Financial Services Regulatory Update – October 2020 Round Up

Anti-Money Laundering – Bulletin

The Central Bank of Ireland (“CBI”) has published a new edition of its Anti-Money Laundering Bulletin (here), which sets out the CBI’s expectations on the application of transaction monitoring controls.

According to the Bulletin, the CBI will continue to focus on designated persons’ compliance with transaction monitoring requirements and a designated person should be able to evidence that it has fully considered the expectations outlined in the bulletin and implemented them where appropriate.

Benchmarks – Brexit

ESMA has published an updated Statement on the consequences of Brexit for the ESMA register for benchmark administrators and third-country benchmarks under the Benchmarks Regulation (here).

While after the 31 December 2020, UK administrators included in the “ESMA register of administrators and third-country benchmarks” will be deleted from the ESMA register, EU supervised entities can continue to use third-country UK benchmarks until 31 December 2021. This transitional period is also applicable to those third-country benchmarks endorsed or recognised in the UK.

Benchmarks – IBOR Fallbacks

ISDA launched its IBOR Fallbacks Supplement to the 2006 ISDA Definitions and IBOR Fallbacks Protocol on 23 October (press release here).

The Supplement will amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain IBORs, with the changes coming into effect on 25 January 2021. From that date, all new cleared and non-cleared derivatives that reference the definitions will include the fallbacks.

The Protocol will enable market participants to incorporate the revisions into their legacy non-cleared derivatives trades with other counterparties that choose to adhere to the Protocol. It is open for adherence from 23 October and also takes effect on 25 January 2021.

Brexit

The Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020 (here) was initiated on 27 October in order to address the wide range of complex issues that could arise for citizens and businesses post transition.

Part 9 of the Bill is intended to ensure that protections under the EU Settlement Finality Directive and the Irish Settlement Finality Regulations continue to apply to Irish participants in UK based settlement systems post-Brexit.

Part 10 of the Bill amends the European Union (Insurance and Reinsurance) Regulations 2015 and the European Union (Insurance Distribution) Regulations 2018, so that a firm that is authorised in the UK and/or Gibraltar, which has passported into Ireland will be deemed to be authorised for specific and limited purposes in Ireland for a 15 year period following the end of the transition period, subject to the fulfilment of certain conditions.

Parts 9 and 10 of the Bill largely reflect parts 7 and 8 of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2019, which would have applied had the UK and the EU failed to enter into the Withdrawal Agreement. 

See our previous briefing here.

Capital Requirements Directive (“CRD”)

On 2 October, the EBA published final guidelines on the appropriate subsets of sectoral exposures to which competent or designated authorities may apply a systemic risk buffer in accordance with Article 133(5)(f) of the CRD (here).

The guidelines set pre-determined dimensions or components of exposures, which competent or designated authorities should use when defining a subset of sectoral exposures in the application of a systemic risk buffer. They will apply from 29 December 2020. 

Capital Requirements Regulations (“CRR”) – Prudential Treatment of Legacy Instruments

The EBA published an opinion on the prudential treatment of legacy instruments (here), on 21 October. 

When the CRR entered into force, certain capital instruments that, at that time, did not comply with the new definition of own funds (referred to as legacy instruments) were grandfathered for a transition period, the objective being that they would be gradually phased out from own funds. The grandfathering provisions come to an end on 31 December 2021.

In the opinion, the EBA clarifies the prudential treatment of legacy instruments in the light of the end of the grandfathering period and proposes policy options to address the so-called "infection risk" (defined as the disqualification of other layers of own funds or eligible liabilities instruments) created by such instruments.

CRR – Software Assets

The EBA published a final report on draft regulatory technical standards (“RTS”) on the prudential treatment of software assets under Article 36 of the CRR (here), on 14 October.  The RTS specify the methodology to be adopted by institutions for the purpose of the prudential treatment of software assets, providing for the application of a prudential treatment based on software amortisation. They have been sent to the European Commission for adoption.

