Blog: Financial Regulation Weekly Bulletin – 9 June 2022 – Lexology

Includes developments in relation to: CRR; MREL; EMIR; introduction of the SMCR for FMIs; recovery and resolution of insurers; pensions consumer journey; and breaches of financial sanctions

Click on the headings below to access each section:

GENERAL

Issue 1163 / 9 June 2022

HEADLINES

  1. International Platform on Sustainable Finance
    1. Common Ground Taxonomy - IPSF publishes updated documents -3 June 2022
  2. European Commission
    1. SFDR – European Commission publishes letter to ESAs-9 June 2022
  3. Council of the European Union and European Parliament
    1. Distributed ledger technology – Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology published in the OJ-2 June 2022
  4. European Supervisory Authorities
    1. SFDR - ESAs publish clarifications on scope of disclosures - 2 June 2022
  5. UK Government
    1. EU proposed Directive on corporate sustainability due diligence – BEIS publishes letter-7 June 2022
  6. HM Treasury
    1. A regime for critical third party service providers to the financial sector – HM Treasury publishes policy paper-8 June 2022
  7. Financial Conduct Authority
    1. Preventing claims management phoenixing – FCA publishes Policy Statement (PS22/6) -7 June 2022
  8. Financial Ombudsman Service
    1. New Chief Executive and Chief Ombudsman – announced by FOS-8 June 2022

International Platform on Sustainable Finance

Common Ground Taxonomy - IPSF publishes updated documents -3 June 2022

The International Platform on Sustainable Finance (IPSF) has published several documents related to its Common Ground Taxonomy (CGT), a comparison between the adopted EU taxonomy for sustainable activities and the China green finance taxonomy. The IPSF was launched in October 2019 to provide a forum for dialogue between policymakers, with the overall aim of increasing the amount of private capital being invested in environmentally sustainable investments.

The current version of the CGT covers 72 climate change mitigation activities that share common ground between the EU and China taxonomies with regard to the “substantial contribution” criteria. As well as an updated report on the CGT, the IPSF has published an amended table of relevant activities and a new set of FAQs.

IPSF: updated report: Common Ground Taxonomy – climate change mitigation

Updated table of activities

Summary of consultation responses (24 February 2022)

FAQs on the Common Ground Taxonomy Table

Updated webpage

European Commission

SFDR – European Commission publishes letter to ESAs - 9 June 2022

The European Commission (the Commission) has published a letter sent to the European Supervisory Authorities (ESAs) (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) regarding amendments to regulatory technical standards (RTS) under the Sustainable Finance Disclosure Regulation (EU 2019/2088) (SFDR). The letter follows the Commission’s adoption of: (i) the RTS in the SFDR Delegated Regulation (C(2022) 1931 (final)), in April 2022; and (ii) a Complementary Climate Delegated Regulation (C(2022) 631 (final)) covering nuclear and fossil gas activities, in March 2022.

The Commission invites the ESAs to jointly propose amendments to the RTS in the SFDR Delegated Regulation regarding the information that should be provided in pre-contractual documents, on websites, and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities, by 30 September 2022. This is to ensure that investors receive information reflecting the provisions set out in the Complementary Climate Delegated Regulation. 

European Commission letter from John Berrigan to the European Supervisory Authorities: amendments to regulatory technical standards under the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (Ares(2022)2798608)

Council of the European Union and European Parliament

Distributed ledger technology – Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology published in the OJ - 2 June 2022

Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (DLT), amending the Markets in Financial Instruments Regulation (600/2014/EU), the Central Securities Depositories Regulation (909/2014/EU) and the Markets in Financial Instruments Directive 2014/65/EU, has been published in the Official Journal of the European Union.

The Regulation aims to develop the trading and settlement of “tokenised” securities. In particular, it aims to ensure more efficient, secure, and cost-effective management of the data stored on blockchains while preserving its quality, usability and comparability. The Council of the EU (the Council) published the revised text of the proposed Regulation on 1 June 2022 (PE-CONS 88/2/21 REV 2), as previously reported in this Bulletin. The European Parliament and the Council adopted the Regulation on 24 March 2022 and 12 April 2022. It will come into force on 22 June 2022 and will apply for the most part nine months later.

Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU

Regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU (PE-CONS 88/2/21 REV 2)

European Supervisory Authorities

SFDR - ESAs publish clarifications on scope of disclosures - 2 June 2022

Three European Supervisory Authorities (ESAs) (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) have published a statement clarifying aspects of the draft regulatory technical standards (RTS) issued under the Sustainable Finance Disclosure Regulation (SFDR). The statement follows “numerous requests for clarifications received from stakeholders and national competent authorities relating to the practical implications and given the significant breadth and technical complexity of these rules.”

The statement clarifies the disclosure of principal adverse impacts (PAI) of investment decisions on sustainability factors and the applicable calculation methodology. It also sets out guidance on pre-contractual and periodic financial product disclosures; the meaning of “minimum proportion” taxonomy-related financial product disclosures; “do not significantly harm” disclosures; and disclosures for financial products with investment options.

The document refers to the European Commission’s November 2021 announcement, as previously reported in this Bulletin, that the RTS’ application date would be delayed to 1 January 2023. 

Clarifications on the ESAs’ draft RTS under SFDR

EBA press release

UK Government

EU proposed Directive on corporate sustainability due diligence – BEIS publishes letter - 7 June 2022

The Department for Business, Energy and Industrial Strategy (BEIS) has published a letter (dated 23 May 2022) from Lord Callanan, Minister for Business, Energy and Corporate Responsibility, to Darren Jones MP, Chair of the BEIS Committee. The letter follows earlier correspondence from Mr Jones (dated 25 March 2022) on the European Commission’s (the Commission’s) proposal for a Directive on corporate sustainability due diligence.

