Financial Services Regulation and Compliance - Banking June 2021
CBI publishes report on legal costs on mortgage accounts in arrears
The CBI has published a report on the issue of regulated entities applying costs associated with legal proceedings, including third party costs, to mortgage accounts in arrears and charging interest on those costs.
An investigation in to this issue began in 2019 and concluded that this practice was not in borrowers' best interests where there were repossession proceedings that had not concluded and where a court had not awarded costs to the regulated entity. The CBI had regard to General Principle 2.1 of the Consumer Protection Code in making this finding.
Charging interest on costs is never acceptable having regard to Regulation 29(2) of the EU (Consumer Mortgage Credit Agreements) Regulations 2016. The CBI stated that in the interests of fairness and treating customers fairly and equally, it expects equivalent protections to be afforded to all mortgage agreements, even those that pre-date the 2016 regulations.
The CBI engaged with all banks, retail credit firms and credit servicing firms, 32 in total. 13 of these had been engaged in this practice but have now ceased the practice and have begun to unwind the costs applied to accounts and refund interest charged on costs. This affected approximately 32,600 accounts.
Adjustments are expected to be complete by the end of this year.
"Conditions have improved, but the recovery may be bumpy and uneven" – Governor of the CBI, Gabriel Makhlouf
On 16 June 2021 Gabriel Makhlouf, the Governor of the CBI, spoke at the launch of the CBI's Financial Stability Review for 2021. Mr. Makhlouf addressed the review which outlines that the expansion of the vaccination programmes has reduced the uncertainty and downside risks to the macro-financial outlook, however the review also mentions that vulnerabilities in global financial markets have been rising. Mr. Makhlouf also noted that the full impact of the COVID-19 shock will become apparent once the government supports start to slow down.
Mr. Makhlouf also mentioned that the ongoing review of the CBI's mortgage measures framework is the first review since the measures took place and stated that "... It is now approaching seven years since the introduction of the measures and a review of the framework will allow us to consider the overarching approach to our toolkit and strategy to ensure they continue to remain fit for purpose in view of the constant evolution of our financial system and economy." This review is part of a three-pronged review of the CBI's macroprudential framework.
EBA publishes its 2020 Annual Report
On 3 June 2021 the European Banking Authority (EBA) published its 2020 Annual Report. The report shows what the EBA achieved in the past year and provides an outline of the key topics that the EBA will focus on for the upcoming year. In order to absorb the shock of the pandemic on the banking sector the EBA put in place prudential and supervisory measures to support bank lending into the real economy. This was carried out by the EBA publishing Guidelines on legislative and non-legislative moratoria on loan repayments and on reporting and disclosure of exposures subject to measures applied in response to the pandemic. The report also outlines that throughout 2020 the EBA placed an emphasis on areas including anti-money laundering (AML), countering financing of terrorism (CFT), sustainable finance and digital innovation.
The priorities of the EBA for 2021 include the review of the stress-testing framework, the implementation of the mandates in relation to AML/CFT, financial innovation and sustainable finance.
ECB publish an opinion on the Digital Operational Resilience Act
The European Central Bank (ECB) published an opinion on Digital Operational Resilience Act (DORA), welcoming the aim of the proposals and making a number of suggestions, including:
- harmonising the application of DORA with the Network and Information Security Directive 2016/1148
- promoting a common understanding of ICT related risks, having a single point of contact for information sharing and clearly established classification and information sharing mechanisms
- recommending a 15 year data retention period
EBA publishes final revised guidelines on major incident reporting under the Payment Services Directive
The EBA published its final revised guidelines on major incident reporting under the Payment Services Directive (PSD2). The revised guidelines aim to optimise and simplify the reporting process and templates, focus on incidents with significant impact on payment service providers and improve the meaningfulness of the information to be reported. The revised guidelines are also estimated to reduce the reporting burden for Payment Service Providers.
EBA publishes study on the cost of compliance with supervisory reporting requirements
The EBA has published a study on the cost of compliance of European Economic Area (EEA) banks with supervisory reporting requirements. The study focused on three key topics:
- the supervisory reporting costs faced by banks
- the effect a reduction of specific reporting requirements would have on both costs and supervisory effectiveness
- the proportionality of reporting costs
The EBA sent voluntary questionnaires to all EEA credit institutions, conducted interviews with industry trade bodies and reviewed case studies from various stakeholders. Based on its findings the EBA has identified 25 recommendations for reform, which could potentially reduce the reporting costs of institutions by 15-24% and save institutions up to €288m in administrative costs. The recommendations address the following categories:
- changes to the development process for the EBA reporting framework
- changes to the design and content of supervisory reporting requirements
- the coordination of data requests and reporting requirements
- the wider use of technology in the reporting process
The EBA will implement the majority of these recommendations as part of its ongoing policy work to redevelop the supervisory reporting framework.
