Includes developments in relation to: ESG; CRR; COVID-19; IFPR; Basel III; Securitisation Regulation; LIBOR; and EMIR.

Click on the headings below to access each section:

General

HEADLINES

  1. European Commission
    1. Distance Marketing of Consumer Financial Services - European Commission launches consultation on Directive- 22 June 2021
  2. UK Government
    1. London Capital & Finance -Treasury Committee publishes report and makes further recommendations to FCA and HM Treasury- 24 June 2021
  3. UK Parliament
    1. Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739) published- 22 June 2021
  4. HM Treasury
    1. Regulatory frameworkforapproval of financial promotions - HM Treasury publishes response to consultation and next steps- 22 June 2021
  5. Financial Conduct Authority
    1. Climate-related disclosure requirements for listed companies, asset managers, life insurers and pension providers-FCA publishes two consultation papers- 22 June 2021
    2. The UKs future regulatory environment - FCA publishes speech by its Chief Executive- 22 June 2021
    3. Interim General Counsel and Senior Legal Advisor - FCA makes new appointments- 23 June 2021

European Commission

Distance Marketing of Consumer Financial Services - European Commission launches consultation on Directive - 22 June 2021

The European Commission has launched a review of the Distance Marketing of Consumer Financial Services Directive (2002/65/EC) (DMD).  According to the accompanying press release, since the DMD entered into force in 2002:

the retail financial sector has gone increasingly digital, with new products and actors available on the market and new sales channels being used. Several EU laws pertinent to financial services have also been adopted or updated. Whereas the Directive had clear value added when it entered into force, many of its substantial elements have been taken over by sectoral legislation that has been adopted afterwards, e.g. in the context and aftermath of the financial crisis”.

The European Commission particularly wishes to hear from consumers, retail financial services providers and the regulatory authorities that are responsible for supervising and enforcing the provisions of the DMD. Comments may be made by submitting a completed questionnaire before 28 September 2021. The Commission intends to publish its proposals in the first quarter of 2022.

Consultation paper: The Directive on Distance Marketing of Consumer Financial Services

Technical working document

Daily news (See section titled “Consumer protection: Commission launches public consultation concerning the distance marketing of consumer financial services”)

UK Government

London Capital & Finance - Treasury Committee publishes report and makes further recommendations to FCA and HM Treasury - 24 June 2021

The House of Commons Treasury Committee has published a report following an inquiry into the FCA’s regulation of London Capital & Finance plc (LC&F), launched in February 2021. The findings and recommendations set out in the report include the following:

  • on FCA culture, the Committee’s summary notes as follows: “We welcome the FCA’s ongoing transformation programme which has cultural change as one of its priorities… We … recommend that the FCA Board sets itself an end date for the transformation programme and that it creates milestones at which improvements and evidence of changes in culture can be reviewed. These milestones and reviews should be put into the public domain”;
  • it is not “readily justifiable” for the FCA to require the firms that it regulates to adhere to the principles of the Senior Managers Regime but seemingly not to apply similar principles internally when there are failings of practice and culture in the organisation;
  • the FCA should ensure that it requires authorised firms to make clear the risks to customers associated with their unregulated activities. Any changes to the perimeter must be matched with appropriate changes in the FCA’s resources, and the FCA should republish its priorities. The Treasury should publish a policy statement on how it will analyse changes to the FCA’s perimeter and what factors it will take into account;
  • HM Treasury should, as a priority, re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes are needed to protect consumers;
  • the government should include measures in the Online Safety Bill to address fraud via online advertising. Pending any legislative changes, the FCA should continue to work with online platforms to remove misleading and fraudulent advertisements as quickly as possible; and
  • HM Treasury’s ongoing consultation on the regulation of mini-bonds is welcome, but the committee notes the delay in its launch.

Report: The Financial Conduct Authority’s Regulation of London Capital & Finance plc (HC 149)

Summary

Conclusions and recommendations

Inquiry

Press release

UK Parliament

Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739) published - 22 June 2021

These Regulations set out commencement dates for a number of provisions in the Financial Services Act 2021. The following provisions come into force on 1 July 2021:

  • Sections 8 to 21 and Schedule 5 relating to benchmarks;
  • Section 27 and Schedule 10 relating to access to financial services markets;
  • Section 28 and Schedule 11 relating to variation or cancellation of permission to carry on a regulated activity at the FCA’s initiative;
  • Section 29 on FCA rules about the level of care provided to consumers by authorised persons (referred to as the duty of care);
  • Section 34 on the application of money laundering regulations to overseas trustees;
  • Section 37 relating to regulated activities and the application of the Consumer Credit Act 1974;
  • Section 38 on amendments to the UK Regulation on Packaged Retail and Insurance-based Investment Products (1286/2014) (UK PRIIPS);
  • Section 39 relating to the retention of personal data under the UK Market Abuse Regulation (596/2014) (UK MAR);
  • Section 40 on clearing and procedures for reporting OTC derivatives; and
  • Section 43 relating to subordinated legislation made under retained direct EU legislation.

The Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739)

Webpage

HM Treasury

Regulatory framework for approval of financial promotions - HM Treasury publishes response to consultation and next steps - 22 June 2021

HM Treasury has published a response to its July 2020 consultation on the regulatory framework for approval of financial promotions. As noted in a previous edition of this Bulletin, HM Treasury proposed in the original consultation to introduce a new FCA-operated regulatory ‘gateway’ through which authorised firms would need to pass before they are able to approve the financial promotions of unauthorised persons. Two policy options were suggested in this regard: restricting the approval of financial promotions through the imposition of FCA requirements (option 1); and specifying the approval of financial promotions as a ‘regulated activity’ (option 2). 

HM Treasury agrees with the majority of respondents to the consultation that a gateway should be introduced and that it should be implemented through option 1. This would achieve the intended outcome of strengthening the FCA’s ability to ensure that authorised firms comply with FCA rules when approving the financial promotions of unauthorised persons, without fundamentally altering the overall regulatory architecture of the financial promotion regime. 

As such, it is proposed that all new and existing authorised firms will be prohibited from approving the financial promotions of unauthorised persons through the imposition of a Financial Promotion Requirement on their permission. Firms that wish to approve financial promotions will be required to apply to the FCA for a ‘variation of requirement’ to have the prohibition removed either entirely (allowing them to approve all types of financial promotions), or partially (allowing them to approve certain types of financial promotions).

HM Treasury has also developed proposals to implement a transitional period (with three distinct phases) to allow for an orderly transition between the current and the future regime. It intends to bring forward the relevant legislation when parliamentary time allows. The FCA will consult on its proposals for implementing the gateway in due course.

Consultation response: Regulatory Framework for Approval of Financial Promotions

Financial Conduct Authority

Climate-related disclosure requirements for listed companies, asset managers, life insurers and pension providers - FCA publishes two consultation papers - 22 June 2021

The FCA has published two consultation papers setting out proposals on climate-related disclosure rules for listed companies and certain regulated firms. 

First, it has announced a consultation on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP21/17). According to the press release:

“The new proposals are among the FCA’s first substantive policy proposals for the UK asset management and asset owner sectors since the end of the EU Withdrawal transition period. Given the global reach of regulated firms operating in the UK, the FCA has approached the design of the regime with international consistency in mind and to accommodate firms’ different business models.”

In summary, the FCA proposes to introduce the following rules and guidance, consistent with the recommended disclosures developed by the Task Force on Climate-related Financial Disclosures (TCFD), which would be set out in a new Environmental, Social and Governance (ESG) sourcebook in the Handbook:

  • entity-level disclosures: relevant firms would be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers.  These proposals would apply to FCA-regulated firms with respect to their assets managed or administered from the UK, notwithstanding where the client, product or portfolio is based; and
  • product or portfolio-level disclosures: firms would be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

The proposed Handbook text is set out in Appendix 1, with a draft version of the Disclosure of Climate-Related Financial Information (Asset Manager and Asset Owner) Instrument 2021. The FCA is suggesting a phased implementation “beginning with the largest, most interconnected firms” and extending the application a year later to the remaining firms above a proposed £5 billion threshold for assets under management or administration.

