Financial Services Speedread 16 June edition

1. HM Treasury Policy Statement: Critical third parties to the finance sector

On 8 June 2022, HM Treasury published a Policy Statement with its proposals for mitigating risks from critical third parties to the finance sector. The statement notes increasing reliance on third parties outside the finance sector for performance of key functions or services, and consequently the potential for disruption. HM Treasury proposes to mitigate this risk of disruption by, in consultation with regulators and other bodies, designating certain service providers as 'critical'. Designations will take into account high-level criteria such as the number and type of services a third party provides to firms, and the materiality of these services. Regulators will then be able to make rules, gather information, and take enforcement action in respect of certain services that critical third parties provide.

2. ESMA Final Report: CSDR RTS on Settlement Discipline – suspension of buy-in

On 6 June 2022, ESMA published its Final Report on amending the regulatory technical standards (RTS) on settlement discipline to postpone the application of the CSDR mandatory buy-in regime for three years. The buy-in regime started applying in February 2022 after several postponements, although market participants have conveyed concerns over implementation due to lack of clarity on the implementation and uncertainty on whether CSDR would include amendments to the buy-in rules. ESMA in this report proposes suspending the application of the provisions on the buy-in regime for three years, to allow the European Commission and the co-legislators time to determine the best way forward.

3. ESMA Final Report: Increase of the EMIR commodity derivatives clearing threshold

On 3 June 2022, ESMA published its Final Report on the increase of the commodity derivatives clearing threshold under European Market Infrastructure Regulation (EMIR). In the Final Report, ESMA proposes to increase the commodity derivatives from 3 billion euro to 4 billion euro. The report further considers:

• structural changes in the way clearing thresholds are calculated;
• the time period for implementing changes; and
• exceptional circumstances that non-financial counterparties are facing.

On 1 June 2022, Verena Ross, ESMA Chair made a speech in relation to the Capital Markets Union. Ms Ross stressed the importance of a consistent application of a strong regulatory framework. The speech focused on the November 2021 EU legislative proposal to amend MiFIR and ESMA's supervisory convergence work in the area of MiFID II and trading venues.

Key points

• Consolidated tape: ESMA is very supportive of the idea of single, real-time tape per asset class and considers that work on further specifying the data to be submitted to and published by the tape should be developed by ESMA via technical standards.
• Trading venue perimeter: Ms Ross confirmed that ESMA is analysing feedback in relation to its 2022 consultation on an Opinion on a Multilateral System (see item 4 in Ashurst's Speedread 28 March 2022 edition) and ESMA will be finalising its Opinion in the coming months.
• Digital transformation and cryptoassets: ESMA's view is that cryptoassets remain less significant than 'traditional' assets in terms of market share, and linkages with the core financial markets are limited. Ms Ross considers that the European Commission’s Regulation on Markets in Cryptoassets (MiCA) can help to address some of the concerns and issues that have been raised following recent unrest in the cryptoassets sector, and address the risks associated with stablecoins.
• Commodities and circuit breakers: Volatility in the commodity markets has led ESMA to consider additional tools that can be implemented to better identify potential risks to orderly markets at an early stage, so that corrective action can be taken before risks materialise.

On 1 June 2022, the European Central Bank (ECB) issued an Opinion on the legislative proposal to amend MiFIR, which was introduced in November 2021 by the European Commission.

Notable areas covered

• Consolidated tape: The ECB welcomes the introduction of the proposed enhanced regime for the "consolidated tape" and the competitive bid process for the selection of a consolidated tape provider for each asset class.
• Pre-trade transparency regime for equities: The ECB welcomes the proposed streamlining of the pre-trade transparency regime for equities. The ECB considers that these proposals would have diverging effects on transparency and suggests that the pre-trade transparency regime for equities, in particular the calibration of the volume cap, should be kept under review.
• Payment for Order Flow (PFOF): The ECB considers that PFOF can impede market efficiency and the transparency of European capital markets.
• Ending open access for exchange-traded derivatives: The ECB supports the proposals in this area in principle but, argues that it is important to consider the possible implications that the removal of the open access provision could have for competition, innovation and market integration.

On 31 May 2022, the FCA published a 'Dear CEO' Letter to entities providing data reporting services of approved reporting mechanisms and approved publication arrangements (DRSPs). The FCA sets out key risks it has identified in relation to the DRSP portfolio of businesses and its expectations on minimising these risks. Key risks and respective mitigants identified were:

• A small number of DRSPs limiting client opportunity of switching provider and disincentivising high service quality. The FCA expects firms to review DRSP services provided, to ensure clients meet their regulatory reporting obligations, and to review fees.
• Inadequate systems to identify incomplete and potentially erroneous trade or transaction reporting data. The FCA expects data quality systems and controls to be a priority. Information published must be complete, accurate and in accordance with the applicable reporting deadline.