EBA report on data provided by Payment Service Providers on Strong Customer Authentication readiness
On 11 June 2021 the EBA published a report on the data provided by payment service providers (PSPs) on their readiness to apply strong customer authentication (SCA) in relation to the subset of payment transactions that are e-commerce card-based payment transactions. The report outlines the status of issuing and acquiring PSPs in enrolling online merchants, payment cards and payment service users into SCA-compliant solutions, and in requesting SCA for online payment transactions after 31 December 2020.
EBA publishes report on RegTech in the EU
The EBA published a report analysing the overall benefits and challenges faced by financial institutions and regtech providers in the use of regtech. The report considers the application of technology-enabled innovation for regulatory, compliance and reporting requirements and provides a detailed analysis of the five most frequently used regtech segments:
- anti-money laundering / countering the financing of terrorism
- fraud prevention
- prudential reporting
- ICT security
- creditworthiness assessment
According to financial institutions, the main benefits of regtech solutions are enhanced risk management, better monitoring and sampling capabilities, and reduced human errors. The majority of challenges to regtech market development are internal factors within financial institutions and regtech providers including relating to data, integration, and costly and complex due diligence processes. A lack of common regulatory standards could also pose barriers, according to the report.
The report also assesses potential risks arising from regtech solutions that supervisors will need to address, and proposes actions to enhance knowledge and skills in competent authorities.
ECB extends leverage ratio relief for banks until March 2022
On 18 June 2021 the ECB announced that the euro area banks it directly supervises are allowed to continue to exclude certain central bank exposures from the leverage ratio. The leverage ratio relief was set to expire on 27 June 2021 but has now been extended until March 2022. This is due to the continuing exceptional macroeconomic circumstances arising from the pandemic.
ECB work on cross-currency instant payments in TIPS moves forward
The ECB and Sveriges Riksbank are working together to see how the TARGET Instant Payment Settlement (TIPS) could support the settlement of instant payments between the euro and the Swedish krona. The Governing Council of the ECB state that improving cross-border payments beyond the EU is a significant goal of the Eurosystem's retail payment strategy as it will provide better support to European business and individuals who make and receive payments overseas. TIPS is looking to offer instant payment settlement in Swedish krona by May 2022.
EBA consults on amendments to reporting on securitisation, asset encumbrance and G-SIIs
On 23 June 2021 the EBA launched a consultation to amend its Implementing Technical Standards on Supervisory Reporting in relation to CORE and asset encumbrance reporting for small and non-complex institutions in order to identify global systemically important institutions (G-SIIs). The aim of the proposals is to compliment the implementation of the EBA's costs reduction measures.
This consultation will run until 23 September 2021.
EBA proposes to further harmonise EU law applicable to branches of third country credit institutions
On 23 June 2021 the EBA published a report on the treatment of incoming third country branches (TCBs) under the national law of Member States. Due to the fact that TCBs are carrying out an increased volume of activities, the report outlines 14 high-level policy recommendations for additional harmonisation of EU law. The recommendations focus on the following:
- EU centralised equivalence assessment
- effective cooperation supported by the conclusion of MoUs with third country home authorities
- an appropriately determined scope of authorisation and prudential requirements (notably capital, liquidity, internal governance including booking arrangements)
- certain AML/CFT aspects
- a uniform minimum reporting framework
- satisfactory recovery plans
EBA updates the monitoring of Additional Tier 1 instruments and issues recommendations for ESG-linked capital issuances
On 24 June 2021 the EBA published a report on the monitoring of Additional Tier 1 instruments as well as an update in relation to the monitoring of the implementation of the EBA's opinion on legacy instruments and its considerations on ESG capital bonds. The aim of the update it to strengthen the quality and resilience of EU institutions' own funds and eligible liabilities instruments.
EBA launches consultation to amend technical standards on credit risk adjustments
On 24 June 2021 the EBA launched a public consultation on amendments to its regulatory technical standards on credit risk adjustments in the context of the calculation of the risk weight of defaulted exposures under the standardised approach. The proposed amendments make a change to the recognition of total credit risk adjustments to allow the risk weight to remain the same in both cases. The price discount coming from the sale will be recognised as a credit risk adjustment when determining the risk weight.
This consultation process runs until 24 September 2021.
EBA consults to review its guidelines on common procedures and methodologies for the supervisory review and evaluation process
On 28 June 2021 the EBA launched a consultation on its revised guidelines on common procedures and methodologies in relation to the supervisory review and evaluation process (SREP) and supervisory stress testing. The objective of the revisions aim to implement recent amendments to the Capital Requirements Directive (CRD V) and the Capital Requirements Regulations (CRR II). This consultation process runs until 28 September 2021.
