Financial Services SpeedRead 11 April 2022

1. FCA releases Primary Market Bulletin 39

On 23 March 2022, the FCA issued Primary Market Bulletin 39. In this edition, the FCA announced the removal of temporary measures introduced in 2020 to alleviate pressures caused by the coronavirus pandemic. These measures had allowed for delayed annual and interim financial reporting. The FCA also announced the rescinding of temporary measures regarding working capital statement and General Meetings.

2. ESMA proposes amendments on the review of transparency requirements under MiFIR

On 28 March 2022, ESMA proposed amendments to Regulatory Technical Standards (RTS) 1 and 2, which specify the MiFIR transparency requirements for equity and non-equity instruments respectively. The amendments aim to simplify the transparency regime for equity and non-equity instruments.

This series of reports represents the first of ESMA's two step approach to reviewing RTS 1 and RTS 2. The final reports on RTS 1 and 2, address only some of the proposals included in ESMA's July 2021 Consultation Paper. A second, and broader, review will be carried out following the MiFIR review (published by the EC on 25 November 2021).

The reports are submitted to the European Commission (EC) who will have 3 months to decide whether to endorse the proposed amendments to the RTS.

3. FCA updates UK SFTR news and announces a temporary extension to LEI reporting for non-EEA third country issuers

On 1 April 2022, the FCA updated its webpage on the UK Securities Financing Transactions Regulation (UK SFTR). In its update, the FCA announced that the period of forbearance implemented in April 2021 for reporting of LEIs of non-EEA third country issuers under UK SFTR will expire on 13 April 2022. The FCA simultaneously announced that they are extending the period during which reports under UK SFTR without the LEI of a non-EEA country issuer until 13 October 2022. This extension recognises that many non-EEA third country issuers have still not acquired a LEI and that this could impact their reporting under UK SFTR.

4. European Commission adopts additional equivalence decisions for US exchanges

On 4 April 2022, the European Commission (EC) adopted a decision declaring that a number of US exchanges supervised by the US Securities & Exchange Commission (SEC) are equivalent to EU regulated markets. The effect of this is that derivatives traded on these US exchanges will be treated as exchange-traded derivatives under EMIR.

In addition, the EC amended its equivalence decision regarding US central counterparties which now includes certain products, such as mortgage-backed securities issued or granted by certain government sponsored agencies on a 'to-be-announced' basis.

The EC's decision is consistent with its previous decision in 2021 to adopt an equivalence decision determining that the SEC regime for US CCPs is equivalent to EU rules.

5. ESMA: Final Report: review of certain aspects of Short Selling Regulation

On 4 April 2022, ESMA published its final report on the review of Short Selling Regulation (SSR). In the report, ESMA considers the emergency actions different competent authorities took in response to the coronavirus pandemic and proposes amendments to the SSR to improve operation in any future emergency context. ESMA has also proposed changes to promote supervision of locate services and supervisory convergence in light of the 'meme-stock' phenomenon.

The reports considers:

• amendment to rules allowing competent authorities to issue long-term and short-term bans;

• the introduction of record keeping requirements to enhance existing rules on uncovered short sales;
• the introduction of an ESMA centralised system for publication and disclosure to the public of net short positions (NSPs); and
• an EU-wide-obligation for competent authorities to publish aggregated NSPs per issuers, including positions reaching the notification and publication thresholds.

6. FCA publishes is Business Plan 2022/23 and Strategy 2022 to 2025

On 7 April 2022, the FCA published its 2022/23 Business Plan, which details the FCA's focus over the next 12 months and its three-year strategy, which sets out the outcomes the FCA expects firms to deliver across its markets.

