Financial Services Regulatory Update – March 2021 Round Up

Anti-Money Laundering / Counter Terrorist Financing

March saw a number of AML related developments at domestic, EU and international level.

At domestic level, the EU’s Fifth Money Laundering Directive has been transposed into Irish law by the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021, which amends the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010. Among other things, the 2021 Act amends the definition of a designated person to include a “virtual asset service provider”. It also imposes a number of new obligations on designated persons.

At EU level, the EBA published:

• an opinion on the risks of money laundering and terrorist financing that are affecting the EU's financial sector (here).

• a final report setting out revised guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions under Articles 17 and 18(4) of the Fourth Money Laundering Directive (here).

• a consultation on changes to its Guidelines on Risk-Based Supervision of credit and financial institutions’ compliance with anti-money laundering and countering the financing of terrorism obligations (here).

At international level, the Financial Action Task Force (FATF) published revised guidance for applying a risk-based approach to AML/CFT supervision (here). In addition, the FATF, together with the Egmont Group of Financial Intelligence Units, published a joint report on trade-based money laundering risk indicators (here).

Benchmarks Regulation (BMR)

ESMA published an updated statement on the impact of Brexit on the BMR (here) as well as updated BMR Q&As (here).

As set out in the updated Statement, Regulation 2021/168 extended the transitional period during which an EU supervised entity can use a third country benchmark to 31 December 2023 (see our briefing here). Consequently, according to the Statement, until that date, EU supervised entities can continue to use a) third country UK based benchmarks and b) third country benchmarks that were endorsed or recognised in the UK before the end of the Brexit transition period.

Complaints Handling

The European Supervisory Authorities (“ESAs”) published an assessment of the application of its Guidelines on complaints handling (here), on 31 March. The ESAs have concluded that there is no need to review the Guidelines at this stage, and no further assessment of the application of the Guidelines is warranted, especially taking into account prioritisation decisions arising in the context of the Covid-19 pandemic.

Consumer Protection

The Central Bank of Ireland (“CBI”) published its Consumer Protection Outlook Report for 2021 (here), which details the CBI’s consumer protection priorities for this year as well as identifying key sectoral risks and how the CBI expects firms to mitigate those risks.

The CBI also published a speech given by Director General, Financial Conduct, Derville Rowland on its financial conduct priorities for 2021 (here).  Ms Rowland stated that the CBI is currently working on a substantial update of the Consumer Protection Code and expects to consult on its proposals later in 2021.

EMIR – Intragroup Transactions and the Covered Bond Exemption

The ESAs published a set of Q&As on exchange of collateral under EMIR (here), which address both intragroup transactions and the covered bond exemption.

ESMA also updated its Q&As on the implementation of EMIR (here), to clarify issues concerning the exemption for intragroup transactions involving non-financial counterparties under Article 9(1) of EMIR.  These issues relate to reporting the details of derivatives when the exemption ceases to be valid and the location of the parent undertaking for the purposes of the exemption.

Financial Services MoU – Brexit

The EU and the UK agreed the text of a memorandum of understanding (“MoU”) on UK-EU regulatory co-operation in financial services (here).  Among other things, the MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues.

Securitisation Regulation – Opinion and Q&A

On 26 March, the ESAs published a joint opinion to the European Commission on the jurisdictional scope of the Securitisation Regulation (here).

The purpose of the Joint Opinion is to facilitate the understanding of certain Securitisation Regulation provisions in cases where third country entities become parties to a securitisation. The Joint Opinion aims to clarify the potential obligations of those third country parties, as well as related compliance aspects of a transaction under the Securitisation Regulation, and is intended to help improve the functioning of EU securitisation markets.

On 26 March, the Joint Committee of the ESAs published a set of Q&As on the Securitisation Regulation, covering questions that fall outside the scope of any one of the ESAs (here).  The Q&As aim to help market participants comply with their obligations, in particular, in relation to:

• the content and format of the information that should be disclosed by the originator, sponsor and SSPE;

• the transaction documents in a simple, transparent and standardised (STS) securitisation that should be made publicly available to facilitate investors’ compliance with its due diligence requirements; and

• the type of STS certification services that can be provided by third party verifiers to the securitisation parties.

