Includes developments in relation to: ISSB Draft Sustainability Standards; appointed representatives regime; mortgage switching; pre-hedging; Long-Term Asset Fund; and climate change risk scenarios

Click on the headings below to access each section:

GENERAL

Issue 1171 / 4 August 2022

HEADLINES

  1. European Commission
    1. ESG ratings providers - European Commission publishes summary report of consultation responses-3 August 2022
  2. UK Government
    1. ISSB Draft Sustainability Standards - BEIS publishes letter to International Sustainability Standards Board-1 August 2022
  3. Financial Conduct Authority and The Financial Reporting Council
    1. TCFD disclosures for listed companies - FCA and FRC find significant progress, but further improvement needed-29 July 2022
  4. Financial Conduct Authority
    1. Appointed representatives regime - FCA publishes Policy Statement (PS22/11)-3 August 2022

European Commission

ESG ratings providers - European Commission publishes summary report of consultation responses - 3 August 2022

The European Commission (the Commission) has published a report setting out a summary of responses to its April 2022 consultation paper on ESG ratings and sustainability factors in credit ratings. The consultation follows the European Securities and Markets Authority’s (ESMA’s) February 2022 call for evidence on ESG ratings providers.

Key findings from the consultation, which had 168 respondents, include:

  • the majority of respondents stated they use ESG ratings. Among these, 77% use them ‘very much’ while a smaller share use them ‘a little’;
  • the most used ESG ratings are those that provide an opinion on exposure to, and management of, ESG risks, with 86% of respondents using this type of rating;
  • over 84% of respondents consider that the current market is not functioning well. Two thirds of respondents consider the quality of ESG ratings to be fine to very good, with about one third considering it poor;
  • 94% of respondents consider that intervention in the ESG ratings market is necessary. Over 80% support a legislative intervention while the remainder support the development of non-regulatory intervention in the form of guidelines or a code of conduct. Over 90% of respondents indicate that the main element to be addressed by intervention should be improving transparency on the methodology used by ESG ratings providers;
  • 60% of respondents believe it is ‘very important’, and 30% believe it is ‘important’, to understand to what extent individual credit rating actions have been influenced by sustainability factors; and
  • 52 of 101 respondents consider that the current trends in the market are sufficient to ensure that credit ratings agencies incorporate relevant ESG factors in credit ratings.

The Commission explains that these findings will be reflected in any further initiative it takes in this area.

European Commission Summary Report: Targeted consultation on the functioning of the ESG ratings market in the EU and on the consideration of ESG factors in credit ratings

Updated webpage

UK Government

ISSB Draft Sustainability Standards - BEIS publishes letter to International Sustainability Standards Board - 1 August 2022

The Department for Business, Energy and Industrial Strategy (BEIS) has published a letter from Lord Callanan, Parliamentary Under Secretary of State at BEIS, to the International Sustainability Standards Board (ISSB) regarding their exposure drafts of IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures) (the Standards). The ISSB published the exposure drafts for consultation in March 2022.

BEIS strongly welcomes the exposure drafts and makes four high-level and strategic points to support the development of the final Standards. In particular, it considers that the ISSB should:

  • set a baseline standard that is accessible for use on a global scale;
  • implement the Standards in a proportionate and scalable way to accommodate the circumstances of different organisations and jurisdictions;
  • ensure that the Standards are principles-based, to enable jurisdictions to adopt them in a manner consistent with the local legislative framework while still delivering an effective global baseline of comparable disclosures; and
  • provide precise definitions and clarify what is required to achieve compliance.

Given the critical importance of the Standards, BEIS has asked the Financial Reporting Council (FRC), the FCA, the UK Endorsement Board and the Bank of England to provide substantive comment letters on the exposure drafts.

The ISSB aims to publish the final Standards by the end of 2022.

