Tracker, Financial Services Regulation & Compliance - Cross Sectoral / Other
Government publishes its legislation programme for Autumn/Winter 2015
Key Bills in respect of which heads have yet to be approved by Government include:
- Central Bank Consolidation Bill – This Bill will consolidate the body of legislation relating to the Central Bank into one statute. Not possible to indicate when publication is expected.
- Data Sharing Bill – This Bill will allow specified public bodies to share specified data relating to businesses. Not possible to indicate when publication is expected.
- Consumer Rights Bill – This Bill will update and consolidate consumer rights legislation. Publication is expected in 2016.
Financial Reporting Council revises financial reporting standards for the UK and Republic of Ireland
With effect from 1 January 2015 the Financial Reporting Council (FRC) revised financial reporting standards for the UK and Republic of Ireland. The revision fundamentally reformed financial reporting, replacing the extant standards with five Financial Reporting Standards:
- FRS 100 Application of Financial Reporting Requirements;
- FRS 101 Reduced Disclosure Framework;
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland;
- FRS 103 Insurance Contracts; and
- FRS 104 Interim Financial Reporting.
The FRC has also issued FRS 105 the Financial Reporting Standard applicable to the Micro-entities Regime to support the implementation of the new micro-entities regime.
Office of the Director of Corporate Enforcement issues notice on printing of directors' names on letterhead
Section 151, Companies Act 2014 requires that details of directors be printed on all business letters on or in which the company name appears. The details required are:
- The present Christian name, or the initials thereof, and present surname; and
- Any former Christian names and surnames; and
- The nationality, if not Irish
Minister for Finance amends Prospectus Regulations
On 24 September the Minister for Finance approved the Prospectus (Directive 2003/71/EC) (Amendment) Regulations 2015. The Prospectus Regulations are amended to clarify that Article 24 is a standalone provision. Also effect is given to Directive 2014/51/EU (the Omnibus Directive) which seeks to, amongst other things, amend the Prospectus Directive to place an obligation upon the Central Bank of Ireland, to notify the competent authority of each host member state and the European Securities and Markets Authority of the final terms of an offer where these were not available in the base prospectus or in a supplement.
Central Bank publishes guidelines on completing Trust or Company Service Provider Applications
Part 4 of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (CJA 2010) contains provisions requiring any person wishing to carry on the business of a TCSP to obtain an authorisation to do so. The Central Bank has published guidance in relation to the requirements for applying for authorisation as a Trust or Company Service Provider (TCSP) under the CJA 2010. In advance of making an application, each potential applicant must assess whether its proposed business model requires authorisation. Independent legal advice should be sought if in any doubt as to whether authorisation as a TCSP is required.
Central Bank updates its Authorisation Application Process for Payment Institutions and Electronic Money Institutions
The Central Bank has introduced an updated application process for Payment Institutions and Electronic Money Institutions.
New application documentation and guidance notes are now available to provide greater clarity to applicants regarding the requirements of the application process and to increase the effectiveness and efficiency of the process. The content of the relevant pages on the Central Bank website has also been updated to enhance their transparency and usability by Payment Institution and Electronic Money Institution applicants in terms of facilitating a clear understanding of the various stages and timelines of the process.
At all stages in the process the applicant will be kept informed of the progress of its application and the next steps in the application process. Firms also now have the option of a pre-application meeting to discuss the application process and key areas that need to be addressed in any formal application.
Publication of Section 43 Review of the Credit Union Restructuring Board
The Minister for Finance welcomed the publication by his Department of a Report carried out under section 43 of the Credit Union and Co-Operation with Overseas Regulators Act 2012, providing a detailed review of the work of the Credit Union Restructuring Board - ReBo. The Minister established the Credit Union Restructuring Board - ReBo, on a time-bound basis to oversee and facilitate the credit union restructuring process. 31 March 2016 is the final date for acceptance of any further restructuring proposals.
Minister for Jobs, Enterprise and Innovation introduces European Union (Traded Companies- Corporate Governance Statements) Regulations 2015
The Regulations amend section 1373 of the Companies Act 2014 by the substitution of subsection (7). The amendment clarifies the duties of the statutory auditor regarding the corporate governance statement, where such a statement is prepared. The new subsection 7 provides that where a company prepares a corporate governance statement, the statutory auditors shall, in their report:
- provide an opinion as to the consistency of information provided with statutory financial statements;
- state whether they have identified material misstatements in the information given and, if so, give an indication of the nature of such misstatements, and
- state whether the information required pursuant to subsections (2)(a), (b), (e) and (f) is contained in the company’s corporate governance statement.”
