Financial Services Regulatory Update – September 2020 Round Up

AML/CFT – MLD5

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2020 was presented to the Dáil on 8 September 2020. The Bill transposes the EU’s Fifth Anti-Money Laundering Directive into Irish Law (“MLD5”). Among other things, the Bill:

• introduces more specific enhanced due diligence measures for customers established in high risk third countries;
• requires a designated person, when carrying out CDD on a customer subject to beneficial ownership registration requirements, to ensure that the beneficial ownership information concerning the customer is held on the relevant central register of beneficial owners; and
• extends the definition of “designated person” to include a provider engaged in exchange services between virtual currencies and fiat currencies, among others.

AML/CFT – Virtual Assets

The Financial Action Task Force (FATF) published a report on virtual assets: red flag indicators of money laundering and terrorist financing (here), on 14 September 2020.  The report is based on 100 case studies collected by members of the FATF Global Network and it highlights the most important red flag indicators that could suggest criminal behaviour.

Autumn Legislative Programme

The Legislative Programme for Autumn was released on 16 September 2020. The Investment Limited Partnerships (Amendment) Bill is listed among the priority legislation.  Bills that are intended to undergo pre-legislative scrutiny stage in the Autumn, include, in particular the Consumer Protection (Regulation of Retail Credit Firms) Bill and the Central Bank (Amendment) Bill. The first of these is intended to ensure that every entity providing credit, hire purchase, PCPs (personal contract plans) or consumer hire agreements must register with the Central Bank of Ireland (the “CBI”) as a “retail credit firm” before trading. For its part, the Central Bank (Amendment) Bill is intended to foster a greater sense of accountability and responsibility within regulated institutions in the wake of the Tracker Mortgage Examination, including through the introduction of a Senior Executive Accountability Regime.  See our related briefing here.

Bank Recovery and Resolution – Directive  2019/879 (“BRRD II”)

The European Commission (the “Commission”) Notice relating to the interpretation of certain legal provisions of the revised bank resolution framework in reply to questions raised by Member States’ authorities was published in the EU’s Official Journal (the “OJ”) (here) on 29 September.  According to the Notice, the Commission will also shortly adopt a communication containing answers to questions that it has received from the European Supervisory Authorities as well as from the EBA relating to BRRD II.

Benchmarks

ESMA published a speech by Steven Maijoor, ESMA Chair, outlining recent and expected developments in the reform of global interest rates (here), on 21 September.  According to Mr Maijoor, Euribor will be available for the foreseeable future. Mr Maijoor also stressed the importance of introducing fallbacks in Euribor contracts.

Benchmarks –Benchmarks Regulation

ESMA published a final report containing draft regulatory technical standards (“RTS”) under the Benchmarks Regulation (here) on 29 September, which set out the behaviours and standards expected of administrators.

Benchmarks – IBOR Fallbacks Protocol and  Supplement

ISDA published a letter sent to the Co-Chairs of the Financial Stability Board (“FSB”) Official Sector Steering Group (here) regarding the launch and effective date of the IBOR Fallbacks Protocol and Fallbacks Supplement, on 22 September. According to the letter, the Supplement and Protocol will not take effect before the second half of January 2021 and from that point on, all new derivatives referencing the 2006 ISDA Definitions will automatically include the updated fallbacks for covered IBORs. The changes will apply to legacy derivatives as well if both counterparties have adhered to the protocol or have agreed similar bilateral amendments.  Certain central counterparties (“CCPs”) also intend to apply the new fallbacks to all new and existing cleared OTC derivatives transactions from this date.

Brexit - Central Counterparties (“CCPs”)

From 1 January 2021, UK CCPs will be considered “third country CCPs” for the purposes of EMIR and will need to be recognised by ESMA in order to provide clearing services within the EU.  In order for such recognition, the Commission must first have determined that:

• the legal and supervisory arrangements governing the UK CCP are equivalent to those of EMIR; and
• the UK CCP is systemically important for the financial stability of the EU.

On 21 September 2020, the Commission adopted the relevant equivalence decision (here) and, in a related press release, announced that it has adopted the time-limited decision to give financial market participants 18 months to reduce their exposure to UK CCPs. The decision enters into force on 22 September 2020, applies from 1 January 2021 and expires on 30 June 2022.

