Financial Services SpeedRead 1 July

1. European Commission: Transitional provisions and delayed application date to amends to PRIIPs KID Delegated Regulations

On 24 June 2022, Commission Delegated Regulation (EU) 2022/975 amending Commission Delegated Regulation (EU) 2017/653 and Commission Delegated Regulation (EU) 2021/2268 (the Delegated Regulation) was published in the Official Journal. This was accompanied by a statement from the European Commission and another by the European Supervisory Authorities.

The Delegated Regulation extends the application of Article 14(2) of Delegated Regulation (EU) 2017/653 until 31 December 2022 (instead of 1 July 2022 as initially envisaged) in relation to ability to use UCITS Key Investor Information to provide specific information for the purposes of disclosures relating to PRIIPs offering a range of options for investment under PRIIPs KID. The Delegated Regulation also postpones the application date of certain PRIIPs-related disclosures to 1 January 2023 (instead of 1 July 2022).

The Delegated Regulation enters into force on 14 July 2022.

On 22 June 2022, the European Parliament's Committee on Economic and Monetary Affairs (ECON) published a briefing detailing its initial analysis of the European Commission's impact assessment (IA) accompanying regulatory proposals for enhanced market data transparency.

According to the IA, MiFID II and MiFIR have improved competition in the market for equity trading, but have also led to a high number – and fragmentation – of registered execution venues in the EU. The IA outlines various options designed to improve market data quality and facilitate market data consolidation, whilst also addressing the 'decisive factor' of how mandatory data contributions will be offset.

ECON recognises the 'solid internal and external sources' upon which the IA is based, but laments the 'lack of consistency and coherence' inherent in its definitions of both the problems and objectives. ECON also criticises the baseline scenarios against which policy options are presented, whilst urging greater depth of discussion surrounding the effects of the IA's preferred options combination.

On 22 June 2022, the FCA updated its webpage on accessing and using wholesale data. The FCA confirmed its trade data review is underway and this is a key strand of its work to promote competition and positive change, and to strengthen the UK's position in wholesale markets. The FCA stated that the trade data review will inform the development of consolidated tape, being one of the key changes proposed by the Treasury.

The FCA has sent information requests to a sample of trade data suppliers in relation to equities, fixed income and derivatives. The FCA intends on issuing a questionnaire to users of trade data in July 2022, with the aim of publishing findings and any further steps in January 2023.

On 22 June 2022, the European Commission updated its webpage to reflect the change of the Commission adoption feedback period from 23 to 31 August 2022 for its initiative to amend the Capital Requirements Regulation ((EU) No 575/2013). This will be part of a legislative package together with a proposal to amend the Capital Markets Directive (2013/36/EU), aiming to implement the final elements of the internationally agreed prudential standards for credit institutions developed by the Basel Committee on Banking Supervision.

This initiative attempts to achieve four specific objectives:

• to strengthen the risk-based capital framework, without significant increases in capital requirements overall;
• to enhance the focus on ESG risks in the prudential framework;
• to further harmonise supervisory powers and tools; and
• to reduce institutions’ administrative costs related to public disclosures and to improve access to institutions’ prudential data.

On 21 June 2022, the PRA issued a consultation paper and a draft supervisory statement on proposed principles it considers key in establishing an effective Model Risk Management (MRM) framework. The PRA wants to support firms in the further development and implementation of policies, procedures, and practices to identify, manage and control the risks in the use of models.

The principles are intended to complement existing requirements and supervisory expectations in force on MRM and are intended to address specific shortcomings currently observed in UK banks. However, the PRA states that the principles may also be of interest to third-country firms operating in the UK through a branch. The principles cover: Model identification and model risk classification; Governance; Model development, implementation and use; Independent model validation; and Model risk mitigants.

The deadline for comments is 21 October 2022.

On 17 June 2022, the European Commission adopted a Delegated Regulation and accompanying Annexes concerning Regulatory Technical Standards (RTS) specifying the information to be provided in the application for the authorisation as a credit institution, and the obstacles which may prevent the effective exercise of supervisory functions of competent authorities.

