Includes developments in relation to: EU Taxonomy Regulation; EMIR; UK-EU financial services; Basel III reforms; Consumer Credit Directive; MiFID II; and LIBOR transition

Click on the headings below to access each section:

GENERAL

Issue 1146 / 10 February 2022

HEADLINES

  1. European Commission
    1. EU Taxonomy Regulation - ClientEarth files internal review request to European Commission-4 February 2022
  2. European Parliament
    1. DLT - European Parliament updates procedure file on pilot regime-8 February 2022
  3. European Supervisory Authorities
    1. Digital finance - ESAs respond to European Commission’s call for advice-7 February 2022
  4. HM Treasury
    1. FCA and Payment Systems Regulator - HM Treasury announces interim Chair appointments-4 February 2022
  5. Bank of England
    1. Climate Biennial Exploratory Scenario - Bank of England launches second round-9 February 2022
    2. Transforming data collection - Bank of England publishes communication to firms-10 February 2022
  6. Financial Conduct Authority
    1. Enhancing the UK’s financial services sector - FCA publishes speech by Sarah Pritchard-8 February 2022

European Commission

EU Taxonomy Regulation - ClientEarth files internal review request to European Commission - 4 February 2022

ClientEarth, an environmental law organisation, has filed an internal review request to the European Commission (the Commission) for “unlawfully labelling bioenergy, bio-based plastics and chemicals used to make plastics as ‘sustainable’” in the EU Taxonomy. An internal review request is the first step that non-governmental organisations (NGOs) must take before being able to bring a court challenge.

The Taxonomy Climate Delegated Act ((EU) 2021/2178) (the Act) was adopted in June 2021 and has been applicable since January 2022. It classifies bioenergy, bio-based products and chemicals used to make plastics as activities that “contribute substantially to climate change mitigation or adaption” and do no significant harm to the environment.

ClientEarth claims that the Commission has infringed the EU Taxonomy Regulation ((EU) 2020/852) by relying on flawed standards for biomass already provided under the Renewable Energy Directive (2009/28/EC), instead of assessing whether the available scientific evidence on biomass production is conclusive. ClientEarth is also challenging the labelling of bio-based plastics and bio-based chemicals, such as ethylene and propylene, used to make plastics, which are also classified as ‘sustainable’ under the Act.

The Commission has 16 weeks to reply, after which the campaigners are permitted to take their challenges to the European Court of Justice.

ClientEarth press release

European Parliament

DLT - European Parliament updates procedure file on pilot regime - 8 February 2022

The European Parliament has updated the procedure file on the proposed Regulation covering a pilot regime for market infrastructures based on distributed ledger technology (DLT) (2020/0267(COD)) to show an indicative plenary sitting date of 23 March 2022.

The pilot regime aims to test the development of European infrastructure for the trading, clearing and settlement of DLT-based financial instruments, and, among other things, lays down the conditions for acquiring permission to operate DLT market infrastructure and defines which DLT financial instruments can be traded. The pilot regime will be in place for three years, after which the European Commission, based on advice from the European Securities and Markets Authority, will report on the costs and benefits of extending, modifying or ending it.

Procedure file: Digital finance: Pilot regime on distributed ledger technology market infrastructures (DLT) (2020/0267(COD))

European Supervisory Authorities

Digital finance - ESAs respond to European Commission’s call for advice - 7 February 2022

The European Supervisory Authorities (ESAs), comprising the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), have published a report (ESA 2022 01), dated 31 January 2022, containing their response to the European Commission’s (the Commission’s) February 2022 call for evidence on digital finance and related issues.

In response to the Commission’s call for evidence, ESMA also issued a survey to national competent authorities (NCAs) in February 2021 and a general call for evidence on digital finance in May 2021. ESMA has published reports (ESMA50-164-5410 and ESMA50-164-5410, respectively) summarising the responses that it received covering a number of issues, including fragmented value chains, digital platforms and ‘mixed-activity groups’ (MAGs). These responses have informed the ESAs’s report and recommendations. Links to ESMA’s reports can be found in the ESAs’s press release.

In the report, the ESAs note that the use of innovative technologies is facilitating changes to value chains in the EU financial sector, that dependencies on digital platforms are increasing rapidly and that new MAGs are emerging. In light of this, the ESAs recommend rapid action to ensure that the EU’s financial services regulatory and supervisory framework remains ‘fit for purpose’, through:

  • a holistic approach to the regulation and supervision of the financial services value chain;
  • strengthened consumer protection in a digital context, including through enhanced disclosures, complaints handling mechanisms, measures aimed at preventing the mis-selling of tied or bundled products, and improved digital and financial literacy;
  • further convergence in the classification of cross-border services;
  • further convergence in addressing money laundering and the financing of terrorism risks in a digital context;
  • effective regulation and supervision of MAGs, including a review of prudential consolidation requirements;
  • strengthened supervisory resources and cooperation between financial and other relevant authorities, including on a cross-border and multi-disciplinary basis; and
  • active monitoring of the use of social media in financial services.