The FCA has grouped its commitments into three key areas:

• reducing and preventing serious harm: with a focus on protecting consumers from the harm that authorised firms can cause, including tackling fraud and poor treatment, improving the redress framework, reducing harm from firm failure, reducing and preventing financial crime and delivering assertive action on market abuse;
• setting and testing higher standards: the FCA is focusing on the impact that authorised firms’ actions have on consumers and markets. This includes focussing on the new Consumer Duty and enabling customers to help themselves. The FCA also plans to prioritise its work on ESG and firms' operational resilience; and
• promoting competition and positive change: the FCA wants to use competition as a force for better consumer and market outcomes using regulatory open-mindedness. The FCA's over the next 12 months include strengthening the UK’s position in global wholesale markets and shaping digital markets to achieve good outcomes.

The FCA states it is now focussing on results rather than being driven by process. Accordingly, the FCA has framed the Business Plan by streamlining its work into six core regulatory activities that capture 'start-to-finish' regulation of financial services markets: (i) authorise firms and individuals, (ii) set rules and standards, (iii) support competition and innovation, (iv) empower consumers and firms, (v) recognise and reduce harm, and (vi) take quick and effective action.

No updates included for this fortnight's edition of the FSS.

7. ESMA: Executive Director delivers a speech on the key priorities for the asset management industry in 2022

On 24 March 2022, Natasha Cazenave, the Executive Directive of ESMA, delivered a speech at the ICI investment Management Conference 2022. In her speech, Ms Cazenave set out the key priorities for the asset management industry in 2022 and beyond.

Ms Cazenave acknowledged that the asset management sector had been the focus of significant reform and identified key challenges ESMA will be addressing in the coming year, including:

• The development of a framework for the asset management industry to positively contribute to the climate transition. Ms Cazenave addressed the progress and priorities in respect of sustainable finance, whilst suggesting that the market should remain vigilant to greenwashing.
• To strengthen the resilience of the investment market, credit and liquidity shocks. Ms Cazenave identified the ongoing AIFMD review as an opportunity to increase the availability and harmonise the use of liquidity management tools across EU Member States. Additionally, Ms Cazenave also referenced ESMA's guidelines on liquidity stress testing and that ESMA is actively monitoring liquidity risks within open-ended funds.

8. ESMA: Cross-border distribution of investment funds summary of implementation by Member States

On 28 March 2022, ESMA published a summary of EEA member states' national laws and regulations governing the marketing and distribution of interests in AIFs and UCITS to investors domiciled within each member state, including hyperlinks to the relevant sections of the regulators' websites. ESMA was required to publish this summary under the Cross-Border Distribution of Funds Directive and Regulation, which entered into force last year.

Whilst helpful in parts, the summary does fully not reflect the practical considerations for third country managers in particular when marketing in Europe under national private placement regimes under Article 42 of AIFMD. Further, the application of the "pre-marketing" requirements to third country managers by national regulators at the individual member state level is continuing to develop, and managers and distributors should continue to monitor national level requirements in this area.

9. FCA: Final Notices in respect of GAM International Management and Timothy Haywood

On 30 March 2022, the FCA published the Final Notice addressed to GAM International Management Ltd (GAM) and the final notice addressed to Timothy Haywood, a former investment director and business unit head at GAM. This in respect of fines to GAM £9,103,523, as well as a fine for Timothy Haywood for £230,037. Both GAM and Mr Haywood agreed to resolve the cases at an early stage of the FCA’s investigation and therefore qualified for a 30% discount.

GAM Final Notice

The FCA found GAM breached Principle 2 (requirement for a firm to conduct its business with due skill, care and diligence) and Principle 8 (requirement for a firm to manage conflicts of interest fairly, both between itself and its customers and different customers) of the FCA Principles for Businesses by failing to ensure that its systems and controls for the identification, management and prevention of conflicts of interest operated effectively. The FCA also found GAM failed to adequately control the conflicts of interest arising out of three investments, two of which related to Greensill Capital (UK) Ltd. The FCA identified a number of deficiencies in the conflicts of interest framework, including the conflicts of interest committee failed to meet regularly, GAM failed to sufficiently promote the identity and role of the conflicts of interest officer, and conflict of interest issues identified with the particular fund were not escalated as appropriate.

