Posts by: Stephen Wallace

BCBS Publishes its Work Program for 2018 and 2019

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On June 5, 2018, the Basel Committee on Banking Supervision (“BCBS“) published details of its work program for 2018 and 2019. Details of the work program can be found here.

There are four key themes surrounding the work program. These are:

  • Policy Development – the BCBS intends to finalize its revisions to the revised market risk framework “shortly” so that there is sufficient time for the framework to be implemented by January 1, 2022. The BCBS will continue to review potential longer-term revisions to the regulatory treatment of accounting provisions.
  • Implementation – the BCBS is continuing to monitor the implementation of its post financial crisis reforms. It expects to publish its next report on the adoption of Basel III standards by its members in October 2018.
  • Supervision – the BCBS intends to finalize a set of principles on stress-testing practices in 2018.
  • Monitoring and evaluation – the BCBS intends to devote more time to evaluating and assessing the impact of its reforms and assessing emerging risks. In particular, crypto-assets and risks in the FinTech industry will be themes it will be focusing on.

Draft Report Published by ECON-AFCO on Decision to Increase Regulatory Power for ECB Over Clearing Systems

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The European Parliament’s Economic and Monetary Affairs Committee (“ECON“) and Committee on Constitutional Affairs (“AFCO“) have published a joint draft report on a decision to amend article 22 of the Statute of the European System of Central Banks and of the European Central Bank (“ECB“).

The decision relates to an ECB recommendation for a decision made in June 2017, where it sought a greater role in the regulation of clearing systems for financial instruments, including central counterparties (“CCPs“) by amending article 22 of the statute. This amendment would allow the Eurosystem (i.e. the ECB and the national central banks of Eurozone nations) to assess risks posed by CCPs clearing significant amounts of transactions made in Euros and also to enable the ECB to adopt additional requirements for those CCPs.

Two reporters, Gabriel Mato and Danuta Maria Hübner welcomed the ECB’s proposal. In particular, they highlighted:

  • As the ECB’s new powers will interact with those of other EU institutions, nations will be more inclined to respect the laws of other EU institutions by the acts adopted by the ECB under the amended article 22 of the statute.
  • The recitals of the amending decision should contain regulatory powers that can be used over CCPs by the ECB under article 22 of the statute, including allowing monetary concerns to be addressed.

ECON Drafts a Report on Proposed IFR

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The Economic and Monetary Affairs Committee (“ECON“) drafted a report dated April 11, 2018 on the proposal for a regulation on the supervision on investment firms. A link to the report is here.

In December 2017, the European Commission published proposals for the Investment Firms Regulation (“IFR“) and for a directive on the prudential requirements of investments firms, known as the Investment Firms Directive (“IFD“).

Draft Text of European Parliament Legislative Decision on the MLD5

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The European Parliament published the provisional edition of the Fifth Money Laundering Directive (“MLD5“) on April 19, 2018 which it decided to adopt in full on the same day.

The Parliament has asked the European Commission to inform it if it replaces or substantially amends the proposal. It has also instructed the President to inform its position to the Council of the EU, the Commission and National Parliaments.

The next step is for the Council to formally adopt the proposed MLD5. When this happens it will enter into force 20 days after being published in the Office Journal of the EU (“OJ“). The draft text currently sets out that member states must enshrine the provisions of MLD5 into their national law 10 months after the date on which it enters into force.

EBA Reports on Basel III Monitoring Exercise as of June 30, 2017

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The European Banking Authority (“EBA“) published a report, available here, summarizing the results of the latest EU Basel III monitoring exercise, using data as of June 30, 2017. The report was accompanied by a press release.

The report contains analysis relating to matters such as:

  • Capital ratios
  • Capital shortfalls
  • Impact of phase-in arrangements
  • Composition of capital and risk-weighted assets (“RWAs“)
  • Composition of the leverage ratio exposure measure
  • Liquidity coverage ratio (“LCR“)
  • Net stable funding ratio (“NSFR“)

The report highlights an improved capital position for EU banks, with a total average common equity tier 1 (“CET1“) ratio of 13.8%, an improvement from the 13.4% ratio as on December 31, 2016. Average LCR was 143.1% as of December 31, 2016, as opposed to 139.5% as of December 2016, and the overall average NSFR ratio was 112.3%, up from 112.0% as of December 2016.

The impact of Basel III is monitored semi-annually by the Basel Committee on Banking Supervision (“BCBS“) at a global level and by the EBA at EU level.