Joint European Supervisory Authority response: to the European Commission’s February 2021 Call for Advice on digital finance and related issues: regulation and supervision of more fragmented or non-integrated value chains, platforms and bundling of various financial services, and risks of groups combining different activities (ESA 2022 01)

Factsheet

Press release

HM Treasury

FCA and Payment Systems Regulator - HM Treasury announces interim Chair appointments - 4 February 2022

HM Treasury has announced that Richard Lloyd, FCA Senior Independent Director, will become the interim Chair of the FCA from 1 June 2022 until the next permanent Chair takes up the post. Mr Lloyd was recently reappointed for a second three-year term on the FCA board, taking effect from 1 April 2022. The Treasury has also announced that the FCA has appointed Aidene Walsh as interim Chair of the Payment Systems Regulator (PSR) from 1 April 2022 until the next permanent PSR Chair takes up the post. Ms Walsh has been a non-executive director on the PSR board since June 2020.

HM Treasury has launched a recruitment campaign to appoint the next Chair of the FCA and will do so in respect of the next PSR Chair in due course.

Press release

Bank of England

Climate Biennial Exploratory Scenario - Bank of England launches second round - 9 February 2022

The Bank of England (the Bank) has launched the second round of its Climate Biennial Exploratory Scenario (CBES) for the largest UK banks, building societies, life insurers and general insurers. The CBES’s three main objectives are to:

  • size the financial exposures of participants and the financial system more broadly to climate-related risks;
  • understand the challenges to participants’ business models from these risks and gauge their likely responses and the related implications for the provision of financial services; and
  • assist participants in enhancing their management of climate-related financial risks, including engaging counterparties to understand their vulnerability to climate change.

The Bank highlights that the second round will focus on the second objective above, in particular in respect of participants’ proposed management actions in response to climate scenarios. Participants will be asked a small number of questions, which will further explore their strategic responses to the three scenarios of early, late and no action, published as part of the first round, as well as the associated implications for their business models. The Bank highlights that participants will not be required to update the quantitative loss projections they provided as part of the first round and that all first round CBES participants are taking part.

The deadline for participants’ submissions is 31 March 2022. The Bank expects to publish the CBES results in May 2022.

Webpage: Stress testing

Press release

Transforming data collection - Bank of England publishes communication to firms - 10 February 2022

The Bank of England (the Bank) has published a communication to firms providing an update on the progress of its joint programme with the FCA to transform how data is collected from the UK financial sector. The joint transformation plan was published in February 2021 and the FCA published a new webpage on the joint programme on 26 January 2022.

As previously reported in this Bulletin, the joint programme will focus on: (i) integrating reporting to increase consistency in respect of the design and delivery of data collection; (ii) modernising reporting instructions to improve how data is interpreted and implemented by firms; and (iii) defining and adopting common data standards that identify and describe data in a consistent way.

The update covers the steps that have been made, which include planned activities up to the start of the next phase of the programme at the end of June 2022 and the skills and capabilities that the Bank is looking for to help progress the programme. In the update, the Bank highlights the following key points:

  • subject to resourcing constraints and approval by the Reporting Transformation Committee, the Bank plans to extend the phase one Commercial Real Estate reporting use case from the end of March, to the end of May 2022;
  • the Bank would like industry participants that are part of the core delivery team to remain with the programme until March 2023. During April and May 2022, the Bank will work with them to capture lessons learnt from the first iteration of the use cases; and
  • the Bank is requesting firms to provide additional resource for phase two of the programme. It is looking for approximately 20 full-time equivalent personnel from firms to be part of the core delivery team.

The Bank highlights that it will be working alongside the FCA to develop the use case roadmap during Q1 and Q2 2022. It expects to publish the roadmap in Q2 2022 following engagement with industry.

Transforming data collection: communication to firms

Financial Conduct Authority

Enhancing the UK’s financial services sector - FCA publishes speech by Sarah Pritchard - 8 February 2022

Sarah Pritchard, Executive Director of Markets at the FCA, has given a speech at the City and Financial Global’s Future of UK Financial Regulation Summit on the FCA’s role and priorities in enhancing the UK’s financial services sector. In the speech, Ms Pritchard reiterates the FCA’s commitment to setting high regulatory standards that support and encourage innovation but which are grounded in the FCA’s statutory objectives: to protect consumers, enhance market integrity, and promote competition in the interests of those who use UK markets.

Ms Pritchard notes that, since the FCA’s CEO, Nikhil Rathi, set out the FCA’s vision for change and the future in July 2021, the FCA has taken steps towards delivering the outcomes that are needed to protect consumers and ensure a well-functioning market, through “being innovative, assertive and adaptive”. These steps include making the FCA’s regulatory sandbox permanent, proposing to introduce new rules to embed diversity and inclusion across financial services and in listed markets, and taking a tough approach to cryptoasset firms which are required to register under the anti-money laundering regime. Ms Pritchard welcomes feedback on whether the FCA “looks and feels different” in the months ahead.

