Financial institutions general regulatory news, June 2021 #2

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to most financial institutions. See also our sector specific updates in the Related Materials links.


  • Financial Services Act 2021 (Commencement No 1) Regulations 2021
  • UK taxonomy: HM Treasury establishes Green Technical Advisory Group
  • Taskforce on Innovation, Growth and Regulatory Reform report
  • Tackling financial exclusion: government response to House of Lords Liaison Committee follow-up report
  • Sam Woods reappointed as PRA Chief Executive and BoE Deputy Governor for Prudential Regulation
  • Digital money: BoE discussion paper and summary of responses to CBDC discussion paper
  • BoE and BIS launch Innovation Hub London Centre
  • Tackling climate change: BoE speech
  • PRA temporary permissions regime: PRA approach to authorising firms
  • FCA quarterly consultation 32
  • FCA regulatory sandbox: successful applicants to seventh cohort
  • FCA policy development update
  • Pensions consumer journey call for input: FCA and TPR extend deadline for responses
  • MaPS releases Beta MoneyHelper site
  • Accelerating the S in ESG: IRSG report
  • Taxonomy Regulation: European Commission adopts Taxonomy Climate Delegated Act
  • Taxonomy Regulation: European Commission publishes EU Taxonomy Compass
  • DORA: ECB opinion on proposed Regulation and Directive
  • CRR and Solvency II: Joint Committee of ESAs final reports on amending ITS on mapping credit assessments of ECAIs
  • CRD: EBA consults on threshold for reclassification of investment firms as credit institutions
  • G7 finance ministers and central bank governors communique
  • Climate-related metrics, financial impacts, targets and transition plans: TCFD consults on guidance
  • Climate scenarios for climate risk assessments: NGFS updates
  • Developing climate finance taxonomies: GFMA guiding principles
  • Outsourcing and third-party relationships: FSB overview of responses to discussion paper

Financial Services Act 2021 (Commencement No 1) Regulations 2021

The Financial Services Act 2021 (Commencement No 1) Regulations 2021 (SI 2021/671) have been published. SI 2021/671 is a commencement regulation made under the Financial Services Act 2021 and sets out the following commencement dates for provisions concerning the prudential regulation of investment firms and credit institutions:

  • sections 3, 4 and 5 and Schedule 3 of the Act come into force on 9 June 2021. These provisions give HM Treasury the power to make regulations to revoke existing prudential regulation contained in the UK Capital Requirements Regulation (UK CRR) and set out the framework for the Prudential Regulation Authority (PRA) to make rules relating to CRR Basel standards. This includes the introduction of new Part 9D of the Financial Services and Markets Act 2000 (FSMA) on the prudential regulation of credit institutions;
  • section 7 and paragraph 12 of Schedule 4 of the Act come into force on 26 June 2021 for the purpose of amending Article 500d of the UK CRR;
  • section 2 and Schedule 2 of the Act come into force on 1 July 2021. These provisions set out the legislative framework for the prudential regulation of investment firms, including new Part 9C to FSMA. The Finance Conduct Authority (FCA) and HM Treasury will use this framework to establish the Investment Firms Prudential Regime (IFPR) for FCA investment firms; and
  • section 1, Schedule 1 and the remainder of Schedule 4 of the Act come into force on 1 January 2022. These provisions amend the UK CRR to end its application to investment firms, other than PRA-designated firms and to reflect amendments to the EU CRR made by CRR II that the UK intends to implement in the UK CRR rather than through Prudential Regulation Authority (PRA) rules.

UK taxonomy: HM Treasury establishes Green Technical Advisory Group

HM Treasury has announced the appointment of the Green Technical Advisory Group (GTAG), an expert group which will provide independent advice to the government on the development and implementation of a UK green taxonomy. It has also published the terms of reference and a membership list for the GTAG.

The GTAG will produce a series of issues papers to be delivered according to an indicative timetable agreed after the inaugural meeting of the group in June 2021. It will provide initial recommendations to the government in September 2021.

HM Treasury expects the GTAG to be convened initially for two years, after which its remit and membership will be reviewed. During the first year, the GTAG will meeting on a quarterly basis.