Also on 21 September, the three delegated acts on tiering, comparable compliance and fees under EMIR were published in the OJ.  These acts set out the new regulatory and supervisory regime for third country CCPs (“TC-CCPs”), including the details for determining the systemic importance for the EU of a TC-CCP which has applied for recognition under EMIR.

On 28 September 2020, ESMA announced that the three UK established CCPs – ICE Clear Europe Limited, LCH Limited, and LME Clear Limited – will be recognised as TC-CCPs eligible to provide their services in the EU, after the end of the transition period on 31 December 2020. In line with the equivalence decision, the recognition decisions will apply for 18 months until 30 June 2022.

Brexit - EMIR and Pension Scheme Arrangements (“PSAs”)

ISDA has published a letter sent to the Commission and ESMA on the post-Brexit exemption for PSAs under EMIR (dated 7 September 2020) (here). The letter highlights the risks posed to EU banks, investment firms and pension funds, as well as UK pension funds, by the fact that UK pension funds will cease to benefit from the exemption under the EMIR clearing obligation for PSAs on 31 December 2020.  It sets out a number of proposed solutions that could be adopted to mitigate the impact. See below for more information on PSAs.

Brexit - Insurance

On 9 September 2020, the Government published the General Scheme of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020 (the “General Scheme”), as part of its preparations for the end of the transition period (here).

Part 10 of the General Scheme amends the European Union (Insurance and Reinsurance) Regulations 2015, which transpose the EU’s Solvency II Directive into Irish law, and the European Union (Insurance Distribution) Regulations 2018, which transpose the EU’s Insurance Distribution Directive into Irish law. The relevant amendments mean that a Firm that is authorised in the UK and/or Gibraltar, which has passported into Ireland will be deemed to be authorised for specific and limited purposes in Ireland for a 15 year period following the end of the transition period, subject to the fulfilment of certain conditions.  See our related briefing (here).

Capital Markets Union (“CMU”)

The Commission published a new CMU Action Plan (here) on 24 September, setting out three key objectives and the measures intended to achieve them, as follows:

1. Support a green, digital, inclusive and resilient economic recovery by making financing more accessible to European companies - the Commission will consider simplifications for the listing rules for public markets, undertake a review of the Regulation on European long-term investment funds and conduct a comprehensive review of the EU securitisation framework;
2. Make the EU an even safer place for individuals to save and invest long-term – this will include amendments to the MiFID II Directive for retail investors and assess potential amendments to the Insurance Distribution Directive, the PRIIPs Regulation and the MiFID II Directive relating to inducements and disclosure; and
3. Integrate national capital markets into a genuine single market - this will include a review of the Central Securities Depositories Regulation and legislate to establish a post-trade consolidated tape for equity and equity-like financial instruments.

Credit Institutions – EBA Opinion

The EBA published an opinion addressed to the Commission on the definition of “credit institution” under Article 4(1)(1)(a) of the Capital Requirements Regulation and on aspects of the scope of the authorisation (here), on 18 September. The opinion references previous reports and related opinions regarding the need to clarify certain issues relating to the definition of “credit institution” and calls on the Commission to clarify these issues in the upcoming review of the Capital Requirements Regulation and Capital Requirements Directive. 

Credit Institutions – Payment Moratoria

The EBA published a press release announcing that it is phasing out its guidelines on legislative and non-legislative repayments moratoria (here), on 21 September 2020.  The regulatory treatment set out in the guidelines will continue to apply to all payment holidays granted under eligible payment moratoria prior to 30 September 2020, thus avoiding cliff effects risks of having to reclassify existing loans abruptly at a later stage. Banks can continue supporting their customers with extended payment moratoria after 30 September 2020, but such loans should be classified on a case-by-case basis according to the usual prudential framework. See our briefing here.

Credit Rating Agencies

ESMA published a final report on guidelines on internal controls (“ICs”) for credit rating agencies (“CRAs”) (here), on 30 September.  The guidelines set out the following:

• ESMA’s views on the components and characteristics that should be present in a CRA to demonstrate a strong framework for internal controls; and
• ESMA’s views on the components and characteristics that a CRA should evidence to demonstrate the effectiveness of internal control functions within such a framework.

The guidelines will be translated into all official languages and published on ESMA’s website. They will apply from 1 July 2021.