On 20 June 2022, the European Commission adopted a Delegated Regulation and an accompanying Annex on Implementing Technical Standards (ITS) concerning the standard forms, templates and procedures to be adopted in the provision of information in applications for authorisation of a credit institution under CRD IV.
EU co-legislators will now scrutinise the Delegated Regulations.

On 15 June 2022, the Single Resolution Board (SRB) issued its updated operational guidance to banks on the implementation of the bail-in tool. The updated materials are the SRB's operational guidance on bail-in playbooks, the instructions and explanatory note on the bail-in data set. These documents, which were last published by the SRB in August 2020, are intended to assist banks to adequately prepare for bail-in application during the resolution planning phase and to fulfil the SRB's Expectations for Banks, which outlines the role of banks in making themselves resolvable.

Changes to the operational guidance on bail-in playbooks include: a new chapter on bail-in testing to be conducted by banks, including objectives and scope, methodology, and dry-run components; and further information in the section on internal execution to address the loss transfer and recapitalisation mechanisms between the resolution entity and its subsidiaries.

On 15 June 2022, the EBA published its 2021 Annual Report, which sets out the activities and achievements of the EBA in 2021 and provides an overview of the key priorities for the coming year. Key points include:

• Monitoring and updating the prudential framework for supervision and resolution: Actions in this area will include preparing for the implementation of CRD VI and CRR III, assessing the current legal framework for payment services and electronic money and consolidating the intermediate parent undertaking framework under the CRD IV.
• Digital resilience, fintech and innovation: Actions in this area include deepening analysis and information-sharing, preparing for the regulatory and oversight mandates under DORA, preparing for the regulatory and potential supervisory mandates under MiCA, assessing the current legal framework for the digitalisation of payment services and electronic money, developing retail risk indicators to measure the likelihood and probability of consumer harm and carrying out a thematic review into the level and transparency of fees and charges for retail banking products.
• Providing tools to measure and manage ESG risks: Actions in this area include advising on a framework for green retail loans, consulting on the role of environmental risks in the Pillar 1 framework, and developing further guidelines on ESG risk assessment.

On 14 June 2022, the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022 were published in draft (the Regulations).

The Regulations outline consequential amendments to various pieces of legislation following the introduction of the IFPR and Basel III standard via the Financial Services Act 2021. The Regulations are part of a series of instruments giving effect to provisions designed to ensure that the UK’s regulatory framework continues to function effectively following Brexit. The Regulations also correct deficiencies in EU retained law.

Changes introduced by the Regulations include:

• adding and updating cross-references to CRR Rules, Part 9C Rules and PRA and FCA Handbook references, where required to effectively link the legislation and the new rules;

• updating references to EU Directives, which have now been transposed into retained EU law or replaced with domestic legislation;
• amending section 49D of the Banking Act 2009 to ensure that short-term liabilities owed to both PRA-regulated and FCA-regulated investment firms with permission to underwrite or deal on own account will continue to be exempt from contractual recognition of bail-in;
• repealing the Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014; and
• making a transitional provision in respect of risk retention requirements for certain securitisations following the implementation of the IFPR (these requirements concern the retention of a material net economic interest in a securitisation by the originator, sponsor, or original lender to better align their interests with those of investors).

On 17 June 2022, the Council of the EU issued a press release announcing it had agreed a position in relation to the legislative proposal to amend the AIFMD and the UCITS Directive. The Council of the EU later issued a note setting out its general approach, including its:

• support for the EU framework for loan-originating funds;
• suggestions in relation to provisions concerning outsourcing, and the delegation of certain functions by fund managers to third parties, and also suggests new reporting requirements on delegation arrangements; and
• views on the importance of a harmonised approach to liquidity risk management, and in particular, liquidity management tools.

The update to AIFMD was introduced by the European Commission in November 2021 (see entry 12 of Financial Services SpeedRead - 9 December 2021).

No updates for this edition of the FSS.