Looking to the longer term, Ms Pritchard welcomes the government’s vision for the Future Regulatory Framework (FRF) as “an opportunity to create a rulebook which meets the specific needs of the UK market, while still remaining anchored by the high international standards which the UK has done so much to shape.” The FRF proposals would give the FCA and the PRA a secondary objective to operate in a way that facilitates the long-term growth and international competitiveness of the UK economy and would amend the existing regulatory principle to take into account ‘sustainable growth in the UK economy’ and to ensure such growth is consistent with the government’s commitment to achieve a net zero economy by 2050. Ms Pritchard welcomes this, highlighting that a “secondary competitiveness objective for UK financial regulators strikes an appropriate balance that recognises the important role the FCA plays in supporting the long-term growth of the UK economy, as we continue to deliver on our existing core strategic objectives”.

On ESG, Ms Pritchard highlights that the FCA expects ESG and sustainable finance to grow as an area of interest, noting that the FCA will “need to redouble work on [its] innovation agenda, to support the data and technology solutions which underly [sic] ESG integration”. She also refers to the FCA’s discussion paper on sustainability disclosure requirements (SDR) (DP21/4), which closed on 7 January 2022 and on which the FCA intends to publish its proposals by mid-2022.

Finally, Ms Pritchard turns to future developments in 2022. She highlights that the FCA will publish its overarching consumer and market strategies, detailing its future priorities. She explains that the strategies should provide “a continued focus on the elements [she has] covered above, but with a focus also on the outcomes [the FCA is] seeking, and how progress will be measured.” Ms Pritchard also touches on the FCA’s current recruitment drive, highlighting the arrival of new senior leaders as well as senior leader vacancies.

Speech by Sarah Pritchard, Executive Director, Markets, to City and Financial Global - The Future of UK Financial Regulation Summit

BEYOND BREXIT

Issue 1146 / 10 February 2022

HEADLINES

  1. European Commission
    1. EMIR - Commission Implementing Decision on extending UK CCP equivalence published in OJ and European Commission consults on review of EU central clearing framework - 9 February 2022
  2. UK Parliament
    1. UK-EU financial services - House of Lords European Affairs Committee announces inquiry - 4 February 2022

European Commission

EMIR - Commission Implementing Decision on extending UK CCP equivalence published in OJ and European Commission consults on review of EU central clearing framework - 9 February 2022

Commission Implementing Decision (EU) 2022/174 has been published in the Official Journal of the European Union (OJ) and entered into force on 10 February 2022. The Commission Implementing Decision determines that, until 30 June 2025, the regulatory framework that applies to UK-based central counterparties (CCPs) is equivalent to the European Market Infrastructure Regulation (648/2012/EU) (EMIR). This will extend the temporary equivalence of UK CCPs to that date following the expiry of the previous Commission Implementing Decision on 30 June 2022. The Commission adopted the draft Implementing Decision (C(2022 831 final) on 8 February 2022.

The Commission has also published a targeted consultation on a review of the EU central clearing framework. The Commission is seeking stakeholders’ views on a number of areas, including:

  • widening the scope of clearing members and clients accessing CCPs to include entities such as pension schemes, private entities that do not access CCPs directly and public authorities;
  • widening the scope of the products offered for clearing or that are required to be cleared to include products such as equity derivatives, repos and foreign exchange derivatives;
  • measures aimed at market participants, such as ways to reflect the greater systemic importance of Tier 2 third-country CCPs in the context of banking rules and supervision, and the potential use of macroprudential tools to address financial stability risks arising from over-reliance on Tier 2 CCPs;
  • measures aimed at EU CCPs, such as ways to support them in expanding their range of clearing services and improving the current set up of payment and settlement arrangements available to them in the EU;
  • introducing a monitoring process to measure EU market participants’ progress towards reducing their exposures to Tier 2 CCPs;
  • strengthening the supervisory framework for EU CCPs and giving EU-level supervision a stronger role, in order to better address risks involved in increased cross-border clearing activity, simplify and accelerate procedures, remove legal uncertainties and facilitate co-ordination with third country supervisory authorities; and
  • clarifying the interaction between EMIR and other relevant legislation such as the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and the Directive relating to undertakings for collective investment in transferable securities (2009/65/EC) (UCITS Directive).

The deadline for responses is 8 March 2022. The Commission has also published a call for evidence on an impact assessment and intends to adopt any legislative proposals in Q3 2022.

Commission Implementing Decision (EU) 2022/174) of 8 February 2022 determining, for a limited period of time, that the regulatory framework applicable to central counterparties in the United Kingdom of Great Britain and Northern Ireland is equivalent, in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council

Webpage

Press release

European Commission Consultation Document: Targeted consultation on the review of the EU central clearing framework

Webpage

Call for evidence for an impact assessment (Ares(2022)899227)

UK Parliament

UK-EU financial services - House of Lords European Affairs Committee announces inquiry - 4 February 2022

The House of Lords European Affairs Committee (the Committee) has announced the launch of a new UK-EU financial services inquiry. The Committee notes that the UK-EU Trade and Cooperation Agreement (TCA) contains only limited provisions on financial services trade between the UK and the EU. Since the TCA was signed, the EU has only granted the UK two equivalence decisions for financial services, both of which have been limited and one of which has since expired. Conversely, the UK has granted equivalence to EEA member states in 28 of the 32 areas identified for the equivalence process.

