Financial Services Regulatory Update – November 2020 Round Up

Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT)

The EBA published an opinion on how prudential supervisors should take into account money laundering (“ML”) and terrorist financing (“TF”) risks in the Supervisory Review and Evaluation Process (“SREP”) (here), on 4 November.

The EBA will include more detailed guidance on how ML/TF risks should be considered by prudential supervisors as part of their overall SREP assessment in the revised version of the SREP guidelines that it plans to publish by end December 2021, as set out in the Pillar 2 roadmap.

Bank Recovery and Resolution

The Association for Financial Markets in Europe (“AFME”) published a document (here), on 13 November, which sets out model clauses relating to:

• the contractual recognition of bail-in powers for other liabilities governed by a non-EEA law reflecting the requirements of Article 55 of the Bank Recovery and Resolution Directive.
• the contractual recognition of bail-in powers for other liabilities governed by a non-English law reflecting the requirements of the UK bail-in regime, as set out in Part I of the Banking Act 2009.

Among other things, the model clauses are intended for use in contracts related to new issues of bonds, bond issuance programmes and euro commercial paper (ECP) issuance programmes.

Benchmarks – Fallbacks

On 18 November, ISDA published a statement (here) responding to announcements from:

• ICE Benchmark Administration (“IBA”), the administrator of LIBOR, that it will consult on its intention to cease publication of euro, sterling, Swiss franc and yen LIBOR after 31 December 2020 (here).
• The FCA, setting out its potential approach to the use of its new powers under the Financial Services Bill to ensure an orderly wind down of LIBOR in the light of the announcement made by IBA (here).

According to the ISDA statement, neither of the above announcements will constitute an index cessation event under the IBOR Fallbacks Supplement or the ISDA 2020 IBOR Fallbacks Protocol triggering fallbacks to the relevant adjusted risk-free rate. Fallbacks under the 2018 ISDA Benchmarks Supplement or its protocol will not be triggered either.

Benchmarks – Proposed Regulation

The European Parliament and the Council of the EU have reached political agreement on the proposed Regulation amending the Benchmarks Regulation as regards the exemption of certain third-country FX benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation (here). Among other things, under the proposed Regulation, the European Commission will be empowered to designate a statutory replacement rate to replace the reference to a benchmark in cessation, in certain circumstances. In addition, EU market participants will be able to use benchmarks administered in a country outside the EU until the end of 2023, (with a possible extension to 31 December 2025).

Capital Markets Union (CMU)

The European Court of Auditors (“ECA”) published a report on the CMU (here), on 11 November. The overall conclusion reached is that the results of the actions taken to establish the CMU are still to come. Among other things, the ECA comments that the objectives for the CMU set by the European Commission were in many cases vague and the Commission’s communications raised expectations that were higher than what it could achieve with its own actions.

The ECA also found that the Commission's monitoring was limited to progress with legislative measures and that it has not regularly and consistently monitored if it is progressing in accomplishing the main CMU objectives. The report sets out a number of specific recommendations for the Commission.

Capital Requirements Regulation – Software Assets

The European Commission adopted a Commission Delegated Regulation amending Delegated Regulation (EU) 241/2014 as regards the deduction of software assets from Common Equity Tier 1 items (here), on 12 November.

The prudential treatment of certain software assets was revised by Regulation (EU) 2019/876, in order to further support the transition towards a more digitalised banking sector. Once the new provision applies, an institution will no longer be required to fully deduct that type of software assets from its Common Equity Tier 1 items.

The CDR further specifies how that exemption from deductions is to be applied, by defining the exact scope of software assets to be exempted and how they will be risk-weighted.

Central Securities Depositories – Brexit

Commission Implementing Decision (EU) 2020/1766 determining, for a limited period of time, that the regulatory framework applicable to central securities depositories (“CSDs”) of the United Kingdom of Great Britain and Northern Ireland is equivalent in accordance with Regulation (EU) No 909/2014 (“CSDR”) was published in the EU’s Official Journal (here), on 26 November. This Decision will extend temporary equivalence to facilitate the continued operation of UK based CSDs for EU entities until 30 June 2021 and will allow Irish securities to continue to be settled through Euroclear UK & Ireland until this market transfers to Euroclear Bank Belgium.

Related press releases from the Department of Finance and the CBI are available here and here.

