Basel Committee
NPL securitisation - Basel Committee proposes technical amendment to prudential treatment - June 2020
The Basel Committee on Banking Supervision has published a proposal for a technical amendment to the prudential treatment of non-performing loan (NPL) securitisations. The technical amendment establishes a 100% risk weight for certain senior tranches of NPL securitisations. The risk weight applicable to the other positions are to be determined by using the existing hierarchy of approaches, in conjunction with a 100% risk weight floor and a ban on the use of certain inputs for capital requirements. The proposed amendment does not change the applicable capital requirements to securitisations of performing assets.
The Basel Committee welcomes comments on the proposed amendment until 23 August 2020.
Basel Committee technical amendment to the prudential treatment of NPL securitisations
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Press release
European Commission
Consumer Credit Directive - European Commission publishes inception impact assessment - 23 June 2020
The European Commission has published an inception impact assessment following its review of the Consumer Credit Directive (2008/48/EC) (CCD) in 2018/19. The assessment aims to inform stakeholders and the general public about the Commission’s plans, so that they can comment on planned initiatives and participate effectively in upcoming consultations.
The full results of the Commission’s review will be published in summer 2020, but broadly the Commission found that the Directive does not fully achieve its objectives, especially in the light of changing consumer and market needs. Against this background, the Commission has decided to review the CCD in line with its better regulation principles. The Commission has identified several key issues which it aims to tackle as part of this initiative, including that:
- the scope of the CCD may be inadequate to protect consumers from new challenges arising from the emergence of new credit providers and platforms, such as peer-to-peer (P2P) lending, and new forms of consumer credit, such as short-term high-cost loans and microloans;
- the content and disclosure of information provided to consumers in accordance with the CCD is often too complex; and
- the CCD does not contain appropriate provisions to adequately deal with exceptional situations and systemic economic disruption, such as that caused by COVID-19.
The Commission states that several policy options will be assessed in response to these key issues, ranging from implementing no policy changes to comprehensive revision of the CCD. The deadline for comments on the assessment is 1 September 2020. The Commission intends for its work on reviewing the CCD to result in proposals to amend the CCD in respect of the highlighted weaknesses by Q2 2021.
European Commission impact assessment on its review of EU consumer credit rules
European Parliament
COVID-19 - European Parliament adopts first reading position on proposed Regulation amending the CRR - 19 June 2020
The European Parliament has adopted its position at first reading on proposed Regulation (2020/0066(COD)), which contains a series of amendments to the Capital Requirements Regulation (575/2013/EU) (CRR) to mitigate the economic impact of the COVID-19 pandemic and encourage banks to lend credit to the real economy.
The CRR Amending Regulation proposes several important changes, including: (i) extending the transitional arrangements for IFRS 9 by two years; (ii) aligning minimum coverage requirements for non-performing loans guaranteed by the public sector with those guaranteed by official export credit agencies; (iii) deferring the application of the leverage ratio buffer by one year to January 2023; and (iv) applying more favourable prudential treatment to loans to individuals backed by the borrower’s pension or salary, certain exposures to small and medium-sized enterprises (SMEs) and infrastructure investments. It also proposes the introduction of a temporary “prudential filter” to calculate losses accumulated by firms since 31 December 2019 and the reintroduction of transitional arrangements relating to preferential treatment for exposures to government and central bank bonds denominated in currencies of non-Euro member states.
The Council of the European Union also adopted the proposed Regulation at first reading on 24 June 2020. The European Commission adopted the legislative proposal for the Regulation in April 2020. The Council of the EU states that the Regulation will enter into force on the day following its publication in the Official Journal of the European Union, and at the latest by the end of June 2020.
Adopted text of proposed Regulation (2020/0066(COD)) amending the CRR in light of COVID-19
Press release: European Parliament adopts proposed Regulation at first reading
Press release: Council of the EU adopts proposed Regulation at first reading
Capital Markets Union - European Parliament publishes draft report - 19 June 2020
The European Parliament Economic and Monetary Affairs Committee (ECON) has published a draft report on further developments relating to the Capital Markets Union (CMU).
