European Commission
CRR - Commission Delegated Regulation amending RTS on calculation of credit risk adjustments published in OJ - 21 June 2022
Commission Delegated Regulation (EU) 2022/954 amending the regulatory technical standards (RTS) laid down in Commission Delegated Regulation 183/2014/EU as regards the specification of the calculation of specific and general credit risk adjustments under the Capital Requirements Regulation (575/2013/EU), has been published in the Official Journal of the European Union.
Currently, the capital charge for a defaulted exposure may, under certain circumstances, increase after its sale from a risk weight of 100% on the seller’s balance sheet to a risk weight of 150% on the balance sheet of the credit institution buying the assets. The Commission Delegated Regulation amends the existing RTS on credit risk adjustments by introducing a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same in both cases. In particular, the price discount stemming from the sale will be recognised as a credit risk adjustment for the purposes of determining the risk weight.
The European Commission adopted the Commission Delegated Regulation on 12 May 2022. It will come into force on 11 July 2022.
Commission Delegated Regulation (EU) 2022/954 of 12 May 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) No 183/2014 as regards the specification of the calculation of specific and general credit risk adjustments
Council of the European Union
CMDI framework - Eurogroup publishes statement on the future of the banking union - 16 June 2022
The Eurogroup (an informal body that brings together ministers from the euro area countries to discuss euro-related matters) has published a statement on the future of the banking union. The statement sets out that, as an immediate step, work on the banking union should focus on strengthening the common framework for bank crisis management and national deposit guarantee schemes (CMDI), as set out in the Bank Recovery and Resolution Directive (2014/59/EU), the Single Resolution Mechanism Regulation (806/2014/EU) and the Deposit Guarantee Schemes Directive (2014/49/EU).
The Eurogroup agrees that the following elements should underpin a strengthened CMDI framework:
- a clarified and harmonised public interest assessment;
- broader application of resolution tools in crisis management at the European and national level, including for smaller and medium-sized banks, where the funding needed for effective use of resolution tools is available, particularly through the minimum requirement for own funds and eligible liabilities (MREL), and industry-funded safety nets;
- further harmonisation of the use of national deposit guarantee schemes (DGSs) in crisis management; and
- harmonisation of targeted features of national bank insolvency laws to ensure consistency with the principles of the EU CMDI framework.
The Eurogroup invites the European Commission to consider bringing forward legislative proposals for a reformed CMDI framework during this institutional cycle until early-2024, and further plans to review the state of the banking union to identify, “in a consensual manner”, possible further measures to strengthen and complete the banking union.
Eurogroup statement on the future of the Banking Union
European Banking Authority
COVID-19-impacted data - EBA publishes four draft principles for banks - 21 June 2022
The European Banking Authority (EBA) has published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using internal ratings based (IRB) models. The draft principles are based on the policy laid down in the Capital Requirements Regulation (575/2013/EU) (CRR) and the EBA’s November 2017 Guidelines on the probability of default (PD) and loss given default (LGD) (EBA/GL/2017/16) (the Guidelines).
The principles relate to:
- assessing data representativeness: the guidance on the assessment of data representativeness laid down in the Guidelines should be applied in the case of COVID-19-impacted data;
- IRB risk parameters: a significant decrease in applied IRB risk parameters compared to pre-crisis levels indicates a potential lack of representativeness and should be analysed in more depth;
- default and loss rates: in the case of non-representativeness of the default and loss rates observed during the pandemic, a recalibration should be postponed to lower long-run averages; and
- validation and recalibration of downturn LGD: potential downward recalibrations should be postponed at least until the effects of the pandemic have fully materialised in the observed loss rates.
The principles will be part of a supervisory handbook, which the EBA plans to publish later in 2022. The handbook aims to ensure a harmonised approach in the use of COVID-19 data, especially where the use of moratoria and other public measures may have led to changes in default rates.
Principles that should be applied in ensuring representativeness of the IRB-relevant data impacted by the COVID-19 pandemic and related measures
Press release
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PSD2 - EBA publishes reply to European Commission’s call for advice on review - 23 June 2022
The European Banking Authority (EBA) has published an opinion and report in response to the European Commission’s October 2021 call for advice on the review of the Payment Services Directive ((EU) 2015/2366) (PSD2).
The EBA puts forward more than 200 proposals that would contribute to the development of the single EU retail payments market and ensure a harmonised and consistent application of the legal requirements across the EU.
The EBA’s proposed amendments to PSD2 include:
- merging PSD2 and the Electronic Money Directive (2009/110/EC);
- clarifying the application of strong customer authentication (SCA) and the transactions in scope;
- addressing new security risks for customers such as where customers are tricked into initiating a payment transaction;
- addressing concerns about authentication approaches that have led to the exclusion of certain groups in society from using payment services online; and
- adjusting the prudential requirements, in particular, in relation to initial capital, own funds, the use of professional indemnity insurance, the proposal for recovery and wind-down for significant payment institutions and possible consolidated (group) supervision.