EU & INTERNATIONAL
Developments in Capital Markets Union
On 30 September 2015, the Commission adopted an action plan setting out 20 key measures to achieve a true single market for capital in Europe following consultation in February. On the same day, and as part of the CMU Action Plan, the Commission also published a proposal for a securitisation regulation and a proposal for the amendment of the regulatory capital treatment for securitisations in the CRR. The Commission has also published a consultation paper on covered bonds, a consultation calling for evidence in relation to the EU Regulatory Framework for Financial Services and a consultation on the review of the European Venture Capital Funds (EUVECA) and European Social Entrepreneurship Funds (EUSEF) Regulations. The Commission also proposed legislation that will modify the Solvency II Delegated Regulation to create better incentives for insurers to invest in infrastructure projects.
Under the Action Plan the Commission will take forward action in the following priority areas:
1. Providing more funding choices for Europe’s businesses and SMEs by
a. Modernising the Prospectus Directive to make it less costly for businesses to raise funds publicly, reviewing regulatory barriers to small firms listing on equity and debt markets and support the listing activities of small firms through European advisory structures;
b. Launching a package of measures to support venture capital and equity financing in the EU, including catalysing private investment using EU resources through pan-European funds-of-funds, regulatory reform, and the promotion of best practice on tax incentives;
c. Promoting innovative forms of business financing such as crowd-funding, private placement, and loan-originating funds whilst safeguarding investor protection and financial stability; and
d. Exploring ways to build a pan-European approach to better connect SMEs with a range of funding sources
2. Ensuring an appropriate regulatory environment for long term and sustainable investment and financing of Europe’s infrastructure by
a. Swiftly revising Solvency II calibrations to better reflect the true risk of infrastructure investment, followed by a review of the treatment under the Capital Requirements Regulation for bank exposures to infrastructure; and
b. Assessing the cumulative impact of previous regulatory reforms to ensure coherence and consistency, as part of the Commission's initiative on Better Regulation and building on the work started in the European Parliament in 2013 on the coherence of EU financial services legislation.
3. Increasing investment and choices for retail and institutional investors by
a. Looking at ways to boost choice and competition in cross-border retail financial services and insurance through a Green Paper published later this year. It will also assess the regulatory framework for retail investment, looking particularly at improving transparency and the quality and availability of investment advice against the backdrop of increased on-line provision;
b. Exploring ways to increase choices for retirement saving and build an EU market for personal private pensions which pension providers could opt for when offering private pensions across the EU; and
c. Delivering an effective European fund passport that eliminates cross-border fees and barriers to increase competition and consumer choice.
4. Enhancing the capacity of banks to lend by
a. Revitalising simple, transparent and standardised European securitisations to free up capacity on banks' balance sheets and provide access to investment opportunities for long term investors;
b. Exploring the possibility for all Member States to benefit from local credit unions to operate outside the scope of the EU's capital requirements rules for banks;
c. Assessing whether and how to build a pan-European covered bond framework, building on national regimes that work well, and explore the feasibility of similar funding tools for SME loans.
5. Bringing down cross-border barriers and developing capital markets for all 28 Member States by
a. Consulting on the key insolvency barriers and take forward a legislative initiative on business insolvency, addressing the most important barriers to the free flow of capital and building on national regimes that work well;
b. Tackling uncertainty around securities ownership, and pursue improvements in the arrangements for clearing and settlement of cross-border securities transactions;
c. Promoting the development of capital markets in all 28 Member States, as part of the European Semester and by offering Member States tailored support to strengthen administrative capacity through the Commission's Structural Reform Support Service;
d. Working with the European Supervisory Authorities (ESAs) to develop and implement a strategy to strengthen supervisory convergence and identify areas where a more collective approach can improve the functioning of the single market for capital;
e. Drawing on the forthcoming European Systemic Risk Board (ESRB) review and international work, to ensure that national and European macro-prudential authorities have the tools to react appropriately to developments in capital markets.
The Action Plan sets out the building blocks for putting a well-functioning and integrated Capital Markets Union, encompassing all Member States, into place by 2019. The Commission will assess achievements and re-assess priorities in 2017.
Commission proposal for a securitisation regulation
The Commission published its proposal for a Regulation laying down common rules on securitisation and creating a European framework for simple and transparent securitisation. The general objective of the initiative is to revive a safe securitisation market that will improve the financing of the EU economy. Specifically, this is to be achieved by distinguishing between simple, transparent and standardised securitisation (STS) products that can provide a sustainable funding channel for the EU economy on the one hand and more opaque and complex ones on the other. Secondly, the standardisation of processes and practises in securitisation markets as well as tackling regulatory inconsistencies will be pursued.
