Financial Services Regulation and Compliance - General Cross Sectoral June 2020

DOMESTIC

Blog by the Governor of the CBI

The Governor of the Central Bank of Ireland (CBI) is continuing to update his blog, covering topics such as the economic outlook and monetary policy in light of COVID-19, the impact of COVID-19 on firms and households in Ireland, and consumer protection during COVID-19.

Speech of CBI Director General, Derville Rowland, on payment breaks and consumer protection

CBI Director General Rowland gave an address to the Association of Compliance Officers in Ireland on 5 June 2020, stating that lenders must be clear with customers on how payment breaks work. She further stated that all lenders' consumer protection obligations must be met in full. Deputy Governor Rowland stressed that borrowers on payment breaks must be given the option to repay the loan in full within the remaining term or extend the term of the loan by the length of the payment break. Payment breaks do not alter the CBI's long term expectations of how to deal with financially troubled customers.

She then turned to the subjects of insurance and investor protections, emphasising the need for insurers to act honestly and fairly in relation to COVID-19 payouts, and the enhanced supervision being undertaken by the CBI in respect of investment funds. Finally Deputy Governor Rowland addressed the heightened risk of fraud during COVID-19 and encouraged consumers and investors alike to remain vigilant.

Central Bank of Ireland publishes economic letter entitled "Measuring Economic Activity in Real Time During COVID-19"

The CBI published two economic letters on 9 June 2020. The letters examine the impact of COVID-19 on the Irish economy and consumer perceptions of inflation in the euro zone. The first letter updates the CBI's Business Cycle Indicator (BCI), a monthly summary of overall economic conditions in Ireland. It found that the BCI dropped to an unprecedented low at the peak of the containment measures in April, which suggests the impact of COVID-19 was greater than the 2008/09 financial crisis. BCI estimates for May suggests there is now some stabilisation following sharp declines in March and April.

The second letter notes that survey data shows consumers tend to think inflation is higher than it actually is. This perception shapes households' financial and economic decisions. There also appears to be a different "basket of goods" in mind from that used in the Harmonised Index of Consumer Prices.

Speech by Governor Gabriel Makhlouf on the Economic Outlook

On 11 June 2020, CBI Governor Gabriel Makhlouf gave a speech to Market News International. His speech encompassed areas ranging from the euro area's economic outlook and recent decisions made by the ECB Governing Council on increasing the envelope of the Pandemic Emergency Purchase Programme (PEPP) to €1.35tn, to Brexit and more domestic matters relating to the Irish economic outlook.

Governor Makhlouf acknowledged the challenges facing the euro area as it recovers from COVID-19, and highlighted the unprecedented decline of 3.6% of GDP in Q1 2020. It is hoped the PEPP will alleviate some of the shock of COVID-19, as it will create more favourable financing conditions for all economic sectors.

Meanwhile, the Governor noted, Ireland has faced a severe and unprecedented downturn in economic activity as a result of COVID-19, although the recently published business cycle indicators shows there is some sign of stabilisation. However, Brexit could bring further adverse economic conditions to Ireland.

CBI publishes its 2019 report on protected disclosures

The CBI has published its report for 2019 on the protected disclosures it received pursuant to the Protected Disclosures Act 2014 and Part 5 of the Central Bank (Supervision and Enforcement) Act 2013. 200 protected disclosures were made to the CBI during the period of 1 January 2019 to 31 December 2019. Actions taken on foot of information received as protected disclosures include undertaking additional supervisory work such as on-site inspections, requiring a firm to fix issues, and putting firms under higher supervisory focus.

EUROPEAN

ESMA consults on cloud outsourcing guidelines

ESMA has launched a consultation on guidelines on outsourcing to cloud service providers. The purpose of the guidelines is to provide guidance on the outsourcing requirements applicable to financial market participants when they outsource to cloud service providers. In particular, they help firms and competent authorities identify, address, and monitor the risks and challenges that arise from cloud outsourcing arrangements.

The proposed guidelines set out:

  • the governance, documentation, oversight and monitoring mechanisms that firms should have in place
  • the assessment of due diligence which should be undertaken prior to outsourcing
  • the minimum elements that outsourcing and sub-outsourcing agreements should include
  • the exit strategies and the access and audit rights that should be catered for
  • the notification to competent authorities
  • the supervision by competent authorities

The consultation is open until 1 September 2020.

