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Key Regulatory Topics: Weekly Update 29 September – 5 October 2023
Consumer/Retail
EP adopts proposed Directive on financial services contracts concluded at a distance
On 5 October, the EP announced that it has adopted at first reading the proposed Directive on financial services contracts concluded at a distance. The EP highlights areas that the new rules cover, including: (i) effective right of withdrawal - additional safeguards to allow consumers to withdraw from any distance contract via a withdrawal function, which is prominently displayed, easily accessible and continuously available during the entire 14-day withdrawal window; (ii) right to pre-contractual information – clarity on the requirements for what information the trader needs to provide to the consumer before concluding a distance contract. Consumers must have sufficient time to read and understand pre-contractual information, compare offers and make an informed decision; and (iii) ban on dark patterns – financial services providers will be prohibited from deceiving or “nudging” consumers into making choices that may be against their interest via their website designs (e.g. dark patterns), for example by presenting choices in a non-neutral manner. The next step is for the Council of the EU to adopt the proposed Directive. After that, it will enter into force 20 days after publication in the OJ. Member States will have 24 months to transpose the rules into national law, and a further six months to apply them.
ECON draft reports on proposed Directive on retail investment protection and Regulation amending PRIIPs
On 5 October, ECON published draft reports on: (i) the proposed Directive on retail investment protection; and (ii) the proposed Regulation amending the PRIIPs Regulation, as regards the modernisation of the key information document (KID). The draft reports include the EC’s proposed texts with the Rapporteur’s proposed amendments. As regards the Directive on retail investment protection, the Rapporteur highlights amendments including in relation to: (a) inducements – the Rapporteur expresses strong views against a full ban on inducements. She remains concerned about the introduction of a partial ban on executive-only services which is not justified and does not seem to address issues of conflict of interest; (b) best interest test – the Rapporteur clarifies and strengthens the EC’s proposal on the “best interest” test under MiFID and the IDD. In MiFID, she proposes to clarify the notion of “cost-efficiency”; (c) value for money benchmarks - further discussions are needed to find the right and balanced approach. The Rapporteur deletes the benchmarks in the draft report, with a view to continuing discussions on this topic; (d) supervision and cross-border practices – the Rapporteur introduces an obligation for companies to register in the same Member State where their head office is located, in order to avoid forum-shopping; and (e) finfluencers - the Rapporteur proposes additional elements, including to impose firms to sign a contract with finfluencers in order to ensure transparency and determine responsibility. In relation to PRIIPs, the Rapporteur sees the need to introduce further adjustments to market practices and certain adaptations to the insurance sector. The Rapporteur suggests erasing a new section in the KID titled “Product at a glance” and will continue to further assess the alignment of the new sustainability section with the relevant existing legislation.
Proposed Directive on retail investment protection draft report
Amending PRIIPs Regulation draft report
FCA statement on end of implementation period for debt packager referral fee ban
On 2 October, the FCA reminded debt packager firms and their appointed representatives (ARs) that benefitted from the implementation period for the debt packager referral fee ban, that they must ensure they do not receive any commission, fee or any other financial consideration (referral fees) from a debt solution provider for any referral or related service conducted after 2 October. The ban does not apply to work carried out before 3 October where the firm has an accrued contractual right to payment for the referral, or related services, in relation to a customer. Any firms who act as principal to ARs who would fall under the scope of the ban if they were an authorised person must take all reasonable steps to ensure that these ARs also comply with the ban. The FCA also reminds lead generators and insolvency practitioners to consider the guidance in PERG 17.7 that was published in June along with the final rules and apply for authorisation where appropriate.
Fees and Levies
Please see the FinTech section for the EBA’s technical advice on supervisory fees that may be charged by the EBA to issuers of significant ARTs and significant EMTs under MiCAR.
Please see the Other Developments section for the ESA’s technical advice on oversight fees to be levied on critical ICT third-party service providers under DORA.
Fintech
Please see the Prudential Regulation section for an overview of the upcoming initiatives of the BCBS, including in relation to cryptoassets and the digitalisation of finance.
Please see the Other Developments section for the UK-US Financial Regulatory Working Group’s joint statement.
