, rather than three months, between the Prudential Regulation Committee designating an investment firm and it becoming PRA-regulated; and
- note that the PRA, when making a designation decision, will take into account whether or not an investment firm is a clearing member of a central counterparty offering clearing services to other financial institutions.
The consultation paper also proposes to change the Definition of Capital Part of the PRA Rulebook to increase the base capital resources requirement for designated investment firms from EUR 730,000 to £750,000, and to denominate this in sterling. The changes are set out in the Draft CRR Firms: Investment Firms Prudential Regime Instrument 2021.
The consultation closes on 5 October 2021. The PRA proposes that the resulting changes would take effect on 1 January 2022.
Consultation paper: Designating investment firms (CP15/21)
Financial Conduct Authority
LIBOR - FCA publishes speech by Director of Markets and Wholesale Policy, Edwin Schooling Latter - 5 July 2021
The FCA has published a speech by Director of Markets and Wholesale Policy, Edwin Schooling Latter, on LIBOR transition progress. Points of interest include:
- for LIBOR panels ending in 2021 (GBP, JPY, CHF and EUR), the central challenge remaining is ensuring that all legacy contracts that can be converted are converted by the end of 2021;
- firms must act now to move their new USD interest rates business to the Secured Overnight Financing Rate (SOFR);
- the FCA does not want to see transition to new so-called ‘credit-sensitive’ rates, such as Bloomberg’s Short Term Bank Yield index (known as BSBY) that some have suggested as a possible successor to LIBOR in some contracts; and
- any regulated UK market participants looking to use these credit sensitive rates - which share many of the same flaws as LIBOR because they are derived largely from transactions in commercial paper and certificate of deposit markets - in UK-based business should carefully consider the risks and raise this with their FCA supervisors before using such rates.
Speech by Director of Markets and Wholesale Policy, Edwin Schooling Latter: LIBOR – 6 months to go
Listing regime - FCA publishes consultation on effectiveness of UK primary markets - 5 July 2021
The FCA has published a consultation paper on a series of proposed reforms to improve the effectiveness of UK primary markets (CP21/21), alongside a discussion of how it might continue to develop the regime to ensure that the UK remains a competitive and dynamic market. The FCA’s suggested reforms seek to address and build on proposals detailed in the recent UK Listing Review, chaired by Lord Hill and published in March 2021, and the Kalifa Review of UK FinTech published in February 2021.
The paper is divided into two parts. The first is a discussion of the purpose and value of the listing regime, which is intended to inform how the listing regime may be made more effective in the future. In particular, four potential models of how the listing regime could be structured are described.
The second part is a consultation on measures to remove barriers to listing, to ensure the listing regime continues to uphold the highest standards of market integrity and to improve the accessibility of the FCA rulebooks. To this end, the FCA is consulting on the following targeted measures:
- allowing a targeted form of dual class share structures within the premium listing segment to encourage innovative, often founder-led companies onto public markets sooner, thereby broadening the listed investment landscape for investors in the UK;
- reducing the amount of shares an issuer is required to have in public hands (i.e. free float) from 25% to 10%, reducing potential barriers for issuers created by current requirements;
- increasing the minimum market capitalisation (MMC) threshold for both the premium and standard listing segments for shares in ordinary commercial companies from £700,000 to £50 million. Raising the MMC will give investors greater trust and clarity about the types of company with shares admitted to different markets; and
- making minor changes to the Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules to simplify the FCA’s rulebooks and reflect changes in technology and market practices.
The FCA is consulting for 10 weeks on these proposals, with a closing date of 14 September 2021. Subject to consultation feedback and FCA Board approval, it will seek to make relevant rules before the end of 2021. On the discussion areas, the FCA will provide feedback and potentially consult further on wider listing regime changes in due course, if appropriate.
Consultation paper: Primary Markets Effectiveness Review (CP21/21)
Financial Stability Board
LIBOR - FSB publishes report on transition issues - 6 July 2021
The Financial Stability Board (FSB) has published a progress report to the G20 on LIBOR transition issues. The transition away from LIBOR is a significant priority for the FSB, which strongly urges market participants to act now to complete the steps set out in its global transition roadmap, which was updated in June 2021.
The report emphasises that, with cessation timelines confirmed, there should be no remaining doubts about the urgency of the need to transition away from LIBOR by the end of 2021. The FSB observes that the continuation of some key USD LIBOR tenors through to 30 June 2023 is intended only to allow legacy contracts to mature, as opposed to supporting new USD LIBOR activity. Supervisory authorities are called upon to step up their efforts for active and adequate communication to increase awareness of the scope and urgency of relevant LIBOR transitions for all clients and other market participants. Financial and non-financial institutions are, moreover, urged to accelerate the adoption of risk-free rates in new contracts, the acceptance of newly developed products, as well as the active conversion of legacy LIBOR-referencing contracts to directly reference risk-free rates and/or insert robust fallback language.