Taskforce on Innovation, Growth and Regulatory Reform report

The Taskforce on Innovation, Growth and Regulatory Reform (TIGRR), which was commissioned by the UK government to identify post-Brexit regulatory reforms, has produced its report. Among other things, the report contains recommendations relating to financial regulation relating to:

  • Encouraging investment by insurers: the TIGRR recommends amendments to the matching adjustment and risk margins in the UK Solvency II framework, with the aim of releasing capital for investment.
  • Restoring a common law principles-based approach to regulation: the UK should move away from the highly restrictive EU codified system of rulemaking. By way of example, TIGRR recommends amending the position limits derived from the Markets in Financial Instruments Directive (MiFID) to introduce greater flexibility while preserving protections on critical contracts. It also recommends introducing a more discretionary and judgement-based approach to calculating central counterparty (CCP) margins. As general principles, regulators should scale their support and requirements appropriately to risk and the size of firms, introduce "scaleboxes", put the proportionality principle at the heart of all UK regulation, and build technology-neutral regulatory regimes which focus on goals and outcomes rather than inputs.
  • Supporting FinTech and digitalisation of financial services infrastructure: among other things, the TIGRR recommends mandating the expansion of Open Banking to Open Finance quickly and taking a more market-led, Australian-style approach; increasing competition in the banking sector by adopting a graduated regulatory approach for challenger banks; reducing anti-money laundering (AML) requirements for new Open Banking or Fintech services; and accelerating plans to develop a central bank digital currency (CBDC), with the launch of a pilot within 12 to 18 months.
  • Amending disclosure and transparency requirements for financial services products: For example, the TIGRR recommends removing the MiFID-derived requirement to provide costs and charges reports to professional investors and eligible counterparties (ECPs); removing the investment recommendation disclosure requirements from the UK Market Abuse Regulation (UK MAR) for wholesale clients; and restricting the key information document disclosure requirement in the UK PRIIPs Regulation to genuinely complex packaged products; and consider a more proportionate approach to a range of other disclosure and reporting requirements, including under requirements derived from the Cross-border Payments Regulation, the Deposit Guarantee Scheme Directive, the Mortgage Credit Directive and the Payment Accounts Directive.
  • Replace the General Data Protection Regulation with a new UK framework for data protection: For example, this could include a UK Framework of Citizen Data Rights and amendments to account for the use of AI.

In a letter to the TIGRR in response to the report, the Prime Minister states that the government will publish a formal response to the report as soon as practicable.

Tackling financial exclusion: government response to House of Lords Liaison Committee follow-up report

The government has published its response to the House of Lords Liaison Committee's third follow-up report on tackling financial exclusion, which was published in April 2021. In the response, the government states that it is committed to tackling financial exclusion and that this remains high up on its agenda, particularly given the impact of COVID-19 on people's personal finances. It has responded to each of the committee's conclusions and recommendations.

Sam Woods reappointed as PRA Chief Executive and BoE Deputy Governor for Prudential Regulation

HM Treasury has announced that Sam Woods has been reappointed as the PRA Chief Executive and Bank of England (BoE) Deputy Governor for Prudential Regulation. Mr Woods will serve a second term of five years, from 1 July 2021 to 30 June 2026.

Digital money: BoE discussion paper and summary of responses to CBDC discussion paper

The BoE has published a discussion paper on new forms of digital money. It has also published a summary of responses to its March 2020 discussion paper on central bank digital currencies.

The discussion paper on new forms of digital money is based on a number of assumptions, such as that new forms of digital money are stable in value, with a retail focus, and are denominated in sterling. It considers the role of money in the economy; public policy objectives; an illustrative example; implications for macroeconomic stability; and the regulatory environment.

Comments can be made on the discussion paper until 7 September 2021. Responses will help inform the BoE's thinking on digital money and support the ongoing work of the recently announced central bank digital currency (CBDC) taskforce, engagement and technology forums.

In its separate summary of responses to the discussion paper on CBDC, the BoE explains that respondents showed strong agreement that the BoE should, at the very least, be carefully studying CBDC. However, there was a range of views on whether one was ultimately likely to be needed or desirable.