The draft report, which takes into account the final report by the High-Level Forum on the CMU, dated 10 June 2020, contains a motion for a legislative resolution which includes:
- measures to enhance supervisory convergence to promote a common EU model, guided by the European Securities and Markets Authority (ESMA), to reduce the existing obstacles to cross-border financial operations;
- measures to promote and increase the participation of retail investors in capital markets through more attractive and appropriate personal pension products;
- introducing a new category of semi-professional investors to better tailor the treatment of retail investor clients according to their knowledge and experience on the markets;
- measures to simplify the current reporting frameworks under the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), which are considered costly, complex and ineffective;
- amendments to ensure access to independent advice by financial intermediaries and to ensure the fair marketing of financial products; and
- measures promoting the creation of a pan-European ‘sandbox’ for financial services to enhance innovation and the competitiveness of the sector.
European Parliament draft report on further developments of the CMU
Official Journal of the European Union
Macroprudential policy measures - ESRB Decision postponing certain reports published in the Official Journal - 19 June 2020
Decision ESRB/2020/10 of the European Systemic Risk Board (ESRB) of 2 June 2020 on the cancellation of certain reports on actions and measures taken pursuant to ESRB Recommendations ESRB/2014/1 and ESRB/2015/2 has been published in the Official Journal of the European Union. The Decision cancels the requirement to submit the relevant reports under the Recommendations. ESRB/2014/1 relates to the setting of countercyclical buffer rates (CCyB) and ESRB/2015/2 concerns the cross-border effects of macro-prudential measures. Reports on the Recommendations had been due by 30 June 2020.
Official Journal: ESRB Decision cancelling certain reports on actions and measures taken pursuant to ESRB Recommendations ESRB/2014/1 and ESRB/2015/2
CRR - Delegated Regulation containing revisions to RTS on prudent valuation published in the Official Journal - 25 June 2020
Commission Delegated Regulation (EU) 2020/866 of 28 May 2020, which amends Delegated Regulation (EU) 2016/101 with regard to the regulatory technical standards (RTS) for prudent valuation under Article 105 of the CRR, has been published in the Official Journal of the European Union.
Under Article 105 of the CRR, institutions are required to value prudently their fair-valued instruments, and Delegated Regulation (EU) 2016/101 specifies how additional valuation adjustments (AVAs) should be calculated for this purpose, by reference either to a core or a simplified approach. In light of the economic impact of COVID-19, Commission Delegated Regulation (EU) 2020/866 temporarily increases the aggregation factor applicable to the core approach from 50% to 66% until 31 December 2020 in order to mitigate the excessive procyclical effect of the current prudent valuation aggregation part of the framework.
The Delegated Regulation will enter into force on 26 July 2020.
Official Journal: Commission Delegated Regulation (EU) 2020/866 revising RTS on prudent valuation under the CRR
European Banking Authority
CRR - EBA publishes final draft ITS on supervisory reporting requirements - 24 June 2020
The European Banking Authority (EBA) has published revised final draft implementing technical standards (ITS) on supervisory reporting requirements for institutions under the CRR. This follows the EBA’s consultation on the draft ITS in October 2019.
The draft ITS will replace and repeal the existing ITS on supervisory reporting set out in Commission Implementing Regulation (680/2014/EU) and reflects changes introduced by the second Capital Requirements Regulation (EU) 2019/876 (CRR II) and Regulation (EU) 2019/630, which established a prudential backstop for non-performing loans (NPLs). The draft ITS include new reporting requirements on counterparty credit risk and net stable funding ratio (NSFR) and minimum coverage for non-performing exposures. It also makes several changes to the reporting of: (i) own funds; (ii) credit risk; (iii) large exposures; (iv) leverage ratio; (v) financial information (FINREP); and (vi) global systemically important institution (G-SII) indicators.
The first reference date for the application of the ITS is expected to be 30 June 2021. The draft ITS will be submitted to the European Commission for endorsement before being published in the Official Journal of the European Union.
EBA final report on draft ITS on supervisory reporting requirements under the CRR
Press release
CRR - EBA publishes final draft ITS on public disclosure requirements - 24 June 2020
The EBA has published final draft ITS on public disclosure requirements for institutions under the CRR. This follows the EBA’s consultation on the draft ITS in October 2019.