• Insufficient operational resilience leading to disruption for market participants, consumers and regulators, or the loss, compromise, or lack of availability of data. The FCA expect firms to notify them where disruption occurs and to have effective alternative arrangements in place to mitigate adverse consequences. Outsourcing arrangements of critical functions must meet applicable obligations under UK MiFID RTS 13.

On 26 May 2022, the FCA published a discussion paper exploring the listing regime having a single segment for equity shares in commercial companies. The proposal is that all listed companies would meet the basic criteria and there would be an option to comply with additional obligations focussed on enhancing shareholder engagement. The proposal further summarises the role of the sponsor regime and seeks views on potential improvements. The FCA's stated aim is to remove unnecessary complications for listed companies while maintaining robust minimum standards.

On 25 May 2022, Duncan MacKinnon made a speech at the City & Financial 9th Annual Operational Resilience for Financial Institutions Summit setting out the PRA's expectations for firms for building operational resilience.

Mr MacKinnon reiterated the PRA's assessment of operational resilience set out in David Bailey's speech of 28 April 2022.

Mr MacKinnon highlighted that the PRA had the following expectations of firms:

• firms need to plan for a wide range of possible failures;

• mapping should quickly become more sophisticated and enable firms to identify vulnerabilities to inform scenario testing;
• the scenarios firms use for testing should assume that disruption has occurred. They should incorporate third party disruption and factors beyond the firm's control;
• senior management and boards should be involved with the testing results;
• operational resilience policy is 'outcome-based', and firms must be within impact tolerance by March 2025. The process of achieving this is less important; and
• operational resilience should be embedded within a firm's business.

9. ESMA: Final Report: Review of the MiFID II framework on best execution reports by investment firms

On 24 May 2022, ESMA issued a report in relation to best execution reports by investment firms under MIFID II. This follows a September 2021 consultation on best execution.

ESMA notes that the EU MiFID 'Quick Fix' Directive suspended the requirement for RTS 27 reports and RTS 28 reports. Since then, the European Commission has issued a legislative proposal indicating the removal of RTS 27 requirement and, therefore ESMA has decided to put any work in relation to RTS 27 on hold (ESMA may review this decision should the Commission’s proposal be amended as a result of legislative negotiations in relation to the November 2021 MiFID II/MiFIR Review). ESMA sets out proposals for amendments to RTS 28.

Proposals put forward by ESMA to amend RTS 28 include:

• deleting the obligation to report, as part of the list of top five venues used by a firm, the percentage of the executed orders that were passive and aggressive orders;
• requiring firms to explicitly confirm in their summaries of execution quality, if they do not report on the required parameters;
• publishing the quantitative information of RTS 28 reports in the CSV format in order to facilitate end-users’ access and comparison of this data; and
• clarifying the reporting obligations for firms executing client orders and for firms providing services of reception and transmission of orders.

The European Commission is now expected to review the report by ESMA.

On 27 May 2022, the Competition and Markets Authority (CMA), published a report entitled Open Banking Lessons Learned Review, conducted by Kirstin Baker CBE. The Review answers the governance failures that were identified, in an independent report, with the Open Banking Implementations Entity (OBIE) in 2021. The key failure found was that the former Trustee had not ensured the OBIE was managed in accordance with the Retail Banking Market Investigation Order 2017, and this failure was attributed to both the managers and primary stakeholders, including the CMA. In this Review, the CMA acknowledges underestimating the complexity and failing to foresee risks inherent in the delivery of Open Banking and the governance of the OBIE. Baker makes the following recommendations to the CMA:

• build more effective Board oversight and risk management of the end-to-end strategy for complex remedies;
• set out processes and governance for CMA Board and Executive oversight of the delivery and implementation of remedies;
• consider questions relating to implementation at the remedies design phase;
• ensure key factors are considered where a remedy establishes a new entity or large and enduring CMA function;
• include formal review points into the project plan for the implementation of complex remedies;
• set out clear internal decision-making processes and ensure appropriate resourcing for the remedies’ implementation phase of market investigations; and
• conduct an evaluation case study of complex market investigation remedies.