On 24 June 2022, HM Treasury published a policy paper establishing its intention to conduct a review of the UK's extensive anti-money laundering and countering the financing of terrorism regime to ensure that it continues to evolve to meet the changing nature of economic crime. It is focused on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

The review revolves around three main themes, which are:

• Systemic effectiveness: A constant agreement on what effectiveness looks like should be maintained as more reforms are implemented and proposals should be considered to measure effectiveness more accurately.
• Regulatory effectiveness: Those involved on the front line of the UK's fight against illicit finance should have all the tools and knowledge required to enforce effective risk-based controls and target areas of highest risk.
• Supervisory effectiveness: The continued reform of the supervision regime in light of building on the recent changes while evaluating the reasons for future changes to the regime.

The intention is to establish an improved range of metrics by which the range of activity and outputs under the MLRs can be measured and considered in detail, to support future assessments of effectiveness. These will be integrated into current reporting mechanisms, such as the HM Treasury annual supervision reports. The review also sets to establish the government's plan to use the National Risk Assessment of Money Laundering and Terrorist Financing and current public-private forums to evaluate upcoming risks and changes to the scope of the MLRs.

There is also consideration of the potential levers for government to support businesses in increasing their own effectiveness via the relevant use of new technology. Finally, this review looks at possible reforms to the essential structure of the supervision regime in order to enforce effective supervision across all sectors.

Overall, this review only marks the start of the HM Treasury's reform agenda relating to the anti-money laundering regulatory and supervisory regime. This will also constitute a part of the government's wider agenda, which will include the second public-private Economic Crime Plan, Companies House reform and the Economic Crime and Corporate Transparency Bill later this year.

On 23 June 2022, ESMA published an update to its Questions and Answers on the Market Abuse Regulation (MAR), clarifying the scope of the new Article 11(1a) of MAR with an answer provided by the European Commission.

The update clarified that the scope of Article 11(1a) is limited to the communication of information to the potential qualified investors who negotiate the terms and conditions to subscribe to the bonds only, setting forth an exception from the narrow market soundings regime provided in Article 11(1). It was further clarified that the exception provided in Article 11(1a) relates only to private placements being the result of negotiations between an issuer and a limited number of potential qualified investors, aiming to determine the contractual terms and conditions of the transaction.

On 23 June 2022, the FCA issued a Decision Notice addressed to Ghana International Bank (GIB) in respect of a fine for £5,829,900 imposed as a result of poor anti-money laundering and counter-terrorist financing controls over its correspondent banking activities. The FCA found that GIB did not recognise its correspondent banking business as a separate business line or product area but instead included revenue from this within its relevant business lines. GIB breached Regulations 14(1), 14(3) and 20(1) of the Money Laundering Regulations 2007 (SI 2007/2157) (MLRs 2007).

• Deficiencies in policies and procedures: The FCA found that staff at GIB that were onboarding and monitoring respondents had to rely on fragmented, confusing and overlapping policies, manuals, frameworks and forms. The policies and procedures were not appropriate or sufficiently risk sensitive to deal with the money laundering risks posed by GIB's correspondent banking business.
• Deficiencies in due diligence: GIB failed to ensure that it collected sufficient information in relation to the purpose and nature of respondents' businesses. It did not always obtain information on the type of business a respondent was engaged in or the type of market and customers the respondent served. GIB failed to perform adverse media checks in relation to 11 of 14 respondents it had established a correspondent banking relationship with and so failed to determine the reputation of the respondents. Where it did perform adverse media checks, this was done several months before or after the business relationship was established. GIB failed to evidence that it received or assessed the quality of the AML controls of 12 of the 14 respondents it had onboarded.
• Deficiencies in ongoing monitoring: Failures identified by the FCA included failures in relation to the requirement to keep documents, data or information obtained for the purpose of applying customer due diligence measures up-to-date and failures in relation to the requirement to terminate relationships where respondents fail to provide satisfactory answers to reasonable questions concerning their transactions or activities.

