Banking and Finance

Issue 1106 / 22 April 2021

Overview

  • Green finance – Treasury Committee publishes report
  • Central Bank Digital Currency – Bank of England statement published
  • Mortgage loans – PRA publishes statement on regulatory treatment under the Mortgage Guarantee Scheme

Headlines

  1. United Nations Environment Programme Finance Initiative
    1. Climate target setting – UNEP FI issues guidelines for banks–21 April 2021
  2. Basel Committee
    1. Work programme 2021-22 – published by Basel Committee–16 April 2021
  3. European Commission
    1. Consumer credit – European Commission carries out mini-sweep –16 April 2021
    2. BRRD – European Commission adopts Delegated Regulation on contractual recognition of stay powers– 22 April 2021
  4. Official Journal of the European Union
    1. BRRD – Commission Implementing Regulation published in the Official Journal –16 April 2021
    2. CRR – Commission Implementing Regulation published in the Official Journal– 21 April 2021
  5. European Central Bank
    1. Internal models – European Central Bank publishes report of its review– 19 April 2021
  6. Single Resolution Board
    1. Crisis management and deposit insurance framework – Single Resolution Board respond to European Commission consultation on its review– 21 April 2021
  7. House of Commons Treasury Committee
    1. Green finance – Treasury Committee publishes report–22 April 2021
  8. Bank of England
    1. Central Bank Digital Currency – Bank of England statement published –April 19 2021
  9. Prudential Regulation Authority
    1. Mortgage loans – PRA publishes statement on regulatory treatment under the Mortgage Guarantee Scheme– 19 April 2021
  10. Financial Markets Law Committee
    1. Sustainable finance – FMLC publishes letter to HM Treasury on UK-EU divergence–22 April 2021
  11. Working Group on Sterling Risk-Free Reference Rates
    1. LIBOR – Working Group publishes paper supporting transition from LIBOR in sterling structured products– 19 April 2021
    2. Safe harbour provisions –Working Group publishes letter– 22 April 2021
  12. Recent Cases
    1. Davis v Lloyds Bank plc [2021] EWCA Civ 557, 16 April 2021

United Nations Environment Programme Finance Initiative

Climate target setting – UNEP FI issues guidelines for banks21 April 2021

The United Nations Environment Programme Finance Initiative has published guidelines for climate target setting for banks. The guidelines consist of the following four principles, and additional guidance on each principle:

  • banks will publicly disclose long-term and intermediate targets they have set to support meeting the goals of the Paris Agreement;
  • banks will use science-based decarbonisation scenarios to set those targets;
  • banks will regularly review targets to ensure congruity with current climate science; and
  • banks will establish an emissions baseline and measure and report annually on the emissions profile of their lending portfolios and investment activities.

UNEP FI guidelines for climate target setting for banks

Webpage

Basel Committee

Work programme 2021-22 – published by Basel Committee16 April 2021

The Basel Committee on Banking Supervision (BCBS) has published its 2021-22 work programme. The three themes of the work programme are:

  • COVID-19 resilience and recovery, including the ongoing monitoring and assessment of risks and vulnerabilities to the global banking system. The BCBS is conducting an evaluation of the initial “lessons learned” from the pandemic with regards to the Basel III standards and an interim report is expected by summer 2021.
  • horizon scanning, analysis of structural trends and mitigation of risks. The BCBS intends to pursue a forward-looking approach to identifying, assessing and mitigating medium-term risks and structural trends relating to the banking system and seeks to finalise several outstanding initiatives, including on the prudential treatment of banks’ cryptoasset exposures.
  • strengthening supervisory co-ordination and practices, with a focus on the role of artificial intelligence and machine learning.

The BCBS has ended its Basel III policy agenda, focusing now on monitoring the full, timely and consistent implementation of these standards by its members.

Basel Committee Work Programme 2021-22

Webpage

Press Release

European Commission

Consumer credit – European Commission carries out mini-sweep – 16 April 2021

The European Commission has updated its webpage on sweeps to include details on a 2021 mini-sweep on consumer credit. According to the webpage, a ‘sweep’ is a set of checks carried out on websites to identify potential breaches of EU consumer law.

The webpage explains that the consumer protection authorities from 13 Member States and 2 EEA countries took part in mini-sweep of websites advertising and selling consumer credit products. The sweep aimed to check whether traders were complying with EU consumer rules and not misleading consumers or exploiting consumer vulnerabilities.