ECB Monetary policy decisions - 4 June 2020

On 4 June 2020, the ECB announced a number of important monetary policy decisions. They are:

  • the envelope for the pandemic emergency purchase programme (PEPP) will be increased by €600bn to a total of €1.35tn
  • the horizon for net purchases under the PEPP will be extended to at least the end of June 2021
  • the maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2022
  • net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20bn, together with the purchases under the additional €120bn temporary envelope until the end of the year
  • reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates
  • the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively

ESMA provides guidance on the compliance function under MiFID II

On 5 June 2020, ESMA published the final guidelines on the MiFID II compliance function. These guidelines aim to enhance clarity and foster convergence in the implementation of certain aspects of the new MiFID II compliance function requirements, and replace the guidelines issued in 2012.

The guidelines set out:

  • new responsibilities of the compliance function
  • guidelines on organisational requirements of the compliance function
  • review of the compliance function by competent authorities

The guidelines are addressed to investment firms and credit institutions providing investment services and activities; investment firms and credit institutions selling or advising clients in relation to structured deposits; UCITS management companies and external Alternative Investment Fund Managers (AIFMs) when providing investment services and activities in accordance with the UCITS Directive and the AIFM Directive.

The guidelines apply from two months after publication on ESMA's website. Competent authorities must notify ESMA whether they comply or intend to comply with the guidelines.  

ESMA publishes new Peer Review Methodology integrating improvements introduced by EMSAR

This revised methodology provides for the set-up of ad hoc Peer Review Committees chaired by ESMA staff, an enhanced role for the Management Board, and the introduction of fast-track peer reviews to be launched in case of an urgent convergence issue.

ESMA extends deadline for responses to consultation on EMIR REFIT

ESMA has extended the end of the consultation period on the technical standards on reporting, data quality, data access and registration of Trade Repositories under EMIR REFIT from 19 June 2020 to 3 July 2020 in light of COVID-19.

ESMA publishes statement on MiFIR open access and COVID-19

This statement, published on 11 June 2020, sets out the issues national competent authorities (NCAs) should consider when assessing open access provision (OAP) requests during the COVID-19 pandemic. ESMA outlines that NCAs need to consider the adverse impact of COVID-19 in terms of delays in assessing OAPs as well as its effect on central counterparties and trading venues. ESMA requires central counterparties (CCPs) and trading venues (TVs) to have capacity to process access requests once the extraordinary market circumstances caused by COVID-19 have cleared up. The current exemptions under MiFIR allowing NCAs to exempt TVs and CCPs from the OAP for exchange traded derivatives expires on 3 July 2020 and the OAP will apply from 4 July on.

ESMA Responds to European Commission consultation on revision of the NFRD

On 11 June 2020, ESMA responded to the European Commission's consultation on a revision of the Non-Financial Reporting Directive (NFRD).

EMSA recommends:

  • standardising disclosure requirements
  • widening the range of companies required to report
  • ensuring consistency between legislative initiatives on sustainable finance

ESMA publishes draft amendment of RTS on the European Single Electronic Format

This draft amendment provides technical amendments to RTS published in March 2020 which incorporated the 2020 version of IFRS taxonomy as published by IFRS. It will continue to be updated on the basis of updates being provided by the IFRS Foundation. 

European Commission publishes draft text of delegated regulation as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms

On 8 June 2020, the European Commission published this piece of draft legislation, along with similar pieces for the insurance and funds industries. The delegated regulations are borne out of the EU's action plan on sustainable finance and seek to clarify the duties of investment firms to provide their clients with clear advice on the social and environmental risks and opportunities attached to their investments. Feedback on the draft regulations is open until 6 July 2020.

The General Board of the European Systemic Risk Board takes second set of actions in response to the coronavirus emergency at its extraordinary meeting on 27 May 2020

The European Systemic Risk Board (ESRB) agreed a second set of actions in response to the COVID-19 pandemic on 8 June 2020, addressing five priority areas. The ESRB's General Board decided to establish an EU-wide framework to monitor the financial stability implications of the support measures. The General Board also adopted a recommendation that introduces minimum requirements for national monitoring and establishes a framework for reporting to the ESRB. This recommendation does not create new reporting requirements for financial institutions.