Credit Rating Agencies (“CRA”) – Brexit

Under the CRA Regulation, credit ratings issued by a non-EU CRA may be used for regulatory purposes in the EU, (i.e. by EU financial institutions), where an EU CRA has endorsed those credit ratings. Before an EU CRA can endorse such credit ratings, ESMA must complete two separate assessments, namely: an assessment of the conditions relating to the legal and supervisory framework of the third-country and an assessment of certain conditions relating to the CRAs intending to endorse credit ratings.

ESMA published an update to its March 2019 statement on the endorsement of credit ratings from the UK (here), on 27 October, stating that it has completed those assessments in the case of the UK.  Consequently, it will be possible for an EU CRA to endorse credit ratings issued by UK-based CRA for use in the EU, after 31 December 2020.

Credit Unions

The CBI has published Issue 13 of Credit Union News (here), which covers the following topics among others:

• Application process for the 15% Combined Concentration Limit for House and Business Lending
• Credit Union PRISM Supervisory Commentary Report
• Review of the €100,000 Individual Member’s Savings Limit
• 2020 Financial Year End
• Credit Unions coming in scope of 2018 Fitness & Probity Regulations
• Minimum Reserve Requirement

Crowdfunding

The Crowdfunding Regulation 2020/1503, was published in the EU’s Official Journal (“OJ”) on 20 October, (here) and will apply from 10 November 2021. It covers crowdfunding campaigns of up to EUR 5 million over a 12 month period and applies to both investment and loan-based crowdfunding. It does not apply to crowdfunding where the project owner is a consumer.

The Regulation, which will enable crowdfunding platforms to offer their services across the EU, lays down uniform requirements for the provision of crowdfunding services, for the organisation, authorisation and supervision of crowdfunding service providers, for the operation of crowdfunding platforms as well as for transparency and marketing communications in relation to the provision of crowdfunding services in the EU.

The Regulation was accompanied by Directive 2020/1504, which ensures that legal persons authorised as crowdfunding service providers under the Crowdfunding Regulation are excluded from the scope of the MiFID Directive 2014/65/EU.

EIOPA – Annual Work Programme

On 1 October, EIOPA published its single programming document (“SPD”) 2021-23, which includes its annual work programme 2021 (here).  According to the SPD, EIOPA’s main areas of focus will be continued COVID-19 crisis management, risk mitigation and active support to the recovery of the European economy.  Other key priorities include: consumer protection; digitalisation and cyber risk; sustainable finance; supervisory convergence; and the financial stability of the insurance and occupational pensions sectors.

As regards Brexit, according to EIOPA, the UK’s withdrawal will lead to greater fragmentation of the EU’s financial markets thus strengthening the case for continued work by EIOPA regarding regulatory harmonisation and supervisory convergence. 

ESMA

ESMA published its work programme for 2021 (here), on 2 October. ESMA intends to respond to the challenges faced by the EU, its capital markets and its citizens, including by developing the retail investor base to support the Capital Markets Union, promoting sustainable finance and long-term oriented markets, dealing with the opportunities and risks posed by digitalisation, strengthening the EU’s role in global capital markets and ensuring a proportionate approach to regulation.

ESMA – Common Enforcement Priorities

ESMA published a statement setting out the priorities that European corporate reporting enforcers will consider when examining the 2020 annual financial reports of listed companies, on 28 October (here). These enforcement priorities reflect the need to provide adequate transparency regarding the consequences of the COVID-19 pandemic, which are expected to affect several areas of the 2020 annual financial reports.

European Commission

The European Commission published its 2021 work programme (here), on 19 October, which includes key initiatives across its political priorities, as well as withdrawals/modifications of existing legislation and actions to review the quality of existing legislation.

Various aspects of the work programme are relevant to financial services. In particular, Annex 1 sets out new initiatives including proposals relating to a European e-id, an investment protection and facilitation framework, revision of Solvency II and of the MiFID II Directive/ MiFIR; establishment of an EU green bond standard; a legislative proposal for an anti-money laundering package; completion of the Banking Union; and revision of the EU Emissions Trading System.

