Of particular note this week in the EU, the Council adopted the legislative package to strengthen market data transparency which includes changes to the EU’s trading rules on market data, payment for order flow and commodity derivatives arising from the EU MiFID II/MIFIR Review. There were also some notable developments on the fintech front, with MiCAR Delegated Regulations on fees, supervisory fines, classification of ARTs and EMTs and supervisory intervention powers adopted and, in the UK, the Law Commission launching a call for evidence and a consultation in relation to its work on digital assets. In addition, the FCA was active on the consumer and retail side this week, with updates and a speech on Consumer Duty implementation, plus the launch of its working group on interest-only mortgages.
CONSUMER/RETAIL
FCA working group on interest-only mortgages
On 21 February, the FCA launched the creation of an industry working group on interest-only mortgages. The group’s primary purpose will be to support and inform the FCA’s review of its existing interest-only mortgage market. The working group will: (i) map the current guidance as it is currently applied, including options and support offered to borrowers who are not able to repay at maturity; (ii) consider how borrower contact strategies have evolved over time, and outcomes achieved; (iii) review current follow-on mortgage products and solutions, and consider where further innovation could be beneficial; and (iv) review existing FCA guidance in light of, amongst other things, FCA research findings, firms’ experiences with borrowers and the Consumer Duty coming into force. The working group's discussions are expected to assist the FCA’s ability to ensure firms are providing appropriate support for interest-only borrowers who may otherwise be at risk of not being able to repay. Following the final meeting and once the guidance review has concluded, the FCA will set out any applicable next steps.
Press release
Terms of reference
FCA review of Consumer Duty implementation
On 20 February, the FCA published two documents in relation to its review of firms’ implementation of the Consumer Duty: (i) the results of a November 2023 survey of firms’ implementation progress – the FCA found that there was a significant increase in firms reporting that they have completed the required steps, compared with its Spring 2023 survey. 43% of firms surveyed reported that they are not having difficulty with implementing any aspects, although outcomes monitoring was reported as the most difficult area to implement; (ii) a document highlighting good practices and areas for improvement, including: (a) culture, governance and monitoring – firms need to ensure that the focus on good customer outcomes is understood at all levels, in their strategies, leadership, and people policies; (b) consumers in vulnerable circumstances – firms should be able to identify where particular groups of customers, especially those that are vulnerable, receive poorer outcomes than other customers and take action to address this; (c) products and services – firms in a distribution chain should consider what information they need from each other, with the joint goal of delivering good outcomes for the customer; (d) price and value – firms are expects to be able to explain their remuneration practices and how they are proportionate to the work they do; (e) consumer understanding – firms have a responsibility to promote their products and services in a way that supports good outcomes; and (f) consumer support – firms are expected to train their staff to an appropriate level so they can support good outcomes for their customers, for example by understanding their circumstances and finding appropriate and tailored solutions where needed. The FCA expects firms to consider its findings and continue to make improvements in line with good practice. It considers that the findings may be useful for firms when considering what changes they need to make to meet the 31 July implementation deadline for closed products and services. The FCA states that it will act where it identifies firms that are delivering poor customer outcomes.
Good practices and areas for improvement
Survey results
Survey summary
FCA speech on implementation of the Consumer Duty
On 20 February, the FCA published a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition, on the Consumer Duty. Mr Mills, referring to the FCA’s implementation review (see above) highlights that the price and value outcome is possibly the most challenging outcome for firms to meet. Many of the fair value assessments the FCA has seen are not relying on solid data and other credible evidence to justify the products’ value to retail customers. The FCA states that board reports will come under greater scrutiny as it looks to these to evidence the steps firms are taking to drive good outcomes. Mr Mills sets out the main challenges facing firms as they prepare for the extension of the Consumer Duty to closed products on 31 July: (i) evidencing good outcomes for consumers and addressing gaps in customer data; (ii) determining fair value on closed products; (iii) taking action relating to less engaged customers or customers with which the firm has lost contact; and (iv) vested rights. By now the FCA expects firms to have a clear roadmap to comply with the Consumer Duty for closed products.