BEIS Notice: Letter from Lord Callanan to the International Sustainability Standards Board regarding their exposure drafts IFRS S1 and IFRS S2

Webpage

Financial Conduct Authority and The Financial Reporting Council

TCFD disclosures for listed companies - FCA and FRC find significant progress, but further improvement needed - 29 July 2022

The FCA and the Financial Reporting Council (FRC) have each published a report detailing the findings of a review of the first climate-related disclosures made in line with Listing Rule 9.8.6R(8) (the Listing Rule).  The Listing Rule was introduced in the FCA’s December 2020 Policy Statement (PS20/17) and requires commercial companies with a UK premium listing to include a statement in their annual financial report setting out whether they have made disclosures that are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and to explain if they have not.

Key observations from the FCA’s review include that:

  • 81% of companies indicated that they had made disclosures consistent with all seven recommended disclosures which the FCA would ordinarily expect a company to comply with;
  • some companies indicated that they had made disclosures consistent with the recommended disclosures, but the disclosures themselves appeared to be very limited in content. The FCA is considering these in more detail and may take action as appropriate;
  • the number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020; and
  • the most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations, such as scenario analysis and metrics and targets.

The FCA encourages companies making net zero commitments to consider the TCFD’s guidance on Metrics, Targets and Transition Plans and to ensure that their disclosures are not misleading.  Companies should also ensure that they are ready to disclose effectively against the standards of the International Sustainability Standards Board (ISSB), once they are finalised and adopted in the UK.  

The FRC’s report reflects a comprehensive review of the climate-related disclosures of a sample of 25 premium listed companies, weighted towards larger companies in climate-intensive sectors. It also provides examples of better practice to help companies develop and improve their disclosures.  According to the FRC, companies may need to raise the quality of their disclosures by:

  • providing more granular information about the effect of climate change on different business sectors and geographies;
  • balancing the discussion of climate-related risks and opportunities appropriately;
  • linking climate-related disclosures to other risk management and governance processes;
  • explaining how they have decided which climate-related information should be disclosed; and
  • explaining more clearly how the effects of different global warming scenarios, and their own net zero commitments, may affect the valuation of their assets and liabilities.

FCA Report: Review of TCFD-aligned disclosures by premium listed commercial companies

FRC Report: CRR Thematic review of TCFD disclosures and climate in the financial statements

Press release

Financial Conduct Authority

Appointed representatives regime - FCA publishes Policy Statement (PS22/11) - 3 August 2022

The FCA has published a Policy Statement (PS22/11) on improvements to the appointed representatives (AR) regime. The Policy Statement follows the FCA’s Consultation Paper on the improvements (CP21/34), which was published in December 2021.

Most respondents to the consultation support the FCA’s proposals. The FCA is proceeding with those proposals that received wide ranging support as consulted on, but is also making changes to the final rules to add flexibility, make it easier for firms to implement the relevant proposals, and reduce duplication and regulatory burden. The FCA explains that the changes will also ensure that the data requested from principals will be the most useful in identifying trends, issues and harms arising from the AR regime, while minimising the burden on firms. The FCA confirms that the rules will not apply to firms in the Temporary Permissions Regime or the Financial Services Contracts Regime.

In summary, the new rules will require principals to:

  • apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources;
  • assess and monitor the risk that their ARs pose to consumers and markets, providing similar oversight as they would to their own business;
  • review information on their ARs’ activities, business and senior management annually, and be clear on the circumstances when they should terminate an AR relationship;
  • notify the FCA of future AR appointments 30 calendar days before they take effect; and
  • provide complaints and revenue information for each AR to the FCA on an annual basis.

The FCA highlights that the new rules do not change the fact that principals are responsible for the activities of their ARs. It also indicates that, as part of its new three-year strategy to improve outcomes for consumers and markets, it is undertaking targeted supervision of principal firms across the financial services sector as a whole, using improved data and analytical tools to focus its work, and increasing its scrutiny of firms when they apply for authorisation and appoint ARs.

The FCA will publish its response to the feedback received on the discussion chapter (Chapter 5) of the Consultation Paper separately in 2023. This chapter sought views on potential areas of future change and was developed alongside HM Treasury’s call for evidence on the AR regime, published in December 2021, which is exploring potential legislative changes. HM Treasury is currently analysing responses to the call for evidence and will set out next steps in its review of the AR regime in due course.

