FSS - 11 November 2021
11 November 2021
IN THIS EDITION OF THE FINANCIAL SERVICES SPEEDREAD WE COVER THE FOLLOWING 12 UPDATES: |
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ESG 1. FCA: Discussion paper: Sustainability Disclosure Requirements (SDR) and investment labels (DP 21/4) 2. FCA's "A strategy for positive change: our ESG priorities" 3. G20 adopt Rome Declaration 4. FCA, PRA, TPR and FRC issue joint statement on the Climate Change Adaptation Reports |
Banking and Prudential 5. PRA publish policy statement PS 25/21 6. European Commission: EU Banking Package 2021 |
Financial Crime 7. HMT updates the UK list of countries with high AML risk |
Retail Investments 8. ESMA: Statement on Investment Recommendations on Social Media |
Payments 9. PSR's final report into card-acquiring services |
Other 10. HM Treasury's consultation: Future Regulatory Framework Review 11. FCA's speech on "Drivers of change" 12. Financial Services Regulatory Initiatives Forum publish fourth edition of the Regulatory Initiatives Grid |
ESG |
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1. FCA: Discussion paper: Sustainability Disclosure Requirements (SDR) and investment labels (DP 21/4)On 3 November 2021, the FCA published DP21/4, a discussion paper in relation to Sustainability Disclosure Requirements ("SDR") and investment labels. This publication kickstarts the UK's approach to classifying investment products and it is clear that the approach is markedly different to that provided under the EU Sustainable Finance Disclosure Regulation ("SFDR"). The FCA is considering a three-tier disclosure system, whereby products are categorised under an overarching sustainability label, with retail-focussed disclosures containing key product information sitting underneath. More detailed disclosures at both product and entity level will underly the label and retail disclosure, which will be primarily aimed at institutional investors. In terms of the label itself, the FCA have proposed five labels: (1) not promoted as sustainable, (2) responsible, (3) transitioning, (4) aligned, and (5) impact. Only labels (3) – (5) would be classified as "sustainable", with all labels being allocated minimum entry criteria for financial products. In contrast to SFDR, the FCA have also proposed the use of a quantitative minimum threshold of sustainable assets for "aligned" financial products – under SFDR, the analogous Article 9 products must only demonstrate that they have a sustainable investment objective. 2. FCA's "A strategy for positive change: our ESG priorities"On 3 November 2021, the FCA published "A strategy for positive change: our ESG priorities" which sets out the FCA's plans to meet the ESG targets in its Business Plan for 2021/22 and, in particular, how it aims to support the financial sector towards its transition to net zero. The FCA's strategy is based on the following "core themes":
The FCA have also published a helpful diagram setting out the key "milestones" for 2022 which shows the progress that has been made so far. This can be accessed here. 3. G20 adopt Rome DeclarationOn 2 November 2021, the G20 Rome Leaders' Declaration was published. This Declaration followed the G20 Summit which took place on 30 and 31 October 2021. The Declaration sets out the collaborative discussions and negotiations which took place at the summit as well as over the past year and addresses the "most pressing global challenges" including the energy and climate economic crisis. The leaders made a number of promises to prioritise their ESG commitments by implementing the United Nations Framework Convention on Climate Change, the Paris Agreement and by promoting sustainable development. Sustainable finance and financial regulation were among the issues addressed. G20 have established a sustainable finance working group, a sustainable finance roadmap and synthesis report to better advise the wider G20 agenda on climate and sustainability. G20 also welcomed the Financial Stability Board's ("FSB") roadmap on addressing financial risks from climate change and the International Financial Reporting Standards Foundation's baseline global reporting standard. G20 also support the FSB's final report on the lessons learnt from Covid-19 from a financial stability viewpoint. This includes addressing the regulatory gaps that were highlighted throughout the pandemic, strengthening non-bank financial intermediation sector and money market fund resilience. The Declaration also addresses the progress that has been made against G20's 2021 milestones to enhance cross-border payments and endorses the FSB's report and global targets on this topic such as the potential role of central bank digital currencies. 4. FCA, PRA, TPR and FRC issue joint statement on the Climate Change Adaptation ReportsOn 28 October 2021, the FCA, PRA, The Pensions Regulator ("TPR") and the Financial Reporting Council ("FRC") issued a joint statement on the publication of the Climate Change Adaptation Reports. The statement reiterated each regulator's focus on ensuring the identification and proactive management across the financial sector of the risks associated with climate change and the potential opportunities stemming from transitioning to a net-zero economy. The PRA's report focused on the PRA's management and response to the climate change risks affecting PRA regulated firms, as well as the PRA's supervisory strategy which will apply from 2022. Although a number of PRA regulated firms have made "tangible progress" towards managing climate-related financial risks, there is still a long way to go. The report also concluded that more work was needed regarding the relationship between climate change and the banking and insurance regulatory capital regimes. The FCA's report assessed how successfully the financial services industry has mitigated the risks