Timothy Haywood Final Notice

The FCA found that Mr Haywood breached Principle 2 and Principle 7 (requirement to take reasonable steps to ensure compliance of business with the relevant requirements and standards of the regulatory system) of the FCA Principles for Business by: (a) failing to take reasonable steps regarding two investments to ensure GAM complied with relevant regulatory requirements to manage conflicts of interest fairly; and (b) breaching GAM's gifts and entertainment policies. The FCA did not find evidence that Mr Haywood made investment decisions because of the gifts and entertainment received, but the fact that conflicts were not properly managed increased the risk he may have been encouraged to invest for personal interest.

10. The European Parliament publishes press release regarding cryptoassets and the new rules to stop illicit flows in the EU

On 31 March 2022, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a press release announcing that it has adopted its report on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets.

The draft legislation (the Proposed Requirements) aim to strengthen EU AML rules and ensure crypto-assets can be traced in the same way as traditional money transfers.

The changes agreed by Members of the European Parliament (MEPs) from the Committee, include:

• traceability of transfers of cryptoassets: under the Proposed Requirements, all transfers of cryptoassets will have to include information on the source of the asset and its beneficiary, which will also be made available to competent authorities;
• no minimum thresholds: due to the speed and virtual nature of cryptoassets, MEPs decided to remove minimum transaction thresholds and exemptions for low-value transfers; and

• public register of high-risk entities: MEPs want the EBA to create a public register of businesses involved in crypto-assets that might have a high risk of money-laundering and other criminal activities. Providers would have to verify that the source of the asset is not subject to restrictive measures and that there are no risks of money laundering or terrorist financing.

The Proposed Requirements are currently a draft mandate for MEPs to negotiate into final form with EU member states. The press release states that the European Parliament as a whole should vote on the Proposed Requirements during the plenary session in April.

11. FCA Policy Statement on PRIIPs KID scope and amendments to RTS

On 25 March 2022, the FCA issued a policy statement confirming its final position on changes to the UK PRIIPs regulation. The changes follow feedback received in response to consultation CP21/23.

The key changes introduced include:

•  the introduction of rules to clarify the scope of the UK PRIIPs Regulation for corporate bonds to make it clear that common features of these instruments do not make them a PRIIP, including a statement that FX forwards are in scope;
• the introduction of interpretative guidance to clarify what it means for a PRIIP to be 'made available' to retail investors, which means that offers with a £100k minimum denomination will no longer require a KID unless targeted at retail investors;
• remove performance scenarios from the KID and introduce a requirement for manufacturers to instead include a narrative description of performance in the KID
• addressing the potential for PRIIPs to be assigned an inappropriately low summary risk indicator, which will include an obligation to upgrade the Summary Risk Indicator where the current SRI underestimates the level of risk, but removes the requirement for manufacturers to notify the FCA when they have done this; and
• to address concerns about applications of 'slippage' when calculating transaction costs.

Despite constituting a significant change, the FCA has provided limited guidance on what will be required in terms of 'narrative description' of performance.

The changes took effect from 25 March 2022, but are subject to an implementation period lasting until 31 December 2022. The FCA expects firms to familiarise themselves with the details of the RTS and be in a position to meet all requirements by 31 March 2021.

12. UK Regulators issue joint statement on the future of Open Banking

On 25 March 2022, HMT, the CMA, the FCA and the PSR published a joint statement setting out their plan to establish a new entity to succeed the Open Banking Implementation Entity (OBIE) and oversee the development of Open Banking beyond the scope of the CMA’s Open Banking remedies.

The regulators agree that the future entity should:

• have effective regulatory oversight, with a new 'Joint Regulatory Oversight Committee' led jointly by the FCA and PSR, which would consider the entity's vision, governance and priorities;
• be independent, well-governed and underpinned by a set of values and cultures that include an emphasis on integrity and promoting ethical behaviours;
• be adequately resourced to carry out its functions through a more broadly-based and sustainable funding model; and
• effectively serve the interests of consumers and businesses, including consideration for how these groups will be represented on the Board.