Speech
FINANCIAL CRIME
Text of political agreement on proposed AMLA Regulation
On 20 February, the Council of the EU published the final compromise text reflecting the provisional political agreement reached with the EP on the proposed Regulation establishing the AML Authority (AMLA Regulation). The provisional political agreement is still subject to formal approval by the Council and the EP. The location of the seat of the AML Authority is yet to be determined.
Text
Delegated Regulation in relation to AML/CFT central database published in OJ
On 16 February, Commission Delegated Regulation (EU) 2024/595 supplementing the EBA Regulation with regard to RTS specifying the materiality of weaknesses, the type of information collected, the practical implementation of the information collection and the analysis and dissemination of the information contained in the AML/CFT central database referred to in Article 9a(2) of that Regulation, was published in the OJ. The RTS relate to EuReCa, the EU’s central database of information for AML/CFT launched in January 2022. Primarily, the RTS specify: (i) when weaknesses are material; (ii) which information competent authorities have to report and how they have to report it; (iii) how the EBA will analyse this information and make it available to competent authorities; and (iv) the rules that will apply to ensure confidentiality and the protection of personal data contained in the database. The Delegated Regulation shall enter into force on 7 March, 20 days after its publication in the OJ.
Delegated Regulation
FINTECH
EC adopts Delegated Regulations on fees, supervisory fines, classification of ARTs and EMTs and supervisory intervention powers under MiCAR
On 22 February, the EC adopted four Commission Delegated Regulations, supplementing MiCAR by specifying: (i) the fees charged by the EBA to issuers of significant asset-referenced tokens (ARTs) and issuers of significant e-money tokens (EMTs); (ii) the procedural rules for the exercise of the power to impose fines or periodic penalty payments by the EBA on issuers of significant ARTs and issuers of significant EMTs; (iii) certain criteria for classifying ARTs and EMTs as significant; and (iv) the criteria and factors to be taken into account by ESMA, the EBA and competent authorities in relation to their intervention powers. The Council of the EU and the EP will now scrutinise the Delegated Regulations. If neither objects, they will be published in the OJ.
Delegated Regulation on fees
Delegated Regulation on supervisory fines
Delegated Regulation on classification
Delegated Regulation on intervention powers
Law Commission call for evidence and consultation on digital assets
On 22 February, the Law Commission launched a call for evidence to help it identify the most challenging and prevalent issues of private international law that arise from the digital, online, and decentralised contexts in which modern digital assets and electronic trade documents are used. The Law Commission are focusing on questions arising from dealings in crypto-tokens as a particular type of digital asset, and electronic bills of exchange and bills of lading as particular types of electronic trade documents. The deadline for comments is 16 May. The Law Commission is also consulting on draft legislation that would confirm the existence of a “third” category of personal property, implementing the recommendation set out in its June 2023 report. This report concluded that the flexibility of common law allows for the recognition of a distinct category of personal property that can better recognise, accommodate and protect the unique features of certain digital assets. The Law Commission wishes to hear stakeholders’ views and any estimates on the impact that implementation could have on the market. The deadline for comments is 22 March.
Press release
Call for evidence
Consultation
MARKETS AND MARKETS INFRASTRUCTURE
Please see the Recovery and Resolution section for the BoE’s final policy on its approach to its power to temporarily restrict or prohibit discretionary payments to employees or shareholders or recognised UK CCPs in severe circumstances to ensure the continuity of critical clearing services.
