European Commission
CRR – European Commission adopts Commission Delegated Regulation in relation to economic downturn – 1 March 2021
The European Commission has adopted a Commission Delegated Regulation supplementing the Capital Requirements Regulation (575/2013/EU) (CRR) with regard to regulatory technical standards (RTS) relating to economic downturn.
The RTS specify the nature, severity and duration of an economic downturn to be taken into account for the estimation of loss given default (LGD) and conversion factors (CFs) appropriate for an economic downturn, where LGDs and CFs are estimated under the Internal Ratings Based Approach (IRB Approach).
Articles 181(3)(a) and 182(4)(a) of the CRR provide the Commission with the power to adopt delegated acts on this point following the European Banking Authority’s (EBA) submission of draft RTS. The EBA submitted the final draft RTS in November 2018 and, following the Commission’s submission to it of a modified version with envisaged changes, an Opinion in September 2020 with further drafting suggestions.
The RTS set out a notion of economic downturn that may encompasss one or more distinct downturn periods. They specify:
- the nature of an economic downturn through a set of economic indicators (such as gross domestic product (GDP), unemployment rate and house prices) relevant for the underlying businesses, sectors and jurisdictions;
- the severity by the worst value observed in the past 20 years on each economic indicator; and
- the duration by reference to the downturn periods, which are identified as periods in time where one or several economic indicators show their most severe values.
Relevant institutions should use the RTS to identify the relevant downturn period to take into account for the downturn LGD and CF estimation.
The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulation, after which it will enter into force 20 days after its publication in the Official Journal of the European Union. It will apply retrospectively from 1 January 2021.
Commission Delegated Regulation (EU) of 1 March 2021 supplementing the EU Capital Requirements Regulation (575/2013/EU) (CRR)
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CRR - European Commission adopts Commission Delegated Regulation in relation to counterparty credit risk – 1 March 2021
The European Commission has adopted a Commission Delegated Regulation supplementing the Capital Requirements Regulation (575/2013/EU) (CRR) in relation to regulatory technical standards (RTS) on the standard approach for counterparty risk, in accordance with Article 277(5) and 279a(3) of the CRR.
The final draft RTS specify the methodology for identifying the material risk drivers of derivative transactions on the basis of which the mapping to one or more risk categories, as set out in Article 277 of the CRR, is carried out. The RTS set out:
- the methods for the identification of the material risk drivers of derivative transactions: (i) a purely qualitative approach where such transactions have only one driver; (ii) a qualitative and quantitative approach where the mapping cannot be done on a purely qualitative basis; and (iii) a fallback approach which identifies all drivers to be material;
- the formula to be used to calculate the supervisory delta of put and call options mapped to the interest rate risk category and supervisory volatility suitable for such formula; and
- the methods for determining whether a transaction is a long or short position in the primary risk driver or in the most material risk driver in a given category.
The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulation, which will enter into force 20 days after its publication in the Official Journal of the European Union.
Commission Delegated Regulation (EU) of 1 March 2021 supplementing the EU Capital Requirements Regulation (575/2013/EU) (CRR)
Official Journal of the European Union
CRR II – OJ publishes corrigendum to CRR II – 26 February 2021
The Official Journal of the EU has published a corrigendum to the Capital Requirements Regulation II ((EU) 2019/876) (CRR II). The corrigendum amends several provisions in CRR II, including those relating to the leverage and net stable funding ratios, requirements for own funds and eligible liabilities, large exposures and counterparty credit and market risks.
Corrigendum to Regulation (EU) 2019/876
European Banking Authority
CRR – EBA publishes a consultation regarding draft implementing ITS on disclosure of ESG risks – 1 March 2021
The EBA has published a consultation paper on draft implementing technical standards (ITS) in relation to Pillar 3 disclosures on environmental, social and governance (ESG) risks under Article 449a of the Capital Requirements Regulation (575/2013/EU) (CRR).
The disclosure requirements apply to large credit institutions with securities traded on any EU Member State regulated market and will apply from June 2022, on an annual basis for the first year and biannually afterwards. The ITS must specify uniform formats and instructions for this disclosure so that it provides sufficiently comprehensive and comparable information for users of the information to assess the risk profile of institutions.
Annex I of the consultation paper proposes tables and templates that specify the required disclosures, including: (i) tables for qualitative disclosures on ESG risks; (ii) templates for qualitative disclosures on climate change transition and physical risks respectively; and (iii) templates with quantitative information and key performance indicators (KPIs) on climate change mitigating measures, including the green asset ratio (GAR) on taxonomy-aligned activities and other mitigating actions. Annex II contains instructions to complete the tables and templates.
The EBA recommends that the consultation paper is read in conjunction with its advice to the European Commission on key performance indicators (KPIs) and the methodology for disclosures under Article 8 of the Taxonomy Regulation ((EU) 2020/852) which has also been published (see the item below in this section).
