Financial Services Regulatory Update – January 2023 Round Up

CBI Financial Regulation Priorities for 2023

On 17 January 2023, the Governor of the Central Bank of Ireland (the “CBI”) published a letter sent to the Minister for Finance regarding the CBI’s financial regulation priorities for 2023 (here). The letter first discusses the challenging macro-economic context and the evolving financial system. The letter then outlines the CBI’s priorities for financial regulation, which are:

• consulting and engaging widely on the development of the consumer protection framework;
• consulting and engaging widely on the operationalisation of the individual accountability framework (“IAF”);
• continuing work on the systemic risks generated by non-banks (such as developing a macro-prudential framework for non-banks and investor protection in the investment funds sector);
• enhancing the governance, oversight and investor outcomes in the funds sector, including implementation of new ESG requirements and measures to mitigate greenwashing risks;
• considering the implications of the UK Overseas Funds Regime, to ensure Irish domiciled funds can continue to service UK investors;
• implementing changes to credit union regulations and guidance;
• strengthening the resilience of the financial system to climate change risks and supporting the transition to a climate-neutral economy, as well as implementing the Sustainable Finance Disclosures Regulation (“SFDR”);
• consulting on an Innovation Hub that will include new ways of engagement with innovators and their products;
• ensuring that the EU Anti-Money Laundering Action Plan results in a consistent and robust EU-wide framework;
• contributing to the review of the revised Payment Services Directive (“PSD2”) and the functioning of open banking; and
• implementing the Digital Operational Resilience Act (“DORA”) and the Markets in Cryptoassets Regulation (“MiCA”).

Consultation on the Credit Servicing Directive

On 24 January 2023, the Minister for Finance issued a public consultation on the transposition of Directive 2021/2167/EU on credit servicers and credit purchasers (the “Credit Servicing Directive”) (here). The consultation period will run until 8 March 2023.

The Credit Servicing Directive, which must be transposed into Irish law by 29 December 2023, outlines a common framework for a secondary market for the sale and management of bank originated non-performing loans. This Directive also provides for an EU-wide authorisation and regulatory framework for credit servicers, to be overseen by national competent authorities, and provides for authorised entities to passport credit servicing activities across the EU.

This Consultation is intended to seek views to inform the transposition of the discretionary aspects of the Directive.

Our briefing (here) examines this Consultation in further detail.

Client Asset Requirements

On 23 January 2023, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023 were published in the Irish Statute Book (here).

These Regulations revoke the Central Bank (Supervision and Enforcement) Act 2013 Section 48(1)) (Investment Firms) Regulations 2017 and are the third version of the CBI’s Investment Firms Regulations.  These Regulations set out revised client asset requirements (“CAR”) for investment firms (which includes credit institutions in respect of the carrying out of MiFID investment business).

In June 2022, the CBI had published a Guidance to assist firms comply with CAR (here). In January 2023, the CBI also published a draft Addendum to this Guidance (here).

The CBI expects full compliance with CAR 2022 from 1 July 2023 (for investment firms) and from 1 January 2024 (for in-scope credit institutions)

Our briefing (here) provides further detail on CAR requirements.

Commission Plans for 2023

On 24 January 2023, the European Commission (the “Commission”) published a speech by Commissioner Mairead McGuinness given at a structured dialogue with the European Parliament (the “Parliament”)’s Economic and Monetary Affairs Committee (“ECON”) (here). Commissioner McGuinness stated that the Commission plans to adopt several proposals in 2023, including:

• the bank crisis management and deposit insurance framework;
• the review of PSD2;
• an open finance framework; and
• the retail investment strategy, to consider the distribution of financial products to retail investors, the information that consumers receive and the behaviour of consumers.

DORA

On 4 January 2023, the European Banking Authority (“EBA”) published a letter (here) and provisional call for advice (here) from the Commission, requesting technical advice from the European Supervisory Authorities (“ESAs”) on delegated regulations to be adopted under Articles 31(6) and 43(2) of DORA.

These Delegated Regulations will specify the criteria to be considered when determining the critical nature of ICT third-party service providers and the fees to be levied on critical ICT third-party service providers.

FSPO Levy Regulations

On 20 January 2023, the Financial Services and Pensions Ombudsman Act 2017 [Financial Services and Pensions Ombudsman Council] Financial Services Industry Levy Regulations 2023 were signed (here).  These Regulations came into operation on 1 February 2023.

These Regulations provide that each financial service provider is liable to pay an annual levy in relation to the services provided by the Financial Services and Pensions Ombudsman (the “FSPO”) to the finance industry.  The levy payable by each type of financial service provider for the year ended 31 December 2023 is to be calculated by reference to the criteria in each category under the Schedule to these Regulations.