The FCA has separately published a Consultation Paper (CP21/18) on proposals to extend the application of LR 9.8.6R(8) to certain issuers of standard listed equity shares, consistent with commitments in the roadmap towards mandatory climate-related disclosures, published by a cross-government and regulators taskforce in November 2020. This follows the implementation in December 2020 of a new disclosure rule for commercial companies with a UK premium listing, referencing the TCFD recommendations, finalised in PS20/17. 

In short, a new rule LR 14.3.27R would require in-scope standard listed companies to include a statement in their annual financial report setting out certain information about their climate-related disclosures, including whether they comply with the TCFD recommendations. The new rule would apply on a ‘comply or explain’ basis for accounting periods beginning on or after 1 January 2022 for issuers of equity shares in LR 14 (excluding standard listed investment companies and shell companies). The FCA invites views on whether the rule should be extended to issuers of global depositary receipts in LR 18 and standard listed issuers of shares other than equity shares, and whether and how issuers of standard listed debt and debt-like securities in LR 17 should be reflected in the scope of the rule.

In chapter 4 of the Consultation Paper, the FCA seeks to generate stakeholder discussion on certain other topical ESG matters, including issues related to green, social or sustainability labelled debt instruments; prospectus and ‘use of proceeds’ bond frameworks; the role of verifiers and second party opinion (SPO) providers; and ESG data and rating providers. 

The FCA is inviting feedback to both consultations by 10 September 2021 and intends to confirm its final policy on climate-related disclosures before the end of 2021. The FCA will separately consider stakeholder views on the ESG-related discussion topics in capital markets, with a view to publishing a Feedback Statement in the first half of 2022.

Consultation paper: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP21/17)

Webpage

Press release

Consultation paper: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets (CP21/18)

Webpage

Press release

The UK’s future regulatory environment - FCA publishes speech by its Chief Executive - 22 June 2021

The FCA has published a speech delivered by the FCA Chief Executive, Nikhil Rathi, on building and operating an effective regulatory regime for the firms and consumers of the future. Mr Rathi describes the following three ways in which the FCA is seeking to do this:

first, meeting the needs of UK markets; second, setting the bar high at the gateway for entry to regulation and intervening assertively to deal with misconduct; and third, playing our part in international regulatory discussions.”

On the first point, Mr Rathi notes that Brexit has provided the UK with:

the freedom to tailor our rules to better suit UK markets. We’re making them more efficient and targeted, and removing unnecessary barriers to entry. We are not diverging just for the sake of it, we are ensuring appropriate safeguards and upholding – in fact, building on - high, internationally consistent and outcome-driven standards and this may well involve in some areas standards that are tougher than those in the EU”. 

Among other things, he refers to the consultation on the research and best execution regime in the Markets in Financial Instruments Directive (2014/65/EU) (MiFID) and the FCA’s contribution to an HM Treasury consultation on the broader MiFID regime which is due to be published this summer. He also refers to an upcoming consultation on the purpose and effectiveness of the UK’s listing regime.  

On the second point, Mr Rathi warns that there will be a rigorous review of all firms seeking to enter the UK authorisation gateway via the Temporary Permissions Regime and that the FCA’s robust approach will continue in its supervision of firms. On international regulatory discussions, among other things, Mr Rathi referred to negotiations on the cross-border financial services agreement with Switzerland and the FCA’s “world-leading” work in the area of sustainable finance.

Speech by FCA Chief Executive, Nikhil Rathi: Building a regulatory environment for the future

Interim General Counsel and Senior Legal Advisor - FCA makes new appointments - 23 June 2021

The FCA has announced the appointment of David Anthony Scott as its Interim General Counsel. Mr Scott was most recently a litigation partner at Freshfields before retiring from the firm in October 2020. He also spent 18 months in an earlier part of his career on secondment to the Financial Services Authority (FSA) and has advised both the Bank of England and the FSA on various legal matters. The FCA will shortly launch an open and competitive global recruitment process for the permanent General Counsel role. To support Mr Scott, the FCA has also appointed Daniel Thornton as its Deputy General Counsel, who is currently FCA Director of Enforcement legal.

The FCA is also planning to appoint Raj Parker as a part-time Senior Legal Advisor. Mr Parker is an associate member at Matrix Chambers and a part-time judge and arbitrator. Recently, Mr Parker conducted the independent review into the Connaught Income Fund Series 1 and according to the relevant press release the FCA considers that he is ideally placed to offer critical and impartial advice as the FCA evolves its culture and transforms its organisation.

Press release

Banking and Finance

HEADLINES

  1. European Commission
    1. Recurring subscription payments -European Commission writes to major credit card companies- 21 June 2021
    2. PSD2 - European Commission adopts RTS on co-operation and information exchange- 21 June 2021
    3. CRR - European Commission confirms extension of transition period for treatment of exposures to third-country CCPsuntil June 2022- 24 June 2021
  2. Council of the European Union
    1. Banking union - Council of the European Union publishes progress report- 17 June 2021
  3. Official Journal of the European Union
    1. CRR - Implementing Regulation amending ITS as regards disclosure of indicators of global systemic importance published in OJ- 22 June 2021
  4. European Banking Authority
    1. Cross-border payments - European Parliaments Legal Affairs Committee publishes addendum to report on proposed codified Regulation- 17 June 2021
    2. ESG - EBA publishes report on the management and supervision of ESG risks for credit institutions and investment firms-23 June 2021
    3. CRD IV - EBA publishes report on treatment of incoming third-country branches- 23 June 2021
    4. COREP, asset encumbrance and G-SII reporting - EBA publishes consultation paper on draft ITS- 23 June 2021
    5. CRR and calculation of risk adjustments - EBA publishes consultation paper on amending RTS- 24 June 2021
    6. CRR - EBA publishes update on monitoring of Additional Tier 1 instruments and issues recommendations for ESG-linked capital issuances- 24 June 2021
  5. European Central Bank
    1. COVID-19 - ECB adopts decision extending exclusion of certain central bank exposures from leverage ratio- 18 June 2021
    2. Distributed ledger technology - ECB Opinion on proposed Regulation on pilot regime for market infrastructures published in OJ- 22 June 2021
  6. Single Resolution Board
    1. BRRD - SRB publishes guidance on notifications of impracticability of bail-in recognition clauses- 21 June 2021
    2. EU crisis management and deposit insurance framework - SRB publishes speech- 23 June 2021
  7. UK Parliament
    1. The Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) made-17 June 2021
  8. HM Treasury
    1. UK implementation of IFPR and Basel III - HM Treasury publishes response to consultation- 22 June 2021
  9. Bank of England
    1. Evolution of UK payment systems - Bank of England publishes speech-21 June 2021
  10. Prudential Regulation Authority
    1. Financial holding companies - PRA publishes consultation paper on implementation of the regulatory framework- 21 June 2021
  11. Competition and Markets Authority
    1. Breach of Retail Banking Market Investigation Order 2017 -CMA writes to four banks- 22 June 2021
  12. Recent Cases
    1. Manchester Building Society (Appellant) v Grant Thornton UK LLP (Respondent) [2021] UKSC 20-18 June 2021

European Commission

Recurring subscription payments - European Commission writes to major credit card companies - 21 June 2021

The European Commission has updated its webpage on co-ordinated actions to announce action on recurring subscription payments. The European Commission—together with the EU and EEA national consumer enforcement authorities—has written to three major credit card companies, Visa, MasterCard and American Express. These companies have been asked to make changes to the way information is presented to consumers when they make a payment involving recurring subscription fees. In particular, all necessary information should be presented in the payment window for the consumer when they make such a payment.

