Financial Services Regulation and Compliance - Banking Mar 2021
Financial Services Regulation and Compliance - Banking Mar 2021
Revised CBI guidance and forms for payment and e-money institutions
A new guidance note in relation to applications for authorisation as a payment institution or e-money institution has been published by the Central Bank of Ireland (CBI). A new payment institution change of business model form has also been introduced. This form will be required to be submitted (along with relevant supporting documents) when a payment institution proposes to make a material change to its business model, which does not involve a change in regulated services.
"Perspectives on the role of the INED" - Mary-Elizabeth McMunn, Director of Credit Institutions
Mary-Elizabeth McMunn, Director of Credit Institutions, gave a speech at the KPMG INED webinar on 25 February 2021. In her speech Ms McMunn discussed the CBI's goals for the financial system and its current priorities, the role of the INED from the CBI's perspective, the role of boards in addressing future challenges including those which relate to climate change and digitalisation as well as distressed debt and the CBI's expectations in relation to board oversight.
Ms McMunn stated that the CBI's aim is to ensure the resilience and trustworthiness of the financial system and to ensure that it services the needs of the economy and consumers in a sustainable manner.
The CBI's strategic priorities for the year ahead were outlined and Ms McMunn noted that these priorities include:
maintaining supervisory focus on the financial and operational resilience of firms and markets to ensure they continue to support households and business through the economic disruption caused by COVID-19, and can support the recovery from it
improving governance and risk management capabilities in firms and markets in order to improve culture and decision-making and identifying and mitigating risks, including those resulting from climate change
ensuring the identification of detrimental customer outcomes and preventing or mitigating same where possible
resolving pandemic-related and long term distressed debt
In relation to the role of the INED, Ms McMunn stated that a good INED can foster a positive culture and can influence and shape a firm's values, behaviours and standards, particularly in relation to risk mitigation. Ms McMunn emphasised the role INEDs can play in terms of offering challenge to a firm's practices and procedures. In relation to the Fitness and Probity regime, Ms McMunn acknowledged that there has been an increasing focus on diversity in relation to the candidates being put forward for senior management roles but that in certain cases candidates are not adequately prepared for these roles or do not possess the requisite levels of knowledge or experience. Ms McMunn stated that INEDs who sit on nomination committees can play a role in addressing this issue by adequately reviewing the due diligence performed by firms in this regard.
In relation to the issues of climate change and digitalisation, Ms McMunn noted that it is essential that banks consider the sustainability of their business models and that they have appropriate risk appetite statements in place.
On the topic of distressed debt, Ms McMunn noted the negative effects of the pandemic on businesses, households and the economy as a whole. She noted that recovery will take time and emphasised the role banks can play in ensuring the resilience of the economy. Ms McMunn noted that innovative financial solutions and flexible strategies will be necessary in this regard. While short-term forbearance has been effective in mitigating economic shock, appropriate long term solutions will also be required and Ms McMunn noted that boards have an important role to play in challenging banks' activities in this regard.
"Firms are responsible for selling their customers products that meet their needs both now and into the future.” – Derville Rowland, Director General, Financial Conduct
Director General, Financial Conduct, Derville Rowland gave a speech outlining the CBI's priorities in relation to consumer and investor protection for 2021 at a virtual event for the Banking and Payments Federation of Ireland Membership Forum on 16 March 2021. Ms Rowland noted that these priorities include:
the review of the Consumer Protection Code
insurance issues focused on differential pricing and business interruption
managing liquidity risk in funds during periods of market volatility
strengthening policy in capital markets union and sustainable finance
enforcement and anti-money laundering priorities
Ms Rowland stated that as part of its work to assist borrowers in arrears, the CBI has launched a consultation on the Standard Financial Statement (SFS) (see below) and noted that "Distressed debt remains a key priority for the Central Bank, and our focus is to ensure lenders have suitable supports in place to help borrowers in arrears. We are supervising lenders to ensure they have appropriate strategies, the necessary financial and operational resources, and a suite of appropriate and sustainable solutions to resolve distressed debt."
The aim of the proposed amendments is to enhance borrowers' understanding, facilitate the completion of the SFS and to reduce the volume of information borrowers are required to provide whilst also ensuring that the SFS achieves its goal of providing a comprehensive basis for a firm to undertake an assessment of the borrower’s individual circumstance.
