On 7 May 2020, the European Commission published a Communication on an Action Plan for a comprehensive EU policy on preventing money laundering and terrorist financing (here) and a parallel consultation. The Action Plan sets out a series of proposed measures designed to remedy weaknesses in the EU’s anti-money laundering (“AML”) rules including proposals for a single EU rule-book and EU-level supervision. See our related briefing here.
The Commission also published a delegated regulation amending the list of high-risk third countries with strategic anti-money laundering and counter-terrorist financing deficiencies produced under Article 9(2) of the Fourth Money Laundering Directive (here), together with a staff working document setting out a new methodology for identifying high-risk third countries with strategic anti-money laundering and counter-terrorist financing deficiencies under Article 9(2) of the Fourth Money Laundering Directive (here).
On 12 May 2020, the European Banking Authority (“EBA”) published its inquiry into dividend arbitrage trading schemes (Cum-Ex/Cum-Cum), and announced a 10-point action plan to enhance the future regulatory framework of prudential and anti-money laundering requirements covering such schemes.
The European Parliament’s ECON Committee also published a study on improving anti-money laundering policy (here).
Bank Recovery and Resolution
On 20 May 2020, the EBA published a report (here) which assesses interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD), with the aim of enhancing synergies between the two phases and ensuring consistency in their potential implementation.
On 14 May 2020, ISDA published a report providing a summary of responses to its consultation on the implementation of pre-cessation fallbacks for derivatives referencing LIBOR (here). ISDA expects to publish the protocol and amendments to the 2006 ISDA Definitions to incorporate the fallbacks for new trades in July 2020, with both coming into effect before the end of 2020.
Capital Requirements Regulation
On 4 May 2020, the EBA published its final report on draft implementing technical standards (“ITS”) on specific reporting requirements for market risk under the Capital Requirements Regulation (here).
On 6 May 2020, the EBA published final guidelines on credit risk mitigation (CRM) for institutions applying the internal ratings based (IRB) approach by using their own estimates of loss given defaults (here). The guidelines provide clarification on the application of the CRM provisions laid down in the Capital Requirements Regulation applicable to institutions using the advanced IRB approach (A-IRB). The guidelines will apply from 1 January 2022.
On 4 May 2020, the EBA published a final report containing guidelines on the determination of the weighted average maturity (WAM) of the contractual payments due under the tranche of a securitisation transaction, as laid down in the Capital Requirements Regulation (here). The aim of the guidelines is to ensure that the methodology applicable for the determination of the WAM for regulatory purposes is sufficiently transparent and harmonised in order to increase consistency and comparability in the own funds held by institutions. The guidelines will apply from 1 September 2020.
Central Bank of Ireland – Annual Report and Annual Performance Statement
On 27 May 2020, the Central Bank of Ireland (“CBI”) published its 2019 Annual Report and Annual Performance Statement (here).
The Report provides details of the CBI’s key activities and developments for 2019 including in the areas of conduct and consumer protection, supervision and enforcement, regulatory policy development and recovery and resolution. It also contains a review of implementation of the Central Bank's strategic plan along with details of financial operations and governance.
The Annual Performance Statement sets out details of the performance of the CBI’s financial regulatory mandate in 2019 and its objectives for 2020.
Convergence of Supervisory Practices
On 29 May 2020, the EBA published a report on the convergence of supervisory practices in 2019 (here).
According to the Report, the four key topics for supervisory attention identified in the EBA 2019 convergence plan – internal governance, ICT risk and operational resilience, non-performing exposures, and benchmarking of internal models - have been largely implemented in supervisory work across the EU, although to different degrees. Areas that will require further attention include:
- the formalisation of the ICT risk appetite and how it cascades down the organisation's ICT risk governance and controls; and
- the ongoing assessment of the individual and collective suitability of the members of the management bodies.
The Report also sets out the EBA’s 2020 convergence plan, which identifies five key topics for supervisory attention for 2020: ICT risk and operational resilience; loan origination standards; profitability; capital and liability management; and money laundering and terrorism financing (ML/TF) risk and other conduct risk for prudential supervisors.
COVID-19 dominated much of the month of May, with regulators taking a variety of measures relevant to regulated financial service providers. Generally, this briefing does not deal with these developments, a number of which we have summarised elsewhere in the following briefings:
The McCann FitzGerald website has a dedicated COVID-19 section containing FAQs, briefings and guidance on a range of legal and business issues that may need to be addressed (here).