On the same day, the CMA published its recommendation on the future oversight and governance of Open Banking. The CMA's recommendations will be taken into consideration in the design of the new entity. The CMA considers the future entity should have independent and accountable leadership, with a majority of independent directors on its Board.

The future entity will build on the progress made by the OBIE to encourage innovation and support competition in retail banking.

13. Payment Services Regulator publishes plans and budget 2022/23

On 29 March 2022, the PSR published its annual plan and budget for 2022/23, alongside a factsheet. The plan contains a summary of the PSR's key aims and activities for 2022/23. The PSR notes that the payments landscape is evolving and that there are issues that need to be addressed. Notable activities include:

• the PSR will provide input on the regulatory framework for potential new payment systems, such as crypto-based options that it may regulate in the future;
• the PSR will work to ensure that as many people as possible are able to use the Confirmation of Payee (CoP) name-checking service, to reduce money lost through fraud and accidentally misdirected payments. The PSR is also preparing for proposed legislative changes that should enable it to act against APP fraud;
• following its market review of card-acquiring services, the PSR is looking at ways for merchants to easily compare and switch providers; and
• the PSR will be looking at how account-to account payments could provide competition for debit and credit card payments in retail.

14. EBA publishes final Report on the amendment of its technical standards on the exemption to strong customer authentication for account access

On 5 April 2022, the EBA published its final report on the amendment of its RTS on strong customer authentication and secure communication (SCA&CSC) under PSD2.

The targeted amendments to the SCA&CSC RTS include:

• introducing a new mandatory exemption to SCA, which allow account providers not to apply SCA when access is through an AISP, provided certain conditions are met;
• limiting the scope of the voluntary exemption in Article 10 RTS to the case where the customer accesses the account information directly with the ASPSP; and
• extending the timeline for the renewal of SCA from every 90 days to every 180 days, both where the information is accessed through an AISP or directly by the customer.

The changes introduce a new mandatory exemption to SCA that will require account providers not to apply SCA when customers use an account information service provider (AISP) to access their payment account information, provided certain conditions are met.

The amendments to the RTS will apply seven months after the amending RTS has been published in the Official Journal (OJ) of the EU. The draft amending RTS will be submitted to the Commission for endorsement following which it will be subject to scrutiny by the European Parliament and the Council before being published in the OJ.

15. ASA: Enforcement Notice: advertising of cryptoassets

On 22 March 2022, the Advertising Standards Authority (ASA) published an enforcement notice to provide guidance on the advertising of cryptocurrencies to UK consumers or on behalf of UK-based advertisers. The ASA has recently found several adverts for cryptocurrencies to be misleading, socially irresponsible and in breach of rules applicable to financial products.

The guidance states that adverts must:

• state that cryptocurrencies are unregulated in the UK, gains may be subject to capital gains tax, and the value of investment may go down;
• present qualifications clearly, noting that a qualification cannot override the overall message of the advert;
• consider whether the advertising medium is suitable;
• not imply that products are low risk, regulated, suitable for purchase on credit card or trivial investments; and
• not create a sense of urgency or give the impression that past performance is a guide for future income.

16. European Parliament (ECON): Report: Report on the proposal for a regulation of the European Parliament and of the Council on markets in cryptoassets and amending EU Whistleblowing Directive

On the 23 March 2022, the European Parliament published the Economic and Monetary Affairs Committee's report adopted on 14 March 2022 on the proposal for a regulation of the European Parliament and Council on markets in cryptoasset (MICA). The report sets out suggested amendments to the proposed Regulation

Key aspects of the report include:

• tasking ESMA with publishing guidelines to reduce legal uncertainty on the requirements for the classification of crypto assets as financial instruments;
• the need to ensure that the underlying technology for cryptoassets aligns with the European Green Deal objectives;
• calling on the Commission to devise legislation addressing issues arising from industries in addition to cryptoassets that consume energy resources (e.g. data centres and video games). This would include, for example, the need for crypto white papers relying on the proof-of-work method to include an independent assessment of the cryptoassets likely energy consumption;
• mandating the Commission to adopt a legislative proposal which would include in the EU taxonomy for sustainable activities crypto-mining activities which would contribute to climate change in a substantial way by 1 January 2025;
• designation of ESMA as the lead authority for the development of regulatory and technical standards for the carrying out of supervisory duties in relation to markets in cryptoassets; and
• supervision by ESMA of the issuance of asset-referenced tokens and supervision by the EBA of electronic money tokens.

The report highlights the need to adopt a technologically neutral approach to financial services regulation, meaning that cryptoassets with the same of very similar features to other 'financial instruments' should be classified as equivalent and treated as such.

It is noted that the approach set out in the report should only apply to cryptoassets that are able to be transferred amongst holders without the issuers permission, and should not apply to unique cryptoassets that are not fungible with other cryptoassets. The report clarifies that there is a necessity to consider whether such assets require a union-wide bespoke regime.

The proposed MICA regulation continues to progress through the EU's Ordinary Legislative Procedure.

17. FCA Notice to regulated firms with exposure to cryptoassets

On 24 March 2022, the FCA issued a notice to all regulated firms with exposure to cryptoassets.

In the notice the FCA highlighted some areas of risk that such firms should be considering, including:

• being clear with customers to ensure the firm's regulated business that is clearly distinguished from those elements which are unregulated;
• the need to comply with the Money Laundering Regulations 2017 in relation to cryptoasset business;
• the need for appropriate systems and controls (for example, relating to money laundering and due diligence);
• best practice on assessing risks, including the evidential tests on source of wealth that should be used;
• custody considerations and the need to maintain compliance with CASS; and
• clarification on prudential considerations including the need to apply IFPR and financial adequacy obligations in an appropriate manner.

For further information, please see our recent briefing on the PRA and FCA's recent clarifications to the framework for exposure to cryptoassets.

18. The Bank of England publishes responses to its Discussion Paper on new forms of digital money

On 24 March 2022, the BoE published responses to its Discussion Paper on new forms of digital money, released on 7 June 2021.

The responses enabled the Bank to conclude that:

• respondents were in agreement that whilst digital money would provide benefits, any publicly provided digital money should not replace cash. The Bank further recognised that cash builds confidence and as a result the Bank remains committed to the ongoing provision of cash;
• the majority of respondents were in agreement that it was important for the general public to have direct access to central bank money;
• respondents agreed that any private sector firm issuing or intermediating payments in new forms of digital money would need to fully comply with data protection regulation frameworks;
• respondents considered interoperability between all forms of money, including new forms of digital money, are essential for an effective and competitive payments ecosystem;
• key risks highlighted by respondents include financial instability, tightening of liquidity conditions and credit contraction (due to an outflow of bank deposits into new forms of digital money); and
• there is mixed reaction on the ability of market-based finance to fully substitute commercial banks and its ability to support innovation and SMEs

The feedback received will input into the BoE's ongoing work in relation to the topics explored in the Discussion Paper.

19. PRA publishes Dear CEO letter regarding existing or planned exposure to cryptoassets

On 24 March 2022, Sam Woods, CEO of the PRA, published a Dear CEO letter addressed to banks and designated investment firms discussing the regulator's approach to existing or planned exposure to cryptoasset in the context of increasing growth and innovation in the cryptoasset industry.

The PRA acknowledges that no one part of the current framework fully captures crypto risks, a combination of strong risk controls, operational risk assessments, robust new product approval processes, Pillar 1, Pillar 2, and ongoing monitoring arrangements has the potential to provide firms with an appropriate interim treatment, and firms must consider the risks from first principles to ensure risk area appropriately considered and addressed.

