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Regulatory Watch #03 | January & February 2022

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Regulatory Watch #03 | January & February 2022

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.

Please download the Regulatory Watch by clicking on the green button below.


Download Regulatory Watch

Executive Summary

The past two months have seen a number of significant regulatory developments. 

A first set of EU taxonomy criteria going live while the fate of natural gas and nuclear remains uncertain

With the Commission Climate Delegated Act (DA) published in the Official Journal of the EU on 10 December 2021, the first two climate objectives became effective on 1 January 2022. The Platform on Sustainable Finance (PSF) is expected to submit its final recommendations to the Commission on the Technical Screening Criteria (TSC) for the other four environmental objectives in the Taxonomy (water, circular economy, pollution prevention & control, and biodiversity & ecosystems) in Q1 2022.

As of today, the DA does not include TSC for natural gas and nuclear energy. The Taxonomy Regulation reflects a delicate compromise on whether or not to include them in the EU Taxonomy and their inclusion has been subject to technical assessment.

On 31 December 2021, the European Commission began consultations on a draft text of a Taxonomy (complementary) Delegated Act including certain gas and nuclear activities. Taking account of scientific advice and transition challenges across Member States, the Commission considers there is a role for natural gas and nuclear to facilitate the transition towards a predominantly renewable-based future. Within the Taxonomy framework, this would mean classifying these energy sources under clear and tight conditions as they contribute to the transition to climate neutrality.

Once the consultation and usual scrutiny periods are over and assuming neither of the co-legislators object, the (complementary) Delegated Act will enter into force and apply.

 

Additional delay announced for SFDR level two implementation

The European Commission (EC) has once again delayed the implementation of the Sustainable Finance Disclosure Regulation (SFDR) level two measures. The Deputy Director-General of the EC announced in a letter the deferral of delegated act to 1 January 2023, due to the length and technical detail of the 13 Regulatory Technical Standards under consideration, the time of the submissions to the Commission, and to facilitate a smooth implementation.  However, the letter envisages that the first entity level report on principal adverse impact indicators (PASI) under the delayed Regulatory Technical Standards (RTS) will be due by 30 June 2023, and that the first reference period for that report will be the 2022 calendar year. Therefore, firms will still be required to collect data on PASIs from 1 January 2022.

Mandatory climate-related disclosures for a larger scope of UK-registered compagnies

From 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis – in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). This will include many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.

Recently, the FCA published two policy statements confirming further rules and guidance to promote better climate-related financial disclosures. Moreover, the FCA extended the application of TCFD-aligned listing rule for premium-listed commercial companies to a wider scope of listed issuers and introduced TCFD-aligned disclosure requirements for asset managers and asset owners.

New climate-related disclosure rules apply from 1 January 2022 for the largest in-scope firms and 1 year later for smaller firms above the £5 billion exemption threshold. The first public disclosures in line with the FCA requirements must be made by 30 June 2023.

Last year, the Financial Reporting Council (FRC) published a report  to help companies prepare for mandatory TCFD reporting.

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…

Regulatory Watch #02 | December 2021

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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.

Please download the Regulatory Watch by clicking on the green button below.


Download Regulatory Watch

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…

Regulatory Watch #01 | November 2021

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Regulatory Watch #01 | November 2021

Welcome to the first edition of 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.

Please download the Regulatory Watch by clicking on the green button below.


Download Regulatory Watch

Executive Summary

The past month has seen a number of significant regulatory developments. International and European priorities remain much the same, as evidenced by recently published work programs of the European Commission, the ESAs, the EBA and ESMA.

Sustainability stays at the top of the regulatory agenda

Ahead of COP26 – UN Climate Change Conference taking place this month in Glasgow, policy development on climate risks remained a key focus for regulators and supervisors.

Sustainability is one of the key areas of the European Commission’s Sustainable Finance Strategy. The Commission adopted new EU rules to strengthen banks’ resilience as part of its Banking Package 2021 that will require banks to systematically identify, disclose and manage ESG risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks.