Taxonomy Regulation

According to Article 8(1) of the Taxonomy Regulation, undertakings required to publish non-financial information pursuant to the Non-Financial Reporting Directive must include information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. For this purpose, Article 8(2) of the Taxonomy Regulation requires such undertakings to provide disclosure of three key performance indicators (“KPIs”): turnover, capital expenditure and operating expenditure related to environmentally sustainable activities.

On 1 March, the three ESAs published advice to the European Commission on KPI disclosure obligations under the Taxonomy Regulation (here, here and here). The Commission must adopt, by 1 June 2021, a delegated act specifying the content, presentation and methodology of the KPI information to be disclosed.

Bank Resolution – Bail-In Clauses – Brexit

On 22 March, the Single Resolution Board (“SRB”) published a communication on its approach to liabilities governed by UK law without a contractual bail-in recognition clause in the light of Brexit (here).

According to the SRB, it will consider such liabilities to be eligible for minimum requirement for own funds and liabilities (MREL), if they were issued on or before 15 November 2018.  This exemption applies until 28 June 2025.

SRB – Bail-In for International Debt Securities

On 30 March, the SRB published guidance on reflecting bail-in in the books of the international central securities depositories (“ICSDs”) (here). The guidance aims at:

• providing a better understanding of the procedures the ICSDs would apply in the case of the bail-in of international bearer debt securities for which the ICSDs act as issuer CSDs;

• providing information to banks and resolution authorities across jurisdictions about how the bail-in of such instruments would be reflected in the books of the ICSDs;

• supporting banks in preparing their bail-in playbooks, in particular for securities issued and safekept in the ICSDs.

Capital Requirements – Delegated and Implementing Regulations

The following delegated and implementing legislation was published in the EU’s Official Journal (“OJ”):

• Commission Delegated Regulation (“CDR”) 2021/539 which amends Delegated Regulation 1222/2014 supplementing the Capital Requirements Directive 2013/36 (CRD IV) (here). The amendments reflect: a) the revised methodology for assessing globally systemically important banks that was published by the Basel Committee on Banking Supervision (“BCBS”) in July 2018; and b) new requirements set out in the fifth Capital Requirements Directive. Generally, the CDR applies since 30 March 2021.

• CDR 2021/424 which amends the Capital Requirements Regulation with regard to the alternative standardised approach for market risk (here).  The amendments reflect the revised version of the BCBS standard on minimum capital requirements for market risk which were published in January 2019. The CDR will apply from 30 September 2021.

• Commission Implementing Regulation 2021/453 with regard to the specific reporting requirements for market risk (here).  The Implementing Regulation will apply from 5 October 2021.

• Commission Implementing Regulation 2021/451 (here), which sets out all the implementing technical standards on supervisory reporting under the CRR in one place and will generally apply from 28 June 2021.

Insurance Distribution – General Good Rules

EIOPA has completed its analysis of all published general good rules on registration and professional and organisational requirements that could potentially be non-compliant with the Insurance Distribution Directive (“IDD”) (here). The analysis follows a report published by EIOPA in July 2019 analysing national general good rules in the context of the proper functioning of the IDD and the internal market.

Insurance Distribution – Q&As

On 23 March, EIOPA published a set of Q&As on the IDD, setting out the European Commission’s response to a series of questions (here).

MiFID – Delegated Regulations

The following CDRs were published in the EU’s OJ on 26 March (here):

• CDR 2021/529 amending CDR 2017/583, which sets out the transparency requirements applicable to bonds, structured finance products, emission allowances and derivatives. The CDR will enter into force on 15 April 2021.

• CDR 2021/527 amending CDR 2017/565 as regards the thresholds for weekly position reporting.  The CDR entered into force on 29 March 2021.

MiFID – Execution Venues

Directive 2021/338 (“amending Directive”) made targeted amendments to the MiFID II Directive, including temporarily suspending the obligation on execution venues to make available to the public data relating to the quality of execution of transactions on their venues. This reporting obligation is set out in Article 27(3) of MiFID II and further specified in CDR 2017/5754 (RTS 27).

