Europe

EC Summary of Contributions of the Green Paper on Retail Financial Services

On July 14, 2016 the European Commission published a summary of responses to the public consultation launched on December 10, 2015 relating to the Green Paper on retail financial services prepared by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union.

The summary report sets out the broad content of responses received. Firms highlighted a number of obstacles to offering services cross-border, including local financial regulation, tax laws, access to data and information, local network for insurance claims handling, and divergent national interpretations of the anti-money laundering directive (2015/849/EU).

The report states that work is ongoing in the Commission services on a follow-up initiative, which might take the form of an action plan.

ESMA Consultation on Validation and Review of Credit Rating Agencies’ Methodologies

On July 13, 2016 the European Securities and Markets Authority published a new consultation paper relating to Credit Rating Agency methodologies. This follows on from a discussion paper published on November 17, 2015 and an open hearing on January 25, 2016.

The consultation and review is based around CRA’s application of Articles 8(3) and 8(5) of the CRA regulation and articles 7 and 8 of the Regulatory Technical Standards. ESMA believes that publication of official guidelines will help to ensure the consistent application of validation and review measures for demonstrating the discriminatory power, predictive power and historical robustness of methodologies.

The consultation will be open for 5 weeks, and ESMA aims to finalize the proposed guidelines and publish a final report in Q1 2017.

ECB Guide on Approach for the Recognition of Institutions Protection Schemes

On July 12, 2016 the European Central Bank published a guide on the approach for the recognition of institutional protection schemes for prudential purposes. The report aims to ensure coherence, effectiveness and transparency in the processes of assessing IPSs in accordance with Regulation 575/2013 of the European Parliament and of the Council (the Capital Requirements Regulation).

An IPS is a contractual or statutory liability arrangement which protects its member institutions and ensures that they have the liquidity and solvency needed to avoid bankruptcy where necessary.

The guide sets out how the ECB will assess the compliance of IPSs and their member institutions with the conditions laid down in the CRR.

Delegated Regulation on Recovery and Resolution Planning under BRRD Published in OJ

On July 8, 2016, the Commission Delegated Regulation ((EU) 2016/1075) supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD”) on recovery and resolution planning, was published in the Official Journal of the EU (“OJ”). The Delegated Regulation details regulatory technical standards (“RTS’) outlining the following:

  • the content of recovery plans, resolution plans and group resolution plans;
  • the minimum criteria that the competent authority is to assess regarding recovery plans and group recovery plans;
  • the conditions for group financial support;
  • the requirements for independent valuers;
  • the contractual recognition of write-down and conversion powers; and
  • the procedures and contents of notification requirements and of notice of suspension and the operational functioning of the resolution colleges.

It is hoped that the above RTS will be included in a single Delegated Regulation to ensure coherence between the provisions dealing with the resolution framework laid down in the BRRD.

The Delegated Regulation was adopted by the Commission on March 23, 2016. It comes into force twenty days after publication in the OJ and as such on July 28, 2016.

Cyber Security: European Parliament Formally Adopts Network and Information Security Directive at Second Reading

On July 6, 2016, the European Parliament plenary session formally adopted the Network and Information Security Directive (“NIS Directive”) at second reading.

Securing network and information systems in the EU is fundamental to keep the online economy running and to ensure prosperity. The NIS Directive is the key instrument supporting Europe’s cyber resilience. The aim of the NIS Directive is to bring cybersecurity capabilities at the same level of development in all EU member states and ensure that exchanges of information and cooperation are efficient, including at a cross border level.

The NIS Directive also stipulates security obligations for operators of essential services, including transport, health and finance and digital service providers, such as online marketplaces, search engines and cloud services. Any disruption to the services provided by essential operators poses a severe risk to society and the economy and therefore the requirements will be stronger for such operators than for digital service providers. Each member state will also be required to designate one or more national authorities and lay down a strategy to deal with cyber threats.

The NIS Directive will now be published in the OJ and will enter into force on the twentieth day after publication. The EU member states will then have 21 months to transpose the NIS Directive into their national laws and six further months to identify operators of essential services.

For further information, please see the European Parliament press release.

European Commission Calls for Further Technical Advice from EBA on Prudential Regime for Investment Firms under CRD IV

On July 6, 2016, the EBA published a call for advice, dated June 13, 2016, that it has received from the European Commission relating to the prudential requirements applicable to investment firms under the Capital Requirements Regulation (Regulation 575/2013) (“CRR”) and the CRD IV Directive (2016/36/EU) (together referred to as CRD IV).