Earlier this month, the ESAs published draft Regulatory Technical Standards (‘RTS’) regarding disclosures under the Sustainable Finance Disclosure Regulation (‘SFDR’) as amended by the EU Taxonomy Regulation. These new RTS will provide disclosures to end investors regarding the investments of financial products in environmentally sustainable economic activities, providing them with comparable information to make informed investment choices and establish a single rulebook for sustainability disclosures.

The UK Government, as COP26 host, multiplied announcements ahead of the summit. HMT Treasury introduced new Sustainability Disclosures Requirements through on Greening Finance: A Roadmap to Sustainable Investing, including:

  • Becoming the first G20 country to make Task Force on Climate-Related Financial Disclosures (‘TCFD’) recommended disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach. The Chancellor set out a roadmap showing how the government would achieve this by 2025, with most of the measures in place by 2023. From 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis – in line with recommendations from the TCFD. This will include many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.
  • Developing a UK Green Taxonomy and creating the Green Technical Advisory Group to advise on greenwashing and how to implement the taxonomy in a UK context.

HM Treasury also published its strategy for decarbonising all sectors of the UK economy to meet the Net Zero target by 2050 and will publish an update to the Green Finance Strategy in 2022, which will include a net zero transition pathway for the UK financial sector.

The Climate Financial Risk Forum (‘CFRF’), co-chaired by the PRA and the FCA, published a second round of guides to support UK financial institutions in managing climate-related financial risk. The CFRF Scenario Analysis Working Group is also developing an online climate scenario analysis narrative tool to support smaller firms, planned to launch in the first quarter of 2022.

Final rules for the new prudential regimes for MiFID investment firms

In June 2021, the FCA published its first policy statement introducing the Investment Firms Prudential Regime (‘IFPR’). The UK Regulators was willing to develop the EU’s IFD/IFR with the intention to retain their key principles for the UK regime and keep options open to reflect UK market specificities. This month and as part of IFPR, the FCA published its final rules to streamline and simplify prudential requirements for solo-regulated UK firms authorised under the Markets in Financial Instruments Directive (‘MiFID’). Along with the final rules, the FCA also published final general guidance on the application of ex-post risk adjustment to variable remuneration (FG21/5) as well as templates for Remuneration policy statements. The introduction of IFPR will represent major changes for FCA investment firms in areas such as the approach to risk, capital and minimum liquidity requirements, remuneration policies or reporting and public disclosures; and it is critical that firms adequately prepare for it as it will take effect in January 2022.

Progress made on Basel III implementation

Despite the disruptions resulting from Covid-19 and the required shift in regulatory and supervisory priorities, the BCBS progress report on adoption of the Basel regulatory framework shows further progress has been made in the implementation of the Basel III standards. For reminder, in response to the COVID-19 crisis, the Basel Committee decided in March 2020 to postpone the implementation deadline by one year to 1 January 2023, followed by a five-year phasing-in period of certain elements of the reform.

In the EU, the European Commission new Banking Package includes a review of EU banking rules (the Capital Requirements Regulation and the Capital Requirements Directive). The package implements the internal Basel III agreement and specifically aims to ensure that “internal models” used by banks to calculate their capital requirements do not underestimate risks, thereby ensuring that the capital required to cover those risks is sufficient. The proposal aims to strengthen resilience, without resulting in significant increases in capital requirements. It limits the overall impact on capital requirements to what is necessary, which will maintain the competitiveness of the EU banking sector. The package also further reduces compliance costs, in particular for smaller banks, without loosening prudential standards.

In the UK, the ‘UK Basel III regime’ implements the Basel III standards with deviations in timing and substance. In October, the PRA published a series of policy statements (‘PS’) regarding the implementation of Basel standards. PS24/21 ‘Implementation of Basel standards: Non-performing loan securitisations’, PS 22/21 ‘Implementation of Basel standards: Final rules’ and PS21/21 ‘The UK leverage ratio framework’. The policy material included in these PS will take effect on 1 January 2022 except for some of the policy material related to the UK leverage ratio that will apply from 1 January 2023.