On 31 March, ESMA published a statement on the application of the temporary suspension of the obligation to publish reports under RTS 27 (here).  According to ESMA, there is a lack of clarity among market participants on the application date of the suspension of the obligation to publish RTS 27 reports. In particular, although Article 1(6) of Directive 2021/338 provides that the requirement to publish RTS 27 reports will not apply until 28 February 2023, Article 4(1) requires member states to apply the measures necessary to comply with the amending Directive by 28 February 2022.

ESMA states that the legislative aim of the Directive 2021/338 was to suspend the best execution reports for two years as of the date of its entry into force. On that basis, ESMA expects National Competent Authorities (“NCAs”) “not to prioritise supervisory actions towards execution venues relating to the obligation to publish the RTS 27 reports until the date on which the national transposition measures of the amending Directive postpone that obligation in national law.”

MiFID – Investor Protection

MiFID II generally prohibits firms from paying inducements to or receiving inducements from third parties, unless certain conditions are fulfilled, including that the relevant benefit is designed to enhance the quality of the relevant service to the client.

On 29 March, ESMA published an updated version of its Q&As on investor protection and intermediaries topics under MiFID II and MiFIR (here). The updated version includes a new Q&A on the conditions to be met for inducements to be considered to enhance the quality of services to clients.

MiFID – Position Limits

On 17 March, ESMA published a statement on its supervisory approach to position limits for commodity derivatives (here). The statement seeks to clarify the application of position limits and coordinate the supervisory actions of NCAs, pending the legislative change for commodity derivatives introduced by the MiFID II Recovery Package, which will start to apply in early 2022.

Investment Funds – AIFMD Q&A

On 30 March, ESMA published an updated version of its Q&As on the application of AIFMD (here), which includes two new Q&As on ESMA’s guidelines on performance fees in UCITS and certain types of AIFs.  The Q&As provides clarification on the:

• crystallisation of performance fees
• timeline of the application of the performance reference period
• scope of the guidelines in respect of ELTIFs

Investment Funds – Liquidity Risk

On 10 March, the CBI issued a letter to fund management companies (“FMCs”) that were surveyed as part of an ESMA co-ordinated exercise to analyse the preparedness of funds with significant exposures to corporate debt to potential future shocks, including any resumption of significant redemptions and/or an increase in valuation uncertainty (here).   

The CBI asks FMCs who received this letter to consider how their liquidity risk management frameworks and fund structures should be adapted to take into account the experience and lessons learned from the market and redemption activity in 2020 and the findings of the ESMA Report. This should also consider the steps needed to increase funds’ resilience to future shocks.

A recipient of the letter must conclude its consideration of this matter and have the results presented to and approved by the Board no later than the end of June 2021, with an action plan to take any necessary steps promptly and in any event no later than the end of December 2021. A copy of the report presented to the Board should be available to the Central Bank on request.

Investment Funds – CSA on UCITS Liquidity Risk Management

On 24 March, ESMA published the results of the 2020 Common Supervisory Action (“CSA”) on UCITS liquidity risk management (“LRM”) (here).  According to ESMA, overall most UCITS managers have demonstrated that they have implemented and applied sufficiently sound LRM processes. However, in a few cases, some adverse supervisory findings were identified, particularly linked to documentation, procedures and methodology.  In some cases, the liquidity assessment before investing should be strengthened, as well as the data reliability verification and the internal control framework.

ESMA sets out a number of next steps, including:

• Market participants should critically review their LRM frameworks to ensure that none of the adverse supervisory findings are to be found in their LRM frameworks.

• NCAs will undertake follow-up action in individual cases to ensure that all regulatory breaches as well as any other shortcomings or weaknesses identified are remedied.

• Some NCAs have also indicated that they need to further interact with some UCITS managers, through on-site visits or desk-based reviews of the latest documents provided, to complete their supervisory analysis.