These Regulations also provide for the collection and recovery of the levy and provide for certain obligations in respect of self-assessment and record keeping by financial service providers.

Critical Infrastructures Directive

On 27 December 2022, Directive 2022/2557/EU on the resilience of critical entities and repealing Council Directive 2008/114/EC (the “Critical Infrastructures Directive”) was published in the Official Journal of the European Union (the “Official Journal”) (here).

Credit institutions as defined in Regulation (EU) 575/2013 (the “CRR”), operators of trading venues as defined in Directive 2014/65/EU (“MiFID II”) and central counterparties (“CCPs”) are included in the categories of entities in the banking and financial market infrastructure sectors that may be identified as critical. This Directive is aimed at enhancing the resilience of critical entities in the internal market by laying down harmonised minimum rules and assisting them by means of coherent and dedicated support and supervision measures.

EU member states must adopt and publish the necessary measures to comply with the Directive by 17 October 2024 and must apply those measures from 18 October 2024. This Directive also includes a requirement for Member States to adopt a strategy for enhancing the resilience of critical entities by 17 January 2026.

SPE Registration

On 12 January 2023, the CBI published updated versions of the following documents relating to special purpose entities (“SPEs”):

• FVC and SPV Registration Form: Guidance Notes (here)
• Registration – FAQs (here)

Market Correction Mechanism

On 23 January 2023, ESMA published a preliminary data report on the introduction of the market correction mechanism (“MCM”) (here). Regulation (EU) 2022/2578 established the MCM and provided that the MCM will apply from 15 February 2023.

ESMA’s report concludes that while “no market changes could be identified that could be unequivocally and directly attributed to the Regulation”, the MCM may have an effect on market participants’ trading behaviour and on their ability to manage risks effectively, as a result of curbing the price discovery function of regulated markets.

The report also assesses the impact of the MCM on CCPs and the wider clearing system, in particular in relation to CCP margin calls and necessary liquidity for clearing members and their clients.

ESMA also published a letter (here) sent to the Commission containing an Annex (here) seeking clarification of points relating to Regulation (EU) 2022/2578. ESMA discovered uncertainties and ambiguities in the operation of the MCM and believes that further clarification on the following points would improve understanding and implementation:

• the identity of the competent authorities responsible for supervision and enforcement under this Regulation;
• the operation of the exemption for buying and selling Title Transfer Facility (“TTF”) derivatives to offset or reduce TTF derivatives contracts concluded prior to 1 February 2023;
• the scope of the MCM, such as its application to the default management process, block-trading facilities and options; and
• the conditions of activation and deactivation.

European Sustainability Reporting Standards

On 26 January 2023, ESMA, the EBA and EIOPA published their opinions on the draft European Sustainability Reporting Standards (the “ESRS”) (here), (here) and (here).

EIOPA noted that further guidance may be necessary to foster comparability with certain SFDR-related indicators and that a continued dialogue among all relevant stakeholders would be beneficial to ensure consistent and coherent implementation. EIOPA also underlined the importance of avoiding the fragmentation of sustainability reporting requirements across jurisdictions and emphasised that compatibility between ESRS standards and IFRS standards should be ensured so that European companies reporting according to ESRS are automatically considered to be compliant with the IFRS sustainability reporting framework.

The EBA welcomed a better alignment with the disclosure requirements under the EBA Pillar 3 framework and stated that a few aspects of the ESRS framework deserved further consideration by the Commission, including the timetable for the development of the sector-specific standards for credit institutions.

ESMA suggested:

• possible improvements to the level of consistency vis-à-vis the requirements of the Corporate Sustainability Reporting Directive and other pieces of EU legislation;
• clarifications of definitions and terminology; and
• further guidance on the materiality assessment process.

Further information on the draft ESRS is available in our briefing (here).

Corrigendum to  SFDR RTS

On 12 January 2023, a corrigendum to Delegated Regulation (EU) 2022/1288 was published in the Official Journal (here). The corrigendum corrects the title of the Delegated Regulation.

EBA Stress Test

On 31 January 2023, the EBA announced the launch of the 2023 EU-wide stress test for banks (here). This stress test in intended to provide banks, supervisors and market participants with a common framework to compare and assess the resilience of EU banks and the EU banking system to shocks. The EBA has also published the following documents to assist in the stress test:

• methodological note (here);
• templates and template guidance (here);
• information on the macro-financial scenario (here);
• information on the growth of gross value added (“GVA”) in 16 sectors of economic activity (here); and
• FAQs (here).