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…

Expanding our ESG advice

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Expanding our ESG advise

Maria Alegre, ESG Advisor

Please let’s welcome the new member of the Neofin Advisory team Maria Alegre who joins us as the ESG Advisor from the 1st June 2021.

Maria is an energy transition professional working on strategic data and analytics. With five years of energy consulting experience assessing policy, managerial, commercial, strategic, governance, regulatory, and energy transition issues in the O&G sector in North America, South America and Northern Africa. Maria supported of C-level executives and senior officers in energy companies and government agencies.
Plus an additional seven years of policy experience working for local and national governments and think tanks.

Graduating from the University of Columbia with an MPA in Energy and Environment, and a Graduate diploma in Public Policy from LSE. Maria has a BS in International Studies, from the Universidad Torcuato Di Tella and is a Fulbright Scholar, Columbia University Scholar, US State Department Professional Fellow, British Chevening Scholar.

With global expertise in policy, strategy and thought leadership, 5 years in energy consulting and 7 years working for local and national governments and think tanks Maria’s expertise in energy and climate; energy transition and sector transformation strategy; ETRM and governance will be of great use at Neofin.

Welcome Maria to the Neofin Advisory team!

Leading the way in sustainability

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Leading the way in sustainability

Cécile Rigault – Sustainable Finance Lead

Please let’s welcome the new member of the Neofin Advisory team Cécile Rigault who joins us as Sustainable Finance Lead from 17th May 2021.

Cécile joins Neofin Advisory from Mazars where she has spent 7 years gaining solid experience of Banking and Asset Management businesses, first within the Banking Audit Department and then within the Financial Services Consulting practice.

Cécile was Team Deputy Lead of Mazars UK Regulatory Affairs, supporting internal and external business partners through the provision of insightful analysis of UK, EU and international regulatory developments. She also advised banks on regulatory change implementation such as new sustainability-related standards and Brexit.

French born Cécile is a certified Prince 2 project manager. She also has an MSc in Wealth Management from Paris-Dauphine and a BSc in Management and Finance from Paris I Panthéon-Sorbonne university.

With 14 years’ experience in financial services covering Retail Banking, Wealth and Asset Management businesses, Cécile will lead the Neofin Sustainable Finance Advisory team bringing her expertise in Regulatory and Business Change, Sustainable Finance, Risk Management, Compliance and Conduct. As a valued member of the Neofin team, Cécile will play a vital role using her breadth of experience and knowledge to support clients in all areas impacted by Sustainability.

Welcome to the team Cécile!

China, powerful & arrogant ?

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China, powerful and arrogant?

Growth threatened by outflows of resources and market closures

At the World Economic Forum held as a virtual event in Davos from the 25th  to 29th of January, China looked to be the major country that has best managed the challenges of the health and economic crisis in 2020. President Xi Jinping capitalised on this to deliver a very stirring speech to his counterparts tempted by a certain form of protectionism: “To build small cliques or start a new cold war, to reject, threaten or intimidate others will only push the world into division and even confrontation, which will lead us to a dead end… It serves no one’s interest to use the pandemic as an excuse to reverse globalisation.”

China has published triumphant growth statistics for the fourth quarter of 2020. Over the full year in 2020, its GDP totalled $15,230 billion, equal to 72% of US GDP. This compares with 12% in 2000 and 41% in 2010.

China was the only “big” country to achieve growth over the full year. Its profile, and in particular the acceleration seen at the end of the year, guarantee that it will enjoy a dazzling 2021, with growth in economic activity likely to outstrip the IMF forecast of 8.2%.

In the light of this, a number of specialists such as the Centre for Economics and Business Research (CEBR) predict that China could become the world’s leading economic power in 2028. This would mean the United States losing its global hegemony, which could deprive it from pursuing the economic policy in place since 2008. It is the status of the dollar that allows the United States to continue printing money, as it is still doing in 2021.  According to Daniele DiMartino Booth, former advisor to Richard Fisher and the FOMC, “the balance between the two countries relates a lot to the fact that they need one another: China to cover its significant food deficit and the United States to cover a structural shortage of technology products… When we see how China got its hands on a very poorly protected technological ecosystem, we can’t but worry about what it could do in finance, which is scarcely protected any more.”