The inquiry will consider matters including:

  • the impact so far on the UK financial services sector of the UK’s departure from the  EU single market;
  • the impact of the absence of a functioning framework for UK-EU regulatory cooperation;
  • the future of cross-border UK-EU financial services trade in the absence of equivalence; and
  • the impact of regulatory divergence and agreements with third countries on UK-EU financial services trade.

The Committee indicates on its accompanying webpage that there will be an oral evidence session on 8 February 2022.

The Committee expects to report by May 2022.

Inquiry page: UK-EU relationship in financial services

Press release   

BANKING AND FINANCE

Issue 1146 / 10 February 2022

HEADLINES

  1. Basel Committee on Banking Supervision
    1. Basel III reforms - BCBS publishes speech by Pablo Hernández de Cos -8 February 2022
  2. European Parliament
    1. Updates to the EU bank resolution framework - European Parliament publishes ECON report on proposed Regulation on MREL and TLAC amendments-4 February 2022
    2. Consumer Credit Directive - European Parliament publishes draft report-7 February 2022
  3. European Central Bank
    1. COVID-19 - ECB announces no further extension of capital and leverage relief for banks-10 February 2022
  4. HM Treasury
    1. The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 - Statutory instrument and explanatory memorandum published-7 February 2022
  5. Prudential Regulation Authority
    1. Definition of capital - PRA publishes Consultation Paper (CP2/22) on updates to PRA rules and supervisory expectations-7 February 2022
  6. Payment Systems Regulator
    1. Broadening coverage of Confirmation of Payee - PSR publishes Policy Statement (PS22/1)-10 February 2022

Basel Committee on Banking Supervision

Basel III reforms - BCBS publishes speech by Pablo Hernández de Cos - 8 February 2022

The Basel Committee on Banking Supervision (BCBS) has published a speech by BCBS Chair and Governor of the Bank of Spain, Pablo Hernández de Cos, on the final Basel III reforms, delivered at the European Economic and Social Committee public hearing on ‘The EU banking reform package’. The speech focuses on the European Commission’s (the Commission’s) proposals for implementing the final Basel III reforms, which are set out primarily in the Commission’s legislative proposal for a Regulation amending the Capital Requirements Regulation (575/2013/EU) (CRR III) (2021/0342(COD)).

In his capacity as BCBS Chair, Mr Hernández de Cos highlights three points: (i) the importance of a resilient banking system, as highlighted by COVID-19; (ii) that the Basel III reforms have been adequately designed to reflect jurisdiction- or region-specific characteristics; and (iii) fully implementing Basel III will signal jurisdictions’ ongoing commitment to multilateralism.

In his capacity as Governor of the Bank of Spain, Mr Hernández de Cos stresses that, “it is critical to implement the full Basel III package in Europe, as its components are complementary in nature and are necessary to safeguard the resilience of the European banking system.” However, he highlights concerns in relation to the implementation timetable, given the Commission foresees an application date of 1 January 2025, two years later than the deadline set by the BCBS. Mr Hernández de Cos urges all stakeholders to accelerate work on CRR III and warns that “further delays could result in the European banking system being insufficiently prepared to face future shocks and could even have undesirable knock-on effects on the implementation process in other jurisdictions.”

Mr Hernández de Cos also expresses concerns about deviations in CRR III from the final Basel III standards, particularly in relation to the credit risk framework. He warns that these deviations, “could leave specific risk exposures under-capitalised,” citing collateral valuation as an example where the BCBS has identified a build-up of systemic risk in real estate markets across different jurisdictions.

Finally, Mr Hernández de Cos notes concerns relating to the output floor, where the Commission, “introduces a range of transitory adjustments when it comes to residential real estate, unrated corporates and derivative exposures.” He stresses that that these adjustments, “should be avoided as, in [his] view, they present a deviation from Basel III, are unfounded from prudential or financial stability grounds and could trigger a ‘race-to-the-bottom’”. He cautions that any such deviations should be strictly temporary in nature and should not be extended further.

Speech by BCBS Chair, Pablo Hernández de Cos: Implementing Basel III

European Parliament

Updates to the EU bank resolution framework - European Parliament publishes ECON report on proposed Regulation on MREL and TLAC amendments - 4 February 2022

The European Parliament has published the text of the report (A9-0020/2022) adopted by its Economic and Monetary Affairs Committee (ECON) on the so-called ‘Daisy Chain’ proposal. The proposal concerns the prudential treatment of global systemically important institution (G-SII) groups with a multiple point of entry (MPE) resolution strategy and a methodology for the indirect subscription of instruments eligible for internal minimum requirements for own funds and eligible liabilities (MREL).