Consumer – Communication on New Consumer Agenda

The European Commission adopted a Communication launching the New Consumer Agenda (here) on 13 November. The Communication sets out a long-term vision for EU consumer policy from 2020-25, to be implemented through a series of key actions to be taken at the EU and national levels. Among other things, in 2021, the Commission plans to prepare proposals for the revision of the Consumer Credit Directive  “CCD”) and the Distance Marketing of Financial Services Directive (“DMD”) to reinforce consumer protection in the context of the digitalisation of retail financial services.

Some days earlier, on 5 November, the European Commission published a report on the implementation of the CCD (here). According to the report, certain provisions of the CCD may need to be reviewed, particularly those relating to its scope and the credit-granting process (including the pre-contractual information and creditworthiness assessment). The report also provides that such a review could also be a suitable opportunity to consider remedies for other shortcomings, such as improving the definitions.

In addition, the Council of the EU published a cover note attaching the European Commission’s staff working document on its evaluation of the DMD (here) on 9 November. The working document presents the results of the REFIT evaluation of the DMD, which was carried out in 2019 and finalised in 2020.

COVID-19

In April 2020, the CBI communicated that it would allow a level of flexibility for regulated firms in certain specified areas, in recognition of the challenges faced as a result of COVID-19. On 5 November, it published updates on its expectations in this regard, which are available at this link (here).

Derivatives

ISDA published legal guidelines for smart derivatives contracts relating to credit derivatives (here), on 3 November, which suggest steps that should be taken to ensure the design and implementation of new technology solutions are consistent with legal and regulatory standards.

EBA – Product Oversight and Governance

The EBA published its second report on the application of the guidelines on product oversight and governance (“POG”) arrangements (here), on 3 November. The second report confirms the EBA’s conclusions in its earlier report, namely that while the manufacturers surveyed had implemented the internal processes relating to product oversight for retail products, this was not necessarily done in a way that put the required focus on ensuring that consumers' needs are met. 

EMIR – Bilateral Margin Requirements and Novations from UK to EU Counterparties

The European Supervisory Authorities (“ESAs”) published, on 23 November, a final report with draft regulatory technical standards (“RTS”) amending CDR 2016/2251 (here).

The draft amendments, which have been submitted to the European Commission, propose to extend the temporary exemptions for intragroup transactions with a third country entity until 30 June 2022 and for single-stock equity options or index options until 4 January 2024. They also allow UK counterparties to be replaced with EU counterparties without triggering the bilateral margin requirements under certain conditions and within a 12-month timeframe. The draft amendments also reflect the Covid-related BCBS/IOSCO 3 April 2020 decision to defer the implementation of the remaining phases of the initial margin requirements so that the final implementation phase will take place on 1 September 2022, at which point covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion will be subject to the requirements, with an intermediate step, from 1 September 2021, where covered entities with an AANA of non-centrally cleared derivatives greater than €50 billion will be subject to the requirements.

The final report indicates that ESMA expects competent authorities to apply the EU framework with regards to the clearing obligation and the treatment of intragroup OTC derivative contracts and OTC derivative contracts novated from the UK to the EU in a risk-based and proportionate manner until the draft RTS enter into force.

EMIR and SFTR – Brexit

ESMA published a number of updated statements relating to Brexit (here), on 10 November. This includes a statement covering issues affecting reporting, recordkeeping, reconciliation, data access, portability and aggregation of derivatives under Article 9 EMIR and of securities financing transactions reported under Article 4 of Securities Financing Transactions Regulation ("SFTR").

EMIR – Clearing Obligation regarding Intragroup Transactions

ESMA published a final report, on 23 November, with draft RTS on the clearing obligation regarding intragroup transactions as well as on novations from UK to EU counterparties (here). The draft RTS are in the form of a CDR which amends the three CDR on the EMIR clearing obligation (that is, (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178) (the “Clearing Delegated Regulations”).

The amendments:

• extend the deferred application date of the clearing obligation for intragroup transactions satisfying certain conditions and where one of the counterparties is established in a third country, until 30 June 2022.
• amend the Clearing Delegated Regulations to facilitate certain Brexit-related novations of OTC derivative contracts to EU counterparties under certain conditions and within a 12-month timeframe.

The RTS also update the Clearing Delegated Regulations in line with the changes introduced by the EMIR Refit Regulation 2019/834, including the removal of the front-loading requirements.

The final report indicates that ESMA expects competent authorities to apply the EU framework with regards to the clearing obligation and the treatment of intragroup OTC derivative contracts and OTC derivative contracts novated from the UK to the EU in a risk-based and proportionate manner until the draft RTS enter into force.