Commission proposal for a regulation amending the regulatory capital treatment for securitisations in the CRR
The current securitisation framework in the CRR is essentially based on the standards developed by the Basel Committee on Banking Supervision (BCBS) more than a decade ago and these do not make any distinction between STS securitisations and other more complex and opaque transactions. The BCBS adopted a recommendation for a revised securitisation framework in December 20143 (the Revised Basel Framework). The Revised Basel Framework does not currently provide for a more risk-sensitive treatment for STS securitisations. However the BCBS is currently working on the incorporation in the new framework of the STS criteria adopted jointly with the International Organisation of Securities Commission (IOSCO) on 23 July 2015. No outcome is expected from this workstream before mid-2016.
In order to contribute to the overarching objectives of the Commission Proposal for a Securitisation Regulation of restarting securitisation markets on a more sustainable basis and making this a safe and efficient instrument for funding and risk management, it is proposed to amend the regulatory capital requirements for securitisations in the CRR in order to:
- implement the regulatory capital calculation approaches set out in the Revised Basel Framework (Articles 254 to 268); and
- introduce a re-calibration for STS securitisations, consistent with the recommendation of the EBA (Articles 243, 260, 262, and 264).
This Regulation is to form a legislative package with the proposed Securitisation Regulation. The development of STS eligibility criteria would not be sufficient 'per se' to achieve the objective of reviving EU securitisation markets if not accompanied with a new prudential treatment, including in the area of capital requirements, better reflecting their specific features.
Capital requirements for positions in securitisation, including the more risk-sensitive treatment for STS securitisations, are set out in the proposal while eligibility criteria for STS securitisations, together with other cross-sectoral provisions, are contained in the Securitisation Regulation. These notably encompass all provisions on risk retention, due diligence and disclosure requirements, previously included in Part V of CRR. The same applies to some definitions originally included in Article 4 which are of general nature and therefore have been moved to the cross-sectoral legislative framework.
The proposal will be followed at a later stage by an amendment to the LCR Delegated Act in order to align it with the Securitisation Regulation. In particular the eligibility criteria for securitisations as Level 2B assets in Article 13 of the LCR Delegated Act will be amended to make it consistent with the general STS criteria as laid down in the Securitisation Regulation. Amendments of this Delegated Act could not be made at this time since they follow a different procedure and depend on the outcome of the legislative negotiations on this package.
Commission Consultation Paper on Covered Bonds
As part of the CMU project, the Commission has launched a Consultation Paper on covered bonds in the EU. The consultation is set against the backdrop of the challenges faced in relation to covered bonds during the financial crisis in the form of investor retrenchment to their domestic jurisdictions and spread widening. The European banking sector faced two major challenges:
- fragmentation between credit institutions from "core and non-core countries"; and
- difficulties to access liquidity which became available only against collateral either in private repo transactions, by issuing secured instruments such as covered bonds, or by pledging assets to central banks, and as a result of which a significant proportion of banks' assets became encumbered.
Tackling fragmentation and market inefficiencies is at the core of the CMU project.
The Consultation Paper evaluates signs of weaknesses and vulnerabilities in national covered bond markets as a result of the crisis, with a view to assessing the convenience of a possible future integrated European covered bond framework that could help improve funding conditions throughout the Union and facilitate cross-border investment and issuance in Member States currently facing practical or legal challenges in the development of their covered bond markets.
The Consultation Paper presents two options:
- voluntary convergence of Member States' covered bond laws in accordance with non-legislative coordination measures such as targeted recommendations from the Commission; or
- direct EU product legislation on covered bonds, which could seek to harmonise existing national laws or provide an alternative framework.
The Consultation Paper is intended to trigger a debate with stakeholders on the feasibility and potential merits of greater integration between covered bond laws. Replies must be submitted by 6 January 2016.
Commission consultation calling for evidence in relation to the EU Regulatory Framework for Financial Services
The last six years have been a period of intensive rulemaking as part of an international drive to restore financial stability and public confidence in the financial system. Given the large amount of legislation put in place and the interactions between them, there is a need to understand their combined impact and whether they give rise to any unintended consequences. It is also important to reflect on whether there are unintended barriers to new market players and innovative businesses preventing them from entering markets and challenging incumbents.
Building on the work started in the European Parliament in 2013 to look at the coherence of EU financial services legislation, and in line with the European Parliament's draft report, the purpose of this call for evidence is to gather feedback on:
- Rules affecting the ability of the economy to finance itself and grow;
- Unnecessary regulatory burdens;
- Interactions, inconsistencies and gaps; and
- Rules giving rise to unintended consequences.