Asset Management
Issue 1117 / 8 July 2021
HEADLINES
European Securities and Markets Authority
Regulation on the cross-border distribution of collective investment undertakings - ESMA publishes first report on marketing requirements and marketing communications - 30 June 2021
The European Securities and Markets Authority (ESMA) has published its first report (ESMA34-45-1219) providing an overview of marketing requirements and marketing communications under the Regulation on the cross-border distribution of collective investment undertakings ((EU) 2019/1156).
ESMA’s key findings include that:
- national laws, regulation and administrative provisions governing marketing requirements are usually based on the transposition of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Undertakings for the Collective Investments in Transferable Securities Directive (2009/65/EC) (UCITS), although national competent authority (NCA) responses identified many additional requirements imposed by member states to regulate further the marketing of UCITS or AIFs in their jurisdiction;
- in relation to the verification of marketing communications, a large number of NCAs indicated that no national rules required the ex-ante or ex-post verification of marketing communications, or that such verifications were not part of their supervisory practice; and
- it is expected that greater harmonisation of the marketing requirements will be achieved after transposition of the Directive on cross-border distribution of collective investment undertakings ((EU) 2019/1160) by the 2 August 2021 deadline.
ESMA has submitted the report to the European Parliament, the Council of the European Union and the European Commission. It intends to publish the next report in two years’ time.
Financial Conduct Authority
AFMs - FCA publishes multi-firm review on assessment of funds’ value - 6 July 2021
The FCA has published its findings following a review of the processes used by different authorised fund managers (AFMs) when they carry out assessments of value for the funds they operate. Between July 2020 and May 2021, the FCA visited a sample of AFMs and found that most had not implemented the assessment of value arrangements that the FCA expects in order to achieve compliance with the FCA’s rules. Many had not implemented assessments meeting the minimum consideration requirements and several practices fell short of the FCA’s expectations.
The FCA’s key findings included:
- applying assessment of value rules: some firms assessed value in the abstract, rather than weighing up the value delivered against the costs and charges investors pay to invest in the fund;
- assessment of service quality: many firms considered service quality only at a firm level rather than by fund and unit class, even when variations in service levels between funds and unit classes were likely;
- assessment of performance: the FCA found that sometimes fund performance was assessed using measures that do not reflect a fund’s investment policy and strategy; and
- general assessment of AFM costs: many firms incorrectly implemented the requirement in COLL 6.6.21R(3) which concerns assessment of AFM costs and, rather than seeing this as a consideration of fees and charges incurred by investors in the context of costs incurred by the AFM in operating the fund, firms compared total fund charges with those of competitors’ funds.
In light of its findings, the FCA expects more rigour from AFMs when assessing value in funds and expects all AFMs to consider the findings from its review and use them to assess their own assessment of value processes. The FCA intends to review firms again within the next 12 to 18 months and will assess how well firms have reacted to its feedback. It will consider other regulatory tools if it finds that firms are not meeting the standards that the FCA expects.
Multi-firm review: Authorised fund managers’ assessments of their funds’ value
Insurance
Issue 1117 / 8 July 2021
HEADLINES
- European Insurance and Occupational Pensions Authority
- Climate change, catastrophes and macroeconomic benefits of insurance - EIOPA publishes thematic article- 6 July 2021
- Equity prices and systemic risk - EIOPA publishes report on impact of EU-wide insurance stress tests- 6 July 2021
- (Re)insurance climate change-related risks - EIOPA publishes report on non-life underwriting and pricing in light of climate change- 9July 2021
- Solvency II - EIOPA publishes methodological paper on Nat Cat standard formula- 8July 2021
- Bank of England
- Financial Conduct Authority
European Insurance and Occupational Pensions Authority
Climate change, catastrophes and macroeconomic benefits of insurance - EIOPA publishes thematic article - 6 July 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has published a thematic article on climate change, catastrophes and the macroeconomic benefits of insurance. The article has been produced by representatives of EIOPA and the European Central Bank (ECB), but is stated not to represent the views of EIOPA or the ECB.
