Key Regulatory Topics: Weekly Update February 2021

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Brexit

Please see our Brexit financial services webpage, which contains, amongst other things, tables detailing Brexit statutory instruments, equivalence decisions, EEA transitional regimes and UK regulators’ publications.

Capital Markets

Please see our Markets and Markets Infrastructure section for an update on the Council of the EU adopting amendments to MiFID II and the Prospectus Regulation in view of Covid-19.

Consumer/Retail

FCA consults on extending guidance on cancellations and refunds

On 12 February, the FCA published a consultation on guidance on cancellations and refunds, specifically regarding helping consumers with rights and routes to refunds. The FCA explains that on 2 October 2020, it published temporary guidance setting out its expectations for insurance providers and card providers to reduce consumer confusion and frustration by outlining its expectations of firms to provide more information and make the consumer journey easier. Currently, the guidance is effective until 2 April. In the consultation, the FCA proposes that the guidance remain in place during the exceptional circumstances arising out of Covid-19 until varied or revoked. The deadline for comments is 26 February.

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Covid-19

Please see the other sections for product-specific updates relating to Covid-19.

European Systemic Risk Board (ESRB) report on the financial stability implications of Covid-19 support measures to protect the real economy

On 16 February, the ESRB published a report on the financial stability implications of support measures aimed at protecting the real economy from the effects of Covid-19. The report shows that the fiscal response designed to support the real economy has stabilised lending and that the financial system has continued to function – however, as risks still lie ahead, the report also identifies various policy priorities in terms of the design and duration of the fiscal measures, enhanced transparency and reporting, and preparedness for further adverse scenarios. Further, the ESRB notes that: (i) the longer the crisis lasts and the weaker the economic recovery, the greater the risk that losses in the non-financial sector could spill over into the financial sector; and (ii) authorities need to carefully manage the trade-offs related to the duration of the measures. The ESRB has published an infographic on the fiscal response to the Covid-19 shock, illustrating that lending has stabilised but risks still lie ahead.

Report

Infographic

Financial Crime

Please see our Other Developments section for an update on the publication of the draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021.

Fintech

UK Jurisdiction Taskforce (UKJT) consultation on blockchain dispute resolution

On 17 February, the UKJT published a consultation on a possible dispute resolution mechanism for blockchain disputes, specifically a new arbitration procedure. The questions posed by the UKJT are: (i) whether there is a need for or advantage in a new arbitral process aimed at facilitating the rapid, informal and cost-effective resolution of disputes arising out of novel digital technologies; (ii) whether the process, as described in the draft rules, meets that need; and (iii) the reasons why, if the process does not meet that need. With the benefit of input received through this consultation, the UKJT hopes to publish the Digital Dispute Resolution Rules for use by commercial parties in the spring.

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Markets and Market Infrastructure

Please see our Other Developments section for an update on the publication of the draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021.

Delegated Regulations under EMIR on clearing obligation and risk mitigation published in the OJ

On 17 February, two Delegated Regulations made under EMIR were published in the OJ. First, Commission Delegated Regulation (EU) 2021/236 was published which amends the regulatory technical standards (RTS) laid down in Delegated Regulation (EU) 2016/2251 as regards to the timing of when certain risk management procedures will start to apply for the purpose of the exchange of collateral. Second, Commission Delegated Regulation (EU) 2021/237 was published which amends the RTS laid down in Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the date at which the clearing obligation takes effect for certain types of contracts. The Delegated Regulations entered into force on 18 February (the day following their publication in the OJ).

Commission Delegated Regulation (EU) 2021/236

Commission Delegated Regulation (EU) 2021/237

ESMA board of supervisors’ deletation to ESMA Chair regarding opinions on positon limits that national competent authorities (NCAs) intend to set under MiFID II

On 17 February, ESMA published a decision by its board of supervisors on delegating to the ESMA Chair the task of issuing opinions relating to NCAs’ submissions on the position limits they intend to set under Article 57 of MiFID II. Specifically, the Board of Supervisors delegates to the ESMA Chair the task of: (i) assessing the compatibility of position limits with the objectives of Article 57(1) of MiFID II and with the methodology for calculation established in Commission Delegated Regulation (EU) 2017/591; and (ii) issuing on behalf of ESMA any non-controversial opinion regarding the intended position limits. The board of supervisors retains the power to adopt controversial opinions for the purposes of Article 57(5) of MIFID II. The decision also provides detail on the exercise of the delegation, and the conditions for it.