European Supervisory Authorities (the “ESAs”)

The ESAs’ Joint Committee published its 2021 work programme, on 5 October (here).  Issues of focus include consumer protection, sustainable finance and financial innovation. In particular, the ESAs will continue providing guidance on the application of the PRIIPs rules and will develop and deliver a number of draft technical standards under the Sustainable Finance Disclosure Regulation (the “SFDR”).  The Joint Committee will also increase its efforts in the area of digital finance.

Fitness and Probity

The CBI has added three new functions to the list of pre-approval controlled functions (“PCFs”) and has split out PCF-39 Designated Person into six PCF roles aligned to specific managerial functions. The new PCFs comprise PCF-49 Chief Information Officer, which is applicable to all regulated financial service providers (“RFSPs”) except for credit unions, as well as PCF-50 Head of Material Business Line and PCF-51 Head of Market Risk, which apply to banks. RFSPs will need to provide certain confirmations or returns to the CBI regarding the additional PCF roles by 16 November 2020.

See our related briefing here.

Legal Entity Identifier (LEI)

The European Systemic Risk Board published a recommendation on identifying legal entities (here), on 19 October. The proposal seeks the introduction of an EU legal framework to uniquely identify legal entities engaged in financial transactions by LEIs and to make the use of the LEI more systematic in respect of supervisory reporting and public disclosure. Taking into account the time frame for the adoption of such an EU framework, the ESRB recommends that relevant authorities pursue and systematise their efforts to promote the adoption and use of the LEI, making use of their various regulatory or supervisory powers.

Insurance – Annual European Insurance Overview

EIOPA published its third annual European Insurance Overview (here) in order to provide an easy-to-use and accessible overview of the European insurance sector. It is based on annually reported Solvency II information.

Insurance – Brexit

On 13 October, EIOPA published a press release calling on the insurance sector to complete preparations for the end of the UK transition period on 31 December 2020 (here).  In its press release, EIOPA states that:

• The insurance sector needs to be prepared for the consequences of UK and Gibraltar insurance undertakings becoming third-country undertakings and no longer benefiting from the Solvency II authorisation to provide services in the EU. There are also legal repercussions concerning insurance contracts, insurance disclosure and group supervision.
• The insurance sector should finalise preparations and implement suitable and realistic contingency plans. (Re)insurance undertakings must have measures in place to prevent (re)insurance activity without authorisation and ensure service continuity of cross-border business, in order to minimise the detriment to policyholders and beneficiaries. 
• (Re)insurance undertakings must inform customers about the possible impact of the withdrawal of the UK from the EU on insurance contracts.

The press release also states that the previously agreed Memoranda of Understandings on cooperation and information exchange concluded by EIOPA, and all EEA national competent authorities with competencies in the insurance sector, on the one hand and the PRA and FCA on the other, remain valid and will come into effect on the date the European treaties and secondary legislation have ceased to apply in the United Kingdom.

On the domestic front, as mentioned above, the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2020, provides for a 15 year run-off provision for UK and Gibraltar insurance undertakings which have passported into Ireland before the end of the transition period.

Insurance – Product Oversight and Governance

EIOPA published a report on its approach to the supervision of product oversight and governance (“POG”) requirements under the Insurance Distribution Directive (here), on 8 October. The report aims at providing more clarity for insurance manufacturers and distributors on the supervisory approach to POG requirements and to support them when they implement their own POG policies, so they can better engage with their supervisors.  The report is for information purposes only and is not binding on national competent authorities or insurance distributors and insurance manufacturers.

Insurance – Solvency II Directive – ICT Security and Governance

On 12 October, EIOPA published its final guidelines on information and communication technology (“ICT”) security and governance (here), which will apply from 1 July 2021. The guidelines provide guidance on how (re)insurance undertakings should apply the governance requirements in the Solvency II Directive and in Commission Delegated Regulation (EU) No 2015/356 in the context of ICT security and governance.

Investment Funds – Liquidity Stress Testing

The CBI has published details on how to make a notification where liquidity stress testing reveals a material risk and what should be included in it. See our related briefing here.

Investment Funds – Thematic Review of Fund Management Companies

The CBI published a Dear Chair Letter on the outcomes of its thematic review of the implementation of its framework for governance, management and oversight in fund management companies (“FMCs”) (here), on 20 October. The relevant framework is set out in the CBI’s UCITS Regulations, in its AIF Rulebook and in the CBI’s Fund Management Companies – Guidance (2016) (the “Guidance”).

