ECB Publishes the Response of the Eurosystem to the European Commission’s Call for Evidence on the EU Regulatory Framework for Financial Services

On February 4, the European Central Bank (“ECB“) published a response of the ECB and the national central banks of member states of the eurozone (Eurosystem) to the European Commission’s call for evidence on the EU regulatory framework for financial services.

The Eurosystem’s response makes the following remarks:

  • the financial crisis led to much-needed and far-reaching reform of the European regulatory framework and a redesign of its supervisory architecture;
  • the regulatory framework for banks is largely in place, but a few important initiatives on the regulatory agenda for banks and the non-bank sector still need to be finished;
  • initiatives to support the financing of the economy should maintain the robustness of the regulatory framework which resulted from the post-crisis reforms;
  • reaping long-term benefits implies both assuming temporary costs that emerge in the transitional period and complementing regulation with measures to correct any unintended long-term impacts that are identified;
  • it is important to ensure that regulations are able to preserve financial stability, while leaving sufficient room for markets to develop and fully play their role in the economy; and
  • the European exercise should take into account ongoing initiatives at the international level.

The Eurosystem’s response aims to provide evidence from recent impact studies of the effects of the new regulatory framework and to highlight areas where possible improvements could be made, including: (i) rules affecting the ability of the economy to finance itself and to grow; (ii) unnecessary regulatory burdens; (iii) interactions of individual rules, as well as inconsistencies and gaps in the existing regulations; and (iv) rules giving rise to unintended consequences.  Response.

BCBS Finalizes Revised General Guide to Account Opening

On February 4, the Basel Committee on Banking Supervision (“BCBS“) published a revised draft of its guidelines on “sound management of risks related to money laundering and financing of terrorism” which comprises the Guidelines issued in January 2014 and the addition of a new Annex IV – General Guide to Account Opening.

Annex IV is intended to focus on some of the mechanisms that banks can use in developing an effective consumer identification and verification programme and sets out the information that should be collected at the time of account opening. BCBS acknowledges that customer identification and verification policies and procedures will differ to reflect risks arising from the relevant categories of customers, products and services.

Annex IV is divided into two substantive sections: the first deals with what types of information should be collected and verified for natural persons seeking to open accounts; and the second describes what types of information should be collected and verified for legal persons and legal arrangements.  Guidelines.

EIOPA Publishes Consultation Paper on the Development of an EU Single Market for Person Pension Products

On February 1, the European Insurance and Occupational Pensions Authority (“EIOPA“) published a consultation paper on its advice on the development of an EU Single Market for personal pension products (“PPP“). This consultation is in response to EIOPA’s 2014 preliminary report “Towards an EU-Single Market for personal pensions” and EIOPA’s 2015 consultation paper on the creation of a standardised Pan-European Personal Pension product.

EIOPA is asking:

  1. Would PPPs benefit from harmonisation of provider governance standards?
  2. Would PPPs benefit from harmonisation of product governance rules?
  3. Would PPPs benefit from harmonisation of distribution rules?
  4. Would PPPs benefit from harmonisation in disclosure rules?
  5. Are respondents aware of any differences in prudential regimes that would lead to an unlevel playing field amongst PPP providers?
  6. Are further supervisory powers necessary?
  7. Do respondents agree with EIOPA’s assessment of the policy options’ impacts?

The Consultation Paper is open for responses until April 26 and such responses will be published on EIOPA’s public website.  Consultation Paper.

EBA to Assess the Potential Impact of IFRS 9 on EU Banks

In a press release dated 27 January 2016, the European Banking Authority (EBA) launched an impact assessment of IFRS 9 (dealing with financial Instruments) which is due to be implemented in the EU in 2018. The impact assessment is designed to assist the EBA to understand the likely impact of IFRS 9 on regulatory own funds, the interaction between IFRS 9 and other prudential requirements, and the way institutions are preparing for the application of IFRS 9. The assessment will be based on a sample of approximately 50 EU institutions. The EBA contemplates that the assessment process will need to be repeated in the run up to the implementation date for IFRS 9 as institutions are still developing their response to IFRS 9.