According to the Commission, 36% of swept websites were flagged for potential issues, and participating authorities will follow up on these. Key findings from the sweep included:

  • 34% of checked creditor websites did not include clear information on how the creditworthiness assessment is performed, including the personal data used for that purpose;
  • for 47% of products identified as short-term high cost, the websites did not include the required standard information for advertising by means of a representative example in a clear, concise and prominent way; and
  • in cases where the Member States had adopted extraordinary consumer credit measures due to COVID-19, 64% of websites did not contain key information in a clear and comprehensible manner.

European Commission webpage on ‘sweeps’

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BRRD – European Commission adopts Delegated Regulation on contractual recognition of stay powers – 22 April 2021

The European Commission has adopted a Delegated Regulation (C(2021) 2656 final) on regulatory technical standards (RTS) determining the content of the contractual terms of recognition of resolution stay powers under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).

Article 71a(1) of the BRRD (inserted by the BRRD II Directive (EU) 2019/879)), requires institutions and entities to include in any financial contract governed by the laws of a third country, a contractual term by which the parties recognise that the financial contract may be subject to the exercise of powers to suspend or restrict rights and obligations by the exercise of those powers by a member state resolution authority.

Article 71a(5) of the BRRD empowers the Commission to adopt delegated acts specifying the content of the terms required in Article 71a(1), taking institutions’ and entities’ different business models into account. The RTS sets out a list of mandatory components that must be present in the contractual terms required in the financial contracts.

The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulation and if neither object, the Delegated Regulation will enter into force on the 20th day following that of its publication in the Official Journal of the European Union.

Commission Delegated Regulation on regulatory technical standards determining the content of the contractual terms on recognition of resolution stay powers (C(2021) 2656 final)

Official Journal of the European Union

BRRD – Commission Implementing Regulation published in the Official Journal – 16 April 2021

Commission Implementing Regulation (EU) 2021/622 (the Implementing Regulation) containing implementing technical standards (ITS) on uniform reporting templates, instructions and methodology for reporting on the minimum requirement for own funds and eligible liabilities (MREL) under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) has been published in the Official Journal of the European Union.

The ITS replace the existing ITS on MREL reporting by resolution authorities that are set out in Commission Implementing Regulation (EU) 2018/308 and include minimum procedural obligations covering reporting periods and submission dates, as well as templates to be used by resolution authorities when informing the European Banking Authority (EBA) of the MREL requirements they have set.

The Implementing Regulation enters into force on 6 May 2021.

Commission Implementing Regulation (EU) 2021/622

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CRR – Commission Implementing Regulation published in the Official Journal – 21 April 2021

Commission Implementing Regulation (EU) 2021/637 (the Implementing Regulation) containing implementing technical standards (ITS) on public disclosures by institutions under the Capital Requirements Regulation (575/2013/EU) (CRR) has been published in the Official Journal of the European Union.

The purpose of the ITS is, among other things, to optimise the Pillar 3 policy framework to provide a single comprehensive package, improving clarity for users of information. It also aims to promote market discipline by increasing the consistency and comparability of the information disclosed by institutions, and aligning with the regulatory changes introduced by the CRR II Regulation (EU) 2019/876 (CRR II) and with the Basel Committee on Banking Supervision (BCBS) revised Pillar 3 disclosure framework.

The Implementing Regulation enters into force on 11 May 2021. It will apply from 28 June 2021.

Commission Implementing Regulation (EU) 2021/637

European Central Bank

Internal models – European Central Bank publishes report of its review – 19 April 2021

The European Central Bank (ECB) has published a report containing the results of its targeted review of internal models (TRIM). The TRIM was launched by the ECB in 2016 and aims to assess whether the internal models used by significant institutions in the single supervisory mechanism comply with regulatory requirements and whether their results are reliable and comparable.

The outcomes of the TRIM investigations confirmed that the internal models of significant institutions can continue to be used for the calculation of own funds requirements. However, for some models, limitations were needed to ensure a level of own funds that was appropriate to cover the underlying risk.

The ECB also identified a number of deficiencies to be remediated, and a related press release explains that binding supervisory measures to take corrective action have been issued. Through these measures, the TRIM resulted in a 12% increase (about EUR275 billion), of risk-weighted assets for the affected internal models.

The report emphasises that banks need to continue to invest in the development and maintenance of their internal models. The ECB plans to pursue its risk-based supervision of internal models to ensure that banks continue to meet their regulatory requirements.

ECB Report: Targeted Review of Internal Models Project Report

Press Release

Single Resolution Board

Crisis management and deposit insurance framework – Single Resolution Board respond to European Commission consultation on its review – 21 April 2021

The Single Resolution Board (SRB) has published its response to the European Commission’s targeted consultation of its crisis management and deposit insurance (CMDI) framework.