EMIR – Post Trade Risk Reduction (PTRR)

ESMA published a report on PTRR services with regards to the clearing obligation under EMIR (here), on 10 November. According to the report, exempting certain PTRR transactions from the clearing obligation would reduce risk in the market, allow for legacy trades to be compressed, increase participation in PTRR services and overall reduce complexity in the market. However, any such exemption should be limited and subject to certain requirements, in order to reduce any risk of circumvention of the clearing obligation.

ESMA – Supervisory Priorities

On 13 November, ESMA published a press release on the identification of its EU strategic supervisory priorities for National Competent Authorities (“NCAs”) (here). According to these priorities, the specific topics on which NCAs will undertake supervisory action in 2021, co-ordinated by ESMA, are costs and fees charged by fund managers and improving the quality of transparency data reported under MiFIR.

Financial Institutions – Brexit Preparations

The EBA published a press release, on 9 November, reminding financial institutions of the need for readiness in view of the expiry of the Brexit transition period on 31 December (here). Among other things, the press release highlights the following:

• UK-based financial institutions need to finalise their authorisations and fully establish EU-based operations. Associated management capacity, including appropriate risk management capabilities, should be in place in the EU, and must be commensurate to the magnitude, scope and complexity of activities and the risks generated in EU operations. Financial institutions must have clearly articulated and appropriate booking arrangements. The EBA's guidelines on outsourcing arrangements must be met and financial institutions must not outsource activities to such an extent that empty shell companies operate.
• Any eIDAS certificate issued to UK-based third party providers under the revised Payment Services Directive will no longer meet the legal requirements of Article 34 of Commission Delegated Regulation (“CDR”) (EU) 2018/389. Qualified trust service providers that have issued eIDAS certificates to the UK-based account information service providers and payment initiation service providers should revoke the certificates.
• Transfers of funds to or from the UK will be subject to requirements in the Wire Transfer Regulation 2015/847 on payments from outside the EU. In particular, payment service providers will need to provide more detailed information on the payer and payee.
• Customers should be informed in a timely way about preparations for the end of the transition period. Information on the cessation of services to EU-based customers should explain the impact of the cessation on the provision of services and the way to exercise customer rights, in order to avoid any detrimental effects for customers.

Fitness and Probity

The Central Bank of Ireland (the “CBI”) has published a “Dear CEO” letter following on from its recent thematic inspections of compliance by Regulated Financial Service Providers (“Firms”) with their obligations under the Fitness and Probity Regime. The CBI expects all Firms to take appropriate action to address the issues outlined in its letter and to be able to evidence this to the CBI, if requested.  For more information, see our related briefing here.

Insurance

On 30 October, the Cost of Insurance Working Group published its eleventh and final progress report (here), which covers its work to date in 2020.  The reform agenda outlined in the Programme for Government will now be led by the newly established Cabinet Committee on Economic Recovery and Investment’s Sub-Group on Insurance Reform.

On 3 November, the CBI published its second annual Private Motor Insurance Report of the National Claims Information Database (here), which provides an analysis of the cost of claims, the cost of premiums, how claims are settled, variance in and components of settlement costs.

Investment Funds – AIFMD Q&A

The CBI has updated its AIFMD Q&A to include new Q&A IDs 1134 and ID 1135 (here) which clarify that a general partner of an investment limited partnership is not required to be approved by the CBI as an AIF management company.

Investment Funds – Liquidity Risk

ESMA published a report in response to the European Systemic Risk Board’s (“ESRB”) recommendation on liquidity risk in investment funds (here) on 12 November, which focuses on investment funds that have significant exposures to corporate debt and real estate assets to assess their preparedness for potential future adverse shocks. In its report, ESMA identifies the following five priority areas that would enhance this preparedness:

1. Ongoing supervision of the alignment of the funds’ investment strategy, liquidity profile and redemption policy.
2. Ongoing supervision of liquidity risk assessment.
3. The establishment and reporting of fund liquidity profiles.
4. An increase of the availability and use of liquidity management tools (LMTs).
5. The supervision of valuation processes in a context of valuation uncertainty.

ESMA will follow-up with NCAs in relation to priority areas 1, 2, and 5, however, it considers that 3 and 4 should be taken forward in the context of the Commission's review of the AIFMD.

Investment Funds – Penalties and Measures

On 12 November, ESMA published its third annual report on penalties and measures imposed by NCAs in 2019 under the UCITS Directive (here) as well as its first annual report on penalties and measures imposed under AIFMD (here).

Investment Funds – Performance Fees

ESMA published a press release announcing that it has issued the official translations of its guidelines on performance fees in UCITS and certain types of AIFs (here), on 5 November.  NCAs now have two months to notify ESMA whether they comply or intend to comply with the guidelines.