The FCA found no evidence of actual money laundering, but argued that the risk of money laundering as a result of these deficient systems was significant. GIB agreed to settle early and so qualified for a 30 per cent discount, thus reducing the financial penalty of £8,328,500 to £5,829,900.

On 23 June 2022, the Register of Overseas Entities (Delivery, Protection and Trust Services) Regulations 2022 were issued in draft form (the Regulations). The Regulations provide further detail in relation to the operation of Register of Overseas Entities kept by the Registrar of Companies for England and Wales in accordance with the Economic Crime (Transparency and Enforcement) Act 2022. The register will require overseas entities owning or buying property in the UK to provide information to the Registrar of Companies, including about their beneficial owners. The introduction of the register follows the 2016 implementation of the PSC Register, which required all companies incorporated in the UK to give information to Companies House about who held significant control of the company. The UK government committed to collecting and making publicly accessible the beneficial ownership information of overseas entities owning or buying property in the UK. The process for introducing the Register of Overseas Entities was expedited in response to the Russian invasion of Ukraine.

The Regulations:

• require certain documents to be delivered by electronic means;
• introduce a protection regime allowing beneficial owners and managing officers of overseas entities to apply to have their information made unavailable for public inspection and not for it not to be disclosable in certain circumstances; and
• provide that legal entities governed by the law of a country or territory outside of UK providing trust services are subject to their own disclosure requirements, for the purpose of the definition of registrable beneficial owner.

On 17 June 2022, the Financial Action Task Force (FATF) published the outcomes of its Plenary, held from 14-17 June in Berlin, with delegates present from over 200 jurisdictions.

FATF members approved a report designed to help the real estate sector to better detect money laundering, and finalised a targeted update on implementation of their requirements on virtual assets and their service providers. FATF also approved a white paper on potential revisions to Recommendation 25 on transparency and beneficial ownership of legal arrangements, which was subsequently released on 23 June.

FATF finalised a report that shares good practices and recommendations for combatting money laundering and terrorist financing through shared information, with attention paid to data protection and privacy. The Plenary agreed to undertake new projects on the misuse of citizenship and residency by investment schemes, guidance for assessors on how to access implementation of the UN's Convention Against Corruption, and a review of the non-financial sector facilitating corruption.

Simultaneously, FATF also issued a statement in condemnation of the Russian Federation's actions in Ukraine, whilst issuing a document outlining which high-risk jurisdictions are subject to a Call for Action, and another document outlining which jurisdictions are now under Increased Monitoring.

On 17 June 2022, the FCA issued a press release outlining its work in tackling insider dealing and manipulation. The update highlighted the FCA's data-driven approach, characterised by the publication of annual market cleanliness statistics and Suspicious Transaction and Order Reports collected from market participants. It also revealed the powers at the FCA's disposal to tackle market abuse, including criminal prosecution, civil enforcement and disruptive activities. These efforts are carried out by approximately 90 enforcement staff, supported by specialist intelligence, legal and cyber resources, as well as primary and secondary market oversight teams.

On 17 June 2022, the National Crime Agency (NCA) published an update to its guidance on the use of Suspicious Activity Reports (SAR), clarifying its revised glossary codes and reporting routes. There are four key points that have been highlighted in this edition, which include:

• The use of glossary codes: The UK Financial Intelligence Unit (UKFIU) believes that it is considered good practice for glossary codes to be utilised in order to identify money laundering trends and high-risk cases for developments and enable the production of feedback to reports on trends and patterns seen in SARs.
• The SAR regime: It is reiterated that the SAR regime is not the proper avenue to report crime or matters relating to immediate risk to others. In addition to the submission of a SAR, there is an expectation that such matters have to be reported via other routes to ensure the relevant information reaches the right organisation.
• 'Reason for Suspicion' text space: In the course of submitting a SAR, the required glossary code should be included in the 'Reason for Suspicion' text space.
• Multiple codes/no code: When inputting the relevant code(s) into the SAR, it is advised to include more codes when in doubt or no code if a specific code does not match the set of circumstances faced.