Evidence is not only sought on the impacts of the EU financial legislation but also on the impacts of national implementation (e.g. gold-plating) and enforcement.
Replies must be submitted by 6 January 2016. Following this call for evidence, Commission services will report on the main findings and next steps by mid-2016.
Commission consultation on the review of the European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF) Regulations
The CMU Action Plan confirms the Commission will take forward a comprehensive package to support venture capital and risk capital financing in the EU, including amending the EuVECA and EuSEF legislation. This consultation paper asks for detailed responses to a range of questions in order to take this work forward.
EU legislation has attempted to establish the regulatory conditions for a successful EU venture capital sector. The Regulation on European Venture Capital Funds (EuVECA) and the Regulation on European Social Entrepreneurship Fund (EuSEF) in particular define the conditions under which these funds can be marketed to institutional and high net worth individuals across the EU. However, the EuVECA and EuSEF passports are currently available only to smaller fund operators managing asset portfolios below EUR 500 million. Changes to these regulations could enhance the effectiveness of the passports by, for example, allowing larger fund managers to establish and market EuVECA and EuSEF funds, reducing the investment threshold in order to attract more investors and expediting cross-border marketing and investment.
The objective of the consultation is to collect further information on the performance of the current legislation and identify measures the Commission could propose to increase take-up of the two new fundraising passports for venture capital and social entrepreneurship funds. Interested parties are invited to report on their experiences with the new passports and on potential obstacles to their take-up that can be addressed further by legislative or other means. In particular, this consultation invites interested parties to provide more detailed responses to the issues raised in the CMU consultation paper.
Replies must be submitted by 6 January 2016.
Commission proposal to modify the Solvency II Delegated Regulation
One of the goals of the CMU is to help mobilise capital in Europe and channel it to the infrastructure and long term sustainable projects that Europe needs to create jobs. By amending the rules on how much capital insurance companies need to hold, the Commission is giving them incentives to invest for the long-term in infrastructure.
The Commission is proposing legislation that will modify the Solvency II Delegated Regulation to create better incentives for insurers to invest in infrastructure projects, in particular by reducing the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects.
- The amended Regulation introduces a new concept of 'qualifying infrastructure investments'. Insurers will need to hold a lower level of capital against their investment in these infrastructure projects. 'Qualifying infrastructure investments' will form a distinct asset category under Solvency II and will benefit from an appropriate risk calibration, lower than that which would otherwise apply. This will ultimately lead to a lower capital charge.
- It allows investments in European Long-Term Investment Funds (ELTIFs) to benefit from lower capital charges under Solvency II. This brings them in line with investments in European Venture Capital Funds and European Social Entrepreneurship Funds, which benefit from the same equity capital charge as equities traded on regulated markets, lower than that for other equities.
- It grants equities traded on multilateral trading facilities (MTFs) the same capital charge as equities traded on regulated markets. This ensures coherence with the new legislative framework applicable to these structures.
- It extends the application of a transitional measure for equity investments to unlisted equities, so that insurers will not suddenly withdraw from equity investments. It also clarifies how insurers should apply the transitional measure to equities held in managed funds.
CJEU Declares Safe Harbour Invalid
The Court of Justice of the European Union (CJEU) has declared that the Commission's US Safe Harbour Decision 200/520 is invalid. This means that companies can no longer rely on Safe Harbour certification in order to legitimise the transfer of personal data from the EU to the US. Impacted companies will need to put alternative arrangements in place immediately to legitimise their transfers of personal data to the US, such as the Model Contractual Clauses or Binding Corporate Rules (BCRs).
The decision also means that the Data Protection Commissioner (the DPC) must now examine and decide whether, pursuant to the Data Protection Directive 95/46/EC, transfer of the data of Facebook's European subscribers to the US should be suspended on the ground that that country does not afford an adequate level of protection of personal data.
The CJEU's decision will put further pressure on the EU-US to reach a speedy agreement on the reform of Safe Harbour. Negotiations have been stuck for some time on the European Commission's recommendation that US authorities should only be allowed to access data covered by Safe Harbour to the extent that is strictly necessary or proportionate to the protection of national security. This effectively requires US authorities to restrict their electronic data surveillance practices. The CJEU's decision today shows the importance of this revision being agreed to in order for the negotiations to move forward. For further information please click here.
Following the landmark ruling the EU data protection authorities assembled in the Article 29 Working Party have discussed the first consequences to be drawn at European and national level.