The letter notes that the UK government “supports voluntary due diligence approaches by UK businesses … as steered by several international frameworks” and “does not intend to replicate the European Commission’s proposal for cross cutting mandatory due diligence in the UK’s framework of corporate governance and reporting”. It also refers to the development by the International Sustainability Standards Board of international standards to harmonise ESG reporting and the UK government’s commitment to strengthening section 54 of the Modern Slavery Act 2015. 

More specifically on the Commission’s proposal, Lord Callanan comments that “[i]t is not yet clear how many UK companies will fall directly within the scope” but cautions that “in addition to large companies directly in scope, it is highly likely that small and medium-sized enterprises would be affected where in value chains supplying EU companies in scope.”

Letter from Lord Callanan, Minister for Business, Energy and Corporate Responsibility: EU proposed Directive on corporate sustainability due diligence

HM Treasury

A regime for critical third party service providers to the financial sector – HM Treasury publishes policy paper - 8 June 2022

HM Treasury has published a policy paper on its proposal for mitigating risks from critical third party service providers to the financial sector. The proposal was developed with the Bank of England, the PRA and the FCA (the Regulators) to enable the direct oversight of services that critical third parties provide to firms. It aims to be flexible and proportionate, to ensure that the UK is able to harness the benefits of outsourcing, whilst combatting the systemic risk it poses.

Notable aspects of the proposed critical third party regime are as follows:

  • HM Treasury will be able to designate certain third parties as ‘critical’, in consultation with the Regulators and other bodies. Designation will be made by secondary legislation, taking into account high-level criteria such as the number and type of services a third party provides to firms and the materiality of these services. The designation framework will be set out in primary legislation;
  • Once designated as ‘critical’, the Regulators will be able to exercise a range of powers in respect of any material services that the third party provides to the financial sector. In particular, the Regulators will be able to make rules relating to the provision of material services, gather relevant information from critical third parties, and take formal action (including enforcement) where needed;
  • A rule-making power will allow the Regulators to set minimum resilience standards to be met by critical third parties in respect of any material services provided to the UK financial sector. Regulators will also have the power to require critical third parties to take part in a range of targeted forms of resilience testing. 

The Regulators will publish a joint discussion paper on the exercise of their powers, exploring their role in the designation of third parties as ‘critical’ and the potential ways in which they may coordinate the exercise of their powers with oversees financial regulators as well as UK authorities and regulators outside the financial services sector.

The government intends to legislate for the new regime when parliamentary time allows after which the discussion paper will be published. Following royal assent, the Regulators anticipate publishing a further consultation paper on their proposed rules. Once the Regulators’ rules are finalised, HM Treasury expects to begin designating the first critical third parties under the new regime.

HM Treasury Policy Paper: Critical third parties to the finance sector

Webpage

Financial Conduct Authority

Preventing claims management phoenixing – FCA publishes Policy Statement (PS22/6) - 7 June 2022

The FCA has published a Policy Statement (PS22/6) setting out final rules and guidance prohibiting Claims Management Companies (CMCs) from carrying out regulated claims management activities on claims and potential claims to the Financial Services Compensation Scheme (FSCS) where they have relevant connections to the claims. The rules in the Policy Statement also require CMC firms to notify the FCA of relevant connections they have to financial services firms. The Policy Statement follows the FCA’s May 2021 Consultation Paper (CP21/14).

The FCA explains that claims management phoenixing occurs when individuals from financial services firms later reappear in connection with CMCs and charge consumers for seeking compensation against their former firm’s poor conduct by bringing claims to the FSCS.

The rules and guidance will come into force on 7 July 2022.

FCA Policy Statement: Preventing claims management phoenixing by financial services firms (PS22/6)

Webpage

Financial Ombudsman Service

New Chief Executive and Chief Ombudsman – announced by FOS - 8 June 2022

The Financial Ombudsman Service has announced the appointment of Abby Thomas to the role of Chief Executive and Chief Ombudsman. She will take up the new role in the autumn, replacing current interim Chief Executive and Chief Ombudsman, Nausicaa Delfas.

Ms Thomas began her career as a strategy consultant, moving to industry in 2014. She currently works for Virgin Media O2, where she has led Virgin Media consumer operations, with responsibility for service call centres, field force and supply chain leadership, and more recently their flagship ‘B2B Transformation’ programme.

Press release

BANKING AND FINANCE

Issue 1163 / 9 June 2022

HEADLINES

  1. Basel Committee on Banking Supervision
    1. Climate-related financial risks, prudential treatment of cryptoassets and G-SIB assessment methodology-Basel Committee provides update on its work-31 May 2022
  2. Council of the European Union
    1. Consumer Credit Directive – Council of the EU adopts general approach-7 June 2022
  3. European Parliament
    1. CRR III and CRD VI – ECON publishes draft reports on proposed Regulation and Directive
  4. European Banking Authority
    1. Publication of approach to implementing the bail-in tool – EBA publishes Consultation Paper (CP/2022/06) on draft Guidelines-7 June 2022
    2. CRR – EBA consults on draft RTS on identification of a group of connected clients-8 June 2022
  5. European Central Bank
    1. Proposal to amend EU MiFIR - ECB issues opinion- 1 June 2022
  6. Single Resolution Board
    1. MREL – SRB publishes updated policy for 2022-8 June 2022
  7. HM Treasury
    1. Cash Ratio Deposit scheme – HM Treasury publishes Policy Statement-7 June 2022
  8. Prudential Regulation Authority
    1. Strengthening accountability – PRA publishes updated remuneration templates for identification and exclusion of material risk takers-1 June 2022

Basel Committee on Banking Supervision

Climate-related financial risks, prudential treatment of cryptoassets and G-SIB assessment methodology - Basel Committee provides update on its work - 31 May 2022

The Basel Committee on Banking Supervision (the Basel Committee) has announced that it has finalised its principles for the effective management and supervision of climate-related financial risks; progressed its work on the prudential treatment of banks’ cryptoassets; and completed its review of the treatment of cross-border exposures on the assessment methodology for global systemically important banks (G-SIBs).

