knowledge | 31 March 2020 |

COVID-19: Financial Services Round-Up for 23 – 29 March 2020

 

Accounting Implications of COVID-19 – IFRS 9

Both ESMA (here) and the EBA (here) have published statements covering the accounting implications of COVID-19 on the calculation of expected credit losses in accordance with IFRS9.

The EBA’s statement is part of a broader statement on the prudential framework, which is considered again below.

Basel III

The oversight body of the Basel Committee on Banking Supervision, the Group of Central Bank Governors and Heads of Supervision (the “GHOS”), published a press release announcing the deferral of the implementation of Basel III to increase the operational capacity of banks and supervisors to respond to COVID-19 (here). This includes deferring, by one year, the implementation dates of the:

  • Basel III standards finalised in December 2017 to 1 January 2023. The accompanying transitional arrangements for the output floor have also been extended by one year to 1 January 2028;
  • revised market risk framework finalised in January 2019 to 1 January 2023;
  • revised Pillar 3 disclosure requirements finalised in December 2018 to 1 January 2023.
Consumer Protection Issues

The EBA published a statement on consumer and payment issues in light of COVID-19 (the “Statement”) (here), which addresses both temporary payment measures (“TPMs”), such as debt moratoria and payment holidays, and payment services.

Regarding TPMs, according to the Statement, Financial Institutions:

  • must act in the best interests of consumers, particularly when engaging with customers regarding TPMs for consumer and mortgage loans and must grant such measures in compliance with EU law (such as the Mortgage Credit Directive and the Consumer Credit Directive).  In particular, financial institutions must make full information disclosure, especially with regards to any potential charges and costs and the transparency and clarity of terms and conditions;
  • should give careful consideration from a legal and reputational perspective to any new costs and charges specifically introduced in relation to contingency measures, which are ostensibly designed to alleviate the pressure on consumers and businesses and any cross selling of products to consumers;
  • should note that given TPMs may not automatically lead to loan reclassification from a prudential perspective, the acceptance of TPMs should not automatically lead to negative implications for the consumer’s credit rating.

The Central Bank of Ireland published a statement on its expectations of insurers, which is also relevant to consumer protection, and which is discussed below.

ECB and Significant Credit Institutions

The ECB published a Recommendation (ECB/2020/19) (here) addressed to significant supervised entities, significant supervised groups and national competent authorities and designated authorities. According to the Recommendation:

  • credit institutions should not pay out dividends at least until 1 October 2020 and should not make an irrevocable commitment to pay out dividends for the financial year 2019 and 2020. Credit institutions should also refrain from share buy-backs aimed at remunerating shareholders;
  • credit institutions that are unable to comply with the recommendation because they consider themselves legally required to pay-out dividends should immediately explain the underlying reason to their joint supervisory team.

The ECB also updated its FAQs on ECB supervisory measures in reaction to the coronavirus (here).

Initial Margin

ISDA published a letter it has submitted to the Basel Committee on Banking Supervision (“BCBS”), International Organization of Securities Commissions (“IOSCO”) and global regulators requesting a suspension of the current timeline for the initial margin phase-in to enable market participants to focus their resources on ensuring continued access to the derivatives market during the COVID-19 pandemic (here).

According to the letter, decisions regarding a new timeline for the implementation of further phases of the initial margin requirements should be delayed and reconsidered when the overall impact of COVID-19 is known.  The letter also requests that once market conditions are back to normal and new phase-in dates are being set, sufficient lead time be provided in order to complete implementation in a phased and reasonable period of time.

Insurers and CBI Expectations

The Central Bank of Ireland (CBI) has written to the Chairs and CEOs of both life and general insurance firms. The letter sets out the CBI’s expectations regarding:

  • the handling of insurance claims;
  • engagement with customers; and
  • operational resilience.

CEOs of Irish authorised firms must have responsibility for the oversight of how their firm is managing determinations of whether claims are covered or not in the context of COVID-19. Where the firm is passporting into Ireland, senior management must take that responsibility.

The CBI also published a related press release (here).

LIBOR Transition

On 25 March 2020, the FCA published a statement on the impact of COVID-19 on firms’ LIBOR transition plans (here).  According to the statement, the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and this should remain the target date for firms to meet. However, in segments of the UK market that have made less progress in transition and are therefore still more reliant on LIBOR, such as the loan market, COVID-19 is likely to affect some of the interim transition milestones.

Payment Services

As set out above, the EBA published a statement on consumer and payment issues in light of COVID-19 (here).

Regarding payment services, the statement calls on payment service providers (“PSPs”) to facilitate consumers’ ability to make payments without the need for physical contact, by making use of the existing exemption from strong customer authentication (SCA) available for contactless payments at the point of sale under Article 11 of Commission Delegated Regulation 2018/389.  The EBA also encourages PSPs to increase, where possible, the limits up to the maximum thresholds of EUR50 per transaction as allowed under the Commission Delegated Regulation.

In order to support issuing and acquiring PSPs’ efforts to focus on their customers, the EBA is removing the obligation for national competent authorities to report by 31 March 2020 their readiness to meet the strong customer authentication requirements for e-commerce card-based transactions (set out in task 3 of Tables 1 and 2 of the EBA Opinion on the migration to SCA).  Other requirements set out in the Opinion remain unchanged.  The EBA will continue to monitor events and assess if any additional measures need to be taken.