The draft ITS aim to: (i) optimise the Pillar 3 policy framework by providing a single comprehensive package, improving clarity for users of information; (ii) promote market discipline by increasing the consistency and comparability of the information disclosed by institutions; (iii) improve alignment with new regulatory changes introduced by CRR II and the Basel Committee revised Pillar 3 disclosure framework; (iv) improve access to institutions’ key prudential data; and (v) increase the efficiency of disclosures through technology, including the integration of quantitative disclosure data and supervisory reporting.
The draft ITS are expected to apply from 30 June 2021 and will be submitted to the European Commission for endorsement before being published in the Official Journal of the European Union.
EBA final report on draft ITS on public disclosure requirements under the CRR
Press release
HM Treasury
Financial Services Bill - HM Treasury updates policy statement on prudential standards and FCA publishes Discussion Paper on UK prudential regime for investment firms - June 2020
HM Treasury has published an updated version of its policy statement on the prudential standards contained in the forthcoming Financial Services Bill. As noted in a previous edition of this Bulletin, the Bill was announced in March 2020 and is expected to be introduced in the current Parliamentary session.
Among other things, the Bill will:
- enable the implementation of outstanding Basel III standards and provisions under CRR II for banks that will not be incorporated into UK legislation by the end of the Brexit transition period; and
- introduce the Investment Firms Prudential Regime (IFPR), an updated prudential regime for investment firms in the UK Investment Firms Prudential Regime (IFPR)in light of the EU’s recently introduced regime under the Investment Firms Directive ((EU) 2019/2034) (IFD) and Investment Firms Regulation ((EU) 2019/2033) (IFR), which will apply in the EU from June 2021.
The updated policy statement explains HM Treasury’s legislative approach to the implementation of prudential standards, including the introduction of a delegation and accountability framework for the UK regulators. It indicates that HM Treasury, the PRA and the FCA intend to introduce the IFPR and updated rules for credit institutions so that they achieve similar intended outcomes as those in the relevant EU legislation. However, the regulators plan to make targeted deviations from the EU regimes where necessary to reflect the number, size and nature of investment firms and credit institutions within the UK and the structure of the UK market and how it operates. In a separate written ministerial statement (see Brexit section), Mr Sunak MP stated:
“For the IFPR, the June update further clarifies that the Government and the PRA do not intend to require PRA-designated investment firms to re-authorise as credit institutions, unlike the EU regime. It also clarifies that the Government does not intend to require FCA-regulated investment firms to comply with the requirements of the Fifth Capital Requirements Directive (CRD V) in the period until the new IFPR applies. A consultation on our transposition of CRD V will take place in July”.
HM Treasury intends for the updated UK prudential regimes for banks and investment firms to apply from summer 2021, though the timing will ultimately depend on the Bill’s passage through Parliament.
Separately, the FCA has published a Discussion Paper (DP20/2) on the government’s proposals to introduce the IFPR after Brexit for UK investment firms who are currently authorised under MiFID II. The paper sets out the technical details of, and the FCA’s initial views on, the EU regime introduced by the IFD and IFR and seeks industry feedback on the design of the UK regime. Annex 3 provides a table to help all types of MiFID investment firms determine the parts of the Discussion Paper most relevant to their business models.
The deadline for comments is 25 September 2020. Feedback received in response to the FCA Discussion Paper will inform its consultation.
Updated HM Treasury Policy Statement on prudential standards in the Financial Services Bill
Webpage
FCA Discussion Paper on introducing a new UK prudential regime for MiFID investment firms
Webpage
Press release
BRRD II - HM Treasury publishes consultation on transposition - June 2020
HM Treasury has published a consultation on how it intends to transpose the second Bank Recovery and Resolution Directive (EU) 2019/879 (BRRD II) into UK law. The BRRD II sets a deadline of 28 December 2020 for EU member states to adopt and publish the necessary measures to comply.