The ‘Daisy Chain’ proposal would amend provisions in the Capital Requirements Regulation (575/2013/EU) (CRR) on total loss-absorbing capacity (TLAC) and MREL, and the Bank Recovery and Resolution Directive (2014/59/EU). The report contains a draft Parliament legislative resolution, which sets out suggested amendments to the proposed Regulation, including:

  • introducing a cap for the deduction mechanism (‘daisy chain’) proposed by the Commission;
  • a request for the Commission to assess the impact of the ‘daisy chain’ framework on the different banking group structures to avoid any unintended consequences; and
  • establishing a transitional arrangement that allows the European resolution authority to apply a transitional deduction regime to G-SII groups with an MPE resolution strategy under certain restrictive conditions.

The proposed Regulation would enter into force and apply 20 days following its publication in the Official Journal of the European Union. However, Article 1, point (3), point (5)(b), and points (7), (8) and (9) and Article 2 would apply from 1 January 2024.

I Report on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities (2021/0343(COD))

Consumer Credit Directive - European Parliament publishes draft report - 7 February 2022

The European Parliament’s Internal Market and Consumer Protection Committee (IMCO) has published a draft report (2021/0171(COD)), dated 31 January 2022, on the European Commission’s (the Commission’s) legislative proposal for a Directive on consumer credit, which will revise and replace the Consumer Credit Directive (2008/48/EC) (CCD). The legislative proposal was adopted by the Commission in July 2021 (COM(2021) 347 final).

IMCO’s draft report contains a draft European Parliament legislative resolution, which sets out suggested amendments to the proposed Directive. The accompanying explanatory statement contains a number of proposals and comments, including:

  • that IMCO is pleased to see that the Commission’s proposal includes a broadening of the scope of the CCD. However, it considers that the Commission’s proposal does not sufficiently address the issue of peer-to-peer crowdfunding lending and that it should be removed from scope;
  • a proposed ban on personalised advertisements and an obligation to show only standardised offers. The requirements on advertisements should be extended to include information on the consequences and/or costs of missed payments and EU Member States should prohibit misleading advertisements that underexpose the consequences of a loan, that might create over-indebtedness and that focus on the ease of obtaining a loan;
  • the proposed provision of pre-contract information in the clearest possible way by restructuring the Standard European Consumer Credit Information form, to include information on missed payments and the right of withdrawal;
  • a proposed list of objective financial data to be used to assess a customer’s creditworthiness;
  • a proposal that the European Banking Authority, industry stakeholders and consumer representatives develop a range of standardised environmentally sustainable consumer credit products; and
  • a proposed new Article laying down rules on the debt collection process.

The annex to the draft report sets out the entities and persons that have provided input to it.

I Draft Report on the proposal for a directive of the European Parliament and of the Council on consumer credits (2021/0171(COD))

European Central Bank

COVID-19 - ECB announces no further extension of capital and leverage relief for banks - 10 February 2022

The European Central Bank (ECB) has announced that it sees no need to allow banks to operate below the level of capital defined by their Pillar 2 Guidance beyond December 2022, nor to extend beyond March 2022 the supervisory measure that allows them to exclude central bank exposures from their leverage ratios. The ECB introduced these provisions in March and September 2020 to assist banks in the context of COVID-19.

The ECB notes that there is still some uncertainty regarding the impact of COVID-19. However, it highlights that banks have ample headroom above their capital requirements and above the leverage ratio requirement. At the end of September 2021, the aggregate Common Equity Tier 1 ratio of banks under direct ECB supervision stood at 15.47% and their average leverage ratio stood at 5.88%.

In light of this, the ECB sets out that Banks should: (i) operate above Pillar 2 Guidance from 1 January 2023; and (ii) re-include central bank exposures in their leverage ratios from 1 April 2022. It has published an updated version of the FAQs on its supervisory measures in relation to COVID-19 to reflect its decision.

Press release

FAQs on ECB supervisory measures in reaction to the coronavirus

HM Treasury

The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 - Statutory instrument and explanatory memorandum published - 7 February 2022

The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 (SI 2022/100) (the Order) has been published, together with an explanatory memorandum, under section 38 of FSMA. The Order allows Norges Bank, the Norwegian central bank, to continue its activities in the UK without authorisation when the Temporary Transition Regime ends.

The Order amends the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 2001/1201) (the Exemption Order), which provides for certain persons to be exempt from the general prohibition imposed by section 19 of FSMA (regulated activities must only be carried out by an authorised, or exempt, person). Article 2 of the Order adds Norges Bank to Part IV of the Schedule to the Exemption Order and, in combination with Article 5(2) of the Exemption Order, exempts Norges Bank from requiring authorisation in respect of the activities specified under Articles 14, 21, 25, 37, 40, 53 and 64 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

The Order comes into force on 31 March 2022.