FCA speech on AI in financial services
On 5 October, the FCA published a speech by Jessica Rusu, FCA Chief Data, Information and Intelligence Officer, on using AI in financial services. Points of interest include: (i) the FCA is currently reviewing responses to the critical third parties discussion paper. The FCA intends to consult on potential rules and guidance relating to providers of critical services later this year; (ii) the role of data in AI means that responsible AI depends upon data quality, data management, data governance, as well as data accountability and ownership structures and data protection; (iii) while the FCA is a technology-agnostic regulator, there are already regulations and frameworks in place to facilitate the safe and responsible implementation of AI in financial services. The FCA expects firms to be fully compliant with the existing framework, including the SMCR and Consumer Duty; (iv) Ms Rusu is encouraged by feedback to the AI discussion paper. Firms welcome the legal certainty that a regulatory framework brings that is principles-based, technology-agnostic and outcomes-driven. The feedback statement from the FCA’s AI discussion paper will be published this month; and (v) Ms Rusu highlights some areas where the FCA is using AI: (a) in detecting reviewing and triaging potential scam websites; (b) to provide enhanced Management Information and key risk indicators to the authorisation, supervision and enforcement teams; and (c) to create synthetic datasets for innovators to use in their AML identification tools.
Second ESMA consultation package on draft technical standards under MiCAR
On 5 October, ESMA began consulting on the second package of technical standards supplementing MiCAR, which includes six draft RTS and two draft ITS on: (i) content, methodologies and presentation of sustainability indicators on adverse impacts on the climate and the environment (RTS); (ii) measures that cryptoasset service providers must take to ensure continuity and regularity in the performance of services (RTS); (iii) pre- and post-trade transparency data to be made public (RTS); (iv) content and format of order book records (RTS); (v) record-keeping by cryptoasset service providers (RTS); (vi) data necessary for the classification of white papers (RTS); (vii) standard forms and templates for the cryptoasset white paper (ITS); and (viii) technical means for appropriate public disclosure of inside information (ITS). The deadline for comments is 14 December. ESMA then expects to publish a final report and submit the draft technical standards to the EC for endorsement by June 2024. In order to allow market participants to familiarise themselves with Inline XBRL, ESMA has made available a Proof of Concept illustrating a concrete application of the proposed format requirements included in the draft ITS on forms, formats and templates for the cryptoasset white papers. ESMA will publish a third consultation package with the remaining 18-month mandates in Q1 2024.
IRSG response to UK government’s AI White Paper
On 2 October, the International Regulatory Strategy Group (IRSG) published its response to the UK government’s White Paper on “a pro-innovation approach to AI regulation” (AI White Paper). The IRSG’s key recommendations include that: (i) the financial services sector is not currently in need of additional AI-specific legislation; (ii) an outcomes-based approach is likely to be the most appropriate in practice, noting the risk that process-focused regulation of AI may stifle innovation; (iii) as stated in the AI White Paper, regulators issue clear, consistent, and interoperable guidance on how the principles interact with existing legislation and the future approaches to enforcement to be taken by the regulators. To that end, a clear deadline for the provision of guidance from regulators would be welcomed. Such guidance should also be regularly reviewed given the speed of technological change; and (iv) while effective coordination is critical to achieve the objectives of the AI White Paper, the addition of further regulators, or an AI-specific regulator, is not required at this stage.
EBA advice on significance criteria and supervisory fees under MiCAR
On 29 September, the EBA published its response to the EC’s call for advice on two delegated acts under MiCAR relating to the criteria for determining the significance of asset-referenced tokens (ARTs) and electronic money tokens (EMTs) and to the supervisory fees that may be charged by the EBA to issuers of significant ARTs and significant EMTs. The EBA proposes a set of core and ancillary indicators for each significance criterion within the scope of the call for advice: financial sector interconnectedness, and activities on an international scale. The proposed core indicators would inform the “default” assessment of significance against the relevant criterion, with the ancillary indicators having a role when the core indicators do not lead to a conclusive determination of significance. Once the delegated act has been published, the EBA will work on proposing minimum thresholds and weighting for the indicators, as there is currently insufficient data available. The EBA also identifies gaps in reporting obligations for issuers of ARTs and EMTs under MiCAR. Absent legislative changes, the EBA anticipates the need for own-initiative guidelines on which it will begin work in Q1 2024. Regarding the supervisory fees, the EBA proposes criteria for allocating costs between issuers and ensures that all costs it will incur in the performance of its supervisory tasks, including the establishment of supervisory colleges and in the context of any delegation of tasks to NCAs, can be charged to issuers of significant ARTs and significant EMTs in accordance with the full cost-recovery approach foreseen in MiCAR. The EBA highlights that flexibility will be needed to estimate the amount of fees from year-to year in view of the fast-evolving market for cryptoassets.
