The consumer/retail sector has been the subject of a number of publications this week, including the European Commission’s Retail Investment Package and the FCA’s consultation on a new framework for firms to better support customers facing payment difficulties. ESMA also issued a public statement to warn investors of risks that arise when investment firms offer both regulated and unregulated products and/or services.
Consumer/Retail
Please see the Markets and Market Infrastructures section for a public statement issued by ESMA, warning investors of risks that arise when investment firms offer both regulated and unregulated products and/or services.
FCA consults on proposals to strengthen protection for borrowers in financial difficulty
On 25 May, the FCA began consulting on a new framework for firms to better support customers facing payment difficulties which will incorporate relevant aspects of its temporary Covid-19 Tailored Support Guidance (TSG) into the Handbook. Key proposals include: (i) broadening the scope of relevant consumer credit (CONC) and mortgage (MCOB) chapters to make clear to firms that appropriate support should be provided to customers in or at risk of payment difficulty; (ii) enhancing the FCA’s expectations around customer engagement and providing information including on money guidance and debt advice; (iii) expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate; and (iv) for consumer credit, expecting firms to take into account the customer’s individual circumstances when providing forbearance (this is already expected for mortgage firms). The FCA also proposes to introduce guidance for consumer credit firms to help firms determine their necessary and reasonable costs in setting fees and charges. For mortgages, in addition to incorporating the TSG, the FCA proposes: (1) to change its guidance to allow firms more scope to capitalise payment shortfalls where appropriate; (2) to improve disclosure for all customers in payment shortfall; and (3) to make clearer its existing requirement to record telephone calls with customers in payment shortfall, including video conferencing. The FCA does not propose to transfer aspects of the TSG that are not relevant outside the context of the COVID-19 pandemic. These aspects will not remain after the TSG is withdrawn. The deadline for comments is 13 July. The FCA aims to respond to feedback in H2 2023, with rules coming into force in H1 2024 and it will withdraw the TSG at that time. In a related press release, the FCA notes that it has been working with almost 100 lenders on how they treat borrowers in financial difficulty and has sought significant improvements from many of them. The FCA has so far secured up to £47m of redress from 17 of these firms for over 195,000 customers.
Press release
Consultation
European Retail Investment Package
On 24 May, the EC adopted a Retail Investment Package “that places the consumers' interests at the centre of retail investing”. The aim is to empower retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected. The EC believes that the package will enhance retail investors' trust and confidence to safely invest in their future and take full advantage of the EU's Capital Markets Union. The packages aims include to: (i) improve the way information is provided to retail investors about investment products and services, in ways that are more meaningful and standardised; (ii) increase transparency and comparability of costs by requiring the use of a standard presentation and terminology on costs; (iii) address potential conflicts of interest in the distribution of investment products by banning inducements for "execution-only” sales (i.e. where no advice is provided) and ensuring that financial advice is aligned with retail investors' best interests.; (iv) preserve high standards of professional qualifications for financial advisors; and (v) reduce administrative burdens and improve the accessibility of products and services for sophisticated retail investors, by making the eligibility criteria to become a professional investor more proportionate. The package consists of an amending Directive, which revises existing rules set out in MiFID II, the Insurance Distribution Directive , the UCITS Directive, the AIFMD, and Solvency II, as well as an amending Regulation, which revises the PRIIPs Regulation.
Press Release
Questions & Answers
Factsheet
Legal texts
IMCO votes in favour of proposal for a Directive on Consumer Credits
On 23 May, the European Parliament's Internal Market and Consumer Protection Committee voted in favour of and published the text (dated 27 April) of the proposed second Directive on Consumer Credits on which a provisional agreement has been reached between the co-legislators. The text will now be put to the vote in plenary.
Press Release
Text
LSB report on access for d/Deaf customers in banking & credit
On 23 May, the LSB published a report on access for d/Deaf customers in banking & credit. The report looks at key considerations to deliver the tailored and responsive support required. It is applicable to firms registered to the Standards of Lending Practice, along with currently non-registered firms. The LSB is concerned there is a risk of financial exclusion for d/Deaf customers and those with hearing loss. The report found that there is a need for an understanding of d/Deaf cultures and the different ways d/Deafness and hearing loss can affect people. There are a number of areas that firms are encouraged to consider in relation to d/Deaf customers and those with hearing loss, such as (i) raising the awareness of staff as to how d/Deaf customers may require support and how a tailored approach should be taken; and (ii) appointing champions within firms who can educate and advise colleagues on specific access needs.