The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2022 (SI 2022/100)     

Explanatory memorandum

Prudential Regulation Authority

Definition of capital - PRA publishes Consultation Paper (CP2/22) on updates to PRA rules and supervisory expectations - 7 February 2022

The PRA has published a Consultation Paper (CP2/22) on changes to its rules and supervisory expectations relating to the definition of capital. It sets out the PRA’s proposed approach to transferring the UK Technical Standards for own funds requirements for institutions (UKTS) into PRA rules, with amendments to reflect revisions to the Capital Requirements Regulation (575/2013/EU) (CRR) introduced by CRR II ((EU) 2019/876) in June 2019.

The UK version of Commission Delegated Regulation 241/2014/EU contains regulatory technical standards (RTS) on own funds requirements for banks, building societies and PRA-designated investment firms (Own Funds RTS). Articles 13 to 19 of the Own Funds RTS, which relate to deductions from Common Equity Tier 1 (CET 1), were moved to the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook on 1 January 2022 as part of the PRA’s implementation of the Basel III standards. CP2/22 sets out the PRA’s proposals to transfer the remaining provisions in the Own Funds RTS to the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and to revoke the Own Funds RTS. The PRA also proposes to update PRA Supervisory Statement (SS) 7/13 ‘Definition of capital (CRR firms)’ to clarify the PRA’s expectations of CRR firms regarding capital issuances and reductions.

The policy proposals in CP2/22 are as follows:

  • replicate UKTS requirements in the PRA Rulebook and update the relevant provisions in the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook (the text of which is contained in Appendix 1 of CP2/22) to align with the changes introduced to the CRR by CRR II. These include updates to the requirements on firms regarding: (i) information that must be provided when seeking PRA permission to reduce capital instruments; (ii) the new general prior permission process; and (iii) the process for reductions in share premium accounts; and
  • update SS7/13 (the text of which is in Appendix 3 of CP2/22) to: (i) clarify the PRA’s expectations of CRR firms regarding the quality of capital instruments; (ii) set out PRA expectations on liability-accounted Additional Tier 1 (AT1) instruments; (iii) update existing references on subordinated swaps; and (iv) introduce an expectation for firms to seek PRA views prior to issuing any new Tier 2 instruments that include new or complex features; and (v) clarify the PRA’s expectation that firms seek PRA permission for all forms of reduction of own funds instruments and that firms should inform supervisory contacts when there is sufficient certainty regarding capital reduction transactions in order to facilitate publication of the related PRA permission.

The PRA proposes that the implementation date for the changes resulting from CP2/22 would be September 2022. The appendices to CP2/22 can be found on the associated PRA webpage.

The deadline for responses is 2 May 2022.

PRA Consultation Paper: Definition of capital: updates to PRA Rules and supervisory expectations (CP2/22)

Webpage

Payment Systems Regulator

Broadening coverage of Confirmation of Payee - PSR publishes Policy Statement (PS22/1) - 10 February 2022

They Payment Systems Regulator (PSR) has published a Policy Statement (PS22/1) setting out the next steps for the wider implementation of Confirmation of Payee (CoP), including the next steps through Phase 2 of CoP development. The Policy Statement follows the PSR’s Consultation Paper (CP21/11) on the matter, published in December 2021.

As previously reported in this Bulletin, CoP is a name-checking service designed to prevent Authorised Push Payment scams and misdirected payments, and is already offered by the UK’s six largest banking groups. Pay.UK has been working with the Open Banking Implementation Entity (OBIE) to develop the technical environment, rules and standards in phases. Phase 1 allowed payment service providers (PSPs) that operate accounts with a unique sort code and account number to implement CoP, under Specific Direction 10 (SD10). Phase 2 will broaden coverage to remaining PSPs.

In PS22/1, the PSR confirms that it will direct Pay.UK to ensure the Phase 1 environment is closed by 31 May 2022, with all PSPs to use Phase 2 in line with the PSR’s proposals in CP21/11. This will end ‘dual running’ (where the PSPs joining CoP operate in the Phase 2 environment, while existing CoP PSPs operate in the Phase 1 environment against Phase 1 rules and standards). This will ensure that CoP services across all PSPs can work together, increasing CoP coverage and further reducing fraudulent, and accidentally misdirected, payments being received by PSPs.

To ensure the end of ‘dual running’, the PSR has published a new Specific Direction (SD11), which:

  • requires Pay.UK to terminate the terms and conditions for participating in Phase 1, withdraw each PSP’s CoP Phase 1 accreditation and retire the Phase 1 rules and standards on 31 May 2022;
  • requires Pay.UK to notify the OBIE of this action, so the OBIE can close the Phase 1 technical environment;
  • requires Phase 1 PSPs to use only the Phase 2 technical environment for the CoP service after 31 May 2022;
  • requires relevant PSPs to report regularly to Pay.UK on their progress in migrating CoP traffic to the Phase 2 open banking environment by 1 May 2022 and requires Pay.UK to pass this information to the PSR;
  • requires relevant PSPs to undergo enhanced reporting to both Pay.UK and to the PSR if the PSR considers such PSPs are at significant risk of failing to migrate by 1 May 2022, with an obligation to implement a remediation plan agreed with the PSR; and
  • revokes SD10 on 31 May 2022.