The changes to the AR regime will take effect on 8 December 2022 following a four-month implementation period. As part of the FCA’s enhanced reporting requirements, principal firms should expect to receive a request for data about their ARs later in 2022. The final Handbook rules and guidance and updated forms are set out in Appendix 1 to the Policy Statement through the ‘Appointed Representatives Instrument 2022’ (FCA 2022/32).

FCA Policy Statement: Improvements to the Appointed Representatives regime (PS22/11)

Appointed Representatives Instrument 2022 (FCA 2022/32)

Webpage

Press release

BANKING AND FINANCE

Issue 1171 / 4 August 2022

HEADLINES

  1. European Banking Authority
    1. Deposit Guarantee Schemes Directive - EBA consults on methods for calculating contributions-29 July 2022
  2. Financial Conduct Authority
    1. Approach to remuneration - FCA publishes letter to Committee Chairs-2 August 2022
    2. Mortgage switching - FCA publishes statement-2 August 2022

European Banking Authority

Deposit Guarantee Schemes Directive - EBA consults on methods for calculating contributions - 29 July 2022

The European Banking Authority (EBA) has published a Consultation Paper (EBA/CP/2022/10) on draft Guidelines on methods for calculating contributions to deposit guarantee schemes (DGSs) under the Deposit Guarantee Schemes Directive (2014/49/EU) (DGSD) (the revised Guidelines). The revised Guidelines will repeal and replace the EBA’s previous Guidelines on the topic (EBA/GL/2015/10) (the original Guidelines), which were published in May 2015.

The EBA is consulting on several improvements to the original Guidelines, including the introduction of a formula for determining the risk adjustment factor for each member institution that seeks to align the riskiness of institutions and their DGS contributions.

The deadline for responses is 31 October 2022.

EBA Consultation Paper: Draft Guidelines (revised) on methods for calculating contributions to deposit guarantee schemes under Directive 2014/49/EU repealing and replacing Guidelines EBA/GL/2015/10 (EBA/CP/2022/10)

Webpage

Press release

Financial Conduct Authority

Approach to remuneration - FCA publishes letter to Committee Chairs - 2 August 2022

The FCA has published a letter addressed to the Remuneration Committee Chairs of proportionality level one banks, building societies and PRA designated investment firms, from the FCA’s Executive Director of Markets, Supervision, Policy and Competition, setting out its expectations for remuneration outcomes.

The letter refers to the new Consumer Duty, noting that a firm’s remuneration policies should be designed to support the expectations set by the Consumer Duty when it comes into effect.  It also addresses operational resilience, stating that: “[I]n the event of service disruptions, data breaches or other interruptions, we would expect firms to respond appropriately, such as making remuneration adjustments where appropriate, and to recover and learn from the experience.”  As firms respond to evolving regulatory, societal and customer expectations in the area of ESG, they are encouraged to review whether incentives for their senior leadership and other material risk takers are aligned to wider ESG risk factors. The letter also points out that remuneration and incentives have a part to play in supporting diversity in firms.

The FCA will consult on a package of measures to promote diversity and inclusion in the financial services sector, which will include proposals to make changes to the responsibilities of the Remuneration Committee.

FCA letter to Chair, Remuneration Committee [of proportionality level one Banks, Building Societies and PRA designated investment firms]

Updated webpage

Mortgage switching - FCA publishes statement - 2 August 2022

The FCA has published its latest statement on switching in the mortgage market. Among other things, the statement sets out the FCA’s expectations for lenders in this context, which include:

  • considering what more they can do to encourage mortgage borrowers to think about switching to a less costly option where that is available.
  • considering their overall approach to communicating information to make sure they equip consumers to make effective, timely and properly informed decisions and to monitor the outcomes borrowers receive. Whilst the Consumer Duty is not yet in force, the statement notes that firms should not wait to apply these requirements and should look for opportunities to support consumers to make the decisions they need to make; and
  • treat those who cannot switch fairly and support those in financial difficulties.