The government confirms that it will implement EU legislation that requires transposition before the end of 2020, including BRRD II. However, in the accompanying written statement on the UK’s approach to forthcoming reforms (see Brexit section), Mr Sunak MP states:
“In our transposition of BRRD II we are not intending to transpose the requirements in the Directive that do not need to be complied with by firms until after the end of the EU Exit Transition Period, in particular Article 1(17) which revises the framework for MREL requirements across the EU. … The UK already has in place a MREL framework in line with international standards. BRRD II states that the deadline for institutions and entities to comply with end-state MREL requirements shall be 1 January 2024. Given this is after the end of the Transition Period, it is right that the UK exercises its discretion about whether to transpose those requirements”.
The consultation seeks views on the UK’s approach to transposition, particularly in areas where there are certain policy choices available, including in relation to: (i) moratorium powers; (ii) the sale of eligible liabilities to retail clients; and (iii) the contractual recognition of bail-in and resolution stay powers.
The consultation period closes on 11 August 2020. Following its consultation, HM Treasury intends to lay a statutory instrument transposing BRRD II before 28 December 2020.
HM Treasury consultation on the transposition of BRRD II
Webpage
Bank of England
Record of the Financial Policy Committee - published by Bank of England - 25 June 2020
The Bank of England has published a record of the decisions taken by the Financial Policy Committee (FPC) since publishing its interim Financial Stability Report (FSR) on 5 May 2020.
The FPC states that it has taken a number of decisions, including:
- maintaining the UK countercyclical capital buffer (CCyB) rate at 0% in Q2 2020;
- following an update on the provision of cloud services in June 2020, postponing further discussions on the risks posed by cloud services until 2021; and
- supporting the government’s intention to amend and strengthen the UK’s existing regulatory framework for critical benchmarks before the end of 2021 to ensure that the FCA have the appropriate regulatory powers to manage any wind-down period before the cessation of LIBOR.
The FPC also states that in light of the interim FSR, published in May 2020, it has decided to delay the publication of the Q2 FSR until 6 August 2020.
Record of the Financial Policy Committee: June 2020
Webpage
Financial Policy Committee - Bank of England publishes letter on its remit and recommendations for 2020/21 - 25 June 2020
The Bank of England has published a letter from Andrew Bailey (Governor of the Bank of England and Chairman of the FPC) to Rishi Sunak MP (Chancellor of the Exchequer) welcoming the remit and recommendations for the FPC for 2020/21, which were published by HM Treasury in March 2020.
The letter summarises the FPC’s ongoing work to mitigate the economic impact of COVID-19 before outlining its current work in relation to its financial stability objectives. In particular, the letter outlines the FPC’s work on non-bank financial sector risks, including the preparation of an assessment on the adequacy of the risk oversight system and the risk mitigation system for non-banks. The assessment plans to: (i) evaluate how well systemic risks are identified and monitored via existing data and the availability and effectiveness of tools and the UK’s framework for dealing with systemic risks; and (ii) list a series of possible indicators that the FPC could regularly publish to monitor and assess risks from the non-bank financial sector going forward. The assessment will apply to all non-bank financial institutions and the preliminary findings are planned to be published in the Q2 FSR in early August 2020.
Among other things, Mr Bailey also discusses the government’s economic policy for the financial services industry, the UK’s exit from the EU and the importance of managing the financial stability risks arising from climate change.
Letter from Andrew Bailey (Governor of the Bank of England) to Rishi Sunak MP (Chancellor of the Exchequer) on the FPC’s remit and recommendations for 2020/21
Prudential Regulation Authority
COVID-19 - PRA publishes statement on the implementation of the EBA Guidelines on the reporting and disclosure of exposures subject to COVID-19 measures - 24 June 2020
The PRA has published a statement on the implementation of the EBA Guidelines on the reporting and disclosure of exposures subject to COVID-19 measures, published by the EBA on 2 June 2020. The EBA developed the Guidelines to address data gaps associated with measures taken in response to the pandemic to ensure an appropriate understanding of institutions’ risk profiles and the asset quality on their balance sheets for supervisors and the wider public.
The PRA states that in light of the PRA and FCA’s approach to payment deferrals, it does not consider it necessary to extend the supervisory reporting elements of the Guidelines to UK credit institutions. Therefore, firms are not expected to submit to the PRA the reporting templates contained in the Guidelines. The PRA intends to consider further how the disclosure elements of the Guidelines will be applied, and to provide further details on this in due course.