The Commission has taken this action further to its finding that as many as one in 12 EU consumers has ordered a cheap product or service online, only to find out later that there is a costly monthly subscription. Common cases involve mobile phones and beauty products sold by online sellers who are concealing the actual costs about recurring payments in hidden or small print in the payment window where the consumer enters their credit card information.

Although credit card companies are not running these schemes, the Commission explains that they have a duty properly to inform their customers. Under the revised Payment Services Directive (EU) 2015/2366 (PSD2) and the Unfair Commercial Practices Directive (2005/29/EC), consumers must be made aware of the specific amount for payment transactions.

The three credit card companies now have two months to inform the Commission, together with the EU and EEA national consumer enforcement authorities, of the positive changes they intend to make to their existing payment processes.

Daily News: Consumer protection: Credit card companies should clearly inform consumers when they risk being tricked into costly monthly subscriptions

Updated webpage

PSD2 - European Commission adopts RTS on co-operation and information exchange - 21 June 2021

The European Commission has adopted a draft Delegated Regulation (C(2021) 4273) supplementing the revised Payment Services Directive ((EU) 2015/2366) (PSD2) with regard to regulatory technical standards (RTS) specifying the framework for co-operation and the exchange of information between competent authorities of the home and the host member states in the supervision of payment institutions and electronic money institutions exercising cross-border provision of payment services.

The Commission adopted the draft Delegated Regulation on 18 June 2021. The draft Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.

Commission Delegated Regulation supplementing the revised Payment Services Directive ((EU) 2015/2366) with regard to regulatory technical standards specifying the framework for cooperation and the exchange of information between competent authorities of the home and the host Member States in the context of supervision of payment institutions and electronic money institutions exercising cross-border provision of payment services (C(2021) 4273 final)

CRR - European Commission confirms extension of transition period for treatment of exposures to third-country CCPs until June 2022 - 24 June 2021

The European Commission has confirmed that it will extend the transitional period during which EU credit institutions may treat exposures to a third-country central counterparty (CCP) that has not been recognised in accordance with the European Market Infrastructure Regulation (648/2012/EU) (EMIR) as if they were exposures to a qualifying CCP.

Pursuant to Article 497(1) of the Capital Requirements Regulation (575/2013/EU) (CRR), the transitional period is currently due to expire on 28 June 2021 in respect of certain third-country CCPs. These are CCPs that submitted their application for recognition under Article 25(6) of EMIR before 27 June 2019 and await recognition by the European Securities and Markets Authority (ESMA) and in respect of whose jurisdiction the Commission has not made an equivalence decision under Article 25(6) of EMIR, or has made such a decision that has not yet entered into force. Article 497(3) of the CRR allows the Commission to extend this period once by 12 months, where it is deemed necessary and proportionate to avoid disruption to international financial markets.

The Commission has decided to adopt an Implementing Regulation extending the transitional regime until 28 June 2022. The Commission will continue its work on equivalence assessments but warns that there is no guarantee that it will adopt equivalence decisions for all of the affected jurisdictions. It is therefore possible that some or all of the non-EU CCPs within the scope of the transition will not be recognised by ESMA to provide clearing services in the EU. It comments that exposures to those non-EU CCPs that are not recognised by ESMA by 28 June 2022 will no longer be eligible for lower capital requirements after that date and that stakeholders should start preparing for this.

The text of the final version of the Implementing Regulation has not yet been published.

Press release: Financial stability: Commission adopts final one-year extension of the transitional regime for capital requirements for non-EU central counterparties

Council of the European Union

Banking union - Council of the European Union publishes progress report - 17 June 2021

The Council of the European Union has published a progress report on the strengthening of the banking union (9311/21). The report focuses on technical discussions between member states on the design of the proposed European Deposit Insurance Scheme (EDIS), and includes discussion of the following issues:

  • the scope of EDIS and, in particular, whether it should apply to certain entities outside the scope of the Capital Requirements Regulation (575/2013/EU) (CRR), to institutional protection schemes and to third-country branches;
  • the treatment of options and national discretions in the context of EDIS; and
  • the design of the methodology for calculating risk-based contributions.

The report also summarises member states’ views on the interaction between EDIS and the review of the Crisis Management and Deposit Insurance framework and, in particular, how closely connected the two initiatives should be.

Report: Presidency progress report on the strengthening of the Banking Union (9311/21)

Official Journal of the European Union

CRR - Implementing Regulation amending ITS as regards disclosure of indicators of global systemic importance published in OJ - 22 June 2021

Commission Implementing Regulation (EU) 2021/1018 amending the implementing technical standards (ITS) laid down in Commission Implementing Regulation (EU) 2021/637 as regards the disclosure of indicators of global systemic importance and repealing Implementing Regulation (EU) 1030/2014, has been published in the Official Journal of the European Union (OJ).

Article 441 of the Capital Requirements Regulation (575/2013/EU) (CRR), as amended by the CRR II Regulation ((EU) 2019/876), requires global systemically important institutions (G-SIIs) to disclose annually the values of the indicators used for determining their score in accordance with the methodology set out in Article 131 of the Capital Requirements Directive (2013/36/EU) (CRD IV), as amended by the CRD V Directive ((EU) 2019/878). The Implementing Regulation adds a new Article 6a to Commission Implementing Regulation (EU) 2021/637, incorporating the Article 441 disclosure provisions into the ITS on institutions’ public disclosures of the information referred to in Titles II and III of Part Eight of the CRR.

The Implementing Regulation also repeals Commission Implementing Regulation (EU) 1030/2014.

It enters into force on 24 June 2021 and will apply from 28 June 2021.

Commission Implementing Regulation (EU) 2021/1018 amending the implementing technical standards laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of indicators of global systemic importance, and repealing Implementing Regulation (EU) 1030/2014 (C/2021/4324)

European Banking Authority

Cross-border payments - European Parliament’s Legal Affairs Committee publishes addendum to report on proposed codified Regulation - 17 June 2021

The European Parliament’s Legal Affairs Committee has published the addendum to its report on the European Commission’s legislative proposal for a Regulation on cross-border payments in the EU, codifying and replacing the existing Regulation on cross-border payments in the EU (2020/0145(COD)).

As reported in last week’s bulletin, the report states that the Parliament should adopt the Commission’s legislative proposal for the proposed Regulation as its own position at first reading, as adapted to the recommendations of the Consultative Working Party of the legal services of the Parliament, the Council of the EU and the Commission. The addendum sets out the text of the Parliament’s draft position after legal linguistic revision. The Parliament’s procedure file for the proposed Regulation indicates that the report will be considered in plenary on 23 June 2021.

Addendum to the report on the proposal for a regulation on cross-border payments in the Union (codifed) (COM(2020)0323 – C9-0204/2020 – 2020/0145(COD)) (PE693.563v02-00)

ESG - EBA publishes report on the management and supervision of ESG risks for credit institutions and investment firms - 23 June 2021

The European Banking Authority (EBA) has published a report (EBA/REP/2021/18) on the management and supervision of environmental, social and governance (ESG) risks for credit institutions and investment firms, together with an accompanying factsheet. The report focuses on the following matters:

  • The impact of ESG risks: The EBA outlines the impact that ESG factors, particularly climate change, can have on institutions’ counterparties or invested assets. It also illustrates available indicators, metrics and evaluation methods for effective ESG risk management and identifies remaining gaps and challenges;
  • Recommendations to incorporate ESG risk-related considerations: The EBA sets out certain recommendations on the incorporation and management of ESG risk-related considerations in strategies, objectives and governance structures. The EBA also recommends developing methodologies and approaches to test the long-term resilience of institutions against ESG factors and risks; and
  • A proposal for a phase-in approach: The EBA proposes a phase-in approach, starting with the inclusion of climate-related and environmental factors and risks into the supervisory business model and internal governance analysis, while encouraging institutions and supervisors to build up data and tools to develop quantification approaches to increase the scope of the supervisory analysis to other elements.