The Court’s judgment requires that any adequacy decision implies a broad analysis of the third country domestic laws and international commitments. Therefore, the Working Party is urgently calling on the Member States and the European institutions to open discussions with US authorities in order to find political, legal and technical solutions enabling data transfers to the territory of the United States that respect fundamental rights.
In the meantime, the Working Party will continue its analysis on the impact of the CJEU judgment on other transfer tools. During this period, data protection authorities consider that Standard Contractual Clauses and Binding Corporate Rules can still be used.
If by the end of January 2016, no appropriate solution is found with the US authorities and depending on the assessment of the transfer tools by the Working Party, EU data protection authorities are committed to take all necessary and appropriate actions, which may include coordinated enforcement actions.
2016 Work Programme of the Joint Committee of the European Supervisory Authorities (ESAs)
On 5 October the Joint Committee of the ESAs (the Joint Committee) published their work programme for 2016.
Consumer Protection and Financial Innovation
The work on consumer protection and financial innovation will focus on the following:
a. Developing draft Regulatory Technical Standards (RTS) in the area of disclosures for PRIIPs. The legal text foresees three RTS:
- on the content and presentation of the Key Information Document (KID);
- on the revision and review of the KID; and
- on timing of the delivery of the KID.
The publication of the final draft RTS is expected in the first half of 2016.
b. In 2016 the Joint Committee will, where appropriate, develop policy recommendations based on the outcome of analysis of the benefits and risks in the automation in financial advice, including the responses to the joint Discussion Paper to be launched in the Autumn of 2015. The Joint Committee will assess, which, if any, regulatory and/or supervisory measures need to be taken.
c. The Joint Committee will, in relation to the implementation by financial institutions of the Complaints-Handling Guidelines that the three ESAs issued in their respective sectors in previous years, follow-up with an overall aim to achieve a consistent standard of application across the EU.
d. A new area of the financial innovation work will focus on the opportunities and challenges related to the use of “big data”, as well as personal data, by financial institutions to profile consumers, identify patterns of consumption and make targeted offers, which raises questions about firms expected behaviours in order to comply with their overarching obligations. The topic aims to analyse the adequacy of sectoral regulatory frameworks and identify any regulatory and/or supervisory measures which may need to be taken.
Cross-sectoral risk analysis and assessment will continue to be one of the main areas of focus for the Joint Committee in 2016. The ESAs will continue to produce in 2016, a Report on Risks and Vulnerabilities to the Council’s Economic and Financial Committee’s Financial Stability Table, in spring and in autumn, as part of their joint bi-annual reporting on micro-prudential analysis of cross-sectoral developments. The analyses will highlight the assessments by the ESAs of key trends and vulnerabilities to financial stability and continue to include appropriate cross-referencing in the sectoral risk reports.
The ESAs will continue to develop suitable indicators for cross-sectoral financial risks, and to enhance their analytical approaches. In particular, the ESAs will improve their cooperation on evaluating financial market developments of mutual concern, including their contributions to the European System Risk Board.
Securitisation: the ESAs will continue to monitor overall developments regarding the securitisation market in the EU.
Anti-Money Laundering (AML): The ESAs will continue their work to fulfil their mandates under the 4th AML Directive and AML Regulation. This will include:
- Guidelines on money laundering and terrorist financing risk factors and the application of enhanced and simplified customer due diligence;
- Guidelines on risk-based AML supervision;
- Guidelines on the information on the payer or the payee accompanying a wire transfer;
- Draft RTS on central contact points for payment services providers and issuers of electronic money;
- Draft RTS on the measures the firms should take where a third country’s legislation prohibits the application of equivalent AML/CFT standards; and
- A Joint Opinion on the money laundering/terrorist financing risks affecting the EU financial sector.
Financial Conglomerates: The ESAs will work on Guidelines on supplementary supervision of mixed financial holding companies under the Financial Conglomerates Directive. Further, the ESAs will continue to update the list of identified Financial Conglomerates and publish it on their websites. The ESAs stand ready to assist the Commission with its possible review of the Financial Conglomerates Directive.
Finally, the Joint Assessment Team of the Joint Committee will continue to assess the compliance of the different initial margin models to the requirements of the draft joint RTS on EMIR and the BCBS-IOSCO framework, and to give some clarification on the supervisory expectations on the models to the developers.
Cooperation with EEA EFTA states
The ESAs will cooperate with the European Commission and EEA EFTA countries in finalising a solution allowing for implementation of the ESAs Regulations as well as financial sectoral legislation in EEA EFTA states.