Its principles on climate-related financial risks will be published “in the coming weeks” and have been designed such that “they can be adapted to a diverse range of banking systems in a proportional manner”. 

The Basel Committee plans to publish a second consultation paper on the prudential treatment of banks’ cryptoasset exposures over the coming month, with a view to finalising the framework around the end of 2022. 

It has also completed its targeted review of the treatment of cross-border exposures within the European Banking Union (EBU) on the methodology for G-SIBs. It has agreed to give recognition in the G-SIB framework to this progress through the existing methodology, which allows for adjustments to be made according to supervisory judgment. Under the agreement, a parallel set of G-SIB scores will be calculated for EBU-headquartered G-SIBs and used to adjust their bucket allocations. The Committee’s agreement will not affect the classification of any banks as G-SIBs or the scores or bucket allocations of banks outside the EBU.

Press release

Council of the European Union

Consumer Credit Directive – Council of the EU adopts general approach - 7 June 2022

The Council of the EU (the Council) has agreed on a general approach to the proposed Directive on consumer credit, which will revise and replace the Consumer Credit Directive (2008/48/EC) (CCD) (CCD II). The legislative proposal was adopted by the European Commission in July 2021, and the European Parliament published its draft opinion (2021/0171(COD)) on the proposal in February 2022. The Council’s Permanent Representatives Committee approved the text of the general approach on 25 May 2022.

The proposed CCD II recognises the changes that digitalisation has brought to the lending sector and the appearance of new market players, such as peer-to-peer lending platforms offering credit agreements in different forms, and new products, such as short-term high-cost credit. It envisages the application of a proportionate regime with some targeted exclusions from scope of credits that are free of interest and without any other charges.

The Council may now begin negotiations with the European Parliament.

Final Compromise Text: Proposal for a Directive of the European Parliament and of the Council on consumer credits (2021/0171(COD)) (9433/1/22)

Joint statement by Estonia and Lithuania (9433/22)

Press release

European Parliament

CRR III and CRD VI – ECON publishes draft reports on proposed Regulation and Directive

30 May 2022 and 1 June 2022 - The European Parliament’s Economic and Monetary Affairs Committee (ECON) has published two draft reports (dated 23 May 2022):

  • on the proposal for a Regulation amending the Capital Requirements Regulation (575/2013/EU) (CRR) as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRR III) (2021/0342(COD)); and
  • on the proposal for a Directive amending the Capital Requirements Directive (2013/36/EU) (CRD IV) as regards supervisory powers, sanctions, third-country branches, ESG risks, and amending the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) (CRD VI) (2021/0341(COD)).

The reports contain draft European Parliament legislative resolutions, which detail suggested amendments to the proposed CRR III Regulation and CRD VI Directive. They do not contain explanatory statements on the reasons for the amendments.

The European Parliament adopted the relevant legislative proposals in October 2021. They form part of the European Commission’s work to finalise the implementation of the Basel III agreement. ECON is scheduled to vote on the draft reports on 5 December 2022.

ECON I Draft Report: on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (2021/0342(COD))

ECON I Draft Report: on the proposal for a directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU (2021/0341(COD))

European Banking Authority

Publication of approach to implementing the bail-in tool – EBA publishes Consultation Paper (CP/2022/06) on draft Guidelines - 7 June 2022

The European Banking Authority (EBA) has published a Consultation Paper (CP/2022/06) on draft Guidelines addressed to resolution authorities for the publication of their approach to the implementation of the bail-in tool. The draft Guidelines specify information to be made public by resolution authorities on how the write-down and conversion will be applied, in particular in the context of the use of the bail-in tool (that is, the exchange mechanic), in accordance with the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). The document follows the EBA’s published Guidelines on improving resolvability for institutions and resolution authorities (GL/2022/01).

The EBA explains that guidelines are needed to ensure a harmonised approach by setting out minimum elements that authorities must publish about their exchange mechanics. They require all authorities, by January 2024, to have published basic information about their approach, including, for example, whether it is intended to make use of interim entitlements and how potential valuation adjustments would take place. Authorities should update this publication continuously as they develop their approach.

The deadline for responses is 7 September 2022.

EBA Consultation Paper: Guidelines to resolution authorities on the publication of the write-down and conversion and bail-in exchange mechanic (EBA/CP/2022/06)

Webpage

Press release

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CRR – EBA consults on draft RTS on identification of a group of connected clients - 8 June 2022

The European Banking Authority (EBA) has published a consultation paper (CP/2022/07) relating to draft regulatory technical standards (RTS) on the identification of a group of connected clients (GCC) for the purposes of Article 4 of the Capital Requirements Regulation (575/2013/EU) (CRR). The draft RTS set out the specific circumstances in which an interconnection by means of a control and/or an economic dependency relationship leads to a single risk and thus a grouping requirement.

The draft RTS, in conjunction with the EBA Guidelines on connected clients, provide the complete framework for the identification of the GCC. The draft RTS focus on a clear specification of the circumstances in which the conditions set out in point (39) of Article 4(1) of the CRR to form a group of connected clients are met, whilst the EBA Guidelines contain practical examples and provide procedural guidance.

The objective of the definition of a GCC is to identify two or more natural or legal persons who are so closely linked by “idiosyncratic risk factors” that it is prudent to treat them as a single risk. In addition, the draft RTS set out rebuttable provisions for the assessment of situations where control and economic dependencies coexist and thus one overall GCC, as opposed to two or more separate GCCs, needs to be formed.

The deadline for responses is 8 September 2022. Following the consultation, the draft RTS will be submitted to the European Commission for adoption. If adopted, they will be subject to scrutiny by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union.