Solvency II – Reporting and Disclosure Requirements

EIOPA has published recommendations on supervisory flexibility (here), which set out specific degrees of flexibility that competent authorities (“CAs”) should permit to undertakings regarding the following reporting and disclosure requirements relating to Solvency II:

  • Annual reporting referring to year-end occurring on 31 December 2019 or year-end after that date but before 1 April 2020 - CAs should accept an eight-week delay in submitting specified reporting templates, apart from as specified in the recommendation;                   
  • Quarterly reporting referring to Q1 2020-end occurring on 31 March 2020 or after that date but before 30 June 2020  -  CAs should accept a one-week delay in submitting specified reporting templates, apart from as specified in the recommendation;
  • Solvency and Financial Condition Report referring to year-end occurring on 31 December 2019 or year-end after that date but before 1 April 2020 - CAs should accept an eight-week delay in submitting specified reporting templates apart from as specified in the recommendation.

CAs that comply or intend to comply with the recommendations should incorporate them into their regulatory or supervisory framework in an appropriate manner.

Undertakings may choose to submit the full reporting package at any time before the delays permitted in the recommendations. 

Tick-Size Regime for Systematic Internalisers

ESMA has issued a statement setting out its approach to the tick-size regime for systematic internalisers (“SIs”) under the Markets in Financial Instruments Regulation 600/2014 (“MiFIR”) as amended by Regulation 2019/2033, to mitigate the impact of COVID-19 (here).

The tick-size regime for SIs was due to apply from 26 March 2020, however, ESMA expects  competent authorities not to prioritise their supervisory actions in relation to the new tick-size regime until 26 June 2020, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.

Transparency Calculations for Equity Instruments

ESMA published a press release stating that it has decided to keep the date of application of the transparency calculations for equity instruments of 1 April 2020 unchanged (here). According to the press release, having consulted with market participants, ESMA considers that delaying the application of the new transparency results would in itself entail some risks and might even create additional operational burdens.

Postponed Regulator Activities

The EBA published a statement on postponed activities in light of COVID-19 (here). The EBA has reviewed all ongoing activities requiring input from banks and has decided:

  • to extend the deadlines of ongoing public consultations by two months;
  • to postpone all public hearings already scheduled to a later date and run them remotely via teleconference or similar means;
  • to extend the remittance date for funding plans data;
  • in coordination with the BCBS, to extend the remittance date for the QIS based on December 2019 data.

A list of consultations and public hearings is available in the statement.  It also states that regular data collections, such as those based on implementing technical standards on supervisory reporting, are not considered for these purposes.

ESMA previously published a similar announcement in March 2020.

Prudential Regulation Framework

As mentioned above, the EBA published a statement on the application of the prudential framework regarding default, forbearance and IFRS9 in light of COVID-19 measures (here). The statement follows the EBA’s call on 12 March 2020 and explains a number of additional interpretative aspects on the functioning of the prudential framework in relation to the classification of loans in default, the identification of forborne exposures and their accounting treatment.

Securities Financing Transactions Regulation 2015/2365

On 26 March 2020, ESMA published a revised version of its statement on coordinated supervisory actions on the application of the Securities Financing Transactions Regulation (“SFTR”) (here).   The statement was updated in response to feedback received from financial market participants and stakeholders.

The revised statement clarifies that competent authorities are not expected to prioritise their supervisory actions towards counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations under SFTR or MiFIR for securities financing transactions (“SFTs”) concluded between 13 April 2020 and 13 July 2020 and SFTs subject to backloading under SFTR. Competent authorities should generally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.

Transparency Directive 2004/18

ESMA has issued a public statement (here) on the implications of the COVID-19 pandemic on the deadlines for publishing financial reports, which apply to listed issuers under the Transparency Directive. The Statement recommends National Competent Authorities to apply forbearance powers towards issuers who need to delay publication of financial reports beyond the statutory deadline.  It also underlines that issuers should keep their investors informed of the expected publication delay and that requirements under the Markets Abuse Regulation 596/2014 continue to apply.

Useful Resources

ICMA has launched a new COVID-19 updates page on its website (here), which gathers information and links from various authorities globally under the following headings: monetary policy; regulatory responses; market practice; and market data and commentary. The website specifically focuses on actions and events affecting the cross-border fixed income market and on actions in Europe and the UK and Asia.

 

ISDA has also launched a new COVID-19 updates page on its website (here) which serves as the central repository for information from ISDA relating to COVID-19. The page is in five parts, covering: 1) recent updates; 2) ISDA Member calls; 3) Market closure information and related ISDA guidance; 4) Electronic Contracts Opinion and 5) Other useful information.

Various Other International Regulators

Basel Committee on Banking Supervision (BCBS) - Statement on the coordination of the policy and supervisory response to COVID-19 (here).  According to the statement, the BCBS is suspending consultation on all policy initiatives and postponing all outstanding jurisdictional assessments planned in 2020 under its Regulatory Consistency Assessment Programme. It will consider additional measures aimed at supporting the financial resilience of banks and the operational resilience of both banks and supervisors in the coming days.

Financial Stability Board (FSB) - Press release (here) - FSB coordinates financial sector work to buttress the economy in response to COVID-19. According to the press release, the FSB is actively cooperating to maintain financial stability during market stress related to COVID-19. The FSB also encourages authorities and financial institutions to make use of the flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19, and to ensure that capital and liquidity resources in the financial system are available where they are needed.

International Organization of Securities Commissions (IOSCO) – Media release (here) – IOSCO members are cooperating closely on their responses to the disruption in capital markets resulting from the macroeconomic impact of COVID – 19. The IOSCO Board is committed to ensuring that capital markets continue to function in an open and orderly manner to enable all participants to price and transfer risk across all traded asset classes.

You may also be interested in…

The McCann FitzGerald website has a dedicated COVID-19 section containing FAQs, briefings and guidance on a range of legal and business issues that may need to be addressed (here).

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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