Financial Services Regulatory Update – December 2019 Round Up

Anti-Money Laundering and Terrorist Financing

The Joint Committee of the European Supervisory Authorities (“ESAs”) published a final report containing joint guidelines on cooperation and information exchange for the purpose of the fourth Money Laundering Directive 2015/849 between competent authorities supervising credit and financial institutions (available here).

The aim of the guidelines is to ensure that supervisors from different EU Member States have a formal framework to structure supervisory cooperation thus strengthening the effectiveness of the AML/CFT framework.  In this regard, they set out the rules for the establishment of AML/CFT colleges for firms.

The guidelines have applied since 10 January 2020.

See our briefing here.

Brexit

ESMA announced, on 23 December 2019, that it has extended its recognition decisions, to 31 January 2021, for the three UK CCPs, LCH Ltd, ICE Clear Europe Ltd and LME Clear Ltd (available here).

ESMA’s extension of its recognition decisions reflects the extension of the expiry date set out in the European Commission’s Implementing Decision 2018/2031 on the equivalence of the UK CCP legal framework. The relevant expiry date was initially March 2020 but this has now been extended to 30 March 2021 under Commission Implementing Decision 2019/2211, which was published in the EU’s OJ  on 23 December 2019 (available here).

The recognition decisions would take effect on the date following Brexit under a no-deal Brexit scenario.

Central Bank

During December, Central Bank of Ireland ("Central Bank") speeches included the following:

Resilience in the face of changing winds, Michael Hodson, Director of Asset Management and Investment Banking, addressing; the changing landscape of asset management; the evolution of supervision; supervisory convergence; and the Central Bank’s supervisory priorities for 2020 (here).

Introductory statement by Governor Gabriel Makhlouf at the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, outlining the principal issues currently being addressed by the Central Bank, including consumer protection, mortgage arrears and market-based finance (here).

Better Data, to Inform Better Policy, Deputy Governor Sharon Donnery, outlining how better data informs better policy, including in the areas of market-based finance and insurance (here).

Covered bond reform

The covered bond reform package was published in the EU’s OJ on 18 December 2019, (available here), comprising Regulation 2019/2160 and Directive 2019/2162.

The Regulation amends the Capital Requirements Regulation 575/2013 as regards exposures in covered bonds, providing a new set of rules on harmonised product requirements and specifying criteria to enhance the quality of covered bonds that benefit from preferential capital treatment.

The Directive lays down investor protection rules concerning requirements for issuing covered bonds, the structural features of covered bonds, covered bond public supervision and publication requirements in relation to covered bonds. It also revises provisions on covered bonds in the UCITS Directive 2009/65 and the Bank Recovery and Resolution Directive 2014/59.

The Regulation will apply from 8 July 2022. Member States must transpose the Directive into national law by 8 July 2021, and those transposing measures must apply at the latest from 8 July 2022.

EMIR

The ESAs published joint draft regulatory technical standards (“RTS”) to amend Commission Delegated Regulation 2016/2251 on the risk mitigation techniques for non-cleared OTC derivatives including in respect of the phase-in of the regulatory initial margin requirements (here). The ESAs stated that they expect competent authorities to apply the EU framework in a risk-based and proportionate manner pending the entry into force of the RTS.  See our briefing here.

The ESAs also published a joint statement on the introduction of benchmark fall-backs in legacy OTC derivative contracts and the requirement to exchange collateral, explaining that in their view, the inclusion of such fall-backs should not trigger the margining or clearing requirement. For further information, see the above mentioned briefing.

Regulation 2019/2099 amending EMIR as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third country CCPs (“EMIR 2.2”) was published in the EU’s OJ (available here) on 12 December 2019. EMIR 2.2 entered into force on 1 January 2020 and has applied since that date.

European System of Financial Supervision (ESFS)

The Regulations and Directive amending the ESFS, as part of the ESFS reform package were published in the EU’s OJ on 27 December 2019 and entered into force on 30 December 2019.

The amendments set out in the Omnibus Regulation 2019/2175, Regulation 2019/2176 amending the ESRB Regulation and the Omnibus Directive 2019/2177 include:

• Changes to the existing system of supervisory convergence, including the elaboration of a strategic supervisory plan at EU level;
• Changes to the European Supervisory Authorities governance structures;
• Strengthening the role of the EBA in the supervision and enforcement of anti-money laundering and terrorist financing rules; and
• Giving ESMA direct supervisory powers over critical benchmarks and consolidated tape providers.

