European supervisory authorities

Joint Committee of ESAs Report on Risks and Vulnerabilities in EU Financial System

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The Joint Committee of the European Supervisory Authorities (“ESAs“) (that is, the EBA, EIOPA and ESMA) published its spring 2018 report (JC 2018 07) on risks and vulnerabilities in the EU financial system on April 12, 2018.

The Joint Committee identifies the following as the main risks to the EU financial system:

  • Brexit. Uncertainties around the terms of the UK’s withdrawal from the EU could expose the EU27 and the UK to economic and financial instability and weaken market confidence, particularly if negotiations end in a disorderly way. The lack of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and the continuity of financial contracts, and create operational challenges.
  • Cyber risks. These risks threaten data integrity and business continuity and are particularly dangerous because of possible multiplier effects leading to further business risks such as supply chain risk and reputational risk. Similarly, risks related to virtual currencies and crypto-assets have recently materialised.

The Joint Committee published a report in March 2017 noting that the growing use of big data could increase the risk of harm from cyber attacks.

  • Asset repricing. The risks related to valuations and repricing of risk premiums could reduce profitability and asset quality across sectors. Asset quality in the banking sector has recently improved and volumes of non-performing loans (“NPLs“) disposals are increasing. However, the amount of NPLs on banks’ balance sheets remains high, which needs to be addressed by banks and supervisors.

The Joint Committee’s spring 2017 report on risks and vulnerabilities in the EU financial system warned that the banking sector was being affected by high levels of NPLs.

  • Climate change and the transition to a lower carbon economy. This raises concerns about the sustainability of investments across large parts of the financial sector. Climate change can affect asset quality through different transmission channels, which could in turn affect the solvency position of financial institutions.

In the light of the risks identified, the Joint Committee recommends a series of policy actions by the ESAs, national competent authorities and financial institutions. These recommended actions are set out in the report.

The Joint Committee previously reported on risks and vulnerabilities in the EU financial system in September 2017.

ECB Publishes Opinion on Proposed Regulation Amending EBA Regulation

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The European Central Bank (“ECB“) published an opinion (CON/2018/19) (dated April 11, 2018) on a proposed Regulation amending (among other things) the EBA Regulation (Regulation 1093/2010) on April 12, 2018.

The proposed Regulation forms part of the European Commission’s legislative proposals for reforms to the European System of Financial Supervision (“ESFS“), which were published in September 2017. In November 2017, the Council of the EU requested an opinion from the ECB on the proposed Regulation.

In the opinion, the ECB welcomes the proposed Regulation’s objective of fostering effective and consistent prudential supervision and regulation across the EU. It supports further integration of the supervisory framework at EU level for the banking sector and strengthening supervision by re-examining the current set-up of the European supervisory authorities (“ESAs“) (that is, ESMA, EIOPA and the EBA).

The opinion sets out the ECB’s general observation that the banking union and the capital markets union (“CMU“) are at different stages of progress. The review of the ESAs should not necessarily produce three identical outcomes for the three ESAs, but should address their respective mandates and functions.

The ECB considers that certain of the proposed amendments to the EBA Regulation do not adequately distinguish between the scope of the ECB’s microprudential supervisory tasks and the EBA’s competence to set regulatory standards to promote supervisory convergence. It states the importance of avoiding duplication or inappropriate allocation of tasks, as this could blur the responsibilities of the two authorities and render the system less effective overall.

The ECB also makes some specific observations in the opinion concerning the revised EBA governance framework, strategic supervisory plans, stress testing and independent reviews of national competent or supervisory authorities.

A technical working document accompanied by an explanatory text is appended to the opinion, setting out the ECB’s proposed amendments to the text of the proposed Regulation.

The ECB has decided to adopt separate opinions on the Commission’s legislative proposals for reforms to the ESFS, so it advises that the opinion should be read in conjunction with an opinion it published in March 2018 on a proposed Regulation amending the European Systemic Risk Board (ESRB) Regulation (Regulation 1092/2010).

Joint Committee of ESAs Final Report on Use of Big Data by Financial Institutions

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On March 15, 2018, the Joint Committee of the European Supervisory Authorities (“ESA“) published its final report, together with a factsheet, on the use of big data by financial institutions (JC/2018/04). The report is available here and the factsheet here.

Chapter 4 of the report contains a feedback statement summarizing the responses received. Among other things, respondents expressed concerns about practices that do not guarantee the accuracy of the data collected and the potential consequences of the increasing level of segmentation of customers enabled by big data. They also warned that consumers may not be fully aware of big data tools being used and that the growing use of big data could increase the risk of harm from cyberattacks.

The ESAs consider that the requirements in sectoral financial legislation and in legislation relating to data protection, cybersecurity and consumer protection mitigate the risks identified by the ESAs. This framework will be further strengthened with the entry into application of several key pieces of legislation in the financial sector and the General Data Protection Regulation ((EU) 2016/679) (“GDPR“). The ESAs intend to monitor the extent to which these requirements contribute to mitigate big data risks.