SD11 will come into effect on 11 February 2022.

PSR Policy Statement: Confirmation of Payee: Response to consultation CP21/11: Ending dual running (PS22/1)

Press release

PSR Specific Direction 11: Closure of initial technical environment for Confirmation of Payee

Webpage

SECURITIES AND MARKETS

Issue 1146 / 10 February 2022

HEADLINES

  1. European Commission
    1. EMIR and MiFIR - European Commission adopts two Delegated Regulations amending RTS on the CO and DTO-8 February 2022
  2. European Securities and Markets Authority
    1. MiFID II - ESMA launches common supervisory action on costs and charges-8 February 2022
  3. Financial Conduct Authority
    1. LIBOR transition - FCA publishes statement-9 February 2022

European Commission

EMIR and MiFIR - European Commission adopts two Delegated Regulations amending RTS on the CO and DTO - 8 February 2022

The European Commission (the Commission) has adopted two Commission Delegated Regulations amending regulatory technical standards (RTS) on the clearing obligation (CO) and on the derivative trading obligation (DTO) under the European Market Infrastructure Regulation (648/2012/EU) (EMIR) and the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR), respectively:

  • Commission Delegated Regulation (C(2022) 619 final) amending the RTS in Delegated Regulation (EU) 2015/2205 as regards the transition to new benchmarks in certain over-the-counter (OTC) derivative contracts (Regulation 1); and
  • Commission Delegated Regulation (C(2022) 620 final) amending the RTS in Delegated Regulation (EU) 2017/2417) as regards the transition to new benchmarks referenced in certain OTC derivative contracts (Regulation 2).

The RTS in Regulation 1 relate to a mandate under Article 5(2) of EMIR and specify the classes of OTC interest rate derivatives denominated in euro, sterling, Japanese yen and US dollar that are subject to the CO under EMIR. The Regulation will amend the RTS to remove from the CO those classes of derivatives that reference the Euro Overnight Index Average (EONIA), the sterling London Interbank Offered Rate (GBP LIBOR) or the Japanese yen LIBOR (JYP LIBOR) as they no longer meet the relevant conditions in EMIR. It will also bring within the CO classes of OTC interest rate derivatives referencing the Euro Short-Term Rate (ESTR), the Secured Overnight Financing Rate (SOFR), the Sterling Overnight Index Average (SONIA) or the Tokyo Overnight Average Rate (TONA) that certain central counterparties (CCPs) have been authorised to clear.

The RTS in Regulation 2 relate to a mandate under Article 32(1) of MiFIR and specify the classes of OTC derivatives that are subject to the DTO under MiFIR. Regulation 2 will amend the RTS to remove from the DTO those classes of derivatives that currently reference GBP LIBOR or USD LIBOR, as they will no longer meet the condition laid down in Article 31(1) of MiFIR.

The Council of the EU and the European Parliament will now scrutinise the Commission Delegated Regulations. If neither body objects, the Regulations will enter into force the day after their publication in the Official Journal of the European Union.

Commission Delegated Regulation (EU) …/… amending the regulatory technical standards laid down in Delegated Regulation (EU) 2015/2205 as regards the transition to new benchmarks in certain OTC derivative contracts (C(2022)619)

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Commission Delegated Regulation (C(2022)620) amending the RTS in Delegated Regulation (EU) 2017/2417) as regards the transition to new benchmarks referenced in certain OTC derivative contracts (C(2022)620)

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European Securities and Markets Authority

MiFID II - ESMA launches common supervisory action on costs and charges - 8 February 2022

The European Securities and Markets Authority (ESMA) has launched a common supervisory action (CSA) with national competent authorities (NCAs) on the costs and charges disclosure rules under the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), which will be conducted during 2022.

The CSA will allow ESMA and the NCAs to assess firms’ application of the MiFID II requirements on costs and charges. It will focus on information provided to retail clients and will involve NCAs reviewing how firms ensure that these disclosures:

  • are provided to clients in a timely manner;
  • are fair, clear and not misleading;
  • are based on accurate data reflecting all explicit and implicit costs and charges; and
  • adequately disclose inducements.

ESMA believes that the initiative will help ensure consistent implementation and application of EU rules, and enhance the protection of investors. It also notes that its Q&As, last updated in November 2021, will help NCAs and firms input into the CSA.

Press release

Financial Conduct Authority

LIBOR transition - FCA publishes statement - 9 February 2022

The FCA has published a statement on finalising the transition from the London Interbank Offered Rate (LIBOR), which sets out achievements in sterling markets and what remains to be done. The statement follows the FCA’s overview of the status of the transition from LIBOR, published on 1 January 2022, when the publication of most LIBOR settings ceased.

