Posts by: Heidi Wardle

BCBS Publishes Progress Report on Implementation of Basel Regulatory Framework

 

On May 7, the Basel Committee on Banking Supervision (BCBS) published its sixteenth progress report on BCBS members’ implementation of Basel III. The report can be found here.

The report, which looks at implementation as of the end of March 2019, focuses on the status of adoption of the Basel III standards to ensure they are transformed into national law or regulation in accordance with agreed timeframes. The Basel III standards reviewed include: risk-based capital standards, the leverage ratio, the standards for global and domestic systemically important banks and interest rate risk in the banking book, the net stable funding ratio (NSFR), the large exposures framework and the disclosure requirements.

The report states that since BCBS’s previous report, published in October 2018, member jurisdictions have made progress in implementing standards for which deadlines have already passed, including those relating to the revised securitization framework. However, progress has been limited in the implementation of other standards which have yet to be finalized and put into effect in a number of jurisdictions, including the NSFR, which took effect on January 1, 2018, but only 11 jurisdictions have final rules in place.

FSB Publishes Report on Third Thematic Review of Resolution Regimes

 

As part of a review launched in June 2018, the Financial Stability Board (FSB) published a report (which can be found here) on its third thematic peer review of resolution regimes. The findings of the first and second peer reviews of resolution regimes were published in April 2013 and March 2016 respectively. The reviews are designed to support the timely and consistent implementation by FSB jurisdictions of the FSB’s key attributes of effective resolution regimes for financial institutions.

Bank resolution planning frameworks have been adopted in most FSB jurisdictions, with planning most advanced for global systemically important banks in jurisdictions that are home to them. The report recommends further work to be done to ensure that bank resolution plans can be put fully into effect:

  • FSB jurisdictions take further steps to adopt and operationalize their resolution planning framework, including: adopt resolution planning frameworks, adopt resolvability assessment frameworks and provide powers to require banks to take measures to improve resolvability and participate in cross-border coordinating arrangements. By June 2020, jurisdictions identified as not having a resolution planning framework will need to report to the FSB.
  • FSB undertake work to support member authorities’ resolution planning for banks other than G-SIBs that could be systemic in failure.
  • FSB work with relevant authorities and other bodies, to promote the sharing of bank resolution planning experiences and practices in enhancing cooperation and information-sharing arrangements.

EBA Publishes Consultation Paper on RTS on Standardized Approach for Counterparty Credit Risk

 

On May 2, the European Banking Authority (EBA) published a consultation paper on four draft regulatory technical standards (RTS) on the standardized approach for counterparty credit risk under Article 277(5) and Article 279a(3) of the proposed Regulation mending the Capital Requirements Regulation (575/2013) (CRR II). These proposals build on the proposals included in the discussion paper published in December 2017 (which can be found here) and include specifying methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.

A three-pronged approach is proposed for the assignment of a derivative transaction to a risk category:

  • Qualitative approach identifies derivative transactions that clearly have only one material risk driver.
  • Qualitative and quantitative approach requires a more detailed assessment of, and is applicable to, derivative transactions for which the mapping cannot immediately be done on the basis of the first approach.
  • Third approach identifyies all possible risk drivers of a transaction as material and allocating the transaction to all relevant risk-categories.

Comments can be made on the consultation paper until August 2. There will be a public hearing on June 17. The RTS are subject to change, as they are based on the proposed legislative text for CRR II and so will change to the extent the draft legislative text changes.

EIOPA Publishes Report on Thematic Review on Big Data Analytics

 

On May 8, the European Insurance and Occupational Pensions Authority (EIOPA) published a report setting out the findings of its EU-wide thematic review on the use of Big Data Analytics (BDA) in motor and health insurance. The aim of the review was to gather empirical evidence on the benefits and risks arising from BDA, including artificial intelligence, machine learning and cloud computing services.

The report found that there was a strong tendency towards increasingly data-driven business models throughout the insurance value train and that a majority of firms were either using, or contemplating using, BDA tools.

The report notes that there are still risks to be addressed, including ethical issues around the fairness of the use of BDA, as well as regarding the accuracy, transparency and auditability of BDA tools. It highlighted the biases inherent in data that being used could be reinforced through machine learning algorithms if firms do not have adequate governance arrangements in place. The EIOPA is going to undertake further work throughout 2019 in relation to these identified risks.

The report also sets out details of future BDA initiatives, including: the supervision of artificial intelligence and machine learning, ethics and fairness, outsourcing of cloud computing services by insurers and cyber insurance and cyber security.