Council adopts proposed legislative package to improve MiFID II market data access and transparency
On 20 February, the Council of the EU announced that it has adopted the proposed Regulation and Directive amending MiFID II and MiFIR to strengthen market data transparency. Changes to the existing framework include: (i) the establishment of consolidated tapes to provide investors with up-to-date transaction information for the whole EU; (ii) the imposition of a general ban on ‘payment for order flow’, a practice through which brokers receive payments for forwarding client orders to certain trading platforms. Member States in which the practice already existed may allow investment firms under its jurisdiction to be exempt from the ban, provided that the practice only happens in the context of services to clients in that Member State, but the practice must be phased out by 30 June 2026; and (iii) the introduction of new rules on commodity derivatives. The texts will now be published in the OJ and enter into force 20 days later. The Regulation will apply immediately in all EU countries, whereas Member States will have 18 months to bring into force the laws, regulations and administrative provisions necessary to comply with the directive.
Press release
PAYMENT SERVICES AND PAYMENT SYSTEMS
Please see our FinTech and Digital Assets Talk blog for a recent blog post on the PSR’s final policy positions on APP fraud where we discuss what this means for payment service providers.
EPC consultation on Verification of Payee Scheme Rulebook
On 20 February, the EPC launched a consultation on its proposed Verification of Payee (VoP) Scheme Rulebook and the proposed EPC recommendations for the matching processes under the VoP Scheme Rulebook. This proposed version of the VoP Scheme Rulebook focuses to predominantly fulfil the EU legislative requirements set out by the proposed EU Instant Payments Regulation (IPR) amending the SEPA Regulation. This means that for the time being, and to allow PSPs in the EEA to comply with the new regulatory requirements within the given deadlines, the rulebook limits itself to verifications of a payee related to a SEPA Credit Transfer or a SEPA Instant Credit Transfer. The EPC states that future versions of the VoP scheme rulebook could cover other payment instruments as well, depending on market needs or interest. The deadline for comments is 19 May. The EPC intends to publish the final version of the rulebook by the end of September 2024 in time for the expected implementation date of September/October 2025 for the IPR.
Consultation
PRUDENTIAL REGULATION
Memorandum of Cooperation between ECB and CAs on third-country bank supervision
On 19 February, the ECB published a Memorandum of Cooperation (MoC) between the ECB and competent authorities (CAs) in relation to the supervision of third-country banking groups and branches. The MoC’s aims include to: (i) ensure cooperation by the authorities with the aim that all activities of third-country groups in the EU are subject to comprehensive supervision. It seeks to strengthen the supervisory framework established by the CRD and the CRR that applies to third-country groups in the Union, prevent the circumvention of its requirements and prevent any detrimental impact on the financial stability of the EU; (ii) foster the supervisory framework within which the authorities cooperate and coordinate actions on credit institutions with their head office in a third country that establish one or more third-country branches in the EU; (iii) facilitate the exchange of information between the authorities on third-country groups and third-country branches, and specify the timing and means of such exchange; and (iv) facilitate the building of consensus on supervisory approaches taken by the authorities, to the extent possible.
Memorandum of Cooperation
EBA consults on two ITS on operational risk Pillar 3 and supervisory reporting requirements
On 20 February, the EBA began consulting on two sets of draft ITS amending Pillar 3 disclosures and supervisory reporting requirements for operational risk. These amending ITS implement the new CRR III reporting and disclosure requirements linked to the introduction of the revised framework for the calculation of own funds requirements for operational risk. The consultations are part of phase 1 in the implementation of the EU Banking Package, which also includes the two consultations published in December 2023 covering the disclosure and reporting requirements for output floor, credit risk (also IP Losses), credit valuation adjustment (CVA), market risk and leverage ratio. With these ITS, the EBA aims to bring under one single document both the reporting and disclosure requirements for operational risk and the broader Pillar 3 disclosures and supervisory reporting CRR III changes (already under consultation) so as to provide certainty to banks as soon as possible. The deadline for comments is 30 April.