CCPC publishes Alternative Dispute Resolution entity notifications
On 1 October the Competition and Consumer Protection Commission (CCPC) published notification details for organisations that wish to be listed as an alternative dispute resolution (ADR) for consumers. ADR entities provide mechanisms that seek to solve disputes between consumers and traders out-of-court. The Commission will be responsible for assessing notifications to ensure that entities meet minimum standards as set out in the new regulations. It is voluntary for dispute resolution entities to be listed. For more details and the required notification form click here.
CPMI issues consultative report on correspondent banking
On 6 October the Committee on Payments and Market Infrastructures (CPMI) issued a consultative report on Correspondent banking (an essential component of the global payment system, especially for cross-border transactions).
The CPMI consultative report provides some basic definitions, outlines the main types of correspondent banking arrangement, summarises recent developments and touches on the underlying drivers. The report then reviews certain technical measures relating to (i) know-your-customer (KYC) utilities; (ii) increased use of the Legal Entity Identifier (LEI); (iii) information-sharing mechanisms; and (iv) improvements in payment messages. The report puts forward four recommendations for consideration by the industry and authorities.
The report seeks comments on the recommended technical measures by 7 December 2015, to be sent to the CPMI secretariat.
OECD advises CEOs and governments should treat digital security as an economic risk
On 1 October the OECD recommended that digital security risk should be treated as an economic rather than a technical issue, and should be part of an organisation’s overall risk management and decision-making, according to a new OECD Recommendation to member countries. The OECD Recommendation on Digital Security Risk Management says that leaders and CEOs in the public and private sectors should take specific responsibility for the issue and integrate it into overall planning, rather than treating it solely as a technology matter. The OECD, whose last Recommendation on digital security was in 2002, offers eight principles to guide digital security risk management, including on the responsibility of different actors, co-operation between stakeholders and the role of innovation. It recommends that countries adopt national plans to identify measures to prevent, detect, respond to and recover from digital security incidents.
Financial Reporting Council publishes consultation paper on proposed revision of auditing standards
On 29 September the Financial Reporting Council (FRC), as part of its ongoing work to enhance confidence in audit, has published a consultation on revisions to Ethical and Auditing Standards, the UK Corporate Governance Code and related Guidance on Audit Committees. The FRC is now consulting on proposals in connection with those elements which it considers should be introduced at the same time as the new EU Regulation and Directive on statutory audit (ARD) is implemented into the UK.
New report calls for measures to enable people to work until they reach the pension age
A new report by the EU's Social Protection Committee shows that EU’s pension systems can be expected to deliver adequate pensions to future generations of retirees provided strong policies to enable workers to stay in jobs until they reach the statutory pension age are pursued. The report recommends that employment policies should provide more possibilities for older workers to stay longer in the labour market. However, pension systems must also provide protection for those who are unable to remain in the labour market long enough to build up sufficient pension entitlements.
ESMA publishes Technical Advice on competition, choice and conflicts of interest in the credit rating industry
On 30 September ESMA published technical advice on competition, choice and conflicts of interest in the credit rating industry.
The Technical Advice draws together ESMA’s reflections on how the objectives of the CRA Regulation are being achieved in practice. It also presents data submitted by credit rating agencies (CRAs) to ESMA’s Central Repository (the CEREP database) and the responses received to ESMA’s Call for Evidence on Competition, Choice and Conflicts of Interest in the CRA Industry which ran from 5 February 2015 until 31 March 2015.
The Technical Advice concludes that the CRA Regulation already appears to have had a positive impact on the governance and operation of CRAs overall. However, it is important to wait and see how the markets develop in response to the implementation of the CRA Regulation before considering the adoption of further measures. This assessment should be revisited by ESMA within the next 3-5 years depending on changes in market dynamics. In light of the concerns raised in the Technical Advice about their effectiveness, ESMA will, in particular, keep the following provisions under review:
- Article 6 and Annex I regarding conflicts of interest;
- Article 6b regarding mandatory rotation;
- Article 8d regarding the requirement to consider using CRAs with less than a 10% market share; and
- Annex I Section B 3c regarding fees charged by CRAs for credit ratings and ancillary services.
ESMA publishes Technical Advice on reducing sole and mechanistic reliance on external credit ratings
On 30 September ESMA published technical advice on reducing sole and mechanistic reliance on external credit ratings. The Technical Advice provides a background to steps taken so far to reduce reliance on credit ratings by market participants, ESMA’s views in respect of the use of ratings across certain member states, the views of market participants on credit ratings and potential alternative indicators, the role of ratings within collateral assessment frameworks and some working examples of alternatives to credit ratings.