Back in 2017, i.e. four years after Xi Jinping came into power (2013), the IMF already ranked China the world’s biggest economy on the basis of GDP expressed in purchasing power parity terms.

The two countries had been neck and neck since 2014. Whether by chance or as a consequence, it was during this period that a radical change was seen in the attitude of Chinese executives, both on a domestic level with the country’s drastic retaking control, and with regard to the rest of the world, with the official tone shifting from discrete conciliation to a more dogmatic and hegemonic stance.

It is only a matter of time before China’s GDP exceeds that of the United States, as a nation’s true wealth is its population. On the basis of this criterion, India should overtake China in two years. The challenge is identifying how this transition will be achieved, which could be shorter or longer. China has always been the world’s most populated country but its GDP has been below that of Europe since 1838 and below that of the United States since 1891. What will the situation look like in the future?

China’s population is no longer growing and is even ageing rapidly. In terms of the age pyramid, the proportion of the population of working age (15-65) as a percentage of the total population peaked in 2010 at 74.5%. In 2020, it dropped below 70%. China has therefore already passed its maximum productivity and growth rates will level out very quickly.

Furthermore, by launching its “take control” policy and changing the constitution to become president for life, Mr. Xi has created deep distrust of the private sector, which was the main driving force behind the “Chinese miracle”. Until the government regains control of the situation, we have seen massive capital flight – hidden in the form of exports – which totaled $1,500 billion from September 2014 to December 2016.

Similarly, a number of businessmen have temporarily or permanently disappeared, such as Lam Kok, Wang Jian (both of whom died in France) and Jack Ma. Hong Kong’s driving forces are having to make emergency applications for British passports. All these resources are no longer available for the domestic economy. One last example of the problem is that the country’s economic data seem less and less transparent. The changes in economic data announced no longer correspond to published figures, when these figures do not just disappear, such as industrial production.

Without going so far as to conclude that China will never be able to “catch up” with the United States during our lifetime, Mr. Xi will have to spend more and more time solving problems such as reduced efficiency and productivity, capital flight, closure of foreign markets and loss of access to innovation. All these factors will only curb China’s growth.

Winter Menu

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This winter season come and join us for hearty soups and stews, cheesy gratins and casseroles. These delicious items can be found on our seasonal menu, with specials changing weekly.

Our best crêpes recipe

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Everyone loves crêpes and they are really easy to make. All you need is flour, eggs, milk and our tried and tested recipe. Thin and delicate, can be served with fresh fruit and chocolate or a savoury filling. If you try the recipe, please let us know what you think in the comments!

The automatic choice…

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The automatic choice!!

Andrzej Silarow – RPA Lead

Please let’s welcome the new member of the Neofin Advisory team Andrzej Silarow who joins us as the RPA Lead from the 1st April 2021.

Andrzej joins Neofin Advisory from Smart Automation where he has gained a solid experience of supporting clients in various sectors of Banking, Insurance and Transport industries.

As the Senior Technical Lead at Smart Automation he was responsible for building up the internal RPA capability across different functions and departments globally, managing Business Continuity for RPA services, and ensuring quality of service delivery is consistent.

With 10+ years experience in Robotics Process Automation covering projects in multiple sectors of Banking, Insurance, Transport, and Energy industries, Andrzej was an early adopter of RPA, and as such he managed the implementation and growth of the RPA programme within one of the world’s largest banks.

With qualifications as a Blue Prism Certified Developer, ROM Architect, Cloud Operator, Cloud IADA Orchestration, Cloud Practicioner and Cloud Architect as well as CMI Level 5 in People Management and Advanced Blue Prism RPA Certification, Andrzej brings much needed Automation experience to guide our clients throughout their organisational and digital transformation journey.