The article considers the protective role that insurance can play in mitigating the negative macroeconomic and welfare impacts of catastrophes, and the interplay between climate change and insurance coverage. It outlines a new theoretical model that links insurance to macroeconomic performance in the short and long term, accounting for changes in the distribution of climatic conditions. The model provides three main conclusions:
- insurance can help mitigate the macroeconomic and welfare impact of catastrophes;
- climate change is likely to have an increasingly negative impact on welfare; and
- that impact is likely to be magnified by a reduction in insurance coverage, as material climate change may widen the insurance protection gap.
The article states that the future impact of catastrophes may consequently be greater than that of similar events in the past, and economic models that fail to account for this mechanism may underestimate the full magnitude of climate change costs.
Thematic article: Climate change, catastrophes and the macroeconomic benefits of insurance
Equity prices and systemic risk - EIOPA publishes report on impact of EU-wide insurance stress tests - 6 July 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has published a report on the impact of EU-wide insurance stress tests on equity prices and systemic risk. Since the global financial crisis, stress tests have become standard tools for regulators and supervisors to assess the risks and vulnerabilities of financial sectors. To this end, EIOPA regularly performs EU-wide insurance stress tests.
The report analyses the impact of the exercises conducted in 2014, 2016 and 2018 on the equity prices of insurance companies. Using an event study framework, EIOPA only found a statistically significant impact in respect of the publication of the 2018 exercise results. Its empirical analysis further suggested that the final version of technical specifications for the 2014 exercise, the initiation of public consultation and the published stress test scenario of the 2018 exercise, contributed to a decline in systemic risk.
In addition, to the best of its knowledge, EIOPA notes that this is the first report that investigates this topic for the European insurance sector and goes on to say that its empirical results could help improve the communication and design of future stress test exercises.
Report: Impact of EU-wide insurance stress tests on equity prices and systemic risk
(Re)insurance climate change-related risks - EIOPA publishes report on non-life underwriting and pricing in light of climate change - 9 July 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has published a report addressing non-life underwriting and pricing. The report notes that the (re)insurance sector may be significantly affected by climate change as a result of: (i) underwriting natural catastrophe risks, which are increasing as a result of global warming; and (ii) the challenges associated with short-term non-life contracts and annual re-pricing in the context of climate change.
The report investigates the opportunity for (re)insurers to support the insurability of climate change-related risks and to avoid a situation where insurance for natural catastrophe risks becomes unaffordable for the policyholder. EIOPA suggests that this could be achieved by (re)insurers using their data, expertise and risk assessment capacity - including through risk-based pricing, contractual terms, and underwriting strategy – to incentivise policyholders to mitigate risks and to promote climate change adaptation and mitigation measures.
Report on non-life underwriting and pricing in light of climate change (EIOPA-BoS-21/259)
Solvency II - EIOPA publishes methodological paper on Nat Cat standard formula - 8 July 2021
The European Insurance and Occupational Pensions Authority (EIOPA) has published a methodological paper on the potential inclusion of climate change considerations in the calibration of the Solvency Capital Requirement (SCR) for natural catastrophe underwriting risk (Nat Cat SCR) under Solvency II (2009/138/EC).
The paper explores the impact of the increased frequency and severity of natural catastrophes as a result of climate change and discusses how, for the purposes of policyholder protection and insurance sector stability, calibration of the Nat Cat SCR could be amended to include considerations reflecting the expected impact of climate change.
The methodology paper also discusses the current methodology used for Nat Car SCR calibration, and analyses the perils/countries in Europe affected by climate change.
Methodological Paper on potential inclusion of climate change in the Nat Cat standard formula
Bank of England
Solvency II Review - BoE publishes consultation paper on reporting requirements - 8 July 2021
The Bank of England (BoE) has published a consultation paper setting out the PRA’s proposed changes to reporting requirements under the UK’s Solvency II (2009/138/EC) regime.
The paper sets out proposals intended to remove duplication and reduce less generally relevant areas of reporting for firms. The proposals include:
- removing the requirement for insurance and reinsurance undertakings to report a number of Solvency II Quantitative Reporting Templates (QRTs);
- the reduction of reporting frequency of the minimum capital requirement (MCR) collected via S.28 templates, from a quarterly to a semi-annual basis;
- the amendment of a reporting proportionality threshold to further exempt reinsurance undertakings from reporting template S.16.01 on annuities stemming from non-life insurance obligations; and
- expanding the PRA’s modification by consent to waive certain quarterly returns, to firms that the PRA designates as Category 3 under its Potential Impact Framework.
The proposed implementation date for the proposals set out in the consultation paper is for quarterly and annual reporting reference dates falling on and after 31 March 2022.
Responses to the consultation paper must be submitted by 8 October 2021.