Central Securities Depositories Regulation – Q&A

ESMA published updated Q&As on the implementation of the Central Securities Depositories Regulation (“CSDR”) (here) which set out the European Commission’s answers to questions regarding; a) the provision of CSD services in other Member States and, b) the exemption from the application of cash penalties and the buy-in requirements for settlement fails relating to transactions involving central counterparties.

Pan-European Personal Pension Product (PEPP)

On 22 March, CDR 2021/473 was published in the EU’s OJ (here). The CDR supplements Regulation 2019/1238 with regard to RTS specifying the requirements on information documents, on the costs and fees included in the cost cap and on risk-mitigation techniques for the Pan-European Personal Pension Product. It entered into force on 11 April 2021.

Prospectus Regulation – Guidelines, CDR and Updated Q&As

On 4 March, ESMA published its final guidelines on disclosure requirements under the EU Prospectus Regulation (here), which will apply from two months after the date of their publication on ESMA’s website in the EU’s official languages.

On 26 March, CDR 2021/528 was published in the EU’s OJ (here). The CDR supplements the Prospectus Regulation as regards the minimum information content of the document to be published for a prospectus exemption in connection with a takeover by means of an exchange offer, a merger or a division. It will enter into force on 15 April 2021.

On 31 March, ESMA published an updated version of its Q&As on the Prospectus Regulation (here).  The Q&As provide clarification on the following aspects:

• the application of the exemption in Article 1(5)(b) of the Prospectus Regulation in a situation concerning non-transferable securities;

• the application of the Prospectus Regulation where shares can be exchanged for global depositary receipts (and vice versa);

• dissemination of amended advertisements; and

• the status of transferable securities.

Selected Consultations, Discussion Papers, Speeches and Reports Published

• CBI – Consultation on enhancing its engagement with stakeholders (CP136) (here).  The consultation is open until 11 May 2021.

• CBI – Consultation on review of the Standard Financial Statement (CP139) (here).  The consultation is open until 20 April 2021.

• EBA – Consultation on guidelines for institutions and resolution authorities on improving resolvability (here).  The consultation is open until 17 June 2021.

• EIOPA – Launch of an EU-wide comparative study on non-life underwriting risk in internal models under the Solvency II Directive (1 March 2021)(here).

• ESAs – Consultation on draft RTS regarding the content and presentation of sustainability disclosures under Articles 8(4), 9(6) and 11(5) of the Sustainable Finance Disclosure Regulation (here).  The consultation is open until 12 May 2021.

• European Commission – Consultation on a draft delegated regulation supplementing EMIR by specifying the conditions under which the commercial terms for clearing services for OTC derivatives are to be considered to be fair, reasonable, non-discriminatory and transparent (“FRANDT”) (here).  The consultation is open until 7 April 2021.

• European Commission – Consultation on its roadmap on a proposal for a regulation on an EU-wide instant payments scheme (here).  The consultation is open until 7 April 2021.

• European Commission – Consultation on supervisory convergence and the single rulebook (here).  The consultation is open until 21 May 2021.

• European Commission – Consultation on draft delegated regulation extending the transitional period for pension scheme arrangements (here).  The consultation is open until 13 April 2021.

• European Commission – Consultations on instant payments (here and here).  The consultations are open until 2 June 2021 and 23 June 2021.

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McCann FitzGerald regularly publishes briefings on topics relevant to financial services regulation, among others. You may be interested in the following briefings:

• Ireland as a Location for MiFID Investment Firms 2021 (here)

• Ireland as a Location for Payment Institutions 2021 (here)

• Highlights of the Data Protection Commission’s 2020 Annual Report (here)

• Sustainable Finance Disclosure Regulation: Draft RTS to Light the Way (here)

• Implications of the GameStop Short Squeeze for Financial Services Legislation (here)

• LIBOR: FCA Announces Future Cessation and Loss of Representativeness (here)

• Financial Services Regulatory Update – February 2021 Round Up (here)

• Brexit: An Overview of Legal and Regulatory Implications (here)

• Crypto-Assets: The Meteoric Rise of ‘Non-Fungible Tokens’ (here)

• Right to Disconnect – What does it mean for Employers (here)