The FCA highlights its June 2022 Dear CEO letter, sent to mortgage lenders and administrators and reported previously in this Bulletin, in which it outlined its expectations in more detail.  The statement concludes that the case for further regulatory intervention is not currently justified since the number of borrowers who can switch but do not switch when it may save them money to do so is very low.

FCA Statement: Switching in the mortgage market - an update

Press release

SECURITIES AND MARKETS

Issue 1171 / 4 August 2022

HEADLINES

  1. Committee on Payments and Market Infrastructures and The International Organization of Securities Commissions
    1. Addressing non-default losses - CPMI and IOSCO publish joint discussion paper on CCP practices-4 August 2022
  2. European Parliament
    1. MiFIR - ECON publishes draft report on proposed amending Regulation-29 July 2022
  3. European Securities and Markets Authority
    1. Pre-hedging - ESMA publishes call for evidence-29 July 2022

Committee on Payments and Market Infrastructures and The International Organization of Securities Commissions

Addressing non-default losses - CPMI and IOSCO publish joint discussion paper on CCP practices - 4 August 2022

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) have published a joint discussion paper on central counterparty (CCP) practices to address potential losses arising from non-default events (non-default losses or NDLs).

The CPMI and IOSCO caution that NDLs can threaten a CCP’s viability as a going concern and its ability to continue providing critical services. Under the ‘Principles for financial market infrastructures’ (PFMI), CCPs must take action and have policies, procedures and plans in place for addressing NDLs, in addition to sound risk management frameworks to mitigate and manage those risks. The CPMI and IOSCO highlight that the discussion paper is not intended to create additional standards for CCPs beyond the PFMI, nor is it intended to be an assessment of whether CCPs have appropriately implemented the standards set out in the PFMI regarding NDLs. Instead, the discussion paper aims to advance industry efforts and foster dialogue on the key concepts and processes used by CCPs in four areas:

  • developing methodologies and practices for: (i) identifying scenarios from which NDLs may occur, (ii) quantifying potential NDLs, and (iii) assessing the sufficiency of resources and tools available to address NDLs;
  • achieving the operational effectiveness of plans to address NDLs;
  • reviewing, exercising and testing plans for addressing NDLs; and
  • providing effective governance of, and transparency regarding, plans for addressing NDLs both in advance of, and during, an NDL event, and engaging with participants and authorities.

The deadline for responses is 4 October 2022.

CPMI/IOSCO discussion paper: on central counterparty practices to address non-default losses

Cover note

Press release

European Parliament

MiFIR - ECON publishes draft report on proposed amending Regulation - 29 July 2022

The European Parliament’s Economic and Monetary Affairs Committee (ECON) has published a draft report (021/0385(COD)) (dated 26 July 2022) on the proposed Regulation amending the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR), regarding enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders.

The legislative proposal for the Regulation was adopted in November 2021. The draft report suggests several improvements to that proposal, including:

  • an exemption from mandatory contributions for markets that either represent less than 1% of the total EU average daily trading volume or do not contribute significantly to the fragmentation of EU markets;
  • an opt-in option to the mandatory contribution scheme for those exemptible regulated markets;
  • limiting the use of waivers to pre-trade transparency requirements under Article 4 of MiFIR;
  • harmonising the deferral regime for non-equities at EU level. The price and volume of a non-equity transaction should be published as close to real time as possible, and the price should only be delayed until the end of the trading day at most;
  • the establishment by ESMA a register of all systematic internalisers (SIs) and designated reporting entities (DREs) specifying their identity and the instruments or classes of instruments for which they are either an SI or a DRE;
  • allowing targeted suspensions of the derivatives trading obligation in favour of dealer-to-dealer platforms that have established links to central counterparties established in the EU; and
  • implementing changes to the best execution requirements under Article 27 of the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), to ensure a harmonised approach to best execution, more transparency and a level playing field across the EU.