EBA Consultation Paper: Draft Regulatory Technical Standards on the identification of a group of connected clients under Article 4 paragraph 1 number 39 of Regulation (EU) No 575/2013 (EBA/CP/2022/07)

Press release

European Central Bank

Proposal to amend EU MiFIR - ECB issues opinion - 1 June 2022

The European Central Bank (ECB) has issued an opinion on a proposal of the European Parliament and the Council of the European Union amending Regulation (EU) 600/2014 (MiFIR) to enhance market data transparency, remove obstacles to the emergence of a consolidated tape, optimise trading obligations and prohibit receipt of payments for forwarding client orders.

Among other things, the ECB welcomes the introduction of the proposed enhanced regime for the ‘consolidated tape’ (CT) and the competitive bid process for the selection of a consolidated tape provider (CTP) for each asset class. It understands that under the proposal the CTP will only be responsible for consolidating the core market data and disseminating it commercially to the market and that the quality of the contributed data, which remains wholly the responsibility of the market data contributors, will be regulated by the Commission on the basis of a delegated act. The ECB also expresses support for the proposed streamlining of the pre-trade transparency regime for equities, by replacing the double volume cap with a single volume cap set at 7% of the total volume of trades that are executed in the relevant financial instrument under the reference price waiver or the negotiated trade waiver.

Where the ECB recommends amendment to the proposed regulation, it has set out drafting proposals in a technical working document underneath the opinion.

ECB opinion on proposed regulated amending EU MiFIR

Single Resolution Board

MREL – SRB publishes updated policy for 2022 - 8 June 2022

The Single Resolution Board (SRB) has published an updated version of its policy for the minimum requirement for own funds and eligible liabilities (MREL) under the Bank Recovery and Resolution Directive ((EU) 2019/879) (BRRD II). The updated policy reflects the SRB’s experience during the 2020 resolution planning cycle.

The updated policy takes into account regulatory developments such as the end of the supervisory leverage relief measures of the European Central Bank and changes to the Capital Requirements Regulation (CRR) recently agreed by the EU co-legislators on the indirect holding of internal MREL and the MREL calibration for banks with a multiple point-of-entry resolution strategy. It expands the coverage of entities under internal MREL and involves a more dynamic subordination policy, taking into account evolving balance sheets prior to resolution.

The updated MREL policy will apply from the 2022 resolution planning cycle.

SRB Minimum Requirement For Own Funds and Eligible Liabilities (MREL)

Press release

HM Treasury

Cash Ratio Deposit scheme – HM Treasury publishes Policy Statement - 7 June 2022

HM Treasury has published a Policy Statement on proposed changes to the Bank of England’s (the Bank’s) Cash Ratio Deposit (CRD) scheme, which funds the Bank’s monetary policy and financial stability functions. This follows HM Treasury’s September 2021 consultation paper on the proposal to replace the CRD scheme with a levy-based arrangement.

Under the proposal, banks and building societies with eligible liabilities of more than £600 million will be required to place a proportion of their deposit base with the Bank on a non-interest bearing basis. The Bank will invest these funds in interest bearing assets, such as gilts, and the income generated will be used to meet the costs of its monetary policy and financial stability functions. 

Replacing the CRD scheme with the levy will ensure that it no longer has to fund income shortfall through its own capital or reserves. When the levy scheme is introduced, the Bank will publish a framework outlining its approach to levying policy costs. 

The government intends to legislate to introduce the levy when parliamentary time allows. Secondary legislation will allocate the Bank’s policy costs to payers in proportion to their eligible liability base and will set out the formula and ratio for how this will be applied.

HM Treasury Policy Statement: Review of the cash ratio deposit scheme

Updated webpage

Prudential Regulation Authority

Strengthening accountability – PRA publishes updated remuneration templates for identification and exclusion of material risk takers - 1 June 2022

The PRA has published a number of amended remuneration Policy Statement templates (RPS templates) for use by banks to communicate information on the identification and exclusion of their material risk takers (MRTs). The updates reflect changes made to the Remuneration Part of the PRA Rulebook, following the PRA’s December 2021 Policy Statement (PS28/21) on the identification of MRTs.

Although use of the templates is not mandatory, it is considered good practice for firms to use them as they set out the PRA’s expectation of the level of detail that should be included. The updated templates can be accessed under the ‘Remuneration’ section of the PRA’s webpage on strengthening accountability.

Updated webpage

SECURITIES AND MARKETS

Issue 1163 / 9 June 2022

HEADLINES

  1. European Commission
    1. EMIR – Equivalence decisions for five non-EU jurisdictions published in OJ -9 June 2022
    2. EMIR – European Commission publishes third report on clearing solutions for pension scheme arrangements and further extends clearing exemption-9 June 2022
  2. European Securities and Markets Authority
    1. Capital Markets Union – ESMA publishes speech-1 June 2022
    2. CSDR buy-in regime – ESMA publishes final report and draft RTS suspending application-2 June 2022
    3. EMIR clearing threshold increase – ESMA publishes final reportand proposed RTS amendments-3 June 2022
  3. HM Treasury
    1. Introduction of the SMCR for FMIs – HM Treasury publishes response to consultation-7 June 2022
  4. Bank of England
    1. EMIR – Bank of England publishes Consultation Paperon derivatives clearing obligation-9 June 2022

European Commission

EMIR – Equivalence decisions for five non-EU jurisdictions published in OJ - 9 June 2022

Five Commission Implementing Decisions on the equivalence of the regulatory framework for central counterparties (CCPs) in non-EU jurisdictions to the requirements of the European Market Infrastructure Regulation (648/2012/EU) (EMIR), have been published in the Official Journal of the European Union:

  • three Commission Implementing Decisions determining that the legal and supervisory frameworks for central counterparties (CCPs) in Chile, Malaysia and Indonesia are equivalent to the requirements applicable under EMIR; and
  • two Commission Implementing Regulations amending the existing equivalence decisions for CCPs in South Africa and India.