European Supervisory Authorities Request Response from European Commissioner to Inconsistencies in Cross-Selling Legislation

On 26 January 2016, the Chairpersons of the European Supervisory Authorities (ESAs) (i.e. EBA, EIOPA and ESMA) sent a letter to the European Commissioner for the Directorate General Financial Stability, Financial Services and Capital Markets Union.

The letter flags up that differences in primary legislation currently preclude the ESAs from developing consistent guidelines on cross selling across the investments, insurance and banking sectors in the EU and asks that the Commission look into the differences in financial services legislation and consider the steps required in order to guarantee that the ESAs are fully equipped to regulate these practices, to the benefit of consumers, financial institutions and supervisory authorities. The ESAs suggest that the Commission may have an opportunity to review these matters as part of its follow up to its September 2015 call for evidence on the EU framework for the regulation of financial services and its December 2015 green paper on retail financial services.

ESMA and South African and Mexican Authorities to Cooperate Under EMIR on CCPs

On 26 January 2016, ESMA announced that had entered into a memorandum of understanding (MoU) with each of the Mexican Comisión Nacional Bancaria y de Valores (CNBV) and the South African Financial Services Board (FSB) under the European Markets Infrastructure Regulation (EMIR).

EMIR provides for co-operation arrangements to be established by ESMA and non-EU authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission. The memoranda set out the terms on which the two authorities will cooperate and share information with ESMA regarding Central Counterparties (CCPs) which are authorised or recognized in Mexico or South Africa, and which have applied for EU recognition under EMIR. As well as establishing these arrangements, the MoUs provide ESMA with adequate tools to monitor the on-going compliance by the CCPs with the recognition conditions contained in EMIR. The MoU with FSB entered into force on 30 November 2015 and the MoU with the CNBV entered into force on 25 January 2016.  Press release. CNBV MoU. FSB MoU.

ESMA Opinion Highlights Differences with the European Commission on the Main Indices and Recognized Exchanges Under CRR

On 19 December 2014, the European Securities and Markets Authority (ESMA) submitted to the European Commission draft implementing technical standards (ITS), pursuant to the Capital Requirements Regulation 575/2013, specifying a list of main indices and recognized exchanges. On 17 December 2015, the European Commission informed ESMA of its intention to amend the draft ITS by including two additional equity indices (the Russell 3000 Index and the Hang Send Composite Index). In an opinion (ESMA/2016/163), published on 29 January 2016, ESMA made recommendations in response to this intention.

ESMA argues that the Russell 3000 Index and the Hang Send Composite Index should not be included in the ITS on the grounds that these indices do not contain relatively liquid instruments in an EEA economy, given that they are mainly composed of US and Asian Stocks. Instead, ESMA suggests adding four other additional indices (Russell 1000 Index, Shanghai Shenzhen CSI 300, the S&P BSE 100 Index and FTSE Nasdaq Dubai UAE 20 Index), and replacing the Nikkei 225 with the Nikkei 300 and the NZSE 10 with the S&P NZX 15 Index. ESMA’s opinion recognizes the value of incorporating a large number of indices as this will cast a wider net of eligible collateral that European banks can use.

Finally, given the frequency with which updates to ITS are needed, ESMA suggests that the Commission reviews the regime to avoid each modification requiring a full legislative cycle.

EBA Consults on Draft Guidelines on Implicit Support for Securitization Transactions

On January 20, the EBA published a consultation paper (EBA/CP/2016/01) on draft guidelines on implicit support for securitization transactions under Article 248(2) of the Capital Requirements Regulation (Regulation 575/2013) (“CRR”).

Examples of implicit support include the purchase of deteriorating credit risk exposures from the underlying pool, improving the quality of credit enhancements, the sale of discounted credit risk exposures into the pool of securitised credit risk exposures, the purchase of underlying exposures at above market price, ad hoc credit enhancements or an increase in the first loss position according to the deterioration of the underlying exposures. The provision of implicit support undermines the achievement of significant risk transfer, hence, under Article 248 of the CRR, there are restrictions on providing implicit support to securitisations. The draft guidelines recognise the fact that implicit support should not cover support that institutions are contractually obliged to provide. Such explicit support is assessed under guidelines EBA/GL/2014/05 on significant risk transfer.