Fund Regulation
Please see the Consumer/Retail section for ECON’s draft reports on: (i) the proposed Directive on retail investment protection; and (ii) the proposed Regulation amending the PRIIPs Regulation, as regards the modernisation of the key information document.
Please see the Sustainable Finance section for a report published by ESMA on exploring the use of language related to ESG factors in EU investment fund names and documentation.
Markets and Markets Infrastructure
Please see the FinTech section for the EBA’s technical advice on the criteria for determining the significance of ARTs and EMTs under MiCAR.
ESMA call for evidence on potential impact of shortening the standard settlement cycle
On 5 October, ESMA launched a call for evidence on the shortening of the settlement cycle to either T+1 or T+0. ESMA focuses on the following aspects: (a) what would be the impact of the reduction of the settlement cycle on the operations of market players, as well as any other impact that such reduction could be expected to have on trading, liquidity formation or on access to financial markets by investors; (b) what would be the costs (differentiating between one-off costs linked to operational changes required for operating in accordance with a shorter settlement cycle and ongoing costs linked to a potential increase of settlement fails or securities lending fees) and the benefits that a shorter securities settlement cycle would bring; (c) if it is concluded that a mandatory shorter settlement cycle should be imposed, how and by when could it be achieved; and (d) what are the impacts on the EU’s capital markets resulting from international developments related to securities settlement, such as the planned shortening of the settlement cycle to T+1 in other jurisdictions, such as the US. The deadline for comments is 15 December. ESMA intends to finalise a feedback report and present it to the EC with its main findings in 2024. ESMA may provide an earlier report to the EC identifying possible regulatory actions to address the impact for EU market participants of the US move to T+1.
ESRB letter to EC on active account requirement under EMIR 3.0
On 5 October, the European Systemic Risk Board (ESRB) published a letter sent to the EC on the proposal to introduce an active account requirement (AAR) in the EMIR 3.0 proposal. The ESRB concludes that although an AAR can help build clearing capacity, it considers that an AAR on its own would probably not be sufficient to address the risks to financial stability that the ESRB has previously identified. The ESRB believes that if a quantitative AAR were established, its effectiveness in helping to build clearing capacity in the EU would depend on the types of trades that fall within the scope of the AAR and the threshold applied. The analysis performed by the ESRB for euro-denominated interest rate derivatives indicates that if the proposed AAR were limited to new trades and exempted market-making and client clearing, then – even if it were combined with a high threshold – it might have little impact on its own in bringing clearing volumes for these instruments to EU CCPs and building clearing capacity in the EU. In addition, the introduction of the AAR would need to be accompanied by market developments such as an expansion in the range of services offered by EU CCPs. More fundamentally, if the AAR focuses on the number or notional amounts of trades, rather than the exposures associated with the trades, its introduction may not result in a reduction in EU clearing members’ and clients’ exposures to the clearing services provided by UK CCPs that the ESRB has deemed to be of substantial systemic importance.
PRA letter to CROs on fixed income financing thematic review
On 5 October, the PRA sent a letter to the Chief Risk Officers of banks operating in the UK to share insights from the PRA’s thematic review of regulated firms’ liquid fixed income financing (or “matched book” repo) businesses, which focused on the financing of developed market sovereigns and liquid credit fixed income instruments. In the review, the PRA identified a number of shortcomings in firms’ counterparty risk management processes and margining arrangements that should be remediated. The PRA notes that the messages communicated following the 2022 gilt market stress event involving liability-driven investment funds have not been fully addressed. Consequently, the PRA emphasises the importance of its expectation that firms extend enhanced credit due diligence principles, client disclosure standards, and counterparty risk management controls, beyond those that have been introduced for hedge fund clients in equity financing, to all client types in all secured financing and other relevant trading businesses. The PRA expects firms to carry out a benchmarking exercise against its observations set out in the letter. Firms must share this analysis and a confirmation that the letter has been shared with their Board Risk Committees, with the PRA, by 8 December. Such remediation plans should be fully scoped, with agreed timelines that address any weaknesses on a timely and systematic basis.