Once recognised, non-EU CCPs are able to provide central clearing services in the EU to EU clearing members and trading venues.

The European Commission adopted the Commission Implementing Decisions on 8 June 2022. They will enter into force on 29 June 2022.

Commission Implementing Decision (EU) 2022/903 of 8 June 2022 on the equivalence of the regulatory framework for central counterparties in Chile to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council

Commission Implementing Decision (EU) 2022/902 of 8 June 2022 on the equivalence of the regulatory framework for central counterparties in Malaysia to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council

Commission Implementing Decision (EU) 2022/899 of 8 June 2022 on the equivalence of the regulatory framework for central counterparties in Indonesia to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards central counterparties under the supervision of the Indonesia Financial Services Authority (Otoritas Jasa Keuangan)

Commission Implementing Decision (EU) 2022/900 of 8 June 2022 amending Implementing Decision (EU) 2015/2039 as regards the evolution of the regulatory framework of South Africa for central counterparties

Commission Implementing Decision (EU) 2022/901 of 8 June 2022 amending Implementing Decision (EU) 2016/2269 as regards central counterparties under the supervision of the International Financial Services Centres Authority

Press release

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EMIR – European Commission publishes third report on clearing solutions for pension scheme arrangements and further extends clearing exemption - 9 June 2022

The European Commission (the Commission) has published a third report on clearing solutions for pension scheme arrangements (PSAs) under the European Market Infrastructure Regulation (648/2012/EU) (EMIR) (COM(2022) 254 final). The Commission’s first and second reports were issued variously in September 2020 and May 2021, as previously reported in this Bulletin.

The Commission notes that PSAs are largely ready to clear, have clearing arrangements in place and clear some trades voluntarily, but the underlying issue of access to cash remains. The EMIR Refit Regulation ((EU) 2019/834) amended EMIR to extend the exemption from the clearing obligation for PSAs until June 2021. The Commission has adopted Commission Delegated Regulation C(2022) 3584 (final), which will now extend the exemption for PSAs until 18 June 2022. It explains that a further extension will allow alternative models to accessing liquidity through the repo market time to mature, and will provide time for PSAs to improve their internal liquidity and collateral management practices.

The European Parliament and Council of the EU will now scrutinise the Commission Delegated Regulation. If neither objects, it will enter into force on the day after its publication in the Official Journal of the European Union.

Report from the Commission to the European Parliament and the Council: under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended by Regulation (EU) No 834/2019, assessing whether viable technical solutions have been developed for the transfer by pension scheme arrangements of cash and non-cash collateral as variation margins and the need for any measures to facilitate those viable technical solutions (COM(2022) 254 final)

Commission Delegated Regulation (EU) …/… of 9.6.2022 extending the transitional period referred to in Article 89(1), first subparagraph, of Regulation (EU) No 648/2012 of the European Parliament and of the Council (C(2022) 3584 final)

European Securities and Markets Authority

Capital Markets Union – ESMA publishes speech - 1 June 2022

The European Securities and Markets Authority (ESMA) has published a speech delivered by Verena Ross, ESMA Chair, at the Convention of the Federation of European Securities Exchanges. In the speech, Ms Ross elaborates on a number of topics related to the delivery of the Capital Markets Union, including:

  • review of Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR) review and establishing a consolidated tape: ESMA’s overall support for the European Commission’s proposal for a review of MiFIR is highlighted, albeit with concerns over the current timetable;
  • MiFIR review and the trading venue perimeter: Ms Ross refers to the January 2022 consultation on ESMA’s proposed opinion on what a multilateral system is and providing guidance on when a system should seek authorisation as a trading venue;
  • digital transformation and cryptoassets: Ms Ross notes ESMA’s support for the European Commission’s Digital Finance Package, including the Regulation on Markets in Crypto-Assets (MiCA). ESMA hopes to play a greater role in the authorisation and supervision of significant cryptoasset service providers;
  • commodities and circuit breakers: ESMA is reflecting on additional tools that could be put in place to better identify potential risks to orderly markets at an early stage, so that market infrastructures and authorities can take necessary action before those risks materialise. ESMA is particularly looking at how transparency, for example through additional information on the over-the-counter positions held by market participants trading on-venue commodity derivatives, could allow market participants, trading venues and regulators to better identify risks and maintain orderly markets.

Speech by Verena Ross: Towards delivering the CMU (ESMA70-445-442)

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CSDR buy-in regime – ESMA publishes final report and draft RTS suspending application - 2 June 2022

The European Securities and Markets Authority (ESMA) has published a final report (the Report) on its approach to the implementation of buy-in provisions under Article 7 of the Central Securities Depositories Regulation (909/2014/EU) (CSDR) and Articles 21 to 28 of Commission Delegated Regulation (EU) 2018/1229 which contains Regulatory Technical Standards (RTS) on settlement discipline. The CSDR settlement discipline regime has applied since 1 February 2022.

ESMA proposes to suspend the application of the mandatory buy-in rules for three years. The proposed amendment to the RTS on settlement discipline, as set out in the draft regulatory technical standards (RTS) in Annex IV to the Report, is based on the expected changes to the CSDR buy-in regime presented in the European Commission’s legislative proposal for the CSDR Review, which was published in March 2022 as well as on the amendment made to the CSDR through the DLT Pilot Regulation ((EU) 2022/858) (covered in the General section above), which allows ESMA to propose a later start date for the CSDR buy-in regime.

ESMA has sent the draft RTS to the Commission for endorsement in the form of a Commission Delegated Regulation. Following the Commission’s endorsement, the draft RTS will be subject to non-objection by the European Parliament and the Council of the EU.