associated with climate change and highlighted retail investments and mortgages as areas to focus on. The FCA also confirmed that they are incorporating ESG considerations across the entire organisation and refreshing their ESG strategy to incorporate the following principles: (1) transparency; (2) trust; (3) tools; (4) transition; and (5) team. The FCA further highlighted their use of innovation tools such as the Green FinTech Challenge where innovative products and services are developed to accelerate the transition towards a net zero economy. The TPR's report outlined the climate change risks that are most applicable to occupational pensions schemes. Further to the climate change requirements under the Pension Schemes Act 2021, the TPR will release guidance to help schemes with their climate-related reporting requirements and will continue to work with the Department for Work and Pensions to publish guidance on climate risk reporting best practice. The TPR also plans to make the measurement of climate-related risks and opportunities a requirement under their proposed new code of practice. |
Brexit |
No updates for this fortnight's edition of the FSS. |
Financial Markets |
No updates for this fortnight's edition of the FSS. |
Banking and Prudential |
5. PRA publish policy statement PS 25/21On 8 November 2021, the PRA published policy statement PS 25/21 which provides the PRA's feedback to responses to Consultation Paper CP 13/21 'Occasional consultation paper'. PS 25/21 also contains final rules, updated Supervisory Statements and updated templates, instructions, and associated guidance and notes. In CP 13/21, the PRA proposed:
Additionally, references related to the UK’s membership of the EU in the rules and any other material 6. European Commission: EU Banking Package 2021On 27 October 2021, the European Commission published a package of legislative proposals amending existing EU prudential regulation (the "2021 EU Banking Package"). The package is intended to finalise implementation of the Basel III agreement in the EU. (a) A proposed Regulation amending the CRR The proposed Regulation includes amendments to the internal ratings based approach to credit risk; standardised approach to credit risk; credit risk mitigation techniques; market risk; and operational risks. Changes relating to the market risk framework include transforming the current reporting requirements based on the Fundamental Review of the Trading Book in the CRR (as amended) into substantive capital requirements. The proposed Regulation introduces definitions for ESG risks and also amends current requirements in the CRR in relation to ESG disclosures to require all credit institutions to disclose exposure to ESG risks in a proportionate way (i.e. not just large risks, as is currently the case). The proposed Regulation also invites the European Commission to consider legislative proposals on prudential treatment for exposures to cryptoasssets. (b) A proposed Directive amending the CRD IV Directive The proposed Directive introduces amendments to the fit and proper framework. These include requiring credit institutions to assess their "key function holders" to ensure they have all the relevant qualities needed to carry out their functions, as well as requiring competent authorities to assess the suitability of management board members. The proposed Directive also introduces harmonised provisions regarding the authorisation, capital, liquidity, governance, reporting and supervision of third country branches ("TCBs"). For TCBs with assets equal to or larger than EUR 30 billion in one or more Member States, competent authorities will be required to assess whether these TCBs are systemically important for the Member States where they are established, and the EU. (c) A proposed Regulation in relation to resolution The proposed Regulation makes targeted amendments to the CRR and the BRRD relating to the minimum requirement for own funds and eligible liabilities ("MREL"). Under the BRRD, financial instruments that are eligible for internal MREL must be held by the resolution entity (e.g. the parent undertaking). The parent can hold internal MREL eligible instruments either directly or indirectly through other entities in the same resolution group. The amendments introduced by the proposed Regulation relate to methodology for instruments to be indirectly subscribed by parent undertakings through intermediate entities. |
Fund Management |
No updates for this fortnight's edition of the FSS. |
Senior Managers and Governance |
No updates for this fortnight's edition of the FSS. |
Financial Crime |
7. HMT updates the UK list of countries with high AML riskOn 2 November 2021, the Money Laundering and Terrorist Financing (Amendment) (No.3) (High-Risk Countries) Regulations came into force. Under regulation 33(3), "relevant persons" must apply enhanced customer due diligence measures and enhanced ongoing monitoring in any business relationship with a person established in a high-risk third country or in any relevant transaction where either party is established in a high-risk third country. |
Retail Investments |
8. ESMA: Statement on Investment Recommendations on Social MediaOn 28 October 2021, ESMA issued a statement setting out the application of the investment recommendations regime under the Market Abuse Regulation to social media. The statement is intended for those recommending investments in some way or form via any platform, as well as those making investment decisions based on investment recommendations done on any platform (including social media). ESMA sets out the definition of investment recommendations and stresses that investment recommendations must be done in a specific and transparent way, so as to allow investors to assess: the credibility of the recommendation; and any interests of those making the recommendations. ESMA notes that investment recommendations are often made by brokers and financial analysts but can also be said to be made by other individuals proposing an investment strategy when the proposal is intended for wider distribution (e.g. posting on social media). ESMA reiterates rules under the Market Abuse Regulation requiring those making investment recommendations to disclose identities, present recommendations in an objective way, and disclose all relationships or circumstances that would impair objectivity. ESMA also sets out sanctions applicable in the event of a breach of the investment recommendation regime. |