In relation to enforcement, Ms Rowland stated that the CBI is pursuing cases against firms and individuals alike under the Fitness and Probity Regime and the Administrative Sanctions Procedure. In light of a recent high-profile enforcement outcome, Ms Rowland emphasised that firms are required to implement effective cultures and appropriate standards and that they are responsible for ensuring that the products they offer to customers are appropriate to their needs.
Review of the Standard Financial Statement
The CBI has launched a consultation paper (CP139) in order to review the SFS set out in Appendix 1 to the Code of Conduct on Mortgage Arrears 2013 (as amended) (CCMA). The CBI received feedback from a number of stakeholders in relation to issues borrowers have experienced in completing the SFS, particularly in relation to the length of the document and the level of information required. In light of the increased levels of financial difficulties on primary residence mortgages as a result of the COVID-19 pandemic, the CBI has decided to undertake a review of the SFS. The consultation paper seeks stakeholders' opinions in relation to proposed amendments to the SFS and offers stakeholders the opportunity to share their views on additional ways in which banks can support borrowers in completing the SFS. The consultation period will run from 16 March to 20 April 2021.
EBA launches public consultation on draft technical standards on Pillar 3 disclosures of ESG risks
The European Banking Authority (EBA) has published a consultation paper on draft implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks. The draft ITS set out comparable disclosures which demonstrate the effect climate change may have on other risks within institutions' balance sheets, how these risks are being mitigated by institutions and their green asset ratio on exposures financing taxonomy-aligned activities, such as those consistent with the Paris Agreement goals.
In accordance with the requirements of the Capital Requirements Regulation (CRR), the draft ITS recommend comparable quantitative disclosures on climate-change related transition and physical risks, including information on exposures towards carbon related assets and assets subject to chronic and acute climate change events. Quantitative disclosures on institutions’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy and in the adaptation to climate change are also set out in the ITS. In addition, the draft ITS also set out qualitative information on how institutions are incorporating ESG considerations into their governance, business model and strategy and risk management framework. The consultation period will run until 1 June 2021.
ECB publishes guide on method of determining penalties for regulatory breaches
The European Central Bank (ECB) has published a guide to setting administrative pecuniary penalties, which sets out the principles and methods for calculating the penalties used to sanction banks for breaches of prudential requirements. The ECB has the power to impose administrative pecuniary penalties pursuant to Council Regulation (EU) No 1024/2013.
While the ECB has a wide discretion in relation to assessing the appropriate penalty, penalties must be effective, proportionate and dissuasive and must not be in excess of the limits set out in the Regulation. The guide notes that the level of a penalty set by the ECB is determined in relation to the severity of the breach and, in order to ensure proportionality, also to the size of the supervised entity. Breaches may be classified as minor, moderately severe, severe, very severe and extremely severe. The impact of the breach and the degree of misconduct will dictate the category a breach falls into.
The base penalty for a breach classified as very severe or below will be set with reference to a predefined “penalty grid” according to the severity of the breach and the size of the institution, or by multiplying the total profits gained or losses avoided (where these can be ascertained), by an amount corresponding to the severity of the breach. The base penalty for a breach classified as extremely severe will be set as a percentage of the supervised entity’s total annual turnover. The ECB has discretion to consider aggravating or mitigating factors and can increase or reduce the amount accordingly in order to ensure that the penalty is proportionate, effective and dissuasive.
EBA consults on guidance on how to grant authorisation as credit institution
The EBA has published a consultation paper on its guidelines on a common assessment methodology for granting authorisation as a credit institution. The draft guidelines discuss the authorisation requirements set out in the Capital Requirements Directive (CRD) and are addressed to all competent authorities across the EU in charge of granting authorisation as a credit institution. The draft guidelines complement the Regulatory Technical Standards (RTS) on authorisation of credit institutions and aim to promote the convergence of supervisory practices around market access for credit institutions across the EU.