The letter outlines a number of tangible measures that firms must take when gaining exposure to cryptoassets, and should be considered by firms in relation to risk management systems and capital adequacy calculations going forward. Such measures include:

• enhanced risk management controls and frameworks appropriately adapted to suit the different risk profile of crypto-activities;
• increased involvement of senior managers in decision making processes relating to cryptoassets exposure; and
• re-consideration of capital adequacy and other prudential risk calculations and assessments.

The PRA is launching a survey of firms’ current and planned cryptoasset exposures, with a view to receiving information by early June 2022.
For further information, please see our recent briefing on the PRA and FCA's recent clarifications to the framework for exposure to cryptoassets.

20. FPC: The Financial Stability in Focus

On 24 March 2022, the Bank of England published the Financial Stability in Focus report (Report) which sets out the FPC's view on cryptoassets and financial stability. The Report assesses the role that cryptoassets and associated markets and activities play both in the UK and globally.

The Report covered key areas, including:

• the role of cryptoassets and decentralised finance: the Report confirmed that the majority of current cryptoasset activity is driven by the use of volatile unbacked assets as speculative investments. It was also noted that stablecoins may alternatively have the potential to become widely used in payments;
• financial stability implications: the Report commented that the technology behind cryptoassets has the potential to reshape traditional financial sector activities and could bring multiple benefits. The FPC did however identify several risks, including the risk of stablecoins harming public confidence in money and the risk of spill overs to core financial markets; and
• regulatory initiatives to mitigate risks: the Report confirmed that work is under way internationally to clarify the treatment of cryptoassets and the FPC supports the BSB in its role co-ordinating the international approach to unbacked cryptoassets.

21. European Parliament: Adoption of first reading position on the Regulation for a pilot regime for market infrastructures based on Distributed Ledger Technology

On 24 March 2022, the European Parliament voted to adopt its first reading position on the legislative proposal for an EU Regulation on a pilot regime for market infrastructures based on distributed ledger technology. This follows a political agreement reached between the Council of the EU and the European Parliament in November 2021. The Council of the EU is expected to adopt the Regulation in due course.

22. FCA announces opening of Regulatory Sandbox and the Innovation Pathway

On 27 March 2022, the FCA announced that its Regulatory Sandbox and Innovation Pathways were open for applications. The Regulatory Sandbox allows firms to test innovative propositions in the market with real consumers. The Innovation Pathway is designed to help financial services firms launch innovative products and services. Specifically, it aims to promote innovation by helping innovative firms understand how regulation relates to their activities and removing barriers to entry.

23. FCA call for input on synthetic data to support financial services innovation

On 30 March 2022, the FCA announced a call for input to enable it to understand the existing market maturity of synthetic data within financial services and its potential use for safe data sharing between firms, regulators and public bodies. The call for input runs until 22 June 2022.

24. HM Treasury response to the consultation and call for evidence on the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology in financial markets

On 4 April 2022, HM Treasury published the consultation responses to the call for evidence on the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology.

The consultation forms the first stage in the government's broader consultative process with industry stakeholders on the regulatory approach to cryptoassets and stablecoins, seeking views on how the UK can ensure that its regulatory framework is equipped to utilise the benefits of new technologies.

The document includes a call for evidence on the investment and wholesale use of cryptoassets and broader use of DLT in financial markets.

In its response the government confirms:

• its intention to make the necessary legislative steps required to bring activities that facilitate the use of stablecoins as a means of payment into the regulatory perimeter by amending existing e-money and payments legislation; and
• its intention to support industry in ensuring that regulations can accommodate tokenisation and DLT in financial market infrastructures by working collaboratively with regulators and industry.

In the context of increasing interest on behalf of the government in the regulation of crypto-assets, John Glen, Economic Secretary to the Treasury delivered a keynote speech at the Innovative Finance Global Summit highlighting the growth of the Fintech industry, and the measures that will be taken by UK regulators (including the 'Sandbox' operated by the Bank of England and the FCA) to achieve appropriate supervision of cryptoassets whilst maintaining the competitive position of the UK in the global market, supporting innovation.