ECB publishes opinion on proposed DLT market regime
The ECB has published its opinion on a proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT). The ECB welcomed the proposed regulation which aims to enable investment firms, market operators and central securities depositaries to operate market infrastructures based on DLT either as a DLT multilateral trading facility (MTF) or a DLT securities settlement system (SSS).
The ECB also made a number of observations including:
- welcoming the limitations contained in the proposed regulation in respect of asset classes and markets size of transferable securities available for registration, trading and settlement via DLT MTFs and SSSs
- suggesting that, considering the level of capital markets development in some Member States, national competent authorities could be given the option to lower the thresholds set out in the regulation
- suggesting that the proposed regulation does not contain sufficient requirements for DLT MTFs providing additional core central securities depository services as this creates an unequal playing field between DLT MTFs and DLT SSSs
The effectiveness of European banks' boards
Andrea Enri, Chair of the Supervisory Board of the ECB gave a speech at the Florence School of Banking and Finance. Mr. Enri stressed that in order to tackle the effects of the pandemic, climate change and digital technology EU banks will need to have more effective and experienced boards. Mr Enria outlined the following points that banks need to improve on:
- Hiring more non-executive directors with IT experience in order to challenge the board on issues such as risk management, cyber risk and information technology.
- The composition of the banks' boards need to be more diverse as women make up less than a third of non-executive directors and a quarter of executive directors for SSM significant institutions. A fifth of euro area banks have still not implemented a diversity policy.
The ECB Banking Supervision will publish updated guidance to fit and proper assessments in order to clarify their expectations on the suitability of board members.
ECB Banking Supervision seeks greater diversity within banks
On 15 June 2021 Frank Elderson, Vice-Chair of the Supervisory Board of the ECB and Elizabeth McCaul, Member of the Supervisory Board of the ECB posted a blog on diversity within banks. This blog focuses on the benefits that a diverse board brings to an organisation and the upcoming measures that the ECB Banking Supervision will be looking to introduce to promote diversity on the boards of European banks.
First, the blog notes that two German banks recently appointed women to their management boards for the first time in their history and that a global US bank made history by appointing the first female CEO of a major Wall Street firm. Secondly, the blog outlines that the ECB are launching a public consultation on a draft version of its revised and more comprehensive guide to fit and proper assessments by introducing some extra sections to its assessment of the collective suitability of banks boards.
The blog emphasises that diverse boards lead to effective governance as it promotes independent thinking, allows individuals to effectively challenge management decisions and allows board members to be better equipped to understand its stakeholders and customers. Recent evidence that was collated by the EBA shows that more diverse boards are more likely to achieve higher returns.
European legislation such as the Capital Requirements Directive (CRD) is helping the ECB promote the need for diversity at board level. The CRD requires that credit institutions use diversity as one of the criteria when appointing members of management bodies. The ECB will provide a new fit and proper questionnaire where they will ask institutions if they have diversity targets and if they are in fact meeting those targets. If targets are not met, the ECB will make recommendations to address any imbalances.
ECB consults on the guide to fit and proper assessments
The ECB is consulting on a revised guide to fit and proper assessments and a new fit and proper questionnaire. An interesting aspect of these new documents is the introduction of supervisory expectations on climate and environmental risks and diversity. In addition, the guide gives closer consideration to severe supervisory findings, even where the appointee is not directly responsible, but will now be held individually accountable for good management and adequate decision-making.
The new guide explains how board members can be reassessed if new material facts emerge after their appointment. Gender diversity will also be taken into account as an element of collective suitability. The consultation period runs until 2 August 2021.
EBS consults on updates to options and discretions policies
The ECB has launched a consultation on updates to its harmonised policies for exercising the options and discretions that it is allowed to exercise under EU law when supervising banks. The goal of the consultation is to provide transparency on the ECB's supervisory activities. The ECB is proposing to update its policies primarily to account for legislative changes since the policies were first adopted in 2016. The consultation period runs until 23 August 2021.
EU banks are lagging on climate risk assessment, warns the ECB
In a keynote address by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, the ECB shared insights from banks' self-assessments of climate risk. The ECB state that no bank has met all of the ECB's expectations although almost all have developed implementation plans.
The ECB highlighted that banks should:
- assign responsibility for managing climate risks to the management body
- assess what data they need to start accounting for climate risk.
- design strategies to measure present and potential exposures to climate risk
- assess the materiality of climate risks they are facing
- prepare for ECB assessment of entire risk management frameworks and how structures are allowing banks to actively manage and disclose climate-related and environmental risks
- integrate climate risk in to customer due diligence and lending policies
The ECB will look at expanding capacity and expertise to deal with climate topics in its supervisory role. Next year the ECB will conduct a full supervisory review of practices for incorporating climate risks in to banks' risk frameworks and will move towards treating climate risk as any other risk with possible Pillar 2 requirements.
For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.
Date published: 9 July 2021