EBA Consultation Paper: Draft Implementing Standards on prudential disclosures on ESG risks in accordance with Article 449a CRR (EBA/CP/2021/06)
Annex 1
Annex 2
Factsheet
Infographic: ESG disclosures for financial institutions
Infographic: Summary of ESG disclosures Pillar 3
Press release
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EU Taxonomy Regulation – EBA publishes Opinion and report on Article 8 – 1 March 2021
The EBA has published an Opinion and report on key performance indicators (KPIs) and related methodology for the disclosure of how, and to what extent, the activities of credit institutions and investment firms falling within the scope of the Non-Financial Reporting Directive (2014/95/EU) (NFRD) qualify as environmentally sustainable in accordance with the EU Taxonomy Regulation ((EU) 2020/852) (Taxonomy Regulation). The Opinion and report respond to a call for advice from the European Commission to all the European Supervisory Authorities (namely, the EBA, the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA)).
The Opinion and report set out the KPIs that institutions should disclose, the scope and methodology for the calculation of those KPIs and the qualitative information they should provide. In addition, the documents include some policy recommendations for putting in place the means to facilitate institutions’ disclosures and the eventual extension of the KPIs to all relevant assets, including sovereign and central banks’ exposures.
The main KPI proposed by the EBA is the green asset ratio (GAR), which identifies institutions’ asset financing activities that are environmentally sustainable according to the Taxonomy Regulation, such as those consistent with the European Green Deal and the Paris Agreement goals. Information on the GAR is supplemented by other KPIs that provide information on the taxonomy alignment of institutions’ services other than lending and investing. The Opinion and report also set out proportionality measures that should facilitate institutions’ disclosures, including transitional periods where disclosures in terms of estimates and proxies are allowed.
Please see the Securities and Markets, and Insurance, sections respectively for similar reports from ESMA and EIOPA.
EBA Report: Advice to the Commission on KPIS and methodology for disclosure by credit institutions and investment firms under the NFRS on how and to what extent their activities qualify as environmentally sustainable according to the EU Taxonomy Regulation
Letter from José Manuel Campa, Chair, to John Berrigan Director General DG FISMA: Call for advice to the European Supervisory Authorities on key performance indicators and methodology on the disclosure of how and to what extent the activities of undertakings under the NFRD qualify as environmentally sustainable as per the EU Taxonomy
EBA Opinion (EBA/Op/2021/03)
Annex I
Annex II
Press release
Single Resolution Board
Banking Union - SRB publishes resolution dossier for FMI services – 1 March 2021
The Single Resolution Board (SRB) has published a resolution dossier which provides an overview of the four resolution tools available to national resolution authorities in the Banking Union and their impact on banks’ continued access to financial market infrastructure services (FMI services). The dossier explains the economic rationale and legal framework behind the continued access to FMI services by a bank in resolution, as well as the protection of FMI services.
The dossier covers several areas, including:
- the resolution framework, including institutional set-up, objectives and decision making processes;
- the importance of preserving access to FMI services by a bank in resolution, how the legal framework supports this continued access and how it protects FMI services in this situation; and
- the potential impact of the four resolution tools (bail-in, sale of business, bridge institution and asset separation) on FMI services.
SRB Resolution Dossier for FMI services
Webpage
Press release
Financial Conduct Authority
Breathing Space Regulations – FCA publishes Policy Statement PS21/1 – 26 February 2021
The FCA has published a Policy Statement (PS21/1) on changes to its Handbook to reflect The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the Breathing Space Regulations) which come into force in May 2021.
As previously reported in this Bulletin, the Regulations provide a person in problem debt with the right to legal protections from creditor action for up to 60 days while they receive debt advice and enter into an appropriate debt solution. A consumer can only access this breathing space moratorium after being advised and assessed as eligible by an FCA-authorised debt advice firm or a local authority, or by accessing a mental health crisis moratorium.
The FCA is making some minor changes to chapters 5, 6 and 7 of its Consumer Credit sourcebook (CONC) to clarify how its rules apply where the Breathing Space Regulations also apply and to avoid duplicating the effects of the Breathing Space Regulations in a disproportionate way.
The Policy statement applies to regulated firms who will need to comply with the Breathing Space Regulations, particularly consumer credit lenders and debt collection agencies. It is also relevant to mortgage lenders and administrators; debt advice firms, consumer groups with an interest in debt advice; and local authorities that give debt advice to consumers in England and Wales.
Firms who are affected by the Breathing Space Regulations will need to assess the need for any changes to their systems and processes, and will need to implement them as soon as possible ahead of the Breathing Space Regulations coming into force.
Policy Statement – Breathing Space Regulations: changes to Handbook
Updated webpage
Contactless payments – FCA publishes policy statement on amendments to single and cumulative transaction thresholds – 3 March 2021
The FCA has published a policy statement on amendments to the single and cumulative transaction thresholds for contactless payments. The policy statement summarises the responses the FCA received to two questions on proposed changes relating to contactless payment limits, which it consulted on in January 2021.