Credit Ratings Agencies
On 13 May 2020, ESMA published a thematic report on EU collateralised loan obligations (CLOs) ratings (here), which provides an overview of CLO rating practices along with setting out the main supervisory concerns and medium-term risks associated with this asset class. The report is based on information collected up until March 2020.
The CBI has published the following documents relating to the 15% combined concentration limit for house and business loans (here):
- 15% Combined Concentration Limit for House and Business Loans Application Form
- Guidance Note on the Application Process and Application Form for the 15% Combined Concentration Limit for House and Business Loans
By way of background, the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016 prescribe limits for credit unions in respect of their combined total amount outstanding in relation to house loans and business loans as a percentage of a credit union’s total assets. Credit unions with total assets of at least €100 million for two or more consecutive quarters immediately preceding an application may apply to the Central Bank for a 15% limit.
The CBI has published its response to the European Commission’s consultation on the market in crypto-assets (here), which includes recommendations for consideration when moving forward with a regulatory framework for crypto-assets.
On 14 May 2020, Gerry Cross, Director of Financial Regulation, Policy and Risk at the CBI gave a speech on digital finance in Europe to the Department of Finance / Directorate-General for Financial Stability, Financial Services and Capital Markets Union virtual outreach event on the European Commission’s consultation on digital finance (here).
According to the speech, CBI priority areas in the area of FinTech and financial innovation include the promotion and protection of consumer interests, implications for AML/CFT, challenges to the regulatory perimeter, crypto-assets and the specific question of stablecoins, new types of participants in the financial system, analytics technologies and Big Data analytics including the use of Big Data in differential pricing and Information and Communication Technology (ICT) risks.
ESMA published an updated version of its Q&As on the implementation of EMIR (here), which contains a new Q&A providing clarification on reporting of OTC derivatives by a financial counterparty (FC) on behalf of a non-financial counterparty below clearing threshold (NFC-) under the EMIR Refit Regulation 2019/834.
On 4 May 2020, ISDA and a number of other trade associations published two letters which they have sent to the European Commission and the European Supervisory Authorities (“ESAs”) (here):
- The first letter urges the Commission and the ESAs to consider amending the margin regulatory technical standards (RTS) to permanently exempt single-stock equity option or index option transactions, or to significantly extend the period of deferred application to allow further observation of developments in other jurisdictions and to avoid an unlevel playing field for EU market participants.
- The second letter requests that the necessary equivalence decisions are adopted in all jurisdictions that have implemented margin requirements in line with the BCBS/IOSCO framework and that the draft revised margin RTS be amended so the current temporary derogation from margin requirements for intragroup transactions with non-EU affiliates in other jurisdictions is extended for a further three years.
European Commission 2020 Work Programme
On 27 May 2020, the European Commission published a communication setting out its adjusted work programme for 2020 (here). Changes to the financial services aspects of the plan are as follows:
- Sustainable finance. As part of the European Green Deal, a non-legislative proposal relating to a renewed sustainable finance strategy is expected in Q4 2020 (previously Q3 2020).
- Capital Markets Union. An action plan on deepening the CMU is expected in Q4 2020 (previously Q3 2020). The other proposals relating to the CMU are still expected in Q3 2020.
- Consumer credit. The Commission is expected to publish more on its ongoing evaluation of the Consumer Credit Directive in Q2 2021.
- Distance marketing. The Commission is expected to publish more on its ongoing evaluation of the Financial Services Distance Marketing Directive in Q4 2021.
- eIDAS framework. A report on the application of the Electronic Identification and Signature Regulation ((EU) 910/2014) (eIDAS Regulation) is due by 1 July 2020 (previously no date was given).
The timing of the initiatives relating to a FinTech action plan remain unchanged (Q3 2020).
IOSCO Consultation on Principles of Outsourcing
On 28 May 2020, the International Organization of Securities Commissions (IOSCO) published a consultation on updates to its 2005 outsourcing principles for market intermediaries and its 2009 outsourcing principles for markets (here).
The principles currently apply to regulated entities that outsource tasks to service providers. IOSCO is proposing to expand their application to include trading venues, market participants acting on a proprietary basis, credit rating agencies (CRAs) and financial market infrastructures.