Press release and annexes
Consultation on Pillar 3 operational risk disclosures
Consultation on supervisory reporting for operational risk
EBA consults on three technical standards for business indicator test under CRR III
On 20 February, the EBA began consulting on two sets of draft RTS and one draft ITS aiming to clarify the new business indicator required for the operational risk capital requirements calculation, map the business indicator items to financial reporting (FINREP) items and highlight possible adjustments to the business indicator in case of specific operations. CRR III replaced the previous calculation of regulatory capital for operational risk with the business indicator component. The draft RTS on the specification on the business indicator items provide a list of typical items developed for each component of the business indicator in line with the work provided in the EBA Policy Advice on the Basel III Reform. They also include subsequent amendments to accounting standards and clarify the elements to be excluded from the business indicator. The draft ITS, where possible, map the typical items of the business indicator to their corresponding reporting cells in FINREP. The draft RTS on business indicator adjustments require institutions to use the actual three-year historical data or a limited number of alternative methodologies following an operation. In the context of disposals, the draft RTS specify the conditions under which permission to exclude business indicator items related to disposed entities or activities may be granted. In parallel with the consultation, the EBA will carry out a quantitative analysis based on data requested as part of the Basel III monitoring quantitative impact study to assess the impact of the proposed amendments, as well as to inform the calibration of certain aspects of the new framework. The deadline for comments is 21 May.
Press release
Consultation
ECB revises guide to internal models under SSM
On 19 February 2024, the European Central Bank (ECB) published a revised version of its guide to internal models under the Single Supervisory Mechanism (SSM). The new version incorporates the ECB’s proposals set out in its June 2023 consultation and the subsequent industry feedback. The guide is intended to provide transparency on how the ECB understands the CRR rules relating to internal models and how it intends to apply them when assessing whether institutions meet the requirements. The revisions, among other changes: (i) clarify how banks should go about including material climate-related and environmental risks in their models; (ii) clarify how banks can revert to the standardised approach for calculating their risk-weighted assets; (iii) in relation to credit risk, aim to help all banks to move towards a common definition of default and a consistent treatment of massive disposals; (iv) in relation to market risk, detail how to measure default risk in trading book positions; and (v) provide clarifications regarding counterparty credit risk. The ECB has published a related FAQ on the changes.
Revised guide
FAQ
RECOVERY AND RESOLUTION
BoE policy statement on approach to restrict or prohibit discretionary payments by CCPs
On 16 February, the BoE published a policy statement on its approach to its power to temporarily restrict or prohibit discretionary payments to employees or shareholders or recognised UK CCPs in severe circumstances to ensure the continuity of critical clearing services. This new power was provided to the BoE by FSMA 2023, as part of the establishment of the special resolution regime for CCPs. The BoE clarifies: (i) the types of factors it may consider in assessing the statutory conditions for the use of the power; (ii) the types of circumstances that could lead to the statutory conditions being deemed to be met; and (iii) the process for giving any direction under this power. The BoE notes that respondents were generally supportive to its proposals and only minor changes were made to the final policy. The policy entered into effect from 16 February.
Policy statement
OTHER DEVELOPMENTS
EC adopts Delegated Regulation on critical ICT third-party service providers and oversight fees under DORA
On 22 February, the EC adopted two Commission Delegated Regulations supplementing DORA by: (i) specifying the criteria for the designation of ICT third-party service providers as critical for financial entities; and (ii) determining the amount of the oversight fees to be charged by the Lead Overseer to critical ICT third-party service providers and the way in which those fees are to be paid. The Council of the EU and the EP will now scrutinise the Delegated Regulations. If neither objects, they will be published in the OJ.
Delegated Regulation on critical designation
Delegated Regulation on oversight fees
PRA policy statement on review of rules
On 22 February, the PRA published a policy statement on its review of its rules. FSMA 2023 introduced a statutory requirement for the PRA to keep its rules under review and to prepare and publish a statement of its policy relating to its review of rules. Respondents to the PRA’s consultation on its rule review framework did not raise major concerns, but did make suggestions on how some aspects of the PRA statement could be changed. Changes the PRA has made in response include clarifying how stakeholder representations, including those made by statutory panels, are considered. The implementation date for the policy was 21 February.
Policy statement
Statement on review of rules