MiFID II – Best Execution Requirements

The CBI published a Dear CEO Letter on the outcome of a thematic review of compliance by MiFID authorised investment firms with the MiFID ‘Best Execution’ requirements for consumers (here), on 10 November. According to the letter:

• the CBI identified significant shortcomings in Best Execution governance, including a lack of clear decision-making processes and evidence of Board and/or committee oversight and challenge, with the Risk Function having limited involvement;
• Best Execution frameworks are at various stages of development and some firms were unable to provide evidence that these are reviewed on a regular basis and in response to regulatory developments. There was also evidence of a lack of training for staff, resulting in poor awareness of Best Execution policies and procedures; and
• the CBI identified a lack of independent reviews of the end-to-end Best Execution process and limited assurance testing being completed.

The CBI requires all firms to review their Best Execution frameworks and processes against the findings in the letter and the good practices detailed in the letter’s Appendix. In addition, the letter must be discussed at the next Board meeting and the discussion must be recorded in the meeting minutes.

MiFID II – Product Governance

ESMA published an updated version of its Q&As on investor protection and intermediaries under the MiFID II Directive and MiFIR (here) on 6 November, to include three new Q&As on product governance that aim to give guidance on how firms manufacturing financial instruments should ensure that:

• financial instruments’ costs and charges are compatible with the needs, objectives and characteristics of the target market;
• costs and charges do not undermine the financial instrument's return expectations; and
• the charging structure of the financial instrument is appropriately transparent for the target market, ensuring that it does not disguise charges or is too complex to understand.

MiFIR - Brexit – Derivatives Trading Obligation (DTO)

ESMA published a public statement on the impact of the end of the Brexit transition period on 31 December 2020 on the trading obligation for derivatives (“DTO”) under Article 28 of MiFIR (here), on 25 November. ESMA clarifies that the DTO will continue applying without changes after the end of the transition period, confirming the approach outlined in ESMA’s previous statement in March 2019 (here).

While ESMA acknowledges that this approach creates challenges for some EU counterparties particularly UK branches of EU investment firms, it considers that this situation is primarily a consequence of the way the UK has chosen to implement the DTO. Based on the current legal framework, and in the absence of an equivalence decision by the European Commission, ESMA does not see room for providing different guidance.

Mortgage Lenders – CBI Expectations

The CBI published a Dear CEO Letter (the “Letter”) on expectations of mortgage lenders in relation to changes to the mortgage application process (here), on 11 November.

According to the Letter, the CBI expects mortgage lenders to communicate clearly with customers at all stages of the mortgage application process, including those customers who have already received loan offers. Mortgage lenders must make clear to customers that where there has been any material change to the customer’s circumstances prior to the drawdown of funds, the loan offer may subsequently be withdrawn, paused or varied. At a minimum, this communication must be included in the loan offer letter. Mortgage lenders were required to provide specified confirmations to the CBI by 4 December 2020.

Pensions

On 12 November, EIOPA published a supervisory statement on the sound supervisory practices for registering or authorising Institutions for Occupational Retirement Provision (“IORPs”), including the assessment of suitability for cross-border activities (here). The statement’s main aim is to ensure that IORPs operating cross-border do so under prudent conditions, regardless of the different authorisation or registration regimes.

Prospectus Regulation – Brexit

ESMA published an updated Q&A on the Prospectus Regulation (here), on 9 November. It includes five new Q&As, two of which deal with Brexit related issues addressing:

• how issuers that have chosen the UK as their home member state should choose a new home member state when they wish to offer securities to the public or be admitted to trading in the EU27 or EEA ETA after the end of the transition period;
• the use of prospectuses approved by the FCA while the UK was a member state or during the transition period after 31 December; and
• how issuers with prospectuses approved by the FCA while the UK was a member state or during the transition period should proceed after 31 December.

Securities Financing Transactions Regulation (SFTR) – Reporting

The EBA published its first set of Q&As relating to reporting under the SFTR (here), on 5 November.  The new Q&As include clarifications on how reporting of certain business events should be performed.