The EBA already provided advice on this matter to the Commission in December 2015, in which it broadly concluded that the current prudential regime for investment purposes is not adequate. To better inform the Commission’s decision, it is seeking further technical advice from the EBA on the details of the high level recommendations set out in the December 2015 advice. It has asked the EBA to provide advice on the following:

  • the criteria and thresholds for each of the three proposed classes of investment firm;
  • the design and calibration of all relevant aspects of a new prudential regime for the three proposed classes of investment firm;
  • the application of the CRD IV remuneration requirements to the different proposed classes of investment firm, and if whether the proposed new classes would affect the applicability of the CRD IV corporate governance rules; and
  • any other issues or inconsistencies the EU competent authorities have identified in implementing the rules relating to investment firms.

The EBA is to consult with ESMA when preparing its advice. The deadline for preparing the advice on the analysis relating to class one investment firms is September 31, 2016. The EBA must prepare its final report on the substantive content and calibration of the proposed regimes for the different classes of investment firms to the Commission by June 30, 2017.

EBA Clarifies Use of 2016 EU-Wide Stress Test Results in SREP Process

On July 1, 2016, the EBA published additional information on how the results of the EU-wide stress test will inform the Supervisory Review and Evaluation Process (“SREP”).

The focus of the update is to explain how additional capital guidance can be used to cover potential shortfalls in own funds based on the outcomes of supervisory stress tests. Although capital guidance does not constitute any form of minimum capital requirement, institutions are expected to incorporate it in their risk management frameworks. Competent authorities should also monitor its fulfillment.

The 2016 EU-wide stress test does not contain a pass fail threshold and instead is designed to be used as a crucial piece of information for SREP in 2016. The results will allow competent authorities to assess banks’ abilities to meet applicable minimum and additional own funds requirements under stressed scenarios based on a common methodology and assumptions. If competent authorities identify capital shortfalls leading to potential breaches of applicable own funds requirements revealed by the stress tests, they can employ the capital guidance to address their concerns.

The results of the EU-wide stress test, which was launched by the EBA in February 2016, are expected to be published in the early part of the third quarter of 2016.

EIOPA Publishes Final Report on Identification and Calibration of Infrastructure Corporates under Solvency II

On June 30, 2016, The European Insurance and Occupational Pensions Authority (“EIOPA”) published a final report providing technical advice to the European Commission on the identification and calibration of other infrastructure investment risk categories (that is, infrastructure corporates) under the Solvency II Directive.  An infrastructure corporate is an entity or corporate group that carries out infrastructure activities (such as energy generation, social housing, healthcare or hospitals).

On October 14, 2015, EIOPA received a request from the European Commission for further technical advice on the issue of infrastructure corporates. In response, in November 2015, EIOPA published a call for evidence on the treatment of infrastructure corporates.  The final report follows EIOPA’s April 2016 consultation on the issues.

In the report, EIOPA recommends that the asset class is extended in two ways:

  1. To allow certain infrastructure corporates to qualify for the treatment for infrastructure projects provided that there is an equivalent level of risk.
  2. To create a separate differentiated treatment for equity investments in high-quality infrastructure corporates.

For those corporates that have a lower risk profile, EIOPA proposes reduction in the risk charges for equity investments.

EIOPA also recommends that insurers are required to conduct adequate due diligence, establish written procedures to monitor the performance of their exposures and perform stress testing on the cash flows and collateral values supporting their investment.

European Commission Adopts Delegated Regulation on RTS on Key Information Documents for PRIIPS

On June 30, 2016, the European Commission adopted a Delegated Regulation and related annexes supplementing the Regulation on key information documents (“KIDs”) for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs KID Regulation). The delegated act introduces RTS specifying the content and underlying methodology of the KIDs that will have to be provided to retail consumers when they buy certain investment products.

The RTS specify the exact contents of the KID, which must outline the product’s aims, how risky it is, when investors can get their money back, how much it costs and its expected returns. The information must be set out in a standard way, regardless of the type of investment product.

The European Parliament and Council now have a two-month scrutiny period, which they can extend for a further month, during which to consider the Delegated Regulation. If neither of them objects, it will enter into force 20 days after its publication in the OJ and it will apply from December 31, 2016.