ECB Report on LSI Supervision

On 13 January 2023, the European Central Bank (“ECB”) published its 2022 report on the supervision of less-significant institutions (“LSIs”) (here).

The report finds that:

• profitability remains low for key businesses despite a partial recovery in 2021;
• loan portfolios are exposed to both legacy and new risks which pose potential risks to capital positions; and
• the outlook for the LSI sector remains challenging due to new and existing uncertainties hampering the adjustments needed to achieve stable profits.

EBA Report on High Earners in EU Banks

On 18 January 2023, the EBA published its report on high earners in EU banks for the financial year 2021 (here).

The report provides aggregated data on high earners earning €1 million or more in 2021 and compares this to 2020. The EBA found that the number of high earners earning more than €1 million increased from 2020 to 2021, which is linked to good performance of institutions, relocations of staff following Brexit and an overall increase in salary levels. The EBA also found that the weighted average ratio of variable to fixed remuneration for all high earners increased from 86.4% in 2020 to 100.6% in 2021.

Bank Resolution and Recovery

On 23 January 2023, the Council of the EU (the “Council”) published the text of a Delegated Regulation (here), which was adopted by the Commission on 20 January 2023, containing amendments to Delegated Regulation (EU) 2015/63 on ex ante contributions to resolution financing arrangements under Directive 2014/59/EU (the “BRRD”).

This Delegated Regulation contains amendments to the methodology for calculating liabilities of an institution arising from derivative contracts.

This Delegated Regulation will be scrutinised by the Council and the Parliament and it applies retroactively from 1 October 2022, so that the instructions sent by resolution authorities to institutions on the data points used for the purposes of calculating contributions for the contribution period of 2023 will be covered by the amendments contained in this Delegated Regulation.

CRR III and CRD VI

On 24 January 2023, ECON announced the adoption of draft reports on the Commission's legislative proposals for the CRR III Regulation and the CRD VI Directive (here). ECON stated the agreement reached included:

• capital requirements: the output floor should be consolidated at EU level, competent authorities should be able to address inappropriate distribution of capital among banking groups and propose a capital redistribution and there should be transitional arrangements for low-risk exposures secured by mortgages on residential property;
• sustainable finance: ECON agreed on stronger reporting and disclosure requirements for ESG risks;
• cryptoassets: banks should disclose their exposure to cryptoassets and their risk management policies;
• governance: bank management bodies should have diverse and gender-balanced membership and a key function holder should be replaced if he or she ceases to comply with suitability criteria; and
• third-country branches: ECON proposes that new third-country branches must not commence their activities in the EU until the EBA and the third country have agreed a memorandum of understanding on a co-operation framework.

The next step is for the Parliament to take a position on the draft proposals.  The procedural file of the Parliament (here) and (here) details the status of proposals as they progress through the Parliament.

Corrigenda -  CRD IV RTS and ITS

On 12 January 2023, two corrigenda amending a Delegated and an Implementing Regulation supplementing Directive 2013/36/EU (“CRD IV”) were published in the Official Journal:

• Corrigendum to Commission Delegated Regulation (EU) 2022/2580 (here), which inserts 18 July 2023 as the application date of the Delegated Regulation; and
• Corrigendum to Commission Implementing Regulation (EU) 2022/2581 (here), which inserts 18 July 2023 as the application date of the Implementing Regulation.

Guidance for (Re)Insurers on Intragroup Transactions and Exposures

On 24 January 2023, the CBI published Guidance for (re)insurance undertakings on intragroup transactions and exposures (here). The CBI had consulted on this Guidance in 2022 and the CBI also published a feedback statement on this Consultation (here).

This Guidance applies to insurance and reinsurance undertakings authorised by the CBI which are part of a group, including captive (re)insurers and branches of third-country insurance undertakings authorised by the CBI. This Guidance applies from 30 January 2023.

This Guidance focuses on three key exposures: (a) intragroup assets, (b) intragroup reinsurance and (c) cash pooling/treasury function arrangements.  The CBI expects (re)insurers to evaluate this Guidance and adopt proportionate measures to guarantee that risks associated with intra-group transactions are properly identified and integrated in capital considerations, governance and risk management frameworks.

CBI Discretions under IFD/IFR

On 31 January 2023, the CBI updated its implementation notice on the implementation of competent authority discretions in the European Union (Investment Firms) Regulations 2021 and Regulation (EU) 2019/2033 (“IFR”) (here). This Notice was updated to take account of:

• the publication of an updated implementation notice for credit institutions;
• finalisation of the transposition of Directive 2019/2034/EU (“IFD”);
• the publication of Commission Delegated Regulations and EBA Guidelines under the EBA Roadmap on Investment Firms; and
• notification that CBI permission is required before capital contributions may be recognised as CET1 capital.