ESMA to launch Common Supervisory Action on MiFID II sustainability requirements in 2024
On 3 October, ESMA announced that it will launch a Common Supervisory Action (CSA) with NCAs on the integration of sustainability in firms’ suitability assessment and product governance processes and procedures in 2024. The goal of the CSA will be to assess the progress made by intermediaries in the application of the key sustainability requirements, which entered into application in 2022 following the amendments to the MiFID II Delegated Acts. The CSA will cover: (i) how firms collect information on their clients’ “sustainability preferences”; (ii) which arrangements firms have put in place to understand and correctly categorise investment products with sustainability factors for the purpose of the suitability assessment; (iii) how firms ensure the suitability of an investment with respect to sustainability (including the use of a “portfolio approach”); and (iv) how firms specify any sustainability-related objectives a product is compatible with as part of the target market assessment of the investment product.
ESRB response to ESMA proposal to extend emergency measures on CCP collateral requirements
On 2 October, the ESRB responded to ESMA’s final report setting out its proposal to extend emergency measures on CCP collateral requirements. The ESRB supports the proposal, based on: (i) the findings for ESMA’s recent report, which did not find any evidence that the measures have created unmanageable risks for CCPs and the EU financial system as the risk management safeguards of the CCP and all other applicable collateral requirements continue to apply; (ii) there is a potential increase in volatility in energy markets in the coming winter months; and (iii) the ongoing negotiations to review the regulatory framework applicable to EU CCPs. The ESRB maintains its views communicated in its previous response when the emergency measures were first implemented, including that it should be a temporary measure.
EC adopts RTS on credit scoring of crowdfunding projects, pricing of crowdfunding offers, and risk management policies and procedures
On 29 September, the EC adopted a Delegated Regulation supplementing the Crowdfunding Regulation with regard to RTS specifying requirements on credit scoring of crowdfunding projects, pricing of crowdfunding offers, and risk management policies and procedure. The RTS specify: (i) the information that crowdfunding service providers must disclose to investors about the methods used to calculate the credit score for crowdfunding projects and to suggest the price for crowdfunding offers; (ii) the factors that crowdfunding service providers must consider to ensure fair and appropriate pricing of the loans they facilitate on their platforms; (iii) the governance arrangements that crowdfunding service providers must have in place to support information disclosure to investors, credit risk assessment and loan valuation and the risk management framework; and (iv) the information and factors that crowdfunding service providers must consider when: (a) assessing the credit risk for a crowdfunding project or project owner; and (b) conducting a loan valuation at different points in the life cycle of the loan.
ITS on standardised information requirements to support sales of NPLs published in OJ
On 29 September, Commission Implementing Regulation (EU) 2023/2083, laying down ITS for the application of Article 16(1) of the Non-Performing Loans (NPL) Directive with regard to the templates to be used by credit institutions for the provision to buyers of information on their credit exposures in the banking book, was published in the OJ. Under the NPL Directive, credit institutions must provide all necessary information to a credit purchaser before entering into a contract to transfer a NPL. The ITS provide standardised templates for the provision of this information. The EC believes that applying such data templates to credit agreements would reduce information asymmetries between prospective buyers and sellers of credit agreements and, therefore, contribute to the development of a functioning secondary market in the EU. The Implementing Regulation will apply from 19 October (20 days following its publication in the OJ).
Payment Services and Payment Systems
PSR consults on proposed revisions to its Powers and Procedures Guidance
On 3 October, the PSR began consulting on proposed changes to its Powers and Procedures Guidance (PPG). The PPG sets out the procedures and processes that the PSR would generally apply in relation to its regulatory and enforcement powers and functions under the Financial Services (Banking Reform) Act 2013. The two main updates to the PPG are to change: (i) who can decide to open an enforcement case in order to reflect current management structure and practices and account for the new Supervision and Compliance Monitoring Division. The PSR hopes to streamline the process and provide executive oversight at the start of an investigation; and (ii) who can be appointed as part of the enforcement team allocated to a specific case in order to enable staff who have been involved in the monitoring stage of a suspected compliance failure to become part of the enforcement team investigating. This would allow resources to be allocated more efficiently to support operational objectives, react swiftly to emerging issues, and deliver outcomes quicker. The deadline for comments is 23 October. The PSR expects to publish the finalised, updated PPG before early 2024. The PSR last published a revised version of the PPG in June 2020.