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Council of the EU adopts amendments to MiFID II and Prospectus Regulation – Covid-19

On 15 February, the Council of the EU published a press release announcing that it has adopted targeted amendments to MiFID II and the Prospectus Regulation to facilitate the recapitalisation of EU companies in the wake of the Covid-19 crisis, as part of the Capital Markets Recovery Package. The MiFID II rules have been amended to simplify information requirements in a targeted manner, while safeguarding investor protection. The changes reduce, for instance, the information on costs and charges that must be provided to professional investors and eligible counterparties. Paper-based investment information will also be phased out, except for retail clients if they ask to continue to receive it. The new rules will also allow banks and financial firms to bundle research and execution costs when it comes to research on small and mid-cap issuers to help to increase research on such issuers and their access to funding. Other changes include adaptations to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivatives markets. Separately, the Council of the EU notes that the Prospectus Regulation has been amended mainly to establish a new ‘EU recovery prospectus’ – this shorter prospectus will make it easier for companies to raise capital to meet their funding needs, while ensuring adequate information is provided to investors. The recovery prospectus will be available for capital increases of up to 150% of outstanding capital within a period of 12 months, and the new regime will apply until the end of 2022. The texts of the adopted legislative acts were signed on 16 February and are expected to be published in the OJ before the end of February.

Press Release

Legislative Act – Amendments to MiFID II

Legislative Act – Amendments to the Prospectus Regulation

HMT consults on supporting the wind-down of critical benchmarks

On 15 February, HMT published a consultation paper on supporting the wind-down of critical benchmarks. HMT explains that the Financial Services Bill includes amendments to the Benchmarks Regulation (BMR), which provide the FCA with new and enhanced powers to oversee the orderly wind-down of critical benchmarks, such as LIBOR. This consultation seeks views on whether a legal safe harbour could be a helpful supplement to the provisions inserted into the BMR – the consultation looks to gain views on whether there is a case for introducing legislation and, if it is warranted, the design and scope of any such legislation. Specifically, the consultation seeks views on whether legislation is needed in respect of a legal safe harbour that would act as a helpful contingency in reducing the potential risk of contractual uncertainty and disputes in respect of certain legacy contracts referencing or relying upon a benchmark that has been designated as an Article 23A benchmark, and that may be subject to a change in methodology under Article 23D. The deadline for comments is 15 March.

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The Working Group on Sterling Risk-Free Reference Rates (RFRWG) paper on transition in sterling non-linear derivatives referencing GBP LIBOR ICE Swap Rate (ISR)

On 12 February, the RFRWG published a paper on transition in sterling non-linear derivatives referencing GBP LIBOR ISR. The RFRWG states that the purpose of this paper is to document how the Non-Linear Derivatives Task Force (NLTF) has been considering the use of SONIA swap rates to develop a potential methodology for a replacement for GBP LIBOR ISR. Furthermore, the RFRWG notes that the paper is intended to support market participants’ use of non-linear derivatives, structured products and cash market instruments that reference the GBP LIBOR ISR, in their efforts to meet the target milestones in the Working Group’s roadmap and priorities for this year.

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UK Finance guide to LIBOR discontinuation for banks and lenders

On 12 February, UK Finance published a guide to LIBOR discontinuation for banks and lenders. UK Finance states that the purpose of the document is to help UK Finance members identify the actions that they need to take to ensure that they are ready to meet the various LIBOR implementation deadlines. The guide provides a UK focused introduction to regulatory, commercial and operational challenges of LIBOR transition. It also includes a useful checklist for potential next steps and how to transition away from LIBOR with minimal disruption.

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Regulation amending the Benchmarks Regulation (BMR) as regards the exemption of certain third-country foreign exchange (FX) benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation, published in OJ

On 12 February, Regulation (EU) 2021/168, which amends the BMR as regards the exemption of certain third-country foreign exchange (FX) benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation, was published in the OJ. The Regulation will enter into force and apply from 13 February.