The guidelines recommend a risk-based approach and highlight the importance of consistency in terms of the supervisory approaches applied in going concern situations. The principle of proportionality is a key feature of the guidelines, which will apply to both traditional and innovative business models and/or delivery mechanisms. The guidelines also include guidance in relation to money laundering or terrorist financing (ML/TF) risks, emphasising the importance of cooperation with anti-money laundering (AML) supervisors and other public bodies, in accordance the CRD. The consultation will run until 10 June 2021.
EBA issues revised list of ITS validation rules
The EBA has issued a revised list of validation rules included in its Implementing Technical Standards (ITS) on supervisory reporting, highlighting those which have been deactivated either for incorrectness or for triggering IT problems. The EBA has advised competent authorities throughout the EU that data submitted in accordance with these ITS should not be formally validated against the set of deactivated rules.
EBA launches public consultation on draft revised Guidelines on stress tests of Deposit Guarantee Schemes (DGSs)
The EBA has launched a public consultation on its revised guidelines on the stress tests conducted by national DGSs under the Deposit Guarantee Schemes Directive (DGSD). The amended guidelines will extend the scope of the DGS stress testing, by requiring more tests that will cover additional aspects of DGS interventions. The aim of the revised framework is to achieve greater harmonisation and comparability in order to facilitate the EBA to conduct a robust peer review of national DGS stress tests in 2024/25.
The EBA has proposed that DGSs should be required to stress test their ability to perform all of the interventions allowed under their legal mandates, and to access all of their funding sources. The draft revised guidelines aim to enhance cooperation between DGSs and other authorities by testing scenarios where such cooperation is required. The provisions proposed by the EBA also require DGSs to consider testing scenarios with additional business continuity challenges, such as the pandemic, ICT failures or other similar issues. The proposed amendments are based on the results of the EBA's first peer review of the DGS stress tests and resilience of national DGS. These results were published by the EBA in a report in June 2020. The consultation period will run until 11 June 2021.
EBA launches discussion paper on integrated reporting
The EBA has published a discussion paper on the feasibility study of an integrated reporting system to collect feedback for the preparation of its final report in this area. The paper sets out several possible options for an integrated system which include a single data dictionary and single reporting system across supervisory, resolution and central bank statistical data. The EBA notes that each of these areas are key parts of a reporting process and that their design could have an effect on the manner in which the current reporting process is carried out. The consultation period will run until 11 June 2021.
EBA consults on technical elements for the implementation of the alternative standardised approach for market risk as part of its FRTB roadmap
The EBA has launched two public consultations on its draft Regulatory Technical Standards (RTS) on gross jump-to-default (JTD) amounts and its draft RTS on residual risk add-on (RRAO). The draft RTS set out the manner in which gross JTD amounts are to be determined for the purposes of calculating the default risk charge for non-securitisation instruments, and how instruments exposed to residual risks for the purposes of the RRAO - under the alternative standardised approach for market risk should be identified.
The draft RTS form part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches. The consultation paper provides guidance as to the technical specifications for the implementation of the additional own funds requirements for default risk and for residual risks which apply to institutions using the alternative standardised approach (FRTB-SA) to determine own funds requirements for market risk. The draft RTS on gross JTD amounts set out the key inputs required for calculating own funds requirements for default risk under the FRTB-SA. The draft RTS on RRAO provide clarity as to the scope of the RRAO, i.e. for which instruments the own funds capital requirements for residual risks should be determined.
The RTS set out a non-exhaustive list of instruments bearing residual risks, and a list of risks that, in themselves, do not constitute residual risks. In addition, the RTS also clarify that longevity risk, weather, natural disasters and future realised volatility should all be considered as exotic underlyings. The deadline for the submission of comments to the consultation is 12 June 2021.
EBA reports on the monitoring of LCR implementation in the EU
The EBA has published its second report on the monitoring of liquidity coverage ratio (LCR) implementation in the EU. The latest report identifies areas in respect of which banks and supervisors may require additional guidance in order to foster a common understanding and harmonisation of the application of the liquidity standard across the EU, as well as to address some level playing field issues. The implementation of the LCR for EU banks will be monitored on an ongoing basis and the EBA and will update these reports regularly to set out its observations and provide further guidance, where required.