The FCA confirms that it has decided to amend the contactless exemption in Article 11 of the regulatory technical standards on strong customer authentication (SCA-RTS) to increase the single transaction threshold for contactless card payments from £45 to £100, and the cumulative transaction threshold from £130 to £300. The FCA expects that, further to these changes, more consumers will use contactless card payments for higher value transactions such as purchasing fuel and weekly groceries without needing to use Chip and PIN.
The FCA considers that the change to the cumulative transaction threshold replaces the supervisory flexibility it introduced to support the industry throughout COVID-19, and means that firms can set limits up to these thresholds but not exceed them. To support consumers and merchants during the pandemic, the FCA had previously confirmed that they were very unlikely to take enforcement action where a firm fails to require Chip and PIN when a customer exceeds the cumulative transaction value threshold. The FCA further states that, in making use of the new limits, firms must ensure that they mitigate the risk of unauthorised transactions and fraud.
The FCA’s amendments to Article 11 are set out in the Technical Standards on Strong Customer Authentication and Common and Secure Methods of Communication (Amendment) Instrument 2021, which came into force on 3 March 2021.
FCA policy statement on amendments to single and cumulative transaction thresholds for contactless payments
Technical Standards on Strong Customer Authentication and Common and Secure Methods of Communication (Amendment) Instrument 2021
Webpage
Press release
Lending Standards Board
Authorised push payment scams - LSB publishes CRM Code review roadmap – 1 March 2021- The Lending Standards Board (LSB) has published a roadmap outlining the key activities planned for 2021 as part of its review of the Contingent Reimbursement Model Code (CRM Code) for authorised push payment (APP) scams.
Key activities include: (i) implementing CRM Code changes; (ii) publishing a call for input on emerging scams and the expansion of the Code to other business models; and (iii) publishing a revised practitioners guide to take account of the FCA’s vulnerability guidance.
Alongside the activity outlined in the roadmap, the LSB has begun work on a follow-up review of the customer reimbursement provision under the Code. The outcome of this review will be published later in 2021.
LSB CRM Code Review Roadmap 2021
Press release
The Working Group on Sterling Risk-Free Reference Rates
LIBOR transition – UK Working Group publishes Best Practice Guide for GBP loans market – 26 February 2021
The UK’s Working Group on Sterling Risk-Free Reference Rates has published a Best Practice Guide (the Guide) and Q&A document to support market participants in transitioning new and refinanced loan issuances away from GBP LIBOR and meeting with the Working Group’s recommended milestone to cease new issuance of GBP LIBOR-linked loans by the end of March 2021.
The Guide is intended to be a single point of reference for best practice in relation to GBP loans maturing after the end of 2021, consolidating relevant information from previous Working Group publications. It covers the conventions for new GBP SONIA referencing loans (including refinancing and renewals) and the transition of legacy GBP LIBOR referencing loans, including bilateral and syndicated loans.
The Q&A document relates to the end-Q1 2021 recommended milestone. It addresses key questions that market participants may have in relation to it and highlights particular considerations that participants should take into account when transitioning from GBP LIBOR.
Best Practice Guide for GBP Loans
GBP loan market Q&A for the Working Group’s end-Q1 2021 recommended milestone
Updated webpage
Recent Cases
Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm), 26 February 2021
Rescission of loans, LIBOR-related fraudulent misrepresentation
Cockerill J has struck out local authorities’ claims seeking rescission of bank loans for implied fraudulent misrepresentation concerning LIBOR. In doing so, the court evaluated the applicable test for establishing reliance in a misrepresentation claim.
The local authorities entered into Lender-Option, Borrower-Options (LOBO) loans with Barclays Bank between 2006 and 2008. The interest rates were low but with an option for the Bank to increase the rates on certain dates. If these interest rates were increased, the local authorities were able to break the loans (with breakage costs). As the loans referenced LIBOR either for setting interest rates or as part of the breakage costs calculations, the local authorities brought claims against Barclays for misrepresentation following the LIBOR manipulation scandal in 2012.
The Bank applied to strike out the claims on two grounds on the basis that the local authorities could not meet the test for reliance in relation to misrepresentation. They relied on Marme Inversiones 2007 SL v Natwest Markets plc [2019] EWHC 366 (Comm) to argue that a necessary element of reliance is ‘awareness’ that the representation is being made. Cockerill J agreed that legal authorities did establish some requirement of awareness and the lack of any ‘active appreciation’ of any representation regarding LIBOR was fatal to the local authorities’ claim. It was concluded that ‘to say that the key people assumed that LIBOR would be set in a straightforward and proper manner’ was not enough.
Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm)
Please see the Securities and Markets section for items on the Directive amending MiFID II and CRD V and on a supervisory statement published by the ESAs on the Sustainable Disclosure Regulation.