Annex 2 summarises the feedback received on the EBA’s discussion paper on ESG risk management and supervision. Respondents were broadly supportive of the proposals but, where appropriate, the EBA has adjusted its approach in line with the comments received.

The EBA has submitted the report to the EU Parliament, the Council of the EU and the European Commission, which are invited to take it into consideration in the context of the renewed sustainable finance strategy and the review of the Capital Requirements Directive (2013/36/EU) (CRD IV) and the Capital Requirements Regulation (575/2013/EU) (CRR).

The EBA will use the report and recommendations to develop guidelines on the management of ESG risks by institutions and an update of the Supervisory Review and Evaluation Process (SREP) guidelines to include ESG risks in the supervision of credit institutions.

Report on management and supervision of ESG risks for credit institutions and investment firms (EBA/REP/2021/18)

Factsheet

Press release

CRD IV - EBA publishes report on treatment of incoming third-country branches - 23 June 2021

The European Banking Authority (EBA) has published a report on the treatment of incoming third-country branches (TCBs) under the national law of member states, in accordance with Article 21b(10) of the Capital Requirements Directive (2013/36/EU) (CRD IV). The EBA explains that recent structural changes have renewed the EU’s interest in the regulation of TCBs. Cross-border regulatory changes in the aftermath of the financial crisis, as well as the UK’s withdrawal from the EU, have prompted calls for an assessment of the state of play and for further harmonisation of EU law.

The EBA identifies a variety of regulatory and supervisory approaches across the EU to the treatment of TCBs. It sets out 14 high-level policy recommendations for further harmonising EU law applicable to TCBs covering a number of areas, including the following:

  • an EU centralised equivalence assessment;
  • effective co-operation supported by the conclusion of memoranda of understanding with third-country home authorities;
  • appropriately determined scope of authorisation and prudential requirements (notably capital, liquidity and internal governance requirements, including booking arrangements), as well as satisfactory recovery plans; and
  • certain anti-money laundering and counter-terrorist financing matters.

Under Article 21b(10), once the EBA has submitted its report, the European Commission is to submit a legislative proposal to the European Parliament and the Council of the EU, where appropriate, based on the EBA’s recommendations. In the meantime, the EBA will continue to monitor the establishment of TCBs in the EU.

Report on the treatment of incoming third country branches under the national law of member states, in accordance with Article 21b(10) of the Capital Requirements Directive (2013/36/EU)

Press release

COREP, asset encumbrance and G-SII reporting - EBA publishes consultation paper on draft ITS - 23 June 2021

The European Banking Authority (EBA) has published a consultation paper (EBA/CP/2021/24) on draft implementing technical standards (ITS) amending Commission Implementing Regulation (EU) 2021/1451 with regards to common reporting (COREP), asset encumbrance and global systemically important institution (G-SII) supervising reporting.

Implementing Regulation (EU) 2021/451, which came into force on March 2021, sets out all the ITS on supervisory reporting under the Capital Requirements Regulation (575/2013/EU) (CRR) and reflects additional reporting requirements introduced by the CRR II Regulation ((EU) 2019/876).

Among other things, the proposals in the consultation paper will exempt small and non-complex institutions from reporting more granular data, as recommended by the EBA’s report on the study on the cost of compliance with supervisory reporting requirements as proposed in the report.  The proposals would also expand the scope of the requirement to report information for determining G-SIIs and assigning G-SII buffer rates to include certain standalone entities. Minor amendments would also be made to COREP (reporting on own funds and own funds requirements) to allow the EBA to obtain a deeper understanding of a financial institution’s use of the exemption of certain software assets from the deduction from own funds.

The consultation closes on 23 September 2021. The EBA will hold a public meeting on its proposals on 9 July 2021. The EBA expects to submit the finalised draft ITS to the European Commission in the fourth quarter of 2021 or the first quarter of 2022.  The revised requirements would apply from 31 December 2022.

Consultation paper: Draft Implementing Technical Standards amending Commission Implementing Regulation (EU) 2021/451 with regard to COREP, asset encumbrance and G-SII reporting (EBA/CP/2021/24)

Annex 1 (Solvency) (Excel)

Annex 2 (Solvency) (PDF)

Annex 3 (Annex 16 - Asset Encumbrance) (Excel)

Annex 4 (Annex 17 – Asset Encumbrance) (PDF)

Press release

CRR and calculation of risk adjustments - EBA publishes consultation paper on amending RTS - 24 June 2021

The European Banking Authority has published a consultation paper (EBA/CP/2021/25) on amendments to Commission Delegated Regulation (EU) 183/2014, which supplements the Capital Requirements Regulation (575/2013/EU) (CRR) with regard to regulatory technical standards (RTS) for specifying the calculation of specific and general credit risk adjustments under Article 110(4).

This follows the European Commission’s action plan published on 16 December 2020 on tackling non-performing loans in the aftermath of the COVID-19 pandemic, in which it recommended a revision of the treatment of defaulted assets under the standardised approach for credit risk. In that action plan, the Commission asked the EBA to consider the appropriate prudential treatment of the risk weight for defaulted exposures following the sale of a non-performing asset, noting that “only provisions/write-downs (so-called ‘credit risk adjustments’) made by the institution itself can be accounted for, not write-downs accounted for in the transaction price of the exposure”.

The proposals in the consultation allow for the recognition of such write-downs accounted for in the transaction price of the exposure, which are retained by the seller, in the credit risk adjustments recognised for the determination of the risk weight of defaulted exposures applied by the buyer under the standardised approach.

The deadline for comments on the proposed revision to the RTS is 24 September 2021. The EBA will hold a public hearing on the proposals on 13 July 2021. While this amendment is intended to clarify the regulatory treatment of sold non-performing loan assets, the EBA also recommends that the treatment set out in this RTS be included in the European Commission’s considerations as part of the future revised Capital Requirements Regulation (CRR III) proposal.

Consultation paper: Draft Regulatory Technical Standards on the specification of the calculation of specific credit risk adjustment: Amending Delegated Regulation (EU) 183/2014 supplementing the Capital Requirements Regulation (575/2013/EU) on prudential requirements for credit institutions and investment firms, with regard to regulatory technical standards for specifying the calculation of specific and general credit risk adjustments (EBA/CP/2021/25)

Press release

CRR - EBA publishes update on monitoring of Additional Tier 1 instruments and issues recommendations for ESG-linked capital issuances - 24 June 2021

The European Banking Authority (EBA) has published an updated report on the monitoring of Additional Tier 1 (AT1) instruments which includes an update on the implementation of its opinion on legacy instruments and its take on environmental, social and governance (ESG) capital bonds.

Among other things, the report identifies variations in ESG issuances made for capital/loss absorbency purposes and makes several recommendations on how ESG capital bond features are meant to interact with the eligibility criteria for own funds and eligible liabilities instruments, and ultimately to safeguard the quality of the instruments from a prudential perspective.

Report on the monitoring of Additional Tier 1 instruments of EU institutions – update (EBA/REP/2021/19)

Press release

European Central Bank

COVID-19 - ECB adopts decision extending exclusion of certain central bank exposures from leverage ratio - 18 June 2021

The European Central Bank (ECB) has adopted a decision to extend the temporary exclusion of certain exposures to central banks from the leverage ratio total exposure measure (TEM) in view of COVID-19 (ECB/2021/07).

Article 500b of the Capital Requirements Regulation (575/2013/EU) (CRR), introduced by Regulation (EU) 2020/873 (COVID-19 CRR Amending Regulation), currently allows institutions to exclude exposures to their central bank from the TEM where the institution’s competent authority has determined there are exceptional macro-economic circumstances. Further to this provision, in September 2020 the ECB adopted Decision (EU) 2020/1306 (ECB/2020/44) which allows credit institutions to exclude certain central bank exposures from the leverage ratio in light of COVID-19. Article 500b will cease to apply from 27 June 2021, and its provisions on the exclusion of central bank exposures are replicated in new Article 429a which was inserted by the CRR II Regulation ((EU) 2019/876) and which will apply from 28 June 2021.

