Written by Regulatory Watch #02 | December 2021
Welcome to our monthly Regulatory Watch.
It covers the key regulatory developments of the month that impact Investment Management and Banking industries, globally, in the EU and the UK.
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Executive Summary
The past month has seen a number of significant regulatory developments.
A further delay for the application of Level 2 SFDR and EU Taxonomy requirements
In a Letter dated 25 November 2021, the European Commission (EC) confirmed that the single delegated act which will include the RTS supplementing SFDR, as well as the RTS supplementing disclosures for Article 8 and 9 SFDR products (under Articles 5 and 6 of the EU Taxonomy Regulation), will be delayed
by a further six months to 1 January 2023. This follows the EC previous postponement to SFDR Level 2 RTS from 1 January 2022 to 1 July 2022 and announcement that all 13 RTS’ will instead be compiled into a single delegated act, in their letter dated 8 July 2021.
EU financial institutions are paving the way to embedding sustainability risk into their Business
Strategy, Governance and Risk Management Frameworks…but there is still a long way to go to
fully align their practices with supervisory expectations
The European Central Bank (ECB) assessed the state of climate-related and environmental (C&E) risk management in the banking sector based on the results of a self-assessment performed by 112 significant institutions on their current practices. The report shows that none of the institutions are close to fully aligning their practices with the supervisory expectations.
The ECB recognises that the challenges linked to the integration of C&E risks into strategies, governance and risk management arrangements are constantly evolving. Half of the institutions expect C&E risks to have a material impact in the coming three to five years as they view credit risk, operational risk and business model risk as being most sensitive to C&E risk drivers.
In most cases, institutions have not developed the relevant risk reports for their management bodies to enable them to exercise this responsibility comprehensively. Few institutions have made any effort at all to take stock of the type of data they would need to identify and report internally on C&E risks.
Similarly, more than half of institutions have described C&E risks in their risk inventory, but less than one-fifth have included dedicated key risk indicators on C&E risks in their risk appetite statement. Over half of institutions have no concrete actions planned to embed C&E risks in their business strategy.
The ECB is aware that data and methodological gaps may make it difficult to fully implement the supervisory expectations in some cases however the ECB expects institutions to adopt a strategic approach and to take intermediate steps as appropriate.
Last weeks before LIBOR cessation
According to the FSB, significant progress has been made in transitioning to Risk-Free Rates (RFRs), but market participants still need to finalise preparations to
cease new use of LIBOR by end-2021. Synthetic LIBOR will not be published indefinitely and is a temporary bridging solution only. It is being made available to support those legacy LIBOR linked contracts that mature beyond end-2021, it should not be directly or indirectly referenced in any new contracts. The FSB reminds that active transition of legacy contracts remains the best way for market participants to have control and certainty over their existing agreements.
The UK government set future regulatory ‘perimeter’
The government launched a consultation on the Future Regulatory Framework (FRF) Review. The UK’s withdrawal from the EU means that it needs
to decide how important policy and regulatory functions carried out at the EU level will be exercised in a standalone UK regime. The FRF Review is an opportunity to adapt the UK’s regulatory approach to meet the specific needs of the UK. With this Reform, the government intends to move to a comprehensive FSMA model of financial services regulation, with the appropriate enhancements to ensure that the regime remains fit for the future and can support the UK’s high standards of regulation. This means that the financial services regulators will take responsibility for setting many of the direct regulatory requirements which are currently set out in retained EU law. The consultation sets out proposals, including by, amongst others:
• Providing for a greater focus on growth and international competitiveness through the introduction of new secondary objectives for the PRA and the FCA.
• Embedding climate change into the regulatory principles and demonstrate the government’s long-term commitment to achieve a net zero economy by 2050
• Introducing a new statutory requirement for the PRC and the FCA to respond to HM Treasury recommendations, bringing them into line with the FPC
• Introducing a new power for HM Treasury to be able to require the regulators to review their rules where the government considers that it is in the public interest
• Introducing new accountability mechanisms requiring the regulators to consider the impact of exercising their powers to make rules and set general approaches on supervision, and to assess compliance with relevant trade agreements with overseas jurisdictions.
Many of the necessary changes will be delivered through an extensive programme of secondary legislation, which is likely to take several years.
These regulatory developments are covered in more detail in this month’s edition, alongside other significant updates and are organised by geography: International, European and the UK, main topic: Prudential Regulation, Sustainable Finance, Market developments…
Neofin Advisory 