The EBA's aim in monitoring the area of liquidity is to harmonise the implementation of the LCR in areas where a lack of clarity in relation to regulatory provisions has led to divergent practices. The report sets out guidance in relation to the treatment of fiduciary deposits, LCR optimisation risk, interdependent inflows and outflows and assessment of deposit guarantee schemes (DGS) conditions for a 3% outflow rates in stable retail deposits. It also addresses the usage of liquidity buffers and provides guidance on unwinding mechanism waivers, recourse to central bank support and additional outflows from derivatives in the context of the COVID-19 pandemic and considers the effects of the guidance provided in the previous report.
EBA to make Basel III monitoring exercise mandatory
The EBA has published a decision, which will make the Basel III monitoring exercise a mandatory exercise from December 2021. This change will be made in order to address the need to expand the sample to more jurisdictions and credit institutions, making it more representative, as well as to reach a stable sample over time by providing authorities with a sound legal basis that frames institutions’ participation.
It is hoped that the decision will help the EBA effectively represent the interests of EU institutions in the Basel Committee on Banking Supervision (BCBS) and provide informed opinions and technical advice to the European Commission, the European Parliament and the Council in relation to the implementation of the BCBS standards into EU law. The decision sets out a clear and fair methodology in relation to assessing which institutions should be included in the sample. The methodology is based on the principle of proportionality and it is hoped that this will enhance the stability of the sample over time. The decision also provides for a reduced frequency of reporting Basel III data.
The decision provides member states with the following guidance in relation to the selection criteria for defining country samples:
all Global and Other Systemically Important Institutions (G-SIIs and O-SIIs) are included in the country sample at the highest level of EU consolidation, irrespective of their size
if 80% RWA coverage is not exceeded, and the sample is smaller than 30 banks, additional large banks (Tier 1 capital > EUR 3 billion or Total Assets > EUR 30 million), that are not O-SIIs, are included until 80% RWA coverage is exceeded
if 80% RWA coverage is not exceeded, additional medium-sized and small banks, that are not O-SIIs, are selected from the eligible population of three different broad business models according to predefined percentages per business model
European Commission launches targeted consultation on instant payments
The European Commission has launched a targeted consultation on instant payments in order to collect technical information from payment service providers (PSPs) and providers of technical services supporting the provision of instant payments. The purpose of the consultation is to identify any remaining obstacles the European Commission may encounter in relation to ensuring the widespread availability and use of instant payments in the EU and to consider any actions which may need to be taken to avoid such issues. It is also intended that the consultation will assist the Commission in reaching its decision as to whether or not EU coordinated action and/or policy measures are necessary in order to ensure that a critical mass of EU PSPs offer instant credit transfers. An additional aim of the consultation is to identify any factors which may be relevant for fostering customer demand towards instant credit transfer services. The consultation period will run from 24 March 2021 to 2 June 2021.
EBA updates phase two of its 3.0 reporting framework
The EBA has published phase two of its reporting framework v3.0. The technical package aims to support the implementation of the reporting framework by providing standard specifications and includes the validation rules, the Data Point Model (DPM) and the XBRL taxonomies for v3.0. The technical package sets out reporting requirements on MREL/TLAC and MREL decisions and notifications on impracticability of contractual recognition of bail-in. Phase two of the reporting framework also includes error corrections to previous releases related to remuneration (High earners and benchmarking Report), G-SII indicators and asset encumbrance.
EBA consults on its revised guidelines on recovery plan indicators
The EBA has published a consultation paper on its revised guidelines on recovery plan indicators. The guidelines have been updated to provide additional guidance on indicators’ calibration, monitoring and breaches notifications. The objective of the amendments is to strengthen the quality of recovery indicators framework and to enable institutions to effectively prepare for crises. The recovery plan indicators aim to assist institutions in monitoring and responding to the emergence and evolution of stress. Additional guidance in relation to the calibration of thresholds of recovery indicators to ensure that recovery options are implemented early enough to be effective is set out in the guidelines. The guidelines also highlight the importance of constant monitoring of recovery indicators and timely notification of their breaches to supervisors. The minimum list of recovery indicators has been updated to include three new recovery indicators (MREL/TLAC, asset encumbrance and liquidity position) and one (cost of wholesale funding) has been removed. The consultation period will run until 18 June 2021.