Opinion of the European Banking Authority on its technical advice on the review of Directive (EU) 2015/2366 on payment services in the internal market (PSD2) (EBA/Op/2022/06)
EBA letter to John Berrigan: European Commission Call for advice to the European Banking Authority (EBA) regarding the review of Directive (EU) 2015/2366) (PSD2) (EBA-2022-D-3992)
Press release
HM Treasury
Buy now pay later products - HM Treasury publishes response to consultation paper - 20 June 2022
HM Treasury has published its response to its consultation paper on the regulation of interest-free buy now pay later (BNPL) products, published in October 2021. The consultation sought stakeholder views on the scope of BNPL regulation, that is, what activities should be regulated, as well as the regulatory controls that should be applied to the products.
In the response, the government confirms its intention to:
- expand the scope of regulation beyond the BNPL-only scope proposed in the consultation so that it includes short-term interest-free credit (STIFC) provided by third-party lenders;
- allow exemptions for specific agreements where there is a limited risk of potential consumer detriment, and where regulation would otherwise adversely impact day-to-day business activities; and
- take an approach to regulatory controls for in-scope agreements that will tailor the application of the Consumer Credit Act 1974 (CCA) to these products.
The government is also minded to extend the scope of regulation to capture STIFC agreements which are provided directly by merchants where they are offered online or at a distance, subject to further stakeholder feedback which is requested by 1 August 2022.
Given the anticipated complexity of the legislation implementing the new regulatory regime, the government intends to publish a second consultation seeking views on draft legislation by end-2022. Following consultation on this draft legislation, the government aims to lay secondary legislation in mid-2023 confirming the scope and framework of the new regulatory regime. This will enable the FCA to consult on its approach for the new regime and undertake a cost-benefit analysis.
HM Treasury Consultation: Regulation of Buy-Now Pay-Later: Response
Press release
Financial Policy Committee
Mortgage affordability test recommendation - Bank of England publishes FPC response to consultation - 20 June 2022
The Bank of England has published a response from the Financial Policy Committee (FPC) following the FPC’s consultation paper on the withdrawal of its mortgage affordability test recommendation, published in February 2022.
The FPC notes that the majority of respondents were supportive of its proposal to withdraw the affordability test and maintain the ‘LTI flow limit’, which limits the number of mortgages that can be extended at loan to income (LTI) ratios at or greater than 4.5. The FPC will therefore withdraw the affordability test recommendation with effect from 1 August 2022. Lenders do not need to make any changes as existing affordability assessment practices are subject to the FCA’s mortgage conduct of business framework and will remain so. The FPC notes that it will be up to individual lenders as to whether they wish to make any changes to their own lending practices and to determine the timing of any such changes after this date.
An FPC Response - Consultation on withdrawal of the affordability test Recommendation
Press release
Prudential Regulation Authority
Model risk management principles for banks - PRA publishes consultation paper (CP6/22) - 21 June 2022
The PRA has published a consultation paper (CP6/22) setting out a proposed set of five principles for banks which the PRA considers to be key in establishing an effective model risk management (MRM) framework. The expectations are set out in a proposed new supervisory statement, ‘Model risk management principles for banks’, in the appendices to CP6/22.
The PRA considers MRM as a risk discipline in its own right, and proposes to embed these principles, in a proportionate manner, as supervisory expectations for all regulated UK-incorporated banks, building societies, and PRA-designated investment firms. The proposed principles, which are intended to address specific shortcomings currently observed in UK banks, and which complement existing requirements and supervisory expectations in force on MRM, relate to:
- model identification and model risk classification;
- governance;
- model development, implementation and use;
- independent model validation; and
- model risk mitigants.
The PRA notes that while the proposals may be relevant to insurance firms, given the ongoing review of the Solvency II Directive (2009/138/EC), it has decided not to extend the proposals to insurers at this time. The PRA intends to consider at a later date whether there is a need to strengthen MRM practices for insurers.
The deadline for responses is 21 October 2022.
PRA Consultation Paper: Model risk management principles for banks (CP6/22)
Appendices to CP6/22
Recent cases
Barclays Partner Finance Applicants v The Financial Conduct Authority UKUT 00151 (TCC) - 16 June 2022 - Right to claim compensation - Right to seek validation order - Section 28A FSMA
The Upper Tribunal has drawn a distinction between the compensation regime available to consumers under section 28A(2) of the Financial Services and Markets Act 2000 (FSMA) and the enforceability of a regulated credit agreement under section 28A(3) FSMA. In doing so, it confirmed that the right to apply for compensation exists independently of the right to apply for a validation order, as these are “separate rights, and each has to be independently invoked. The fact that a consumer has invoked the compensation process does not of itself invoke the validation process and the converse also applies.”
Barclays Partner Finance Applicants v The Financial Conduct Authority UKUT 00151 (TCC)
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