11. ESMA Supervisory Briefing: Sustainability risks and disclosures in the area of investment management

On 31 May 2022, ESMA published a supervisory briefing to aid national competent authorities (NCAs) on the supervision of investment funds with sustainability features to ensure convergence across the EU and combat to greenwashing by investment funds. ESMA's key recommendations are that NCAs should:

• consider creating a checklist of information to be provided in per-contractual templates that will help assess compliance of disclosures of new and existing funds under Article 8 or 9 of SFDR. This would ensure the pre-contractual templates have been completed and environmental and social characteristics are clearly stated and explained;
• on a risk-based approach, assess and be satisfied that the sustainability-related disclosures made are consistent across the fund documentation and the marketing material;
• verify that information published via investments funds' websites complies with disclosure obligations; and
• verify funds compliance with periodic disclosure obligations. For this purpose, NCAs could create a checklist based on the information to be provided in periodic reports that will help assessing the compliance of disclosures of funds disclosing under Article 8 or 9 SFDR.

12. ESMA Final Report on the 2021 CSA on costs and fees

On 31 May 2022, ESMA published a report on the Common Supervisory Action (CSA) on costs and fees for investment funds, carried out with National competent Authorities (NCAs) during 2021. The aim of the CSA was to assess compliance of supervised entities with cost-related provisions in the Undertakings for the Collective Investment in Transferable Securities (UCITS) framework, in particular the obligation of not charging investors undue costs. ESMA stressed the importance of all UCITS managers to have structured and formalised pricing processes. The level of costs should be subject to independent analysis and periodically reviewed. ESMA further recommended that NCAs ensure compliance with the regimes by assessing undue costs against the best interest of the fund and its investors. ESMA also encouraged NCAs to take stricter follow-up measures and enforcement actions in relation to absences of policies and procedures on the use of Efficient Portfolio Management techniques, which it regards as a breach of regulatory obligations.

13. ESMA: Speech by ESMA Chair Verena Ross on key priorities for EU retail fund investors

On 31 May 2022, ESMA Chair, Verena Ross made a speech on key priorities for retail fund investors.

• PRIIPs review: Ms Ross refers to technical advice provided by ESMA to the European Commission in relation to the PRIIPs Regulation and calls for a broad review of the PRIIPs framework, adding that any proposed changes should be accompanied by consumer testing. Ms Ross stresses the need for changes to the PRIIPS KID relating to performance and past performance information. Ms Ross states that ESMA is calling for the PRIIPs Regulation to be amended so that, where appropriate, in order to provide fair, clear and not misleading information to retail investors, different approaches can be adopted for between different types of products. Ms Ross considers that digital disclosures need to be considered in any future review of the PRIIPs Regulation (for example the use of "layering" in the presentation of information and ensuring that retail investor disclosures fit the digital age).
• Sustainability and greenwashing: ESMA considers the SFDR as a building block of the EU sustainable framework, but that the disclosure framework is incomplete. Ms Ross confirms that ESMA will continue to consider how investor disclosures and rules for financial market participants can be simplified. She states that the European Supervisory Authorities will continue to work with NCAs to reduce what is sometimes termed “over-disclosure” by investment funds under Article 8 of SFDR, so as to avoid misleading disclosures to investors about the greenness of a product.

14. HM Treasury publishes consultation response on the Senior Managers & Certification Regime for financial market infrastructures

On the 7 June 2022 HM Treasury published the consultation response to its July 2021 consultation on the ‘Senior Managers & Certification Regime (SMCR) for Financial Market Infrastructures (FMIs)’. The consultation proposed creating an SM&CR for certain FMIs regulated by the Bank of England.

13 responses were received, and after reviewing these responses, HM Treasury concluded that application of SMCR for FMIs would be an effective way of enhancing the accountability of senior managers and improving governance arrangements at FMIs.

The consultation response sets out the following implementation steps through legislation:

• the creation of a new SMCR 'gateway' to enable HM Treasury to lay statutory instruments which will apply the SMCR to central counterparties (CCPs) and central securities depositories (CSDs) and in the future to registered investment exchanges (RIEs) and/or credit rating agencies (CRAs); and
• separately from the gateway, the implementation of an SMCR for recognised payment systems and specified service providers.

15. FATF: AML / CTF digital strategy for law enforcement authorities

On 8 June 2022, the Financial Action Task Force (FATF) issued a summary on a AML / CTF digital strategy for law enforcement authorities. FATF states that in recent years, law enforcement agencies have enhanced their digital capabilities to respond to developments in digital finance.