The CMDI framework sets out the rules for handing bank failures while protecting depositors and consists of three EU legislative texts working together with relevant national legislation: the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD); the Regulation on the Single Resolution Mechanism (806/2014/EU) (SRM Regulation); and the Deposit Guarantee Schemes Directive (2014/49/EU). The consultation (which closed on 20 April 2021) sought to gather stakeholders’ experience with the current CMDI framework as well as their views on the revision of the framework.

Among other things, the SRB makes the following points in its response:

  • it believes the resolution objectives are appropriate for the CMDI framework;
  • deposit guarantee scheme flexibility should be preserved to strengthen the CMDI framework;
  • the resolution framework already has a comprehensive set of tools at its disposal and enhancing these tools, rather than taking additional measures relating to the availability, effectiveness and fitness of these tools in the framework, is preferable; and
  • it seems unnecessary and unhelpful to change SRB governance arrangements if the review of the CMDI framework enhances (rather than overhauls) the resolution toolkit.

Single Resolution Board Consultation Response: Targeted consultation document review of the crisis management and deposit insurance framework

Press Release

House of Commons Treasury Committee

Green finance – Treasury Committee publishes report22 April 2021

The Treasury Committee has published its report on the future of green finance. The report makes a series of recommendations for how the government can achieve net-zero by 2050, including:

  • financial products should have climate impact labels;
  • the FCA should have the appropriate remit, powers and priorities to prevent the greenwashing of financial products;
  • the FCA should tackle regulatory barriers that discourage innovative products from coming to market;
  • the principles upon which the UK will fund its transition to net zero should be set out, highlighting cost assessments, methodology and any uncertainties; and
  • clear sectoral pathways towards decarbonisation should be set out, addressing the key policy decisions as to the future of high carbon industries (and regions) that will feel the impact more immediately.

House of Commons Treasury Committee report on the future of green finance

Press release

Bank of England

Central Bank Digital Currency – Bank of England statement published – April 19 2021

The Bank of England (BoE) and HM Treasury have announced the joint creation of a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential UK CBDC. According to the BoE, a CBDC would be a new form of digital money issued by the BoE for use by households and businesses that would exist alongside cash and bank deposits. The government and the BoE have not yet made a decision on whether to introduce a CBDC in the UK.

Among other things, the Taskforce aims to:

  • coordinate exploration of the objectives, use cases, opportunities and risks of a potential UK CBDC;
  • support a comprehensive assessment of the overall case for a UK CBDC; and
  • monitor international CBDC developments to ensure the UK remains at the forefront of global innovation.

The BoE has also announced the creation of the following:

  • a CBDC Engagement Forum to gather strategic input on all non-technology aspects of CBDC. It will consider issues such as financial and digital inclusion considerations, and data and privacy implications;
  • a CBDC Technology Forum to gather input on all technology aspects of CBDC from a range of expertise of perspectives; and
  • a CBDC Unit which will lead its internal exploration and external engagement around CBDC.

Bank of England Press Release on Central Bank Digital Currency

Central Bank Digital Currency Taskforce Terms of Reference

Webpage

CBDC Engagement Forum Terms of Reference

CBDC Technology Forum Terms of Reference

Prudential Regulation Authority

Mortgage loans – PRA publishes statement on regulatory treatment under the Mortgage Guarantee Scheme – 19 April 2021

The PRA has published an updated statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme (MGS). Under the MGS, the government guarantees a portion of the first losses (net of recoveries) on retail residential mortgage loans eligible for the scheme.

The statement provides information on capital, notification, disclosure and reporting requirements for loans under the MGS. Among other things, the PRA clarifies:

  • the operation of firms using the standardised approach for underlying mortgage loans under Articles 245 and 261 of the retained EU law version of the Capital Requirements Regulation (575/2013) (UK CRR);
  • the operation of firms using the internal rating based approach for underlying mortgage loans under Articles 245 and 259 of the UK CRR; and
  • the requirement to obtain a legal opinion on the effectiveness and enforceability of credit protection afforded by a guarantee such as the MGS is satisfied by a legal opinion obtained jointly by firms.

PRA statement on the regulatory treatment of retail residential mortgage loans under the Mortgage Guarantee Scheme

Direction for modification by consent in relation to the Help to Buy Scheme

Updated Webpage

Financial Markets Law Committee

Sustainable finance – FMLC publishes letter to HM Treasury on UK-EU divergence22 April 2021

The Financial Markets Law Committee (FMLC) has published a letter sent to HM Treasury on the International Platform on Sustainable Finance (IPSF). HM Treasury announced that the UK had joined the IPSF – a forum to share best practice, compare initiatives and identify barriers to sustainable finance – in February 2021.