The BoE has identified five core principles from the responses that will guide its future exploration of CBDC. These include financial inclusion being a prominent consideration in the design of any CBDC and, when assessing the case for CBDC, the BoE should assess whether non-CBDC payment innovations could deliver the same benefits.

BoE and BIS launch Innovation Hub London Centre

The BoE and Bank for International Settlements (BIS) have announced the launch of a BIS Innovation Hub London Centre, to foster international collaboration on innovative FinTech within the central banking community. The London centre will help advance the Innovation Hub's work on priority themes, which currently focus on six areas:

  • use of technological innovation in supervision and regulation (SupTech and RegTech);
  • next generation financial market infrastructures;
  • CBDCs;
  • Open Finance;
  • cyber security; and
  • green finance.

This is the fourth new innovation hub centre to be opened in the past two years, with existing hubs already established in Basel, Hong Kong and Singapore. BIS also plans to open further new centres in due course including in Toronto, Frankfurt and Paris, and Stockholm.

Tackling climate change: BoE speech

The Bank of England (BoE) has published a speech by Andrew Bailey, BoE Governor, about tackling climate change. In the speech, Mr Bailey reflects on central banks' climate-related work to date and considers how it will need to evolve if banks are going to continue to meet their remit.

PRA temporary permissions regime: PRA approach to authorising firms

The PRA has published a statement providing an update on its approach to authorising firms within the temporary permissions regime (TPR). The PRA explains that it has an extended period to process authorisation applications from EEA banks and insurers in the TPR (currently up to the end of 2023). It has received a considerable volume of applications of varying scale and complexity across a range of different business models, and some firms in the TPR may choose not to apply for authorisation until the end of 2022 (or otherwise as the PRA may direct).

In view of this, the PRA expects to take authorisation decisions on a case-by-case basis, dependent on its resourcing and governance processes. This approach may also result in the PRA taking multiple decisions on the same date. While this means that some firms may receive an authorisation application outcome ahead of others, it states that the timing of authorisation should not be taken as an indication of its view of risks at individual institutions.

The PRA's dedicated webpage on the TPR contains further information on its approach.

FCA quarterly consultation 32

The FCA has published Quarterly Consultation Paper No. 32, CP21/16, in which it invites comments on proposed miscellaneous amendments to the FCA Handbook in the following sections:

  • CONC 6.7.4R to enable firms providing credit cards to offer instalment plans to customers without requiring a rule modification. Comments can be made on these proposals until 2 August 2021;
  • CONC to make minor consequential changes arising from the FCA's recent update to the statutory information sheets sent to customers in arrears and default under the Consumer Credit Act 1974. Comments can be made on these proposals until 5 July 2021;
  • the Mortgage Lenders and Administrators Return (MLAR) reporting instructions due to the cessation of LIBOR. Comments can be made on these proposals until 2 August 2021; and
  • DEPP and FEES as a result of a new power given in the Financial Services Act 2021 to the FCA to cancel or vary FCA-authorised firms' Part 4A permissions. Comments can be made on these proposals until 5 July 2021.

FCA regulatory sandbox: successful applicants to seventh cohort

The FCA has published a new webpage providing details of the 13 firms that were successful in applying to begin testing in the seventh cohort of the regulatory sandbox.

Although the regulatory sandbox is currently run on a cohort basis, with application windows opened periodically throughout the year, the FCA says that it intends to move to "Always Open" later in 2021 to make the regulatory sandbox available throughout the year. It will also expand and clarify the scope of qualifying propositions. The FCA will make further announcements about these changes.

FCA policy development update

The FCA has updated its policy development update webpage for June 2021, setting out information on recent and future FCA publications.

Pensions consumer journey call for input: FCA and TPR extend deadline for responses

The FCA has announced that the deadline for responding to the call for input it published jointly with The Pensions Regulator (TPR) on the behaviour of consumers at key points in the pension saving journey has been extended by four weeks, to 30 July 2021.