The digital strategy follows a May 2022 confidential report prepared by FATF considering how technology can be used by law enforcement agencies in relation to investigating and mitigating the risks of money laundering and terrorist financing, as well as sharing information securely. The digital strategy focuses on the key strategic questions to be considered prior to launching digital initiatives. FATF published a public summary of key strategic questions that law enforcement agencies should consider before beginning digital transformation that includes legal, ethical and other strategic considerations that need to be taken into account in an effective digital strategy.

16. ESAs: Joint ESAs report on the withdrawal of authorisation for serious breaches of AML / CTF rules

On 31 May 2022, the European Supervisory Authorities (ESAs) issued a joint report on the withdrawal of authorisations following serious breaches of AML / CTF rules. The ESAs consider that recent cases have demonstrated that serious breaches of AML / CTF rules may impact the sound and prudent management of supervised financial entities and their ability to continue meeting the conditions for authorisation (or registration).

The report examines action points set out in Objective 5 of the EU AML Action Plan. This objective requested that the ESAs (among other things): ensure a consistent consideration of the consequences of licence withdrawal, particularly in terms of the need to preserve critical functions in the bank; and clarify the degree of discretion afforded to prudential supervisors and the criteria for the withdrawal of the authorisation once a serious breach of AML / CTF rules has been ascertained.

The report sets out areas of improvement for the framework relating to applicable sectoral legislation or where additional analysis is needed, and the key points of the report are as follows:

• The report calls for the introduction in all relevant EU sectoral laws of a specific legal ground to revoke licences for serious breaches of AML / CTF rules. The report also calls for the inclusion of assessments by NCAs of the adequacy of arrangements and processes in place to ensure AML / CTF compliance as one condition for granting authorisation or registration. For this purpose, it calls for cooperation and information exchange between prudential supervisors and AML / CTF supervisors.
• The report also suggests that sectoral acts be amended to provide that competent authorities expressly consider the applicant’s exposure to AML / CTF risk, and be satisfied that the envisaged arrangements, processes and mechanisms enable sound and effective AML / CTF risk management and compliance with AML / CTF requirements. The report considers these requirements should be one of the conditions for granting authorisation / registration for competent authorities.
• The report argues for the decision to revoke licenses as a last resort measure, subject to a discretionary and proportionality assessment. The Report also contains uniform criteria for the notion of serious breach of AML / CTF rules, highlighting that the identification of a serious breach is subject to a case-by-case assessment by the AML / CTF supervisor.
• The report provides a preliminary analysis of the interaction between serious breaches of AML / CTF rules and the crisis management and resolution frameworks as well as a first mapping of operational and legislative criticalities.
• The report states that the proposed MiCA should appropriately integrate AML and CTF issues in the prudential supervision of entities that will be regulated under MiCA.

   

17. ECB Opinions on proposed Regulations and Directive under the EU AML / CTF plan

On 25 May 2022, the following opinions by the ECB concerning EU legislative proposals contained in the July 2021 AMl/CTF package were published in the Official Journal:

• Opinion on the proposal for a Regulation establishing the Authority for AML and CTF (AMLA Regulation); and
• an Opinion on a proposal for a directive and Regulation on the prevention of the use of financial system for the purposes of money laundering or terrorist financing (MLD6 and AML Regulation). The opinions were first published in February 2022 (see item 8 in Ashurst's Speedread 28 March 2022 edition).

The ECB was broadly supportive of the proposals but made number of suggested amendments in relation to the definition of obliged entities, the impact of the limitation on payments in cash, and risk factors for customer due diligence and cryptoassets.

The EU AML package is still making its way through the EU legislative process.

18. Council of the EU adopts its position on new rules for consumer credit

On 7 June 2022, the Council of the EU agreed and published its position on the revision of the Consumer Credit Directive. The revised Directive will repeal and replace the current 2008 Directive with respect to Consumer credit Agreements.

Key points include:

• the new position broadens the scope of products that will need to comply with stricter credit rules. For example, loans below €200, loans offered through crowdfunding platforms and 'buy-now-pay-later' products are all included;
• for some of the credit products being added to the scope of the directive and considered to be less risky, the Council’s mandate suggests an optional partial derogation from certain provisions. This proportionate regime adapts pre-contractual information, advertising requirements and early repayment provisions for certain products, including but not limited to, credit loans of less than €200 and credit agreements free of interest and any other charges;
• the Council’s mandate proposes to merge the pre-contractual information forms that have to be presented to consumers. To further allow credit offers to be compared quickly, the text requires the key information to be presented on the first page; and
• the mandate clarifies the creditworthiness assessment, the definition of a maximum time limit to exercise the right of withdrawal, the obligation to protect consumers from high rates, clarifications on the admission procedures and penalties.