The guidance also includes a walkthrough checklist and further detail on codes.

On 15 June 2022, HM Treasury published the consultation response to its July 2021 consultation on 'Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017' (MLRs). The consultation outlined the government's plans to amend UK Money Laundering Regulations, with the aim of ensuring continued adherence to international standards, whilst strengthening and clarifying the operation of the UK's anti-money laundering and counter-terrorist financing (AML/CTF) regime.

94 responses were received from a wide range of respondents, and after reviewing these responses, HM Treasury concluded that various changes should be implemented, including but not limited to:

• the removal of certain providers from the regulated sector;
• amendments to the definition of Art Market Participants;
• the introduction of a clear legal gateway for AML/CTF supervisors to access, view and consider the quality of Suspicious Activity Reports;
• the implementation of Financial Action Task Force standards to mitigate proliferation financing risk;
• the expansion of discrepancy reporting requirements;
• the expansion of the intelligence and information-sharing gateway; and
• changes to the provisions surrounding transfers of cryptoassets.

Following the consultation response, a draft amendment (The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022) to the MLRs was issued, implementing a number of the changes recommended by the consultation.

On 15 June 2022, HM Treasury and the Office of Financial Sanctions Implementation (OFSI) issued updated guidance on OFSI enforcement and monetary penalties for breaches of financial sanctions. The guidance is made under the power provided by section 149(1) of the Policing and Crime Act 2017, and is designed to bring OFSI in line with changes brought about by the Economic Crime (Transparency and Enforcement) Act 2022.

In the guidance, OFSI outlined the powers it has to impose monetary penalties, its compliance and enforcement approach, factors determining the application and severity of penalties, and the rights of those on whom it imposes a monetary penalty.

Significantly, OFSI is no longer required to prove that a person had knowledge or reasonable cause to suspect that a person was in breach of a financial sanction in order to impose a monetary policy. The guidance confirmed that the failure of a regulated professional to comply with regulatory and professional standards may be considered an aggravating feature in assessments of seriousness, whilst also confirming that OFSI will continue to impose a level of monetary penalty that is "clearly and consistently related" to their "view of the impact of the case and the value of the breach".

On 14 June 2022, the European Banking Authority (EBA) published its Guidelines on the anti-money laundering and counter the financing of terrorism (AML/CFT) compliance officer and the management body of credit or financial institutions.

The Guidelines aim to ensure a common interpretation and adequate implementation of AML/CFT internal governance arrangements across the EU in line with the requirements of the EU Directive on the prevention of the use of the financial system for money laundering or terrorist financing. The Guidance does not replace the relevant guidelines issued by the EBA on wider governance arrangements and suitability checks.

On 20 June 2022, the issued a response to its October 2021 consultation on the regulation of Buy-Now-Pay-Later (BNPL). In the response, the Government confirms that it will extend the scope of regulation to capture previously exempt consumer finance arrangements, including BNPL and other forms of short-term interest-free credit (STIFC) where offered by third party lenders. The key areas of the response are:

• Advertising and promotions: The Government believes that the financial promotions regime should apply to merchants offering BNPL and STIFC products as payment options.
• Creditworthiness and credit files: BNPL and STIFC lenders would become subject to the FCA's current rules on creditworthiness assessments in CONC 5 in the FCA Handbook.
• Arrears, default and forbearance: FCA rules around the treatment of customers in default and arrears would apply to BNPL and regulated STIFC subject to FCA consultation on the scope and nature of application.
• Pre-contractual information: BNPL and STIFC products will not be subject to information disclosure regulations made under section 55 of the Consumer Credit Act.

The closing date for comments is 1 August 2022. The Government aims to publish legislation towards the end of 2022, together with a further consultation paper. The Government aims to lay secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime.

For more information, please see our briefing.

On 16 June, HM Treasury issued a press release indicating that the Government would be making changes to the Consumer Credit Act 1974. The Government notes that many firms view the Act as highly prescriptive, cumbersome and inflexible. It confirms that it will move much of the Act from statute to the FCA rulebook and that the reforms will build on the recommendations of the FCA’s retained provisions report and the Woolard Review, both of which made recommendations for a reformed regime.