ESMA Final Report: CSDR RTS on Settlement Discipline – Suspension of buy-in (ESMA70-156-5011)

Webpage

EMIR clearing threshold increase – ESMA publishes final report and proposed RTS amendments - 3 June 2022

  1.  

The European Securities and Markets Authority (ESMA) has published its final report (ESMA70-451-114) (the Report) containing proposed amendments to the regulatory technical standards (RTS) laid down in Commission Delegated Regulation EU/149/2013 relating to the commodity derivative clearing thresholds under the European Market Infrastructure Regulation (648/2012/EU) (EMIR).

ESMA is required to review the EMIR clearing thresholds and update them where necessary under the EMIR Refit Regulation ((EU) 2019/834). It proposes to increase the clearing threshold for commodity derivatives from EUR3 billion to EUR4 billion. Annex II to the report sets out the proposed draft regulatory technical standards (RTS), which will amend the RTS laid down in Delegated Regulation (EU) No 149/2013, to reflect the increase.

The Report also refers to ESMA’s response to the European Commission’s consultation on the targeted review of the central clearing framework in the EU, notably two structural change proposals to the EMIR framework for the clearing threshold: the proposed distinction between cleared versus non-cleared (such that only derivatives not cleared at an authorised or recognised CCP should count towards the clearing threshold); and the proposed application of bilateral margins to NFCs above the clearing threshold (NFC+) on a “per-asset-class-basis”, i.e. once the relevant threshold is exceeded.

It takes into account these Level 1 change recommendations and presents an overview of the considerations, concerns and feedback on certain issues faced by NFCs entering into commodity derivatives. If the proposed amendments to Level 1 are adopted, ESMA will re-assess the clearing thresholds as part of the mandate to periodically review them, to ensure they remain fit for purpose. Given the uncertainties around the timing of the legislative procedure on the Level 1 framework, ESMA does not recommend a pre-defined end date for the increased clearing threshold.

ESMA has sent the draft RTS to the European Commission for endorsement in the form of a Commission Delegated Regulation. Following the Commission’s endorsement, the draft RTS will be subject to non-objection by the European Parliament and the Council of the EU.

ESMA Final Report: EMIR RTS on the commodity derivative clearing threshold

Press release

HM Treasury

Introduction of the SMCR for FMIs – HM Treasury publishes response to consultation - 7 June 2022

HM Treasury has published the response to its July 2021 consultation paper on a proposal to introduce a Senior Managers and Certification Regime (SMCR) for financial market infrastructures (FMIs) to cover central counterparties (CCPs), central securities depositories (CSDs), payment systems recognised under the Banking Act 2009 (recognised payment systems), and specified service providers to these recognised payment systems.

The government considers that creating an SMCR for FMIs remains a desirable and effective way to achieve its objectives of enhancing the accountability of senior managers and improving governance arrangements at FMIs. It intends to implement an SMCR for CCPs and CSDs, with particular detailed aspects of the regime set out in secondary legislation and regulators’ rules, where appropriate.

The government also wishes to retain the option to extend the SMCR to other systemic financial services entities in the future, such as credit rating agencies (CRAs) and recognised investment exchanges (RIEs). The government will therefore legislate to create an SMCR ‘gateway’ when parliamentary time allows, to enable HM Treasury to lay statutory instruments to apply the SMCR to CCPs, CSDs and, in the future, potentially CRAs and/or RIEs. Separately to the gateway, the government intends to legislate to implement an SMCR for recognised payment systems and specified service providers, with a separate timetable. This is to account for the forthcoming review of the regulatory perimeter for systemic firms in payment chains regulated by the Bank of England (the Bank).

The detail of the regime will be decided and implemented by the Bank through its rules and will be subject to public consultation. The Bank will have the power to determine which functions will be ‘Senior Management Functions’ and scope of the Certification Regime.

HM Treasury Consultation Response: Senior Managers & Certification Regime for Financial Market Infrastructures

Updated webpage

Bank of England

EMIR – Bank of England publishes Consultation Paper on derivatives clearing obligation - 9 June 2022

The Bank of England (the Bank) has published a consultation paper on its proposal to modify the scope of contracts which are subject to the clearing obligation, by adding Overnight Index Swaps (OIS) that reference the Secured Overnight Financing Rate (SOFR) and then removing contracts referencing the USD London Interbank Offered Rate (LIBOR). The consultation paper follows the Bank’s September 2021 and December 2021 policy statements, which finalised changes to the clearing obligation to reflect the discontinuation of certain other interest rate benchmarks by January 2022.

The Bank explains that, owing to the increase in trading activity in SOFR contracts since the beginning of 2022, it now considers it appropriate to consult on changes to the clearing obligation in relation to USD interest rate swaps.

The Bank proposes to modify the contract types which are subject to the clearing obligation in the retained EU-law version of Commission Delegated Regulation (EU) 2015/2205 supplementing the European Market Infrastructure Regulation ((EU) 648/2012) (EMIR) on over-the-counter derivatives, central counterparties (CCPs) and trade repositories with regard to regulatory technical standards on the clearing obligation (Binding Technical Standards (BTS) 2015/2205). Specifically, the Bank proposes to:

  • add OSI contracts that reference SOFR, to come into force on 31 October 2022; and
  • subsequently remove contracts that reference USD LIBOR, to come into force around the same time as a number of CCPs contractually convert these contracts and remove them from their list of contracts eligible for clearing.

The Bank notes that the SOFR OIS contract type will cover broadly the same maturity range as the USD LIBOR contracts currently cover. However, with the addition of the Tokyo Overnight Average Rate (TONA) OIS to the clearing obligation in January 2022, the Bank proposes a minimum maturity for the SOFR OIS contract type of seven days.

The deadline for responses is 21 July 2022. Following the consultation, the Bank will submit the proposed technical standards to HM Treasury for approval.