The ECB has decided to extend the effect of the exclusion, as it considers that exceptional macro-economic circumstances continue to apply in respect of the Eurozone. The decision, made under Article 429a(5) of the CRR, will apply from 28 June 2021 in respect of any credit institution that is a significant supervised entity for the purposes of the ECB’s banking supervision role under the Single Supervisory Mechanism (SSM). The decision also repeals Decision (EU) 2020/1306 with effect from 28 June 2021.

The decision will cease to apply on 31 March 2022. The ECB states that this date was chosen to facilitate the implementation of monetary policy measures linked to the situation resulting from COVID-19, including measures under the Pandemic Emergency Purchase Programme. In a press release, the ECB warns that banks that make use of the exclusion should plan to maintain sufficient capital in preparation for the expiry of the exclusion in March 2022.

Decision (EU) [2021/XX] on the temporary exclusion of certain exposures to central banks from the total exposure measure in view of COVID-19 and repealing Decision (EU) 2020/1306 (ECB/2021/27)

Press release: ECB extends leverage ratio relief for banks until March 2022

Press release: ECB’s Governing Council confirms that exceptional circumstances continue to justify leverage ratio relief

Distributed ledger technology - ECB Opinion on proposed Regulation on pilot regime for market infrastructures published in OJ - 22 June 2021

An opinion of the European Central Bank (ECB) (2021/C 244/04) on a proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) has been published in the Official Journal of the EU. The proposed Regulation is part of the Digital Finance package which seeks to further enable and support the potential of digital finance in the EU in terms of innovation and competition, while mitigating associated potential risks.

The legislation would enable investment firms, market operators and central securities depositors to operate market infrastructures based on DLT, either as a DLT multilateral trading facility or a DLT securities settlement system. The ECB raises a number of general concerns, including in relation to monetary policy, oversight and systemic issues, financial stability and prudential supervision. Specific drafting proposals are set out in a separate technical working document, which can be found attached to the original version of the opinion.

European Central Bank Opinion on a proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technology (CON/2021/15) (2021/C 244/04)

Original version of opinion with technical working document attached

Single Resolution Board

BRRD - SRB publishes guidance on notifications of impracticability of bail-in recognition clauses - 21 June 2021

The Single Resolution Board (SRB) has published a document setting out its approach and expectations on notifications of impracticability to include bail-in recognition clauses in contracts. Under Article 55(2) of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD), if a bank determines that it is impracticable to include a contractual recognition clause in a liability contract, it must make a notification to its resolution authority. The resolution authority then assesses the notification and may require the bank to include the clause. Article 55(7) requires resolution authorities to specify, if deemed necessary, categories of liabilities for which banks may reach the conclusion that it is impracticable to include the relevant bail-in recognition clauses.

In the guidance the SRB sets out its expectations regarding these notifications, the conditions and categories for impracticability, as well as the process by which it may require banks to include such clauses following the receipt of the notification. The guidance is based on the European Banking Authority’s final draft regulatory technical standards and implementing technical standards on Article 55 published in December 2020.

In particular, the SRB specifies four preliminary categories of liabilities for the purposes of Article 55(7):

  • liabilities resulting from trade finance operations under internationally agreed frameworks and protocols;
  • liabilities resulting from project finance activities under official standardised terms;
  • liabilities to financial market infrastructure service providers, where the services are provided on standard terms not susceptible to bilateral negotiation; and
  • minor operating liabilities, arising from non-critical business operations, where the terms of the contract are set by the provider and not bilaterally negotiated.

Further detail on each of these categories is set out in Annex I to the document.

Guidance: Notification of impracticability to include bail-in recognition clauses in contracts: SRB approach and expectations

Press release

SRB XBRL Filing rules for the 2021 Notification of Impracticability of Bail-In

Data

EU crisis management and deposit insurance framework - SRB publishes speech - 23 June 2021

The Single Resolution Board (SRB) has published a speech by SRB Director of Resolution Planning and Decisions, Mr Pedro Machado, on the challenges of resolving mid-sized banks. Among other things, Mr Machado discusses the European Commission’s ongoing review of the EU crisis management and deposit insurance framework (CMDI).

Mr Machado comments that proposals for the harmonisation of bank insolvency procedures will inevitably be fraught with political difficulty and resistance and suggests that an incremental approach may be a more pragmatic solution. However, the ultimate goal must be to put in place an EU liquidation regime alongside an EU resolution regime, something akin to an EU version of the US Federal Deposit Insurance Corporation.

Speech by SRB Director of Resolution Planning and Decisions, Pedro Machado: The challenges of resolving mid-sized banks

UK Parliament

The Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) made - 17 June 2021

The Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) have been made and come into force on 8 July 2021, ushering in new special administration procedures for payment and electronic money institutions.

These types of institutions are generally consumer-facing and facilitate card, mobile and electronic payments without themselves being banks. Where such an institution becomes insolvent, the new special administration procedures are designed to improve returns to consumer creditors and the speed of the process, as compared with an administration process under Schedule B1 to the Insolvency Act 1986. The Regulations have been made with no change from the draft version, reported on in a previous edition of this bulletin.

A summary of draft insolvency rules to accompany the new special administration processes has been published, but no further detail on the draft rules has been made available. The explanatory memorandum to the Regulations states that the relevant rules (made under section 411 of the Insolvency Act 1986) “will be made in due course in England and Wales”, and will be put before the Insolvency Rules Committee. These rules will need to become effective before it is practicable to use the new special administration procedures created by the Regulations.

The Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716)

Explanatory memorandum

Webpage

HM Treasury

UK implementation of IFPR and Basel III - HM Treasury publishes response to consultation - 22 June 2021

HM Treasury has published a response to its February 2021 consultation paper on implementing the Investment Firms Prudential Regime (IFPR) and the final Basel III standards using powers under the Financial Services Act 2021. In light of the comments received, HM Treasury is changing its approach in several areas. Key points include the following:

  • HM Treasury now considers that applying the equivalence provision contained in Article 132 of the UK CRR would be a “disproportionate method for addressing the prudential risks arising from UK banks’ investments in overseas funds” and has decided to remove it;
  • it has decided to implement the Fundamental Review of the Trading Book (FRTB) reporting requirements alongside FRTB revisions to Pillar 1 capital requirements (that is, as part of Basel 3.1 and not from 1 January 2022) due to concerns about implementation costs;
  • it sees no reason to depart from its proposed approach of amending the Financial Services and Markets Act (PRA-Regulated Activities) Order 2013 (SI 2013/556) to remove reference to the EUR 730,000 initial capital requirement, which will become obsolete (this allows the PRA to designate investment firms that deal as principal under Part 4A of FSMA where it considers this is desirable); and
  • it has decided to remove FCA-regulated EUR 730,000 initial capital requirement firms from the scope of the UK resolution regime and additional firms brought into the scope of the £750,000 capital requirement will also not be within scope of the UK resolution regime.

The document also makes certain clarifications regarding the operation of equivalence determinations for the purposes of Large Exposures under Article 391 of the UK CRR and the scope of the use of bail-in and resolution stays. In addition, it confirms the government’s intention to replicate the scope of prudential consolidation that applies under Article 18 of the UK CRR.

HM Treasury intends to lay the relevant implementing secondary legislation to a timeline that provides firms with adequate time to prepare ahead of the 1 January 2022 implementation date.

The FCA is staggering its consultations on the IFPR, with the first consultation undertaken between 14 December 2020 and 5 February 2021 and the second consultation between 19 April 2021 and 31 May 2021. It will publish its third IFPR consultation, and related policy statements, later this year.

The PRA has also consulted on the key elements of the updated Basel 3 regime, and its consultation closed on 3 May 2021.

