COVID-19: Financial Services Round-Up for 6 July - 2 August 2020

CMU – capital markets recovery package

On 24 July 2020, the European Commission adopted a capital markets recovery package which proposes targeted changes to capital market rules designed to encourage greater investments in the economy, allow for the rapid re-capitalisation of companies and increase banks’ capacity to finance the recovery.  The package contains targeted amendments to the Capital Requirements Regulation, MiFID II Directive, the Prospectus Regulation and the Securitisation Regulation.  It includes:

• A new “EU Recovery Prospectus” – a type of short-form prospectus – to facilitate the raising of capital in public markets.
• Improvements to MiFID II to encourage investment in the real economy and free up resources for both firms and investors.
• Improvements to the securitisation rules to support SME lending and the management of non-performing loans.

The legislative proposals will now be sent to the European Parliament and European Commission for adoption. More information, including the legislative proposals is available here.

Central Securities Depositories Regulation (CSDR)

On 28 July 2020, ESMA published a press release announcing that it is working on a proposal to possibly delay the entry into force of the CSDR settlement discipline regime until 1 February 2022 (here).  This is due to the impact of the COVID-19 pandemic on the implementation of regulatory projects and IT deliveries by Central Securities Depositories and came as a request from the European Commission.

Credit Institutions – COVID-19 vulnerability analysis

On 28 July 2020, the ECB published the results of its COVID-19 vulnerability analysis of banks directly supervised within the Single Supervisory Mechanism (here). The purpose of the exercise was to assess how the economic shock caused by COVID-19 would impact 86 euro area banks and to identify potential vulnerabilities within the banking sector over a three-year horizon. Overall, the results show that the euro area banking sector can withstand the pandemic-induced stress.

According to a related press release, the information will be used in the supervisory review and evaluation process.

Credit Institutions - dividends and remuneration

On 28 July 2020, the ECB published a press release announcing that it is extending its recommendation to banks on dividend distributions and share buy-backs, asking that they are not paid until 1 January 2021.  The ECB will review whether this stance remains necessary in Q4 2020.  Once the uncertainty requiring this temporary and exceptional recommendation subsides, banks with sustainable capital positions may consider resuming dividend payments.

The ECB also issued a letter to banks asking them to be extremely moderate with regard to variable remuneration payments, for example by reducing the overall amount of variable pay. Where this is not possible, banks should defer a larger part of the variable remuneration and consider payments in instruments.

The ECB also clarified that it will give enough time for banks to replenish their capital and liquidity buffers in order not to act pro-cyclically.

More information is available here.

Credit institutions –distressed debtors

On 28 July 2020, the ECB published a letter to the CEO of significant institutions clarifying its operational expectations on the management of the quality of loan portfolios so that significant credit institutions can better provide financial support to viable businesses that have or may come under distress as a result of COVID-19 (here).  The ECB expects credit institutions to:

• provide sustainable solutions or support in an efficient and timely manner;
• take timely action to minimise any cliff effects when moratoria measures begin to expire;
• have a clear understanding of the risks they are facing and devise an appropriate strategy.

The letter sets out a number of specific operational elements (such as IT resources, reporting, and portfolio segmentation) that the ECB will assess through its ongoing engagement with credit institutions.  Risk management should be assessed on an ongoing basis and adapted according to risk in a credit institution's portfolios.  The contents of the letter should be discussed at board level and responses from individual credit institutions sent to the ECB by 15 September 2020.

Financial Sector – Best Practices to mitigate COVID-19 effects

On 14 July 2020, the European Commission published a list of Best Practices to mitigate the effects of the COVID-19 pandemic and support citizens and businesses (here). The list was agreed at two roundtable meetings between the Commission, European banks, smaller lenders and stakeholders from a business and consumer background. Key features of the list include:

• Payment moratoria for loans and insurance contributions;
• Enabling safer cashless payments while ensuring cash payment remains an option for those who rely upon it;
• Ensuring quick payment of loans and fairness in fees and interest rates; and
• Ensuring legitimate insurance claims are processed and paid as quickly as possible.

IFRS 16 – accounting for lease modification

On 21 July 2020, ESMA issued a public statement on coordination of supervisory action on accounting for lease modifications in the context of actions to mitigate the impact of COVID-19 on the EU financial markets (here).

The International Accounting Standards Board (IASB) issued in May 2020 an amendment to IFRS 16 providing a practical relief for lessees.  Provided that the European Parliament and the Council do not object to the endorsement of the IFRS 16 amendment, ESMA recommends that national competent authorities do not prioritise supervisory actions on the application of the lease modification requirements contained in IFRS 16 as currently endorsed by the EU to COVID-19-related lease modifications which would fall within the scope of the IFRS 16 amendment.

Insurance

On 21 July 2020, EIOPA published a supervisory statement on the recognition of schemes based on reinsurance with regard to COVID-19 and credit insurance under the Solvency II Directive (here). The supervisory statement sets out EIOPA's view on the treatment, for Solvency II purposes, of schemes based on reinsurance implemented by member states within the temporary framework for state aid measures, which were introduced to support the economy in the light of the COVID-19 pandemic.  It also outlines several supervisory recommendations for national competent authorities.

On 30 July 2020, EIOPA publishes its July 2020 financial stability report (here).  The report focuses on the financial stability of the insurance, reinsurance and occupational pensions sectors in the European Economic Area. The report notes that as of year-end 2019 the insurance sector had a solid and comfortable capital buffer which helped insurers to withstand the initial severe market shocks experienced with COVID-19.  However, a high level of uncertainty on the magnitude of economic disruption increases downside risks going forward.

MMF Regulation

On 9 July 2020, ESMA published a statement on external support under Article 35 of the Regulation on money market funds ((EU) 2017/1131) (MMF Regulation) in light of the COVID-19 pandemic (here).

ESMA warned that certain measures taken by financial markets authorities to mitigate the effects of the pandemic on financial markets may have created a level of market liquidity which could indirectly benefit MMFs, through the intermediation of credit institutions. This risked breaching Article 35, which prohibits direct or indirect support offered to an MMF by a third party, which would guarantee the liquidity of the MMF or stablilise the NAV per unit or share of the MMF.

ESMA clarified that MMFs may enter into transactions with third parties, including affiliated or related parties, provided the requirements of Article 35 of the MMF Regulation are met.

Public Guarantee Schemes

On 21 July 2020, the EBA published an overview of public guarantee schemes issued in response to COVID-19 (here).  It aims to provide transparency to the public on the existence of public guarantees along with responding to a request from the European Commission for a stock-take of such guarantees.

Supervisory Reporting Evaluation Process

On 23 July 2020, the EBA published a final report on the pragmatic 2020 supervisory review and evaluation process (“SREP”) in light of COVID-19 (here). These guidelines make available to competent authorities a special procedure for the SREP for 2020 and build on the existing requirements of the CRD IV Directive and the SREP guidelines.

They cover the:

• Focus of the pragmatic SREP.
• Overall SREP assessment and scoring.
• Supervisory measures.
• Conduct of the SREP in cross-border contexts.

Competent authorities may continue to apply the SREP guidelines as they currently stand if they wish to do so. However, they also have the option of applying the alternative specific process for 2020, which may be necessary in response to COVID‐19.

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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).