Bank of England Consultation Paper: Derivatives clearing obligation – modifications to reflect USD interest rate benchmark reform: Amendments to BTS 2015/2205

INSURANCE

Issue 1163 / 9 June 2022

HEADLINES

  1. European Parliament
    1. Recovery and resolution of insurers – ECON publishes draft report on proposed Directive-8 June 2022
  2. Financial Conduct Authority and The Pensions Regulator
    1. Pensions consumer journey – FCA and The Pensions Regulator publish Feedback Statement (FS22/3)-7 June 2022

European Parliament

Recovery and resolution of insurers – ECON publishes draft report on proposed Directive - 8 June 2022

The European Parliament’s Economic and Monetary Affairs Committee (ECON) has published a draft report (dated 2 June 2022) (2021/0296(COD)) on the proposal for a Directive establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending the Financial Collateral Directive (2002/47/EC), Directives 2004/25/EC and 2017/1132, the Solvency II Directive (2009/138/EC), Regulation 1094/2010 and the European Market Infrastructure Regulation (648/2012/EU) (EMIR). The European Insurance and Occupational Pensions Authority first suggested that the harmonisation of national recovery and resolution frameworks for insurers and reinsurers within the scope of Solvency II would contribute to the protection of policyholders, the maintenance of financial stability and protection of public funds in a July 2017 opinion.

While the rapporteur, Markus Ferber, shares the assessment that rules should be available to manage the failure of cross-border insurance or reinsurance undertakings, he takes the view that the proposed framework raises a number of questions that have not been answered yet. There are questions as to how useful recovery and resolution tools can be in the absence of harmonised rules for insurance guarantee schemes. Furthermore, a number of aspects in the present proposal have been taken from the banking sector, without due regard to the specifics of the insurance market.

The European Commission adopted the legislative proposal in September 2021.

ECON I Draft Report: on the proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012 (2021/0296(COD))

Financial Conduct Authority and The Pensions Regulator

Pensions consumer journey – FCA and The Pensions Regulator publish Feedback Statement (FS22/3) - 7 June 2022

The FCA and The Pensions Regulator (TPR) have published a Feedback Statement (FS22/3) following their May 2021 call for input on the behaviour of consumers at key points in the pension saving journey. Most respondents to the call for input agreed that the stages of the consumer journey set out in that document provided a broad basis for engaging with the consumer, but said that the journey was highly personalised and non-linear with consumer decisions and touchpoints mainly shaped by life events, such as changing jobs or buying a house. The personalised journey means that savers need tailored support throughout their lives. Different types of organisation across the pensions industry said that given the low levels of consumer financial literacy, there remains real difficulty in communicating about pensions.

Respondents also noted that many of the structural issues affecting pensions reflected wider issues in society; some offered potential mitigations to inequalities in pensions outcomes associated with gender and religion. Pension dashboards were also highlighted as a potential key tool in enhancing engagement with pensions.

Rather than making new rules, the FCA and TPR have committed to a range of other measures, such as publicising the ‘Midlife MOT’ toolkits available for employers and encouraging larger schemes and providers to support employers in this initiative, as well as working with the Money and Pensions Service to produce guidance that enables employers to support staff returning to the workforce. The Feedback Statement also refers to the FCA’s proposed consumer duty rules which aim to set a higher expectation for the standard of care firms give retail consumers. Vulnerability will be a relevant factor for firms to consider under current proposals in relation to the consumer duty.

FCA and TPR Feedback Statement: Pensions consumer journey (FS22/3)

FCA webpage

FINANCIAL CRIME

Issue 1163 / 9 June 2022

HEADLINES

  1. Financial Action Task Force
  2. European Supervisory Authorities
  3. Ministry of Justice
  4. HM Treasury
  5. Recent cases

Financial Action Task Force

AML/CFT – FATF publishes follow-up report on UK’s measures and compliance - 9 June 2022

The Financial Action Task Force (FATF) has published a follow-up report (the Report) on the UK’s anti-money laundering (AML) and countering the financing of terrorism (CFT) measures and its level of compliance with FATF Recommendations. The Report follows the FATF’s mutual evaluation report (the MER Report), published in December 2018.

The Report notes that the UK has made progress in addressing most of the technical compliance deficiencies identified in the MER Report. As a result, the FATF has re-rated the UK on Recommendation 13 from ‘Partially Compliant’ to ‘Compliant’. The FATF notes that the UK is Compliant on 24 Recommendations, ‘Largely Compliant’ on 15 Recommendations, and Partially Complaint on 1 Recommendation.

FATF Follow-up Report & Technical Compliance Re-Rating: Anti-money laundering and counter-terrorist financing measures: United Kingdom

Executive summary

European Supervisory Authorities

AML/CFT – ESAs publish joint report on withdrawal of authorisation for serious breaches of rules - 1 June 2022

The European Supervisory Authorities (ESAs) – comprising the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority – have published a joint report (dated 31 May 2022) on the withdrawal of authorisation for serious breaches of anti-money laundering (AML) and countering the financing of terrorism (CFT) rules. The joint report fulfils the ESAs’ mandate under Objective 5 of the Council of the EU’s December 2018 ‘Anti-Money Laundering Action Plan’.

According to the report, only the Capital Requirements Directive (2013/36/EU) sets out an express ground to withdraw authorisation for serious breaches of AML/CFT rules. The ESAs support the introduction in the sectoral acts which are not yet covered of a specific ground empowering competent authorities to withdraw the authorisation (or registration) solely on the ground of serious breaches of AML/CFT rules as a last resort measure and respecting proportionality requirements. The report also calls for the inclusion of assessments by national competent authorities of the adequacy of the arrangements and processes to ensure AML/CFT compliance as a condition for granting authorisation or registration.