Although some steps have already been taken to mitigate reliance on ratings by financial market participants there still remain instances of references to ratings within national and EU sectoral legislation. In particular, CRR and Solvency II contain references to ratings in a number of critical areas, most notably capital requirement calculations. While these references remain, reducing reliance on ratings for these entities will remain challenging.
Outside of EU legislation it should be noted that credit ratings remain a factor within the collateral assessment frameworks of some central banks in the EU. Procedures reducing mechanistic reliance on ratings within these frameworks are a desirable objective.
It may not be practical to completely remove references to ratings within EU legislation and as such the focus of any future initiatives should be on the mitigation of mechanistic reliance on ratings rather than their removal altogether.
One particular set of alternative indicators that could be used to mitigate reliance on credit ratings are market-based indicators such as information based on the pricing of fixed income securities and credit default swaps. For smaller market participants mitigation of reliance on a particular rating could be achieved by the publication of credit rating data on the forthcoming European Ratings Platform.
EBA seeks legislative clarifications on mortgage lending value
The EBA has published an Opinion on mortgage lending value (MLV) addressed to the European Commission and related to the EBA's mandate to deliver technical standards harmonising the concept of MLV in the Capital Requirements Regulation (CRR). The EBA raises concerns about the possible unintended consequence that a harmonised definition of MLV across the CRR might have on the EU covered bonds market. While stressing the importance of pan-EU harmonisation of the MLV concept, the EBA is of the opinion that the scope of application of the RTS on MLV should be limited to the credit risk area, the credit risk mitigation and the large exposure framework. Therefore, the EBA is advising the Commission to initiate appropriate legislative steps with a view to limiting the scope of these RTS on MLV. In light of the concerns raised, the EBA called on the EU Commission to clarify the scope of the mandate laid down in the CRR so as to avoid these possible unintended implications, which could happen in the context of the work on the Capital Markets Union and a comprehensive review of EU covered bond frameworks. Until such clarification is provided, the EBA will not work further on its mandate.
Pensions Authority publishes synopsis of responses to consultation on draft codes of governance for DC schemes
On 6 October 2015 the Pensions Authority published a synopsis of the main points made in submissions it received in response to its consultation paper on draft codes of governance for defined contribution schemes.
The Authority received a total of thirteen written submissions in response to the consultation. The synopsis document reflects the main points made and a range of suggestions offered on how the draft codes could be improved. The next stage of this process will involve a detailed consideration of all of the points made which will further inform the Pension Authority’s views on the appropriate revisions to be made to the codes.
Payment Services Directive FAQ
On 8 October the European Commission published its FAQ on the Payment Services Directive (PSD).
European Parliament adopts European Commission proposal to create safer and more innovative European payments
On 8 October the European Commission welcomed the adoption by the European Parliament of the revised Directive on Payment Services (PSD2). The new law, proposed by the European Commission in July 2013, enhances consumer protection, promotes innovation and improves the security of payment services. PSD2 is the latest in a series of laws recently adopted by the EU in order to provide for modern, efficient and cheap payment services and to enhance protection for European consumers and businesses. Following the Parliament's vote, the Directive will be formally adopted by the EU Council of Ministers in the near future. The Directive will then be published in the Official Journal of the EU. From that date, Member States will have two years to introduce the necessary changes in their national laws in order to comply with the new rules.
IFRIC publish draft interpretation regarding foreign currency transactions and advance consideration
The draft Interpretation has been published by the International Accounting Standards Board’s IFRS Interpretations Committee (‘the Interpretations Committee’).
The Interpretations Committee received a question about which exchange rate to use when reporting transactions that are denominated in a foreign currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. The request described a circumstance in which a customer paid for goods or services by making a non-refundable payment in advance.
IAS 21 sets out requirements about which exchange rate to use when recording a foreign currency transaction on initial recognition in an entity’s functional currency. However, the Interpretations Committee observed some diversity in practice in circumstances in which consideration was received or paid in advance of the recognition of the related asset, expense or income.
Consequently, the Interpretations Committee developed the draft Interpretation. Comments to be received by 19 January 2016.
FRC proposes new guidance to enhance reporting on risks and the going concern basis of accounting
The Financial Reporting Council (FRC) has issued for consultation draft guidance on the assessment of and reporting on the going concern basis of accounting and solvency and liquidity risks. The guidance is intended to assist directors in applying the relevant requirements in accounting standards and company law, incorporating recent regulatory developments such as the introduction of new UK and Ireland GAAP and the Strategic Report. Comments and feedback on the FRC’s discussion paper are invited by 15 January 2016.