Draft Report on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders (2021/0385(COD))

European Securities and Markets Authority

Pre-hedging - ESMA publishes call for evidence - 29 July 2022

The European Securities and Markets Authority (ESMA) has published a call for evidence (ESMA70-449-672) on pre-hedging. The call for evidence aims to promote discussion and gather evidence on pre-hedging to assist ESMA in developing appropriate guidance to delineate its admissibility in the context of the Market Abuse Regulation (596/2014/EU) (MAR), the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR). It follows ESMA’s Final Report (ESMA70-156-2391) on the review of MAR, which was published in September 2020.

ESMA explains that the review of MAR found fundamentally different views on pre-hedging, with some market participants seeing pre-hedging as essential for risk management and the correct functioning of the markets, while others considered that it may amount to insider trading. In light of this, following the Final Report, market participants asked ESMA to issue guidance on what should be considered as MAR-compliant in terms of pre-hedging; and the sort of behaviour that might constitute front-running. 

The deadline for responses is 30 September 2022.

ESMA Call for Evidence: On Pre-hedging (ESMA70-449-672)

Webpage

Press release

  1.  

CSDR - ESMA updates Q&As on settlement discipline - 3 August 2022 - ESMA has published an updated version of its Q&As on the implementation of the Central Securities Depositories (CSDs) Regulation (909/2014/EU) (CSDR) on improving securities settlement in the EU and on central securities depositories.

The revised version updates the ‘Settlement Discipline’ Q&As by introducing two new Q&As on the cash penalties calculation and two new Q&As on the bilateral cancellation facility.

ESMA: Q&As on implementation of the Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories (ESMA70-156-4448)

ASSET MANAGEMENT

Issue 1171 / 4 August 2022

HEADLINES

  1. European Commission
    1. Disclosure, inducements and suitability rules - European Commission publishes final report-2 August 2022
  2. European Banking Authority
    1. IFR - EBA publishes Final Report on Guidelines on liquidity requirements exemption-29 July 2022
  3. Financial Conduct Authority
    1. Financial promotion rules - FCA publishes Policy Statement (PS22/10) and Handbook rules for high-risk investments and firms approving financial promotions-1 August 2022
    2. Long-Term Asset Fund - FCA publishes Consultation Paper (CP22/14) on broadening the retail distribution-1 August 2022

European Commission

Disclosure, inducements and suitability rules - European Commission publishes final report - 2 August 2022

The European Commission (the Commission) has published its final report, dated May 2022, on disclosure, inducements and suitability rules. The final report follows the Commission’s retail investors study, which aimed to feed into the development of the retail investment strategy announced for 2022, and which was conducted as part of the Capital Markets Union action plan. The retail investment strategy aims to respond to new challenges in the market, such as increasing digitalisation of investment advice and the use of digital distribution channels.

The final report sets out the study’s findings in individual chapters, with the findings analysed under the Commission’s Better Regulation Guidelines, published in November 2021, to understand whether the current legal framework is relevant, coherent and effective, as well as adding value for consumer protection. To achieve this, the methodology for the study was designed to capture the whole process of retail investor decision-making, to understand and analyse the investment environment for investors, including through an analysis of product costs and current practices in advice and product provision. The primary data collection focused on 15 EU Member States, selected to cover a wide range of situations regarding levels of take-up of retail investment products, market characteristics and geographical diversity.

Positive findings from the final report include:

  • the availability of information documents is good and for the majority of products easy for investors to locate. Information documents are less easy to collect for some non-complex products, notably simple shares or bonds. However, there is no shortage of easily available digital information on these products;
  • compliance of the information contained in such documents is strong;
  • comparability of most information items is strong. The standardisation of risk indicators is highly relevant as it works as a common anchor for investors comparing products; and
  • the advice that the study’s mystery shoppers received was aligned with their profiles and objectives.