The ESAs invite financial institutions to develop and implement good practices on the use of big data to promote a fair, transparent and nondiscriminatory treatment of consumers and to ensure that big data strategies are designed in a responsible way and are fully aligned with the interests of consumers. The ESAs suggest an indicative list of arrangements and behaviors concerning:

  • Robust big data processes and algorithms relating to the monitoring of the functioning of big data procedures and methodologies.
  • Consumer protection. Among other things, the ESAs suggest firms should periodically assess whether big data-based products and services are aligned with consumers’ interests.
  • Disclosures on the use of big data, relating to firms’ transparency toward customers concerning the use of big data technologies to process their data.

European Commission Adopts Delegated Regulation on RTS on Risk Mitigation Techniques for Uncleared OTC Derivative Contracts under EMIR

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On October 4, 2016, the European Commission adopted a Delegated Regulation supplementing EMIR (the Regulation on OTC derivatives, CCPs and trade repositories) (Regulation 648/2012) with regulatory technical standards (“RTS”) on risk mitigation techniques for uncleared OTC derivative contracts, together with related Annexes (C(2016) 6329 final).

The Delegate Regulation sets out the levels and types of collateral that OTC derivatives counterparties must exchange bilaterally if the transaction is not cleared through a central counterparty (“CCP”). In the event that one counterparty to the transaction defaults, the margin collected will protect the non-defaulting counterparty against resulting losses.

The Joint Committee of the European Supervisory Authorities (ESAs) submitted the final draft RTS to the Commission in March 2016. In July 2016, the Commission informed the European Banking Authority that it intended to endorse the draft RTS with some amendments, including in relation to the concentration limits for pension scheme arrangements and the timeline for.

The Council of the EU and the European Parliament will now consider the Delegated Regulation. If neither of them objects to it, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.

European Commission Intends to Endorse, with Amendments, Draft RTS on Risk Mitigation Techniques for Uncleared OTC Derivative Contacts under EMIR

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On July 28, 2016, The European Commission published a letter to the Joint Committee of the European Supervisory Authorities (ESAs) informing them that it intends to endorse, with amendments, the draft regulatory technical standards (RTS) on risk mitigation techniques for OTC derivative contracts not cleared by a central counterparty (CCP) under Article 11(15) of EMIR. The Commission also published the revised text of the draft RTS, together with the accompanying annexes.

The letter highlights that the Commission intends to make several clarifications and to restructure the legal text of the draft RTS. The changes include:

  • introducing a recital containing reasoning for the delayed phase-in of the requirements for equity options;
  • clarification that EU counterparties wishing to rely on the intragroup exemption may submit their application after the RTS enter into force;
  • clarification that cash initial margin may be held with equivalent third country institutions (as well as with authorized EU credit institutions);
  • clarification that requirements relating to foreign exchange (FX) contracts should start to apply from the date of application of the relevant Delegated Act under the MiFID II framework, as opposed to the date of entry of this Delegated Regulation; and
  • changes to one provision relating to concentration limits for pension scheme arrangements.

The ESAs now have six weeks to amend the draft RTS and resubmit them to the Commission in the form of a formal opinion.

ESA Issues ESMA and EBA Consultation for Securities and Banking Complaints Handling

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On November 6, the Joint Committee of the European Supervisory Authorities (ESAs) issued a consultation paper by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) concerning draft guidance for the handling of complaints in the securities and banking industries. This guidance aims to:

  • clarify expectations on firms’ procedures for complaints handling;
  • give guidance on the provision of information to complainants and the procedures for answering complaints;
  • harmonize the complaint handling arrangements of firms in order to help protect consumers; and
  • set a minimum level of supervision for firms’ complaint handling arrangements on an EU-wide basis.

The guidance applies to investment firms, UCITS management companies and UCITS investment companies that have not designated a management company, AIFMs providing MiFID services, credit institutions and e-money institutions.

The deadline for responses to the consultation is February 7, 2014, with the final report scheduled to be published in the first quarter of 2014.  Consultation Paper.

EU Commission to Publish Proposals for a European Bank Recovery and Resolution Framework on 6 June 2012

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The European Commission has published an agenda which, inter alia, states that it will present its legislative initiative for a new European framework for bank recovery and resolution on 6 June 2012. Agenda.

According to the agenda, key elements of the proposal are:

– The framework will primarily be based on preventing and reducing the risk of failure. The powers of the European supervisory authorities (ESAs) will be expanded so that they can intervene at an early stage before problems in a bank become critical and its financial situation deteriorates irreparably.

– The proposal will ensure that national authorities and the European Banking Authority (EBA) have the appropriate co-ordination tools to ensure coherent procedures. This is particularly important in the context of cross-border banking groups.

– The framework will provide for credible resolution tools when a bank is no longer viable and allowing it to go bankrupt would be disruptive for essential financial services and overall stability. These tools will include bail-in measures (the power to convert or write down the debt of failing banks).

– To be effective, sufficient funds should be available to finance resolution, for example to issue guarantees or provide short term loans to help a newly set up bridge bank to operate. Such funds would only serve to ensure the continuity of critical functions and not to bail out troubled institutions.

New Structure for European Financial Supervision

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On September 22, the European Parliament approved a new structure for financial supervision. Three European Supervisory Authorities are established with broader powers than the current supervisory committees they replace, including the power to settle disputes among national financial supervisors and to impose temporary bans on risky financial products and activities. A European Systemic Risk Board is also established to monitor and warn about the general build-up of risk in the EU economy. Press Release.