Payments |
9. PSR's final report into card-acquiring servicesOn 3 November 2021, the Payment Systems Regulator ("PSR") published its final report into the card-acquiring market review. The PSR's review came as a result of its consultation on the contents of its interim report last year which highlighted concerns regarding the value card-acquiring services had to small and medium-sized merchants. The final report revealed that small and medium-sized merchants are negatively impacted due to the following factors which affect the merchants' ability and willingness to search and switch for better value services:
The PSR aims to publish a remedies consultation in 2022 by gathering views from key stakeholders. The PSR hopes that remedying the issues outlined in its report will encourage merchants to search for better deals, negotiate a better deal with its existing provider or switch to a new provider by reducing the obstacles that are currently prevalent. |
Fintech |
No updates included for this fortnight's edition of the FSS. |
Others |
10. HM Treasury's consultation: Future Regulatory Framework ReviewOn 9 November 2021, HM Treasury issued a consultation in relation to the UK's Financial Services Future Regulatory Framework Review (FRF Review).The FRF Review was set up to determine how the financial services regulatory framework should adapt to the UK’s new position outside of the EU. A consultation was issued by the Government in October 2020. This consultation paper provides an overview of responses received to the October 2020 consultation, as well as proposals concerning the Government's approach to taking forward the FRF Review including: the changes needed to the regulators’ statutory objectives and regulatory principles to ensure the government’s priorities for the sector are fully reflected; and the proposed approach to transferring responsibility for designing and implementing the direct requirements that apply to firms in certain areas of retained EU law to the regulators. Key proposals
11. FCA's speech on "Drivers of change"On 2 November 2021, Jessica Rusu, the FCA's Chief Data, Information and Intelligence Officer delivered a speech at the CDO Exchange for Financial Services titled: "Drivers of change in the financial services industry and how we are responding". The speech focussed on the "data-driven revolution" which has resulted in a number of new technologies and as a result, new challenges. The "revolution" has transformed "the kinds of products and opportunities available; how firms offer services and interact with customers; as well as how risks are qualified, and decisions made." The speech highlights the changing nature of the "threat landscape" as consumers are drawn to new high risk markets and products which have also attracted new types of consumers that are encouraged to enter the market by social media, friends and family. Ms Rusu used the examples of cryptocurrencies and social media to highlight the opportunities and challenges associated with the new technologies. She noted that the FCA have been engaging with social media platforms to ensure that they are complying with laws preventing the communication of unregulated investments as well as tightening up on the advertisement of scam investments. The speech also highlighted the need for a "data-led regulator". This will be set out in more detail in the FCA's refreshed data strategy in due course.« 12. Financial Services Regulatory Initiatives Forum publish fourth edition of the Regulatory Initiatives GridOn 1 November 2021, the Financial Services Regulatory Initiatives Forum issued the fourth edition of its Regulatory Initiatives Grid (the "Grid"). The forum is made up of the Bank of England (including the PRA), FCA, Payment Systems Regulator, Competition and Markets Authority, Financial Reporting Council, The Pensions Regulator and Information Commissioner's Office, with HM Treasury attending as an observer member. The Grid sets out the planned regulatory initiatives for the next 24 months to help the financial services industry get ready for initiatives that may have a significant operational effect on them. For each initiative the Grid sets out: (i) the lead authority behind the initiative; (ii) the expected key milestones; (iii) the indicative impact on firms; (iv) the expected timings for key milestones on a quarter-by-quarter basis; (v) the interest to consumers/consumer organisations; (vi) any change in timing to already existing initiatives; and (v) whether the initiative is a new initiative. The Grid also comes in the form of an interactive dashboard and an Excel spreadsheet to enable users to interact with the information. There are 134 initiatives in this edition, including new climate-related initiatives centred around establishing the Sustainable Finance Disclosure regime, Net Zero Transition Plans and work on environmental, social and governance ("ESG") issues in capital markets. This is a small increase on the number of initiatives in the previous May 2021 edition (128), which is principally in response to Government strategic reviews and the increasingly important themes such as ESG. |
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.