Report
Press Release
FCA consultation on the expansion of the Dormant Assets Scheme – second phase
On 22 May, the FCA published a consultation paper on proposed changes to the FCA handbook to reflect the second phase of the expansion of the Dormant Assets Scheme (DAS) to enable investment funds and client money to the expanded scheme. The proposed amendments apply to Reclaim Fund Limited (RFL), managers and depositaries of authorised collective investment schemes, and firms holding client money. The FCA is proposing that AFMs and depositaries should be able to become participants in the DAS in relation to their UCITS schemes and non-UCITS retail schemes. The draft version of the Dormant Assets (collective investment schemes and client money) Instrument 2023 can be found in Appendix 1 of the paper, along with draft versions of the amendments to the: (i) Glossary; (ii) the Fees manual; (iii) CASS; (iv) DISP; (v) COLL; and (vi) PERG. The deadline for comments is 10 July. The FCA hopes to finalise its proposals in Q4.
Press Release
Consultation Paper
Fees/Levies
FSCS revises 2023/24 levy forecast
On 25 May, the FSCS published its Outlook update, which provides a revised compensation and levy forecast for 2023/24. The levy forecast has been revised down from £478 million, to £270 million. The FSCS explains that this is due to: (i) an increased surplus from the 2022/23 levy being carried over into 2023/24, which has reduced the amount of money FSCS needs to raise to cover compensation costs; and (ii) an overall decrease to the compensation forecast for 2023/24 of £121m, however the FSCS notes that it still expects to pay £471m. The FSCS highlights that it continues to see increasingly complex firm failures, for example within the SIPP operator, ongoing claims management of insurance estates and defined-benefit pension advice areas. These can take significant time and expertise to investigate, and often rely on third parties providing information. The overall process can take many months to resolve. These claims can also be high value and compensation relating to these claims can be spread over multiple financial years. The FSCS will continue to closely monitor the volume and complexity of claims throughout the year and will share its next update on the levy in the autumn.
Press release
Introduction
Fintech
ESRB report on crypto and decentralised finance
On 25 May, the ESRB published a report outlining the systemic implications of crypto-markets and proposing policy options to address the risks stemming from cryptoassets and decentralised finance (DeFi). The report’s key findings include that while this past year has been turbulent for cryptoassets and DeFi, systemic implications on the financial system have not materialised. The crypto market has few interlinkages with the traditional financial sector and the real economy, and none of those links are currently significant. However, given the exponential growth dynamics of crypto-assets seen in the past, the future development of these markets is uncertain and therefore close monitoring will be required. These risks could materialise if, for example, interconnectedness with the traditional financial system increases over time, new connections are not promptly identified, or if similar innovations such as distributed ledger technology are widely adopted in traditional finance. The report proposes three areas to focus policy: (i) improve the EU’s capacity to monitor potential contagion channels, both between the cryptoasset sector and the traditional financial sector, and within the cryptoasset sector itself. The aim is to improve monitoring capacity through the introduction of regular reporting requirements for financial institutions with exposures to cryptoassets. Given the potential for contagion across trading platforms, the report proposes to introduce reporting requirements to map exposures between cryptoasset trading platforms and other relevant entities; (ii) carry out assessments of risks posed by cryptoasset conglomerates and leverage using cryptoassets. Taking into account market developments following the application of MiCA, it could be useful to identify and assess any risks arising from cryptoasset conglomerates, given the potential for cumulative prudential, reputational or operational risks; and (iii) promote EU-level knowledge exchange and monitoring of market developments, focusing on operational resilience, DeFi, and cryptoasset staking and lending. The use of different underlying technology for cryptoassets may bring about varied novel operational risks that must be considered by regulators and supervisors.
Press release
Report
BIS paper on ongoing CBDC policy perspectives
On 25 May, the BIS, together with a group of central banks published a paper exploring ongoing policy perspectives on CBDCs. Key messages from the paper include that: (i) the development of CBDC work requires careful consideration and engagement with a wide range of stakeholders, including the private sector and legislators; (ii) to successfully meet its public policy objectives, a CBDC ecosystem should allow a wide range of private and public stakeholders to participate and, in doing so, deliver services which benefit end users; (iii) the complex design questions and the potential risks arising from the implementation of any CBDC require careful consideration; and (iv) the evolving payments landscape requires central banks to give some consideration to how CBDCs may be used for wholesale and cross-border use cases. The paper also shares perspectives on how central banks can best engage industry and the public, the key legal issues related to retail CBDC, the tools that may be needed to manage stressed conditions, and the implications of using blockchain technology and associated concepts in CBDC.