Despite this, the final report also notes the following areas of concern regarding disclosure, inducements and suitability rules:

  • while confident investors are at ease in making their own choices of products, potentially without advice, others are more reliant on advice and vulnerable in relation to advice that is not in their best interests;
  • there is a tension between the objectives the EU legal framework aims to achieve. The templates and requirements aim for transparency, standardisation and comparability, but there is also an ambition for disclosure documents and advice services to be engaging, encourage investment and support optimal investor choice. This creates a high volume of disclosure information, which can overload investors and negatively affect the attention they pay to the disclosures and their subsequent investment choices;
  • handing out information documents and undertaking suitability assessments and needs tests is required, but the legal framework does not define at which stage of the investment process this should be required. This results in inconsistencies in practice, whereby some distributors comply with the requirements at first contact with potential investors, while others delay this step until almost the end of the process;
  • product characteristics have the strongest influence on the extent to which investors succeed in making the right investment choice;
  • despite EU level rules on advice and inducements, in the majority of member states analysed there is no identified increase in the access to, and use of, independent advice; and
  • there is no evidence of a declining use of inducements, except in the Netherlands which applies a ban.

The final report can be accessed via the webpage below.

Webpage

European Banking Authority

IFR - EBA publishes Final Report on Guidelines on liquidity requirements exemption - 29 July 2022

The European Banking Authority (EBA) has published its Final Report (EBA/GL/2022/10) on Guidelines on the liquidity requirements exemption for small and non-interconnected investment firms. 

Under Article 43(1) of the IFR, small and non-interconnected investment firms that meet the conditions set out in Article 12(1) of the IFR may benefit from an exemption from liquidity requirements granted by their national competent authority (NCA). To ensure a harmonised application of the exemption, the Guidelines address three main topics:

  • the sorts of investment services and activities which make an investment firm eligible for the exemption;
  • the set of criteria to be assessed by an NCA before granting the exemption; and
  • guidance for NCAs when granting and withdrawing the exemption.

The Guidelines apply from 29 September 2022.

EBA Final Report: Guidelines on the criteria for the exemption of investment firms from liquidity requirements in accordance with Article 43(4) of Regulation (EU) 2019/2033 (EBA/GL/2022/10)

Press release

Financial Conduct Authority

Financial promotion rules - FCA publishes Policy Statement (PS22/10) and Handbook rules for high-risk investments and firms approving financial promotions - 1 August 2022

The FCA has published a Policy Statement (PS22/10) on strengthening its financial promotion rules for high-risk investments. Appendix 1 to the Policy Statement sets out the draft Handbook Instrument that will make the proposed changes. The Policy Statement follows the FCA’s consultation paper (CP22/2) on the proposals, published in January 2022.

The FCA is making several targeted changes to the original proposals, with a view to avoiding certain negative unintended consequences identified by respondents. These include:

  • clarifying that the FCA’s marketing restrictions do not generally apply to investments issued by local authorities;
  • shortening the main risk warning for high-risk investments and allowing alternative risk warnings in peer-to-peer agreements and portfolios, and where the activity of the product issuer or provider could be covered by the Financial Services Compensation Scheme;
  • exempting investment companies listed under Chapter 15 of the FCA’s Listing Rules that are caught by its marketing restrictions from the risk warning, risk summary and personalised risk warning requirements;
  • exempting ‘shareholder benefits’;
  • clarifying that the Direct Offer Financial Promotion (DOFP) rules relate to promotions which include a manner of response or includes a form by which any response may be made;
  • clarifying that the 24-hour cooling off period starts from when the consumer requests to view the DOFP (for Restricted Mass Market Investments) or financial promotion (for Non-Mass Market Investments); and
  • ensuring that consumers must wait at least 24 hours before undertaking the appropriateness test again from their second assessment onwards.

It is also extending the implementation period to six months (with the exception of the main risk warning rules, which must be implemented within four months).

The rules will not apply to cryptoasset promotions. The FCA will make final rules for cryptoasset promotions once the relevant legislation bringing certain cryptoassets into the scope of the financial promotion regime has been made by HM Treasury. The FCA currently expects to take a similar approach to cryptoassets as that taken for other high-risk investments.