HMT policy statement on payment service contract termination rule changes
On 2 October, HMT published a policy statement in relation to implementation, timings and next steps for payment service contract termination rule changes. The changes include extending the notice period for termination of a framework contract from two months to 90 days and mandating that providers give a clear and tailored reason for termination. HMT provides details of how the proposals will be implemented, including: (i) it will principally require amendments to Regulation 51 of the Payment Services Regulations 2017 (PSRs); (ii) clear and tailored explanatory reasons should be provided in cases where a provider decides to terminate a contract for the provision of a payment service, except in limited scenarios including where to do so would be unlawful, inconsistent with wider legal and regulatory requirements, or where this would present risk of significant or serious harm to the customer or another individual; (iii) the corporate opt-out in Regulation 40(7) of the PSRs will apply in respect of the new requirements, however the UK government’s position is clear that firms should as standard practice default to offering 90 days’ notice and clear and tailored explanatory reasons; and (iv) the UK government will take an outcome-based approach and therefore does not intend to prescribe the specific information that should be provided to a customer. A public consultation will be launched shortly to consider how these changes are best delivered. The UK government intends to publish a draft SI by the end of 2023 and make the relevant amendments to the legislation subject to Parliamentary approval as soon as Parliamentary time allows.
Prudential Regulation
BCBS October 2023 meeting
On 5 October, the BCBS summarised the topics discussed at its meeting on 4-5 October to take stock of recent market developments and risks to the global banking system, and to discuss a range of policy and supervisory initiatives: (i) risks and vulnerabilities to the global banking system – the BCBS will publish a supervisory newsletter in due course on the adoption of its Principles for operational resilience and Principles for the sound management of operational risk; (ii) report on 2023 banking turmoil (we cover this report in a separate item below); (iii) global systemically important banks – the BCBS approved the results of the 2023 annual assessment which will be submitted to the FSB before the list is published; (iv) climate-related financial risks – the BCBS will consult on a Pillar 3 disclosure framework for bank exposures to climate-related financial risks by November; (v) cryptoassets – the BCBS will soon consult on a set of disclosure requirements related to banks' cryptoasset exposures; and (vi) digitalisation of finance – by mid-2024, the BCBS will publish a report on developments in the digitalisation of finance and their implications for banks and supervisors.
BCBS report on 2023 banking turmoil
On 5 October, the BCBS published a report on the 2023 banking turmoil. The report provides an assessment of the causes of the banking turmoil, the regulatory and supervisory responses, the initial lessons learnt, and the regulatory and supervisory takeaways. With regards to supervision, these include: (i) the importance of supervisors analysing banks’ business models and identifying outlier banks; (ii) the need to robustly assess banks’ governance and risk management; (iii) the merit in reviewing the way in which to oversee liquidity risk in light of the recent turmoil; (iv) the importance of exercising supervisory judgment and reviewing the existing supervisory toolkit; and (v) and the need to continue to promote effective cross-border supervisory cooperation. With regards to regulation, these include: (a) issues relating to the Basel III liquidity standards, the regulatory treatment of interest rate risk in the banking book, the treatment of held-to-maturity assets and role of Additional Tier 1 instruments; and (b) the scope of the Basel framework, including the definition of “internationally active banks”, the application of the framework to non-internationally active banks and the level of consolidation of the Basel framework. The BCBS is pursuing a series of follow-up initiatives related to the turmoil, including: (1) prioritising work to strengthen supervisory effectiveness and identify issues that could merit additional guidance at a global level; and (2) pursuing additional follow-up analytical work based on empirical evidence to assess whether specific features of the Basel framework performed as intended during the turmoil, such as liquidity risk and interest rate risk in the banking book, and assessing the need to explore policy options over the medium-term.
ECON draft reports on legislative proposals for CMDI framework
On 5 October, ECON published three draft reports in relation to the legislative proposals for the review of the crisis management and deposit insurance (CMDI) framework: (i) on the proposed Directive amending the DGSD; (ii) on the proposed Regulation amending the SRM Regulation; and (iii) on the proposed Directive amending the BRRD. The reforms aim to increase the protection of depositors in case of a bank failure, to harmonise resolution practices across the EU and to bring a broader range of small and medium-sized banks under the resolution framework. The draft reports contain draft EP legislative resolutions, the texts of which set out suggested amendments to the proposals.
EBA speech on potential reform of EU bank crisis management framework
On 5 October, the EBA published a speech by José Manuel Campa, EBA Chair, on potential improvements to the EU bank crisis management framework in light of the 2023 banking turmoil. Mr Campa reflects on the themes emerging and lessons learnt from recent crisis cases. He discusses the implications on the EBA’s crisis management work and priorities, including: (i) European Resolution Examination Programme – aspects of liquidity needs in resolution and assessment of resolvability capabilities are crucial areas in need of continued close assessment under futur
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