Press release
Report
IOSCO consultation on policy recommendations for crypto and digital asset markets
On 23 May, IOSCO published a consultation on detailed recommendations to jurisdictions across the globe as to how to regulate cryptoassets. The report proposes 18 policy recommendations which aim to support greater consistency with respect to regulatory frameworks and oversight in its member jurisdictions, to address concerns related to market integrity and investor protection arising from crypto-asset activities. The proposed 18 recommendations cover six key areas: (i) conflicts of interest arising from vertical integration of activities and functions; (ii) market manipulation, insider trading and fraud; (iii) cross-border risks and regulatory cooperation; (iv) custody and client asset protection; (v) operational and technological risk; and (vi) retail access, suitability, and distribution. The deadline for comments is 31 July and IOSCO plans to finalize the recommendations in early Q4.
Consultation Paper
Press Release
Fund Regulation
Please see the Consumer/Retail section for the adoption of a European Retail Investment Package by the EC.
ESMA final report on the 2022 CSA on valuation
On 24 May, ESMA published a report on the Common Supervisory Action (CSA) on the supervision of the asset valuation rules under the UCITS and AIFM Directives. The report found room for improvement in the following areas: (i) the appropriateness of valuation policies and procedures; (ii) valuation under stressed market conditions; (iii) independence of the valuation function and use of third-party valuers; and (iv) early detection mechanisms for valuation errors and compensation to investors. ESMA notes that the current macroeconomic outlook, combined with the tightening of financial conditions, heightened inflation and increased interest rates level, compounds challenges for ensuring a fair valuation of assets at all times and especially under stressed market conditions. The report stresses the importance that NCAs addresses the deficiencies identified in the course of the CSA exercise. NCAs should keep paying close attention to potential valuation issues arising from less liquid assets, whose nature can amplify the structural liquidity mismatches of certain types of investment funds. Building on these findings, ESMA plans to facilitate discussions among NCAs on the topic of asset valuation to ensure that both market participants and NCAs are better prepared to address valuation-related challenges in future periods of stress.
Report
Press Release
ESMA draft RTS under the revised ELTIF Regulation
On 23 May, ESMA published a consultation paper on draft RTS under the revised ELTIF Regulation. The RTS will specify the way the new requirements of the revised ELTIF Regulation, in particular the redemption policy and matching mechanism, will apply. ESMA is seeking stakeholders’ views on: (i) the circumstances in which the life of an ELTIF is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF; (ii) the circumstances for the use of the matching mechanism, i.e. the possibility of full or partial matching (before the end of the life of the ELTIF) of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors; and (iii) the costs disclosure. The deadline for comments is 24 August. ESMA expects to publish a final report and submit the draft technical standards to the commission for endorsement by 10 January 2024.
Consultation Paper
Press Release
Markets and markets infrastructure
ESMA highlights risks arising from investment firms providing unregulated products and services
On 25 May, ESMA issued a public statement to warn investors of risks that arise when investment firms offer both regulated and unregulated products and/or services. NCAs and ESMA have observed investment firms offering products and/or services which are outside the scope of financial services regulation, but that are offered to investors as investment alternatives to financial instruments, including cryptoassets, real estate, gold, raw materials and certain non-transferable securities. ESMA is concerned that retail investors often rely solely on the reputation of a regulated investment firm, which makes them susceptible to overlooking potential risks of the unregulated products and/or services, which is referred to as the ‘halo effect’. This is especially so where the unregulated products have a purpose similar to financial instruments regulated under MiFID II (investment or hedge). ESMA reminds investment firms: (i) of the behaviours they are expected to adopt in such circumstances, including disclosure and appropriate documentation, to make investors fully aware of the unregulated status of these products and services and of the fact that they may not benefit from the regulatory protections that apply to investments in a regulated product; (ii) that they should take into consideration the impact that their unregulated activities may have on the firm’s business activity as a whole when it comes to risk management systems and policies; and (iii) that they should have a full understanding and comprehensive view of the risks connected with both their regulated and unregulated activities, including the risks to clients, to markets and the risk to the investment firm itself.