Consultation response: Implementation of the Investment Firms Prudential Regime and Basel III standards

Updated webpage

Bank of England

Evolution of UK payment systems - Bank of England publishes speech - 21 June 2021

The Bank of England (BoE) has published a speech by its Executive Director for Banking, Payments and Innovation, Victoria Cleland, on the evolution of payment systems in the UK.

Among other things, Ms Cleland discusses the BoE’s real time gross settlement (RTGS) system and its multi-year programme to review the RTGS service. The first key milestone will be in June 2022, when the Clearing House Automated Payment System (CHAPS) will move to the global standard for financial messaging in payments, ISO 20022 (on a like-for-like basis). The BoE intends to move to enhanced ISO 20022 messaging in February 2023 and expects to introduce a state-of-the-art core settlement engine in September 2023.

Ms Cleland notes: “June next year will be the first step in the UK’s migration to ISO 20022. Its implementation is a foundational step that will enable many of the future changes that are coming, both domestically in the renewal of RTGS and internationally including enhancing cross border payments”. 

She notes that realising the benefits of these changes “relies on the quality of data submitted being sufficiently high and consistent”.  As such, the BoE will mandate the sending of enhanced data in due course, starting with Purpose Codes and Legal Entity Identifiers (LEIs) within certain CHAPS messages from Spring 2024. She stresses that CHAPS Direct Participants (DPs) have a pivotal role in ensuring the success of both the transition to ISO 20022 and the wider RTGS Renewal programme.

Ms Cleland refers to the BoE’s recent discussion paper on digital money, including the possibility of central bank digital currencies (CBDC) and states that a decision on whether to introduce a CBDC will be made in due course.

Speech by Executive Director for Banking, Payments and Innovation, Victoria Cleland: A new dawn for payments

Prudential Regulation Authority

Financial holding companies - PRA publishes consultation paper on implementation of the regulatory framework - 21 June 2021

The PRA has published a consultation paper (CP12/21) on the further implementation of the regulatory framework for financial holding companies. The CP is relevant to financial holding companies, mixed financial holding companies, banks and PRA-designated investment firms that are part of a UK consolidation group controlled by a UK parent financial holding company or UK parent mixed financial holding company.

Following the UK’s implementation of the Capital Requirements Directive ((EU) 2019/878) (CRD V), holding companies in UK banking groups are subject to supervisory approval and consolidated supervision under Part 12B of the Financial Services and Markets Act 2000 (FSMA). A UK consolidated group’s approved parent holding company is responsible for ensuring that consolidated prudential requirements are met. If the relevant holding company cannot be approved, another group entity may be temporarily designated as responsible for ensuring that the requirements are met. The Financial Services Act 2021 gave the PRA the power to make rules relating to approved or designated holding companies.

In CP12/21, the PRA sets out proposals for rules and guidance relating to approved and designated holding companies as follows:

  • Appendix 1 contains the draft text of the ‘PRA (Rules applying to holding companies) Instrument 2021’, which contains proposed revisions to a number of Parts of the PRA Rulebook to bring approved and designated holding companies within their scope by applying them to ‘Capital Requirements Regulation (CRR) consolidation entities’. This is defined as a UK parent institution, a PRA approved parent holding company, a PRA designated parent holding company or a PRA designated institution;
  • Appendix 2 contains the text of a new PRA statement of policy, ‘Supervisory measures and penalties in relation to financial holding companies’. This reflects the PRA’s obligation under section 129Z2 of FSMA to prepare and issue a statement of policy on the taking of supervisory measures, including directions, under section 192T of FSMA and the imposition and amount of penalties under section 192Y of FSMA; and
  • Appendix 3 (included in the consultation paper) contains proposed amendments to the PRA’s statement of policy on its approach to enforcement, reflecting the PRA’s powers concerning holding companies under section 192Y of FSMA.

The consultation closes on 22 July 2021. The PRA intends to implement its proposals on 15 September 2021.

Consultation paper: Financial holding companies: Further implementation (CP12/21)

Appendix 1: Draft text of PRA Rulebook: PRA (Rules applying to holding companies) Instrument 2021

Appendix 2: Text of new PRA Statement of Policy: Supervisory measures and penalties in relation to financial holding companies

Webpage

Competition and Markets Authority

Breach of Retail Banking Market Investigation Order 2017 - CMA writes to four banks - 22 June 2021

The Competition and Markets Authority (CMA) has published letters that it has sent to NatWest Group, Virgin Money UK plc, Bank of Ireland and Monzo Bank Limited about breaches of the Retail Banking Market Investigation Order 2017 (the Order), which implements remedies arising from the retail banking market investigation.

The CMA has written separately to the four banks to explain their individual breaches of Article 20 of the Order, which requires the provision of transaction histories to customers who have closed their current account within 10 working days. The banks are taking steps to send all outstanding information to affected customers. If the banks breach the order again, the CMA can take further action by issuing legally binding ‘Directions’. These could include banks having to introduce specific training or carrying out annual compliance audits to prevent this from happening in the future.

CMA Letter to NatWest Group

CMA Letter to Virgin Money UK plc

CMA Letter to Bank of Ireland UK plc

CMA Letter to Monzo Bank Limited

Press release

Recent Cases

Manchester Building Society (Appellant) v Grant Thornton UK LLP (Respondent) [2021] UKSC 20 - 18 June 2021

The Supreme Court has unanimously held that Manchester Building Society suffered a loss falling within the scope of the duty of care assumed by Grant Thornton, having regard to the purpose for which it gave its advice on the use of hedge accounting. Grant Thornton is liable for the loss suffered by the society in breaking swaps—which it had entered into on Grant Thornton’s advice—early, subject to a reduction in damages of 50% for contributory negligence.

Manchester Building Society’s main activity is the provision of mortgage products. The society’s accounts were audited by Grant Thornton until 2012. Grant Thornton negligently advised the society that an accounting treatment, “hedge accounting”, could be applied to reduce the volatility of the market-to-market (MTM) value of swaps in its accounts. In reliance on that advice, Manchester Building Society entered into various fixed rate mortgages hedged against long term swaps under which it paid a fixed rate but received a variable rate. The 2008 global financial crisis led to a fall in interest rates, with the effect that the MTM value of the swaps became negative. When Grant Thornton’s negligence was realised, Manchester Building Society ceased to apply hedge accounting, closed out the swaps and, in consequence, had to pay the MTM losses on the swaps and transaction fees for breaking the swaps early.

The society brought a claim in negligence against Grant Thornton. The issue was whether Grant Thornton was liable for the MTM losses as well as the transaction fees. In the Commercial Court, the judge concluded that Grant Thornton was not liable for the MTM losses. The Court of Appeal dismissed Manchester Building Society’s appeal. The Supreme Court unanimously allowed the appeal and held that the loss suffered by the society fell within the scope of the duty of care assumed by Grant Thornton, in light of the purpose of its advice.

Judgment

Press release

Securities and Markets

Issue 1115 / 24 June 2021

HEADLINES

  1. European Commission
    1. Reducing exposures to LIBOR - European Commission, EBA, ESMA and the ECB issue joint statement- 24 June 2021
  2. European Securities and Markets Authority
    1. Credit rating agencies -ESMA publishes technical advice on supervisory fees charged-21 June 2021
  3. HM Treasury
    1. Securitisation Regulation in the UK - HM Treasury launches call for evidence- 24 June 2021
  4. Bank of England
    1. UK central counterparties -Bank of England publishes discussion paper on supervisory stress test framework- 21 June 2021
  5. Financial Conduct Authority
    1. Proposed Decision to require synthetic LIBOR for 6 sterling and Japanese yen settings - FCA publishes consultation- 24 June 2021
    2. Prospectus Regulation - Primary Market Bulletin No.34 published by the FCA- 24 June 2021
  6. Investment Association
    1. LIBOR -Investment Association calls for collective effort in final stage of LIBOR-linked bond transition- 22 June 2021

European Commission

Reducing exposures to LIBOR - European Commission, EBA, ESMA and the ECB issue joint statement - 24 June 2021

The European Commission, together with the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) (in its banking supervisory capacity (ECB Supervision)) have jointly issued a statement to encourage all market participants to cease their use of all LIBOR settings. Market participants are urged to reduce their exposure to LIBOR and not wait for the exercise by the Commission of its new powers to designate a replacement under Article 23b of the Benchmarks Regulation (EU) 2016/1011.