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EC targeted consultation on review of the Settlement Finality Directive (SFD) and Financial Collateral Directive (FCD)

On 12 February, the EC published a targeted consultation on the review of the SFD. Amongst other things, the EC is considering: (i) extending the scope of the SFD to e-money and payment institutions; (ii) the position of central securities depositories (CSDs); (iii) technological neutrality; and (iv) clarity of the interaction of the SFD with other relevant legislation, such as the BRRD, the CCP Recovery and Resolution Regulation and PSDII. The EC’s findings from the review will feed into a report to the EP and the Council of the EU. Furthermore, the EC confirms that since the FCD is closely related to the SFD, it has decided to review the FCD in parallel and has published a targeted consultation on the review of the FCD. The EC notes that two issues that are dealt with in the FCD consultation are also important for the SFD: (a) the provision of cash and financial instruments as financial collateral; and (b) the recognition of close-out netting provisions. The deadline for responses for both consultations is 7 May.

Consultation – SFD

Consultation – FCD

Payment and Payment Services

Please see our Markets and Markets Infrastructure section for an update on the EC’s recent targeted consultations on the review of the Settlement Finality Directive (SFD) and Financial Collateral Directive (FCD).

Prudential Regulation

Commission Implementing Regulation on closely correlated currencies in accordance with the CRR published in OJ

On 18 February, Commission Implementing Regulation (EU) 2021/249, which amends Implementing Regulation (EU) 2015/2197 with regard to closely correlated currencies in accordance with the CRR, was published in the OJ. The Regulation replaces the text of the Annex to Implementing Regulation (EU) 2015/2197 to update the list of closely correlated currencies. The list uses 31 March 2019 as the end date for the purpose of computing the three and five-year data series required to assess currency pairs. The Regulation will enter into force on 10 March (this being 20 days after publication in the OJ).

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EBA publishes final draft implementing technical standards (ITS) on disclosure of indicators of global systemic importance by global systemically important institutions (G-SIIs)

On 18 February, the EBA published its final draft ITS on disclosure of indicators of global systemic importance by G-SIIs. The EBA explains that these standards help to identify which banks are GSIIIs and specify the formats and instructions in accordance with which G-SIIs disclose the information required under the CRR and aim at ensuring consistency of information. The EBA notes that the ITS will amend the final draft ITS on institutions’ public disclosures with the strategic objective of defining a single, comprehensive Pillar 3 framework under the CRR that should integrate all the relevant Pillar 3 disclosure requirements.

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EBA consults on guidance to assess breaches of the large exposure limits under the CRR

On 17 February, the EBA published a consultation paper on the criteria that competent authorities should use to assess a breach of the large exposure limits under the CRR. The consultation also details how competent authorities may determine the time considered appropriate for the institution to return to compliance, and measures to be taken to ensure the timely return to compliance with those limits. The guidelines will apply from 1 March 2022. The deadline for comments is 17 May.

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EC report on possible extension of the leverage ratio buffer framework to other systemically important institutions (O-SIIs) as well as on the definition and calculation of the total exposure measure under the CRR

On 16 February, the EC published a report on the possible extension of the leverage ratio buffer framework to O-SIIs, as well as on the definition and calculation of the total exposure measure, including the treatment of central bank reserves, under the CRR (as amended by the CRR II). The EC concludes that it: (i) does not consider it appropriate to introduce a leverage ratio surcharge for O-SIIs in the current context – this question should be examined as part of the comprehensive review of the macroprudential toolbox in banking by 30 June 2022; and (ii) considers it appropriate to adjust the calculation of the total exposure measure referred to in Article 429(4) of the CRR to align the treatment of client-cleared derivatives with internationally agreed standards. The EC notes that revisions to the treatment of central bank reserves have already been made via Regulation (EU) 2020/873 – in the absence of further international developments on the treatment of central bank reserves and in light of this recent revision, the EC does not consider that additional amendments are necessary.