As the Neofin Advisory RPA Lead, Andrzej’s main responsibilities will be Client engagement on internal capability build and other RPA projects, working closely with Directors to grow business and client base in region. Andrzej will provide consultancy expertise to the client technical team using his expertise in Blue Prism and Automation Anywhere, but also Business Change and Development and Cyber Security.

Welcome on-board Andrzej !

Inherited debt?

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Inherited debt?

With negative interest rates, debt is not a problem unless it causes a concentration of wealth.

As a result of the initiatives taken by governments and central banks to cope with the current pandemic, public debt has soared all over the world. This debt is often described as the result of the systematic trade-off between health and the economy. It has triggered a number of debates, mainly very lively, the main theme of which is the question of what world we are going to leave to future generations.

There are therefore many calls for the cancellation of the portion of this debt borne by central banks as part of their programmes to inject liquidity in order to lower interest rates and stimulate inflation.

Against the current backdrop of financial assets’ extremely high price, which attests to an almost blind faith in the foresight of governments and central banks’ actions, a default – even if organised – on government borrowings could be the last straw. A major financial crisis would become even more likely if the pandemic takes off again and non-performing loans on banks’ balance sheets could be expected to rise sharply.

 

In reality, the question of debt is a concern because it has been put the wrong way. Firstly, a traditional bank’s aim is not to get its loans repaid and reduce its balance sheet. It is in the business of wanting debtors to pay interest. With negative interest rates, debtors can pay off their debts’ load eternally.

Negative interest rates are of major significance, supporting in a certain way those who defend the theory of reasoned negative growth. They mean that savers should expect to see their investments fall in value in the medium term, in other words losing money on a recurring basis. Getting into debt today in order to spend today would therefore be the most rational decision to make under the current circumstances.

The third key observation is that government debt is not representative of the economy’s general level of debt; it represents the level of concentration of this debt among certain debtors.

The example of the United States shows that although government debt has risen sharply, the country’s overall debt remains below the percentage of GDP reached in March 2009. As per the above chart, the latest available figures (September 2020) show that this debt is 334% of GDP, following a peak of 365% in March 2009. And it should also be stressed that at the same time US household saving rate has jumped precisely as a consequence of government transfers, resulting in an increase in household wealth, which has at least equalled the increase in the country’s total debt.

Lastly, the central banks will continue to want to stimulate inflation and therefore inject liquidity on a massive scale: in Japan, the plan is to inject $700 billion, compared with around €2,000 billion in Europe, and $1,440 billion in the United States.

As the chart shows, buying up debt has become a norm in terms of conducting monetary policy, just like the level of interest rates or money supply in the past. In the case of the Fed, 34% of GDP will hence be frozen between now and end of 2021, compared with 50% for the Bank of England and 65% for the ECB. At the other end of the spectrum, the Bank of Japan’s total balance sheet has reached 135% of the country’s GDP. This clearly also relates to government bonds, but the BoJ has also bought up a lot of other assets such as equities. Most unexpectedly, since the Swiss government is not in debt, is the Banque Nationale Suisse with a total balance sheet of 154% of GDP in the third quarter of 2020. The BNS “only” buys currencies against the Swiss franc to counteract its rise. These currencies are then invested in government bonds – mainly US and European – but also, like the BoJ, in shares in various major listed companies. Lastly, the People’s Bank of China is quite an unusual case insofar as its total balance sheet has remained more or less unchanged since 2006 and has therefore decreased significantly as a percentage of GDP. China is in debt (over 300% of its GDP) but the government does not have very much debt (48% of GDP) and the central bank is still steering its monetary policy mainly on the basis of a reserve requirement ratio equal today to 12% of Chinese banks’ total balance sheets (vs almost zero elsewhere in the world).

This kind of statistics show is that our world can survive for a long time in this configuration, without the need to talk about defaults. However, governments will have to endeavour to deal with the highly toxic collateral effects of such developments, particularly with the distribution of wealth, a recognised  driver of populism and social instabilities, as can be seen in Russia and Turkey, as well as in the United States, the UK and even in a largely redistributive country such as France.