The FCA notes that the UK Working Group on Sterling Risk-Free Reference Rates (the Working Group) concluded in a meeting held in January 2022 that it had met its objective to “catalyse a broad-based transition to the Sterling Overnight Index Average (SONIA) across sterling derivative, loan and bond markets.” The Working Group will now be moving forward in an amended form with new objectives and further goals, including: (i) supporting the continued active conversion of legacy sterling LIBOR-linked bonds and loans that are dependent on temporary synthetic LIBOR; and (ii) considering any implications of non-sterling LIBOR transition in UK markets. The FCA notes that the Chair of the Working Group, Tushar Morzaria, Group Finance Director at Barclays, is stepping down. He will be replaced by Sarah Boyce of the Association of Corporate Treasurers, who will lead the Working Group in the next phase of its work.

The FCA also highlights remarks from Governor of the Bank of England, Andrew Bailey, on the transition away from LIBOR and the importance of co-operation across a wide range of industry sectors and jurisdictions in achieving the end of most LIBOR settings by the end of 2021 with minimal disruption. He has also called for those firms with remaining LIBOR exposures to continue this effort to ensure that the transition is completed smoothly.

The FCA will seek views in 2022 on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022 and on when to retire 3-month synthetic sterling LIBOR.

Press release

See also the General section for an item on the ESAs’ response to the European Commission’s digital finance call for advice and the Beyond Brexit section for an item on the EU’s temporary equivalence decision in relation to UK central counterparties

ASSET MANAGEMENT

Issue 1146 / 10 February 2022

HEADLINES

  1. HM Treasury
    1. UK funds regime - HM Treasury publishes summary of responses to call for input-10 February 2022

HM Treasury

UK funds regime - HM Treasury publishes summary of responses to call for input - 10 February 2022

HM Treasury has published the summary of responses (the Summary) to its January 2021 call for input in relation to the government’s review of the UK funds regime (the Review). The Summary outlines the feedback received on the call for input, the Treasury’s conclusions and which measures will be progressed or explored further. Overall, the Summary highlights that respondents were supportive of the scope and ambition of the call for input.

As previously reported in this Bulletin, the government announced the Review at Budget 2020 to consider tax and relevant areas of regulation. The call for input set out the scope and objectives of the Review and invited stakeholders to provide views on which reforms should be taken forward and how these should be prioritised. As part of the Review, the FCA has introduced rules for Long-Term Asset Funds (LTAFs) and the government has included legislation for a new tax regime covering Asset Holding Companies in the Finance Bill 2021-2022.

The Summary sets out the further steps the government, and the FCA, intend to take, including to:

  • make the taxation of funds simpler and more efficient, including in relation to the genuine diversity of ownership requirement, Real Estate Investment Trusts and solutions to deal with the tax efficiency of multi-asset authorised funds;
  • expand the range of investment products available in the UK, including in relation to authorised fund structures that are permitted to distribute capital, and a new type of fund structure - an unauthorised contractual scheme - aimed at professional investors;
  • explore opportunities to support the wider funds environment, including by providing additional information on the fund authorisation process and by promoting the UK funds regime abroad;
  • consult on options to simplify the VAT treatment of fund management fees; and
  • continue ongoing work to facilitate the rollout of the LTAF, including: (i) the continued work of the Productive Finance Working Group; (ii) a planned FCA consultation on potentially changing the restrictions on the promotion of LTAFs to allow distribution to a broader range of retail investors; and (iii) continued assessment of the case for any further changes to the way LTAFs are taxed.

The government welcomes further representations from industry.

HM Treasury: Review of the UK funds regime: a call for input: Summary of responses

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INSURANCE

Issue 1146 / 10 February 2022

HEADLINES

  1. European Insurance and Occupational Pensions Authority
    1. Supervisory convergence plan for 2022 - published by EIOPA-9 February 2022

European Insurance and Occupational Pensions Authority

Supervisory convergence plan for 2022 - published by EIOPA - 9 February 2022

The European Insurance and Occupational Pensions Authority (EIOPA) has published its supervisory convergence plan for 2022 (EIOPA-21/619) with reference to a number of priority areas, including:

  • practical implementation of the common supervisory culture and further development of supervisory tools: EIOPA will, among other priorities, continue working on proportionality, supervisory assessments of conduct risk, ESG issues and group supervision;
  • risks to the internal market and the level playing field that may lead to supervisory arbitrage: EIOPA will focus on supervisory convergence tools in calculating technical provisions and benchmark studies on internal models, and will address inconsistencies in the way national competent authorities treat reinsurance undertakings with their head office in third countries; and
  • supervision of emerging risks: with priorities including the implementation of the new framework on digital operational resilience, the supervision of run-off undertakings and the development of a supervisory convergence tool on cyber underwriting.

New priorities for 2022 have also been added to the plan, covering areas such as exclusions from insurance cover and the lack of clarity in insurance contracts revealed by the COVID-19 pandemic, the supervision of captives and issues related to digital transformation.

EIOPA supervisory convergence plan for 2022 (EIOPA-21/619)

Press release                                                     

See also the General section for items on the ESAs’s response to the European Commission’s call for advice on digital finance and the second round of the Bank of England’s Climate Biennial Exploratory Scenario.