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.
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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…
Neofin Advisory 