The Government confirms that a consultation outlining proposals and seeking views from stakeholders on how the Act should be reformed should be issued by the end of 2022.

On 16 June 2022, the FCA sent a letter to more than 3,500 lenders to remind them of the standards they should meet, as consumers across the country are affected by rising living costs. They voiced expectations that household bills will continue to rise in the autumn, urging firms to act now so borrowers and customers in vulnerable circumstances can access the necessary help. Lenders have been reminded to charge struggling borrowers fair fees, and to direct vulnerable customers towards suitable money guidance or debt advice.

On 23 June 2022, the EBA published an opinion with annexed report, outlining the findings and advice in response to the European Commission's November 2021 call for advice on the review of PSD2. The EBA also published a covering letter addressed to Director of General of European Commission. Notable points from the opinion include:

• Merging PSD2 and the Electronic Money Directive: The EBA is supportive and makes proposals in this regard, including applying identical legal requirements to payment institutions (PIs) and electronic money institutions (EMIs) covering the authorisation process, safeguarding requirements and initial capital and own funds. The EBA also makes proposals in relation to scope and definitions.
• Clarifying the application of strong customer authentication (SCA) and the transactions in scope: The EBA does not consider that the scope of application of SCA should be expanded but has a number of proposals concerning the application of SCA e.g. the regulatory treatment of merchant-initiated transactions and transactions excluded from the scope of SCA and preventing financial exclusion.
• Proposals on access to and use of payment accounts data in relation to PIS and AIS: Proposals in this regard include calling for the European Commission to look into introducing a common API standard across the EU to be developed by the industry, and requiring ASPSPs to share with AISPs and PISPs the name of the PSU/account holder and of the person initiating the payment.
• Addressing unwarranted de-risking practices by banks: The EBA asks for further clarification on the reference in PSD2 to "duly justified reasons" in relation to refusing and terminating access to PIs/EMIs to accounts with credit institutions.

On 21 June 2022, the PSR issued a press release setting out how it intends to undertake a review into scheme and processing fees and the review of cross-border interchange fees.

The review focuses on Mastercard and Visa, as these two card payment system operators account for 99% of debit and credit card payments. The Scheme and processing fees review follows the PSR card-acquiring market review, which found a significant increase in the fees paid by acquirers.

The review will seek to establish whether the markets in connection with scheme and processing fees are working well and will examine the levels, structure and types of scheme and processing fees.

The cross border interchange fees review is in response to increase in cross-border interchange fees and seeks to understand the rationale for these increases and whether they indicate that they market is not working well.

On 17 June 2022, ECB Guidelines on the new-generation Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET) were published in the Official Journal.

The ECB launched the TARGET2/T2S consolidation project in 2017 to improve payments and settlement systems in the Eurosystem, in order to respond to technological developments, regulatory requirements and changing consumer demands. TARGET2 is the real-time gross settlement (RTGS) system owned and operated by the Eurosystem.

T2S provides harmonised securities settlement to CSDs and applies a single set of rules, standards and tariffs to all participant CSDs. As of November 2022, the new generation TARGET will replace the current TARGET2, which is governed by Guideline 2013/47/EU of the European Central Bank (ECB/2012/27), with the result that Guideline 2013/47/EU (ECB/2012/27) has to be repealed.

No updates for this edition of the FSS.

On 23 June 2022, the Climate Financial Risk Forum (CFRF) published a beta version of its online climate scenario analysis narrative tool, a cross-industry project from the PRA and FCA.

The tool is primarily targeted at banks, asset managers, and insurers of all sizes, but may prove useful for other institutions, such as pension funds. It summarises the relevant climate-related risks and opportunities and can create an Institutional Report tailored to an organisation or a broader sector report. The reports may encourage organisations to complete more thorough climate risk analysis, considering impacts and informing their decision-making processes.