EC Publishes Communication on FinTech Action Plan

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On March 8, 2018, the European Commission (“EC“) published a communication (COM(2018) 109 final) setting out its FinTech action plan, which includes measures to create a more competitive and innovative European financial sector. A set of FAQs and a factsheet have been published alongside the action plan.

The Commission decided that there was no need at this stage for sweeping legislative or regulatory changes at EU level but it is aware that no intervention at all may threaten the prosperity of EU financial services providers.

The FinTech action plan initiatives are set out in a workplan, available here, annexed to the communication, many of which invite the European Supervisory Authorities (“ESAs“) to carry out specific work. They include:

  • Blockchain and distributed ledger technology (“DLT“)
  • Cyber resilience
  • Crowdfunding
  • Outsourcing to the cloud
  • Regulatory framework
  • Regulatory soundboxes

EC Publishes Communication on Funding Sustainable Growth Action Plan

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The European Commission (“EC“) published a communication on its action plan for financing sustainable growth, available here. FAQs were also published alongside the communication, available here.

Sustainable finance generally refers to the process of taking due account of environmental and social considerations in investment decision-making, leading to more investments in longer-term and sustainable activities.

The action plan aims to shift capital flows towards sustainable investment to achieve sustainable and inclusive growth. This addresses the fact that currently there is insufficient investment to support an environmentally and socially sustainable economic system. It will also manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues, and encourage transparency and long-term thinking in financial and economic activity. In particular, actions relating to matters including the following are identified in the plan:

  • Establish an EU classification system for sustainable activities
  • Create standards and labels for green financial products
  • Incorporate sustainability when providing financial advice
  • Develop sustainability benchmarks
  • Foster better integration of sustainability in ratings and market research
  • Clarify institutional investors’ and asset managers’ duties
  • Incorporate sustainability in prudential requirements

The Commission will report on the implementation of the action plan in 2019. An accompanying press release states that the Commission is organizing a conference to discuss the action plan on March 22, 2018.

New Solutions in the CDD Process Published by the Joint Committee of ESAs

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The Joint Committee of the European Supervisory Authorities (“ESAs“) published an opinion on January 23, 2018 about the use of innovative solutions in customer due diligence (“CDD“) for financial institutions. A copy of the opinion is here.

Currently the Fourth Money Laundering Directive ((EU) 2015/849) imposes requirements on firms to carry out extensive CDD to identify customers, assess the purpose of their business and monitor the business relationship on an ongoing basis.

The ESAs explored solutions such as performing identity checks through smartphones that were previously done by looking at physical documents, such as passports. Additionally, the ESAs proposed using central identity documentation repositories (sometimes referred to as know your customer (“KYC“) repositories).

The ESAs were cautious of using this approach in all cases and said it should be used with reference to the specific firm’s money laundering and terrorist finance risk profile.

AFME Publishes Paper on Brexit Cliff-Edge Risks in Wholesale Financial Services

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On January 22, 2018, the Association for Financial Markets in Europe (“AFME“) published a paper on cliff-edge risks in wholesale financial services resulting from Brexit. It defined a ‘cliff edge risk’ as one that is likely to cause severe disruption to markets and commercial activity on the day of Brexit if no regulations or legislation are in place.

The focus of AFME was on areas which are not easily resolved by businesses and therefore need intervention at policy level. It believes that the Withdrawal Agreement between the UK and EU is the best way to address the following risks:

  • Personal data transfers across multiple countries;
  • Continuity of cross-border contracts;
  • Ability to choose jurisdiction and enforcement of judgements;
  • UK Central Counterparties (CCPs) should be recognized under EMIR (Regulation 648/2012) and be allowed to continue servicing EU banks; and
  • Recognition of resolution actions.

FCA Publishes Paper on SME Access to the FOS

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The Financial Conduct Authority (“FCA“) is considering allowing Small and Medium Sized Enterprises (“SMEs“) access to Financial Ombudsman Service (“FOS“). On January 22, 2018, the FCA published a consultation paper, available here, exploring this option.

After speaking with SMEs, the FCA found that SMEs struggle to resolve disputes with financial firms through the courts and have no other means to seek redress.

The paper considers what size of SME should be allowed to use FOS, an “eligible complainant.” This term will be defined as a business that: is too large to be a micro-enterprise, has an annual turnover below £6.5 million, has a balance sheet not exceeding £5 million and has less than 50 employees. The FCA is also considering allowing charities and trusts of a similar size to be eligible complainants.

The FCA is also proposing that guarantors be eligible complainants. This will allow entities who provide security or guarantees to SMEs to be able to lodge a complaint with FOS.