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EBA publishes final guidelines on conditions for alternative treatment of “tri-party repurchase agreements” for large exposure purposes under CRR

On 16 February, the EBA published its final guidelines specifying the conditions for the application of the alternative treatment of institutions’ exposures related to ‘tri-party repurchase agreements’ set out in Article 403(3) of the CRR (as amended by the CRR II) for large exposures purposes. Specifically, the guidelines: (i) recommend a set of elements that an institution and a tri-party agent should include in their service agreement for the use of the alternative treatment; (ii) establish a set of safeguards that the tri-party agent has to put in place and for which the institution needs to verify the appropriateness for the use of the alternative treatment; (iii) specify how institutions should determine the limits to be applied by a tri-party agent with regard to the securities of a collateral issuer, as well as the general framework under which such limits can be revised; and (iv) include a non-exhaustive list of circumstances that could lead the competent authority to raise material concerns and that would prevent the use of the alternative treatment by institutions – a procedure for dealing with those material concerns is also specified. The deadline for competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply from 28 June.

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PRA Dear CFO letter on disclosures about International Financial Reporting Standard (IFRS) 9 expected credit losses (ECLs)

On 16 February, the PRA published a Dear CFO letter (dated 15 February) on disclosures about IFRS 9 ECLs. In November 2018, the Taskforce on Disclosures about ECLs published its first report on what good ECL disclosure looks like. In its letter from January 2019, the PRA noted that it expects firms to be looking to adopt the report’s recommendations in full, as amended by the second report that was published in December 2019, consistent with the commitments made in the British Bankers’ Association Code for Financial Reporting Disclosure (BBA Disclosure Code). As it has now been two years since that letter, the PRA is asking CFOs for a voluntary update on their progresses. In particular, the PRA would like to know: (i) how far firms have progressed in adopting each of the Taskforce’s recommendations – the PRA asks to provide that assessment against each recommendation; and (ii) firms’ plans for adopting the recommendations that are not so far adopted in full. The deadline for responses is within six weeks of firms finalising their 2020 (or 2020/21) year-end annual report.

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BoE materials on variable paths for the stress test scenario for firms not participating in the 2021 solvency stress test

On 15 February, the BoE published a document that sets out variable paths for the 2021 stress test of the UK banking system (macroeconomic variables, yield curves and traded risk). Furthermore, the updated webpage notes that the BoE has published the solvency stress test 2021 scenario for banks and building societies that are not part of concurrent stress testing.

Webpage

Variable Paths – 2021 stress test of UK banking system

Variable Paths – Firms not participating in 2021 concurrent stress test

PRA consultation on implementation of Basel standards

On 12 February, the PRA published a consultation paper on the implementation of Basel standards through a new PRA CRR rule instrument. The PRA explains that the purpose of these rules is to implement part of the set of the standards that remain to be implemented in the UK. This CP also sets out the proposed new PRA CRR rules in full, including: (i) specification of the level and scope of application of the requirements for UK firms; (ii) revision to the definition of capital, in particular for the treatment of Common Equity Tier 1 (CET1) deductions for software assets and certain collective investment undertakings (CIUs); (iii) revised Basel standards for prudent valuation for market risk and amendments to market risk management requirements; (iv) revised Basel standards for calculating risk-weighted exposures to CIUs under the standardised approach and a more prudent treatment of exposures to certain CIUs located and managed in third countries; (v) a new Basel standardised approach to counterparty credit risk (SA-CCR) and the revised Basel framework for exposures to central counterparties (CCPs); (vi) clarification of the treatment of operating leases under the basic indicator approach (BIA) for operational risk; (vii) implementation of the Basel III standards revised large exposures framework; (viii) implementation of the Basel III standards for liquidity coverage ratio (LCR); (ix) the Basel III standards for the net stable funding ratio; (x) an update to supervisory reporting; (xi) revised Basel disclosure standards; (xii) the currency in which requirements would be set; (xiii) the interaction between the temporary transitional power (TTP) and the CRR rules; and (xiv) enhanced proportionality for smaller firms. The PRA confirms that its proposed approach would enable these Basel III standards to be implemented by firms from 1 January 2022. The deadline for comments is 3 May.

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Sustainable Finance

Please see our Other Developments section for updates on the: (i) publication of the draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021; and (ii) PRA letter to Independent Non-Executive Directors (iNEDs).