The government also issued more detailed proposals for this financial market infrastructure sandbox on its website, drawing it to attention as part of a wider suite of measures to regulate cryptoassets including:

• bringing stablecoins within regulation;

• establishing a Cryptoasset Engagement Group to work more closely with the industry;
• exploring ways of enhancing the UK tax system to encourage further development of the cryptoassets market; and
• working with the Royal Mint on a Non-Fungible Token (NFT) this summer as an 'emblem' of the UK's forward looking approach.

25. HM Treasury releases terms of reference for the Centre of Finance, Innovation and Technology Steering Committee

On 4 April 2022, HM Treasury released its terms of reference for the Centre for Finance, Innovation and Technology (CFIT) Steering Committee. This followed the publication of Ron Kalifa OBE's independent review into UK Fintech in February 2021. The 'Kalifa Review' recommended the establishment of the CFIT to drive financial innovation. In 2021, HM Treasury were allotted £5 million of seed funding to set up the CFIT. The publication of the CFIT's terms of reference is the first step towards establishing its role and remit.

26. Updated Joint ESA Supervisory Statement on the application of the Sustainable Finance Disclosure Regulation

On 24 March 2022, the ESAs published an updated supervisory statement on the application of the EU Sustainable Financial Disclosure Regulation (EU SFDR).

In general, the ESAs reiterate that despite the delay to the finalisation and application of the regulatory technical standards (RTS) (now expected to apply from 1 January 2023), the underlying regulatory requirements of the SFDR and the Taxonomy Regulation continue to apply as stated in the respective regulations.

This means, for example, product disclosure requirements introduced by the Taxonomy Regulation for products that promote climate change mitigation or climate change adaption apply from 1 January 2022 as originally stated in the Taxonomy Regulation there is no delay in application by virtue of the corresponding RTS being delayed.

More specific guidance has been provided in respect of the requirement in Article 5(b) of the Taxonomy Regulation in accordance with which a product whose objective is climate change mitigation or climate change adaptation must provide a description of how and to what extent the investments underlying the financial product are in economic activities that qualify as environmentally sustainable. The Article 5(b) Taxonomy Regulation disclosure is made in both a financial product's pre-contractual and periodic disclosures. For clarity, this requirement came into effect on 1 January 2022 in respect of such products.

The ESAs clarified that the description should include a numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned and until the application of the RTS. The numerical disclosure can be accompanied by a clarification explaining how the product addressed the determination of the proportion of taxonomy-aligned investments of the financial product, for example by identifying the sources of information. In addition, although estimates should not be used – where information is not readily available from public disclosures by investee companies, firms may rely on equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers.

27. European Commission targeted consultation on the functioning of the ESG ratings market in the European Union and on the consideration of ESG factors in credit ratings

On 4 April 2022, the European Commission launched a targeted consultation and accompanying call for evidence on the functioning of the ESG ratings market in the European Union and on the consideration of ESG factors in credit ratings.

The consultation forms part of the renewed sustainable finance strategy adopted in July 2021 and will run between 4 April 2022 and 6 June 2022. It seeks to assist the Commission with obtaining a better insight on the functioning of the market for ESG ratings, and how credit rating agencies incorporate ESG risks into their creditworthiness.

The consultation requests responses on a broad range of issues, including:

• the use of ESG ratings and dynamics of the market;
• the functioning of the ESG ratings market;
• the need for EU intervention on ESG ratings; and

the incorporation of ESG factors in credit ratings.For more insights, see our briefing 'Will ESG rating agencies be brought within the perimeter?'.

28. UK launches negotiations with Canada on new trade deal

On 24 March 2022, the Department for International Trade announced that the UK and Canada will launch negotiations on a New Free Trade Deal which is intended to build upon the UK-Canada Trade Continuity Agreement.