The revised outsourcing principles comprise a set of fundamental precepts and seven principles. The fundamental precepts cover issues such as the definition of outsourcing, the assessment of materiality and criticality, affiliates, sub-contracting and outsourcing on a cross-border basis. The seven principles set out expectations for regulated entities that outsource tasks, along with guidance for implementation.
On 29 May 2020, the EBA published a final report on guidelines on loan origination and monitoring together with an explanatory note on its approach to loan origination (here).
The Guidelines seek to improve institutions’ practices and associated governance arrangements, processes and mechanisms in relation to credit granting, in order to ensure that institutions have robust and prudent approaches to credit risk taking, management and monitoring, and that newly originated loans are of high credit quality, while respecting and protecting the interests of consumers.
The Guidelines will generally apply from 30 June 2021, however, the application of the guidelines to already existing loans and advances that require renegotiation or contractual changes with borrowers will apply from 30 June 2022. Moreover institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until 30 June 2024.
Markets in Financial Instruments
ESMA published an updated version of its Q&A on investor protection and intermediaries under the MiFID II Directive and MiFIR (here), which includes a new Q&A on MiFID inducements, clarifying the application of the MiFID definition of “acceptable minor non-monetary benefits”. ESMA also published an updated version of its Q&As on market structures topics and transparency topics under the MiFID II Directive and MiFIR (here).
Money Market Funds (MMF) Regulation
The CBI has published a notice of intention in relation to the ESMA Guidelines on stress test scenarios under the MMF Regulation (here). The CBI will in due course consult on the incorporation of a provision in the Central Bank UCITS Regulations and AIF Rulebook that all managers of money market funds adhere to the Guidelines. In the interim, the CBI expects full compliance with the Guidelines from 4 May 2020.
On 6 May 2020, the EBA published a final report containing its proposals for developing a simple, transparent and standardised (STS) framework for synthetic securitisation (here).
ESMA published an updated version of its Q&As on the Securitisation Regulation (here).The new document addresses new questions relating to securitisation repositories and disclosure requirements and templates, as well as modifying some existing questions.
Single Supervisory Mechanism - Reporting of Supervisory Information
On 7 May 2020, ECB Regulation (EU) 2020/605 amending Regulation (EU) 2015/534 on reporting of supervisory financial information was published in the EU’s Official Journal (here). The Amending Regulation amends ECB Regulation (EU) 2015/534 on the reporting of supervisory financial information under the Single Supervisory Mechanism. It entered into force on 27 May 2020 and has applied since 1 June 2020.
2021 Benchmarking Exercise
On 4 May 2020, the EBA published updated implementing technical standards on benchmarking of internal approaches (here). The updated ITS include all benchmarking portfolios that will be used for the 2021 exercise. Among the changes is the addition of new Annexes VIII and IX to Implementing Regulation (EU) 2016/2070, which contain templates for reporting the impact of International Financial Reporting Standard 9 (IFRS 9) and the instructions for completing those templates.
Selected Consultations/Discussion Papers Published
- Department of Finance – Consultation on the exercise of national discretions in the Investment Firms Directive (here). The closing date is 6 July 2020.
- EBA – Consultation on draft regulatory technical standards on the contractual recognition of stay powers under Article 71a(5) of Directive 2014/59/EU (here). The closing date is 15 August 2020.
- EBA – Consultation on revised RTS on own funds and eligible liabilities (here). The closing date is 31 August 2020.
- ECB – Consultation on its guide on climate-related and environmental risks (here). The closing date is 25 September 2020.
- ESMA – Consultation on the functioning of the regime for SME Growth Markets under MiFID II (here). The closing date is 15 July 2020.
- European Commission – Consultation on protection and facilitation of investment within the EU (here). The closing date is 8 September 2020.
- European Commission – Consultation questionnaire on evaluation of Mortgage Credit Directive (here). The closing date is 12 June 2020.
- Financial Stability Board – Consultation on guidance on financial resources to support CCP resolution (here). The closing date is 31 July 2020.
- International Organization of Securities Commissions - Consultation on principles of outsourcing (here). The closing date is 1 October 2020.
- Single Resolution Board – Consultation on its ‘standardised Data Set’ proposals (here). The closing date is 30 June 2020.