The CBI requires all FMCs to:

• critically assess their day to day operational, resourcing and governance arrangements against all relevant rules and guidance, taking into account the findings of the review; and
• implement a time-bound plan for making the necessary changes to ensure full and effective embedding of all aspects of the Guidance. The firm’s analysis should be completed and an action plan discussed and approved by the Board by end Q1 2021.

A related press release and speech are available here and here.

Market Abuse – SME Growth Markets

ESMA published its final report on amendments to the Market Abuse Regulation for the promotion of the use of SME Growth Markets (here), on 29 October.  The amendments are focused on liquidity contracts and insider lists for SME Growth Markets.

Markets in Financial Instruments – Brexit

ESMA published (here) an updated Statement on the impact of Brexit on the application of MiFID II/MiFIR on 1 October, which, among other things, deals with the C(6) carve-out for certain wholesale energy products. According to the Statement, following the end of the transitional period, certain derivatives contracts may cease to benefit from the C(6) carve-out, and may thus become financial instruments for MiFID purposes.

Markets in Financial Instruments – Brexit

Trading venues established in the UK will, with effect from 1 January 2021, no longer be considered EU trading venues. Consequently, transactions concluded on UK trading venues would be considered OTC-transactions and subject to the post-trade transparency requirements pursuant to Articles 20 and 21 of MiFIR. Furthermore commodity derivatives traded on UK trading venues could, subject to meeting certain conditions, be considered as economically equivalent over-the-counter (EEOTC) contracts for the EU position limit regime.

In order to avoid double-reporting and including commodity derivative contracts traded on third-country trading venues in the position limit regime, in 2017 ESMA published two opinions on third-country trading venues in the context of MiFID II/MiFIR clarifying that:

• investment firms trading on third-country trading venues meeting a set of criteria are not required to make transactions public in the EU via an approved publication arrangement (APA);
• commodity derivatives contracts traded on third-country trading venues meeting a set of criteria are not considered as EEOTC contracts for the position limit regime.

According to a press release published on 27 October (here), ESMA has positively assessed UK venues against the criteria of the 2017 opinions, and has added them to the annexes of each of the opinions. Consequently, from 1 January 2021:

• investment firms will not be required to make transactions public in the EU via an EU-approved publication arrangement if they are executed on one of the UK trading venues on the transparency list; and
• commodity derivative contracts traded on UK trading venues on the position limits list will not be considered as EEOTC contracts for the EU position limit regime.

To give market participants enough time to implement the changes to the guidance, the date of application of the transparency list is set on 10 November 2020.

MiFID – Brexit – Share Trading Obligation

ESMA has published a statement confirming its guidance on the application of the STO following the end of the Brexit transition period, subject to one clarification; the STO will not apply to shares with an EEA ISIN traded on a UK trading venue in UK pound sterling (GBP) at the end of the transition period.  However, as ESMA’s commentary notes, very few shares are likely to be in scope of this clarification.  See our related briefing here.

Payment Services

On 9 October, Commission Delegated Regulation (EU) 2020/1423 supplementing the Payment Services Directive 2015/2366 with regard to RTS on the criteria for appointing central contact points within the field of payment services and on the functions of those central contact points (here), was published in the EU’s OJ.  The Delegated Regulation entered into force and has applied since 29 October 2020 and aims to create legal certainty about the criteria that member states will apply to determine whether it is appropriate to appoint a central contact point and to set out the functions a central contact point must have to fulfil its duties.

Reinsurance

The CBI has rescinded its Guidelines on the Reinsurance Cover of Primary Insurers and the Security of their Reinsurers, for (re)insurance undertakings subject to Solvency II with effect from 14 September 2020 (here). The Guidelines will continue to apply for Non-Solvency II undertakings and have been retained on the Non-Solvency II section of the CBI’s website.