19. EPC: Updates to the EPC SEPA payment scheme rulebooks

On 25 May 2022, the European Payments Council (EPC) published a host of updates to the 2023 EPC Single European Payments Area (SEPA) payment scheme rulebook which will enter into force of 19 November 2023.

For more information, please see our briefing.

21. HM Treasury Consultation: Managing the failure of systemic digital settlement asset (including stablecoin) firms

On 31 May 2022, HM Treasury issued a consultation setting out a proposed approach to managing the failure of systemic digital settlement asset (including stablecoin) firms, by applying a modified Financial Market Infrastructure Special Administration Regime (FMI-SAR) to these firms.

The Government uses the term DSA to refer to the type of stablecoin it has consulted on previously, together with wider forms of digital assets used for payments/settlement. It uses the term “systemic DSA firm” to refer to systemic DSA payment systems and/or an operator of such a system or a DSA service provider of systemic importance. The principal proposed amendments to the FMI SAR - which would only apply to the administration of a systematic DSA firm, and not to other firms are:

• the addition of an new objective under the FMI SAR, being the return or transfer of funds and custody assets (the current primary objective being continuity of service, meaning that the administrator must focus primarily on the continued operation of the firm);
• the inclusion of a Bank of England right to direct administrators as to which of the two objectives should take priority in each case; and
• a requirement for the Bank of England to consult the FCA before seeking a special administration order for a systemic DSA firm that is subject to regulatory requirements imposed by both the Bank and the FCA, or directing an administrator with regard to the regime’s objectives.

The closing date for comments is 2 August 2022.

For more information, please see our briefing.

22. ESAs: Clarifications on the ESAs’ draft RTS under SFDR 

On 2 June 2022, the European Supervisory Authorities (ESAs) issued a statement intended to provide clarification on draft regulatory technical standards (RTS) issued pursuant to the Sustainable Finance Disclosure Regulation (SFDR). The ESAs state that this is in response to a number of requests seeking clarification on practical implications of the RTS in relation to the content, methodologies and presentation of disclosures and the RTS relating to the content and presentation of disclosures. These were published in final reports issued by the ESAs in February 2021 and October 2021 respectively. The ESAs state that the European Commission has recently adopted a Delegated Regulation containing the relevant provisions but that their statement does not refer to the Commission's text.

Areas covered by the statement include:

• clarifications concerning the disclosure of principal adverse impacts (PAIs) of investment decisions on sustainability factors;
• guidance about pre-contractual financial product disclosures;
• guidance about periodic financial product disclosures;
• guidance about taxonomy-related financial product disclosures;
• guidance about "do no significant harm" disclosures; and
• guidance about disclosures for financial products with investment options.

• financial market participants are responsible for assessing which financial products must comply with SFDR and therefore whether a products falls under Article 8 or 9, and then they must ensure compliance with applicable disclosure requirements;
• where investment firms and credit institutions provide investment advice, Article 6(3), points (h) and (i), of SFDR requires them to include information referred to in Article 6(2);
• financial advisers must disclose whether they consider in their investment or insurance advice on financial products, the principal adverse impacts on sustainability factors, and, if not, why not and, where relevant, whether and when they intend to do so;
• the definition of financial advisers includes a credit institution or an investment firm which provides investment advice;
• where a financial product is no longer made available to end investors as of 10 March 2021 and a financial market participant draws up for such product a periodic report after that date, the Report must comply with the requirements of Article 10 and 11 of SFDR;
• the good governance practices referred to in Article 2, point (17), and Article 8(1) of SFDR relate to investee companies and companies respectively and do not apply to government bonds; and
• financial market participants may only disclose such information for the purposes of disclosures under Articles 5 and 6 of the Taxonomy Regulation for which they have reliable data, otherwise they risk infirming the Regulations or incurring liability.

1. Chile;
2. Indonesia;
3. Malaysia;
4. India; and
5. South Africa.

In Chile, Indonesia and Malaysia CCPs may apply for recognition by ESMA. The Implementing Decisions in Chile, Indonesia and Malaysia will come into force 20 days after publication in the Official Journal of the European Union, whereas the Implementing Decisions relating to India and South Africa will come into force the day after publication in the Official Journal.