United Nations Environment Programme Finance Initiative (UNEP FI) three reports on climate risk management tools for financial institutions

On 17 February, the UNEP FI published three reports on climate risk management tools for financial institutions: (i) Pathways to Paris – a practical guide to climate transition scenarios for financial professionals; (ii) Decarbonisation and Disruption – understanding the financial risks of a disorderly transition using climate scenarios; and (iii) Climate Risk Landscape – a comprehensive overview of climate risk assessment methodologies. The UNEP FI explains that the latest guidance is the result of a leading-edge project that convened 39 banks to pilot the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) building on previous UNEP FI’s work. The package of reports also includes guidance on understanding how the impacts of climate change and the low-energy transition may impact society and the economy. Additionally, the reports provide an overview of the various tools and analytics available, as well as the potential technological and regulatory developments that may shape climate risk tools in the future.

Press Release

Report – Pathways to Paris

Report – Decarbonisation and Disruption

Report – Climate Risk Landscape

New UK Centre for Greening Finance and Investment (CGFI)

On 15 February, HMT published a press release to announce that Leeds and London will be home to a new UK Centre for CGFI, as announced by Energy Minister Anne-Marie Trevelyan, as a result of £10 million in Government investment. HMT states that the new centre will begin in April, with physical hubs in Leeds and London opening a matter of months later led by a partnership with a number of UK institutions including University of Oxford, the University of Leeds and Imperial College London. HMT notes that the research hubs in the two cities will provide world-class data and analytics to financial institutions and services such as banks, lenders, investors and insurers around the world to better support their investment and business decisions by considering the impact on the environment and climate change.

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Other Developments

FCA regulation round-up 2021

On 18 February, the FCA published its regulation round-up for February. Amongst other things, this covers: (i) registration for RegData – the FCA reports that half of the firm reporting population have successfully moved to its new data collection platform, RegData, and have begun using the new system for their regulatory reporting; (ii) SIPP operator capital adequacy – the FCA notes that its recent work indicates that some SIPP operators are not calculating liquid capital correctly in line with IPRU-INV 5.8; and (iii) Digital Sandbox pilot – the FCA has made available the recordings of the presentations given by firms that are taking part in the Digital Sandbox pilot.

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PRA letter to Independent Non-Executive Directors (iNEDs) – summary of virtual meetings with the PRA’s senior advisors

On 16 February, the PRA published a letter addressed to iNEDs regarding virtual meetings between the PRA’s Senior Advisors and independent Non-Executive Directors (iNEDs) from approx. 40 PRA-regulated banks and insurers (firms) which took place in October and November 2020. The PRA notes that the Covid-19 outbreak was a dominant theme in its discussions. The letter summarises key themes that emerged in the discussions, in the following areas: (i) the effect of the economic downturn on business models; (ii) operational resilience in light of the new working environment; (iii) governance and people challenges; (iv) climate related financial risks; (v) feedback on the regulatory landscape; and (vi) other issues, in particular, wider consequences of the outbreak for business strategies.

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Business Banking Resolution Service (BBRS) announces that a free and independent service for unresolved bank complaints goes live

On 15 February, the BBRS announced that small businesses will now be able to use a new, free and independent service to help them resolve disputes with their banks, in a boost for SMEs struggling in the current crisis. The BBRS states that it will use alternative dispute resolution techniques to settle unresolved complaints from larger SMEs with seven participating banks, which make up the majority of the business banking market.

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Draft Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021

On 12 February, the Government published a draft version of the Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021. A draft explanatory memorandum was also published, which explains that the instrument is being made as part of the legislative effort to establish a UK Emissions Trading Scheme (ETS) and accompanying emission allowance market. The instrument updates existing UK provisions to reflect that the UK is no longer part of the EU ETS but has now established the UK ETS. The instrument is specifically concerned with amendments to financial services law that govern access to a UK ETS auction platform, what is required of an auction platform, and the auctioning and trading of emission allowances as financial instruments. Further, the instrument ensures the appropriate regulatory treatment of UK emission allowances, which includes replacing references to EU emission allowances with references to UK emission allowances or adding references to UK emission allowances to existing references to EU emission allowances. The legislation that is amended by the instrument includes the: (i) Financial Services and Markets Act 2000 (FSMA); (ii) Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; (iii) Financial Services and Markets Act 2000 (Financial Promotion) Order 2005; (iv) Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; and (v) UK Market Abuse Regulation. The Regulations will come into force the day after they are made.

Draft Regulations

Draft Explanatory Memorandum

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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