The Regulations and Directive are available here.

Insurance

The Consumer Insurance Contracts Act 2019 (the “Act”) was signed into law by the President of Ireland on 26 December 2019 but has not yet been commenced (available here). The Act is aimed at reforming and modernising the law of consumer insurance contracts.  The Act will apply to inscope life and non-life contracts of insurance entered into, and variations of such contracts of insurance agreed between an insurer and a consumer. For the purpose of the Act, the term "consumer" includes both individuals and SMEs with a turnover of less than €3 million.

Investment Firms Regulation and Directive

The EU has agreed a new bespoke prudential regime for investment firms composed of the Investment Firms Regulation 2019/2033 (the “IFR”) and the Investment Firms Directive 2019/2034 (the “IFD”), which were published in the EU’s OJ on 5 December 2019. The new regime categorises investment firms based on their nature, scale and complexity and subjects each category of investment firm to a differing set of requirements in respect of reporting, capital, liquidity, remuneration etc.

For most existing firms, the IFR and the IFD will replace the prudential requirements for investment firms set out in the Capital Requirements Regulation 575/2013 and the Capital Requirements Directive 2013/36. It will also amend the Markets in Financial Instruments Directive 2014/65 and the Markets in Financial Instruments Regulation 600/2014.

The new prudential regime will largely apply from 26 June 2021.  The IFR and IFD are available here.

SME growth markets

An “SME growth market” is a type of trading venue that was introduced by the revised MiFID Directive 2014/65 in order to facilitate access to capital for SMEs and enable them to grow. Regulation 2019/2115 (here), which was published in the EU’s OJ on 11 December 2019, seeks to increase the attractiveness of SME Growth Markets by reducing some of the administrative and compliance costs faced by issuers on such markets. In pursuit of this objective, that Regulation amends the MiFID Directive, as well as the Market Abuse Regulation 596/2014 and the Prospectus Regulation 2017/1129. It has applied since 31 December 2019, save for the amendments to the Market Abuse Regulation which will apply from 1 January 2021.

SSM supervisory fees

The ECB published its amended Regulation 1163/2014 on supervisory fees, on 17 December 2019 as well as updating the related Decision on the date used to calculate annual fees. The revised framework will apply from the 2020 fee period onwards. The amendments are set out in Regulation 2019/2155 of the ECB (available here).

The changes mainly concern the individual fees the ECB charges the banks it supervises and the timing of their collection. Starting from the 2020 fee period, the ECB will reduce the minimum fee for smaller less significant institutions (LSIs). To be eligible, an LSI must have total assets of €1 billion or less. Around two-thirds of LSIs will benefit from this change.

Other changes include the move to ex post invoicing, which means that banks will now be invoiced on the basis of actual costs incurred by the supervisor rather than estimated costs. The ECB will also reuse existing supervisory data to calculate fees, removing the need for a separate data collection process for most banks.

In a related press release (available here), the ECB states that the ECB will collect the fees in the second quarter of the following year for the 12 months ending in December. This means that fees for the 2020 fee period will be collected in the second quarter of 2021.

Selection of Consultations and Discussion Papers Published

Basel Committee on Banking Supervision – Discussion paper on designing a prudential treatment for crypto-assets (here).  The closing date is 13 March 2020.

EBA - Consultation on draft RTS on the identification of staff with material impact on institutions' risk profiles (here).  The closing date is 19 February 2020.

EIOPA – Consultation on proposed approaches and considerations for its technical advice and ITS and RTS under the Regulation on a Pan-European Personal Pension Product (here).  The closing date is 2 March 2020.

EIOPA – Consultation on guidelines for information and communication technology security and governance (here).  The closing date is 13 March 2020.

European Commission – Consultation on digital operational resilience framework for financial services (here). The closing date is 12 March 2020.

European Commission – Consultation on an EU framework for markets in crypto-assets (here).  The closing date is 12 March 2020.

International Association of Insurance Supervisors – Consultation on draft issues paper on the implementation of the Financial Stability Board Task Force on Climate-related Financial Disclosures (here).  The closing date is 5 February 2020.

International Organization of Securities Commissions – Consultation on conflicts of interest and associated conduct risks during the debt capital raising process (here).  The closing date is 16 February 2020.

ISDA - Consultation on fallbacks for derivatives referencing Euro LIBOR and EURIBOR (here).  The closing date is 21 January 2020.