PRA statement on the implementation of EBA Guidelines on on the reporting and disclosure of exposures subject to COVID-19 measures
Financial Conduct Authority
COVID-19 - FCA publishes draft updated temporary guidance for consumer credit customers - 19 June 2020
The FCA has published draft updated temporary guidance for consumer credit customers in light of the economic impact caused by the COVID-19 pandemic. The draft guidance relates to credit cards, overdrafts and personal loans and updates the final guidance and temporary financial relief measures published by the FCA on 9 April 2020.
The proposed guidance outlines the support firms would be expected to provide to credit card, overdraft and personal loan customers approaching the end of an initial payment freeze, as well as those yet to request one. Among other things, the proposals suggest that:
- firms should contact customers at the end of a payment freeze to find out if they can resume payments and agree a plan for repayment;
- for customers who continue to face temporary payment difficulties, firms should reduce payments on credit card and personal loans to an affordable level for three months;
- firms should continue to support overdraft customers by allowing them to request up to £500 interest-free for a further three months. Firms should also offer lower interest rates on borrowing above the interest-free buffer and repayment plans;
- the availability of support measures should be extended to allow customers who have not yet had a payment freeze or an arranged interest-free overdraft of up to £500 to request one up until 31 October 2020;
- any full or partial payment freezes offered under the guidance should not impact negatively on credit files; and
- firms should be particularly aware of the needs of vulnerable customers when implementing the guidance. Firms should also help customers understand the types of debt help and money guidance that are available and encourage them to access the resources that can help them.
This guidance does not apply to consumer credit products such as motor finance or the provision of high-cost short-term credit and pawnbroking agreements, which are covered by separate guidance which will be updated in due course.
Comments can be made on the proposals until 22 June 2020. The FCA expects to finalise the updated guidance shortly afterwards.
Press release: FCA publishes draft updated temporary guidance for consumer credit customers in light of COVID-19
FCA draft updated temporary guidance for firms in relation to credit cards in light of COVID-19
Webpage
FCA draft updated temporary guidance for firms in relation to overdrafts in light of COVID-19
Webpage
FCA draft updated temporary guidance for firms in relation to personal loans in light of COVID-19
Webpage
Recent Cases
Case C-639/18 KH v Sparkasse Südholstein, 18 June 2020
Interpretation of ‘distance contract’ – interest rate agreements for existing loans - Article 2(a) of the Distance Marketing of Financial Services Directive (2002/65/EC)
The European Court of Justice (First Chamber) (ECJ) has given a preliminary ruling on the correct interpretation of Article 2(a) of the Distance Marketing of Financial Services Directive (2002/65/EC) (DMFSD) and the concept of a ‘distance contract’. The case considered whether the DMFSD applied to an agreement concluded by way of distance communication that amended the interest rate of an existing loan contract. Article 2(a) of DMFSD defines a ‘distance contract’ as “any contract concerning financial services concluded between a supplier and a consumer under an organised distance sales or service-provision scheme run by the supplier, who, for the purpose of that contract, makes exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded”.
The ECJ concluded that the concept of "contract concerning financial services" within the meaning of Article 2(a) must include a subsequent interest rate agreement that neither extends the term nor modifies the amount of the loan. An agreement on a new fixed interest rate would not be an “operation” of the existing contract within the meaning of the DMFSD, but rather a new contract between the same parties. Moreover, there would be an "organised distance sales or service-provision scheme run by the supplier" for these purposes “where a supplier, in order to conclude a subsequent interest rate agreement, makes exclusive use of means of distance communication, where the use of those means is exclusive and not strictly occasional but forms part of a framework set by that supplier, in terms of its commercial structure, including staffing and resources, allowing it to conclude contracts without the simultaneous physical presence of the parties”.
Case C-639/18 KH v Sparkasse Südholstein
Please see the Brexit section for an item on the written ministerial statement outlining the UK’s approach to the implementation of a range of financial regulatory reforms before the end of the Brexit transition period, including in relation to Solvency II, CSDR, SFTR, EMIR Refit, BMR, MAR, PRIIPs and BRRD II.
Please see the Securities and Markets section for an item on the Bank of England confirming that it will publish a daily Sterling overnight index average (SONIA) compounded index.