MaPS releases Beta MoneyHelper site

The Money and Pensions Service (MaPS) has announced that it has released a Beta version of the MoneyHelper consumer website to share with stakeholders and partners. MoneyHelper is a single access service for people needing pensions and money guidance. It replaces and consolidates the MaPS' legacy brands (Money Advice Service, The Pensions Advisory Service and Pension Wise). Pension Wise will continue to operate as a named service provided by MoneyHelper.

The release of the Beta MoneyHelper site is to allow MaPS to continue testing and to gather feedback ahead of the full consumer launch. MaPS has set a working date of 30 June 2021 for this.

While the Beta MoneyHelper site is live, MaPS will not be promoting it to consumers, and no webpages beyond the homepage will show up on search results. MaPS' legacy brand websites and services will continue to operate during the transition period.

Accelerating the S in ESG: IRSG report

The International Regulatory Strategy Group (IRSG) has published a report on "Accelerating the S in ESG – a roadmap for global progress on social standards".

Among other things, the report sets out recommendations for how public policy, companies and financial markets participants can drive more socially sustainable investment. These include pursing global consensus on social principles, developing minimum standards for social issues, choosing a single social principle (such as modern slavery) to drive momentum, and using legislation to drive socially sustainable finance. Specifically, financial institutions should act as a catalyst of change by applying consistent standards across all jurisdictions they operate in to raise social standards. They should "use the levers available to them to engage and promote best practice across their own activities, their supply chains and in the business they facilitate".

Taxonomy Regulation: European Commission adopts Taxonomy Climate Delegated Act

The European Commission has updated a webpage to confirm it has adopted Commission Delegated Regulation supplementing the Taxonomy Regulation relating to climate change mitigation and adaptation (known as the Taxonomy Climate Delegated Act).

The text of the adopted Taxonomy Climate Delegated Act has also been published (along with Annex 1 and Annex 2 to it). The legislation contains a set of technical screening criteria that define which activities contribute to environmental objectives contained in the Taxonomy Regulation (climate change adaptation and climate change mitigation).

The Taxonomy Climate Delegated Act will enter into force 20 days after it has been published in the Official Journal of the European Union (OJ). It will apply from 1 January 2022.

Taxonomy Regulation: European Commission publishes EU Taxonomy Compass

The European Commission has announced the publication of its EU Taxonomy Compass, which provides a visual representation of the content of the EU Taxonomy, starting with the Taxonomy Climate Delegated Act.

The EU Taxonomy Compass provides a visual representation of the contents of the EU Taxonomy. It aims to enable a variety of users to access the contents of the EU Taxonomy more easily, by allowing them to check which activities are included in the EU Taxonomy (taxonomy-eligible activities), which objectives they substantially contribute to and what criteria they have to meet. It also aims to make it easier to integrate the criteria into business databases and other IT systems by including a number of download options.

The Commission explains that, to start with, the EU Taxonomy Compass covers the Taxonomy Climate Delegated Act (see report above), which was adopted on 4 June 2021 but has not yet entered into force. However, it plans to update the Compass over time to include future delegated acts specifying technical screening criteria for additional economic activities substantially contributing to the climate objectives and the other environmental objectives of the Taxonomy Regulation. It will also reflect any future reviews of the delegated acts.

DORA: ECB opinion on proposed Regulation and Directive

The European Central Bank (ECB) has published an opinion on the proposal for a Regulation on digital operational resilience for the financial sector (DORA) and the related proposal for a Directive that clarifies and amends certain existing EU financial services Directives to align them with the proposed Regulation. Points of interest in the opinion include the following:

  • the ECB welcomes the proposed Regulation. In particular, it welcomes the aim of the proposed Regulation to remove obstacles to, and improve the establishment and functioning of, the internal market for financial services by harmonising the rules applicable in the area of information and communication technology (ICT) risk management, reporting, testing and ICT third-party risk;
  • the ECB suggests that the EU legislative bodies reflect further on potential inconsistencies between the proposed Regulation and the Network and Information Security Directive (NIS Directive) that may hamper the harmonisation and reduction of overlapping and conflicting requirements for financial entities. It also suggests that there should be greater coordination between the proposed Regulation and the proposed NIS2 Directive to clarify the exact scope of reporting to which any given financial entity may be subject.
  • the ECB states that further clarification and reflection by the EU legislative bodies is warranted on the interplay between the proposed Regulation and the regulatory technical standards supplementing the Central Securities Depositories Regulation (CSDR) to avert the risk of conflicting requirements. Also, it should be clarified that exemptions granted to CSDs operated by certain public entities under the CSDR are extended under the proposed Regulation; and
  • the requirements related to ICT risk for the financial sector are currently spread over a number of pieces of EU legislation and soft law instruments (such as European Banking Authority guidelines) and are diverse and occasionally incomplete. In some cases, ICT risk has only been implicitly addressed as part of operational risk, whereas in others it has not been addressed at all. This should be remedied by aligning the proposed Regulation and relevant legislation.

Where the ECB recommends that the proposed Regulation is amended, it has set out specific drafting proposals in a technical working document (at the end of the opinion) accompanied by explanatory text.

CRR and Solvency II: Joint Committee of ESAs final reports on amending ITS on mapping credit assessments of ECAIs

The Joint Committee of the European Supervisory Authorities (ESAs) has published the following final reports on the mapping of external credit assessment institutions' (ECAIs) credit assessments:

  • a final report on draft implementing technical standards (ITS) amending Implementing Regulation (EU) 2016/1799 on the mapping of ECAIs' credit assessments under Article 136(1) and (3) of the Capital Requirements Regulation (CRR). The ITS reflect a mandate in Article 136(1) of the CRR; and
  • a final report on draft ITS amending Implementing Regulation (EU) 2016/1800 on the allocation of credit assessments of ECAIs to an objective scale of credit quality steps in accordance with the Solvency II Directive. These ITS reflect a mandate in Article 109a(1) of the Solvency II Directive.

The ITS have been amended following the recognition of two new credit rating agencies (CRAs) and the de-registration of a number of CRAs. The amendments reflect the allocation of appropriate risk weights to the newly established ECAIs, and remove reference to the de-registered CRAs. They also reflect the outcome of a monitoring exercise on the existing mappings, based on the additional quantitative and qualitative information collected after the original Implementing Regulation entered into force. In particular, the ESAs propose to change the credit quality step allocation for two ECAIs, and to introduce new credit rating scales for nine ECAIs.

The ESAs have also published individual draft mapping reports showing how the methodology was applied to produce the amended mappings.

The ITS will be submitted to the European Commission for endorsement, following which they will be published in the OJ. The ITS will apply 20 days following their publication in the OJ.

CRD: EBA consults on threshold for reclassification of investment firms as credit institutions

The European Banking Authority (EBA) has published a consultation paper on regulatory technical standards (RTS) on the reclassification of investment firms as credit institutions.

Article 8a of the Capital Requirements Directive (CRD), which was introduced by the Investment Firms Directive (IFD), specifies the triggers for when a systemically important investment firm must seek authorisation as a credit institution. Broadly, the trigger is that the average of the firm's monthly total assets, calculated over a period of 12 consecutive months on a solo consolidated basis, is equal to or exceeds EUR30 billion. Article 8a(6)(b) mandates the EBA to produce RTS on the calculation of the EUR30 billion threshold.

In the draft RTS, the EBA sets out provisions on calculation of the value of assets for determining the threshold. The RTS cover issues including the concept of consolidated assets, the accounting standards for determining asset values, the procedure to calculate the total assets on a monthly basis and the treatment of assets of branches of third country groups.

The deadline for responses is 17 July 2021. The EBA intends to finalise the RTS and submit them to the European Commission in early Q4 2021. This is the second consultation on these RTS.