EBA, EIOPA and ESMA consult on anti-money laundering and countering the financing of terrorism
The Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) have launched a public consultation on two anti-money laundering and countering the financing of terrorism (AML/CFT) Guidelines.
The consultation closes on 22 January 2016. The ESAs will hold a public hearing on the draft Guidelines, which will take place at the EBA premises in London on 15 December 2015.
The Risk-Based Supervision Guidelines
The Guidelines specify the characteristics of a risk-based approach to AML/CFT supervision and set out what competent authorities should do to ensure that their allocation of supervisory resources is commensurate to the level of money laundering and terrorist financing (ML/TF) risk associated with credit and financial institutions in their sector.
The Risk-Factors Guidelines
It provides guidance on the factors credit and financial institutions should consider when assessing the risk of ML and TF associated with individual business relationships, and on how they should adjust their customer due diligence measures as a result of that risk assessment. They also aim to help competent authorities assess whether the ML/TF risk assessment and management systems and controls of EU credit and financial institutions are adequate.
ESMA prepares for entering into force of amended Transparency Directive
The Transparency Directive (TD), which creates a common basis for disclosure and dissemination of regulated information to the markets on a regular and on-going basis, was amended in 2013 and enters into force on 26 November 2015.
In order to promote the implementation and contribute to a harmonised EU application, ESMA has published the following four documents relating to the amended TD:
- Updated Q&A on TD
- New standard “Home Member State Disclosure form”
- New standard form for the notification of major holdings
- Re-published the indicative list of financial instruments subject to notification requirements as stand-alone document
Public consultation on impacts of maximum remuneration ratio under CRD IV and overall efficiency of CRD IV remuneration rules
The Commission is called upon to review and report on the application and the impact of the remuneration rules in CRD IV by 30 June 2016. The purpose of the consultation is firstly to obtain information and views from stakeholders on paragraph (b) of Article 161(2) CRD IV, namely on the possible impact of the Maximum Ratio Rule on: (i) competitiveness, (ii) financial stability, and (iii) staff in non-EEA countries. Secondly, it seeks stakeholders' views on the overall efficiency of the remuneration provisions of CRD and CRR.
The responses will be taken into account in the Commission’s assessment and report required under Article 161(2) CRD, in parallel with information received from EBA, the results of an external study carried out for the Commission and other information available.
ESMA urges companies to improve quality of disclosures in financial statements
ESMA has published a Public Statement on improving the quality of disclosures in financial statements following growing concern over their relevance. ESMA stresses the need for clear and concise disclosures which are company specific and to avoid boiler-plate templates, highlighting that the size of annual reports often makes it hard for users to identify key information.
ESMA encourages all parties involved in preparing financial statements to contribute to improving the quality of disclosures:
- issuers should focus on preparing disclosures which are relevant and material, making them as specific and readable as possible;
- auditors should encourage issuers to focus on materiality and entity-specific information; and
- European national enforcers should promote best practice amongst issuers and reflect on their enforcement practices in the light of this statement.
European national enforcers will monitor and discuss together progress on improvements to the quality of disclosures and reflect on their enforcement practices in the light of this statement.
ESMA sets enforcement priorities for listed companies’ 2015 financial statements
The Statement on Priorities identifies topics which ESMA, together with European national enforcers, see as key areas when they examine listed companies’ 2015 financial statements. The common enforcement priorities focus on recurring issues identified in the application of IFRS requirements and the current economic climate where it may pose challenges to issuers, in particular, the current interest rate environment, foreign exchange rate and country risks.
The common enforcement priorities encompass the following topics:
- Impact of financial markets conditions on financial statements; ESMA urges listed companies and their auditors to pay particular attention to the current interest rate environment, country risk in relation to where their business is located and exposure to foreign exchange rates and high volatility for commodities.
- Statement of cash flows and related disclosures: issuers should ensure the statement and disclosures are consistent with the other primary financial statements.
- Fair value measurement and related disclosures: ESMA considers there is substantial room to improve measurement and disclosure related to non-financial assets and liabilities in particular.
IFRS Practice Statement: Application of Materiality to Financial Statements
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. General purpose financial statements are a type of general purpose financial report.
The aim of this Exposure Draft of the IFRS Practice Statement Application of Materiality to Financial Statements (the ‘[draft] Practice Statement’) is to provide guidance to assist management in applying the concept of materiality to general purpose financial statements prepared in accordance with IFRS. Information is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.
The consultation is open for comment until 26 February 2016.
For further information please contact a member of the Financial Regulation team.
Date published: 09 November 2015