Securitisation

ESMA published final guidelines on portability of information between securitisation repositories under the Securitisation Regulation (here) on 5 October, which set out common provisions that a securitisation repository should follow when transferring securitisation information to another securitisation repository. For the most part, ESMA will consider the guidelines for the purpose of its supervision as of 1 January 2021.

ESMA also published an updated version of its Q&As on the Securitisation Regulation (here) which include new questions relating to COVID-related debt moratoria and primary income in case of buy-to-let.

Sustainable Finance Platform

The European Commission published FAQs on the setting-up and work of the platform on sustainable finance (here), on 1 October. The platform will advise the Commission on the development of technical screening criteria for the EU taxonomy, and policy development, amongst other things, as required by the Taxonomy Regulation 2020/852.  The Commission has also updated its webpage on the platform to include a list of platform members.

Sustainable Finance – SFDR

On 30 October, the European Commission published a letter to the ESAs about the application of the SFDR and related RTS (here). According to the letter, the deadline for the public consultation on the draft RTS has been extended due to the COVID-19 pandemic to allow stakeholders to properly address the complex issues contained in the joint consultation paper. While the disclosure obligations under the SFDR will still apply from 10 March 2021, the RTS will not apply until a later date.

Selected Consultations, Discussion Papers, Speeches and Reports Published

• Bank for International Settlements – Report on the foundational principles and core features of central bank digital currencies (9 October 2020) (here).
• CBI – Speech given by Gerry Cross, Director of Financial Regulation - Policy and Risk;  Asset Management and Investment Banking (Interim) entitled “A financial sector better serving citizens and the economy: the role of Supervisory Inspections in driving improvements” (14 October 2020) (here).
• EBA – Consultation on revision of guidelines on major incident reporting under revised Payment Services Directive (here).  The consultation is open until 14 December 2020.
• EBA – Industry survey to gather information about the use of digital platforms by financial institutions (here).  The survey is open until 7 December 2020.
• ECB – Consultations on draft Eurosystem oversight framework for electronic payment instruments, schemes and arrangements; draft Eurosystem assessment methodology for electronic payment instruments, schemes and arrangements; and draft exemption policy for the Eurosystem oversight framework for electronic payment instruments, schemes and arrangements (here). The consultations are open until 31 December 2020.
• EIOPA – Consultation on draft opinion on supervision of use of climate change risk scenarios in ORSA (here).  The consultation is open until 5 January 2021.
• EIOPA – Study on diversification in internal models (here). Insurance undertakings must submit the results to their group national supervisory authority by 15 January 2020. National supervisory authorities must report back to EIOPA by 22 January 2020.
• ESMA – Steven Maijoor delivered a keynote address at the Irish Funds Annual Global Funds Online Conference (21 October 2020) (here). 
• ESMA – Consultation on regulatory technical standards on conditions under which additional services or activities to which a CCP wishes to extend its business are not covered by the initial authorisation and conditions under which changes to the models and parameters are significant under EMIR (here).  The consultation is open until 15 November 2020.
• ESMA – Consultation on draft guidelines on common procedures and methodologies on supervisory review and evaluation processes of CCPs under Article 21 of EMIR (here). The consultation is open until 16 November 2020.
• European Commission – Consultation relating to its review of the Regulation on European long-term investment funds (here).  The consultation is open until 19 January 2021.
• European Commission – Consultation relating to its review of AIFMD (here). The consultation is open until 29 January 2021.
• European Commission – Consultation on a draft delegated regulation amending Delegated Regulation (EU) 2015/61 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council, with regard to liquidity coverage requirement for credit institutions (here). The consultation is open until 24 November 2020.
• FSB – Effective Practices for Cyber Incident Response and Recovery: Final Report (19 October 2020) (here)
• FSB – Global Transition Roadmap for LIBOR (16 October 2020) (here)
• FSB – Enhancing Cross-border Payments: Stage 3 roadmap (13 October 2020) (here)
• FSB – Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements (13 October 2020) (here)
• FSB – The Use of Supervisory and Regulatory Technology by Authorities and Regulated Institutions: Market developments and financial stability implications (9 October 2020) (here)
• IAIS – Consultation on draft application paper on supervision of climate-related risks (here).  The consultation is open until 12 January 2021.

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