The rules related to risk warnings for financial promotions of high-risk investments will take effect from 1 December 2022. All other rules will have effect from 1 February 2023.

FCA Policy Statement: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions (PS22/10)

Webpage

Press release

  1.  

Long-Term Asset Fund - FCA publishes Consultation Paper (CP22/14) on broadening the retail distribution - 1 August 2022

The FCA has published a Consultation Paper (CP22/14) on proposals for broadening the retail distribution of the Long-Term Asset Fund (LTAF) to a wider group of retail investors and pension schemes. The LTAF is a new category of authorised open-ended fund and has been designed to enable investors to invest in long-term illiquid assets through an authorised fund vehicle. LTAF promotion is currently restricted to professional investors, certified and self-certified sophisticated investors, and certified high net worth individuals.

The FCA is now proposing to treat the LTAF as a Restricted Mass Market Investment, in line with its Policy Statement (PS22/10) on strengthening the FCA’s financial promotion rules for high-risk investments. The FCA’s proposals will also increase the amount of exposure that some other authorised retail funds, including Funds of Alternative Investment Funds, can have to the LTAF.

The FCA is also consulting on proposals to remove the 35% restrictions on illiquid assets in unit-linked products where the investor is a qualifying default pension scheme. This would give LTAFs equivalent status to other illiquid assets which can meet the conditions for securing an appropriate degree of consumer protection, enabling firms to develop unit-linked products which contain other kinds of illiquid assets, but only under the same terms that currently apply to LTAFs, meaning that they can only be sold to default pension schemes.

The deadline for responses is 10 October 2022. The FCA aims to publish a final Policy Statement and Handbook rules in early-2023.

FCA Consultation Paper: Broadening retail access to the long-term asset fund (CP22/14)

Webpage

Press release

INSURANCE

Issue 1171 / 4 August 2022

HEADLINES

  1. European Insurance and Occupational Pensions Authority
    1. Governance arrangements in third countries - EIOPA consults on draft supervisory statement-1 August 2022
    2. Climate change risk scenarios - EIOPA publishes Application Guidance and Feedback Statement on Own Risk and Solvency Assessment-2 August 2022
  2. Financial Conduct Authority
    1. Non-compliant pension transfer advice - FCA publishes Consultation Paper (CP22/15) on calculating redress-2 August 2022

European Insurance and Occupational Pensions Authority

Governance arrangements in third countries - EIOPA consults on draft supervisory statement - 1 August 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper (EIOPA-22-715) (dated 29 July 2022) containing a draft supervisory statement on the use of governance arrangements in third countries to perform functions or activities. EIOPA has developed the draft supervisory statement on the basis of the Solvency II Directive (2009/138/EC) (in particular, Articles 18, 29, 35 and 41) and the Insurance Distribution Directive ((EU) 2016/97) (IDD) (in particular, Articles 1(6), 3, 10 and 16).

The draft supervisory statement aims to ensure appropriate supervision and monitoring of the compliance of insurance undertakings and intermediaries with the requirements of the relevant EU legislation in relation to their governance arrangements in third countries.  In particular, it notes that EIOPA has previously underlined the need for insurance undertakings not to display the characteristics of an empty shell company and instead demonstrate an appropriate level of corporate substance, including the presence of key decision-makers, function holders and staff to an extent proportionate to the nature, scale and complexity of the firm's business in the EEA. EIOPA is concerned by governance arrangements when they are used to conduct certain regulated functions and activities for undertakings and intermediaries that ultimately serve policyholders in EEA. This has the potential to impair risk management and effective decision making and affect the ability of supervisory authorities to conduct proper supervision.

The deadline for responses is 31 October 2022.

EIOPA Consultation Paper: on Supervisory Statement on the use of governance arrangements in third countries to perform functions or activities (EIOPA-22-715)

Webpage

Press release

Climate change risk scenarios - EIOPA publishes Application Guidance and Feedback Statement on Own Risk and Solvency Assessment - 2 August 2022

EIOPA has published Application Guidance (EIOPA-BoS-22/329) on running climate change materiality assessments and using climate change scenarios in the Own Risk and Solvency Assessment (ORSA) (the Guidance). EIOPA has also published a Feedback Statement (EIOPA-22-646) in relation to its December 2021 Consultation Paper on a draft of the Guidance.