The FMLC supports the decision to join the IPSF but draws attention to the risk of uncertainty due to divergence which may arise between sustainable finance standards adopted in the UK and EU, particularly in relation to the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR), the Non-Financial Reporting Directive (2014/95/EU) (NFRD) and the Taxonomy Regulation ((EU) 2020/852). Certain climate mitigation provisions in EU legislation became applicable after the end of the Brexit transition period and none have become EU retained law in the UK.

The FMLC also comments on the fact that the challenges firms are facing are being exacerbated by delays to regulatory technical standards underpinning the SFDR. The FMLC urges HM Treasury to clarify its intentions towards the SFDR and the other pieces of legislation, and suggests considering EU standards or an outcomes-based approach that is consistent with the general direction of the EU.

FMLC letter to HM Treasury
 

Working Group on Sterling Risk-Free Reference Rates

LIBOR – Working Group publishes paper supporting transition from LIBOR in sterling structured products – 19 April 2021

The Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published a paper considering how to support the transition of GBP LIBOR legacy structured products and considers how a sterling structured products market could be designed using compounded in arrears SONIA (Sterling Overnight Index Average).

The Working Group’s priorities and roadmap envisage a broad-based transition from LIBOR to SONIA by the end of 2021 across sterling bond, loan, derivatives and structured products markets. The paper addresses a range of structured products, including on-balance sheet issuances and repackaging transactions (new and legacy).

To help market participants complete their operational transition plans for structured products by the end of 2021, the paper encourages issuing new structured products based on compounded in arrears SONIA.

The Working Group on Sterling Risk-Free Reference Rates Publication: Transition from LIBOR in Sterling Structured Products

Updated webpage
 

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Safe harbour provisions –Working Group publishes letter – 22 April 2021

The Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published a letter it sent to HM Treasury relating to the possible safe harbour provisions in the Financial Services Bill 2019-21 (FS Bill) supporting the wind-down of critical benchmarks.

The letter states that, given the known challenges post by ‘tough legacy’ LIBOR contracts, the Working Group welcomed the introduction of the FS Bill, which proposes amendments to the retained EU version of the Benchmarks Regulation (EU) 2016/1011 and provides the FCA with new and enhanced powers to oversee the orderly wind-down of critical benchmarks, such as LIBOR. The Working Group also welcomed HM Treasury’s recent consultation, published in February 2021, seeking feedback on the case for incorporating a supplementary legal ‘safe harbour’ provision to reduce the risk of contractual uncertainty and disputes that may arise from the transition of tough legacy contracts.

The letter flags that the Working Group has now learnt that the safe harbour protections outlined in the consultation are unlikely to be included in the FS Bill, but understands that this does not represent a substantive decision on the merits of introducing such protections. Given the impending deadline for GBP LIBOR cessation at the end of 2021, the Working Group considers it critical that clarity is given on this point given the concerns regarding potential market disruption or other unintended consequences that may arise.

Working Group on Sterling Risk-Free Reference Rates Letter on safe harbour provisions to support the wind-down of critical benchmarks

Recent Cases

Davis v Lloyds Bank plc [2021] EWCA Civ 557, 16 April 2021

Claim for damages for breach of statutory duty in dealing with a complaint – classification of interest rate hedging product during review process – definition of ‘complaint’ - section 138D FSMA 2000 - DISP sourcebook in the FCA Handbook

The Court of Appeal has upheld the judgment of the High Court in the case of Davis v Lloyds Bank plc, handed down in July 2020, as detailed previously in this Bulletin. Mr Davis’s claim arose out of his unhappiness at the amount of redress offered to him under a process agreed between the FCA and the defendant to review the sale of certain interest rate hedging products.

The claim was brought under section 138D(2) of FSMA 2000 for breach of statutory duty to deal with a complaint “fairly, consistently and promptly” in accordance with rule 1.4.1R of the Dispute Resolution: Complaints sourcebook (DISP) in the FCA Handbook. Mr Davis argued that he had made a ‘complaint’ (within the meaning of DISP) and the bank owed him a statutory duty to consider the complaint, in accordance with the terms of the review as agreed between the bank and the FCA.

The Court of Appeal upheld the High Court’s assessment that Mr Davis had not made a complaint about the interest rate hedging products he was sold, but had in fact made a complaint that one of the products had not been included in the review. It therefore concluded that the complaint was about the scope of the review rather than a complaint about the products as defined in DISP. Consequently, the appeal was dismissed.

Davis v Lloyds Bank plc [2021] EWCA Civ 557