CSA - Disclosure Rules on Marketing Communications

On 16 January 2023, ESMA launched a common supervisory action (“CSA”) with national competent authorities (“NCAs”) on the application of disclosure rules under MiFID II (here). The CSA will take place during 2023.

ESMA states that it is cognisant of the role of marketing communications and advertisements in determining consumer behaviour and influencing investment decisions. Therefore, the CSA will:

• review whether marketing communications are fair, clear and non-misleading and review how firms select target audiences for marketing, particularly for riskier and more complex investment products;
• consider marketing and advertising through various distribution channels, including apps, websites, social media, and collaborations with affiliates such as influencers; and
• collect information about potential greenwashing practices observed in marketing communications and advertisements.

Corrigendum - PRIIPs’ KID RTS

On 12 January 2023, a Corrigendum to Commission Delegated Regulation (EU) 2021/2268 was published in the Official Journal (here). The corrigendum corrects the title of the Delegated Regulation, which contains regulatory technical standards (“RTS”) on the PRIIPs KID.

Supervisory Co-operation under IFD – RTS and ITS

On 12 January 2023, the Commission adopted several Implementing and Delegated Regulations supplementing the IFD:

• Commission Implementing Regulation laying down implementing technical standards (“ITS”) for the application of the IFD with regard to standard forms, templates and procedures for the information sharing between the competent authorities of home and host member states (here);
• Commission Delegated Regulation supplementing the IFD with regard to RTS specifying requirements for the type and nature of the information to be exchanged by competent authorities of home and host member states (here); and
• Commission Delegated Regulation supplementing the IFD with regard to RTS specifying the conditions under which colleges of supervisors exercise their tasks (here).

The Council and the Parliament will now consider the draft Delegated Regulations and, if neither object, they shall be published in the Official Journal.

Transparency Requirements for Equity and Non-equity Instruments -  RTS

On 17 January 2023, the Commission adopted two Delegated Regulations under  Regulation (EU) 600/2014 (“MiFIR”) that make amendments relating to certain reporting fields, flags and transitional provisions:

• Commission Delegated Regulation amending and correcting the RTS laid down in Delegated Regulation (EU) 2017/587 as regards certain transparency requirements applicable to transactions in equity instruments (here); and
• Commission Delegated Regulation amending the RTS laid down in Delegated Regulation (EU) 2017/583 as regards certain transparency requirements applicable to transactions in non-equity instruments (here).

The Council and the Parliament will now consider the draft Delegated Regulations and, if neither object, they shall be published in the Official Journal.

Post-trade Transparency Requirements

On 19 January 2023, ESMA began a Consultation on a manual on post-trade transparency under MiFIR (here).  ESMA states that it will consider all comments received by 31 March 2023.

ESMA’s proposed manual is based on the Commission’s proposed Delegated Regulations (detailed in the row above) which were published on 17 January 2023, regarding the pre- and post-trade transparency requirements for equity and non-equity instruments under MiFIR. The proposed manual will cover:

the scope of instruments and transactions subject to post-trade transparency;

the relevant entities in charge of the reporting and publication of post-trade transparency information;

when and which post-trade transparency information should be made public; and

the common aspects and the differences between the post-trade transparency regime and the transparency calculations regarding the scope of instruments and transactions.

ECON Report on AIFMD2

On 24 January 2023, the Parliament's ECON voted to adopt a draft report (here) on the proposed Directive amending Directive 2011/61/EU (“AIFMD”) and Directive 2009/65/EC (the “UCITS Directive”), also known as “AIFMD2”.

The amendments proposed by AIFMD2 relate to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds (“AIFs”).

The next step is for the Parliament to adopt its position on AIFMD2. The procedural file of the Parliament (here) details the status of AIFMD2 as it progresses through the Parliament.

The Council agreed its position on AIFMD2 in June 2022, further detail on the Council’s position is set out in our briefing (here).

Guidelines on Stress Testing under MMF Regulation

On 27 January 2023, ESMA published updated Guidelines on stress test scenarios under the Regulation on money market funds (“MMF Regulation”) (here).

These Guidelines apply to competent authorities, money market funds (“MMFs”) and managers of MMFs and aim to ensure a uniform application of the MMF Regulation. The Guidelines establish common reference parameters of the stress test scenarios to be included in stress tests taking into account the factors contained in Article 28(1) of the MMF Regulation.

MiCA and Recast WTR Proposals

On 11 January 2023, the Parliament announced that it will consider the proposed MiCA Regulation (here) and the proposed Regulation on information accompanying transfers of funds and certain cryptoassets (“recast revised WTR”) (here) at its 17 to 20 April 2023 plenary session.