Market participants should use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposure to these interest rates by:

  • stopping the use of the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021;
  • limiting the use of any LIBOR setting published under a changed methodology (known as synthetic LIBOR) only to contracts that are particularly difficult to amend before LIBOR’s cessation (commonly referred to as ‘tough legacy contracts’); and
  • including robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.

Joint statement: Forthcoming cessation of all LIBOR settings

Press release

European Securities and Markets Authority

Credit rating agencies - ESMA publishes technical advice on supervisory fees charged - 21 June 2021

The European Securities and Markets Authority (ESMA) has published a final report (ESMA80-196-5170) setting out its technical advice to the European Commission on supervisory fees charged to credit rating agencies (CRAs). To prepare the technical advice, ESMA published a consultation paper in January 2021, and an overview of responses is outlined in the final report. Respondents raised concerns about increasing fees, the impact of Brexit and ensuring the fees changed are proportionate to the work undertaken. Some amendments have been made to the technical advice in light of the responses received.

In the technical advice ESMA proposes changes to the calculation and collection of supervisory fees set out in Commission Delegated Regulation (EU) 272/2012 (Fees Regulation), including a fixed fee of EUR40,000 and an annual supervisory fee of 0.5% of turnover to CRAs with annual revenues of between EUR4 million to 15 million. ESMA considers that the proposed changes will ensure it meets the regulatory obligation to charge fees that cover its costs, while remaining proportionate to the revenues of the CRAs supervised. It has not recommended changes to the calculation of annual supervisory fees paid by CRAs with annual revenues of over EUR15 million which are already calculated proportionately to cover ESMA’s costs.

ESMA also recommends a number of changes to streamline the fee collection process and align its approach across supervisory mandates. The technical advice has been sent to the European Commission and will feed into the upcoming review of the Fees Regulation.

Report: Technical Advice on Fees Charged to CRAs by ESMA (ESMA80-196-5170)

Press release

HM Treasury

Securitisation Regulation in the UK - HM Treasury launches call for evidence - 24 June 2021

HM Treasury has published a call for evidence in relation to its review of the onshored Securitisation Regulation ((EU) 2017/2402) with a view to ensuring that it “best delivers for the UK’s financial sector and real economy”. In particular, it seeks views on how the UK’s securitisation market is performing and how the Securitisation Regulation can be tailored to the UK. The aims of the review are:

  • to bolster securitisation standards in the UK, in order to enhance investor protection and promote market transparency; and
  • to support and develop securitisation markets in the UK, including through the increased issuance of STS securitisations, in order to increase their contribution to the real economy.

The call for evidence is described as “a targeted review of the regulatory approach taken” under the onshored version of the Regulation.  It notes that HM Treasury is separately conducting a wider Future Regulatory Framework (FRF) Review to determine how the overall framework for financial services will need to adapt to the UK’s position outside of the EU.

HM Treasury is using the opportunity of this call for evidence to seek more detailed views on two potential changes which might be brought forward at the appropriate legislative opportunity:

  • whether a change is required to scope out certain non-UK Alternative Investment Fund Managers (AIFMs) marketing in the UK from certain requirements in the Securitisation Regulation; and
  • whether it would be desirable to introduce an equivalence regime for simple, transparent and standardised securitisations (STS).

Comments are welcomed before 2 September 2021. Responses will inform the government’s review of the legislation and a report is expected to be laid before Parliament by 1 January 2022.

Call for evidence: Review of the Securitisation Regulation

Webpage

Bank of England

UK central counterparties - Bank of England publishes discussion paper on supervisory stress test framework - 21 June 2021

The Bank of England (BoE) has published a discussion paper on supervisory stress testing of UK central counterparties (CCPs) and announced its first public CCP stress test. In recognition of the growing importance of CCPs, the BoE has been developing its approach to UK CCP supervisory stress testing and is working towards publication of a framework for undertaking supervisory stress-testing of CCPs.

Following a pilot CCP supervisory stress-test exercise in 2019, the BoE is launching its first public CCP supervisory stress test around the start of Q4 2021 which will run over a nine-month period. The three recognised UK CCPs (ICE Clear Europe Ltd, LCH Ltd and LME Clear Ltd) will participate, and all of their clearing services will be in scope. This stress test will be exploratory in nature, the CCPs will not be tested against regulatory requirements and there will be no pass-fail thresholds. If, however, deficiencies are identified, the BoE will take remedial action. The outcomes from the exercise will be published around the end of Q2 2022.

The BoE intends to use CCP supervisory stress testing as a key mechanism through which to undertake assessments of the resilience of individual CCPs, as well as assessments of the broader resilience of the clearing network and its interactions with the rest of the financial system. CCP supervisory stress tests will also be used to promote transparency and help establish public confidence in the UK CCP system.

In the discussion paper, the BoE sets out a range of proposals and options for the design of the CCP supervisory stress-testing framework. In some areas, the BoE already has clear proposals and a direction in mind. For example, it proposes to use supervisory stress testing to assess both credit and liquidity risk in full. In other areas, the BoE is considering a broader range of options, for example, relating to market shock scenario design and alternative default assumptions.

Comments can be made on the discussion paper until 17 December 2021. The BoE will use the responses received, in conjunction with the findings from the 2021-22 stress test, to inform further development of the CCP supervisory stress-test framework.

Discussion paper: Supervisory Stress Testing of Central Counterparties

Financial Conduct Authority

Proposed Decision to require synthetic LIBOR for 6 sterling and Japanese yen settings - FCA publishes consultation - 24 June 2021

The FCA has published a consultation paper (CP21/9) seeking views on its proposal to use its “methodology change” powers under Article 23D(2) of the Benchmarks Regulation (EU) 2016/1011 (BMR) as introduced by the Financial Services Act 2021.

The FCA said that it would consult on using its new powers under the BMR to require the 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings to be determined under a changed methodology (in other words, on a ‘synthetic’ basis) after the end of 2021. It intends to compel the publication of the 3 Japanese yen LIBOR settings for 1 year only until the end of 2022, after which they will cease. The FCA proposes to use its Article 23D(2) powers to require a synthetic LIBOR to be calculated using a forward-looking term version of the relevant risk-free rate (i.e. SONIA for sterling and TONA for yen) and the fixed ISDA spread adjustment published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol for the respective LIBOR setting.

The FCA notes that, for sterling, there are 2 term SONIA reference rates (TSRRs) provided by Refinitiv and IBA. Both TSRRs are compliant with BMR requirements. The FCA has selected the TSRR provided by IBA as a component for the specific purpose of a potential synthetic sterling LIBOR. For yen, it has selected the Tokyo Term Risk Free Rate (TORF) provided by QUICK Benchmarks Inc (QBS) as a component for a potential synthetic yen LIBOR. TORF is recommended by the Japanese Cross-Industry Committee to help transition in the cash market and is the only forward-looking term RFR for yen.

The FCA considers that its proposed decision is in line with its policy framework for whether and how it would use the Article 23D(2) powers to ensure an orderly cessation of a critical benchmark, which was published in final form in March 2021.

The consultation is open for 9 weeks. Where a synthetic LIBOR is implemented, the FCA will also need to determine who will be permitted to use it. A separate consultation on its proposed policy in this regard closed on 17 June 2021. The FCA states that it will aim to consult further in the third quarter on a proposed decision on precisely what legacy use to allow for any synthetic sterling and yen LIBOR.