The Guidance supports EIOPA’s April 2021 Opinion (EIOPA-BoS-21-127) by giving practical and concrete examples to support the inclusion of climate change in the ORSA, with a particular focus on small and medium sized enterprises with limited resources. It sets out how to implement sustainable finance plans, includes case studies for materiality assessments of climate change scenarios and provides general insights on how firms can address climate change risks in the ORSA based on ‘dummy’ non-life and life company examples. EIOPA highlights that the Guidance is not binding and is not a supervisory tool, rather an initial aid for firms to use when conducting analysis on climate change in the ORSA.

In light of the feedback received to the consultation, EIOPA is proceeding with the Guidance as consulted on. However, EIOPA notes that to reconcile the very long-term dynamics of climate change with the operational ability to assess the impact of related risks based on the firms’ current business models, a new approach in the ORSA may be needed to analyse climate change risks. EIOPA also highlights the importance of flexibility in approaches and models used for climate change reporting, and encourages firms to choose the most appropriate approach for their business and risk profile.

EIOPA Application guidance on running climate change materiality assessment and using climate change scenarios in the ORSA (EIOPA-BoS-22/329)

EIOPA Feedback Statement: “Application guidance on running climate change materiality assessment and using climate change scenarios in the ORSA” (EIOPA-22-646)

Webpage

Press release

Financial Conduct Authority

Non-compliant pension transfer advice - FCA publishes Consultation Paper (CP22/15) on calculating redress - 2 August 2022

The FCA has published a Consultation Paper (CP22/15) on calculating redress for consumers who have suffered financial loss because a firm’s non-compliant advice caused them to transfer from a defined benefit pension scheme to a defined contribution pension scheme.

The Consultation Paper follows the FCA’s periodic review of its methodology for calculating redress, which found that, overall, the current methodology remains appropriate.  The methodology aims to put them, so far as possible, back in the position they would have been in if they had been given compliant advice and remained in their DB scheme.  That said, the FCA has identified areas where it could improve or clarify the methodology to ensure it continues to reflect actuarial best practice and is responsive to consumers’ individual circumstances. These include:

  • consolidating the methodology as rules and guidance in the FCA Handbook;
  • changing the approach to determining the consumer’s retirement age;
  • paying as much redress as possible into the consumer’s defined contribution pension and ensuring that calculations are more understandable and transparent for consumers.

The FCA explains that the proposed changes to the methodology should also apply when firms are calculating redress under the proposed British Steel Pension Scheme (BSPS) redress scheme. The FCA has identified two areas not covered in the review, where it considers the scheme should have a BSPS-specific approach rather than simply using the methodology for all cases. These are:

  • where it is necessary because of issues specific to the scheme or the consumers covered by it; and
  • where the focus of the redress scheme on transfers out of a single defined benefit scheme permits a different approach to the general methodology, which must cater for all defined benefit schemes.

The proposed rules and guidance implementing the FCA’s proposed changes to the methodology are set out in a draft version of the Pension Transfer Redress Instrument 2022, which is contained in Appendix 1 to the Consultation Paper.

The deadline for responses is 20 September 2022. If the FCA decides to make changes to the methodology and implement the proposed BSPS consumer redress scheme, it will publish a Policy Statement including final rules during the winter of 2022. The FCA would expect any BSPS redress scheme to come into force in early 2023, with most members who are eligible receiving compensation later in 2023 or in early 2024.

FCA Consultation Paper: Calculating redress for non-compliant pension transfer advice (CP22/15)

Deloitte Technical Report: FCA Periodic Review of Defined Benefit Pension Transfer Redress Guidance

Deloitte Technical Manual: FCA Periodic Review of Defined Benefit Pension Transfer Redress Guidance

Legal Opinion: Michael Furness QC

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