Joint ESAs Report: on the withdrawal of authorisation for serious breaches of AML/CFT rules (ESAs 2022 23)

Press release

Ministry of Justice

Post-legislative assessment of the Fraud Act 2006 - Ministry of Justice publishes memorandum - 8 June 2022

The Ministry of Justice (the Ministry) has presented a post-legislative assessment of the Fraud Act 2006 (the Act) to the House of Lords, as per the government’s process for post-legislative scrutiny, following consultation with a wide range of practitioners and stakeholders. A previous assessment was conducted in 2012 and concluded that the Act was working well. This new memorandum assesses whether the Act remains an effective tool for tackling fraud in an environment of rapidly developing technology.

Based on responses it has received, the Ministry believes that the Act continues to meet its objectives, though there was a difference of opinion as to whether the Act sufficiently combats complex digital fraud. Other concerns referred to the variation in fraud sentencing. The memorandum also considers whether the common law offence of conspiracy to defraud remains necessary, or whether the relevant behaviour could be charged adequately under the Act or through a series of statutory conspiracy offences.

Post-Legislative Assessment of the Fraud Act 2006

Webpage

HM Treasury

Breaches of financial sanctions – OFSI publishes updated Guidance on enforcement and monetary penalties - 8 June 2022

The Office of Financial Sanctions Implementation (OFSI), which is part of HM Treasury, has published updated Guidance on enforcement and monetary penalties for breaches of financial sanctions. OFSI has the power to impose monetary penalties for breaches of financial sanctions under the Policing and Crime Act 2017 (the 2017 Act), as amended by the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). Following the Russian invasion of Ukraine, the government brought forward the Economic Crime (Transparency and Enforcement) Act 2022 which included important changes to OFSI’s powers. The measures will commence on 15 June 2022, and the updated guidance reflects these changes.

For breaches of financial sanctions that are committed after 15 June 2022, OFSI will be able to impose civil monetary penalties on a strict civil liability basis. This means the previous requirement to prove that a person had knowledge or reasonable cause to suspect that they were in breach of financial sanctions will be removed, though OFSI will still bear the burden of proof to establish that there was a breach of financial sanctions prohibitions. There is no equivalent change to the financial sanctions criminal legal test or threshold.

OFSI has also gained the power to publicise details of financial sanctions breaches committed after 15 June 2022 where a monetary penalty has not been imposed. These will include a summary of the case and the persons that committed the breach. The power only applies where there is found to be a breach of financial sanctions, and publication will be considered on a case-by-case basis. The changes also introduced flexibility in the review process for monetary penalties.

The Guidance will apply from 15 June 2022.

OFSI Guidance: OFSI enforcement and monetary penalties for breaches of financial sanctions

Updated webpage

Recent cases

Tecnimont Arabia Limited v National Westminster Bank plc EWHC 1172 (Comm) - 17 May 2022

Whether a bank that had received monies from an innocent third party is liable in restitution for the dissipation of monies as a result of its own customer’s fraud

The High Court has considered whether a bank is liable to victims of fraud who were not direct customers. Tecnimont Arabia Limited (TAL), part of a multi-national Italian corporation operating in Saudi Arabia, was the victim of an authorised push payment (APP) fraud. Through business email compromise – a form of phishing attack – TAL was tricked into making a USD 5 million payment to a dollar account held at National Westminster Bank plc (the Bank), in the name of a third party, Asecna Limited. TAL sought to hold the Bank responsible for failing to freeze the account until nearly all the funds had been dissipated. 

TAL’s main argument was that the Bank had been unjustly enriched as the recipient of the payment. HHJ Bird (sitting as a judge of the High Court) found that the Bank had not been unjustly enriched at the expense of TAL, noting that the payment had passed through the various layers of the international banking system, so the claim failed.

The judge also considered whether the Bank had a defence of change of position in good faith, because it had paid out the money on its customer’s instructions. The fundamental question was whether it would be unjust to deny restitution to TAL. TAL argued that the Bank had opportunities to freeze the funds, but the judge did not accept that any of them would have made it unjust to deny TAL’s claim. 

Tecnimont Arabia Limited v National Westminster Bank plc EWHC 1172 (Comm)

ENFORCEMENT

Issue 1163 / 9 June 2022

HEADLINES

  1. HM Treasury
    1. Breaches of financial sanctions – OFSI publishes updated Guidance on enforcement and monetary penalties-8 June 2022

HM Treasury

Breaches of financial sanctions – OFSI publishes updated Guidance on enforcement and monetary penalties - 8 June 2022

The Office of Financial Sanctions Implementation (OFSI), which is part of HM Treasury, has published updated Guidance on enforcement and monetary penalties for breaches of financial sanctions. OFSI has the power to impose monetary penalties for breaches of financial sanctions under the Policing and Crime Act 2017 (the 2017 Act), as amended by the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). Following the Russian invasion of Ukraine, the government brought forward the Economic Crime (Transparency and Enforcement) Act 2022 which included important changes to OFSI’s powers. The measures will commence on 15 June 2022, and the updated guidance reflects these changes.

For breaches of financial sanctions that are committed after 15 June 2022, OFSI will be able to impose civil monetary penalties on a strict civil liability basis. This means the previous requirement to prove that a person had knowledge or reasonable cause to suspect that they were in breach of financial sanctions will be removed, though OFSI will still bear the burden of proof to establish that there was a breach of financial sanctions prohibitions. There is no equivalent change to the financial sanctions criminal legal test or threshold.

OFSI has also gained the power to publicise details of financial sanctions breaches committed after 15 June 2022 where a monetary penalty has not been imposed. These will include a summary of the case and the persons that committed the breach. The power only applies where there is found to be a breach of financial sanctions, and publication will be considered on a case-by-case basis. The changes also introduced flexibility in the review process for monetary penalties.

The Guidance will apply from 15 June 2022.

OFSI Guidance: OFSI enforcement and monetary penalties for breaches of financial sanctions

Updated webpage

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