User feedback and climate research will be used to update the tool in the first quarter of 2023 to enhance content and reflect the latest Network for Greening the Financial System (NGFS) scenarios.

On 23 June 2022, the FCA published its report titled "supporting innovation in ESG data and disclosures: the digital sandbox sustainability pilot" (the Report).

The FCA piloted the Digital Sandbox in 2020 to support firms at the proof of concept stage of development. The Digital Sandbox provides participants with a suite of features including bespoke synthetic data assets and a range of relevant mentors, to develop solutions from both technological and conceptual angles.

The Report confirmed that the FCA are committed to building on the lessons learned during the previous 2 years to inform a future and permanent operating model for the Digital Sandbox.

On 22 June 2022, the FCA added a new section to its Sustainability Disclosure Requirements and investment labels webpage to reflect the closure of the discussion paper and the next consultation in Q2 2022.

On 21 June 2022, the European Parliament announced the provisional agreement of reforms to environmental, social and governance reporting in the EU further details of which can be found in their proposal for Directive of the European Council on Corporate Sustainability Due Diligence and amending the EU Whistleblowing Directive. From 2024, large companies will be required to make public disclosures in relation to their "impact on the environment, human rights, social standards and work ethics". The Corporate Sustainability Reporting Directive, which will apply to companies with over 250 employees and EUR40 million turnover, will require that reporting on climate and humans right issues be "independently audited and certified".

The new rules will also mandate equivalent reporting standards by non-EU companies with "substantial activity" (EUR150 million turnover) within the EU. Subcontractors and some publicly listed SMEs will be subject to less arduous requirements. If the agreement is formally approved by the European Parliament and Council, member states will have 18 months to transpose its provisions into national law.

On 15 June 2022, the Principles for the effective management and supervision of climate-related financial risks were published by the Basel Committee on Banking Supervision (BCBS). The principles, which were consulted in November 2021, seek to improve banks' risk management and supervisors' practices related to climate-related financial risks. They seek to encourage a holistic approach to addressing climate-related financial risks to the global banking system.

There are 18 high-level Principles, with Principles 1-12 outlining guidance on effective management of climate-related financial risks, while Principles 13-18 provide guidance for prudential supervisors.

• Corporate governance: The board and senior management should clearly assign climate-related responsibilities to members and/or committees and exercise effective oversight of climate-related financial risks. Banks should adopt appropriate policies, procedures and controls that are implemented across the entire organisation to ensure effective management of climate-related financial risks.
• Internal control framework: Climate-related financial risks should be incorporated into internal control frameworks across the three lines of defence to ensure sound, comprehensive and effective identification, measurement and mitigation of material climate-related financial risks.
• Capital and liquidity adequacy: Banks should identify and quantify climate-related financial risks and incorporate those assessed as material over relevant time horizons into their internal capital and liquidity adequacy assessment processes.
• Risk management process: Board and senior management should ensure that climate-related financial risks, where material, are clearly defined and addressed in the bank’s risk appetite framework.
• Management monitoring and reporting: The principles provide that risk data aggregation capabilities and internal risk reporting practices should account for climate-related financial risks and that banks should develop qualitative and/or quantitative metrics or indicators to assess, monitor, and report climate-related financial risks.
• Scenario analysis: Objective(s) of climate scenario analysis should reflect a bank’s overall climate risk management objectives as set out by its board and senior management.

The BCBS expects implementation of the Principles as soon as possible, and will monitor progress across member jurisdictions.

On 15 June 2022, the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions working to accelerate the world’s transition to net-zero greenhouse gas emissions by 2050, issued an interim report for consultation.

The report includes recommendations and guidance intended to achieve a global framework for net-zero transition plans for financial institutions. The recommendations and guidance draw on guidance produced by financial sector net-zero alliances and other stakeholders. GFANZ considers that a pan-sector framework allows financial institutions to better evaluate how other institutions’ plans may impact their own net-zero strategies. GFANZ recommends a financial institution’s net-zero transition plan addresses ten core components, grouped into five themes: foundations; implementation strategy; engagement strategy; metrics and targets; and governance.