The Parliament had previously indicated that it would consider the proposed Regulations at a plenary session in February 2023.

‘Dear CEO’ Letter on Supervision of Payment and E-money Firms

On 20 January 2023, the CBI published a ‘Dear CEO’ letter on supervisory findings and expectations for payment and electronic money (“e-money”) firms (here).

The CBI states that 2022 was a year of intense supervision for the payment and e-money sector due to the identification by the CBI of significant deficiencies in the governance, risk management and control frameworks of some firms.

The CBI outlines that the purpose of the ‘Dear CEO’ letter is to reaffirm the supervisory expectations that it has developed from its supervisory experiences in firms and to enhance the transparency around the CBI’s approach to regulation and supervision.

The ‘Dear CEO’ letter details the key findings from the CBI’s supervision activities, including outlining several actions it expects firms to take. The CBI also notes that it expects that the letter will be provided to and discussed with the board of each firm and that any consequent necessary improvements are actioned. In addition, the CBI expects firms to progress the completion of a specific audit of compliance with regulatory safeguarding requirements which must be submitted to the CBI by 31 July 2023.

Report on PSD2 Authorisations

On 11 January 2023, the EBA published a report on its peer review on authorisation of payment institutions and e-money institutions under PSD2 (here).

In this peer review, the EBA examined how competent authorities have implemented the EBA’s Guidelines on authorisation that were published in 2017. The EBA reported that the Guidelines have been implemented by most authorities.

SCA and Digital Wallets – Q&As

On 31 January 2023, the EBA published new Q&As (here, with summaries) clarifying the application of strong customer authentication (“SCA”) to digital wallets under PSD2 and Delegated Regulation (EU) 2018/389.

The Q&As clarify the application of SCA to the enrolment of a payment card to a digital wallet and to the initiation of payment transactions with digitised versions of a payment card. The Q&As also clarify the requirements that apply to the outsourcing of the application of SCA to digital wallet providers.

Selected Consultations, Discussion Papers, Speeches and Reports Published

Commission – Report - Summary of responses: Regime applicable to the use of benchmarks administered in a third country (here).

Council - Presidency compromise proposal (from 8 December 2022) on the proposed Directive on financial services contracts concluded at a distance (here).

EIOPA - Technical information on the relevant risk-free interest rate term structures (“RFR”) with reference to the end of December 2022 (here).

EIOPA - Technical information on the symmetric adjustment of the equity capital charge for Solvency II with reference to the end of December 2022 (here).

ESAs - Consultation on draft Guidelines on the system for the exchange of information relevant to fit and proper assessments (here). The deadline for the submission of comments is 2 May 2023.

European Systemic Risk Board - Recommendation on vulnerabilities in the commercial real estate sector in the EEA (here).

Financial Conduct Authority - memorandums of understanding entered into with ESMA regarding cooperation arrangements for third-country benchmark administrators under the retained EU law version of Regulation (EU) No 2016/1011 (the “Benchmarks Regulation”) and the Benchmarks Regulation:

Memorandum of Understanding concerning EU critical benchmarks (here); and

Memorandum of Understanding concerning the recognition of UK benchmark administrators in the EU (here).

ISDA - ‘In Review’, a compendium of links to new documents, research papers, press releases and comment letters published by ISDA in January 2023 (here). This includes links to ISDA’s new:

• factsheet on reasons to consider using the French and Irish law versions of ISDA’s 2002 Master Agreement and related regulatory and non-regulatory credit support documents; 
• standard documentation for the trading of digital asset derivatives; and
• factsheet on its digital regulatory reporting initiative, which is being extended to encompass (among others) changes to EMIR reporting standards due to take effect from 29 April 2024.

You may also be interested in:

McCann FitzGerald regularly publishes briefings on topics relevant to financial services briefings, among others. You may be interested in the following briefings:

Financial Services Regulatory Update – December 2022 Round Up (here)

The Transparent and Predictable Working Conditions Regulations (here)

Data Protection Commission fines Meta €395.5 million over GDPR infringements in Terms of Use (here)

Reform of Personal Injuries Procedures (here)

Majority of Firms Believe ESG Reporting Will Improve Corporate Behaviour (here)

Credit Servicing: Consultation on Transposition of EU Directive (here)

A Guide to Employee Share Incentive Schemes (here)

Gambling Regulation Bill 2022: Proposed time restrictions on advertising of gambling activities will have a wide reach (here)

Data Protection Commission fines Meta €395.5 million over GDPR infringements in Terms of Use (here)

Contempt of Court: What is it and what are the consequences? (here)