Consultation Paper: CP11/21 Review of Solvency II: Reporting (Phase 1)
Financial Conduct Authority
Adequate client money arrangements - FCA publishes Dear CEO letter to general insurance intermediaries - 2 July 2021
The FCA has published a Dear CEO letter sent to general insurance intermediaries on maintaining adequate client money arrangements. The FCA explains that, as part of its work on firms’ financial resilience, the FCA has reviewed certain general insurance intermediaries’ client money arrangements and identified common shortcomings that may indicate more widespread non-compliance in the sector.
The letter reminds firms holding or controlling client money that they must establish and maintain arrangements to ensure that such funds are adequately protected. It sets out the key issues that the FCA found from its assessments, as well as the FCA’s expectations in these areas, which include:
- client money calculation: over half the firms assessed did not appear to have client money calculations that aligned with the FCA’s rules and expectations;
- appropriate withdrawal of commission: the FCA saw many instances where firms had withdrawn commission from client money accounts before a client money calculation was completed;
- segregation of client money: the FCA notes that it is essential that firms segregate client money by paying it into a client bank account and that this account remains a trust account at all times; and
- co-mingling risk transfer money with client money: risk transfer money held in a client money account is subject to the client money rules. Co-mingling requires the relevant insurer’s agreement, and if there is no valid risk transfer agreement in place, the client funds received by the firm will be subject to the client money rules.
The FCA intends to continue to assess firms’ client money arrangements. Firms are expected to review their arrangements in light of the issues highlighted in the letter and to take robust action, if needed, to ensure that client money is appropriately safeguarded. Firms that are required to obtain client money audits should also ensure that their auditor is aware of the FCA’s letter and the material referenced in it.
Dear CEO letter: Maintaining adequate client money arrangements – general insurance intermediaries
Part VII insurance business transfer schemes - FCA consulting on proposed changes to its guidance - 8 July 2021
The FCA has launched a consultation on its proposed update to its finalised guidance regarding its approach to the review of Part VII insurance business transfer schemes. The FCA proposes to amend the guidance, initially published in May 2018, to account for changes in the regulatory landscape as a result of the UK’s exit from the EU and to incorporate the FCA’s experience with Part VII transfers and feedback from stakeholders.
Feedback should be submitted to the FCA by 31 August 2021.
Financial Crime
Issue 1117 / 8 July 2021
HEADLINES
Financial Action Task Force
Data pooling, AML and CFT - FATF publishes two reports - 1 July 2021
The Financial Action Task Force (FATF) has published two reports on the interaction of technology and anti-money laundering (AML) and counter-terrorist financing (CFT). The first report is on data pooling, collaborative analytics and data protection, and sets out how developments in technology allow financial institutions to analyse large amounts of structured and unstructured data more efficiently and to identify patterns and trends more effectively. The FATF highlights that data pooling and collaborative analytics can help financial institutions better understand, assess and mitigate money laundering and terrorist financing risks.
Developing this theme further, the report examines commercially available and emerging technologies that facilitate advanced AML and CFT analytics within regulated entities, as well as technologies that allow collaborative analytics between financial institutions (without breaching national and international data privacy and whilst ensuring the protection of legal frameworks).
The second report focuses on the opportunities and challenges that new technologies present for the purposes of AML and CFT, and identifies emerging and available technology-based solutions.
The FATF’s findings have led to its members adopting a set of suggested actions for governmental authorities to advance the responsible development and use of new technologies for AML and CFT, including ensuring privacy and data protection when implementing new technologies, and promoting AML and CFT innovation that support financial inclusion by design.
Report: Stocktake on data pooling, collaborative analytics and data protection
Report: Opportunities and challenges of new technologies for AML/CFT
AML and CTF standards - FATF publishes second report on review of revised standards on virtual assets and virtual asset service providers - 5 July 2021
The Financial Action Task Force (FATF) has published a report on the findings from its second 12-month review of its revised anti-money laundering (AML) and counter-terrorist financing (CTF) standards on virtual assets (also known as cryptoassets) and virtual asset service providers (VASPs). The review looks at how jurisdictions and the private sector have implemented the revised standards since the FATF’s first 12-month review in July 2020. It also looks at changes in the typologies, risks and the market structure of the virtual assets sector.
The report finds that many jurisdictions have continued to make progress in implementing the revised FATF standards. Although the supervision of VASPs and implementation of AML/CTF obligations by VASPs is generally emerging, the FATF notes that there is evidence of progress. In particular, there has been progress in the development of technological solutions to enable the implementation of the ‘travel rule’ for VASPs, which is a key AML/CTF measure which mandates that VASPs obtain, hold and exchange information about the originators and beneficiaries of virtual asset transfers.