Press release
Statement
ESMA final report on market outages
On 24 May, ESMA published its final report on guidance on market outages, together with ESMAs opinion to NCAs on market outages. The opinion sets out ESMA’s expectations on how NCAs should ensure that trading venues have appropriate communication protocols in place, to avoid an outage affecting the closing auction, and how trading venues should ensure the market is provided with an official closing price. ESMA expects NCAs to ensure that trading venues have in place an appropriate outage plan ready to be deployed in case of an outage. NCAs are also expected to require trading venues to assess their arrangements and procedures against the opinion and to consider whether any changes need to be made.
BCBS-CPMI-IOSCO analysis of margining dynamics in centrally cleared commodities markets during 2022 stress events
On 24 May, the BCBS, CPMI and IOSCO published a report analysing margin dynamics in centrally cleared commodities markets during the high-volatility episode in 2022. Key findings of the report include: (i) CCPs are sensitive to the impact of margin calls on market participants and many either maintain or have introduced measures to help limit the speed and size of initial margin requirement increases; (ii) the market turmoil of 2022 exceeded some of the biggest shocks foreseen in the scenarios CCPs used to size their default funds and consequently some are adjusting their approach to stress testing for commodity derivatives; (iii) end users of commodities derivatives are concerned about the current level of transparency and predictability of CCPs' margin requirements, in particular for intraday margin calls; and (iv) many end users of commodity derivatives believe that there is scope to improve the transparency and predictability of additional margin requirements applied by their clearing brokers on top of the initial CCP margin (referred to as "add-ons" or "margin multipliers"). The findings from the report support the case for, and will help inform, current international policy work aimed at enhancing the transparency of initial margin requirements and evaluating margin responsiveness to market stress.
Report
Press Release
Payment services and payment systems
Council of EU position on the instant payments proposal
On 22 May, the Council of EU announced it had agreed its position on the instant payments proposal, which aims to improve the availability of instant payment options in euro to everyone who owns a bank account in the EU and in EEA countries. Under the proposed rules, payment service providers such as banks, which provide standard credit transfers in euro, will be required to also offer the service of sending and receiving instant payments in euro. The charges they apply (if any) must not be higher than the charges they apply for standard credit transfers. The Council’s position specifies that for payment service providers located in member states outside the euro area, there will be a phased implementation time, to address concerns that payment service providers outside the euro area could face challenges in access to euro liquidity outside regular business hours. The sending of instant payments in euro from non-euro accounts will be only mandatory during business hours for those payment service providers who also provide standard transfers in euro. Now that the Council has set its position on the proposal, it is ready to start negotiations with the EP in order to agree on a final version of the text.
Press Release
Prudential Regulation
EC adopts RTS on additional capital requirements under the IFD
On 25 May, the EC adopted a draft Delegated Regulation setting out RTS relating to the determination of additional capital requirements for risks or elements of risk that are not covered, or not sufficiently covered, by
Part Three or Part Four of the IFR. The RTS provide a comprehensive methodology described to be proportionate to the nature, scope and complexity of the activities performed by investment firms. It aims to identify, assess and quantify material risks that investment firms are exposed to or pose to their counterparties or to the wider market in which they operate. Based on this methodology, competent authorities must ensure that investment firms hold adequate own funds to cover such material risks, including those risks that are explicitly excluded from the own funds requirements set out in Part Three (Capital Requirements) or Part Four (Concentration Risk) of the IFR. If the EP and the Council do not object, the RTS will be published in the OJ and enter into force 20 days following that of its publication.
Draft Delegated Regulation
ESAs consult on amendments to ITS mapping ECAIs’ credit assessments
On 25 May, the ESAs began consulting on amendments to the Implementing Regulations on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk. The CRR establishes that risk weights under the Standardised Approach should be based on the exposure class to which the exposure is assigned and, if applicable, its credit quality determined by reference to the credit assessments of ECAIs. The ESAs are mandated to provide a correspondence (‘mapping’) between relevant credit assessments of ECAIs and Credit Quality Steps where reference is made to the relevant risk weights for the calculation of credit risk capital requirements under the Standardised Approach. Mappings should be specified for all ECAIs. The proposed amendments to the ITS reflect: (i) the outcome of a monitoring exercise on the adequacy of existing mappings, namely those to the credit quality steps allocation for four ECAIs; (ii) the introduction of new credit rating scales for seven ECAIs; and (iii) the withdrawal of the registration of one ECAI. The deadline for comments is 26 June.