The deadline for comments on the consultation is 27 July 2022 and GFANZ is expected to publish an updated report in the autumn 2022. In addition to the Net-Zero Transition Plan framework for financial institutions, GFANZ has published a set of documents to enable collaboration between stakeholders in relation to the transition to net-zero:

• Guidance on Use of Sectoral Pathways for Financial Institutions
• Concept note on Portfolio Alignment Measurement
• Introductory note on Expectations for Real-Economy Transition Plans
• Report on the Managed Phaseout of High-emitting Assets

On 13 June 2022, the House of Commons (European Security Committee) launched an inquiry into post-Brexit regulatory divergence. The inquiry will look into the benefits and challenges to business and the UK economy of diverging from copied EU regulations, whilst examining where the Government should rewrite or repeal these laws. It will also examine the complexities emerging as regulations in areas previously controlled at EU-level overlap with commitments made in the Withdrawal Agreement, new trade deals and the devolution settlements.

The inquiry is currently welcoming submissions from anyone with relevant expertise in its call for evidence.

On 23 June 2022, the House of Commons (Treasury Committee) published its report outlining the new forms of scrutiny that will be required as UK regulators assume additional responsibilities following the UK's exit from the EU.

The report's main proposal sees the establishment of a Sub-Committee on Financial Services Regulations, which will take the lead on scrutiny of financial regulatory proposals. The Sub-Committee, which will be chaired by the Rt. Hon. Mel Stride MP, will have powers to "send for persons, papers and records", and agree reports. Its work will focus on assessing regulatory proposals which contain texts that would have legal effect.

A new Financial Services Scrutiny Unit is also being formed, to offer advice to the Sub-Committee on the likely impact, fitness for implementation and level of appropriate scrutiny for each proposal. This unit will include financial specialists, staff members of the Treasury Select Committee, and a legal adviser.

On 23 June 2022, the EBA published an Opinion in response to the European Commission's Call for Advice on the review of the Mortgage Credit Directive (MCD). The EBA proposed a review of the MCD in order to facilitate the smooth functioning of the internal mortgages market, foster a level-playing field across all types of lenders and ensure a higher level of consumer protection across EU Member States.

The EBA observed that consumer protection has become more effective within the EU Single Market since the application of MCD in 2016, but identified some specific issues to be addressed, including the clarification of the MCD's scope, the impact of digitalisation and the facilitation of cross-border mortgage provision, as well as the links between financial stability and sustainability.

Some of the EBA's key suggestions include:

• revising the requirements on pre-contractual and advertising information;
• ensuring the requirements on information disclosure are fit for digital channels;
• introducing additional consumer protections measures when AI systems are used for creditworthiness assessment;
• introducing borrowers-based measures in information provided to consumers; and
• establishing an EU-wide definition of 'green mortgages' to encourage sustainable lending and borrowing.

36. BoE: Consultation Response: An FPC Response - Consultation on withdrawal of the Affordability Test Recommendation

On 20 June 2022, the Financial Policy Committee (FPV) issued a response to its February 2022 consultation on withdrawing its Affordability Test Recommendation of June 2017. The Affordability Test Recommendation, which builds on the FCA's Mortgage Conduct of Business (MCOB) framework, specifies a stress interest rate for lenders when assessing a prospective borrowers' ability to repay a mortgage. Along with the LTI flow limit Recommendation issued by the FPC at the same time, it designed to guard against the risks associated with aggregate household indebtedness and the number of highly indebted households.

The FPC's consultation followed an FPC review of its mortgage market recommendations in which the FPC noted some concerns with how the affordability test has operated. In the response, the FPC states that withdrawing its affordability test Recommendation would simplify its macroprudential regulatory framework and make it more efficient. The Recommendation will be removed as of 1 August 2022. The FPC confirms that following the withdrawal of the Recommendation, affordability will continue to be assessed according to the FCA’s MCOB rules on responsible lending.