Originator institutions and sponsor institutions which have failed to comply with the relevant requirements shall, at a minimum, must hold own funds against all of the securitised exposures as if they had not been securitised. Article 248(2) of the CRR sets out a mandate for the EBA to issue guidelines on what constitutes arm’s length conditions and when a transaction is not structured to provide support. A transaction is not considered to provide support if it is executed at arm’s length conditions and is taken into account in the assessment of significant risk transfer.

The draft guidelines include (i) the conditions to be satisfied in order to determine that a relevant transaction is not structured to provide support, depending on whether the relevant transaction is entered into by a sponsor institution or by an originator institution, (ii) an objective test for assessing whether a relevant transaction is entered into at arm’s length terms, (iii) clarifications regarding the notification requirements for relevant transactions and (iv) further guidance on how the conditions for assessing whether a transaction is structured to provide support, including the factors set out in points (a)-(e) of Article 248(1) CRR, should be assessed.

To ensure that the test is applied correctly, the assessment is to be made with due regard to the information available to each of the parties at the time when the transaction is entered into, and not to such information that is available at a later date.

The EBA will hold a public hearing on the draft guidelines on February 18, 2016.

European Commission Letter to ESMA on Application of AIFMD Passport

On January 19, ESMA published a letter it has received from the European Commission relating to the application of the EU passport under the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) to non-EU alternative investment fund managers (“AIFMs”) and alternative investment funds (“AIFs”).

The Commission stated that with regard to the advice on granting the AIFMD passport to managers and funds established in third countries, it agrees that the country-by-country approach adopted by ESMA is correct. It noted that the nature of the test set out in Article 67 of the AIFMD may result in different outcomes depending on the regulatory and supervisory framework of the third countries in which non-EU AIFMs and funds are established.

The Commission stated that it will take a decision [as to whether the AIFM Directive passporting regime should be extended to the management and marketing of AIFs by non-EU AIFMs, and to the marketing of non-EU AIFs by EU AIFMs] when a sufficient number of countries have been appropriately assessed.

The Commission invites ESMA to:

  • Complete, by June 30, 2016, the assessment of the USA, Hong Kong, Singapore, Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia.
  • Provide a more detailed assessment of the capacity of supervisory authorities and their track record in ensuring effective enforcements, including in those countries looked at in the first wave of countries.
  • Provide a preliminary assessment of the expected inflow of funds by type and size into the EU from relevant third countries.

The letter concludes with the Commission agreeing with ESMA’s suggestion that it produces another opinion on the functioning of the passport and national private placement regimes once the AIFMD is fully transposed in all member states and there is more experience on the functioning of the framework. (An accompanying press release explains that ESMA suggested it produce another opinion because the delay in implementing the AIFMD, together with the delay in its transposition in some member states, made it difficult for ESMA to provide a definitive assessment by July 2015, the initial legislative deadline).

FCA Issues Consultation Paper on Proposed Changes to the Senior Managers and Certification Regime

The FCA has launched a consultation paper setting out a number of technical rule changes to the Senior Managers and Certification Regime (SM&CR). The changes are being made as a result of HM Treasury’s announcement in October 2015 that it would be amending the current SM&CR legislation as it applies to the banking sector. This included the repeal of section 64B(5) of the Financial Services and Markets Act 2000 (FSMA), which required firms to report to the FCA known and suspected breaches of the FCA Rules of Conduct, before the SM&CR regime enters into force on 7 March 2016.

The FCA proposes to remove references to notifications of known and suspected rule breaches in the associated forms, thereby streamlining reporting requirements so that the forms only require firms to inform the FCA of disciplinary action taken against staff as a result of a breach of one or more Rules of Conduct. The pre-existing obligation to report material breaches will, however, remain in place.

The Consultation Paper sets out how the FCA intends to implement the consequential changes to rules and forms that will be required prior to commencement of the regime, as well as examining the likely impact the changes will have on the industry and on consumers.