Finally, the FCA reminds market participants that any synthetic LIBOR will be time limited and is intended as a safety-net only for contracts that cannot transition.

Consultation paper: Proposed decision under Article 23D BMR for 6 sterling and yen LIBOR settings (CP21/9)

Webpage

Statement

Prospectus Regulation - Primary Market Bulletin No.34 published by the FCA - 24 June 2021

The FCA has published its Primary Market Bulletin No.34. Among other things, this edition addresses the creation of a new Technical Note to adapt, as FCA Guidance, the European Securities and Markets Authority’s (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation ((EU) 2017/1129). It also deals with the incorporation of certain explanations in ESMA’s Q&As on Prospectuses on the FCA Handbook site into Technical Notes.

The FCA notes that it will no longer refer to the CESR Recommendations and the Q&As on Prospectuses on its Handbook site. The relevant substantive content will be consolidated into the FCA’s Technical Notes. The FCA intends to consult in the September 2021 Quarterly Consultation Paper on removing these from the FCA Handbook site and on consequential amendments to the Prospectus Regulation Rules, as well as taking the opportunity to update a Procedural Note and several other Technical Notes.

Primary Market Bulletin No.34

Guidance consultation: GC21/1: Primary Market Bulletin No.34

Investment Association

LIBOR - Investment Association calls for collective effort in final stage of LIBOR-linked bond transition - 22 June 2021

The Investment Association (IA) has published a document calling for increased efforts to ensure that the LIBOR-linked bond transition deadline of 31 December is met, noting that there are a large number of outstanding LIBOR-linked bonds which have still not yet moved to a new rate.

The IA describes this as a matter of “serious concern” for the industry (and particularly for the buy-side) and calls on all market participants to actively engage amongst themselves in order to ensure effective collaboration and successful transition by the deadline. 

The FCA confirmed the cessation dates for all panel bank LIBOR setting on 5 March 2021, as previously reported in this Bulletin. The Bank of England expects all legacy sterling LIBOR contracts, wherever possible, to have been amended by the end of the third quarter of 2021 to include at least a contractually robust fall-back that takes effect on an appropriate event, or preferably, an agreed conversion to a robust alternative reference rate.

Encouraging Transition of LIBOR Linked Bonds

Press release

Please see the Banking and Finance section for an item on the extension by the European Commission of the transition period for treatment of exposures to third-country CCPs until June 2022.

Asset Management

Issue 1115 / 24 June 2021

HEADLINES

  1. European Securities and Markets Authority
    1. AIFMD - ESMA publishes official translations of guidelines addressing leverage risks- 23 June 2021

European Securities and Markets Authority

AIFMD - ESMA publishes official translations of guidelines addressing leverage risks - 23 June 2021

The European Securities and Markets Authority (ESMA) has published the official translations of its guidelines to address leverage risks under Article 25 of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). The guidelines provide national competent authorities with a set of indicators to consider when performing their risk assessment and a set of principles to take into account when calibrating and imposing leverage limits.

The guidelines will apply on a ‘comply or explain’ basis from 23 August 2021.

Guidelines on Article 25 of the Alternative Investment Fund Managers Directive (2011/61/EU)

Webpage

Insurance

Issue 1115 / 24 June 2021

HEADLINES

  1. International Association of Insurance Supervisors
    1. Supervision of control functions and resolution powers and planning -IAIS publishes two new application papers-23 June 2021
    2. Application paper on supervisory colleges and issues paper on insurer culture - IAIS launches consultations- 23 June 2021

International Association of Insurance Supervisors

Supervision of control functions and resolution powers and planning - IAIS publishes two new application papers - 23 June 2021

The International Association of Insurance Supervisors (IAIS) has published two new application papers on supervision of control functions and resolution powers and planning.

The former application paper describes practices aimed at helping supervisors address issues related to the supervision of control functions, as described in the Insurance Core Principles (ICPs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). In particular, the application paper supports supervisors in achieving the outcomes stipulated in ICP 8 (Risk Management and Control Functions), and is relevant to ICP 5 (Suitability of Persons) and ICP 7 (Corporate Governance).

The latter provides supporting material on supervisory practices relating to resolution. In particular, it provides background for the application of ICP 12 (Exit from the Market and Resolution), including the ComFrame standards and guidance, and is also relevant to ICP 25 (Supervisory Cooperation and Coordination), including the ComFrame standards and guidance (related to crisis management planning).

Application papers are designed to provide additional material related to IAIS supervisory material (ICPs and ComFrame), including examples or case studies.

Application Paper on Resolution Powers and Planning

Application Paper on Supervision of Control Functions

Application paper on supervisory colleges and issues paper on insurer culture - IAIS launches consultations - 23 June 2021

The International Association of Insurance Supervisors (IAIS) has launched a consultation on a draft revised application paper on supervisory colleges together with a draft issues paper on insurer culture.

The draft paper on supervisory colleges explains the work of the colleges and the way in which insurers might become involved in the supervisory college process. It has been updated to reflect subsequent developments of IAIS supervisory material, including revisions to insurance core principle 3 (information sharing and confidentiality requirements) and 25 (supervisory co-operation and co-ordination), and the adoption of ComFrame, which took place in November 2019. The deadline for comments on the proposals is 24 August 2021.

The second paper explores the concept of “insurer culture” as a point of intersection for prudential and conduct risks and identifies the various insurance core principles that explicitly refer to supervisory expectations regarding insurer culture. The press release notes that: “understanding the various elements that make up insurer culture, which in turn inform certain decisions, behaviours and practices across an insurer’s business, can be critical in helping supervisors identify and address prudential and conduct issues in a more timely and effective manner. This could potentially reduce the occurrence of widespread misconduct and possible financial and consumer harm”. The deadline for comments is 23 August 2021.

The IAIS intends to hold a public session on the two papers via webinar on 30 June 2021.

Press release: IAIS supporting material adopted and released for public consultation

Draft Revised Application Paper on Supervisory Colleges

Questions for Draft Revised Application Paper on Supervisory Colleges

Webpage

Draft Issues Paper on Insurer Culture

Questions for Draft Issues Paper on Insurer Culture

Webpage

Enforcement

Issue 1115 / 24 June 2021

HEADLINES

  1. Financial Conduct Authority
    1. Refusal to vary Part 4A permission of agency broker - FCA publishes Final Notice- 24 June 2021

Financial Conduct Authority

Refusal to vary Part 4A permission of agency broker - FCA publishes Final Notice - 24 June 2021

The FCA has published a Final Notice issued to Gedik International Ltd, an agency broker, in which the FCA refuses the firm’s application under section 55H of the Financial Services and Markets Act 2000 (FSMA) for a variation to its Part 4A permission. To enable the firm to trade in an additional financial product, it applied to vary its permission to include arranging, safeguarding and administration of assets and rolling spot FX (across all current activities for which the firm has permission). The FCA considered the firm’s contention that the variation would not affect the firm’s business model or financial forecasts to be incorrect. The additional permission would have enabled the firm to trade a new product, “creating a new, prospective stream of revenue and with a different operational flow, thereby necessitating changes to the firm’s internal systems”.

The FCA concluded that the firm could not be relied on to provide accurate and reliable information relating to the application as it had not considered how the proposed new permissions would impact its current operations, and whether its systems and controls more widely would be fit for purpose in relation to the proposed variation of permission. As such, it considered that, if the application were granted, there was no certainty that the firm would satisfy and continue to satisfy, in relation to all of the regulated activities for which the firm would have permission, the threshold conditions (in particular, the effective supervision and appropriate resources threshold conditions). The FCA also did not consider that the firm would satisfy the appropriate resources threshold condition, including systems and controls that are fit for purpose and adequately skilled and competent human resources.

Final notice: Gedik International Ltd (FRN 916641)