The FATF states that all jurisdictions need to implement the revised FATF standards, including travel rule requirements, as quickly as possible, and the FATF will:
- focus on implementing the current FATF standards on virtual assets and VASPs, including through finalising the revised FATF guidance on virtual assets and VASPs by November 2021;
- accelerate the implementation of the travel rule; and
- monitor the virtual asset and VASP sector, but not further revise the FATF standards at this point in time (except to make a technical amendment regarding proliferation financing).
Enforcement
Issue 1117 / 8 July 2021
HEADLINES
Financial Conduct Authority
Home insurance renewals - FCA fines insurers and insurance intermediaries for failures in communications - 8 July 2021
The FCA has published a final notice it has issued to Lloyds Bank General Insurance Limited, St Andrew’s Insurance Plc, Lloyds Bank Insurance Services Limited and Halifax General Insurance Services Limited (LBGI) for failing to ensure that language contained within millions of home insurance renewal communications was clear, fair and not misleading. A financial penalty of £90,688,400 has been imposed.
Between January 2009 and November 2017, LBGI sent nearly 9 million renewal communications to home insurance customers which included language to the effect that they were receiving a ‘competitive price’ at renewal, but LBGI did not substantiate the ‘competitive price’ language. Separately, LBGI informed approximately half a million customers that they would receive a discount based on either their ‘loyalty’ or the fact they were a ‘valued customer’. This described discount was not applied and was never intended to apply, affecting approximately 1.2 million renewals. As a result, the FCA found that LBGI breached Principle 3 and Principle 7 of the FCA’s Principles for Businesses between 1 January 2009 and 19 November 2017.
LBGI has voluntarily made payments of approximately £13.5 million to customers who received communications that erroneously referred to the application of a discount when none was applied, and this has been taken into account in the assessment of the financial penalty. LBGI is contacting customers proactively, meaning customers do not have to take any steps to receive payment. The FCA continues to engage with LBGI on the voluntary payments process.
Recent Cases
Financial Conduct Authority v 24hr Trading Academy Ltd and another [2021] EWHC 648
The Court of Appeal has updated its civil appeals case tracker to reflect that an application for permission to appeal the decision of the High Court in Financial Conduct Authority v 24hr Trading Academy Ltd and another was refused on 30 June 2021.
As previously reported in this bulletin, Richards J. gave summary judgment for the FCA, deciding that 24hr Academy Ltd - an unauthorised company - had breached the general prohibition in section 19 of FSMA by carrying on certain regulated activities specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) without authorisation. Richards J also decided that 24hr Academy had breached the financial promotion prohibition in section 21 of FSMA, and that a senior individual at 24hr Academy was knowingly concerned in the FSMA contravention, although he did not find that the individual had themselves breached FSMA.
Stuart Malcolm Forsyth v The Financial Conduct Authority and The Prudential Regulation Authority, [2021] UKUT 0162 (TCC), 6 July 2021
This decision concerned two references by Mr Stuart Forsyth (Mr Forsyth) in respect of a decision notice of the FCA dated 30 September 2019 and a decision notice of the PRA also dated 30 September 2019. Both decision notices (the Decision Notices) concerned the same matters.
Pursuant to the Decision Notices, the regulators decided to: (i) make an order, under section 56 of FSMA, prohibiting Mr Forsyth from performing any function in relation to any regulated activity; and (ii) impose, pursuant to section 66 of FSMA, financial penalties of £78,318 and £76,180 on Mr Forsyth.
The regulators contended that during the period 19 February 2010 to 8 July 2016, Mr Forsyth’s conduct – which concerned remuneration paid to Mr Forsyth’s wife - demonstrated a serious lack of integrity, in breach of a number of its rules, including: Statement of Principle 1 (Integrity) of the Regulators’ Statements of Principle for Approved Persons; Rule 1 (Integrity) of the FCA’s Individual Conduct Rules; and Individual Conduct Standard 1 (Integrity) of the PRA’s Insurance Conduct Standards.
The tribunal found that the regulators had not made out their case that Mr Forsyth failed to act with integrity in relation to the subject matter of the references. Accordingly, the tribunal held that the regulators should not impose a financial penalty on Mr Forsyth, and remitted the question of whether a prohibition order should be imposed to the regulators for them to reconsider their decision in that regard. The tribunal also made a number of recommendations to the FCA and the PRA pursuant to section 133A(5) of FSMA.