G7 finance ministers and central bank governors communique

The G7 finance ministers and central bank governors have issued a communique following their June 2021 meeting in London. In the communique, among other things, the ministers and governors:

  • commit to properly embed climate change and biodiversity loss considerations into economic and financial decision-making, including addressing the macroeconomic impacts and the optimal use of the range of policy levers to price carbon;
  • emphasise the need to green the global financial system so that financial decisions take climate considerations into account. They support moving towards mandatory climate-related financial disclosures that provide information for market participants, which are based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, and agree on the need for a baseline global reporting standard for sustainability;
  • recognise that climate change poses increasing physical and transition risks to regulated financial institutions and to financial stability, and that these risks have distinct characteristics. G7 authorities consider it important for financial firms to manage the financial risks of climate change using the same risk management standards as applied to other financial risks. G7 central banks will consider using scenarios published by the Network for Greening the Financial System (NGFS). The work of the Financial Stability Board (FSB) and the G20 Sustainable Finance Working Group (SFWG) is supported;
  • commit to work together to consider the wider policy implications of CBDCs. CBDCs should be resilient and energy-efficient, support innovation, competition, inclusion, and could enhance cross-border payments. Conclusions on common principles are due to be published later in 2021; and
  • reiterate that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards.

Climate-related metrics, financial impacts, targets and transition plans: TCFD consults on guidance

The TCFD has published a consultation on its Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans and published Measuring Portfolio Alignment: Technical Supplement.

The consultation closes on 7 July 2021 and the TCFD aims to finalise the guidance in autumn 2021.

Climate scenarios for climate risk assessments: NGFS updates

The NGFS has published:

  • a new set of climate scenarios. This second set builds on the first set (which were published in June 2020) by incorporating countries' commitments to reach net-zero emissions and by covering more macroeconomic variables. The six climate scenarios aim to explore the impacts of climate change and climate policy and provide a common reference framework. Each NGFS scenario explores a different set of assumptions for how climate policy, emissions, and temperatures evolve, and are characterised by their overall level of physical and transition risk; and
  • a website, which aims to act as a portal to NGFS scenarios. The website also hosts related NGFS publications and data (including physical risk data).

Although the climate scenarios have been primarily developed for central banks and supervisors, they can also be used by financial institutions. A related press release explains the scenarios and highlights some key themes which can be used to help set more granular targets, enhance strategic thinking, and form a part of climate-related financial disclosures.

The NGFS plans to continue developing the scenarios and is due to work with industry ahead of COP26 in November 2021 to ensure the scenarios are suitable for wider use.

Developing climate finance taxonomies: GFMA guiding principles

The Global Financial Markets Association (GFMA) has published a paper containing global guiding principles for developing climate finance taxonomies. The GFMA calls on global policymakers, standard setters, and market participants to agree on a minimum set of global guiding principles and definitions to underpin all existing and new taxonomies across regions and to align their taxonomies to globally consistent definitions to promote this common understanding.

Outsourcing and third-party relationships: FSB overview of responses to discussion paper

The Financial Stability Board (FSB) has published a note providing an overview of the responses it received to its November 2020 discussion paper on regulatory and supervisory issues relating to outsourcing and third-party relationships. Respondents generally welcomed the discussion paper and agreed with the challenges and issues it identified. They suggested the following measures to address these challenges and issues:

  • the development of global standards (which could include both regulatory and industry standards) on outsourcing and third-party risk management. These standards should be proportionate to the complexity, size, nature and risk profile of different financial institutions and they should be principles-based, outcomes-focused and proportionate to the criticality of the functions, services or technologies provided or supported by third parties;
  • the adoption of consistent definitions for terms such as "outsourcing" and "third-party relationships", so it is clear what activities are in scope of regulation;
  • the use of pooled audits (that is, collaborative assessments of common third-parties carried out by groups of financial institutions or experts appointed on their behalf) as an effective form of third-party risk management that can help to reduce the burden on the relevant stakeholders;
  • the use of certificates and reports provided by third-party service providers evidencing compliance with internationally-recognised standards as a way to promote a consistent approach to financial institutions' oversight of third-parties;
  • the establishment by financial institutions of an inventory of services and technologies provided by third parties (including key entities involved in their supply chains) to map their dependency on third parties, and the enhancement of supervisory authorities' oversight of third-party service providers; and
  • the creation of a regular international forum (or public-private global working group) to exchange views and best practices on cross-border issues associated with outsourcing and third-party relationships.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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