Press release
Consultation
Regulatory reform post Brexit
Please see the Other Developments section for the UK and EU Commission’s draft MoU on regulatory cooperation in financial services.
Legislative Progress of FSM Bill and Brexit Freedoms Bill
On 24 May, The Brexit Freedoms Bill returned to the House of Commons, after its third reading in the House of Lords on 22 May. The Commons have disagreed to the non-government amendments passed in the House of Lords and therefore the Bill is scheduled to return to the Lords on 6 June. The Lords had added greater parliamentary scrutiny of both the laws to be revoked and the introduction of Statutory Instruments that replace, revoke or restate retained EU law. With regards to the FSM Bill, the Lords report stage is scheduled to commence on 6 June, with sittings on 6, 8 and 13 June. A marshalled list of amendments to be moved on report is available.
FSM Bill amendments list
Retained EU Law (Revocation and Reform) Bill
FCA new secondary international competitiveness and growth objective
On 19 May, the FCA updated its webpage on regulatory framework reforms, providing an update on its new secondary international competitiveness and growth objective. The two components of the new secondary objective are facilitating ‘international competitiveness’ and the ‘medium to long-term growth of the UK economy.’ The FCA identifies seven drivers of productivity that will shape its work to embed and facilitate the new secondary objective in a manner that is consistent with its primary objectives: protecting consumers, ensuring market integrity, and promoting effective competition. The seven drivers are: (i) operational efficiency; (ii) proportionate regulation: (iii) effective competition; (iv) innovation; (v) trust and reputation in UK financial markets; (vi) market stability and effectiveness; and (vii) international markets. The FCA explains that these drivers provide a flexible approach and a common language for future use, depending on how markets and the economy develop. Looking forward, the FCA intends to report annually on how it has delivered against the new secondary objective, with the first report expected in July 2024.
Webpage
Other Developments
FCA updates information on authorisation process
On 25 May, the FCA updated the information provided to firms with regards to the authorisation process. A new authorisation homepage includes updated pages on: (i) how to apply for authorisation and registration – the FCA outlines the concept of firms "being ready, willing and organised" to comply with FCA rules and guidance. The FCA provides tips on avoiding delays in the application process and explains its commitments to firms once it has received their application. It outlines the steps following assessment for successful and unsuccessful applicants; (ii) preparing a firm's financial information – the FCA details the minimum financial information firms must include in an application. The FCA notes that the financial information it receives often falls short of its expectations leading to delays in the application process. It is increasing the scrutiny in this area; and (iii) authorisation and registration application fees – the FCA indicates the fees common types of firms are likely to pay according to its pricing categories.
Authorisation homepage
ECB guide on qualifying holding procedures
On 23 May, the ECB published a guide on qualifying holding procedures (dated March 2023). The guide aims to clarify the supervisory approach taken by NCAs and the ECB in the assessment of qualifying holding procedures, in the hopes of making supervisory actions more predictable and to support applicants intending to acquire a qualifying holding in banks. It covers: (i) the scope of the persons required to undergo an assessment; (ii) how the assessment criteria are applied; and (iii) further guidance on some of the key documentation required in the assessment of qualifying holding procedures. It also provides more information on complex acquisition structures, the application of proportionality and specific procedural aspects. The ECB also published the feedback statement to the public consultation on the guide.
Guide
Press Release
Feedback Statement
Draft UK-EU MoU on regulatory cooperation in financial services text published
On 19 May, the UK and EU Commission published the joint text of the draft MoU on regulatory cooperation in financial services. The MoU sets out a framework for financial services regulatory cooperation between the EU and the UK. Based on a shared objective of preserving financial stability, market integrity, and the protection of investors and consumers, the arrangements should provide for: (i) bilateral exchanges of views and analysis relating to regulatory developments and other issues of common interest; (ii) transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; (iii) bilateral exchanges of views and analysis relating to market developments and financial stability issues; and (iv) enhanced cooperation and coordination including in international bodies as appropriate. The MoU is still subject to the internal processes of the EU, after which the EC and HMT will sign the MoU.
Draft MoU