Credit Unions

The CBI published the fourth edition of the Credit Union PRISM Supervisory Commentary Report (here), on 8 September.  The report sets out the nature and type of risks identified during the CBI’s 2019 supervisory engagements, and related supervisory expectations in addressing such issues.

The CBI has published an updated version of its Credit Union Handbook (here). The Investments chapter has been updated along with the publication of a consolidated version of the Handbook.

Derivatives

The Legal Entity Identifier Regulatory Oversight Committee (“LEI ROC”) will be the International Governance Body (“IGB”) for the globally harmonised identifiers used to track OTC derivatives transactions, according to a press release published by the FSB on 25 September (here).

In a related press release, the FSB explains that LEI ROC will be responsible for the governance of the Unique Product Identifier, the Unique Transaction Identifier and the Critical Data Elements.  This transfer of all governance and oversight responsibilities to the ROC will be effective from 1 October 2020.

Digital Finance

The Commission published a communication on a Digital Finance Strategy for the EU (here) on 24 September, which comprises a Digital Finance Strategy and a Retail Payments Strategy as well as legislative proposals, including a proposed Markets in Crypto-Assets Regulation and a proposed Digital Operational Resilience Regulation. See our related briefing here.

Dividend Arbitrage Trading

ESMA published a final report on Cum/Ex, Cum/Cum and withholding tax (“WHT”) reclaim schemes (here) setting out the findings of its formal inquiry into WHT schemes.  ESMA’s key proposal is that national competent authorities for securities markets should be empowered to share information with the tax authorities to assist in detecting WHT reclaim schemes. The report will be submitted to the European Parliament.

EBA

The EBA published its work programme for 2021 (here), on 30 September. In the work programme, the EBA sets out its strategic priorities, as well as the specific activities that the EBA intends to undertake, in 2021.

EMIR - PSAs

On 24 September 2020, the European Commission published a report on clearing solutions for PSAs under EMIR (here).  EMIR grants a temporary exemption from the central clearing obligation to entities operating PSAs, in relation to certain types of OTC derivatives, until June 2021.  This temporary exemption is intended to provide the time needed in order to find a suitable technical solution, which would allow PSAs to clear centrally at CCPs while avoiding materially adverse effects on pensioners’ income.

The report aims at updating the European Parliament and the Council as to the progress made in this field and to identify the aspects to be explored further in order to favour a feasible and sustainable central clearing solution.

Insurance

The CBI published a Dear CEO Letter setting out its expectations in respect of the pricing of insurance policies, following the conclusion of the first phase of its Review of Differential Pricing in the Motor and Home Insurance Markets (press release and letter here). See our briefing here.

The CBI also published the September 2020 edition of its Insurance Quarterly newsletter (here). 

Investment Funds - MMFR

The CBI published a guidance note providing information and direction on the completion of MMFR Reporting by UCITS Management Companies and Alternative Investment Fund Managers (here).

IOSCO – Debt Capital Raising

IOSCO published a report on conflicts of interest and associated conduct risks during the debt capital raising process (here), on 21 September. The report contains guidance to help IOSCO members address conflicts of interest and associated conduct risk. It also explores the potential benefits and risks of blockchain technology in addressing conflicts of interest in the debt capital raising process.

Market Abuse Regulation - Review

On 24 September 2020, ESMA published its final Market Abuse Regulation (“MAR”) review report (here), which concludes that, overall, MAR has worked well in practice and is fit for purpose. The report sets out proposals for targeted amendments to MAR regarding:

• Market soundings - clarify that the MAR requirements represent an obligation for disclosing market participants that, if complied with, will protect them from the allegation of having unlawfully disclosed inside information;
• Benchmark provisions and the interplay between MAR and collective investment undertakings - clarify the responsibility of management companies in relation to the disclosure of inside information;
• Withholding tax reclaim schemes - removing the legal limitations for NCAs to exchange information with tax authorities.

The report also contains suggestions for additional guidance in a number of areas.  It has been submitted to the Commission and is expected to feed into its review of MAR.