European Parliament Adopts First Reading Position on Proposed Regulation and Directive on European Crowdfunding Service Providers

 

On the March 27, the European Parliament issued a press release announcing that it has adopted its position at first reading on the proposed Regulation on European crowdfunding service providers (2018/0048 (COD)). The Parliament’s first reading position sets out its amendments to the European Commission’s legislative proposals, in this case MEPs extended the scope of the regulation by increasing the maximum threshold for each crowdfunding offer to €8,000,000 (from €1,000,000 as proposed by the European Commission) calculated over a period of 12 months.

The proposal aims to help crowdfunding services to function smoothly in the internal market and to foster cross-border business funding in the EU. It also intends to better protect investors, including by ensuring that crowdfunding service providers give clients clear information about financial risks and charges related to their investment and that investors are provided with a key investment information sheet drawn up by the project owner for each crowdfunding offer. The initiative forms part of the European Commission’s FinTech action plan. First Reading Position.

ESMA Fines Fitch CRAs for Breaching Conflict of Interest Requirements

 

On March 28, ESMA fined three credit rating agencies, all belonging to the Fitch Group, a total of €5,132,500, in relation to breaching the conflict of interest requirements under the CRA Regulation (1060/2009) (CRAR). They were fined because, between June 2013 and April 2018, 20% of three Fitch subsidiaries were indirectly owned by an individual through a French entity. However, that same individual was also sitting on the boards of three entities rated by the Fitch subsidiaries.

Each of the three subsidiaries voluntarily undertook measures to ensure similar infringements would not be committed again, and this was considered by ESMA, along with other mitigating and aggravating factors, when the fines were determined. The subsidiaries can appeal the decision but this will not have a suspensive effect.

The public notice issued in relation to the fines can be found here.

ECJ Rules on Powers of National Courts to Modify or Replace Unfair Terms in Consumer Contracts

 

In two joined cases, Abanca Corporación Bancaria SA v García Salamanca Santos (Case C-70/17) and Bankia SA v Lau Mendoza and Rodríguez Ramírez (Case C-179/17) EU:2019:250, the European Court of Justice (ECJ) considered the power of national courts to substitute national law provisions to save a loan where deleting unfair terms would prejudice the consumer. Under Article 6(1) of the Unfair Contract Terms Directive (93/13/EEC) member states must ensure that unfair terms in consumer contracts are not binding on consumers, but that the contract will survive if it can do so without the unfair terms. The ECJ ruled that a court can substitute national law for an unfair term where deleting it would end the contract with negative consequences for the consumer.

Specifically, the ECJ confirmed that:

  • As per its decision in Banco Español de Crédito, C618/10, EU:C:2012:349, a national court cannot simply revise an unfair term to make it fair. If this were the case suppliers would continue to use unfair terms, safe in the knowledge that the court would merely amend them to make them fair; Article 6(1) would not have its intended dissuasive effect.
  • As per Kásler and Káslerné Rábai, C26/13, EU:C:2014:282, Article 6(1) does not preclude a national court from removing an unfair term and replacing it with a provision of national law if simply removing the unfair term would require the court to annul the contract in its entirety and this would penalise the consumer.

This is not new law, but highlights the ECJ’s interpretation of Article 6(1).

ESMA Publishes Guidelines on Risk Factors Under Prospectus Regulation

 

On March 29, the European Sescurities and Markets Authority (ESMA) published a report setting out final guidelines on how national competent authorities (NCAs) should review risk factors as required by the new Prospectus Regulation. The aim of the guidelines is to encourage more appropriate, focussed and streamlined risk factor disclosures for securities and are intended to assist NCAs in their review of disclosure. ESMA noted that in 2019 it will focus on the consistency of application of the guidelines on risk factors by NCAs.

The purpose of including risk factors in a prospectus is to help investors make informed investment decisions by enabling them to assess the risks. Risk factors generally include information concerning: the issuer’s financial situation, business activities and industry; the nature of the security; external risks such as legal and regulatory, environmental, social and governance.

A copy of the report can be found here.

European Commission Adopts New Delegated Regulation Identifying High-Risk Third Countries under MLD4

 

On February 13, the European Commission adopted a Delegated Regulation (C(2019) 1326 final) which supplements the Fourth Money Laundering Directive ((EU) 2015/849) (“MLD4“) by identifying 23 high-risk third countries with strategic deficiencies. The Delegated Regulation will repeal Delegated Regulation (EU) 2016/1675 which currently lists 16 countries as high-risk. READ MORE

Council of EU Agrees Position on Proposed PEPP Regulation

 

On February 13, the Council of the EU published a press release which announced that its Permanent Representative Committee (COREPER) had agreed its position relating to the proposed Regulation on a pan-European personal pension product (“PEPP“). The text, now agreed between the European Commission, the European Parliament and the Council, will undergo legal and linguistic review, before the Parliament and Council will be called to adopt the final text.

In a press release, the Commission welcomed the agreement.