Single Resolution Board – Priorities for 2021

On 30 November, the Single Resolution Board (“SRB”) published a document containing its work programme for 2021 and its multi-annual programme, covering the period 2021-23 (here).  The SRB’s priorities for 2021 as they relate to its strategic areas of operation include:

• Resolvability. The SRB will direct banks to become resolvable and meet its Expectations for Banks (EfB) document.  It will send priority bespoke letter to banks.  The common EfB priorities for 2021 will be liquidity in resolution, management information system and valuation capabilities, and bail-in preparedness.  Banks will also be expected to update and operationalise resolution plans.  The SRB will conduct resolvability assessments which will feed into create a "heat-map", in order to track individual banks' progress and benchmarking. Visits to banks deemed to be of specific interest will be conducted in 2021.
• Resolution framework. The SRB will revise and develop policies on the following: minimum requirements for own funds and eligible liabilities (MREL), public interest assessment (PIA) and the financial continuity framework.
• Crisis management. Priorities in this area include enhancing readiness for implementing resolution schemes based on transfer strategies, refining data and procedures for crisis cases and performing dry-run exercises.
• Single resolution fund. A key priority for the SRB will be monitoring covered deposits, including work to calculate individual contributions, and focusing on litigation involving contributions.

Sustainability – ECB Guide and Report

On 27 November, the ECB published its final and amended guide on climate-related and environmental risks, which explains how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules.

The ECB will now follow up with banks in two concrete steps. In early 2021 it will ask banks to conduct a self-assessment in light of the supervisory expectations outlined in the guide and to draw up action plans on that basis. The ECB will then benchmark the banks’ self-assessments and plans, and challenge them in the supervisory dialogue. In 2022 it will conduct a full supervisory review of banks’ practices and take concrete follow-up measures where needed.

The ECB also published a report which finds that banks are lagging behind on their climate-related and environmental risk disclosures.

You will find the associated ECB press release here.

Transparency Directive

ESMA published the official translations of its guidelines on enforcement of financial information (here), on 23 November. Inscope NCAs must notify ESMA within two months whether they comply or intend to comply with the guidelines.

Selected Consultations, Discussion Papers, Speeches and Reports Published

• CBI – Consultation Paper 132 - Guidance on Share Class Features of Closed-Ended QIAIFs (here).  The closing date is 22 December 2020.
• CBI – Speech given by Director of Financial Regulation - Policy and Risk; Asset Management and Investment Banking (Interim) entitled “Sustainable Finance: the changing regulatory landscape” (3 November 2020) (here).
• EBA – Discussion paper on management and supervision of environmental, social and governance (“ESG”) risks for credit institutions and investment firms (here). The consultation is open until 3 February 2021.
• EBA – Speech given by José Manuel Campa, Chairperson of the EBA at the XVII International Professional Conference on Good Corporate Governance (10 November 2020) (here).
• EIOPA – Consultation on advice to the European Commission under Article 8 of the Taxonomy Regulation (here).  The consultation is open until 17 February 2021.
• ESMA – Speech given by Verena Ross, ESMA Executive Director on future challenges for fund managers (19 November 2020) (here).
• ESMA – Consultation on guidelines on the MiFID II/MiFIR obligations on market data (here).  The consultation is open until 11 January 2021.
• ESMA – Consultation on draft advice to the European Commission under Article 8 of the Taxonomy Regulation (here).  The consultation is open until 4 December 2020.
• ESMA – Consultation on guidelines on marketing communications under the Regulation on cross-border distribution of funds (here).  The consultation is open until 8 February 2021.
• European Commission – Consultation on the text of a Commission Delegated Regulation supplementing the Taxonomy Regulation relating to climate change mitigation and adaptation (here).  The consultation is open until 18 December 2020.
• European Commission – Consultation on the draft Delegated Regulations supplementing the Regulation on a pan-European personal pension product (PEPP) (here and here).
• FSB – Discussion paper on regulatory and supervisory issues relating to outsourcing and third-party relationships (here).  The consultation is open until 8 January 2021.
• FSB – 2020 progress report on reforming major interest rate benchmarks (20 November 2020) (here).
• FSB – Report on implications of climate change for financial stability (23 November 2020)(here).
• Task Force on Climate-related Financial Disclosures – Consultation on forward-looking climate metrics for financial firms (here).  The consultation is open until 27 January 2021.
• Working Group on Euro Risk-Free Rates – Consultations on fallback rates for EURIBOR (here).  The consultations are open until 15 January 2021.

You may also be interested in---

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

• The EU Share Trading Obligation (STO) Post-Brexit – Fragmenting Markets (here)
• SFDR Prospectus Filings – Full Steam Ahead! (here)
• Financial Services Regulatory Update – October 2020 Round Up (here)
• VAT on Payments for Management Services Provided to Pension Funds (here)
• Securing your Costs when Making Discovery (here)
• EDPB Publishes Recommendations on International Data Transfers Following Schrems II (here)
• Collective Redress on the way for Consumers under EU Law (here)