Markets in Financial Instruments – Third Country Firms

The Investment Firms Regulation and Directive introduced changes to the MiFIR and MiFID II regimes for the provision of investment services and activities in the EU by third country firms. These changes include new reporting requirements from third country firms to ESMA on an annual basis in accordance with Article 46 of MiFIR, and also mention explicitly the possibility for ESMA to ask third country firms in the ESMA register to provide data relating to all orders and all transactions in the EU, whether on own account or on behalf of a client, for a period of five years.

On 28 September 2020, ESMA published its final report containing:

• Draft RTS specifying the information for registration of third country firms and the information to be reported annually by third country firms registered with ESMA (here);
• Draft implementing technical standards (“ITS”) with regard to the format of applications for registration of third country firms and the format of the information to be reported annually to ESMA by registered third country firms;
• Draft ITS for the application of the MiFID II Directive with regard to the format of the information to be reported annually to national competent authorities by branches of third country firms authorised in accordance with Article 41 of that Directive.

The draft ITS and RTS have been submitted to the Commission for adoption.

Markets in Financial Instruments – Transparency Regime Applicable to Non-Equity Financial Instruments

On 29 September 2020, ESMA published its final report on the review of the transparency regime for non-equity instruments and the trading obligations for derivatives under MiFIR (here).  Following a consultation issued in March 2020, ESMA concluded that the regime was too complicated and not always effective in ensuring transparency for market participants. The report contains a number of recommendations to the Commission on improving the regime and forms part of a wider effort by ESMA to bring more transparency into the derivative and bond markets.

Prospectus Regulation

The Commission published final versions of two regulations that amend and correct two delegated regulations under the Prospectus Regulation (here and here), namely Delegated Regulation 2019/980 and 2019/979.

• Commission Delegated Regulation (EU) 2020/1273 amends, among other things, the requirements for universal registration documents and EU growth prospectuses set out in Regulation 2019/980;
• Commission Delegated Regulation (EU) 2020/1272, among other things, deletes the requirement that issuers of securities which are convertible or exchangeable into third party shares must publish a supplement to their prospectus, set out in Delegated Regulation 2019/979.

On 30 September 2020, ESMA published an update on the process of revising the guidance published under the Prospectus Directive and applicability of the CESR recommendations concerning specialist issuers (here). 

Securities Financing Transactions

On 7 September 2020, the FSB published a press release announcing that it has extended the implementation timelines for minimum haircut standards for non-centrally cleared securities financing transactions (“SFTs”) (here) by one year.  The purpose of the extension is to ease operational burdens on market participants and authorities so that they can focus on addressing the priorities resulting from the impact of the COVID-19 pandemic.  It follows the decision taken by the Basel Committee on Banking Supervision in March 2020 to defer the implementation of the Basel III framework by one year to January 2023.

Securitisation Regulation

On 3 September 2020, the Commission published various implementing and delegated regulations under the Securitisation Regulation in the OJ (here). These came into force on 23 September including new disclosure templates. See our related briefing (here).

Sustainable Financial Disclosures Regulation (SFDR)

The European Supervisory Authorities published a survey seeking public feedback on presentational aspects of product templates, pursuant to Article 8(3), Article 9(5) and Article 11(4) of the SFDR. The survey is open for comments until 16 October 2020 (here). In particular, the ESAs are inviting stakeholders to comment on the layout of the templates, which reflects the text of the draft RTS from the recent public consultation on the SFDR that ran from 23 April until 1 September 2020.

According to press reports, asset managers are to be given more time to comply with the new disclosure requirements, which are due to apply from 10 March 2021.

Selected Consultations and Discussion Papers Published

• EBA – Survey on credit institutions’ disclosure of information related to ESG risks (here). The closing date is 16 October 2020.
• EIOPA – Consultation on supervisory statement on use of risk mitigation techniques by insurance and reinsurance undertakings (here).  The closing date is 24 November 2020.
• ESMA – Consultation on fees for benchmark administrators (here).  The closing date is 6 November 2020.
• ESMA – Consultation on reference data and transaction reporting obligations under MiFIR (here).  The closing date is 20 November 2020.
• ESMA – Consultation on functioning of organised trading facilities (here).  The closing date is 25 November 2020.
• ESMA – Call for evidence on review of MiFIR transparency requirements for equity and non-equity instruments (here).  The closing date is 31 October 2020.
• IAIS – Survey on existing prudential treatments for investments in infrastructure and strategic equity (here).  The closing date is 7 December 2020.

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