The ESRB also decided to supplement initiatives of the ECB, EBA, EIOPA and national authorities by issuing a recommendation on the restriction of distributions during the COVID-19 pandemic.

Finally, the General Board issued a recommendation aimed at:

  • limiting cliff effects in relation to the demand for collateral, also including client clearing services and non-centrally cleared markets
  • enhancing CCP stress test scenarios for the assessment of future liquidity needs
  • limiting liquidity constraints related to margin collection
  • promoting international standards related to the mitigation of procyclicality in the provision of client clearing services and in securities financing transactions

EBA publishes its 2019 annual report

On 11 June 2020, the EBA published its annual report. The report notes a year of great change for the EBA, from the appointment of a new Chairperson, to its relocation from London to Paris. Key items actioned in 2019 included the EBA's advice on the implementation of the Basel III framework in the EU, work on a regulatory package on risk reduction measures, generally, providing transparency to the financial community on the status of the European banking industry, and focus on consumer protection and depositors. The EBA was also given new AML powers allowing it to lead policy development of AML practices across the single market.

Remarks by ECB President, Christine Lagarde: The path out of uncertainty

On 13 June 2020, ECB President Lagarde addressed the Italian National Consultation, focusing on the uncertain economic times that we are experiencing, and encouraging policy makers to find a constructive way forward. She underlined the ECB's commitment to act within its mandate to find a way out of the COVID-19 crisis, noting the huge uncertainties in relation to how the economy will recover, and how the economy will change as a result of the pandemic. President Lagarde stressed that monetary policy alone cannot bring the economy back, and that governments need to encourage innovation and directly invest in their societies in order to restore confidence.

Speech of Andrea Enria: ECB Banking Supervision’s approach to climate risks

Mr Enria, Chair of the Supervisory Board of the ECB, addressed the ECB's climate and environmental risks webinar on 17 June 2020 discussing the multitude of climate-related risks that face banks. He noted that up to 15% of significant institutions’ exposures are to the most carbon-intensive firms, and an abrupt transition to a low-carbon economy would have a severe impact on climate-sensitive economic sectors. He stated that identifying these climate risks requires innovative vision, and the real threat they pose requires banks to be forward looking and proactive. He also drew attention to the ECB's recent consultation paper on climate and environmental risks, and highlighted the work the ECB is doing with other authorities to drive its climate agenda forward.

Financial industry calls for one-year extension to T2-T2S consolidation project timeline

The Market Infrastructure Board concluded on 22 June 2020 that the T2-T2S consolidation project's live date should be postponed to November 2022 from November 2021. This is due to COVID-19 and SWIFT's rescheduling of global migration of cross-border payments to ISO 20022. The Governing Council will make a decision by the end of July 2020.

Speech of ECB's Vice-President, Luis de Guindos: Financial stability and the pandemic crisis

Speaking at the Frankfurt Finance Summit on 22 June 2020, the ECB's Vice President de Guindos addressed the topic of financial stability during COVID-19. He discussed the severe contraction of the economy from the onset of COVID-19, but noted the expectation that there will be a strong resurgence in the second half of 2020, although it is still uncertain how quickly the recovery will happen. He noted the ECB's PEPP programme, and that the ECB will monitor and evaluate its appropriateness on an ongoing basis. De Guindos praised the EU's ability to weather the COVID-19 storm, but acknowledged that it will lead to increased fragmentation and a massive increase in public debt. A resilient financial system can play a part in reducing these burdens as the economy recovers.

Speech of Pentti Hakkarainen: Completing the banking and capital market union under new circumstances

On 22 June 2020, Mr Hakkarainen, Member of the Supervisory Board of the ECB, addressed the Frankfurt Finance Summit on the banking and capital market union. He noted how the current pandemic shows it in action, and indicated that it is vital to take similar and further action in relation to the capital markets union. Funding to escape the current crisis should ideally come from both banks and capital markets. Deep and well-functioning capital markets improve the banking system’s capacity to raise capital and strengthen its balance sheets. Capital market funding also complements bank lending by channelling investment to riskier areas, such as young and innovative firms. The EU can preserve the strength of its banking union by strengthening its capital markets union.

For more information on this topic please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 8 July 2020